Bank of Montreal 2004 Annual Report Download - page 120

BMO Financial Group Annual Report 2004116
Notes to Consolidated Financial Statements
Notes
Our Series 4, 6 and 10 Class B Preferred shares, in certain
circumstances, are convertible into common shares. These conver-
sions are not included in the calculation of diluted earnings per
share as we have the option to settle the conversion in cash instead
of common shares.
Employee Stock Options
In determining diluted earnings per share, we increase the
average number of common shares outstanding by the number
of shares that would have been issued if all stock options with
a strike price below the average share price for the year had been
exercised. We also decrease the average number of common shares
outstanding by the number of our common shares that we could
have repurchased if we had used the proceeds from the exercise
of stock options to repurchase them on the open market at the
average share price for the year. We do not adjust for stock options
with a strike price above the average share price for the year
because including them would increase our earnings per share,
not dilute it.
Operating Groups
We conduct our business through operating groups, each of which
has a distinct mandate. We determine operating groups based on
our management structure and therefore our groups may not be
comparable with other financial services companies. We evaluate
the performance of our groups using measures such as net income,
return on equity, net economic profit and non-interest expense-to-
revenue (productivity) ratio.
Personal and Commercial Client Group
Personal and Commercial Client Group (“P&C”) offers a full range
of products and services in Canada and the United States through
direct banking channels such as branches, telephone banking,
online banking and a network of automated banking machines.
Private Client Group
Private Client Group (“PCG”) brings together all of our wealth
management businesses. Operating primarily in Canada and the
United States, PCG serves a full range of North American client
segments, from mainstream to ultra-high net worth, as well as
select institutional market segments. PCG offers its clients a broad
range of wealth management products and services, including
full-service and direct investing, private banking and investment
products, providing the tools they need to accumulate, protect
and grow their financial assets.
Investment Banking Group
Investment Banking Group (“IBG”) combines all of our businesses
serving corporate, institutional and government clients. In Canada,
its client base comprises large corporations and institutions across
a broad range of industry sectors. In the United States, it serves
middle-market and institutional clients in selected sectors. IBG also
serves institutional and government clients in the United Kingdom,
Europe and Asia. It offers clients complete financial solutions
across the entire balance sheet, including treasury services, cash
management, foreign exchange, trade finance, corporate lending,
securitization, and public and private debt and equity underwriting.
The group also offers financial advisory services in mergers and
acquisitions and restructurings, while providing investing clients
with research, sales and trading services.
Corporate Support
Corporate Support 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 results for
Corporate Support include revenues and expenses associated with
certain securitization activities, the hedging of foreign-source
earnings and activities related to the management of certain balance
sheet positions and our overall asset liability structure.
T&S manages and maintains information technology, process-
ing, real estate and sourcing for the Bank. The unit focuses on
enterprise-wide priorities and integrates common infrastructure
and service standards to maximize operational quality, effectiveness
and efficiency.
Operating results for T&S are included with Corporate Support
for reporting purposes. However, costs of T&S services are
transferred to P&C, PCG and IBG and only minor amounts are
retained in T&S’ results. As such, results for Corporate Support
largely reflect operating results of Corporate units.
Corporate Support also includes residual revenues and expenses
representing the differences between actual amounts incurred
and the amounts allocated to operating groups.
Basis of Presentation
The results of these operating groups are based on our internal
financial reporting systems. The accounting policies used in
these groups are generally consistent with those followed in the
preparation of the consolidated financial statements as disclosed
in Note 1 and throughout the consolidated financial statements.
Notable accounting measurement differences are the taxable
equivalent basis adjustment and the provision for credit losses,
as described below.
Taxable Equivalent Basis
We analyze net interest income on a taxable equivalent
basis (“teb”). This basis includes an adjustment that increases
GAAP revenues and the GAAP provision for income taxes by
an amount that would increase revenues on certain tax-exempt
securities to a level that would incur tax at the statutory rate.
Analysis on a teb basis neutralizes the impact of investing
in tax-exempt or tax-advantaged securities rather than fully
taxable securities with higher yields. It reduces distortions in
net interest income related to the choice of tax-advantaged
and taxable investments.
Note 23 Operating and Geographic Segmentation
Diluted earnings per share
(Canadian $ in millions, except as noted) 2004 2003 2002
Net income available to common shareholders $ 2,275 $ 1,743 $ 1,338
Dividends on convertible shares 111
Net income adjusted for dilution effect 2,276 1,744 1,339
Average number of common
shares outstanding (in thousands) 501,656 496,208 490,816
Convertible shares 683 996 1,278
Stock options potentially exercisable (1) 32,057 36,608 30,575
Common shares potentially repurchased (2) (19,351) (26,803) (23,205)
Average diluted number of common
shares outstanding (in thousands) 515,045 507,009 499,464
(Canadian $)
Diluted earnings per share $ 4.42 $ 3.44 $ 2.68
(1) In computing diluted earnings per share, we excluded average stock options outstanding of
679,510, 455,282 and 7,884,526 with weighted-average exercise prices of $53.93, $41.21 and $38.11
for the years ended October 31, 2004, 2003 and 2002, respectively, because the options’ strike
price was greater than the average share price for the year.
(2) The number of shares potentially repurchased is determined by computing a weighted average
of the number of shares potentially repurchased in each quarter.