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BMO Financial Group
197th Annual Report 2014
Not just
any bank.

Table of contents

  • Page 1
    Not just any bank. BMO Financial Group 197th Annual Report 2014

  • Page 2
    ... 17 Senior Leadership Team 18 Corporate Governance 20 Board of Directors Financial Review 22 Reasons to Invest in BMO 23 CFO's Foreword to the Financial Review 24 Financial Performance and Condition at a Glance 26 Management's Discussion and Analysis 106 Supplemental Information 120 Statement of...

  • Page 3
    ... work to the next level," says Jason Rhule, Mobility Specialist, Digital Workspace, pictured here with Jacquelyn van Kampen of MakeLab. This is what we do. 2 BMO Financial FinancialGroup Group 197th 197th Annual Annual Report Report 2014 2014 BMO BMO Financial Financial Group Group 197th Annual...

  • Page 4
    ...Group report, Building a New Momentum in Montreal, BMO initiated the I see mtl movement in partnership with the Board of Trade of Metropolitan Montreal to reignite confidence in the city's future. L. Jacques Ménard, chairman of BMO Nesbitt Burns and BMO's Quebec president, is spearheading the drive...

  • Page 5
    We serve individuals, businesses, governments and corporate customers across Canada and the United States. Our significant presence in North America is bolstered by operations in select global markets, including Europe and Asia, allowing us to provide our customers in North America with access to ...

  • Page 6
    ...'ve added 135,000 square feet of manufacturing space," says United Alloy founder Tom Baer, a BMO customer for three decades. "Our sales have more than doubled since 2011, and we expect them to double again in the next five years." 8 BMO Financial FinancialGroup Group 197th Annual Report 2014 197th...

  • Page 7
    ... $2.2 billion, strengthening the balance sheet to finish the year with a Common Equity Tier 1 Ratio of 10.1%. We also completed the $1.3 billion acquisition of F&C Asset Management plc, moving BMO into the global top 50 in institutional money management. Our total shareholder return for the year was...

  • Page 8
    ...2012 2013 2014 2012 2013 2014 2012 2013 2014 * 2012* 2013 2014 2012 CET1 Ratio is on a pro-forma basis. Ensure our strength in risk management underpins everything we do for our customers. 12 BMO Financial Group 197th Annual Report 2014 BMO Financial Group 197th Annual Report 2014 13

  • Page 9
    ... offer direct access to bankers anytime for additional information and help. • Launching Apple Pay for customers of BMO Harris Bank, enabling them to pay for purchases using their iPhones in a secure and contactless transaction that doesn't require sharing their debit and credit card numbers with...

  • Page 10
    ... Executive Officer, BMO Harris Bank N.A. Carol Neal Chief Auditor, BMO Financial Group Gilles Ouellette Group Head, Wealth Management Surjit Rajpal Chief Risk Officer, BMO Financial Group Joanna Rotenberg Chief Marketing Officer and Head of Strategy, BMO Financial Group Richard Rudderham Chief Human...

  • Page 11
    ... Games 2014 annual review of corporate governance practices in Canada ranked BMO first overall among the 247 companies and income trusts in the S&P/ TSX Composite Index. The board operates independently of management The Chairman of the Board and our directors, other than the Chief Executive Officer...

  • Page 12
    ... Board, BMO Financial Group, and Chair of Torys LLP Board/Committees: Governance and Nominating, Human Resources, Risk Review, The Pension Fund Society of the Bank of Montreal Other public boards: George Weston Limited, Onex Corporation Director since: 2000 Don M. Wilson III Corporate Director Board...

  • Page 13
    ... high standards of governance and transparency. Thomas E. Flynn Chief Financial Officer, BMO Financial Group · Clear opportunities for growth across North America · Large North American commercial banking business · Good momentum in our well-established Canadian Personal and Commercial Banking...

  • Page 14
    ... basis points from 22 basis points on a reported basis a year ago. This positive ratio trend reflects lower new provisions across both our consumer and commercial loan portfolios, compared to 2013. Provision for Credit Losses as a % of Average Net Loans and Acceptances • The Canadian peer group...

  • Page 15
    ... in 2014 Future Changes in Accounting Policies Transactions with Related Parties Management's Annual Report on Disclosure Controls and Procedures and Internal Control over Financial Reporting Shareholders' Auditors' Services and Fees Enhanced Disclosure Task Force Enterprise-Wide Risk Management...

  • Page 16
    ... businesses: BMO Nesbitt Burns, BMO InvestorLine, BMO Private Banking, BMO Global Asset Management and BMO Insurance. BMO Capital Markets, our investment and corporate banking and trading products division, provides a full suite of financial products and services to North American and international...

  • Page 17
    ... the financial services industry. 28 BMO Financial Group 197th Annual Report 2014 ‰ Continued to develop new products designed to respond to clients' emerging needs, including the launch of seven new exchange traded funds (ETFs) this year. Assets under management in our ETF line of business have...

  • Page 18
    ... client relationships, including the BMO World Elite MasterCard UPGRADE, our Spring Home Financing and Summer Everyday Banking campaigns. o 4. Expand strategically in select global markets to create future growth. ‰ Completed the acquisition of F&C Asset Management plc (F&C). This acquisition...

  • Page 19
    ... loan growth. Demand for 30 BMO Financial Group 197th Annual Report 2014 Canadian/U.S. Dollar Exchange Rates 1.04 1.12 1.18 0.99 0.13 0.13 0.13 Jan 2013 Oct 2013 Canadian overnight rate U.S. federal funds rate Oct Oct 2014 2015* Jan 2013 Oct 2013 Oct Oct 2014 2015* *Forecast *Forecast...

  • Page 20
    ... Canadian indices. Total Shareholder Return For the year ended October 31 2014 2013 2012 2011 2010 3-year CAGR (1) 5-year CAGR (1) Closing market price per common share ($) Dividends paid ($ per share) Dividend yield (%) Increase (decrease) in share price (%) Total annual shareholder return...

  • Page 21
    ... in trading revenues in non-interest revenue. (6) Restructuring charge to align our cost structure with the current and future business environment as part of a broader effort to improve productivity. (7) Effective the first quarter of 2014, Corporate Services adjusted results include credit-related...

