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BMO Financial Group 189th Annual Report 2006BMO Financial Group 189th Annual Report 2006
OUR

Table of contents

  • Page 1
    OUR BMO Financial Group 189th Annual Report 2006

  • Page 2
    ...This Is BMO Vision and Strategy Financial Highlights Chairman's Message to Shareholders Chief Executive Officer's Message to Shareholders Chief Financial and Administrative Officer's 2006 Financial Review Chief Operating Officer's 2006 Business Review Customer Profiles Corporate Governance Corporate...

  • Page 3
    ... personal and business banking solutions, including deposit accounts, loans and credit cards, insurance products, and personal investment products, to more than eight and a half million customers across Canada and the United States. Our products and services are delivered by a highly skilled team of...

  • Page 4
    ...• Annual financial targets for ROE, EPS growth, credit losses and Tier 1 capital were achieved. The cash productivity ratio improved by 25 basis points, but was below our target because of continued investment in our retail businesses and a change in our business mix. Build a superior Canadian...

  • Page 5
    ... expense Net income Common Share Data ($) (b) Earnings per share Cash earnings per share (c) Key Financial Measures (%) (b) Five­year average annual total shareholder return Earnings per share growth (b) Return on equity Revenue growth (teb) (c) Cash productivity ratio (teb) (c) - improvement...

  • Page 6
    ... investors. Over the seven­ year period when he was CEO, BMO's total shareholder return achieved a compound annual growth rate of 17.3%. Once again, in 2006, your company achieved record results while continuing to invest in strategic initiatives to bolster future growth. This performance reflects...

  • Page 7
    ...the place in excellent hands. And in excellent shape. I take my leave in the sure and comforting knowledge that our balance sheet is robust, our businesses are healthy, successful and poised for higher growth, and the management team is savvy and deep. With earnings per share growth of 11%, a return...

  • Page 8
    Chief Executive Officer's Message to Fellow Shareholders This played to a long­standing BMO strength. As the definition of what it meant to be a good corporate citizen changed over the years, BMO people were right up there on the crest of the wave. It was back in the early 1990s, for example, that...

  • Page 9
    ... is robust, our businesses are healthy, successful and poised for higher growth, and the management team is savvy and deep. We have a clear and sharp strategic focus on Canada and our chosen markets in the United States. We are investing in growing our core Canadian businesses and accelerating our...

  • Page 10
    ... than our performance target of $400 million or less. As well, our Tier 1 Capital Ratio was 10.22%, meeting our target of at least 8%. Our cash productivity ratio improved by 25 basis points, falling short of our target improvement primarily due to the mix of business in Investment Banking Group and...

  • Page 11
    ... as our trading business in Invest­ ment Banking Group, and our conscious decision to invest in our P&C businesses, in both Canada and the United States. As a result, our productivity ratio improved by 77 basis points, while our cash productivity ratio improved by 25 basis points, below our target...

  • Page 12
    ... up response times for customers. Timely New Products and Services In all of our businesses, we continued to focus on providing innovative products and services. Wealth management is the most dynamically growing segment in financial services today. Our Private Client Group is committed to helping...

  • Page 13
    ...BMO Bank of Montreal branches to provide a higher level of service for our Canadian customers. • Unveiled BMO Capital Markets, the new name that unites our global investment banking capabilities. • Opened a BMO Capital Markets representative office in Beijing to better serve China's business...

  • Page 14
    ... to do business." With his enterprise now achieving annual revenues of $100 million, Leung, who has two grown children, is working with BMO to develop a succession plan. "I see BMO not simply as my financier but as my business partner," he says. 10 • BMO Financial Group 189th Annual Report 2006...

  • Page 15
    ...for business loans $5 million and below. BMO's new everyday banking Performance Plan allows customers to conduct unlimited transactions from a number of personal accounts for one low monthly fee. BMO is committed to serving diverse communities across Canada. For example, some of our branches in...

  • Page 16
    ... bank was Harris, which in 1992 provided Gable with a business line of credit for her start­up company, a stake that the mother of seven has used to build a $30 million business. "Harris has always been there for me," says Gable, who recently worked with Harris to secure financing for a new venture...

