Bank of Montreal 2005 Annual Report Download

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188th Annual Report 2005
Every customer. Every shareholder. Every employee. Every community. Every business. Every market. Every
industry. Every stakeholder. Every individual. Every partnership. Every plan. Every goal. Every objective.
Every answer. Every share. Every idea. Every policy. Every service. Every practice. Every priority. Every
target. Every initiative. Every value. Every experience. Every dream. Every aspiration. Every investment.
Every opportunity. Every perspective. Every transaction. Every contribution. Every commitment. Every
promise. Every loan. Every acquisition. Every channel. Every branch. Every department. Every group.
Every action. Every intention. Every decision. Every solution. You can count on us. This is BMO today.
Every Day

Table of contents

  • Page 1
    .... Every transaction. Every contribution. Every commitment. Every promise. Every loan. Every acquisition. Every channel. Every branch. Every department. Every group. Every action. Every intention. Every decision. Every solution. You can count on us. This is BMO today. Every Day 188th Annual Report...

  • Page 2
    ...highest international standard for operating an Information Security Management System. Top Online Brokerage BMO InvestorLine® ranked #1 in The Globe and Mail 's annual review of Canada's online brokerage firms for the fourth consecutive year. Sustainability: Best in Class BMO Financial Group was...

  • Page 3
    ... commercial banking as reflected by the second-largest market share in business lending. U.S. Operations In the United States, clients are served through Harris, a major U.S. Midwest financial services organization with a network of community banks in the Chicago area and wealth management offices...

  • Page 4
    ... clients with customized portfolios that combine separately managed accounts, mutual funds, exchange-traded funds, and alternative investment products in a single account. BMO Harris Private Banking was named the best private bank in Canada by Euromoney magazine for the second consecutive year. BMO...

  • Page 5
    ...the top-performing financial services company in North America. Advancing our strategic priorities Delivering consistently to our shareholders Providing exceptional customer service Focusing on our strength in credit risk management Leading in corporate governance Valuing every employee Helping our...

  • Page 6
    ...every action. We share information, learn and innovate to create consistently superior customer experiences. Our Enduring Strengths Long-Term Shareholder Return At the end of 2005, the five-year annual Total Shareholder Return on BMO common shares was 13.8%. Excellence in Credit Risk Management BMO...

  • Page 7
    ... growth in the United States both organically and through acquisitions. See pages 7, 28 and 47 Grow net income in Canada through operational efficiency and improved market share, accelerating our growth in commercial banking and wealth management. See pages 8, 28 and 45 Build a high-performance...

  • Page 8
    ... year for the North American financial services sector, BMO focused on actions that will create value for our shareholders by executing our business strategy and maintaining focus on our foundational strengths which include sound corporate governance and strong credit risk management. David...

  • Page 9
    ...the second-best productivity ratio in our Canadian peer group. We have improved the cash productivity ratio by a total of 540 basis points over the past three years, creating a strong culture of cost discipline that will serve BMO well for years to come. We are also aware that revenue growth is the...

  • Page 10
    ... the United States. Management is confident in the strategic course we have set. In its five-year global ranking of large cap financial services companies published in May 2005, The Boston Consulting Group ranks BMO second in the world with an average Risk-adjusted Relative Total Shareholder Return...

  • Page 11
    ... our wellestablished, integrated U.S. operations. Including our acquisition of Harris in 1984, we have invested $2.4 billion in U.S. retail acquisitions, transforming a handful of private Chicago banks into a community banking network of nearly 200 branches in the Chicago area and Northwest Indiana...

  • Page 12
    ... credit management. Karen Maidment Senior Executive Vice-President and Chief Financial Officer "Over the past five years, shareholders have earned an average annual total return of nearly 14%." Every day at BMO Financial Group, our goal is to ensure that we grow and protect the long-term value...

  • Page 13
    ... rate environment to buy homes and other goods. For its part, business ramped up investment spending. of the year when our net income increased by 20%, and also reflects the sale of Harrisdirect. We have the right strategy to grow our business and best serve our shareholders. BMO's differentiating...

  • Page 14
    ... customers with the depth and breadth of financial products and services they need. BMO has the second largest market share in business lending in Canada. BMO participated in 268 corporate equity transactions that raised $34 billion for Canadian companies. 10 | BMO Financial Group 188th Annual...

  • Page 15
    ... Fund Left to right: David Farmer, Vice President and Underwriter Corporate Finance Loan Syndications, BMO Bank of Montreal Debra Puckett, Business Development Leader, Cash Management, BMO Bank of Montreal Neil Runions, Senior Manager, Corporate Finance Division, BMO Bank of Montreal BMO Financial...

