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Defining great
customer experience
191ST ANNUAL REPORT 2008

Table of contents

  • Page 1
    191ST ANNUAL REPORT 2008 Defining great customer experience

  • Page 2
    I value a clear plan for the retirement I want.

  • Page 3
    I appreciate a bank that can help my company in good times and bad.

  • Page 4
    Who will explain all my mortgage options so that I actually understand? Thanks for giving me the advice that makes sense for me.

  • Page 5
    ... clarity to the complexities of money. BMO gratefully acknowledges our customers who so generously gave their time and portraits to this annual report. Adolphe A. Tinling President and Principal Designer Adolphe Anthony T. Design International and Associates Montreal, Quebec Linda Knight CEO...

  • Page 6
    ...our customers. Private Client Group (PCG) Operating under the BMO brand in Canada and Harris in the United States, we deliver a broad range of wealth management products and solutions to client segments ranging from mainstream to ultra-high net worth individuals, as well as institutions. BMO Capital...

  • Page 7
    ... Investment Bank in Canada by Global Finance magazine. • BMO Capital Markets ranked as the top Equity Research Group in Canada for the 28th consecutive year in the Brendan Wood International Survey of Institutional Investors. • Four funds managed by Private Client Group received a 2008 Lipper...

  • Page 8
    ...HIGHLIGHTS 2008 Highlights BMO's annual report provides our shareholders with the information they need to make sense of our business. The following chart presents a snapshot of our financial performance and business growth, customer satisfaction and risk management, as well as corporate governance...

  • Page 9
    ... time, this year confirmed the strength and diversity of BMO Financial Group's businesses. We turned in a solid financial performance with close to $2 billion in net income and a Tier 1 Capital Ratio of 9.77 per cent - and we improved customer loyalty and market share in key product lines. Equally...

  • Page 10
    PRESIDENT AND CHIEF EXECUTIVE OFFICER'S MESSAGE Our strategy at a glance HOW WE WILL ACHIEVE IT OUR GOVERNING OBJECTIVE To maximize the total return to BMO shareholders and generate, over time, top-quartile total shareholder return relative to our Canadian and North American peer groups. We will ...

  • Page 11
    ... business offers products that are highly attractive to customers and help them to plan and invest for their retirement years - and it's tied to our entire commercial and personal distribution platform in Canada and the United States, which provides further opportunity to grow. BMO Capital Markets...

  • Page 12
    ... we serve customers. In BMO Capital Markets, our focus on customer relationships positions us to benefit from increased mergers and acquisitions and advisory work as a number of our corporate clients - among them many of Canada's largest and strongest companies - will be poised for growth when the...

  • Page 13
    ... and the cards and retail payments, insurance and broker services lines of business. Joined BMO in 1978; in role since August 2006. Personal and Commercial Banking U.S. 5 Ellen Costello, President and Chief Executive Officer, Harris Financial Corp., is responsible for the strategic direction of our...

  • Page 14
    ...more of our locations. Similarly, at Harris we are primarily growing our branch network through acquisitions. Under the Harris banner, we have grown 44% over the past three years and now operate over 280 branches in three states in the U.S. Midwest. 10 | BMO Financial Group 191st Annual Report 2008

  • Page 15
    ... Global Treasury Management Solutions We're offering our business customers access to markets across the United States, Canada and Europe, and helping them navigate an array of options and requirements through one banking relationship and a single point of contact. BMO Financial Group 191st Annual...

  • Page 16
    ...our commercial business were also up in 2008. i P 46 Momentum is also building in P&C U.S., where our customer focus, performance-driven culture and the ongoing expansion of Chicago's "home town" bank are combining to provide opportunities today and 12 | BMO Financial Group 191st Annual Report 2008

  • Page 17
    ...wealth management businesses showed we're not standing still. Private Client Group stayed focused on its established targets and delivered strong results. In 2008, to reach more clients and improve service, we expanded our customer service and sales forces at BMO Nesbitt Burns®*, BMO Harris Private...

  • Page 18
    ...across the enterprise, and to partner with all of our lines of business in generating sustainable shareholder returns. i P 73 Eighteen months ago, we launched a review of how we measure and manage risk at BMO. This exercise confirmed some significant strengths, particularly in credit risk, where we...

  • Page 19
    ...attractive risk-return profiles to address opportunities that will optimize risk-return • Partner with each business to enhance risk transparency and risk-return performance • Encourage open and effective dialogue about risk across the enterprise BMO Financial Group 191st Annual Report 2008 | 15...

  • Page 20
    ... succeeded in managing risk. Our capital base remains strong and our lines of business continue to grow. Personal and Commercial Banking is stronger across the board. Private Client Group continues to produce impressive results, and we have succeeded in reducing risk across BMO Capital Markets. Bill...

  • Page 21
    ... governance practices. BMO Corporate Responsibility Report and Public Accountability Statement This annual report documents our corporate citizenship activities throughout the year. The 2008 report will be released in February 2009. New York Stock Exchange Governance Requirements Our web site...

