193 RD ANNUAL REPORT 2010 Financial Snapshot 2010 Performance

For the year ended October 31 (Canadian $ in millions, except as noted) 2010 2009 2008 billion Revenue (p 37) 12,210 11,064 10,205 $

Total provision for credit losses (p 40) 1,049 1,603 1,330 2.8 BMO Financial Group Net Income Non-interest expense (p 41) 7,590 7,381 6,894 Net income rose by 57%, or more than $1 billion, driven by reduced provisions Net income (p 33) 2,810 1,787 1,978 for credit losses and stronger results in P&C Canada.

P 33 Earnings per share – diluted ($) (p 33) 4.75 3.08 3.76

Return on equity (ROE) (p 34) 14.9% 9.9% 13.0%

Cash operating leverage1 (p 41) 7.5% 1.3% 4.7% %

Tier 1 Capital Ratio (p 60) 13.45% 12.24% 9.77% 10.4 Revenue Growth Net Income by Segment Revenue rose by more than $1.1 billion, or 10.4%, after having grown 8.4% P&C Canada (p 47) 1,644 1,415 1,153 and 9.2% in the past two years, demonstrating the benefits of our P&C U.S. (p 50) 175 286 242 diversified business mix.

Private Client Group (p 53) 470 359 426 P 37

BMO Capital Markets (p 56) 820 873 568 Corporate Services, including % Technology and Operations (T&O) (p 57) (299) (1,146) (411) 13.45

Net Income (p 33) 2,810 1,787 1,978 Tier 1 Capital Ratio The Tier 1 Capital Ratio increased from 12.24% in 2009, providing greater 1 This is a non-GAAP measure. Please see the Non-GAAP Measures section on page 91. operational and strategic flexibility.

P 60

Total Shareholder Our Share Price ($) (%) BMO shareholders were rewarded with strong returns on their investment. Return (TSR) 24.1 25.1 26.4 65 5.9% 5-Year TSR 60 (5.8)

55 (27.9) 20102009200820072006 50 BMO’s one-year TSR was 26.4%, providing an annual shareholder return Oct 31 Jan 31 Apr 30 Jul 31 Oct 31 in the top tier of our Canadian peer

2009 2010 2010 2010 2010 group – for the second consecutive year.

P 32 P 32

“ There is a sea change Our relationship with underway with consumers – money is changing. P 8 their preferences have We’re rethinking what shifted and their value really means.

relationship with money P 10 has changed.” We want the freedom Bill Downe to make financial President and Chief Executive Officer decisions everywhere.

P 12

A company’s first responsibility is to be well managed.

P 14

A company’s vision is only as strong as its people.

P 16

Making money make sense

Table of Contents Business Review Corporate Directory Financial Review Resources 2 Our Strategic Agenda 19 Corporate Governance 24 Financial Performance and Condition 169 Principal Subsidiaries 4 Chairman’s Message 20 Our Board of Directors at a Glance 170 Glossary 5 President and Chief Executive 21 Our Governance Structure 26 Management’s Discussion and Analysis 172 Shareholder Information Officer’s Message 22 Management Committee 96 Supplemental Information IBC Where to Find More Information 8 Our relationship with money is changing and Performance Committee 110 Consolidated Financial Statements 10 We’re rethinking what value really means 114 Notes to Consolidated Financial 12 We want the freedom to make Statements financial decisions everywhere 14 A company’s first responsibility is to be well managed Bank of Montreal uses a unified branding approach that links all of the organization’s 16 A company’s vision is only as strong member companies. Bank of Montreal, together with its subsidiaries, is known as

as its people BMO Financial Group. As such, in this document, the names BMO and BMO Financial

18 Leadership in China Group mean Bank of Montreal together with its subsidiaries.

Our Strategic Agenda

Our Vision Our Guiding Principle We aim to maximize total shareholder To be the bank return and balance our commitments that defines to financial performance, our customers, our employees, the great customer environment and the communities experience. where we live and work.

Established in 1817 and based in Canada, BMO Financial Group serves 11 million personal, 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 vision: to be the bank that defines great customer experience.

“ The progress we’ve made with our customers makes us proud – and it’s reflected in our results.”

Nancy Cyr Personal Banking Area Manager Montreal, Quebec

A summary of our enterprise-wide strategy in context and our progress in 2010 appears in our Management’s Discussion and Analysis.

P 28

2 BMO Financial Group 193rd Annual Report 2010 “It was my privilege this year to introduce new customers, employees and communities to Harris. They welcomed us in return, because at BMO, they not only matter – they’re our priority.”

Daniela O’Leary-Gill Senior Vice-President, North District Executive, Harris N.A. Chicago, Illinois

Our Strategic Priorities

Maximize earnings growth across all North American personal and commercial banking 1 businesses, focusing on industry-leading customer experience and sales force productivity.

P 28, 45, 48

Accelerate the growth of our wealth management business through client-focused financial planning 2 and by investing for future growth. P 28, 51

Deliver strong, stable returns in our capital markets business by providing highly targeted 3 solutions to our core clients from a single integrated platform.

P 28, 54

Develop our business in select global markets to grow with our clients, expand our capabilities 4 and reach new customers. P 18, 28

Sustain a culture that focuses on customers, high performance and our people. 5 P 16, 28

BMO Financial Group 193rd Annual Report 2010 3 CHAIRMAN’S MESSAGE

Good Governance Represents a Competitive Advantage

Our practices continue to evolve Recent events have caused financial institutions everywhere to reconsider the way they operate. Our customers and their relationships with money have changed also – as they, too, adjust to the current reality. As directors of Bank of Montreal, responsible for the oversight of a large, complex organization, we are keenly aware that good governance represents a competitive advantage. The banks that emerged from the financial crisis in good shape were those with the best controls in place, and the discipline to adhere to them. Canadian banks fared better than most. It is not a coincidence that Canadian banks are recognized for the quality of their governance, and we are proud that BMO ranks among the top companies in Canada for governance. Achieving good governance, however, is not a fixed target. It is forever moving, steadily The right improving. At BMO, we strive constantly for board renewal – new ideas, new approaches, blend of new points of view. Since I was named Chairman of the Board in 2004, more than one-third of the faces on the board have changed. This is in line with our desire to have the right blend of experience experience and knowledge, tempered with fresh perspective. This year, in the spirit of renewal, we have introduced term limits for board membership. Once phased in, BMO and directors will be limited to 15 years of service, or until their 70th birthday, whichever knowledge comes first. After 24 years of service, Jeremy Reitman leaves the board this year, as does Nancy Southern, who has served shareholders for 15 years. On behalf of shareholders, I thank them for their invaluable contributions to the company over their years of service. We will miss their insight and guidance. We were pleased to announce the appointment of Christine Edwards of Chicago to the board in August 2010. Finally, I want to offer our thanks to management and all employees for delivering strong financial results in the past year. The bank has grown, both within our traditional David A. Galloway Chairman of the Board markets as well as in markets that will be of increasing importance to us. The incorporation of BMO ChinaCo (see page 18), for example, was an important strategic milestone for the company. I also want to recognize our employees’ contribution to important initiatives – the kind that are never reflected adequately in the bottom line. Under Bill Downe’s leadership, bank employees, enterprise-wide, supported their communities in record manner, donating time and money to the United Way. They also embraced the bank’s environmental goals and helped us, during the course of the year, achieve carbon neutrality relative to energy consumption and transportation emissions.

4 BMO Financial Group 193rd Annual Report 2010 PRESIDENT AND CHIEF EXECUTIVE OFFICER’S MESSAGE

Our Customers’ Success Defines Our Success

Setting higher standards The financial services industry has changed for the better. The establishment of new rules under which financial institutions will operate has not only been necessary, it is right – both for the overall stability of financial markets and for the customers we serve. At BMO, we’re positioned for success in this environment. It’s not just a matter of meeting new regulations. Customers are changing the rules of the game as well. People’s relationship with money has evolved, so too has their relationship with their financial institution. This is why the theme running through our annual report is: competing in a changing world. It’s changing because people are reassessing their idea of value. They want the freedom to do their banking everywhere. They expect a higher standard of social responsibility from companies than ever before. And in a marketplace where change itself has become so profound, a company’s vision is only as strong as its people.

Strong performance in 2010 BMO is a BMO’s financial and operating results in 2010 reflect the success of our 38,000 employees company in meeting our customers’ needs and striving for higher performance. Net income increased to $2.8 billion, driven in large part by strong revenue growth of 10.4%. BMO’s deeply rooted return on equity continued to improve, reaching 14.9%. The year was characterized by significant achievement across each of our operating in the economic groups. This performance is demonstrated by our pre-tax pre-provision earnings, which reached $4.6 billion, the highest in the history of the bank. We achieved these results advancement of while maintaining financial strength and flexibility, managing impaired loans, capitalizing on unique expansion initiatives and investing in future growth. North America This was accomplished against a dramatic backdrop including G20 initiatives to stimulate growth; continued regulatory efforts to address systemic vulnerabilities and to develop new policies; the formulation of new Basel III capital rules; and active legislative agendas in both developed and emerging economies. At BMO, we view these changes to the operating environment as an opportunity – and source of advantage – as we move ahead with our strategic priorities. William A. Downe Making money make sense President and Chief Executive Officer We have a brand promise common to every business – our commitment to customers and their success is tangible. BMO has a clear strategy and strong execution capabilities. Everything we’re undertaking – from customer offers to the 7,640 employees across North America who completed customer experience and sales training this year – lines up to support our brand: Making money make sense. Our ability to stay ahead of our customers’ changing needs is reflected in BMO’s internal advocacy. It has never been higher: 95% of our employees said they personally recommend our products and services and 98% said they believe in the strategy. Our strong balance sheet, liquidity, capital position, reputation and people reinforce our ability to react to opportunities.

BMO Financial Group 193rd Annual Report 2010 5 PRESIDENT AND CHIEF EXECUTIVE OFFICER’S MESSAGE

The bank’s strong balance sheet, liquidity, capital position, reputation and people reinforce our ability to react to opportunities.

Creating opportunity Customers’ preferences have shifted. None of us want to forget the lessons of the last three years. We’re all paying more attention to our finances. This re-emergence of clients’ appreciation of consistency and value is something that plays to our core strengths. And it is what BMO is delivering. We are very proud of the performance of our personal and commercial bank in Canada. Even for a company as diversified as ours, it is a barometer of the health of our organization. We are building BMO Bank of Montreal through investments in front-line staff and the expansion of our branch network, online and customer contact capabilities. We intend to keep this business growing. In so doing, we not only create opportunities for our customers, but also for our other businesses. Our intense focus on personal and commercial banking in North America reflects our commitment to leverage one of the bank’s greatest strengths: our brand and strong reputation. Making money make sense speaks directly to customers as individuals – whether they’re acting for themselves, or as entrepreneurs, or as the leaders of the companies and institutions with which we do business. Maintaining a balance when it comes to controlling spending, growing savings, borrowing smartly and investing wisely is important. Our role at BMO is to help customers make sense of these things. It is where customers most value the help of a bank and where we are most capable – combining our understanding of customers with our capital – to take full advantage of this unique market position.

A clear strategy rests on a strong foundation 2010 confirms we are on the right path. We are well positioned with a clear strategy, and a brand promise common to every business. As we reach important milestones our aspirations remain ambitious. There is much yet to be accomplished.

BMO Financial Group has the longest-running dividend Dividends Declared ($ per share) 2.80 2.80 2.80 2.71 payout record of any Compound annual growth rate 2.26 company in Canada, at 10.1% 8.6% 1.85 BMO 15-year BMO 5-year 1.59 182 years. BMO common 1.34 1.12 1.20 1.00 shares provided a 0.88 0.94 0.74 0.82 dividend yield of 4.65% 0.66 at October 31, 2010.

1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010

6 BMO Financial Group 193rd Annual Report 2010 PRESIDENT AND CHIEF EXECUTIVE OFFICER’S MESSAGE

We invest with a view to meeting future demands – improving our processes and technology to provide our clients with the products, services and tools that will ensure their success.

Supporting our vision is a belief in the importance of both maintaining strong core capabilities and investing in the quality and knowledge of the people who are providing guidance and advice to our customers. We are maintaining a sharp focus on improving our processes and technology to provide our clients with the products, services and tools that will ensure their success in a fast-changing environment. We are intensifying collaboration North-South and across groups to provide meaningful efficiency and scale for the benefit of customers. As the context in which we compete changes, strong core capabilities are critical to ensure reliability and resilience. And we are continuing to invest with a view to meeting future demands. This will ensure that BMO remains uniquely positioned to grow. The progress of the bank relies on its employees and their ability and commitment to deliver against these different elements. Every member of the team – from senior management to investment professionals to front-line bankers – must be confident and capable. We continue to invest in the skills necessary to sustain successful long-term growth – and we are active in ensuring we have the best learning and development programs available.

Generating returns for shareholders Our focus is entirely on the things that will define the next phase of our growth and translate our brand promise into a new set of capabilities – to support our customers in fulfilling their ambitions in new ways… ways, perhaps, they have yet to envisage. I believe that the potential returns from investing in our businesses today are better than at any time in the past decade. In a changing world, it is likely that there will be consolidation in financial markets that will create opportunities for BMO. Equally important will be consistent investment in new distribution points, in finding new ways to reach customers, and in product and service innovation that empowers those customers to make informed decisions – always with the sure sense they’re in control. BMO is a company deeply rooted in the economic success of North America, serving customers for 193 years. For our shareholders, we are committed to building the value of the bank and demonstrating consistent growth in common share dividends over time. Our strategic path is clear; we are focused on performance in the year ahead and confident in our plans to invest in future growth. The opportunity to serve our customers is a privilege for me and for our entire team. I thank our employees for their contributions in 2010 and pass on to you, our shareholders, sincere thanks for your support.

Bill Downe

BMO Financial Group 193rd Annual Report 2010 7 Our relationship with money is changing.

The past three years brought global realities down to the personal level. Now millions of people have reassessed their priorities with newfound clarity. As we move forward and the sense of urgency passes, our relationship with money, in many ways, will have changed.

As life unfolds, we all make financial borrowing smartly and investing wisely. debt and savings. They want a financial choices to meet specific goals – borrowing And at every stage, we need to feel that coach who’ll keep them on their game to buy a home, for instance, or allocating we’re reasonably protected against risk. year in, year out. savings for a family trip or a child’s As the economy slowly regains momentum, Above all, people want an institution education. Over the past decade, such people are examining how they manage to practice what it preaches by presenting decisions were too often made without their money and asking tougher questions options with a broad and balanced reference to the bigger picture. The appeal of themselves. Equally, they believe that perspective. Bankers cannot simply of immediate answers took precedence financial institutions have a responsibility be sellers of investment products or the over the merits of a balanced, long-term to understand their situation, offer gatekeepers of credit. They must be strategy. straightforward advice and lead the trusted allies whose advice looks beyond The economic downturn changed all that way forward. a moment in the market, or the wish – or accelerated a shift in thinking. Today to make a sale, to always put the Faced with a daily barrage of unfiltered people want a holistic view of their personal customer’s interest first. information, customers are seeking finances. They’re more aware of how meaningful conversations and insights. As people’s relationship with money individual decisions are part of a total life They expect an institution to educate changes, their relationship with financial cycle in which each step depends on all and offer counsel and advice, providing institutions has to change as well. the others. There exists a balance between rules of thumb on the right levels of controlling spending, growing savings,

8 BMO Financial Group 193rd Annual Report 2010 “We’re listening. Clear information and advice are at the heart of making money make sense at BMO.”

Cherry Cruz Relationship Manager, BMO Bank of Montreal Toronto, Ontario

When Financial Advice is Needed – Triggering Events over the Life Cycle More Smart Steps BMO introduced SmartSteps to Canadians Events that most Canadians Living your retirement Critical illness to provide them with ways to save think they won’t experience Long-term disability Dealing with tax changes money quickly, become debt-free faster

Planning for retirement and better manage their spending.

Receiving an inheritance Planning for your estate Building on the program’s success, Losing a loved one we followed up in 2010 with SmartSteps Going to post-secondary school

Net Worth Net for Business, SmartSteps for Investing Getting your first job Caring for a loved one Getting divorced Opening an account and SmartSteps for Students, as well as

10 20 30 40 50 60 70 80 90 Harris Helpful Steps in our U.S. markets. Buying a car Starting a business Age Losing a job www.bmo.com/smartsteps Getting married www.harrisbank.com/helpfulsteps Having a baby Buying your first home

Source: The Investment Funds Institute of Canada (2010)

Creating Confidence Take Charge of – Your Retirement Having access to the right information relevant, clear and straightforward – is In 2010, we continued to roll out the first step toward achieving financial Take Charge of Your Retirement. control and confidence. We’ve made clear This program helps customers information and advice a key part of our to think differently about their offering at BMO. Whether we’re making our retirement and make sense of the banking agreements easier to understand, link between their financial and non-financial retirement goals. clearly disclosing our fee structures and interest rate calculations, or providing resources to help in decision-making, customers can count on BMO for easy +183% +77% BMO MoneyLogic access to the information they need.

Customers tell us they want to better $3.4 • BMO FirstHome Essentials kit trillion understand their finances and be $96,100 • Business Coach podcast more active in managing their money. • Take Charge of Your Retirement online With MoneyLogic, the new personal • Student Banking: SmartSteps for $54,200 Students online financial management tool from BMO, $1.2 they can easily view, track and trillion • BMO Business Insights eNewsletter manage their spending and savings online. They can also use the free tool

to prepare personal budgets and set 1990 2009 1990 2009

savings goals. Growth in Financial Canadians’ Average Assets of Canadians Household Debt1 www.bmo.com/moneylogic 1 Consumer, mortgage and other. Includes households with and without debt. Source: Roger Sauvé, The Vanier Institute for the Family and Statistics Canada (2009), and Ian Russell, President and CEO, The Investment Industry Association of Canada (2010).

BMO Financial Group 193rd Annual Report 2010 9 We’re rethinking what value really means.

As the choices around us change, so do the yardsticks by which we evaluate them. True value, however, has become increasingly difficult to gauge. Too many opportunities come wrapped in layers of complexity that may hide a lack of proven benefits. Attractive propositions are too often several steps removed from what’s honest and fair.

So where should the search for value now They also put a premium on sustainable Above all, customers want the confidence be focused? Price is an important factor, but choices now that the pendulum is swinging of knowing that their decisions are backed it doesn’t go far enough: not every product away from unchecked consumption. by a wealth of experience – and by or service can be commoditized with the an institution that only makes promises But the most significant source of value is a rigour of big-box retailing. By the same it can keep. rigorous set of expectations around service token, volume discounts and bundling of and performance – that have been met. Value is not a fixed point. It changes through services can’t capture the full spectrum the process of discovering, questioning of value that today’s consumers expect. In rethinking what value really means, and refining its many dimensions. Today, people now apply a sharper lens when eval- In financial services, what matters as customers understand that they can only uating whether a company really measures much as cost is transparency. Customers realize true value by participating more up. They still want tangible returns, of course, want clear explanations of exactly what actively in the decision-making process – and a foundation for future growth. They each service entails. They expect fees and institutions must be ready to help want relevant advice that reflects a thorough to be reasonable and fair. make that happen. understanding of their needs. They want Innovation is another driver of value. clearly defined goals, commitments and People welcome the convenience of new obligations on both sides – with no surprises. technologies and the precious time that And they want to feel that their financial more efficient services can save them. institution is investing as much as they are in the relationship.

10 BMO Financial Group 193rd Annual Report 2010 “Here we measure customer relationships in generations and we’re adding new customers faster than ever before. That’s value.”

Jim Fallon District Vice-President, Newfoundland and Labrador, BMO Bank of Montreal St. John’s, Newfoundland

More Comfortable, More Confident: A Better Outlook with Advice Investing in Home (% of respondents who agree: 6 to 10 on a 10-point scale) More than 55% of recent home 74 72 69 71 renovations in Canada were done 57 with the intention of updating, 52 53 47 adding value or preparing to sell the home, according to a 2009 survey commissioned by Canada Mortgage and Housing Corporation. BMO Economics research reveals that home renovation

I feel confident that I am satisfied with I am comfortable A year from now, investment in Canada grew 14% in I will have enough money my household’s current with the amount of debt I will be financially better the second quarter of 2010, the second- to retire comfortably financial situation I am carrying off than I am today largest year-over-year increase in Households with an advisor Households with no advisor nearly a decade. Source: Ipsos Canadian Financial Monitor (2009)

The Flexible Investor % % % Customers have told us they want greater control and flexibility when it comes 68 72 70 to investing. It’s one of the reasons BMO has taken the lead with Exchange Traded Funds (ETFs). ETFs combine the advantages Don’t want lots of “bells Are shopping more carefully Say saving money makes them of low cost, diversity, flexibility and tax and whistles” on the products and mindfully than they feel good about themselves. efficiency to give investors a greater sense they buy, just the functions did before. of control over their portfolios. BMO they really need. currently offers 30 ETFs. Source: The New Consumer in the Era of Mindful Spending study, Euro RSCG Worldwide (survey of 5,700 adults in seven markets: Brazil, China, France, Japan, Netherlands, United Kingdom, United States) (2009) At BMO Nesbitt Burns, the Architect Program is making it possible for investors to hold both managed and non-managed Award-Winning Relationships investment vehicles in a single account. This year, Harris received a 2010 TNS Choice Award for Metro Chicago in recognition of its Customers enjoy a clear view of their total success in establishing strong client relationships and offering the best customer-focused investment picture, along with the benefits solutions. Winners of the award are chosen by Chicago residents for superior performance of professional management. in attracting new customers, satisfying and retaining customers, and/or for winning a P 51 larger share of their customers’ total banking business.

Harris’ focus on customer experience extends across all channels. For the second consecutive year, the Harris Contact Center was certified as a Center of Excellence by BenchmarkPortal, a recognized leader in benchmarking and certifying contact centres.

BMO Financial Group 193rd Annual Report 2010 11 We want the freedom to make financial decisions everywhere.

As our lives become increasingly mobile, we expect instant access to information and services wherever we are. Technology is making this possible – but only as a means to an end. What we really need is to feel confident that we’re in control of each new situation and prepared to make all the right choices as we move through the world.

When people talk about being connected in every corner of the globe. And people Above all, customers want to feel that everywhere, it’s with a different sense follow their education and career goals they’re in control, that the choices they of place than they had a generation or wherever opportunity leads them. make are not constrained by a need even a decade ago. Shopping no longer for anyone else’s permission or approval. For financial institutions, meeting requires stores. Classrooms have become The information that reaches them on expec tations in a borderless world means online spaces. Employees work from the move is ultimately validated by the providing the one essential resource home or take their virtual offices on the confidence it instills – in helping to shape required by both organizations and road. Markets are defined as much by a clear, well-grounded plan. individuals: timely, accurate and secure the exchange of bits and bytes as they information. Businesspeople and consumers As we reassess our relationship with money, are by trade in goods and services. alike want a comprehensive picture of the financial institutions that provide true At the same time, people are travelling their past transactions and current situation. value understand that the ability to make further and more frequently than ever They need data they can trust, understand informed decisions everywhere is not before. While political borders remain intact and immediately act upon. And they want about devices, it’s about independence. and in some places are etched more deeply, expert guidance on a range of potential in the world of commerce, traditional strategies – at any time of day, wherever boundaries are disappearing. Businesses they happen to be. make investments and forge partnerships

12 BMO Financial Group 193rd Annual Report 2010 “InvestorLine’s online research tools give customers the confidence to make investment decisions at the speed of the market. These tools matter to our clients – and we’re proud to be the team that built them.” Cesar Rainusso Vice-President, Strategy and Product Development, BMO InvestorLine Toronto, Ontario

BMO on YouTube Going Beyond Social media offer us a whole new way The growth of our network in to interact with customers on their terms. China is helping us provide seamless Webcasts on the BMO Capital Markets service to customers preparing to portal give investors access to the opinions immigrate to North America, and to and research of our key economists. customers wanting to invest in China. The Harris enCircle website offers expert Our solid reputation and relationships eldercare advice, ranging from how in China and India are also providing to navigate important legal and financial valuable pathways for our commercial decisions to avoiding caregiver burnout. clients looking to expand into BMO Money Diarie$ invites students emerging markets. to share their ideas for managing their money while at school.

How Canadians Bank Experts on Demand Up-to-the-Minute Team members come together from across Information 5% Combination/other 4% Telephone banking financial disciplines to ensure the solutions BMO introduced a mobile conference 45% Online banking we provide fit with the client’s overall application that allows attendees 23% In person at a branch financial picture. TelePresence is helping. at BMO Capital Markets conferences 23% ABMs This video conferencing tool allows us to use their mobile devices to to bring the best BMO financial experts access up-to-the-minute conference to our personal, commercial and corporate information, including their individual Source: The Strategic Counsel for the CBA (2010) clients, everywhere they’re needed. meeting schedules, agendas, and speaker and company information. Rethinking Call Centres And our Twitter feed helps clients who use social media get BMO Capital In November 2010, BMO opened Markets information in real time. the lines at our state-of-the-art facility that will bring 1,700 personal, commercial, credit card and The Informed Entrepreneur collections call centre agents together into a single facility. By working The BMO Business Coach series now offers as an integrated team, agents are over 120 podcasts delivering expert advice better positioned to deliver a to entrepreneurs on how to run their seamless customer experience. business better. www.bmo.com/podcast Harris customers banking online can access eChat to talk with a banker in real time or click Push to Talk to receive a callback within 60 seconds.

BMO Financial Group 193rd Annual Report 2010 13 A company’s first responsibility is to be well managed.

Today people expect more of businesses than ever before. But as they set higher standards and apply closer scrutiny, what they’re really looking for comes down to one key element: responsibility. It’s what market leaders have always done – act responsibly to achieve sustainable positive results.

As the uncertainty that swept financial Organizations, like individuals, are judged in a branch down the street or an office markets in late 2008 led to a global not by what they say, but by what they do. halfway around the globe. Communities downturn, the impact on individual lives should be able to count on support A company’s good name is a reward was mirrored in the damaged reputations for local efforts to improve health and bestowed by customers who feel their of businesses that had lost their way prosperity. And the entire planet should needs have been well served. Financial and disappointed long-time stakeholders. benefit from companies’ efforts to institutions earn solid reputations The public conversation soon turned reduce their collective footprint. through sound decision-making and by from specific examples of questionable upholding the principles of responsible Measuring success against the triple judgment to broader issues of corporate manage ment, maintaining capital bottom line of social, economic and environ- governance and accountability. strength and strategically managing mental responsibility is not a matter Customers want to know that they can risk in complex global markets. of compliance – it’s a business imperative. still invest their most valued asset: trust. From adopting greener practices to As Canada’s financial sector reaffirms its People want to see that institutions are safeguarding against risk, responsible stewardship role in ensuring economic actively striving to meet and exceed their choices spur competition, inspire innovation stability, governance practices must be high expectations. Gauging the depth and drive sustainable growth. And rigorous and transparent. Codes of conduct of that commitment means looking beyond the loyalty they create is embodied must extend beyond the boardroom to treat corporate declarations of vision and values. in the ultimate hallmark of corporate all employees equitably and welcome their responsibility: reputation. diverse points of view. Customers must receive the same level of respect, whether

14 BMO Financial Group 193rd Annual Report 2010 “Clients tell me, ‘Harris gives us the reach of a global financial institution.’ It’s also our consistency and stability that stand out.”

Scott Ferris Managing Director, Harris N.A. Chicago, Illinois

Capital Strength Tier 1 Capital Ratio (%) Basel I** Basel II** BMO is the ninth-largest* bank 13.45 in North America, measured by 12.24 10.22 market capitalization. We’re 9.51 9.77 years financially strong, with a Tier 1 182 Consistency Capital Ratio of 13.45%. 24.1 Bank of Montreal has paid dividends P 60 for 182 years – the longest-running dividend payout record of any company * Data is as at October 31, 2010 for Canadian banks in Canada. and September 30, 2010 for U.S. banks. **Basel I and Basel II measures are not comparable. 2006 2007 2008 2009 2010

$9.6 million Managing Risk Donated through Equity Through Risk management at BMO is Education since 2005, helping grounded in five key principles: visible minorities, people with accountability, transparency, disabilities, Aboriginals and women process, governance and gain access to higher education. culture. P 75

Carbon Neutral* in 2010 Contributions to the Community* Worldwide. We reached this goal by choosing video confer- 14% Federated Appeals encing over travel, building (includes United Way) more environmentally friendly 33% Health Care branches, powering buildings 22% Education with 100% renewable energy 13% Arts and Culture and purchasing high-quality 10% Civic and carbon offsets that support Community Initiatives community greening initiatives. 8% Other www.bmo.com/environment

* Relative to energy consumption and *Corporate donations in Canada and the United States in 2010. transportation emissions

BMO Financial Group 193rd Annual Report 2010 15 A company’s vision is only as strong as its people.

Ideas are a new global currency. But it’s important to remind ourselves that those ideas come from people. In the end, people, not companies, create world-changing breakthroughs. And it’s human vision that gives ideas their power.

As this knowledge economy matures, Recruiting top talent has long been a welcoming the varied perspectives and we’re less inclined to applaud innovation priority for the entrepreneurial businesses cultural nuances of vibrant, emerging for its own sake. Faced with consumer that are catalysts of economic growth. markets across town and around the planet. trends that seem to change as often as the The ability to attract, develop and retain What drives the knowledge economy weather, we’re becoming more thoughtful the best people has become a strategic is the same fuel that keeps today’s smart about what really matters. Our focus is imperative for companies worldwide. companies alert, creative and connected: shifting from having the latest to getting Industry leaders engage skilled, imaginative vision. And that vision is conceived by the best – smart products and services people in designing products that resonate, people. It’s about confidently embracing created by people who’ve paid attention in devising better models of service – a world that’s changed – and that will and anticipated our needs. in focusing their collective energy on change even more tomorrow. creating more meaningful interactions What differentiates today’s successful with customers. companies is the ability to address our expectations and aspirations by thinking And diversity is no longer just a noble beyond the obvious. And what will goal – it’s the key to success. Having the keep such businesses sustainable in an best people means finding the sharpest increasingly competitive world is the minds in a global talent pool. Successful quality of their people. organizations become more relevant by

16 BMO Financial Group 193rd Annual Report 2010 “At BMO we insist on respect for all, nurture talent and celebrate performance. That’s why we’re regularly one of Canada’s top employers.”

Doug Bourque Director, Aboriginal Banking, B.C. & Yukon, BMO Bank of Montreal Victoria, British Columbia

Right on the Money Sherry Cooper, Chief Economist, BMO Financial Group, and her highly % respected Economics team correctly identified key indicators at the start of both the recent recession and the recovery. For those impressive 30 Employees who identify predictions, Dr. Cooper received the prestigious Lawrence R. Klein Award themselves as visible minorities* for accuracy in economic forecasting in 2010. Our commitment to diversity leads Other BMO recognitions include: us to broader ideas, greater empathy and improved decision-making, • Best Foreign Exchange Bank in North America, European CEO magazine helping BMO to be the bank that • Best Trade Bank in Canada, Trade Finance magazine defines great customer experience.

• World’s Best Metals and Mining Bank, Global Finance magazine *As of October 31, 2010

Game Changer Thought Leaders We’ve been investing strategically in our BMO announced the creation of the 5,650 leadership team. An addition of note in $8 million BMO Isaac Newton Chair in Employees who completed Customer 2010 is The Honourable Kevin Lynch, P.C., Theoretical Physics. BMO’s pioneering Conversations training. They now have the former Clerk of Canada’s Privy Council, $4 million gift to Waterloo, Ontario’s skills to expand the conversation – and named Vice-Chair, BMO Financial Group. Perimeter Institute for Theoretical the relationship – beyond the customer’s Dr. Lynch serves as a key strategic advisor Physics will bring the first of five pre- immediate financial needs. to senior management, advising them eminent scientific minds to Canada – on strategic planning for the changing world advancing innovation, Canadian science Civic Leaders after the recession, focusing on the global and our knowledge of the universe. In 2009, when the government of Canada drivers of change. created a national Task Force on Financial Literacy, L. Jacques Ménard, O.C., O.Q., Chairman, BMO Nesbitt Burns and President, BMO Financial Group, Quebec, Mentors was appointed as vice-chair. BMO is the exclusive industry sponsor for the ACCES Speed Mentoring program, which is designed to help new % Canadian jobseekers develop “ Human creativity their networking skills and is the ultimate make connections through economic resource.” 96BMO employees who, in our annual employee Ontario in the Creative Age, individual coaching sessions Martin Prosperity Institute, survey, said that they understand how their role University of Toronto (2009) contributes to achieving our vision of being the with senior leaders. bank that defines great customer experience.

BMO Financial Group 193rd Annual Report 2010 17 Leadership in China BMO ChinaCo

“Our presence in China is unmatched by our peers. We are here because of our customers.”

Gilles Ouellette President and Chief Executive Officer, Private Client Group Chairman of the Board, BMO ChinaCo (Ltd.)

(Clockwise from top left) Ribbon-cutting ceremony celebrating the founding of BMO ChinaCo. The headquarters of our China operations – Beijing’s China Central Place. The Honourable Chuck Strahl, federal Minister of Transport, Infrastructure and Communities, congratulates BMO and welcomes new opportunities for trade.

China is an important market for BMO • First and only Canadian bank as Co-Lead outside of North America. In October 2010, Manager of Bank of China’s US$11.2 billion BMO officially opened its new incorporated IPO, and Co-Manager of IPOs by major subsidiary, Bank of Montreal (China) Co. Ltd. Chinese banks including CMB, ICBC, CITIC (BMO ChinaCo). Bank and ABC First Canadian bank to offer derivative BMO’s commitment to China spans much • services of its history. With local incorporation, BMO First and only Canadian bank chosen joins a limited number of foreign banks in • as market maker for FX trading in China offering a broad range of financial services First foreign bank permitted to invest to its customers. The new company gives • in a Chinese mutual fund company us a clear advantage in growing our existing businesses and branch network. It gives With branches in Beijing, Shanghai, us the flexibility to expand our product and Guangzhou and Hong Kong, as well as “ There is tremendous service offerings for North American and our investment banking representative potential for business Chinese clients – including the possibility office in Beijing, representative office between our countries of new initiatives in retail banking, wealth in Taipei and ownership position in Fullgoal management and capital markets. Fund Management, BMO’s presence in and BMO’s China team is China is unmatched by its peers. National treatment will ensure BMO can grow proud to be the bridge.” at a faster pace as China embraces financial BMO was recognized by the Canada China liberalization and regulatory reform. Business Council with the 2010 Extraordinary Tina Zheng Achievement Award, nominated by SunLife Director and General Manager, BMO ChinaCo represents another milestone Financial and Agricultural Bank of China. Beijing Branch, Bank of Montreal on a list of BMO firsts in Greater China, including:

18 BMO Financial Group 193rd Annual Report 2010 CORPORATE DIRECTORY

Corporate Governance

• Our core values guide the board’s oversight, relationship with “ The Board of management and accountability to shareholders Directors of • Our governance responsibilities are integral to our performance and long-term sustainability Bank of Montreal • We embrace high standards of corporate governance, which reflect is committed not only applicable legal and regulatory requirements but also evolving best practices to leadership • Sound corporate governance is the foundation for responsible in corporate business behaviour towards our shareholders, employees, governance.” customers, and the communities and environment in which we operate David Galloway Chairman of the Board

Bank of Montreal’s Board of Directors is the board functions effectively and meets The bank’s director and executive compen- responsible for the supervision of manage- its obligations and responsibilities, including sation programs are strongly aligned with ment of the business and affairs of the bank its responsibilities to shareholders. In 2010, governance best practices. Minimum share with the objective of enhancing shareholder the board approved a written process for the ownership requirements for directors and value. The recent financial crisis has high- appointment of the Chairman of the Board. executives ensure the alignment of interests lighted the importance for the board to with shareholders. Our executive compen- FirstPrinciples, our comprehensive code provide well-informed strategic direction sation programs establish clear pay for of business conduct and ethics, provides and oversight that looks beyond short-term performance linkages. The programs, which a framework for directors, officers and financial performance. The board’s focus include the use of clawbacks, do not employees on their conduct and ethical on corporate governance is seen in its encourage excessive risk-taking. decision-making. The board, through its various practices and procedures. Audit Committee, reviews the operation of The board and its committees play a central The board has adopted position descriptions FirstPrinciples. Each year, every director, role in the enterprise’s risk management for the Chairman of the Board, the commit- officer and employee must sign an acknowl- framework, including through the approval tee chairs and the directors, all of which are edgement that they have read, understood of our corporate policies and the guidance available on our website. The board’s man- and complied with FirstPrinciples. provided by the risk review committee date outlines the general responsibilities of of the board. Our whistleblower procedures allow the board, while the bank’s board approval officers and employees to report violations The board supports the bank’s efforts and oversight guidelines define the roles of FirstPrinciples, and concerns regarding to communicate with its shareholders and and responsibilities of the board and man- accounting, internal accounting controls or other stakeholders through a variety of agement and explicitly delineate the lines auditing matters on a confidential and channels, including the annual report, proxy of accountability within the bank. anonymous basis. The board believes that circular, quarterly reports, annual information The Chairman of the Board is an independent providing a forum for employees and form, news releases, website and industry director who ensures that the board oper- officers to raise concerns about ethical con- conferences. In 2010, the board approved ates separately from management and that duct and treating all complaints with the a shareholder engagement policy promoting directors have an independent leadership appropriate level of seriousness, including open dialogue and the exchange of ideas contact. The Chairman manages the affairs escalation to the board and Audit Committee with the bank’s shareholders. of the board, with a view to ensuring that where appropriate, fosters a culture of ethical conduct within the bank. BMO Financial Group 193rd Annual Report 2010 19 CORPORATE DIRECTORY

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Our Board of Directors*

1 Robert M. Astley, Former President and Chief 10 Bruce H. Mitchell, President and Chief Executive Honorary Directors Executive Officer, Clarica Life Insurance Company Officer, Permian Industries Limited Stephen E. Bachand and former President, Sun Life Financial Canada Board/Committees: Governance and Nominating, Ponte Vedra Beach, FL, Board/Committees: Governance and Nominating, Risk Review (Chair) United States Human Resources (Chair), Risk Review Director since: 1999 Charles F. Baird Director since: 2004 Skillman, NJ, United States 11 Philip S. Orsino, O.C., F.C.A. Corporate Director and Ralph M. Barford 2 David R. Beatty, O.B.E. Chairman and Chief former President and Chief Executive Officer, Masonite Toronto, ON Executive Officer, Beatinvest Limited International Corporation (formerly Premdor Inc.) Matthew W. Barrett, O.C., LL.D. Board/Committees: Human Resources, Risk Review Board/Committees: Audit (Chair), Governance Oakville, ON Other public boards: FirstService Corporation, and Nominating, Risk Review Peter J.G. Bentley, O.C., LL.D. Inmet Mining Corporation, Western Coal Corporation Other public boards: Clairvest Group Inc. Vancouver, BC Director since: 1992 Director since: 1999 Frederick S. Burbidge, O.C. Frelighsburg, QC 3 Robert Chevrier, F.C.A. President, 12 Dr. Martha C. Piper, O.C., O.B.C. Corporate Tony Comper Société de gestion Roche Inc. Director, former President and Vice-Chancellor, Toronto, ON Board/Committees: Audit, The Pension Fund The University of British Columbia Pierre Côté, C.M. Society of the Bank of Montreal (Chair) Board/Committees: Audit, Human Resources Quebec City, QC Other public boards: Cascades Inc., CGI Group Inc., Other public boards: Shoppers Drug Mart C. William Daniel, O.C., LL.D. Compagnie de Saint-Gobain, Richelieu Hardware Ltd. Corporation, TransAlta Corporation Toronto, ON Director since: 2000 Director since: 2006 Graham R. Dawson 4 George A. Cope, President and Chief Executive 13 J. Robert S. Prichard, O.C., O.Ont. Former President Vancouver, BC Officer, BCE Inc. and Bell Canada and Chief Executive Officer, Metrolinx, Chair of Louis A. Desrochers, C.M., c.r. Board/Committees: Human Resources Metrolinx and Chair of Torys LLP Edmonton, AB Other public boards: BCE Inc., Bell Aliant Board/Committees: Governance and A. John Ellis, O.C., LL.D., O.R.S. Director since: 2006 Nominating (Chair), Risk Review Vancouver, BC Other public boards: George Weston Limited, John F. Fraser, O.C., LL.D. 5 William A. Downe, President and Chief Executive Onex Corporation Winnipeg, MB Officer, BMO Financial Group Director since: 2000 Thomas M. Galt Board/Committees: Attends all committee Toronto, ON meetings as an invitee 14 Jeremy H. Reitman, Chairman and Chief Executive Richard M. Ivey, C.C., Q.C. Director since: 2007 Officer, Reitmans (Canada) Limited Toronto, ON Board/Committees: Audit, The Pension Fund Senator Betty Kennedy, O.C., LL.D. 6 Christine A. Edwards, Capital Partner, Winston & Strawn Society of the Bank of Montreal Campbellville, ON Board/Committees: Risk Review Other public boards: Reitmans (Canada) Limited Eva Lee Kwok Director since: 2010 Director since: 1987 Vancouver, BC J. Blair MacAulay 7 Ronald H. Farmer, Managing Director, 15 Guylaine Saucier, F.C.A., C.M. Corporate Director Oakville, ON Mosaic Capital Partners Board/Committees: Audit, Risk Review Ronald N. Mannix, O.C. Board/Committees: Audit, Human Resources Other public boards: Areva, Danone, Wendel Calgary, AB Director since: 2003 Director since: 1992 Robert H. McKercher, Q.C. Saskatoon, SK 8 David A. Galloway, Chairman of the Board 16 Nancy C. Southern, President and Chief Executive Eric H. Molson Board/Committees: Audit, Governance and Officer, ATCO Ltd. and Canadian Utilities Limited Montreal, QC Nominating, Human Resources, Risk Review, Board/Committees: Governance and Nominating, Jerry E.A. Nickerson The Pension Fund Society of the Bank of Montreal Risk Review, The Pension Fund Society of the North Sydney, NS Other public boards: Scripps Networks Interactive, Bank of Montreal Lucien G. Rolland, O.C. Inc., Toromont Industries Ltd. Other public boards: Akita Drilling Ltd., ATCO Ltd., Montreal, QC Director since: 1998 Canadian Utilities Limited, CU Inc. Joseph L. Rotman, O.C., LL.D. Director since: 1996 9 Harold N. Kvisle, Former President and Toronto, ON Mary Alice Stuart, C.M., O.Ont., LL.D. Chief Executive Officer, TransCanada Corporation 17 Don M. Wilson III, Corporate Director Toronto, ON Board/Committees: Risk Review Board/Committees: Human Resources, Risk Review, Other public boards: ARC Energy Trust, The Pension Fund Society of the Bank of Montreal * As of October 31, 2010. Talisman Energy Inc. Director since: 2008 Director since: 2005

20 BMO Financial Group 193rd Annual Report 2010 CORPORATE DIRECTORY

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Our Governance Structure Audit Committee At every board and committee meeting, members hold in-camera Philip S. Orsino (Chair) Martha C. Piper sessions without management present. In addition, at Audit Robert Chevrier Jeremy H. Reitman Ronald H. Farmer Guylaine Saucier Committee meetings, the members meet separately with the David A. Galloway Internal Auditors, shareholders’ auditors and General Counsel, • Oversees the integrity of our financial reporting, internal controls, without management present. disclosure controls and internal audit function, as well as our compliance with legal and regulatory requirements and auditor independence requirements. • Monitors transactions involving related parties, conflicts of interest, the use and disclosure of confidential and personal information and standards of business conduct. Shareholders’ Oversees the accurate and clear reporting of financial information Shareholders ELECT • Auditors to shareholders.

Governance and Nominating Committee J. Robert S. Prichard (Chair) Bruce H. Mitchell ELECT Robert M. Astley Philip S. Orsino Governance David A. Galloway Nancy C. Southern and Nominating • Develops, reviews and assesses corporate governance principles Committee and systems on an ongoing basis. • Continuously monitors BMO practices in comparison to best Human Audit Committee APPOINT APPOINT practices worldwide. Resources Board of Committee Directors • Identifies and recommends new director candidates. • Responsible for director succession, orientation and compensation. Risk Review Committee Human Resources Committee Robert M. Astley (Chair) David A. Galloway APPOINT Risk Management Management Committee David R. Beatty Martha C. Piper Committee Responsible for setting George A. Cope Don M. Wilson III Responsible for risk and managing enterprise Ronald H. Farmer oversight and strategy and performance • Assists the board in its oversight of the appointment, performance governance evaluation and compensation of senior executives. Performance Committee at the highest Management Ensures effective talent development, retention strategies and levels of Responsible for driving • succession planning. management enterprise results and delivering on corporate • Recommends guidelines and principles for compensation programs, Disclosure priorities including a clear link between pay and performance and safeguards Committee against the encouragement of excessive risk-taking. Responsible for Leadership Council the accuracy and Responsible for under- Risk Review Committee standing enterprise and timeliness of BMO’s Bruce H. Mitchell (Chair) Philip S. Orsino public disclosure group strategies and aligning all BMO employees Robert M. Astley J. Robert S. Prichard Reputation around them David R. Beatty Guylaine Saucier Risk Committee Christine A. Edwards Nancy C. Southern Responsible for David A. Galloway Don M. Wilson III reviewing significant Harold N. Kvisle potential reputation Oversees the identification, documentation, measurement risks to BMO • and management of significant risks. • Monitors compliance with risk-related regulatory requirements and with internal risk management policies and procedures.

BMO Financial Group 193rd Annual Report 2010 21 CORPORATE DIRECTORY

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Management Committee The Management Committee is responsible for reviewing enterprise and group strategies; monitoring strategic initiatives; approving mergers and acquisitions, fi nancial targets and plans and culture and diversity goals; governing investment in initiatives across the enterprise; and tracking performance and results. It meets monthly.

1 William A. Downe, President and Operating Groups Personal and Commercial 7 Christopher J. McComish*, Executive Chief Executive Officer, BMO Financial Personal and Commercial Banking U.S. Vice-President and Head, Personal Group, is responsible for the overall Banking Canada 5 Ellen M. Costello, President and Banking U.S., is responsible for leadership and vision of BMO 3 Frank J. Techar, President and Chief Executive Officer, Personal and executing strategy and driving Financial Group, and is accountable Chief Executive Officer, Personal and Commercial Banking U.S. and Harris performance of the Harris personal to shareholders through the Board of Commercial Banking Canada, oversees Financial Corp., is responsible for the banking network, and has direct Directors for defining, communicating the strategic direction and delivery strategic direction and performance responsibility for retail product and implementing strategic and of our banking services through of our U.S. personal and commercial management, echannels, banking operational goals that will maximize BMO Bank of Montreal, which serves banking business, driving profitable operations, distribution, micro shareholder value. The President more than seven million customers business growth both organically business banking, indirect auto, and CEO has responsibility for BMO’s across Canada. Joined BMO in 1984; and through acquisition. Joined BMO mortgage and consumer lending. enterprise-wide performance and in role since July 2006 in 1983; in role since August 2006 Joined BMO in 2008; in role financial results, including Profit & since December 2008 6 David R. Casper*, Executive Loss, Balance Sheet and Shareholder 4 Cameron Fowler, Executive Vice-President and Head, Commercial Private Client Group Value metrics. Joined BMO in 1983; Vice-President, Personal and Banking U.S., is responsible for in role since March 2007 Commercial Banking Canada, is 8 Gilles G. Ouellette, President and accountable for the development executing strategy and driving Chief Executive Officer, Private Client 2 The Honourable Kevin G. Lynch, P.C., and implementation of customer performance of Harris commercial Group, is responsible for BMO Financial Vice-Chair, BMO Financial Group, strategies and our integrated distri- banking, and has direct responsibility Group’s wealth management busi- is a key strategic advisor to senior bution strategy, as well as the for commercial product management nesses. He is also Deputy Chair, management on domestic and management of all personal and and lending. Joined BMO in 1978; BMO Nesbitt Burns and Chairman international markets. Joined BMO commercial banking products. Joined in role since March 2010 of BMO ChinaCo. Joined BMO in 2010; in role since March 2010 BMO in 2009; in role since July 2010 in 1979; in role since May 1999

Performance Committee* The Performance Committee is composed of the heads of all lines of business and functional groups and is responsible for driving enterprise results and taking action on initiatives relating to BMO’s strategic priorities. It meets quarterly to discuss performance against established targets and courses of action to continuously improve performance.

William A. Downe Cameron Fowler David R. Casper Ed N. Legzdins President and Chief Executive Officer Executive Vice-President Executive Vice-President and Head Managing Director, International BMO Financial Group Personal and Commercial Commercial Banking U.S. and Senior Vice-President Banking Canada Retail Investments BMO Financial Group Christopher J. McComish Robert K. Hayes Executive Vice-President Dean Manjuris The Honourable Kevin G. Lynch, P.C. Senior Vice-President, Prairies Division and Head, Personal Banking U.S. Head, Full Service Brokerage Vice-Chair, BMO Financial Group François M.P. Hudon Peter B. McNitt Line of Business and President and L. Jacques Ménard, O.C., O.Q. Senior Vice-President Vice-Chair, Harris Bankcorp, Inc. Director, Private Client Division, Chairman, BMO Nesbitt Burns Quebec Division and Specialized Sales BMO Nesbitt Burns and President, BMO Financial Private Client Group James B. Kelsey Peter C. McCarthy Group, Quebec Gilles G. Ouellette Senior Vice-President President and Chief Executive Officer President and Chief Executive Officer Personal and Commercial Corporate Finance Division BMO Life Assurance Private Client Group Banking Canada Steve C. Murphy Barry S. McInerney Andrew B. Auerbach Frank J. Techar Senior Vice-President President and Chief Executive Officer Senior Vice-President and Head President and Chief Executive Officer Atlantic Provinces Division Harris Investment Management, Inc. BMO Harris Private Banking Personal and Commercial Robert J. Serraglio** Rajiv Silgardo Gordon J. Henderson Banking Canada Senior Vice-President Chief Executive Officer President and Chief Executive Officer Susan M. Brown British Columbia Division BMO Asset Management Inc. BMO Life Insurance Senior Vice-President Connie A. Stefankiewicz Ontario Regional Division Personal and Commercial Terry A. Jenkins Vice-President and President Senior Vice-President and Alex P. Dousmanis-Curtis Banking U.S. BMO InvestorLine Inc. President and Chief Executive Senior Vice-President Ellen M. Costello Officer, Harris Private Bank, U.S. BMO Capital Markets Greater Toronto Division President and Chief Executive Officer Thomas V. Milroy and Customer Contact Centre Personal and Commercial Banking U.S. and Harris Financial Corp. Chief Executive Officer BMO Capital Markets

22 BMO Financial Group 193rd Annual Report 2010 CORPORATE DIRECTORY

11 12 13 14 15 16 17 18 19

9 Dean Manjuris, Head, Full Service Corporate Functions Human Resources and Technology and Operations Corporate Communications Brokerage Line of Business and Finance 17 Jean-Michel Arès, Group Head, President and Director, Private Client 15 Rose M. Patten, Senior Executive 12 Russel C. Robertson, Chief Financial Technology and Operations, is Division, BMO Nesbitt Burns, is Vice-President, Head of Human Officer, is responsible for BMO Financial responsible for managing, maintaining responsible for the strategic direction Resources and Senior Leadership Group’s financial strategy, financial and providing governance related of the Private Client Division within Advisor, is responsible for BMO reporting and planning, treasury, to information technology, operations our wealth management business. Financial Group’s strategies and investor relations and enterprise- services, real estate and sourcing Joined BMO in 1983; in role since functions in Human Resources wide group strategy development for BMO Financial Group. Joined BMO November 1999 and Corporate Communications. and management. Joined BMO in in 2010; in role since April 2010 As Senior Leadership Advisor, BMO Capital Markets 2008; in role since March 2008 18 Sandra L. Hanington*, Executive she provides advice and counsel 10 Thomas V. Milroy, Chief Executive Vice-President, Product Operations and Legal, Corporate and Compliance Group to BMO’s most senior leaders Officer, BMO Capital Markets, is Process Simplification, is accountable 13 Simon A. Fish, Executive Vice-President and directs all leadership development responsible for all of BMO Financial for product operations for Personal and and General Counsel, is BMO Financial and succession planning. Joined BMO Group’s businesses serving corporate, Commercial Banking (Canada and U.S.), Group’s chief legal officer and is in 1995; in role since July 2006 institutional and government clients Private Client Group and BMO Capital responsible for providing advice to the in North America and around the Office of Strategic Management Markets, business process improve- Board of Directors and management world. Joined BMO in 1993; in role 16 Joanna Rotenberg, Senior Vice- ment, end-to-end initiatives and on a variety of matters, including since March 2008 President, Office of Strategic operational risk. Joined BMO in 1999; banking, mergers and acquisitions, Management, is accountable for in role since June 2009 11 Eric C. Tripp, President, BMO Capital compliance and securities laws. Joined building our strategic capability Markets, is responsible for BMO BMO in 2008; in role since May 2008 19 Karen L. Metrakos*, Executive Vice- Financial Group’s dealings with across all businesses and President, Technology Development Enterprise Risk and corporate, institutional and govern- strengthening the linkages and Enterprise Infrastructure, is Portfolio Management ment clients, which encompass between our strategic plans, accountable for technology develop- trading products and treasury 14 Thomas E. Flynn, Executive Vice-President financial targets and business ment and infrastructure architecture operations. Joined BMO in 1983; and Chief Risk Officer, is responsible for plans. Joined BMO in 2010; at BMO Financial Group. Joined BMO in role since March 2008 enterprise-wide risk and portfolio man- in role since July 2010 in 1979; in role since June 2009 agement at BMO Financial Group. Joined

BMO in 1992; in role since March 2008 * Rotating members of the Management Committee.

Eric C. Tripp Charles N. Piermarini Nico Meijer Office of Strategic President, BMO Capital Markets Executive Managing Director Executive Vice-President Management Valerie C. Sorbie and Head, Debt Products and Chief Risk Officer BMO Capital Markets Joanna Rotenberg Chief Administrative Officer Surjit S. Rajpal Senior Vice-President BMO Capital Markets Executive Managing Director Wendy L. Millar Office of Strategic Management William Butt and Head, Loan Products Executive Vice-President Executive Managing Director Luke Seabrook and Chief Risk Officer Corporate Marketing and Head, Investment and Executive Managing Director Personal and Commercial Banking Susan M. Payne Corporate Banking and Head, Financial Products Senior Vice-President Human Resources and and Chief Marketing Officer Patrick Cronin Paul Stevenson Corporate Communications BMO Financial Group Executive Managing Director Executive Managing Director Rose M. Patten and Head, Financial Products and Head, Credit Investment Senior Executive Vice-President Technology and Operations and Debt Products Management, Securitization Head of Human Resources Jean-Michel Arès and Asset Portfolio Management Andre L. Hidi and Senior Leadership Advisor Group Head Executive Managing Director Jamie K. Thorsen Technology and Operations Richard D. Rudderham and Head, Mergers Executive Managing Director Deputy Head of Human Resources Sandra L. Hanington and Acquisitions and Head, Foreign Exchange and Senior Vice-President Executive Vice-President and China Capital Markets Perry C. Hoffmeister BMO Institute for Learning Product Operations Head, Investment and Corporate and Process Simplification Finance † Banking, U.S. Lynn T. Roger Russel C. Robertson Senior Vice-President Karen L. Metrakos Marnie J. Kinsley Chief Financial Officer Talent Strategies Executive Vice-President Executive Managing Director Technology Development Pierre O. Greffe and Executive Resourcing and Head, Global Treasury and Enterprise Infrastructure Executive Vice-President, Finance † Management Gabriella R.J. Zillmer Senior Vice-President Legal, Corporate and Michael J. Miller Enterprise Risk and Performance Alignment Executive Managing Director Portfolio Management Compliance Group and Compensation Simon A. Fish and Head, Equity Products, Thomas E. Flynn Executive Vice-President Research and Economics Executive Vice-President and General Counsel Peter A. Myers and Chief Risk Officer Executive Managing Director * As of October 31, 2010. and Head, Investment and ** Retired November 1, 2010. Corporate Banking, Canada † Rotating members of the Performance Committee.

BMO Financial Group 193rd Annual Report 2010 23 Financial Performance and Condition at a Glance

Our Performance (Note 1) Peer Group Performance

Five-Year Total P 32 Five-Year TSR 19.1 Shareholder Return (TSR) • The Canadian peer group average annual five-year TSR was • BMO shareholders have earned an average annual 14.2 7.9%. The one-year TSR was 22.5%. return of 5.9% over the past five years. • The North American peer group average annual five-year TSR of • The one-year TSR in 2010 was a strong 26.4%, well –0.5% and one-year TSR of 13.4% were well below the Canadian above the comparable market indices in both 5.9 averages, as U.S. bank results continued to be more affected 0.9 1.8 Canada and the United States. BMO’s one-year TSR by credit losses. has exceeded 20% in three of the past five years. 2006 2007 2008 2009 2010

Earnings per Share (EPS) Growth P 33 54.2 EPS Growth (%) • EPS grew 54% to $4.75 in 2010. Net income • The Canadian peer group average EPS increased 42%, compared 11.2 increased more than $1 billion to $2.8 billion, with 9.6% in 2009. All banks in the peer group saw healthy increases while the average number of common shares in EPS, due in part to lower credit losses. outstanding increased modestly. • Net income available to common shareholders of the North American EPS growth was driven by strong growth in (8.5) peer group was low in 2009, as five of our peers recorded losses due • (20.2) (18.1) revenues and lower provisions for credit losses. to the difficult credit conditions and weak economic environment, resulting in overall peer group EPS growth of –80%. Net income 2006 2007 2008 2009 2010 available to common share holders in 2010 was 14 times as high as the North American 2008 to 2010 peer group data is not to scale. 2009 level, due to lower credit losses and low funding costs in 2010.

Return on Equity (ROE) P 34 ROE (%) • ROE improved from 9.9% to 14.9% in 2010, 19.2 • The Canadian peer group average ROE of 15.2% increased primarily due to an increase of more than 14.9 from the average return in 2009, as ROE improved for each $1 billion in earnings available to common 13.0 14.4 bank in the peer group due to higher earnings. shareholders, while we continued to enhance • ROE for the North American peer group was 8.8%. our strong capital position. 9.9 ROE for each of our U.S. peers was less than BMO’s and • BMO has achieved an ROE of 13% or better three U.S. banks reported negative returns. in 20 of the past 21 years. 2006 2007 2008 2009 2010

Net Economic Profit (NEP) Growth P 34 1309.8 NEP Growth (%) • NEP, a measure of added economic value, • The Canadian peer group average NEP growth was 212.0%, was $818 million, up from a loss of $68 million as some banks in the peer group recorded significant increases in 2009. in NEP from the low levels of a year ago. • The improvement was attributable to the 10.3 • NEP growth for the North American peer group was 86.4%, (51.0) (32.8) significant increase in earnings, net of a higher (116.7) as NEP was significantly higher for all but one of our U.S. peers. charge for capital as a result of an increase in shareholders’ equity. 2006 2007 2008 2009 2010 The result for BMO in 2010 is not to scale.

Revenue Growth P 37 Revenue Growth (%)

• Revenue increased $1,146 million or 10.4% to 9.2 8.4 • Revenue growth for the Canadian peer group $12,210 million in 2010, following growth of 8.4% averaged 5.9%. in 2009 and 9.2% in 2008. The consistently high 10.4 • Revenue growth for the North American peer group growth rates demonstrate the benefit of our averaged 9.8%, reflecting particularly strong growth 1.5 diversified business mix. recorded by a few members of the peer group. • There was solid growth in each of the operating (6.4) groups except P&C U.S., where revenues were modestly higher on a U.S. dollar basis. 2006 2007 2008 2009 2010 Peer group data for 2009 is not to scale.

Productivity Ratio P 41 70.6 Productivity Ratio (%) (Expense-to-Revenue Ratio) 63.6 62.2 The Canadian peer group average productivity ratio 67.6 • • The productivity ratio was 62.2%, an improvement 66.7 was 59.9%, improving from 63.7% in 2009 due to solid of 450 basis points from 2009. Similarly, the cash revenue growth and good expense control. productivity ratio improved 440 basis points • The average productivity ratio for the North American to 61.9%. peer group was 60.9%, a level that remains worse than • The improvement was due to strong revenue growth the average of our Canadian peers but better than combined with effective expense management. the ratio in 2009. 2006 2007 2008 2009 2010

Note 1. Results stated on a cash basis as well as NEP Certain BMO and peer group prior year data has been restated to are non-GAAP measures. Please see page 91 for a discussion conform with the current year’s basis of presentation. of the use of non-GAAP measures. BMO Financial Group Canadian peer group average Results are as at or for the years ended October 31 for Canadian banks North American peer group average and as at or for the years ended September 30 for U.S. banks.

24 BMO Financial Group 193rd Annual Report 2010 Our Performance (Note 1) Peer Group Performance

Credit Losses P 40, 80 Provision for Credit Losses as a % of Average • The provision for credit losses (PCL) fell to $1,049 million from Net Loans and Acceptances $1,603 million in 2009. There was no change in the general • The Canadian peer group average PCL represented allowance, compared with a $60 million increase a year ago. 0.88 56 basis points of average net loans and acceptances, 0.76 • PCL as a percentage of average net loans and acceptances fell 0.61 down from 90 basis points in 2009. to 61 basis points from 88 basis points a year ago. Credit market 0.21 • The North American peer group average PCL was 137 basis conditions improved but remain challenging in certain sectors. 0.11 points, well below the 2009 level but still elevated, as U.S. bank results continued to be severely affected by 2006 2007 2008 2009 2010 North American peer group data for 2008 and 2009 is not to scale. weakness in the real estate market and broader economy.

Impaired Loans P 40, 80 Gross Impaired Loans and Acceptances as a % of Equity and Allowances for Credit Losses • Gross impaired loans and acceptances (GIL) decreased 14.9 to $3,221 million from $3,297 million in 2009, and 13.6 The Canadian peer group average was in line with last 12.1 • represented 13.6% of equity and allowances for credit losses. year, at 11.0% of equity and allowances for credit losses. GIL includes $302 million in respect of loans acquired in 2010 • The average ratio for North American banks was also for which there is a loss-sharing agreement with the FDIC. 4.1 4.4 in line with a year ago, at 13.9%, and remains higher • Formations of new impaired loans and acceptances, a key than the average of the Canadian peer group. driver of provisions for credit losses, were $1,525 million, down 43% from $2,690 million in 2009, with the United States 2006 2007 2008 2009 2010 accounting for the majority of the impaired formations.

35.0 Cash and Securities-to-Total Assets P 85 33.1 Cash and Securities-to-Total Assets (%) 31.9 • The cash and securities-to-total assets ratio increased 29.1 • The cash and securities-to-total assets ratio for to 35.0% from 31.9% in 2009, reflecting a strong 27.2 the Canadian peer group of 31.0% was unchanged from liquidity position. 2009 levels. The average ratio remains at a level that • Liquidity continues to be supported by our large base is in line with historic averages. of customer deposits and our strong capital position. • The North American peer group average ratio was 30.4% in 2010, a level that is up from a year ago but marginally below the average of our Canadian peers. 2006 2007 2008 2009 2010

13.45 Capital Adequacy P 60 Capital Adequacy 12.24 • The Tier 1 Capital Ratio remained strong at 13.45%, • The Canadian peer group average Tier 1 Capital Ratio up from 12.24% in 2009. 10.22 was 12.81% in 2010, up from 11.78% in 2009, as all banks 9.77 • The Total Capital Ratio was 15.91%, up from 14.87% 9.51 in the peer group had higher capital ratios. in 2009. • The basis for computing capital adequacy ratios is not comparable in Canada and the United States.

2006 2007 2008 2009 2010 2006–2007 2008–2010 under Basel I under Basel II

Credit Rating P 86 • BMO’s credit ratings, as assessed by the four major ratings agencies, are listed • The Canadian peer group median credit ratings were unchanged in 2010. below. There was one downgrade in 2010 and all four ratings are considered Each of the median Canadian peer group ratings is considered high-grade high-grade and high quality. and high quality. • Credit ratings are important in the raising of both capital and funding to support • The North American peer group median credit rating as assessed by our business operations. Maintaining strong credit ratings allows us to access one of the ratings agencies fell slightly from 2009, while another increased the capital markets at competitive pricing. Should our credit ratings materially slightly. Three of the ratings were slightly lower than the median of decrease, our cost of funds would likely increase significantly and our access the Canadian peer group, as economic conditions remain more difficult to funding and capital through capital markets could be reduced. A material in the United States. downgrade of our ratings could have additional consequences, including those set out in Note 10 on page 130 of the financial statements.

BMO Financial Group Canadian peer group average North American peer group average 2006 2007 2008 2009 2010 2006 2007 2008 2009 2010 2006 2007 2008 2009 2010 DBRS AA AA AA AA AA DBRS AA AA AA AA AA DBRS AAL AA AA AA AAL Fitch AA– AA– AA– AA– AA– Fitch AA– AA– AA– AA– AA– Fitch AA– AA– AA– AA– AA– Moody’s Aa3 Aa1 Aa1 Aa1 Aa2 Moody’s Aa3 Aa1 Aa1 Aa1 Aa1 Moody’s Aa3 Aa2 Aa2 Aa3 Aa2 S&P AA– A+ A+ A+ A+ S&P AA– AA– AA– AA– AA– S&P A+ AA– AA– A+ A+

The Canadian peer group averages are based on the performance of Canada’s six largest banks: BMO Financial Group, Canadian Imperial Bank of Commerce, National Bank of Canada, RBC Financial Group, Scotiabank and TD Bank Financial Group. The North American peer group averages are based on the performance of 13 of the largest banks in North America. It includes the Canadian peer group, except National Bank of Canada, BMO Financial Group as well as BB&T Corporation, Fifth Third Bancorp, Key Corp., Bank of New York Mellon, The PNC Financial Services Group Inc., Regions Financial, Canadian peer group average SunTrust Banks Inc. and U.S. Bancorp. The North American peer group was redefi ned in 2010. Prior year averages have not been restated. North American peer group average

BMO Financial Group 193rd Annual Report 2010 25 MANAGEMENT’S DISCUSSION AND ANALYSIS Management’s Discussion and Analysis

BMO’s President & Chief Executive Officer and Chief Financial Officer have signed a statement outlining management’s responsibility for financial information in the annual consolidated financial statements and Management’s Discussion and Analysis (MD&A). The statement, which can be found on page 108, also explains the roles of the Audit Committee and Board of Directors in respect of that financial information. The MD&A comments on BMO’s operations and financial condition for the years ended October 31, 2010 and 2009. The MD&A should be read in conjunction with our consolidated financial statements for the year ended October 31, 2010. The MD&A commentary is as of December 7, 2010. Unless otherwise indicated, all amounts are stated in Canadian dollars and have been derived from financial statements prepared in accordance with Canadian generally accepted accounting principles (GAAP). Certain prior year data has been reclassified to conform with the current year’s presentation, including restatements arising from transfers of certain businesses between operating groups. See pages 42 and 43.

MD&A Index

27 Who We Are provides an overview of BMO Financial Group, 51 Private Client Group explains the links between our objectives and our overall vision, 54 BMO Capital Markets presents key performance data and outlines “Reasons to invest 57 Corporate Services, including Technology and Operations in BMO.” Financial Condition Review discusses our assets and 28 Enterprise-Wide Strategy outlines our enterprise-wide strategy liabilities by major balance sheet category. It reviews our and the context in which it is developed, as well as our progress capital adequacy and our approach to ensuring we optimize in relation to our strategic priorities. our capital position to support our business strategies and maximize returns to our shareholders. It discusses proposed 29 Caution Regarding Forward-Looking Statements advises regulatory changes that are expected to impact capital readers about the limitations and inherent risks and uncertainties and liquidity management as well as certain business of forward-looking information. operations. It also discusses off-balance sheet arrangements and financial instruments. 29 Factors That May Affect Future Results outlines certain industry and company-specific factors that investors should consider 57 Summary Balance Sheet when assessing BMO’s earnings prospects. 59 Enterprise-Wide Capital Management 63 Select Financial Instruments 31 Economic Developments includes commentary on the impact of 67 U.S. Regulatory Developments economic developments on our businesses in 2010 and expectations 68 Off-Balance Sheet Arrangements for the Canadian and U.S. economies in 2011. Accounting Matters and Disclosure and Internal Control Value Measures reviews financial performance on the four key reviews critical accounting estimates and changes in accounting measures that assess or most directly influence shareholder return. policies in 2010 and for future periods. It also discusses our 32 Total Shareholder Return evaluation of disclosure controls and procedures and internal 33 Earnings per Share Growth control over financial reporting. 34 Return on Equity 34 Net Economic Profit Growth 68 Critical Accounting Estimates 71 Changes in Accounting Policies in 2010 35 2010 Financial Performance Review provides a detailed review 71 Future Changes in Accounting Policies – IFRS of BMO’s consolidated financial performance by major income 74 Disclosure Controls and Procedures and Internal Control statement category. It also includes the impact of business acquisi- over Financial Reporting tions, changes in foreign exchange, and a summary of notable 74 Shareholders’ Auditors’ Services and Fees items affecting results. 75 Enterprise-Wide Risk Management outlines our approach to Operating Group Review outlines the strategies of our operating managing the key financial risks and other related risks we face. groups, the paths they choose to differentiate their businesses and the challenges they face, along with their strengths and key 91 Non-GAAP Measures includes explanations of non-GAAP value drivers. It also includes a summary of their achievements measures and their reconciliation to their GAAP counterparts. in 2010, their priorities for 2011 and a review of their financial 92 2009 Financial Performance Review, Review of Fourth performance for the year. Quarter Performance and Quarterly Earnings Trends provide commentary on results for relevant periods other 42 Summary than fiscal 2010. 44 Personal and Commercial Banking 96 Supplemental Information presents many useful financial 45 Personal and Commercial Banking Canada tables and provides more historical detail. 48 Personal and Commercial Banking U.S.

Regulatory Filings Our continuous disclosure materials, including our interim management’s discussion and analysis and interim financial statements, and annual audited consolidated financial statements, Annual Information Form and Notice of Annual Meeting of Shareholders & Proxy Circular, are available on our website at www.bmo.com, on the Canadian Securities Administrators’ website at www.sedar.com and on the EDGAR section of the SEC’s website at www.sec.gov. BMO’s President & Chief Executive Officer and Chief Financial Officer each certify the appropriateness and fairness of BMO’s annual and interim consolidated financial statements and MD&A and Annual Information Form, and the effectiveness of BMO’s disclosure controls and procedures and material changes in our internal control over financial reporting.

26 BMO Financial Group 193rd Annual Report 2010 MD&A 27

na na na na 10.8

our North na na na na 8.6 We serve more serve more We can and international international can and 14.9 14.3 15.3 of $412 billion and and billion $412 of ain certain forward-looking certainain forward-looking 26.4 5.9 9.8 aterial factors and assumptions and factors aterial certainties. Please refer to the to refer Please certainties. ormance, our customers, our our customers, ormance, 2010 Annual Report 193rd Financial Group BMO 4.7 54.2 0.5 3.9 – 1.77 12.7

13.45 not applicable – not Clear growth strategy growth Clear stakeholders to Commitment financial position Strong management risk Proactive Our Medium-Term Financial Objectives Financial Our Medium-Term per year, 12% of average an EPS by increase time, Over achieve 20%, and 17% between of ROE annual average earn 1.5%, least at of leverage cash annual operating average current both meet that ratios capital maintain strong and requirements. regulatory expected and in BMO Invest to Reasons • • • • 2010 31, the periodsAs or for ended October at as noted) except (%, return shareholder total annual Compound EPS in annual growth Compound ROE annual Average in annual growth Compound dividends declared per share 2010 31, October at Dividend yield Price-to-earnings multiple ratio value value/book Market 1 Capital Ratio Tier 1-year 5-year 10-year Our Vision experience. customer great defines that be the bank To Our Guiding Principle balance and return shareholder total maximize aim to We financial perf to our commitments we where the communities and the environment employees, work. and live na Banking, Banking, Commercial and Personal groups: operating three oup comprises

Our medium-term financial objectives of, over time, increasing increasing time, over of, financial objectives Our medium-term BMO’s business planning process is rigorous and considers the considers and is rigorous planning process business BMO’s

The Our Financial Objectives section above and the Enterprise-Wide Strategy and Economic Developments sections that follow cont follow that sections Developments Economic and Strategy the Enterprise-Wide and above section The Our Financial Objectives un and risks inherent subject to are and assumptions make us to require statements forward-looking By their nature, statements. the m and such uncertainties and risks of a discussion this MD&A for of page 29 on Statements Forward-Looking Caution Regarding related to the statements set forth in such sections. forth set the statements to related higher than general economic growth rates, while limiting expense expense while limiting rates, growth economic general than higher (defined leverage cash annual operating average achieve to growth cash-based and expense the revenue between as the difference In managing our operations, time. over 1.5% least at of rates) growth in our invest the need to with profitability balance current we growth. future for businesses strong capital ratios that meet both current and expected regulatory regulatory expected and current both meet that ratios capital strong our strategic against execute guideposts we as key are requirements rates at revenues philosophy is increase Our to operating priorities. earnings per share (EPS) by an average of 12% per year, earning an an earning per year, 12% of average an (EPS) by per share earnings maintaining and 20% to 17% (ROE) equity on return of annual average prevailing economic conditions, our customers’ evolving needs and evolving our customers’ conditions, economic prevailing It includes business. our lines of across available the opportunities is measured that performance annual for accountability direct and clear our towards benchmarks progress and external and internal against strategic priorities. meet our medium-term financial objectives by aligning our operations our operations aligning by financial objectives our medium-term meet as outlined on the priorities, on our strategic with executing and page. following BMO’s vision, guiding principle and medium-term financial objectives medium-term vision, guiding and principle BMO’s out in the adjacent set are measures certain important performance for and return shareholder total maximize will we that believe chart. We Our Financial Objectives Our Financial than seven million customers across Canada through our Canadian retail arm, BMO Bank of Montreal. We also serve customers through our wealth our wealth through serve customers also We Montreal. Bank of BMO arm, our Canadian retail Canada through across customers million seven than our North Ameri services and financial to products of a full suite banking division, provides corporate and American investment million 1.3 almost with financial services organization integrated an Chicago-based Harris, through serves customers BMO States, Inclients. the United Financial Gr BMO customers. commercial and small business retail, Capital Markets. BMO and Group Client Private 38,000 employees, BMO provides a broad range of retail banking, wealth management and investment banking products and services. and banking products investment and management banking, retail wealth of range a broad provides BMO employees, 38,000 Banking. Capital Markets, BMO Private Harris BMO and Insurance BMO InvestorLine, BMO Burns, Nesbitt BMO businesses, management Established in 1817, BMO Financial Group is a highly diversified North American financial services provider. With total assets assets total With North American financial services diversified provider. highly is a Financial Group BMO 1817, in Established Who We Are Are We Who MANAGEMENT’S DISCUSSION AND ANALYSIS Enterprise-Wide Strategy

Our Vision To be the bank that defines great customer experience. Our Guiding Principle We aim to maximize total shareholder return and balance our commitments to financial performance, our customers, our employees, the environment and the communities where we live and work. Our Strategy in Context Changes in the economic environment, and their effects on our customers, are rapid and ongoing. Our focus on providing clarity for our customers by “Making Money Make Sense,” serves as a compass for us in all economic environments. It also drives our employees to deliver their best, every day.