  • Page 16
    ... and trust in our community." Through organic growth and acquisition, and by providing every customer every day a range and depth of products and services, Harris is well on the way toward achieving our goal of becoming the leading Midwest personal and commercial bank in the United States. Client...

  • Page 17
    ...: Gary Gardner, President, Namasté Laboratories with model and stylist Left to right: Joe Dillon, Market Manager, Harris Nellie Tomicich, Assistant Vice President, Cash Management Specialist, Harris Mike Stanton, Managing Director, Harris Private Bank BMO Financial Group 188th Annual Report 2005...

  • Page 18
    ... a private placement arranged by Harris Nesbitt's New York office as well as senior debt financing packaged jointly by BMO Bank of Montreal in Montreal and Harris Nesbitt in Chicago. Sanimal, which had been the client of a competitor for 25 years, also transferred its cash management business...

  • Page 19
    ... Board Member; Martin Couture, President Left to right: Brian Moeller, Managing Director, Food Group, Harris Nesbitt Luc Bernier, Senior Manager, Corporate Finance Division, Personal and Commercial Client Group, BMO Bank of Montreal Amy Lauterjung, Director, U.S. Debt Products Group, Harris Nesbitt...

  • Page 20
    ...the United States reopened its border to young Canadian cattle and our clients were back in business. And that, after all, is the point. Better Results for Shareholders What does our credit risk management approach mean for our shareholders? It's simple. We gain market share without increased risks...

  • Page 21
    ... basis of accountability, board independence, disclosure, three-year total return and three-year return vs. the S&P/TSX. The Globe and Mail 's Report on Business annual review of corporate governance practices ranked BMO second overall among 209 Canadian reporting issuers. The Canadian Institute of...

  • Page 22
    ...Director Mosaic Capital Partners Toronto David A. Galloway Toronto, ON Chairman of the Board Bank of Montreal Harold N. Kvisle Calgary, AB President and Chief Executive Officer TransCanada Corporation Eva Lee Kwok Vancouver, BC Chair and Chief Executive Officer Amara International Investment Corp...

  • Page 23
    ... Reitman Montreal, QC President and Chief Executive Officer Reitmans (Canada) Limited Guylaine Saucier, C.M., F.C.A. Montreal, QC Corporate Director Nancy C. Southern Calgary, AB President and Chief Executive Officer ATCO Ltd. and Canadian Utilities Limited BMO Financial Group 188th Annual Report...

  • Page 24
    ...race relations practice in Canada. BMO Financial Group Bank-wide Student Training Program was recognized with a Recruiting & Staffing Best in Class Award from International Quality & Productivity Center. BMO was recognized by the Canadian Paraplegic Association for outstanding corporate philanthropy...

  • Page 25
    ...past year, we presented BMO Financial Group CanSkate Champions Medals to more than 4,000 young people from across the country. For more examples of our commitment to our communities, please see our Corporate Social Responsibility Report including our Public Accountability Statement online at www.bmo...

  • Page 26
    ... for a coalition of the world's largest institutional investors. Members of the Project voluntarily disclose investment-relevant information concerning greenhouse gas emissions. For more on BMO and the Environment, see our web site at www.bmo.com/community. Dow Jones Sustainability North America...

  • Page 27
    ... Total Shareholder Return Earnings per Share Growth Return on Equity Net Economic Profit Growth 2005 Financial Performance Review Operating Group Review Summary Personal and Commercial Client Group Private Client Group Investment Banking Group Corporate Support, including Technology and Solutions...

  • Page 28
    ... Performance and Condition at a Glance Our Performance Peer Group Comparison Five-Year TSR (%) 18.9 12.9 7.9 13.8 Total Shareholder Return (TSR) BMO's average annual five-year TSR of 13.8% declined from 18.9% a year ago, but is consistent with returns from the financial services industry and better...

  • Page 29
    ...be supported by broad diversification of deposits. 29.1 24.9 23.1 25.8 26.2 Cash and Securities as a % of Total Assets BMO's liquidity ratio of 26.2% was below the Canadian peer group average of 32.0% and the North American peer group average of 30.8%. Our liquidity ratio was higher than a year ago...

  • Page 30
    ... six BMO Rank of six Financial Performance Measures (%) Five-year total shareholder return (TSR) Diluted earnings per share (EPS) growth Return on common shareholders' equity (ROE) Net economic profit (NEP) growth Revenue growth Expense-to-revenue (productivity) ratio Provision for credit losses...