  • Page 17
    ... Gable has worked closely with Deborah Cleverdon and Andrea Ward. Today, Gable's partnership with Harris has grown to include commercial deposit and cash management accounts, a revolving line of credit, and personal and commercial mortgages. Additionally, Harris provides banking services to Expect...

  • Page 18
    .... The deal began six months earlier, when representatives from BMO Capital Markets' Houston office proposed the merger to the leadership team at Petrohawk. "We had actually considered this merger before," recalls Floyd Wilson. "But we saw no way to make it work until BMO brought all the pieces...

  • Page 19
    ... Survey of Institutional Investors. $ billion 26 BMO Capital Markets advised on 59 completed mergers and acquisitions transactions in North America totalling $26 billion. BMO Capital Markets operates in 26 locations worldwide with 2,200 employees, including our newest office in Beijing...

  • Page 20
    ... and publisher that conducts an annual review of corporate annual reports, ranked our 2005 annual report first in the global financial sector, with a rating of A+. IR Global Rankings recognized our investor relations web site as number one worldwide in the financial services category, the second...

  • Page 21
    ... corporate governance. We place a high value on stakeholders of the organization being able to understand our operations, goals and values, as well as our financial perform­ ance. Our efforts to enhance public disclosure have made us a leader in this area. Our Board encourages, and management...

  • Page 22
    ... Executive Officer BMO Financial Group George A. Cope Toronto, ON President and Chief Operating Officer Bell Canada Ronald H. Farmer Markham, ON Managing Director Mosaic Capital Partners Toronto David A. Galloway Toronto, ON Chairman of the Board Bank of Montreal Harold N. Kvisle Calgary...

  • Page 23
    ... Inc. Training Top 100 Training magazine recognized BMO Financial Group as 14th overall, the highest ranked Canadian company in its annual survey. 50 Best Employers for Diversity Harris was recognized by DiversityInc magazine in the following areas: CEO commitment, human capital (retention...

  • Page 24
    ...in Canada and the United States. days, time off as requested to help a charitable organization, and our Volunteer Grants program, which makes donations to support employees' community volunteer efforts. training days 6.5 Investing in Learning In 2006, BMO averaged 6.5 training days per employee...

  • Page 25
    ... Canadian Opera Company (COC) to present the inaugural celebrations at the COC's magnificent new home, the Four Seasons Centre for the Performing Arts. Partners in Sport In the belief that sports and athletics promote well­being and build life skills, BMO continues to support Skate Canada®2 and...

  • Page 26
    ... in 2006, their priorities for 2007 and a review of their financial performance for the year. Summary Personal and Commercial Banking Private Client Group Investment Banking Group Corporate Services, including Technology and Operations Financial Condition Review discusses our assets and liabilities...

  • Page 27
    ...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 28
    ... points of total improvement in the three previous years. We had targeted an improvement of 100 to 150 basis points in the cash productivity ratio in 2006. 69.0 65.0 63.6 62.8 Expense­to­Revenue Ratio (%) • 66.5 • BMO's productivity ratio of 62.8% was worse than the Canadian peer group...

  • Page 29
    ...up slightly from a year ago at 27.2%. Cash and Securities as a % of Total Assets (%) • 29.1 24.9 26.0 26.5 27.2 • Liquidity remains sound and continues to be supported by broad diversification of deposits. • BMO's liquidity ratio of 27.2% was below the Canadian peer group average of 33...

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

  • Page 31
    ... Dea Executive Vice­President Head of Strategic Management BMO Financial Group Vision To be the top­performing financial services company in North America. Enterprise Strategy • Strengthen our broad­based Canadian franchise, pursuing profitable growth in high­potential markets; accelerate...

  • Page 32
    ... Economic and Business Conditions in the Countries in which We Conduct Business We conduct business in Canada, the United States and other countries. Factors such as interest rates, foreign exchange rates, consumer spending, business investment, government spending, the health of capital markets...

  • Page 33
    ... or other financial information provided by customers and counterparties is 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...

  • Page 34
    .... High commodity prices supported earnings growth in the resource sector, extending the rally in Canadian equity markets and pro­ viding support to our mutual fund and brokerage businesses and to underwriting and merger and acquisition activities. The U.S. economy grew at a respectable rate in...

  • Page 35
    ... per share. MD&A • • Total Shareholder Return BMO's governing objective is to maximize the total return to our shareholders and generate, over time, first­quartile total share­ holder return (TSR) relative to our Canadian and North American peer groups. The five­year average annual TSR...