MD&A We have emerged from the recent economic downturn with a strong financial position, supported by growth in our businesses. We believe that strengths in our business model, balance sheet, risk management framework and leadership team will generate sustainable growth. We remain steadfastly committed to our strategy, our customers and our shareholders. Our Strategic Priorities and Progress Maximize earnings growth across all North American personal • Increased referral volumes across BMO Financial Group, contributing and commercial banking businesses, focusing on industry-leading to asset growth through deeper customer relationships. customer experience and sales force productivity. Deliver strong, stable returns in our capital markets business • Our strategy is paying off, with P&C Canada achieving double-digit by providing highly targeted solutions to our core clients from growth in revenue and net income for each of the past two years, as well a single integrated platform. as personal and commercial loyalty scores that are up from 2008 levels. • Focusing on clients is at the core of our strategy. We continued to • Introduced offers that bring clarity to financial decisions, including target clients where we are differentiated and we expanded valuable the Low-Rate Mortgage, BMO SmartSteps for Business, BMO Business relationships with a broader offering from across the capabilities of Bundles, AgriInvest and Harris Helpful Steps. BMO Capital Markets. • Made good progress in growing our profitable payments business by • Strengthened capabilities in the United States, including refocusing introducing our BMO World Elite MasterCard, entering into an exclusive our business on core clients, appointing a new head of U.S. Investment strategic credit card relationship with Sobeys in Canada and acquiring and Corporate Banking and hiring strategically across the business to the Diners Club North American franchise, which more than doubled position us for future growth. our corporate card business. • Aligned our capital and capabilities with client opportunity, with • Strengthened our network by continuing to invest in new branches and the goal of creating a more integrated capital markets business and launching an innovative new branch format. Commenced operations more robust distribution capabilities. in our new state-of-the-art customer contact centre, better positioning • Continued to implement risk management initiatives, enhancing our us to deliver a seamless customer experience. capabilities and introducing new methodologies to measure, monitor • In the United States, maintained very strong personal banking customer and report risk with transparency and clarity across the organization. loyalty scores compared to the major banks with which we compete. Develop our business in select global markets to grow with Received a Metro Chicago 2010 TNS Choice Award for excellence our clients, expand our capabilities and reach new customers. in offering customer-focused solutions and establishing strong client Successfully incorporated in China, where we can now provide banking relationships in our personal banking business. Won several awards • and investment products and be considered a preferred partner. from Greenwich Associates for our U.S. commercial banking team. Acquired a U.S.-based global securities lending team and completed Increased the scale of our U.S. commercial bank to position Harris as • • its integration into our existing North American Securities Lending the preferred bank for business in the U.S. Midwest. business, creating a strong presence in New York, London, Acquired certain assets and liabilities and successfully integrated • Hong Kong and Melbourne. the operations of AMCORE Bank, N.A., a Rockford, Illinois-based bank, Continued to expand our presence in Asia, including additions to our in a transaction assisted by the Federal Deposit Insurance Corporation • trading and investment banking product offering in China and develop- (FDIC), accelerating our growth strategy and adding quality locations and ment of our investment and corporate banking business in India. a good customer base. Sustain a culture that focuses on customers, high performance Accelerate the growth of our wealth management business through and our people. client-focused financial planning and by investing for future growth. Renewed our learning and leadership development programs Delivered a planning-based client experience and improved sales • • at BMO’s Institute for Learning to support our focus on customers, efficiency with enhanced financial planning and investment advisor tools talent and performance. and comprehensive financial planning client materials. Continued to develop our industry-leading talent management Delivered an innovative program (Take Charge of Your Retirement) that • • practices and maintained our Employee Promise to current and motivates clients to think about how their financial and non-financial prospective employees, consistent with our brand and values. retirement goals are linked. Reinforced the knowledge and understanding of risk and risk Expanded our Exchange Traded Funds (ETF) family of lower-cost and risk • • management across the enterprise, strengthening our risk manage- diver sifying investment products to provide our clients with greater access ment practices and building our capabilities for the future. to innovative and industry-leading investment products and solutions. Maintained our focus on productivity, high-quality service and Strengthened BMO InvestorLine’s capabilities and delivered an enhanced • • risk management in technology and operations, while preparing online experience with improved functionality and educational materials. to transform our technology capabilities in support of sustained Effectively integrated and expanded our insurance businesses and • growth and our customer experience vision. streamlined related sales processes and applications. 28 BMO Financial Group 193rd Annual Report 2010 MD&A

29

and the actions lying assets of the structured structured the of lying assets riods ended on the dates presented, riods ended on the dates presented, 2010 Annual Report 193rd Financial Group BMO s, our reputation s, rial factors considered we when setting our strategic priorities tations of the future performance of the transactions that that the transactions of performance the future of tations ive to the U.S. dollar. In determining our expectations for for our expectations In determining dollar. the U.S. to ive its behalf, except as required by law. The forward-looking The forward-looking law. by as required except its behalf, parties; our ability to execute our strategic plans and to complete complete to and plans our strategic execute to our ability parties; erately in 2011, that interest rates will remain low and that that and low remain will rates interest that in 2011, erately general economic and market conditions in the countries in in the countries conditions market and economic general ousing markets will strengthen in Canada and the United States. States. in Canada the United and strengthen will ousing markets . There is significant risk that predictions, forecasts, conclusions or conclusions forecasts, predictions, that risk is significant . There mitted. nt with historical experience. Material factors that were taken into into taken were that factors Material experience. historical with nt hicles, under various asset price scenarios, and that the level of of and that the level price scenarios, asset under various hicles, actual future results, conditions, actions or events to differ materially differ materially to or events actions conditions, actual results, future models used to assess those requirements are consistent with the final with consistent are requirements those assess used to models the Canadian and U.S. governments and their agencies. and governments the Canadian U.S. and make decisions with respect to Bank of Montreal, investors and and investors Montreal, Bank to of respect with decisions make II compliant can be fully included in the October 31, 2010 pro-forma pro-forma 2010 can 31, be fully included in the October II compliant or future actions, our targets, expectations for our financial condition our financial condition for expectations our targets, actions, or future nd losses on default of the under default of on nd losses nd capital markets environment, will not impair our ability to do so. do so. to our ability impair not will environment, markets nd capital y from such predictions, forecasts, conclusions or projections. We caution caution We projections. or conclusions forecasts, such predictions, y from ty of forward-looking statements. Bank of Montreal does not undertake undertake not does Montreal Bank of statements. forward-looking ty of continuing difficult market conditions. In determining amounts of asset asset amounts of In determining conditions. difficult market continuing ges in monetary, fiscal or economic policy; the degree of competition competition of the degree policy; fiscal or economic ges in monetary, truments) and the minimum regulatory capital ratios are adopted adopted are truments) the minimum ratios and capital regulatory tion provided by the subordinate capital notes will exceed future losses. losses. future exceed will notes capital the subordinate by provided tion have also assumed that the proposed changes affecting capital deductions, deductions, capital changes affecting the proposed that assumed also have . For more information, please see the discussion below, which outlines below, see the discussion please information, more . For s (including Counterparty Credit Risk and Market Risk), we have assumed assumed have we Risk), s (including Market and Risk Credit Counterparty cts of transition could change. could transition cts of refinance certain capital instruments in the future, as and when necessary when necessary as and instruments in the future, certain capital refinance global capital markets activities; the possible effects on our business of of our business effectson the possible activities; capital markets global end or as close to year end as was practical. The Basel rules are not yet finalized finalized yet The Basel not practical. rules are end as was year end or as close to the level of interest rates. Changes in market expectations and monetary monetary and expectations in market Changes rates. interest of the level in interest Fluctuations predict. and difficult anticipate to are policy The level of competition among financial services companies is financial services among companies competition of The level been increasingly have companies non-financial Furthermore, high. loyalty Customer banks. by provided services traditionally offering including service factors, a number of can be influenced by retention and products prices for or service levels, regulatory by enacted regulations and laws Also, our competitors. of in which jurisdictions other and States in the United authorities competitors our international benefits to provide may operate we in these factors Changes compete. to our ability impact could that our earnings. affect adversely could share market of or a loss tions about inflation and central bank monetary policy have an impact on impact an monetary have policy bank central and about inflation tions our earnings. on impact an these changes can have from result that rates complete a more for 85 to pages 82 on section Risk the Market to Refer exposures. risk rate our interest of discussion Competition of Level Fiscal and Monetary Policy policies fiscal, economic monetary and by affected are Our earnings authorities. regulatory other and Canadian, U.S. by adopted are that increasing and reducing competition of the effect Such can have policies expecta- market money and bond As well, uncertainty in the markets. l position as at and for the pe and for s in understanding our financial position as at ng the state of the economic a economic the of ng the state and 1995 of Act any applicable Canadian Reform Securities Litigation Private securities legislation. Forward-looking statements s in laws or in supervisory expectations or requirements, including capital and liquidity requirements and guidance; judicial and including requirements liquidity and capital or in supervisory or requirements, s in laws expectations se of assisting our shareholder assisting se of alysis. In setting out the expectation that we will be able to be able will we that out the expectation In setting alysis. or, we primarily consider historical economic data provided by by data provided economic historical consider primarily we or, vehicles discussed in this document, discussed vehicles including be to amount the investment the structured regarding our expectations establishing will be required and the expectation that the first-loss protec first-loss the that the expectation and be required will r to our transition to IFRS, our expectations of the key impa the key of our expectations IFRS, our transition to r to factors beyond our control, includi our control, beyond factors will redeem subordinated debt prior to its per prior to maturity debt where date, subordinated will redeem quantified based on our financial and risk positions at year year at positions risk our financial and based on quantified our forward-looking statements as a number of factors could cause could factors as a number of statements our forward-looking possible factors. Other factors could adversely affect our results affect adversely could Other factors factors. possible operations or for the Canadian and U.S. economies. the Canadian or for operations and U.S. the amount of business we conduct conduct we business of the amount ructure and the hedges that BMO has entered into. into. has entered BMO the hedges that and ructure

be consiste defaults on would defaults losses and of the level that were assumptions our expec when establishing Among the key considered we factors material into. defaults on were defaults has entered losses of and about the level Trust Assumptions Apex portfolio, by quality credit initial included BMO industry to in the portfolio, loss diversification of risk and Trust in Apex losses credit of risk the future of our expectations when establishing account the st into incorporated protection the first-loss investment vehicles were material factors we considered when considered we factors material were vehicles investment consolidation whether facilities, liquidity under the BMO drawn mate were our businesses affect will that how and in 2011 economies the Canadian U.S. and of about the performance Assumptions Board Standards Accounting the International by IFRS as issued based on (IFRS) are Standards Financial Reporting International to our transition impacts of the key regarding this Should Our expectations date. IFRS change in effect as of that are (IASB) prio mod grow will economies included the Canadian U.S. and that assumptions Key our businesses. for our outlook and objectives, and h that assumed also We such reforms. of the implementation with be consistent will reforms regulatory regarding our assumptions relat modestly strengthen will the Canadian dollar that and somewhat improve will markets in capital conditions that assumed We in the financial services and sect broadly both growth, economic funding net cost, credit default quality a of and risk saleprices, asset expected sales, asset of about the Assumptions level to update any forward-looking statements, whether written or oral, that may be made from time to time by the organization or on the organization time by time to be made from may that or oral, written whether statements, forward-looking any update to the purpo for is presented in this document contained information asset risk-weighted and Basel our regulatory III on capital, of regulatory impact capital In ratios, calculating the pro-forma We Canada (OSFI). Financial Institutions of the Superintendent of BCBS the Office and by be promulgated will that requirements ins capital instruments (i.e. capital share grandfathered non-common for treatment capital the regulatory assets, risk-weighted Basel are but non-Basel III compliant are instruments that capital existing that assumed also We BCBS OSFI. and by as proposed has been the Basel III proposals of The full impact calculations. readers of this Annual Report not to place undue reliance on on undue reliance place to not this Annual Report of readers statements. in the forward-looking expressed or intentions estimates expectations, the targets, from to: including limited but not factors, many be influenced may by statements fluctuations; chan value currency and rate forward-looking to interest credit markets; capital relate and/or or illiquid that weak, volatile outcomes The future operate; which we change operate; in which we areas business and in the geographic counter and our customers to respect with obtain we information the of completeness and the accuracy proceedings; or regulatory conditions; political general risks; infrastructure and operational estimates; critical accounting acquisitions; integrate and supply; or water power communications, such as transportation, infrastructure, public to disruptions economies; or international affects local, national that disease or illness activities; or terrorist war changes. technological and to statements forward-looking on When relying results. future all of exhaustive is not list Montreal’s Bank of affect may the foregoing that that caution factors We certain key in detail uncertain the inherent and events, potential and uncertainties as other as well these factors, consider should carefully others purposes. other for be appropriate not and may as our objectives, priorities and strategic as well Banking on our Supervision and the Baselmmittee (BCBS) this date Co by rules as of announced the proposed of our interpretation ve investment the structured of reducing the size to a view with be sold to continue would included assets that assumptions Key regarding expectations our current and the underlying assets of quality the credit with be consistent will defaults losses and which as to issuers made assumptions we maturities year, by Caution Regarding Forward-Looking Statements Forward-Looking Regarding Caution included this type are in this Annual be included Report, may of and filings Statements in other statements. forward-looking or oral include written often communications public Montreal’s Bank of and of, harbor” provisions the “safe to made pursuant such All statements are communications. or in other Commission, Exchange and Securities the U.S. or regulators Canadian securities with States the United under, statements be forward-looking to intended are actual differ materiall results may that and be correct uncertainties and risks not may inherent to subject our assumptions are and that assumptions be accurate, make to us to require statements prove not will forward-looking projections By their nature, and are subject to change, which may impact the results of our an the results of which impact change, may subject to are and that assumed have we requirements, capital regulatory meet to r objectives and priorities for 2011 and beyond, our strategies beyond, and 2011 and priorities for comments our objectives to with respect limited to, not but are involve, may our for and the or outlook results price, of or share and the threat of terrorism affect the business and economic environ- economic and the business affect terrorism of the threat and Therefore, ments operate. in which we con- business and its and local economic region in a specific geographic example, For earnings. and our revenues on effect an have may ditions in credit losses, increase decline in an result may economic a regional activity. capital markets reduced and growth in loan a decrease spending, business investment, government spending, the rate of inflation inflation spending, of the rate spending, government investment, business

As noted in the above Caution Regarding Forward-Looking Statements, Statements, Forward-Looking Caution Regarding in the above As noted are their nature, by information, and statements forward-looking all specific, and general both uncertainties, and risks inherent subject to the expecta- which cause may from our actual differ materially results to The Enterprise-Wide statements. forward-looking in any expressed tions of a number describes page 75 on starting section Management Risk funding, and liquidity market, including counterparty, and credit risks, and reputation strategic, model, business, operational, insurance, additional outline some follow that The sections risks. environmental uncertainties. and risks in the Countries Conditions and Market Economic General Business Conduct in which We countries. other and States the United in Canada, business conduct We including liquidity, capital markets, of such health as the general Factors on impact a material have could stability, and volatility activity, of level consumer rates, exchange foreign rates, interest As well, our business. Factors That May Affect Future Results Future Affect May That Factors MANAGEMENT’S DISCUSSION AND ANALYSIS

Currency Rates would be affected in the period in which any new circumstances or The Canadian dollar equivalents of our revenues and expenses information became apparent, and the amount of the impact could be denominated in currencies other than the Canadian dollar are subject significant. More information is included in the discussion of Critical to fluctuations in the value of the Canadian dollar relative to those Accounting Estimates on page 68. currencies. Refer to the Foreign Exchange section on page 36 and the We are required to adopt IFRS commencing November 1, 2011. Market Risk section on pages 82 to 85 for a more complete discussion Further discussion on the impact is included on pages 70 to 73. of our foreign exchange risk exposures. Acquisitions Changes in Laws, Regulations and Approach to Supervision We conduct thorough due diligence before completing an acquisition. Regulations are in place to protect our clients, investors and the public However, it is possible that we might make an acquisition that interest. Considerable changes in laws and regulations that relate to the subsequently does not perform in line with our financial or strategic financial industry have been proposed, including changes related to objectives. Changes in the competitive and economic environment capital and liquidity requirements. Changes in laws and regulations, as well as other factors may lower revenues, while higher than anticipated including how they are interpreted and enforced, and in approaches to integration costs and failure to realize expected cost savings could supervision could adversely affect our earnings, for example by limiting also adversely affect our earnings after an acquisition. Our post-acquisition the products or services we can provide and the manner in which we performance is also contingent on retaining the clients and key provide them and by increasing the costs of compliance. The changes employees of acquired companies, and there can be no assurance MD&A could also affect the levels of capital and liquidity we choose to maintain. that we will always succeed in doing so. In particular, the Basel III global standards for capital and liquidity, which Accuracy and Completeness of Customer are discussed in the Enterprise-Wide Capital Management section that and Counterparty Information starts on page 59, and enactment of the Dodd-Frank Wall Street Reform When deciding to extend credit or enter into other transactions and Consumer Protection Act, which is discussed in the U.S. Regulatory with customers and counterparties, we may rely on information provided Developments section on page 67, may have an impact on our results by or on behalf of those customers and counterparties, including or activities. Liquidity and funding risk is discussed starting on page 85. audited financial statements and other financial information. We also In addition to the factors outlined, our failure to comply with laws may rely on representations made by customers and counterparties and regulations could result in sanctions and financial penalties that that the infor mation they provide is accurate and complete. Our financial could adversely affect our reputation and earnings. results could be adversely affected if the financial statements or Judicial or Regulatory Judgments and Legal other financial information provided by customers and counterparties and Regulatory Proceedings is materially misleading. We take reasonable measures to comply with the laws and regulations Operational and Infrastructure Risks of the jurisdictions in which we conduct business. Should these measures We are exposed to many of the operational risks that affect all large prove not to be effective, it is possible that we could be subject to corporations. Such risks include the risk of fraud by employees or others, a judicial or regulatory judgment or decision which results in fines, unauthorized transactions by employees, and operational or human damages or other costs that would have a negative impact on earnings error. We also face the risk that computer or telecommunications and damage our reputation. We are also subject to litigation arising systems could fail, despite our efforts to maintain these systems in good in the ordinary course of our business. The unfavourable resolution of working order. Given the high volume of transactions we process on a any litigation could have a material adverse effect on our financial daily basis, certain errors may be repeated or compounded before they results. Damage to our reputation could also result, harming our future are discovered and rectified. Shortcomings or failures of our internal business prospects. Information about certain legal and regulatory processes, employees or systems, or those provided by third parties, matters we currently face is provided in Note 28 on page 159 of the including any of our financial, accounting or other data processing financial statements. systems, could lead to financial loss and damage to our reputation. Execution of Strategy In addition, despite the contingency plans we have in place, our Our financial performance is influenced by our ability to execute strategic ability to conduct business may be adversely affected by a disruption plans developed by management. If these strategic plans do not meet in the infrastructure that supports our operations and the communities with success or if there is a change in these strategic plans, our earnings in which we do business, including disruption caused by pandemics could grow at a slower pace or decline. In addition, our ability to execute or terrorist acts. our strategic plans is dependent to a large extent on our ability to Other Factors attract, develop and retain key executives, and there is no assurance Other factors beyond our control that may affect our future results are we will continue to do so successfully. noted in the Caution Regarding Forward-Looking Statements on page 29. Critical Accounting Estimates We caution that the preceding discussion of factors that may We prepare our financial statements in accordance with Canadian affect future results is not exhaustive. When relying on forward-looking generally accepted accounting principles (GAAP). The application of GAAP statements to make decisions with respect to BMO, investors and others requires that management make significant judgments and estimates should carefully consider these factors, as well as other uncertainties, that can affect when certain assets, liabilities, revenues and expenses potential events and industry and company-specific factors that may are recorded in our financial statements and their recorded values. In adversely affect future results. We do not undertake to update any making these judgments and estimates, we rely on the best information forward-looking statements, whether written or oral, that may be made available at the time. However, it is possible that circumstances may from time to time by us or on our behalf, except as required by law. change or new information may become available. Our financial results

30 BMO Financial Group 193rd Annual Report 2010 MD&A 31 * * 9.1 * Oct Oct 1.3 2011 0.98 2011 7.7 2011 9.6 2.1 Oct Estimate Oct Estimate Estimate 1.02 2010 2010 7.9 * * * (%)

* 1.6 2010 1.7 (0.3) Oct Oct 2009 2009 2009 0.3 (%)

3.8 Canada States United Canada States United 7.7 2008 2.4 Jan Jan 1.22 2009 The Canadian dollar is expected the with parity rise above to in 2011. dollar U.S. Inflation should remain low, Inflation should low, remain especially States, in the United rate the unemployment where high. remain to is expected Unemployment rates are expected expected are rates Unemployment with in 2011, declineto slowly high. remaining rate the U.S. Consumer Price Index Price Consumer Inflation Dollar Canadian/U.S. Rates Exchange Canadian and U.S. U.S. Canadian and Rates Unemployment 2009 7. 3 2010 Annual Report 193rd Financial Group BMO * Oct * 2011 2500 2000 1500 1000 500 2.3 1.75 0.13 0.13 2011 11* Oct 2.4 Estimate Estimate 2010 Estimate * * 1.00 * * * 2.8 (%)

2010 2.9 (%)

Oct (2.6) 2009 06 2009 (2.5) 05 04Canada (left axis) 07 axis) (right States United 08 09 10 Canada States United Canadian overnight rate rate Canadian overnight funds rate federal U.S. 0.0 0.13 2008 Jan 0.5 2009 Interest rates should remain should remain rates Interest modestly increasing in 2011, low in Canada. Note: Data as points appropriate. for averages the are month or year, The Canadian and U.S. economies economies U.S. The Canadian and to continue to expected are in 2011. moderately grow Homebuilding should strengthen Homebuilding should strengthen in the levels low from moderately his- near remaining States, United in Canada. normal levels torically Housing Starts (in thousands) Canadian and U.S. Interest Rates Real Growth in Gross in Gross Growth Real Product Domestic 137.5 1.30 175.0 100.0 212.5 250.0

invest- rd equity mutual funds. Businesses mutual equity Businesses funds. rd support the economy. In the Midwest, where the In where the Midwest, the economy. support

The U.S. and U.S. Midwest economies are projected to grow grow to projected are economies Midwest U.S. and The U.S. The U.S. economy grew by an estimated 2.8% in 2010 after after in 2010 2.8% estimated an by grew economy The U.S.

to save more of their income to pay down debt, and personal credit credit debt, personal and down pay to their income of more save to following sharply Housing demand weakened contract. to continued in the spring, tax commercial credit and the homebuyer of the expiry at Deep cutbacks rates. vacancy high by hampered was construction government in federal increases offset largely local levels and the state growth in capital spending and employment, supporting consumer spend- consumer supporting spending employment, in capital and growth mortgages residential and credit personal and business Demand for ing. the Federal In a subdued climate, inflation year. next should strengthen Capital markets 2012. until rates interest raise not likely will Reserve business and broadens as the recovery strengthen to expected are confidence improves. moderately in 2011, improving as housing markets stabilize and credit credit stabilize and as housing markets improving in 2011, moderately balance sheets should encourage business Healthier ease. standards rise above parity with the U.S. dollar in 2011. The resource-producing The resource-producing in 2011. dollar the U.S. with parity rise above year. next again the recovery lead likely will provinces Western Business credit demand should improve in response to continued continued to in response demand should improve credit Business raise to Canada The Bank is expected spending. of investment strong periods to extended pausing for only slightly in 2011, rates interest interest higher by outlook. Supported uncertain global the still assess the Canadian and firm commodityrates prices, dollar to is expected The Canadian economy is expected to grow by 2.4% in 2011, supported by by supported in 2011, 2.4% by grow to is expected The Canadian economy The unemployment and firmer commodity rates prices. interest still-low in residential Growth end. year by 7.7% to should decline slightly rate 2010. to relative be moderate likely credit will personal and mortgages Economic and Financial Services Outlook for 2011 for Financial and Services Outlook Economic Reserve has maintained a near-zero rate policy and recently expanded expanded recently and policy rate has maintained a near-zero Reserve purchases to its asset grow to continued the economy located, are operations our U.S. of bulk in auto sales upswing an and export strong from benefiting modestly, housing markets. weak by back but held production spending. While business spending on equipment and machinery and spending equipment on While business spending. weak has remained hiring private-sector strong, exceptionally remained The Federal costs. care health and uncertainty about the economy due to contracting in 2009. Inventory rebuilding and fiscal incentives drove drove fiscal and incentives rebuilding Inventory in 2009. contracting when the incentives slowed but growth in the year, early the recovery continued as households modestly, spending has grown Consumer ended. raised its overnight rate target several times from record low levels, as levels, low record times from several target rate its overnight raised the However, stimulus. significant required no longer the economy growth. economic slowing of in light in October rates raise Bank did not growth. While exports were strong early in 2010 due to improved global global improved due to in 2010 early strong were exports While growth. spending and domestic solid reflecting faster, even importsdemand, rose expected than faster recovered Employment Canadian dollar. the strong growth. credit spending personal and consumer supporting in 2010, in investors’ increase as an slowed, growth deposit personal However, savings towa redirected tolerance risk the recovery, supported by very low interest rates. Housing markets were Housing markets rates. interest very low by supported the recovery, mortgage tighter and rates in interest increases modest to in response economic restrain to continued sector The trade rules. insurance issuances, bond new and cash flow spending from finance to continued growth deposit business However, demand. credit business limiting the uncertain and in profits growth strong due to solid remained After contracting in 2009, the Canadian economy grew by an estimated estimated an by grew the Canadian economy in 2009, contracting After led have investment spending business and Consumer in 2010. 2.9% Canadian and U.S. Economic and Financial Services and Economic Canadian U.S. and in 2010 Developments Economic Developments Economic strong early in the year, supporting mortgage growth, but weakened weakened but growth, mortgage supporting in the year, early strong ment climate. Although inflation remained low, the Bank of Canada the Bank of low, remained Although inflation climate. ment MANAGEMENT’S DISCUSSION AND ANALYSIS Value Measures

Highlights • Total shareholder return (TSR) – Our one-year TSR in 2010 was with results up appreciably from 2009. Corporate Services also a strong 26.4%, well above the comparable indices. Low equity recorded significantly improved results, with higher revenues and valuations in 2008 reduced the average annual return over the lower provisions for credit losses. past five years to 5.9%. • Return on equity (ROE) was 14.9% in 2010, up from 9.9% in 2009 • Earnings per share (EPS) growth – EPS grew 54% from 2009 as due to increased net income. BMO has achieved an ROE of 13% net income rose significantly. Market conditions improved, resulting or better in 20 of the past 21 years, one of only two banks in our in strong revenue growth and lower provisions for credit losses. North American peer group to have done so. There was a modest increase in expenses and a higher effective • We maintained our dividend payments at $2.80 per common income tax rate. The average number of common shares share in 2010, in light of the financial environment and uncer- outstanding increased, primarily due to our 2010 dividend tainty regarding pending changes in the rules governing capital

MD&A reinvestment program. adequacy. Dividends paid per common share over five-year • Net income was up 57%, rising by more than $1 billion to $2.8 bil lion. and ten-year periods have increased at average annual compound P&C Canada and Private Client Group recorded strong net income, rates of 9.2% and 11.0%, respectively.

Total Shareholder Return The five-year average annual total shareholder return (TSR) The five-year average annual TSR is a key measure of shareholder represents the average annual total return earned on an value and is the most important of our financial performance and investment in BMO common shares made at the beginning condition measures, since it assesses our success in achieving our guiding of a five-year period. The return includes the change in share principle of maximizing return to shareholders. Over the past five years, price and assumes that dividends received were reinvested shareholders have earned an average annual TSR of 5.9% on their in additional common shares. The one-year TSR also assumes investment in BMO common shares. The average was suppressed by that dividends were reinvested in shares. the low valuations in the difficult equity market conditions of 2008, as annual returns have exceeded 20% in three of the past five years. The five-year average annual return was lower than the 7.0% average annual return for the S&P/TSX Composite Total Return Index, but Five-Year Average Annual One-Year Total higher than the 5.0% return for the S&P/TSX Financial Services Total Total Shareholder Return (%) Shareholder Return (%) Return Index and the 1.7% return for the S&P 500 Total Return Index. 26.4 The one-year return was strong, at 26.4%, and was higher than the 7.0 comparable indices. 19.5 5.9 16.5 The table below summarizes dividends paid on BMO common 5.0 14.7 shares over the past five years and the movements in BMO’s share price. An investment of $1,000 in Bank of Montreal common shares 1.7 made at the beginning of fiscal 2006 would have been worth $1,333 at

October 31, 2010, assuming reinvestment of dividends, for a total return S&P 500 S&P/TSX S&P/TSX BMO S&P 500 S&P/TSX S&P/TSX BMO of 33.3%. We maintained our dividend payments at $0.70 per common Index* Composite Financial common Index* Composite Financial common Index* Services shares* Index* Services shares* share in each quarter of 2010, consistent with 2009. Dividends paid Index* Index* over five-year and ten-year periods have increased at average annual compound rates of 9.2% and 11.0%, respectively. *Total return *Total return The average annual TSR of 5.9% for the most recent five-year Average annual returns have Equity markets were strong period improved from the 1.8% average annual return for the five years been affected by the difficult in 2010 and BMO outperformed ended October 31, 2009. The averages are affected by each one-year equity market conditions of 2008. the comparable indices. TSR included in the calculations.

Total Shareholder Return Five-year For the year ended October 31 2010 2009 2008 2007 2006 CAGR (1)

Closing market price per common share ($) 60.23 50.06 43.02 63.00 69.45 0.8 Dividends paid ($ per share) 2.80 2.80 2.80 2.63 2.13 9.2 Dividends paid (%) (2) 5.6 6.5 4.4 3.8 3.7 Increase (decrease) in share price (%) 20.3 16.4 (31.7) (9.3) 20.1 Total annual shareholder return (%) 26.4 25.1 (27.9) (5.8) 24.1

Total annual 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) expressed as a percentage. (2) As a percentage of the closing market price in the prior year.

32 BMO Financial Group 193rd Annual Report 2010 MD&A 33 54 (%) (18) 2009 2010

(9) 2008 (20) 2007 11 2006 EPS growth was particularly was EPS growth rose income as net in 2010, high billion. than $1 more by EPS Annual Growth 2010 Annual Report 193rd Financial Group BMO 4.75 2010 3.08 2009 3.76 2008 4.11 2007 ($) 5.15 2006 Private Client Group (PCG) net income increased $111 million or million $111 increased income net (PCG) Group Client Private million $53 decreased CM) income (BMO Capital Markets BMO net million $299 to million $847 decreased loss Services net Corporate is calculated by dividing net income, dividing income, (EPS) is calculated net by per share Earnings number the average by dividends, preferred of deduction after which is our basis outstanding. EPS, Diluted shares common of conversions possible adjusts for performance, measuring for conversions if those shares common financial instruments into of on 25 in Note fully explained is more and EPS, reduce would financial the statements. of 156 page The increase in EPS was due in EPS was The increase and growth revenue strong to lower provisions for credit losses. for provisions lower EPS attributable to volume-driven revenue growth and improved net net improved and growth revenue volume-driven to attributable group in the operating discussed P&C Canada results are margin. interest or 39% million $111 decreased income net P&C U.S. page 45. on review a on million $168 to or 31% million $75 but decreased million, $175 to loans, impaired of the impact adjusts for On a basis that basis. dollar U.S. costs, integration acquisition and accrual changes in the Visa litigation a year from 17% or million US$50 down million, US$237 was income net discussed in results are P&C U.S. basis. a comparably-adjusted ago on page 48. on review group the operating revenue to attributable largely was The increase million. $470 to 31% in client assets growth to related businesses PCG’s of in all growth insurance as higher as well administration, and under management Life the BMO results from a full year’s including of the benefit premiums, 2009. of quarter in the second late occurred that acquisition Assurance page 51. on review group discussed in the operating results are PCG due largely revenue, increased was There million. $820 to or 6% credit for provisions higher gains, securities investment increased to tax income effective a higher and growth expense modest losses, revenues lower also were There decreased. revenues Trading rate. which benefited had businesses, our interest-rate-sensitive from and corporate banking market from spreads favourable in the prior year, Mergers levels. asset reduced due to primarily lower, were revenues considerably. improved fees underwriting debt and acquisitions and page 54. on review group CM discussed in the operating BMO results are losses credit for provisions lower and revenues improved due to provisioning loss expected Services under BMO’s in Corporate recorded Services’ results are Corporate and This methodology methodology. page 57. on review group discussed in the operating

nificantly. nificantly. rose $937 million to $4,620 million. million to $4,620 $937 rose (1) Income before provisions for credit losses, income taxes and non- and taxes income credit losses, for provisions before Income The notable items that reduced net income in 2009 by $474 million million $474 by in 2009 income net reduced that items The notable Personal and Commercial Banking results in 2010 continued to show show to continued Banking Commercial and results in 2010 Personal Banking Commercial and (P&C)Personal rose income net Provisions for credit losses totalled $1,049 million, consisting consisting million, $1,049 totalled losses credit for Provisions million. $7,590 to or 3% million $209 increased expense Non-interest Revenue increased $1,146 million or 10% to $12,210 million. million. $12,210 to 10% or million $1,146 increased Revenue Notable items are discussed further on page 36. discussed further on are items Notable or 57% million $1,023 up in 2010, million $2,810 was income Net Our five-year compound average annual EPS growth rate was 0.5%, 0.5%, was rate EPS growth annual average compound Our five-year $4.75, up or $4.75, EPS was 54% $1.67 from $3.08 in Certain 2009. notable The effective income tax rate was 19.2% in 2010, up from 10.5% 10.5% up from in 2010, 19.2% was tax rate income The effective to the deterioration in capital markets of $521 million ($355 million million ($355 million $521 of in capital markets the deterioration to Capital Markets; in BMO recorded per share) tax or $0.66 after Services; and in Corporate recorded share) ($39 million after tax or $0.07 per share) recorded in Corporate Services. Services. in Corporate recorded per share) tax or $0.07 after million ($39 an increase in the general allowance for credit losses of $60 million million $60 of credit losses for allowance in the general increase an adjustments related valuation and activities certain trading for charges per tax or $0.15 after million ($80 million $118 of costs severance The year-over-year percentage change in earnings per share (EPS) is per share change in earnings percentage The year-over-year $118 million or 7% from a year ago to $1,819 million. The P&C group The P&C group million. $1,819 to ago a year from or 7% million $118 The weaker U.S. dollar reduced revenue growth by $365 million, million, $365 by growth revenue reduced dollar U.S. The weaker (1) page 91. See Non-GAAP measure. (1) and Commercial Banking U.S. (P&C U.S.). P&C Canada net income income P&C Canada net (P&C U.S.). Banking Commercial U.S. and was The improvement million. $1,644 to 16% or million $229 by rose combines our two retail and business banking operating segments, segments, banking operating business and retail our two combines Banking Commercial Canada and (P&C Canada) Personal and Personal strong growth and Private Client Group net income was up sig up sig was income net Group Client Private and growth strong Corporate Services results also were appreciably from 2009. improved in 2009, as we earned a lower proportion of income in lower-tax-rate in lower-tax-rate income of proportion a lower earned as we in 2009, is discussed taxes income for The provision in 2010. jurisdictions page 42. further on controlling interest in subsidiaries The weaker U.S. dollar reduced expenses by $213 million, while acquired while acquired million, $213 by expenses reduced dollar U.S. The weaker expense Non-interest million. $152 by expenses increased businesses page 41. further on is discussed entirely of specific provisions. In 2009, provisions for credit losses totalled totalled losses credit for provisions In 2009, specific provisions. of entirely and specific provisions of million $1,543 of consisting million, $1,603 credit for The provision allowance. in the general increase million a $60 page 40. is discussed further on losses while acquired businesses added $214 million to growth. P&C Canada growth. to million $214 added businesses while acquired increased revenue P&C U.S. 10%; or million $543 increased revenue million $233 increased revenue Group Client Private 2%; or million US$25 or million $190 increased revenue Capital Markets BMO and 12%; or in 2009. than higher substantially was revenue Services Corporate 6%. page 37. further on is discussed Revenue • • or $0.88 per share were: share per or $0.88 • period as chose we to bolster capital levels. average of 12% over time. Net income available to common shareholders common to available income Net time. over 12% of average the same over 10% outstanding by shares increased common diluted of our key measure for analyzing earnings growth. All references to EPS to references All growth. earnings analyzing for measure our key otherwise. indicated unless diluted EPS, to are Earnings per Share Growth per Share Earnings from $1,787 million a year ago. There was strong revenue growth and a and growth revenue strong was There ago. a year million $1,787 from moderate was There credit losses. for in provisions decrease significant tax rate. income effective a higher and growth expense well below our current medium-term objective of growing EPS by an an EPS by growing of objective medium-term our current below well number while the average base year, in the 2005 than higher 13% was items affected results in 2009, reducing EPS by $0.88. There were no were There $0.88. reducing EPS by results in 2009, affected items in 2010. items notable MANAGEMENT’S DISCUSSION AND ANALYSIS

Return on Equity ROE (%) Return on common Return on equity (ROE) is another key value measure. ROE was 14.9% shareholders’ equity (ROE)

in 2010, compared with 9.9% in 2009. The improvement was primarily 19.2 is calculated as net income, attributable to an increase of more than $1 billion in earnings available less preferred dividends, 14.4 14.9 to common shareholders. Average common shareholders’ equity increased 13.0 as a percentage of average $1 billion from 2009. In 2009 and 2010, we decided to strengthen 9.9 common shareholders’ equity. equity and associated capital ratios to support investors’ and depositors’ Common share holders’ equity confidence and provide greater operational and strategic flexibility. is comprised of common The increase in equity has contributed to our ROE falling short of our share capital, contributed historic returns and medium-term objectives. BMO has achieved an surplus, accumulated other 2006 2007 2008 2009 2010 ROE of 13% or better in 20 of the past 21 years, one of only two banks comprehensive income in our North American peer group to have done so. We fell short of (loss) and retained earnings. that standard in the difficult economic environment in 2009. As in 2009, Improved ROE was attributable our ROE in 2010 compared favourably with our global peers. Our medium- to strong earnings growth, term objective is to achieve an average annual ROE of 17% to 20%, over net of the effects of higher MD&A time. Table 3 on page 97 includes ROE statistics for the past 10 years. common shareholders’ equity.

Net Economic Profit Growth NEP ($ millions) Net economic profit (NEP) (1) The last of our four key value measures is net economic profit (NEP) represents cash net income growth. NEP was $818 million, up from a loss of $68 million in the prior 1,230 available to common share- year. The improvement was attributable to a significant increase in holders, less a charge for earnings, net of a higher charge for capital as a result of the increase 818 capital. NEP is an effective in shareholders’ equity. Earnings available to common shareholders 603 measure of economic value rose by more than $1 billion in 2010. 405 added. NEP is a non-GAAP measure. See page 91.

(68) 2006 2007 2008 2009 2010

NEP improved significantly as earnings available to common shareholders rose by more than $1 billion.

Net Economic Profit ($ millions, except as noted)

For the year ended October 31 2010 2009 2008 2007 2006 Net income available to common shareholders 2,674 1,667 1,905 2,088 2,633 After-tax impact of the amortization of acquisition-related intangible assets 32 35 35 38 36 Cash net income available to common shareholders 2,706 1,702 1,940 2,126 2,669 Charge for capital* (1,888) (1,770) (1,535) (1,523) (1,439) Net economic profit 818 (68) 405 603 1,230

Net economic profit growth (%) +100 (+100) (33) (51) 10 *Charge for capital Average common shareholders’ equity 17,980 16,865 14,612 14,506 13,703 Cost of capital (%) 10.5 10.5 10.5 10.5 10.5 Charge for capital (1,888) (1,770) (1,535) (1,523) (1,439)

(1) Non-GAAP measure. See page 91.

34 BMO Financial Group 193rd Annual Report 2010 MD&A 35 2 24 26 45 1 45 86 41 152 19

44 10 21 (8) 46 114 158 214 (1)

65 39 18 (2) 2010 Annual Report 193rd Financial Group BMO 2009 2009 – – – 2010 2010 2010 2010 2010 2010 2010 2010 lion in 2009. Specific provisions were down $494 million million $494 down were Specific provisions in 2009. lion in: (decrease) Increase lions) Business acquired/sold acquired/sold Business Revenue Expense income Net 2009 172 124 30 Paloma Securities L.L.C. – certain Securities assets Paloma million $7 for 2009 December Acquired Inc. Kubik, & Thompson, Griffin, Stephens million $31 for May 2008 Acquired BMO Financial Group Incremental results effects on for: in 2009 million $290 and in 2010 million $1,086 for businesses Purchases of costs. integration excludes The impact (1) Personal and Commercial Banking and Commercial Personal Incremental results for: effects on Banking Canada and Commercial Personal Incremental results for: effects on Diners Club North American franchise million $838 for 2009 December Acquired Banking U.S. and Commercial Personal Incremental results for: effects on Bank,AMCORE – certain liabilities and N.A. assets million $225 for 2010 April Acquired Inc.Merchants Bancorporation, Manufacturers and million $135 for 2008 February Acquired Bank Ozaukee million $180 for 2008 February Acquired Group Client Private Incremental results for: effectson Integra GRS million $16 for 2009 November Acquired Inc. Advisors, Wealth Ostler Stoker million $12 for 2009 September Acquired Assurance) Canada Life (BMO of Company Insurance Life AIG million $278 for 2009 April Acquired plc Internation Pyrford million $47 for 2007 December Acquired BMO Capital Markets Incremental results for: effectson 2009 71 50 13 ($ mil ($ mil

2009 36 35 (1) 2009 36 35 (1) Non-interest expense increased 3% in 2010. The increase was was The increase in 2010. 3% increased expense Non-interest of a rate with compared 19.2%, was tax rate income The effective to mainly attributable was in 2010 rate The higher in 2009. 10.5% jurisdictions. lower-tax-rate from income lower proportionately The provision for credit losses fell to $1,049 million from from million $1,049 to fell credit losses for provision The $1,603 mil in the general no increase was there and million $1,049 to ago. a year increase million $60 a with compared allowance, challenging. but remain improved have conditions market Credit performance-based com- higher businesses, acquired to attributable technology higher and results, improved in line with pensation The weaker our businesses. support spending to initiative and costs points. percentage 2.9 by growth expense reduced dollar U.S.

million. $32 by losses credit for provisions raised The Diners Club acquisition franchise (2) Impact of Business Acquisitions on Year-over-Year on Year-over-Year Acquisitions Business Impactof Results Operating of Comparisons • • • A review of our operating groups’ strategies and performance follows the enterprise the enterprise follows performance and strategies groups’ operating our of A review Revenue increased $1,146 million or 10% in 2010 to $12.2 billion, billion, $12.2 to in 2010 10% or million $1,146 increased Revenue This consistently in 2008. 9% and in 2009 8% of growth following our of the benefit demonstrates growth revenue of rate high in P&C Canada was 10% or million $543 of growth Revenue an products, in most growth volume to attributable primarily the inclusion of of the impact and margin interest net improved the Diners Club North American results in the current franchise contributions, made significant also groups operating The other year. revenue and Services Corporate in growth revenue strong with Capital Markets in BMO 6% Group, Client in Private 12% of growth basis. dollar a U.S. on in P&C U.S. 2% and diversified business mix in market conditions that have been have that conditions in market mix business diversified challenging times. at In respect of fiscal 2009 results relative to fiscal 2008, for the for fiscal 2008, to results relative fiscal 2009 of In respect In respect of fiscal 2010 results relative to fiscal 2009, for the acqui- for fiscal 2009, to results relative fiscal 2010 of In respect

Highlights • • review. A summary of the enterprise financial performance for 2009 appears on page 92. on appears 2009 for financial performance the enterprise A summary of review. This section provides a review of our enterprise financial performance for 2010 that focuses on the Consolidated Statement of Income included Income in of Statement Consolidated the on focuses that 2010 for financial performance our enterprise of a review provides This section 110. page which begin on financial statements, our consolidated acquisitions completed in fiscal 2009, the incremental effects are the are the incremental effects in fiscal 2009, completed acquisitions included in results are that businesses those of expenses and revenues the in fiscal 2008, completed the acquisitions For fiscal 2009. for the inclusion of to relate 2009 results for on incremental effects in 2008. months number of a lesser and results in 2009 of months 12 sitions completed in fiscal 2010, the incremental effects are the revenues the revenues are effects the incremental 2010, in fiscal completed sitions included fiscal are in results for that businesses those of expenses and the incremental in fiscal 2009, completed the acquisitions For 2010. results of months 12 the inclusion of to relate 2010 results for effects on in 2009. months number of a lesser and in 2010 acquisitions by operating group and their incremental impact on BMO’s BMO’s on their incremental impact and group operating by acquisitions and costs) integration acquisition (excluding expenses revenues, assist to 2008, to relative 2009 and 2009 to relative 2010 for income net includes income net on The impact changesin analyzing in results. which are taxes, income and losses credit for provisions of the impact in the table. disclosed separately not BMO Financial Group has selectively acquired a number of businesses. businesses. a number of acquired has selectively Financial Group BMO year- affecting expenses, and revenues increase acquisitions These table outlines The adjacent results. operating of comparisons over-year Impact of Business Acquisitions Business Impact of 2010 Financial Performance Review Performance Financial 2010 MANAGEMENT’S DISCUSSION AND ANALYSIS

Foreign Exchange The U.S. dollar was weaker at October 31, 2010 than at October 31, 2009, Effects of Changes in Exchange Rates on BMO’s Results

and assets and liabilities are translated at year-end rates. The average 2010 vs. 2009 vs. exchange rate over the course of 2010 is used for translation of revenues ($ millions, except as noted) 2009 2008 and expenses in 2010 and, while the U.S. dollar also weakened on Canadian/U.S. dollar exchange rate (average) this basis, it strengthened in 2009 relative to 2008. The Canadian dollar 2010 1.043 equivalents of BMO’s U.S.-dollar-denominated net income, revenues, 2009 1.165 1.165 expenses, income taxes and provision for credit losses in 2010 were 2008 1.032 reduced relative to the preceding year by the weakening of the U.S. dollar. Increased (reduced) net interest income (210) 246 The adjacent table indicates average Canadian/U.S. dollar exchange Increased (reduced) non-interest revenue (155) 117 rates in 2010, 2009 and 2008 and the impact of changes in the average Increased (reduced) revenues (365) 363 rates. At October 31, 2010, the Canadian dollar traded at $1.020 per Reduced (increased) expenses 213 (216) U.S. dollar. It traded at $1.082 per U.S. dollar at October 31, 2009. Reduced (increased) provision for credit losses 70 (125) At the start of each quarter, BMO assesses whether to enter into Reduced income taxes and hedging transactions that are designed to partially offset the pre-tax non-controlling interest in subsidiaries 18 24 MD&A effects of exchange rate fluctuations in the quarter on our expected U.S.- Increased (reduced) net income (64) 46 dollar-denominated net income for that quarter. As such, these activities partially mitigate the impact of exchange rate fluctuations, but only BMO’s U.S.-dollar-denominated results are affected, favourably within that quarter. As a result, the sum of the hedging gains/losses for or unfavourably, by movements in the Canadian/U.S. dollar exchange the four quarters in a year is not directly comparable to the impact of rate. Rate movements affect future results measured in Canadian year-over-year exchange rate fluctuations on earnings for the year. dollars and the impact on results is a function of the periods in which Hedging transactions resulted in an after-tax gain of $5 million in 2010 revenues, expenses and provisions for credit losses arise. If future ($1 million loss in 2009). results are consistent with the range of results for the past three years, The gain or loss from hedging transactions in future periods will be each one cent decrease in the Canadian/U.S. dollar exchange rate, determined by both future exchange rate fluctuations and the amount expressed in terms of how many Canadian dollars one U.S. dollar buys, of the underlying future hedging transactions, since the transactions are would be expected to change the Canadian dollar equivalents of U.S.- entered into each quarter in relation to expected U.S.-dollar-denominated dollar-denominated net income (loss) before income taxes by between net income for the next three months. The effect of exchange rate –$6 million and $10 million. An increase of one cent would have the fluctuations on our net investment in foreign operations is discussed opposite effect. in the Provision for Income Taxes section on page 42.

Notable Items We have designated certain charges as notable items to assist in Notable Items

discussing their impact on our financial results. There were no items ($ millions) 2010 2009 2008 designated as notable in 2010. Charges related to deterioration These items reduced net income by $474 million in 2009 and in capital markets environment – 521 388 $426 million in 2008, as set out in the adjacent table. Charges in 2009 Related income taxes – 166 128 and 2008 include amounts related to BMO’s investment in Apex Trust, Net impact of charges related to deterioration a Canadian credit protection vehicle. In the latter half of 2009, we in capital markets environment (a) – 355 260 put in place hedges that reduced BMO’s risk exposure on Apex to levels that are not expected to expose BMO to significant loss. In 2010, the total Increase in general allowance – 60 260 Related income taxes – 21 94 mark-to-market losses on the exposure, net of hedging, were nominal, at less than $10 million pre-tax. Net impact of increase in general allowance (b) – 39 166 In 2009, revenue was reduced by charges of $521 million related Severance costs – 118 – to Apex. These charges reduced trading non-interest revenues by Related income taxes – 38 – $344 million and securities gains by $177 million. Net impact of severance costs (c) – 80 – In 2008, revenue was reduced by charges of $388 million in respect of the capital markets environment, including charges of $230 million Total reduction in net income (a + b + c ) – 474 426 related to Apex and $158 million in respect of exiting positions related to the monoline insurer ACA Financial Guarantee Corporation. These Caution charges reduced trading non-interest revenues by $258 million and This Notable Items section contains forward-looking statements. securities gains by $130 million. Please see the Caution Regarding Forward-Looking Statements. Further details on the effects of notable items in 2009 can be found on page 33.

36 BMO Financial Group 193rd Annual Report 2010 MD&A 37 nm 3 Change 22 75 (%) nm 5 2009

(in basis points) 25 2009 2010 Net interest margin interest Net 92 90 2 nm 70 295 282 13 362 313 49 307 289 18 188 163 25 281 334 (53) 2010 3 22 Other countries Canada States United 2008 75 The change in revenue by by The change in revenue the stronger reflects country in Canada. recovery economic Revenue by Country Country by Revenue 2009 2008 20072006 Change $ % Revenues of operating groups groups operating of Revenues 2010 Annual Report 193rd Financial Group BMO 7.0 13.6 (14.0) 3.8 (14.0) 13.6 8.8 7.0 2010 8.4 9.2 (6.4) 1.5 (6.4) 10.4 8.4 9.2 9.8 5.0 2.0 (0.9) 11.9 9.8 5.0 2.0 6,235 5,570 5,072 4,829 4,732 5,975 5,494 5,133 4,520 5,253 6,084 5 7,823 67 2,414 23 11,064 10,205 9,349 9,985 11,064 12,210 (8,784) (23) (2,700) (2) (9,380) (3) (16,917) (10)

10.4 12,210 (%) (%) (%) 8.4 2009 11,064 Average earning assets assets earning Average millions) millions) 2009 9.2 2008 2010 10,205 2010 (3,847) (11,670) 30,149 38,933 12,981 10,567 ($ millions) (6.4) 2007 152,116 169,033 141,069 134,985 171,218 173,918 332,468 341,848 9,349 Revenue ($ millions) Revenue (%) Growth 1.5 2006 9,985 Revenue and Annual Growth Revenue Taxable equivalent basis (teb) equivalent Taxable equivalent a taxable on presented in our MD&A are reflected and GAAP revenues increases adjustment The teb basis (teb). increase would that amount an by taxes income for the provision would that a level to securities certain tax-exempt on revenues comparisons. facilitate to the statutory rate, incur tax at dividend and income including interest securities, and as loans for accounted investments from income of share BMO’s and expense interest less accounting, of method using the equity such as deposits. liabilities, on paid to income interest net of is the ratio margin interest Net or in basis points. as a percentage expressed assets, earning is comprised of earnings on assets, such assets, on earnings of is comprised income interest Net 2010 marked a third consecutive a third marked 2010 growth. revenue strong of year Total revenue revenue Total growth Year-over-year For the year ended October 31 31 ended October the year For income interest Net growth Year-over-year revenue Non-interest growth Year-over-year Change ($ Revenue $ % 12 3 353 9 225 4 665 12 562 42 (128) (11) (134) (9)

353 3,811 1,220 5,031 1,528 5,570 (1,342)

Net interest income (teb) (teb) income interest Net 2009

($ millions) millions) ($ lion. There There lion. Illinois-based Illinois-based 365 2010 (780) 1,394 6,235 4,164 1,092 5,256 basis. Revenues Revenues basis. There were no such were There $521 million related to the to related million $521

(1) not meaningful – not For the third consecutive year, there was solid growth in both BMO BMO in both growth solid was there year, consecutive the third For Total BMO net interest margin is stated on a GAAP basis. The operating groups net interest margins are stated on a teb basis. a teb on stated are margins interest net groups The operating a GAAP basis. on is stated margin interest net BMO Total P&C Canada revenue increased $543 million or 10%. The segment’s The segment’s 10%. or million $543 increased P&C Canada revenue BMO analyzes revenue at the consolidated level based on GAAP GAAP based on level the consolidated at revenue analyzes BMO 5 million or 12% from 2009. The net effect of businesses acquired acquired businesses of effect The net 2009. from 12% or 5 million For the year ended October 31 31 ended October the year For

nm Total BMO BMO Total Personal and Commercial Banking Commercial and (P&C)Personal (PCG) Group Client Private CM) (BMO Capital Markets BMO Operations and including Technology Services, Corporate P&C Canada P&C U.S.

6 6 impact of the difficult capital markets environment. the difficult markets capital of impact in BMO Capital Markets in 2009 were elevated by favourable market market favourable by elevated were in 2009 Capital Markets in BMO of a charge by lowered but were conditions from the Diners Club acquired business. P&C U.S. revenue increased increased revenue P&C U.S. business. the Diners Club acquired from cer- of the acquisition of the impact for Adjusting 1.8%. or million US$25 Bank, AMCORE of tain liabilities and assets a Rockford, N.A.,

(1) (1) Change in Net Interest Income, Average Earning Assets and Net Interest Margin Interest Net Earning and Assets Average Income, Interest in Net Change increased net interest income by $24 million, while the impact of of while the impact million, $24 by income interest net increased million. $210 by income interest net decreased dollar U.S. the weaker but increased billion, $9.4 decreased assets earning average The bank’s net interest income and non-interest revenue. non-interest and income interest net Income Interest Net of increase an million, $6,235 was the year for income interest Net $ and administration and associated fee-based revenues. Insurance revenue revenue Insurance revenues. fee-based associated and administration and a full year’s the inclusion of and premiums higher due to increased the by offset partially acquisition, Assurance Life the BMO results of Capital Markets BMO movements. market unfavourable of effects were that results in 2009 from 6% or million $190 increased revenue gains securities Investment outlined above. the charge by lowered underwriting fees debt and fees acquisitions and Mergers increased. and businesses interest-rate-sensitive from but revenues improved also difficult market in the more fell revenue trading lending and corporate due higher to significantly were Services revenues Corporate conditions. actions. management and conditions stable market more bank, and the impact of impaired loans, revenue decreased US$27 million US$27 decreased revenue loans, bank, impaired of the impact and revenue growth was driven by volume growth in most products, products, in most growth volume by driven was growth revenue revenues of months ten the inclusion of and margin interest net improved by $365 million or 3.3 percentage points, while the net impact of acquired of impact while the net points, percentage or 3.3 million $365 by Revenue increased $1,146 million or 10% in 2010 to $12,210 mil mil $12,210 to in 2010 10% or million $1,146 increased Revenue P&C U.S., except groups the operating of in each growth revenue solid was dollar a U.S. on higher modestly were revenues where Revenue charges in 2010. The weaker U.S. dollar lowered overall revenue growth growth revenue overall lowered dollar U.S. The weaker in 2010. charges or 2.0% as the effect of loan spread improvement was more than than more was improvement spread loan of as the effect or 2.0% client lower to related balances loan in commercial a decrease by offset Group Client Private compression. spread as deposit as well utilizations, growth revenue reflecting 12%, or million $233 increased revenue conditions market in equity The improvement its businesses. of all across under management assets the group’s increased the year of most for revenues reflected in the financial statements rather than on a taxable a taxable on than rather in the financial statements reflected revenues our Canadian peer group. with which is consistent basis (teb), equivalent at basis a teb on revenue analyze to continue we banks, many Like totalled fiscal 2010 adjustments The teb for level. group the operating in 2009. million $247 up from million, $355 businesses increased growth by $214 million or 1.9 percentage points. percentage 1.9 or million $214 by growth increased businesses MANAGEMENT’S DISCUSSION AND ANALYSIS

$4.1 billion excluding the impact of the weaker U.S. dollar. Asset levels were reduced in BMO Capital Markets and P&C U.S., due in part to the Average Earning Assets and Net Interest Income weaker U.S. dollar, but there were solid increases in P&C Canada and Net Interest Margin and Non-Interest Revenue Private Client Group. BMO’s overall net interest margin was up 25 basis ($ billions) 6.2 342 327 332 points in 2010, driven primarily by higher margins in P&C Canada 5.6 304 6.0 and improved net interest income in Corporate Services. The main drivers 5.3 5.1 261 5.5 of BMO’s overall net interest margin are the individual group margins, 4.8 changes in the magnitude of each operating group’s assets and changes 4.7 5.1 in net interest income in Corporate Services. 1.81 1.88 1.59 1.55 1.63 4.5 P&C Canada recorded a solid increase in net interest income. Volume growth remained strong in all major product categories. Net interest margin increased 13 basis points, driven primarily by 2006 2007 2008 2009 2010 2006 2007 2008 2009 2010

actions taken in 2009 to mitigate the impact of rising long-term funding Net interest margin (%) Net interest income costs, improvement in the spread on deposit products from unusually Average earning assets ($ billions) Non-interest revenue low levels a year ago and higher volumes in more-profitable products. In P&C U.S., net interest income fell, but increased on a U.S. dollar basis. MD&A The favourable effects of the Rockford, Illinois-based bank transaction Adjusting for the weaker There was consistent growth and loan spread improvement more than offset the impact of impaired U.S. dollar, earning assets in net interest income and increased with improved non-interest revenue. loans, the decrease in commercial loan balances caused by lower net interest margin. client utilizations, and deposit spread compression. P&C U.S. net interest margin rose significantly from 2009. Assets under Administration Assets under Management Private Client Group net interest income increased modestly. ($ billions) ($ billions) Volume growth in our brokerage and private banking businesses 133 259 261 129 was partially offset by spread compression in our brokerage businesses. 239 228 230 The group’s net interest margin decreased 53 basis points, with 109106 109 approximately 90% of the decrease due to the mid-2009 acquisition of BMO Life Assurance, which increased assets with no change to net interest income. BMO Capital Markets net interest income decreased $134 million or 9%. Revenues from interest-rate-sensitive businesses and corporate 2006 2007 2008 2009 2010 2006 2007 2008 2009 2010 bank ing were lower, while trading net interest income was higher. The group’s average earning assets were reduced by $16.9 billion, including the $8.2 billion negative impact of the weaker U.S. dollar, due There was growth in Growth reflects the number mainly to lower levels of money market and corporate lending assets. institutional, personal and of new clients and stronger Net interest margin increased nominally as higher net interest income mutual fund assets under equity markets, offset in part from trading assets was offset by lower spreads on money market administration. by the weaker U.S. dollar. and corporate lending assets. The improvement in Corporate Services net interest income was primarily due to a lower negative carry on certain asset-liability interest Non-Interest Revenue ($ millions) rate positions as a result of management actions and more stable market Change from 2009 For the year ended October 31 2010 2009 2008 $ % conditions, and the diminished impact in 2010 of funding activities in prior years that enhanced our strong liquidity position. Securities commissions and fees 1,048 973 1,105 75 8 Table 9 on page 100 and Table 10 on page 101 provide further details Deposit and payment service charges 802 820 756 (18) (2) on net interest income and net interest margin. Trading revenues 504 723 546 (219) (30) Non-Interest Revenue Lending fees 572 556 429 16 3 Non-interest revenue, which comprises all revenues other than net Card fees 233 121 291 112 93 Investment management interest income, was $5,975 million in 2010, an increase of $481 million or and custodial fees 355 344 339 11 3 9% from 2009. Revenues in BMO Capital Markets in 2009 were elevated Mutual fund revenues 550 467 589 83 18 by favourable market conditions, but charges related to notable items Securitization revenues 678 929 513 (251) (27) reduced revenue in that year by $521 million, increasing year-over-year Underwriting and advisory fees 445 397 353 48 12 growth in 2010. The net impact of acquired businesses increased 2010 Securities gains (losses) 150 (354) (315) 504 +100 non-interest revenue by $190 million, while the impact of the weaker Foreign exchange, other than trading 93 53 80 40 75 U.S. dollar decreased non-interest revenue by $155 million. Insurance income 321 295 237 26 9 Securities commissions and fees increased $75 million or 8%. Other 224 170 210 54 32 These fees consist largely of full-service and online brokerage commis- Total 5,975 5,494 5,133 481 9 sions within Private Client Group, which account for about two-thirds of the total, and institutional equity trading commissions within BMO Capital Markets. The increase was largely due to increases in client Deposit and payment service charges decreased $18 million or trading volumes in Private Client Group, as equity market valuations 2%, largely due to the impact of the weaker U.S. dollar on revenues in were low in the first half of 2009 and activity levels were reduced. P&C U.S. and BMO Capital Markets.