  • Page 31
    ... management offices across the United States, as well as Harris Nesbitt, a leading mid-market investment and corporate bank. Our financial services professionals can provide access to any service our customers require across the entire enterprise. BMO Financial Group comprises three client operating...

  • Page 32
    ... market share, accelerating our growth in commercial banking and wealth management. Build a high-performance organization by developing our people, living our values and being an employer of choice. Maintain our world-class foundation of leading governance, sound risk management, productive systems...

  • Page 33
    ... of the information we obtain with respect 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 market activities...

  • Page 34
    ... information provided by customers and counterparties are materially misleading. Execution of Strategic Plans Our financial performance is influenced by our ability to execute strategic plans developed by management. If these strategic plans do not meet with success or there is a change in strategic...

  • Page 35
    ..., with support from low interest rates offset by the negative effects of a strong Canadian dollar. Consumer spending remained healthy, sustaining growth in personal loans. Housing markets continued to be buoyant, with record-high home sales, low interest rates and rising prices boosting residential...

  • Page 36
    ..., over time, first-quartile total shareholder return (TSR) relative to our Canadian and North American peer groups. The five-year average annual TSR is a key measure of shareholder value and is the most important of our financial performance and condition measures, since it assesses our success in...

  • Page 37
    ...from the sale of term investment products, mutual funds and securitization activities. In the United States, higher revenues were due to robust consumer and small business loan growth and acquisitions, partially offset by the impact of lower net interest margin. In PCG, successful revenue-generating...

  • Page 38
    ... 2004 2005 Return on common shareholders' equity (ROE) is 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, net unrealized foreign exchange gain (loss...

  • Page 39
    ... enterprise review. Highlights Revenue increased $470 million or 5% in 2005. Revenue growth was attributable to improved product volumes in Personal and Commercial Client Group and the benefits of revenue-generating initiatives and improved market fundamentals in Private Client Group. Higher trading...

  • Page 40
    ... Net income Cash net income Business acquired Revenue Expense Personal and Commercial Client Group Mercantile Bancorp, Inc. Acquired December 2004 for $194 million New Lenox State Bank Acquired June 2004 for $314 million Lakeland Community Bank Acquired March 2004 for $49 million Total purchases...

  • Page 41
    ... growth in Personal and Commercial Client Group, driven by higher product volumes, insurance income and card fees. Private Client Group revenue also increased, as successful revenue-generating initiatives and improved market fundamentals drove higher full-service investing, mutual fund and term...

  • Page 42
    ... due to higher levels of low-margin assets, driven by client demand in the capital markets businesses. The group's net interest margin declined sharply due to the funding of trading positions, lower spreads on corporate loans in the competitive rate environment in the United States and lower spreads...

  • Page 43
    ... due to increased client demand, while equity trading revenues declined from the strong levels of 2004. Foreign exchange trading revenues rose modestly. The Market Risk section on page 70 provides further information on trading-related revenues. BMO Financial Group 188th Annual Report 2005 | 39

  • Page 44
    .... The decline was attributable to improved credit quality in the performing loan portfolio and lower levels of impaired loans and acceptances. The general allowance, which totalled $959 million at year-end, remains adequate, representing 64 basis points of risk-weighted assets. In addition, BMO uses...

  • Page 45
    ... terms, thereby improving their expense-to-revenue ratios. Personal and Commercial Client Group is BMO's largest operating group and its productivity ratio of 60.2% improved by 290 basis points from last year, surpassing its target. Productivity improved in both Canada and the United States...

  • Page 46
    ... services to our joint ventures and equity-accounted investees on the same terms that we offer to our customers. A select suite of customer loan and mortgage products is offered to our employees at rates normally accorded to our preferred customers. We also offer employees a subsidy on annual credit...

  • Page 47
    2005 Review of Operating Groups Performance William A. Downe Deputy Chair, BMO Financial Group Chief Executive Officer, BMO Nesbitt Burns and Head, Investment Banking Group Net Income by Operating Group 2005 P&C 50.0% PCG 13.3% IBG 35.5% Corporate Support 1.2% Net Income by Country 2005 Canada 69...

  • Page 48
    ... environment where Canadians can choose from among the products and services of traditional banks, credit unions and trust companies as well as other competitors such as direct banks, mortgage and deposit brokers, financial planners and mutual fund companies. Personal deposit growth 4.4 Commercial...

  • Page 49
    ... in commercial banking in 2005. Improving customer loyalty remains a key focus in 2006 and beyond as we invest in sales force growth and improve our ability to offer relevant, flexible solutions to help our customers better manage their financial affairs. Maintain our personal banking market share...

