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192ND ANNUAL REPORT 2009

Table of contents

  • Page 1
    192 ND ANNUAL REPORT 2009

  • Page 2
    ..., commercial, corporate and institutional customers in North America and internationally. Our operating groups - Personal and Commercial Banking, BMO Bank of Montreal in Canada and Harris in the United States; Private Client Group, our wealth management business; and BMO Capital Markets - share one...

  • Page 3
    ... all North American personal and commercial banking businesses, focusing on industry-leading customer experience and sales force productivity. P 31, 48, 51 Accelerate the growth of our wealth management business by providing our clients with exceptional advice, emphasizing retirement and financial...

  • Page 4
    ...-term financial objectives P 31 Strong financial position P 10, 28, 62 • Balanced approach to capital management • Tier 1 Capital Ratio of 12.24% at October 31, 2009 • Tangible common equity to risk-weighted assets ratio of 9.21% at October 31, 2009 • Strong senior debt ratings Proactive...

  • Page 5
    Our Dividend Record BMO Financial Group has the longest-running dividend ividend payment record of any company in Canada, anada, at 181 years. BMO common shares had a dividend yield of 5.59% at October 31, 2009. Dividends Declared ($ per share) Compound annual growth rate: 2.80 2.71 2.26 1.85 1.12 ...

  • Page 6
    ... and severance costs. Net income reflected strong performance in our major operating groups but was impacted by increased credit losses. P 37 Provision for Credit Losses as a % of Average Net Loans and Acceptances %#-%#,+ P 43 Return on Equity (ROE) Tier 1 Capital Ratio (%) Basel...

  • Page 7
    ... development, risk and sales and service programs. In 2009, BMO contributed $55 million in corporate donations, sponsorships and events to support our communities and thousands of charities and not-for-profit organizations in Canada and the United States. BMO Financial Group 192nd Annual Report...

  • Page 8
    ... of the shareholders, our goal is always top-tier financial performance. Your board feels confident that BMO Financial Group, with its strong management team, is well positioned for growth in the years to come. David A. Galloway Chairman of the Board 6 BMO Financial Group 192nd Annual Report 2009

  • Page 9
    ... to a great customer experience." 94% highly agreed that "I actively look for new ways to enhance the customer experience." " The pace has really picked up. It's energizing." Derek Tsang Financial Services Manager, Personal Banking Canada, Montreal BMO Financial Group 192nd Annual Report 2009 7

  • Page 10
    PRESIDENT AND CHIEF EXECUTIVE OFFICER'S MESSAGE Our Private Client Group delivered good revenue growth in the second half of the year driven by better equity markets and a growing client base. We also benefited from momentum in our expanded life insurance business - early results confirm our ...

  • Page 11
    ... Group helps customers understand and choose the financial products and services that are right for them." " Clarity. Consistency. Confidence. That's what we offer our customers every day." Debbie Rechter Managing Director, BMO Capital Markets, Chicago BMO Financial Group 192nd Annual Report 2009...

  • Page 12
    ... institution. BMO was established in 1817 and has declared shareholder dividends for 181 consecutive years. BMO's assets totalled more than $388 billion at October 31, 2009. Our market capitalization totalled $27.6 billion, the eleventh highest among Canadian and U.S. banks. Our Tier 1 Capital Ratio...

  • Page 13
    ...year. In 2009, P&C Canada was ranked second in business loans market share among our Canadian competitors. • Developed new programs and offers to help customers navigate through recent economic conditions. We introduced BMO SmartSteps, a series of P 48 personal financial management tips designed...

  • Page 14
    ...helping them manage cash flow, optimize cash reserves and minimize risk. * Harris was ranked "Highest in the Midwest for Customer Satisfaction in Retail Banking in a Tie" by J.D. Power and Associates in their 2009 Retail Banking Customer Satisfaction Study. 12 BMO Financial Group 192nd Annual Report...

  • Page 15
    2009 HIGHLIGHTS Private Client Group • Acquired BMO Life Assurance Company (formerly AIG Life Insurance Company of Canada), strengthening our competitive position in the wealth management market. • Continued to develop financial planning and investment advisor tools to enhance the experience ...

  • Page 16
    ... choice for all financial services solutions. - Expansion of our equity capabilities through a number of new hires and opening a new sales office in Paris. - Development of targeted capabilities to meet the needs of core clients, including the formation of a Capital Structure group. - Integration of...

  • Page 17
    ...programs that promote work/life balance. Additionally, BMO was named as one of Greater Toronto's Top Employers for the fifth consecutive year. Students in the BMO Dalhousie MBA (Financial Services) program class of 2012 at the BMO Institute for Learning. BMO Financial Group 192nd Annual Report 2009...

  • Page 18
    ... in Canada. The highest designation from the Uptime Institute, a global data centre authority, BMO received the Tier IV designation on August 4, 2006. BMO's new Neighbourhood Branch design was introduced at a recently opened location in Toronto. 16 BMO Financial Group 192nd Annual Report 2009

  • Page 19
    ...'s annual Report on Business Board Games 2009 survey ranked BMO third overall among 157 Canadian companies (two companies tied for first place). The survey addresses four key areas: board composition, compensation, shareholder rights and disclosure. Corporate Knights recognized BMO Financial Group...

  • Page 20
    ... business. • More than 200 senior leaders have completed our Advanced Leadership Program, which to date has played a part in addressing a number of businesscritical strategic issues. In 2009, BMO strategically launched new learning initiatives. 18 BMO Financial Group 192nd Annual Report 2009

  • Page 21
    ...two new learning series webcasts - Advanced Leadership and Making Money Make Sense - to extend key leadership concepts, contribute to a more open and performancebased culture and reinforce our focus on customers. • Developed new curricula for key positions in Personal and Commercial Banking Canada...

  • Page 22
    ... in communities across Canada and the United States. • Pledged $500,000 to establish BMO Financial Group Future Green Leaders' Fund at Trent University in Peterborough, Ontario. The fund will help attract new student researchers to the university's leading environmental programs and prepare new...