  • Page 22
    ... and Nominating Committee Audit Committee Appoint Human Resources and Management Compensation Committee Board of Directors Appoint Risk Review Committee Appoint Management For the sixth consecutive year, BMO Financial Group was recognized for its leadership in corporate social responsibility...

  • Page 23
    ... Risk Review ComPresident and Chief Executive mittee and The Pension Fund Society Officer, Torstar Corporation of the Bank of Montreal meetings as Board/Committees Governance an ex-officio (non-voting) member and Nominating (Chair), Human Other public boards Scripps Networks Resources and Management...

  • Page 24
    ... and risk management. Changes are now underway to ensure that the training we provide in these important disciplines is customer-centric, relevant and easily accessible, equipping our employees with the best business knowledge and tools to perform. 20 | BMO Financial Group 191st Annual Report 2008

  • Page 25
    ... be the bank that defines great customer experience. In 2008, we continued to actively partner with community and government agencies to recruit talented people from our communities, including people from groups that are underrepresented in our workforce. BMO Financial Group 191st Annual Report 2008...

  • Page 26
    ...central to the city's history. We continue to support communities in times of need. Last spring, BMO Financial Group and BMO Employee Charitable Foundation made a joint contribution of $30,000 to Canadian Red Cross relief efforts for flood victims in New Brunswick. For its part, Harris donated US$50...

  • Page 27
    ..., which provides matching funding for donations to eligible institutions of higher learning, and our Volunteer Grants Program, which provides funds to organizations where our employees and pensioners are active volunteers. www.bmo.com/community BMO Financial Group 191st Annual Report 2008 | 23

  • Page 28
    ... branches • Achieve BOMA Go Green certification in office towers • Measure and reduce energy consumption BMO Sustainable Transport Program • Encourage employee use of public transit • Replace service vehicles with more fuel-efficient alternatives • Reduce commercial air travel for meetings...

  • Page 29
    ... 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 30
    ...this year and last. • EPS growth for the North American peer group was -127%, reflecting the more difficult market environment for the U.S. banks. Return on Equity (ROE) • ROE was 13.0% in a difficult year, reflecting BMO's relative strength and stability among global financial institutions, as...

  • Page 31
    ... Corporation, and Wells Fargo & Company. Due to recent market developments, the U.S. banks included in our North American peer group are expected to change in 2009. BMO Financial Group Canadian peer group average North American peer group average BMO Financial Group 191st Annual Report 2008...

  • Page 32
    ...our Canadian retail arm, BMO Bank of Montreal, and through our wealth management businesses, BMO Nesbitt Burns, BMO InvestorLine and BMO Harris Private Banking. BMO Capital Markets, our North American investment and corporate banking division, provides a full suite of financial products and services...

  • Page 33
    ... Financial Group 191st Annual Report 2008 | 29 MD&A Commercial banking is attractive and growing, particularly in the small business segment of the market. A financial institution that provides a differentiated customer experience, an experienced sales force and leading credit and risk management...

  • Page 34
    ... position as at and for the periods ended on the dates presented and our strategic priorities and objectives, and may not be appropriate for other purposes. Assumptions about the level of asset sales, expected asset sale prices, net funding cost, credit quality and risk of default and losses...

  • Page 35
    ...noted in the Caution Regarding Forward-Looking Statements on page 30. Additional risks, including credit and counterparty, market, liquidity and funding, operational, business, model, strategic, reputation and environmental risks, are discussed in the Enterprise-Wide Risk Management section starting...

  • Page 36
    ... overnight rate U.S. federal funds rate *Estimate *Estimate The Bank of Canada and U.S. Federal Reserve will likely keep rates low well into 2009. The Canadian dollar is expected to strengthen modestly in 2009 relative to the last quarter of 2008. 32 | BMO Financial Group 191st Annual Report 2008

  • Page 37
    ... Total annual shareholder return assumes reinvestment of quarterly dividends and therefore does not equal the sum of dividend and share price returns in the table. (1) Compound annual growth rate (CAGR) %. (2) As a percentage of the closing market price in the prior year. BMO Financial Group 191st...

  • Page 38
    ... EPS growth rate was 1.8%, below our medium-term objective of 10% because of low earnings in 2008 related to the impact of the difficult credit and capital markets conditions. The notable items that reduced net income by $585 million or $1.16 per share in 2008 were: • charges for certain trading...

  • Page 39
    ...calculated as net income, less preferred dividends, as a percentage of average common shareholders' equity. Common shareholders' equity is comprised of common share capital, contributed surplus, accumulated other comprehensive income (loss) and retained earnings. ROE was 13% in 2008 despite charges...

  • Page 40
    ... business. The charges in 2007 reduced trading revenue by $1,156 million and securities gains by $15 million. Charges in 2008 included: $230 million ($80 million in 2007) in respect of BMO's investment in notes issued by Apex Trust, a Canadian credit protection vehicle, and a related total return...