  • Page 36
    ... were affected by growth in our sales forces in P&C Canada and PCG and by higher performance­based compensation costs, which were in line with improved results in particular businesses. Non­interest expense is discussed further on page 40. 32 • BMO Financial Group 189th Annual Report 2006

  • Page 37
    ...to higher cash net income, which more than offset a higher charge for capital associated with strong growth in shareholders' equity. Growth in NEP was driven by improved returns in Corporate Services and Private Client Group. Personal and Commercial Banking and Investment Banking Group earnings rose...

  • Page 38
    ... as well as a customer loyalty card reserve increase in 2005 and a gain on the MasterCard IPO. P&C U.S. revenue growth was attributable to loan growth, acquisitions and new branches. Private Client Group revenue growth was driven by higher mutual fund fees and direct investing commissions, excluding...

  • Page 39
    ... Impact of Business Acquisitions (Sales) BMO Financial Group has selectively acquired and sold a number of businesses in advancing our North American growth strategy. These acquisitions and sales increase or decrease revenue and expenses, affecting year­over­year comparisons of operating results...

  • Page 40
    ...10) (10) (10) 52 (13) nm Personal and Commercial Banking (P&C) 3,680 Private Client Group (PCG) 569 Investment Banking Group (IBG) 773 Corporate Services, including Technology and Operations (151) Total nm - not meaningful 4,871 158 165 (7) 36 • BMO Financial Group 189th Annual Report 2006

  • Page 41
    ... in certain deposit categories in both Canada and the United States. Private Client Group net interest income declined modestly, but was up strongly when adjusted for the sale of Harrisdirect, because of improved margins in term investment products and moderate balance growth. The group's net...

  • Page 42
    ... 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 contracts. MD&A Interest and Non­Interest Trading­Related...

  • Page 43
    ... sensitive to high energy prices, a strong Canadian dollar and a softening of the U.S. economy. BMO's exposure to these sectors remains well within acceptable levels. Looking forward, we expect the credit environment to remain relatively stable in 2007, with potential weakness developing in the...

  • Page 44
    ...line sales and service representatives to increase capacity and improve customer ser­ vice. In P&C U.S., there were acquisition­related expenses, costs of new branch expansion, costs associated with volume increases and expenses of implementing our new technology platform. In Private Client Group...

  • Page 45
    ... growth. Additional examples of initiatives to enhance productivity are outlined in the 2006 Review of Operating Groups Performance, which starts on page 42. In 2007, we are targeting to improve our cash productivity ratio by 100 to 150 basis points. We plan to achieve this by driving revenues...

  • Page 46
    ... 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 Investment Banking Group Corporate Services, including Technology and Operations Total Consolidated...

  • Page 47
    ... income Net economic profit Return on equity (%) Cash return on equity (%) Non-interest expense-to-revenue ratio (%) Cash non-interest expense-to-revenue ratio (%) Average net interest margin (%) Average common equity Average assets Risk-weighted assets Average loans and acceptances Average deposits...

  • Page 48
    ... Canada (P&C Canada), working together with BMO's other businesses, serves the financial needs of more than seven and a half million Canadians. We offer a full range of products and services through almost 1,000 BMO Bank of Montreal traditional and instore branches, telephone banking, online banking...

  • Page 49
    ... service. 2007 Objectives • Improve the customer experience through business process improvements and leveraging our previous investments in people and technology. • Continue expanding and upgrading our branch network to better serve our customers in key markets. • Drive revenue growth...

  • Page 50
    ... enhancement of technology for front­line sales and service representatives to increase capacity and improve customer service. Our productivity ratio improved by 74 basis points from a year ago to 56.8%. This follows a 311 basis point improvement in 2005, as revenue growth outpaced expense growth...

  • Page 51
    ... network banks. Invest in our strategic infrastructure by refreshing the branch technology platform. • All branches were successfully converted to our new branch technology platform. 2007 Objectives • Improve financial performance by growing revenue and managing costs. • Continue to build...

  • Page 52
    .... Our productivity ratio deteriorated by 184 basis points to 75.2%. Expense growth exceeded revenue growth, as we invested in integrating our acquisitions, expanding our branch network and improving our branch technology platform. U.S.­based Mid­Market Business Net income from U.S. operations...