  • Page 50
    ... for entering new markets. Frank J. Techar President and Chief Executive Officer, Harris Bankcorp Group Description P&C Chicagoland Banking serves personal and business clients with a full suite of financial products and services. This is done through a community banking model that emphasizes...

  • Page 51
    ... high customer service levels of a community bank. Invest in our strategic infrastructure by refreshing the branch technology platform. 8.2 2002 2003 2004 2005 Growth (%) Impact of acquisitions Core loans There was continued strong loan growth of US$2 billion per year. U.S. Cash Productivity...

  • Page 52
    ...% of total Personal and Commercial Client Group net income for the year, compared with 11% for fiscal 2004. BMO's corporate banking operations in the United States are concentrated among mid-market corporate clients, which BMO manages and reports in our Investment Banking Group operations because of...

  • Page 53
    ... Personal and Commercial Client Group net income rose $217 million or 22% from the record results of a year ago to $1,199 million. The improvement was driven by strong volume growth and effective cost management, partially offset by lower net interest margin in the United States. P&C Canada's net...

  • Page 54
    .... management, banking and financial planning services to high and ultra-high net worth clients. Using a client-centred advisory approach, we deliver solutions through a complete range of financial products and services. Investment Products includes BMO Mutual Funds, Guardian Group of Funds, Harris...

  • Page 55
    ... funds and alternative investment products into a single account. This program is the first of its kind in Canada. Award-winning leadership in client services: - BMO InvestorLine was The Globe and Mail 's choice as best online broker for the fourth consecutive year. - BMO Harris Private Banking...

  • Page 56
    ... 2006. Equity markets are expected to remain solid, which should translate into continued growth in managed asset balances. Long-term trends remain favourable for wealth management services and should result in continued growth. Private Client Group Financial Results Private Client Group net income...

  • Page 57
    ... investment and corporate bank in our markets. Strategies Continue to reinforce our leading positions in Canada. Accelerate growth in the United States. Continuously improve the profitability of client relationships. Yvan J.P. Bourdeau President and Chief Operating Officer, BMO Nesbitt Burns Group...

  • Page 58
    ... year. notes) for institutions, corporations and high net worth individuals across North America. Launched eFXpedite, an online foreign exchange trading system that lets customers execute trades over the Internet and access foreign exchange prices in real time. Improve our cash productivity ratio...

  • Page 59
    ...short-term interest rate environment, the flatter yield curve, lower spreads on corporate loans and our strategy of reducing non-core assets. Higher funding costs of our increased commodity and equity trading businesses also contributed to the decline in net interest income. The provision for credit...

  • Page 60
    ...of BMO's customer-facing lines of business. Product Operations focuses on providing excellent customer service, and has deployed a quality program to improve service and productivity. Supported Harris Bank in consolidating more than 80 different processing systems across 26 bank charters to form one...

  • Page 61
    ... Support activities. Financial Results Corporate Support net income for the year was $29 million, compared with $265 million in 2004. The decline was driven by a significantly higher provision for credit losses, as well as reductions in net gains on investment securities and foreign exchange...

  • Page 62
    ... interest rate environment. Trading securities increased $8.9 billion to $44.3 billion due to an increase in corporate debt securities related to growth in our credit derivatives business and an increase in holdings of Government of Canada issued paper. Note 3 on page 97 of the financial statements...

  • Page 63
    ... required capital; results in targeted credit ratings; funds our operating groups' business strategies; and builds long-term shareholder value. Our approach includes establishing limits, goals and performance measures for management of balance sheet positions, risk levels and minimum capital amounts...

  • Page 64
    ... the exercise of stock options, exchangeable shares and the dividend reinvestment plan. BMO's credit rating, as measured by Standard & Poor's (S&P) senior debt ratings, remained unchanged at AA-, the highest, along with two of our competitors, of the six major Canadian banks. Our rating, as measured...

  • Page 65
    ... vehicles provide clients with access to liquidity 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 vehicles' purchases of the assets. The customers continue to service the transferred assets and are...

  • Page 66
    ...no additional loans would be sold to the trust. Credit Investment Management Vehicles Credit investment management vehicles provide investors with investment opportunities in customized, diversified debt portfolios in a variety of asset and rating classes. We earned investment management fees of $31...

  • Page 67
    ... losses, the fair value cost of servicing, and the rate at which to discount these Valued using quoted market prices Valued using internal models* Total *Almost all models are based on observable market data. 99% 1 100% 11% 89 100% 13% 87 100% BMO Financial Group 188th Annual Report 2005 | 63

  • Page 68
    ... fair value for 12 months or more. Additional information regarding our accounting for investment securities is included in Note 3 on page 97 of the financial statements. Customer Loyalty Program We record the liability related to our credit card customer loyalty program when our customers become...

