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190th Annual Report 2007

Table of contents

  • Page 1
    190th Annual Report 2007

  • Page 2
    ... to ultra-high net worth, as well as select institutional market segments. Working together with our partners throughout BMO and Harris, we offer clients a broad range of wealth management products and services, including full-service and online brokerage, private banking and investment products...

  • Page 3
    ...organization supported by a world-class foundation of productive technologies, efficient processes, disciplined performance management, and sound risk management and governance. Bank of Montreal uses a unified branding approach that links all of the organization's member companies. Bank of Montreal...

  • Page 4
    ... increased to 19.2%. • In the United States, we opened loan production offices in four new markets, enhanced by our Indiana and pending Wisconsin acquisitions. • Private Client Group reported record net income of $408 million, up 15%. • Continued investments in our sales forces and businesses...

  • Page 5
    ... strong risk-adjusted performance. • BMO Capital Markets ranked as top Equity Research Group in Canada for the 27th consecutive year in the Brendan Wood International Survey of Institutional Investors. 50.4 Full-Time Employees (thousands) See page 80. Branches See page 80. Legend Reported...

  • Page 6
    ...of new products and a more concerted focus on customer service, our Personal and Commercial Banking in Canada business increased significantly. Our Private Client Group also experienced solid gains. And excluding our commodities losses, and the fourth quarter capital markets environment charges, BMO...

  • Page 7
    President and Chief Executive Officer's Message to Fellow Shareholders Delivering Value for Our Customers In this, my first letter to the shareholders of BMO Financial Group, my objective is to speak to you in plain terms about our recent performance and the higher expectations we have for the ...

  • Page 8
    ... BMO Bank of Montreal in the Canadian market. 7 Maurice Hudon, Senior Executive Vice-President, Personal and Commercial Banking Canada, is accountable for operational risk management, long-term development initiatives and the cards and retail payments, insurance and broker services lines of business...

  • Page 9
    ... high return on equity business. The institutional trading business, where much of the market risk activity is centred, remains critical to our clients' execution needs but will follow a strategy to reduce future volatility from the levels of the past 12 months. " ...our history has been defined...

  • Page 10
    ... to our customers. We know that the best way to do that is to bring the strength of our entire company to our customers, to help them to make the choices that are best for them. Every time. Q William A. Downe President and Chief Executive Officer 6 BMO Financial Group 190th Annual Report 2007

  • Page 11
    ...investment we make in risk systems and processes one that not only manages risk but moves us ahead in other ways. Q What is BMO doing to differentiate itself in the highly competitive Canadian retail banking market? A Something we work at every day is to see banking and investing from our customers...

  • Page 12
    ... on our priorities. The businesses performed well, which should pay off as market conditions improve. $ 2,131 Net Income million Operating Groups In 2007, our Personal and Commercial Banking Canada (P&C Canada) and Private Client Group (PCG) both set new net income records. P&C Canada is now...

  • Page 13
    ...number of our capital markets businesses, including strong activity in mergers and acquisitions, equity underwriting and lending fees and commissions. 2002 2003 2004 2005 2006 2007 Foreign Exchange Net income in 2007 was minimally impacted by the significant Canadian and U.S. foreign exchange rate...

  • Page 14
    ..., BMO Mosaik® MasterCard®2 increased the number of new personal and small business accounts by 28% and 40%, respectively. Coupled with strong customer retention, we've increased our active account growth to the highest level in over a decade. In 2007, we acquired First National Bank & Trust in...

  • Page 15
    ...to help every client reach their financial potential. When they grow, we grow." Derral Moriyama, Senior Vice-President, Commercial, Greater Vancouver District 41.5 billion of completed mergers and acquisitions This year, at BMO Capital Markets, we participated in 599 corporate and government debt...

  • Page 16
    ... And we're giving our customers the easyto-understand information, informed advice and the right products they need to make the right decisions about their money - and their financial futures. c Craig Christie, Personal and Commercial Banking Canada 12 BMO Financial Group 190th Annual Report 2007

  • Page 17
    ... many ways we focus on their success and provide them with financial solutions that meet their personal preferences. From BMO Harris Private Banking, which offers an unparalleled banking and investing experience to high net worth clients, to our focus on the "new" retirement to help Boomers plan for...

  • Page 18
    ..., answer our customers' questions and get things done. That means less red tape, simpler processes and shorter wait...customers and communities they serve. This is how we're picking up the pace. p Suzy Brown, Investment Advisor, BMO Nesbitt Burns 14 BMO Financial Group 190th Annual Report 2007

  • Page 19
    ... answers faster. And we acted. For example, we improved our Direct Promotions application process to get our Mosaik® MasterCard®2 credit card into customers' hands much faster - 30% faster. For Canadian customers who apply for a loan or mortgage online or by telephone, we shortened the wait time...