  • Page 41
    ...entered into each quarter in relation to expected U.S.-dollardenominated net income for the next three months. The effect of exchange rate fluctuations on our net investment in foreign operations is discussed in the Provision for Income Taxes section on page 43. BMO's U.S.-dollar-denominated results...

  • Page 42
    ...For the year ended October 31 2008 2007 $ % Average earning assets ($ millions) Change 2008 2007 $ % Net interest margin (in basis points) 2008 2007 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...

  • Page 43
    ...and fees Deposit and payment service charges Trading revenues Lending fees Card fees Investment management and custodial fees Mutual fund revenues Securitization revenues Underwriting and advisory fees Securities gains (losses) Foreign exchange, other than trading Insurance income Other Total 1,105...

  • Page 44
    ...management of these positions typically includes marking them to market on a daily basis. Trading revenues include income (expense) and gains (losses) from both on-balance sheet instruments and off-balance sheet interest rate, foreign exchange (including spot positions), equity, commodity and credit...

  • Page 45
    .... Credit risk management is discussed further on page 76. Note 4 on page 113 of the financial statements and Tables 11 to 19 on pages 96 to 99 provide details of BMO's loan portfolio, impaired loans and provisions and allowances for credit losses. BMO Financial Group 191st Annual Report 2008...

  • Page 46
    ... achieve this by driving revenues through an increased customer focus and ongoing expense management, and by working to create greater efficiency and effectiveness in all support functions, groups and business processes that support the front line. 42 | BMO Financial Group 191st Annual Report 2008

  • Page 47
    ... customers. We also offer employees a fee-based subsidy on annual credit card fees. Stock options and deferred share units granted to directors and preferred rate loan agreements for executives, relating to transfers we initiate, are discussed in Note 28 on page 146 of the financial statements...

  • Page 48
    ... from the United States in 2008. 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...

  • Page 49
    ...Cash net income Average earning assets Average loans and acceptances Average deposits 959 833 799 126 15 773 634 599 139 22 95 107 104 (12) (11) 121 130 125 (9) (7) 24,103 19,855 17,797 4,248 21 21,203 19,136 17,175 2,067 11 18,657 17,218 15,885 1,439 8 BMO Financial Group 191st Annual Report 2008...

  • Page 50
    ... investing, credit cards and insurance as well as a full suite of integrated commercial and capital markets products and financial advisory services. P&C Canada manages an integrated national network of BMO Bank of Montreal branches, telephone banking, online banking, mortgage specialists, financial...

  • Page 51
    ...2007 2008 2006 2007 2008 2006 2007 2008 Total loan growth (%) Commercial ($ billions) Personal and Cards ($ billions) Total deposit growth (%) Commercial ($ billions) Personal ($ billions) Revenue growth (%) Cash productivity ratio (%) Net income growth (%) ROE (%) MD&A Loan growth was...

  • Page 52
    ... of the branch network and debit and credit card chip technology, as well as higher operating costs and higher Moneris expenses. Our cash productivity ratio improved by 30 basis points from 2007 to 55.3%, as revenue growth exceeded expense growth. 48 | BMO Financial Group 191st Annual Report 2008

  • Page 53
    ...and businesses, including deposit and investment services, mortgages, consumer credit, business lending, cash management and other banking services. Key Performance Metrics and Drivers Average US$ loan growth (%) Average US$ deposit growth (%) Cash operating leverage (%) Number of branches Employee...

  • Page 54
    ... deliver great customer experience. Improve sales force productivity across all our lines of business. • Internal referrals per service representative increased 21% year over year. • Commercial mid-market closed loans increased 62% year over year. Expand our commercial sales force in Chicago and...

  • Page 55
    ... well as stronger fee revenues, partially offset by the impact of difficulties in credit markets. Net interest margin fell 37 basis points, largely due to the 22 basis point impact of a transfer of a portfolio from Corporate Services, higher levels of non-performing loans and the highly competitive...

  • Page 56
    ...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 solutions, including full-service and online brokerage in Canada, and private banking and investment products in Canada and the United States. "We...

  • Page 57
    ... Term Deposits ($ billions) 267 296 284 275 Cash Productivity Ratio (%) Net Income and Return on Equity 395 341 314 29.4 34.0 36.4 395 2008 Revenue by Line of Business (%) 72.5 71.6 70.2 71.2 19.6 Investment Products 26% North American Private Banking 20% Online Brokerage 8% Full-Service...

  • Page 58
    ... the charges, the group's cash productivity ratio was relatively unchanged from the prior year. All amounts in the following paragraph are stated in U.S. dollars. U.S. operations recorded a net loss of US$6 million in 2008. Adjusted for the charges related to support for U.S. clients, net income was...

  • Page 59
    ...funding and liquidity management to BMO Financial Group and its clients, as well as new product development, proprietary trading and origination. Key Performance Metrics and Drivers Trading products revenue ($ millions) Equity block trading dollar value ($ billions) Investment and Corporate Banking...

  • Page 60
    ... and foreign exchange trading 56 | BMO Financial Group 191st Annual Report 2008 businesses during the year. We also reduced the size and risk profile of our commodities portfolio, which had incurred large losses in the previous year. Further, in our efforts to improve the risk-return profile of...