  • Page 53
    ...President and Chief Executive Officer Private Client Group BMO Financial Group and Deputy Chair BMO Nesbitt Burns Group Description Private Client Group (PCG) brings together all of BMO Financial Group's wealth management businesses. Operating under the BMO brand in Canada and Harris in the United...

  • Page 54
    ... for our clients. - BMO Term Investments launched the BMO Income Generator, a deposit product that provides monthly retirement income, the first of its kind in Canada. - BMO Nesbitt Burns introduced the Retirement Income Management Account to help retirees generate monthly cash flow by directing all...

  • Page 55
    ..., expense increased $57 million or 4%. This growth was primarily due to higher revenue­based costs, in line with increased revenue, combined with further investments in our sales force and U.S. investment management business. The group's productivity ratio improved by 421 basis points from a year...

  • Page 56
    ... financing, mergers and acquisitions advisory services, merchant banking, securitization, treasury and market risk management, debt and equity research and institutional sales and trading. MD&A Yvan J.P. Bourdeau Chief Executive Officer BMO Capital Markets and Head of Investment Banking Group...

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

  • Page 58
    ... the prior year, lower investment securities gains and higher expenses. These factors were largely offset by increases in commodity derivatives trading revenues, commissions, corporate banking assets, debt underwriting, and merger and acquisition fees. Net income from U.S. operations represented 37...

  • Page 59
    ... President and Chief Executive Officer, Technology and Solutions) Barry K. Gilmour Group Head Technology and Operations Technology and Operations Group Description Technology and Operations manages, maintains and provides governance over information technology, operations services, real estate...

  • Page 60
    ...Group Description Corporate Services includes the corporate units that provide expertise and governance support to BMO Financial Group in areas such as strategic planning, law, finance, internal audit, risk management, corporate communications, economics, human resources and learning. Our operating...

  • Page 61
    ... diversified, with healthy growth in both Canada and the United States. Loans to businesses and governments and related acceptances increased $9.5 billion due to stronger demand and our strategy of expanding our corporate banking portfolio. Securities borrowed or purchased under resale agreements...

  • Page 62
    ... to its annual review of our capital management corporate policy and capital plan. At the consolidated enterprise level, our targeted capital levels are set in support of our risk tolerance, while satisfying regulatory and legal requirements. At the line of business level, performance measurement is...

  • Page 63
    ...Private Client Group Investment Banking Group Corporate Services End of year 149,855 4,705 (184) 10,163 (1,745) 162,794 136,661 8,170 (1,192) 6,570 (354) 149,855 Outstanding Shares and Securities Convertible into Common Shares Dividends declared per share As of November 28, 2006 Number of shares...

  • Page 64
    ... and servicing fees for supporting the ongoing operations of the vehicles. These fees totalled approximately $99 million in 2006 and $84 million in 2005. In general, investors in the commercial paper have recourse only to the assets of the related VIE, unless BMO has provided credit support for...

  • Page 65
    ...trading activities generally include the business of lending, long­term investing, funding and asset­liability management. Our use of financial instruments exposes us to credit and counterparty risk and various market risks, including equity price risk, interest rate risk and foreign currency risk...

  • Page 66
    ...credit risk adjustment incorporates credit risk into our determination of fair values by taking into account factors such as the counterparty's credit rating, the duration of the instrument and changes in credit spreads. A group independent of the trading lines of business, Valuation Product Control...

  • Page 67
    ... of rewards offered and general economic conditions. If our estimate of the future redemption rate increased by 5 percentage points, our annual card fee revenue would decrease by approximately $11 million. Additional information regarding our accounting for our customer loyalty program is included...

  • Page 68
    ...compensation. The new rules require that stock­based compensation granted to employees eligible to retire should be expensed at the time of grant. Previously, we amortized the cost over the vesting period. Financial statements for prior years were restated to reflect the change in accounting policy...

  • Page 69
    ...2006 relate to fees paid for reviews of compliance with regulatory requirements for financial information, reports on internal controls over services provided by various BMO Financial Group businesses and corporate recovery services that were grandfathered when the Bank's Auditor Independence Policy...

