Bank of Montreal 2004 Annual Report Download - page 30

BMO Financial Group Annual Report 200426
MD&A
Management’s Discussion and Analysis
GAAP and Related Non-GAAP Measures Used in the MD&A
($ millions, except as noted)
2004 2003 2002
Net interest income per financial statements (a) 4,922 4,899 4,829
Non-interest revenue 4,551 4,220 3,924
Revenue per financial statements (b) 9,473 9,119 8,753
Taxable equivalent basis (teb) adjustment (c)
(see page 28) 139 152 106
Net interest income (teb) (a+c) (d) (1) 5,061 5,051 4,935
Non-interest revenue 4,551 4,220 3,924
Revenue (teb) (e) (1) 9,612 9,271 8,859
Provision for income taxes per
financial statements 1,008 688 424
Taxable equivalent basis adjustment 139 152 106
Provision for income taxes (teb) (1) 1,147 840 530
Non-interest expense (f) 6,157 6,087 6,030
Amortization of intangible assets (104) (105) (87)
Cash-based expense (g) (1) 6,053 5,982 5,943
Net income 2,351 1,825 1,417
Amortization of intangible assets (net of tax) 78 79 75
Cash net income (1) 2,429 1,904 1,492
Preferred share dividends (76) (82) (79)
Charge for capital (1) (1,230) (1,119) (1,045)
Net economic profit (1) 1,123 703 368
Non-interest expense-to-revenue
ratio (2) (%) ((f/b) x 100) 65.0 66.7 68.9
Non-interest expense-to-revenue
(teb) ratio (1) (2) (%) ((f/e) x 100) 64.1 65.7 68.1
Cash non-interest expense-to-revenue
(teb) ratio (1) (2) (%) ((g/e) x 100) 63.0 64.5 67.1
Net interest margin annualized (%)
((a / average assets) x 100) 1.82 1.86 1.95
Net interest margin (teb) annualized (1) (%)
((d / average assets) x 100) 1.88 1.91 1.99
EPS (uses net income) ($) 4.42 3.44 2.68
Cash EPS (1) (uses cash net income) ($) 4.57 3.59 2.83
(1) These are non-GAAP amounts or non-GAAP measures.
(2) Also referred to as productivity ratio and cash productivity ratio.
2004 Financial Performance Review
Highlights
•Revenue increased $341 million or 3.7% in 2004 and was higher in each
of our client operating groups.
•Revenue growth was attributable to improved volumes in both Personal
and Commercial Client Group and Private Client Group, and to net gains
on investment securities and higher underwriting and commission rev-
enue in Investment Banking Group.
•
The provision for credit losses improved by $558 million. Specific provisions
for credit losses fell by $388 million and there was a $170 million decrease
in the general allowance. The improvement was attributable to favourable
credit conditions and effective loan realization practices.
•
Non-interest expense increased at a relatively modest 1.1% in 2004,
consistent with the 0.9% increase in 2003 and reflective of our focus
on productivity.
•The expense-to-revenue ratio (or productivity ratio) improved by 160 basis
points to 64.1%. The cash productivity ratio improved by 155 basis points
to 63.0%.
BMO uses both GAAP and certain non-GAAP measures to assess
performance. Securities regulators require that companies
caution readers that earnings and other measures adjusted
to a basis other than generally accepted accounting principles
(GAAP) do not have standardized meanings under GAAP
and are unlikely to be comparable to similar measures used
by other companies.
Cash earnings and productivity measures may enhance com-
parisons between periods when there has been an acquisition,
particularly because the purchase decision may not consider
the amortization of intangible assets to be a relevant expense.
Cash EPS measures are also disclosed because analysts often
focus on this measure, and cash EPS is used by Thomson
First Call to track third-party earnings estimates that are
frequently reported in the media. Cash measures add the after-
tax amortization of intangible assets to GAAP earnings to
derive cash net income (and associated EPS) and deduct the
amortization of intangible assets from non-interest expense
to derive cash productivity measures.
BMO, like many banks, analyzes revenue, and ratios
computed using revenue, 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 raise revenues on certain tax-exempt
securities to a level that would incur tax at the statutory rate.
The effective income tax rate is also analyzed on a taxable
equivalent basis for consistency of approach.
Net economic profit is another non-GAAP measure. It repre-
sents cash earnings available to common shareholders less
a charge for capital, and is considered an effective measure
of added economic value.
Non-GAAP Measures
This section provides a review of our enterprise financial performance for 2004 that focuses on the Consolidated Statement of Income
included in our consolidated financial statements, which begin on page 83. A summary of our enterprise financial performance for
2003 is outlined on page 34. A review of our operating groups strategies, achievements and performance follows the enterprise review.