  • Page 61
    ... asset growth in the loan portfolio. BMO's practice is to charge loss provisions to the client operating groups each year using an expected loss provisioning methodology based on each group's share of expected credit losses over an economic cycle. Corporate Services is generally charged (or credited...

  • Page 62
    ... and shareholders' equity) by $47.4 billion. 58 | BMO Financial Group 191st Annual Report 2008 Available-for-sale securities increased $6.1 billion from $26.0 billion in 2007, primarily due to the increase in BMO-underwritten Canadian mortgages held in the form of government-insured mortgage-backed...

  • Page 63
    ...of $33.0 billion and $26.5 billion, respectively, was primarily due to movements in interest rates, foreign exchange rates and underlying equity values as well as client-driven volume. Volatility in exchange and interest rates increases the value of BMO Financial Group 191st Annual Report 2008 | 59

  • Page 64
    ... capital requirements that are more sensitive to a bank's risk profile. The Office of the Superintendent of Financial Institutions (OSFI), our regulator, approved BMO's application to apply the Advanced Internal Ratings Based (AIRB) Approach for calculations related to credit risk in our portfolio...

  • Page 65
    ...,321 As noted in the Provisions for Income Taxes section, BMO hedges the foreign exchange risk arising from 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...

  • Page 66
    ... October 31, 2008. Of this, US$10 million or 0.62% was 90 days or more in arrears. This compares with a rate of 0.94% for BMO's total U.S. first mortgage loan portfolio. We discontinued the Easy Doc and No Doc programs in the third quarter of 2008. 62 | BMO Financial Group 191st Annual Report 2008

  • Page 67
    ... on the property. In the United States, we have a US$5.0 billion home equity loan portfolio, which amounted to 2.5% of BMO's total loan portfolio at October 31, 2008. Of the total portfolio, loans of US$0.4 billion were extended to customers with original credit bureau scores below 620, and would...

  • Page 68
    ... is rated A1 by S&P and P1 by Moody's. BMO has not invested in the conduit's ABCP. Outstanding commercial paper has consistently been purchased by third-party investors, notwithstanding market disruptions, and pricing levels are in line with those of top-tier ABCP conduits in the United States. In...

  • Page 69
    ... vehicles provide investors with opportunities to invest in customized, diversified debt portfolios in a variety of asset and investment grade rating classes. We hold subordinate capital notes of two BMO-managed Londonbased Structured Investment Vehicles (SIVs), Links Finance Corporation (Links) and...

  • Page 70
    ...-A RMBS collateral. Parkland's asset diversification is broadly in line with that of Links. Auction-Rate Securities Auction-rate securities (ARS) are typically short-term notes issued by trusts in the United States to fund long-term, fixed-rate debt instruments (corporate or municipal bonds issued...

  • Page 71
    ... of hedged investment amounts reflect mark-to-market adjustments, which are generally recoverable through total return or credit default swaps. The underlying securities are a wide range of assets. BMO's investments typically represent about 20% of the pool but can be as low as 5% and as high as 50...

  • Page 72
    ... 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, interest rate risk and foreign currency risk. A discussion...

  • Page 73
    ... risks and other factors that would affect a particular instrument's fair value. As a result, we incorporate certain adjustments when using internal models to establish fair values. These fair value adjustments take into account the estimated impact BMO Financial Group 191st Annual Report 2008...

  • Page 74
    ...our Canadian plans, which currently represent 82% of BMO's pension obligations, we determine a discount rate at each year-end using market rates applicable to high-quality debt instruments with cash flows that match the timing and amount of expected benefit payments. Additional information regarding...

  • Page 75
    ... used when we are acquiring businesses. Valuation models used to determine fair value Changes in Accounting Policies in 2008 Transfer of Financial Assets On August 1, 2008, we adopted the CICA's new accounting guidance permitting the transfer of certain financial assets out of trading portfolios...

  • Page 76
    ... fees (3) Total 11.6 0.1 - 0.1 11.8 12.0 0.1 - 0.1 12.2 (1) The classification of fees is based on applicable Canadian securities laws and United States Securities and Exchange Commission definitions. (2) Audit-related fees for 2008 relate to fees paid for accounting advice, specified procedures...

  • Page 77
    ... over financial reporting. The President and Chief Executive Officer (CEO) is directly accountable to the Board for all of BMO's risk-taking activities. The Risk Management Committee and its sub-committees as well as Enterprise Risk and Portfolio Management support the CEO. Risk Management Committee...

  • Page 78
    ... of risk management. Our objective is to consistently occupy a position of leadership in the management of risk. Effective Processes Rigorous processes, periodically reviewed by Corporate Audit Division, are used across BMO to: • develop policies and limits for approval by senior management and...

  • Page 79
    ... approach for calculations related to credit risk in our portfolio, except for our subsidiary Harris Bankcorp, Inc., which currently uses the Standardized Approach. We have adopted the Standardized Approach for calculations related to operational risk. BMO Financial Group conducts business through...

