Bank of Montreal 2008 Annual Report Download - page 89

Review of Fourth Quarter Performance
MD&A
BMO Financial Group 191st Annual Report 2008 | 85
Non-GAAP Measures
BMO uses both GAAP and non-GAAP measures to assess performance.
Securities regulators require that companies caution readers that
earnings and measures adjusted to a basis other than GAAP do not have
standardized meanings and are unlikely to be comparable to similar
measures used by other companies.
Management sometimes reports amounts on a basis that adjusts
for certain significant items. Amounts and measures stated on a basis
that excludes the significant items are considered useful as they are
expected to be more reflective of ongoing operating results. Since such
charges tend to be irregular and vary in magnitude, adjusting for them
is helpful in assessing quarterly trends in results. Effective in the fourth
quarter of 2008, we chose to discontinue categorizing certain charges
related to capital markets and commodities losses as significant items
and highlighting results on a basis that excludes such items, as they
have been incurred for periods longer than we expected when we
began to categorize such charges as significant items. Similarly, we
have discontinued categorizing changes in the general allowance for
credit losses as significant items and stating results on a basis that
excludes those amounts, as changes in the general allowance have
become more frequent in recent periods.
At times, we report certain results excluding the effects of notable
items, but generally do so in conjunction with disclosure of the nearest
GAAP measure and details of the reconciling item. To assist readers, we
have also provided a schedule on page 36 that summarizes notable
items that have affected results in the current reporting periods.
Net economic profit is a non-GAAP measure that assesses cash
earnings available to common shareholders after deducting a charge for
capital. It is considered an effective measure of added economic value.
GAAP and Related Non-GAAP Measures Used in the MD&A
($ millions, except as noted) 2008 2007 2006
Total non-interest expense (a) 6,894 6,601 6,353
Amortization of intangible assets (42) (46) (44)
Cash-based non-interest expense (b) (1) 6,852 6,555 6,309
Net income 1,978 2,131 2,663
Amortization of intangible assets,
net of income taxes 35 38 36
Cash net income (1) 2,013 2,169 2,699
Preferred share dividends (73) (43) (30)
Charge for capital (1) (1,535) (1,523) (1,439)
Net economic profit (1) 405 603 1,230
Revenue (c) 10,205 9,349 9,985
Revenue growth (%) (d) 9.2 (6.4) 1.5
Productivity ratio (%) ((a/c) x 100) 67.6 70.6 63.6
Cash productivity ratio (%) ((b/c) x 100) (1) 67.1 70.1 63.2
Non-interest expense growth (%) (e) 4.4 3.9 0.3
Cash-based non-interest
expense growth (%) (f) (1) 4.5 3.9 1.1
Operating leverage (%) (d – e) 4.8 (10.3) 1.2
Cash operating leverage (%) (d – f) (1) 4.7 (10.3) 0.4
EPS (uses net income) ($) 3.76 4.11 5.15
Cash EPS (uses cash net income) ($) (1) 3.83 4.18 5.23
(1) These are non-GAAP amounts or non-GAAP measures.
(2) The table above outlines non-GAAP measures used by BMO together with their closest
GAAP counterparts.
•a charge of $49 million for other-than-temporary impairment
of securities in our portfolios, including $29 million in respect
of securities transferred from the trading to the available-for-
sale portfolio;
•a benefit of $133 million for mark-to-market valuations on credit
default swaps related to BMO Capital Markets’ loan portfolio;
•a benefit of $89 million related to our liabilities recorded at fair
value as a result of our widening credit spreads; and
•a number of other valuation adjustments and trading activities
resulting in a net benefit of $71 million, including an $81 million
pre-tax gain primarily related to portfolios where certain securities
were transferred to the available-for-sale portfolio.
The charges in Private Client Group included $31 million
($19 million after tax) in respect of management actions taken to
support our U.S. clients in the difficult capital markets environment,
including:
•a net charge of $19 million related to securities of Lehman
Brothers; and
•a charge of $12 million in respect of the valuation of auction
rate securities that we expect to be tendered to our offer to
purchase them from client accounts.
As explained on page 71, during the quarter, the CICA amended
accounting and reporting rules applicable to financial instruments and
as a result, we elected to transfer certain securities from our trading
portfolio to our available-for-sale portfolio. We subsequently recorded
mark-to-market charges on these securities, of which $29 million
was charged to earnings as other than temporary impairments and
$183 million ($123 million after tax) was charged to other comprehensive
income rather than to trading revenues (losses).
Results in the fourth quarter of 2008 were good, in the context of a
difficult capital markets environment and weakening North American
economies. We remained focused on our core operations and on serving
our customers. This was reflected in results and in further gains in
market share in our priority businesses 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 appre-
ciably due to higher credit losses charged to the group under our
expected credit loss provisioning methodology.
BMO’s net income was $560 million, an increase of $108 million or
24% from the fourth quarter of 2007. Summary income statements and
data for the quarter and comparative quarters are outlined on page 88.
Notable items affected quarterly results in both years. Results in 2008
included the $125 million after-tax impact of charges of $45 million
related to the deterioration in the capital markets environment and a
$150 million increase in the general allowance for credit losses. Results
in 2007 included the $275 million after-tax impact of charges of $318 mil-
lion related to the deterioration in the capital markets environment and
a $50 million increase in the general allowance for credit losses, as well
as modest charges related to commodities losses and restructuring.
The charges of $45 million related to the capital markets environ-
ment were reflected in BMO Capital Markets and Private Client Group.
The charges in BMO Capital Markets included $14 million ($8 million
after tax) comprised of:
•charges of $258 million in respect of exposures related to Apex
($170 million before tax), and mark-to-market valuations on counter-
party credit exposures on derivative contracts largely as a result
of corporate counterparties’ credit spreads widening relative to BMO’s
($88 million before tax);