  • Page 23
    .... In 2009, BMO invested in the Greening Canada Fund, which provides direct access to credits that offset greenhouse gas emissions and will help us invest in local emission reduction projects. • Continued to be a leading consumer of emission-free energy. To date, 78 BMO Bank of Montreal branches in...

  • Page 24
    ... and management of significant risks. • Monitors compliance with risk-related regulatory requirements and with internal risk management policies and procedures. Harold N. Kvisle Philip S. Orsino Guylaine Saucier Nancy C. Southern Don M. Wilson III 22 BMO Financial Group 192nd Annual Report 2009

  • Page 25
    ... shareholdings exceed $25 million**. 1 Robert M. Astley, Former President and Chief Executive Officer, Clarica Life Insurance Company and former President, Sun Life Financial Canada Board/Committees: Governance and Nominating, Human Resources and Management Compensation (Chair), Risk Review Director...

  • Page 26
    ... strategies/plans • Problem-solve on major enterprise and business issues • Communicate key messages and model behaviours to BMO community at large • Build problem-solving and peer-to-peer review capabilities Meets annually 16 15 14 7 5 17 6 4 10 8 11 9 12 13 2 3 1 24 BMO Financial...

  • Page 27
    ... Financial Group. Joined BMO in 1978; in role since November 2006 16 Sandra Hanington†, Executive Vice-President, Product Operations and Process Simplification, is accountable for product operations for Personal and Commercial Banking (Canada and U.S.), Private Client Group and BMO Capital Markets...

  • Page 28
    ... BMO Life Insurance Company Harold Hillier Senior Vice-President and Head of BMO Asset Management Terry A. Jenkins Senior Vice-President and President and Chief Executive Officer, Harris Private Bank, U.S. Ed N. Legzdins Managing Director, International and Senior Vice-President, Retail Investments...

  • Page 29
    ... the year. 71 73 73 74 74 75 46 47 48 51 54 57 60 Summary Personal and Commercial Banking Personal and Commercial Banking Canada Personal and Commercial Banking U.S. Private Client Group BMO Capital Markets Corporate Services, including Technology and Operations Financial Condition Review discusses...

  • Page 30
    ... $3.08 in 2009. • There were increased provisions for credit losses, higher • income taxes and more shares outstanding. Personal and Commercial Banking Canada (P&C Canada) and BMO Capital Markets achieved strong growth in net income. • The Canadian peer group average EPS increased 9.6% after...

  • Page 31
    ..., Key Corp., Bank of New York Mellon, The PNC Financial Services Group Inc., Regions Financial, SunTrust Banks Inc., U.S. Bancorp, and Wells Fargo and Company. The North American peer group was redefined in 2009. Prior year averages have not been restated. BMO Financial Group Canadian peer group...

  • Page 32
    ..., BMO Financial Group is a highly diversified North American financial services provider. With total assets of $388 billion and more than 36,000 employees, BMO provides a broad range of retail banking, wealth management and investment banking products and solutions. We serve clients across Canada...

  • Page 33
    ... and risk culture with the continuation of the Enterprise Risk Management Evolution program. • Increased productivity and effectiveness of technology and operations through a focus on high-quality service delivery and continued unit cost reductions. BMO Financial Group 192nd Annual Report 2009 31

  • Page 34
    ...as our strategic priorities and objectives, and may not be appropriate for other purposes. Assumptions about the level of asset sales, expected asset sale prices, net funding cost, credit quality and risk of default and losses on default of the underlying assets of the structured investment vehicles...

  • Page 35
    ... are noted in the Caution Regarding Forward-Looking Statements on page 32. Additional risks, including credit and counterparty, market, liquidity and funding, insurance, operational, business, model, strategic, reputation and environmental risks, are discussed in the Enterprise-Wide Risk Management...

  • Page 36
    ...improved levels of demand for personal credit. In response to increased affordability, home sales and prices have reversed last year's declines, keeping mortgage growth strong. However, growth in business investment and credit remains weak because of low rates of capacity utilization and uncertainty...

  • Page 37
    ... shareholder return assumes reinvestment of quarterly dividends and therefore does not equal the sum of dividend and share price returns in the table. (1) Compound annual growth rate (CAGR). (2) As a percentage of the closing market price in the prior year. BMO Financial Group 192nd Annual Report...

  • Page 38
    ... $363 million to revenue growth and business acquisitions added $171 million. P&C Canada revenue increased $385 million or 8% and BMO Capital Markets revenue increased by more than $1 billion or 42%. Corporate Services revenue was lower than in 2008. 36 BMO Financial Group 192nd Annual Report 2009

  • Page 39
    ... the year. Average common shareholders' equity increased $2.3 billion. Preferred share dividends increased $47 million or 64%, contributing to reduced ROE. Through fiscal 2008, BMO had achieved an ROE of 13% or better for the previous 19 years, the only bank in our North American peer group to...

  • Page 40
    ...volume growth in most products and an improved net interest margin. BMO Capital Markets revenues rose by more than $1 billion or 42% in 2009 due to increases in trading revenues and corporate banking revenues and the effects of the stronger U.S. dollar. • • • The provision for credit losses...

  • Page 41
    ...our net investment in foreign operations is discussed in the Provision for Income Taxes section on page 45. Effects of Changes in Exchange Rates on BMO's Results ($ millions, except as noted) 2009 vs. 2008 2008 vs. 2007 Canadian/U.S. dollar exchange rate (average) 2009 2008 2007 Increased (reduced...

  • Page 42
    ... For the year ended October 31 2009 2008 $ % Average earning assets ($ millions) Change 2009 2008 $ % Net interest margin (in basis points) 2009 2008 Change P&C Canada P&C U.S. Personal and Commercial Banking (P&C) Private Client Group BMO Capital Markets Corporate Services, including Technology...