  • Page 80
    ... credit risk exposures and regular portfolio and sector reporting to the Board and senior management committees. Performing accounts are reviewed on a regular basis, with all commercial and corporate accounts reviewed at least annually. The credit review process ensures that an appropriate structure...

  • Page 81
    ...business mix, and economic and credit market conditions. Portfolio Management Total enterprise-wide outstanding credit exposures were $395 billion as at October 31, 2008, comprised of $232 billion in Canada, $136 billion in the United States and $27 billion in other jurisdictions. BMO's credit risk...

  • Page 82
    ...interest rate, foreign exchange rate, equity and commodity prices and their implied volatilities. This measure calculates the maximum likely loss from portfolios, over a specified holding period, measured at a 99% confidence level. Issuer Risk arises in BMO's trading and underwriting portfolios, and...

  • Page 83
    ... well as the graphs. Total Trading and Underwriting MVE Summary For the year ended October 31, 2008 (pre-tax Canadian equivalent) Year-end Average ($ millions)* High Low Commodity risk (0.9) Equity risk (7.3) Foreign exchange risk (1.4) Interest rate risk (mark-to-market) (30.6) Diversification...

  • Page 84
    ...by positive amounts. i Models used to measure structural market risk project how interest rates and foreign exchange rates may change and predict how customers would likely react to the changes. For customer loans and deposits with scheduled maturity and repricing dates (such as mortgages and term...

  • Page 85
    ... at all times. Three of the measures we use to evaluate liquidity and funding risk are the liquidity ratio, the level of core deposits, and the customer deposits and capital to loans ratio. The liquidity ratio represents the sum of cash resources and securities as a percentage of total assets. BMO...

  • Page 86
    ...risk management activities and processes to senior line and corporate management, ORC, RMC and the Board of Directors. Operational risk programs work with other risk disciplines to better manage the converging risks across the enterprise. Each line of business is responsible for using ORMF processes...

  • Page 87
    ... and capital management methodologies. These models are used to guide strategic decisions and to assist in making daily lending, trading, underwriting, funding, investment and operational decisions. Models have also been developed to measure exposure to specific risks and to measure total risk on...

  • Page 88
    ... products and services we provide to our customers. We are addressing climate change through a series of internal operating initiatives designed to reduce our impact on the environment. As part of our environmental action plan, we have developed a strategy to help focus employee efforts on managing...

  • Page 89
    ... in Canadian retail banking. P&C Canada reported very good results and Private Client Group had strong underlying performance. Net income in BMO Capital Markets was up sharply from 2007, while results in Corporate Services were down appreciably due to higher credit losses charged to the group under...

  • Page 90
    ...impact of difficult credit market conditions. There are higher levels of non-performing loans and costs of managing the loan portfolio have increased. Private Client Group net income was $78 million, a decrease of $25 million or 25% from last year. Results in the fourth quarter of 2008 were affected...

  • Page 91
    ... loans and costs of managing credit assets in the difficult credit environment. Net interest margin was lower over 2008, due primarily to a portfolio transfer at the start of the year. Private Client Group's results have grown steadily over 2007 and 2008, but were reduced in the fourth quarter...

  • Page 92
    ... 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 93
    ... and mutual funds. Non-interest expense increased $75 million or 3% to $2,644 million due to higher employee-related expenses as a result of additions to front-line sales and service staff, bcpbank Canada costs and higher promotional costs, including a debit card AIR MILES initiative. Net income in...

  • Page 94
    ... 2000 1999 Market Price per Common Share ($) High Low Close Common Share Dividends Dividends declared per share ($) Dividends paid per share ($) Dividend payout ratio (%) Dividend yield (%) Total Shareholder Return (%) Five-year average annual return One-year return Common Share Information Number...

  • Page 95
    ... Shareholders' Equity Deposits Other liabilities Subordinated debt Preferred share liability Capital trust securities Share capital Preferred Common Contributed surplus Retained earnings Accumulated other comprehensive loss Total liabilities and shareholders' equity Average Daily Balances Net loans...

  • Page 96
    ...(%) Canadian dollar net interest margin (%) U.S. dollar and other currencies net interest margin (%) 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 revenues...

  • Page 97
    ... compensation were not separately reported in 1998. Together, they have increased at a 10-year compound annual growth rate of 3.8%. (2) Government levies are included in various non-interest expense categories. na - not applicable nm - not meaningful BMO Financial Group 191st Annual Report 2008...

  • Page 98
    ... rate (%) 2006 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 99
    ... 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-residential mortgages Consumer instalment and other personal Credit cards Businesses and governments Total loans Other non...

  • Page 100
    ... Includes amounts returning to performing status, sales, repayments, the impact of foreign exchange, and offsets for consumer write-offs that are not recognized as formations. un - unavailable, as equity is not allocated on a country of risk basis 96 | BMO Financial Group 191st Annual Report 2008

  • Page 101
    ... (0.12) 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...