38 BMO Financial Group 193rd Annual Report 2010 MD&A

39 (5) (5) 20 31 (23) (32) (34) (30) +100 $ % 95 85 (57) (57) (95) (27) 162 (115) (219) 79 (18) (76) (3) 467 176 362 379 409 200 518 188 723 546 1,241 734 1,241 734 2009 2008

Change from 2009 from Change 9 52 2010 Annual Report 193rd Financial Group BMO 562 247 314 680 504 2010 2010 1,184 1,184 ar but softening in the latter half. half. in the latter but softening ar include net interest income and non- and income include interest net – The Market Risk section on page 82 provides more information information more provides page 82 on section Risk The Market Trading-related revenues decreased $57 million from 2009, showing showing 2009, from million $57 decreased revenues Trading-related Although the North American economy improved in 2010 from the from in 2010 improved Although the North American economy Trading-related revenues Trading-related positions sheet off-balance and on from earned revenue interest these of The management purposes. trading for undertaken a daily on includes typically marking market positions them to include also (expense) income revenues Trading-related basis. instruments and sheet on-balance both (losses) gains from and (including exchange foreign rate, interest sheet off-balance contracts. credit and commodity equity, positions), spot Total Total (taxable equivalent basis) equivalent (taxable ($ millions) 31 ended October the year For Interest rates exchange Foreign Equities Commodities Other Total as: Reported income interest Net revenue Non-interest revenues trading modestly lower than the levels of a year ago. Trading-related revenues revenues Trading-related ago. a year of the levels than lower modestly Interest rate trading revenues were higher in 2010 but were weak in weak but were in 2010 higher were revenues trading rate Interest the due to largely increased, revenues Other trading quarter. the third securitization- and sheet balance certain structural of impact improved from decreased revenue trading Equities hedging activities. related which provided year, in the current volatility mainly lower due to 2009 reduction 2010 quarter as a fourth as well opportunities, trading fewer revenue trading commodities Similarly, adjustments. accounting for which benefited from in the prior year, levels elevated from decreased in 2010 markets exchange Foreign flows. usual customer than higher 2009, to compared volatility lower and very spreads thin experienced revenue. trading exchange in a declineresulting in foreign revenues. trading-related on recession that affected much of 2009, our trading-related revenues were revenues our trading-related much 2009, affected of that recession market in taking of successful advantage were as we in 2009 strong were Conditions volatility. market of levels high by presented opportunities a more and opportunities market fewer with favourable, less were in 2010 36 page on section Items The Notable difficult environment. trading environ- in the capital markets deterioration to related outlines charges total and million $344 by revenues trading-related reduced that ment in 2010. no similar charges were There in 2009. million $521 by revenue Financial Instruments whichThe Select starts section, page 63, on had markets certain instruments that on information detailed provides as carrying risk, higher in which regard certain resulted to of come charges that designated were as notable items in prior years. the ye half of in the first strength Interest and Non-Interest Trading-Related Revenues Trading-Related Non-Interest and Interest

f activities undertaken for clients who enter into transactions transactions into clients who enter for undertaken activities f Other revenue includes sundry various Other revenue amounts and increased Securities gains were $150 million, improving from a net loss loss a net from improving million, $150 were gains Securities Underwriting and advisory fees were $48 million or 12% higher higher 12% or million $48 advisoryUnderwriting and were fees Table 7 on page 98 provides further details on revenue and and revenue on further details provides page 98 7 on Table Securitization revenues decreased $251 million or 27%, reflecting a reflecting or 27%, million $251 decreased revenues Securitization trading, than increased other exchange, foreign from Income higher due to in part or 9%, million $26 increased income Insurance Mutual fund revenues improved markedly, growing by $83 million million $83 by growing markedly, improved Mutual fund revenues Investment management and custodial fees increased $11 million million $11 increased fees custodial and management Investment Card fees increased $112 million to $233 million. The increase The increase million. $233 to million $112 increased fees Card Lending fees increased $16 million or 3% due to higher volumes, volumes, higher due to or 3% million $16 increased fees Lending Trading revenues are discussed in the trading-related revenues revenues in the trading-related discussed are revenues Trading lume o reduction from securitizing residential mortgages. Revenues included Revenues mortgages. securitizing residential from reduction down securitizations, new for loans the sales on of million $68 of gains to loans sales on of million $428 of gains and 2009, from million $30 The 2009. from million $174 down vehicles, securitization revolving income interest less of results in the recognition assets of securitization less million ($449 fees credit card reduced in 2010), less million ($507 in 2010). less million ($203 losses credit for provisions lower and in 2010) the in 2010, million $678 of As such, revenue including securitization decreased and prior years securitizing impactcombined of in 2010 assets $54 million or 32%. million $54 on policyholder liabilities. policyholder on revenue growth. revenue and Corporate Services. assumes proprietary positions with the goal earning of trading profits. with BMO to mitigate their risks or to invest. BMO earns a spread a spread earns BMO invest. or to their risks mitigate to BMO with neutralizing, profitably by its client positions sum of the net on or profit also BMO positions. the net of risk the overall limits, prescribed within Trading-Related Revenues Trading-Related the things, other among on, dependent are revenues Trading-related vo premiums and the inclusion of a full year’s results of BMO Life Assurance Assurance Life BMO results of a full year’s the inclusion of and premiums movements market unfavourable of the effects by offset partially in 2010, of $354 million in 2009. The notable items discussed on page 36 include page 36 discussed on items The notable in 2009. million $354 of million $177 of (losses) gains in 2009 in securities recorded charges environment. markets in the capital the deterioration to related Group Client Private in P&C Canada, growth reflecting or 75%, million $40 than in 2010. Mergers and acquisitions fees and debt underwriting underwriting debt and fees acquisitions and Mergers in 2010. than improved and performance strong reflecting considerably, improved decreased. underwriting fees Equity conditions. market pre-tax income by $75 million in 2010. We securitize loans primarily primarily loans securitize We in 2010. million $75 by income pre-tax securitized We funding. cost-effective of sources alternate obtain to in billion $6.8 and in 2010 loans mortgage residential of billion $4.3 the of 126 page 8 on in Note detailed are revenues Securitization 2009. financial statements. $91 million reduction from securitizing credit card loans and a $160 million a $160 and loans securitizing credit card from reduction million $91 or 18%. Asset levels continued to reflect the growth that began in the began that the growth reflect to continued levels Asset 18%. or the year. of the course further over rising 2009, half of second or 3% due to stronger equity markets. equity stronger due to or 3% reflects volume growth, reduced securitization activity over the course the course over activity securitization reduced growth, reflects volume Club the Diners the results of of months ten the inclusion of and 2010 of year. the current in business acquired offset in part by the impact of the weaker U.S. dollar. U.S. the weaker of the impact by part in offset section that follows. that section MANAGEMENT’S DISCUSSION AND ANALYSIS

Provision for Credit Losses During 2010, we saw an improvement in the overall global economic Provision for (Recovery of) Credit Losses (PCL) environment, but conditions in some sectors remained challenging. ($ millions, except as noted) This was particularly evident in the slower pace of recovery in the United For the year ended October 31 2010 2009 2008 2007 2006 2005 2004 States, most notably in the real estate sector, which faced continuing New specific provisions 1,419 1,765 1,242 460 410 407 510 pressure. However, with an economic recovery underway and evidence Reversals of previous of stabilization in much of the credit market, we believe the overall allowances (187) (77) (58) (66) (87) (121) (312) improvement will continue into 2011, with some potential for variability. Recoveries of BMO recorded $1,049 million of specific provisions for credit losses prior write-offs (183) (145) (114) (91) (112) (67) (131) in the current year, with no change to the general allowance for credit Specific provisions losses. This compares to the $1,603 million provision recorded in 2009, for credit losses 1,049 1,543 1,070 303 211 219 67 which comprised specific provisions of $1,543 million and a $60 million Increase in (reduction of) general allowance – 60 260 50 (35) (40) (170) increase in the general allowance. Provisions as a percentage of average net loans and acceptances decreased to 0.61% in 2010 from 0.88% in Provision for (recovery of) 2009. The majority of our provisions continue to relate to our U.S. port- credit losses 1,049 1,603 1,330 353 176 179 (103)

MD&A folio, although we have seen an improving trend develop across both PCL as a % of our Canadian and U.S. portfolios in 2010. average net loans A significant factor influencing both provisions for credit losses and and acceptances write-offs is the level of formations of new impaired loans – identified (excluding repos) (%) 0.61 0.88 0.76 0.21 0.11 0.13 (0.08) as additions to impaired loans and acceptances in the adjacent Changes in Gross Impaired Loans and Acceptances table. As with specific provisions Changes in Gross Impaired Loans (GIL) and Acceptances and consistent with a year ago, impaired loan formations were well ($ millions, except as noted) above the low levels of 2007 and 2006, but decreased to $1,525 million For the year ended October 31 2010 2009 2008 2007 2006 2005 2004 (excluding acquired impaired loans) in 2010 from a peak of $2,690 million GIL, beginning of year 3,297 2,387 720 666 804 1,119 1,918 in 2009. On a geographic basis, the United States again accounted for Additions to the majority of the impaired formations, with the commercial real estate impaired loans and commercial mortgage sectors providing the largest contributions. and acceptances 1,525 2,690 2,506 588 420 423 607 Gross impaired loans decreased to $3,221 million from $3,297 million Net additions to in 2009. Gross impaired loans include an amount of $302 million (net impaired loans and acceptances due $327 million acquired) related to the acquisition of a U.S.-based portfolio to acquisitions (1) 327 – – – – – – in an FDIC-assisted transaction. The loss sharing arrangement with the Reductions in FDIC on this transaction indemnifies BMO against 80% of any losses on impaired loans the acquired portfolio. Additional factors contributing to the change and acceptances (2) (712) (288) 131 (143) (220) (319) (936) in impaired loans are outlined in the accompanying table. In 2010, sales Write-offs (1,216) (1,492) (970) (391) (338) (419) (470) of gross impaired loans totalled $29 million, with related reversals and GIL, end of year 3,221 3,297 2,387 720 666 804 1,119 recoveries of $9 million. This compares with sales of $97 million and related reversals and recoveries of $9 million in 2009. GIL as a % of The general allowance is maintained to cover impairment in gross loans and acceptances the existing credit portfolio that cannot yet be associated with specific (excluding repos) (%) 1.80 1.94 1.26 0.44 0.41 0.55 0.83 loans, and is assessed on a quarterly basis. The general allowance decreased $9 million from the prior fiscal year. While the general allowance (1) See Table 15 on page 103. (2) Includes the impact of foreign exchange and write-offs of consumer loans included was increased by our acquisition of the Diners Club business credit card in additions to impaired loans in the period. receivables early in fiscal 2010, this was more than offset by the impact of the weaker U.S. dollar. The general allowance remains adequate and, as at October 31, 2010, represented 0.95% of credit risk-weighted Gross Impaired Loans and Specific Provision for Credit assets. The total allowance for credit losses decreased $24 million Acceptances as a % of Equity Losses as a % of Average * in 2010 to $1,878 million (excluding a $9 million allowance included in and Allowances for Credit Losses Net Loans and Acceptances Other Liabilities related to letters of credit that are considered Other 0.85 Credit Instruments). 14.9 13.6 0.61 0.61 BMO’s loan book continues to comprise primarily the more stable 12.1 consumer and commercial portfolios, which represented 86.2% of the 7.5 loan portfolio at year end, an increase from 80% in 2009 mainly due 5.1 4.1 4.4 0.18 to reduced levels of corporate loans. The consumer loans portfolio repre- 0.16 0.14 0.05 sents 56.6% of the portfolio, up from 53.9% in 2009, with approximately 87.0% of the portfolio secured. The corporate and commercial loans port- 2004 201020092008200720062005 2004 201020092008200720062005 folio represents 43.4% of the portfolio, down from 46.1% in 2009. We continue to monitor industry sectors that we consider to be of concern, including real estate services, financial institutions and manufacturing. In 2010, credit conditions began Provisions remain elevated, to improve. but have returned to the BMO’s exposure to sectors of concern remains within acceptable limits. lower levels of 2008. Credit risk management is discussed further on page 80. Note 4 *Restated. See Table 12 on page 102. on page 120 of the financial statements and Tables 11 to 19 on pages 102 to 105 provide details of BMO’s loan portfolio, impaired loans and provisions and allowances for credit losses. Caution This Provision for Credit Losses section contains forward-looking statements. Please see the Caution Regarding Forward-Looking Statements. 40 BMO Financial Group 193rd Annual Report 2010 MD&A 41 – – 9 3 5 (5) 10 100 71.8 55.5 55.3 62.2 $ % – 10 62 (21) 117 158 209 (138) – (2.5) P&C CM BMO ) is our key ) is our key (%) 3.1 (1.4) 0.6 0.3 7.1 4.4 Change from 2009 Change from 56.6 78.0 56.5 2009 2010 66.7 (%)

20092008 – 2.1 1.8 1.1 1.6 2.0 1.6 6.9 2.8 PCG * BMO Total 75.1 67.6 59.5 2008 2010 (2.9) 73.1 Non-teb Productivity Ratio by by Ratio Productivity (teb) Group ratio productivity BMO’s our of as most improved revenues increased groups expenses. to relative * 2009 2008 ses that support the front line. the front support ses that – (10) (8) 2010 Annual Report 193rd Financial Group BMO 203 203 183 2010 1,455 1,338 1,297 2,909 3,047 2,679 4,364 4,385 3,976 1,343 1,281 1,241 1,680 1,522 1,502 7,590 7,381 6,894 2.8 2010 7,590 ($ millions) expense-to-revenue ratio expense-to-revenue (or 7.1 is calculated in the same manner, after after is calculated in the same manner, 2009 7, 381 ratio

4.4 2008 6,894 3.9 2007 6,601 Expenses ($ millions) (%) Expense growth 0.3 2006 6,353 measure of productivity. It is calculated as non-interest expense It is calculated as non-interest productivity. of measure basis in equivalent a taxable (on revenues total divided by The cash as a percentage. expressed groups), the operating ratio productivity non-interest from assets intangible of the amortization removing page 91. See expenses. Expenses and Annual Expense Growth moderate was Expense growth the due to in part in 2010, dollar. U.S. weaker The productivity 31 ended October the year For Performance-based Performance-based compensation compensation Other employee compensation employee Total equipment and Premises charge Restructuring Other assets intangible Amortization of Total Businesses acquired acquired Businesses charge Restructuring effect translation Currency compensation Performance-based Other factors growth expense non-interest Total For the year ended October 31 31 ended October the year For growth. We aim to achieve operating leverage by driving revenues driving revenues by leverage operating achieve to aim We growth. management, expense ongoing and focus customer increased an through support in all effectiveness efficiency and greater create to working proces business and groups functions, Contribution to Non-Interest Expense Growth Expense Growth Non-Interest to Contribution Expense Non-Interest

- We continued continued We crease are set out in the adjacent in the adjacent out set are crease was 61.9%, a 440 basis point improve a 440 basis point 61.9%, was (1) employment levels increased over the over increased levels employment Columbia. This has increased the sales tax This has increased paid Columbia. business acquisitions and higher initiative spending. spending. initiative higher and acquisitions business Other employee compensation expense, which includes compensation expense, salariesOther employee The dollar and percentage changes in expenses by category are category are by changes percentage and in expenses The dollar As explained on page 35, the net effect of businesses acquired in acquired businesses of effect the net page 35, on As explained Premises and equipment costs increased $62 million or 4.8%, pri- or 4.8%, million $62 increased costs equipment and Premises P&C’s productivity ratio improved to 55.3% from 56.6%. P&C Canada 56.6%. from 55.3% to improved ratio productivity P&C’s BMO’s cash productivity ratio cash productivity BMO’s outlined in the are productivity enhance to initiatives of Examples On July 1, 2010, the harmonized sales tax was implemented in implemented sales tax was the harmonized 2010, 1, On July Other expenses rose $158 million or 10%, mainly in respect of a of mainly in respect 10%, or million $158 rose Other expenses and employee benefits, decreased $138 million or 4.5% from 2009, in 2009, from or 4.5% million $138 decreased benefits, employee and dollar. U.S. weaker the and charges severance year’s last duepart to There increased. expense compensation other these items, Adjusting for were outlined in the adjacent Non-Interest Expense table. Table 8 on page 99 page 99 8 on Table Expense table. Non-Interest outlined in the adjacent growth. expense and expenses on detail more provides 2010 and 2009 increased expenses in 2010 relative to 2009 by $152 mil- $152 by 2009 to relative in 2010 expenses increased 2009 and 2010 dollar U.S. the weaker 36, page on As further explained (2.1%). lion performance-based Higher (2.9%). million $213 by in 2010 costs reduced in line (1.6%), million $117 by expenses increased costs compensation performance. improved with items in 2010, but notable items in 2009 included severance costs that that costs included severance in 2009 items but notable in 2010, items million. $118 by expense non-interest increased to invest in our businesses and and in our businesses invest to 2010. of course (1) page 91. See non-GAAP measures. are Cash-based measures (1) operating leverage of at least 1.5%, increasing revenues by an average of of average an by revenues increasing 1.5%, least at of leverage operating cash-based expense of the rate than points more percentage 1.5 least at results in 2009, BMO’s cash productivity ratio improved by 46 basis points. by improved ratio cash productivity BMO’s results in 2009, is BMO’s largest operating segment, and its productivity ratio of 51.1% 51.1% of segment, ratio operating its and productivity largest is BMO’s sub- growth revenue with year last from points basis 260 by improved in P&C U.S. ratio The productivity growth. outpacing expense stantially condi- difficult market basis pointscontinuing as the 600 by deteriorated basis, dollar a U.S. on increased costs and growth revenue affected tions including transaction, bank Illinois-based the Rockford, due to primarily the impact for years both in costs Adjusting costs. integration acquisition acquisi- and accrual changes in the Visa litigation costs, loan impaired of to basis points 280 by deteriorated productivity costs, integration tion improved in 2010 Group Client Private for ratio The productivity 65.7%. and revenue increased reflecting 71.8%, to basis points 620 by markedly ratio productivity Capital Markets BMO control. expense effective growth. revenue good by driven points, basis 100 improved Productivity basis 450 by improved ratio) (expense-to-revenue ratio The productivity results affected that items Excluding the notable in 2010. 62.2% to points basis points. 54 by improved ratio productivity BMO’s in 2009, both Ontario and British both in a number expenses higher to contributing jurisdictions, in these two ago. a year to relative categories expense of marily related to software development in support of our business growth. our business of in support development software to related marily Non-interest expense increased $209 million or 2.8% to $7,590 million in million $7,590 to or 2.8% million $209 increased expense Non-interest in the to contributing The factors 2010. Non-Interest Expense Non-Interest Contribution to Non-Interest Expense Growth table. There were no notable were There table. Expense Growth Non-Interest to Contribution 2010 Review of Operating Groups Performance, which starts page 42. on Performance, Groups Operating of Review 2010 7.5%. was leverage cash and operating 7.6% was leverage Operating cash annual average achieve is to time, goal, over Our medium-term large number of small increases for initiative-related expenses such as expenses initiative-related for small increases number of large in activities to related primarily costs, travel and fees professional growth. our business of support ment from 66.3% in 2009. Excluding the notable items that affected affected that items Excluding the notable in 2009. 66.3% from ment MANAGEMENT’S DISCUSSION AND ANALYSIS

Provision for Income Taxes The provision for income taxes reflected in the Consolidated Statement on translation of investments in U.S. operations are charged or credited of Income is based upon transactions recorded in income, regardless to shareholders’ equity. For income tax purposes, the gain or loss on of when such transactions are subject to taxation by tax authorities, with the hedging activities results in an income tax charge or credit in the the exception of the repatriation of retained earnings from foreign sub- current period, which is charged or credited to shareholders’ equity, sidiaries, as outlined in Note 24 on page 155 of the financial statements. while the associated unrealized gain or loss on the investments in Management assesses BMO’s consolidated results and associated U.S. operations does not incur income taxes until the investments are provisions for income taxes on a GAAP basis. We assess the performance liquidated. The income tax charge/benefit arising from a hedging gain/ of the operating groups and associated income taxes on a taxable loss is a function of the fluctuations in exchange rates from period equivalent basis and report accordingly. to period. Hedging of the investments in U.S. operations has given rise The provision for income taxes was $687 million in 2010, compared to income tax expense in shareholders’ equity of $206 million for with $217 million in 2009. The effective tax rate in 2010 was 19.2%, the year, compared with $382 million in 2009. Refer to the Consolidated compared with 10.5% in 2009. The higher effective tax rate in 2010 was Statement of Changes in Shareholders’ Equity on page 112 of the mainly attributable to proportionately lower income from lower-tax-rate financial statements for further details. jurisdictions. There were also proportionately lower levels of recoveries Table 8 on page 99 details the $1,089 million of total net

MD&A of prior years’ income taxes and tax-exempt income. government levies and income tax expense incurred by BMO in 2010. BMO hedges the foreign exchange risk arising from its investments The increase from $581 million in 2009 was primarily due to higher in U.S. operations by funding the investments in U.S. dollars. Under this income tax expense. program, the gain or loss on hedging and the unrealized gain or loss

Transactions with Related Parties In the ordinary course of business, we provide banking services to made available to our preferred customers. We also offer employees our directors and executives and their affiliated entities, joint ventures a fee-based subsidy on annual credit card fees. and equity-accounted investees on the same terms that we offer to Stock options and deferred share units granted to directors, and our customers for those services. A select suite of customer loan and preferred rate loan agreements for executives relating to transfers we mortgage products is offered to our employees at rates normally initiate, are discussed in Note 27 on page 159 of the financial statements.

2010 Review of Operating Groups Performance This section includes an analysis of the financial results of our operating groups and descriptions of their businesses, strategies, strengths, Net Income Net Income challenges, key value drivers, achievements and outlooks. by Operating Group* by Country Personal and Commercial Banking (P&C) (pages 44 to 50) Net income was $1,819 million in 2010, an increase of $118 million 2010 2010 or 7% from 2009. P&C 58.5% Canada PCG 15.1% 90.2% Private Client Group (PCG) (pages 51 to 53) BMO CM 26.4% U.S. 2.1% Net income was $470 million in 2010, an increase of $111 million or 31% Other countries from 2009. 7.7 % BMO Capital Markets (BMO CM) (pages 54 to 56) Net income was $820 million in 2010, a decrease of $53 million or 6% 2009 2009 from 2009. P&C 58.0% Canada PCG 12.2% 87.4% Corporate Services, including Technology and Operations (page 57) BMO CM 29.8% U.S. (6.2)% The net loss was $299 million in 2010, compared with a net loss of Other countries $1,146 million in 2009. 18.8% Allocation of Results The basis for the allocation of results geographically and among operating The share of net income by Lower provisions for credit losses groups is outlined in Note 26 on page 157 of the financial statements. operating group is largely improved the U.S. contribution Certain prior-year data has been restated, as explained on the following in line with results in 2009. to net income, while net income page, which also provides further information on the allocation of results. from other countries decreased.

* Percentages determined excluding results in Corporate Services, which in large part reflect our expected loss provisioning methodology.

42 BMO Financial Group 193rd Annual Report 2010 MD&A 43 Total 20092008 Consolidated ($ millions, except as noted) except ($ millions, (110) (184) 59 (110) 100 100 100 100 100 100 100 100 100 100 100 100 100 397 530 302 176 162 173 215 336 154 2010 2010 1,975 1,989 1,710 7,590 7,381 6,894 2,536 1,561 2,008 2,810 1,787 1,978 9,174 7,714 7,611 2,639 2,820 2,292 5,439 5,230 5,011 27,529 29,421 31,854 12,210 11,064 10,205 398,474 438,548 397,609 256,611 266,649 236,495 114,334 142,478 129,260 2010 Annual Report 193rd Financial Group BMO 20092008 70 92 6 70 25 6 27 44 43 17 44 9 9 11 9 2.5 0.6 2.0 2.5 (0.6) (1.6) 1.3 (0.6) (26) (69) (69) (67) (26) 126 (83) (420) 147 189 41 206 101 203 206 2010 2010 (8.1) (2.4) (4.7) (8.1) Corporate Services, including Services, Corporate (753) (562) (222) (753) (299) (1,146) (411) (641) (217) (217) (413) (641) (130) (161) (321) (255) (568) (892) (64.2) (20.7) (20.7) (10.6) (64.2) (2,859) (6,247) 5,449 (2,859) (7,013) (10,315) (9,187) 7,412 2,897 12,445 7,412 BMO BMO 20092008 In 2010, we determined that certain BMO Capital Markets Capital Markets certain BMO that determined we In 2010, States as the United growth for business our commercial position To BMO analyzes consolidated revenues on a GAAP basis. However, However, a GAAP basis. on revenues consolidated analyzes BMO actions should be reported on a teb. Similar transactions have have Similar transactions a teb. on should be reported actions Capital Markets Markets Capital Operations and Technology margin and income taxes in BMO Capital Markets, with offsetting offsetting with Capital Markets, in BMO taxes income and margin amounts reflected in Corporate Services. in Corporate amounts reflected trans trans would be better served by a commercial banking model and transferred transferred banking and model a commercial served by be better would in the second Capital Markets BMO from P&C U.S. to their business and in loans billion $5.4 assumed As a result, P&C U.S. 2010. of quarter reflect to with prior periods results restated for billion in deposits, $3.2 the transfer. (teb). This basis includes an adjustment that increases GAAP revenues GAAP revenues increases that This basis includes adjustment an (teb). would that amount an by taxes income for the GAAP provision and to equivalent a level to securities certain tax-exempt on revenues raise the to The offset the statutory rate. incur tax at would amounts that and revenues Services in Corporate adjustments teb is reflected group tax provisions. income those in prior periods of ounts and am been reported in respect reported the reflect current to been restated transactions in prior periods have inter- net income, interest in net in increases reporting, resulting basis of est clients that mid-market U.S. identified we recession, from emerges These changes do not have a meaningful impact on the earnings of of the earnings on impact a meaningful have These changes do not to conform to been restated prior periodsP&C Canada. have Results for presentation. the current and groups its operating of the revenues analyzes BMO banks, many like basis equivalent a taxable on using revenue computed ratios associated 71 363 146 67 141 (2) 216 286 47 138 131 127 755 723 627 682 369 424 820 873 568 929 890 882 2010 2010 27.9 21.3 26.9 27.9 24.0 23.6 23.7 29.2 48.9 28.7 50.4 56.6 56.4 2,028 1,471 1,270 1,035 1,332 861 3,279 3,089 2,178 1,822 1,744 1,636 27,009 28,926 31,365 66,443 90,581 87,471 200,866 248,194 224,289 107,414 128,687 105,453 (%) 20092008 Private Private Client Group Group Client 27 22 37 (10) 17 (6) 3.6 2.6 2.2 142 168 131 503 451 446 175 174 163 311 197 305 470 359 426 252 241 219 222 250 237 2010 2010 18.2 21.0 18.4 18.2 21.0 21.2 21.3 22.8 16.7 20.1 21.5 2,340 2,811 2,385 1,611 1,569 1,569 1,818 1,597 1,764 2,245 2,012 2,146 1,362 1,297 1,295 14,214 11,594 8,658 11,371 8,332 5,827 20092008 Banking – – – – – – – – – – – – Personal and Commercial Commercial and Personal 193 286 242 2010 2010 62.0 60.1 59.4 62.0 52.8 52.6 52.9 64.7 95.2 70.5 44.7 41.4 43.0 4,010 3,879 3,648 1,626 1,415 1,153 1,819 1,701 1,395 5,741 5,287 4,794 1,513 1,568 1,342 7,254 6,855 6,136 2,945 2,837 2,733 1,065 1,042 915 33,106 41,674 36,507 177,945 181,619 170,909 144,839 139,945 134,402 $712 million included credit losses of $203 million related related million $203 included of million credit losses $712

In 2010, we changed the manner in which we report securitized securitized changed report the manner we which in we In2010, The actual specific provision for credit losses for P&C was P&C was for credit losses for The actual specific provision

For the year ended the year For

Assets Average Income Net Expenses Total Total Revenue Total Operating Groups Relative Contribution to BMO’s Performance Performance BMO’s to Contribution Relative Groups Operating

31 October respectively, for the 2009 fiscal year. The P&C Canada provision for for P&C Canada The provision fiscal year. the 2009 for respectively, of credit losses credit loss basis. basis. loss credit million in P&C Canada $465 and million $712 of comprised million, $1,177 million, $632 and million $664 million, $1,296 with compared in P&C U.S., quarterly based on their share of expected credit losses. The difference The difference credit losses. expected of their share quarterly based on required and credit losses expected based on quarterly charges between Corporate to is charged actual based on losses quarterly provisions expected an on presented results are group The operating Services. BMO employs a methodology for segmented reporting purposes purposes reporting segmented for a methodology employs BMO groups the operating to charged are credit losses expected whereby United States States United countries Other Other countries countries Other Canada Canada Canada States United United States States United countries Other Other countries countries Other Canada Average assets assets Average Canada States United Revenue Revenue Expenses income Net Contributions to Revenue, Expenses, Net Income and Average Assets by Operating Group and by Location Location by and Group Operating by Assets Average and Income Net Expenses, Revenue, to Contributions assets in our segmented disclosure. Previously, certain securitized mort- certain securitized Previously, disclosure. in our segmented assets now balance sheet. We in P&C Canada’s reported not were gage assets in P&C Canada assets offsetting mortgage with securitized all report all on earned income interest net and Services, amounts in Corporate is included assets interest mortgage in P&C Canada net securitized certain securitized on earned income interest net Previously, income. revenue. included was in P&C Canada assets mortgage non-interest to securitized assets, which are reflected as a reduction of non-interest non-interest of as a reduction reflected which are assets, securitized to method- reporting under our securitization Services in Corporate revenue specific of million $1,049 included not in BMO’s therefore are and ology credit for the actual specific provision Group, Client Private For provisions. BMO for and in 2009, million $30 with compared million, $13 was losses 2010 for credit losses for the actual specific provision Capital Markets, in 2009. million $389 with compared million, $62 was MANAGEMENT’S DISCUSSION AND ANALYSIS

Personal and Commercial Banking (Canadian $ in millions, except as noted)

P&C Canada P&C U.S. P&C

Change Change Change Fiscal Fiscal Fiscal from 2009 Fiscal Fiscal Fiscal from 2009 Fiscal Fiscal Fiscal from 2009 As at or for the year ended October 31 2010 2009 2008 $ % 2010 2009 2008 $ % 2010 2009 2008 $ % Net interest income (teb) 4,164 3,811 3,428 353 9 1,092 1,220 997 (128) (11) 5,256 5,031 4,425 225 4 Non-interest revenue 1,666 1,476 1,366 190 13 332 348 345 (16) (4) 1,998 1,824 1,711 174 10 Total revenue (teb) 5,830 5,287 4,794 543 10 1,424 1,568 1,342 (144) (9) 7,254 6,855 6,136 399 6 Provision for credit losses 502 387 341 115 30 124 92 63 32 35 626 479 404 147 31 Non-interest expense 2,978 2,837 2,733 141 5 1,032 1,042 915 (10) (1) 4,010 3,879 3,648 131 3 Income before income taxes 2,350 2,063 1,720 287 14 268 434 364 (166) (38) 2,618 2,497 2,084 121 5 Income taxes (teb) 706 648 567 58 9 93 148 122 (55) (37) 799 796 689 3 – Net income 1,644 1,415 1,153 229 16 175 286 242 (111) (39) 1,819 1,701 1,395 118 7 Amortization of acquisition-related intangible assets (after tax) 5 4 3 1 25 20 28 27 (8) (29) 25 32 30 (7) (22) MD&A Cash net income 1,649 1,419 1,156 230 16 195 314 269 (119) (38) 1,844 1,733 1,425 111 6 Net economic profit 1,117 953 739 164 17 Return on equity (%) 27.6 23.6 22.3 4.0 Cash return on equity (teb) (%) 28.0 24.1 22.8 3.9 Cash operating leverage (%) 5.4 6.6 (2.0) nm (9.3) 2.3 (7.0) nm 2.2 5.4 (3.1) nm Productivity ratio (teb) (%) 51.1 53.7 57.0 (2.6) 72.5 66.5 68.1 6.0 55.3 56.6 59.5 (1.3) Cash productivity ratio (teb) (%) 51.0 53.6 57.0 (2.6) 70.8 64.3 65.6 6.5 54.9 56.0 58.9 (1.1) Net interest margin on earning assets (%) 2.95 2.82 2.63 0.13 3.62 3.13 2.89 0.49 3.07 2.89 2.69 0.18 Average common equity 6,404 6,975 6,002 (571) (8) Average earning assets 141,069 134,985 130,165 6,084 5 30,149 38,933 34,490 (8,784) (23) 171,218 173,918 164,655 (2,700) (2) Average loans and acceptances 143,034 136,698 131,591 6,336 5 25,737 33,646 30,529 (7,909) (24) 168,771 170,344 162,120 (1,573) (1) Average deposits 98,945 95,953 86,122 2,992 3 26,178 29,726 22,298 (3,548) (12) 125,123 125,679 108,420 (556) – Assets under administration 22,740 24,513 23,502 (1,810) (7) 55,957 47,375 65,027 8,582 18 78,697 71,888 88,529 6,772 9 Assets under management – – – – – 805 – – 805 nm 805 – – 805 nm Full-time equivalent employees 16,377 15,950 16,493 427 3 4,460 3,932 4,386 528 13 20,837 19,882 20,879 955 5

nm – not meaningful

P&C U.S. Selected Financial Data (US$ in millions)

As at or for the year ended October 31 Total revenue (teb) 1,367 1,342 1,301 25 2 Non-interest expense 991 895 883 96 11 Net income 168 243 236 (75) (31) Cash net income 186 266 263 (80) (30) Average earning assets 28,910 33,289 33,319 (4,379) (13) Average loans and acceptances 24,679 28,754 29,492 (4,075) (14) Average deposits 25,112 25,388 21,591 (276) (1)

44 BMO Financial Group 193rd Annual Report 2010 Personal and Commercial Banking Canada

We serve more than seven million customers, offering a full range of products and services. These include solutions for everyday banking, financing, investing, credit cards and creditor insurance, as well as a full suite of commercial products and financial advisory services. We provide our customers with an integrated network of BMO Bank of Montreal branches, telephone banking, online banking and automated banking machines, along with the expertise of our mortgage specialists and financial planners.

” We are delivering strong results by differentiating our business from Our Strategies our competitors, with a clear focus MD&A We aim to succeed in the Canadian market through the quality on one vision and one brand promise and consistency of our customer experience and through the that both start with the customer.” productivity of our sales and distribution network.

Frank Techar President and Chief Executive Officer Personal and Commercial Banking Canada Our Path to Differentiation Strengths and Value Drivers • Excel at sales leadership and performance management. Leverage customer insights to develop offers and drive • Strong competitive position in commercial banking, reflected in our • marketing program results. number two ranking in market share for business loans of $5 million Focus investments and allocate resources to capitalize on and less. • the highest-value sales and distribution opportunities. • Largest MasterCard issuer in Canada, as measured by transaction Redesign core processes and leverage technology to improve volumes, and one of the top commercial card issuers in North America. • the customer experience, free up front-line capacity and • Highly experienced team of senior account managers in upper mid- reduce operating costs. market commercial banking, offering integrated products and services Build best-in-class human resources capabilities and develop that are driving high customer loyalty scores in the segment. • strong line leaders. • Strong and consistently applied credit risk management practices that provide customers with reliable access to appropriate financing

solutions in all economic conditions. Key Performance Metrics and Drivers 2010 2009 2008 • Rigorous performance management system, encompassing planning, Net income growth (%) 16.2 22.7 3.9 tracking, assessment and coaching. Revenue growth (%) 10.3 10.3 4.8 Challenges Operating leverage (%) 5.4 6.5 (1.8) • Uncertainty regarding the strength of the economic recovery is Personal banking revenue ($ millions) 2,777 2,546 2,344 Personal loan growth (%) (1) 4.8 4.6 5.7 expected to affect demand for some products and services. Personal deposit growth (%) 0.4 14.6 4.3 Increased pace of change and innovation offers customers access • Commercial banking revenue ($ millions) 1,640 1,500 1,376 to an array of products and services from competitors. Commercial loan growth (%) (1) 2.0 1.6 9.7 • Demand continues to grow for resources to meet regulatory, compliance, Commercial deposit growth (%) 9.2 4.9 6.4 information security and fraud management requirements. Cards revenue ($ millions) 1,413 1,241 1,074 Cards loan growth (%) 15.4 6.5 13.8 Employee engagement index (%) (2) 75 75 73

(1) Includes current consumer loans and mortgages, acceptances and securitized loans. Our Lines of Business (2) Source: BMO Annual Employee Survey, conducted by Burke Inc., an independent research company. Personal Banking provides financial solutions for everyday banking, financing, investing and creditor insurance needs. We serve approximately 20% of Canadian households. Caution This Personal and Commercial Banking Canada section contains forward-looking statements. Commercial Banking provides our small business, medium-sized Please see the Caution Regarding Forward-Looking Statements. enterprise and mid-market banking clients with a broad range of banking products and services. Cards and Payments Services offers flexible, secure payment options to our customers, along with a comprehensive and industry-leading suite of rewards, including AIR MILES reward miles and our newly launched BMO ELITE Rewards Program.

BMO Financial Group 193rd Annual Report 2010 45 MANAGEMENT’S DISCUSSION AND ANALYSIS

Loans and Loan Growth Deposits and Deposit Growth Cash Productivity Ratio Net Income Growth (includes acceptances and securitized loans) and Revenue Growth and Return on Equity (ROE) 143.0 99.0 57.0 49.7 131.6 136.7 96.0 86.1 53.6 42.1 11.4 7.1 51.0 36.4

4.6 10.3 10.3 22.7 3.9 5.0 3.9 16.2 3.1 4.8

2008 2009 2010 2008 2009 2010 2008 2009 2010 2008 2009 2010

Total loan growth (%) Total deposit growth (%) Revenue growth (%) Net income growth (%) Commercial ($ billions) Commercial ($ billions) Cash productivity ratio (%) ROE (%) Personal and Cards ($ billions) Personal ($ billions) MD&A There was loan growth Deposit growth was lowered Cash productivity improved Revenue growth drove high ROE across all products. by a return of client preferences by 260 basis points due to and strong net income growth. for equities. strong revenue growth and effective cost containment.

2010 Group Objectives and Achievements Continue to enhance the customer experience and create Improve productivity of our sales and distribution network. a differentiated position in the Canadian market. • Strengthened our network, opening and upgrading a total • Employees are aligned behind one vision and one brand promise, of 27 branches, and launched an innovative new branch format both centred on providing our customers with a great experience. designed to encourage great conversations with our customers. 98% of employees participating in this year’s employee survey • Added to our specialized sales force, increasing our mortgage indicated that they understand how their work aligns with our vision specialists by 31% and our financial planners by 14%. of being the bank that defines great customer experience. • Improved online capabilities, providing our customers with more • Continued to renew our leadership base to improve the customer information and making it easier for them to manage their finances. experience. Approximately 55% of executives were appointed to their We ranked third among the public websites of the six largest current roles within the past three years and all P&C Canada executives Canadian banks as evaluated by an independent research firm participated in an advanced leadership development program. in Forrester Research, Inc.’s 2010 Canadian Bank Public Web • Rolled out training to our front-line employees geared to improving Site Ranking (April 2010). the quality and consistency of their conversations with customers, which • Started the move and consolidation of 1,700 personal, commercial, is driving higher growth in both personal and commercial banking credit card and collections call centre agents and their support teams revenues. Overall, we invested $35 million in training and development. into a state-of-the-art building in the Toronto area, better positioning us to deliver a seamless customer experience. Leverage improvements in our performance management system to deliver stronger revenue growth and greater customer loyalty. Redesign core processes and technologies to achieve a high-quality • Revenue grew by 10% to $5.8 billion and customer loyalty improved. customer experience, create capacity for customer-facing employees • Enhanced our performance management system to motivate and and reduce costs. reward employees based on targets that are clearly linked to improved • Improved and simplified more than 100 branch processes. financial performance and customer loyalty. Sales force productivity • Significantly reduced the in-branch reporting burden, and we are improved by 11% over the prior year. now automating the remaining in-branch reporting. Re-engineered key end-to-end processes in personal lending, Launch attractive and compelling new offers that drive results. • retail investments and commercial lending, and streamlined our • Responding to customer insights, we introduced offers that sales processes for lending and investments. bring clarity to financial decisions, including the Low-Rate Mortgage, BMO SmartSteps for Business and BMO Business Bundles. • Maintained our focus on the Canadian agriculture segment, providing rate leadership with our AgriInvest solution. 2011 Group Objectives • Made good progress in growing our profitable payments business by • Continue to enhance the customer experience and create introducing our BMO World Elite MasterCard, entering into an exclusive a differentiated position in the Canadian market. strategic credit card relationship with Sobeys in Canada and acquiring • Launch attractive and compelling new offers that drive results. the Diners Club North American franchise, which more than doubled • Improve productivity of our sales and distribution network. our corporate card business. • Continue the redesign of core processes and technologies to achieve a high-quality customer experience, create capacity for customer-facing employees and reduce costs.

46 BMO Financial Group 193rd Annual Report 2010 MD&A 47 2010 Annual Report 193rd Financial Group BMO iness in the current year and higher higher and year in the current iness Non-interest expense was $2,978 million, up $141 million or 4.9% or 4.9% million up $141 million, $2,978 was expense Non-interest In our commercial banking segment, revenue increased $140 million million $140 increased segment, banking revenue In our commercial Looking forward to 2011, we anticipate that the recovery will will the recovery that anticipate we 2011, to forward Looking Cards and payment services revenue increased $172 million or 14%. 14%. or million $172 increased services revenue payment and Cards 9.4%. The increase was attributable to volume growth in loans and and in loans growth volume to attributable was The increase 9.4%. $114 million impact of the inclusion of the results of the Diners Club the results of the inclusion of of impact million $114 fees. card lower by offset partially year, in the current business the Diners Club bus the results of of basis 260 improved ratio Our cash productivity costs. employee-related growth. expense outpaced growth revenue as 51.0%, to points reflect the moderate rate of growth. In personal banking, deposit growth banking, In growth personal deposit growth. of rate the moderate reflect personal in growth slow relatively be dampened by to is expected longer-term and equities deposits into of a redeployment and income decline their slow continue to expected mutual Housing sales are funds. mortgage in residential As a result, growth highs. record previous from banking, In commercial demand in 2011. slow to balances is expected an should experience loans business and mortgages non-residential for in 2011. steam gathers investment in business as the recovery upturn as businesses in 2011, slow to is expected growth deposit Business assets. as liquid held funds currently deploy or due to higher initiatives costs, the $45 million impact of the inclusion of impact million the $45 costs, initiatives higher due to 2009 and then tighter lending standards, but has shown recent signs signs recent but has shown lending standards, then tighter and 2009 improvement. of likely will performance Financial product rate. a moderate at continue deposits, higher loan and deposit fees and mark-to-market investment investment mark-to-market and fees deposit and loan higher deposits, securities losses in the prior year. the and balances in account growth to attributable was The increase gher than in the prior year. The increase The increase gher than in the prior year. Revenue increased $543 million or 10% to $5,830 million, driven driven million, $5,830 to 10% or million $543 increased Revenue million $231 increased revenue business, banking In our personal by volume growth in most products and improvements in net interest interest in net improvements and products in most growth volume by the of months ten the inclusion of of as the impact as well margin, mar- interest Net year. in the current the Diners Club business results of basis points hi 13 2.95%, gin was lending in personal growth volume by driven was The increase or 9.0%. our from revenue higher and margin interest net improved products, mutual fund products. P&C Canada Financial Results P&C Canada Financial from 16% or million up $229 million, $1,644 was income P&C Canada net ago. a year was largely driven by actions taken in 2009 to mitigate the impact of of the impact mitigate to in 2009 taken actions by driven largely was deposit on in the spreads improvement funding costs, long-term rising volumes higher ago and a year of levels low the unusually from products products. in more-profitable The Canadian economy emerged from recession in the summer of summer of in the recession from emerged The Canadian economy in consumer growth broad-based by supported was recovery The 2009. more and, exports construction, spending, residential government and growth balance mortgage Residential investment. business recently, the market entered as homebuyers 2010, of half in the first strong was ahead theof introduction the of Harmonized in Ontario Sales Tax and in the eased growth mortgage residential However, Columbia. British rules. mortgage tighter and rates interest higher half due to second 2010, half of the first and in 2009 rapidly deposits grew operating Retail fixed-term up savings in low-interest, lock to unwillingness reflecting to back move to savers encouraged rates Rising interest accounts. banking, In commercial 2010. half of depositsin the second fixed-term cash and in profits upturn an reflecting strong, was growth deposit 2010, into and in 2009 sharply slowed growth loan Commercial flows. in decline investment in business the significant reflecting initially Canadian Business Environment and Outlook and Environment Business Canadian MANAGEMENT’S DISCUSSION AND ANALYSIS Personal and Commercial Banking U.S.

We serve nearly 1.3 million customers, working together with other Harris and BMO businesses in select U.S. Midwest markets to deliver clarity to our customers in the form of simplicity, guidance and financial know-how. Our retail and small business customers are served through 312 branches, an award-winning call centre, online banking and more than 880 automated banking machines. We deliver financial expertise to our commercial banking customers through a full range of lending products, in-depth specific industry knowledge and strategic capital markets solutions.

” Our focus is on customers and their experience at Harris. Our Strategies We have a position in the market Focus on acquiring new customers while capitalizing on that is differentiated and supports • attractive merger and acquisition opportunities. MD&A long-term, profitable growth.” • Build the leading U.S. Midwest commercial bank, focused on Ellen Costello acquiring and retaining high-quality clients. President and Chief Executive Officer Improve the effectiveness of our distribution capabilities, Personal and Commercial Banking U.S. • and Harris Financial Corp. responding to evolving customer expectations. • Partner with Private Client Group to grow the wealth Strengths and Value Drivers management business within our customer base. • A rich heritage of more than 125 years in the U.S. Midwest with • Drive individual and team productivity through rigorous the established Harris brand, a commitment to service excellence as performance and talent management. demonstrated by our strong customer loyalty scores and a history of playing an active role in our customers’ local communities. • A comprehensive and increasingly integrated distribution network, Our Path to Differentiation supported by a differentiated customer experience. A customer-focused culture centred on understanding and • A large-scale, relationship-based commercial banking business • responding to our customers’ most important financial needs. based in the U.S. Midwest, with in-depth industry knowledge A one-team mindset that brings the entire organization’s in select sectors. • capabilities to our customers. • Strong working relationships with our partners in Private Client Group Effective sales management and leadership that drive our and BMO Capital Markets. • sales and service employees to excel. • Ability to leverage the capabilities and scale of BMO Financial Group. • A disciplined, transparent performance management system Challenges that supports our business objectives, motivates employees • The economic outlook continues to be uncertain, with relatively slow and rewards top performance. improvement and modest expectations for increased loan demand • A strong brand signifying strength, stability and helpfulness. in 2011. • Regulatory oversight has become increasingly complex with the advent of new regulations and compliance requirements. Key Performance Metrics and Drivers 2010 2009 2008* • Market dynamics remain competitive, as banks compete aggressively Average US$ loan growth (%) (1) (14.1) (2.4) 10.8 on pricing for both loans and deposits to maintain and increase Average US$ deposit growth (%) (1.1) 17.6 8.4 market share. Operating leverage (US$) (%) (8.9) 1.8 (6.7) Core operating leverage (US$) (%) (2) (4.5) 1.9 3.4 Number of branches 312 280 281 Personal Banking Net Promoter Score (3) 40 43 42 Serviced mortgage portfolio growth (%) 5.6 13.3 39.7 Our Lines of Business Employee engagement index (4) 71 74 74 Personal Banking offers a full range of products and services (1) Based on current loans. to con sumers and small businesses, including deposit and investment (2) Excludes the impact of impaired loans, Visa and acquisition integration. services, mortgages, consumer credit, small business lending and (3) A measure of the strength of customer loyalty. Commercial Banking does not have other banking services. We rank second in deposit market share in a comparable measure on a consolidated basis. (4) Source: BMO Annual Employee Survey, conducted by Burke Inc., an independent the Chicago area and have a significant presence in the other markets research company. where we compete. * Loan and deposit growth and operating leverage in fiscal 2008 have not been restated for the impact of the 2010 portfolio transfer from BMO Capital Markets to P&C U.S. Commercial Banking provides mid-sized businesses with a broad range of banking products and services, including lending, deposits, treasury Caution management and risk management. Segments of focus are business This Personal and Commercial Banking U.S. section contains forward-looking statements. banking, corporate finance, diversified industries, financial institutions, Please see the Caution Regarding Forward-Looking Statements. food and consumer and commercial real estate. We also offer wealth management and investment banking services through our partners in Private Client Group and BMO Capital Markets.

48 BMO Financial Group 193rd Annual Report 2010 MD&A 49 312 2010 . 280 2009 281 2008 Number of Branches Number of The Rockford, Illinois-based bank bank Illinois-based The Rockford, our branch to added transaction in 2010. network l deposit market share in the share market l deposit BMO Financial Group 193rd Annual Report 2010 Annual Report 193rd Financial Group BMO ion in the Chicago area and increase and increase ion in the Chicago area 6 40 2010 12 43 2009 Maintain strong customer loyalty. loyalty. customer Maintain strong through revenue growing by financial performance Improve sales productivity, effectively managing costs and continuing continuing and managing costs effectively sales productivity, network. our distribution optimize to to acquisition customer profitable of the level Increase rates. retention customer our high complement and position banking leadership a commercial Establish the and expertise have in which we in sectors growth drive share. market grow to opportunity 20 42 Major competitors Banking Personal P&C U.S.

2008 2011 Group Objectives Group 2011 • • • • our channels, for the second consecutive year, Harris Contact Center Center Contact Harris year, consecutive the second for our channels, in persona ranking our number two market banks lost larger while some market, Chicago metropolitan fell. levels deposit market overall and share serve them better to Capital clients Markets BMO from mid-market U.S. strategy Banking our Commercial growth accelerate and in 2010. 14% to in 2009 10% their money. sense of make help our customers to steps banking. in commercial leader was certified as a Center of Excellence by BenchmarkPortal, by Excellence of as a Center certified was in benchmarking centres. leader contact certifying and a recognized bank Illinois-based a Rockford, of liabilities and certain assets Acquired its operations integrated successfully and transaction FDIC-assisted in an our accelerated that fit strategic excellent an This was Harris. into base and customer a good locations, quality adding strategy, growth Wisconsin. southern and in northern Illinois markets key new Personal Banking Personal Score Promoter Net U.S. personal banking customer banking personal customer U.S. very strong, remained scores loyalty major of the scores to compared banks which compete. with we Consistent with our focus on the customer experience across all of of all across experience the customer on our focus with Consistent maintaining basis points, 35 by grew share market deposit Harris’ select transferring by bank our commercial the scale of Increased from visibility, marketing of a measure voice, of our share Increased simple five Steps, Helpful Harris banking, developed In personal we as a Harris position to campaign marketing Launched integrated an • posit on our leadership Capitalize compete. we where markets and visibility in all other our presence • • • • • •

25.1 (1.1) 2010 17.6 25.4 2009 Growth (%) Growth deposits (US$ billions) Average 8.4 21.6 2008 Deposits Growth and Deposit After growing strongly in 2009, in 2009, strongly growing After relatively deposits remained our demonstrating unchanged, in customers in retaining success market. competitive the highly nce has resulted in historically in historically has resulted nce 24.7 2010 (14.1) 28.7 (2.4) 2009 and Loan Growth and Loan

Growth (%) Growth billions) (US$ loans current Average 10.8 29.4 2008 Loans Strong mortgage and auto loan loan auto and mortgage Strong portfolio with originations, secondarybalances reflecting sales mortgage and market balances. loan commercial lower year’s employee survey indicated that they understand how their how understand they that indicated survey employee year’s and attracting new ones. Harris received a Metro Chicago 2010 TNS Chicago 2010 a Metro received Harris ones. new attracting and client strong in establishing our success of recognition Award, Choice solutions. customer-focused best the offering and relationships leveraging BMO’s scale to operate more effectively and enable enable and effectively more operate scale to BMO’s leveraging capabilities. better 9.7% and 16.2%, respectively, with new customers representing representing customers new with respectively, 16.2%, and 9.7% online banking new households. of 80% approximately market accounts, grew by more than 15%, excluding the Rockford the Rockford excluding 15%, than more by grew accounts, market our sales efforts. of the success reflecting transaction, accrual changes in the Visa litigation loans, impaired and transaction adjustments our serviced portfolio. on mortgage valuation and interest margin, primarily due to improved loan spreads and revenue revenue and spreads loan improved due to primarily margin, interest loans, impaired of the impact despite transaction, the Rockford from compression spread deposit and balances loan commercial lower environment. in a difficult economic performance focus. Over 60% of leaders have new or broadened or broadened new have leaders of 60% Over focus. performance years. two the past over roles Associates, recognizing excellence in our Mid-Market and Small Business and in our Mid-Market excellence recognizing Associates, group. Management as our Treasury segments well as work aligns with our vision and 86% think that Harris offers something offers Harris think that 86% and vision our with aligns work experie the customer on Our focus in the industry. the highest among are that rates retention strong distinctive in the marketplace. distinctive Employees are aligned behind one vision. 95% of employees in this employees of 95% vision. behind one aligned are Employees customers existing with deepening relationships by our business Grew Integrated our existing ABM platform with BMO’s platform in 2010, in 2010, platform BMO’s with ABM platform our existing Integrated services increased payment banking bill using online and Households which includes chequing, deposits, certain savings money and Core the Rockford unchanged of the impact excluding Expenses were Revenue grew almost 2% to $1.4 billion, reflecting improved net net improved reflecting billion, $1.4 to 2% almost grew Revenue and our capabilities improve talent to leadership renew to Continued Our Commercial Banking team won several awards from Greenwich Greenwich from awards several Banking won Commercial Our team

Optimize our integrated distribution network and build our base network distribution our integrated Optimize expansion. organic households through core of Improve financial performance by growing revenue and effectively and effectively revenue growing by financial performance Improve managing costs. • • • • • • • • • Maintain strong customer loyalty. customer Maintain strong • 2010 Group Objectives and Achievements Group 2010 MANAGEMENT’S DISCUSSION AND ANALYSIS

U.S. Business Environment and Outlook Chicago’s financial services marketplace remains one of the most slowly as credit availability increases. Low home prices will likely fragmented in the United States, with approximately 230 deposit-taking continue to dampen demand for home equity loans, but low interest institutions. Harris and the two other largest banks in the Chicago area rates and rising employment should increase demand for residential have together held only 25% to 37% of the personal and commercial mortgages. Consumer spending began to recover in 2010 and is deposit market since 1997. The Chicago area remains a highly contested expected to increase at a measured pace in 2011. Business investment market because of the growth opportunities presented by this frag- in machinery and equipment rebounded in 2010 and should continue mentation. Competitors are attempting to capture market share through to advance at a brisk pace in 2011. However, non-residential construction acquisitions, aggressive pricing and continuous investment in their continued to slump in 2010, and will likely remain weak in 2011, given brands. Since November 1, 2009, there have been 15 bank failures in high vacancy rates for commercial and industrial properties. the Chicago area. The 2010 competitive dynamic has shifted with In 2011, we plan to continue to grow organically by embedding further consolidation of the market due in large part to FDIC-assisted customer acquisition into our sales culture, providing compelling product transactions. P&C U.S. has participated in this consolidation, acquiring offerings, becoming a commercial banking leader in the U.S. Midwest certain assets and liabilities of a Rockford, Illinois-based bank in an and leveraging our brand. We will strive to improve our financial FDIC-assisted transaction. performance by continuing to focus on revenue growth and effectively MD&A We expect the U.S. Midwest economy to show a modest improve- managing costs. By bringing clarity to our customers in the form of ment in 2011, consistent with the broader U.S. economy, led by a simplicity, guidance and know-how, we will continue to enhance our business recovery. Consumer and business loan demand should improve reputation as a strong, stable and customer-focused bank.

P&C U.S. Financial Results P&C U.S. net income decreased $111 million or 39% from the prior year Revenue of $1,367 million was $25 million or 1.8% higher in 2010. to $175 million. On a U.S. dollar basis, net income was $168 million, Adjusting results in both years for the impact of the Rockford transaction down $75 million or 31% from the prior year. Amounts in the rest of and the impact of impaired loans, revenue decreased $27 million or this section are expressed in U.S. dollars. 2.0% as the effect of loan spread improvement was more than offset On a basis that adjusts for the impact of impaired loans, changes by a reduction in commercial loan balances, caused by lower client in the Visa litigation accrual and acquisition integration costs, net income utilization, and deposit spread compression. was $237 million, down $50 million or 17% from results of a year ago on Non-interest expense of $991 million increased $96 million or a comparably-adjusted basis. On this adjusted basis, the cash productivity 11%. Adjusting costs in both years for the impact of the operating and ratio was 64.2%, compared with 70.8% on a reported basis. integration costs arising from the Rockford transaction, increases in Late in the second quarter of 2010, we acquired certain assets impaired loan costs, changes in the Visa litigation accrual and a valuation and liabilities of a Rockford, Illinois-based bank from the Federal Deposit adjustment on our serviced mortgage portfolio related to lower long-term Insurance Corporation (FDIC). The transaction increased revenue by interest rates, non-interest expense increased $3 million or less than 1%. $42 million and expenses by $59 million (including acquisition integra- To position our commercial business for growth as the United States tion costs of $19 million) and decreased net income by $10 million. emerges from recession, we identified U.S. mid-market clients that The acquisition provides an excellent strategic fit that accelerates our would be better served by a commercial banking model and transferred growth strategy, adding quality locations and a good customer base their business to P&C U.S. from BMO Capital Markets in the second and expanding our branch network into new key markets in northern quarter of 2010. As a result, P&C U.S. assumed $5.4 billion in loans and Illinois and southern Wisconsin, where we already have a strong and $3.2 billion in deposits, with results for prior periods restated to reflect growing commercial banking presence. the transfer.

50 BMO Financial Group 193rd Annual Report 2010 Private Client Group

Private Client Group (PCG), BMO’s group of wealth management businesses, serves a full range of client segments, from mainstream to ultra-high net worth, as well as select institutional markets, with a broad offering of wealth management products and solutions. PCG operates in both Canada and the United States, as well as in China and the United Kingdom.

” We are helping our clients reach their goals by providing clarity on Our Strategies financial matters, creating innovative Our vision is to be the wealth management solutions provider solutions and delivering financial MD&A that defines great client experience. Our strategy is to and retirement planning expertise.” strengthen and build our client-focused wealth management offering and invest for future growth. Our priorities include: Gilles Ouellette Strengthening our client-focused wealth offering by focusing on President and Chief Executive Officer • Private Client Group our clients’ holistic wealth management needs and delivering best-in-class financial products and services. Strengths and Value Drivers • Building collaboratively by expanding our client offering • A planning and advice-based approach that integrates investments, through effective partnering across BMO Financial Group. insurance, specialized wealth management and core banking solutions. • Selectively investing for future growth through acquisitions, • A team of highly skilled wealth professionals committed to providing expanding our offering and widening our geographic reach. a great client experience. • Brand prestige, recognition and trust. • Strong national presence in Canada, as well as strategic positioning Our Path to Differentiation in select high-growth U.S. and emerging wealth management markets. Deliver a personalized financial planning experience to our clients. • Access to BMO’s broad client base and distribution network in • Build a culture of innovation. Canada and the United States. • Attract, develop and retain superior talent. • A culture of innovation focused on achieving competitive advantage. • Challenges • Evolving client needs based on changing demographics and rapidly Key Performance Metrics and Drivers 2010 2009 2008 advancing technology. Increase (decrease) in assets under • Increased regulatory complexity requiring proactive engagement management and administration (%) 12.7 7.5 (13.7) and oversight. Increase in full-time employees (%) 4.9 1.7 3.7 • Erosion of consumer confidence in market performance. Employee engagement index (%) (1) 75 74 75 • Competition for top talent. Performance measures exclude the impact of businesses sold or transferred and the impact of changes in the Canadian/U.S. dollar exchange rate. (1) Source: BMO Annual Employee Survey, conducted by Burke Inc., an independent research company. Our Lines of Business Full-Service Investing operates as BMO Nesbitt Burns to offer BMO Asset Management operates in Canada, the United States and comprehensive, client-focused investment and wealth advisory services, the United Kingdom, providing the highest standard of investment leveraging strong financial planning capabilities, a broad range of management services. internal and external partnerships and highest-quality products. BMO Insurance operates as two businesses: BMO Life Insurance, Self-Directed Investing operates as BMO InvestorLine. We understand which focuses on creditor insurance, and BMO Life Assurance, which and anticipate our clients’ needs and offer a range of tools to help concentrates on life insurance and annuity products and services. self-directed investors plan, research and manage investing decisions in their own way. Caution This Private Client Group section contains forward-looking statements. Private Banking operates as BMO Harris Private Banking in Canada Please see the Caution Regarding Forward-Looking Statements. and Harris Private Bank in the United States. We deliver a planning and advice-based value proposition to high net worth and ultra-high net worth clients, offering a comprehensive range of services. Retail Investments operates as BMO Mutual Funds, BMO Guardian Funds and Group Retirement Services, and includes our joint venture with the mutual fund company Fullgoal (China). Our Funds businesses offer clients innovative investment solutions across a range of channels. Our Group Retirement Services business provides record-keeping and administrative services for defined contribution pension plans.

BMO Financial Group 193rd Annual Report 2010 51 MANAGEMENT’S DISCUSSION AND ANALYSIS

Assets under Management Cash Productivity Ratio (%) Net Income and Return 2010 Revenue by and Administration ($ billions) on Equity Line of Business (%)

264 Full-Service 470 Investing 42% 231 239 426 77.8 BMO Insurance 37.9 359 72.9 37.4 13% 71.5 29.4 BMO Asset Management 5% Retail Investments 13% Private Banking 20% Self-Directed Investing 7% 2008 2009 2010 2008 2009 2010 2008 2009 2010

Canada Net income ($ millions) United States Return on equity (%)

Client assets grew 11% The cash productivity ratio The significant increases in Our lines of business are aligned MD&A (13% in source currency) improved year over year due to net income and return on to implement our wealth year over year. revenue growth and effective equity were driven by cash management strategy effectively. expense management initiatives. operating leverage of 9.1%.

2010 Group Objectives and Achievements Continue to differentiate PCG by delivering a great client experience Maintain our high level of internal collaboration and continue that is anchored in financial and retirement planning. to leverage the full range of our wealth management businesses • Delivered a planning-based client experience and improved sales to better meet client needs. efficiency with enhanced financial planning and investment advisor • Developed an integrated wealth management approach in U.S. retail tools and comprehensive financial planning client materials. branches to better serve the mass affluent and high net worth • Delivered an innovative program (Take Charge of Your Retirement) that client segments. motivates clients to think about how their financial and non-financial • Created joint deal teams across full-service investing, private banking, retirement goals are linked. retail and commercial banking and insurance to better address • Increased retirement planning training across our sales force to ensure the complex financial needs of our clients. we remain competitive in this important market, add value for our • Increased referral volumes across BMO Financial Group to ensure our clients and drive business results. clients’ specific wealth management needs are addressed seamlessly. Strengthened asset management capabilities to drive scale and focus Innovate in the design and delivery of our products and services. • on new external mandates. • Expanded our Exchange Traded Funds (ETF) family of lower-cost and Leveraged core capabilities in China by building a strong foundation risk-diversifying investment products to provide our clients with greater • for future business opportunities, and actively participated in BMO’s access to innovative and industry-leading investment products and incorporation activities there. solutions. We now offer 30 funds, as well as strategic ETF Portfolios, as part of our managed solutions program for retail customers. • Strengthened BMO InvestorLine’s capabilities and delivered an enhanced online experience with improved functionality and 2011 Group Objectives educational materials. • Deliver a great client experience with a strong focus on • Effectively integrated and expanded our insurance businesses, and financial planning. streamlined related sales processes and applications. • Leverage our high level of internal collaboration across wealth management businesses and BMO Financial Group. • Invest for future growth by focusing on innovative products and services and widening our geographic reach.

52 BMO Financial Group 193rd Annual Report 2010 MD&A 53 3 nm (6.2) (6.3) (0.53) 8.0 8.2 $ % $ % 3 100 2 39 (2) (1) 42 3 20 +100 12 78 98 35 16 132 11 221 13 233 12 314 4 226 5 189 43 111 31 114 31 110 47 (174) (8) (229) (11) 2,414 23 1,862 13 4,406 4 Change from 2009 Change from Change from 2009 Change from 20,877 15

(US$ in millions) 3.34 4.78

2009 2008 2009 2008

6 3 4 7 5 4 BMO Financial Group 193rd Annual Report 2010 Annual Report 193rd Financial Group BMO (4) (6) 16 (4) (6.3) (5.5) 9.1 (6.3) 627 438 573 147 157 79 470 359 426 476 362 430 342 232 308 243 208 217 213 215 230 365 353 376 2010 2010 37.4 29.4 37.9 37.9 29.7 38.3 71.8 78.0 73.1 71.5 77.8 72.9 2.81 2,077 2,251 2,142 1,877 2,106 2,120 1,328 1,196 1,155 7,768 7,454 6,726 4,837 4,611 4,531 1,880 1,659 1,770 2,245 2,012 2,146 1,611 1,569 1,569 12,981 10,567 7,855 16,467 14,605 11,382

160,323 139,446 131,289 103,534 99,128 99,428

(%)

(%)

(Canadian $ in millions, except as noted) except $ in millions, (Canadian (%) (%)

(%) (%)

not meaningful – not We see the North American wealth management industry continuing industry management continuing North American see the wealth We As at or for the year ended October 31 31 ended October the year or for As at As at or for the year ended October 31 31 ended October the year or for As at

Net income income Net assets earning Average loans and acceptancesAverage deposits Average Income before income taxes taxes income before Income (teb) taxes Income income Net acquisition-related Amortization of tax) (after assets intangible income Cash net profit economic Net equity on Return (teb) equity Cash on return leverage Cash operating (teb) ratio Productivity (teb) ratio Cash productivity on margin interest Net assets earning assets earning Average loans and acceptancesAverage deposits Average under administration Assets under management Assets equivalent Full-time employees (teb) revenue Total expense Non-interest Net interest income (teb) (teb) income interest Net revenue Non-interest (teb) revenue Total losses credit for Provision expense Non-interest

nm Financial Data Selected Business U.S. The U.S. economy is also expected to grow at a slow pace. Given this pace. a slow at grow to expected is also economy The U.S. Canada the and both in authorities monetary that is likely it backdrop, future. the foreseeable for low rates interest keep will States United income. interest net pressure to continue will environment rate This low countries in both markets as capital should improve levels Our asset and the economy with along strengthen to continue to expected are confidence. business changing demographics by supported term, the longer over grow to sectors. worth net high and particularly in the retirement Group Client Private U.S. operations recorded net income of US$16 million in 2010, com- in 2010, million US$16 of income net recorded operations U.S. Non-interest expense of $1,611 million increased $42 million or million $42 increased million $1,611 of expense Non-interest Revenue of $2,245 million increased $233 million or 12%. The 12%. or million $233 increased million $2,245 of Revenue The Canadian economy is expected to grow modestly in 2011, in 2011, modestly grow to is expected The Canadian economy There was modest growth in the Canadian and U.S. economies in economies U.S. in the Canadianand growth modest was There levels in our asset growth to contributed markets equity Stronger 2010. moderately, grew income interest Net revenues. fee-based related and and expenses were relatively unchanged, reflecting effective expense expense effective unchanged, reflecting relatively were expenses and million ago included a US$9 a year Results initiatives. management clients. our U.S. assist to the decision to related charge after-tax pared with a net loss of US$4 million in 2009. Revenue increased 16% 16% increased Revenue in 2009. million US$4 of loss a net with pared also contributed to expense growth. The weaker U.S. dollar reduced reduced dollar U.S. The weaker growth. expense to contributed also significantly was Expense growth 1.6%. or million $25 by expenses expense on focus our continuing reflecting growth, revenue than lower The 9.1%. of leverage in cash operating management. This resulted basis points. 630 by improved ratio cash productivity 2.6%, primarily due to higher revenue-based costs, in line with improved improved in line with costs, revenue-based higher due to primarily 2.6%, Assurance Life BMO results of a full year’s The inclusion of performance. Net interest income increased primarily due to volume growth in our growth volume due to primarily increased income interest Net spread by offset partially bankingbusinesses, private and brokerage reduced dollar U.S. weaker The businesses. in our brokerage compression 1.6%. or million $33 by revenue late in the second quarter of 2009. This was partially offset by the by offset partially This was 2009. of quarter in the second late liabilities. policyholder on movements market unfavourable effects of growth in PCG, excluding insurance, was driven by an 11% (13% in (13% 11% an by driven was insurance, excluding in PCG, growth and under management assets in client improvement currency) source premiums higher due to increased revenue Insurance administration. acquired Assurance, Life BMO results of a full year’s the inclusion of and increase reflected revenue growth across all of our businesses. Revenue Revenue our businesses. of all across growth revenue reflected increase to the decision to assist some of our U.S. clients by purchasing auction-rate clients by our U.S. of some assist to the decision to environment. markets capital in the weak their accounts from securities from or 3.6% million $7 down million, $164 was income net Insurance million ago includedresults a $23 a year Insurance year. the previous recovery prior of periods’ income taxes. Private Client Group net income of $470 million increased $111 million million $111 increased million $470 of income net Group Client Private the excluding income, net PCG year. the previous from in 2010 or 31% Results 62%. or million up $118 million, $306 was business, insurance tax) related after million ($11 million $17 ago included of a charge a year Private Client Group Financial Results Financial Group Client Private supported by relatively low interest rates and firmer commodity rates prices. interest low relatively supported by constrained by historically low interest rates but benefiting from from but benefiting rates interest low historically by constrained while waiting clients cash as some assets holdings liquid increased held rates interest decline The general in long-term stabilize. to markets for resulted rates results low as insurance our on impact a negative had liabilities. in policyholder increase in an Private Client Group Business Environment and Outlook and Environment Business Group Client Private MANAGEMENT’S DISCUSSION AND ANALYSIS BMO Capital Markets

BMO Capital Markets provides a full range of products and services to help corporate, institutional and government clients achieve their ambitions. From 26 offices on five continents, including 14 in North America, BMO Capital Markets draws on expertise in areas including equity and debt underwriting, corporate lending and project financing, mergers and acquisitions, merchant banking, securitization, treasury and market risk management, foreign exchange, derivatives, debt and equity research and institutional sales and trading.

” Our clients remain at the core of our long-term strategy, and our Our Strategies performance and progress in fiscal Build out our distribution platform, primarily in the United 2010 demonstrate that we have • States, to create a more focused and integrated capital MD&A the right plan in place to deliver.” markets business. • Align capital and capabilities to client opportunity with Tom Milroy a focus on core clients, a diversified, dynamic portfolio of Chief Executive Officer BMO Capital Markets businesses and strong risk management capabilities. • Focus on strategic sectors, while building the capability to Strengths and Value Drivers further extend BMO Capital Markets’ offering. • Diversified, dynamic portfolio of businesses that supports our well- established franchise. • North American expertise providing an integrated cross-border market Our Path to Differentiation experience, combined with select strategic presence internationally. A successful, stable and trustworthy North American universal • Expertise and leadership in targeted sectors and products such as • banking model. the Natural Resources sector and Retail Investor Products. Leading expertise and relationships in strategic sectors and • Top-tier equity research, sales and trading capabilities. • products (such as the Natural Resources sector and Research • Significant North American investment and corporate banking presence. and Structured Products) that facilitate client acquisition. Challenges • In the United States, a unique opportunity to capitalize on • Evolving regulatory requirements. reduced competition from full-service banks in the mid- • Ongoing market volatility and economic uncertainty. capitalization space, serving these clients with an integrated offer and strong balance sheet. • Strong risk management practices, facilitating optimal risk/return balance. Our Lines of Business

Investment and Corporate Banking services include strategic Key Performance Metrics and Drivers 2010 2009 2008 advice and execution on mergers and acquisitions, restructurings and Trading Products revenue ($ millions) 2,040 2,018 1,020 recapitalizations, as well as valuation and fairness opinions. We provide Investment and Corporate Banking capital-raising services through debt and equity underwriting as well revenue ($ millions) 1,239 1,071 1,158 as a full range of loan and debt products, balance sheet management Equity underwriting participation (deals) (1) 213 226 140 solutions and treasury management services. In support of our Debt underwriting participation (deals) (1) 134 115 121 25.4 34.9 30.8 clients’ international business activities, we offer trade finance and Average loans and acceptances ($ billions) (2) Canadian equity research ranking (3) #2 #1 #1 risk mitigation services. We also provide a wide range of banking Employee engagement index (%) (4) 71 70 66 and other operating services to North American and international financial institutions. (1) Canadian corporate issuers in North America. Trading Products services include sales, trading and research activities. (2) Based on current loans. (3) Brendan Wood International survey. We offer integrated debt, foreign exchange, interest rate, credit, equity, (4) Source: BMO Annual Employee Survey, conducted by Burke Inc., an independent securitization and commodities solutions to institutional, commercial research company. and retail clients. In addition, we provide new product development,

proprietary trading and origination services to our clients. We also supply Caution efficient funding and liquidity management to our clients, including This BMO Capital Markets section contains forward-looking statements. BMO Financial Group. Please see the Caution Regarding Forward-Looking Statements.

54 BMO Financial Group 193rd Annual Report 2010 MD&A 55 (%) 18.8 2010 15.7 2009 Overall in – Overall 10.4 2008 Return on Equity (ROE) (ROE) on Equity Return Improved ROE due to strong due strong ROE to Improved and performance business capital. of levels lower BMO Financial Group 193rd Annual Report 2010 Annual Report 193rd Financial Group BMO #2 13.7 2010 Rank #4 11.6 2009 Rank Build out our distribution platform, primarily in the primarily platform, out our distribution Build States. United while building the capability to sectors, strategic on Focus offering. Capital Markets’ BMO further extend #2 13.1 BMO Capital Markets Capital Markets BMO volume) total (% of client with opportunity. capabilities capital and Align 2008 Rank • • • 2011 Group Objectives Group 2011 and 1st in Equity Trading in the Brendan Wood survey. survey. Wood in the Brendan Trading in Equity 1st and Analysts Equity study. U.S. 2010 Associates’ borrowers. and lenders global of survey Euromoney FX survey. Euromoney in the 2010 size by share market Magazine in 2010. Finance Global by in participation through billion $27 Raised billion. $164 raised that transactions. equity 213 billion. $28 of a value with sales and trading combined) with the highest reputational sales combined) reputational trading and highest the with of Survey International Wood in the Brendan score franchise Investors. Institutional Share Market Canadian Fixed-Income in 2010 1st client study. 2010 Associates’ Greenwich Canadian Equity Block Trading Equity Canadian and Ranking – Volume Equity block trading ranking ranking trading block Equity selectively due to improved capital usage in our increased Canadian trading business. block Ranked 1st as an overall institutional equity franchise (for research, research, franchise (for equity institutional overall as an 1st Ranked Sales in Equity 1st Research, in Equity Quality Research for 1st Ranked firms in Greenwich Research Equity U.S. 20 top the of the ranks Joined and Quality Research Canadian Fixed-Income in 2010 1st Ranked Magazine. Finance Trade Bank in Canada by Trade Named Best in the 2010 rankings Borrower Equity Global 20 Top into Moved improved most and growth share FX market in Global 1st Ranked Bank in the World Mining Investment and Metals Named Best transactions debt government and corporate in 276 Participated in North America acquisitions and mergers completed Advised 71 on Other Achievements • • • • • • • • • •

71 28.3 2010 50 12.9 2009 * byVolume 58 44.7 Number of deals of Number Value (US$ billions) Value 2008 M&A Deals and Dollar Value revenue due to increased activity. increased due to revenue U.S. deals were reported for the for reported were deals U.S. * 2010. 30, ended September months 12 for reported Canadian were deals 2010. 31, October ended the year Improved mergers and acquisitions and mergers Improved 55.5 2010 risk management capabilities through capabilities through risk management (%) 56.5 2009 75.1 2008 Productivity Ratio Ratio Productivity Improved productivity due productivity Improved and growth revenue to control. cost focused to recognize and mitigate risks and identify any opportunities. any identify and risks mitigate and recognize to Products platform. platform. Products create an integrated North American platform through initiatives initiatives through North American platform integrated an create our North American and offering Products our Debt such as expanding Sales & Equity our U.S. upgrading and business Lending Securities platform. Trading and the United driven client a States, robust by prioritization process. our business on core clients, appointing a new head of U.S. Investment Investment U.S. of head a new appointing clients, core on our business to the business across Banking strategically hiring and Corporate and growth. future us for position provide proper risk/return balance and alignment across the business. the business. across alignment balance and risk/return proper provide Acquisition and Divestiture Advisory team based in Houston and Calgary. Calgary. and Advisory based in Houston team Divestiture and Acquisition teams managing regulatory changes cross-functional with Proactively to Group Management Risk with collaboration our ongoing Continued sectors. talent in focus Upgraded an of the addition with capabilities sector our Energy Expanded in Asia. offering product and our presence expand to Continued Continued to grow our U.S. Equity Derivatives and Structured Structured and Derivatives Equity our U.S. grow to Continued to capabilities distribution our overall strengthened and Expanded Canada approach in both coverage Established a cross-functional including refocusing States, in the United capabilities Strengthened Continue to optimize our businesses to generate appropriate appropriate generate to our businesses optimize to Continue returns. risk-adjusted Maintain a diversified, dynamic portfolio of businesses to meet meet to businesses of Maintain dynamic portfolio a diversified, clients. core needs of the evolving Better serve clients by creating a more integrated capital integrated a more creating serve clients by Better business. markets solid working relationships and enhanced risk transparency. and enhanced relationships solid working • Continue to build strong build strong to Continue • • • • • • • • 2010 Group Objectives and Achievements Group 2010 clients. profitable on core our focus Increase MANAGEMENT’S DISCUSSION AND ANALYSIS

BMO Capital Markets Business Environment and Outlook Fiscal 2010 saw strong results in BMO Capital Markets. The North American Looking forward, we expect the economic recovery to continue in economy was off to a strong recovery at the start of the year, but slowed Canada and the United States, although GDP has slowed and will likely to a much more moderate pace in the latter half of the year. Conditions grow only moderately in the first half of fiscal 2011 as the effects of were favourable for our investment banking business in 2010 as mergers previous stimulus measures abate. With unemployment still high and and acquisitions and debt underwriting fees improved, although equity inflation pressures low, the Federal Reserve is expected to maintain underwriting revenue decreased from high levels in the prior year when its policy of very low interest rates in the United States through 2011. corporate clients were seeking to strengthen their capital positions. The Bank of Canada, after a period of rate tightening this year, is The U.S. economy remains weak, which has suppressed corporate loan now holding steady and is not expected to resume raising rates until demand, resulting in lower corporate banking revenues. Similarly, the spring of 2011. Capital market conditions should continue to improve, corporate banking revenues were also down in Canada, but the effect which will benefit our fee-based businesses. Our focus in 2011 will was more muted due to a relatively stronger recovery. The aggressive be to continue to deliver a strong return on equity with stable, high- interest rate easing in the United States in the prior year had significantly quality earnings. Growth in fiscal 2011 will depend on the performance benefited our interest-rate-sensitive businesses. Revenues from these of financial and commodity markets, as well as general economic businesses returned to historic levels in 2010 as rates stabilized during activity and business confidence. the year. Our favourable overall performance in 2010 reflected the MD&A strength, diversification and resilience of our core businesses.

BMO Capital Markets Financial Results

BMO Capital Markets net income decreased $53 million to $820 million, BMO Capital Markets (Canadian $ in millions, except as noted) as increases in revenues were offset by higher provisions for credit losses Change from 2009 and increases in expenses. Prior year results were affected by charges of As at or for the year ended October 31 2010 2009 2008 $ % $521 million ($355 million after tax) related to the difficult capital markets Net interest income (teb) 1,394 1,528 1,048 (134) (9) environment. There were no such charges in 2010. Revenue increased Non-interest revenue 1,885 1,561 1,130 324 21 $190 million to $3,279 million. The weaker U.S. dollar reduced revenue by Total revenue (teb) 3,279 3,089 2,178 190 6 $140 million. Revenue growth reflected the work we have undertaken Provision for credit losses 264 146 97 118 81 in focusing on our core client base. Non-interest expense 1,822 1,744 1,636 78 4 Net interest income decreased $134 million or 8.8%, reflecting lower revenues from our interest-rate-sensitive businesses, which benefited Income before income taxes 1,193 1,199 445 (6) – 373 326 (123) 47 15 from favourable market spreads in the prior year, and a decrease in Income taxes (recovery) (teb) corporate banking revenues primarily due to lower asset levels. Net Net income 820 873 568 (53) (6) interest margin increased 2 basis points due to higher trading net interest Amortization of acquisition-related income, partially offset by lower spreads in our interest-rate-sensitive intangible assets (after tax) – – 1 – – businesses and a decrease in corporate lending assets. Non-interest revenue increased $324 million or 21% due to invest- Cash net income 820 873 569 (53) (6) ment securities gains in 2010 compared to significant losses in the prior Net economic profit 347 272 (7) 75 28 year. Mergers and acquisitions and debt underwriting fees improved Return on equity (%) 18.8 15.7 10.4 3.1 considerably, while equity underwriting fees decreased from elevated Cash return on equity (teb) (%) 18.8 15.7 10.4 3.1 levels in the prior year. Trading revenues also decreased in a less favour- Cash operating leverage (%) 1.7 35.3 12.9 nm able trading environment with fewer market opportunities. Productivity ratio (teb) (%) 55.5 56.5 75.1 (1.0) The provision for credit losses was $264 million compared with Cash productivity ratio (teb) (%) 55.5 56.4 75.1 (0.9) $146 million in 2009, as expected losses for 2010 were anticipated to be Net interest margin on earning assets (%) 0.92 0.90 0.63 0.02 higher a year ago. Average common equity 4,154 5,255 5,120 (1,101) (21) Non-interest expense increased $78 million to $1,822 million due Average earning assets 152,116 169,033 166,504 (16,917) (10) to increased employee costs, as we made strategic hires across our Average loans and acceptances 25,437 34,873 30,825 (9,436) (27) operations to position our business for future growth, and higher other Average deposits 80,401 85,458 102,951 (5,057) (6) costs, including a litigation settlement. The weaker U.S. dollar decreased Assets under administration 21,870 27,418 38,781 (5,548) (20) expenses by $73 million. The group’s productivity ratio improved from Assets under management 5,196 6,969 9,294 (1,773) (25) 56.5% to 55.5%, driven by the growth in revenue. Income taxes increased Full-time equivalent employees 2,305 2,103 2,204 202 10 from 2009 primarily due to the higher proportion of income in lower- nm – not meaningful tax-rate jurisdictions in the prior year. Net income from U.S. operations decreased US$238 million to U.S. Business Selected Financial Data (US$ in millions) US$67 million, reflecting significantly lower trading revenue and decreased Change from 2009 revenues from our interest-rate-sensitive businesses, partially offset by As at or for the year ended October 31 2010 2009 2008 $ % increases in investment securities gains and investment banking revenue. Total revenue (teb) 992 1,136 824 (144) (13) Non-interest expense increased as we continued to invest in strategic Non-interest expense 725 622 611 103 17 hiring. Net income 67 305 133 (238) (78) To position our commercial business for growth as the United States Average earning assets 48,231 56,151 60,195 (7,920) (14) emerges from recession, we identified U.S. mid-market clients that would Average loans and acceptances 5,359 7,424 9,097 (2,065) (28) be better served by a commercial banking model and transferred these Average deposits 25,136 30,061 33,401 (4,925) (16) accounts to P&C U.S. from BMO Capital Markets in the second quarter of 2010. As a result, P&C U.S. assumed US$5.4 billion in loans and US$3.2 billion BMO Capital Markets to direct its attention to sectors and clients where in deposits, with results for prior periods restated to reflect the transfer. it has a differentiated competitive advantage while maintaining a clear Transferring accounts that are primarily lending-based to P&C U.S. allows focus on winning investment banking mandates.