  • Page 43
    .... Securities commissions and fees decreased $132 million or 12%. These fees consist largely of full-service and online brokerage commissions within Private Client Group, which account for about two-thirds of the total, and institutional equity trading commissions within BMO Capital Markets. The...

  • Page 44
    ...start of the year. Other trading revenues were affected by the impact of hedging exposures in our structural balance sheet position and securitization-related hedges. The Market Risk section on page 82 provides more information on trading-related revenues. 42 BMO Financial Group 192nd Annual Report...

  • Page 45
    ... for credit losses during the year were higher than in prior periods. The 2009 specific provisions included a $41 million one-time increase related to a change in provisioning for the consumer loan portfolio in Canada, while provisions a year ago included $336 million related to two corporate loans...

  • Page 46
    ... through an increased customer focus and ongoing expense management, working to create greater efficiency and effectiveness in all support functions, groups and business processes that support the front line. 44 BMO Financial Group 192nd Annual Report 2009 Total employee compensation 4,385 3,976...

  • Page 47
    ... subsidy on annual credit card fees. Stock options and deferred share units granted to directors and preferred rate loan agreements for executives, relating to transfers we initiate, are discussed in Note 28 on page 156 of the financial statements. BMO Financial Group 192nd Annual Report 2009 45

  • Page 48
    ..., 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 2009 2008 2007 2009 Private Client Group 2008 2007 2009 BMO Capital Markets 2008 2007 Corporate Services, including Technology and Operations...

  • Page 49
    ... Cash net income Average earning assets Average loans and acceptances Average deposits 973 769 94 118 24,504 21,017 20,596 959 773 95 121 24,103 21,203 18,657 833 14 634 (4) 107 (1) 130 (3) 19,855 401 19,136 (186) 17,218 1,939 2 (1) (1) (2) 2 (1) 10 BMO Financial Group 192nd Annual Report 2009...

  • Page 50
    ...Source: BMO Annual Employee Survey, conducted by Burke Inc., an independent research company. Caution This Personal and Commercial Banking Canada section contains forward-looking statements. Please see the Caution Regarding Forward-Looking Statements. 48 BMO Financial Group 192nd Annual Report 2009

  • Page 51
    ... 2009 2007 2008 2009 2007 * 2008 2009 Total loan growth (%) Commercial ($ billions) Personal and Cards ($ billions) Total deposit growth (%) Commercial ($ billions) Personal ($ billions) Revenue growth (%) Cash productivity ratio (%) Net income growth (%) Return on equity (%) Loan growth...

  • Page 52
    ... Canada's banks and housing markets proved more stable than those in the United States. Residential mortgage balance growth slowed in 2009, although residential real estate market conditions improved as a result of low mortgage rates, greater affordability and government stimulus. Personal deposit...

  • Page 53
    ... President and Chief Executive Officer, Personal and Commercial Banking U.S. and Harris Financial Corp. Our Strategies Transform the capabilities and economics of our sales and distribution network to respond to evolving customer behaviours and expectations. Partner with Private Client Group...

  • Page 54
    ..."We're Here to Help" positioning in our markets. • Harris maintained its number two rank for retail deposit market share in the Chicago metropolitan market, growing 7%, while larger banks lost market share. This growth resulted from our focused and integrated customer development and sales efforts...

  • Page 55
    ... ratio improved by 150 basis points to 76.0%. Excluding the impact of the Visa litigation accrual and the partial sale of our investment, as well as impaired loans, severance costs and acquisition integration costs, the cash productivity ratio was 70.2%. BMO Financial Group 192nd Annual Report 2009...

  • Page 56
    ...increase investing activity among existing clients. North American Private Banking operates as BMO Harris Private Banking in Canada and Harris Private Bank® in the United States. As trusted advisors, we deliver a planning and advice-based value proposition to high net worth and ultra-high net worth...

  • Page 57
    ... Life Insurance Company of Canada), adding 300 new employees and 400,000 clients. We also consolidated our insurance operations within PCG to strengthen strategic alignment and address client needs under a single brand. • We launched a family of exchange traded funds, low-cost investment products...

  • Page 58
    ... market volatility, the North American wealth management industry remains attractive as strong industry growth rates are expected over the long term with high net worth and retirement segments becoming increasingly significant. MD&A Private Client Group Financial Results Private Client Group net...

  • Page 59
    ... rate, credit, equity, securitization and commodities solutions to institutional, commercial and retail clients. In addition, we supply efficient funding and liquidity management to BMO Financial Group and its clients, as well as new product development, proprietary trading and origination. Key...

  • Page 60
    ... losses 2009 Total revenues Excluding commodities losses Excluding commodities losses BMO Capital Markets MD&A Improved performance in the United States as we took advantage of market opportunities. Our productivity ratio improved significantly due to revenue growth and focused cost...

  • Page 61
    ... trading revenue and increased corporate banking revenue. BMO Capital Markets (Canadian $ in millions, except as noted) Reported As at or for the year ended October 31 2009 2008 2007 Change from 2008 $ % Net interest income (teb) Non-interest revenue Total revenue (teb) Provision for credit losses...

  • Page 62
    ... 2,469 Capital trust securities 1,150 1,150 1,150 1,150 1,150 Preferred share liability - 250 250 450 450 Shareholders' equity 20,197 17,904 15,298 15,061 13,842 388,458 416,050 366,524 319,978 293,862 60 BMO Financial Group 192nd Annual Report 2009 Total assets decreased $27.6 billion or 6.6% from...

  • Page 63
    ..., due to the conversion of BMO-underwritten Canadian mortgages to government-insured mortgagebacked securities, which are included in securities. Credit card loans increased a modest $0.5 billion, reï¬,ecting both new customer accounts and higher consumer balances. Table 11 on page 102 provides...

  • Page 64
    ...deploy resources to the high-return, strategic growth activities of our operating groups. Capital in excess of what is necessary to support our line of business activities is held in Corporate Services. MD&A Governance The Board of Directors and its Risk Review Committee provide ultimate oversight...