  • Page 20
    ... structure: An Active Year The Board's leadership role was particularly evident in fiscal 2007. It was a year that saw a number of complicated and challenging issues arise, including losses in our commodities business, unsettled asset-backed commercial paper markets and economic concerns related...

  • Page 21
    ... for Corporate Governance The Globe and Mail 's Report on Business 2007 annual review of corporate governance practices ranked BMO fifth overall among 270 Canadian reporting issuers. Protecting Privacy BMO Financial Group ranked second in the 2007 Canada's Most Trusted Companies for Privacy...

  • Page 22
    ...Board of Directors* 1 Robert M. Astley Corporate Director and former President and Chief Executive Officer, Clarica Life Insurance Company and former President, Sun Life Financial Canada Committees Human Resources and Management Compensation, Risk Review, The Pension Fund Society of Bank of Montreal...

  • Page 23
    ... under-represented in our workforce. We are committed to developing new opportunities through community outreach, bursaries, scholarships and job placements to create a representative workforce that supports the attainment of our strategic imperatives. BMO Financial Group 190th Annual Report 2007 19

  • Page 24
    ... organizations, such as the United Nations Environment Programme, we continue to contribute to the discussion and use the knowledge we gain to enhance our own environmental management practices while promoting environmental sustainability globally. 20 BMO Financial Group 190th Annual Report 2007

  • Page 25
    ... Tradition of Helping Helping to strengthen local communities is a tradition in our U.S. operations. Last October 10th in Chicago, hundreds of our employees picked up paintbrushes, brooms and hammers to assist local organizations and launch the Harris and BMO Capital Markets United Way annual giving...

  • Page 26
    ... Commercial Banking Personal and Commercial Banking Canada Personal and Commercial Banking U.S. Private Client Group BMO Capital Markets Corporate Services, including Technology and Operations Financial Condition Review discusses our assets and liabilities by major balance sheet category. It reviews...

  • Page 27
    ... Group is a highly diversified North American financial services provider. With total assets of $367 billion and almost 36,000 employees, BMO provides a broad range of retail banking, wealth management and investment banking products and solutions. We serve clients across Canada through our Canadian...

  • Page 28
    ..., NEP grew to $1,390 million, supported by record earnings in P&C Canada and Private Client Group as well as strong results in BMO Capital Markets. 15.2 91.8 58.2 0.1 (51.0) Further details are provided on page 33. 2003 2004 2005 2006 2007 10.3 NEP Growth (%) • Canadian peer group NEP grew by an...

  • Page 29
    ... America having shareholders' equity that is at least 75% as large as BMO's. It includes the Canadian peer group, except National Bank of Canada, as well as Bank of America Corporation, Citigroup Inc., J.P . Morgan Chase & Co., KeyCorp, National City Corporation, The PNC Financial Services Group...

  • Page 30
    ...larger U.S. banks were upgraded. Further details are provided on page 58. 2003 2004 2005 2006 2007 BMO Financial Group Canadian peer group average North American peer group average The following Enterprise-Wide Strategy and Economic Developments sections of this Annual Report contain certain...

  • Page 31
    ... an increasing share of this high-growth market: • Private Client Group reported record net income of $408 million, up 15%. • Continued investments in our sales forces and businesses, including our recent agreement, which is subject to regulatory approval, to purchase Pyrford International plc...

  • Page 32
    ... to our customers and counterparties; our ability to execute our strategic plans and to complete and integrate acquisitions; critical accounting estimates; operational and infrastructure risks; general political conditions; global capital markets activity; the possible effects on our business of war...

  • Page 33
    ... of our internal processes, employees or systems, including any of our financial, accounting or other data processing systems, could lead to financial loss and damage to our reputation. In addition, despite the contingency plans we have in place, our ability to conduct business may be adversely...

  • Page 34
    ...employment and income, supporting growth in personal loans. Housing market activity continued at high levels, boosting residential mortgages. Companies invested briskly to expand capacity, spurring growth in business credit. The strong Canadian dollar held inflation low despite rising oil prices and...

  • Page 35
    ... significant items, EPS increased 11%. Net income was $2.1 billion, with P&C Canada and Private Client Group earning record net income. Excluding the impact of significant items, net income was $2.9 billion with strong results in BMO Capital Markets. • • Return on Equity (ROE) - BMO's ROE was...

  • Page 36
    ... of which related to the change in the general allowance for credit losses. Personal and Commercial Banking and Private Client Group earned record net income in 2007, as in 2006 and 2005, when BMO Capital Markets also reported record earnings. Personal and Commercial Banking (P&C) net income rose...

  • Page 37
    ... in net income and the impact of a $0.8 billion increase in average common shareholders' equity. We achieved this 14.4% return in spite of the commodities losses and the fourth quarter charges associated with the deterioration in the capital markets environment. The 14.4% return was below our annual...