56 BMO Financial Group 193rd Annual Report 2010 MD&A

57 4 (3) 58 67 61 42 35 74 41 36 67 (44) (70) (53) (22) (84) (+100) $ % $ % billion or billion

(2) (40) (42) 255 670 562 342 847 391 110 324 435 (108) (540) (238) (821) billion increase 1,187

Change from 2009 Change from Change from 2009 Change from (US$ in millions) 2009 2008 2009 2008 2010 Annual Report 193rd Financial Group BMO 74 76 74 (64) (24) (68) 227 767 783 212 450 522 147 189 41 152 973 825 2010 2010 (128) (383) (325) (425) (1,095) (492) (355) (247) (285) (780) (1,342) (777) (867) (2,054) (1,121) (642) (984) (784) (299) (1,146) (411) (155) (265) (138) (568) (892) (255) (208) (643) (546) 9,968 9,577 9,459 hased under resale agreements fell fell agreements hased under resale billion increase in shareholders’ equity. in shareholders’ increase billion

billion increase in deposits, a $9.2 in deposits, increase billion

billion in 2010, reflecting the growth in cash invested on a short- on in cash invested the growth reflecting in 2010, billion

Total liabilities and shareholders’ equity increased $23.2 increased equity shareholders’ and liabilities Total BMO’s practice is to charge loss provisions to the client operating operating the client to provisions loss charge is to practice BMO’s 31 ended October the year or for As at Total revenue (teb) revenue Total losses credit for Provision expense Non-interest (teb) (recovery) taxes Income (loss) income Net 31 ended October the year or for As at income interest Net offset teb before offset teb Group (teb) income interest Net revenue Non-interest (teb) revenue Total credit losses for Provision expense Non-interest taxes income (loss) before Income subsidiaries interest non-controlling and in (teb) (recovery) taxes Income interest Non-controlling subsidiaries in (loss) income Net employees equivalent Full-time in other liabilities and a $1.7 and liabilities in other 6.0%. There was a $13.1 was There 6.0%. Banks with Deposits Bearing Cash Interest and to billion $7.3 deposits banks increased with bearing Cash interest and $20.6 growth deposit to a response Reserve, Federal the U.S. basis with term States. in the United balances in certain businesses loan lower and Overview Overview from the to prior year billion or 6.0% assets increasedTotal $23.2 the weaker of the impact despite 2010, 31, October at billion $411.6 which the increase reduced assets, U.S.-dollar-denominated on dollar U.S. is used for rate exchange The year-end billion. $5.3 approximately by at weaker was dollar the U.S. and liabilities and assets of translation increase billion The $23.2 2009. 31, October at than 2010, 31, October billion, $12.6 of in securities reflects increases primarily in assets reported bearing cash interest and and billion $8.8 of acceptances and loans net in increase billion as a $1.9 as well billion, $7.3 deposits banks of with in the adjacent included assets which in other are instruments, derivative or purc borrowed Securities table. billion. $7.9 by Corporate Services, including Technology and Operations Operations and including Services, Technology Corporate as noted) except $ in millions, (Canadian Financial Data Selected Business U.S. groups each year, using an expected loss provisioning methodology methodology provisioning loss expected using an year, each groups Services Corporate losses. credit expected of share each group’s based on expected credited) between differences (or with charged is generally provisions and groups operating the client to charged provisions loss under GAAP. required 2009 2008 20072006 – – 250 250 450 nt adjustments and the impact of of adjustments the impact nt and 800 1,150 1,150 1,150 1,150 2010 3,776 4,236 4,315 3,446 2,726 ($ millions) 20,554 13,295 21,105 22,890 19,608 62,942 60,515 79,812 44,169 41,965 28,102 36,006 28,033 37,093 31,429 21,880 20,197 17,904 15,298 15,061 135,933 126,719 134,761 114,330 96,743 176,643 167,829 186,962 164,095 159,565 411,640 388,458 416,050 366,524 319,978 411,640 388,458 416,050 366,524 319,978 249,251 236,156 257,670 232,050 203,848 123,399 110,813 100,138 98,277 67,411

2010 of funding of activities in prior years that enhanced2010 our

liquidity position. liquidity As explained on page 43, BMO analyzes revenues on a teb basis a teb on revenues analyzes BMO page 43, on As explained Corporate Services net loss for the year was $299 million, compared compared million, $299 was year the for loss Services net Corporate Technology and Operations (T&O) manages, maintains and provides maintains provides and manages, (T&O) Operations and Technology As at October 31 31 October As at

Subordinated debt Subordinated securities Capital trust liability share Preferred equity Shareholders’ Liabilities and Shareholders’ Equity Liabilities and Shareholders’ Deposits Other liabilities Net loans and acceptances Other assets Securities borrowed Securities agreements or purchased under resale Assets bearing Cash interest and deposits banks with at the operating group level, with an offsetting adjustment in Corporate in Corporate adjustment offsetting an with level, group the operating at Financial Condition Review Financial Condition Summary Sheet Balance in the adjacent table. Services. Results reflect teb reductions in net interest income and and income interest in net reductions teb reflect Results Services. itemized is income interest net on The impact taxes. income related There was no change in the general allowance in 2010. The improvement The improvement in 2010. no change allowance in the general was There carry on in the negative a decrease to related is primarily in revenues management of as a result positions rate interest certain asset-liability as the diminished as well conditions, stable market more and actions in impact with a net loss of $1,146 million in 2009. The improvement was attrib- was The improvement in 2009. million $1,146 of loss a net with The revenues. higher and credit losses for provisions utable lower to reduced of as a result lower million $821 was credit losses for provision pro- loss Services under our expected Corporate to charged provisions losses credit for provision Includedthe 2009 in methodology. visioning credit losses. for allowance in the general increase million a $60 was Financial Results Services for included Corporate T&O are with results for Operating transferred T&O services are of the costs However, purposes. reporting in retained minor amounts only are and groups, operating three the to the corporate reflect As such, largely T&O results. results in this section outlined above. activities governance over information technology, operations services, real real services, operations technology, information over governance enterprise- on T&O focuses Financial Group. BMO for sourcing and estate wide priorities that service improve quality and efficiency to deliver experience. customer excellent an Corporate Services consists of the corporate units that provide enterprise- provide units that corporate the of consists Services Corporate including areas, of support a variety in and governance wide expertise compliance, legal and planning,management, risk finance, strategic the results reflect Our operating resources. human and communications activities, management asset-liability and certain securitization of impact equivale taxable of the elimination methodology. provisioning loss our expected Corporate Services, including Technology and Operations Technology including Services, Corporate strong strong MANAGEMENT’S DISCUSSION AND ANALYSIS

Securities ($ millions) Other Assets

As at October 31 2010 2009 2008 2007 2006 Other assets increased $2.4 billion to $62.9 billion, primarily reflecting an increase of $1.9 billion in derivative financial instrument assets. Investment – – – – 14,166 The year-over-year increase was primarily due to movements in interest Trading 71,710 59,071 66,032 70,773 51,820 Available-for-sale 50,543 50,257 32,115 26,010 – rates and their impact on the valuation of contracts. Volatility in interest Other 1,146 1,485 1,991 1,494 1,414 rates increases the value of derivative assets and liabilities, usually Loan substitute – – – – 11 comparably. Derivative instruments are detailed in Note 10 on 123,399 110,813 100,138 98,277 67,411 page 130 of the financial statements. Deposits ($ millions) Securities increased $12.6 billion to $123.4 billion in 2010. Trading securities As at October 31 2010 2009 2008 2007 2006 increased $12.6 billion to $71.7 billion, mainly due to an increase in 19,435 22,973 30,346 34,100 26,632 U.S. government issued securities and corporate equity securities backing Banks Businesses and equity derivatives trading and our equity-linked notes program. Further governments 130,773 113,738 136,111 121,748 100,848 details on the composition of securities are provided in Note 3 on page Individuals 99,043 99,445 91,213 76,202 76,368 116 of the financial statements. 249,251 236,156 257,670 232,050 203,848

MD&A Securities Borrowed or Purchased Under Resale Agreements Deposits increased $13.1 billion to $249.3 billion. The weaker U.S. dollar Securities borrowed or purchased under resale agreements decreased reduced deposit growth by $5.6 billion. Deposits from businesses $7.9 billion to $28.1 billion, largely as a result of client demand. and governments, which account for 52% of total deposits, increased $17.0 billion, largely as a result of the replacement of maturing deposits Loans and Acceptances ($ millions) by banks and funding our growth in loans and securities. Deposits from As at October 31 2010 2009 2008 2007 2006 individuals, which account for 40% of total deposits, decreased $0.4 bil- Residential mortgages 48,715 45,524 49,343 52,429 63,321 lion but increased $1.2 billion in source currency. Deposits by banks, which Consumer instalment account for 8% of total deposits, decreased $3.5 billion due to maturing and other personal 51,159 45,824 43,737 33,189 30,418 deposits, as noted above. The growth in deposits includes the addition Credit cards 3,308 2,574 2,120 4,493 3,631 Businesses and of US$1.9 billion as a result of the Rockford transaction. Further details governments 68,338 68,169 84,151 62,650 56,030 on the composition of deposits are provided in Note 15 on page 140 of Acceptances 7,001 7,640 9,358 12,389 7,223 the financial statements and in the Liquidity and Funding Risk section Gross loans and on page 85. acceptances 178,521 169,731 188,709 165,150 160,623 Other Liabilities Allowance for credit losses (1,878) (1,902) (1,747) (1,055) (1,058) Other liabilities increased $9.2 billion to $135.9 billion. Securities sold Net loans and acceptances 176,643 167,829 186,962 164,095 159,565 but not yet purchased increased $4.4 billion and securities lent or sold under repurchase agreements increased $0.8 billion, mainly due Net loans and acceptances increased $8.8 billion to $176.6 billion, despite to client-driven trading activities related to market opportunities. the impact of the weaker U.S. dollar, which lowered the increase by Derivative liabilities increased $3.2 billion, mainly due to the same $4.0 billion. Consumer instalment and other personal loans increased reasons described above for derivative assets. Further details on the $5.3 billion, reflecting continued growth in demand for personal lending composition of other liabilities are provided in Note 16 on page 141 products, particularly in the Canadian market. Residential mortgages of the financial statements. increased $3.2 billion, reflecting strong growth in Canada in the first half Shareholders’ Equity of 2010, as homebuyers chose to finance their purchases before the Shareholders’ equity increased $1.7 billion to $21.9 billion. The increase introduction of the Harmonized Sales Tax in Ontario and British Columbia, was largely related to a $1.1 billion increase in retained earnings and as well as lower levels of securitization activity. These factors were the issuance of approximately 9.7 million common shares with a value partially offset by lower mortgage balances in the United States, reflect- of $0.5 billion through the bank’s Dividend Reinvestment and Share ing secondary market sales. Credit card loans increased $0.7 billion due Purchase Plan, which is described on page 63 of the Enterprise-Wide to the Diners Club business acquisition and lower levels of securitization Capital Management section. Our Consolidated Statement of Changes activity. Overall loan growth was increased by US$1.3 billion by the in Shareholders’ Equity on page 112 provides a summary of items that Rockford, Illinois-based bank transaction and $1.0 billion by the Diners increase or reduce shareholders’ equity, while Note 20 on page 145 of Club business acquisition. the financial statements provides details on the components of and Table 11 on page 102 provides a comparative summary of loans by changes in share capital. Details of our enterprise-wide capital manage- geographic location and product. Table 13 on page 103 provides a com- ment practices and strategies can be found on page 59. parative summary of net loans in Canada by province and industry. Loan quality is discussed on page 40 and further details on loans are provided in Notes 4, 5 and 8 to the financial statements, starting on page 120.

58 BMO Financial Group 193rd Annual Report 2010 MD&A

59 ment Committee and and Committee ment ntify and differentiate risks so ntify and differentiate the Internal Models Approach, but Approach, Models the Internal uses the Advanced Internal Ratings Ratings Internal uses the Advanced asel II, refer to the Enterprise-Wide the Enterprise-Wide to asel II, refer 2010 Annual Report 193rd Financial Group BMO ort our line of business activities is activities business ort our line of Under the Standardized Approach, operational risk capital require- capital risk operational Approach, Under the Standardized The AIRB Approach is the most advanced of the approaches for the approaches for The AIRB of Approach is the advanced most BMO uses both regulatory and economic capital to evaluate business evaluate capital to economic regulatory and uses both BMO items that arise in the execution of our enterprise-wide strategy. Finance Finance strategy. our enterprise-wide of in the execution arise that items implementa- and design the for responsible are Management Risk and sound risk management principles, including consideration of estimates estimates of including consideration principles, management risk sound default, given default, exposure loss of the likely the probability of Basel Class default, exposure. Asset the type of at maturity and to term data portfolio using historical determined are parameters These risk supplemented benchmarking, by Validation and updated are periodically. enhanced are and in place are these parameters to related procedures qua appropriately to periodically in order credit conditions. and changes reflect in economic they business. our lines of type of and the size by determined ments are the line of business and as an indicator of operational risk. Gross income income risk. Gross operational of indicator as an and business the line of and type, business lines by regulatory business eight into is segmented prescribed factor a corresponding is multipliedeach segment by amount capital risk its operational determine to the Basel II framework by B on further details For requirement. page 75. on starting section Management Risk tion of the corporate policies and framework related to capital and risk risk capital and to related framework and policies the corporate of tion reviewed are processes Our ICAAP operating the ICAAP. and management Audit division. our Corporate basis by annual an on Review Capital Regulatory 2010 currently are entity the consolidated for requirements capital Regulatory BMO a Basel on II basis. determined based on level, the borrower at sophisticated techniques RWA measure to of the size for under Basel as defined II, serves as a proxy income, Gross shareholders, while maintaining a well-capitalized position. This approach Governance ultimate provide Committee Review its and Risk Directors of The Board oversight capital of and approval management, including our capital regu- ICAAP capital plan and They results. policy, corporate management and assessments capital adequacy capital position, BMO’s larly review Manage Risk The activities. management capital key oversight, management senior provide Committee Capital Management action and issues capital policies, discuss significant and review also and (RWA) assets credit risk-weighted determine to Approach Based (AIRB) operational determine to Approach the Standardized and in our portfolio Inc. banking subsidiary Bancorp, Harris retail U.S. BMO’s In 2010, RWA. market BMO’s RWA. credit determine to Approach used the Standardized using determined primarily are RWA exposures. some is used for Approach the Standardized It utilizes under Basel II. capital requirements credit risk determining aims to protect our stakeholders from the risks inherent in our various in our the various risks our inherent from stakeholders protect aims to the to resources deploy to the flexibility allowing while still businesses, Capital in groups. our operating of activities growth strategic high-return, supp is necessary to what of excess Services. in Corporate held performance and as the basis for strategic, tactical and transactional tactical transactional and strategic, as the basis for and performance units measuring and operating to capital By allocating decision-making. the support the capital necessary to to in relation their performance to return our risk-adjusted maximize to seek we in their business, risks

ing our business Capital Supply available Capital to support losses business activities, refer to the Enterprise-Wide the Enterprise-Wide to refer activities, business cludes Internal the the results of ignment between our business and and our business between ignment Actions Management Capital adequacy Capital demand and supply demand and assessment of capital

economic capital economic Capital Demand Capital required support the to underlyingrisks our business activities as by measured ICAAP is an integrated process that evaluates capital adequacy, and and adequacy, capital evaluates that process ICAAP integrated is an

of required economic capital; economic required of and strategies; business groups’ our operating underpins value. shareholder long-term and confidence builds depositor assessment internal and regulatory capital ratios meets our target ratings; credit our targeted with is consistent For further discussion of the risks that underlie our that the risks of further discussion For page 75. on section Management Risk demand (the capital required to support the risks underly the risks support to required demand (the capital is used to establish capital targets and capital strategies that take into into take that strategies capital and targets capital establish is used to BMO’s with in conjunction developed The ICAAP are capital plan and al plan, promoting business annual and requirements, capital economic and regulatory strategies, risk capital comparing by Capital adequacy is assessed capital availability. capital to losses) support to ble availa capital of (the amount supply consideration the strategic direction and risk appetite of the organization. the organization. of appetite risk and direction the strategic consideration The principles and key elements of BMO’s capital management frame- capital management BMO’s elements of key and The principles and policy corporate capital management outlined in our are work which plan, capital in in our annual (ICAAP). Process Capital Adequacy Assessment • • Framework Capital Management • • BMO isBMO a disciplined committed to capital approach to management regulators, shareholders, of requirements and the interests balances that maintain a strong is to Our objective agencies. rating and depositors that: structure in a cost-effective position capital Objective Enterprise-Wide Capital Management Enterprise-Wide activities as measured by economic capital). Enterprise-wide stress stress Enterprise-wide capital). economic by as measured activities testing and scenario analysis also are used to assess the impact of capital requirements. and profile risk BMO’s on conditions stress various capitalized, adequately are we that ensure seeks to The framework goals limits, of supports and determination the take, we the risks given manage sheet balance used to are that measures performance and the consolidated both at requirements capital and levels risk positions, actualforecast and of Assessments level. business of line and entity year, the throughout plan capital the to compared are adequacy capital changes based on in our as required, is updated the capital plan and environment. or operating profile risk activities, business MANAGEMENT’S DISCUSSION AND ANALYSIS

BMO’s total RWA were $161.2 billion at October 31, 2010, down Basel II Regulatory Capital ($ millions)

from $167.2 billion in 2009. The decrease was primarily attributable to As at October 31 2010 2009 the impact of the weaker U.S. dollar, which reduced the translated value Common shareholders’ equity 18,753 17,132 of U.S.-dollar-denominated RWA, and lower corporate and commercial Non-cumulative preferred shares 2,571 2,571 RWA. These factors were partially offset by an increase in retail loan, Innovative Tier 1 capital instruments 2,542 2,907 securitization and operational risk RWA. The table below provides a Non-controlling interest in subsidiaries 23 26 breakdown of our RWA by risk type. Goodwill and excess intangible assets (1,619) (1,569) Accumulated net after-tax unrealized losses Risk-Weighted Assets ($ millions) on available-for-sale equity securities – (2) As at October 31 2010 2009 Net Tier 1 capital 22,270 21,065 Credit risk 136,290 143,098 Securitization-related deductions (165) (168) Market risk 5,217 6,578 Expected loss in excess of allowance (AIRB Approach) – (61) Operational risk 19,658 17,525 Substantial investments and investments in insurance subsidiaries (427) (374) Total RWA 161,165 167,201 Adjusted Tier 1 capital 21,678 20,462 Tier 1 capital represents more permanent forms of capital, and primarily Subordinated debt 3,776 4,236 MD&A includes common shareholders’ equity, preferred shares and innovative Trust subordinated notes 800 800 hybrid instruments, less a deduction for goodwill and excess intangible Accumulated net after-tax unrealized gains 10 – assets and certain other deductions required under Basel II. Our Tier 1 on available-for-sale equity securities Eligible portion of general allowance for credit losses 292 296 capital was $21.7 billion at October 31, 2010, up from $20.5 billion in 2009. The increase was primarily attributable to growth in common shareholders’ Total Tier 2 capital 4,878 5,332 equity, partially offset by the impact of a redemption of innovative Securitization-related deductions (29) (7) Expected loss in excess of allowance (AIRB Approach) – (60) hybrid capital, as outlined under Capital Management Activities. Substantial investments and Total capital includes Tier 1 and Tier 2 capital, net of certain deduc- investments in insurance subsidiaries (890) (868) tions. Tier 2 capital is primarily comprised of subordinated debentures and Adjusted Tier 2 capital 3,959 4,397 the eligible portion of the general allowance for credit losses. Deductions from Tier 2 capital are primarily comprised of our investments in insurance Total capital 25,637 24,859 subsidiaries and other substantial investments, along with other sundry Basel II deductions. Total capital was $25.6 billion at October 31, 2010, The Tier 1 Capital Ratio was 13.45% at October 31, 2010, up from 12.24% up from $24.9 billion in 2009. This increase was primarily attributable to in 2009. The Tangible Common Equity Ratio increased from 9.21% in 2009 growth in common shareholders’ equity, partially offset by the impact to 10.47% at October 31, 2010. The year-over-year increase in the ratios of capital redemptions, as outlined under Capital Management Activities. reflects a reduction in RWA and an increase in capital. The ratios were Our objective is to maintain strong capital ratios that meet both maintained at strong levels during 2010 in anticipation of pending current and expected regulatory requirements. The Tier 1 Capital Ratio regulatory capital changes and the adoption of International Financial and Tangible Common Equity Ratio are our key measures of capital Reporting Standards (IFRS) and in order to maintain financial strength adequacy, and both were strong in 2010. and flexibility as we continue to execute our growth strategy. Further details on the potential impact of proposed regulatory capital changes and IFRS are provided in the next section. The Tier 1 Capital Ratio, Tangible Common Equity Ratio, The Common Equity Ratio, a new measure that is increasingly Total Capital Ratio and Assets-to-Capital Multiple are our being monitored by banks, will become a regulatory capital ratio under primary capital measures. Basel III (see next section for further information on the definition of the ratio and Basel III requirements). The bank’s Common Equity Ratio was The Tier 1 Capital Ratio is defined as Tier 1 capital divided 10.26% on a Basel II basis at October 31, 2010, up from 8.95% in 2009. by RWA. The Tangible Common Equity Ratio is defined as common shareholders’ equity less goodwill and intangibles, divided Capital Measures by RWA. 17.2x The Total Capital Ratio is defined as total capital divided 16.1x 16.4x 14.1x 14.5x by RWA. 15.91 14.87 The Assets-to-Capital Multiple is calculated by dividing total 13.45 12.24 assets, including specified off-balance sheet items net of other 11.76 11.74 12.17 10.47 specified deductions, by total capital. 10.22 9.21 10.26 9.51 9.77 8.12 8.95 8.21 7.18 7.47 7. 33 7.42

2006 2007 2008 2009 2010

Common Equity Ratio (%) Tangible Common Equity Ratio (%) Tier 1 Capital Ratio (%) Total Capital Ratio (%) Assets-to-Capital Multiple (times) Note: 2006–2007 under Basel I; 2008–2010 under Basel II. There is no comparability between measures for 2008–2010 and the prior years.

60 BMO Financial Group 193rd Annual Report 2010 MD&A 61 (2) na na na (3) are are 3.0 3.0 0.0 8.0 8.0 effective effective

0.0 7.0 10.0 7.0 na 4.5 6.0 8.0 3.0 2.5 2.5 2.5 7.0 8.5 10.5 3.0 7.0 8.5

2010 Annual Report 193rd Financial Group BMO ing a base equal to the amount the amount ing a base equal to (1) 3.5 4.5

here could be subsequent adjustments, which adjustments, be subsequent could here (1) 3.5 4.5 4.5 3.5 (%) is defined as common equity as common is defined (1) (1) is defined as Tier 1 capital divided by on- 1 capital divided by as Tier is defined January 1, 2013 requirements 2013 1, – January requirements 2019 1, – January The proposed final minimum capital ratio requirements under requirements final minimum ratio capital The proposed Non-common share Tier 1 and Tier 2 capital instruments must meet meet instruments must 2 capital Tier 1 and Tier share Non-common targeted to be finalized in 2017, with the final leverage ratio requirement requirement ratio the final leverage with in 2017, be finalized to targeted the results of the parallel run testing, t run testing, the parallel the results of A 3% minimum leverage ratio has been proposed by the BCBS. It will be subject to analysis analysis be subject to It will the BCBS. by has been proposed ratio minimum leverage A 3% Depending upon 2013. 1, beginning parallel run January period, test during a four-year 2018. 1, January OSFI currently monitors the Assets-to-Capital Multiple, which is based on total capital. which total is based on Multiple, the Assets-to-Capital monitors OSFI currently 1 capital. Tier is based on ratio Basel III leverage The proposed The final requirements and transition periods OSFI. will be established by not applicable – not Under Basel III, two new regulatory capital metrics are expected expected are regulatory capital metrics new BaselUnder III, two be introduced: to Ratio Equity The Common Ratio The Leverage of net items sheet specified and off-balance assets balance sheet specified deductions. less required capital deductions, divided by risk-weighted assets. assets. risk-weighted divided by capital deductions, required less Ratio. 1 Common as the Tier to referred is also This ratio 1 Common Total Ratio Ratio Ratio Ratio Tier Leverage Equity Capital Capital Basel III minimum requirements Stated Plus: Capital Conservation requirements buffer minimum Effective requirements Basel III minimum requirements Stated 0.0 Plus: Capital Conservation requirements buffer minimum requirements Effective requirements OSFI Basel II – Current (1) (1) (2) (3) na Committee on Banking on on Supervision (BCBS) itsCommittee position finalizes fiscal in 2011. capital contingent as established Canadian requirements current than higher Basel III are table. in the following summarized OSFI under Basel are II and by Requirements Regulatory new requirements to qualify as regulatory capital under Basel III. Existing Existing under Basel capital as regulatory qualify III. to requirements new expected are requirements these new meet do not instruments that 10-year a out over phased and provisions grandfathering be subject to to Us 2013. 1, beginning January period recognition their 2013, 1, such instruments outstandingof January on cap the with 2013, 1, January from 90% at be capped to is expected In addition, year. subsequent in each points percentage 10 reducing by be to expected are be redeemed to incentive an instruments with rules, Under the proposed maturity date. their effective phased out at 1 capital (BMO Tier innovative existing the bank’s of majority a large 2 subordinated Tier and 1 Notes) Tier BMO and Securities Capital Trust capital qualify as regulatory to expected not instruments are debt capital the regulatory expect We fully implemented. the rules are once instruments capital share non-common other the bank’s of treatment the Basel after be determined to treatment grandfathering related and

ser- the Common Equity Ratio Ratio Equity – the Common he Canadian-dollar equivalent of of he Canadian-dollar equivalent to complement the existing Tier 1 Capital Tier the existing complement – to frameworks and strengthen the resilience of individual of banking the resilience strengthen and frameworks BMO conducts business through a variety of corporate structures, structures, corporate of conducts a variety BMO through business As noted in the Provisions for Income Taxes section, we hedge we section, Taxes Income for in the Provisions As noted Our Total Capital Ratio was 15.91% at October 31, 2010, up from 2010, 31, October at 15.91% was CapitalRatio Our Total intended to strengthen the banking sector regulatory the banking capital and sector strengthen to intended securitizations and counterparty credit risk; credit counterparty and securitizations banks are better able to absorb losses on both a going-concern and and a going-concern both on losses absorb to able better banks are basis; liquidation and the Leverage Ratio Ratio the Leverage and Ratio and Total Capital Ratio; and Capital Ratio; Total and Ratio minimum requirements. capital increasing risk, market particularly for requirements, capital risk increasing ratios capital regulatory new introducing raising the quality of capital that banks are required to hold to ensure ensure to hold to required banks are that capital of the quality raising institutions in periods of stress. Collectively, these new global standards standards global these new Collectively, stress. institutions in periods of Based regulatory on guidance provided III”. as “Basel to referred are the bank supervisory or regulatory authorities, a countercyclical capital a countercyclical supervisorythe bank or regulatory authorities, be also could RWA of 2.5% to 0% from ranging requirement buffer excess is deemed that when it banking organizations on imposed risk. systemic of in a build-up resulted has growth credit aggregate serve as an when in effect,would capital buffer, This countercyclical buffer. conservation the capital supplements that buffer additional vation buffer that can absorb losses during periods If stress. of a bank (e.g. distributions earnings on restrictions the buffer, within operates would compensation) discretionary and repurchases, equity dividends, the varying with such restrictions of the degree with ensue, likely of the discretion subject to Moreover, range. the buffer within position to January 1, 2019, or earlier, depending on local regulatory requirements. requirements. regulatory local depending on or earlier, 2019, 1, January to include con will a capital requirements The minimum ratio capital January 1, 2013, and new capital deductions are scheduled in be phased to are deductions capital new and 2013, 1, January 2018. 1, ending and January 2014 1, January beginning on per year 20% at scheduled to are requirements minimum ratio capital New regulatory be implemented a transition over 2013 period that runs from January1, The final requirements and transition will be period applicable BMO to RWA exposure securitization and risk Market OSFI. by established Counterparty in fiscal 2012. be implemented to expected changes are on scheduled be implemented changes to are RWA other and risk credit • be implementedThe Basel to in a phased III rules expected approach. are • • • to date, the key building blocks of Basel III from a regulatory Basel capital building III from of blocks key the date, to include:perspective Over the past two years, global regulators have proposed reforms that that reforms proposed have regulators global years, two the past Over are Potential Impacts of Proposed Regulatory Capital Capital Regulatory Proposed of Impacts Potential IFRS to Conversion and Changes including subsidiaries and joint ventures. All our of subsidiaries must in the jurisdictions of requirements legislative and the regulatory meet which they operate. A framework is in place to ensure that subsidiaries support funding and to capital to access have entities their parent and conditions. normal stressed and under both operations their ongoing Capital Multiple was 14.5 at October 31, 2010, up from 14.1 in 2009. The in 2009. 14.1 up from 2010, 31, October at 14.5 Capital was Multiple OSFI. by maximum permitted the current below well multiple remains 14.87% in 2009. Both our Tier 1 and Total Capital Ratios remain well well remain Capital Ratios Total and 1 Tier our Both in 2009. 14.87% the of the Office by stipulated minimum ratios capital the current above 10%, and 7% of Canada (OSFI) Financial Institutions of Superintendent Assets-to- BMO’s financial institution. a well-capitalized for respectively, the foreign exchange risk arising from our net investment in our investment our net from arising risk exchange the foreign This dollars. in U.S. investment funding the net by operations U.S. changes in foreign of ratios capital our on the impact reduces strategy 1 Tier adjustments currency to foreign of as the effect rates, exchange is the Canadian dollar of changes in the value from arising capital change the in t by offset partially RWA. U.S.-dollar-denominated liquidity MANAGEMENT’S DISCUSSION AND ANALYSIS

We believe the Common Equity Ratio and the Tier 1 Capital Ratio are the most important capital ratios under Basel III. After full imple- Total Economic Capital Total Economic Capital mentation of announced Basel III capital deductions and RWA changes by Risk Type by Operating Group and including the potential impact of certain key changes associated As at October 31, 2010 As at October 31, 2010 with the adoption of IFRS, based on our analysis to date, as set out in Transition to International Financial Reporting Standards in the Future Changes in Accounting Policies – IFRS section on page 71, BMO’s pro- Credit 65% P&C 45% forma October 31, 2010 Common Equity Ratio and Tier 1 Capital Ratio Business 4% BMO CM 44% would be 7.8% and 10.4%, respectively, exceeding the announced Operational 13% PCG 8% Basel III 2019 minimum capital requirements. The pro-forma ratios are Market 18% Corp 3% derived using our October 31, 2010 balance sheet and are based on our understanding of the proposed regulatory rules, which are not yet finalized and are subject to further change. The pro-forma ratios do not reflect management actions that may be taken to mitigate Credit risk remains the largest P&C and BMO Capital Markets the impact of the changes, the benefit of additional retained earnings component of economic capital represented the two largest by risk type. components of economic growth over time that could be available to meet these requirements, capital in 2010. MD&A or factors beyond the control of management. We believe BMO is also well-positioned to meet the other capital requirements. Under the above view, the bank’s regulatory common equity planned for 2011. In addition, the BCBS is working with the Financial would decrease by $1.5 billion from $16.5 billion to $15.0 billion as of Stability Board to address the risk of systemically important banks and October 31, 2010 and its Tier 1 capital would decrease by $1.7 billion from has recommended that for such banks, additional capital requirements $21.7 billion to $20.0 billion. Regulatory common equity and Tier 1 capital be adopted, such as capital surcharges and contingent capital. These decrease relative to reported October 31, 2010 Basel II results, primarily changes could affect the amount of capital that we hold to meet regula- because of the impact of the adoption of IFRS on retained earnings, as tory requirements. well as a new capital deduction for intangible assets. These factors are BMO’s strong capital levels position us well to adopt both the partially offset by the removal of certain existing deductions from capital announced regulatory changes and IFRS accounting changes in the com- and their conversion to higher levels of RWA. We have assumed existing ing years. We do not expect the announced changes in regulatory capital non-common share Tier 1 capital instruments are fully included in Tier 1 requirements to materially affect our strategic or tactical direction. capital for purposes of this calculation. Certain of these instruments do not meet Basel III capital requirements and are expected to be subject Economic Capital Review to the grand fathering provisions previously noted. We expect to be Economic capital is our internal assessment of the risks underlying BMO’s able to refinance non-common capital instruments as and when necessary business activities. It represents management’s estimation of the likely to meet applicable non-common capital requirements. magnitude of economic losses that could occur should adverse situations Our RWA as at October 31, 2010 would increase by $31.3 billion arise, and allows returns to be measured on a basis that considers the from $161.2 billion to $192.5 billion, primarily due to higher counterparty risks taken. Economic capital is calculated for various types of risk – credit, credit risk RWA ($23.4 billion) and, to a lesser extent, higher market market (trading and non-trading), operational and business – where risk RWA and the conversion of certain existing Basel II capital deductions measures are based on a time horizon of one year. For further discussion to RWA ($7.9 billion), as noted above. The quantification of the change in of these risks, refer to the Enterprise-Wide Risk Management section counterparty credit risk RWA is based on Basel III proposals developed on page 75. Economic capital is a key element of our risk-based capital earlier this year. There continues to be significant ongoing discussion management and ICAAP framework. concerning the approach to quantifying counterparty credit risk and, Capital Management Activities as a result, there is considerable uncertainty regarding the final impact There were no share issuances in 2010, other than through the on RWA. The expected introduction of central clearing agencies for bank’s Shareholder Dividend Reinvestment and Share Purchase Plan certain derivative transactions, together with management actions, are and the exercise of stock options. We redeemed $500 million 4.00% expected to significantly mitigate the increase in counterparty credit Series C Medium-Term Notes, Tranche 1 on January 21, 2010 and risk RWA noted above. $350 million BMO Capital Trust Securities – Series A (BMO BOaTS – As previously noted, the regulatory treatment of capital deductions Series A) on June 30, 2010. On November 23, 2010, we announced our is scheduled to change between January 1, 2013 and January 1, 2018. intention to redeem the $400 million BMO Capital Trust Securities – Based on the same underlying assumptions as above but using the Series B (BMO BOaTS – Series B) on December 31, 2010. Further January 1, 2013 transitional arrangements for capital deductions, the details are provided in Notes 18 and 20 on pages 142 and 145 of bank’s pro-forma October 31, 2010 Common Equity Ratio and Tier 1 Capital the financial statements. Ratio would be 9.0% and 10.8%, respectively, higher than the 2019 On October 27, 2010, we announced our intention to renew our requirements. The Common Equity Ratio is higher under the 2013 transi- normal course issuer bid, subject to the approval of OSFI and the Toronto tional view than under the 2018 view because the $1.5 billion goodwill Stock Exchange, under which we may repurchase for cancellation up deduction is initially taken from non-common share Tier 1 capital in 2013. to 15 million BMO common shares (representing approximately 2.7% Between 2013 and 2018, the goodwill deduction is scheduled to change of the public float). No common shares were repurchased under our to a deduction from common equity, lowering the Common Equity Ratio. previous normal course issuer bid, which expired on December 1, 2010. The treatment of intangible assets and new Basel III deductions have a similar impact on the 2013 to 2018 Common Equity and Tier 1 Ratios. Dividends A number of other potential regulatory changes are still being BMO’s target dividend payout range over the medium term is 45% to finalized. For example, counterparty credit risk requirements and 55% of net income available to common shareholders. The target is countercyclical capital buffer requirements have not yet been finalized indicative of our confidence in our continued ability to increase earnings and a fundamental review of trading book capital requirements is and our strong capital position. BMO’s target dividend payout range seeks to provide shareholders with stable income, while ensuring

62 BMO Financial Group 193rd Annual Report 2010 MD&A

63 Community Community 2009 2008 2010 $ 2.80 $ 2.80 2.80 $ 1.33 $ 2.80 $ 1.13 1.33 $ 1.48 1.13 $ $ 1.33 $ 0.94 1.31 $ $ 1.13 $ 0.55 1.45 $ $ 1.31 $ 1.30 $ $ 1.45 $ – 1.55 $ $ 1.30 $ – 1.11 $ $ 1.62 $ – 0.59 $ $ 1.62 $ $ 1.60 $ 1.19 – $ $ – $ US$ 1.49 US$ 1.49 US$ 1.49 US$ 1.49 US$ Dividends declared per share 2010 Annual Report 193rd Financial Group BMO 7,470,000 7,560,000 566,526,090

(1) Number of shares Number of $ 200,000,000 $ 350,000,000 $ 250,000,000 $ 250,000,000 $ 300,000,000 $ 150,000,000 $ 275,000,000 $ 400,000,000 $ – nding requirements under the nding requirements US$ 300,000,000

(2) In Canada, BMO does not any have subprime mortgage programs, We also had net exposure of US$69 million (US$101 million in million (US$101 million US$69 of exposure net had also We equity the homeowner’s by secured are products Home equity vested – vested – nonvested Convertible preferred shares may be exchanged for common shares on specific dates on a on specific dates on shares common for be exchanged may shares preferred Convertible pro-rata basis the of tradingaverage based on 95% price common of shares for days the 20 ending days the four date. exchange prior to 2010 25, November As at shares Common amount or dollar shares B Preferred Class 5 Series 13 Series 14 Series 15 Series 16 Series 18 Series 21 Series 23 Series shares: common into Convertible shares B Preferred Class 6 Series 10 Series options Stock mortgages) at a discounted price. which amounted to 2.9% of BMO’s total loan portfolio at October 31, 2010. 2010. 31, October at portfolio loan total BMO’s of 2.9% to which amounted extended were billion US$0.28 of loans portfolio, home equity Of the U.S. be would and 620 below scores credit bureau with customers to categorized as subprime million Of loans. or these, 2.56% only US$7 in arrears. or more days 90 were in 2009) or 2.1% million (US$7 purchase lenders. nor do we subprime third-party mortgage loans from the of a full assessment lending mortgage incorporate decisions BMO our of component one is only score Credit structure. loan and customer categorize do not we consequently, and process credit adjudication with subprime characteristics the at date authorization. of A small of ratio a loan-to-value with loans uninsured these are of portion or 5.94% million US$15.8 end, year At issuance. at 80% than greater were loans of billion the US$0.27 of in 2009) or 6.29% million (US$18.5 for 4.46% of a rate with This compares arrears. in or more days 90 portfolio. loan mortgage first U.S. total BMO’s to a business that buys2009) distressed mortgages (including subprime Outstanding Shares and Securities Convertible Securities and Outstanding Shares Shares Common into (1) 2008. 25, November on Redeemed (2) capital. includes share the financial statements on details of 145 page on 20 Note Caution statements. forward-looking contains Capital Management section This Enterprise-Wide Statements. Forward-Looking see the Caution Regarding Please and rank subordinate to any existing first mortgage on the property. In the property. on mortgage first existing any to subordinate rank and portfolio, loan home equity billion a US$5.0 have we States, the United . We also occasionally lend to parties with credit with parties lend to occasionally also Act. We Reinvestment qualification criteria. strong other are when there 620 below scores outstanding loans mortgage first of billion US$0.27 As have a result, we Subprime Mortgage Loans Subprime Mortgage In the United subprimeStates, loans typically are considered to be or less. 620 of scores credit bureau with borrowers made to those subprime originate a subprime do not mortgages through mortgage We in available loans make we however, States; in the United program as part 620 below individuals to credit scores States with the United le with our compliance of

ucts, portfolios that have been have that portfolios ucts, nisters and central bank governors, governors, bank central and nisters section, Select Financial Instruments, Financial Instruments, Select section, (Canada) and any similar any and Act (Canada) Tax Income The following is a discussion of subprime mortgage loans, Alt-A Alt-A isdiscussion subprime a of mortgage loans, The following In the United States, our consumer loan portfolio totalled totalled portfolio loan our consumer States, Inthe United At year end, BMO’s common shares provided a 4.6% annual dividend annual a 4.6% provided shares common BMO’s end, year At Dividends declared per common share in 2010 totalled $2.80. $2.80. totalled 2010 in share Dividends declaredper common stment and Share Purchase Share and stment DividendReinve Under the Shareholder mortgage loans and home equity prod home equity and loans mortgage the past of environment in the economic interest investor increased of mortgages. includes It also repurchased on a discussion years. few US$15.0 billion and is also primarily comprised of three asset classes: asset three of comprised primarily is also and billion US$15.0 and (33%) products home equity (34%), mortgages first residential (29%). loans automobile indirect contains forward-looking statements. Please see the Caution Regarding see the Caution Regarding Please statements. forward-looking contains page 29. on Statements Forward-Looking at billion $85.7 totalled portfolio loan our consumer In Canada, classes: residen- main asset three of is comprised and 2010 31, October and (48%) loans personal other instalment and (48%), tial mortgages (4%). loans credit card Consumer Loans Consumer Given the uncertainty in the capital markets environment, our capital our capital environment, markets in the capital the uncertainty Given due losses and gains valuation experience instruments could markets This value. changesto in market our portfolio. We have also followed a practice of reporting on significant on reporting of a practice followed also have We our portfolio. Caution these developments and we have continued to report on them, together on report to continued have we and these developments to relative in context put exposures to financial instruments, other with Select Financial Instruments mi the G7 finance of the request At re-establishedas the Financial (since Forum The Financial Stability enhancing market on 2008 in April a report issued Board) Stability the report Among its recommendations, resilience. institutional and that financial instruments to related disclosure enhanced encouraged expanded as carrying risk. higher We regard to come had markets with in keeping certain financial instruments in 2008 of our discussion Eligible Dividends Designation the of the purposes For provincial and territorial legislation, BMO designates all dividends all paid designates BMO legislation, territorial and provincial as shares preferred and its common both on paid be or deemed to otherwise. indicated unless dividends”, “eligible BMO announced that the Board of Directors declared dividend a quarterly Directors of the Board that announced BMO sufficient earnings are retained to support anticipated business growth, growth, business anticipated support to retained are earnings sufficient depositors. for support continued provide and investments fund strategic changes MD&A. in our interim Annual dividends declared in 2010 represented 58.8% of net income income net of 58.8% represented Annual dividends declared in 2010 increasing on focus to continue We shareholders. common to available ratio in a dividend result payout will expect which we our earnings, dividends are BMO’s term, the long Over range. our target within growth. share per in earnings trends with in line increased generally Plan (the Plan), the bank may offer a discount of up to 5% from the from 5% up to of a discount offer may the bank Plan (the Plan), price (as defined in the Plan) newly on common shares market average who elected shareholders common In fiscal 2010, treasury. from issued from shares issued were BMO of shares dividends in common reinvest to Effective with price. market the discount average from a 2% treasury at dividend is no longer payment, the discount 2010 26, the November elect otherwise. such until time as we offered on common shares of $0.70 per share, unchanged the both prior share, per from $0.70 of on common shares ago. a year and quarter yield based on the year-end closing share price. On December 7, 2010, 2010, closing On December price. 7, share yield on the based year-end MANAGEMENT’S DISCUSSION AND ANALYSIS

loans based upon credit scores alone. A nominal amount of mortgage not meet the terms and conditions of the purchase and sale agreement loans with subprime characteristics are held in certain BMO-sponsored at the time of sale. The recent distress in the mortgage loan market has Canadian conduits that hold third-party assets, as described in the prompted purchasers, such as Freddie Mac, to increase their review of discussion of those conduits that follows. loans purchased to determine if sellers are required to repurchase loans In Canada, we have a $21.2 billion home equity line of credit that did not meet the terms and conditions of the purchase and sale portfolio ($36.1 billion authorized). The portfolio is of high quality, with agreement at the time of sale. P&C U.S. has received a total of 41 requests only 0.11% (0.11% in 2009) of loans in the portfolio 90 days or more to repurchase mortgage loans totalling US$7.2 million in fiscal 2010, in arrears. Of these lines of credit, one product line is offered only in first of which approximately half were repurchased, one quarter were deter- mortgage position and represents approximately 71% of the total port- mined to have met the terms and conditions of the purchase and sale folio. We also have a $0.25 billion home equity instalment loan portfolio, agreement and were not repurchased, and one quarter remain under in which $2 million of loans were 90 days or more in arrears. discussion. At this time, we do not anticipate material losses from future mortgage loan repurchase obligations. Alt-A First Mortgage Loans In the United States, Alt-A loans are generally considered to be loans Euro Zone Exposures for which borrower qualifications are subject to limited verification. In the euro zone, BMO’s direct credit exposures in Greece, Ireland, Italy, The U.S. loan portfolio had two loan programs that met this definition – Portugal and Spain are primarily to banks for trade finance, lending and our Easy Doc and No Doc programs. We discontinued offering the Easy trading products. Exposures remain modest at $194 million. In addition, MD&A Doc and No Doc programs in the third quarter of 2008. Loans under the No our Irish subsidiary is required to maintain reserves with the Irish central Doc program, which comprise most of the exposure in this class, required bank. These totalled $271 million at the end of the year. minimum credit bureau scores of 660 and maximum loan-to-value ratios The BMO-managed structured investment vehicles (SIVs) had of 80% (90% with private mortgage insurance). Due to these lending exposure with a par value of $243 million to banks in these countries as requirements, the credit quality of our Alt-A portfolio is strong and the at October 31, 2010. Included in the exposure was $203 million par value loans have performed relatively well. In the United States, our direct of Irish bank and insurance company subordinated debt. Subsequent Alt-A loans totalled US$0.9 billion at year end (US$1.2 billion in 2009). to year end, the SIVs recorded a $143 million impairment charge against Of these, US$61 million or 6.42% (US$65 million or 5.23% in 2009) were this amount. This impairment charge reduces the book value of the SIVs’ 90 days or more in arrears. This compares with a rate of 4.46% (2.77% subordinated capital notes, with no direct impact on BMO’s financial results. in 2009) for BMO’s total U.S. first mortgage loan portfolio. Subsequent to year end, the SIVs’ exposure to the noted countries was BMO also offered two limited documentation programs within reduced by $40 million par value related to the sale of non-Irish debt. the home equity loan portfolio in the United States, which would The impact of the impairment charge and the sale reduces the SIVs’ par be categorized as Alt-A if they were in the first mortgage loan portfolio. value exposure to the banks in these countries to $60 million. As of October 31, 2010, the amount authorized under these programs was US$0.9 billion, of which US$0.6 billion was outstanding. Loans Leveraged Finance made under these programs have the same strong credit score and Leveraged finance loans are defined by BMO as loans to private equity loan-to-value requirements as the first mortgage loan portfolio, and businesses and mezzanine financings where our assessment indicates as such the portfolio has performed well. As at October 31, 2010, a higher level of credit risk. BMO has exposure to leveraged finance US$11 million or 1.78% (US$6 million or 0.95% in 2009) of the loans in loans, which represent less than 1% of our total assets, with $3.3 billion this portfolio were 90 days or more in arrears. This compares with a rate outstanding as at October 31, 2010, down approximately $300 million of 1.29% (1.10% in 2009) for BMO’s total U.S. home equity loan portfolio. from a year ago. Of this amount, $219 million or 6.6% of loans were Subprime and Alt-A loans are generally considered to carry higher classified as impaired ($201 million or 5.6% in 2009). risk than traditional prime loans. We also consider loans to customers Monoline Insurers and Credit Derivative Product Companies with credit scores between 620 and 660 and a loan-to-value ratio At October 31, 2010, BMO’s direct exposure to companies that specialize above 80% (without private mortgage insurance) to be a higher-risk in providing default protection amounted to $121 million in respect component of our portfolio. At year end, this component represented of the mark-to-market value of counterparty derivatives and $9 million a negligible amount within our total U.S. loan portfolio. in respect of the mark-to-market value of traded credits ($256 million In Canada, we do not have a mortgage program that we consider and $19 million in 2009). The cumulative adjustment for counterparty to be Alt-A. In the past, we may have chosen to not verify income or credit risk recorded against these exposures was $40 million employment for certain customers when there were other strong quali- ($20 million in 2009). fications that supported the creditworthiness of the loan as part of our Approximately 41% of the $121 million gross exposure is related credit adjudication process; however, this approach is no longer in use. to counterparties rated AA+ by Standard & Poor’s (S&P). The remainder is We also have a Newcomers to Canada/non-resident mortgage program largely related to counterparties rated below investment grade. In 2009, that permits limited income verification but has other strong qualification 60% of the $256 million exposure was related to counterparties rated A criteria. At October 31, 2010, there was approximately $3.0 billion ($2.4 bil- or better by S&P. Moody’s Investors Services (Moody’s) credit ratings are lion in 2009) outstanding under this program. Of this, only $15 million lower. The notional value of direct contracts involving monoline insurers or 0.50% ($12 million or 0.50% in 2009) of the loans were 90 days or and credit derivative product companies was approximately $3.4 billion more in arrears, reflecting the high credit quality of these loans. A nominal ($3.8 billion in 2009). Most contracts with these companies relate to amount of mortgage loans with Alt-A characteristics are held in certain collateralized debt obligations (CDOs) and credit default swaps (CDSs) BMO-sponsored Canadian conduits that hold third-party assets, as within our trading portfolio and provide protection against losses arising described in the discussion of those conduits that follows. from defaults. These instruments have minimal subprime exposure. Mortgage Repurchases Certain credit derivative product counterparty exposures are discussed From time to time, Harris sells fixed-rate mortgage loans originated further in the Exposure to Other Select Financial Instruments section. within its branch network to the Federal Home Loan Mortgage At October 31, 2010, BMO also held $811 million of securities insured Corporation (Freddie Mac), a corporation chartered by the United States by monoline insurers, of which $629 million were municipal bonds federal government. Generally, mortgage loan purchasers, including ($901 million and $630 million in 2009). General obligation municipal Freddie Mac, have the right to require a mortgage loan seller to bonds, which have a charge on the taxing authority of the municipality, repurchase a loan when it is subsequently determined that the loan did represent 89% of our municipal bond portfolio. Approximately 93%

64 BMO Financial Group 193rd Annual Report 2010 MD&A

65 residential mortgages. These mortgages. residential cle. The amount of the facilities was was the facilities of cle. The amount 2010 Annual Report 193rd Financial Group BMO es where BMO provides the funding, provides BMO es where he securitization of their assets their assets of he securitization In the event we choose to or are required to terminate our relation- terminate to required or are to choose we In the event been have commitments the vehicle’s of 63% Approximately outstanding paper commercial of billion US$3.2 had The vehicle BMO sometimes enters into derivative contracts with these vehicles these vehicles with contracts derivative into enters sometimes BMO the market, funded in are vehicles securitization customer Most vehicles the market-funded in the ABCP of investment BMO’s the market-funded to facilities support liquidity provided BMO was undrawn. During 2010, in accordance with the terms of the supporting of the terms with in accordance 2010, During undrawn. was commercial the vehicle’s funded six of directly BMO agreements, liquidity two asset classes represent 65% of the aggregate assets of these vehicles. these vehicles. of assets the aggregate of 65% classes represent asset two Canadian residential of million Included $210 are assets in these mortgage loans with characteristics. subprime or Alt-A be obligated would we vehicle, securitization a customer ship with no would We their maturity. until derivatives associated any hold to the securitizations, to services relating providing for fees receive longer described. as previously Securitization Vehicle Customer U.S. securitization ABCP multi-seller This customer vehicle. a U.S. sponsor We t with our customers assists vehicle provides The vehicle funding. of sources alternative them with provide to in 2009) (81 75 through portfolios of pools diversified funding to of size facility average an with individual transactions securitization to million US$0.7 from ranged the pools of The size million. US$59 classified mortgages Residential 2010. 31, October at million US$301 the of portfolio. as comprise subprime 0.4% or Alt-A A or higher. rated those are all of and almost or S&P, Moody’s by rated mono- by insured are the commitments of million $141 Approximately The guarantees MBIA Inc. primarily Ambac and Financial Group. lines, corporate middle-market by secured debt comprising assets to relate cash flows. royalty pharmaceutical and cash flows lottery state loans, asset-backed mortgages, involve guarantees the insurance of None exposures holds The vehicle CDOs. or structured-finance securities secured classes, a asset variety of including by mid-market and corporate loans. auto and estate real commercial loans, the vehicle The ABCP of in 2009). billion (US$4.4 2010 31, October at in the invested has not BMO Moody’s. S&P and P1 by A1 by israted been Outstanding has consistently paper commercial ABCP. vehicle’s disruptions market notwithstanding investors, third-party purchased by during in line with those the of are financial and pricing crisis, levels committed provides BMO States. ABCP in the United vehicles top-tier the vehi to facilities support liquidity which of all in 2009), billion (US$5.7 2010 31, October at billion US$3.8 We use our credit adjudication process in deciding whether to enter enter to in deciding whether process adjudication our credit use We in the form credit do when extending we as just these agreements into a loan. of foreign and rate interest to manage exposures their them to enable to 31, October at such contracts of value The fair fluctuations. rate exchange our in asset as a derivative recorded whichwas million, $14 was 2010 in 2009). million $44 of asset (derivative Balance Sheet Consolidated the accounts consolidates BMO BMO. by funded directly are while some vehicl securitization the customer of to expected are vehicles those of or losses the gains of as the majority vehicles the bank-funded Included of assets in the total BMO. to accrue with loans mortgage of million $4 end were year at million $290 of on BMO’s characteristics. been recorded have No losses subprime or Alt-A these vehicles. to exposure No losses in 2009). million ($328 2010 31, October at million $46 totalled these investments. on been recorded have in 2009). billion ($5.8 2010 31, October at billion $3.0 totalling vehicles instruments outlined in credit other of part comprised This amount these facilities of All the financial statements. of 122 page 5 on Note customer these market-funded each of of The assets undrawn. remain Canadian of pools diversified of primarily consist vehicles securitization Canadian and receivables automobile

or trusts, either or trusts, fund the purchases. ase subordinated ase subordinated to investors to to investors to gages was $105 million ($55 million million ($55 million $105 gages was nce sheet entities nce sheet required to purch to required rance guarantees. Approximately 85% 85% Approximately guarantees. rance Our exposure to losses relates to our investment in ABCP issued by by in ABCP issued our investment to relates losses to Our exposure BMO has retained interests in our three bank securitization vehicles, vehicles, securitization bank in our three interests has retained BMO The assets of two of the vehicles consist of Canadian residential Canadian residential of consist the vehicles of two of The assets interests or maintain cash deposits in the entities, and we have also also have we and or maintain cash deposits in the entities, interests purchase deferred price amounts. These latter amounts recorded that vehicles securitization sales on to gains of the portion represent as assets recorded interests in cash. Retained been received not have 2009 and 2010 31, October as at Balance Sheet in our Consolidated are there In the event respectively. million, $1,015 and million $916 were interests retained the vehicles, by held defaults the assets certain on of then be written would and be fully recoverable not may assets in those affect will rates changes and in interest prepayments In addition, down. in partial which result may the vehicles, from cash flows the expected the vehicles, derivative contracts we have entered into with the vehicles the vehicles with into entered have we contracts derivative the vehicles, facilities. liquidity backstop through provide we support the liquidity and In all cases, the sellers continue to service the transferred assets and and assets service to the transferred continue the sellers In cases, all the assets. on losses realized any absorb to first are of securitization activities on the consolidated financial statements is financial statements the consolidated on activities securitization of the financial statements. of 126 page 8 on outlined in Note Securitization Vehicles Canadian Customer our in Canada assist sponsor we vehicles securitization The customer an them with provide to their assets of the securitization with customers to clients access with provide These vehicles funding. of source alternate financing in the ABCP markets by allowing them to sell their assets into into their assets sell them to allowing by financing in the ABCP markets which ABCP then issue these vehicles, to third-party investors by the vehicle holding credit card loans are are loans credit card holding the vehicle by investors third-party to on the impact Further information DBRS and Aaa Moody’s. AAA by by rated facilities to the vehicle that holds credit card loans as it issues longer- issues as it loans credit card holds that the vehicle to facilities notes subordinated hold We ABCP. not and securities asset-backed term of value a face with vehicle securitization card the credit by issued issued securities The asset-backed in 2009). million ($269 million $257 provided $5.1 billion in liquidity facilities to the two vehicles that that vehicles the two to facilities in liquidity billion $5.1 provided against no amounts been drawn and had mortgages residential hold liquidity provided not have We 2010. 31, October at these facilities write-downs of retained interests. During the year ended October 31, 31, ended October the year During interests. retained of write-downs in bank interests retained of write-down million a $13 was there 2010, in 2009). write-downs of million ($12 vehicles securitization We earn fees for providing services related to the securitizations in the the securitizations to services related providing for fees earn We and distribution including liquidity, vehicles, securitization customer of operations the ongoing supporting for fees financial arrangement and million in 2010 $97 approximately These fees totalled the vehicles. these IFRS on of the impact on disclosure Further in 2009. million $93 73. to pages 70 on is provided vehicles Bank Securitization Vehicles off-bala loans to sell we Periodically, BMO-Sponsored Securitization Vehicles Securitization BMO-Sponsored either by originated fund assets that vehicles various sponsors BMO customer (Canadian or its customers vehicles) (bankBMO securitization vehicle). securitization customer U.S. and vehicles securitization as we sometimes choose to or are or are choose to sometimes as we (91% in 2009) of the municipal bond portfolio is rated investment grade, grade, investment is rated the municipal portfolio bond of in 2009) (91% including the insu of benefits the (approximately 77% in 2009) of the municipal of bond holdings have 2009) in 77% (approximately rated are those of all and guarantees the insurance of exclusive ratings investment grade. of sources alternate obtain or to purposes management capital for revenues as well as vehicles, the securitization to sales Gains on funding. in income. recognized are servicing us for sold, to the loans paid mortgages and the third holds Canadian credit card loans transferred transferred loans Canadian card credit holds the third and mortgages (ABCP) paper commercial in the asset-backed Our investment BMO. from mort residential hold that vehicles of is rated mortgages holding the vehicles by ABCP issued in 2009). have We Moody’s. by (high) DBRS Limited Prime-1 (DBRS) and by R-1 MANAGEMENT’S DISCUSSION AND ANALYSIS

accounts that were of lesser credit quality. These six accounts represented Our exposure to loss in the SIVs relates to our investments in the vehicles, commitments of US$240 million, of which US$223 million is outstanding. derivative contracts we have entered into with the vehicles and senior Three of the accounts, representing exposure of US$140 million, have funding we provide through a loan facility that was put in place in order been classified as impaired and we established a US$45 million provision to fund the repayment of the SIVs’ senior notes. for credit losses in the year. The fair value of our derivative contracts outstanding with the SIVs BMO is also a counterparty to derivative contracts with the vehicle was recorded in our Consolidated Balance Sheet as a derivative asset that are used to manage its exposure to interest rates. The fair value of $30 million ($12 million in 2009). We earned investment management of derivative contracts outstanding with the vehicle and recorded in our fees of $2 million and $3 million in 2010 and 2009, respectively, for Consolidated Balance Sheet was a derivative liability of $2.2 million at managing these portfolios. October 31, 2010 ($1 million in 2009). BMO is not required to consolidate In the event we choose to or are required to terminate our relation- the vehicle, as the vehicle has issued an expected-loss note to a third ship with these vehicles, any associated derivative contracts would be party. The holder of the note consolidates the vehicle as the noteholder settled at their fair value. is exposed to the majority of expected losses. We provide senior-ranked support for the funding of Links and In the event we choose to or are required to terminate our relation- Parkland through BMO loan facilities, permitting the SIVs to continue the ship with the vehicle, we would be required to settle any associated strategy of selling assets in an orderly and value-sensitive manner. derivative contracts at their fair value and would no longer receive fees At October 31, 2010, amounts drawn on the facilities totalled MD&A for the administration of the vehicle. US$4.3 billion and €478 million (US$5.8 billion and €597 million in 2009). The loan facilities totalled US$4.5 billion for Links and €508 million for Credit Protection Vehicle Parkland at October 31, 2010. Advances under the loan facilities rank We also sponsor Apex Trust (Apex), a Canadian special purpose vehicle ahead of the SIVs’ subordinated capital notes. Consistent with that comprises 12 tranches of diversified corporate credits, each of which the strategy of selling assets in an orderly manner, the pace of asset has the benefit of first-loss protection. The 12 tranches in Apex have sales was measured throughout 2010 as a result of market conditions. exposure to approximately 440 corporate credits that are diversified by We anticipate that the SIVs will continue the strategy of selling assets geographic region and industry. Approximately 69% of the corporate in an orderly manner based upon market conditions and that asset sales credits are rated investment grade (25.6% rated higher than BBB in the near future will be modest. The total amount drawn under the and 43.7% rated BBB) and 30.6% are rated below investment grade. loan facilities is primarily affected by the pace and price of asset sales The ratings of the majority of the corporate credits have stabilized and asset maturities. Amounts funded are expected to decrease from in 2010, with the number on review for downgrade decreasing and current levels based on these factors. We expect asset maturities the number on review for upgrade increasing. of US$942 million and €116 million in 2011 and US$1,450 million and Apex has issued $2.2 billion of notes (Apex Notes) with remaining €184 million in 2012. The remaining assets mature over time. terms of three and six years. The par value of the assets held by Links and Parkland totalled A senior funding facility of $1.13 billion has been made available US$5.3 billion and €624 million, respectively (US$7.1 billion and to Apex, with BMO providing $1.03 billion of that facility. €752 million in 2009). The market value of the assets held by Links and BMO has entered into CDS contracts on the net notional positions Parkland, including hedges and cash equivalents, totalled US$4.4 billion in the structure with the swap counterparties and into offsetting swaps and €551 million, respectively (US$5.5 billion and €631 million in 2009). with the vehicle. BMO has exposure to losses on the notional amount During 2010, there were maturities and repayments of assets totalling above the $3.33 billion total amount of Apex Notes and senior funding US$1.1 billion in Links and €105 million in Parkland, as well as asset facility. Based on their notional values, the contracts will expire in sales of US$730 million in Links and €44 million in Parkland. The SIVs’ 2012 (24%), 2013 (40%), 2014 (6%) and 2016 (30%). capital noteholders will continue to bear the economic risk from actual After giving effect to the hedges we have entered into, BMO has losses up to the full amount of their investment. The book value of no net exposure through the Apex Notes to realized credit losses in the subordinated capital notes in Links and Parkland at October 31, 2010 the tranches. Realized credit losses in Apex would only be incurred was US$689 million and €141 million, respectively. Subsequent to year should losses on defaults on the underlying credits exceed the first-loss end, the SIVs recorded impairment charges related to Irish bank and protection on a tranche. As detailed below, a significant majority of insurance company subordinate debt of US$113 million and €19 million Apex’s positions benefit from substantial first-loss protection. There was on par values of US$158 million and €29 million in Links and Parkland, minimal change in the levels of first-loss protection in 2010. We have respectively. These charges reduce the book value of the subordinated hedged the first $515 million of loss exposure on our committed expo- capital notes. For both Links and Parkland, BMO believes that the sure under the senior funding facility. As of October 31, 2010, $nil first-loss protection provided by the subordinate capital notes continues ($112 million in 2009) was advanced through BMO’s committed share to exceed future expected losses. of the senior facility to fund collateral calls arising from changes in Links holds a portfolio of debt securities including subordinated mark-to-market values of the underlying CDSs. commercial bank debt (43%), CBOs and CLOs with underlying assets that Two of the 12 tranches have lower levels of first-loss protection are primarily corporate obligations (14%), residential mortgage-backed than the others. If losses were realized by Apex investors on the full securities (16%) and commercial mortgage-backed securities (8%). notional amounts of $1,217 million in the two weakest tranches, BMO’s Links has 54% of its assets invested in the United States, 43% in Europe exposure would be $nil, given the hedges that are now in place. Each of and 3% in other countries. Approximately 45% of Links’ debt securities the other 10 tranches, which have a net notional amount of $20.1 billion, are rated Aa3 or better by Moody’s (51% in 2009) with 88% rated invest- is rated from A (low) to AAA and has significant first-loss protection, ment grade (91% in 2009). Approximately 39% are rated AA– or better ranging from 13% to 29% with a weighted average of 23.2%. by S&P (47% in 2009) with 90% rated investment grade (92% in 2009). Structured Investment Vehicles Parkland has a higher proportion of highly-rated assets than Links, and We hold subordinate capital notes of two BMO London-managed struc- has 64% of its assets invested in Europe, 30% in the United States and tured investment vehicles (SIVs), Links Finance Corporation (Links) and the remainder in Australia and Canada. Certain debt securities are on Parkland Finance Corporation (Parkland), with a carrying value of $nil. credit watch for a ratings downgrade.