  • Page 65
    ... 2008 2009 Total Capital Ratio (%) Tangible Common Equity Ratio (%) Assets-to-Capital Multiple (times) Tier 1 Capital Ratio (%) Note: 2005-2007 under Basel I; 2008-2009 under Basel II. There is no comparability between 2008-2009 and the prior years. BMO Financial Group 192nd Annual Report 2009...

  • Page 66
    ...of net income available to common shareholders, our quarterly dividend payout ratio decreased in each quarter of the year, reaching 63.4% in the fourth quarter. At year-end, BMO's common shares provided a 5.6% annual dividend yield based on the year-end closing share price. On November 24, 2009, BMO...

  • Page 67
    ... mortgage loans are held in certain BMO-sponsored Canadian conduits that hold third-party assets, as described in the discussion of those conduits that follows. In Canada, we have a $16.8 billion home equity line of credit portfolio ($29.5 billion authorized). The portfolio is of high quality...

  • Page 68
    ... year ended October 31, 2009, there was a $12 million write-down of retained interests in bank securitization vehicles ($5 million of write-downs in 2008). The assets of two of the vehicles consist of Canadian residential mortgages and the third holds Canadian credit card loans transferred from BMO...

  • Page 69
    ... purchased by third-party investors, notwithstanding market disruptions, and pricing levels are in line with those of top-tier ABCP vehicles in the United States. BMO provided committed liquidity support facilities of US$5.7 billion to the vehicle at October 31, 2009 (US$8.2 billion in 2008). BMO...

  • Page 70
    ...investors with opportunities to invest in customized, diversified debt portfolios in a variety of asset and investment grade rating classes. We hold subordinate capital notes of two BMO-managed Londonbased Structured Investment Vehicles (SIVs), Links Finance Corporation (Links) and Parkland Finance...

  • Page 71
    ... in the hedged investment amounts of $128 million have exposure to an estimated $63 million of underlying U.S. subprime loans. (5) Amounts exclude BMO Life Assurance holdings of $34 million of residential MBS and $237 million of commercial MBS. BMO Financial Group 192nd Annual Report 2009 69

  • Page 72
    ...During 2009, BMO Capital Trust II (Trust II) was created to issue $450 million of BMO Tier 1 Notes - Series A. Trust II used the proceeds of the offering to purchase a senior deposit note from BMO. We are not required to consolidate Trust II. Credit Instruments In order to meet the financial needs...

  • Page 73
    ... the past 10 years, for our Canadian peer group, the average annual ratio has ranged from a high of 1.24% in 2002 to a low of 0.17% in 2004. This ratio varies with changes in the economy and credit conditions. If we applied these high and low ratios to average net loans and acceptances in 2009, our...

  • Page 74
    ... sensitive to changes in discount rates. We determine discount rates at each year-end for our Canadian and U.S. plans using high quality corporate bonds with terms matching the plans' specific cash ï¬,ows. Additional information regarding our accounting for pension and other employee future bene...

  • Page 75
    ...adopting IFRS on either our future financial results or primary capital measures at this time. Caution This Future Changes in Accounting Policies section contains forward-looking statements. Please see the Caution Regarding Forward-Looking Statements. BMO Financial Group 192nd Annual Report 2009 73

  • Page 76
    ... internal control over financial reporting. Pre-Approval of Shareholders' Auditors' Services and Fees Pre-Approval Policies and Procedures As part of BMO Financial Group's corporate governance practices, the Board of Directors ensures the strict application of BMO's corporate policy limiting the...

  • Page 77
    ... and adding new senior talent in a number of areas. Effective engagement model with our lines of business. Experienced and respected team of risk professionals. A difficult global economic environment that resulted in the deterioration of asset quality and significant volatility in capital markets...

  • Page 78
    ... within our annual and long-term strategic planning processes. • Enhanced a number of our economic capital models. • Clarified definitions for enterprise risk appetite and tolerance to guide business unit strategy execution. • Enhanced limit management usage in market risk and lending...

  • Page 79
    ... within its delegated risk-taking authority, as set out in our corporate risk policies and limits. Limits are set for the operating groups, each of which has effective processes and controls in place to enable them to operate within these limits. BMO Financial Group 192nd Annual Report 2009 77

  • Page 80
    ... and inventory limits for trading and investment banking activities. Risk Principles The risks we face are classified as credit and counterparty, market, liquidity and funding, operational, insurance, business, model, strategic, reputation and environmental. Risk-taking and management activities...

  • Page 81
    ...and position limits for market risk. Structured transactions: The Reputation Risk Management Committee and Trading Products Risk Committee review new structured products and transactions with significant reputation, legal, accounting, regulatory or tax risk. BMO Financial Group 192nd Annual Report...

  • Page 82
    ... limits. Credit decision-making is conducted at the management level appropriate to the size and risk of each transaction in accordance with comprehensive corporate policies, standards and procedures governing the conduct of credit risk activities. 80 BMO Financial Group 192nd Annual Report 2009

  • Page 83
    ...credit risk exposures and regular portfolio and sector reporting to the board and senior management committees. Performing accounts are reviewed on a regular basis, with most commercial and corporate accounts reviewed at least annually. The credit review process ensures that an appropriate structure...

  • Page 84
    ... Service industries Forest products Utilities Transportation Oil and gas Mining Manufacturing Communications Agriculture Wholesale trade Retail trade Residential mortgages Credit cards Personal loans Home equity loans Commercial mortgages Commercial real estate Construction Market Risk • Market...

  • Page 85
    ...on assets more than rates paid on deposits. BMO's Market Risk group provides oversight of trading and underwriting and structural portfolios with the goal of ensuring: • market risk of trading and underwriting and structural portfolios is measured and modelled in compliance with corporate policies...

  • Page 86
    ...ï¬,ective of current volatility. Total Trading and Underwriting MVE Summary ($ millions)* For the year ended October 31, 2009 (pre-tax Canadian equivalent) Year-end Average High Low Commodity risk Equity risk Foreign exchange risk Interest rate risk (mark-to-market) Diversification Comprehensive...