  • Page 38
    ...U.S. revenue growth was attributable to loan growth and acquisitions, but was limited by lower net interest margin and the weak U.S. dollar. Private Client Group revenue growth was well balanced, with increases across all its businesses. BMO Capital Markets revenues were down significantly, but were...

  • Page 39
    .... The sale was completed to redeploy capital to higher-return businesses. Impact of Business Acquisitions and Sales on Year-over-Year Comparisons* ($ millions) Increase (decrease) in: Net income Cash net income Business acquired/sold Revenue Expense Personal and Commercial Banking Incremental...

  • Page 40
    ... assets ($ millions) Change 2007 2006 $ % Net interest margin (in basis points) 2007 2006 Change P&C Canada P&C U.S. Personal and Commercial Banking (P&C) Private Client Group (PCG) BMO Capital Markets (BMO CM) Corporate Services, including Technology and Operations Total nm - not meaningful 3,065...

  • Page 41
    ...on loan pricing and by a changing product mix as customers shifted to lowerspread deposits and fixed-rate loans. Private Client Group net interest income increased strongly, primarily due to increased deposit balances in our brokerage businesses and term investment products. The group's net interest...

  • Page 42
    ... three quarters, falling significantly in the fourth quarter in the difficult capital markets environment. Equities trading revenues followed a similar pattern. The Market Risk section on page 68 provides other information on trading-related revenues. 38 BMO Financial Group 190th Annual Report 2007

  • Page 43
    ..., with the increase over the current year largely related to the credit cycle and an expectation of increasing levels of new specific provisions and lower levels of reversals and recoveries. Credit risk management is discussed further on page 67. Note 4 on page 101 of the financial statements and...

  • Page 44
    ...due to the addition of front-line sales and service staff in P&C Canada, growth in Private Client Group's sales force, acquisitions and organic business growth. The weaker U.S. dollar helped keep cost increases in check. Our staffing levels increased in 2007 by almost 900 or 2.5% to 35,827 full-time...

  • Page 45
    ... loan and mortgage products is offered to our employees at rates normally accorded to our preferred customers. We also offer employees a fee-based subsidy on annual credit card fees. Stock options and deferred share units granted to directors are discussed in Note 27 on page 132 of the financial...

  • Page 46
    ... the United States. Contributions to Revenue, Expenses, Net Income and Average Assets by Operating Group and by Location ($ millions, except as noted) Personal and Commercial Banking For the year ended October 31 Private Client Group BMO Capital Markets Corporate Services, including Technology and...

  • Page 47
    ... credit losses Non-interest expense Income before income taxes and non-controlling interest in subsidiaries Income taxes (teb) Net income Amortization of intangible assets (after tax) Cash net income Net economic profit Cash return on equity (%) Productivity ratio (%) Cash productivity ratio (%) Net...

  • Page 48
    ..., investing, credit card and insurance needs as well as a full suite of integrated commercial and capital market products and financial advisory services. P&C Canada's extensive delivery network encompasses almost 1,000 BMO Bank of Montreal traditional and instore branches, telephone banking, online...

  • Page 49
    ... the commercial market will drive our growth. We are beginning to see a turnaround in the small business banking segment with market share in the $1 million and below category having improved 45 bps to 18.73% at the end of 2007. 2008 Group Objectives Continue to enhance the customer experience...

  • Page 50
    ... a strategic advantage when entering new markets. Our Lines of Business P&C U.S. offers a full range of consumer and business loan and deposit products, including deposit and investment services, mortgages, consumer credit, business lending, cash management and other banking services. Strengths...

  • Page 51
    ...in a softer real estate market. Deposit growth reflects increases in both personal and commercial deposits. Customer loyalty continued to strengthen. The acquisition of FNBT added significantly to our branch network. 2007 Group Objectives and Achievements Improve financial performance by growing...

  • Page 52
    .... These factors were partially offset by the impact of our expense management initiatives. The P&C U.S. cash productivity ratio deteriorated by 120 basis points to 73.2%. Excluding acquisition integration costs, the cash productivity ratio was 71.6%. 48 BMO Financial Group 190th Annual Report 2007

  • Page 53
    ... BMO brand in Canada and Harris in the United States, PCG serves a full range of client segments, from mainstream to ultra-high net worth, as well as select institutional market segments. We offer our clients a broad range of wealth management products and services, including full-service and online...

  • Page 54
    ...Ratio and Cash Productivity Ratio (%) Net Income and Return on Equity 408 355 2007 Revenue by Line of Business (%) 81.3 227 77.9 75.0 72.5 70.8 70.5 69.4 69.2 2007 2004 14.4 314 30.5 19.6 35.1 Investment Products 25% North American Private Banking 19% Online Brokerage 8% Full-Service Investing...