66 BMO Financial Group 193rd Annual Report 2010 MD&A 67 security on the two exposures exposures the two on security 2010 Annual Report 193rd Financial Group BMO ly diversified single-name corporate single-namely diversified corporate Hedged with a financial institution rated A rated a financial institution Hedged with AA– rated monolines Hedged with AA– rated monolines Hedged with mode in wind-down monoline with recorded No hedge gains mortgages Australian and U.K. Mostly AA– rated monoline with Wrapped rated or no longer mode wind-down in monolines with Wrapped loans estate real commercial U.S. and U.K. European, loans multi-use and Canadian residential commercial Mostly loans auto and receivables Canadian credit card Mostly loans auto and receivables Canadian credit card Mostly Sundry securities

– – (29) (29)

22 64 183 183 The credit rating of one of the credit derivative product company company product derivative the credit of one of rating The credit Amounts in the table below exclude CDS protection purchased purchased CDS exclude protection Amountsthe table below in Amounts exclude BMO Life Assurance holdings of $32.8 million of residential MBS and MBS and residential of million $32.8 of holdings Assurance Amounts Life BMO exclude MBS. commercial of million $230.9

stability oversight council of regulators with the objective of increasing increasing of the objective with regulators of council oversight stability financial services by posed risks systemic monitoring stability by are Act Many the Dodd-Frank aspects of their activities. and companies making years, several over effect rulemaking take subject to will and us or the on impact this time the overall at anticipate difficultit to increase an anticipate We financial services industry generally. more be focused will and enforcement, regulatory and costs in compliance of business, managing the impact,on our U.S. particularly on breadth. and changesregulatory their complexity given (3) (3) from two credit derivative product company counterparties that has that counterparties company product derivative credit two from million US$39 of deduction (before million US$68 of value a market CDO billion US$1.5 adjustments) a corresponding and valuation credit of financial institutions other to provided in CDS value protection notional as intermediary. in our role counter- the other of notes is Ba1 subordinated the and counterparties The underlying Caa1. rated are party broad of pools three of consists of credits, 134 to 90 from has Each the pools credits. of sovereign and that protection first-loss with grade investment are 83% to which 62% based on 11.1% of average a weighted with 19.2% to 5.9% from ranges value. notional amounts relate to two counterparties rated AA– for which we have have which we AA– for rated counterparties two to amounts relate 25% remaining The hedging contracts. on gains of million $94 recorded which have no gains for mode, in wind-down a counterparty to relate contracts. hedging on been recorded (22) (29) (93) (183) (183)

49 49 284 341 1,185 Dodd-Frank Dodd-Frank 560 (42) 42 232 232 306 370 1,278 (Canadian $ in millions) (1) $ in millions) (Canadian amounts amounts investments hedges investments investments hedges amounts amounts (the Dodd-Frank (the Dodd-Frank

1 7 3 25 33 88 91 13 13 105 143 248 CCC or below below or CCC CCC or below below or CCC AA+ to A– A– to AA+ to AA+ A– to A– 602 B BBB– to BBB+ BBB– to (3)

(2) The differences between hedged investment amounts the and investment hedged between The differences Most of the unhedged and wrapped investments were transferred to the available-for-sale the available-for-sale to transferred were investments wrapped the unhedged and of Most 2008. 1, August effective portfolio subprime residential U.S. million of $44 CDOs approximately include to exposure indirect a large with swaps is hedged via return total this exposure above, As noted mortgages. financial institution. non-monoline 2010 31, October As at rating investments Carrying Tranche Carrying unhedged and wrapped of value investment Hedged investment hedged of hedged in value loss Cumulative on gain hedged on losses Net of value Cumulative CLOs CLOs AAA Asset-backed AAA CDOs securities Commercial MBS Commercial AAA U.S. subprime – U.S. wrapped AA+ A– to No subprime AAA

Residential MBS Residential of systemically significant payment, clearing or settlement systems, systems, or settlement payment, clearing significant systemically of financial a new of the creation and fees, interchange on restrictions U.S. Regulatory Developments Regulatory U.S. the law Obama into signed President U.S. 2010, On July 21, (1) (1) (2) Wall Street Reform and Consumer Protection Act Protection and Consumer Reform Street Wall of the impact assessing are we and in scope is broad The Act Act). protection, consumer include heightened The reforms the legislation. restrictions markets, derivatives (OTC) the over-the-counter of regulation on proprietary trading banks by (referred to Rule), as the Volcker imposition application heightened prudential standards of and broader supervision greater requirements, capital risk-based and leverage of Exposures to Other Select Financial Instruments to Exposures carrying value of hedged investment amounts reflect mark-to-market mark-to-market amounts reflect hedged investment carrying of value or credit default return total through which can be recovered losses, corpo- of range a wide of consist The underlying securities (CDSs). swaps amounts have hedged investment of 15% Approximately assets. rate A. rated a single financial institution with swaps been hedged through collateral by hedges is supported in those interest BMO’s of The value amounts as permitted modest relatively of the exception with held, hedged investment of 60% Another agreements. under counterparty The following table provides additional detail on select financial instru- on detail additional table provides The following portfolios. available-for-sale and in our trading held are ments that obligations loan CDOs collateralized containing and portfolios BMO’s Most in 2010. exposures in reduced resulting mode, in run-off are (CLOs) financial institutions. large other with hedged are CDOs our CLOs and of and in 2009), million ($16 million $13 minimal at was CDO exposure Net in 2009). million ($125 million $29 minimal at also was exposure CLO net Exposure to Other Select Financial Instruments, Financial Instruments, Select Other to Exposure (CDOs) Obligations Debt includingCollateralized MANAGEMENT’S DISCUSSION AND ANALYSIS Off-Balance Sheet Arrangements

BMO enters into a number of off-balance sheet arrangements in the Vehicles sections and on pages 68 to 69 in the Accounting for Variable normal course of operations. Our arrangements with certain variable Interest Entities section. Capital and funding trusts are discussed below. interest entities are addressed on pages 64 to 66 and 68 to 69 of Capital and Funding Trusts this MD&A. The discussion that follows addresses our remaining BMO Subordinated Notes Trust (SN Trust) issued $800 million of BMO off-balance sheet arrangements. Trust Subordinated Notes (SN Trust Notes) in 2007, the proceeds of Credit Instruments which were used to purchase a senior deposit note from BMO. We hold In order to meet the financial needs of our clients, we use a variety all of the outstanding voting trust units in SN Trust and expect to do of off-balance sheet credit instruments. These include guarantees and so at all times while the SN Trust Notes are outstanding. We are not standby letters of credit, which represent our obligation to make pay- required to consolidate SN Trust. BMO does not expect to terminate ments to third parties on behalf of a customer if the customer is unable SN Trust while the SN Trust Notes are outstanding, unless SN Trust has to make the required payments or meet other contractual requirements. sufficient funds to pay the redemption price on the SN Trust Notes MD&A We also write documentary and commercial letters of credit, which and only with the approval of OSFI. We provide a $30 million credit represent our agreement to honour drafts presented by a third party facility to SN Trust, of which $5 million had been drawn at October 31, upon completion of specified activities. Commitments to extend 2010 ($5 million in 2009). We guarantee payment of the principal, credit are off-balance sheet arrangements that represent our commit- interest, redemption price, if any, and any other amounts on the ment to customers to grant them credit in the form of loans or other SN Trust Notes on a subordinated basis. financings for specific amounts and maturities, subject to meeting During 2009, BMO Capital Trust II (Trust II) was created to raise certain conditions. capital, through the issuance of $450 million of BMO Tier 1 Notes – There are a large number of credit instruments outstanding at Series A. Trust II used the proceeds of the offering to purchase a senior any time. Our customers are broadly diversified and we do not anticipate deposit note from BMO. We are not required to consolidate Trust II. events or conditions that would cause a significant number of our cus- Guarantees tomers to fail to perform in accordance with the terms of the contracts. Guarantees include contracts under which we may be required to We use our credit adjudication process in deciding whether to enter into make payments to a counterparty based on changes in the value of an these arrangements, just as we do when extending credit in the form asset, liability or equity security that the counterparty holds. Contracts of a loan. We monitor off-balance sheet instruments to avoid undue under which we may be required to make payments if a third party concentrations in any geographic region or industry. does not perform according to the terms of a contract and contracts The maximum amount payable by BMO in relation to these under which we provide indirect guarantees of indebtedness are also credit instruments was approximately $65 billion at October 31, 2010 considered guarantees. In the normal course of business, we enter ($73 billion in 2009). However, this amount is not representative of into a variety of guarantees, including standby letters of credit, backstop our likely credit exposure or liquidity requirements for these instruments and other liquidity facilities and derivatives contracts or instruments as it does not take into account customer behaviour, which suggests (including, but not limited to, credit default swaps and written options), only a portion will utilize the facility. It also does not take into account as well as indemnification agreements. any amounts that could be recovered under recourse or collateralization The maximum amount payable was $65 billion at October 31, 2010 provisions. Further information on these instruments can be found in ($82 billion in 2009). However, this amount is not representative of our Note 5 on page 122 of the financial statements. likely exposure, as it does not take into account customer behaviour, For the credit commitments outlined in the preceding paragraphs, which suggests that only a portion of the guarantees will require in the absence of an event that triggers a default, early termination payment. It also does not take into account any amounts that could by BMO may result in a breach of contract. be recovered through recourse and collateral provisions. Variable Interest Entities (VIEs) For a more detailed discussion of these agreements, please see Our interests in VIEs are discussed primarily on pages 64 to 66 in the Note 7 on page 125 of the financial statements. BMO-Sponsored Securitization Vehicles and Structured Investment Critical Accounting Estimates

The Notes to BMO’s October 31, 2010 Consolidated Financial Statements we must rely on estimates and exercise judgment regarding matters outline our significant accounting estimates. The following accounting for which the ultimate outcome is unknown. These include economic estimates are considered particularly important, as they require signifi- factors, developments affecting companies in particular industries and cant judgments by management. Management has established detailed specific issues with respect to single borrowers. Changes in circum- policies and control procedures that are intended to ensure these stances may cause future assessments of credit risk to be materially judgments are well controlled, independently reviewed and consistently different from current assessments, which could require an increase applied from period to period. We believe that our estimates of the or decrease in the allowance for credit losses. value of BMO’s assets and liabilities are appropriate. One of our key performance measures is the provision for credit Allowance for Credit Losses losses as a percentage of average net loans and acceptances. Over the past 10 years, for our Canadian peer group, the average annual ratio The allowance for credit losses adjusts the value of loans to reflect their has ranged from a high of 1.24% in 2002 to a low of 0.17% in 2004. estimated realizable value. In assessing their estimated realizable value,

68 BMO Financial Group 193rd Annual Report 2010 MD&A 69 existing credit lending facilities, lending credit facilities, existing 2010 Annual Report 193rd Financial Group BMO We are required to reconsider if consolidation is required when our is required if consolidation reconsider to required are We Apex, vehicle reconsideration protection the credit to respect With Links and vehicles investment the structured to respect With our Canadian multi-seller for conduits events Reconsideration multi-seller include conduit our U.S. for events Reconsideration Additional information concerning accounting for securitizations, securitizations, for accounting concerning information Additional holds BMO is a VIE whether and entity an whether determine We determine which party should consolidate the entity. which should consolidate party determine residual expected receive to or right losses expected absorb to obligation BMO to leads is a change that If there in events increases. returns BMO returns, or residual losses the expected of the majority absorbing the change. of the date the VIE as of consolidate to be required would additional granting Notes, include purchasing additional events BMO BMO by extended the loan of the amount increasing facilities, liquidity under the is contemplated what beyond Each of parties. third by held Notes Apex of repayment or guaranteeing additional absorbing in BMO result could events these reconsideration such that reconsid- expect do not We returns. or residual losses expected future. in the near occur will events eration include events BMO a purchase or sale by reconsideration Parkland, renegotiation lending facilities, additional of provision capital notes, of exchanges capital note for asset BMO, by provided facility the loan of for noteholders compensate to BMO by a guarantee of provision and occur to likely is most that event The reconsideration losses. realized to were If we certain in our lending terms facilities. of is a renegotiation expect not would we our lending facilities, certain of terms renegotiate our of assessment our current based on the vehicles consolidate to losses. expected to exposure and the vehicles by ABCPinclude issued of BMO the purchase or sale by Since enhancement. or credit facilities liquidity additional of the granting our Canadian multi- by regularly ABCP sells issued BMO purchases and losses expected to our exposure monitor continually we conduits, seller to ensure they do not approach consolidation thresholds. enhancement or credit facilities liquidity additional of the granting the of Repayment note. loss the expected a change of and in the size a third and event be a reconsideration also would note loss expected the majority to the exposure absorb to agree to have would party consolidate to be required would BMO Otherwise, losses. the expected of as recon- losses expected to exposure BMO’s monitor We the vehicle. that so note loss the expected increase and occur events sideration required. is not consolidation future cash flows were different, our gain on securitization recognized recognized securitization on different, gain our were cash flows future be different. also would in income 8 is included in Note assumptions, including key for analysis a sensitivity the financial statements. of 126 page on Entities Interest Variable for Accounting with arrangements into enters BMO business, of In normal the course VIEs is the equity include (VIEs). where entities entities interest variable which or for activities the entity’s finance to insufficient considered are We financial interest. a controlling have do not the equityholders in these entities hold we VIEs if the investments consolidate to required exposed in us being them result with have we relationships the and/or from benefit to being able and/or losses their expected of a majority to returns. residual their expected of a majority analysis. quantitative on VIE in that based primarily interest a variable qualita- involving processes estimation complex of a variety perform We expected a VIE’s calculate analyze and to factors quantitative and tive estimating involve These processes returns. residual expected and losses the VIE, of variability the analyzing performance and cashthe future flows expected and losses the expected allocating and cash flows those of interests. variable holding parties the identified among returns residual a majority to is exposed that the party identify us to enables The analysis thus and returns, residual expected and/or losses expected the VIE’s of 2009 9 8 43 41 51 39 109 135 212 223 2010 2010 rket prices (Level 1), internal models 1), prices (Level rket stors, the portion of the securitized the securitized of the portion stors, ount we would receive, or would or would receive, would we ount ($ millions)

The methodologies used for calculating these adjustments used for are The methodologies Valuation models use general assumptions and market data, and and data, market and assumptions use general models Valuation Additional information on the process and methodology for for methodology and the process on information Additional Valuation Product Control (VPC), a group independent of the trading the trading of independent (VPC), a group Control Product Valuation

Liquidity risk Liquidity costs Administrative Other Credit risk Credit As at October 31 31 October As at estimated future cash flows. Actual cash flows may differ significantly Actual differ may significantly cash flows cash future flows. estimated of estimate management. If management’s by estimated those from assets that will be repaid before their scheduled maturity, credit losses, credit losses, their scheduled maturity, before be repaid will that assets these which discount to at servicing of the rate and cost value the fair When loans are securitized, we record a gain or loss on sale. In on deter- or loss a gain record we securitized, are When loans present the net estimate must management or loss, mining the gain the of estimates on relying by cash future flows expected of value the securitized on be collected will that fees and interest of amount inve to be paid to the yield assets, Accounting for Securitizations for Accounting Valuation adjustments made to model estimates to arrive at fair value value fair at arrive to estimates model adjustments made to Valuation risk credit for in the adjustment The decrease in 2010. lower were our counterparties between spreads credit relative narrower due to was BMO. and Valuation Adjustments Valuation reviewed on an ongoing basis to ensurethat they remain appropriate. when made only are and rare are changesSignificant in methodologies value. fair of estimates in better the change result that will believe we are recorded. For instruments that are valued using models, VPC identifies VPC identifies using models, valued are instruments that For recorded. are the model adjustments be made to must valuation where situations value. fair at arrive to estimates fair values by taking into account factors such as the counterparty’s credit credit such as the counterparty’s factors account taking into by values fair changes and spreads. in credit the instrument of rating, the duration therefore do not reflect the specific risks and other factors that would would that factors other the specific and risks reflect do not therefore As incorporate a result, we value. fair instrument’s a particular affect values. fair establish certain to adjustments models when using internal impact the estimated account into adjustments take value These fair costs administrative risk, credit considerations, of risk, liquidity valuation derivative for adjustment risk credit the example, For costs. closeout and of our determination into risk credit financial instruments incorporates as well as a sensitivity analysis of our Level 3 assets, is disclosed in 3 assets, our Level as a sensitivity analysis of as well financial the statements. of 160 page on 29 Note have to pay in the case of a derivative liability, in a current transaction transaction in a current liability, a derivative in the case of pay to have categorize to hierarchy value a fair employ We parties. willing between value. fair measure techniques to use in valuation the inputs we ma quoted our use of of The extent models internal and 2) (Level information market using observable of in the valuation 3) (Level information market observable without 2010, 31, October as at liabilities derivative and assets derivative securities, Financial Instruments Measured at Fair Value Fair at Financial Instruments Measured value Fair value. their fair at derivatives and securities records BMO the am of our estimate represents determining the allowance for credit losses can be found in the discus- in the canbe found losses credit for the allowance determining the of 120 page 4 on as in Note as well page 80 on risk credit of sion financial statements. This ratio varies with changesin the economy and credit conditions. and loans net average to ratios low and these high apply to were If we from range would credit losses for our provision in 2010, acceptances in 2010 losses credit for Our provision million. $292 to million $2,127 million. was $1,049 lines of business, verifies the fair values at which financial at instruments values the fair verifies business, lines of MANAGEMENT’S DISCUSSION AND ANALYSIS

Additional information concerning BMO’s involvement with variable and make assumptions about the expected timing of the reversal of interest entities is included on pages 64 to 66 as well as in Note 9 on future tax assets and liabilities. If our interpretations differ from those of page 128 of the financial statements. tax authorities or if the timing of reversals is not as anticipated, our pro- Pension and Other Employee Future Benefits vision for income taxes could increase or decrease in future periods. The amount of any such increase or decrease cannot be reasonably estimated. BMO’s pension and other employee future benefits expense is calculated Additional information regarding our accounting for income taxes by our independent actuaries using assumptions determined by is included in Note 24 on page 155 of the financial statements. management. If actual experience differs from the assumptions used, pension and other employee future benefits expense could increase or Goodwill and Intangible Assets decrease in future years. The expected rate of return on plan assets is a Goodwill is assessed for impairment at least annually. This assessment management estimate that significantly affects the calculation of pen- includes a comparison of the carrying value and the fair value of each sion expense. Our expected rate of return on plan assets is determined group of businesses to ensure that the fair value of the group is greater using the plan’s target asset allocation and estimated rates of return for than its carrying value. If the carrying value exceeds the fair value of each asset class. Estimated rates of return are based on expected returns the group, a more detailed goodwill impairment assessment would from fixed-income securities, which take into consideration bond yields. have to be undertaken. In determining fair value, we employ internal An equity risk premium is then applied to estimate equity returns. valuation models such as discounted cash flow models consistent with Expected returns from other asset classes are established to reflect the those used when we acquire businesses. These models are dependent MD&A risks of these asset classes relative to fixed-income and equity assets. on assumptions related to revenue growth, discount rates, synergies The impact of changes in expected rates of return on plan assets is not achieved on acquisitions and the availability of comparable acquisition significant for our other employee future benefits expense since only data. Changes in each of these assumptions will affect the determination small amounts of assets are held in these plans. of fair value for each of the business units in a different manner. Pension and other employee future benefits expense and obligations Management must exercise judgment and make assumptions in deter- are also sensitive to changes in discount rates. We determine discount mining fair value, and differences in judgments and assumptions could rates at each year end for our Canadian and U.S. plans using high-quality affect the determination of fair value and any resulting impairment corporate bonds with terms matching the plans’ specific cash flows. write-down. At October 31, 2010, the estimated fair value of each of our Additional information regarding our accounting for pension groups of businesses was greater than its carrying value. and other employee future benefits, including a sensitivity analysis Intangible assets are amortized to income on either a straight-line for key assumptions, is included in Note 23 on page 149 of the or an accelerated basis over a period not exceeding 15 years, depending financial statements. on the nature of the asset. There are no intangible assets with indefinite Other Than Temporary Impairment lives. We test intangible assets for impairment when circumstances indicate the carrying value may not be recoverable. No such impairment We have investments in securities issued or guaranteed by Canadian was identified for the years ended October 31, 2010, 2009 and 2008. or U.S. governments, corporate debt and equity securities, mortgage- Additional information regarding the composition of goodwill backed securities and collateralized mortgage obligations, which are and intangible assets is included in Note 13 on page 138 of the finan- classified as available-for-sale securities. We review available-for-sale cial statements. and other securities at each quarter-end reporting period to identify and evaluate investments that show indications of possible impairment. Insurance-related Liabilities An investment is considered impaired if an unrealized loss on the security Insurance claims and policy benefit liabilities represent current claims represents impairment that is considered to be other than temporary. and estimates for future insurance policy benefits. Liabilities for life In making this assessment, we consider such factors as the type of insurance contracts are determined using the Canadian Asset Liability investment, the length of time and extent to which the fair value has Method, which incorporates best-estimate assumptions for mortality, been below cost, the financial condition and near-term prospects of the morbidity, policy lapses, surrenders, future investment yields, policy issuer, and our intent and ability to hold the investment long enough dividends, administration costs and margins for adverse deviation. These to allow for any anticipated recovery. The decision to record a write- assumptions are reviewed at least annually and updated to reflect actual down, its amount and the period in which it is recorded could change experience and market conditions. The most significant impact on the if management’s assessment of those factors were different. We do not liability results from a change in the assumption on future investment record impairment write-downs on debt securities when impairment yields. Future investment yields may be sensitive to variations in is due to changes in market interest rates, since we expect to realize the reinvestment interest rates and impact the valuation of policy benefit full value of these investments by holding them until maturity or when liabilities accordingly. If the assumed yield were to increase by one per- they recover in value. centage point, net income would increase by approximately $77 million. At the end of 2010, there were total unrealized losses of $25 million A reduction of one percentage point would decrease net income by on securities for which cost exceeded fair value and an impairment approximately $71 million. write-down had not been recorded. Of this amount, $10 million related Contingent Liabilities to securities for which cost had exceeded fair value for 12 months or BMO and its subsidiaries are involved in various legal actions in the more. These unrealized losses resulted from increases in market interest ordinary course of business. rates and not from deterioration in the creditworthiness of the issuer. Contingent litigation loss provisions are recorded when it becomes Additional information regarding our accounting for available-for- likely that BMO will incur a loss and the amount can be reasonably sale securities and other securities and the determination of fair value estimated. BMO’s management and internal and external experts are is included in Note 3 on page 116 of the financial statements. involved in assessing any such likelihood and estimating any amounts Income Taxes involved. The actual costs of resolving these claims may be substantially The provision for income taxes is calculated based on the expected tax higher or lower than the amounts provided. Additional information treatment of transactions recorded in our Consolidated Statements of regarding contingent liabilities can be found in Note 28 on page 159 Income or Changes in Shareholders’ Equity. In determining the provision of the financial statements. for income taxes, we interpret tax legislation in a variety of jurisdictions

70 BMO Financial Group 193rd Annual Report 2010 MD&A 71 unting differences noted in the noted differences unting 2010 Annual Report 193rd Financial Group BMO to our transition to IFRS. The IFRS. our to transition to In response to the financial reporting issues emerging from the from emerging issues the financial reporting to In response OSFI has issued an IFRS advisory that permits IFRS advisory a five-quarter phase-in an that OSFI has issued certain IFRS requirements for purposes of calculating certain ratios. calculating of certain purposes ratios. for certain IFRS requirements – IFRS of the adjustment to retained earnings arising from the first-time adoption adoption the first-time from arising earnings retained to the adjustment of of also be provided in the form of excluding the effect of any on-balance on-balance any of the effect excluding of in the form be provided also Canada Mortgage through sold were that mortgages of recognition sheet 2010. March 31, up to (CMHC) programs Housing Corporation and Benefits Future and Other Employee Pension continue will we 19), (IAS benefits standard Under the IFRS employee as benefits expense future employee other and pension record to the on cost the interest plus in the year benefits earned of the cost alter- two IFRS provides assets. on return the expected of net obligation, or gains market-related the unrealized for account to how for natives changes in discount of the impact and fund assets pension on losses can either We amounts). (market-related obligations pension on rates Identification of Differences between the Bank’s Current Accounting Accounting Current the Bank’s between Differences of Identification under IFRS and the Requirements Policies changes that the main accounting date, Based to our analysis on be in the areas to expected IFRS are of adoption the from result will securitization, asset benefits, future employee other and pension of translation on loss comprehensive other accumulated and consolidation these areas with associated The IFRS requirements operations. foreign of likely will such there policies that accounting BMO current differ from income. of statements and sheets balance be impacts the bank’s on Other significant ratios. our capital to extend also These impacts will be identified prior may differences Canadian based on are follow that in the sections described differences this date. as of in effect are IFRS that GAAP and will Multiple the Assets-to-Capital on the impact for relief Transitional monitor the work of the IASB on any changes to existing IFRS and adjust adjust IFRS and changes existing to any the IASB on of the work monitor developments. these reflect to plan our project Impacts Key of Quantification IFRS require- and policies accounting the bank’s between The differences 1 exemptions IFRS the optional on our decisions with combined ments, in measurement and will result IFRS, application of retroactive from impact The net IFRS. to transition when we differences recognition earnings, retained in opening be recorded will these differences of The acco equity. shareholders’ affecting the Bank’s between Differences of Identification section, following should not under IFRS, the Requirements and Policies Accounting Current but IFRS, adopting the impacts of of list a comprehensive be considered changes our analysis based on certain key of the identification rather from result will the impacts that of all quantifying Precisely date. to work our project all of the completion be subject to IFRS will adopting policies accounting of choices where decisions all of finalization streams, restate- retroactive from exemptions including optional available, are and conditions market prevailing the and 1, under IFRS available ment transition. of the time at circumstances economic or replace to revisions make the IASB to plans financial crisis, global be will there that expect we In particular, IFRS standards. certain existing for hedging, provisions securities, address that changes in the standards benefits, future employee other and pension consolidation, losses, credit these changes of any expect do not We contracts. insurance and leases the result with transition, of date the bank’s after until be in effect to year. our transitional beyond extend IFRS will adopting of the impact that changes. future potential these evaluate and monitor to continue We expertise and governance. Substantial Substantial governance. and expertise STATUS STATUS

The transition plan contemplates substantial completion of all work work all of completion substantial contemplates plan The transition streams by the first quarter of 2011; however, we continue to closely closely to continue we however, 2011; of quarter the first by streams Confirmation of Actual Differences and Implementation Requirements Requirements and Implementation Actual Differences of Confirmation individual by work been organized have activities The implementation work ten completed substantially have We in total). (25 streams intangible compensation, stock-based leases, capital assets, streams: per earnings translation, currency foreign recognition, revenue assets, combina- business and properties investment costs, borrowing share, not have streams these work date, Based our analysis to on tions. accounting BMO current to relative differences material any revealed Progress advanced. well all are streams work 15 The remaining practices. changes is outlined the main accounting to related streams the work on section. in the following ensure sufficient financial reporting financial reporting sufficient ensure 2011. of quarter in the first Phase is expected II activities of completion CURRENT necessary changes within our existing financial reporting and data collection data and collection financial reporting necessary changes our existing within controls internal on the impact assessing technology; and processes implementing and designing disclosure; and financial reporting over financial IFRS-based record and track to solution a technology-based and purposes; comparative for year reporting the 2011 for information to programs awareness and training internal executing and developing CURRENT the IFRS by A detailed implementation and approved developed plan was IFRS between differences Potential in 2009. Committee Steering Executive been fully documented. have policies accounting current the bank’s and and Education Phase II – Implementation Phase elements II include: of actual differences confirming The key selecting and policies accounting current the bank’s IFRS and between the implementing and under IFRS; identifying permitted options policy We will also provide comparative data on an IFRS basis, including an IFRS basis, data an on comparative provide also will We date). (transition 2010 1, November as at balance sheet opening Status Plan and Current IFRS Transition established we IFRS, to transition to the requirement meet to In order Committee. Steering Executive an formed and project enterprise-wide an review a diagnostic phases: three of is comprised plan The transition the IFRS and between differences potential identify to assessment and which education, and implementation policies; accounting current bank’s the bank’s IFRS and between includes actual differences confirming require- integration all of completion and policies; accounting current identified. actualments differences for and Assessment Review Phase I – Diagnostic a comprehensive complete to Phase I was of The primary objective accounting current the bank’s to relative requirements the IFRS of review This analysis identified differences. potential identify to in order policies a detailed of the completion for allowing required, the work of the scope requirements. including plan resource timelines and implementation for the quarter ending January 31, 2012, prepared on an IFRS basis. IFRS basis. an on prepared 2012, ending January 31, the quarter for Canadian public companies will be required to prepare their financial their prepare to be required will companies Canadian public Financial Reporting International with in accordance statements Standards Accounting the International by as issued (IFRS), Standards 2011. 1, January or after beginning on fiscal years for (IASB), Board preparing as the basis for IFRS adopt will we 2011, 1, November Effective our financial results report will We financial statements. our consolidated Future Changes in Accounting Policies Policies Accounting in Changes Future Standards Financial Reporting International to Transition There were no changes in accounting policies in 2010. policies no changes in accounting were There Changes in Accounting Policies in 2010 in Policies in Accounting Changes MANAGEMENT’S DISCUSSION AND ANALYSIS

record these market-related amounts directly in equity or defer them Consolidation on our balance sheet and amortize amounts in excess of 10% of our plan We have substantially completed our assessment of whether we are assets or benefit liability balances to pension expense over a period required to consolidate our credit protection vehicle and our structured of approximately 12 years. We currently follow the second alternative. investment vehicles when we transition to IFRS. We assessed the con- We have not yet finalized our decision on which alternative to elect for solidation requirement based on whether the bank would in substance the accounting of market-related amounts. Additional information on control the vehicles, as determined under the criteria contained in the our pension and other employee future benefits is included in Note 23 IFRS consolidated and separate financial statements standard (IAS 27) on page 149 of the financial statements. and, where appropriate, SIC-12 (an interpretation of IAS 27). Our analysis On transition to IFRS, we can either recalculate pension expense considered whether the activities of the vehicles are conducted on back to inception of the plans as though we had always applied the IFRS behalf of the bank, the bank’s exposure to the risks and benefits, its pension requirements or, alternatively, record market-related amounts decision-making powers over the vehicles, and whether these consider- that exist on November 1, 2010 directly in retained earnings (fresh ations demonstrate that the bank, in substance, controls the vehicles start method). and therefore must consolidate them. Should the bank elect the fresh start method, the result would Information on these vehicles, including total assets, our exposure be a reduction in retained earnings of approximately $1,200 million, a to loss and our assessment of the consolidation requirement under decrease in other assets of approximately $1,600 million and a decrease Canadian GAAP, is included in Note 9 on page 128 of the financial

MD&A in other liabilities of approximately $400 million on November 1, 2010, statements. the beginning of our comparative year. This would result in approxi- Credit Protection Vehicle – Based on the analysis completed to date, our mately a 65 basis point reduction in our Tier 1 Capital Ratio, which would preliminary conclusion is that the bank would be required to consolidate be phased in over five quarters as permitted under OSFI’s IFRS advisory. this vehicle, as our analysis indicates that the bank, in substance, Adopting this alternative would also result in reduced pension expense controls this vehicle, based on the definition of control under IFRS. in future years since any deferred losses that exist on October 31, 2010 Under Canadian GAAP, we are not required to consolidate this vehicle. would not be amortized to pension expense. Consolidation of this vehicle would impact the bank’s balance We have not yet finalized our decision on whether to elect the sheet, increasing assets and liabilities by approximately $500 million on fresh start method as permitted under IFRS. November 1, 2010, the beginning of our comparative year. Our estimate Asset Securitization incorporates the elections permitted under IFRS to fair value certain We have substantially completed our assessment of certain of our signif- assets and liabilities of the credit protection vehicle, with changes in icant asset securitization programs and whether the loans and mortgages the fair value recorded in income as they occur. We do not expect any sold through these programs qualify for off-balance sheet treatment significant volatility in the bank’s net income under IFRS as a result of under IFRS. The assessment included our Canadian credit card loans and the fair value election, unless there is a significant downturn in market Canadian mortgage loans sold to the bank’s securitization vehicles and conditions, as any changes in the fair value of the assets and liabilities to the Canada Mortgage Bond program, a third-party securitization will largely offset each other as a result of the hedges the bank has put program. We assessed whether the loans and mortgages qualify for off- in place. The risk of volatility in net income will be reduced over time as balance sheet treatment based on the transfer of the risks and rewards, the CDS contracts held by the vehicle mature. Based on their notional as determined under the derecognition criteria contained in the IFRS values, the contracts will expire as follows: 24% in fiscal 2012, 40% in financial instruments standard (IAS 39). Based on the analysis completed fiscal 2013, 6% in fiscal 2014 and 30% in fiscal 2016. to date, our preliminary conclusion is that the loans or mortgages sold Structured Investment Vehicles (SIVs) – Based on the analysis completed under these securitization programs will not qualify for off-balance sheet to date, our preliminary conclusion is that the bank would be required to recognition under IFRS. Under Canadian GAAP, the mortgages and loans consolidate the SIVs, as our analysis indicates that the bank, in substance, sold through these programs are removed from our balance sheet. controls the SIVs, based on the definition of control under IFRS. Under Additional information on our asset securitization vehicles is included Canadian GAAP, we are not required to consolidate the SIVs. in Note 8 on page 126 of the financial statements. Consolidation of the SIVs would increase assets and liabilities on If the securitized assets sold to the securitization vehicles noted the bank’s balance sheet by approximately $200 million on November 1, in the preceding paragraph were to be recognized on the bank’s balance 2010, the beginning of our comparative year. This represents the amount sheet, assets and liabilities would increase by approximately $18 billion by which the assets of the SIVs exceed the amount drawn on the loan and opening retained earnings would be reduced by less than $100 mil lion facility the bank has made available to the SIVs as of November 1, 2010. on November 1, 2010, the beginning of our comparative year. The reduc- Our estimate incorporates the election permitted under IFRS to fair tion in retained earnings primarily represents the reversal of the gain value the assets and liabilities of the SIVs, with changes in the fair value on sale previously recognized in earnings. The interest and fees collected recorded in income as they occur. We do not expect any significant from customers, net of the yield paid to investors in the securitization volatility in the bank’s net income under IFRS as a result of the fair value vehicle, would be recorded in net interest income using the effective election, unless there is a significant downturn in market conditions, interest rate method over the term of the securiti zation and credit losses as any changes in the fair value of the assets should be largely offset by associated with loans and mortgages would be recorded in the provision changes in the fair value of the capital notes. The risk of volatility in net for credit losses. The reduction in retained earnings would result in less income will be reduced over time as the assets held by the vehicles than a 5 basis point reduction in our Tier 1 Capital Ratio, which would be mature. Based on their par value, we expect that 47% of the assets will phased in over five quarters, as permitted under OSFI’s IFRS advisory. mature by the end of fiscal 2012, 14% in fiscal 2013, 10% in fiscal 2014, We expect to complete our assessment of the asset securitization 12% in 2015 and 17% between 2016 and 2028. activity associated with selling the bank’s Canadian mortgage loans to The risk-weighted assets of the vehicles noted above are already certain other third-party asset securitization programs in the first and included in the current determination of the bank’s risk-weighted assets. second quarters of 2011. In addition, we do not expect the consolidation of these vehicles would The IASB’s project to revise the accounting requirements for securi- result in any significant adjustment to opening retained earnings. As a tization activities is currently on hold. We do not expect the existing result, we do not expect that consolidating any of these vehicles would accounting requirements impacting asset securitization to change prior have a significant impact on the calculation of our Tier 1 Capital Ratio. to the bank’s transition to IFRS in 2012.

72 BMO Financial Group 193rd Annual Report 2010 MD&A 73 2010 Annual Report 193rd Financial Group BMO Caution statements. forward-looking contains – IFRS section Policies in Accounting Changes This Future Statements. Forward-Looking see the Caution Regarding Please Financial Reporting Expertise and Governance Financial Reporting ensure to launched was in 2009 program IFRS educational An internal when the bank and governance financial expertise reporting appropriate technical detailed sessions 2009, During IFRS basis. an on report begins to our accounting all to presented our findings in Phase to I were relating the across groups functional as certain other as well staff finance and launched, also We IFRS. to the transition by be affected may that enterprise personnel our credit for programs awareness and training in 2009, loan any to relate they IFRS as of the impact understand who need to updated In 2010, IFRS. be adopting also may that customers or credit finance and accounting the bank’s to provided were technical sessions IFRS. to the conversion by impacted directly groups other and staff presented were specific IFRS topics on sessions Quarterly educational 2010. and in 2009 Directors of our Board of the Audit Committee to Changes Integration of Phase III – Completion the final phase of and the third plan for a detailed developing are We which is scheduled changes, integration all of the completion transition, and controls of include This will the development in 2011. commence to and balance sheet opening our 2011 restate necessary to procedures IFRS to the transition for IFRS basis in preparation an financial results on under IFRS available options finalizing policy on decisions in fiscal 2012, applying certain from IFRS requirements(such on a retro- as exemptions our internal to communicate to plans of the development basis), active impacts our internal on of assessment an and stakeholders external and including forecasting. planning and processes, reporting management Accumulated Other Comprehensive Loss on Translation on Translation Loss Comprehensive Other Accumulated Operations Foreign of section, in the preceding can be found available the options on Details Accounting Current the Bank’s between Differences of Identification IFRS. under the Requirements and Policies and Disclosure Reporting Financial over Controls Internal our on impact be a significant not will there that determined have We and controls our disclosure and financial reporting over controls internal internal develop will We IFRS. to the transition from resulting procedures for information IFRS-based communicating and tracking over controls the of treatment changes in the accounting year, the IFRS comparative disclosure certain and additional loans VIEs securitized and bank’s These internal financial the statements. to in the notes requirements final and in the third focus of area be a key will modifications control 2011. of quarter which in the first begins transition, the of phase Activities Business impact be any will there whether assess we basis, ongoing On an our implementation through progress as we activities our business on covenant loan related and agreements loan reviewing are We activities. IFRS. adopting also are customers our loan where in situations ratios existing impacts on significant other any identified not have we date, To IFRS. adopting from result will that activities business Technology Information financial our existing of assessment a detailed completed have We no significant that determined and architecture technology information have We IFRS. to our transition of as a result required changes are a comparative of in the form solution a technology-based developed during financial information IFRS-based track will that tool reporting modification significant any require not This will year. the comparative reporting The comparative systems. financial reporting our existing to in the first be operational will and testing undergoing is currently tool 2011. of quarter

ns from full retroactive application. application. full retroactive ns from nsideration is valued based on the based on is valued nsideration nd after the date the terms of thend after the date the terms of IFRS 1 permits the the requirements application of in IFRS 3 to IFRS IFRS requires all costs related to acquisition and restructuring to be to restructuring and acquisition to related costs all IFRS requires We expect to elect to reset our accumulated other comprehensive comprehensive other our accumulated reset elect to to expect We The IASB is scheduled to release a revised consolidation standard standard consolidation a revised The IASB is scheduled release to We expect to complete our assessment of our U.S. customer customer our U.S. of assessment our complete to expect We Identification of Differences between the Bank’s Current Accounting Current the Bank’s between Differences of Identification Pension and Other Employee Future Benefits Benefits Future and Other Employee Pension section, in the preceding can be found available the options on Details business acquisitions that are completed after the transition to IFRS to the transition after completed are that acquisitions business our choosing. of a date to back or retroactively 2010) 1, (November be would we IFRS 3 retroactively, apply and adopt choose to Should we our chosen up to the date from acquisitions past all restate to required transition date. expensed. Canadian GAAP permits the capitalization of certain of these Canadian certain of GAAP permits of the capitalization expensed. in the form the seller to is paid when consideration In addition, costs. the co the buyer, by issued shares of the closing the at shares Under Canadian price of date. market GAAP, that valuation is based on the an of average market the price of shares a period before a reasonable over affect would These differences announced. and to agreed are acquisition the purchase price allocation, including the amount goodwill of recorded. Business Combinations Business guidance on provides (IFRS 3) standard combinations The IFRS business differs that acquisitions business of recognition and the measurement under Canadian the guidance GAAP. from necessary changes so that hedge accounting will continue under IFRS. under IFRS. continue will hedge accounting changesnecessary that so 1, IFRS under exemptions the optional evaluating currently are We sections. discussed in the following which are of significant the most IFRS on November 1, 2010, we can continue our hedge accounting without without hedge accounting our can continue we 2010, 1, November IFRS on made the have and our assessment completed have We interruption. The mandatory exceptions include hedge accounting. We will not look look not will We include hedge accounting. The mandatory exceptions IFRS hedge with complied we whether determine in time to back accounting requirements prior to transition. As long as comply we with application, such that our opening balance sheet for the comparative year always had as though the bank be restated is to financial statements as an adjustment impactapplied IFRS with the opening net shown to certain mandatory contains 1 exceptions IFRS However, earnings. retained and permits certain exemptio optional First-Time Adoption of IFRS of Adoption IFRS 1 – First-Time for the framework provides that standard 1 is a financial reporting IFRS 1 is retroactive under IFRS principle The general IFRS. to the transition loss on translation of net foreign operations to zero. The impact on the on The impact zero. to operations foreign net of translation on loss million $1,100 approximately of will be an increase balance sheet bank’s a corresponding and income comprehensive other in accumulated million on $1,100 approximately of earnings reduction in retained will There year. our comparative the beginning of 2010, 1, November this change. with associated impact capital be no regulatory On transition to IFRS, we can either recalculate translation differences differences translation recalculate caneither we IFRS, to On transition applied the IFRS requirementson an IFRS basis had always as though we net of translation on loss comprehensive other the accumulated or reset zero. to operations foreign Accumulated Other Comprehensive Loss on Translation of of on Translation Loss Other Comprehensive Accumulated Operations Foreign in 2011. It is unclear when adoption will be required; however, we expect expect we however, be required; will when adoption It is unclear in 2011. the when in place remain will standard consolidation existing the that 2012. IFRS in to transitions bank securitization vehicle and our Canadian customer securitization vehicles vehicles securitization our Canadian customer and vehicle securitization 2011. of quarters second VIEs and in the first significant less other and and/or vehicle securitization customer our U.S. consolidate to were If we this that expect do not we vehicles, securitization our Canadian customer earnings retained opening to adjustment significant in any result would year. our comparative beginning of the 2010, 1, November on Policies and the Requirements under IFRS. under IFRS. the Requirements and Policies MANAGEMENT’S DISCUSSION AND ANALYSIS

Management’s Annual Report on Disclosure Controls and Procedures and Internal Control over Financial Reporting Disclosure Controls and Procedures and the requirements of the Securities and Exchange Commission in the Disclosure controls and procedures are designed to provide reasonable United States, as applicable, and that receipts and expenditures of BMO assurance that all relevant information is gathered and reported to are being made only in accordance with authorizations by management senior management, including the President & Chief Executive Officer and directors of BMO; and provide reasonable assurance regarding (CEO) and the Chief Financial Officer (CFO), on a timely basis so that prevention or timely detection of the unauthorized acquisition, use or appropriate decisions can be made regarding public disclosure. disposition of BMO’s assets that could have a material effect on the An evaluation of the effectiveness of the design and operation of financial statements. our disclosure controls and procedures was conducted as at October 31, Because of its inherent limitations, internal control over financial 2010 by BMO Financial Group’s management under the supervision reporting can provide only reasonable assurance and may not prevent or of the CEO and the CFO. Based on this evaluation, the CEO and the CFO detect misstatements. Furthermore, projections of any evaluation of have concluded that, as at October 31, 2010, our disclosure controls effectiveness to future periods are subject to the risk that controls may and procedures, as defined in Canada by National Instrument 52-109, become inadequate because of changes in conditions, or that the degree

MD&A Certification of Disclosure in Issuers’ Annual and Interim Filings, and of compliance with the policies or procedures may deteriorate. in the United States by Rule 13a-15(e) under the Securities Exchange Act BMO Financial Group’s management, under the supervision of the of 1934 (the Exchange Act), are effective. CEO and the CFO, has evaluated the effectiveness of our internal control Internal Control over Financial Reporting over financial reporting using the framework and criteria established in Internal Control – Integrated Framework, issued by the Committee of Internal control over financial reporting is designed to provide reason- Sponsoring Organizations of the Treadway Commission. Based on this able assurance regarding the reliability of financial reporting and evaluation, management has concluded that internal control over the preparation of financial statements in accordance with Canadian financial reporting was effective as of October 31, 2010. generally accepted accounting principles and the requirements of the BMO Financial Group’s auditors, KPMG LLP (Shareholders’ Auditors), Securities and Exchange Commission in the United States, as applicable. an independent registered public accounting firm, has issued an audit Management is responsible for establishing and maintaining adequate report on our internal control over financial reporting. This audit report internal control over financial reporting for BMO Financial Group. appears on page 111. BMO’s internal control over financial reporting includes policies and procedures that: pertain to the maintenance of records that, in reason- Changes in Internal Control over Financial Reporting able detail, accurately and fairly reflect the transactions and dispositions There were no changes in our internal control over financial reporting of the assets of BMO; provide reasonable assurance that transactions are in fiscal 2010 that have materially affected, or are reasonably likely to recorded as necessary to permit preparation of the financial statements materially affect, our internal control over financial reporting. in accordance with Canadian generally accepted accounting principles

Shareholders’ Auditors’ Services and Fees Pre-Approval Policies and Procedures Shareholders’ Auditors’ Service Fees As part of BMO Financial Group’s corporate governance practices, Aggregate fees paid to the Shareholders’ Auditors during the fiscal years the Board of Directors ensures the strict application of BMO’s corporate ended October 31, 2010 and 2009 were as follows:

policy limiting the services provided by the Shareholders’ Auditors Fees ($ millions) (1) 2010 2009 that are not related to their role as auditors. All services provided by Audit fees 12.4 12.0 the Shareholders’ Auditors are pre-approved by the Audit Committee Audit-related fees (2) 0.7 0.2 as they arise, or through an annual pre-approval of amounts for Tax fees – – specific types of services. All services comply with our Auditor All other fees (3) – 0.2 Independence Policy, as well as professional standards and securities Total 13.1 12.4 regulations governing auditor independence. (1) The classification of fees is based on applicable Canadian securities laws and United States Securities and Exchange Commission definitions. (2) Audit-related fees for 2010 and 2009 relate to fees paid for accounting advice, specified procedures on our Proxy Circular and other specified procedures. (3) All other fees for 2010 and 2009 relate primarily to fees paid for reviews of compliance with regulatory requirements for financial information and reports on internal controls over services provided by various BMO Financial Group businesses. Also included in 2010 and 2009 were translation services.

74 BMO Financial Group 193rd Annual Report 2010 Enterprise-Wide Risk Management

As a financial services company active in banking, investments, insurance and wealth management services, the management of risk is integral to our business. To achieve prudent and measured risk-taking, we are guided by an integrated risk management framework in our daily business activities and planning process. The Risk Management Group develops our risk appetite, risk policies and limits and provides an independent review and oversight function across the enterprise on risk-related issues.

”Risk trends were generally positive in 2010 with credit costs down Our Priorities

from 2009 and lower levels of MD&A • Manage risk effectively throughout the economic cycle. market volatility.” • Bring a continuous improvement mindset to risk management capabilities and maintain a strong risk culture across the enterprise. Tom Flynn Enhance risk-based capital management across the enterprise. Executive Vice-President and Chief Risk Officer • BMO Financial Group • Increase the articulation of our risk appetite across our lines of business. Strengths and Value Drivers • Maximize the value of our impaired loans and problem accounts. • Comprehensive risk management framework, covering all risks in • Maintain strong relationships with our regulators. the organization. • Strong credit risk management discipline. • Credit portfolios performed well compared to our peers. Our Path to Differentiation • Strong foundation established by our Risk Evolution Program, which Reinforce our three-lines-of-defence approach to risk manage- we continue to build on across the enterprise by identifying and • ment, which dictates that operating groups own the risk in implementing best practices. their operations, Risk Management Group, along with other • Effective engagement with our lines of business allows us to appro- Corporate Support areas, provides independent oversight as a priately understand and properly manage risk. second line of defence, and Corporate Audit provides a third • Proactive management of our portfolios to maximize recoveries on line of defence. problem accounts. • Within our independent oversight framework and the limits of Challenges our risk appetite, contribute to the Enterprise’s customer focus. • Weak U.S. economic and real estate conditions. • Promote excellence in risk management as a defining charac- • Uncertainty with respect to how businesses might evolve in what teristic of BMO, both internally and externally. could be a lower growth environment. • Provide leadership in the management of enterprise risk and • Increasing regulatory change. emerging risk-related industry concerns.

Key Performance Indicators 2010 2009 2008

BMO Peer BMO Peer BMO Peer Our Functional Groups avg. avg. avg. Central Risk Group provides independent oversight and support Specific PCL as a % of average in the establishment of enterprise-wide risk management policies, net loans and acceptances 0.61 0.58 0.85 0.74 0.61 0.43 infrastructure and processes. Total PCL as a % of average net loans and acceptances 0.61 0.56 0.88 0.90 0.76 0.48 Operating Group Risk Areas provide integrated risk oversight to our Net impaired loans business groups in the management of risk in support of the execution as a % of average net loans of our business strategies to optimize return on capital. and acceptances 0.78 0.96 0.77 0.93 0.72 0.98

Text and tables presented in a blue-tinted font in the Enterprise-Wide Risk Management section of the MD&A form an integral part of the 2010 annual consolidated financial statements. They present required GAAP disclosures as set out by the Canadian Institute of Chartered Accountants (CICA) in CICA Handbook section 3862, Financial Instruments – Disclosures, which permits cross-referencing between the notes to the financial statements and the MD&A. See pages 114 and 122 of the financial statements.

BMO Financial Group 193rd Annual Report 2010 75 MANAGEMENT’S DISCUSSION AND ANALYSIS

Gross Impaired Gross Impaired Specific Provision Total Provision Loan Formations ($ millions) Loan Balances ($ millions) for Credit Losses ($ millions) for Credit Losses ($ millions)

2,690 3,297 3,221 1,543 1,603 2,506 1,330 2,387 1,070 1,049 1,049 1,525

588 720 303 353

2007 2008 2009 2010 2007 2008 2009 2010* 2007 2008 2009 2010 2007 2008 2009 2010

Gross impaired loan formations Gross impaired loan balances Specific provisions for credit The total provision for credit decreased in 2010, reflecting remained elevated due to the losses were lower in 2010, losses is reflective of our better economic conditions. lingering effects of the recession. reflecting better economic position in the credit cycle. conditions.

MD&A * Includes $302 million of balances related to the acquisition of a U.S. bank’s assets that are covered by an FDIC loss share agreement.

2010 Group Objectives and Achievements Manage risk effectively in the changing economic environment. Further strengthen our risk management practices by expanding • Delivered strong credit performance with significantly lower credit our capabilities and pursuing continuous improvement. losses year over year. • Reinforced our risk foundation which includes the three-lines-of- • Managed market risk positions without significant volatility. defence approach in place across the enterprise. • Reduced exposure to certain run-off portfolios. • Strengthened our stress testing capabilities. Strengthened our risk capital management practices. Work with the operating groups to advance new business • Advanced our talent management strategy by upgrading the skills initiatives consistent with our risk appetite. • of our risk management professionals, delivering risk training across • Worked with our operating groups to reinforce our risk culture and the enterprise and strengthening performance management. make risks more transparent. • Defined levels of skill and competency in risk management • Worked within our independent oversight framework and our risk to help ensure that our people are assigned to roles that suit appetite limits to meet our customers’ needs. their capabilities. Proactively manage our impaired loan portfolio to maximize its potential and minimize future credit losses. • Expanded roles and added resources to effectively manage the portfolio.

Framework and Risks As a diversified financial services company active in a number of us maintain our solid financial position. We continue to expand our risk businesses, managing risk is integral to our operations. A disciplined and management infrastructure, build our capabilities and pursue continuous integrated risk management approach is essential to building competitive improvement while actively benchmarking our capabilities against risk advantage and stability for our enterprise. It is intended to provide management best practices. We believe that the steps we have taken, appropriate and independent risk oversight across the enterprise. It also and the initiatives we continue to pursue, have positioned us appropri- requires that the Risk Management Group works with our lines of business ately to move forward and execute our strategy. to create transparency and maintain open communication. Our enterprise integrated risk management framework includes The impact of the economic downturn has lessened somewhat our operating model and our risk governance structure, both of which over the past year, although some sectors of the economy continue are underpinned by our risk culture. Our framework is predicated on to experience the lingering effects of the recession. BMO has continued the three-lines-of-defence approach to the management of risk. This is to exhibit the strong risk discipline that has served our customers fundamental to our operating model. The first line of defence in our and stakeholders well. While we and the financial services industry management of risk is our operating groups, which are responsible for have learned lessons from the recent economic challenges, the prudent the risks in their business. Their mandate is to identify suitable business risk strategy that we built upon over the past several years has helped opportunities within our risk appetite and to adopt strategies and

76 BMO Financial Group 193rd Annual Report 2010 MD&A

77 Oversight and Monitoring and Committee Reputation Risk Reputation Operational Risk Operational Management Committee Management he Board of Directors and/or board and/or board Directors of he Board and Concurrence and 2010 Annual Report 193rd Financial Group BMO Limits Controls and limits on country, industry, portfolio/ industry, country, – limits on Committee Committee nd single-name exposures; Risk Management Risk Capital Management Capital Audit Committee Risk Management Group Management Risk Second Line of Defence Line of Second Measurement and Reporting limits on Market Value Exposure and stress exposures; and exposures; stress and Exposure Value Market – limits on Committee All elements of our risk management framework are reviewed on a on reviewed are framework management our risk elements of All Balance Sheet iewed and approved annually by t annually by and approved iewed Trading Products Risk Products Trading and Guidelines and and maximum levels of asset pledging, as well as guidelines approved pledging, as guidelines asset approved as well and maximum of levels credit and and diversification liability for management senior by requirements. liquidity product segments, group a group segments, product Market Risk Risk Market v Policies, Standards Policies, Risk Counterparty and Credit assets liquid of – limits minimum on Risk Funding and levels Liquidity Management Committee Management e and management committees: management and In each of our operating groups, management monitors governance governance monitors management groups, our operating In of each regular basis by the Risk Review Committee of the Board of Directors to to Directors of Board the of Committee Review Risk the regular by basis activities. our risk-taking of the governance guidance for effective provide over- and procedures and processes management and controls activities, management risk our overall within operation sees their effective monitor and establish committees Individualframework. governance and with consistent limits, management risk further comprehensive subordinate limits. to the board-approved Limits and Authorities which are limits, our risk shape appetite risk and principles risk BMO’s r • • • Board of Directors or its committees, as well as supporting corporate corporate supporting as as well or itscommittees, Directors of Board manage- risk enterprise-wide This guidelines. operating and standards and committees of a hierarchy through is governed framework ment diagram. as outlined in the following individual responsibilities CEO Board of Directors of Board Risk Business Corporate Audit Group – Corporate Defence Line of Third Risk Reputation Enterprise-Wide Risk Management Framework Enterprise-Wide Risk Operational sight. It is the responsibility of of sight. It is the responsibility liability of financial reporting, of liability Operating Groups Operating Risk First Line of Defence Line of First Credit and Credit Counterparty Risk Review Committee Risk Review and effectiveness of controls across various various across controls of and effectiveness Own the Risks Associated with Business Activities Business with Associated the Risks Own Market Risk Market Trading and Trading Underwriting Structural Market Risk Market Our second line of defence in the management of risk is provided is provided risk of in the management defence line of Our second This group Group. Audit is our Corporate defence line of Our third Funding and Liquidity and Risk Governance Risk framework management risk our enterprise-wide of The foundation and structure committee includes that a robust structure is a governance a comprehensive corporate the which of by set policies, approved are compliance with applicable laws and regulations and the implementation initiatives. significant of by our Risk Management Group and other Corporate Support areas. areas. Support Corporate other and Group Management our Risk by over independent provide These groups themonitors efficiency the re our operations, within functions practices that will optimize return on capital or achieve other business business other or achieve capital on return optimize will that practices its within is acting it that ensure must group Each operating objectives. policies risk out in our corporate as set authority, risk-taking delegated which has of each groups, operating the for set Limitsare limits. and within operate to it enable to in place controls and processes effective these limits. the Risk Management Group to recommend and set corporate risk man- risk corporate set and recommend to Group Management the Risk practices and processes infrastructure, establish and policies agement Management Risk the enterprise. across risks significant all address that report- and monitoring quantification, the assessment, on works Group all significant risksing of senior management to appropriate, as and, Directors. of the Board MANAGEMENT’S DISCUSSION AND ANALYSIS

Board of Directors is responsible for the stewardship of BMO of management. This committee is chaired by the Chief Risk and supervising the management of BMO’s business and affairs. Officer (CRO). The board, either directly or through its committees, is responsible RMC Sub-committees have oversight responsibility for the risk and for oversight in the following areas: strategic planning, defining risk balance sheet impacts of management strategies, governance, risk appetite, identification and management of risk, capital manage- measurement and contingency planning. RMC and its sub-committees ment, promoting a culture of integrity, internal controls, succession provide oversight over the processes whereby the risks incurred across planning and evaluation of senior management, communication, the enterprise are identified, measured, monitored and reported in public disclosure and corporate governance. accordance with policy guidelines and are within delegated limits. Risk Review Committee of the Board of Directors (RRC) assists Enterprise Risk and Portfolio Management (ER&PM) includes the board in fulfilling its oversight responsibilities in relation to independent oversight of the credit and counterparty, operational and BMO’s identification and management of risk, adherence to risk market risk functions. It promotes consistency of risk management management corporate policies and procedures, and compliance practices and standards across the enterprise. ER&PM facilitates a dis- with risk-related regulatory requirements. ciplined approach to risk-taking through the execution of independent Audit Committee of the Board of Directors independently transactional concurrence and portfolio management, policy formula- MD&A monitors and reports to the Board of Directors on the effectiveness tion, risk reporting, stress testing, modelling, vetting and risk education of disclosure controls and procedures and internal controls, including responsibilities. This approach seeks to meet corporate objectives and internal controls over financial reporting. to ensure that risks taken are consistent with BMO’s risk tolerance. President and Chief Executive Officer (CEO) is directly accountable Operating Group CROs provide advice and independent risk oversight to the board for all of BMO’s risk-taking activities. The CEO is sup- across all risk types, foster a high-performance risk culture at the ported by the Risk Manage ment Committee and its sub-committees, operating group level and provide leadership for the operating group as well as Enterprise Risk and Portfolio Management. risk organizations. Risk Management Committee (RMC) is BMO’s senior risk Operating Groups are responsible for managing risk within their committee. RMC reviews and discusses significant risk issues and respective areas. They exercise business judgment and seek to ensure action plans that arise in executing the enterprise-wide strategy. that policies, processes and internal controls are in place and that RMC provides risk oversight and governance at the highest levels significant risk issues are appropriately escalated to ER&PM.

The Board of Directors, based on recommendations from the Risk Review To enhance our risk management capabilities and support the Committee and the Risk Management Committee, delegates the setting ongoing strengthening of our risk culture, we continue to add to the of credit and market risk limits to the President and CEO, who in turn available learning opportunities and have expanded our delivery of risk delegates more specific authorities to the CRO and the operating group training across the enterprise. Our educational programs are designed CROs. These delegated authorities allow the officers to set risk toler- to foster a deeper understanding of BMO’s capital and risk management ances, approve geographic and industry sector exposure limits within frameworks across the enterprise, providing our Risk Management defined parameters, and establish underwriting and inventory limits for employees and management with the tools and awareness required trading and investment banking activities. to undertake their accountabilities for independent oversight regardless These delegated authorities are reviewed and approved annually by of their position in the organization. This education strategy has the Board of Directors on the recommendation of the Risk Review Com- been developed in partnership with our Institute for Learning, our mit tee. The criteria whereby these authorities may be further delegated Risk Management professionals, external risk experts and teaching throughout the organization, as well as the requirements relating to professionals. Our credit training program, together with defined job documentation, communication and monitoring of delegated authorities, descriptions, provides training and practice in sound risk management are set out in corporate policies and standards. as a prerequisite to the granting of appropriate discretionary limits to Risk Culture qualified professionals. At BMO, risk culture is characterized as the actions and behaviours Risk Principles exhibited by our employees and groups as they identify, interpret and The risks we face are classified as credit and counterparty, market, discuss risk and make choices in the face of both opportunity and risk. liquidity and funding, operational, insurance, business, model, Our risk culture shapes the way we view and manage risks, and also the strategic, regulatory, reputation and environmental. Risk-taking and way we work with our colleagues to assess the ongoing alignment of risk management activities across the enterprise are guided by the business strategies and activities within the limits of our risk appetite. following principles: Our risk culture encourages an engagement between Risk Manage- • management of risk is a responsibility at all levels of the organization, ment and our business groups that contributes to and enhances risk employing the three-lines-of-defence approach; transparency. This promotes an understanding of the risks inherent in • our risk appetite is approved by the Risk Review Committee, and is our businesses so that they can be managed appropriately. We encour- aligned with BMO’s strategic direction; age the open and timely sharing of information and ongoing discussions • ER&PM provides independent oversight of risk-taking activities across pertaining to risk to ensure that our understanding remains current. the organization; We also encourage the escalation of concerns regarding potential or • ER&PM monitors our risk management framework to ensure that our emerging risks to senior management so that they can be evaluated and risk profile is maintained within our established risk appetite and appropriate action taken. We actively incorporate risk appetite into our supported with adequate capital; discussions, and work with the lines of business to consider appropriate • all material risks to which the enterprise is exposed are identified, risk-based measures when making business decisions. measured, managed, monitored and reported;

78 BMO Financial Group 193rd Annual Report 2010 MD&A 79 to the underlying to ing our business ing our business scenario selection, analysis and 2010 Annual Report 193rd Financial Group BMO ty of our exposures our exposures ty of the risk underly the risk committees and the Board of Directors Directors of the Board and committees – Policies and procedures for the approval itions. Stress testing and scenario testing analysis Stress itions. credit, market (trading and non-trading), operational and and operational non-trading), and (trading – credit, market where measures are based on a time horizon of one year. year. one of a time horizon based on are measures – where We also conductWe ongoing stress testing and scenario analysis An enterprise-wide framework of An of enterprise-wide framework On a regular basis, reporting on risk is also provided to stakeholders, stakeholders, to provided is also risk on reporting On a regular basis, w or modified products and services offered to our customers our to services offered and products w or modified ne are reviewed and approved by Corporate as Support as well by and reviewed are approved areas, and Committee Risk Products Trading Committee, Risk the Operational RiskReputation Management as appropriate. Committee, stress testing assists in determining the relative magnitude of risks risks magnitude of the relative in determining assists testing stress opera- enterprise’s the across risks those of the distribution and taken tions under cond different risk characteristics of specific industries. characteristics of risk measure the impact on our operations and capital of stressed but stressed of capital and our operations on the impact measure plausible operational, economic, credit and market events. Scenarios Management Risk our economists, with in collaboration designed are or hypothetical historical based on business, lines of and Finance groups, developments. economic or significant thereof, a combination events, Economic variables derived from these scenarios then are applied to all the enterprise. across portfolios risk-taking relevant and significant of testing conducts also stress BMO the BaselAs II Accord, by stipulated using the Advanced portfolios material all regulatory credit capital across methodology. calculation Approach Based Ratings (AIRB) Internal several to a specific industry, to credit exposures BMO’s test to designed These tests correlated. highly are that specific products or to industries and loss scenariosgauge on default various the probabilities effect of manage- senior The results provide under review. in the portfolio rates the sensitivi into insight with ment Risk Reporting Risk critical are reporting associated and transparency risk Enterprise-level levels help all culture that operating and our framework of components leaders, risk leaders, business of management, management business their risk exercise effectively to includes reporting Risk Internal Enterprise responsibilities. oversight and that metrics associated and risks the key which synthesize Chapters, signifi- our most highlight The Chapters faces. currently the organization senior provide to risks, emerging and as potential as well risks, cant and actionable timely, with Directors of the Board and management our organization risks the significant on reporting risk forward-looking these of assessments includes facilitate to This reporting material faces. limits established the relevant and appetite our risk to relative risks risk. includes It also emerging on framework. our material within as agencies our shareholders, and rating external including regulators, community. the investment in others as to well Assessment Capital Risk-Based Economic These are BMO. used by capital are risk-based of measures Two that risk of measures aggregate are Capital. Both Regulatory Capital and model Our operating our financial targets. of in pursuit undertake we provides type but also each risk of management the direct for provides Capital is Economic basis. integrated an on risks of the management for of measure internal our integrated magnitude the of of estimation management’s It represents activities. allows and arise, situations if adverse occur could that losses economic Capital is Economic calculated risks. various be adjusted for to for returns types risk business New products and services services and products New of

ommittee of the Risk Management Management the Risk of ommittee riginator. Delegated authorities and and authorities Delegated riginator. Transactions are approved through risk assess- through approved are – Transactions and approved by Corporate Support by and approved areas. through our investment spending approval process, which process, spending our approval investment through ocesses for all types of transactions, including dual signatory transactions, types of all for ocesses ading Products Risk Committee review new structured products products structured new review Committee Risk Products ading alized alized guarded and protected at all times; and all at protected and guarded capital. of ment relative to our peers; to relative adverse tail event risks that could jeopardize the bank’s credit rating, credit the bank’s jeopardize could that risks tail event adverse or reputation; capital position Corporate Support functions; Support Corporate process to ensure risks are understood and can be managed; and understood are risks ensure to process all risk types and business activities to facilitate the incorporation of of the incorporation facilitate to activities business and types risk all and returns; business of the measurement into risk medium- long-term and short-, balances that motivation incorporate non-volatile sustainable, of the achievement with generation profit appetite. our risk with in line growth, earnings by robust metrics and analysis; and metrics robust by established appropriate return risk limits of a level and should generate decision-making is based on a clear understanding of risk, understanding of clear a decision-makingon is based accompanied to their risk profile; risk their to rm is safe- our reputation ensure that policies and practices business deploy- effective and the efficient facilitate to risk-return, optimizing lending quality portfolio above-average maintaining and a diversified our peers; to outsized relative is not that (VaR) risk at value better; AA– or of BMO for a credit rating targeting low-probability to minimizing and exposure identifying, evaluating providing adequate resources for Risk Management, Finance and other other Management, and Risk Finance for resources adequate providing fundingand positions; liquidity and capital maintaining strong them; monitoring managing and and face, understanding we the risks and approval review a rigorous to initiatives product subjecting new Economic Capital is used to measure and aggregate risk across across risk aggregate and measure Capital is used to Economic to implemented and designed are programs compensation incentive business activities and conducted developed, are approved within

o The Reputation Risk Management Committee Committee Management Risk – The Reputation transactions Structured Tr and Portfolio transactions transactions Portfolio Risk Review and Approval and Review Risk established are based on the nature, processes and approval Risk review and review the risk Generally, involved. risks the of complexity and size categories by various of and approval is a formal review process approval individual, an or sub-ceither group category outlined below. by are approvals pr ment • • • • the o of independent Committee, • • • • • • Risk Appetite Appetite Risk are we that risk of type and the amount identifies appetite Our risk our guiding our capital capacity. given and principles accept to willing for Statement Appetite our Risk recommends management Senior the by Riskapproval Management Committee and the Risk Review is Statement Appetite Our Risk Directors. of the Board of Committee other among and, terms qualitative and quantitative in both defined requires: things, • • • • is now reviewed reviewed is now and transactions with significant reputation, legal, accounting, regulatory regulatory legal, accounting, reputation, significant with transactions and or tax risk. is assessments risk of – Documentation initiatives Investment f authorities for credit risk and transactional and position limits for limits for position and transactional and risk credit for authorities risk. market MANAGEMENT’S DISCUSSION AND ANALYSIS

Credit and Counterparty Risk Risk Rating Systems Credit and counterparty risk is the potential for loss due to the BMO’s risk rating systems are designed to assess and measure the risk failure of a borrower, endorser, guarantor or counterparty to repay of any exposure. The rating systems differ for the consumer and small a loan or honour another predetermined financial obligation. business portfolios and the commercial and corporate portfolios. This is the most significant measurable risk that BMO faces. Consumer and Small Business The consumer and small business portfolios are made up of a diversified group of individual customer accounts and include residential Credit and counterparty risk exists in every lending activity that mortgages, personal loans, and credit card and small business loans. BMO enters into, as well as in the sale of treasury and other capital These loans are managed in pools of homogeneous risk exposures. For markets products, the holding of investment securities and securitization these pools, credit risk models and decision support systems are devel- activities. BMO’s robust and effective credit risk management begins oped using established statistical techniques and expert systems for with our experienced and skilled professional lending and credit underwriting and monitoring purposes. Adjudication models, behavioural risk officers, who operate in a dual control structure to authorize lending scorecards, decision trees and expert knowledge are combined to transactions. These individuals are subject to a rigorous lender quali-

MD&A produce optimal credit decisions in a centralized and automated environ- fication process and operate in a disciplined environment with clear ment. The characteristics of both the borrower and the loan, along with delegation of decision-making authority, including individually delegated past portfolio experience, are used to predict the credit performance of lending limits. Credit decision-making is conducted at the management new accounts. These metrics are used to define the overall credit risk level appropriate to the size and risk of each transaction in accordance profile of the portfolio, predict future performance of existing accounts with comprehensive corporate policies, standards and procedures for ongoing credit risk management and determine both Economic governing the conduct of credit risk activities. Capital and Basel II regulatory capital. Every exposure is assigned risk Credit risk is assessed and measured using risk-based parameters: parameters, PD, LGD and EAD based on the performance of the pool, and Exposure at Default (EAD) represents an estimate of the outstanding these assignments are updated monthly. The PD risk profile of the AIRB amount of a credit exposure at the time a default may occur. For off- Retail portfolio at October 31, 2010, was as follows: balance sheet amounts and undrawn amounts, EAD includes an estimate PD risk profile PD range % of Retail EAD of any further amounts that may be drawn at the time of default. Exceptionally low ≤ 0.05% 38.8 Very low > 0.05% to 0.20% 20.3 Loss Given Default (LGD) is the amount that may not be recovered Low > 0.20% to 0.75% 23.7 in the event of a default, presented as a proportion of the exposure Medium > 0.75% to 7.00% 15.6 at default. LGD takes into consideration the amount and quality of any High > 7.00% to 99.99% 1.3 collateral held. Default 100% 0.3 Probability of Default (PD) represents the likelihood that a credit Commercial and Corporate Lending obligation (loan) will not be repaid and will go into default. A PD Within the commercial and corporate portfolios, we utilize an enterprise- is assigned to each account, based on the type of facility, the product wide risk rating framework that is applied to all of our sovereign, bank, type and customer characteristics. The credit history of the counterparty/ corporate and commercial counterparties. This framework is consistent portfolio and the nature of the exposure are taken into account in the with the principles of Basel II, under which minimum regulatory determination of a PD. capital requirements for credit risk are determined. One key element Expected Loss (EL) is a measure representing the loss that is expected of this framework is the assignment of appropriate borrower risk ratings to occur in the normal course of business in a given period of time. to help quantify potential credit risk. BMO’s risk rating framework EL is calculated as a function of Exposure at Default, Loss Given Default establishes counterparty risk ratings using methodologies and rating and Probability of Default. criteria based on the specific risk characteristics of each counterparty. Unexpected Loss (UL) is a measure of the amount by which actual The resulting rating is then mapped to a probability of default over losses may exceed expected loss in the normal course of business in a one-year time horizon. As counterparties migrate between risk ratings, a given period of time. the probability of default associated with the counterparty changes. We review our loans and acceptances on an ongoing basis to assess Under Basel II, there are three approaches available for the computation whether any loans should be classified as impaired and whether an of credit risk: Standardized, Foundation Internal Ratings Based and allowance or write-off should be recorded. Future losses are estimated Advanced Internal Ratings Based (AIRB). We apply the AIRB Approach for based on the expected proportion of the exposure that will be at risk if calculations of credit risk in our portfolios, while our subsidiary Harris a counterparty default occurs, through an analysis of transaction-specific Bancorp Inc. currently uses the Standardized Approach. Pending approval factors such as the nature and term of the loan, collateral held and the from OSFI, we plan to adopt the AIRB Approach for Harris Bancorp Inc. seniority of our claim. For large corporate transactions, we also utilize in 2011. unexpected loss models to assess the extent and correlation of risks before authorizing new exposures.

Material in blue-tinted font above is an integral part of the 2010 annual consolidated financial statements (see page 75).

80 BMO Financial Group 193rd Annual Report 2010 MD&A

81 U.S. Canada – – purchase Canada U.S. Residential mortgages Residential – Home equity loans loans Home equity Home equity loans Home equity loans – Residential mortgages Residential Canada U.S. – – Credit cards Credit Personal loans loans Personal Personal loans loans Personal 2010 Annual Report 193rd Financial Group BMO Commercial mortgages Commercial estate real Commercial Construction Other Government Financial institutions industries Service products Forest Utilities Transportation Oil and gas Mining Manufacturing Communications Agriculture trade Wholesale trade Retail BMO employs a number of measures to mitigate and manage credit and mitigate to measures of a number employs BMO were outstanding enterprise-wide credit exposures Total Gross Loans and Acceptances Loans Gross Industry by Diversification 2010 31, October As at risk. These measures include but are not limited to strong underwriting underwriting strong to limited include not risk. but are These measures monitoring a robust managers, risk professional qualified standards, the and exposures, of the redistribution process, review and or sale of insurance through guarantees or credit default swaps. guarantees through insurance or sale of Collateral Management Collateral losses minimize is to mitigation risk credit for collateral of The purpose in funds employed protect to and be incurred otherwise would that avail- the assets borrower, Depending the type of on activities. credit risk collateral requirements, the credit of term and the structure and able regularly are securities liquid grade Investment forms. various can take and corporate For facilities. counterparty treasury of in support pledged the of pledges of the form can take collateral borrowers, commercial machinery inventory, receivable, such as accounts a business, of assets guarantees. of in support pledged assets or personal estate, real and as prescribed regular valuation is subject to collateral basis, ongoing On an which incorporate standards, and policies governing in the relevant economic current of types in the context formulas certain asset set for circumstances. market and Losses Credit for Allowance employs BMO a disciplined approach to all loan portfolios, Across of identification the prompt with evaluation, loss loan and provisioning maintains BMO objective. management risk being a key loans problem the sum of credit losses, for allowances specific general and both their to credit assets of value the book reduce which to is sufficient carrying the aggregate reduce allowances Specific value. estimated in deterioration of is evidence which there for credit assets of value cover to in order allowance maintain also a general We credit quality. be associated yet cannot that portfolio in the existing impairment any establishing Ourwith approach to specific and maintaining loans. the our regulator, by the guideline issued is based on allowance general a basis and a quarterly on is reviewed allowance The general OSFI. the appropriate when determining considered are factors number of model This includes allowance a general allowance. the general of level based on rates, loss and unexpected that applies historical expected current to default factors, given loss default and of probabilities details of BMO’s loan portfolios, impaired loans and provisions and and provisions and loans impaired portfolios, loan BMO’s of details credit losses. for allowances $378 billion at October 31, 2010, comprised of $251 billion in Canada, in Canada, billion $251 of comprised 2010, 31, October at billion $378 jurisdictions. in other billion $25 and States in the United billion $102 of 120 page 4 on Note 40. page discussed is on quality portfolio Credit provide 105 to 102 pages on 19 to 11 Tables and the financial statements

Material in blue-tinted font above is an integral part of the 2010 annual consolidated financial statements (see page 75). financial statements consolidated annual the 2010 of part integral is an above font in blue-tinted Material implied equivalent implied with BMO’s risk risk BMO’s with are reviewed on a on reviewed are Moody’s Investors Moody’s Service implied Poor’s & Standard

and Sovereign Sovereign and Aaa Sovereign AAA Sovereign

Description of risk risk of Description equivalent and Impaired C D Impaired Impaired Default and Default D-1 C Default D-2 and D Watchlist B2 Uncertain P-1 B3 Watchlist P-2 B Caa/C Watchlist P-3 CCC/C B– Non-investment grade Non-investment Ba1 Acceptable S-1 Ba2 BB+ Acceptable S-2 BB Marginal Ba3 S-3 Marginal S-4 B1 BB– B+ I-2 Undoubted Aaa/Aa1 AAA/AA+ Aaa/Aa1 Undoubted I-2 AA/AA– Minimal I-3 Aa2/Aa3 A+/A/A– I-4 Modest A1/A2/A3 I-5 Modest Baa1 I-6Average Baa2 BBB+ Baa3 Average I-7 BBB BBB I-1 Undoubted Undoubted I-1

BMO BMO rating Investment grade to more specific guidelines and procedures. These specific guidelines procedures. and more to regular basis to ensure they are current and consistent and current are they ensure regular basis to appetite. The structure, limits, collateral requirements, ongoing manage- ongoing requirements, collateral limits, The structure, appetite. governed all are our credit exposures of reporting and ment, monitoring principles. management these credit risk by of diversification. Limits are in place for several portfolio dimensions, dimensions, portfolio several for in place Limits are diversification. of single-name and concentrations, product country, including industry, our credit assets end, year At limits. as transaction-specific as well clients, of millions of comprised portfolio a well-diversified of consisted medium-sized businesses. small to and them consumers of the majority Portfolio Management Portfolio level acceptable an for provide policies governance credit risk BMO’s Credit Risk Governance Governance Risk Credit provides ultimately Directors of the Board of Committee Review The Risk the enterprise, by faced risks all of the management for oversight include monitoring including the ongoing practices risk. credit Operating to reporting sector and regular and portfolio exposures credit risk of accounts Performing committees. management senior and the board corporate and commercial most with a regular on basis, reviewed are provides process The credit review annually. least at reviewed accounts an appropriate structure, including covenant monitoring, for each the with in accordance is increased review of The frequency account. higher- deteriorating with credit losses, potential of size and likelihood groups management specialized account to referred situations risk for closer attention, when appropriate. Corporate Audit Group reviews samples credit trans- and controls and processes management tests and as to as well conditions, and credit terms to adherence for actions carry we out In addition, procedures. and standards policies, governing regular portfolio including sector reviews, stress testing and scenario risks. or prospective current, emerging on based analysis BMO’s credit risk management framework is built on governing principles governing is built on framework management risk credit BMO’s through which flow standards, and policies corporate of in a series defined Policies and Standards and Standards Policies As evidenced in the table below, our internal risk rating system maps in system rating risk internal our below, in the table As evidenced Agencies. Rating External the manner to a logical Scale Risk Rating Borrower MANAGEMENT’S DISCUSSION AND ANALYSIS

balances. For business loans, these historical loss rates are associated loans, loss rates are based on historical loss experience for the different with the underlying risk rating of the borrower, which is assigned at the portfolios. Model results are then considered, along with the level of the time of loan origination, monitored on an ongoing basis and adjusted to existing allowance and management’s judgment regarding portfolio reflect changes in underlying credit risk. These loss rates are further quality, business mix, and economic and credit market conditions, to refined with regard to industry sectors and credit products. For consumer determine the appropriate adjustment to the allowance.

Market Risk

Market risk is the potential for a negative impact on the balance Earnings Volatility (EV) is a measure of the adverse impact sheet and/or income statement resulting from adverse changes in of potential changes in market parameters on the projected the value of financial instruments as a result of changes in certain 12-month after-tax net income of a portfolio of assets, liabilities market variables. These variables include interest rates, foreign and off-balance sheet positions, measured at a 99% confidence exchange rates, equity and commodity prices and their implied level over a specified holding period. MD&A volatilities, as well as credit spreads, credit migration and default. Market Value Exposure (MVE) is a measure of the adverse impact of changes in market parameters on the market value BMO incurs market risk in its trading and underwriting activities and of a portfolio of assets, liabilities and off-balance sheet positions, structural banking activities. measured at a 99% confidence level over a specified holding As part of our enterprise-wide risk management framework, we period. The holding period considers current market conditions employ extensive governance and management processes surrounding and composition of the portfolios to determine how long it market risk-taking activities. These include: would take to neutralize the market risk without adversely • oversight by senior governance committees, including the Trading affecting market prices. For trading and underwriting activities, Products Risk Committee, Balance Sheet Management Committee, MVE is comprised of Value at Risk and Issuer Risk. Risk Management Committee and Risk Review Committee; Value at Risk (VaR) is measured for specific classes of risk in • an Economic Capital plan process that incorporates market risk measures BMO’s trading and underwriting activities: interest rate, foreign (market value exposures, stress testing); exchange rate, equity and commodity prices and their implied • a process for the effective valuation of trading positions and measure- volatilities. This measure calculates the maximum likely loss ment of market risk; from portfolios, measured at a 99% confidence level over a • development of appropriate policies and corporate standards; specified holding period. • a well-developed limit-setting and monitoring process; Issuer Risk arises in BMO’s trading and underwriting portfolios, • controls over processes and models used; and and measures the adverse impact of credit spread, credit migra- • a framework of scenario and stress tests for worst-case events. tion and default risks on the market value of fixed-income High-level market risk measures for structural market risk include instruments and similar securities. Issuer risk is measured at a Earnings Volatility (EV) and Market Value Exposure (MVE). These 99% confidence level over a specified holding period. positions are summarized in the table on page 85. The primary measure for market risk in trading and underwriting activities is MVE. Trading and Underwriting Market Risk BMO’s Market Risk group provides independent oversight of trading and To capture the multi-dimensional aspects of market risk effectively, underwriting portfolios with the goal of ensuring: a number of metrics are used, including VaR, stress testing, option market risk of trading and underwriting activities is measured and • sensitivities, position concentrations, market and notional values and modelled in compliance with corporate policies and standards; revenue losses. risk profiles of our trading and underwriting activities are maintained • VaR and stress testing are portfolio estimates of risk but have within our risk appetite, and are monitored and reported to traders, limitations. Among the limitations of VaR are its assumption that all management, senior executives and board committees; positions can be liquidated within the assigned one-day holding period proactive identification and reporting to management, senior executives • (ten-day holding period for regulatory calculations), which may not and board committees of specific exposures or other factors that be the case in illiquid market conditions, and that historical data can be expose BMO to unusual, unexpected, inappropriate or otherwise not used as a proxy to predict future market events. Scenario analysis and fully identified or quantified risks associated with market or traded probabilistic stress testing are performed daily to determine the impact credit exposures; and of unusual and/or unexpected market changes on our portfolios. As well, all individuals authorized to execute trading and underwriting activities • historical and event stresses are tested on a weekly basis. Scenarios on behalf of BMO are appropriately informed of BMO’s risk-taking are amended, added or deleted to better reflect changes in underlying governance, authority structure, procedures and processes by being market conditions. The results are reported to the lines of business, given access to and guidance on the relevant corporate policies Trading Products Risk Committee, Risk Management Committee and Risk and standards. Review Committee on a regular basis. Stress testing is limited by the BMO’s Market Risk group also provides oversight of Structural Market number of scenarios that can be run, and by the fact that not all downside Risk managed by Corporate Treasury. scenarios can be predicted and effectively modelled. Neither VaR nor stress testing are viewed as predictors of the maximum amount of losses

Material in blue-tinted font above is an integral part of the 2010 annual consolidated financial statements (see page 75).