  • Page 70
    ...with our risk management corporate policies and corporate standards. Risk limits, which define BMO's risk tolerance, are reviewed and approved annually by the Risk Review Committee of the Board for: • credit and counterparty risk - limits on country, industry, portfolio/product segments, group and...

  • Page 71
    ... as BMO's desired credit rating and risk tolerance. Desired total shareholder return Desired credit rating, given target business mix BMO's Risk Tolerance Approved by the Board of Directors for each major category of risk and delegated to management in the lines of business through the CEO Stress...

  • Page 72
    ... corporate policies, standards and procedures governing the conduct of credit risk activities. Operating practices include the ongoing monitoring of credit risk exposures and regular portfolio and sector reporting to the Board and senior management committees. Performing accounts are reviewed...

  • Page 73
    ... of economic capital and the valuation of positions; • a well­developed limit­setting and monitoring process; • effective controls over processes and models used; and • a framework of scenario and stress tests for worst­case events. BMO's primary market risk measures are Market Value...

  • Page 74
    ... to concentrations of market risk, such as changes in particular interest rates, foreign exchange rates, equity or commodity prices and their related implied volatilities. Effective controls over the revaluation of trading and underwriting portfolios and the determination of daily revenue from these...

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

  • Page 76
    ... line and corporate management, ORC, RMC and the Board of Directors. Each line of business is responsible for using the afore­ mentioned framework processes and control programs to Operational risk is the potential for loss resulting from inadequate or failed internal processes or systems, human...

  • Page 77
    ...in BMO's share price. Reputation risk is also managed through our corporate governance practices, code of conduct and risk management framework. It is the responsibility of all employees to conduct themselves in accordance with FirstPrinciples, BMO's code of conduct, and thus build and maintain BMO...

  • Page 78
    ...sale of TSX common shares in the fourth quarter a year ago. Investment Banking Group net income decreased $40 million or 17%, driven by reduced trading revenues in a weaker capital markets environment, partially offset by a lower effective income tax rate. Prior year results benefited from IBG's $25...

  • Page 79
    ...line sales and other staff in P&C Canada and various other initiatives in both countries as set out in the segment discussions. Private Client Group's results benefited from growth in fee­based revenue from managed asset businesses, improved spread on term investment products and continued expense...

  • Page 80
    ... Investment Banking Group 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...

  • Page 81
    ... costs in our commodity and equity trading businesses. The provision for credit losses declined $40 million due to lower expected credit losses. Non­interest expense increased $72 million or 5%, due primarily to higher performance­based compensation associated with improved fee­based revenues...

  • Page 82
    ... annual return One-year return Common Share Information Number outstanding (in thousands) End of period Average basic Average diluted Number of shareholder accounts Book value per share ($) Total market value of shares ($ billions) Price-to-earnings multiple (based on diluted EPS) Price-to-cash...

  • Page 83
    ...and 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...

  • Page 84
    ... 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 85
    ... Expense and Expense-to-Revenue Ratio For the year ended October 31 ($ millions, except as noted) 2006 2005 2004 2003 2002 5­year CAGR 10­year CAGR Non­Interest Expense Employee compensation Salaries Performance-based compensation Employee benefits Total employee compensation Premises...

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

  • Page 87
    ... 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 in Canadian dollar interest income...

  • Page 88
    ... of specific and general allowances; the consumer, commercial and corporate categories are stated net of specific allowances only. (3) Includes amounts returning to performing status, sales, repayments, the impact of foreign exchange, and offsets for consumer write-offs that are not recognized as...

  • Page 89
    ... Net Impaired Commercial and Corporate Loans Commercial mortgages Commercial real estate Construction (non-real estate) Retail trade Wholesale trade Agriculture Communications Manufacturing Mining Oil and gas Transportation Utilities Forest products Service industries Financial institutions Other...

  • Page 90
    ... States 2004 Allowance for credit losses (ACL), 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 Write­offs by Market Consumer Commercial and corporate...

  • Page 91
    ... real estate Construction (non-real estate) Retail trade Wholesale trade Agriculture Communications Manufacturing Mining Oil and gas Transportation Utilities Forest products Service industries Financial institutions Other Total specific allowance for credit losses on commercial and corporate...

  • Page 92
    ...Balance sheet items Cash resources Securities Mortgages Other loans and acceptances Other assets Total balance sheet items Off-balance sheet items Guarantees and standby letters of credit Securities lending Documentary and commercial letters of credit Commitments to extend credit: Original maturity...