  • Page 55
    ...dollars. Net income from U.S. operations was $2 million, a decline of $1 million from 2006. Revenue was relatively unchanged. Trust and investment revenue in Harris Private Bank grew 7% over the prior year, offset by spread compression in the loan portfolio and lower fee revenue in Harris Investment...

  • Page 56
    ... exchange, interest rate, credit, equity, securitization and commodities solutions to wholesale, commercial and retail clients. In addition, we provide efficient funding and liquidity management to BMO Financial Group and its clients, as well as new product development, proprietary trading and...

  • Page 57
    ... enhancing client coverage of key segments, with a focus on growing fee-based revenues. Implement a number of high-value initiatives to drive earnings growth in our Trading Products line of business. Maintain Canadian leadership in the high-return fee businesses of mergers and acquisitions, equity...

  • Page 58
    ..., net income increased US$70 million, largely driven by growth in corporate banking assets, merger and acquisition activity, equity underwriting fees, commissions and investment gains. Excluding the significant items, net income from U.S. operations represented 42% of BMO Capital Markets net income...

  • Page 59
    ... Technology and Operations Corporate Services 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, human resources and learning. Our operating...

  • Page 60
    ... of expanding our commercial and corporate banking portfolios. Securities borrowed or purchased under resale agreements increased $5.7 billion as a result of customer demand and our balance sheet management activities. These instruments are very short-term loans that are managed in conjunction with...

  • Page 61
    ...our net investment in our U.S. operations by funding the net investment in U.S. dollars. This strategy reduces the impact on BMO's capital ratios of changes in foreign exchange rates, as the effect of foreign currency adjustments to Tier 1 capital arising from an increase or decrease in the value of...

  • Page 62
    ...641 Risk-Weighted Assets ($ millions) 2007 2006 Beginning of year Increases (decreases) Personal and Commercial Banking Private Client Group BMO Capital Markets Corporate Services End of year 162,794 (4,138) 680 19,505 (154) 178,687 149,855 4,705 (184) 10,163 (1,745) 162,794 Outstanding Shares...

  • Page 63
    ... alternate sources of funding. These vehicles provide clients with access to financing in the commercial paper markets by allowing them to sell their assets into these vehicles, which then issue commercial paper to investors to fund the purchases. In almost BMO Financial Group 190th Annual Report...

  • Page 64
    ...-trading activities. Non-trading activities generally include the business of lending, long-term investing, funding and asset-liability management. Our use of financial instruments exposes us to credit and counterparty risk and various market risks, including equity price risk, commodity price risk...

  • Page 65
    ... 3 for trading securities is the asset-backed commercial paper issued by non-bank-sponsored conduits and one BMO-sponsored conduit. Included in Level 3 for available-for-sale securities is our investment in the capital notes and senior notes of our BMO-sponsored SIVs. We determined the fair value of...

  • Page 66
    ... have investments in securities issued or guaranteed by Canadian or U.S. governments, corporate debt and equity securities, mortgage-backed securities and collateralized mortgage obligations. Quoted market value is considered to be fair value for actively traded securities. At the end of 2007, there...

  • Page 67
    ... value and include a new section in Shareholders' Equity, called Accumulated Other Comprehensive Income (Loss), to report unrealized gains or losses related to certain available-for-sale securities and cash flow hedges and foreign exchange gains or losses on our net investment in foreign operations...

  • Page 68
    ... public accounting firm, has issued an audit report on our internal control over financial reporting. This audit report appears on page 91. MD&A Changes in Internal Control over Financial Reporting In connection with BMO Financial Group's review of its losses in its commodities trading business...

  • Page 69
    ... Risks Managed Liquidity and Funding and Structural Market Risk Trading and Underwriting Market Risk Credit and Counterparty Operational Business and Reputation Business Units Enterprise Risk and Portfolio Management (ER&PM) Assurance Reporting BMO Financial Group 190th Annual Report 2007...

  • Page 70
    ...total shareholder return and credit ratings, as well as our risk tolerance. BMO's risk management is supported by the Initiative Decisioning Process model, which ensures that changes to the enterprise's risk 66 BMO Financial Group 190th Annual Report 2007 Stress testing and scenario analysis assist...

  • Page 71
    ... corporate policies, standards and procedures governing the conduct of credit risk activities. Operating practices include the ongoing monitoring of credit risk exposures and regular portfolio and sector reporting to the Board and senior management committees. Performing accounts are reviewed...

  • Page 72
    ... mix, and economic and credit market conditions. We use credit derivative products to enhance the management of our portfolio of credit risk assets, in particular our corporate loan book. In 2007, we were active in the use of single-name credit default swaps to mitigate the credit risk related to...