  • Page 87
    ...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, high-quality earnings and maximization of sustainable product spreads. Structural interest rate risk...

  • Page 88
    ... 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; and • contingency plans to facilitate managing through a disruption. 86 BMO Financial Group 192nd Annual Report 2009

  • Page 89
    ... funds to higher yielding investments as markets normalized in 2009. U.S. dollar and other currency core deposits have increased from pre-2008 levels. Larger fixed-date customer deposits totalled $23.0 billion at the end of the year, compared with $20.2 billion in 2008. Total deposits decreased...

  • Page 90
    ... Company (formerly AIG Life of Canada), which was purchased in 2009. Through oversight and monitoring, the boards are responsible for ensuring the insurance subsidiaries are managed and function in accordance with established insurance strategies and policies. BMO's Enterprise Risk and Portfolio...

  • Page 91
    ... portfolio and capital management methodologies. These models are used to guide strategic decisions and to assist in making daily lending, trading, underwriting, funding, investment and operational decisions. Models have also been developed to measure exposure to specific risks and to measure total...

  • Page 92
    ...risk is addressed in our board-approved sustainability corporate policy. Executive oversight of our environmental activities is provided by BMO's Sustainability Council, comprised of executives representing the various areas of the organization. Senior management committees are provided with reports...

  • Page 93
    ...effective expense control contributed to improved results. Assets under management and administration benefited from improving market conditions, growing $8 billion or 3% from a year ago despite a $9 billion decline related to the weaker U.S. dollar. BMO Financial Group 192nd Annual Report 2009 91

  • Page 94
    ... of rising long-term funding costs. Average earning assets increased $3 billion or 1%, driven by Private Client Group as a result of the inclusion of BMO Life Assurance in 2009 and loan growth in Private Banking. Non-interest revenue increased $143 million or 10% from a year ago. The improvement...

  • Page 95
    ...the partial sale of our investment in Visa. Revenues were stronger in 2009, reï¬,ecting deposit growth and a full year of results for our Wisconsin acquisitions. Private Client Group's results were weaker in the first half of 2009 as stock markets were weak and interest rates were low. Asset levels...

  • Page 96
    ... BMO Capital Markets Corporate Services, including T&O BMO Financial Group net income Information per Common Share ($) Dividends declared Earnings Basic Diluted Cash earnings Basic Diluted Book value Market price High Low Close Financial Measures (%) Five-year average annual total shareholder return...

  • Page 97
    ... volumes with solid growth in personal banking, cards and payment services revenue. While there was volume growth in commercial products, commercial revenue decreased slightly due to a 2007 gain on an investment security and increased funding costs. Non-interest expense increased $168 million or...

  • Page 98
    ... 2001 2000 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 99
    ...and cash equivalents Interest bearing deposits with banks Securities Securities borrowed or purchased under resale agreements Net loans and acceptances Other assets Total assets Liabilities and Shareholders' Equity Deposits Other liabilities Subordinated debt Capital trust securities Preferred share...

  • Page 100
    ... for the year ended October 31 2009 2008 2007 2006 2005 2004 2003 2002 2001 2000 Other Information Employees (1) Bank branches Automated banking machines (Canada) Rates Average Canadian prime rate (%) Average U.S. prime rate (%) Canadian/U.S. dollar exchange rates ($) High Low Average End of period...

  • Page 101
    ... the amortization of intangible assets increased at a compound annual growth rate of 1.8% over five years and 2.6% over ten years. (2) Government levies are included in various non-interest expense categories. na - not applicable nm - not meaningful BMO Financial Group 192nd Annual Report 2009 99

  • Page 102
    ... rate (%) 2007 Interest income/ expense Assets Canadian Dollar Deposits with other banks Securities Securities borrowed or purchased under resale agreements Loans Residential mortgages Non-residential mortgages Consumer instalment and other personal Credit cards Businesses and governments Total...

  • Page 103
    ...to change in Average rate Total Assets Canadian Dollar Deposits with other banks Securities Securities borrowed or purchased under resale agreements Loans Residential mortgages Non-residential mortgages Consumer instalment and other personal Credit cards Businesses and governments Total loans Other...

  • Page 104
    ... Information Canada As at October 31 2009 2008 2007 2006 2005 ($ millions, except as noted) United States 2009 2008 2007 2006 2005 2009 Other countries 2008 2007 2006 2005 Consumer Residential mortgages (1) Cards Consumer instalment and other personal loans Total consumer Commercial and corporate...

  • Page 105
    ...0.90 Net Impaired Commercial and Corporate Loans Commercial mortgages (4) Commercial real estate Construction (non-real estate) Retail trade Wholesale trade Agriculture Communications Manufacturing Mining Oil and gas Transportation Utilities Forest products Service industries Financial institutions...

  • Page 106
    ... Consumer Commercial and corporate 1 Net write-offs as a % of un average loans and acceptances Supplemental Information Table 17: Allocation of Allowance for Credit Losses - Segmented Information ($ millions, except as noted) Canada As at October 31 2009 2008 2007 2006 2005 2009 2008 United States...

  • Page 107
    ... (non-real estate) Retail trade Wholesale trade Agriculture Communications Manufacturing Mining Oil and gas Transportation Utilities Forest products Service industries Financial institutions Government Other Total specific allowances for credit losses on commercial and corporate loans 29 76...

  • Page 108
    ... from available-for-sale equity securities Net Tier 1 capital Securitization-related deductions Expected loss in excess of allowance (AIRB Approach) (5) Substantial investments and investments in insurance subsidiaries (7) Other deductions Adjusted Tier 1 capital Tier 2 capital Preferred shares of...

  • Page 109
    ... Retail small and medium-sized enterprises Equity Trading book Securitization Other credit risk assets - non-counterparty managed assets Scaling factor for credit risk assets under AIRB (1) Total Credit Risk Market Risk Operational Risk Total Basel II Risk-Weighted Assets 108,368 44,229 53...