  • Page 102
    ... 2008 2007 2006 2005 2004 Allowance for credit losses, beginning of year Provision for credit losses Transfer of allowance Recoveries Write-offs Other, including foreign exchange rate changes Allowance for credit losses, end of year Allocation of Write-offs by Market Consumer Commercial...

  • Page 103
    ... loans Total consumer Commercial and Corporate (1) 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...

  • Page 104
    ... Adjusted Tier 1 capital Tier 2 capital Preferred shares of a subsidiary (3) Subordinated debt Trust subordinated notes Accumulated net after-tax unrealized gain from available-for-sale equity securities Eligible general allowance for credit losses (5) (6) Total Tier 2 capital First-loss protection...

  • Page 105
    ... Amortized cost Fair value 2008 ($ millions) Unrealized gains (losses) (1) 2007 2006 2005 2004 Canadian governments debt U.S. governments debt Mortgage-backed securities - Canada - United States Corporate debt Corporate equity Other governments debt Total securities, other than trading 3,524...

  • Page 106
    ...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 Russel C. Robertson Interim Chief Financial Officer Canada November 25, 2008 102 | BMO Financial Group 191st Annual...

  • Page 107
    ... Public Company Accounting Oversight Board (United States). Our report dated November 25, 2008 expressed an unqualified opinion on those consolidated financial statements. Chartered Accountants, Licensed Public Accountants Toronto, Canada November 25, 2008 BMO Financial Group 191st Annual Report...

  • Page 108
    ... loss Total Liabilities and Shareholders' Equity The accompanying notes are an integral part of these consolidated financial statements. $ 416,050 $ 366,524 William A. Downe President and Chief Executive Officer Philip S. Orsino Chairman, Audit Committee 104 | BMO Financial Group 191st Annual...

  • Page 109
    ... 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 110
    ... net foreign operations (net of income taxes of $881, $575 and $156) Balance at End of Year Total Accumulated Other Comprehensive Loss Total Shareholders' Equity The accompanying notes are an integral part of these consolidated financial statements. 106 | BMO Financial Group 191st Annual Report 2008

  • Page 111
    ... of loans (Note 8) Net (increase) decrease in securities borrowed or purchased under resale agreements Proceeds from sales of land and buildings (Note 11) Premises and equipment - net purchases Acquisitions (Note 12) Net Cash Provided by (Used in) Investing Activities Effect of Exchange Rate Changes...

  • Page 112
    ... Note 19 20 21 22 23 24 Topic Capital Trust Securities Interest Rate Risk Share Capital Capital Management Employee Compensation - Stock-Based Compensation Employee Compensation - Pension and Other Employee Future Benefits Income Taxes Earnings Per Share Operating and Geographic Segmentation Related...

  • Page 113
    ... 1, 2008. A continuity of the transferred securities is as follows: (Canadian $ in millions) Available-for-sale securities whose sale is restricted are recorded at amortized cost. The new rules do not affect accounting for our merchant banking investments or investments in corporate equity where...

  • Page 114
    ... in income related to declines in the fair value of this investment. Within derivative assets and derivative liabilities as at October 31, 2008 was $1,250 million and $52 million, respectively, related to the mark-to-market of credit default swaps and total return swaps on structured products. The...

  • Page 115
    ... supported by guaranteed mortgages. (2) For preferred shares, term to maturity is based on dividend reset dates. For other equities, term to maturity is assumed to be over 10 years unless specified otherwise. Yields in the table above are calculated using the cost or amortized cost of the security...

  • Page 116
    ... 2006 Reported in Consolidated Statement of Income: Interest, Dividend and Fee Income Trading securities Available-for-sale securities Other securities Notes $ 1,459 1,682 65 $ 3,206 Non-Interest Revenue Available-for-sale securities Gross realized gains Gross realized losses Other securities, net...

  • Page 117
    ... 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. BMO Financial Group 191st Annual Report 2008...

  • Page 118
    ... is determined using other methods, such as analysis of discounted cash flows or market prices for similar assets. During the year ended October 31, 2008, we foreclosed on impaired loans and received $45 million in real estate properties that we classified as held for sale (no impaired loans were...

  • Page 119
    ...to 77 of this report. Additional information on loans and derivative-related credit risk is disclosed in Notes 4 and 10, respectively. Concentrations of Credit and Counterparty Risk Concentrations of credit risk exist if a number of clients are engaged in similar activities, are located in the same...

  • Page 120
    ..., 2008, based on the Basel II classification is as follows: Credit Exposure by Industry (Canadian $ in millions) Drawn Commitments (undrawn) OTC derivatives Other off-balance sheet items Repo style transactions Total Financial institutions Government Manufacturing Real estate Retail trade Service...

  • Page 121
    ...we use to evaluate liquidity and funding risk are the liquidity ratio, the level of core deposits, and the customer deposits and capital to loans ratio. The liquidity ratio represents the sum of cash resources and securities as a percentage of total assets. Our liquidity ratio as at October 31, 2008...

  • Page 122
    ... payment to us over time 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"). We account for transfers...