  • Page 73
    ..., procedures and processes by providing access to and guidance on the relevant corporate policies and standards. Within Market Risk, the Valuation Product Control group checks whether the valuation of all trading and underwriting portfolios within BMO is materially accurate by: • developing and...

  • Page 74
    ... banking activities (loans and deposits) and foreign exchange risk arising from our foreign currency operations. Structural market risk is managed by BMO's Corporate Treasury in support of stable, high-quality earnings, and maximization of sustainable product spreads. Structural interest rate risk...

  • Page 75
    ... oversight group within Corporate Treasury; • an RRC-approved limit structure to support risk management; • effective processes and models to monitor and manage risk; • strong controls over processes and models and their uses; • a framework of scenario tests for stressed operating conditions...

  • Page 76
    ... throughout the enterprise. Therefore, this framework includes regular reporting of relevant operational risk management activities and processes to senior line and corporate management, ORC, RMC and the Board of Directors. Operational risk events that occur within the Credit, Market or Liquidity...

  • Page 77
    ... with respect for the environment. Environmental risk is the risk of loss or damage to BMO's reputation resulting from environmental concerns related to BMO or its customers. Environmental risk is often associated with credit and operational risk. BMO Financial Group 190th Annual Report 2007 73

  • Page 78
    ...in front-line sales and service staff in P&C Canada and Private Client Group but increased salary and benefits costs in those groups were offset by lower costs in Corporate Services. BMO's productivity ratio was 73.7% in the quarter, compared with 64.6% a year ago. The cash productivity ratio was 73...

  • Page 79
    ... enhancing customer service by investing in front-line sales and service people and simplifying processes across the organization. Results in the fourth quarter were also reduced by a $50 million increase in the general allowance for credit losses. BMO Financial Group 190th Annual Report 2007...

  • Page 80
    ... BMO Capital Markets Corporate Services, including T&O 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 (%) Five-year average annual total shareholder return...

  • Page 81
    ... were increases in fee-based revenue in our mutual fund businesses and higher client trading volumes in direct investing, as well as increases in term deposit spreads with moderate balance growth. The weaker U.S. dollar reduced revenue growth by $22 million, largely in the private banking business...

  • Page 82
    ... Information Table 1 • Shareholder Value As at or for the year ended October 31 2007 2006 2005 2004 2003 2002 2001 2000 1999 1998 Market Price per Common Share ($) High Low Close Common Share Dividends Dividends declared per share Dividends paid per share ($) Dividend payout ratio (%) Dividend...

  • Page 83
    ...purchased, securities lent or sold under repurchase agreements and other secured liabilities. (2) Includes reserves or minimum balances which some of our subsidiaries are required to maintain with central banks in their respective countries of operation. BMO Financial Group 190th Annual Report 2007...

  • Page 84
    ... (%) Canadian dollar net interest margin (teb) (%) U.S. dollar and other currencies net interest margin (teb) Non-Interest Revenue Securities commissions and fees Deposit and payment service charges Trading revenues (losses) Lending fees Card fees Investment management and custodial fees Mutual fund...

  • Page 85
    ... 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 Travel and business development...

  • Page 86
    ... rate (%) 2005 Interest income/ expense Average balances Average balances Average balances For the year ended October 31 Assets Canadian Dollar Deposits with other banks Securities Loans Residential mortgages Non-residential mortgages Consumer instalment and other personal Credit cards Businesses...

  • Page 87
    ... millions) 2007/2006 Increase (decrease) due to change in Average balance Average rate 2006/2005 Increase (decrease) due to change in Average balance Average rate For the year ended October 31 Total Total Assets Canadian Dollar Deposits with other banks Securities Loans Residential mortgages Non...

  • Page 88
    ... 2004 2003 2007 2006 United States 2005 2004 2003 2007 2006 Other countries 2005 2004 2003 Consumer Residential mortgages (1) Cards Consumer instalment and other personal loans Total consumer Commercial and corporate Commercial and corporate, excluding securities borrowed or purchased under resale...

  • Page 89
    ...09 Net Impaired Commercial and Corporate Loans 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 Other...

  • Page 90
    ...2006 United States 2005 2004 2003 2007 2006 Other countries 2005 2004 2003 Consumer Residential mortgages Consumer instalment and other personal loans Total consumer Commercial and corporate Off-balance sheet Total specific allowance General allowance Allowance for credit losses Coverage Ratios ACL...

  • Page 91
    ... 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 92
    ... notes Accumulated unrealized gain from Available-For-Sale Equity Securities General allowance for credit losses (4) Total Tier 2 capital First loss protection Investment in non-consolidated subsidiaries/substantial investments Total capital Risk-weighted assets Capital ratios (%) Tier 1 Capital...