  • Page 110
    ...access to the Board of Directors and its Audit and other relevant Committees to discuss audit, financial reporting and related matters. William A. Downe President and Chief Executive Officer Russel C. Robertson Chief Financial Officer Canada November 24, 2009 108 BMO Financial Group 192nd Annual...

  • Page 111
    ... Public Company Accounting Oversight Board (United States). Our report dated November 24, 2009 expressed an unqualified opinion on those consolidated financial statements. Chartered Accountants, Licensed Public Accountants Toronto, Canada November 24, 2009 BMO Financial Group 192nd Annual Report...

  • Page 112
    ... financial statements. Certain comparative figures have been reclassified to conform with the current year's presentation. $ 388,458 $ 416,050 William A. Downe President and Chief Executive Officer 110 BMO Financial Group 192nd Annual Report 2009 Philip S. Orsino Chairman, Audit Committee

  • Page 113
    ... for credit losses (Note 4) Net Interest Income After Provision for Credit Losses Non-Interest Revenue Securities commissions and fees Deposit and payment service charges Trading revenues (losses) Lending fees Card fees Investment management and custodial fees Mutual fund revenues Securitization...

  • Page 114
    ... the Shareholder Dividend Reinvestment and Share Purchase Plan (Note 21) Issued under the Stock Option Plan (Note 23) Issued on the exchange of shares of a subsidiary corporation (Note 21) Issued on the acquisition of a business (Note 12) Repurchased for cancellation (Note 21) Balance at End of Year...

  • Page 115
    ...cash ï¬,ows provided by (used in) operating activities Impairment write-down of securities, other than trading Net (gain) loss on securities, other than trading Net (increase) decrease in trading securities Provision for credit losses (Gain) on sale of securitized loans (Note 8) Change in derivative...

  • Page 116
    ... balance sheet date. Revenues and expenses denominated in foreign currencies are translated using the average exchange rate for the year. Unrealized gains and losses arising from translating net investments in foreign operations into Canadian dollars, net of related hedging activities and applicable...

  • Page 117
    ... Interest and dividend income of $57 million related to the transferred securities was recorded in interest, dividend and fee income, securities in our Consolidated Statement of Income for the year ended October 31, 2009 ($23 million in 2008). Notes BMO Financial Group 192nd Annual Report 2009 115

  • Page 118
    ...data or comparisons with other securities that are substantially the same. In limited circumstances, we use internal models where the inputs are not based on observable market data. Further discussion of fair value measurement is included in Note 30. 116 BMO Financial Group 192nd Annual Report 2009

  • Page 119
    ... shares, term to maturity is based on dividend reset dates. For other equities, term to maturity is assumed to be over 10 years unless specified otherwise. Yields in the table above are calculated using the cost or amortized cost of the security and the contractual interest or stated dividend rates...

  • Page 120
    ... $ $ Notes Trading securities, net realized and unrealized gains (losses) (2) Total income from securities (1) The following income related to our insurance operations was included in non-interest revenue, insurance income in our Consolidated Statement of Income: Interest, dividend and fee income...

  • Page 121
    ...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 judgment regarding portfolio quality, business mix, and economic and credit market conditions. BMO Financial Group 192nd Annual Report 2009...

  • Page 122
    ... mortgages 2009 2008 2007 Credit card, consumer instalment and other personal loans 2009 2008 2007 2009 Business and government loans 2008 2007 Customers' liability under acceptances 2009 2008 2007 2009 (Canadian $ in millions) As at October 31 Total 2008 2007 Gross loan balances at end of year...

  • Page 123
    ... that their ability to meet contractual obligations could be similarly affected by changes in economic, political or other conditions. Concentrations of credit risk indicate a related sensitivity of our performance to developments affecting Notes BMO Financial Group 192nd Annual Report 2009 121

  • Page 124
    ... Credit Exposure by Industry (Canadian $ in millions) 2009 Drawn 2008 Commitments (undrawn) 2009 2008 OTC derivatives 2009 2008 Other off-balance sheet items 2009 2008 Repo style transactions 2009 2008 2009 Total 2008 Financial institutions Government Manufacturing Real estate Retail trade Service...

  • Page 125
    ... of total assets. Our liquidity ratio as at October 31, 2009 was 31.9% (29.1% in 2008). Core deposits are comprised of customer operating and savings deposits and smaller fixed-date deposits (less than or equal to $100,000). Canadian dollar core deposits totalled $95.4 billion at the end of the year...

  • Page 126
    ...than one year, but can be several years. 124 BMO Financial Group 192nd Annual Report 2009 Notes Derivatives Certain of our derivative instruments meet the accounting definition of a guarantee when we believe they are related to an asset, liability or equity security held by the guaranteed party at...

  • Page 127
    ... 147 $ 929 $ 11,879 11,743 136 284 13 80 513 $ 3,312 - 125 (26) 3,411 3,400 Notes 11 191 28 66 $ 296 $ 644 $ $ 239 (1) Net cash proceeds represent cash proceeds less issuance costs. (2) Includes credit card securities retained on-balance sheet. BMO Financial Group 192nd Annual Report 2009 125

  • Page 128
    ... pool of assets. Static pool credit losses for the years ended October 31, 2009 and 2008 were as follows: 2009 2008 n/a Residential mortgages Credit card loans n/a - Not applicable - residential mortgages are fully insured. n/a 3.65% 1.01% Notes 126 BMO Financial Group 192nd Annual Report 2009

  • Page 129
    ... down to $nil in the years ended October 31, 2009 and 2008. (7) Total assets held as at October 31, 2009 are comprised of a loan of $560 million ($nil in 2008) and $159 million of other assets ($265 million in 2008). n/a - not applicable Notes BMO Financial Group 192nd Annual Report 2009 127

  • Page 130
    ... loan. 128 BMO Financial Group 192nd Annual Report 2009 Capital and Funding Trusts During the year ended October 31, 2009, BMO Capital Trust II ("Trust II") was created to issue $450 million of BMO Tier 1 Notes - Series A. Trust II used the proceeds of the offering to purchase a senior deposit note...