  • Page 22
    ... or 9%. Wealth Management results are discussed in the operating group review on page 51. BMO Capital Markets reported net income increased $35 million or 3% to $1,079 million. The increase reflected growth in revenue across both Investment and Corporate Banking and Trading Products, with good...

  • Page 23
    ...' equity less deductions for goodwill, intangible assets, pension assets, certain deferred tax assets and other items, divided by risk-weighted assets for CET1. 2012* 2013 2014 BMO's CET1 Ratio remains strong. *2012 CET1 Ratio is on a pro-forma basis. 34 BMO Financial Group 197th Annual Report...

  • Page 24
    ...year. BMO Capital Markets revenue growth was driven by higher net securities gains and increases in trading revenues, lending revenues and investment banking fees, particularly in our U.S. platform. U.S. P&C revenue decreased modestly on a U.S. dollar basis, as the benefits of strong commercial loan...

  • Page 25
    ... recorded in net interest income on the purchased performing loan portfolio and income or losses from run-off structured credit activities for 2013 and 2012, which are recorded in Corporate Services, as discussed in the NonGAAP Measures section on page 32. MD&A Effects of Changes in Exchange Rates...

  • Page 26
    ...2013 % Net interest margin (in basis points) 2014 2013 Change Canadian P&C U.S. P&C Personal and Commercial Banking (P&C) Wealth Management BMO Capital Markets Corporate Services, including Technology and Operations Total BMO adjusted Adjusting items impacting net interest income Total BMO reported...

  • Page 27
    ...31 2014 2013 Change from 2013 2012 (%) MD&A Securities commissions and fees Deposit and payment service charges Trading revenues Lending fees Card fees Investment management and custodial fees Mutual fund revenues Underwriting and advisory fees Securities gains, other than trading Foreign exchange...

  • Page 28
    ... (1) (Canadian $ in millions) (taxable equivalent basis) For the year ended October 31 2014 2013 Change from 2013 2012 (%) MD&A Interest rates Foreign exchange Equities Commodities Other (2) Total (teb) Teb offset Total Reported as: Net interest income Non-interest revenue - trading revenues Total...

  • Page 29
    ... by Operating Group (1) For the year ended October 31 (Canadian $ in millions) 2014 2013 2012 Canadian P&C U.S. P&C Personal and Commercial Banking Wealth Management BMO Capital Markets Corporate Services, including T&O (2) Impaired real estate loans Interest on impaired loans Purchased credit...

  • Page 30
    ... a legal matter in 2014. BMO Capital Markets reported efficiency ratio increased by 180 basis points to 63.2% as the rate of growth in revenue across both Investment and Corporate Banking and Trading Products was more than offset by the pace of growth on employee-related costs and increased support...

  • Page 31
    ...Canadian P&C 42% U.S. P&C 14% Wealth Management 20% BMO CM 24% 2013 Canada 71% U.S. 25% Other countries 4% Results provide attractive diversification across businesses and geographies. *Percentages determined excluding results in Corporate Services. 42 BMO Financial Group 197th Annual Report 2014

  • Page 32
    ..., Net Income and Average Assets by Operating Group and by Location (Canadian $ in millions, except as noted) Personal and Commercial Banking For the year ended October 31 2014 2013 2012 2014 Wealth Management 2013 2012 2014 BMO Capital Markets 2013 2012 Corporate Services, including Technology and...

  • Page 33
    ...Personal and Commercial Banking (U.S. P&C). These operating segments are reviewed separately in the sections that follow. (Canadian $ in millions, except as noted) As at or for the year ended October 31 Canadian P&C 2014 2013 2012 2014 U.S. P&C 2013 2012 2014 Total P&C 2013 2012 Net interest income...

  • Page 34
    ... deposit accounts, commercial credit cards, business loans and commercial mortgages, cash management solutions, foreign exchange and specialized banking programs. Strengths and Value Drivers ‰ Highly engaged team of 16,000 employees focused on anticipating customers' needs, finding ways to help...

  • Page 35
    ...accounts. Commercial deposit balances grew 9% with growth coming across a wide number of sectors. We expect to generate revenue growth by targeting opportunities to attract new customers and increasing our share of wallet while continuing to improve productivity. 46 BMO Financial Group 197th Annual...

  • Page 36
    ...house prices fairly steady. In the commercial banking sector, growth in commercial operating deposits is expected to moderate in 2015 from double-digit levels in 2014. With a higher rate of economic growth, companies are expected to reduce their precautionary savings and increase business investment...

  • Page 37
    ...Banking and CEO, BMO Harris Bank N.A. Chicago Lines of Business Personal Banking offers a broad range of products and services to individuals, as well as small and mid-sized business customers, including deposits, mortgages, consumer credit, business lending, credit cards and other banking services...

  • Page 38
    ... management. Average deposits of $59.4 billion were relatively unchanged, as growth in our commercial business and in our personal chequing accounts was offset by a planned reduction in higher-cost personal money market and time deposit accounts. BMO Financial Group 197th Annual Report 2014...

  • Page 39
    ... highly competitive and the low interest rate environment continues to be challenging for the banking industry. We are continuing to concentrate on our customer-focused growth strategy and commercial sector expertise to generate growth in our loan and deposit balances and improve our financial...

  • Page 40
    ... clients in the United States. BMO Global Asset Management is a global investment organization that provides investment management, retirement, and trust and custody services to institutional, retail and high net worth investors around the world. BMO Insurance operates in Canada and internationally...

  • Page 41
    ... 414.5 2014 Revenue by Line of Business (%) 857 848 BMO Nesbitt Burns 31% BMO Insurance 12% BMO Global Asset Management 28% BMO's Private Banking Businesses 24% 548 172.1 313.3 194.2 2012 2013 2014 2012 2013 2014 BMO InvestorLine 5% MD&A Invest in our people, products, technology and...

  • Page 42
    ... volumes and asset levels. Interest rates may start to rise in the fall of 2015 in Canada and the middle of year in the United States which will have a positive impact on our insurance business. Changing demographics, particularly in the retirement, mass affluent and high net worth sectors will...

  • Page 43
    ...global markets for institutional, corporate and retail clients through an integrated suite of sales and trading solutions that include debt, foreign exchange, interest rate, credit, equity, securitization and commodities. We also offer new product development and origination services as well as risk...

  • Page 44
    ... in net loans and acceptances related to growth in corporate banking, and higher cash balances were partly offset by decreases in derivative financial assets, primarily due to declines in the fair value of interest rate contracts. BMO Capital Markets participated in 1,496 new global issues in 2014...