  • Page 69
    ... of the financial statements. Merchant Banking Investments We adopted the CICA's new accounting requirements for merchant banking subsidiaries on November 1, 2004. These subsidiaries now account for their investments at fair value, with changes in fair value recorded in net income. Previously, they...

  • Page 70
    ... will remeasure certain investment securities and certain derivative financial instruments at fair value, and report a new section of shareholders' equity called comprehensive income. The impact of recording these assets and liabilities at fair value will be recognized in opening equity and results...

  • Page 71
    ... risk-related regulatory requirements. The President and Chief Executive Officer (CEO) is directly accountable to the Board for all of BMO's risk-taking activities. Risk Management Committee and its sub-committees as well as Enterprise Risk and Portfolio Management support the CEO. Risk Management...

  • Page 72
    ... of BMO's strategic objectives are consistent with desired total shareholder return as well as BMO's desired credit rating and risk tolerance. It is the foundation for risk-based capital management and permits the cost of capital to be charged to the lines of business. CaR indicates, in terms of...

  • Page 73
    ... value. BMO increasingly uses credit derivative products to enhance the management of its portfolio of credit risk assets, in particular its corporate loan book. In 2005, we were active in the use of single-name credit default swaps to mitigate the credit risk related to specific client credit...

  • Page 74
    ...tax net income of a portfolio of assets, liabilities and off-balance sheet positions, measured at a 99% confidence level over a specified holding period. Value at Risk (VaR) is measured for specific classes of risk in BMO's trading and underwriting activities: interest rate, foreign exchange, equity...

  • Page 75
    ... basis. Structural Market Risk Structural market risk is comprised of interest rate risk arising from our 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...

  • Page 76
    Management's Discussion and Analysis Models used to measure structural market risk help forecast how interest rates and foreign exchange rates may change and predict how customers would likely react to the changes. These models have been developed using statistical analysis and are validated ...

  • Page 77
    ... of total assets reflects a sound liquidity position. Core deposits represent a stable source of funding. The ratio decreased primarily due to an increase in non-core deposits that supported growth in loans and securities. Wholesale funding used to support loan growth was primarily longer term in...

  • Page 78
    ... to ensure the long-term sustainability of the enterprise. Our annual Corporate Social Responsibility Report, including our Public Accountability Statement, documents how BMO Financial Group plays a role in the growth, success and well-being of the citizens and communities of the countries in...

  • Page 79
    ... Group's card fees revenue because of rising reward redemption rates associated with our customer loyalty rewards program. Personal and Commercial Client Group net income in the fourth quarter rose $38 million or 14% from a year ago, driven by higher volumes in both Canada and the United States...

  • Page 80
    ... to credit card fees. Private Client Group's results have benefited from steady growth in fee-based and managed asset businesses, improved net interest margin on term investment products and continued expense management, while also being subject to the variability of client trading activity...

  • Page 81
    ... Book value Market price High Low Close Financial Measures (%) Five-year average annual total shareholder return Dividend yield Diluted earnings per share growth Diluted cash earnings per share growth Return on equity Cash return on equity Net economic profit growth Net income growth Revenue growth...

  • Page 82
    ... expenses increased by only $21 million or 0.3%, as a change in accounting policy to capitalize costs of certain internally developed software in 2004 reduced expenses by $47 million. Operating Groups Results Personal and Commercial Client Group net income rose $68 million or 7% to $982 million, due...

  • Page 83
    ... October 31 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 84
    ... Shareholders' Equity Deposits Other liabilities Subordinated debt Preferred share liability Capital trust securities Share capital Preferred Common Contributed surplus Net unrealized foreign exchange gain (loss) Retained earnings Total liabilities and shareholders' equity Average Daily Balances Net...

  • Page 85
    ... one year 1-3 years 4-5 years Over 5 years No fixed maturity As at October 31, 2005 Total Subordinated debt Operating leases Deposits (1) Capital trust securities (2) Total (1) Includes fixed maturity deposits of $18.2 billion that are redeemable at the customers' option under certain conditions...

  • Page 86
    ... Lending fees Card fees Investment management and custodial fees Mutual fund revenues Securitization revenues Underwriting and advisory fees Investment securities gains (losses) Foreign exchange, other than trading Insurance income Other revenues Total non-interest revenue Year-over-year growth...

  • Page 87
    ... Ratio ($ millions, except as noted) 5-year CAGR 10-year CAGR For the year ended October 31 2005 2004 2003 2002 2001 Non-Interest Expense Employee compensation Salaries Performance-based compensation Employee benefits Total employee compensation Premises and equipment Rental of real estate...