  • Page 93
    ... total deposits payable on a fixed date included $29,318 million, $24,513 million and $21,477 million, respectively, of federal funds purchased and commercial paper issued. These amounts would have been classified as short-term borrowings for U.S. reporting purposes. Supplemental Information Table...

  • Page 94
    ... and internal audit. The Shareholders' Auditors and the Bank's Chief Auditor have full and free access to the Board of Directors and its Audit and other relevant Committees to discuss audit, financial reporting and related matters. William A. Downe President and Chief Executive Officer Thomas...

  • Page 95
    ... with Canadian generally accepted accounting principles. Chartered Accountants, Licensed Public Accountants Toronto, Canada November 27, 2007 To the Shareholders and Board of Directors of Bank of Montreal We have audited Bank of Montreal's (the "Bank") internal control over financial reporting as...

  • Page 96
    ...Notes 3 and 28) Trading Investment (fair value $14,221 in 2006) Available-for-sale Other Loan substitutes Loans (Notes 4, 7 and 28) Residential mortgages Consumer instalment and other personal Credit cards Businesses and governments Securities borrowed or purchased under resale agreements Customers...

  • Page 97
    ... 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 (losses) Lending fees Card fees (Note 16) Investment management and custodial fees Mutual fund...

  • Page 98
    ... Comprehensive Loss 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. 94 BMO Financial Group 190th Annual Report 2007

  • Page 99
    ... Cash Flows from Operating Activities Net income Adjustments to determine net cash flows provided by (used in) operating activities Write-down of securities, other than trading Net gain on securities, other than trading Net (increase) in trading securities Provision for credit losses Gain on sale...

  • Page 100
    ... sheet date. Revenues and expenses denominated in foreign currencies are translated using the average exchange rate for the year. Unrealized gains and losses arising from translating net investments in foreign operations into Canadian dollars, net of related hedging activities and applicable income...

  • Page 101
    ...earnings. The fair value of these securities as at October 31, 2007 was $30 million. The impact of recording these as trading securities was a decrease in non-interest revenue, insurance income of $1 million for the year ended October 31, 2007. Notes BMO Financial Group 190th Annual Report 2007 97

  • Page 102
    ... interest rates and resulting prepayment risk, changes in foreign currency risk, changes in funding sources or terms, or to meet liquidity needs. 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...

  • Page 103
    ... U.S. dollar Other currencies Total securities (1) Classified as investment securities in 2006. (2) These amounts are supported by guaranteed mortgages. Yields in the table above are calculated using the cost or amortized cost of the security and the contractual interest or stated dividend rates...

  • Page 104
    ...-for-sale and other securities Gross unrealized gains Gross unrealized losses 2007 Investment and other securities Gross unrealized gains Gross unrealized losses 2006 Amortized cost Fair value Amortized cost Fair value Issued or guaranteed by: Canadian federal government $ 927 1 Canadian...

  • Page 105
    ...current balances with sensitivity to risk ratings, industry sectors and credit products. Model results are then considered along with the level of the existing allowance, as well as management's judgment regarding portfolio quality, business mix, and economic and credit market conditions. Loan Fees...

  • Page 106
    ..., are as follows: (Canadian $ in millions) 2007 Gross amount 2006 Specific allowance 2007 2006 General allowance 2007 2006 2007 Net amount 2006 Residential mortgages Credit card, consumer instalment and other personal loans Business and government loans Securities borrowed or purchased under resale...

  • Page 107
    ...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 108
    ... of the excess of the sum of interest and fees collected from customers, in connection with the loans that were sold, over the yield paid to investors in the securitization vehicle, less credit losses and other costs (the "deferred purchase price"). 104 BMO Financial Group 190th Annual Report 2007

  • Page 109
    ...(Canadian $ in millions) Residential mortgages 2007 2006 Consumer instalment and other personal loans 2007 2006 Credit card loans 2007 2006 2007 Total 2006 Retained interests Investment in securitization vehicles Deferred purchase price Cash deposits with securitization vehicles Servicing liability...

  • Page 110
    ... customer securitization vehicles amounted to $25,465 million as at October 31, 2007 ($25,791 million in 2006), of which $17,536 million relates to Canadian assets, and the balance are U.S. assets. These vehicles provide clients with access 106 BMO Financial Group 190th Annual Report 2007

  • Page 111
    ... these trusts. Bank Securitization Vehicles We use bank securitization vehicles to securitize our Canadian mortgage loans and Canadian credit card loans either for capital management purposes or to obtain alternate sources of funding. The structure of BMO Financial Group 190th Annual Report 2007...

  • Page 112
    ... trading positions and certain derivatives that do not qualify as hedges for accounting purposes ("economic hedges"). We structure and market derivative products to customers to enable them to transfer, modify or reduce current or expected risks. 108 BMO Financial Group 190th Annual Report 2007

  • Page 113
    ... of fixed rate commercial and personal loans, securities, deposits and subordinated debt. Under the new rules, we will continue to record interest receivable or payable on the derivative as an adjustment to interest, dividend and fee income in the Consolidated Statement of Income over the life of...