  • Page 123
    ... and other personal loans 2008 2007 2006 2008 Credit card loans 2007 2006 2008 Total 2007 2006 Net cash proceeds (1) Investment in securitization vehicle (2) Deferred purchase price Servicing liability Loans sold Gain on sale of loans from new securitizations Gain on sale of loans sold to revolving...

  • Page 124
    ...-offs represent write-offs in the year net of recoveries on loans previously written off. Certain comparative figures have been reclassified to conform with the current year's presentation. Our credit exposure to securitized assets as at October 31, 2008 was limited to our deferred purchase price...

  • Page 125
    ...as we are exposed to the majority of its expected losses and residual returns. Total assets in the vehicle as at October 31, 2008 were $6.0 billion. Our exposure includes drawn BMO Financial Group 191st Annual Report 2008 | 121 Credit Protection Vehicle We sponsor Apex Trust ("Apex") (formerly Apex...

  • Page 126
    ... prevailing market funding rates. The main risks associated with these instruments are related to exposure to movements in interest rates, foreign exchange rates, credit quality, securities values or commodities prices, as applicable, and the possible inability of counterparties to meet the terms of...

  • Page 127
    ...in other assets of $6 million. BMO Financial Group 191st Annual Report 2008 | 123 Risks Hedged Interest Rate Risk We manage interest rate risk through interest rate swaps and options, which are linked to and adjust the interest rate sensitivity of a specific asset, liability, forecasted transaction...

  • Page 128
    ...our equity linked notes are accounted for separately from the host instrument. Fair Value Fair value represents point-in-time estimates that may change in subsequent reporting periods due to market conditions or other factors. Fair value for exchange-traded derivatives is considered to be the price...

  • Page 129
    ... as at October 31, 2008 ($224 million in 2007) related to the Managed Futures Certificates of Deposit Program. 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 $nil as...

  • Page 130
    ...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 for all market risk-taking activities. Terms used...

  • Page 131
    ... netting agreements) with customers in the following industries: (Canadian $ in millions) Interest rate contracts 2008 2007 Foreign exchange contracts 2008 2007 Commodity contracts 2008 2007 2008 Equity contracts 2007 Credit default swaps 2008 2007 2008 Total 2007 Financial institutions Governments...

  • Page 132
    ...dates of acquisition are as follows: (Canadian $ in millions) 2008 Merchants and GKST Manufacturers Ozaukee Pyrford First National 2007 bcpbank Canada Notes Cash resources Securities Loans Premises and equipment Goodwill Core deposit/Customer relationship intangible asset Other assets Total assets...

  • Page 133
    ... 31, 2008 and 2007 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 Private Banking Total Goodwill as...

  • Page 134
    ... by our customers to earn • interest over a fixed period, such as term deposits and guaranteed investment certificates. The terms of these deposits can vary from one day to 10 years. • Federal funds purchased, which are overnight borrowings of other banks' excess reserve funds at a United States...

  • Page 135
    ... Statement of Income. The objectives of the restructuring were to enhance customer service by directing spending and resources to front-line sales and service improvements, creating more efficient processes and systems and continuing to accelerate the pace of growth. The charge related to the...

  • Page 136
    ... 26, 2017, and redeemable at par commencing September 26, 2017. Please refer to the offering circular related to each of the above issues for further details on Canada Yield Price calculations and definitions of Government of Canada Yield. Notes 132 | BMO Financial Group 191st Annual Report 2008

  • Page 137
    ... derivative instruments maturing or repricing at different points in time, we are exposed to interest rate risk. Trading and underwriting (mark-to-market) assets and interest bearing assets on which the customer interest rate changes with the prime rate or other short-term market rates are reported...

  • Page 138
    ... amounts of derivatives Total Canadian dollar interest rate gap position 2008 2007 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 139
    ...from quarter to quarter. Normal Course Issuer Bid On September 8, 2008, we commenced a normal course issuer bid, effective for one year. Under this bid, we may repurchase up to 15,000,000 common shares, approximately 3% of our outstanding common shares. BMO Financial Group 191st Annual Report 2008...

  • Page 140
    ...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 at market prices. During the year ended October 31, 2008, we issued a total of 2,413,244 common...

  • Page 141
    ... years from their grant date. Stock Option Plan We maintain a Stock Option Plan for designated officers, employees and directors. Options are granted at an exercise price equal to the closing The following table summarizes information about our Stock Option Plan: (Canadian $, except as noted) 2008...

  • Page 142
    ...272,824 share units were outstanding for the years ended October 31, 2008, 2007 and 2006, respectively. Deferred Incentive Plans We offer deferred incentive plans for members of our Board of Directors, certain senior executives, and key employees in our BMO Capital Markets and Private Client Groups...

  • Page 143
    ... employee future benefit plans in the United States and Canada are partially funded. Pension and benefit payments related to these plans are either paid through the respective plan or paid directly by us. We measure the fair value of plan assets as at October 31 for our Canadian plans (September...