  • Page 45
    ... 2014 reflected our balanced, diversified and client-focused business model, as well as our disciplined approach to risk management in an environment influenced by market factors that contribute to variability in results. There was growth in our Investment and Corporate Banking businesses, with...

  • Page 46
    ..., risk management, finance, legal and regulatory compliance, marketing, communications and human resources. T&O manages, maintains and provides governance over information technology, operations services, real estate and sourcing for BMO Financial Group. The costs of providing these Corporate Units...

  • Page 47
    ... and Corporate Banking and Trading Products. Results in the fourth quarter of 2014 were impacted by lower client activity levels. Canadian P&C Canadian P&C's strong momentum has continued since the second half of 2013. Improved net income in the last six quarters was driven by good revenue growth...

  • Page 48
    ... and Commercial Banking Wealth Management BMO Capital Markets Corporate Services, including T&O BMO Financial Group adjusted net income Information per Common Share ($) Dividends declared Earnings Basic Diluted Adjusted earnings Basic Diluted Book value Market price High Low Close Financial Measures...

  • Page 49
    ... from the acquired F&C business, higher feebased revenue from strong growth in client assets and higher insurance revenue. BMO Capital Markets revenue increased 2% year over year with solid growth from Investment and Corporate Banking, partly offset by lower revenues in Trading Products, in part due...

  • Page 50
    ... by growth in client assets, a $191 million security gain and the benefit of recent acquisitions. Insurance revenue increased 49% as the prior year results were impacted by unfavourable movements in long-term interest rates, and there was continued growth in both the underlying creditor and life...

  • Page 51
    ... 31 2014 2013 2012 2011 2010 Assets Cash and interest bearing deposits with banks Securities Securities borrowed or purchased under resale agreements Net loans and acceptances Other assets Total assets Liabilities and Shareholders' Equity Deposits Other liabilities Subordinated debt Capital trust...

  • Page 52
    ... and share capital. The share capital increase is driven by the issuance of preferred shares, as well as the issuance of common shares under the Shareholder Dividend Reinvestment and Share Purchase Plan (DRIP) and Stock Option Plan. BMO's DRIP is described in the Enterprise-Wide Capital Management...

  • Page 53
    ... our enterprise-wide strategy. Finance and Risk Management are responsible for the design and implementation of the corporate policies and framework related to capital, risk management and the ICAAP. Regulatory Capital Common equity is the most permanent form of capital. Common Equity Tier 1 (CET1...

  • Page 54
    ... quarter of 2014, BMO's operational risk RWA were determined using the Standardized Approach and were based on the size and type of our lines of business. In August 2013, OSFI advised banks that it would begin phasing in the Credit Valuation Adjustment (CVA) risk capital charge for Canadian banks in...

  • Page 55
    ... Funding Risk section starting on page 95. BMO conducts business through a variety of corporate structures, including subsidiaries and joint ventures. A framework is in place for subsidiaries to appropriately manage their funding and capital. As a bank holding company with total consolidated assets...

  • Page 56
    ... Equity Trading book Securitization Other credit risk assets - non-counterparty managed assets Scaling factor for credit risk assets under AIRB Approach (1) Total Credit Risk Market Risk Operational Risk CET1 Capital Risk-Weighted Assets Additional CVA adjustment, prescribed by OSFI, for Tier...

  • Page 57
    ... AND ANALYSIS Economic Capital and RWA by Operating Group and Risk Type As at October 31, 2014 BMO Financial Group Operating Groups Personal and Commercial Banking Wealth Management BMO Capital Markets Corporate Services Economic Capital by Risk Type (%) MD&A Credit Market Operational/Other...

  • Page 58
    ... finance loans are defined by BMO as loans to private equity businesses and mezzanine financings where our assessment indicates a higher level of credit risk. BMO has exposure to leveraged finance loans, which represent 1.4% of our total assets, with $8.5 billion outstanding at October 31, 2014...

  • Page 59
    ...investors. We use our credit adjudication process in deciding whether to enter into these agreements just as we do when extending credit in the form of a loan. Two of these customer securitization vehicles are funded in the market, while a third is funded directly by BMO. BMO consolidates the assets...

  • Page 60
    ... market information (Level 2) and internal models without observable market information (Level 3) in the valuation of securities, derivative assets and derivative liabilities as at October 31, 2014, as well as a sensitivity Consolidation of Structured Entities In the normal course of business, BMO...

  • Page 61
    ... to changes in discount rates. We determine discount rates at each year end for our Canadian and U.S. plans using high-quality corporate bonds with terms matching the plans' specific cash flows. Additional information regarding our accounting for pension and other employee future benefits, including...

  • Page 62
    ... investment yields, policy dividends, administration costs and margins for adverse deviation. These assumptions are reviewed at least annually and updated to reflect actual Changes in Accounting Policies in 2014 BMO adopted the following new or amended standards in 2014: IAS 19 Employee Benefits...

  • Page 63
    ... specified procedures. (3) All other fees for 2014 and 2013 relate primarily to fees paid for reviews of compliance with regulatory requirements for financial information and reports on internal controls over services provided by various BMO Financial Group businesses. They also include costs of...

  • Page 64
    ... Report: We outline BMO's plans to meet new regulatory ratios on pages 65 to 66 (Leverage Ratio) and 99 to 100 (Net Stable Funding Ratio). 13 Provide granular information to explain how RWA relate to business activities. Annual Report: A diagram of BMO's risk exposure, including RWA by operating...

  • Page 65
    ... management techniques employed by the bank to measure and assess the risk of loss beyond reported risk measures. Annual Report: The use of stress testing, scenario analysis and stressed VaR for market risk management is described on pages 91 to 95. 76 BMO Financial Group 197th Annual Report 2014

  • Page 66
    ...a blue-tinted font in the Enterprise-Wide Risk Management section of the MD&A form an integral part of the 2014 annual consolidated financial statements. They present required disclosures as set out by the International Accounting Standards Board in IFRS 7, Financial Instruments - Disclosures, which...

  • Page 67
    ... Security Risk Information security is integral to BMO's business activities, brand and reputation. Given our pervasive use of the internet and reliance on digital technologies, particularly the mobile and online banking platforms that serve our customers, BMO faces heightened information security...