  • Page 131
    ... trading positions and certain derivatives that do not qualify as hedges for accounting purposes ("economic hedges"). We structure and market derivative products to enable customers to transfer, modify or reduce current or expected risks. Notes BMO Financial Group 192nd Annual Report 2009...

  • Page 132
    ... of fixed rate liabilities. Our cash flow hedges, which have a maximum term of nine years, are hedges of floating rate loans and deposits as well as foreign currency denominated assets. We record interest receivable or payable on the derivative as an adjustment to interest, dividend and fee income...

  • Page 133
    ... ratings were to fall, certain counterparties to the derivative instruments could demand immediate and ongoing collateralization overnight on derivative liability positions or request immediate payment. The aggregate fair value of all derivative Notes BMO Financial Group 192nd Annual Report 2009...

  • Page 134
    ...our derivative instruments are as follows: (Canadian $ in millions) Gross assets Gross liabilities 2009 Net Gross assets Gross liabilities 2008 Net Trading Interest Rate Contracts Swaps Forward rate agreements Futures Purchased options Written options Foreign Exchange Contracts Cross-currency swaps...

  • Page 135
    ... gains and losses accruing to them. Included in foreign exchange contracts is $nil as at October 31, 2009 ($nil in 2008) related to gold contracts. Certain comparative figures have been reclassified to conform with the current year's presentation. BMO Financial Group 192nd Annual Report 2009 133

  • Page 136
    ... we manage our credit risk for derivatives using the same credit risk process that is applied to loans and other credit assets. (Canadian $ in millions) Interest Rate Contracts Swaps Forward rate agreements Purchased options Total interest rate contracts Foreign Exchange Contracts Cross-currency...

  • Page 137
    ... is the replacement cost of contracts (before the impact of master netting agreements) with customers located in the following countries, based on country of ultimate risk: (Canadian $ in millions, except as noted) 2009 2008 Canada United States United Kingdom Other countries (1) Total (1) No other...

  • Page 138
    ... of Canada ("BMO Life Assurance") On April 1, 2009, we completed the acquisition of all outstanding voting shares of AIG Life Insurance Company of Canada for cash consideration of $330 million, subject to a post-closing adjustment based on net assets. 136 BMO Financial Group 192nd Annual Report 2009

  • Page 139
    ...American franchise from Citigroup for total cash consideration of approximately US$1 billion. The acquisition of the net cardholder receivables of Diners Club will give us rights to issue Diners Club cards to corporate and professional clients in the United States and Canada and is expected to close...

  • Page 140
    ... the years ended October 31, 2009 and 2008 is as follows: Personal and Commercial Banking P&C Canada P&C U.S. Client Investing Investment Products Private Banking Private Client Group BMO Capital Markets Corporate Services Technology and Operations (Canadian $ in millions) Total Total Insurance...

  • Page 141
    Note 15: Deposits Payable on demand (Canadian $ in millions) Interest bearing 2009 2008 Non-interest bearing 2009 2008 Payable after notice 2009 2008 2009 Payable on a fixed date 2008 2009 Total 2008 Deposits by: Banks Businesses and governments Individuals Total Booked in: Canada United States ...

  • Page 142
    ... $1,060 million ($1,060 million in 2008) (see Note 19) and 7.375% preferred shares of US$250 million (US$250 million in 2008) issued by Harris Preferred Capital Corporation, a U.S. subsidiary, that forms part of our Tier 1 regulatory capital. Notes 140 BMO Financial Group 192nd Annual Report 2009

  • Page 143
    ... Yield Price calculations and definitions of Government of Canada Yield. (8) Certain subordinated debt recorded amounts include quasi fair value adjustments of $186 million ($125 million in 2008) as they are part of fair value hedges (see Note 10). BMO Financial Group 192nd Annual Report 2009 141

  • Page 144
    ... October 31 of each year. It represents the position outstanding at the close of the business day and may change significantly in subsequent periods based on customer behaviour and the application of our asset and liability management policies. 142 BMO Financial Group 192nd Annual Report 2009 Notes

  • Page 145
    ... amounts of derivatives Total Canadian dollar interest rate gap position 2009 2008 U.S. Dollar and Other Currencies Assets Cash resources Securities Securities borrowed or purchased under resale agreements Loans Other assets Total assets Liabilities and Shareholders' Equity Deposits Securities sold...

  • Page 146
    ...- Series 14 shares are redeemable at our option starting November 25, 2012 for $25.00 cash per share, plus a premium if we redeem the shares before November 25, 2016. The shares carry a non-cumulative quarterly dividend of $0.328125 per share. Notes 144 BMO Financial Group 192nd Annual Report 2009

  • Page 147
    ... at an average of the closing price of our common shares on the Toronto Stock Exchange based on the five trading days prior to the last business day of the month or we may purchase them on the open market at market prices. During the year ended October 31, 2009, we issued a total of 9,402,542 common...

  • Page 148
    ... capital ratios of 7% and 10%, respectively, for a wellcapitalized financial institution. Our Assets-to-Capital Multiple remains below the maximum permitted by OSFI. Note 23: Employee Compensation - Stock-Based Compensation Stock Option Plan We maintain a Stock Option Plan for designated officers...

  • Page 149
    ... our common shares held by the plan are used to purchase additional common shares on the open market. We account for our contribution as employee compensation expense when it is contributed to the plan. Employee compensation expense related to this plan for the years ended October 31, 2009, 2008 and...

  • Page 150
    ... rates, rate of compensation increase, retirement age, mortality and health care cost trend rates. The discount rates for the main Canadian and U.S. pension and other employee future benefit plans were selected using high-quality corporate bonds with terms matching the plans' specific cash flows...

  • Page 151
    ... employee future benefit plans in the United States and Canada are partially funded. Pension and benefit payments related to these plans are either paid through the respective plan or paid directly by us. We measure the fair value of plan assets as at October 31 for our Canadian plans (September...

