Bank of Montreal 2012 Annual Report Download - page 35

MD&A
MANAGEMENT’S DISCUSSION AND ANALYSIS
Adjusting Items
We have designated certain amounts as adjusting items and have
adjusted GAAP results so that we can present and discuss financial
results without the effects of adjusting items to facilitate understanding
of business performance and related trends. Management assesses
performance on a GAAP basis and on an adjusted basis and considers
both to be useful in the assessment of underlying business performance.
Presenting results on both bases provides readers with a better under-
standing of how management assesses results. Adjusted results and
measures are non-GAAP and, together with items excluded in
determining adjusted results, are disclosed in more detail in the Non-
GAAP Measures section on page 98, along with comments on the uses
and limitations of such measures.
Items excluded in the determination of adjusted results for 2012
represented net income of $97 million or $0.15 per share (net loss of
$161 million or $0.26 per share in 2011) and were comprised of:
‰the $251 million ($107 million in 2011) net benefit after tax of
credit-related items in respect of the M&I purchased performing
loan portfolio, including $783 million ($271 million in 2011) for the
recognition in net interest income of a portion of the credit mark on
the portfolio, net of a $376 million ($98 million in 2011) provision
for credit losses (comprised of an increase in the collective allow-
ance of $85 million ($80 million in 2011) and specific provisions of
$291 million ($18 million in 2011)) and related income taxes of
$156 million ($66 million in 2011). The effects of these credit-
related items in respect of the M&I purchased performing loan
portfolio can significantly impact both net interest income and the
provision for credit losses in different periods over the life of the
M&I purchased performing loan portfolio;
‰costs of $402 million or $250 million after tax ($131 million or
$84 million after tax in 2011) for integration of the acquired busi-
ness, including amounts related to system conversions,
restructuring and other employee-related charges, consulting fees
and marketing costs in connection with customer communications
and rebranding activities, including new signage;
‰a charge of $nil ($87 million or $62 million after tax in 2011) for
costs related to the acquisition of M&I;
‰a charge to revenue for the hedge of foreign exchange risk on
the purchase of M&I of $nil ($20 million or $14 million after tax
in 2011);
‰the amortization of acquisition-related intangible assets of
$134 million or $96 million after tax ($70 million or $54 million
after tax in 2011);
‰a decrease in the collective allowance for credit losses of
$82 million or $53 million after tax (increase of $6 million or
$4 million after tax in 2011) on loans other than the M&I purchased
loan portfolio;
‰income of $264 million or $261 million after tax (loss of $50 million
before and after tax in 2011) from run-off structured credit activities
(our credit protection vehicle and structured investment vehicle).
These vehicles are consolidated on our balance sheet under IFRS,
and our results primarily reflect valuation changes associated with
these activities that have been included in trading revenue; and
‰a restructuring charge of $173 million or $122 million after tax ($nil
in 2011) to align our cost structure with the current and future
business environment. This action was part of a broader effort to
improve productivity that is still underway.
Further details on the effects of adjusting items can be found
on page 98.
Adjusting Items (Pre-Tax)
($ millions) 2012 2011 2010
Credit-related items on the M&I purchased
performing loan portfolio 407 173 –
M&I integration costs (402) (131) –
M&I acquisition-related costs –(87) –
Hedge of foreign exchange risk on the
purchase of M&I –(20) –
Amortization of acquisition-related intangible assets (134) (70) (36)
Decrease (increase) in the collective allowance for
credit losses 82 (6) –
Run-off structured credit activities 264 (50) –
Restructuring costs (173) ––
Increase (decrease) in pre-tax income due to
adjusting items in reported results 44 (191) (36)
Adjusting Items (After Tax)
($ millions) 2012 2011 2010
Credit-related items on the M&I purchased
performing loan portfolio 251 107 –
M&I integration costs (250) (84) –
M&I acquisition-related costs –(62) –
Hedge of foreign exchange risk on the
purchase of M&I –(14) –
Amortization of acquisition-related intangible assets (96) (54) (32)
Decrease (increase) in the collective allowance for
credit losses 53 (4) –
Run-off structured credit activities 261 (50) –
Restructuring costs (122) ––
Increase (decrease) in net income after tax due to
adjusting items in reported results 97 (161) (32)
2010 based on CGAAP.
Caution
The foregoing section contains forward-looking statements. Please see the Caution Regarding
Forward-Looking Statements.
The foregoing section contains adjusted results and measures, which are non-GAAP. Please see the
Non-GAAP Measures section on page 98.
Earnings per Share Growth
Earnings per share (EPS) is calculated by dividing net income,
after deduction of preferred dividends, by the average number of
common shares outstanding. Diluted EPS, which is our basis for
measuring performance, adjusts for possible conversions of
financial instruments into common shares if those conversions
would reduce EPS, and is more fully explained in Note 25 on
page 166 of the financial statements. Adjusted EPS is calculated in
the same manner using adjusted net income.
The year-over-year percentage change in earnings per share (EPS) and
in adjusted EPS are our key measures for analyzing earnings growth.
All references to EPS are to diluted EPS, unless indicated otherwise.
EPS was $6.15, up $1.31 or 27% from $4.84 in 2011. Adjusted
EPS was $6.00, up $0.90 or 18% from $5.10 in 2011. Our three-year
compound average annual adjusted EPS growth rate was 14%, higher
than our current medium-term objective of achieving average annual
adjusted EPS growth of 8% to 10%. EPS growth in 2011 and 2012
reflected increased earnings, including the impact of the inclusion of
12 months of results of M&I in the current year and four months in
2011, and a significant increase in capital in 2011. Adjusted net
income available to common shareholders was 78% higher over the
three-year period from the end of 2009, while the average number of
diluted common shares outstanding increased 20% over the same
period, primarily due to the issuance of common shares on the acquis-
ition of M&I in July 2011.
EPS Annual Growth (%)
EPS ($)
Earnings growth was strong.Increases were due to good
revenue growth and much lower
provisions for credit losses.
2010
4.75 4.81
2012
6.15 6.00
2011
4.84 5.10
Adjusted EPS
EPS Adjusted EPS annual growth
EPS annual growth
2010 20122011*
54
20
27
18
26
Growth rates for 2011 reflect growth based on
CGAAP in 2010 and IFRS in 2011.
* 2010 based on CGAAP.
Net income was $4,189 million in 2012, up $1,075 million or 35%
from $3,114 million a year ago. Adjusted net income was $4,092
million, up $817 million or 25%.
32 BMO Financial Group 195th Annual Report 2012