  • Page 68
    ... business, corporate and commercial clients in Canada. A strengthening of the U.S. dollar could increase the value of our risk-weighted assets, lowering our capital ratios. Refer to the Foreign Exchange section on page 36, the Enterprise-Wide Capital Management section on page 64 and the Market Risk...

  • Page 69
    ... Risk Governance Risk Principles Risk Appetite Risk Review and Approval Risk Monitoring Credit and Counterparty Market Liquidity and Operational Funding Insurance Legal and Regulatory Business Model Strategic Reputation Environmental and Social Our enterprise-wide risk management...

  • Page 70
    .... Management also oversees their effective operation within our overall risk management framework. Individual governance committees establish and monitor further risk management limits, consistent with and subordinate to the Boardapproved limits. BMO Financial Group 197th Annual Report 2014 81

  • Page 71
    ... Risk Review Committee Board Audit and Conduct Review Committee Risk Management Committee Balance Sheet and Capital Management Reputation Risk Management Chief Executive Officer Operational Risk MD&A Operating Groups First Line of Defence Enterprise Risk and Portfolio Management Corporate...

  • Page 72
    ... inform our business strategies and decisions. These limits are reviewed and approved by the Board of Directors and/or management committees and include: ‰ Credit and Counterparty Risk - limits on country, industry, portfolio/ product segments, and group and single-name exposures; ‰ Market Risk...

  • Page 73
    ...and informs our strategy, business planning and decision-making processes. Governance of the stress testing framework resides with senior management, including the Enterprise Stress Testing Steering Committee. This committee is comprised of business, risk and finance executives and is accountable to...

  • Page 74
    ... master securities lending agreements. Portfolio Management BMO's credit risk governance policies provide an acceptable level of diversification. Limits are in place for several portfolio dimensions, including industry, specialty segments (e.g., hedge funds and leveraged lending), country, product...

  • Page 75
    ... basis to incorporate additional data points in the parameter estimation process, ensuring that the most recent experience is incorporated. Retail Credit Probability of Default Bands by Risk Rating Risk profile Probability of default band Credit Quality Information Portfolio Review Total enterprise...

  • Page 76
    ... factors such as management's credit judgment with respect to current and near-term macroeconomic and business conditions, portfoliospecific considerations, credit quality trends, changes in lending practices, model factors and the level of non-performing balances (impaired loans) for which...

  • Page 77
    ... Funded lending includes loans (primarily trade finance). (2) Securities include cash products, insurance investments and traded credit. (3) Repo-style transactions are primarily with bank counterparties for which BMO holds collateral ($15 billion for Europe as at October 31, 2014). (4) Derivatives...

  • Page 78
    ...Canadian $ in millions) Lending (1) Funded lending as at October 31, 2014 Country Bank Corporate Sovereign As at October 31, 2014 Commitments Funded As at October 31, 2013 Commitments Funded GIIPS Greece Ireland (5) Italy Portugal Spain Total... MD&A BMO Financial Group 197th Annual Report 2014 89

  • Page 79
    ... Cross-currency interest rate swaps Forward foreign exchange contracts Purchased options Written options Total foreign exchange contracts Commodity Contracts Swaps Purchased options Written options Total commodity contracts Equity Contracts Credit Default Swaps Purchased Written Total credit default...

  • Page 80
    ..., market and notional values and revenue losses. Value at Risk (VaR) is measured for specific classes of risk in BMO's trading and underwriting activities: interest rate, foreign exchange rate, credit spreads, equity and commodity prices and their implied volatilities. This measure calculates the...

  • Page 81
    ... established limits are communicated to senior management on a timely basis for resolution and appropriate action. In addition, we measure the market risk for trading and underwriting portfolios that meet regulatory criteria for trading book capital treatment using the Internal Models Approach...

  • Page 82
    ... (pre-tax) Trading Net Revenues versus Value at Risk November 1, 2013 to October 31, 2014 ($ millions) 50 30 10 Nov 1 Apr 30 Oct 31 Jan 31 Jul 31 (10) (30) Daily Revenues Total Trading VaR Total AFS VaR Material presented in a blue-tinted font above is an integral part of the 2014 annual...

  • Page 83
    ...or repricing dates. Product embedded options include loan prepayment, deposit redemption privileges and committed rates on unadvanced mortgages. Product embedded options are managed to low risk levels through a dynamic hedging process or with purchased options. Structural Market Risk Governance The...

  • Page 84
    ...scheduled terms. For customer loans and deposits without scheduled maturity and repricing dates (such as credit card loans and chequing accounts), we measure our exposure using models that adjust for elasticity in product pricing and reflect historical and forecasted trends in balances. These models...

  • Page 85
    ... assets, including mortgages and loans, to raise long-term secured funding. As part of the Liquidity and Funding Risk Management Framework, a Pledging of Assets corporate policy is in place that sets out the framework and pledging limits for financial and non-financial assets. Liquidity and Funding...

  • Page 86
    ...Multilateral development banks Mortgage-backed securities and collateralized mortgage obligations Corporate debt Corporate equity Total securities and securities borrowed or purchased under resale agreements NHA mortgage-backed securities (reported as loans at amortized cost) (4) Total liquid assets...

  • Page 87
    ...2014, which include securities held in BMO's insurance subsidiary and credit protection vehicle, significant equity investments, and certain investments held in our merchant banking business. Other unencumbered assets also include mortgages and loans that may be securitized to access secured funding...

  • Page 88
    ...wholesale term funding are outlined in the table below. Additional information on deposit maturities can be found in Note 32 on page 186. BMO maintains a sizeable portfolio of unencumbered liquid assets, totalling $171.0 billion as at October 31, 2014, that can be monetized to meet potential funding...

  • Page 89
    ... deposit ratings of BMO and six other large Canadian banks in light of previously announced plans by the Canadian federal government to implement a bail-in regime for domestic systemically important banks. In August 2014, S&P affirmed its long-term and short-term issuer credit ratings of BMO...

  • Page 90
    ... the enterprise. Corporate Operational Risk Management establishes the ORMF and the necessary governance framework, with operating group Chief Risk Officers providing governance and oversight for their respective business units. Operational Risk Management The ORMF defines the processes we use to...

  • Page 91
    .... Failure to properly manage these risks may result in harm to our reputation, cause a decline in investor confidence, and affect our ability to execute our business strategies. 102 BMO Financial Group 197th Annual Report 2014 Under the direction of the Chief Anti-Money Laundering Officer, the Anti...