  • Page 93
    ..., BMO entered into a ten-year contract with an external service provider to provide human resource transactional business processing. In 2000, BMO entered into a five-year contract with two optional five-year renewals with an external service provider to manage our cheque and bill payment processing...

  • Page 94
    ... control over financial reporting. Our system of inter­ nal controls includes written communication of our policies and procedures governing corporate conduct and risk management; comprehensive business planning; effective segregation of duties; delegation of authority and personal accountability...

  • Page 95
    ..., Canada November 28, 2006 Report on Internal Control over Financial Reporting under Standards of the Public Company Accounting Oversight Board (United States) We have audited management's assessment, included on page 65 of Management's Discussion and Analysis, that Bank of Montreal (the "Bank...

  • Page 96
    ... of these statements. Certain comparative figures have been reclassified to conform with the current year's presentation. $ 319,978 $ 293,862 F. Anthony Comper President and Chief Executive Officer Philip S. Orsino Chairman, Audit Committee 92 • BMO Financial Group 189th Annual Report 2006

  • Page 97
    ...Investment securities gains (Note 3) Foreign exchange, other than trading Insurance income Other 4,744 176 4,568 1,051 729 633 337 396 298 499 100 407 145 187 204 255 5,241 Consolidated Financial Statements Net Interest Income and Non-Interest Revenue Non­Interest Expense Employee compensation...

  • Page 98
    ...impact of adopting new accounting requirements for Stock-Based Compensation, net of applicable income taxes (Note 21) Net income Dividends - Preferred shares (Note 20) - Common shares (Note 20) Common shares repurchased for cancellation (Note 20) Balance at End of Year Total Shareholders' Equity The...

  • Page 99
    ... of Exchange Rate Changes on Cash and Cash Equivalents Net Increase (Decrease) in Cash and Cash Equivalents Cash and Cash Equivalents at Beginning of Year Cash and Cash Equivalents at End of Year Represented by: Cash and non-interest bearing deposits with Bank of Canada and other banks Cheques and...

  • Page 100
    ...24 25 26 27 28 29 Capital Trust Securities Interest Rate Risk Share Capital Employee Compensation - Stock-Based Compensation Employee Compensation - Pension and Other Employee Future Benefits Income Taxes Earnings Per Share Operating and Geographic Segmentation Related Party Transactions Contingent...

  • Page 101
    ... purchase with the intention of holding until maturity or until market conditions, such as a change in interest rates, pro­ vide us with a better investment opportunity. With the exception of merchant banking investments, equity securities are recorded at cost and debt securities at amortized cost...

  • Page 102
    ... equity 165 Total investment securities Trading Securities Issued or guaranteed by: Canadian federal government Canadian provincial and municipal governments U.S. federal government U.S. states, municipalities and agencies Other governments Corporate debt Corporate equity Total trading securities...

  • Page 103
    ... Dividend and Fee Income Investment securities Trading securities $ 369 1,789 $ 490 1,340 $ 595 881 $ 2,158 Non­Interest Revenue Investment securities Gross realized gains Gross realized losses Merchant banking securities - net unrealized gains Write-downs Investment securities gains Trading...

  • Page 104
    ...rates to current balances with sensitivity to risk ratings, industry sectors and credit products. Model results are then considered along with the level of the existing allowance, as well as management's judg­ ment regarding portfolio quality, business mix, and economic and credit market conditions...

  • Page 105
    ... to meet contractual obligations could be similarly affected by changes in economic, political or other conditions. Concentra­ tions of credit risk indicate a related sensitivity of our performance to developments affecting a particular counterparty, industry or geographic location. Information...

  • Page 106
    ..., we provide partial credit enhancement facilities to transactions within asset­backed commercial paper programs administered by us to ensure a high investment grade credit rating is achieved for notes issued by the programs. The maximum 102 • BMO Financial Group 189th Annual Report 2006

  • Page 107
    ... the year ended October 31, 2006, we securitized credit card loans totalling $1,500 million for total cash proceeds of $1,425 million and recognized a gain of $27 million. We retained responsibility for servicing these credit card loans. We recorded Notes BMO Financial Group 189th Annual Report...