82 BMO Financial Group 193rd Annual Report 2010 MD&A 83 * i.e. the way the way – i.e. ($ millions) nm nm nm nm backtesting against hypothetical hypothetical against backtesting 4.8 8.6 2010 Annual Report 193rd Financial Group BMO (7.3) (10.5) (15.8) (5.7) (1.9) (3.5) (9.5) (1.3) (0.7) (0.7) (1.7) (0.4) (0.8) (3.4) (8.2) (0.4) (0.1) (0.4) (1.4) (0.1) (15.8) (3.1) (7.5) (6.5) (12.5) (0.3) (0.6) (4.4) (7.5) (10.4) (22.5) (5.7) (7.4) (5.6) (8.8) (2.8) (2.7) (2.6) (4.4) (1.6) 11.4 10.1 e Carloscenario simulation model, (18.7) (19.9) (31.2) (13.4) (27.9) (33.9) (52.1) (24.2) (10.2) (9.6) (16.3) (5.5) (10.2) (9.6) (18.4) (16.3) (29.1) (9.2) (10.9) (13.1) (23.1) (5.9) (21.0) (21.3) (31.0) (15.2)

Year-end Average Average Year-end High Low not meaningful meaningful – not not meaningful meaningful – not We use a variety of methods to verify the integrity of our risk the integrity of verify methods to of use a variety We are our models underpin data that volatility and The correlations Market risk exposures arising from trading and underwriting underwriting and trading from arising exposures risk Market In the fourth quarter of 2010, changes were made to the calculation the calculation made to changes were 2010, of quarter In the fourth Comprehensive risk risk Comprehensive (AFS) risk rate Interest risk Issuer MVE Total level. confidence *One-day using a 99% measure Commodity risk risk Equity risk exchange Foreign Interest rate risk (mark-to-market) Diversification risk Comprehensive (AFS) risk rate Interest risk Issuer MVE Total level. confidence *One-day using a 99% measure 2009 31, ended October the year For (pre-tax Canadian equivalent) Commodity risk risk Equity Year-end risk exchange Foreign Average Interest rate risk (mark-to-market) Diversification High Low For the year ended October 31, 2010 31, ended October the year For (pre-tax Canadian equivalent) activities are summarized in the following table. table. in the following summarized are activities nm Total Trading and Underwriting MVE Summary Underwriting and Trading Total nm rules under GAAP and are accorded banking book regulatory capital banking book accorded rules are and under GAAP the by covered portfolios underwriting and trading For treatment. Book Trading mputed is using BMO’s co internal VaR models approach, Risk model. This at is a Mont Value reporting and management risk market itsand for output is used results using a 99% one-day computes VaR The model exposures. of the different between reflects and the correlations level confidence factors. risk classes market of including themodels, application of day’s no changes in the previous are there assumes This process losses. price then isolates theclosing effects process The each day’s of positions. by validated are Models these closing positions. against movements the exceed losses calculated the hypothetical often how assessing the this confirm testing Results of a defined period. over MVE measure our models. of reliability volatility. current of reflective are MVE measures that so monthly, updated of MVE for AFS positions to better align the risk methodology to that that to methodology risk the align better to AFS positions MVE for of Book. in This change, the Trading within positions the MTM used for increase in an resulted in the quarter, exposures increased to addition a further methodology In 2011, securities. AFS for risk rate in interest the MVE within factors change include risk is planned to additional in the a further increase to lead this will that It is expected calculation. calculated MVE. In general, the approach to the measurement risk of and to continue will businesses in the trading AFS positions of governance treatment their distinct accounting of in recognition evolve in the financial statements. recorded are value changes in market

Material in blue-tinted font above is an integral part of the 2010 annual consolidated financial statements (see page 75). financial statements consolidated annual the 2010 of part integral is an above font in blue-tinted Material ll as the market risk for money money for risk ll as the market ished limits are escalated to senior senior to escalated ished limits are ist of quoted market prices, Level 2 Level prices, market quoted of ist longer holding periods and/or higher ther the valuations of all trading and underwriting portfolios portfolios underwriting and trading all of ther the valuations s whe Trader valuations are reviewed to determine whether they align align they whether determine to reviewed are valuations Trader Within the Market Risk group, the Valuation Product Control group group Control Product the Valuation group, Risk the Market Within We measure the market risk for trading and underwriting portfolios portfolios underwriting and trading for risk the market measure We At a minimum, the following are considered when determining determining when considered are a minimum, the following At Capital Economic risk market determine used to are Our models The Valuation Steering Committee is the senior management level level management senior is the Committee Steering The Valuation (MTM) portfolios; and portfolios; (MTM) portfolios. mark-to-market of valuation used for are and procedures in accordance with regulatory requirements and GAAP; and requirements regulatory with in accordance procedures and establishing official rate sources for valuation of mark-to-market mark-to-market of valuation for sources rate official establishing trader prices trading books where of review an independent providing policies adjustment/reserve maintaining valuation and developing heck the results are reported to the appropriate stakeholders. The bank has a stakeholders. the to appropriate the reported results are valuation committee within the bank. It meets at least quarterly to address address to quarterly the bank. least within at It meets committee valuation acts and as portfolios in the bank’s issues challengingthe more valuation uncertainty. inherent their and 3 positions Level discussing for forum a key The Valuation Control processes include all over-the-counter (OTC) (OTC) include over-the-counter all processes Control The Valuation confidence levels are used than are employed in day-to-day risk risk in day-to-day employed are used than are levels confidence under the review subject to are models use, to management. Prior group. Vetting and Risk our Model by Standard Corporate Risk Model outlines minimum requirements Standard Corporate Risk The Model of management and assessment, monitoring the identification, for the enterprise. throughout risk model and models a valuation adjustment is recorded in accordance with accounting accounting with in accordance is recorded adjustment a valuation the final month-end general to Prior requirements. regulatory and policy business, the line of from staff between held are meetings ledger close, groups Policy Risk, Accounting and Finance Market Capital Markets established are adjustments and that reserves valuation all review to group. Risk the Market by with an independent assessment of the market value of the portfolio. the portfolio. of value market the of assessment independent an with threshold, tolerance the prescribed exceed differences If the valuation Trading portfolios. These include both trading and available-for-sale available-for-sale These include and trading both portfolios. Trading an performs also group Control Products Valuation (AFS) securities. Capital Markets outside of certain portfolios of valuation independent Products. Trading c Capital Markets within booked are instruments that exchange-traded and • • management action. on a timely and appropriate basis resolution for • robust governance process in place for the adherence to delegated market market delegated to the adherence for in place process governance robust establ Amounts limits. exceeding risk market conditions. On a daily basis, exposures are aggregated by lines by aggregated are exposures daily On a basis, conditions. market and levels, limit delegated against monitored type and risk and business of that could occur in any one day, because both measures are computed computed are measures because both day, one in any occur could that volatile highly in exceeded be could and levels confidence prescribed at that meet our criteria for trading book regulatory capital treatment using an internal as we models approach, accounting Available-for-Sale subject to are that portfolios market appropriate valuation adjustment levels: Credit Valuation Adjustments and liquidity costs, administrative uncertainty, close-out costs, (CVA), the inputs categorize is used to hierarchy value a fair risk.model Also, deriv- and assets derivative liabilities, securities, of used in the valuation 1 inputs cons Level liabilities. ative regulatory capital. determine to and business the lines of each of for capital calculationFor purposes, inputs consist of internal models that use observable market information information market use observable that models internal of inputs consist market observable without models internal of 3 inputs consist Level and measure- value 3 fair Level 2 and Level 1, Level of Details information. the financial statements. of 160 page on 29 in Note ments can be found within BMO are materially accurate by: accurate materially are BMO within MANAGEMENT’S DISCUSSION AND ANALYSIS

Trading and Underwriting Net Revenues versus Market Value Exposure November 2, 2009 to October 29, 2010 ($ millions)

(2) 50 (5) (4)

(1) 25 Nov 2 Apr 27 Jan 23 0 Jul 22 Oct 19

(25) (3) MD&A (50)

Revenue Total MVE excluding interest rate risk (AFS) Total MVE

(1) December 31 – Primarily reflects normal trading activity and month-end valuation (4) June 30 – Primarily reflects monthly adjustment to record the taxable equivalent basis of adjustments. Daily Net Revenue $29.6MM. certain transactions. Daily Net Revenue $41.9MM. (2) March 31 – Reflects normal trading activity as well as the recognition of valuation (5) September 30 – Reflects normal trading activity, fee income and the recognition of valuation adjustments including credit. Daily Net Revenue $68.8MM. adjustments. Daily Net Revenue $45.6MM. (3) May 10 – Reflects normal trading activity and the recognition of credit valuation adjustments. Daily Net Revenue ($30.1MM).

MVE Risk Factors November 2, 2009 to October 29, 2010 ($ millions)

0

(5)

(10)

(15)

(20)

(25)

Interest Rate Risk (mark-to-market) Issuer Risk Equity Risk Foreign Exchange Risk Commodity Risk Interest Rate Risk (AFS)

Structural Market Risk Frequency Distribution of Daily Net Revenues Structural market risk is comprised of interest rate risk arising from our November 2, 2009 to October 29, 2010 ($ millions) banking activities (loans and deposits) and foreign exchange risk arising

25 from our foreign currency operations. Structural market risk is managed by BMO’s Corporate Treasury group in support of high-quality earnings 20 and maximization of sustainable product spreads.

15 Structural interest rate risk arises primarily from interest rate mismatches and embedded options. Interest rate mismatches result 10 from differences in the scheduled maturity, repricing dates or reference

5 rates of assets, liabilities and derivatives. Embedded option risk results

Frequency in number of days of in number Frequency from product features that allow customers to alter scheduled maturity or 0 repricing dates. Embedded options include loan prepayment and deposit 0 1 2 3 4 5 6 7 8 9 (9) (4) (8) (5) (1) (6) (2) (3) 11 14 (7) 19 17 16 13 15 18 24 12 10 21 69 26 27 20 30 25 22 23 46 42 (12) (13) (30) Daily net revenues (pre-tax) redemption privileges and committed rates on unadvanced mortgages. The net interest rate mismatch, representing residual assets funded by common shareholders’ equity, is managed to a target duration, which is currently The distribution of our daily net revenue for the portfolios has been affected by periodic valuation adjustments as outlined in the notes to the preceding Trading and Underwriting Net Revenues between two and three years, while embedded options are managed to versus Market Value Exposure graph. low risk levels. The net interest rate mismatch is primarily managed with interest rate swaps and securities. Embedded option risk exposures are Trading revenues include amounts from all trading and underwriting managed by purchasing options or through a dynamic hedging process. activities, whether accounted for as trading securities or AFS Structural foreign exchange risk arises primarily from translation securities, as well as certain fees and commissions directly related risk associated with the net investment in our U.S. operations and from to those activities. transaction risk associated with our U.S.-dollar-denominated net income.

Material in blue-tinted font above is an integral part of the 2010 annual consolidated financial statements (see page 75).

84 BMO Financial Group 193rd Annual Report 2010 MD&A

85 254.2 (75.6) 392.8 (62.9) pre-tax after-tax (353.2) 11.0 (779.2) (10.6) *

sensitivity sensitivity sensitivity 20.9 33.4 (70.3) (12.8) ($ millions) sensitivity

BMO Financial Group 193rd Annual Report 2010 Annual Report 193rd Financial Group BMO value value earnings value earnings ar results in a structural earnings earnings results in a structural ar nomic value sensitivity from the from sensitivity value nomic r stressed operating conditions; and conditions; operating r stressed 322.3 738.2 pre-tax after-tax after-tax pre-tax (380.5) (815.1) 2010 As 31, October at 2009 31, October As at Economic Economic 12-month Economic 12-month sensitivity or consultation an International framework for liquidity liquidity for framework International an consultation or Our liquidity and funding risk management framework includes: framework management funding and risk Our liquidity Structural interest rate sensitivity to an immediate parallel parallel immediate an to sensitivity rate interest Structural ished f Canadian equivalent Canadian equivalent 100 basis point increase increase basis point 100 decrease basis point 100 increase basis point 200 decrease basis point 200 amounts. positive by represented benefits are and in brackets are *Exposures

Sheet Management Committee, Risk Management Committee and and Committee Management Risk Committee, Management Sheet Committee; Review Risk position; liquidity a strong of maintenance manage risk; and monitor to models and processes effective their uses; and models and processes over controls strong scenario tests of fo a framework disruption. managing through facilitate to plans contingency oversight by senior governance committees, including the Balance committees, governance senior by oversight Treasury; Corporate within group oversight independent an a Risk Committee-approved limit Review structure to support the In December 2009, the Basel Committee on Banking on Supervision the Basel (BCBS) Committee In 2009, December publ • • • • two contains The framework monitoring. and standards measurement, Stable Net and (LCR) Ratio Coverage Liquidity measures, liquidity new maturity (contractual tools monitoring four and (NSFR), Ratio Funding collateral for pledging and fund asset fund asset and pledging for purchase collateral lines, liquidity credit and funding and requirements Liquidity investments. strategic and growth political market, economic, stressed and under expected assessed are the minimum which determine enterprise-specific environments, and times. all at be held to assets liquid of amount required • • • increase or decrease of 100 and 200 basis points in the yield curve is in the yield points basis 200 and 100 of or decrease increase and is performed analysis This sensitivity disclosed table below. in the with comparison facilitates and financial institutions many disclosed by The change in eco our peer group. The asset- rates. interest and higher reflects capitalprior year growth the ye the end of at profile liability exposure earnings structural and increases rate interest from benefit decreases. rate interest to Sensitivity Rate Interest Structural interest how project risk market structural measure used to Models customers how change may predict and rates exchange foreign and rates would likely react to the changes. For customer loans and deposits and loans customer For the changes. to react likely would with scheduled maturity and repricing dates (such as mortgages and use to likely are customers how measure our models deposits), term deposits and loans customer For terms. those alter to options embedded withoutscheduled maturity and repricing dates (such credit as card profile a maturity assume our models chequing and accounts), loans These in balances. trends forecasted and historical considers that validated are and analysis using statistical been developed have models ongoing and processes backtesting and regular vetting model through customer predict used to Models business. dialogue the lines of with pricing product used in support and performance also behaviour of are measurement.

(543.2) Material in blue-tinted font above is an integral part of the 2010 annual consolidated financial statements (see page 75). financial statements consolidated annual the 2010 of part integral is an above font in blue-tinted Material 2009 2010 (63.8) (69.0) results and the movement in the the movement results and is the potential for loss if BMO is if BMO loss for is the potential (564.1) * ($ millions) We actively manage liquidity and funding risk across the enterprise the enterprise across funding and risk manage liquidity actively We Structural MVE and EV are summarized in the following table. table. in the following summarized EV MVE and Structural are Structural MVE EV and holding reflect periods both of measures unable to meet financial commitments in a timely manner at financial in a timely manner at commitments meet to unable reasonable prices as they fall due. Financial commitments lending, and suppliers, and depositors include to liabilities commitments. pledging and investment Liquidity and funding risk Measured at a 99% confidence interval. confidence a 99% at *Measured Market Value Exposure (pre-tax) Exposure Value Market (after-tax) Earnings Volatility 12-month As at October 31 October As at equivalent) (Canadian Managing liquidity and funding risk is essential to maintaining both maintaining both to is essential fundingManaging and risk liquidity by holding liquid assets in excess of established minimum requirements minimum established requirements of in excess assets liquid holding by assets high-quality include unencumbered, assets Liquid times. all at and borrowings, for as security can be pledged marketable, are that our liquidity meets that cash in a time frame to can be converted in our trading both held are assets Liquid fundingand requirements. maintained for are that pools liquidity in supplemental and businesses that sufficient liquid assets and funding capacity are available to meet meet to available funding and capacity are assets liquid sufficient that stress. in times of even financial commitments, contingencies. Liquidity and funding requirements consist of expected expected of consist funding and requirements Liquidity contingencies. deposits repay to obligations from These arise cash outflows. stressed and depositor confidence and stability in earnings. It is BMO’s policy to ensure to policy It is BMO’s stability in earnings. and confidence depositor Liquidity and Funding Risk Liquidity and Funding stress analysis, sensitivity use simulations, we EV, MVE and to In addition risk. rate manage interest and measure to analysis gap and testing the of 143 page on 19 is disclosed in Note position gap The interest-rate financial statements. Structural MVE increased from the primarily prior year due to in growth be managed to EV Structural continues equity. shareholders’ common levels. low to and Exposure Value Market Sheet Balance Structural Earnings Volatility between one month and three months and incorporate the impact of of the impact incorporate and months three and month one between variables. market between correlation exchange rate. If future results are consistent with the range of results of the range with consistent results are If future rate. exchange in the Canadian/U.S. decrease cent one each years, three the past for Canadian many dollars how of in terms expressed rate, exchange dollar change to the Canadian dollar be expected would buys, dollar U.S. one income (loss) before income net U.S.-dollar-denominated of equivalents cent one of An increase million. $10 and million –$6 between by taxes effect. the opposite have would U.S. dollar net income for the quarter. The Canadian dollar equivalents equivalents The Canadian dollar the quarter. for income net dollar U.S. or favourably affected, results are U.S.-dollar-denominated BMO’s of rate. exchange dollar in the Canadian/U.S. movements by unfavourably, depends on equivalents the Canadian dollar on impact the of The size U.S.-dollar-denominated of the level dollar exchange rate fluctuations in the quarter on the expected the expected on the quarter in fluctuations rate exchange dollar Translation risk is managed by funding our net U.S. investment in U.S. in U.S. investment U.S. funding our net managed is by risk Translation each the start of at assessing managed is by risk Transaction dollars. hedges contract forward exchange foreign into enter to whether quarter Canadian/U.S. of effects pre-tax the offset partially to expected are that that are withdrawn or not renewed, fund drawdowns on available available on fund drawdowns renewed, or not withdrawn are that MANAGEMENT’S DISCUSSION AND ANALYSIS

mismatch, concentration of funding, available unencumbered assets and Cash and securities totalled $144.0 billion at the end of the year, market-related monitoring tools). The LCR is the ratio of the stock of high compared with $124.1 billion in 2009. Liquidity provided by cash and quality liquid assets to stressed net cash outflows over a 30-day time securities is supplemented by securities borrowed or purchased under period. The NSFR is the ratio of the available amount of stable funding resale agreements, which also can be readily converted into cash or (one-year or greater) to the required amount of stable funding. cash substitutes to meet financial commitments. Securities borrowed or The BCBS has stated that unlike the capital framework, for which purchased under resale agreements totalled $28.1 billion at the end of extensive experience and data help inform the calibration, there is the year, down from $36.0 billion in 2009. no similar track record for liquidity standards. For this reason the BCBS In the ordinary course of business, a portion of cash, securities and is proceeding carefully to refine the design and calibration in order securities borrowed or purchased under resale agreements is pledged to deliver a rigorous overall liquidity standard while avoiding unintended as collateral to support trading activities and participation in clearing consequences to business models and funding structures. Additional and payment systems, in Canada and abroad. At October 31, 2010, guidance from the BCBS is expected before December 31, 2010. Based on $49.9 billion of cash and securities and $19.6 billion of securities bor- the framework’s current design and calibration, the standards would rowed or purchased under resale agreements had been pledged, result in higher costs for the banking industry, including BMO. An obser- compared with $39.3 billion and $25.6 billion, respectively, in 2009. vation period for the LCR is scheduled to commence on January 1, 2011 These changes were driven by trading activities. Additional information and adoption of a minimum standard is scheduled to commence on on cash and securities can be found in Table 5 on page 97 and in MD&A January 1, 2015. An observation period for the NSFR is scheduled to Notes 2 and 3 beginning on page 116 of the financial statements. commence on January 1, 2012 and adoption of a minimum standard Core deposits are comprised of customer operating and savings is scheduled to commence on January 1, 2018. account deposits and smaller fixed-date deposits (less than or equal Fiscal 2010 began in an environment of improving global financial to $100,000). Canadian dollar core deposits totalled $98.6 billion at the markets. Term wholesale funding volumes were increasing and credit end of the year, up from $95.4 billion in 2009, and U.S. dollar and other spreads were decreasing. Governments and central banks were reducing currency core deposits totalled US$33.5 billion at the end of the year, the financial system support mechanisms they had introduced during up from US$27.7 billion in 2009. The increase in our U.S. dollar and other the financial crisis. By mid-year, sovereign debt concerns developed in a currency core deposits reflects investor preference for bank deposits, number of European countries; however, these concerns were largely as well as growth through U.S. acquisitions. Larger fixed-date customer restricted to the European financial system. BMO’s liquidity and funding deposits totalled $20.1 billion at the end of the year, compared with management framework was effective in ensuring we maintained a $22.5 billion in 2009. Total deposits increased $13.1 billion during 2010 strong liquidity position throughout the year, and continues to help to $249.3 billion at the end of the year. The increase in total deposits ensure that we maintain a strong position. primarily reflects an increase in core deposits used to fund loan growth Data provided in this section reflect BMO’s consolidated position. and an increase in non-core deposits to fund securities growth. BMO subsidiaries include regulated and foreign entities, and therefore Our large base of customer deposits, along with our strong capital movements of funds between companies in the corporate group base, reduces our requirements for wholesale funding. Customer are subject to the liquidity, funding and capital adequacy considerations deposits and capital equalled 104.1% of loans at the end of the year, of the subsidiaries, as well as tax considerations. In recognition of these down from 106.6% in the prior year. matters, BMO’s liquidity and funding positions are managed on both a Our funding philosophy requires that wholesale funding used to consolidated and key legal entity basis. support loans is longer term (typically maturing in two to ten years) to Three of the measures we use to evaluate liquidity and funding better match the terms to maturity of our loans. Wholesale funding that risk are the liquidity ratio, the level of core deposits, and the customer supports liquid trading and underwriting assets and liquid available- deposits and capital to loans ratio. for-sale securities is generally shorter term (maturing in less than two The liquidity ratio represents the sum of cash resources and secur- years). Diversification of our wholesale funding sources is an important ities as a percentage of total assets. BMO’s liquidity ratio was 35.0% at part of our overall liquidity management strategy. In accordance with October 31, 2010, up from 31.9% in 2009. The liquidity ratio averaged 29.8% internal guidelines, our wholesale funding is diversified by customer, for the years 2006 to 2008. The ratio reflects a strong liquidity position. type, market, maturity term, currency and geographic region. BMO has the ability to raise long-term funding through various platforms, including a European Note Issuance Program, Canadian and U.S. Liquidity Ratio (%) Core Deposits ($ billions) Medium-Term Note Programs, a Global Covered Bond Program, Canadian and U.S. mortgage securitizations, Canadian credit card securitizations, 33.5 and Canadian and U.S. senior (unsecured) deposits. Information on 32.8 27.7 35.0 33.1 deposit maturities can be found in Table 20 on page 106. 31.9 25.1 98.6 29.1 22.4 95.4 The credit ratings assigned to BMO’s senior debt securities by 27.2 85.8 73.3 75.9 external rating agencies are important in the raising of both capital and funding to support our business operations. Maintaining strong credit ratings allows us to access the capital markets at competitive pricing levels. BMO’s ratings are indicative of high-grade, high-quality issues. They are: DBRS (AA); Fitch Ratings (AA–); Moody’s Investors Service 2006 2007 2008 2009 2010 2006 2007 2008 2009 2010 (Aa2); and Standard & Poor’s Ratings Services (A+). DBRS, Fitch, Moody’s and S&P have a stable outlook for BMO. Should our credit ratings US$ and other currency in US$ Canadian $ materially decrease, our cost of funds would likely increase significantly and our access to funding and capital through capital markets could be reduced. A material downgrade of our ratings could have additional The ratio reflects a strong Core deposits provide a consequences, including those set out in Note 10 on page 130 of the liquidity position. strong funding base. financial statements.

Material in blue-tinted font above is an integral part of the 2010 annual consolidated financial statements (see page 75).

86 BMO Financial Group 193rd Annual Report 2010 MD&A 87 ($ millions)

BMO Financial Group 193rd Annual Report 2010 Annual Report 193rd Financial Group BMO els. The implementation the Baselels. of II We purchase insurance in amounts purchase insurance We ment Committee, is the main decision-making Committee, ment ment Approach is a priority for the enterprise and 3,483 2,884 2,067 14,198 525 2,130 3,109 c, market and credit events on our operations and capital. and our operations on credit events and c, market ure as well as a comprehensive set of policies, standards and and standards policies, of set as a comprehensive as well ure 4 and serves as an important means of measuring our operational our operational measuring of means important serves as an and 4 nomi As at October 31, 2010 31, October As at than Less 1 year 1 to 2 years 3 years 2 to 4 years 3 to 5 years 5 years 4 to Total Over 0 ruct risk exposure and identifying risk mitigation opportunities. Loss data Loss opportunities. mitigation risk identifying and exposure risk trends data material and external against benchmarked and is analyzed a on Directors of our Board and management senior to reported are Data Exchange, Risk the Operational is a member of BMO regular basis. data information loss share banks that of association international an modelling. and assessment identification, in risk assist to anonymously Quantification Capital will enable the quantification of operational risk capital using internal using internal capital risk operational of the quantification enable will methodologies. loss-based and models Testing Analysis and Stress Scenario operational, plausible of impact the potential measures testing Stress eco Corporate Insurance Program Insurance Corporate of secondary mitigation provides program insurance corporate BMO’s exposures. risk certain operational when and loss material unexpected against protection provide that agreement. or contractual regulation law, by is required insurance Scenario analysis management provides understanding with a better of enterprise a gauge of provides and events high-severity low-frequency, risk our exceed that risks create could that events for preparedness Scenario analysisappetite. is an input in the calculation operational of Approach. Measurement under the Advanced capital risk Reporting senior to profile risk operational our enterprise of Regular reporting Operational our of element important is an the board and management supports risk reporting risk Operational Framework. Management Risk operational material of management the proactive and transparency exposures. risk Governance committee a robust by is governed management risk Operational st a sub-committee (ORC), Committee Risk Operational guidelines. operating Manage the Risk of has and matters management risk operational all for committee and management strategy, risk operational for responsibility oversight business lines of the guidance and to advice provides ORC governance. and mitigation, and measurement assessments, risk operational on the develop- oversees ORC change and initiatives. monitoring related to effect give guidelines that operating and standards policies, of ment documents These governance the ORMF. of principles the governing a regular on reviewed are and industry practices best incorporate appetite. our risk with consistent and current are they ensure basis to Unsecured Long-term Wholesale Funding Wholesale Maturities Long-term Unsecured Basel II determine to (TSA) Approach uses The Standardized BMO and processes risk. TSA operational for regulatory capital requirements enter- the consolidated both at been implemented have measures capital prise and applicable legal lev entity Measure Advanced Event Data Collection and Analysis and Collection Data Event since the enterprise throughout data been collected has loss Internal 20 ($ millions) 2009 2008 20072006 2010 4,162 4,396 5,883 4,162 4,396 – – 21,756 35,274 21,628 16,840 14,198 21,756 35,274 12,992 26,906 28,047 25,077 9,792 ment. Operating Group CROs and Operational Operational and CROs Group ment. Operating is the potential for loss resulting from from resulting loss for is the potential isks associated with their business strategies and the controls the controls and strategies their business with isks associated or and report key operational risk exposures. A primary objective A primary objective exposures. risk operational key report and or The three-lines-of-defence operating model establishes appropriate model establishes operating appropriate The three-lines-of-defence t inadequate or failed internal processes or systems, human or systems, processes internal or failed inadequate Operational risk Operational risk. business but excludes events, or external interactions As at October 31 31 October As at Mortgage and credit card and Mortgage issuances securitization Unsecured long-term Unsecured funding wholesale long-term Secured funding wholesale Operating groups and Corporate Support areas are required to identify KRIs identify to required are areas Support Corporate and groups Operating risk operational monitor used to KRIs are risks. their material to related KRIs action. management trigger that thresholds to linked are and profiles changes exposure. in risk adverse of indicator warning early an provide required for risk mitigation. The RCSA process provides a forward-looking a forward-looking provides process The RCSA mitigation. risk for required controls internal and environment the business of the impact of view results RCSA basis, aggregate On an profiles. risk group operating on appetite. risk to relative risks operational of view a consolidated provide (KRIs) Risk Indicators Key of the ORMF is to ensure that our operational risk profile is consistent is consistent profile risk our operational that ensure is to the ORMF of The key capital. adequate with supported and appetite our risk with the support to developed processes and methodologies programs, are Enhancements the ORMF to below. highlighted are framework industry regulatory and emerging to ongoing, giving due consideration guidance in the Basel as detailed II Capital Accord. (RCSA) Self-Assessment Risk and Control identify to groups our operating used by process established is an RCSA r the key Risk Officers independently assess group operational risk profiles, profiles, risk operational group assess independently Officers Risk and in controls weaknesses potential and exposures material identifying recommending appropriate mitigation strategies and actions. Corporate Continuity, Business such as Finance, areas including key areas, Support the develop Technology, and Human Resources Compliance, and Legal manage specialized operational independently to processes and tools Management Risk Operational Enterprise the organization. across risks Strategy and Framework Management Risk the Operational establishes framework. as the necessary governance as well (ORMF) Risk Management Framework Operational manage, measure, identify, use to we processes the defines The ORMF moni accountability for operational risk management. The operating groups groups management. The operating risk operational for accountability risk operational of management the day-to-day for responsible are Independent principles. enterprise-wide with in a manner consistent CROs, Group Operating by is provided oversight management risk Enterprise and areas Support Corporate Officers, Risk Operational Group Manage Risk Operational potential loss arising from a variety operational of risks, including process disruption, business non-compliance, regulatory fraud, and theft failure, outsourcing, to as related exposure and breaches security information our in all is inherent risk Operational assets. as damage physical to well manage used to controls and including the processes activities, business risk While operational face. we risks other all credit risk, and risk market exposure reduce can be managed to it be fully eliminated, can never sanction. or regulatory harm reputational financial loss, to As a large and diversified financial services company, BMO is exposed to to is exposed BMO financial services company, diversified and As a large Operational Risk Operational Long-term Wholesale Funding Sources Funding Wholesale Sources Long-term MANAGEMENT’S DISCUSSION AND ANALYSIS

Insurance Risk

Liabilities are established in accordance with the standards of practice Insurance risk is the risk of loss due to actual experience being of the Canadian Institute of Actuaries and the CICA. The liabilities are different than that assumed when an insurance product was validated through extensive internal and external reviews and audits. designed and priced. Insurance risk exists in all our insurance Assumptions underlying actuarial liabilities are regularly updated to businesses, including annuities and life, accident and sickness, reflect emerging actual experience. The Appointed Actuary of our and creditor insurance, as well as our reinsurance business. Canadian insurance subsidiaries is appointed by the boards of directors and has statutory responsibility for providing opinions on the adequacy of provisions for the policyholder liabilities, the solvency of the insurance Insurance risk consists of: company and fairness of treatment of participating policyholders. In • Claims risk – The risk that the actual magnitude or frequency of addition, the work of the Appointed Actuary is subject to an external, claims will differ from the levels assumed in the pricing or underwriting independent review by a qualified actuary every three years in accor- process. Claims risk includes mortality risk, morbidity risk and natural dance with OSFI Guideline E-15. catastrophe risk. The Board of Directors establishes approval authorities and • Policyholder behaviour risk – The risk that the behaviour of policy- limits and delegates these to the management teams of the insurance MD&A holders relating to premium payments, withdrawals or loans, policy subsidiaries. The boards of directors of our insurance subsidiaries are lapses and surrenders and other voluntary terminations will differ responsible for the stewardship of their respective insurance companies. from the behaviour assumed in the pricing calculations. Through oversight and monitoring, the boards are responsible for • Expense risk – The risk that actual expenses associated with acquiring determining that the insurance subsidiaries are managed and function and administering policies and claims processing will exceed the in accordance with established insurance strategies and policies. expected expenses assumed in pricing calculations. ER&PM is responsible for providing risk management direction and Insurance risk approval authority is delegated by BMO’s Board of Directors independent oversight to the insurance businesses. This group also has to senior management. A robust product approval process is a corner- the approval authority for activities that exceed delegated authorities stone for identifying, assessing and mitigating risks associated with and limits of the boards of the insurance companies, or that expose new insurance products or changes to existing products. This process, BMO to significant risk. combined with guidelines and practices for underwriting and claims Our insurance subsidiaries provide independent evaluation and management, promotes the effective identification, measurement and reporting on insurance risk exposures to their boards of directors and at management of insurance risk. Reinsurance, which involves transactions the enterprise level, including reporting to both Private Client Group that transfer insurance risk to independent reinsurance companies, management and the Risk Review Committee of the Board of Directors. is also used to manage our exposure to insurance risk by diversifying Reporting includes an assessment of all risks facing the insurance risk and limiting claims. subsidiaries, including top-line and emerging risks. Insurance risk is monitored on a regular basis. Actuarial liabilities are estimates of the amounts required to meet insurance obligations.

Business Risk BMO faces many risks that are similar to those faced by non- Business risk arises from the specific business activities of financial firms, principally that our profitability, and hence value, may a company and the effects these could have on its earnings. be eroded by changes in the business environment or by failures of strategy or execution. Sources of these risks include, but are not limited to, changing client expectations, adverse business developments and Business risk encompasses the potential causes of earnings volatility relatively ineffective responses to industry changes. that are distinct from credit, market or operational risk factors. Within BMO, each operating group is responsible for controlling It identifies factors related to the risk that volumes will decrease its respective business risk by assessing, managing and mitigating or margins will shrink without the ability to compensate for this the risks arising from changes in business volume and cost structure, decline by cost cutting. among other factors.

Model Risk decisions and to assist in making daily lending, trading, underwriting, Model risk is the potential loss due to the risk of a model not funding, investment and operational decisions. Models have also been performing or capturing risk as designed. It also arises from developed to measure exposure to specific risks and to measure total risk the possibility of the use of an inappropriate model or the on an integrated basis, using Economic Capital. We have strong controls inappropriate use of a model. over the development, implementation and application of these models. BMO uses a variety of models, which can be grouped within six categories: BMO uses models that range from the very simple to those that value • valuation models for the valuation of assets, liabilities or reserves; complex transactions or involve sophisticated portfolio and capital • risk exposure models measuring credit risk, market risk, liquidity risk and management methodologies. These models are used to guide strategic operational risk, which also address expected loss and its applications;

88 BMO Financial Group 193rd Annual Report 2010 MD&A 89 BMO Financial Group 193rd Annual Report 2010 Annual Report 193rd Financial Group BMO nd the Board of Directors annually annually Directors of nd the Board Dodd-Frank Wall Street Reform and Consumer and Consumer Reform Street Wall Dodd-Frank opment of strategies and incorporates accurate and comprehensive comprehensive and accurate incorporates and strategies of opment During the current year, BMO’s enterprise-wide Model Risk Risk Model enterprise-wide BMO’s year, the current During Regulation of the financial sector has received heightened attention attention heightened has received the financial sector of Regulation in work of deal a great undertaken have we year the past During Basel of III the on our adoption approach to Further information The OSM works with the lines of business and key corporate stake- corporate key and business the lines of with works The OSM the strategic through established commitments Performance management process are regularly monitored and are reported upon upon reported are and regularly are monitored process management performance, of lagging indicators and leading using both quarterly, when necessary. adjusted and can be reviewed strategies that so closely monitored also are financial updates and strategic Regular issues. significant any identify to stakeholders (model users, model owners and the Model Risk and Vetting Vetting and Risk the Model and owners model users, (model stakeholders and implementation the development, input into their provide Group) all covering processes and framework risk the model of maintenance the enterprise. in use across are that models regularly scheduled model validation and vetting, model risk monitoring monitoring risk model regularly vetting, and scheduledvalidation model managed, are models that so place in are activities oversight and of the likelihood increasing thereby as expected, perform used and issues. emerging of detection early on emphasis additional with enhanced was Framework Management including of establishment the governance, end-to-end stakeholder in which all group a cross-functional Forum, Management Risk a Model during the past year, as new rules were proposed and enacted to reform reform to enacted and proposed rules were as new during year, the past included developments Significant requirements. capital and regulatory the of the enactment of adoption Act) and States in the United Act (Dodd-Frank Protection The Dodd- Banks for (Basel III). Regulatory Framework the International new many of development requires and in scope is broad Act Frank rules and regulations. It will be phased a in period years. over several of on have will developments these the impact assess to continue We our operations. the Basel surrounding uncertainties are While there Basel to III. regards the given years, upcoming in the be addressed which will proposals, are we that believe we positions, liquidity and our capital of strength regulatory changes. the known adopt to positioned well the and page 59, on section in the Capital Management can be found page 85. on Funding section and Liquidity devel financialcommitments. to linked financial information consistency promote to process development during the strategy holders Included in this standards. management strategic to adherence and within the changing environment business of is a review process including industry broad operates, business our lines of which each of reviewed are Strategies our competitors. of the actions and trends a Committee the Management with strategies and challenge to designed assumptions sessions in interactive environments. future potential and current of in light cannot be controlled, be controlled, – cannot Regulatory Capital and Economic Capital; Capital Regulatory Economic and including economic, political, regulatory, – including regulatory, political, economic, is the risk of not complying with regulatory regulatory with complying not of is the risk is the potential for loss due to fluctuations in fluctuations due to loss for is the potential BMO’s Office of Strategic Management (OSM) oversees the the oversees (OSM) Management Strategic of Office BMO’s Regulatory risk Regulatory regulatory changes expectations. or regulators’ requirements, in regulatory result may manage regulatory risk properly to Failing our reputation. harm could and being imposed, sanctions Strategic risk Strategic properly to failure and/or environment business the external ineffective inaction, due these fluctuations to to respond strategies. of implementation or poor strategies management; of new strategies in support of our business decision process; and process; decision our business of in support strategies new of capital and stress testing models for measuring capital, allocating allocating capital, measuring for models testing stress and capital managing and capital requirements. stakeholder other and regulatory by driven models portfolio and optimization asset allocation, fiduciary asset for models outcomes the possible forecast to models strategy major business

Prior to use, models are subject to review under the Model Risk Risk under the Model review subject to are models use, to Prior Risk The Model group. Vetting and Risk our Model by Standard Corporate The operating groups are responsible for the day to day management management day to the day for responsible are groups The operating enterprise-wide with in a manner consistent risk their regulatory of provides (LCCG) Group Compliance and Corporate Legal, policies. Deputy General through oversight management risk independent group operating designated with Officers Compliance Chief and Counsel assess independently officers compliance These legal and responsibility. and weaknesses control material in identifying assist profiles, risk the establishes LCCG actions. and strategies mitigation recommend framework, as well management risk enterprise compliance legal and framework. as the necessary governance Regulatory Risk Regulatory governance and management processes for identifying, monitoring identifying, monitoring for processes management and governance strategic rigorous A the enterprise. across risks strategic mitigating and management process incorporates a consistent approach to the Strategic risk arises from: external risks inherent in the business in the business inherent risks from: external arises risk Strategic loss potential of the risk and operates which within BMO environment While effectively. risks external those with deal to is unable if BMO risks strategic external risks social competitive and technological, through can be mitigated their impact magnitude and of the likelihood process. management risk strategic effective an Strategic Risk Strategic Corporate Standard outlines minimum requirements for the identification, the identification, for minimum outlines requirements Standard Corporate risk model and models of management and assessment, monitoring their risk to according rated are models All the enterprise. throughout to In addition review. ongoing of the frequency which determine levels, • • • • MANAGEMENT’S DISCUSSION AND ANALYSIS

Reputation Risk

We believe that active, ongoing and effective management Reputation risk is the risk of a negative impact to BMO that of reputation risk is best achieved by considering reputation risk issues results from the deterioration of BMO’s reputation among stake- in strategy development, strategic and operational implementation holders. These potential impacts include revenue loss, reduced and transactional or initiative decision-making. Reputation risk is also client loyalty, litigation, regulatory sanction or additional managed through our corporate governance practices, code of conduct oversight, and declines in BMO’s share price. and risk management framework. All employees are responsible for conducting themselves in accordance with FirstPrinciples, BMO’s code of conduct, thus building BMO’s reputation is one of its most valuable assets. By protecting and and maintaining BMO’s reputation. The Reputation Risk Management maintaining this reputation, we can increase shareholder value, reduce Committee considers significant potential reputation risks to the the costs of capital and improve employee engagement. enterprise, including the review of complex credit and structured- Fostering a business culture in which integrity and ethical finance transactions as required. conduct are core values is key to effectively protecting and maintaining BMO’s reputation. MD&A

Environmental Risk

context of these issues, and we use this understanding to determine Environmental risk is the risk of loss or damage to BMO’s the consequences for our businesses. reputation resulting from environmental concerns related to In addition, specific line of business guidelines outline BMO or its customers. Environmental risk is often associated how environmental risks inherent in lending activities are managed. with credit and operational risk. Environmental risks associated with lending transactions are managed within BMO’s credit and counterparty risk framework. Specific guidelines related to climate change are applied to transactions with Environmental risk is addressed in our board-approved sustainability clients operating in emissions-intensive industry sectors, and we adhere corporate policy. Environmental risk management activities are overseen to the standards set out in the Equator Principles, a framework for by both the Corporate Sustainability and Environmental Sustainability evaluating social and environmental risk in project finance transactions groups, with support from our lines of business and other Corporate based on the World Bank’s International Finance Corporation Support areas. Executive oversight of our environmental activities is Performance Standards. provided by BMO’s Sustainability Council, comprised of executives In 2010, we achieved carbon neutrality relative to energy con- representing the various areas of the organization. Senior management sumption and transportation emissions across the company worldwide. committees are provided with reports on the progress of activities This was done by engaging in consumption reduction measures, mandated by our environmental strategy, as appropriate. Our environ- purchasing renewable energy for our operations in Canada and the mental policies and practices are outlined in detail in our annual United States and purchasing high-quality carbon offsets to neutralize Corporate Responsibility Report and Public Accountability Statement the remaining emissions. BMO committed $10 million over five years to and on our Corporate Responsibility website. the Greening Canada Fund, the first voluntary carbon emissions reduction Environmental risk covers a broad spectrum of issues, such as fund open only to Canadian corporations. The fund provides direct access climate change, biodiversity and ecosystem health, unsustainable to greenhouse gas emission offset credits and helps BMO invest in resource use, pollution, waste and water. We work with external Canadian-based emission reduction projects. stakeholders to understand the impact our operations have in the

Caution This Enterprise-Wide Risk Management section contains forward-looking statements. Please see the Caution Regarding Forward-Looking Statements.

90 BMO Financial Group 193rd Annual Report 2010 MD&A 91 3,311

35 35 8.4 9.2 7.1 4.4 7.1 4.5 1.3 4.8 1.3 4.7 (68) 405 (43) (42) (43) 66.7 67.6 66.3 67.1 3.08 3.76 (120) (73) 7,381 6,894 7,381 6,852 7,338 1,787 1,978 1,822 2,013 1,787 1,978 1,603 1,330 3,683 (1,770) (1,535) 11,064 10,205

20092008 32 2.8 2.9 7.6 7.5 (36) 818 761 293 3 2010 61.9 4.75 3.83 4.81 3.14 10.4 62.2 (136) 7,554 2,810 2,842 2,810 1,049 4,620 7,590 (1,888) 12,210 2010 Annual Report 193rd Financial Group BMO

(b) (2) (b) (2) ($) (2) ($) (2) (1) (%) (e) (%) (e)

(a) (2)

f) (2) – f)(%) (d (2) (%) ((b/c) x 100) (2) (2) 100) (%) ((b/c) x ($) (2) (2) (%) (d – e) (%) (d (%) (f) (2) (%) (f) (2) (2) (2) (%) ((a/c) x 100) 100) (%) ((a/c) x (2) (2) (%) (d)

(c) The amortization of non-acquisition-related intangible assets is not added back in back added is not assets intangible non-acquisition-related of The amortization income. cash and net expense cash-based non-interest of the determination Cash productivity ratio ratio Cash productivity growth expense Non-interest Cash-based non-interest growth expense leverage Operating leverage Cash operating income) EPS (uses net Cash income) EPS (uses cash net their closest with together BMO used by outlines non-GAAP measures The table above GAAP counterparts. ($ millions, except as noted) except ($ millions, expense non-interest Total assets intangible Amortization of expense Cash-based non-interest income Net assets, intangible Amortization of taxes income of net income Cash net dividends share Preferred capital for Charge profit economic Net income Net credit losses for Provision non-controlling and taxes Income interest in subsidiaries losses, credit for provision before Income non-controlling and taxes income interest in subsidiaries Revenue growth Revenue ratio Productivity (1) (1) non-GAAP amountsThese are or non-GAAP measures. (2) GAAP and Related Non-GAAP Measures used in the MD&A used Non-GAAP Measures Related GAAP and Cash earnings, cash productivity and cash operating leverage leverage cash and operating cash productivity Cash earnings, At times, we indicate measures excluding the effects of certain of the effects excluding measures indicate we times, At Income before provision for credit losses, income taxes and and taxes income losses, credit for provision before Income Net economic profit represents cash net income available to to available income cash net represents profit economic Net common shareholders, less a charge for capital, and is considered an an is considered and capital, for a charge less shareholders, common value. economic added of measure effective non-controlling interest in subsidiaries is considered a useful measure the effects excludes that performance of a measure provides as it performance which times mask can at taxes, income and credit losses of variability. and their size because of measures may enhance comparisons between periods when there has particularly because may the purchase decision acquisition, been an to assets intangible acquisition-related of the amortization consider not disclosed also because are Cash EPS measures expense. be a relevant Thomson cash EPS is used by and this measure, on focus analysts often frequently are that estimates earnings third-party track Call to First amortization the after-tax add Cash in the media. measures reported cash derive to GAAP earnings to assets intangible acquisition-related of of deduct and the amortization cash EPS), associated (and income net derive to expense non-interest from assets intangible acquisition-related measures. leverage cash and operating cash productivity items but we generally do so in conjunction with disclosure of the of disclosure with in conjunction do so generally but we items Amounts item. and reconciling the of details and GAAP measure nearest be could useful as they considered such on basis are a stated measures readers’ results or assist operating ongoing of be reflective to expected provided also have we readers, assist To performance. understanding of results in affected have that items notable a schedule summarizes that the reporting periods. BMO uses both GAAP and certain non-GAAP measures to assess perfor- assess to certain GAAP and non-GAAP uses both measures BMO readers caution companies that require regulators Securities mance. GAAP than basis other a to adjusted measures other and earnings that be to unlikely are and under GAAP meanings standardized have do not adjacent The companies. other used by similar measures to comparable which regu- management these non-GAAP measures, table reconciles their GAAP counterparts. to larly monitors, Non-GAAP Measures MANAGEMENT’S DISCUSSION AND ANALYSIS

2009 Financial Performance Review The preceding discussions in the MD&A focused on our performance in Results largely reflected higher volumes in most products and improve- 2010. This section summarizes our performance in fiscal 2009 relative ments in net interest margin. There was very strong revenue growth to fiscal 2008. As noted on page 26, certain prior year data has been across personal banking, commercial banking and cards and payment restated to conform to the presentation in 2010, including restatements services. Non-interest expense increased $104 million or 3.8% to arising from transfers between operating groups. Further detail is pro- $2,837 million due to increases in employee benefits costs, performance- vided on page 43. based compensation and occupancy and payment services costs, Net income decreased $191 million or 10% to $1,787 million in partially offset by lower business initiative spending and cost savings fiscal 2009 and earnings per share fell $0.68 or 18% to $3.08. Results resulting from reduced employment levels. for the year were affected by charges related to notable items totalling Net income in P&C U.S. increased $44 million to $286 million in $474 million after tax ($0.88 per share). Results in 2008 were affected 2009. On a U.S. dollar basis, net income increased $7 million or 3.0%. by charges related to notable items totalling $426 million after tax Revenue increased $226 million to $1,568 million, but increased $41 mil- ($0.84 per share). Amounts are detailed in the Notable Items section on lion or 3.2% on a U.S. dollar basis. The increase was largely driven by page 36. We also recorded elevated provisions for credit losses in 2009 our Wisconsin acquisitions, strong deposit volume growth and gains and higher income taxes. Return on equity was 9.9%, down from 13.0% on the sale of mortgages. This was partially offset by the impact of MD&A in 2008, primarily due to increases in the number of common and increases in impaired loans and the benefit in 2008 of the sale of preferred shares, as well as lower net income. a portion of our investment in Visa. Non-interest expense increased Revenue rose $859 million or 8.4% in 2009 to $11,064 million. $127 million or 14% to $1,042 million, but increased only $12 million Revenue in 2009 was reduced by charges of $521 million associated with or 1.4% on a U.S. dollar basis. notable items related to the impact of the weak capital markets environ- Net income in Private Client Group was $359 million, down ment. In 2008, revenue was reduced by $388 million of such charges. $67 million from 2008, reflecting weak equity markets and a low The higher charges in 2009 dampened revenue growth by $133 million. interest rate environment. Results in 2009 were reduced by $17 million The stronger U.S. dollar increased overall revenue growth by $363 million ($11 million after tax) of charges associated with actions taken to or 3.5 percentage points, while the net impact of acquired businesses support U.S. clients in the difficult capital markets environment, but also increased revenue growth by $172 million or 1.7 percentage points. reflected a $23 million recovery of prior years’ income taxes. Results in The remaining increase was primarily attributable to business growth, 2008 were affected by a $31 million ($19 million after tax) charge for as there was solid revenue growth in P&C Canada, P&C U.S. and similar actions to support clients. Revenue of $2,012 million decreased BMO Capital Markets. $134 million, primarily due to lower revenues in our brokerage and Credit conditions remained difficult in 2009, with indications of mutual fund businesses. Insurance revenues increased as a result of the stabilization appearing in the latter half of the year. BMO recorded a acquisition of BMO Life Assurance. Non-interest expense was unchanged $1,603 million provision for credit losses, consisting of $1,543 million at $1,569 million. of specific provisions and a $60 million increase in the general allowance Net income in BMO Capital Markets increased $305 million to for credit losses. These amounts compare to a $1,330 million provision $873 million. Results in 2009 were affected by charges of $521 million recorded in 2008, comprised of specific provisions of $1,070 million and ($355 million after tax) related to the deterioration in capital markets. a $260 million increase in the general allowance. Results in 2008 were affected by $388 million ($260 million after tax) of Non-interest expense increased $487 million or 7.1% to $7,381 mil- such charges. Additionally, 2008 net income included a $115 million lion. The net effect of businesses acquired in 2009 and 2008 increased recovery of prior periods’ income taxes. Revenue increased $911 million expenses in 2009 relative to 2008 by $124 million (1.8%). The stronger or 42% to $3,089 million. Revenue growth was largely driven by signifi- U.S. dollar increased costs in 2009 by $216 million (3.1%). Other employee cantly higher trading revenues as well as corporate banking revenues. compensation expense, which includes salaries and employee benefits, Revenues from our interest-rate-sensitive businesses also increased due was $368 million or 14% higher than in 2008. Approximately one third to favourable market spreads and equity underwriting fees increased of this increase was due to $118 million of severance costs, one third to as well, driven by corporate clients choosing to strengthen their capital higher benefit costs and the remainder to business acquisitions in P&C positions. Non-interest expense increased $108 million or 6.6% to U.S. and Private Client Group, as well as the stronger U.S. dollar. Benefit $1,744 million, primarily due to increased employee costs, in line with costs were increased by higher pension costs. Employment levels were improved business performance, and higher allocated costs. reduced in 2009 by 900 full-time equivalent employees or 2.4% to Corporate Services net loss for the year was $1,146 million, 36,173 full-time equivalent employees at October 31, 2009 as a result compared with a net loss of $411 million in 2008. The increased loss of expense management efforts. in part reflected lower revenues, higher provisions for credit losses and The provision for income taxes was $217 million in 2009, compared increased expenses. The reduction in revenues was primarily driven by a with a $71 million recovery of income taxes in 2008. The effective tax negative carry on certain asset-liability interest rate positions as a result rate in 2009 was a tax expense rate of 10.5%, compared with a recovery of changes in interest rates, the impact of funding activities undertaken rate of 3.6% in 2008. Results included a recovery of prior years’ income to enhance our strong liquidity position, the mark-to-market impact of taxes of $160 million in 2008. The higher effective tax rate in 2009 was hedging activities and the effect on results in 2009 of credit card securi- mainly attributable to a lower recovery of prior years’ income taxes tizations completed in 2008. Non-interest expense was $148 million and a lower proportion of income from lower-tax-rate jurisdictions. higher, largely related to a $118 million ($80 million after tax) severance Net income in P&C Canada rose $262 million or 23% from 2008 to charge and higher deposit insurance premiums. $1,415 million. Revenue increased $493 million or 10% to $5,287 million.

92 BMO Financial Group 193rd Annual Report 2010 MD&A 93 2010 Annual Report 193rd Financial Group BMO Non-interest revenue increased $72 million or 4.7% from a year a year from 4.7% or million $72 increased revenue Non-interest a year from 14% or million $244 increased expense Non-interest 2010 of quarter in the fourth losses credit for provisions Specific million $38 increased million $196 of taxes income for The provision Corporate Services incurred a net loss of $66 million in the in million $66 of loss a net incurred Services Corporate ago. a year from 12% or million $168 increased income interest Net BMO’s revenue increased $240 million or 8.0% from a year ago a year from 8.0% or million $240 increased revenue BMO’s U.S. dollar, increased by $12.5 billion. The increase was driven by by driven was The increase billion. $12.5 by increased dollar, U.S. contribution in P&C Canada some with growth volume broad-based Group. Client in Private growth volume from Client in P&C Canada Private increases and strong due to mostly ago, the Diners to due largely fees, in card growth strong was There Group. securities in increases solid were There acquisition. Club business advisory and fees, underwriting mutual fund revenues, commissions, other and revenues Securitization gains. securities investment and lower. were revenues Group Client in Private growth modest was There million. $2,023 ago to Approximately groups. operating the other across increases higher with Diners Club and the Rockford to attributable was growth expense of 25% in increases were There costs. including integration acquisitions, business ini- business to related staffing due to in part compensation, employee improved in line with compensation, performance-based to and tiatives groups. the operating in each of increased levels Staffing performance. equipment and in premises increases significant also were There development), software to related costs in computer (notably expense primarily development, business and travel and fees in professional and dollar U.S. The weaker in the business. investments supporting to related Cash points. percentage 1.2 or million $22 by growth expense reduced quarter. in the current –5.7% was leverage operating loans net average basis points of 58 annualized or an million $253 were in the basis points or 89 million $386 with compared acceptances, and or in the quarter provision no general was There 2009. of quarter fourth quarter. in the comparable the quarter for tax rate The effective 2009. of quarter the fourth from 2009. of quarter in the fourth 19.2% with compared 20.6%, was the quarter increased $20 million from a year ago to $834 million, driven driven million, $834 ago to a year from million $20 increased the quarter acquisitions and mergers higher and securities in investment gains by lower slightly was revenue Trading fees. underwriting debt and revenues in the business adjustments trading the equity in accounting due to particularly in the United demand, weak Continued quarter. current Non-interest banking revenues. corporate lower to contributed States, costs. employee higher due to primarily million, $59 increased expense reduced, was income interest Net revenues. low to due primarily quarter, Inc., in Symcor investment our equity on in part, a write-down by financial provides the banks that certain of between a joint-venture in the than better million $102 Results were services. processing in offset credit for losses, provisions due lower largely to prior year, mainly higher million $58 Expenses were expenses. higher by part and fees spending, professional investment in increases due to performance-based compensation. our operating in each of increases solid were There million. $3,229 to our largest in P&C Canada, growth particularly strong with groups, by growth revenue decreased dollar U.S. The weaker group. operating points. percentage 1.2 or million $36 a produced groups the operating of in most margins interest net Higher in the increase drove and level, bank the total at increase basis point 16 contributing also assets earning average higher with income, interest net or 2.2% billion $7.3 increased assets earning Average the growth. to the weaker of the impact exclude to but adjusted ago, a year to relative

ition of the Diners Club business. the Diners Club business. of ition Private Client Group net income was $131 million, up a strong up a strong million, $131 was income net Group Client Private P&C U.S. net income of US$37 million was down US$11 million million US$11 down was million US$37 of income net P&C U.S. BMO’s net income was $739 million, up $92 million or 14% from from 14% or million $92 up million, $739 was income net BMO’s BMO Capital Markets net income of $216 million decreased decreased million $216 of income net Capital Markets BMO Personal and Commercial Banking net income increased $9 million million $9 increased Banking income Commercial and net Personal after adjusting results in both years for acquisition integration costs. costs. integration acquisition for years results in both adjusting after with strong growth across most businesses. PCG, excluding insurance, insurance, excluding PCG, businesses. most across growth strong with $44 million or 17% from the very strong results of a year ago. Revenue Revenue ago. a year results of the very strong from 17% or million $44 and credit losses for provisions higher were but there increased as we costs employee higher due in part to increased, also expenses for Revenue the business. across hiring in strategic invest to continued higher premium revenue was offset by effects of the unfavourable the unfavourable of effects by offset was revenue premium higher liabilities. policy on movements market achieved strong revenue growth, driven by an 11% improvement in client improvement 11% an by driven growth, revenue strong achieved the from Revenue administration. and under management assets from as the benefit year, over unchanged year was business insurance acquisition integration costs. 8.6% or million $48 increased Revenue year. last from 25% or million $25 or 2.1% from results of a year ago on a comparably-adjusted basis. basis. a comparably-adjusted ago on a year results of from or 2.1% Illinois- the Rockford, due to 13% or million US$42 increased Revenue Non-interest spreads. loan improved and transaction based bank including transaction higher the Rockford due to increased expense costs, net income was US$59 million, an increase of US$1 million million US$1 of increase an million, US$59 was income net costs, The benefits of loan spread improvement and deposit balance growth growth balance deposit and improvement spread loan The benefits of loans, impaired of in the impact increase an by offset largely were deposit and balances in loan a decrease losses, credit for provisions higher impaired of the impact adjusts for On a basis that compression. spread integration acquisition and accrual in our Visa a reduction litigation loans, capital tax expense in the prior year. unchanged essentially but was ago, a year million US$48 from or 21% Non-interest expense increased $80 million or 11% due to higher initia- higher due to 11% or million $80 increased expense Non-interest higher salaries staff levels increased and benefits expense, from tives as low as well in results, the Diners Club business the inclusion of and or 2.1% from a year ago to $458 million. P&C Canada net income increased increased P&C Canada income net million. $458 ago to a year from or 2.1% million $138 increased Revenue million. $420 to 5.5% or million $22 the inclusionof products, most across growth volume by driven 10%, or net improved an results in financial and revenues Diners Club business due to million $30 increased credit losses for Provisions margin. interest the add and in the portfolio growth a $50 million pre-tax charge related to our Canadian Credit Protection Protection our Canadian Credit to related charge pre-tax million a $50 fiscal year. in the 2009 item a notable considered which was Vehicle, 2010. of quarter in the fourth items no notable were There comparative quarters are outlined on page 95. Increased revenues revenues Increased 95. page outlined on are quarters comparative the impact by offset partially were losses credit for provisions lower and included 2009 of quarter fourth in the Results expenses. increased of a year ago. Summary income statements and data for the quarter and and the quarter dataand for Summary statements income ago. a year Results in the fourth quarter of 2010 were very good, with solid solid with very good, were 2010 of quarter fourth in the Results of strategy BMO’s of execution the consistent reflecting growth, revenue the benefits of and experience customer industry-leading an providing quarter, strong mix. business P&C Canada another our diversified had net improved and business lines of most across growth volume by driven improvement, spread loan of benefit the saw P&C U.S. margins. interest but results were balances deposit growing and openings account new acqui- and loans impaired of the impact losses, credit higher by affected results with strong produced Group Client Private costs. integration sition ago, a year in the same quarter than higher substantially income net reflected Capital Markets BMO for Results growth. revenue strong with income but net ago, a year of levels the strong from growth, revenue a result as expenses, increased and credit due losses higher to decreased the business. grow to investing of Review of Fourth Quarter Performance Quarter Fourth of Review MANAGEMENT’S DISCUSSION AND ANALYSIS

Quarterly Earning Trends BMO’s results and performance measures for the past eight quarters are revenue and net income. Results in the first quarter of 2009 were outlined on page 95. In the second quarter of 2010, we identified U.S. reduced by charges related to our decision to purchase certain holdings mid-market clients that would be better served by a commercial banking from our U.S. clients. Results in the third quarter of 2009 included a model and transferred their business to P&C U.S. from BMO Capital recovery of prior periods’ income taxes. Private Client Group is focused Markets. Comparative figures have been restated to reflect the effects on providing a great client experience and delivering the best-in-class of the transfer and conform to the current presentation. Certain other financial services that its clients expect. changes also resulted in changes to comparative figures, as detailed BMO Capital Markets results were strong in 2009, reflecting robust on page 43. trading performance, as we capitalized on market opportunities, and We have remained focused on our objectives and priorities and good corporate banking revenues as we benefited from our continued made good progress in embracing a culture that places the customer at focus on client relationships. Strong results were achieved despite the centre of everything we do. We maintained this focus in 2009 in the charges related to notable items that affected revenues in 2009. These face of very difficult capital and credit market conditions, as well as a charges, which related to deterioration in the capital markets environ- slowing economy. Conditions were at times challenging for some of our ment, totalled $521 million ($355 million after tax) in 2009 and were businesses in 2010, but overall economic conditions improved and we concentrated in the first half of the year. In 2010, revenues improved MD&A maintained our focus on our vision and strategy, while also reporting from 2009 but net income was down slightly and quarterly results were results in 2010 that were stronger than in 2009. uneven, with strong results in the second quarter and particularly weak BMO’s quarterly earnings, revenue and expense are modestly net income in the third quarter. Generally, revenues in interest-rate- affected by seasonal factors. Since our second fiscal quarter has 89 days sensitive businesses were lower in 2010 as market spreads were more and other quarters have 92 days, second-quarter results are lower rela- favourable in 2009, and corporate banking revenues were also lower, tive to other quarters because there are three fewer calendar days, and reflecting a reduction in corporate loan balances. Trading revenues were thus fewer business days. The months of July (third quarter) and August lower in the less favourable trading environment, but mergers and (fourth quarter) are typically characterized by lower levels of capital acquisitions fees and debt underwriting revenues were higher. BMO markets activity, which has an effect on results in Private Client Group Capital Markets has refocused its business over the past three years with and BMO Capital Markets. The December holiday season also contributes the goal of improving its risk-return profile and concentrating on core to a slowdown in some activities; however, credit card purchases are profitable client relationships. particularly robust in that first-quarter period, as well as in the back-to- Corporate Services quarterly net income varies in large part because school period that falls in our fourth quarter. of our expected loss provisioning methodology, general provisions for Personal and Commercial Banking earnings and revenues have credit losses and the impact of recording revenue, expenses and income trended higher through 2009 and 2010 and are strong. taxes not attributed to the operating groups. Revenues were affected P&C Canada has been successful in instilling its vision among in 2009 by the impact of market interest rate changes on our balance employees, who are now firmly aligned behind the need to keep the sheet management activities, but the effects diminished over the course customer at the centre of everything they do and provide a great cus- of the year. Results in the second quarter of 2009 were reduced by a tomer experience. P&C Canada has increased market share in some of $118 million ($80 million after tax) severance charge. Results were much its key businesses, with volume growth in most. Quarterly revenues improved in 2010 as revenues increased from the low levels of the first have trended higher due to volume growth in most products and nine months of 2009 and provisions for credit losses were much lower. improvements in net interest margin, although margin growth was more Corporate Services net income improved in each consecutive quarter subdued in 2010. Net income also increased strongly over the course of of 2009 and 2010 until the most recent quarter, when net income was 2009 and has generally trended higher in 2010. lowered by an upward movement in provisions for credit losses. P&C U.S. has operated in a difficult economic environment in 2009 The U.S. dollar was weaker over the course of 2009, with a parti- and 2010 and results have increasingly reflected the impact of impaired cularly sharp drop in the third quarter. It weakened further in 2010, loans, which reduces revenues and increases expenses. Results in 2010 although the decrease in its value was less pronounced. A weaker U.S. have also been reduced by higher levels of acquisition integration costs dollar lowers the translated value of U.S.-dollar-denominated revenues, following the acquisition of select assets and liabilities of a Rockford, expenses, provisions for credit losses, income taxes and net income. Illinois-based bank in an FDIC-assisted transaction late in the second The effect of movements in exchange rates is sometimes muted by deci- quarter of 2010. The 2010 economic environment in the United States sions to hedge their impact within a single quarter, which is explained has also led to a drop in loan utilization, which suppressed revenue on page 36. growth in 2010 and lowered 2010 net income relative to 2009. P&C U.S. BMO’s provisions for credit losses measured as a percentage of is building a customer-focused culture centred on understanding and loans and acceptances were at elevated levels in 2009. Provisions were responding to evolving customer expectations to deliver a great lower in 2010, reflecting an improving economy and credit environment, customer experience that differentiates Harris in its markets. although conditions remain challenging. Private Client Group’s results were affected in the first half of 2009 The effective income tax rate can vary, as it depends on the timing by weak stock markets and low interest rates. Asset levels were lower of resolution of certain tax matters, recoveries of prior periods’ income and clients held large cash balances as they waited for markets to taxes and the relative proportion of earnings attributable to the different recover. Performance improved over the last six months of 2009 as jurisdictions in which we operate. The effective rate was more stable equity markets regained strength, and the momentum continued into in 2010. 2010 as conditions in equity markets improved further, driving growth in

Caution This Quarterly Earnings Trends section contains forward-looking statements. Please see the Caution Regarding Forward-Looking Statements.

94 BMO Financial Group 193rd Annual Report 2010 MD&A 95 2009 2008 – (10) (8) 60 260 – 60 74 76 74 32 35 35 5.9 1.8 0.9 4.6 5.6 6.5 7.5 1.3 4.7 687 217 (71) 470 359 426 820 873 568 2010 4.78 3.09 3.79 54.2 (18.1) (8.5) 53.2 (18.0) (8.4) 13.0 14.9 9.9 35.0 31.9 29.1 2.80 2.80 2.80 4.75 3.08 3.76 4.83 3.15 3.86 4.81 3.14 3.83 (7.2) 57.2 (9.7) 1.88 1.63 1.55 62.2 66.7 67.6 0.61 0.88 0.76 19.2 10.5 (3.6) 10.4 8.4 9.2 (299) (1,146) (411) (+100) (32.8) +100 (+100) 13.55 14.92 12.15 13.45 12.24 9.77 34.09 31.95 32.02 65.71 54.75 63.44 49.78 24.05 35.65 60.23 50.06 43.02 1.043 1.165 1.032 7,590 7,391 6,902 3,571 2,080 1,981 2,810 1,787 1,978 2,842 1,822 2,013 1,819 1,701 1,395 2,810 1,787 1,978 5,494 5,133 5,975 5,494 5,570 5,072 6,235 5,570 1,543 1,070 1,049 1,543 11,064 10,205 12,210 11,064 2010 Annual Report 193rd Financial Group BMO rmation as at and for the interim periods, includes all periods, the interim and for as at rmation for the full fiscal for year. n restated to reflect this change. reflect to n restated 8 9 10 8 10 8 9 – (10) – – – 60 – – 60 – 19 19 19 19 19 19 19 1.8 4.0 (1.2) (6.9) (1.2) 1.8 4.0 5.6 5.2 7.1 8.4 20.5 6.3 8.4 1.3 6.4 (11.0) 8.3 3.3 647 557 358 225 824 688 395 173 824 688 395 158 112 18 (71) 225 647 557 358 233 655 566 368 449 420 421 411 113 72 68 106 260 310 188 115 386 357 372 428 386 357 31.9 30.0 28.2 28.2 0.70 0.70 0.70 0.70 1.11 0.97 0.61 0.39 1.13 0.98 0.63 0.41 1.13 0.98 0.63 0.40 (71.8) (11.7) (+100) 10.4 (35.1) (44.3) 15.6 6.9 1.73 1.74 1.55 1.51 59.5 62.9 71.1 75.4 0.89 0.94 0.79 0.90 19.2 16.4 (41.0) 4.4 (168) (286) (323) (369) 14.92 13.54 13.79 12.69 12.24 11.71 10.70 10.21 31.95 31.26 32.22 32.18 54.75 54.05 41.03 44.88 49.01 38.86 24.05 29.60 50.06 54.02 39.50 33.25 1.083 1.110 1.242 1.227 1,779 1,883 1,888 1,841 1,779 1,883 1,888 1,547 1,512 1,320 1,115 1,547 1,512 1,442 1,466 1,335 1,327 1,442 1,466 2,989 2,978 2,655 2,442 2,989 2,978

2009 2009 2009 2009

Oct. 31 July 31 30 April 31 Jan. al information, including info al information, results, are not necessarily indicative of actual results of indicative necessarily not are results, – – – – – – – – – – – – – – 7 9 9 7 derived from unaudited financi unaudited from derived 18 19 18 19 18 19 18 8.0 (2.4) 14.8 23.9 14.8 8.0 (2.4) 5.9 5.6 7.2 3.5 4.6 4.5 4.4 5.4 (66) (35) (74) (124) (66) (35) (74) 748 678 752 664 748 678 752 458 466 441 454 131 108 118 113 216 130 260 214 739 669 745 657 953 795 970 853 953 795 970 177 196 107 207 657 739 669 745 253 214 249 333 253 214 2010 2010 2010 2010 2010 2010 2010 (5.7) (3.9) 17.7 (5.7) (3.9) 23.9 1.89 1.88 1.88 1.85 62.6 65.3 60.0 60.8 0.58 0.50 0.59 0.79 20.6 13.4 21.3 20.8 35.0 34.6 35.8 33.9 1.26 1.15 1.29 1.14 1.26 1.14 1.28 1.13 11.7 16.5 +100 +100 11.5 4.7 16.3 +100 +100 (1.0) (51.2) (17.0) 15.1 13.7 16.4 14.3 14.0 12.1 4.6 8.1 4.9 (2.0) (50.0) (18.4) 40.8 +100 +100 +100 14.2 20.1 +100 +100 0.70 0.70 0.70 0.70 1.25 1.13 1.27 1.12 1.12 0.97 0.61 0.39 1.24 1.13 1.26 1.12 Oct. 31 Oct. 31 July 31 April 30 31 Jan. 1.039 1.045 1.027 1.059 13.55 13.54 15.20 13.89 13.45 13.55 13.27 12.53 34.09 33.13 32.04 32.51 63.46 63.94 65.71 56.24 54.35 55.75 51.11 49.78 60.23 62.87 63.09 52.00 2,023 1,898 1,830 1,839 2,023 1,898 1,830 1,619 1,336 1,527 1,493 1,619 1,336 1,610 1,571 1,522 1,532 1,610 1,571 3,229 2,907 3,049 3,025 3,229 2,907 n-controlling interest in subsidiaries. bee Prior periods interest have n-controlling

($) (1)

($)

(%)

lions) Effective the fourth quarter of 2010, the calculation no excludes Effective the fourth 2010, quarter of adjustments necessary for a fair presentation of such information. All such adjustments are of a normal and recurring nature. Financial ratios for interim periods are stated on an annualized on an annualized stated periods are interim for Financial ratios nature. a normal and recurring of All such adjustments are such information. of presentation a fair for adjustments necessary operating as interim as well and the ratios, appropriate, basis where Tier 1 Capital Ratio 1 Capital Ratio Tier Canadian/U.S. dollar average exchange rate rate exchange average dollar Canadian/U.S. as a % acceptances and loans impaired Gross credit losses for allowance and equity of assets Cash and securities-to-total Cash operating leverage leverage Cash operating average as a % of credit losses for Provision net loans and acceptances tax rate Effective Net economic profit growth growth profit economic Net growth income Net growth Revenue assets earning on margin interest Net ratio Productivity Dividend yield Dividend yield growth per share earnings Diluted growth per share cash earnings Diluted equity on Return Close Close Financial Measures return shareholder total annual average Five-year is that management, information Bank Montreal In the opinion of of Book value value Book Market price High Low Diluted Diluted Cash earnings Basic Diluted Information per Common Share Share per Common Information Dividends declared Earnings Basic including T&O Services, Corporate income net Financial Group BMO Operating group net income: net group Operating Banking Commercial and Personal Group Client Private Capital Markets BMO Amortization of acquisition-related acquisition-related Amortization of taxes income of net assets, intangible income Cash net Non-controlling interest in subsidiaries income Net ($ mil ($ mil (reversal) charge Restructuring and taxes income for provision before Income non-controlling interest in subsidiaries of) taxes income (recovery for Provision Total revenue Total – specific credit losses for Provision – general credit losses for Provision expense Non-interest Net interest income interest Net revenue Non-interest

(1) (1)

Summarized Statement of Income and Quarterly Financial Measures Measures Financial and Quarterly Income of Statement Summarized SUPPLEMENTAL INFORMATION Supplemental Information

Table 1: Shareholder Value As at or for the year ended October 31 2010 2009 2008 2007 2006 2005 2004 2003 2002 2001

Market Price per Common Share ($) High 65.71 54.75 63.44 72.75 70.24 62.44 59.65 50.26 40.65 44.40 Low 49.78 24.05 35.65 60.21 56.86 53.05 49.28 37.79 31.00 32.75 Close 60.23 50.06 43.02 63.00 69.45 57.81 57.55 49.33 38.10 33.86 Common Share Dividends Dividends declared per share ($) 2.80 2.80 2.80 2.71 2.26 1.85 1.59 1.34 1.20 1.12 Dividends paid per share ($) 2.80 2.80 2.80 2.63 2.13 1.80 1.50 1.29 1.18 1.09 Dividend payout ratio (%) 58.8 91.8 74.0 64.8 43.0 39.1 35.2 38.2 44.0 40.8 Dividend yield (%) 4.6 5.6 6.5 4.3 3.3 3.2 2.8 2.7 3.1 3.3

Total Shareholder Return (%) Five-year average annual return 5.9 1.8 0.9 14.2 19.1 13.8 18.9 12.9 7.9 14.3 One-year return 26.4 25.1 (27.9) (5.8) 24.1 3.7 20.0 33.4 16.2 (1.2) Common Share Information Number outstanding (in thousands) End of period 566,468 551,716 504,575 498,563 500,726 500,219 500,897 499,632 492,505 489,085 Average basic 559,822 540,294 502,062 499,950 501,257 500,060 501,656 496,208 490,816 511,286 Average diluted 563,125 542,313 506,697 508,614 511,173 510,845 515,045 507,009 499,464 523,561 Number of shareholder accounts 36,612 37,061 37,250 37,165 38,360 40,104 41,438 42,880 44,072 45,190 Book value per share ($) 34.09 31.95 32.02 28.29 28.89 26.48 24.20 22.09 21.07 19.69 Total market value of shares ($ billions) 34.1 27.6 21.7 31.4 34.8 28.9 28.8 24.6 18.8 16.6 Price-to-earnings multiple (based on diluted EPS) 12.7 16.3 11.4 15.3 13.5 12.5 13.1 14.3 14.2 12.7 Price-to-cash earnings multiple (based on diluted cash EPS) 12.5 15.9 11.2 15.1 13.3 12.1 12.6 13.7 13.5 11.8 Market-to-book value multiple 1.77 1.57 1.34 2.23 2.40 2.18 2.38 2.23 1.81 1.72

Table 2: Summary Income Statement and Growth Statistics ($ millions, except as noted) Supplemental Information 5-year 10-year For the year ended October 31 2010 2009 2008 2007 2006 CAGR (1) CAGR (1) Income Statement Net interest income 6,235 5,570 5,072 4,829 4,732 5.5 4.3 Non-interest revenue 5,975 5,494 5,133 4,520 5,253 3.4 3.3 Total revenue 12,210 11,064 10,205 9,349 9,985 4.4 3.8 Provision for credit losses 1,049 1,603 1,330 353 176 nm nm Non-interest expense 7,590 7,381 6,894 6,601 6,353 3.7 3.7 Income before provision for income taxes and non-controlling interest in subsidiaries 3,571 2,080 1,981 2,395 3,456 1.4 2.4 Provision for (recovery of) income taxes 687 217 (71) 189 717 (4.7) (3.6) Non-controlling interest in subsidiaries 74 76 74 75 76 5.2 15.5 Net income 2,810 1,787 1,978 2,131 2,663 3.2 4.8

Year-over-year growth (%) 57.2 (9.7) (7.2) (20.0) 11.2 na na

Earnings per Share (EPS) ($) Basic 4.78 3.09 3.79 4.18 5.25 0.2 3.8 Diluted 4.75 3.08 3.76 4.11 5.15 0.5 3.9 Year-over-year growth (%) 54.2 (18.1) (8.5) (20.2) 11.2 na na

Diluted Cash Earnings per Share (Cash EPS) ($) (2) 4.81 3.14 3.83 4.18 5.23 0.1 3.6 Year-over-year growth (%) 53.2 (18.0) (8.4) (20.1) 9.4 na na

(1) Compound annual growth rate (CAGR) expressed as a percentage. (2) This is a non-GAAP measure. Refer to the Non-GAAP Measures section on page 91. nm – not meaningful na – not applicable

Throughout this Supplemental Information section, certain amounts for years prior to 2004 have not been restated to reflect changes in accounting policies in 2006 as the changes were not significant.