  • Page 92
    .... We must file, by January 1, 2015, an outline of our implementation plan for meeting these requirements by the effective date (July 1, 2016). BMO is preparing for the impact of the FBO Rule on its operations. Risk Governance Framework. The Office of the Comptroller of Currency issued for comment...

  • Page 93
    ... information linked to financial commitments. The Strategy Group works with the lines of business and key corporate stakeholders during the strategy development process to promote consistency and adherence to strategic management standards. The 104 BMO Financial Group 197th Annual Report 2014

  • Page 94
    ... share price. BMO's reputation is one of its most valuable assets. By protecting and maintaining our reputation, we can increase shareholder value, reduce our cost of capital and improve employee engagement and customer loyalty. Our reputation is built on our commitment to high standards of business...

  • Page 95
    ... 31 2014 2013 2012 2011 2010 2009 2008 2007 2006 2005 Market Price per Common Share ($) High Low Close Common Share Dividends Dividends declared per share ($) Dividend payout ratio (%) Dividend yield (%) Dividends declared ($ millions) Total Shareholder Return (%) Five-year average annual return...

  • Page 96
    ...Summary Income Statement and Growth Statistics For the year ended October 31 2014 2013 2012 ($ millions, except as noted) 5-year CAGR 10-year CAGR 2011 2010 Income Statement - Reported Results Net interest income Non-interest revenue Total revenue Provision for credit losses Non-interest expense...

  • Page 97
    ... fees Card fees Investment management and custodial fees Mutual fund revenues Securitization revenues Underwriting and advisory fees Securities gains (losses), other than trading Foreign exchange, other than trading Insurance income Other revenues Total Non-Interest Revenue Year-over-year growth...

  • Page 98
    ... annual growth rate of 5.4% over ten years. (2) This ratio is calculated excluding insurance policyholder benefits, claims and acquisition expenses (PBCAE). (3) Government levies are included in various non-interest expense categories. na - not applicable nm - not meaningful BMO Financial Group...

  • Page 99
    ...Assets Canadian Dollar Deposits with other banks Securities Securities borrowed or purchased under resale agreements Loans Residential mortgages Non-residential mortgages Personal and credit cards Businesses and governments Total loans Total Canadian dollar U.S. Dollar and Other Currencies Deposits...

  • Page 100
    ...) 2013/2012 Increase (decrease) due to change in Average rate Total Assets Canadian Dollar Deposits with other banks Securities Securities borrowed or purchased under resale agreements Loans Residential mortgages Non-residential mortgages Personal and credit cards Businesses and governments Total...

  • Page 101
    ... INFORMATION Table 7: Net Loans and Acceptances - Segmented Information Canada As at October 31 2014 2013 2012 2011 ($ millions) (6) (8) United States 2010 2014 2013 2012 2011 2010 2014 Other countries 2013 2012 2011 2010 2014 2013 Total 2012 2011 2010 Consumer Residential mortgages Credit cards...

  • Page 102
    ...) (8) 2014 As at October 31 2013 2012 2011 2010 Net Impaired Businesses and Governments Loans Commercial real estate Construction (non-real estate) Retail trade Wholesale trade Agriculture Communications Manufacturing Mining Oil and gas Transportation Utilities Forest products Service industries...

  • Page 103
    ... Segmented Information ($ millions) Canada As at October 31 2014 2013 2012 2011 2010 2014 United States 2013 2012 2011 2010 2014 Other countries 2013 2012 2011 2010 2014 2013 Total 2012 2011 2010 Gross impaired loans and acceptances (GIL), beginning of year Consumer Businesses and governments Total...

  • Page 104
    ...including foreign exchange rate changes ACL, end of year (4) Consumer Businesses and governments Total ACL, end of year Allocation of Write-offs by Market Consumer Businesses and governments Allocation of Recoveries by Market Consumer Businesses and governments Net write-offs as a % of average loans...

  • Page 105
    ...31 2014 2013 2012 2011 2010 Businesses and Governments Specific Allowances by Industry 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...

  • Page 106
    ...-sized enterprises Equity Trading book Securitization Other credit risk assets - noncounterparty managed assets Scaling factor for credit risk assets under AIRB Approach (1) Total Credit Risk Market Risk Operational Risk Common Equity Tier 1 (CET1) Capital Risk-Weighted Assets Additional Credit...

  • Page 107
    ... over financial reporting. Our system of internal controls includes written communication of our policies and procedures governing corporate conduct and risk management; comprehensive business planning; effective segregation of duties; delegation of authority and personal accountability; escalation...

  • Page 108
    ... Public Company Accounting Oversight Board (United States), the Bank's internal control over financial reporting as of October 31, 2014, based on the criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission...

  • Page 109
    ... accompanying Management's Discussion and Analysis. Our responsibility is to express an opinion on the Bank's internal control over financial reporting based on our audit. We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those...

  • Page 110
    ... fees Card fees Investment management and custodial fees Mutual fund revenues Underwriting and advisory fees Securities gains, other than trading (Note 3) Foreign exchange, other than trading Insurance income Other Total Revenue Provision for Credit Losses (Note 4) Non-Interest Expense Employee...

  • Page 111
    ...are an integral part of these consolidated financial statements. Certain comparative figures have been reclassified to conform with the current year's presentation and for changes in accounting policies - see Note 1. Consolidated Financial Statements 124 BMO Financial Group 197th Annual Report 2014

  • Page 112
    Consolidated Balance Sheet As at October 31 (Canadian $ in millions) 2014 2013 Assets Cash and Cash Equivalents (Note 2) Interest Bearing Deposits with Banks (Note 2) Securities (Note 3) Trading Available-for-sale Held-to-maturity Other $ 28,386 6,110 85,022 46,966 10,344 987 143,319 53,555 101,...

  • Page 113
    ... Year Common Shares (Note 20) Balance at beginning of year Issued under the Shareholder Dividend Reinvestment and Share Purchase Plan (Note 20) Issued under the Stock Option Plan (Note 23) Repurchased for cancellation (Note 20) Issued on the exchange of shares of a subsidiary corporation Balance at...