  • Page 152
    ... at end of 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 Opening adjustment for the inclusion of the United Kingdom plan Actual return on plan assets Employer contributions Voluntary employee...

  • Page 153
    ... to pensioners in the next five years and thereafter are as follows: (Canadian $ in millions) Pension benefit plans Other employee future benefit plans Notes 2010 2011 2012 2013 2014 2015-2019 $ 234 241 252 260 269 1,480 $ 37 40 42 47 50 310 BMO Financial Group 192nd Annual Report 2009 151

  • Page 154
    ... 81 1,246 (50) Shareholders' Equity Income tax expense (recovery) related to: Unrealized gains (losses) on available-for-sale securities, net of hedging activities Gains (losses) on cash flow hedges Hedging of unrealized (gain) loss on translation of net foreign operations Other Total $ 279 (108...

  • Page 155
    ... diluted earnings per share we excluded average stock options outstanding of 8,244,478, 2,818,599 and 317,266 with weighted-average exercise prices of $46.92, $60.68 and $67.89 for the years ended October 31, 2009, 2008 and 2007, respectively. Notes BMO Financial Group 192nd Annual Report 2009 153

  • Page 156
    ... charges and credits on the groups' assets, liabilities and capital, at market rates, taking into account relevant terms and currency considerations. The offset of the net impact of these charges and credits is reflected in Corporate Services. Notes 154 BMO Financial Group 192nd Annual Report 2009

  • Page 157
    ... is allocated based upon the country of ultimate risk. Our results and average assets, grouped by operating segment and geographic region, are as follows: (Canadian $ in millions) P&C Canada P&C U.S. PCG BMO CM Corporate Services (1) Total Canada United States Other countries 2009 (2) Net interest...

  • Page 158
    ... these services. Loans to directors, executives and their affiliates totalled $5 million and $1 million at October 31, 2009 and 2008, respectively. Board of Directors Compensation Stock Option Plan During the year ended October 31, 2002, we introduced a stock option plan for non-officer directors...

  • Page 159
    ...flows, adjusted for estimated prepayment, at market interest rates currently offered for loans with similar terms. The value of our loan balances determined using the above assumption is further reduced by the allowance for credit losses to determine the fair value of our loan portfolio. Securities...

  • Page 160
    ...Canadian $ in millions) Assets Cash resources Securities Securities borrowed or purchased under resale agreements Loans Residential mortgages Consumer instalment and other personal Credit cards Businesses and governments Customers' liability under acceptances Allowance for credit losses Total loans...

  • Page 161
    ... models using observable market information (Canadian $ in millions) As at October 31 Available-for-sale securities 2009 2008 as inputs (Level 2) and internal models without observable market information as inputs (Level 3) in the valuation of securities, fair value liabilities, derivative assets...

  • Page 162
    ... from trading securities to available-for-sale securities (l) - Insurance (m) - Derivatives (q) Non-Interest Expense - Stock-based compensation (c) - Software development costs (d) - Pension and other employee future benefits (b) - Goodwill and other assets (e) Income taxes and net change in...

  • Page 163
    ... increases into account, exceeds the fair value of plan assets at year end. There is no change in the calculation of the pension and other employee future benefits expense. Under United States GAAP , the pre-tax amounts included in Accumulated Other Comprehensive (Income) Loss are as follows: 2009...

  • Page 164
    ...elected to transfer from trading to available-for-sale those securities for which we had a change in intent caused by current market circumstances to hold the securities for the foreseeable future rather than to exit or trade them in the short term. The Canadian accounting guidance was applicable on...

  • Page 165
    ...for-sale securities. Under Canadian GAAP , fixed income and equity investments supporting the policy benefit liabilities of life and health insurance contracts are designated as held-for-trading using the fair value option. (n) Restricted Net Assets Certain of our subsidiaries and equity investments...

  • Page 166
    ... if VIEs that were previously QSPEs must be consolidated by the enterprise. This standard is effective November 1, 2010 for United States GAAP reporting purposes. We are currently assessing the impact on our United States GAAP reconciliation. Notes 164 BMO Financial Group 192nd Annual Report 2009

  • Page 167
    ... Markets GKST Inc. BMO Financial, Inc. BMO Financial Products Corp. BMO Global Capital Solutions, Inc. Harris Bancorp Insurance Services, Inc. Harris Bankcorp, Inc. Harris Central N.A. Harris Investment Management, Inc. and subsidiary Harris Investor Services, Inc. Harris Life Insurance Company...

  • Page 168
    ...short-term financing needs. Assets-to-Capital Multiple is defined as assets plus guarantees and letters of credit, net of specified deductions (or adjusted assets), divided by total capital. Average Earning Assets represents the daily or monthly average balance of deposits with other banks and loans...

  • Page 169
    ... on a daily basis. Trading revenues include income (expense) and gains (losses) from both cash instruments and interest rate, foreign exchange (including spot positions), equity, commodity and credit contracts. P 42 Economic Capital is our internal assessment of the risks underlying BMO's business...

  • Page 170
    ... Credit rating information appears on page 29 of this annual report and on our website. www.bmo.com/creditratings Total volume of shares traded Common Share Trading in Fiscal 2009 Primary stock exchanges Ticker Closing price October 31, 2009 High Low Auditors KPMG LLP Important Dates Fiscal Year...

  • Page 171
    ... Employees For information on BMO's Employee Share Ownership Plan: General To obtain additional printed copies of the annual report or make inquiries about company news and initiatives: On peut obtenir sur demande un exemplaire en français. Corporate Communications Department BMO Financial Group...

  • Page 172
    ...TM2 Trademark/registered trademark of Bank of Montreal Registered trademark of BMO Nesbitt Burns Corporation Limited Registered trademark of Harris N.A. Registered trademark of Skate Canada Registered trademark of AIR MILES International Trading B.V. Registered trademark of MasterCard International...