  • Page 108
    ... October 31, 2006 was limited to our deferred purchase price of $278 million ($217 million in 2005), certain cash deposits of $12 million ($12 million in 2005) and investments in securitization vehicles of $79 million ($27 mil­ lion in 2005). 104 • BMO Financial Group 189th Annual Report 2006

  • Page 109
    ...liquidity, distribution and servicing fees for supporting the ongoing operations of the vehicles. In general, investors in the commercial paper have recourse only to the assets of the related VIE and do not have recourse to us, unless we have provided credit support for the investors or entered into...

  • Page 110
    .... The main risks associated with these instruments are related to the 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 the contracts. Forwards and...

  • Page 111
    ... translation of our U.S. dollar earnings. These contracts are marked to market, with gains and losses recorded as non­interest revenue in foreign exchange, other than trading. Future Change in Accounting Policy As discussed in Note 1, we will adopt the CICA's new accounting requirements that will...

  • Page 112
    ... Foreign Exchange Contracts Cross-currency swaps Cross-currency interest rate swaps Forward foreign exchange contracts Purchased options Written options Commodity Contracts Swaps Futures Purchased options Written options Equity Contracts Credit Contracts Total fair value/book value - trading...

  • Page 113
    ... 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 at October 31, 2006 ($4 million in 2005) related to gold contracts. BMO Financial Group...

  • Page 114
    ... of Financial Institutions Canada. 2006 Replacement cost Credit risk equivalent Risk­weighted balance Replacement cost Credit risk equivalent 2005 Risk-weighted balance Interest Rate Contracts Swaps Forward rate agreements Purchased options Total interest rate contracts Foreign Exchange...

  • Page 115
    ...) with customers in the following industries: (Canadian $ in millions) Interest rate contracts 2006 2005 Foreign exchange contracts 2006 2005 Commodity contracts 2006 2005 2006 Equity contracts 2005 2006 Credit contracts 2005 Financial institutions Natural resources Governments Other Total...

  • Page 116
    ... 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 Northwest...

  • Page 117
    ... unit for the years ended October 31, 2006 and 2005 is as follows: P&C Canada Personal and Commercial Banking P&C U.S. Personal and Commercial Banking Retail Investment Products Private Client Group Investment Banking Group (Canadian $ in millions) Other Technology and Operations Total Total...

  • Page 118
    ...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 Federal...

  • Page 119
    ...October 31, 2006 were capital trust securities totalling $1,042 million ($1,042 mil­ lion in 2005) that form part of our Tier 1 regulatory capital (see Note 18). Customer Loyalty Program We record the liability associated with our credit card customer loyalty program rewards in the period in which...

  • Page 120
    ..., to capital trust securities. The distributions made on those capital trust securities are now recorded as interest expense. We have restated the 2004 consolidated financial statements to be consistent with the new presentation. See Note 20 for the impact of this change in accounting policy on our...

  • Page 121
    ... rate (%) Noninterest sensitive Total Canadian Dollar Assets Cash resources $ 4,447 $ 832 Securities 29,146 90 Securities borrowed or purchased under 16,939 310 resale agreements Loans 57,501 3,846 Other assets 28,582 262 Total assets Liabilities and Shareholders' Equity Deposits Securities...

  • Page 122
    ... of its capital trust securities (see Note 18). Shareholder Dividend Reinvestment and Share Purchase Plan We offer a dividend reinvestment and share purchase plan for our shareholders. Participation in the plan is optional. Under the terms of the plan, cash dividends on common shares are reinvested...

  • Page 123
    ... Consolidated Financial Statements 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 1,378,328 common shares (1,258,463 in 2005) under the plan. Potential Share...

  • Page 124
    ... accounting requirements for stock­based compensation. The new rules require that stock­based compensation granted to employees eligible to retire be expensed at the time of grant. Previously, we amortized the cost over the vesting period. We have restated prior years' consolidated financial state...

  • Page 125
    ... employee future benefits as at October 31 of each year for our Canadian plans (September 30 for our U.S. plans), using the projected benefit method prorated on service, based on management's assumptions about discount rates, salary growth, retirement age, mortality and health care cost trend rates...

  • Page 126
    ... of plan amendment costs Expected 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 Notes The impact on annual benefits...