  • Page 114
    ... Maturities of securities, other than trading Proceeds from sales of securities, other than trading Premises and equipment - net purchases Purchased and developed software - net purchases Acquisitions (Note 12) Net Cash Provided by (Used in) Investing Activities Effect of Exchange Rate Changes on...

  • Page 115
    ...Capital Trust Securities 159 19 Interest Rate Risk 160 Note Topic Page 20 Equity 161 21 Offsetting of Financial Assets and Financial Liabilities 163 22 Capital Management 163 23 Employee Compensation - Stock-Based Compensation 164 24 Employee Compensation - Pension and Other Employee Future Benefits...

  • Page 116
    ...to changes in discount rates. We determine discount rates at each year end for our Canadian and U.S. plans using high-quality AA rated corporate bonds with terms matching the plans' specific cash flows. Additional information regarding our accounting for pension and other employee future benefits is...

  • Page 117
    ...from a change in the assumption for future investment yields. 130 BMO Financial Group 197th Annual Report 2014 Changes In Accounting Policies Effective November 1, 2013, we adopted the following new and amended accounting pronouncements issued by the IASB. Employee Benefits On November 1, 2013, we...

  • Page 118
    ... of this new standard on our future financial results. BMO Financial Group 197th Annual Report 2014 131 Cash Securities Loans, business and governments Premises and equipment Goodwill Intangible assets Deferred tax asset Other assets Deposits, business and governments Capital trust securities Other...

  • Page 119
    ...-for-sale securities with unrealized gains and losses recorded in other comprehensive income. We designate certain securities held by our insurance subsidiaries that support our insurance liabilities at fair value through profit or loss Notes 132 BMO Financial Group 197th Annual Report 2014

  • Page 120
    ...of debt and equity securities that may be sold in response to or in anticipation of changes in interest rates and resulting prepayment risk, changes in foreign currency risk, changes in funding sources or terms, or to meet liquidity needs. Available-for-sale securities are initially recorded at fair...

  • Page 121
    ... federal government U.S. states, municipalities and agencies Other governments Mortgage-backed securities and collateralized mortgage obligations Corporate debt Corporate equity Total trading securities Available-for-Sale Securities Issued or guaranteed by: Canadian federal government Amortized cost...

  • Page 122
    ... our insurance operations of $379 million for the year ended October 31, 2014 ($(190) million in 2013 and $286 million in 2012). Certain comparative figures have been restated as a result of the adoption of new accounting principles - see Note 1. Notes BMO Financial Group 197th Annual Report 2014...

  • Page 123
    ... in its entirety on a timely basis. Generally, corporate and commercial loans are considered impaired when payments are 90 days past due, or for fully secured loans, when 136 BMO Financial Group 197th Annual Report 2014 Specific Allowance These allowances are recorded for individually identified...

  • Page 124
    ... as follows: (Canadian $ in millions) Residential mortgages (1) 2014 2013 2012 Credit card, consumer instalment and other personal loans 2014 2013 2012 Business and government loans 2014 2013 2012 Customers' liability under acceptances 2014 2013 2012 2014 Total 2013 2012 Gross loan balances at end...

  • Page 125
    ...2014 2013 Specific allowance (3) 2014 2013 Net of specific allowance 2014 2013 Residential mortgages Consumer instalment and other personal loans Business and government loans Total (1) By geographic region (2): Canada United States Other countries Total (1) Excludes purchased credit impaired loans...

  • Page 126
    ... to the acquisition date, we account for each type of loan as follows: Purchased Performing Loans For performing loans with fixed terms, the future credit mark is fully amortized to net interest income over the expected life of the loan using the effective interest method. The impact on net interest...

  • Page 127
    ..., captured within the individual sector in the following table, comprising $169.0 billion ($181.6 billion in 2013). Additional information on the composition of our loans and derivatives exposure is disclosed in Notes 4 and 10, respectively. Notes 140 BMO Financial Group 197th Annual Report 2014

  • Page 128
    ... the Enterprise-Wide Risk Management section of Management's Discussion and Analysis on pages 85 to 86 of this report. Wholesale Credit Exposure by Risk Rating (Canadian $ in millions) Bank Drawn Corporate Sovereign Bank Undrawn (1) Corporate Sovereign 2014 Total exposure 2013 Total exposure Based...

  • Page 129
    ...accounting policies - see Note 1. Market Risk Market risk is the potential for adverse changes in the value of our assets and liabilities resulting from changes in market variables such as interest rates, foreign exchange rates, equity and commodity prices and their implied volatilities, and credit...

  • Page 130
    ... bearing or discounted investor certificates. We use a bank securitization vehicle to securitize our Canadian credit card loans. We are required to consolidate this vehicle. See Note 9 for further information. We also sell Canadian mortgage loans to thirdparty Canadian securitization programs...

  • Page 131
    ... of new accounting principles - see Note 1. Bank Securitization Vehicles We use securitization vehicles to securitize our Canadian credit card loans in order to obtain alternate sources of funding. The structure of these vehicles limits the activities they can undertake and the types of assets they...

  • Page 132
    ... amounts of revenue earned from and assets transferred to such entities are not significant. BMO Financial Group 197th Annual Report 2014 145 Compensation Trusts We have established trusts in order to administer our employee share ownership plan. Under this plan, employees can direct a portion of...

  • Page 133
    ...BMO Financial Group 197th Annual Report 2014 Use of Derivatives Trading Derivatives Trading derivatives include derivatives entered into with customers to accommodate their risk management needs, market-making to facilitate customer-driven demand for derivatives, derivatives transacted on a limited...

  • Page 134
    ... Liabilities - Derivative instruments in the Consolidated Balance Sheet. 46 (371) 42 (39) 360 (44) 7 (11) (2) (2) Unrealized gains (losses) on hedged items are recorded in Securities - Available for sale, Subordinated Debt and Deposits. Notes BMO Financial Group 197th Annual Report 2014 147

  • Page 135
    ... 2014 (per Standard & Poor's Ratings Services), we would have been required to post collateral or meet payment demands of an additional $1.1 billion and $1.4 billion, respectively. Fair Value Fair value represents point-in-time estimates that may change in subsequent reporting periods due to market...

  • Page 136
    ...Balance Sheet are as follows: (Canadian $ in millions) 2014 Assets 2013 Liabilities 2014 2013 Fair value of trading derivatives Fair value of hedging derivatives Total 31,627 1,028 32,655 29,484 775 30,259 32,312 1,345 33,657 31,184 790 31,974 Notes BMO Financial Group 197th Annual Report 2014...