  • Page 144
    ... recognized all costs and benefits during the year Weighted-average assumptions used to determine benefit expenses Estimated average service period of active employees (in years) Discount rate at beginning of year Expected long-term rate of return on plan assets Rate of compensation increase Assumed...

  • Page 145
    ... the United Kingdom plan Actual return on plan assets Employer contributions Voluntary employee contributions Benefits paid to pensioners and employees Settlement payments Other, primarily foreign exchange Fair value of plan assets at end of year Plan funded status Unrecognized actuarial loss (gain...

  • Page 146
    ... | BMO Financial Group 191st Annual Report 2008 established to reduce future income tax assets to the amount more likely than not to be realized. Components of Future Income Tax Balances (Canadian $ in millions) 2008 2007 Notes Future Income Tax Assets Allowance for credit losses Employee future...

  • Page 147
    ... in the calculation of diluted earnings per share as we have the option to settle the conversion in cash instead of common shares. BMO Financial Group 191st Annual Report 2008 | 143 Notes Net income Dividends on preferred shares Net income available to common shareholders Average number of common...

  • Page 148
    ... management products and solutions, including full-service and online brokerage in Canada and private banking and investment products in Canada, the United States, United Kingdom and China. Notes BMO Capital Markets BMO Capital Markets ("BMO CM") combines all of our businesses serving corporate...

  • Page 149
    ...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 Services. Geographic Information...

  • Page 150
    ...respectively. Board of Directors Compensation Stock Option Plan During the year ended October 31, 2002, we introduced a stock option plan for non-officer directors, the terms of which are the same as the plan for designated officers and employees described in Note 23. Options to purchase a total of...

  • Page 151
    ... prepayment, at market interest rates currently offered for loans with similar terms. The value of our loan balances determined using the above assumption is further reduced by the allowance for credit losses to determine the fair value of our loan portfolio. Notes Securities The fair value...

  • Page 152
    ... value Assets Cash resources Securities Loans Residential mortgages Consumer instalment and other personal Credit cards Businesses and governments Securities borrowed or purchased under resale agreements Customers' liability under acceptances Allowance for credit losses Total loans and customers...

  • Page 153
    ... option (a) - Derivatives (c) - Reclassification from trading securities to available-for-sale securities (n) Non-Interest Expense - Stock-based compensation (d) - Software development costs (e) - Pension and related benefits (b) - Goodwill and other assets (f) Income taxes and net change in income...

  • Page 154
    ...for-sale securities (n) Pension and other employee future benefits (b) Total Accumulated Other Comprehensive Loss based on United States GAAP $ (251) 29 123 (772) $ (871) $ (1,533) 41 - (518) $ (2,010) (a) Fair Value Option Effective November 1, 2006, we adopted a new Canadian accounting standard...

  • Page 155
    ... in fair value recorded in income as they occur. (k) Available-for-Sale Securities Under both Canadian and United States GAAP , we have designated as available-for-sale all of our securities other than trading securities, loan substitute securities and investments in corporate equity where we exert...

  • Page 156
    ... Employee Co-Investment Fund I Management (Canada) Inc. and subsidiaries Toronto, Canada BMO Trust Company Toronto, Canada Guardian Group of Funds Ltd. and subsidiaries Toronto, Canada BMO (US) Lending, LLC Chicago, United States Harris Financial Corp. Wilmington, United States BMO Capital Markets...

  • Page 157
    ... BMO Asset Management Terry A. Jenkins Senior Vice-President and President and Chief Executive Officer, Harris Private Bank, U.S. Ed N. Legzdins Senior Vice-President and Head of Retail Investments Dean Manjuris Head of Full Service Brokerage Line of Business, President and Director, Private Client...

  • Page 158
    ...assets, such as loans and securities, including interest and dividend income and BMO's share of income from investments accounted for using the equity method of accounting, less interest expense paid on liabilities, such as deposits. Provision for Credit Losses is a charge to income that represents...

  • Page 159
    ...interest rate, foreign exchange rate, equity and commodity prices and their implied volatilities. This measure calculates the maximum likely loss from portfolios, measured at a 99% confidence level over a specified holding period. i P 78 i P 78 BMO Financial Group 191st Annual Report 2008 | 155

  • Page 160
    ... stock exchanges Ticker Year-end price October 31, 2008 High Low Total volume of shares traded Direct Dividend Deposit Shareholders may choose to have dividends deposited directly to an account in any financial institution in Canada or the United States that provides electronic funds transfer...

  • Page 161
    ... of the Securities and Exchange Commission web site. www.sec.gov GENERAL INFORMATION For general inquiries about company news and initiatives, or to obtain additional copies of the annual report, please contact: Corporate Communications Department 302 Bay Street, 10th Floor, Toronto, Ontario, M5X...

  • Page 162
    ... initiatives www.bmo.com/environment Information on our environmental policies, programs and performance TM/® ®* ®†®1 ®2 ®3 ®4 ®5 TM1 TM2 Trademark/registered trademark of Bank of Montreal Registered trademark of BMO Nesbitt Burns Corporation Limited Registered trademark of Harris...