  • Page 114
    ... swaps Forward foreign exchange contracts Purchased options Written options Commodity Contracts Swaps Purchased options Written options Equity Contracts Credit Contracts Total fair value/book value - trading derivatives Average fair value (1) Hedging Interest Rate Contracts Cash flow hedges - swaps...

  • Page 115
    ...Risk exposures represented by the assets in this program are traded on behalf of customers, with all gains and losses accruing to them. Included in foreign exchange contracts is $1 million as at October 31, 2007 ($nil in 2006) related to gold contracts. BMO Financial Group 190th Annual Report 2007...

  • Page 116
    ... of Financial Institutions Canada. 2007 Replacement cost Credit risk equivalent Risk-weighted balance Replacement cost Credit risk equivalent 2006 Risk-weighted balance Interest Rate Contracts Swaps Forward rate agreements Purchased options Total interest rate contracts Foreign Exchange Contracts...

  • Page 117
    ...) with customers in the following industries: (Canadian $ in millions) Interest rate contracts 2007 2006 Foreign exchange contracts 2007 2006 Commodity contracts 2007 2006 2007 Equity contracts 2006 2007 Credit contracts 2006 Financial institutions Natural resources Governments Other Total $ 7,423...

  • Page 118
    ... approval. The acquisition of Pyrford International plc is 114 BMO Financial Group 190th Annual Report 2007 Cash resources Securities Loans Premises and equipment Goodwill Core deposit intangible asset Other assets Total assets Deposits Other liabilities Total liabilities Purchase price $ 110 317...

  • Page 119
    ...reporting unit for the years ended October 31, 2007 and 2006 is as follows: Personal and Commercial Banking Retail Investment Products Private Client Group BMO Capital Markets Corporate Services Technology and Operations (Canadian $ in millions) Total P&C Canada P&C U.S. Total Client Investing...

  • Page 120
    ...257 Note 15: Deposits Demand deposits (Canadian $ in millions) Interest bearing 2007 2006 Non-interest bearing 2007 2006 2007 Payable after notice 2006 Payable on a fixed date 2007 2006 2007 Total 2006 Deposits by: Banks Businesses and governments Individuals Total Booked in: Canada United States...

  • Page 121
    ...claim is recorded as a loan in our Consolidated Balance Sheet. Change in Accounting Estimate During the year ended October 31, 2007, we increased the liability for future customer redemptions related to our loyalty rewards program in Personal and Commercial Banking Canada's MasterCard business. The...

  • Page 122
    ... by SN Trust are not reported on our Consolidated Balance Sheet. SN Trust used the proceeds of the issuance to purchase a senior deposit note from us which is reported as a business and government deposit liability on our Consolidated Balance Sheet. All of the BMO TSNs - Series A will be exchanged...

  • Page 123
    ... the customer interest rate changes with the prime rate or other short-term market rates are reported in the zero to three months category. Fixed rate and non-interest bearing liabilities with no defined maturity are reported based upon expected account balance behaviour. Capital Common shareholders...

  • Page 124
    ... amounts of derivatives Total Canadian dollar interest rate gap position 2007 2006 U.S. Dollar and Other Currencies Assets Cash resources Securities Securities borrowed or purchased under resale agreements Loans Other assets Total assets Liabilities and Shareholders' Equity Deposits Securities sold...

  • Page 125
    ... shareholder's option starting November 25, 2008 into our common shares; however, we have the right to pay $25.00 cash per share instead. The shares carry a non-cumulative quarterly dividend of $0.296875 per share. Normal Course Issuer Bid On September 6, 2007, we commenced a normal course issuer...

  • Page 126
    ... optional cash payments to acquire additional common shares. We may issue these common shares at an average of the closing prices of our common shares on the Toronto Stock Exchange based on the five trading days prior to the last business day of the month or we may purchase them on the open market...

  • Page 127
    ... Stock Option Plan: (Canadian $ in millions, except as noted) 2007 2006 2005 Change in Accounting Policy During the year ended October 31, 2006, we adopted the CICA's new accounting requirements for stock-based compensation. The new rules require that stock-based compensation granted to employees...

  • Page 128
    ... 31, 2007, 2006 and 2005, respectively. Deferred Incentive Plans We offer deferred incentive plans for certain senior executives and key employees in our BMO Capital Markets and Private Client Groups and members of our Board of Directors. Under these plans, fees, annual incentive payments and/or...

  • Page 129
    ... the cost of our defined contribution pension plans in employee compensation expense as the employees work for us. We also provide other employee future benefits, including health and dental care benefits and life insurance for current and retired employees. from management's expectations at the...