  • Page 127
    ...year Rate of compensation increase Assumed overall health care cost trend rate Fair value of plan assets Fair value of plan assets at beginning of year Actual return on plan assets Bank contributions Voluntary employee contributions Benefits paid to pensioners and employees Other, primarily foreign...

  • Page 128
    ... expense or benefit directly in shareholders' equity when the 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...

  • Page 129
    ... • Earnings Per Share Basic Earnings per Share Our basic earnings per share is calculated by dividing our net income, after deducting total preferred share dividends, by the daily average number of fully paid common shares outstanding throughout the year. Basic earnings per share (Canadian $ in...

  • Page 130
    ... Corporate units that provide expertise and governance sup­ port in areas such as strategic planning, law, finance, internal audit, risk management, corporate communications, economics, corpo­ rate marketing, human resources and learning. Operating results for Corporate Services include revenues...

  • Page 131
    ...: P&C Canada P&C U.S. Corporate Services (1) Total (teb basis) Teb adjustments Total (GAAP basis) United States Other countries (Canadian $ in millions) PCG IBG Canada 2006 Net interest income Non-interest revenue Total Revenue Provision for credit losses Non-interest expense Income before...

  • Page 132
    ... products is now offered to employees at rates normally accorded to preferred customers. We also offer employees a fee­based subsidy on annual credit card fees. Board of Directors Compensation Stock Option Plan In fiscal 2002, we introduced a stock option plan for non­officer directors, the terms...

  • Page 133
    ...pledged and in relation to what activity: (Canadian $ in millions) 2006 2005 (Canadian $ in millions) 2006 2005 Cash resources Securities Issued or guaranteed by Canada Issued or guaranteed by a Canadian province, municipality or school corporation Other securities Other assets Total assets pledged...

  • Page 134
    ... (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-based compensation (e) Software development costs (f) Pension and related benefits (g) Goodwill and...

  • Page 135
    ...2006 United States GAAP Canadian GAAP Increase (Decrease) 2005 (1) United States GAAP Assets Cash resources (a,q) Securities Investment and loan substitutes (n,p) Trading (p) Available-for-sale (d,j,l,n,p) Loans and customers' liability under acceptances, net of the allowance for credit losses...

  • Page 136
    ... development costs capitalized prior to fiscal 2004 are fully amortized. (g) Pension and Related Benefits Under United States GAAP, both pension and other employee future benefits are recorded in our Consolidated Statement of Income in the period services are provided by our employees. The related...

  • Page 137
    ... cost or adjusted cost. Investments in corporate equity where we exert significant influence but not control are classified in other assets under United States GAAP. Canadian GAAP will change on November 1, 2006 to conform with United States GAAP. Notes BMO Financial Group 189th Annual Report...

  • Page 138
    ... BMO Private Equity (Canada) Inc. and subsidiaries BMO Trust Company Guardian Group of Funds Ltd. and subsidiary BMO (US) Lending, LLC Harris Financial Corp. BMO Capital Markets Corp. BMO Capital Markets Financing, Inc. BMO Financial, Inc. BMO Financial Products Corp. BMO Global Capital Solutions...

  • Page 139
    ... Head of Strategic Management Susan M. Payne Senior Vice­President and Head of Marketing & Client Strategy, and Executive Vice­President and Managing Director BMO Nesbitt Burns Investment Banking Group Yvan J.P. Bourdeau* Chief Executive Officer BMO Capital Markets and Head of Investment Banking...

  • Page 140
    ... by the bank and can be traded in the money market. The bank earns a "stamping fee" for providing this guarantee. Basis Point One one­hundredth of a percentage point. Derivatives Contracts whose value is "derived" from movements in interest or foreign exchange rates, or equity or commodity prices...

  • Page 141
    ... on our web site at www.bmo.com. For a printed copy, please contact: Corporate Communications Department BMO Financial Group 302 Bay Street, 10th Floor Toronto, Ontario M5X 1A1 (On peut obtenir sur demande un exemplaire en français.) Online Information BMO Financial Group is committed to open and...

  • Page 142
    ... in the Globe and Mail's Report on Business annual review of corporate governance practices. One of Canada's Top Boards BMO Financial Group's Board of Directors ranked among Canada's Top 25 boards by Canadian Business magazine. Corporate Responsibility Leading in Corporate Responsibility Ranked...