96 BMO Financial Group 193rd Annual Report 2010 Supplemental Information 97 2010 Annual Report 193rd Financial Group BMO 2009 2008 20072006 2009 2008 20072006 – 450 – 250 250 92 79 69 58 49 800 1,150 1,150 1,150 1,150 672 787 1,842 1,531 3,346 2010 2010 35.0 31.9 29.1 33.1 27.2 (399) (251) (1,533) (789) (1,533) (399) (251) (558) (374) 792 2,697 169 1,246 3,776 4,236 4,315 3,446 2,726 2,571 2,571 1,746 1,196 596 6,927 6,198 4,708 4,411 4,231 1,595 2,411 89 1,981 551 3,186 3,340 11,971 19,240 17,150 47,866 36,564 41,499 41,071 36,764 66,153 46,661 60,673 60,449 52,475 50,374 39,638 38,142 30,369 26,299 12,848 11,748 11,632 11,166 10,974 75,533 74,249 58,639 57,206 30,647 77,800 77,447 60,570 60,718 34,544 18,661 9,305 16,477 19,209 14,465 28,102 36,006 28,033 37,093 31,429 62,942 60,515 79,812 44,169 41,965 143,953 124,108 121,243 121,167 87,019 249,251 236,156 257,670 232,050 203,848 135,933 126,719 134,761 114,330 96,743 411,640 388,458 416,050 366,524 319,978 171,554 182,097 175,079 165,783 153,282 398,474 438,548 397,609 360,575 309,131 123,399 110,813 100,138 98,277 67,411 176,643 167,829 186,962 164,095 159,565 411,640 388,458 416,050 366,524 319,978 ctive countries of operation. of countries ctive 9,955 9,134 3,650 2,458 17,368 9,955 9,134 agreements and other secured liabilities. secured other and agreements ($ millions, except as noted) except ($ millions, nt or sold under repurchase under repurchase or sold nt ($ millions) 2009 2008 20072006 20052004 2003 2002 2001 not yet purchased, securities le securities purchased, yet not 2010 14.9 16.4 13.4 13.8 14.4 19.2 18.8 19.4 9.9 13.0

($ millions, except as noted) except ($ millions, 1,667 1,905 2,088 2,633 2,366 2,264 1,743 1,338 1,391 2,264 1,743 2,633 2,366 1,905 2,088 2,674 1,667

120 73 43 30 30 31 38 35 11 31 38 30 30 73 43 120 136 11,696 10,646 13,703 12,577 14,612 14,506 17,980 16,865 9,973 10,100 17.1 14.2 14.8 14.7 19.5 19.4 20.0 15.0 10.1 13.3 0.67 0.55 0.58 0.59 0.86 0.81 0.87 0.71 0.41 0.50 0.66 0.54 0.57 0.58 0.85 0.80 0.86 0.67 0.38 0.48 1,787 1,978 2,131 2,663 2,396 2,295 1,781 1,373 1,402 2,295 1,781 2,663 2,396 1,978 2,131 2,810 1,787

(2)

(%) under resale agreements agreements resale under

(%) (%)

(%)

(1)

(%) Includes liquid assets pledged as security for securities sold but sold securities for Includes as security pledged assets liquid Includes reserves or minimum balances which some our of subsidiaries required are to maintain with central banks in their respe As at October 31 31 October at As As at October 31 31 October at As For the year ended October 31 31 ended October the year For Total Liquid Assets Total assets Cash and securities-to-total included Pledged assets assets liquid in total Other cash resources resources cash Other Securities assets liquid currencies other and dollar U.S. Total Total Canadian dollar liquid assets liquid banks dollar other Canadian Securities with Total Liquid Assets Dollar and Other Currencies U.S. Deposits Deposits with other banks other resources with cash Canadian Dollar Liquid Assets Deposits Other Assets acceptances and loans Daily Balances Average Net Assets Total liabilities and shareholders’ equity equity loss shareholders’ comprehensive and earnings other liabilities Retained Accumulated Total Common Preferred Common surplus capital Share Contributed Capital trust securities securities liability liabilities debt trust share Other Subordinated Capital Preferred Total assets assets Total Equity Liabilities and Shareholders’ Deposits Net loans and acceptances acceptances and loans assets Securities or purchased borrowed Securities Net Other Interest bearing deposits with banks banks equivalents with cash deposits and bearing Assets Cash Interest Return on average assets assets average on Return available assets average on Return shareholders common to Net income available to common shareholders common to available income Net equity shareholders’ common Average equity on Return equity on Cash return Net income income Net dividends Preferred (1) (1) Table 5: Liquid Assets Table (2) (2) Table 4: Summary Sheet Balance Table Table 3: Returns on Equity and Assets and Equity on Returns 3: Table SUPPLEMENTAL INFORMATION

Table 6: Other Statistical Information As at or for the year ended October 31 2010 2009 2008 2007 2006 2005 2004 2003 2002 2001 Other Information Employees (1) 37,947 36,173 37,073 35,827 34,942 33,785 33,593 33,993 34,568 34,693 Bank branches 1,234 1,195 1,280 1,224 1,182 1,180 1,174 1,142 1,134 1,129 Automated banking machines (Canada) 2,076 2,030 2,026 1,978 1,936 1,952 1,993 2,023 2,000 1,982 Rates Average Canadian prime rate (%) 2.46 2.70 5.21 6.08 5.57 4.30 4.05 4.69 4.15 6.55 Average U.S. prime rate (%) 3.25 3.34 5.69 8.19 7.76 5.85 4.17 4.17 4.79 7.68 Canadian/U.S. dollar exchange rates ($) High 1.08 1.30 1.29 1.19 1.20 1.27 1.40 1.59 1.61 1.49 Low 1.00 1.03 0.92 0.95 1.10 1.16 1.22 1.30 1.51 1.59 Average 1.04 1.16 1.03 1.09 1.13 1.21 1.31 1.44 1.57 1.54 End of year 1.02 1.08 1.20 0.94 1.12 1.18 1.22 1.32 1.56 1.59

(1) Reflects full-time equivalent number of employees, comprising full-time and part-time employees and adjustments for overtime hours.

Table 7: Revenue and Revenue Growth ($ millions, except as noted) 5-year 10-year For the year ended October 31 2010 2009 2008 2007 2006 CAGR CAGR Net Interest Income 6,235 5,570 5,072 4,829 4,732 5.5 4.3 Year-over-year growth (%) 11.9 9.8 5.0 2.0 (0.9) na na

Net Interest Margin (1) Average earning assets 332,468 341,848 326,803 304,471 261,461 6.5 5.0 Net interest margin (%) 1.88 1.63 1.55 1.59 1.81 na na Canadian dollar net interest margin (%) 2.12 1.78 2.00 2.12 2.38 na na U.S. dollar and other currencies net interest margin (%) 1.47 1.43 0.92 0.80 0.84 na na Non-Interest Revenue Securities commissions and fees 1,048 973 1,105 1,145 1,051 (0.8) 2.0 Deposit and payment service charges 802 820 756 728 729 1.8 2.2 Trading revenues (losses) 504 723 546 (487) 718 0.3 2.7 Lending fees 572 556 429 406 337 12.8 5.9 Card fees 233 121 291 107 396 (7.0) 0.8

Supplemental Information Investment management and custodial fees 355 344 339 322 298 3.1 (0.5) Mutual fund revenues 550 467 589 576 499 4.7 9.0 Securitization revenues 678 929 513 296 100 43.2 7.0 Underwriting and advisory fees 445 397 353 528 407 4.5 7.8 Securities gains (losses), other than trading 150 (354) (315) 247 145 (1.9) (2.0) Foreign exchange, other than trading 93 53 80 132 102 (0.7) (4.4) Insurance income 321 295 237 246 221 11.8 12.9 Other revenues 224 170 210 274 250 (12.5) (3.2) Total non-interest revenue 5,975 5,494 5,133 4,520 5,253 3.4 3.3

Year-over-year growth (%) 8.8 7.0 13.6 (14.0) 3.8 na na Non-interest revenue as a % of total revenue 48.9 49.7 50.3 48.3 52.6 na na Total Revenue 12,210 11,064 10,205 9,349 9,985 4.4 3.8 Year-over-year growth (%) 10.4 8.4 9.2 (6.4) 1.5 na na

(1) Net interest margin is calculated based on average earning assets. na – not applicable

98 BMO Financial Group 193rd Annual Report 2010 Supplemental Information (1) (1) (1) 99

na na na na nm nm 8.9 1.1 3.8 2.8 1.6 9.4 2.4 3.9 3.6 3.7 (0.1) (1.2) (7.3) (7.7) (5.0) (3.9) (0.3) (3.6) (5.0) (2.5) 13.0

na na na na nm nm 1.8 1.2 8.9 6.8 6.3 2.9 2.9 3.7 2.7 3.1 3.7 (8.8) (0.6) (1.4) (4.7) (8.8) (3.6) 10.1 13.5 (13.5) (14.8) CAGR CAGR CAGR ($ millions, except as noted) except ($ millions, 2010 Annual Report 193rd Financial Group BMO 2009 2008 2007 2006 2009 2008 2007 7 9 10 10 8 1 3 3 3 2 (10) (8) 159 – (10) (8) – 28 30 29 28 26 45 35 32 37 86 30 29 28 26 28 30 29 47 94 52 44 42 2.8 7.1 4.4 3.9 0.3 175 171 164 165 162 146 116 142 122 128 402 364 380 365 412 717 189 687 217 (71) 652 530 586 599 624 652 530 257 246 319 306 279 242 230 269 272 255 634 709 727 673 678 149 131 229 221 202 301 287 372 362 384 343 309 328 287 253 684 586 546 484 509 2010 62.2 66.7 67.6 70.6 63.6 20.7 10.5 (3.6) 7.9 19.2 not meaningful – not On July 1, 2010, the harmonized sales tax implemented was in both Ontario and 2010, British 1, On July jurisdictions. two in these tax paid the sales increased has This Columbia. 7,590 7,381 6,894 6,601 6,353 1,129 1,089 581 309 554 2,395 2,149 1,964 1,903 2,149 1,964 2,285 2,395 1,322 1,297 1,275 1,455 1,338 3,825 3,824 4,364 4,385 3,976 1,161 1,211 1,343 1,281 1,241 6.6 3.9 1,680 1,522 1,502 1,268 1,274 not applicable – not categories. expense included are non-interest levies in various Government (2) (3) na nm 203 203 183 188 44 23.8 13.1 20.1 29.2 23.8 13.1 27.4

(%)

(3)

tion of intangible assets were restated restated were assets intangible of tion al growth rate of 1.5% over five years and and years five over 1.5% of rate al growth uipment expense and the amortization of of the amortization and expense uipment annual growth rate of 2.6% over five years years five over 2.6% of rate growth annual and equipment expense and the amortization the amortization and expense equipment and and equipment to intangible assets. assets. intangible to equipment and (2)

(%) laries a 3.7% over ten years. Together, total premises premises total Together, years. ten over 3.7% In 2009, we adopted new accounting requirements for intangible assets and reclassified reclassified and assets intangible for requirements accounting new adopted we In 2009, premises from equipment certain computer the amortiza and expense equipment and Computer categories these expense for rates growth ten-year and As such, five-year 2008. and 2007 for eq and computer Together, meaningful. not are annu a compound at increased assets intangible a compound at increased assets intangible of years. ten over 3.5% and Sundry taxes taxes Sundry 10-year 5-year 31 ended October the year For

Total government levies and taxes as a % of income as a % of taxes and levies government Total taxes and levies government pay to available tax rate income Effective Provision for (recovery of) income taxes of) taxes income (recovery for Provision and Taxes Levies Government Total Business taxes taxes Business sales tax, sales Harmonized other taxes and GST taxes income than other levies government Total Provincial capital taxes taxes levies taxes capital Payroll Property taxes income than other levies Government Provincial Year-over-year growth Year-over-year ratio) (Productivity ratio expense-to-revenue Non-interest and Taxes Levies Government Restructuring charge (reversal) (reversal) charge assets intangible Amortization of Restructuring Expense Non-Interest Total Total other expenses expenses other Other Total development business and Travel Professional fees Communications Other expenses Professional capital taxes and Business Computers and equipment equipment taxes and Property Computers equipment and premises Total Total employee compensation compensation employee Total equipment and Premises estate real Rental of fixtures and furniture Premises, Performance-based compensation compensation benefits Performance-based Employee S Expense Non-Interest compensation Employee (1) (1) Table 8: Non-Interest Expense and Expense-to-Revenue Ratio Ratio and Expense-to-Revenue Expense Non-Interest 8: Table SUPPLEMENTAL INFORMATION

Table 9: Average Assets, Liabilities and Interest Rates ($ millions, except as noted) 2010 2009 2008

Average Interest Average Interest Average Interest Average interest income/ Average interest income/ Average interest income/ For the year ended October 31 balances rate (%) expense balances rate (%) expense balances rate (%) expense Assets Canadian Dollar Deposits with other banks 518 0.71 4 823 1.25 10 2,059 4.02 83 Securities 76,285 1.93 1,476 66,347 2.49 1,651 55,114 3.58 1,971 Securities borrowed or purchased under resale agreements 11,116 0.22 24 15,773 0.78 123 20,548 2.94 604 Loans Residential mortgages 41,465 3.88 1,609 41,586 3.65 1,519 45,926 4.99 2,294 Non-residential mortgages 3,771 5.02 189 3,304 5.28 174 3,200 5.78 185 Consumer instalment and other personal 37,719 4.00 1,507 32,729 4.12 1,349 27,891 5.74 1,601 Credit cards 2,729 12.12 331 2,067 12.69 262 4,162 12.00 499 Businesses and governments 30,153 5.55 1,673 30,358 5.98 1,815 30,702 5.69 1,747 Total loans 115,837 4.58 5,309 110,044 4.65 5,119 111,881 5.65 6,326 Other non-interest bearing assets 78,864 64,989 35,752 Total Canadian dollar 282,620 2.41 6,813 257,976 2.68 6,903 225,354 3.99 8,984 U.S. Dollar and Other Currencies Deposits with other banks 15,056 0.46 70 16,487 1.07 176 20,985 4.04 847 Securities 44,159 1.49 658 41,627 1.86 776 35,959 3.39 1,220 Securities borrowed or purchased under resale agreements 17,279 0.50 86 24,759 0.49 121 25,019 3.06 767 Loans Residential mortgages 5,476 4.95 271 7,430 5.25 390 6,816 5.39 367 Non-residential mortgages 3,417 5.59 191 3,772 5.88 222 3,622 6.18 224 Consumer instalment and other personal 10,294 4.32 444 11,657 4.70 548 10,035 5.79 581 Credit cards 293 3.07 9 63 11.48 7 36 10.23 4 Businesses and governments 28,822 3.25 936 39,291 3.64 1,430 31,844 5.47 1,741 Total loans 48,302 3.83 1,851 62,213 4.18 2,597 52,353 5.57 2,917 Other non-interest bearing assets (8,942) 35,486 37,939 Total U.S. dollar and other currencies 115,854 2.30 2,665 180,572 2.03 3,670 172,255 3.34 5,751 Total All Currencies Total assets and interest income 398,474 2.37 9,478 438,548 2.41 10,573 397,609 3.71 14,735 Supplemental Information Liabilities Canadian Dollar Deposits Banks 2,846 (0.27) (8) 3,525 0.16 6 2,641 1.94 51 Businesses and governments 66,088 1.28 848 61,513 2.08 1,278 64,881 3.43 2,227 Individuals 78,209 1.32 1,032 76,676 1.77 1,355 65,586 2.27 1,491 Total deposits 147,143 1.27 1,872 141,714 1.86 2,639 133,108 2.83 3,769 Subordinated debt and other interest bearing liabilities 42,444 1.32 561 39,587 1.98 785 38,276 3.62 1,387 Other non-interest bearing liabilities 72,795 57,963 38,220 Total Canadian dollar 262,382 0.93 2,433 239,264 1.43 3,424 209,604 2.46 5,156 U.S. Dollar and Other Currencies Deposits Banks 19,106 1.26 241 23,589 1.59 374 31,975 3.88 1,242 Businesses and governments 55,715 0.19 106 65,298 1.06 691 64,783 2.91 1,882 Individuals 19,999 0.71 142 21,964 1.53 337 18,373 2.44 448 Total deposits 94,820 0.52 489 110,851 1.26 1,402 115,131 3.10 3,572 Other interest bearing liabilities 30,311 1.06 321 35,918 0.49 177 31,076 3.01 935 Other non-interest bearing liabilities (9,590) 33,453 25,738 Total U.S. dollar and other currencies 115,541 0.70 810 180,222 0.88 1,579 171,945 2.62 4,507 Total All Currencies Total liabilities and interest expense 377,923 0.86 3,243 419,486 1.19 5,003 381,549 2.53 9,663 Shareholders’ equity 20,551 19,062 16,060 Total Liabilities, Interest Expense and Shareholders’ Equity 398,474 0.81 3,243 438,548 1.14 5,003 397,609 2.43 9,663

Net interest margin – based on earning assets 1.88 1.63 1.55 – based on total assets 1.56 1.27 1.28 Net interest income based on total assets 6,235 5,570 5,072

100 BMO Financial Group 193rd Annual Report 2010 Supplemental Information 101 ($ millions) 124 (4,782) (4,658) (4,782) 124 2010 Annual Report 193rd Financial Group BMO Average Average change due to in (decrease) Increase (99) (139) (341) (480) 2009/2008 2009/2008 2010/2009

(62)

(37) Increase (decrease) due to change in due to (decrease) Increase Average Average Average Average (36) 1 (35) (7) (638) (645) balance rate Total rate balance Total rate balance (231) (538) (769) (76) (2,851) (2,927) 548 (2,630) (2,082) (2,630) 548 (1,004) (460) (544) 47 (650) (603) (650) 47 (224) (281) 57 88 (199) (111) (199) 88 (195) (164) (31) 252 (385) (133) (385) 252 (323) (350) 27 192 (636) (444) (636) 192 (118) (166) 48 83 (15) 68 (15) (252) (238) 14 83 17 (63) (46) (63) 17 (13) (12) (1) 12 (2,090) (2,078) (2,090) 12 (90) (594) (34) (106) 504 (127) (183) (490) (673) (91) (15) (2) (11) 9 (31) 93 (104) (10) (40) (21) 3 3 1 4 (64) (25) 28 403 (722) (319) (722) 403 (174) (252) (422) (530) 248 278 159 (47) 206 (222) (1,947) (2,169) (1,947) (222) (913) (709) (204) 153 (1,281) (1,128) (1,281) 153 (767) (888) 121 546 (866) (320) (866) 546 (745) (204) (541) 297 (107) 190 (107) 297 (1,208) (204) (1,004) (71) (62) (133) (325) (542) (867) (62) (71) 200 (1,931) (1,731) (1,931) 200 (991) (1,169) 178 13 653 666 436 62 498 653 13 – – – – – – – – – – – – – – – – (a – b) (53) (1,707) (1,760) (1,707) (53) 560 (4,720) (4,160) (4,720) 560 (1,094) (1,054) (40) – – – – – – – – – – – – – – – – (b) (a) 15 (1,206) (1,191) (1,206) 15 (585) (483) (102) 95 (526) (431) (116) (833) (949) (526) 95 408 (719) (311) (719) 408 (494) (113) (381) (12) (130) (142) (21) 87 66 (130) (12) 146 (904) (758) (904) 146 144 171 (27) 6 (17) (11) (17) 6 15 (10) 25 ased under resale agreements agreements ased under resale (4) (3) (7) (3) (23) (71) (48) (4) (103) (16) (119) 33 (10) 23 (16) (103) (215) (558) (773) (558) (215) 90 95 (5)

s s with other banks other s with Total All Currencies Total expense interest in total Change income interest net in total Change Other interest bearing liabilities bearing Other interest liabilities bearing Other non-interest expense interest currencies other and dollar in U.S. Change governments and Businesses Individuals deposits Total Change in Canadian dollar interest expense interest in CanadianChange dollar Currencies Dollar and Other U.S. Deposits Banks Total deposits Total liabilities bearing interest other and debt Subordinated liabilities bearing Other non-interest Banks Banks governments and Businesses Individuals Liabilities Canadian Dollar Deposit Other non-interest bearing assets bearing Other non-interest income interest currencies other and dollar in U.S. Change All Currencies Total income interest in total Change Credit cards cards Credit governments and Businesses loans Total Loans mortgages Residential mortgages Non-residential personal other and instalment Consumer U.S. Dollar and Other Currencies U.S. banks Deposits other with Securities or purch borrowed Securities Total loans Total assets bearing Other non-interest income interest dollar in Canadian Change Non-residential mortgages Non-residential cards personal other and instalment Consumer Credit governments and Businesses Securities agreements or purchased under resale borrowed Securities Loans mortgages Residential Assets Canadian Dollar Deposit 31 ended October the year For Table 10: Volume/Rate Analysis of Changes in Net Interest Income Income Interest Net in Changes of Analysis Volume/Rate 10: Table SUPPLEMENTAL INFORMATION

Table 11: Net Loans and Acceptances – Segmented Information ($ millions, except as noted) Canada United States Other countries

As at October 31 2010 2009 2008 2007 2006 2010 2009 2008 2007 2006 2010 2009 2008 2007 2006 Consumer Residential mortgages (1) 41,481 36,916 38,490 43,442 53,922 4,982 6,160 8,086 5,948 6,425 – – – – – Cards 3,056 2,574 2,117 4,493 3,631 252 – 3 – – – – – – – Consumer instalment and other personal loans 41,112 35,296 31,633 24,393 20,482 10,000 10,477 12,102 8,795 9,935 – – – – – Total consumer 85,649 74,786 72,240 72,328 78,035 15,234 16,637 20,191 14,743 16,360 – – – – – Commercial and corporate 48,663 46,062 52,148 51,548 42,453 19,148 21,560 31,827 21,531 21,024 9,246 10,090 11,877 4,843 2,598 Total loans and acceptances, net of specific allowances 134,312 120,848 124,388 123,876 120,488 34,382 38,197 52,018 36,274 37,384 9,246 10,090 11,877 4,843 2,598 General allowance (595) (589) (579) (587) (555) (702) (717) (742) (311) (350) – – – – – Total net loans and acceptances 133,717 120,259 123,809 123,289 119,933 33,680 37,480 51,276 35,963 37,034 9,246 10,090 11,877 4,843 2,598

Table 12: Net Impaired Loans and Acceptances – Segmented Information ($ millions, except as noted) Canada United States Other countries

As at October 31 2010 2009 2008 2007 2006 2010 2009 2008 2007 2006 2010 2009 2008 2007 2006 Consumer Residential mortgages 227 236 211 112 110 – – – – – – – – – – Consumer instalment and other personal loans 96 97 89 54 42 314 194 91 – 5 – – – – – Total consumer 323 333 300 166 152 314 194 91 – 5 – – – – – Commercial and corporate 372 376 374 183 143 1,591 1,673 1,147 211 202 40 125 49 3 11 Total impaired loans and acceptances, net of specific allowances 695 709 674 349 295 1,905 1,867 1,238 211 207 40 125 49 3 11

Supplemental Information General allowance (595) (589) (579) (587) (555) (702) (717) (742) (311) (350) – – – – – Total net impaired loans and acceptances (NIL) 100 120 95 (238) (260) 1,203 1,150 496 (100) (143) 40 125 49 3 11 Condition Ratios Gross impaired loans and acceptances as a % of equity and allowance for credit losses (2) un un un un un un un un un un un un un un un NIL as a % of net loans and acceptances (3) 0.07 0.10 0.08 (0.19) (0.22) 3.57 3.07 0.97 (0.28) (0.39) 0.43 1.24 0.41 0.06 0.42 NIL as a % of net loans and acceptances (3) Consumer 0.38 0.45 0.42 0.23 0.19 2.06 1.17 0.45 – 0.03 – – – – – Commercial and corporate 0.76 0.82 0.72 0.36 0.34 8.31 7.76 3.60 0.98 0.96 0.43 1.24 0.41 0.06 0.42

(1) Excludes residential mortgages classified as commercial or corporate loans (2010 – (6) Beginning in 2008, our industry segmentation was improved to provide a split between $2.1 billion, 2009 – $2.3 billion, 2008 – $2.7 billion, 2007 – $3.0 billion, 2006 – $2.9 billion). government and financial institutions. For periods prior to 2008, this segmentation was not (2) Effective 2010, the calculation excludes non-controlling interest in subsidiaries. Prior periods available, and the financial institutions sector includes government loans. have been restated to reflect this change. In addition, geographic allocations are not (7) The U.S. portfolio acquired in the second quarter of 2010 included impaired loans with an available, as equity is not allocated on a country of risk basis. estimated value of $437 million, reduced to $327 million in the third quarter of 2010. Subsequent (3) Aggregate balances are net of specific and general allowances; the consumer and changes in impaired loan balances on this portfolio are included in additions to or reductions in commercial and corporate categories are stated net of specific allowances only. impaired loans and acceptances, on a basis consistent with our other loans. All loans in the (4) Beginning with our 2009 reporting of net loans and acceptances by province, we changed acquired portfolio are covered by a loss sharing agreement, with the FDIC absorbing 80% of loan the source of our data for the provincial distribution table. This change resulted in a shift in losses. There were $302 million of gross impaired loans in this portfolio as at October 31, 2010. the provincial distribution to what we believe is a more accurate representation of our (8) Includes amounts returning to performing status, sales, repayments, the impact of foreign portfolio. In 2009, we restated 2008 data to reflect this change. Data for periods prior to exchange, and offsets for consumer write-offs that are not recognized as formations. 2008 were not restated and therefore are not comparable. (9) Amounts for 2010 exclude a $9 million allowance for Other Credit Instruments included in (5) In 2009, the industry allocation of impaired loans for U.S. operations was revised to reclassify Other Liabilities. impairment of commercial mortgages to the commercial mortgages category. Previously un – unavailable commercial mortgages for U.S. operations were classified in applicable industry categories. Periods prior to 2009 have not been restated. Certain comparative figures in Table 11 have been reclassified to conform with the current year’s presentation.

102 BMO Financial Group 193rd Annual Report 2010 Supplemental Information 103 un un

– un un ($ millions) ($ millions) – 2010 Annual Report 193rd Financial Group BMO ($ millions) ($ millions) – – – 88 – – – – 3 – – – – – – – – – 1 – 2009 2008 20072006 20092008 20072006 2009 2008 20072006 (15) 423 (7) (54) 423 (9) (15) (7) 696 875 767 692 405 696 875 767 2010 2010 2010 22,877 24,378 19,002 16,696 19,002 25,159 22,877 24,378 120,848 124,388 123,876 120,488 123,876 134,312 120,848 124,388 2,387 720 666 804 2,387 720 666 3,297 3,297 2,387 720 666 3,221 3,297 2,387 720 (288) 131 (143) (220) (288) 131 (143) (712) (8) 1,747 1,055 1,058 1,128 1,902 1,747 1,055 1,058 1,878 1,902 1,747 1,055 1,058 2,690 2,506 588 420 1,525 2,690 2,506 588

(9)

(4) 21,269 21,541 15,290 15,403 15,290 24,427 21,269 21,541 1,662 1,239 395 322 1,201 1,662 1,239 395 9 15 5 7 15 5 66 9 1,795 1,857 1,425 1,102 1,425 1,802 1,795 1,857 510 38 43 31 510 38 43 564 9,284 10,121 8,994 8,505 8,994 10,121 10,253 9,284 327 – – – – (5) (5) 542 460 96 8 600 542 460 96 6,648 8,300 6,532 5,830 6,532 6,796 6,648 8,300 (7) 363 244 23 4 232 363 244 23 17,867 23,710 16,393 9,595 17,318 17,867 23,710 16,393 Net Loans and Acceptances and Acceptances Loans Net Segmented Information Information Segmented Changes in Impaired Loans and Loans Changes in Impaired Losses Credit for Allowance Segmented Information Information Segmented Net Impaired Loans and Acceptances and Acceptances Loans Impaired Net 7,227 7,127 5,314 5,256 7,127 5,314 8,476 7,227 142 93 58 36 142 93 58 125 8,879 9,613 8,307 6,904 8,879 9,613 8,307 8,605 1 1,041 1,404 1,218 1,547 1,218 932 1,041 1,404

48 51 24 18 48 51 24 29 2,854 3,849 3,200 3,025 3,200 3,174 2,854 3,849 63 16 5 4 71 63 16 5 2 601 865 580 252 275 80 98 252 275 118 80 7,006 9,290 7,238 7,733 7,238 6,220 7,006 9,290 42 27 15 8 28 42 27 15 1,386 1,788 1,467 1,322 1,386 1,788 1,467 1,286 (6) (6) 40 41 9 21 58 40 41 9 4,864 5,269 4,398 3,842 4,398 5,751 4,864 5,269 44 47 – 1 10 44 47 – 4,280 6,199 5,474 5,230 3,678 4,280 6,199 5,474 100 73 18 22 100 73 18 44 3,505 3,769 3,471 3,211 3,471 3,839 3,505 3,769 (1,492) (970) (391) (338) (1,216) (1,492) (970) (391) (338) (1,216) 19 186 21 10 186 21 53 19 356 2,003 2,174 1,570 397 – 2 1,049 3,256 1,522 510 1,522 266 1,049 3,256 985 1,101 1,197 1,591 977 6,042 66,075 5,051 4,760 4,096 6,539 77,057 77,712 95,852 77,922 19,396 21,346 13,110 14,254 68,879 21,346 13,110 22,194 19,396 49,996 71,160 54,056 50,079 Allowance for credit losses, beginning of year beginning of credit losses, for Allowance Increases – specific allowances allowance in the general Change Write-offs Year End of Losses, Credit for Allowance Other year beginning of acceptances, and loans impaired Gross acceptances and loans impaired to Additions acceptances and loans impaired to Additions due to acquisitions acceptances and loans impaired in Reductions Write-offs Year End of and Acceptances, Loans Impaired Gross Net Impaired Commercial and Corporate Loans Loans and Corporate Commercial Impaired Net mortgages Commercial estateCommercial real estate) (non-real Construction Retail trade Wholesale trade Agriculture Communications Manufacturing Mining gas Oil and Transportation Utilities productsForest Service industries Financial institutions Government Mining gas Oil and Transportation Utilities productsForest Service industries Financial institutions Government Other Net Loans and Acceptances by Province by Acceptances and Loans Net Quebec Ontario Prairie provinces territories and Columbia British in Canada acceptances and loans net Total Industry by Loans and Corporate Commercial Net mortgages Commercial estateCommercial real estate) (non-real Construction Retail trade Wholesale trade Agriculture Communications Manufacturing Atlantic provinces As at October 31 31 October As at 31 October As at As at October 31 31 October As at Table 15: 15: Table Table 14: 14: Table Table 13: 13: Table Total Total 2009 2008 20072006 2009 2008 20072006 227 236 211 112 110 410 291 180 54 47 637 527 391 166 157 2010 2010 0.63 0.58 0.42 0.19 0.17 2.60 2.80 1.64 0.51 0.54 0.83 0.34 (0.20) (0.25) (0.20) 0.76 0.83 0.34 13.55 14.92 12.15 4.40 4.13 2,574 2,120 4,493 3,631 3,308 2,574 2,120 4,493 1,343 1,395 640 (335) (392) 2,640 2,701 1,961 563 513 2,003 2,174 1,570 397 356 (1,297) (1,306) (1,321) (898) (905) (1,297) (1,306) (1,321) (898) (905) 77,712 95,852 77,922 66,075 77,057 77,712 95,852 77,922 45,773 43,735 33,188 30,417 51,112 45,773 43,735 33,188 43,076 46,576 49,390 60,347 46,576 49,390 46,463 43,076 167,829 186,962 164,095 159,565 176,643 167,829 186,962 164,095 169,135 188,283 164,993 160,470 177,940 169,135 188,283 164,993 91,423 92,431 87,071 94,395 100,883 91,423 92,431 87,071 SUPPLEMENTAL INFORMATION

Table 16: Changes in Allowance for Credit Losses – Segmented Information ($ millions, except as noted) Canada United States Other countries

As at October 31 2010 2009 2008 2007 2006 2010 2009 2008 2007 2006 2010 2009 2008 2007 2006 Allowance for credit losses, beginning of year 830 708 692 651 687 1,011 998 362 403 435 61 41 1 4 6 Provision for credit losses 485 517 340 257 181 573 1,065 942 99 (3) (9) 21 48 (3) (2) Transfer of allowance 8 – – 5 – 28 – – 7 – – – – – – Recoveries 73 58 61 53 47 110 87 53 38 65 – – – – – Write-offs (544) (451) (387) (274) (263) (670) (1,041) (576) (117) (75) (2) – (7) – – Other, including foreign exchange rate changes – (2) 2 – (1) (59) (98) 217 (68) (19) (8) (1) (1) – – Allowance for credit losses, end of year (1) 852 830 708 692 651 993 1,011 998 362 403 42 61 41 1 4 Allocation of Write-offs by Market Consumer (430) (383) (303) (246) (229) (322) (302) (125) (43) (38) – – – – – Commercial and corporate (114) (68) (84) (28) (34) (348) (739) (451) (74) (37) (2) – (7) – – Allocation of Recoveries by Market Consumer 76 57 56 50 39 61 47 35 22 21 – – – – – Commercial and corporate (3) 1 5 3 8 49 40 18 16 44 – – – – – Net write-offs as a % of average loans and acceptances un un un un un un un un un un un un un un un

Table 17: Allocation of Allowance for Credit Losses – Segmented Information ($ millions, except as noted) Canada United States Other countries

As at October 31 2010 2009 2008 2007 2006 2010 2009 2008 2007 2006 2010 2009 2008 2007 2006 Consumer Residential mortgages 42 33 13 14 5 10 – – – – – – – – – Consumer instalment and other personal loans 47 51 2 1 1 – – – – – – – – – – Supplemental Information Total consumer 89 84 15 15 6 10 – – – – – – – – – Commercial and corporate 168 157 114 90 90 272 294 256 51 53 42 61 41 1 4 Off-balance sheet – – – – – 9 – – – – – – – – – Total specific allowances 257 241 129 105 96 291 294 256 51 53 42 61 41 1 4 General allowance 595 589 579 587 555 702 717 742 311 350 – – – – –

Allowance for credit losses (1) 852 830 708 692 651 993 1,011 998 362 403 42 61 41 1 4 Coverage Ratios Allowance for credit losses as a % of gross impaired loans and acceptances Total 89.5 87.4 88.2 152.4 166.5 45.0 46.8 66.8 138.2 155.0 52.2 32.8 45.6 25.0 26.7 Consumer 21.6 20.1 4.8 8.3 3.8 3.1 – – – – – – na na na Commercial and corporate 31.1 29.5 23.4 33.0 38.6 14.6 14.9 18.2 19.5 20.8 51.2 32.8 45.5 25.0 26.7

(1) Amounts for 2010 include $9 million related to Other Credit Instruments. (2) In 2009, the industry allocation of impaired loans for U.S. operations was revised to reclassify impairment of commercial mortgages to the commercial mortgages category. Previously commercial mortgages for U.S. operations were classified in applicable industry categories. Periods prior to 2009 have not been restated.

un – unavailable na – not applicable

104 BMO Financial Group 193rd Annual Report 2010 Supplemental Information 105 un

un un un –

2 – 1 2 2 2010 Annual Report 193rd Financial Group BMO ($ millions) ($ millions) – – – 1 3 – – (6) – 3 – 2009 2008 20072006 6 25 – – 6 10 2 5 2 10 2 – – – – 2009 2008 20072006 60 260 50 (35) 260 50 60 44 3 7 4 44 3 – – – – – – – – – – (19) – – – 21 8 5 11 21 8 5 237 132 237 132 (9) 20 9 28 7 7 4 9 – 1 (1) 3 (1) 6 76 108 25 65 76 7 40 7 4 4 3 2010 2010 450 178 409 450 178 81 67 482 512 411 142 147 (2) – 419 893 733 74 5 1,049 1,603 1,330 353 176

31 2 1 (2) 1 31 2 48 29 – – – 55 114 1 – – 114 1 87 (2) (2) 1,049 1,543 1,070 303 211

277 254 91 277 254 14 (2) 26 27 26 11 5 7 113 70 10 101 1 62 251 40 (1) 66 62 Provision for Credit Losses Losses Credit for Provision Information Segmented Specific Allowances for Credit Losses Losses Credit for Specific Allowances Information Segmented 51 43 23 17 19 50 33 59 2 2 1 8 23 28 14 17 21 9 22 6 2 2 15 17 5 – (1) 17 5 – (4) 650 337 229 206 630 650 337 85 129 108 35 57 9 9 18 32 12 4 7 2 – 12 8 6 7 9 7 10 7 (5) 7 10 22 7 2 7 27 – – 27 – 7 (1) 17 19 9 13 9 8 – – – 174 154 137 132 154 137 194 174

As at October 31 31 October As at Mining gas Oil and Transportation Utilities productsForest Service industries Financial institutions Government Other credit losses for specific allowances Total loans corporate and commercial on Commercial and Corporate Specific and Corporate Commercial Industry by Allowances mortgages Commercial estateCommercial real estate) (non-real Construction Retail trade Wholesale trade Agriculture Communications Manufacturing Mining gas Oil and Transportation Utilities productsForest Service industries Financial institutions Government Other corporate and commercial Total specific provisions Total credit losses for provision General losses credit for provision Total Consumer mortgages Residential Cards loans personal other and instalment Consumer consumer Total and Corporate Commercial mortgages Commercial estateCommercial real estate) (non-real Construction Retail trade Wholesale trade Agriculture Communications Manufacturing For the year ended October 31 31 ended October the year For

Table 19: 19: Table Table 18: 18: Table Total Total 2009 2008 20072006 2009 2008 20072006 9 – – – – 46 41 23 19 52 – – 12 – 12 36 – – 52 33 13 14 5 51 2 1 1 47 99 84 15 15 6 0.6 0.7 0.5 0.1 0.1 (67) (101) 218 (68) (20) 104 91 72 60 104 91 72 137 183 145 114 91 112 590 596 426 157 153 482 512 411 142 147 2010 2010 57.7 73.2 146.5 158.8 146.5 58.3 57.7 73.2 13.7 3.7 8.3 3.7 13.5 19.4 19.1 20.7 26.3 29.2 (685) (428) (289) (267) (685) (428) (752) (102) (807) (542) (464) (71) 1,902 1,747 1,055 1,058 1,887 1,902 1,747 1,055 1,747 1,055 1,058 1,128 1,902 1,747 1,049 1,603 1,330 353 176 1,887 1,902 1,747 1,055 1,058 1,297 1,306 1,321 898 905 (1,492) (970) (391) (338) (1,492) (1,216) SUPPLEMENTAL INFORMATION

Table 20: Contractual Obligations ($ millions) Less than 1 to 3 3 to 5 Over 5 No fixed As at October 31, 2010 one year years years years maturity Total On-Balance Sheet Financial Instruments Deposits (1) 101,218 23,181 6,907 4,850 109,119 245,275 Subordinated debt (2) 200 411 390 4,566 – 5,567 Capital trust securities (2) 440 413 – – – 853 Other financial liabilities (2) 54,715 23 41 2,517 332 57,628

(1) Deposits exclude interest payments as well as structured notes designated under the fair value option. (2) Includes interest payments. Less than 1 to 3 3 to 5 Over 5 No fixed As at October 31, 2010 one year years years years maturity Total Off-Balance Sheet Financial Instruments Commitments to extend credit (1) 22,393 22,102 4,694 2,282 – 51,471 Operating leases 249 410 268 593 – 1,520 Financial guarantee contracts (1) 41,336 – – – – 41,336 Purchase obligations 225 438 279 77 – 1,019

(1) A large majority of our commitments to extend credit and financial guarantee contracts expire without being drawn upon. As a result, the contractual amounts may not be representative of the funding likely to be required for these commitments. Further details on these obligations are included in Notes 6 and 7 on page 124 of the financial statements.

Table 21: Capital Adequacy ($ millions, except as noted) Basel II basis Basel I basis (1)

As at October 31 2010 2009 2008 2007 2006 Tier 1 capital Common shareholders’ equity 18,753 17,132 15,974 14,233 14,465 Non-cumulative preferred shares (2) (3) 2,571 2,571 1,996 1,446 1,046 Innovative Tier 1 capital instruments (2) 2,542 2,907 2,486 2,422 2,192 Non-controlling interest in subsidiaries 23 26 39 33 36 Goodwill and excess intangible assets (4) (1,619) (1,569) (1,635) (1,140) (1,098) Accumulated net after-tax unrealized losses on available-for-sale equity securities – (2) (15) – – Net Tier 1 capital 22,270 21,065 18,845 16,994 16,641 Securitization-related deductions (165) (168) (115) na na Expected loss in excess of allowance (AIRB Approach) (5) – (61) – na na Substantial investments and investments in insurance subsidiaries (7) (427) (374) na na na Other deductions – – (1) na na Supplemental Information Adjusted Tier 1 capital 21,678 20,462 18,729 16,994 16,641 Tier 2 capital Subordinated debt 3,776 4,236 4,175 3,335 2,306 Trust subordinated notes 800 800 800 800 – Accumulated net after-tax unrealized gains on available-for-sale equity securities 10 – – 26 – Eligible portion of general allowance for credit losses (5) (6) 292 296 494 898 905 Preferred shares of a subsidiary (3) – – – – 273 Total Tier 2 capital 4,878 5,332 5,469 5,059 3,484 First-loss protection na na na (85) (44) Securitization-related deductions (29) (7) (6) na na Expected loss in excess of allowance (AIRB Approach) (5) – (60) – na na Investments in non-consolidated subsidiaries and substantial investments (7) (890) (868) (871) (994) (937) Adjusted Tier 2 capital 3,959 4,397 4,592 3,980 2,503 Total capital 25,637 24,859 23,321 20,974 19,144 Risk-weighted assets 161,165 167,201 191,608 178,687 162,794 Capital ratios (%) Tier 1 Capital Ratio 13.45 12.24 9.77 9.51 10.22 Total Capital Ratio 15.91 14.87 12.17 11.74 11.76 Assets-to-capital multiple 14.5 14.1 16.4 17.2 16.1

(1) Beginning in fiscal 2008, capital is calculated under the Basel II guidelines, whereas for all capital. The general allowance related to credit risk measured under the Standardized Approach is prior periods capital is calculated using the Basel I methodology. included in Tier 2 capital, up to 1.25% of risk-weighted assets. (2) Non-cumulative preferred shares and Innovative Tier 1 capital instruments include amounts (6) Under Basel I, OSFI permits the inclusion of the lesser of the balance of the general allowance that are reflected as liabilities on the consolidated balance sheet, but are eligible for inclusion for credit losses and 0.875% of risk-weighted assets. in the capital calculation for regulatory purposes. (7) Effective November 1, 2008, substantial investments are deducted 50% from Tier 1 capital and 50% (3) In 2007, OSFI approved the reclas sification of preferred shares issued by a subsidiary from from Tier 2 capital. Previously these investments were deducted from Tier 2 capital. Investments in Tier 2 capital to Innovative Tier 1 capital. insurance subsidiaries held prior to January 1, 2007 are deducted from Tier 2 capital. Effective 2012, (4) In addition to goodwill, intangible assets in excess of 5% of gross Tier 1 capital are deducted these investments in insurance subsidiaries will be deducted 50% from Tier 1 capital and 50% from from Tier 1 capital. Tier 2 capital. In addition, incremental investments in insurance subsidiaries are immediately (5) When expected loss as calculated under the Advanced Internal Ratings Based (AIRB) Approach deducted 50% from Tier 1 capital and 50% from Tier 2 capital. exceeds total provisions, 50% of the difference is deducted from Tier 1 capital and 50% from na – not applicable Tier 2. When the expected loss is less than total provisions, the difference is added to Tier 2

106 BMO Financial Group 193rd Annual Report 2010 Supplemental Information

107 2009 ($ millions) (2) ased, commercial paper paper commercial ased, of federal funds purch federal of Unrealized gains (losses) gains Unrealized 2010 Annual Report 193rd Financial Group BMO Default Approach Approach Approach Default Approach Total Exposure Standardized Standardized Exposure Advanced at balance (%) paid rate balance (%) paid rate 2009 2008 2009 2009 2008 20072006

2010 2010 Risk-weighted assets Risk-weighted 19,658 17,525 – 17,525 2010 (1) – balance balance paid (%) rate Average Average Average Average Average Average Average Average Average Risk-weighted assets Risk-weighted issued and other deposit liabilities. These amounts would have been classified as short-term bor- been classified as short-term have These amounts would liabilities. deposit other and issued purposes. reporting U.S. for rowings U.S. reporting requirements; and total deposits payable on a fixed date included $15,844 million, million, included date $15,844 a fixed on deposits payable total and requirements; reporting U.S. respectively, million, $28,074 and million $16,994 19,658 49,444 50,543 (121) 45 1,099 655 55 15,331 0.24 13,640 0.34 11,544 15,331 1.83 – 16,383 19,213 – 14,175 – – – 5,792 5,792 – 5,792 – 5,512 5,512 – – Exposure Standardized Standardized Exposure Advanced at Default Approach Approach Approach Approach Default at Total 9,607 1.08 11,354 3.71 9,607 1.08 0.51 8,862 cost Amortized value Fair 9,622 9,915 293 70 32 (29) 7,945 8,229 8 247 87 20 652 683 284 – (10) 31 28 3 (6) 90 26 4,476 4,592 (19) 662 686 (255) (3) 116 123 24 (6) 3 10,013 10,042 47 1 – 1 29 45,384 0.29 42,480 0.48 38,112 1.88 89,155 45,384 1.83 2.92 90,822 1.08 161,658 87,208 3.53 1.76 154,653 167,136 15,652 3.51 2.66 9,327 0.72 0.98 8,022 0.74 90,907 1.31 93,586 74,827 3.45 48,142 113,023 161,165 49,012 118,189 167,201 3,114 0.03 7,847 0.02 4,000 0.78 64,126 0.68 1.59 62,580 3,114 54,829 3.57 ($ millions) 44,176 3,158 1,293 4,451 44,176 3,158 4,212 47,181 2,597 1,615 19,489 4,232 5,663 9,895 19,489 4,232 12,489 4,544 7,945 21,883 65,782 12,006 62,996 – 12,006 – 10,751 10,751

($ millions, except as noted) except ($ millions, (1) 146 30 – – 146 322 16,396 16,074 241,963 0.98 252,565 1.60 248,239 241,963 2.96 31,197 25,167 – 5,469 5,469 3,210 – 3,210 44,742 6,784 14,688 21,472 44,229 18,201 26,395 8,194 116 555 671 908 1,144 – 492 492

52,023 7,947 25 7,945 7,970 7,947 – 58,466

1,249 – 997 997 1,380 997 1,168 – 1,168 – 1,249 1,115 4,463 27,342 3,348 3,138 1,886 5,024 34,998 5,217 6,578 1,471 5,107 3,628 1,589 40,633 101 13,342 13,443 47,541 11,207 11,207 – 13,342 101 40,633 544,059 26,895 109,395 136,290 520,194 30,016 113,082 143,098 53,978 – 593 593 653 653 – 60,521 32,597 4,648 4,537 283 4,254 4,444 204 42,817

ts amounts credit under risk for the AIRB Approach. 93,446 52,174 108,368 10,776 41,398 9,411 32,336 41,747

Canada – Canada United States States – United non-counterparty managed assets – non-counterparty est bearing bearing est er

Residential mortgages, excluding home equity line of credit line of home equity excluding mortgages, Residential medium-sized small and excluding enterprises Other retail, comprehensive income. included (losses) comprehensive gains are in other Unrealized value. fair at in the balance sheet reflected are securities Available-for-sale The scaling factor is applied to the risk-weighted asse The scaling is the factor applied to risk-weighted

Other governments debt debt Other governments available-for-sale securities Total Mortgage-backed securities securities Mortgage-backed debt Corporate equity Corporate As at October 31 31 October As at debt Canadian governments debt governments U.S. Other deposits payable after notice or on a fixed date date a fixed or on notice after Other deposits payable countries other and States in the United deposits booked Total deposits average Total Deposits Booked in the United States and Other Countries States in the United Deposits Booked countries other and States Banks in the United located countries other and States in the United institutions and Governments Other demand deposits in our Canadian bank depositors foreign deposits by 2008: and 2009 2010, 31, October As at total respectively; million, $14,781 and million $14,392 million, $14,129 to amounted offices million, $22,203 and million $23,477 million, included $24,340 notice after deposits payable been classified as demand deposits under have would that chequing accounts of respectively, Payable after notice notice after Payable date a fixed on Payable in Canada deposits booked Total Deposits Booked in Canada Deposits Booked Demand deposits – int bearing Demand deposits – non-interest Assets Basel II Risk-Weighted Total Total Credit Risk Credit Total Risk Market Risk Operational Trading book Trading Securitization assets Other credit risk Approach under AIRB assets credit risk for Scaling factor Qualifying revolving retail retail revolving Qualifying Equity medium-sized small and enterprises Retail Bank Retail credit line of equity Home Sovereign medium-sized small and enterprises Corporate 31 October As at Risk Credit Wholesale including specialized lending Corporate,

(1) (1) (gains) or hedge contracts. losses liabilities on related by (losses) gains be offset may Unrealized (2) Table 24: Unrealized Gains (Losses) on Available-for-Sale Securities on Available-for-Sale Gains (Losses) Unrealized 24: Table

Table 23: Average Deposits Average 23: Table (1) (1) Table 22: Risk-Weighted Assets Risk-Weighted 22: Table Statement of Management’s Responsibility for Financial Information

The management of Bank of Montreal (the “bank”) is responsible business planning; effective segregation of duties; delegation of for preparation and presentation of the annual consolidated financial authority and personal accountability; escalation of relevant information statements, Management’s Discussion and Analysis (“MD&A”) and for decisions regarding public disclosure; careful selection and training all other information in the Annual Report. of personnel; and accounting policies that we regularly update. The consolidated financial statements have been prepared in This structure ensures appropriate internal controls over transactions, accordance with Canadian generally accepted accounting principles assets and records. We also regularly audit internal controls. These (“GAAP”) and the applicable requirements of the Securities and Exchange controls and audits are designed to provide us with reasonable assurance Commission (“SEC”) in the United States. The financial statements that the financial records are reliable for preparing financial statements also comply with the provisions of the Bank Act and related regulations, and other financial information, assets are safeguarded against including interpretations of GAAP by the Office of the Superintendent unauthorized use or disposition, liabilities are recognized, and we of Financial Institutions Canada, our regulator. are in compliance with all regulatory requirements. The MD&A has been prepared in accordance with the requirements As at October 31, 2010, we, as the bank’s Chief Executive Officer and of securities regulators, including National Instrument 51-102 of Chief Financial Officer, have determined that the bank’s internal control the Canadian Securities Administrators (“CSA”) as well as Item 303 over financial reporting is effective. We have certified Bank of Montreal’s of Regulation S-K under the United States Securities Act of 1933 annual filings with the CSA as required in Canada under National and the Securities Exchange Act of 1934, and their related published Instrument 52-109 (Certification of Disclosure in Issuers’ Annual and requirements. Interim Filings) and with the SEC as required in the United States The consolidated financial statements and information in the under the Securities Exchange Act of 1934. MD&A necessarily include amounts based on informed judgments and In order to provide their audit opinions on our consolidated estimates of the expected effects of current events and transactions financial statements and on the bank’s internal control over financial with appropriate consideration to materiality. In addition, in preparing reporting, the Shareholders’ Auditors audit our system of internal the financial information we must interpret the requirements described controls and conduct work to the extent that they consider appropriate. above, make determinations as to the relevancy of information to Their audit opinion on the bank’s system of internal controls is set be included, and make estimates and assumptions that affect reported forth below. information. The MD&A also includes information regarding the impact The Board of Directors, based on recommendations from its Audit of current transactions and events, sources of liquidity and capital Committee, reviews and approves the financial information contained resources, operating trends, risks and uncertainties. Actual results in in the Annual Report, including the MD&A. The Board of Directors and the future may differ materially from our present assessment of this its relevant Committees oversee management’s responsibilities for information because events and circumstances in the future may the preparation and presentation of financial information, maintenance not occur as expected. of appropriate internal controls, compliance with legal and regulatory The financial information presented in the bank’s Annual Report requirements, management and control of major risk areas, and is consistent with that in the consolidated financial statements. assessment of significant and related party transactions. In meeting our responsibility for the reliability and timeliness The Audit Committee, which is comprised entirely of independent of financial information, we maintain and rely on a comprehensive directors, is also responsible for selecting the Shareholders’ Auditors system of internal controls and internal audit, including organizational and reviewing the qualifications, independence and performance of both and procedural controls, disclosure controls and procedures, and the Shareholders’ Auditors and internal audit. The Shareholders’ Auditors internal control over financial reporting. Our system of internal controls and the bank’s Chief Auditor have full and free access to the Board of includes written communication of our policies and procedures Directors and its Audit and other relevant committees to discuss audit, governing corporate conduct and risk management; comprehensive financial reporting and related matters.

William A. Downe Russel C. Robertson Canada President and Chief Executive Officer Chief Financial Officer December 7, 2010

108 BMO Financial Group 193rd Annual Report 2010 Shareholders’ Auditors’ Reports

To the Shareholders of Bank of Montreal estimates made by management, as well as evaluating the overall We have audited the consolidated balance sheets of Bank of Montreal financial statement presentation. (the “bank”) as at October 31, 2010 and 2009 and the consolidated In our opinion, these consolidated financial statements present statements of income, comprehensive income, changes in shareholders’ fairly, in all material respects, the financial position of the bank as equity and cash flows for each of the years in the three-year period at October 31, 2010 and 2009 and the results of its operations and ended October 31, 2010. These financial statements are the responsibility its cash flows for each of the years in the three-year period ended of the bank’s management. Our responsibility is to express an opinion October 31, 2010 in accordance with Canadian generally accepted on these financial statements based on our audits. accounting principles. We conducted our audits in accordance with Canadian generally accepted auditing standards and the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform an audit to obtain reasonable assurance whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting Chartered Accountants, Licensed Public Accountants the amounts and disclosures in the financial statements. An audit Toronto, Canada also includes assessing the accounting principles used and significant December 7, 2010

To the Shareholders and Board of Directors permit preparation of financial statements in accordance with generally of Bank of Montreal accepted accounting principles, and that receipts and expenditures of We have audited Bank of Montreal’s (the “bank”) internal control the company are being made only in accordance with authorizations of over financial reporting as of October 31, 2010, based on the criteria management and directors of the company; and (3) provide reasonable established in Internal Control – Integrated Framework, issued by assurance regarding prevention or timely detection of unauthorized the Committee of Sponsoring Organizations of the Treadway Commission acquisition, use or disposition of the company’s assets that could have (“COSO”). The bank’s management is responsible for maintaining a material effect on the financial statements. effective internal control over financial reporting and for its assess- Because of its inherent limitations, internal control over financial ment of the effectiveness of internal control over financial reporting, reporting may not prevent or detect misstatements. Also, projections included on page 74 of Management’s Discussion and Analysis. of any evaluation of effectiveness to future periods are subject to Our responsibility is to express an opinion on the bank’s internal the risk that controls may become inadequate because of changes control over financial reporting based on our audit. in conditions, or that the degree of compliance with the policies We conducted our audit in accordance with the standards of or procedures may deteriorate. the Public Company Accounting Oversight Board (United States). In our opinion, the bank maintained, in all material respects, Those standards require that we plan and perform an audit to obtain effective internal control over financial reporting as of October 31, 2010, reasonable assurance whether effective internal control over financial based on the criteria established in Internal Control – Integrated reporting was maintained in all material respects. Our audit included Framework issued by COSO. obtaining an understanding of internal control over financial reporting, We also have conducted audits of the consolidated financial assessing the risk that a material weakness exists, and testing and statements of the bank for each of the years in the three-year period evaluating the design and operating effectiveness of internal control ended October 31, 2010 in accordance with Canadian generally based on the assessed risk. Our audit also included performing such accepted auditing standards and the standards of the Public Company other procedures as we considered necessary in the circumstances. Accounting Oversight Board (United States). Our report dated We believe that our audit provides a reasonable basis for our opinion. December 7, 2010 expressed an unqualified opinion on those consolidated A company’s internal control over financial reporting is a process financial statements. designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the Chartered Accountants, Licensed Public Accountants transactions and dispositions of the assets of the company; (2) provide Toronto, Canada reasonable assurance that transactions are recorded as necessary to December 7, 2010

BMO Financial Group 193rd Annual Report 2010 109 CONSOLIDATED FINANCIAL STATEMENTS Consolidated Balance Sheet

As at October 31 (Canadian $ in millions) 2010 2009 Assets Cash and Cash Equivalents (Note 2) $ 17,368 $ 9,955

Interest Bearing Deposits with Banks (Note 2) 3,186 3,340

Securities (Note 3) Trading 71,710 59,071 Available-for-sale 50,543 50,257 Other 1,146 1,485 123,399 110,813

Securities Borrowed or Purchased Under Resale Agreements (Note 4) 28,102 36,006

Loans (Notes 4 and 8) Residential mortgages 48,715 45,524 Consumer instalment and other personal 51,159 45,824 Credit cards 3,308 2,574 Businesses and governments 68,338 68,169 171,520 162,091 Customers’ liability under acceptances 7,001 7,640 Allowance for credit losses (1,878) (1,902) 176,643 167,829 Other Assets Derivative instruments (Note 10) 49,759 47,898 Premises and equipment (Note 11) 1,560 1,634 Goodwill (Note 13) 1,619 1,569 Intangible assets (Note 13) 812 660 Other (Note 14) 9,192 8,754 62,942 60,515 Total Assets $ 411,640 $ 388,458

Liabilities and Shareholders’ Equity Deposits (Note 15) Banks $ 19,435 $ 22,973 Businesses and governments 130,773 113,738 Individuals 99,043 99,445 249,251 236,156 Other Liabilities Derivative instruments (Note 10) 47,970 44,765 Acceptances (Note 16) 7,001 7,640 Securities sold but not yet purchased (Note 16) 16,438 12,064 Securities lent or sold under repurchase agreements (Note 16) 47,110 46,312 Other (Note 16) 17,414 15,938 135,933 126,719

Subordinated Debt (Note 17) 3,776 4,236

Capital Trust Securities (Note 18) 800 1,150 Consolidated Financial Statements Consolidated Shareholders’ Equity Share capital (Note 20) 9,498 8,769 Contributed surplus 92 79 Retained earnings 12,848 11,748 Accumulated other comprehensive loss (558) (399) 21,880 20,197 Total Liabilities and Shareholders’ Equity $ 411,640 $ 388,458

The accompanying notes are an integral part of these consolidated financial statements. Certain comparative figures have been reclassified to conform with the current year’s presentation.

William A. Downe Philip S. Orsino President and Chief Executive Officer Chairman, Audit Committee

110 BMO Financial Group 193rd Annual Report 2010 Consolidated Financial Statements 111 538 8,875

44 42 576 170 210 203 309 221 183 362 328 202 384 217 (71) 973 1,105 5,494 5,133 5,003 9,663 7,381 6,894 4,385 1,281 3,976 1,241 53 80 53 540,294 502,062 542,313 506,697 3.76 3.08 $ 3.79 2.80 $ 3.09 2.80 121 291 339 121 589 344 513 467 353 929 (315) 397 (354) 237 295 9,461 1,981 74 2,080 76 2,052 1,863 $ 1,787 $ 1,978 $ 73 $ 120 $ 1,667 $ 1,905 $ 7,960 $ 10,614 $ 7,960 $ 3,191 930 2,427 186 7,341 222 4,041 91 135 80 747 5,570 3,742 2,009 3,967 1,603 5,072 756 1,330 546 820 429 723 556 10,573 14,735

2009 2008 2010 2010 Annual Report 193rd Financial Group BMO 559,822 563,125 $ 4.78 4.75 2.80 233 355 550 678 445 150 93 321 224 5,975 11,161 4,364 1,343 203 343 229 52 372 684 7,590 3,571 687 2,884 74 $ 2,810 $ 136 $ 2,674 74 $ 7,270 2,134 74 119 2,362 71 691 3,243 6,235 1,049 5,186 1,048 802 504 572 9,478

(Notes 18 and 20) and 18 (Notes (Note 3) (Note

(Note 24) (Note

(Notes 16 18) and 16 (Notes

(Note 13) (Note

(in thousands)

(Note 20) (Note (Note 4) (Note (Note 11) (Note (in thousands) (Notes 22 and 23) and 22 (Notes (Note 8) (Note (Canadian $) (Note 25) $) (Note (Canadian

(Note 3) (Note

The accompanying notes are an integral part of these consolidated financial statements. these consolidated of part integral an are notes The accompanying presentation. year’s the current with conform to been reclassified have figures comparative Certain Earnings Per Share Share Earnings Per Basic Diluted Share Common Per Dividends Declared Preferred share dividends share Preferred shareholders common to available income Net shares common Average shares common diluted Average Non-controlling interest in subsidiaries Income Net Income Before Provision for (Recovery of) Income Taxes and Non-Controlling Interest in Subsidiaries Interest and Non-Controlling of) Taxes Income (Recovery for Provision Before Income of) taxes income (recovery for Provision Business and capital taxes capital taxes and Business fees Professional Other Premises and equipment equipment and Premises assets intangible Amortization of development business and Travel Communications Net Interest Income and Non-Interest Revenue Revenue Non-Interest and Income Interest Net Expense Non-Interest compensation Employee Foreign exchange, other than trading trading than other exchange, Foreign income Insurance Other Mutual fund revenues Mutual fund revenues revenues Securitization advisoryUnderwriting and fees trading than other (losses), gains Securities Trading revenues revenues Trading fees Lending fees Card fees custodial and management Investment Non-Interest Revenue Non-Interest Securities commissions and fees service charges payment and Deposit Income Interest Net credit losses for Provision Losses Credit for Provision After Income Interest Net Subordinated debt debt Subordinated shares preferred and securities Capital trust Other liabilities Expense Interest Deposits Interest, Dividend and Fee Income and Fee Dividend Interest, Loans Securities Deposits banks with For the Year Ended October 31 (Canadian $ in millions, except as noted) except $ in millions, (Canadian 31 Ended October the Year For

Consolidated Statement of Income of Statement Consolidated CONSOLIDATED FINANCIAL STATEMENTS Consolidated Statement of Comprehensive Income

For the Year Ended October 31 (Canadian $ in millions) 2010 2009 2008 Net income $ 2,810 $ 1,787 $ 1,978 Other Comprehensive Income Net change in unrealized gains (losses) on available-for-sale securities 35 554 (109) Net change in unrealized gains (losses) on cash flow hedges 48 (244) 424 Net gain (loss) on translation of net foreign operations (242) (458) 967 Total Comprehensive Income $ 2,651 $ 1,639 $ 3,260

Consolidated Statement of Changes in Shareholders’ Equity

For the Year Ended October 31 (Canadian $ in millions, except as noted) 2010 2009 2008

Preferred Shares (Note 20) Balance at beginning of year $ 2,571 $ 1,746 $ 1,196 Issued during the year – 825 550 Balance at End of Year 2,571 2,571 1,746

Common Shares (Note 20) Balance at beginning of year 6,198 4,773 4,411 Issued during the year – 1,000 – Issued under the Shareholder Dividend Reinvestment and Share Purchase Plan (Note 20) 537 338 122 Issued under the Stock Option Plan (Note 20) 192 87 60 Issued on the acquisition of a business – – 180 Balance at End of Year 6,927 6,198 4,773

Treasury Shares (Note 20) – – (65) Contributed Surplus Balance at beginning of year 79 69 58 Stock option expense/exercised (Note 22) 13 8 11 Premium on treasury shares – 2 – Balance at End of Year 92 79 69 Retained Earnings Balance at beginning of year 11,748 11,632 11,166 Net income 2,810 1,787 1,978 Dividends – Preferred shares (Note 20) (136) (120) (73) – Common shares (Note 20) (1,571) (1,530) (1,410) Share issue expense (3) (32) (10) Treasury shares – 11 (19) Balance at End of Year 12,848 11,748 11,632 Accumulated Other Comprehensive Income (Loss) on Available-for-Sale Securities Balance at beginning of year 480 (74) 35 Unrealized gains (losses) on available-for-sale securities arising during the year (net of income tax (provision) recovery of $(21), $(253) and $137) 108 491 (280) Reclassification to earnings of (gains) losses in the year (net of income tax (provision) recovery of $25, $(26) and $(84)) (73) 63 171 Balance at End of Year 515 480 (74) Accumulated Other Comprehensive Income on Cash Flow Hedges

Consolidated Financial Statements Consolidated Balance at beginning of year 14 258 (166) Gains (losses) on cash flow hedges arising during the year (net of income tax (provision) recovery of $(69), $64 and $(173)) 154 (153) 363 Reclassification to earnings of (gains) losses on cash flow hedges (net of income tax (provision) recovery of $48, $44 and $(31)) (106) (91) 61 Balance at End of Year 62 14 258 Accumulated Other Comprehensive Loss on Translation of Net Foreign Operations Balance at beginning of year (893) (435) (1,402) Unrealized gain (loss) on translation of net foreign operations (725) (1,331) 2,726 Impact of hedging unrealized gain (loss) on translation of net foreign operations (net of income tax (provision) recovery of $(206), $(382) and $881) 483 873 (1,759) Balance at End of Year (1,135) (893) (435) Total Accumulated Other Comprehensive Loss (558) (399) (251) Total Shareholders’ Equity $ 21,880 $ 20,197 $ 17,904

The accompanying notes are an integral part of these consolidated financial statements.