  • Page 88
    ... Canadian Dollar Deposits with other banks Securities Loans Residential mortgages Non-residential mortgages Consumer instalment and other personal Credit cards Businesses and governments (1) Total loans Other non-interest bearing assets Total Canadian dollar U.S. Dollar and Other Currencies Deposits...

  • Page 89
    ... 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-interest bearing assets Change...

  • Page 90
    ..., commercial and corporate categories are stated net of specific allowances only. (3) Loans and acceptances returning to performing status, sales and repayments. (4) Excludes ACL for off-balance sheet exposure of $6 million in 2003. NA - not available 86 | BMO Financial Group 188th Annual Report...

  • Page 91
    ...05 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 92
    ... 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 and corporate Allocation of Recoveries by Market Consumer Commercial and corporate Net write...

  • Page 93
    ... 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 Total specific allowance for credit losses on commercial...

  • Page 94
    ...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 Ratio Total Capital Ratio U.S. basis Tier 1 Capital Ratio U.S. basis Total Capital Ratio Assets-to...

  • Page 95
    ...appropriate. The Board of Directors, based on recommendations from its Audit and Conduct Review Committees and its Risk Review Committee, reviews and approves the financial information contained in the Annual Report, including the MD&A, and oversees management's responsibilities for the presentation...

  • Page 96
    ... Securities (Note 18) Shareholders' Equity Share capital (Note 20) Contributed surplus (Note 21) Net unrealized foreign exchange loss Retained earnings 2,469 450 1,150 4,618 20 (612) 9,840 13,866 Total Liabilities and Shareholders' Equity The accompanying notes to consolidated financial statements...

  • Page 97
    ... fees Deposit and payment service charges Trading revenues Lending fees Card fees Investment management and custodial fees Mutual fund revenues Securitization revenues (Note 7) Underwriting and advisory fees Investment securities gains (losses) (Note 3) Foreign exchange, other than trading Insurance...

  • Page 98
    ...Note 20) Balance at beginning of year Issued under the Shareholder Dividend Reinvestment and Share Purchase Plan (Note 20) Issued under the Stock Option Plan (Note 21) Issued on the exchange of shares of a subsidiary corporation (Note 20) Issued on the acquisition of a business (Note 20) Repurchased...

  • Page 99
    ... by (used in) operating activities Write-down of investment securities Net gain on investment securities Net (increase) in trading securities Provision for credit losses Gain on sale of securitized loans Change in derivative financial instruments - (Increase) decrease in derivative asset - Increase...

  • Page 100
    ... Capital Trust Securities Interest Rate Risk Share Capital Employee Compensation - Stock-Based Compensation Employee Compensation - Employee Future Benefits Income Taxes Earnings Per Share Operating and Geographic Segmentation Related Party Transactions Contingent Liabilities Fair Value of Financial...

  • Page 101
    ... income. The new section will include gains and losses related to the mark-to-market of investment securities and cash flow hedges as well as the net unrealized foreign exchange gain that is currently included in shareholders' equity. The change in accounting policy as it relates to investment...

  • Page 102
    ... value and record the mark-to-market adjustments and any gains and losses on the sale of these securities in our Consolidated Statement of Income in trading revenues. Loan substitute securities are customer financings, such as distressed preferred shares, that we structure as after-tax investments...

  • Page 103
    ...-for-sale. Available-for-sale securities will be measured at fair value with gains and losses recorded in a new section of shareholders' equity called other comprehensive income. There will be no change in accounting for held-to-maturity securities. Unrealized Gains and Losses (Canadian $ in...

  • Page 104
    ... sale according to management's intention. Fair value is determined based on market prices where available. Otherwise, fair value is determined using other methods, such as analysis of discounted cash flows or market prices for similar assets. Loans Loans are recorded at cost net of unearned income...

  • Page 105
    ...2004 2005 Net amount 2004 Residential mortgages Credit card, consumer instalment and other personal loans Business and government loans Securities borrowed or purchased under resale agreements Subtotal Customers' liability under acceptances Total By geographic region (1): Canada United States Other...

  • Page 106
    ... to our customers to grant them credit in the form of loans or other financings for specific amounts and maturities, subject to meeting certain conditions. Summarized information related to various commitments is as follows: (Canadian $ in millions) 2005 Contract amount Risk-weighted equivalent...