  • Page 130
    Notes to Consolidated Financial Statements Asset Allocations The investment policy for the main Canadian pension plan assets is to have a diversified mix of quality investments that is expected to provide a superior real rate of return over the long term, while limiting performance volatility. ...

  • Page 131
    ...us and certain of our subsidiaries for investment management, record-keeping, custodial and administrative services rendered on the same terms that we offer these services to our customers. The plans did not hold any of our shares directly as at October 31, 2007, 2006 and 2005. $ 4,248 149 217 (218...

  • Page 132
    ...the normal course of our operations. Components of Future Income Tax Balances (Canadian $ in millions) 2007 2006 Future Income Tax Assets Allowance for credit losses Employee future benefits Deferred compensation benefits Other Comprehensive Income Other Total future income tax assets Future Income...

  • Page 133
    ...for income taxes - Current - Future Shareholders' Equity Income tax expense related to: Unrealized gains on available-for-sale securities, net of hedging activities Losses on cash flow hedges Hedging of unrealized loss on translation of net foreign operations Other Total Canada: Future income taxes...

  • Page 134
    ... to ultra-high net worth, as well as select institutional market segments. We offer our clients a broad range of wealth management products and services, including full-service and online brokerage in Canada and private banking and investment products in Canada and the United States. BMO Capital...

  • Page 135
    .... Operating group net interest income reflects internal funding charges and credits on the groups' assets, liabilities and capital, at market rates, taking into account relevant terms and currency considerations. The offset of the net impact of these charges and credits is reflected in Corporate...

  • Page 136
    ... unable to determine the eventual outcome of these matters, but management believes that BMO Nesbitt Burns Inc., the Bank and BMO Capital Markets Corp. have strong defences to these claims and will vigorously defend against all such actions. Notes 132 BMO Financial Group 190th Annual Report 2007

  • Page 137
    ...consolidated financial position or results of the Bank's operations. (Canadian $ in millions) 2007 2006 Cash resources Securities Issued or guaranteed by Canada Issued or guaranteed by a Canadian province, municipality or school corporation Other securities Securities borrowed or purchased under...

  • Page 138
    ...) - (13) (66) (6) (42) 2 5 65 (79) $ 2,276 $ 4.73 4.49 $ 4.63 4.40 Earnings per share: diluted - Canadian GAAP net income - United States GAAP net income (1) Amounts have been restated to reflect the change in accounting policy described in Note 22. 134 BMO Financial Group 190th Annual Report 2007

  • Page 139
    ... Loss, as reported under Canadian GAAP Adjustments to arrive at United States GAAP: Net unrealized gains on available-for-sale securities (m) Unrealized gains on derivatives designated as cash flow hedges (d) Unrealized gain on translation of net foreign operations, net of hedging activities Pension...

  • Page 140
    ... related obligations are valued using current 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...

  • Page 141
    ... other than trading securities, loan substitute securities and investments in corporate equity where we exert significant influence but not control. Available-for-sale securities are carried at fair value, with any unrealized gains or losses recorded in other comprehensive income unless impaired...

  • Page 142
    ... Management Inc. Toronto, Canada BMO Nesbitt Burns Employee Co-Investment Fund I Management (Canada) Inc. and subsidiaries Toronto, Canada BMO Trust Company Toronto, Canada Guardian Group of Funds Ltd. and subsidiary Toronto, Canada BMO (US) Lending, LLC Chicago, United States Harris Financial Corp...

  • Page 143
    ... and Senior Risk Officer BMO Capital Markets Robert L. McGlashan Executive Vice-President and Chief Risk Officer Wendy L. Millar Executive Vice-President and Senior Risk Officer Personal and Commercial Banking/Private Client Group Andrew P.M. Plews Senior Vice-President Corporate Communications...

  • Page 144
    ... Review) Total Shareholder Return (TSR) Trading-Related Revenues Variable Interest Entities (VIEs) Risk-Related Definitions Business Risk Due to Earnings Volatility Credit and Counterparty Risk Earnings Volatility (EV) Economic Capital Environmental Risk Issuer Risk Liquidity and Funding Risk Market...

  • Page 145
    ... Relations, 18th Floor, 1 First Canadian Place, Toronto, Ontario M5X 1A1, e-mail to [email protected], call (416) 867-6656, or fax (416) 867-3367. Alternatively, please visit our web site at www.bmo.com/investorrelations. Corporate Information This BMO Financial Group 2007 Annual Report...

  • Page 146
    ... trademark of BMO Nesbitt Burns Corporation Limited Registered trademark of Harris N.A. Registered trademark of AIR MILES International Trading B.V. Registered trademark of MasterCard International Incorporated Registered trademark of Skate Canada Registered trademark of Kids Help Foundation...