  • Page 137
    ...197th Annual Report 2014 These variables include interest rates, foreign exchange rates, equity and commodity prices and their implied volatilities, as well as credit spreads, credit migration and default. We strive to limit market risk by employing comprehensive governance and management processes...

  • Page 138
    ...-traded derivatives have limited potential for credit exposure as they are settled net daily with each exchange. 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...

  • Page 139
    ...,716 44,834 255,337 291,905 592,076 15,122 54,341 69,463 45,211 22,123 3,538,589 Notes Total foreign exchange contracts Commodity Contracts Swaps Futures and options Total commodity contracts Equity Contracts Credit Contracts Total notional amount 152 BMO Financial Group 197th Annual Report 2014

  • Page 140
    ... other partners. We have BMO Financial Group 197th Annual Report 2014 153 Notes F&C Asset Management plc ("F&C") On May 7, 2014, we completed the acquisition of all the issued and outstanding share capital of F&C Asset Management plc, an investment manager based in the United Kingdom, for cash...

  • Page 141
    ... using the Capital Asset Pricing Model, based on the historical betas of publicly traded peer companies that are comparable to the CGU. There were no write-downs of goodwill due to impairment during the years ended October 31, 2014 and 2013. The key assumptions described above may change as market...

  • Page 142
    ... ended October 31, 2014 and 2013 is as follows: Personal and Commercial Banking Canadian P&C U.S. P&C Traditional Wealth Management (7) Wealth Management BMO Capital Markets Corporate Services Technology and Operations (Canadian $ in millions) Total Total Insurance Total Balance - October 31...

  • Page 143
    ...and for changes in accounting policies - see Note 1. Note 15: Deposits Payable on demand (Canadian $ in millions) Interest bearing 2014 2013 Non-interest bearing 2014 2013 Payable after notice 2014 2013 Payable on a fixed date 2014 2013 Total 2014 2013 Deposits by: Banks Businesses and governments...

  • Page 144
    ... in our Consolidated Balance Sheet. The change in fair value of these note liabilities resulted in an increase of $0.4 million in non-interest revenue, trading revenues for the year ended October 31, 2014 (decrease of $24 million in 2013). BMO Financial Group 197th Annual Report 2014 157 Notes

  • Page 145
    ...: (Canadian $ in millions) 2014 2013 Insurance-related liabilities, beginning of year Increase (decrease) in life insurance policy benefit liabilities from: New business In-force policies Changes in actuarial assumptions and methodology Foreign currency Net increase in life insurance policy benefit...

  • Page 146
    ... for further details on Canada Yield Price calculations and the definition of CDOR. Note 18: Capital Trust Securities We issue BMO Capital Trust Securities ("BMO BOaTS") through our subsidiary BMO Capital Trust (the "Trust"). The proceeds of BMO BOaTS are used for general corporate purposes. We...

  • Page 147
    ... forecasted trends in balances. Capital Common shareholders' equity is reported as non-interest sensitive. Yields Yields are based upon the effective interest rates for the assets or liabilities on October 31, 2014 and 2013. Assets Fixed rate, fixed term assets, such as residential mortgage loans...

  • Page 148
    ... price of US$25.00 per share plus all declared and unpaid dividends up to but excluding the date fixed for redemption. We recognized a gain of $96 million in contributed surplus related to foreign exchange upon redemption of these preferred shares. Notes BMO Financial Group 197th Annual Report 2014...

  • Page 149
    ... market price. During the year ended October 31, 2014, we issued a total of 2,786,997 common shares from treasury (2,069,269 in 2013) and purchased 1,276,088 common shares in the open market (700,362 in 2013) under the DRIP. Normal Course Issuer Bid On February 1, 2014, we renewed our normal course...

  • Page 150
    ... a cost-effective structure that: considers our target regulatory capital ratios and internal assessment of required economic capital; is consistent with our targeted credit ratings; underpins our operating groups' business strategies; and builds depositor confidence and long-term shareholder value...

  • Page 151
    ... met OSFI's stated minimum capital ratio requirements as at October 31, 2014. Note 23: Employee Compensation - Stock-Based Compensation Stock Option Plan We maintain a Stock Option Plan for designated officers and employees. Options are granted at an exercise price equal to the closing price of our...

  • Page 152
    .... To determine the fair value of the stock option tranches on the grant date, the following ranges of values were used for each option pricing assumption: 2014 2013 2012 Expected dividend yield Expected share price volatility Risk-free rate of return Expected period until exercise (in years...

  • Page 153
    ... both assets and liabilities in the development of an investment policy and in managing risk. The plans invest in asset classes that include equities, fixed income and alternative strategies, under established investment guidelines. Plan 166 BMO Financial Group 197th Annual Report 2014 Notes

  • Page 154
    ... primary pension plans, based on the fair market values at October 31, are as follows: Pension benefit plans Range 2014 Actual 2014 Actual 2013 Equities Fixed income investments Other 25% - 50% 35% - 55% 10% - 25% 42% 45% 13% 43% 42% 15% Notes BMO Financial Group 197th Annual Report 2014 167

  • Page 155
    ... 2014 2013 2012 Annual benefits expense Benefits earned by employees Net interest (income) expense on net defined benefit (asset) liability Administrative expenses Remeasurement of other long-term benefits Benefits expense Canada and Quebec pension plan expense Defined contribution expense Total...

  • Page 156
    ... plans are as follows: (Canadian $ in millions, except as noted) Pension benefit plans 2014 2013 Other employee future benefit plans 2014 2013 Defined benefit obligation Defined benefit obligation at beginning of year Opening adjustment for acquisitions Benefits earned by employees Interest cost...

  • Page 157
    ... Maturity Profile The duration of the defined benefit obligation for our primary plans is as follows: (In years) 2014 2013 Notes Canadian pension plans U.S. pension plans Canadian other employee future benefit plans 13.6 11.2 16.5 12.8 10.5 14.3 170 BMO Financial Group 197th Annual Report 2014

  • Page 158
    ... and $107 million as at October 31, 2014 and 2013, respectively, are presented on the balance sheet net by legal jurisdiction. Certain comparative figures have been restated as a result of the adoption of new accounting principles - see Note 1. BMO Financial Group 197th Annual Report 2014 171

  • Page 159
    ... as noted) 2014 2013 2012 Combined Canadian federal and provincial income taxes at the statutory tax rate Increase (decrease) resulting from: Tax-exempt income from securities Foreign operations subject to different tax rates Change in tax rate for deferred income taxes Run-off of structured credit...