  • Page 107
    ... undertaken. The deferred purchase price is recorded in our Consolidated Balance Sheet in other assets. A servicing liability is recognized only for securitizations where we do not receive compensation for servicing the transferred loans. Notes BMO Financial Group 188th Annual Report 2005 | 103

  • Page 108
    ... Statement of Income for the three years ended October 31 was as follows: (Canadian $ in millions) Residential mortgages 2005 2004 2003 Consumer instalment and other personal loans 2005 2004 2003 2005 Credit card loans 2004 2003 2005 Total 2004 2003 Gain on sales of loans from new securitizations...

  • Page 109
    ... issue commercial paper to investors to fund the purchases. The seller continues to service the transferred assets. If there are losses on the assets, the seller is the first to take the loss. We do not sell assets to or service the assets held by these customer securitization vehicles. We earn fees...

  • Page 110
    ... risks associated with these instruments are related to our exposure to movements in interest rates, foreign exchange rates, credit ratings, securities values or commodities prices, as applicable, and the possible inability of counterparties to meet the terms of the contracts. Derivative financial...

  • Page 111
    ... risk management needs, derivatives transacted to generate trading income from our own proprietary 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...

  • Page 112
    ... Futures Purchased options Written options Equity Contracts Credit Contracts Total fair value - trading derivatives Total book value - trading derivatives Average fair value (1) Hedging Interest Rate Contracts Swaps Forward rate agreements Purchased options Written options Foreign Exchange Contracts...

  • Page 113
    ...250 Exchange-traded Futures Purchased options Written options 181,506 76,481 57,850 315,837 Total interest rate contracts Foreign Exchange Contracts Over-the-counter Cross-currency swaps Cross-currency interest rate swaps Forward foreign exchange contracts Purchased options Written options 1,474...

  • Page 114
    ...contracts. Exchange-traded derivatives have no potential for credit exposure as they are settled net with each exchange. (Canadian $ in millions) Terms used in the credit risk table below are as follows: Replacement cost represents the cost of replacing all contracts that have a positive fair value...

  • Page 115
    ... netting agreements) with customers in the following industries: (Canadian $ in millions) Interest rate contracts 2005 2004 Foreign exchange contracts 2005 2004 Commodity contracts 2005 2004 2005 Equity contracts 2004 2005 Credit contracts 2004 Financial institutions Natural resources Other Total...

  • Page 116
    ...we also acquired a small real estate company, Lake Commercial Corp. (collectively "MBI"). The results of MBI's operations have been included in our consolidated financial statements since that date. The acquisition of MBI provides us with the opportunity to expand our community banking services into...

  • Page 117
    ... denominated in foreign currencies into Canadian dollars, purchase accounting adjustments related to prior year purchases and certain other reclassifications. (2) Relates primarily to New Lenox State Bank, First National Bank of Joliet, Household Bank branches, Moneris Solutions Corporation and...

  • Page 118
    ... are overnight borrowings of other banks' excess reserve funds at a United States Federal Reserve Bank. As at October 31, 2005, we had purchased $4,396 million of federal funds ($3,165 million in 2004). Deposits payable on a fixed date include commercial paper totalling $604 million as at October...

  • Page 119
    ... for discussion of a change in accounting policy affecting our capital trust securities included in non-controlling interest in subsidiaries, which was effective November 1, 2004. Customer Loyalty Program We record the liability associated with our credit card customer loyalty program rewards in the...

  • Page 120
    ... with the new presentation. See Note 20 for the impact of this change in accounting policy on our consolidated financial statements. Note 19 Notes Interest Rate Risk The assumptions for 2005 were as follows: Assets Fixed term assets, such as residential mortgage loans and consumer loans, are...

  • Page 121
    ... Total Canadian dollar interest rate gap position 2005 2004 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 but not yet purchased...

  • Page 122
    ... 6,220,500 shares at an average cost of $53.63 per share, totalling $333 million. Issuances Exchangeable into Common Shares One of our subsidiaries, Bank of Montreal Securities Canada Limited ("BMSCL"), has issued various classes of non-voting shares that can be exchanged at the option of the holder...

  • Page 123
    ... average of the closing prices of the Bank's 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 price. During the year, we issued a total of 1,258,463 common shares (1,120,931 in...

  • Page 124
    ... Investment Banking and Private Client Groups. Under these plans, payment of annual incentive payments and/or commissions can be deferred as stock units of our common shares. The amount of deferred incentive payments and/or commissions is adjusted to reflect dividends and changes in the market value...

  • Page 125
    ... service period of active employees. Expected return on assets represents management's best estimate of the long-term rate of return on plan assets applied to the fair value of plan assets. We establish our estimate of the expected rate of return on plan assets based on the fund's target asset...

