Bank of Montreal 2010 Annual Report Download - page 52

MANAGEMENT’S DISCUSSION AND ANALYSIS
MD&A
U.S. Business Environment and Outlook
Chicago’s financial services marketplace remains one of the most
fragmented in the United States, with approximately 230 deposit-taking
institutions. Harris and the two other largest banks in the Chicago area
have together held only 25% to 37% of the personal and commercial
deposit market since 1997. The Chicago area remains a highly contested
market because of the growth opportunities presented by this frag-
mentation. Competitors are attempting to capture market share through
acquisitions, aggressive pricing and continuous investment in their
brands. Since November 1, 2009, there have been 15 bank failures in
the Chicago area. The 2010 competitive dynamic has shifted with
further consolidation of the market due in large part to FDIC-assisted
transactions. P&C U.S. has participated in this consolidation, acquiring
certain assets and liabilities of a Rockford, Illinois-based bank in an
FDIC-assisted transaction.
We expect the U.S. Midwest economy to show a modest improve-
ment in 2011, consistent with the broader U.S. economy, led by a
business recovery. Consumer and business loan demand should improve
slowly as credit availability increases. Low home prices will likely
continue to dampen demand for home equity loans, but low interest
rates and rising employment should increase demand for residential
mortgages. Consumer spending began to recover in 2010 and is
expected to increase at a measured pace in 2011. Business investment
in machinery and equipment rebounded in 2010 and should continue
to advance at a brisk pace in 2011. However, non-residential construction
continued to slump in 2010, and will likely remain weak in 2011, given
high vacancy rates for commercial and industrial properties.
In 2011, we plan to continue to grow organically by embedding
customer acquisition into our sales culture, providing compelling product
offerings, becoming a commercial banking leader in the U.S. Midwest
and leveraging our brand. We will strive to improve our financial
performance by continuing to focus on revenue growth and effectively
managing costs. By bringing clarity to our customers in the form of
simplicity, guidance and know-how, we will continue to enhance our
reputation as a strong, stable and customer-focused bank.
P&C U.S. Financial Results
P&C U.S. net income decreased $111 million or 39% from the prior year
to $175 million. On a U.S. dollar basis, net income was $168 million,
down $75 million or 31% from the prior year. Amounts in the rest of
this section are expressed in U.S. dollars.
On a basis that adjusts for the impact of impaired loans, changes
in the Visa litigation accrual and acquisition integration costs, net income
was $237 million, down $50 million or 17% from results of a year ago on
a comparably-adjusted basis. On this adjusted basis, the cash productivity
ratio was 64.2%, compared with 70.8% on a reported basis.
Late in the second quarter of 2010, we acquired certain assets
and liabilities of a Rockford, Illinois-based bank from the Federal Deposit
Insurance Corporation (FDIC). The transaction increased revenue by
$42 million and expenses by $59 million (including acquisition integra-
tion costs of $19 million) and decreased net income by $10 million.
The acquisition provides an excellent strategic fit that accelerates our
growth strategy, adding quality locations and a good customer base
and expanding our branch network into new key markets in northern
Illinois and southern Wisconsin, where we already have a strong and
growing commercial banking presence.
Revenue of $1,367 million was $25 million or 1.8% higher in 2010.
Adjusting results in both years for the impact of the Rockford transaction
and the impact of impaired loans, revenue decreased $27 million or
2.0% as the effect of loan spread improvement was more than offset
by a reduction in commercial loan balances, caused by lower client
utilization, and deposit spread compression.
Non-interest expense of $991 million increased $96 million or
11%. Adjusting costs in both years for the impact of the operating and
integration costs arising from the Rockford transaction, increases in
impaired loan costs, changes in the Visa litigation accrual and a valuation
adjustment on our serviced mortgage portfolio related to lower long-term
interest rates, non-interest expense increased $3 million or less than 1%.
To position our commercial business for growth as the United States
emerges from recession, we identified U.S. mid-market clients that
would be better served by a commercial banking model and transferred
their business to P&C U.S. from BMO Capital Markets in the second
quarter of 2010. As a result, P&C U.S. assumed $5.4 billion in loans and
$3.2 billion in deposits, with results for prior periods restated to reflect
the transfer.
50 BMO Financial Group 193rd Annual Report 2010