  • Page 160
    ...groups using reported and adjusted measures such as net income, revenue growth, return on equity, and non-interest expense-to-revenue (productivity) ratio, as well as operating leverage. business and commercial banking customers with a broad suite of integrated commercial and capital market products...

  • Page 161
    ... planning, risk management, finance, legal and compliance, marketing, communications and human resources. T&O manages, maintains and provides governance over information technology, operations services, real estate and sourcing for BMO Financial Group. The costs of providing these Corporate Units...

  • Page 162
    ... assets, grouped by operating segment and geographic region, are as follows: (Canadian $ in millions) Canadian P&C U.S. P&C Wealth Management BMO CM Corporate Services (1) Total Canada United States Other countries 2014 (2) Net interest income Non-interest revenue Total Revenue Provision for credit...

  • Page 163
    ... BMO Advisors Private Limited (India) BMO Nesbitt Burns Financial Services Inc. BMO Group Retirement Services Inc. BMO Holding Finance, LLC BMO Investments Inc. and subsidiary BMO InvestorLine Inc. BMO Service Inc. Bank of Montreal Ireland plc Bank of Montreal Mortgage Corporation BMO Mortgage...

  • Page 164
    ... deferred stock units) are Employees A select suite of customer loan and mortgage products is offered to employees at rates normally accorded to preferred customers. We also offer employees a fee-based subsidy on annual credit card fees. Notes BMO Financial Group 197th Annual Report 2014 177

  • Page 165
    ... October 31, 2014 ($4,280 million in 2013). Note 31: Fair Value of Financial Instruments We record trading assets and liabilities, derivatives, available-for-sale securities and securities sold but not yet purchased at fair value, and other non-trading assets and liabilities at amortized cost less...

  • Page 166
    .... The fair value of limited partnership investments is based upon net asset values published by third-party fund managers. Prices from brokers and multi-contributor pricing sources are corroborated as part of our independent review process, which may include using valuation techniques or obtaining...

  • Page 167
    ... terms linked to the performance of interest rates, foreign currencies, commodities or equity securities have been designated at fair value through profit or loss. The fair value of these structured notes is estimated using internally vetted valuation models and incorporates observable market prices...

  • Page 168
    ...prices Valued using models (with observable inputs) 2013 Valued using models (without observable inputs) Securities Held to maturity Other (1) Securities purchased under resale agreements (2) Loans Residential mortgages Consumer instalment and other personal Credit cards Businesses and governments...

  • Page 169
    ... third-party vendor quotes. Level 2 structured note liabilities are valued using models with observable market information. Level 2 derivative assets and liabilities are valued using industry-standard models and observable market information. Notes 182 BMO Financial Group 197th Annual Report 2014

  • Page 170
    .... During the year ended October 31, 2014, $15 million of trading securities and $12 million of available-for-sale securities were transferred from Level 3 to Level 2 as market information became available for certain corporate debt securities. Notes BMO Financial Group 197th Annual Report 2014 183

  • Page 171
    ... derivative liabilities held on October 31, 2014 are included in earnings in the year. For available-for-sale securities, the unrealized gains or losses on securities held on October 31, 2014 are included in Accumulated Other Comprehensive Income. Notes 184 BMO Financial Group 197th Annual Report...

  • Page 172
    ... derivative liabilities held on October 31, 2013 are included in earnings in the year. For available-for-sale securities, the unrealized gains or losses on securities held on October 31, 2013 are included in Accumulated Other Comprehensive Income. Notes BMO Financial Group 197th Annual Report 2014...

  • Page 173
    ... Funding Risk section on pages 95 to 99 of our 2014 Management's Discussion and Analysis. 2014 Total On-Balance Sheet Financial Instruments Assets Cash and cash equivalents Interest bearing deposits with banks Securities Trading securities Available-for-sale securities Held-to-maturity securities...

  • Page 174
    ... to 5 years Over 5 years No maturity 2014 Total Liabilities and Equity Deposits (1) Banks Businesses and governments Individuals Total deposits Other liabilities Derivative instruments Acceptances Securities sold but not yet purchased Securities lent or sold under repurchase agreements Current tax...

  • Page 175
    ...Securities borrowed or purchased under resale agreements Loans Residential mortgages Consumer instalment and other personal Credit cards Businesses and governments Customers' liability under acceptances Allowance for credit losses Total loans and acceptances, net of allowance Other Assets Derivative...

  • Page 176
    ... to 5 years Over 5 years No maturity 2013 Total Liabilities and Equity Deposits (1) Banks Businesses and governments Individuals Total deposits Other liabilities Derivative instruments Acceptances Securities sold but not yet purchased Securities lent or sold under repurchase agreements Current tax...

  • Page 177
    ..., manage or offset interest rate, foreign currency, equity, commodity or credit exposures arising from normal banking activities. Impaired Loans are loans for which there is no longer reasonable assurance of the timely collection of principal or interest. Innovative Tier 1 Capital is a form of Tier...

  • Page 178
    .... Office of the Superintendent of Financial Institutions Canada (OSFI) is the government agency responsible for regulating banks, insurance companies, trust companies, loan companies and pension plans in Canada. Operating Leverage is the difference between revenue and expense growth rates...

  • Page 179
    ... York Stock Exchange Listing Standards is posted on our website. www.bmo.com/corporategovernance Customers Online filing information: BMO filings in Canada Canadian Securities Administrators www.sedar.com For assistance with your investment portfolio or other financial needs: BMO Bank of Montreal...

  • Page 180
    ... Stock Exchange (TSX) and New York Stock Exchange (NYSE). The preferred shares of Bank of Montreal are listed on the TSX. Important Dates Fiscal Year End October 31 Annual Meeting March 31, 2015, 9:30 a.m. (local time) The annual meeting of shareholders will be held in Toronto, Ontario, at the BMO...

  • Page 181
    ... range of retail banking, wealth management and investment banking products and services to more than 12 million customers and conducts business through three operating groups: Personal and Commercial Banking, Wealth Management and BMO Capital Markets. This annual report is carbon neutral. Carbon...