  • Page 126
    ... return on plan assets Annual benefits expense Canada and Quebec pension plan expense Defined contribution expense Total annual pension and other employee future benefit expenses recognized in the Consolidated Statement of Income The impact on annual benefits expense if we had recognized all costs...

  • Page 127
    ...and employees Amounts paid to participants to settle their pension Other, primarily foreign exchange Fair value of plan assets at end of year Plan funded status Unrecognized actuarial loss (a) Unrecognized cost (benefit) of plan amendments (b) Net benefit asset (liability) at end of year Recorded in...

  • Page 128
    ... taxes relate to amounts recorded in shareholders' equity. For example, income tax expense on hedging gains related to our net investment in foreign operations is recorded in shareholders' equity as part of net unrealized foreign exchange gain (loss). 124 | BMO Financial Group 188th Annual Report...

  • Page 129
    ... $ 874 $ (316) (410) (112) (47) $ (885) Consolidated Statement of Income Provision for income taxes - Current - Future Shareholders' Equity Income tax expense related to: Foreign currency gains on translation of net investments in foreign operations Other Total $ 784 91 875 $ 823 149 972 $ 689...

  • Page 130
    ... net income, return on equity, net economic profit and non-interest expense-to-revenue (productivity) ratio. Personal and Commercial Client Group Personal and Commercial Client Group ("P&C") offers a full range of products and services to personal and business clients in Canada and the United States...

  • Page 131
    ... 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 Support. Geographic Information We operate primarily in Canada and the United States but...

  • Page 132
    ... as follows: (Canadian $ in millions) 2005 2004 Mortgage loans Personal loans Total $ 82 - $ 82 $ 80 66 $ 146 The interest earned on these loans is recorded in interest, dividend and fee income in our Consolidated Statement of Income. Board of Directors Compensation Stock Option Plan In fiscal...

  • Page 133
    ... to determine their fair value. In those cases, we have estimated fair value taking into account only changes in interest rates and credit risk that have occurred since we acquired them or entered into the underlying contract. These calculations represent management's best estimates based on a range...

  • Page 134
    ...equity (k) Variable interest entities (a) Mortgage prepayment fees (b) Non-Interest Revenue Merchant banking (l) Variable interest entities (a) Securitizations (c) Derivatives (d) Non-Interest Expense Variable interest entities (a) Stock options (e) Software development costs (f) Pension and related...

  • Page 135
    ...) 2005 United States GAAP Canadian GAAP Increase (Decrease) 2004 United States GAAP Assets Cash resources (a) Securities Investment and loan substitutes (n) Trading Available for sale (d,j,n) Loans and customers' liability under acceptances, net of the allowance for credit losses (a,d) Derivative...

  • Page 136
    ... 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 137
    ... Investments Under United States GAAP, our merchant banking subsidiaries account for their investments at cost or under the equity method. Under Canadian GAAP, these subsidiaries account for their investments at fair value with changes in fair value recorded in income as they occur. (m) Shareholders...

  • Page 138
    ...voting shares Head office Book value of common and preferred shares owned by the Bank (Canadian $ in millions) 4197569 Canada Inc. Bank of Montreal Assessoria e Serviços Ltda. Bank of Montreal Capital Markets (Holdings) Limited BMO Nesbitt Burns Limited (U.K.) Bank of Montreal Finance Ltd. Bank of...

  • Page 139
    ..., Office of Strategic Management William A. Downe* Deputy Chair BMO Financial Group and Chief Executive Officer BMO Nesbitt Burns and Head Investment Banking Group Sherry S. Cooper Executive Vice-President and Global Economic Strategist Susan M. Payne Senior Vice-President and Head of Marketing and...

  • Page 140
    ... limits. The assetsto-capital multiple is defined as assets plus guarantees and letters of credit, net of specified deductions (or adjusted assets), divided by total capital. 34 100 106 37 32 39 61 Securities Borrowed or Purchased under Resale Agreements Low-cost, low-risk loans, often supported...

  • Page 141
    Shareholder Information Common Share Trading Information during Fiscal 2005 Primary stock exchanges Ticker Year-end price October 31, 2005 High Low Total volume of shares traded Market for Securities of Bank of Montreal The common shares of Bank of Montreal are listed on the Toronto and New York ...

  • Page 142
    ... our web site at www.bmo.com/investorrelations. Shareholder Inquiries For dividend information, change in share registration or address, lost certificates, estate transfers, or to advise of duplicate mailings, ® ®* TM1/®1 ®2 ®3 Registered trademark of Bank of Montreal "Nesbitt Burns" is...