112 BMO Financial Group 193rd Annual Report 2010 Consolidated Financial Statements 113 821 5,484 821 1,299 2,198 1,299 $ 5,507 $ 9,900 $ 456 $ (232) (113) 2,045 900 – (150) (113) 17,467 (140) (3,731) 550 (250) – 1,087 (10) 825 – 60 (32) (10,360) – (1,312) (1,361) (63) 8,656 (41,041) (28,507) (3,107) 10,800 (21,303) 10,077 18,917 (285) 16,984 (204) (164) 6,796 8,268 (176) (155) (328) 11,448 17 (10,655) (1,255) 19 551 11,047 $ 9,955 $ 9,134 $ 8,656 $ 6,936 301 324 (9) 301 53 8,275 7,207 1,330 (420) 1,603 14,010 (29,370) (700) 252 20,645 (9,510) (13) 269 (10) (157) 186 (314) 183 296 203 303 387 (351) (492) 1,590 (2,796) 12,794 4,246 (11,149) (6,446) (1,412) (7,251) (10,985) 14,665 $ 9,955 $ 9,134 2009 2008 2010 2010 Annual Report 193rd Financial Group BMO 16,693 7,413 675 17,368 $ $ 3,371 $ 897 2,043 (500) – (10) – – (350) (3) 197 (1,175) 21,626 383 (28,587) 13,879 15,329 (17,531) 4,279 5 (274) (207) (1,029) (7,028) (601) $ 17,368 $ 1,787 $ 1,978 1,787 $ $ 2,810 $ 40 (190) 1,049 (13,707) (2,803) (496) 4,775 267 (4) 203 (62) (229) (75) (119) 1,957 (6,584) 16,762 4,662 6,725 9,955 9,134 3,650

$

(Note 3) (Note

(Note 3) (Note

(Note 17) (Note (Note 11) (Note

(Note 20) (Note

(Note 20) 20) (Note

owed or purchased under resale agreements agreements or purchased under resale owed (Note 20) (Note nt or sold under repurchase agreements agreements under repurchase or sold nt (Note 18) (Note (Note 8) (Note (Note 8) (Note (Increase) decrease in derivative asset asset in derivative decrease – (Increase) liability in derivative (decrease) – Increase net purchases – net (Note 17) 17) (Note (Decrease) in interest payable payable in interest – (Decrease) (Increase) decrease in interest receivable receivable in interest decrease – (Increase) net purchases – net

nancing Activities (Note 12) (Note

Amount of income taxes paid (refunded) in the year (refunded) in the year paid taxes income Amount of Cheques and other items in transit, net in transit, net items other Cheques and Information Cash Flow of Supplemental Disclosure in the year paid interest Amount of Cash and Cash Equivalents at End of Year End of at Cash and Cash Equivalents by: Represented Canada banks deposits Bank other with and of bearing Cash non-interest and Effect of Exchange Rate Changes on Cash on Cash Changes and Equivalents Exchange Rate Effect of in Cash Increase Cash and Equivalents Net Year Cash Beginning of Cash and at Equivalents Purchased and developed software software developed Purchased and Acquisitions Activities (Used in) Investing by Cash Provided Net Proceeds from securitization of loans loans of securitization from Proceeds (increase) borr Net in securities decrease land buildings and sales of from Proceeds equipment and Premises Purchases of securities, other than trading trading than other securities, Purchases of trading than other securities, of Maturities trading than other securities, sales of from Proceeds (increase)Net in loans Net Cash Provided by (Used in) Financing Activities by Cash Provided Net Activities sting Inve from Cash Flows deposits banks with bearing in interest decrease Net Proceeds from issuance of common shares shares common of issuance from Proceeds Securities Capital Trust of Redemption expense issue Share Cash dividends paid Net increase (decrease) in deposits (decrease) increase Net debt subordinated of Repayment debt subordinated of issuance from Proceeds liability share preferred of Redemption shares preferred of issuance from Proceeds Cash Flows from Fi from Cash Flows purchased yet but not sold in securities (decrease) increase Net le in securities (decrease) increase Net increaseNet in (decrease) liabilities subsidiaries of net accruals, and items in other Changes Activities (Used in) Operating by Cash Provided Net assets intangible Amortization of (increase) taxes Net income in future decrease taxes (increase) income Net in current decrease interest in accrued Change instruments in derivative Change equipment and premises Amortization of land buildings and sales on of (Gain) trading than other securities, (gain) on Net loss (increase) Net securities in trading decrease credit losses for Provision loans securitized sale on of (Gain) Cash Flows from Operating Activities Operating from Cash Flows income Net activities in) operating (used by provided cash flows net Adjustments determine to trading than other securities, of write-down Impairment For the Year Ended October 31 (Canadian $ in millions) $ in millions) (Canadian 31 Ended October the Year For

financial statements. these consolidated of part integral an are notes The accompanying Consolidated Statement of Cash Flows Cash of Statement Consolidated Notes total assets, total liabilities or net income arising from applying United United applying from arising income net or liabilities assets, total total reported underUnited States GAAP. Significant differences inconsolidated average exchange rate for theyear. expenses denominated inforeign currencies are translated usingthe at theexchange rate ineffect at thebalance sheet date. Revenues and denominated inforeign currencies are translated into dollars Canadian 114 to reduce ourexposure tointhe value changes of foreign currencies. Consolidated Statement of Income asthey arise. and losses are inforeign included exchange, other inour than trading, gain orloss on disposition. All other foreign currency translation gains loss on translation of net foreign operations, are recorded aspart of the inshareholders’included equity as accumulated other comprehensive foreign operation, theassociated translation gains and losses, previously of net foreign operations. Whenwe sell orliquidate an investment ina equity within accumulated other comprehensive loss on translation income taxes, andapplicable activities inshareholders’ are included consolidated statements dollars. financial inCanadian Assets and liabilities our report and currencies of variety foreign a in business We conduct Translation of Foreign Currencies in Note 9. where we are beneficiary. theprimary Theseare more described fully and fee income, securities, inourConsolidated Statement of Income. net income orloss of thesecompanies isrecorded ininterest, dividend in ourConsolidated Sheet Balance and ourproportionate share of the net income orloss and dividends. They are recorded asother securities recorded at cost and are adjusted for ourproportionate share of any where we own between 20% and 50% of thevoting shares). Theseare overinfluence operating, investing and decisions financing (those inter-company transactions and balances are eliminated. are inourconsolidated included statements. financial All significant of theassets, liabilities, revenues and expenses of ourjoint ventures revenues andexpenses of subsid our an agreement with other shareholders. shares. Joint ventures are those where we exercise joint control through exercise control through ourownership of themajority of thevoting are where those andjointventures. we Subsidiaries subsidiaries We conductbusiness through avariety of corporate structures, including ofBasis Consolidation us. to are applicable that GAAP and theUnited States Securities and Exchange Commission (“SEC”) statements comply with disclosure certain requirements of United States States GAAPare describedinNote 30. addition, In ourconsolidated financial they are presented inablue-tinted font (text and tables). formwhich an integral part of theseconsolidated statements, financial ment’s Discussion and Analysis. To identify clearly thesedisclosures, risk certain disclosures on pages80included to 87 inthe2010 Manage- Superintendent of Institutions Financial (“OSFI”). Canada We have interpretationsincluding of GAAP by ourregulator, theOffice of the generallywith accepted Canadian accounting principles (“GAAP”), We prepare ourconsolidated statements financial inaccordance Note of1: Basis Presentation Notes to Consolidated FinancialStatements in foreign operations into dollars, Canadian net of related hedging

BMO Group Financial 193rd Report Annual 2010 Unrealized gains and losses arising from translating net investments We reconcile to GAAP results ourCanadian those that would be From timeto time, we enter into foreign exchange hedgecontracts We hold interests invariable interest entities, we which consolidate We hold investments incompanies where we exert significant iaries and our proportionate andour iaries share All of theassets, liabilities,

the following notes with therelated disclosures financial by major caption: ments, we have oursignificant disclosed accounting policies throughout To facilitate abetter of understanding ourconsolidated state- financial AccountingSpecific Policies contract) beingrecorded ininterest expense over theterm of thehedge. currency rate at inception of thecontract and therate at theendof the the spot/forward differential (thedifference between theforeign accounting hedgesare recorded inother comprehensive income, with of Income. Changes infair value on forward contracts that qualifyas in foreign exchange, other inourConsolidated than trading, Statement foreign exchange contracts related to economic hedges are included Realized and unrealized gains and losses on themark-to-market of IFRS disclosure requirements. – Pension and OtherEmployee certain Future to Benefits include Stock-Based Compensation; and Note 23 –Employee Compensation in Note 12 requirements, where appropriate. We have disclosure our enhanced Prior to our transition date, we will beginto address IFRS disclosure an opening balance sheet asat November 1, 2010 (“transition date”). for thequarter 31, endedJanuary 2012 prepared on an IFRSbasis. our consolidated statements. financial We will report results ourfinancial Effective November 1, 2011, we will adopt IFRSasthebasisfor preparing Board (“IASB”), for years fiscal beginningon orafter January 1, 2011. Standards (“IFRS”), asissued by the International Accounting Standards statements inaccordance with International Reporting Financial publicCanadian companies will berequired to prepare theirfinancial Transition to International Finan Future Changes inAccounting Policy disclosures as follows: risk management resulted from by standard changes Canadian setters in2009 are presented and goodwill and intangible assets 2009 are asfollows: disclosed instruments financial policies that resulted from by standard changes Canadian setters in accounting policies ordisclosure requirements. Changes inaccounting During the2010 year, fiscal there were GAAP inCanadian nochanges Changes inAccounting Policy 17 Subordinated 16 Other Debt 13815 Deposits 137Liabilities Goodwill14 andAssets Intangible Other 128 13 Assets Premises12 and Equipment Acquisitions 130 11 Variable Interest Entities 10 Derivative 126 122 9 Instruments 122 Asset 8 Guarantees 7 Securitization OtherCredit Instruments 1166 Risk 5 Management with Deposits Banks 4 Securities 3 C of Basis Presentation Interest 2 1 Bearing Note Topic We will also provide comparative on an data IFRSbasis, including loac o rdtLse 120 Allowance for Credit Losses underAcceptances and Loans, Customers’ Liability a sh Resources and – Acquisitions; Note 22 – Note 29. – Note 6;and instruments financial Page 142 140 125 139 137 141 116 114 cial Reporting Standards – Employee Compensation – Note 13. New disclosures that 30 30 159 159 29 Related28 Party Contingent Transactions 27 Liabilities Per Earnings 26 Share 25 24 Income Taxes 23 147 22 21 Capital 20 Share Management Capital 8 aia rs euiis 142 Trust Capital 1 Securities 18 Note Topic 9 Acutn rnils 165 Accounting Principles Generally and United States Accepted 160Reconciliation of Canadian Financial Instruments Fair Value of Segmentation Operating and Geographic 149 Employee Future Benefits Pension and Other Employee Compensation Stock-Based 147 Compensation Employee Compensation Interest Rate Risk – Notes 3and 4; – – – Page 143 145 156 157 155 Notes

115 as our the amount by which the assets by the amount of the consolidation requirement requirement the consolidation of n on the loan facility the bank the bank facility the loan n on 2010 Annual Report 193rd Financial Group BMO xposure to the risks and benefits, benefits, and the risks to xposure Information on these vehicles, including total assets, our including assets, total these vehicles, on Information Consolidation of the SIVs would impact the bank’s balance balance the bank’s impact would the SIVs of Consolidation Consolidation of this vehicle would impact the bank’s balance the bank’s impact would this vehicle of Consolidation We have not completed our assessment of the asset securitization securitization the asset of our assessment completed not have We If the securitized assets sold to the securitization vehicles vehicles the securitization to sold assets If the securitized analysis indicates that the bank in substance controls this vehicle this vehicle controls in substance the bank that indicates analysis and, where appropriate, SIC-12 (an interpretation of IAS 27). Our analysis IAS 27). of (an interpretation SIC-12 appropriate, where and, conducted are the vehicles of the activities whether considered e the bank, behalf of on the bank’s these whether and the vehicles, over its decision-making powers the controls in substance the bank that demonstrate considerations them. must consolidate therefore and vehicles our assessment and loss to exposure 9. is included in Note under Canadian GAAP, required to consolidate the SIVs. consolidate to required by balance sheet the bank’s on liabilities and assets sheet, increasing the beginning of 2010, 1, million on November $200 approximately This represents year. our comparative draw the amount exceed the SIVs of Our estimate 2010. 1, November of as the SIVs to has made available the assets value fair under IFRS to permitted the election incorporates in recorded changeswith value in the fair the SIVs, of liabilities and occur. as they income control the vehicles, as determined under the as determined criteria contained in the vehicles, control (IAS 27) standard financial statements separate and the IFRS consolidated Vehicle Protection Credit conclusion our preliminary date, to Based completed the analysis on this vehicle, consolidate to be required would the bank is that Under Canadian GAAP, under IFRS. control of the definition based on this vehicle. consolidate to required not are we million on $500 sheet, approximately increasing and liabilities assets by Our estimate year. our comparative the beginning of 2010, 1, November certain value fair under IFRS to permitted the elections incorporates changes with in the vehicle, the credit protection of liabilities and assets occur. as they in income recorded value fair (“SIVs”) Vehicles Investment Structured conclusion our preliminary date, to Based completed the analysis on as our the SIVs, consolidate to be required would the bank is that based on the SIVs controls in substance the bank that indicates analysis not are we Under Canadian GAAP, under IFRS. control of the definition noted in the preceding paragraph were to be recognized on the bank’s the bank’s on be recognized to were paragraph the preceding in noted approximately balance by sheet, increase and liabilities assets would than less by be reduced would earnings retained opening and billion $18 our comparative the beginning of 2010, 1, November on million $100 the reversal represents primarily earnings in retained The reduction year. the In addition, in earnings. recognized sale on previously the gain of to paid the yield of net customers, from collected fees and interest interest in net be recorded would vehicle, in the securitization investors the of the term over method rate interest using the effective income would mortgages and loans with associated credit losses and securitization losses. credit for in the provision be recorded Canadian loans mortgage the bank’s selling with activity associated programs. securitization asset third-party certain other to Consolidation are we whether of our assessment completed substantially have We our structured and vehicle protection our credit consolidate to required the assessed We IFRS. to transition when we vehicles investment in substance would the bank whether based on requirement consolidation will not qualify for off-balance sheet recognition under IFRS. Under Under under IFRS. recognition sheet off-balance qualify for not will programs these through sold loans and mortgages the Canadian GAAP, our asset on information our balance sheet. Additional from removed are is included 8. vehicles in Note securitization ts ely quantifying all of the impacts of all ely quantifying We have not yet finalized our decision on whether to elect the to whether on our decision finalized yet not have We Should the bank elect the fresh start method, the impact the impact method, start elect the fresh Should the bank The differences described in the sections that follow are based on based on are follow that described in the sections The differences On transition to IFRS, we can either recalculate pension expense expense pension recalculate can either we IFRS, to On transition Based on our analysis to date, certain of the more significant significant the more certain of date, Based to our analysis on The differences between the bank’s accounting policies and IFRS and policies accounting the bank’s between The differences Asset Securitization Asset our certain of of our assessment completed substantially have We and the loans whether and programs securitization asset significant sheet off-balance qualify for these programs through sold mortgages included our Canadian credit The assessment under IFRS. treatment securitization the bank’s to sold Canadian loans and mortgage loans card a third-party program, the Canada Bond to Mortgage and vehicles mortgages and the loans whether assessed We program. securitization of the transfer based on treatment sheet off-balance qualify for criteria under the as determined derecognition the risks and rewards, Based (IAS 39). in the IFRS financial instruments standard contained is conclusion our preliminary date, to completed the analysis on programs under these securitization sold or mortgages the loans that fresh start method as permitted under IFRS. as permitted start method fresh on the bank’s balance sheet would be a reduction in opening retained retained in opening be a reduction would balance sheet the bank’s on assets in other million, a decrease $1,200 approximately of earnings liabilities in other of million and a decrease $1,600 approximately of our the beginning of 2010, 1, million on November $400 approximately in reduced result also would this alternative Adopting year. comparative exist that losses deferred any since years in future expense pension expense. pension to be amortized not would 2010 31, October on back to inception of the plans as though we had always applied the the plans had always of as though we inception back to market-related record alternatively, or, requirements IFRS pension earnings in retained directly 2010 1, November on exist amounts that start method”). (“fresh Pension and Other Employee Future Benefi Future and Other Employee Pension to continue will we 19), (IAS benefits standard Under the IFRS employee of as cost benefits expense future employee other and pension record net the obligation, on cost the interest plus in the year benefits earned how for alternatives two IFRS provides assets. on return the expected of pension on or losses gains market-related the unrealized for account to pension on changes rates in discount of the impact and fund assets these can record either We amounts”). (“market-related obligations our balance on them or defer amounts in equity directly market-related or our plan assets of 10% of amounts amortize in excess and sheet benefit liability balances to pension expense a period over approxi- of not have We alternative. the second follow currently We years. 12 mately the accounting elect for to which on alternative our decision finalized yet and our pension on information Additional amounts. market-related of 23. benefits is included future in Note employee other Canadian GAAP and IFRS that are in effect as of this date. This should not This should not this date. as of in effect are that Canadian IFRS GAAP and changes the main accounting of list a comprehensive be considered IFRS. adopt when we to be in the areas of pension and other employee future benefits, asset asset benefits, future employee other and pension of be in the areas to comprehensive other accumulated and consolidation securitization, operations. foreign of translation on loss affecting shareholders’ equity. Precis equity. shareholders’ affecting choices where decisions all of finalization streams, work our project all from exemptions including optional available, are policies accounting of market prevailing the and 1, under IFRS available restatement retroactive transition. the time of at circumstances economic and conditions impact of these differences will be recorded in opening retained earnings, earnings, retained in opening be recorded will these differences of impact of the completion be subject to IFRS will adopting from result will that requirements, combined with our decisions on the optional IFRS 1 1 IFRS the optional on decisions our with combined requirements, in measure- will result IFRS, application of retroactive from exemptions The net IFRS. to transition we when differences recognition and ment changes that will result from the adoption of IFRS are expected expected IFRS are of the adoption from result changes will that NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

We do not expect consolidation of these vehicles would result Use of Estimates in any significant adjustment to opening retained earnings. In preparing our consolidated financial statements we must make We have not completed our assessment of our U.S. customer estimates and assumptions, mainly concerning fair values, which securitization vehicle and our Canadian customer securitization vehicles affect reported amounts of assets, liabilities, net income and related and other less significant VIEs. disclosures. The most significant assets and liabilities for which we must make estimates include: measurement of other than temporary Accumulated Other Comprehensive Loss on impairment – Note 3; valuation of securities at fair value – Note 3; Translation of Foreign Operations allowance for credit losses – Note 4; accounting for securitizations On transition to IFRS, we can either recalculate translation differences – Note 8; consolidation of variable interest entities – Note 9; valuation on an IFRS basis as though we had always applied the IFRS requirements, of derivative instruments at fair value – Note 10; goodwill and intangible or reset the accumulated other comprehensive loss on translation of net assets – Note 13; insurance-related liabilities – Note 16; pension and foreign operations to zero. We expect to elect to reset our accumulated other employee future benefits – Note 23; income taxes – Note 24; other comprehensive loss on translation of net foreign operations to zero. contingent liabilities – Note 28; and fair value of financial instruments The impact on the bank’s balance sheet will be an increase of $1,100 mil- – Note 29. If actual results differ from the estimates, the impact lion in accumulated other comprehensive income and a corresponding would be recorded in future periods. reduction in retained earnings of approximately $1,100 million on November 1, 2010, the beginning of our comparative year.

Note 2: Cash Resources and Interest Bearing Deposits with Banks

(Canadian $ in millions) 2010 2009 Cash Restrictions Cash and deposits with Bank of Canada Some of our foreign operations are required to maintain reserves and other banks 16,693 8,656 or minimum balances with central banks in their respective countries Cheques and other items in transit, net 675 1,299 of operation, amounting to $461 million as at October 31, 2010 ($326 million as at October 31, 2009). Total cash and cash equivalents 17,368 9,955 Interest Bearing Deposits with Banks Cheques and Other Items in Transit, Net Deposits with banks are recorded at amortized cost and include accep- Cheques and other items in transit are recorded at cost and represent tances we have purchased that were issued by other banks. Interest the net position of the uncleared cheques and other items in transit income earned on these deposits is recorded on an accrual basis. between us and other banks.

Note 3: Securities Changes in Accounting Policy the amendments, we recognized the transfers at the fair value of the On August 20, 2009, the Canadian Institute of Chartered Accountants securities on August 1, 2008. (“CICA”) released new accounting requirements relating to the A continuity of the transferred securities is as follows: classification and measurement of financial assets. The new standard redefined loans and receivables to include all non-derivative financial For the year ended October 31 (Canadian $ in millions) 2010 2009 assets with fixed or determinable repayment terms which are not Fair value of securities at beginning of year 1,378 1,955 quoted in an active market. The standard also permits reclassification Net (sales) purchases (928) (613) of available-for-sale securities to loans when there is no active market. Change in fair value recorded in other comprehensive income 55 232 Impairment on the reclassified debt securities will be calculated in a Other than temporary impairment manner consistent with our loan portfolio, based on our assessment of recorded in income (17) (99) the recoverability of principal and interest. Impact of foreign exchange (53) (97) This change in accounting policy does not have any impact on our Fair value of securities at end of year 435 1,378 results of operations or financial position since we were not required to and did not elect to transfer any available-for-sale securities to loans. As of the reclassification date, effective interest rates on reclassified During October 2008, the CICA issued amendments to Handbook trading assets ranged from 2% to 17%, with expected recoverable cash section 3855 “Financial Instruments – Recognition and Measurement”, flows of $2.2 billion. Ranges of effective interest rates were determined section 3861 “Financial Instruments – Disclosure and Presentation” based on weighted-average rates of the portfolios transferred. and section 3862 “Financial Instruments – Disclosure”. The amendments Fair value changes recorded in other comprehensive income permit, in rare circumstances, certain reclassifications of non-derivative would have resulted in a gain of $55 million being recorded in income financial assets from the trading category to either the available-for-sale for the year ended October 31, 2010 (gain of $232 million in 2009) if or held-to-maturity categories. It also permits the reclassification of the securities had not been transferred from trading to available-for-sale. certain available-for-sale loans to loans and receivables. Interest and dividend income of $26 million related to the transferred We elected to transfer from trading to available-for-sale those securities was recorded in interest, dividend and fee income,

Notes securities for which we had a change in intent to hold the securities securities in our Consolidated Statement of Income for the year for the foreseeable future rather than to exit or trade them in the short ended October 31, 2010 ($57 million in 2009). term due to market circumstances at that time. In accordance with

116 BMO Financial Group 193rd Annual Report 2010 Notes

117 loss, the length of time that the time that of the length loss, 2010 Annual Report 193rd Financial Group BMO tion provided. The share prices and The share tion provided. , which are included in other securities in included, which securities are in other In determining whether a loss is temporary, factors considered considered factors is temporary, a loss whether In determining For debt securities classified as available-for-sale, a previous a previous classified as available-for-sale, securities debt For securities available-for-sale 118 had we 2010, 31, October As at Fair Value Measurement Value Fair value. be fair to is considered value market quoted securities, traded For securities market where For is value based on bid prices. market Quoted fair techniques determine to use estimation we available, not are quotes internal techniques include cash These estimation flows, discounted value. market observable based on not the inputs where are models use internal 29. is included in Note measurement value fair of discussion Further data. from changes in interest rates and not from deterioration in the credit- in deterioration from not and rates changes in interest from and principal of full recovery expect We the issuers. of worthiness governmental due to securities certain debt from payments interest support and/or over-collateraliza valuations many of equity securities that hold also have we appreciated to our intention and Based these factors on levels. earlier from have we recovery, anticipated any before these securities sell not in nature. temporary are losses the unrealized that determined entity a single non-government by issued securities any own did not We than greater was or 2009, 2010 31, October as at value, the book where equity. our shareholders’ of 10% significant exert we where investments are Included securities in other 31, October as at million $613 and million $196 of control, not but influence, respectively. 2009, and 2010 Merchant banking investments banking Merchant bank- merchant our by held securities Balance Sheet, are our Consolidated ing subsidiaries. These subsidiaries account for their investments at fair Statement in our Consolidated recorded changes value with in fair value, occur. as they trading than other (losses), gains in securities Income of expensed. are securities non-trading for costs Transaction date using settlement transactions our securities of all for account We classified securities Balance Sheet. For our Consolidated on accounting date the trade as trading, between changes value in fair or designated available-for-sale For income. in net recorded are date settlement and settlement and date the trade between changes value in fair securities, income. comprehensive in other recorded are date Review Impairment exert we where investments and securities available-for-sale review We identify to end quarter each at control, but not influence, significant impairment. possible of indications show that investments evaluate and represent losses if its unrealized impaired is considered An investment temporary. than be other to is considered that impairment the unrealized of include the extent the financial condition position, loss unrealized has been in an security to or obligation our intention and the issuer, of prospects near-term and If the decline is con- recovery. anticipated any before the investment sell in our Consolidated is recorded a write-down be temporary, to not sidered models that utilize observable market data or comparisons with other other with data or comparisons market observable utilize that models we circumstances, In limited the same. substantially are that securities Statement of Income in securities gains (losses), other than trading. trading. than other (losses), gains in securities Income of Statement after occurs event if an income net through is reversed loss impairment to attributed can be objectively that recognized was the impairment value. in fair increase an (unrealized million $25 totalling losses unrealized with in 2009) (250 Of these available-for-sale securities, million in 2009). $199 losses of than more for continuously position loss unrealized an been in have 54 of position loss unrealized an to amounting in 2009), (93 year one Unrealized in 2009). million $74 of position loss (unrealized million $10 resulted equities, corporate excluding these instruments, on losses

the fair value option as discussed option value the fair ulation of insurance liabilities is liabilities insurance of ulation as trading securities under the fair under the fair securities as trading consist of debt and equity securities securities equity and debt of consist are securities that we purchase for resale over a over resale purchase for we that securities are than trading. Interest income earned and dividends and earned income Interest trading. than in our Consolidated Statement of Income in securities gains gains in securities Income of Statement in our Consolidated Securities held our by insurance subsidiaries that supportour Available-for-sale securities are measured at fair value with with value fair at measured are securities Available-for-sale Investments made by our insurance operations are classified as are operations our insurance made by Investments our insurance contracts, which are which are contracts, our insurance on liabilities benefit the policy under securities as trading designated above. Interest and other fee income on available-for-sale securities securities available-for-sale on income fee other and Interest above. Income of Statement in our Consolidated when earned is recognized income. insurance revenue, in non-interest 2009). The impact of recording these as trading securities was an increase an was securities these as trading recording of The impact 2009). insurance liabilities are designated designated are liabilities insurance the actuarial Since calc option. value ments with one or more embedded derivatives that would otherwise otherwise would that derivatives embedded or more one ments with the from separately for accounted and be bifurcated to be required when they Financial be designated instruments must contract. host These securities is irrevocable. the designation and acquired, are with securities as available-for-sale for otherwise be accounted would income. comprehensive in other recorded losses and gains unrealized them, electing supporting the investments of value the fair based on the accounting aligns better these investments for option value the fair these of value fair The is managed. the portfolio the way with result in million ($3,167 million $4,153 was 2010 31, October as at securities a fair value basis, in accordance with a documented risk management management risk a documented with in accordance basis, value a fair personnel management key to is reported and strategy, or investment financial instru- hybrid are the securities or (3) basis, value fair a on Securities designated as trading under the fair value option are financial are option value fair under the as trading designated Securities changes with value, fair at for be accounted may instruments that certain meet they criteria. provided in income recorded in fair value must option value fair under the as trading designated Securities the following of one satisfy and value fair measurable reliably have them fair value for at accounting criteria (1) OSFI: established by in measurement inconsistency an reduces or significantly eliminates or assets measuring from otherwise arise would that or recognition a different them on on losses and the gains or recognizing liabilities financial financial assets, of a group of part are the securities (2) basis, on evaluated its is managed and performance that or both liabilities Fair Value Option Value Fair Trading securities securities Trading short report period time. these of We securities their at fair value and in our Consolidated costs changes transaction and value the fair record revenues. in trading Income of Statement Securities and purpose a different each with types, three divided into are Securities as follows: are hold we securities types of three The treatment. accounting unrealized gains and losses recorded in accumulated other comprehen- other in accumulated recorded losses and gains unrealized in our Consolidated securities available-for-sale (loss) on income sive is the security until Equity in Shareholders’ Changes of Statement Gains temporary. than other is considered loss unrealized or if an sold, losses temporary impairment than disposal on other and losses and recorded are that may be sold in response to or in anticipation of changes in interest changes in interest of or in anticipation to in response be sold may that risk, currency changes prepayment in foreign resulting and rates needs. liquidity meet or to risk, or terms, changes in funding sources in non-interest revenue, insurance income of $298 million for the year the year for million $298 of income insurance revenue, in non-interest in 2009). million (increase $415 of 2010 31, ended October securities Available-for-sale available-for-sale or other securities, except for investments that support support that investments for except securities, or other available-for-sale received on available-for-sale securities are recorded in our Consolidated in our Consolidated recorded are securities available-for-sale on received securities. income, dividend fee and in interest, Income of Statement as held-to-maturity. our securities of classified any not have We recorded are sale whose is restricted securities Available-for-sale cost. amortized at (losses), other (losses), NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Canadian $ in millions, except as noted) Term to maturity 2010 2009

Within 1 to 3 3 to 5 5 to 10 Over 10 1 year years years years years Total Total Trading Securities Issued or guaranteed by: Canadian federal government 3,239 5,667 3,899 1,245 1,954 16,004 16,607 Canadian provincial and municipal governments 466 336 418 1,273 1,422 3,915 2,882 U.S. federal government 1,685 1,987 413 2,182 1,793 8,060 3,021 U.S. states, municipalities and agencies 796 1 5 58 194 1,054 756 Other governments – 364 883 118 – 1,365 1,712 Mortgage-backed securities and collateralized mortgage obligations – 3 10 164 893 1,070 1,026 Corporate debt 2,420 1,905 2,379 1,785 3,883 12,372 11,082 Corporate equity (1) – – – – 27,870 27,870 21,985

Total trading securities (3) 8,606 10,263 8,007 6,825 38,009 71,710 59,071 Available-for-Sale Securities Issued or guaranteed by: Canadian federal government Amortized cost 2,063 6,379 4,774 1,148 87 14,451 17,263 Fair value 2,071 6,516 4,836 1,189 89 14,701 17,359 Yield (%) 2.58 3.41 2.29 3.75 3.35 2.95 2.35 Canadian provincial and municipal governments Amortized cost 65 911 455 63 129 1,623 1,638 Fair value 65 950 472 63 145 1,695 1,688 Yield (%) 1.34 1.93 2.03 3.77 4.25 2.19 2.12 U.S. federal government Amortized cost 2,122 255 – 3,062 1 5,440 1,136 Fair value 2,122 264 – 3,271 1 5,658 1,111 Yield (%) 0.18 1.21 – 3.00 4.90 1.82 0.20 U.S. states, municipalities and agencies Amortized cost 1,505 1,408 557 499 213 4,182 5,993 Fair value 1,509 1,428 571 527 222 4,257 6,088 Yield (%) 1.45 2.63 1.39 5.86 6.02 2.60 2.48 Other governments Amortized cost 4,482 5,036 494 1 – 10,013 8,182 Fair value 4,482 5,062 497 1 – 10,042 8,229 Yield (%) 2.60 2.18 0.64 5.54 – 2.29 0.53 Mortgage-backed securities and collateralized mortgage obligations – Canada (2) Amortized cost 4 913 7,021 – 7 7,945 9,331 Fair value 5 945 7,272 – 7 8,229 9,578 Yield (%) 6.10 1.45 2.50 – 6.49 2.38 4.68 Mortgage-backed securities and collateralized mortgage obligations – U.S. Amortized cost 11 – 21 204 416 652 789 Fair value 11 – 21 217 434 683 817 Yield (%) 3.96 – 3.97 4.62 4.12 4.27 4.52 Corporate debt Amortized cost 1,168 1,939 981 126 262 4,476 4,414 Fair value 1,172 2,026 1,000 133 261 4,592 4,537 Yield (%) 1.87 3.10 2.05 5.28 4.88 2.71 2.21 Corporate equity (1) Amortized cost 9 119 93 6 435 662 856 Fair value 14 126 98 6 442 686 850 Yield (%) 4.65 4.46 3.19 0.84 1.36 2.21 2.53

Total cost or amortized cost (4) 11,429 16,960 14,396 5,109 1,550 49,444 49,602 Total fair value 11,451 17,317 14,767 5,407 1,601 50,543 50,257

Yield (%) 1.92 2.73 2.28 3.58 3.71 2.53 2.48 Other Securities Carrying value 158 172 158 312 346 1,146 1,485 Fair value 158 172 158 312 380 1,180 1,503 Total cost or amortized cost of securities 20,193 27,395 22,561 12,246 39,905 122,300 110,158 Total carrying value of securities 20,215 27,752 22,932 12,544 39,956 123,399 110,813

Total by Currency (in Canadian $ equivalent) Canadian dollar 8,013 17,035 19,204 4,909 26,372 75,533 74,249 U.S. dollar 7,723 8,673 3,379 7,471 13,427 40,673 30,015 Other currencies 4,479 2,044 349 164 157 7,193 6,549

Notes Total securities 20,215 27,752 22,932 12,544 39,956 123,399 110,813

(1) For preferred shares, term to maturity is based on dividend reset dates. For other equities, Certain comparative figures have been reclassified to conform with the current year’s presentation. 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 (2) These amounts are supported by insured mortgages. the contractual interest or stated dividend rates associated with each security adjusted for any (3) As at October 31, 2008, the total carrying value for trading securities is $66,032 million, amortization of premiums and discounts. Tax effects are not taken into consideration. The term with $9,537 million and $125 million in U.S. federal government and U.S. states, municipalities to maturity included in the table above is based on the contractual maturity date of the security. and agencies, respectively. The term to maturity of mortgage-backed securities and collateralized mortgage obligations is based (4) As at October 31, 2008, the total carrying value for available-for-sale securities is on average expected maturities. Actual maturities could differ as issuers may have the right to call $32,236 million, with $2,256 million and $8,075 million in U.S. federal government and or prepay obligations. Securities with no maturity date are included in the over 10 years category. U.S. states, municipalities and agencies, respectively. 118 BMO Financial Group 193rd Annual Report 2010 Notes 119 609 (718) 148 99 (69) (106) (354) (315) (301) (324) (132) 16 2,682 2,158 2,427 3,191 20092008

2010 2010 Annual Report 193rd Financial Group BMO 132 (5) 63 933 1,667 773 933 56 2,134 70 65 – – – – – 856 26 32 850 789 28 – 817 1,638 1,136 5,993 8,182 50 1 9,331 98 53 – 247 4,414 26 3 1,688 6 1,111 184 6,088 – 8,229 9,578 61 4,537 49,602 854 199 50,257 – 8 – 2 – 10 – 8 – 2 – 5 1,587 1 309 6 1,896 309 6 1,587 1 5 – 1 510 2 861 3 1,371 861 3 510 2 1 – 30 – – – 30 30 – – – – 12 15 14 2 26 17 12 15 14 2 26 65 3,102 6 316 71 3,418 27 889 1,769 34 880 61 15 38 17 45 32 83 17 45 32 15 38 125 6,179 74 2,415 199 8,594

Gross Gross Gross Gross Gross Amortized unrealized cost unrealized gains Fair losses value

securities Available-for-sale Gross 2009 Gross (40) 150 482 2,766 683 686 Available-for-sale securities Available-for-sale months 12 than Less or longer months 12 for position loss unrealized in an Total 2009 losses losses losses value losses value value 5,658 4,592 10,042 14,701 17,263 167 71 17,359

1,305 1,424 1,459

3 – 3 – 14 Trading securities, net realized and unrealized gains (losses) of $306 million in 2010, in 2010, million $306 (losses) gains of unrealized and realized net securities, Trading $nil in 2008. and in 2009 million $418 (losses of $13 million in 2009) related to securities transferred from trading trading from transferred securities to related in 2009) million $13 (losses of 2008. 1, August effective October 31, 2010 ($18 million in 2009 and $nil in 2008). $nil and in 2009 million ($18 2010 31, October as at held still securities trading to related are losses unrealized net of million $27 (2) presentation. year’s the current with conform to been reclassified have figures comparative Certain

32 31 27 218 130

Available-for-sale securities securities Available-for-sale 2010 (1) (2)

Gross Gross

cost cost gains losses value 49,444 1,124 25 50,543 Available-for-sale securities Available-for-sale Amortized Amortized unrealized unrealized Fair 1,623 74 2 1,695 in an unrealized loss position for for position loss in an unrealized 2010

(1) – 19 – 2 – 21 19 – 2 – – 2 340 – 159 2 499 – – 3 30 3 30 30 3 – – 3 2 253 – – 2 253 2 253 – – 2 10 717 1,205 4 488 14 4,182 77 2 4,257 4,257 77 2 4,182 Gross Gross Gross Gross Gross Gross losses value losses value losses value valuelosses losses value Less than 12 months months 12 than Less or longer months 12 Total (1) 7,945 284 – 8,229 – 284 7,945 unrealized Fair unrealized Fair unrealized Fair unrealized Fair unrealized unrealized Fair unrealized unrealized Fair unrealized Fair Fair (1) 1 326 – – 1 326 326 – – 1 1 14,451 251 1 251 14,451 652

– – – – – – 666 – – 666 – – 5,440

Canada – Canada – U.S. (1) – 1,154 3 3,189 3 4,343 3,189 3 1,154 3 – 10,013

662

securities 4,476 gains gains losses losses (2)

(2) Canada – Canada – U.S. millions) millions) in realized realized realized realized 7,343 3,868 25 3,475 10 15 $ ss ss securities securities o

The following income related to our insurance operations was included in non-interest included was in non-interest operations our insurance to related income The following Income: of Statement in our Consolidated income insurance revenue, and in 2009 million $109 in 2010, million $202 of income dividendInterest, fee and in 2008. million $15 and in 2009 million $9 in 2010, million $3 of trading than other (losses), gains Securities $nil in 2008. Included in unrealized gains (losses) in 2010 are gains of $9 million in corporate in corporate million $9 of gains are (losses) gains in 2010 Included in unrealized equity in corporate million $2 of gains and in 2009) million (gainsdebt $60 of

(Canadian $ in millions) millions) $ in (Canadian Total income from securities securities from income Total (1) Net impairment write-downs write-downs impairment Net trading than other (losses), gains Securities (losses) gains unrealized and realized net securities, Trading Gr Gross Revenue Non-Interest securitiesAvailable-for-sale (losses) gains unrealized and realized net Other securities, Available-for-sale Available-for-sale Other Reported in Consolidated Statement of Income: of Statement in Consolidated Reported Income Dividend and Fee Interest, securitiesTrading (Canadian (Canadian Corporate debt debt Corporate equity Corporate Total Mortgage-backed securities Mortgage-backed mortgage collateralized and obligations Other governments governments Other securities Mortgage-backed mortgage collateralized and obligations municipal and Canadian provincial governments government federal U.S. agencies municipalities states, U.S. and Issued or guaranteed by: or guaranteed Issued government Canadian federal Unrealized Losses Unrealized (2) (2) Corporate debt debt Corporate equity Corporate Total Other governments Other collateralized and securities Mortgage-backed obligations mortgage collateralized and securities Mortgage-backed obligations mortgage municipal and governments Canadian provincial government federal U.S. municipalities agencies and states, U.S. Issued or guaranteed by: or guaranteed Issued government Canadian federal Unrealized GainsLosses and Unrealized $ in millions) (Canadian

mortgages. insured by supported These amounts are (1) as follows: financial statements has been included in our consolidated securities from Income mortgages. insured by supported These amounts are (1) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 4: Loans, Customers’ Liability under Acceptances and Allowance for Credit Losses Change in Accounting Policy costs, principal and any previous write-offs or allowances, and any During August 2009, the CICA issued amendments to Handbook amounts remaining are then recorded as interest income. Payments section 3855 “Financial Instruments – Recognition and Measurement” received on impaired consumer instalment loans are applied first to on the classification and measurement of financial assets. For details of outstanding interest and then to the remaining principal. the impact of our adoption of this new standard, see Note 3. A loan will be reclassified back to performing status when we Loans determine that there is reasonable assurance of full and timely Loans are recorded at amortized cost using the effective interest method. repayment of interest and principal in accordance with the terms and This method allocates interest income over the expected term by conditions of the loan, and that none of the criteria for classification applying the effective interest rate to the carrying amount of the loan. of the loan as impaired continue to apply. The effective interest rate is defined as the rate that exactly discounts From time to time we restructure loans, classified as impaired, estimated future cash receipts through the expected term of the loan. due to the poor financial condition of the borrower. If they are no longer The treatment of interest income for impaired loans is described below. considered impaired, interest on these restructured loans is recorded We amortize deferred loan origination costs using the effective on an accrual basis. interest method. We record the amortization as a reduction to interest, Allowance for Credit Losses dividend and fee income, loans, over the term of the resulting loan. The allowance for credit losses recorded in our Consolidated Balance Under the effective interest method, the amount recognized in interest, Sheet is maintained at a level that we consider adequate to absorb dividend and fee income varies over the term of the loan based on credit-related losses on our loans, customers’ liability under acceptances the principal outstanding. and other credit instruments (as discussed in Note 5). The portion Securities Borrowed or Purchased Under Resale Agreements related to other credit instruments is recorded in other liabilities in Securities borrowed or purchased under resale agreements represent the our Consolidated Balance Sheet. amounts we will receive as a result of our commitment to resell securities The allowance comprises the following two components: that we have purchased back to the original seller, on a specified date at Specific Allowances a specified price. We account for these instruments as if they were loans. These allowances are recorded for specific loans to reduce their book value Lending Fees to the amount we expect to recover. We review our loans and acceptances on an ongoing basis to assess whether any loans should be classified The accounting treatment for lending fees varies depending on the as impaired and whether an allowance or write-off should be recorded transaction. Some loan origination, restructuring and renegotiation (other than credit card loans, which are classified as impaired and fees are recorded as interest income over the term of the loan, while written off when principal or interest payments are 180 days past due, other lending fees to a certain threshold are taken into income at the as discussed under impaired loans). Our review of problem loans is time of loan origination. Commitment fees are recorded as interest conducted at least quarterly by our account managers, each of whom income over the term of the loan, unless we believe the loan commit- assesses the ultimate collectability and estimated recoveries for a specific ment will not be used. In the latter case, commitment fees are recorded loan based on all events and conditions that the manager believes are as lending fees over the commitment period. Loan syndication fees are relevant to the condition of the loan. This assessment is then reviewed included in lending fees as the syndication is completed, unless the yield and concurred with by an independent credit officer. on any loans we retain is less than that of other comparable lenders To determine the amount we expect to recover from an impaired involved in the financing. In the latter case, an appropriate portion of the loan, we use the value of the estimated future cash flows discounted syndication fee is recorded as interest income over the term of the loan. at the effective rate inherent in the loan. When the amounts and timing Customers’ Liability under Acceptances of future cash flows cannot be estimated with reasonable reliability, Acceptances represent a form of negotiable short-term debt that is the expected recovery amount is estimated using either the fair value of issued by our customers and which we guarantee for a fee. We have any security underlying the loan, net of expected costs of realization and offsetting claims, equal to the amount of the acceptances, against any amounts legally required to be paid to the borrower, or an observ- our customers in the event of a call on these commitments. The amount able market price for the loan. Security can vary by type of loan and may due under acceptances is recorded in other liabilities and our corre- include cash, securities, real property, accounts receivable, guarantees, sponding claim is recorded as a loan in our Consolidated Balance Sheet. inventory or other capital assets. For personal loans that are not Fees earned are recorded in lending fees in our Consolidated individually assessed, specific provisions are calculated on a pooled Statement of Income. basis, taking into account historical loss experience. Impaired Loans General Allowance We classify residential mortgages as impaired when payment is contractually We maintain a general allowance in order to cover any impairment 90 days past due, or one year past due if guaranteed by the Government of in the existing portfolio that cannot yet be associated with specific loans. Canada. Credit card loans are classified as impaired and immediately written Our approach to establishing and maintaining the general allowance off when principal or interest payments are 180 days past due. Consumer is based on the guideline issued by OSFI. instalment loans, other personal loans and some small business loans are The general allowance is reviewed on a quarterly basis. A number classified as impaired when principal or interest payments are 90 days past of factors are considered when determining the appropriate level of due, and are normally written off when they are one year past due. the general allowance, including a general allowance model that applies Corporate and commercial loans are classified as impaired when historical expected and unexpected loss rates to current balances we are no longer reasonably assured that principal or interest will be with sensitivity to risk ratings, industry sectors and credit products. Notes collected on a timely basis, or when payments are 90 days past due, or Model results are then considered along with the level of the existing for fully secured loans, when payments are 180 days past due. allowance, as well as management’s judgment regarding portfolio We do not accrue interest income on loans classified as impaired, quality, business mix, and economic and credit market conditions. and any interest income that is accrued and unpaid is reversed against Provision for Credit Losses interest income. Changes in the value of our loan portfolio due to credit-related losses or Payments received on corporate and commercial loans that have recoveries of amounts previously provided for or written off are included been classified as impaired are applied first to the recovery of collection in the provision for credit losses in our Consolidated Statement of Income. 120 BMO Financial Group 193rd Annual Report 2010 Notes 121 2009 . Total Net amount Net 10,090 2009 40 125 695 709 2010 2010 227 236 410 291 Net of specific allowance of Net 2009 2008 2,640 2,701 2,640 2,701 2,003 2,174 1,905 1,867 60 260 – 60 9 – – 33,680 37,480 (75) 163 (9) (75) 133,717 120,259 176,643 167,829 (22) (26) 55 183 145 114 596 426 157 590 596 426 2010 1,887 1,902 1,747 1,878 1,902 1,747 1,049 1,543 1,070 1,297 1,306 1,321 1,306 1,321 898 (1,216) (1,492) (970) 169,731 188,709 178,521 169,731 176,643 167,829 186,962 9,246

(2) 2009 2010 Annual Report 193rd Financial Group BMO 2009 – – General allowance allowance General 52 33 47 51 Specific allowance Specific 42 61 2009 2008 595 589 257 241 282 294 702 717 2010 2010 581 596 581 596 482 512 under acceptances under acceptances Customers’ liability Customers’ – – – – – – – – – 5 5 – 5 – – – – – – – – 1,297 1,306 54 59 41 54 59 41 44 54 41 10 5 – 54 41 43 (10) 13 (2) 2010 7,001 7,640 9,358 6,947 7,581 9,317

(2) 2009 Business and and Business 3,297 3,297 2009 government loans loans government 2009 2008 During the year ended October 31, 2010, we foreclosed on on foreclosed we 2010, 31, ended October the year During 9 – – Specific allowance Specific 42 61 46 41 23 Gross impaired amount amount impaired Gross 2010 excludes allowance for Other Credit Instruments, which is included in Other Liabilities Instruments, Other Credit for allowance excludes 2010 257 241 2010 2010 (22) (26) 55 163 (34) (75) 13 350 350 (43) 13 581 596 282 294 414 888 733 507 411 142 968 1,030 891 968 481 507 411 968 1,030 517 2010 (464) (807) (542) Fully secured loans with past due amounts between 90 and 180 days that we have not classified not have we that days 180 and 90 due amounts past between with loans secured Fully respectively. 2009, and 2010 31, October as at million $187 and million $154 totalled as impaired such as methods, using other is determined value fair Otherwise, analysis discounted of cash flows or market prices for similar assets. that properties estate in real million $124 received and loans impaired These properties in 2009). million sale classified ($70 for as held we favourable. are conditions when market disposed of are Included in loans as at October 31, 2010 are $46,738 million ($49,508 million and $66,081 million in 2009 in 2009 million $66,081 and million ($49,508 million $46,738 are 2010 31, Included October as at in loans in million $2,608 and million ($1,945 million $1,469 and dollars in U.S. denominated loans of 2008) and currencies. foreign in other denominated loans of 2008) and 2009 (2) (2) 1,372 1,475 1,441 1,363 1,475 1,441 68,169 84,151 68,338 68,169 66,975 66,694 82,710 3,221 3,221 2,187 2,161 952 950 82 186 2,485 2,686 279 269 457 342

. other other 10,151 121,089 169,731 llowance for credit losses, by category are as follows: category are by credit losses, for llowance personal loans loans personal 2009 2008 instalment and and instalment Gross amount amount Gross

2009

Credit card, consumer card, Credit

– – – – – – 25 – – 24 (85) 49 24 51 2 1 47 51 2 387 317 244 387 317 244 137 104 91 603 624 332 340 266 242 266 242 327 2010 (744) (679) (422) 2010 54,080 48,081 45,613 48,398 45,857 54,467 48,398 9,288 34,664 38,491 134,569 178,521

13 14 mortgages mortgages Residential Residential 2009 2008

10 (3) – – – – – – – – – – – 2010 74 51 21 4 27 26 5 : : – 8 11 18 8 33 (1) (1) (1) 48,641 45,473 49,322 22 18 8 52 33 13 45,524 49,343 45,524 48,715 74 51 21 (8) (6) (6) 2010 excludes allowance for Other Credit Instruments, which is included in Other Liabilities Instruments, Other Credit for allowance excludes 2010 (Canadian $ in millions) $ in millions) (Canadian 31 October As at

Other countries countries Other Total risk. ultimate of the country is based upon region Geographic (1) (2) By geographic region region By geographic States United Residential mortgages mortgages Residential loans personal other and instalment Consumer loans government and Business Total (Canadian $ in millions) $ in millions) (Canadian Total Total By geographic region region By geographic States United countries Other (Canadian $ in millions) millions) $ in (Canadian Restructured loans of $53 million were classified as performing during the year ended during classified the year as performing were million $53 of loans Restructured million $1 of loans Restructured in 2008). million $3 and in 2009 million ($9 2010 31, October 2008). and ($nil in 2009 2010 31, October ended during year the off written were Net loan balances loan Net year end of at Allowance for other other for Allowance instruments credit excluding allowance Total instruments credit other General allowance General year end of at allowance Total General allowance General year of beginning at credit losses for Provision exchange Foreign other and Specific allowance year end of at Provision for credit losses for Provision Recoveries Write-offs exchange Foreign other and Gross loan balances loan Gross year end of at Specific allowance year of beginning at

Canada Canada Canada Canada

Foreclosed Assets Foreclosed satisfy to borrowers from received have we that assets or other Property classified as are and value fair at recorded commitments are their loan intention. management’s to sale according for use or held for held either available. prices where based on market is value determined Fair

Impaired loans and acceptances, including the related allowances, are as follows: are including allowances, the related acceptances, and loans Impaired risk. ultimate of the country is based upon region Geographic (1) nce for credit losses, by geographic region are as follows: are region geographic by credit losses, for nce allowa and including under acceptances liability customers’ Loans, Instruments is included Other Credit in Other Liabilities. to related The allowance (1) Loans, including customers’ liability under acceptances and a and acceptances under including liability customers’ Loans, NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Impaired Loans $119 million and $102 million, respectively, if we had not classified Our average gross impaired loans and acceptances were $3,255 million any loans as impaired. for the year ended October 31, 2010 ($2,850 million in 2009). Our average Cash interest income of $2 million was recognized on impaired impaired loans, net of the specific allowance, were $2,589 million for loans during the year ended October 31, 2010 ($nil in 2009 and 2008). the year ended October 31, 2010 ($2,325 million in 2009). During the year ended October 31, 2010, we recorded a loss of During the years ended October 31, 2010, 2009 and 2008, $4 million (loss of $24 million in 2009) on the sale of impaired loans. we would have recorded additional interest income of $111 million,

Note 5: Other Credit Instruments We use other off-balance sheet credit instruments as a method of under recourse and collateral provisions. Collateral requirements for meeting the financial needs of our customers. Summarized below are these instruments are consistent with collateral requirements for loans. the types of instruments that we use: A large majority of these commitments expire without being drawn • Standby letters of credit and guarantees represent our obligation upon. As a result, the total contractual amounts may not be representa- to make payments to third parties on behalf of another party if tive of the funding likely to be required for these commitments. that party is unable to make the required payments or meet other We strive to limit credit risk by dealing only with counterparties contractual requirements. Standby letters of credit and guarantees that we believe are creditworthy, and we manage our credit risk include our guarantee of a subsidiary’s debt to a third party; for other credit instruments using the same credit risk process that • Securities lending represents our credit exposure when we lend is applied to loans and other credit assets. our securities, or our customers’ securities, to third parties should Summarized information related to various commitments is as follows:

a securities borrower default on its redelivery obligation; (Canadian $ in millions) 2010 2009 Documentary and commercial letters of credit represent our agree- • Contractual Contractual ment to honour drafts presented by a third party upon completion amount amount of specific activities; and Credit Instruments • Commitments to extend credit represent our commitment to our Standby letters of credit and guarantees 10,163 11,384 customers to grant them credit in the form of loans or other financings Securities lending 2,094 445 for specific amounts and maturities, subject to their meeting certain Documentary and commercial letters of credit 1,272 1,422 conditions. Commitments to extend credit – Original maturity of one year and under 22,393 28,438 The contractual amount of our other credit instruments represents the – Original maturity of over one year 29,078 31,626 maximum undiscounted potential credit risk if the counterparty does not Total 65,000 73,315 perform according to the terms of the contract, before possible recoveries

Note 6: Risk Management We have an enterprise-wide approach to the identification, measurement, Basel II Framework monitoring and management of risks faced across the organization. We use the Basel II Framework for our capital management framework. The key financial instrument risks are classified as credit and counter- The framework uses exposure at default to assess credit and counterparty party, market, and liquidity and funding risk. risk. Exposures are classified as follows: Credit and Counterparty Risk • Drawn loans include loans, acceptances, deposits with regulated financial institutions, and certain securities. Exposure at default (“EAD”) We are exposed to credit risk from the possibility that counterparties represents an estimate of the outstanding amount of a credit exposure may default on their financial obligations to us. Credit risk arises at the time a default may occur. For off-balance sheet amounts and predominantly with respect to loans, over-the-counter derivatives and undrawn amounts, EAD includes an estimate of any further amounts other credit instruments. This is the most significant measurable risk that that may be drawn at the time of default. we face. Our risk management practices and key measures are disclosed Undrawn commitments cover all unutilized authorizations, including in the text and tables presented in a blue-tinted font in Management’s • those which are unconditionally cancellable. Exposure at default Discussion and Analysis on pages 80 to 81 of this report. Additional for undrawn commitments is based on management’s best estimate. information on loans and derivative-related credit risk is disclosed in Over-the-counter (“OTC”) derivatives are those in our proprietary Notes 4 and 10, respectively. • accounts that attract credit risk in addition to market risk. Exposure Concentrations of Credit and Counterparty Risk at default for OTC derivatives is equal to the net gross replacement Concentrations of credit risk exist if a number of clients are engaged cost plus any potential credit exposure amount. in similar activities, are located in the same geographic region or • Other off-balance sheet exposures include items such as guarantees have similar economic characteristics such that their ability to meet and standby letters of credit and documentary credits. Exposure contractual obligations could be similarly affected by changes in at default for other off-balance sheet items is based on management’s economic, political or other conditions. Concentrations of credit risk best estimate. indicate a related sensitivity of our performance to developments • Repo style transactions include repos, reverse repos and securities Notes affecting a particular counterparty, industry or geographic location. lending transactions, which represent both asset and liability exposures. At year-end, our credit assets consisted of a well-diversified port- Exposure at default for repo style transactions is the total amount folio representing millions of clients, the majority of them consumers drawn, adding back any write-offs. and small to medium-sized businesses. • Adjusted EAD represents exposures that have been redistributed to From an industry viewpoint, our most significant exposure as at a more favourable probability of default band or a different Basel asset year-end was to the individual consumers, captured in the “individual class as a result of applying credit risk mitigation. sector”, comprising $136.8 billion. 122 BMO Financial Group 193rd Annual Report 2010 Notes 123 – 69 186 961 396 847 pay- 4,514 8,126 2,541 6,906 9,712 2,666 5,460 1,966 2,173 38,624 19,354 35,859 15,048 89,560 15,889 12,591 42,012 117,176 356,254 166,419 119,200 Total 2009 2009 2009 2009 2010 142 2010 799 5,011 3,981 1,039 3,031 2010 27,203 – 30,272 – 8,741 – 15,467 – 136,813 – 6,918 – 13,576 – 9,085 follows: follows: Total exposure Total exposure Total – Total 206 18,342 96 27 (1) medium-sized and enterprises 47,416 6,734 47,416 227 104 55,252 377,929 91,299 48,312 91,299 2010 (1) 35 59 303 339 2009 2010 Annual Report 193rd Financial Group BMO transactions transactions 1,729 5,027 7,359 13,885 2,082 105 1,592 6,479 1,618 1,876 2010 2009 90 days or more or more days 90 (1) 1 – 2009 730 14,313 505 – 783 – 741 – 753 – 6,792 1 6,792 2,224 67 2,594 – 3,063 37,669 1,417 – 12,811 52,049 2010 ctively. m amount of $125,000 to a single individual. to $125,000 of m amount – – 2009 356 79 327 28 377 107 sheet items items sheet 1,060 214 Other off-balance off-balance Other style Repo 2010 2010 11,383 2009 Based on the Basel II classifications, the following tables the following Based the Basel on II classifications, (2) 30 to 89 days days 89 to 30 300 481 150 33 – 686 – 2,268 – 2,118 – 476 – 818 – 1 – 466 – 1,085 – 2,642 – 823 4,177 2,526 8,860 2,566 6,203 1,699 32,557 7,918 12,867 613 119 (2) Exposure by industry not available for 2009. for available industry not by Exposure (2) ments to be collected. The following table presents the loans that are are that the loans table presents The following be collected. ments to 2009: and 2010 31, October as at impaired duepast but not but for which we expect the full amount of principal and interest interest principal and of the full amount expect which we but for present our retail and wholesale advanced internal ratings approach default at exposure adjusted an on rating risk by exposure credit are Wholesale includes that loans all 2010. 31, October basis as at classified as retail. not 1,376

2009

271 59 271 142 2009 2010 2010 2010 Residential mortgages and and mortgages Residential small retail and Other retail 509 310 493 514 parties 2,694 1,692 410 9,731 6,002 16,323 956 – 1,136 – 4,116 39 20 20 8,539 2,371 1 2,102 12 6,455 33 9,662 22 4,533 – 65,666 158 25,796 31

– 2009 1 to 29 days days 29 1 to Drawn Undrawn Undrawn Drawn 18,447 2009 (undrawn) (undrawn) derivatives OTC 497 Commitments Commitments 3,421 2,514 2010 49 1,504 – – 123 – 1,676 1,504 – 123 – – 49 10 2,343 – – 678 – 3,031 2,343 – 678 – – 10 als that are revolving, unsecured and uncommitted up to a maximu up to uncommitted and unsecured revolving, are als that Bank Corporate Sovereign Sovereign Bank Corporate Sovereign Bank Corporate 13,237 57,433 67,271 732 34,029 1,491 174,193 11,545 35,139 67,000 673 26,436 1,490 142,283 5,250 2,349 4,063 2,089 8,017 5,629 4,426 4,823 30,024 1,397 12,808 3,729 24,726 7,880 13,309 967 91,379 35,511 28,404 9,167 – 222,406 73,541

Drawn Drawn 2009

4,814

2010

261

1,633 410 41,799 41,799 144

12,239 4,351 6,829 31,020 240,798 5,915 13,682 3,439 101,270 20,254 20,254

37,275

(1)

(Canadian $ in millions) millions) $ in (Canadian 2010 Total Total Credit card, consumer instalment and other and instalment consumer card, Credit loans personal loans government and Business under acceptances liability Customers’ (Canadian $ in millions) $ in millions) (Canadian mortgages Residential Loans Past Due Not Impaired Due Not Past Loans 7.00%) to Medium (> 0.75% 99.99%) to (> 7.00% High Total Risk profile (probability of default): of (probability profile Risk (≤ 0.05%) low Exceptionally ≤ 0.20%) to (> 0.05% low Very 0.75%) to (> 0.20% Low $ in millions) (Canadian credit lines of home equity retail Qualifying revolving Total and Risk Rating Portfolio by Exposure Drawn Credit Retail Investment grade grade Non-investment Watchlist Default Wholesale Credit Exposure by Risk Rating by Exposure Wholesale Credit Individual Others exposure Total default at Retail trade Service industries Wholesale trade gas Oil and Financial institutions Governments Manufacturing Real estate Credit Exposure by Industry by Exposure Credit Default (100%) Default (Canadian $ in millions) $ in millions) (Canadian respe 2006, and 2007 2008, 31, October as at million $47 and million $58 million, $163 due past were or more days 90 Loans (1) Loans that are past due but not classified as impaired are loans where where loans are classified due as impaired past but not are that Loans due, when contractually payments make to failed have our customers Loans Past Due Not Impaired Due Not Past Loans million. $12,645 of exposures uncommitted amounts are Included in the undrawn (1) in the Enterprise-Wide Risk Management section of Management’s Management’s of section Management Risk in the Enterprise-Wide this report. of Analysis page 81 and on Discussion Credit Quality Credit counter whether as to probabilities based on ratings risk assign We 2%. than less of exposure a total Includes having industries (1) 4. in Note category is provided product and region geographic by exposure risk about our credit information Additional Total non-trading exposure at default by industry, as at October 31, 2010 and 2009, based on the Basel on based is as II classification 2009, and 2010 31, October as at industry, default by at exposure non-trading Total individu to includes retail exposures Qualifying revolving (1) will default on their financial obligations to us. Our process for assigning assigning for Our process us. to their financial obligations default on will font in a blue-tinted presented in the text is discussed ratings risk NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Loan Maturities and Rate Sensitivity The following table provides gross loans and acceptances by contractual maturity and by country of ultimate risk:

Contractual maturity 2010 2009

1 year Over 1 year Over (Canadian $ in millions) or less to 5 years 5 years Total Total Canada Consumer 24,419 53,644 7,675 85,738 74,870 Commercial and corporate (excluding real estate) 26,950 10,610 1,546 39,106 36,971 Commercial real estate 5,016 3,223 1,486 9,725 9,248 United States 9,796 12,986 11,882 34,664 38,491 Other countries 2,529 6,759 – 9,288 10,151 Total 68,710 87,222 22,589 178,521 169,731

The following table analyzes net loans and acceptances by interest rate Our market risk management practices and key measures are sensitivity: outlined in the text and tables presented in a blue-tinted font in the

(Canadian $ in millions) 2010 2009 Enterprise-Wide Risk Management section of Management’s Discussion and Analysis on pages 82 to 85 of this report. Fixed rate 72,168 55,954 Floating rate 95,877 102,096 Liquidity and Funding Risk Non-interest sensitive (1) 8,598 9,779 Liquidity and funding risk is the potential for loss if we are unable Total 176,643 167,829 to meet financial commitments in a timely manner at reasonable prices as they fall due. It is our policy to ensure that sufficient liquid assets (1) Non-interest sensitive loans and acceptances include customers’ liability under acceptances. and funding capacity are available to meet financial commitments, Market Risk including liabilities to depositors and suppliers, and lending, investment Market risk is the potential for a negative impact on the balance sheet and pledging commitments, even in times of stress. Managing liquidity and/or statement of income resulting from adverse changes in the and funding risk is essential to maintaining both depositor confidence value of financial instruments as a result of changes in certain market and stability in earnings. variables. These variables include interest rates, foreign exchange rates, Our liquidity and funding risk management practices and key equity and commodity prices and their implied volatilities, as well as measures are outlined in the text presented in a blue-tinted font in the credit spreads, credit migration and default. We incur market risk in our Enterprise-Wide Risk Management section of Management’s Discussion trading and underwriting activities and structural banking activities. and Analysis on pages 85 to 86 of this report. Contractual Maturities of Financial Liabilities Financial liabilities are comprised of trading and non-trading liabilities. As liabilities in trading portfolios are typically held for short periods of time, they are not included in the following table. Contractual maturities of on-balance sheet non-trading financial liabilities as at October 31, 2010 were as follows:

Less than 1 to 3 3 to 5 Over 5 No fixed (Canadian $ in millions) 1 year years years years maturity 2010 Total 2009 Total On-Balance Sheet Financial Liabilities Deposits (1) 101,218 23,181 6,907 4,850 109,119 245,275 233,083 Subordinated debt 200 411 390 4,566 – 5,567 6,463 Capital trust securities 440 413 – – – 853 1,281 Other financial liabilities 54,715 23 41 2,517 332 57,628 59,749

(1) Excludes interest payments and structured notes designated under the fair value option. The balances for on-balance sheet financial liabilities in the table above will not agree with those in our consolidated financial statements as this table incorporates all cash flows, on an undiscounted Certain comparative figures have been reclassified to conform with the current year’s presentation. basis, including both principal and interest. Contractual maturities of off-balance sheet financial liabilities as at October 31, 2010 were as follows:

Less than 1 to 3 3 to 5 Over 5 No fixed (Canadian $ in millions) 1 year years years years maturity 2010 Total 2009 Total Off-Balance Sheet Financial Liabilities Commitments to extend credit (1) 22,393 22,102 4,694 2,282 – 51,471 60,064 Operating leases 249 410 268 593 – 1,520 1,542 Financial guarantee contracts (1) 41,336 – – – – 41,336 51,857 Purchase obligations (2) 225 438 279 77 – 1,019 1,298

(1) A large majority of these commitments expire without being drawn upon. As a result, provider which grants us the right to issue Air Miles in Canada to our customers. In 2007, the total contractual amounts may not be representative of the funding likely to be required we entered into a seven-year contract with an external service provider for wholesale lockbox for these commitments. processing. In 2003, we entered into a 10-year contract with an external service provider to (2) We have five significant outsourcing contracts. In 2010, we entered into a seven-year contract provide human resource transactional business processing. In 2000, we entered into a 15-year with an external service provider for various credit card account portfolios processing and contract with two optional five-year renewals with an external service provider to manage other services. In 2009, we entered into a seven-year contract with an external service provider our cheque and bill payment processing, including associated statement and report printing

Notes to provide brokerage transactional processing and reporting of client information. In 2008, activities. All outsourcing contracts are cancellable with notice. we entered into a 15-year contract with optional five-year renewals with an external service

124 BMO Financial Group 193rd Annual Report 2010 Notes

125 nvey to estimate of the maximum the amount of estimate BMO Financial Group 193rd Annual Report 2010 Annual Report 193rd Financial Group BMO . The maximum amount payable under payable . The maximum amount ensate the counterparties for various various for ensate the counterparties ased on a specified notional amount, a specified notional ased on , but not the obligation, to require us to buy us to require to the obligation, , but not No material amount was included in our Consolidated Balance included was in our Consolidated amount No material Written credit default swaps require us to compensate a counter- compensate us to require default swaps credit Written co that agreements include contractual options Written Written options also include contractual agreements where where include agreements also contractual options Written In addition to our investment in the notes subject to the subject to notes in the our investment to In addition the purchaser the right instrument or equity debt commodity, a currency, of a specific amount any time future date or at within a a fixed either at price, a fixed at The maximum under future these period. written amountfixed payable these of the nature due to estimated be reasonably cannot options we could be required to pay to counterparties. to pay to be required could we these indemnifications. to related 2009 and 2010 31, October as at Sheet arrangements, or as a result of third-party claims that may be suffered claims be suffered may that third-party of or as a result arrangements, The terms the transaction. of as a consequence the counterparty by costs resulting from breaches of representations or obligations under such or obligations representations of breaches from resulting costs which of the nature the contract, vary based on indemnifications these of making us from a reasonable prevents contracts. The terms of these contracts range from less than one month to month one than less from range contracts these of The terms contracts. million $599 was Balance Sheet instruments in our Consolidated derivative an which have of none in 2009), million ($667 2010 31, October as at in 2009). rating investment which an had of (none rating investment Agreements Indemnification agreements various into enter we operations, In of the normal course typically These indemnifications indemnifications. general provide that service offerings, securities assets, sales with of in connection occur derivatives arrangements, clearing membership agreements, contracts, us, require These indemnifications transactions. leasing and contracts comp in certain to circumstances, the funding facility provided to our credit protection vehicle ($112 million million ($112 vehicle credit protection our to the funding provided facility in is provided these funding on facilities information Further in 2009). 9. Note million. $300 of facility loan a senior provided have we Accord, Montreal 2010. 31, October as at drawn No amounts were Derivatives of definition the accounting instruments meet our derivative of Certain or asset, liability an to related are they believe when we a guarantee a contract. of the inception at party the guaranteed by held security equity into enter we these derivatives, to our exposure reduce to In order risks. hedge the related that contracts a specified to in relation event a credit of the occurrence following party The maximum amount such a loan. or as a bond obligation, reference of amount their notional is equal to default swaps credit under payable which of in 2009), million ($51,072 2010 31, October as at million $40,650 mil- $2,622 grade, investment are that swaps to relates million $37,764 rated not are that million $264 and grade non-investment are that lion in respectively, million, $195 and million $5,034 million, ($45,843 years. 12 to day one from range these contracts of The terms 2009). included liabilities in derivative derivative the related of value The fair as million $933 was Balance Sheet instruments in our Consolidated in 2009). million ($2,159 2010 31, October at we agree to pay the purchaser, b the purchaser, pay to agree we the difference between a market price or and rate the strike price or the underlying instrument of rate of The terms their nature. due to determinable is not these contracts the of value The fair years. 25 to months 11 from range these contracts instruments in our included liabilities in derivative derivative related 2010 31, October as at million $87 was Balance Sheet Consolidated (none rating investment an which have of none in 2009), million ($118 in 2009). rated which were of eight years. The fair value of the related derivative liabilities included liabilities in derivative the related of value The fair years. eight

related to the SIVs. As at Octo- As at the SIVs. to related the funding likely to be required be required to the funding likely pport to our structured investment investment our structured to pport of another party are considered guarantees. considered are party another of contracts under which we provide indirect guarantees guarantees indirect provide under which we contracts The most significant guarantees are as follows: are guarantees significant The most The maximum amount payable under these backstop and and under these backstop The maximum payable amount As at October 31, 2010, $9 million ($nil in 2009) was included was ($nil in 2009) million $9 2010, 31, October As at to access ABCP markets or when predetermined performance measures measures performance or when predetermined ABCP markets access to met. The terms not are these programs by owned the financial assets of in other liabilities related to a guaranteed party that was unable unable was that party a guaranteed to related liabilities in other amount No other 4). (see Note party a third to its obligation meet to ber 31, 2010, $nil had been drawn down in accordance with the terms of of the terms with in accordance down been drawn $nil had 2010, ber 31, vehicles (“SIVs”) and our credit protection vehicle. As at October 31, 2010, 2010, 31, October As at vehicle. our credit protection and (“SIVs”) vehicles in accordance in 2009) million ($7,230 been drawn had million $5,097 the funding facilities of the terms with Senior Funding Facilities Senior funding senior su provide also We Where warranted, we provide partial credit enhancement facilities facilities credit enhancement partial provide we warranted, Where us or third either by administered ABCPprograms within transactions to included liquidity are in backstop facilities enhancement Credit parties. customer our U.S. to include These facilities relate amounts that facilities. 9. discussed Note in vehicle securitization Credit Enhancement Facilities Enhancement Credit other liquidity facilities totalled $14,009 million as at October 31, 2010 2010 31, October as at million $14,009 totalled facilities liquidity other facilities to relates million which $11,036 of in 2009), million ($19,108 grade non-investment are that million $625 grade, investment are that and million $649 million, ($15,405 rated not are that million $2,348 and million $292 2010, 31, October As at in 2009). respectively, million, $3,054 the terms with in accordance outstanding drawn facilities was from which of in 2009), million ($185 facilities liquidity the backstop of in 2009) million or US$146 million ($158 million) (US$246 million $251 9. in Note discussed vehicle securitization customer our U.S. to related of the backstop liquidity facilities do not require us to advance money to to money advance us to require do not facilities liquidity the backstop of The facilities’ the borrower. of bankruptcy of event in the these programs years. but can be several year, one than no longer generally are terms alternative source of financing in the event that such programs are unable are such that programs financing in the event of source alternative Backstop and Other Liquidity and Facilities Backstop commercial asset-backed to provided are facilities liquidity Backstop as an parties us or third either by administered programs (“ABCP”) paper was included in our Consolidated Balance Sheet as at October 31, 2010 2010 31, October as at Balance Sheet includedwas in our Consolidated guarantees. credit and of letters standby these to related 2009 and Standby Letters of Credit and Guarantees and Credit of Letters Standby to obligation our represent guarantees credit and of letters Standby party if that party another of behalf on parties third to payments make contractual other or meet payments the required make to is unable letters under standby payable The maximum amount requirements. 2010 31, October as at million $10,163 totalled guarantees credit and of credit or guarantees of the letters of None in 2009). million ($11,384 requirements Collateral or 2009. in 2010 rating investment an had our with consistent are guarantees and credit of letters standby for these commitments of majority large A loans. for requirements collateral As contractual a result, upon. the total being drawn without expire of be representative amounts not may for these commitments. for In the normal course business, of enter we into a variety guarantees. of make to be required may we include where contracts Guarantees asset, an changes of based on in the value a counterparty, to payments changes due to holds, the counterparty that security or equity liability variable. or other rate exchange foreign rate, underlyingin an interest make to be required may under which we contracts In addition, of the terms to according perform not does party if a third payments and a contract Note 7: Guarantees 7: Note of the indebtedness the indebtedness of NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 8: Asset Securitization Periodically, we securitize loans to obtain alternate sources of funding. at the time of the sale. These gains are determined based on our best Securitization involves selling loans to off-balance sheet entities or trusts estimate of the net present value of expected future cash flows, primarily (“securitization vehicles”), which buy the loans and then issue either the deferred purchase price, net of our estimate of the fair value of any interest bearing or discounted investor certificates. servicing obligations undertaken. The deferred purchase price is recorded Contracts with the securitization vehicles provide for the payment in our Consolidated Balance Sheet in available-for-sale securities. to us over time of the excess of the sum of interest and fees collected A servicing liability is recognized only for securitizations where we from customers, in connection with the loans that were sold, over the do not receive adequate compensation for servicing the transferred loans. yield paid to investors in the securitization vehicle, less credit losses and It is initially measured at fair value and is recorded in our Consolidated other costs (the “deferred purchase price”). Balance Sheet in other liabilities. A servicing liability is amortized to We account for transfers to securitization vehicles as sales when securitization revenues over the term of the transferred loans. control over the loans is given up and consideration other than notes For some of our securitizations, we are required to purchase sub - issued by the securitization vehicle has been received. For control to have ordinated interests or to maintain cash amounts deposited with the transferred, (1) the transferred loans must be isolated from the seller, even securitization vehicle that are considered retained interests in the in the event of bankruptcy or receivership of the seller, (2) the purchaser securitized assets. This provides the securitization vehicle with a source must have the right to sell or pledge the transferred loans or, if the of funds in the event that the sum of interest and fees collected on the purchaser is a Qualifying Special Purpose Entity (“QSPE”) as defined in loans is not sufficient to pay the interest owed to investors. We record CICA Accounting Guideline 12, “Transfers of Receivables”, the investors these retained interests at their fair value in available-for-sale securities in the QSPE must have the right to sell or pledge their ownership interest in our Consolidated Balance Sheet. These interests, together with the in the QSPE, and (3) the seller cannot retain the right to repurchase deferred purchase price, represent our exposure with respect to these the loans and receive more than an insignificant benefit. When the loans securitizations. Investors have no further recourse against us in the event are considered sold for accounting purposes, we remove them from our that cash flows from the transferred loans are inadequate to service Consolidated Balance Sheet. We recognize gains in securitization revenues the interest related to the investor certificates. The following table summarizes our securitization activity related to our assets and its impact on our Consolidated Statement of Income for the years ended October 31, 2010, 2009 and 2008:

(Canadian $ in millions) Residential mortgages Credit card loans Total

2010 2009 2008 2010 2009 2008 2010 2009 2008

Net cash proceeds (1) 4,234 6,761 8,330 – – 3,024 4,234 6,761 11,354 Investment in securitization vehicles (2) – – – – – 190 – – 190 Deferred purchase price 173 189 331 – – 73 173 189 404 Servicing liability (29) (29) (55) – – (14) (29) (29) (69) 4,378 6,921 8,606 – – 3,273 4,378 6,921 11,879 Loans sold 4,310 6,823 8,524 – – 3,219 4,310 6,823 11,743 Gain on sale of loans from new securitizations 68 98 82 – – 54 68 98 136 Gain on sale of loans sold to revolving securitization vehicles 56 146 72 372 456 212 428 602 284 Other securitization revenue (54) (16) (28) 94 98 41 40 82 13 Amortization of servicing liability 55 57 41 87 90 39 142 147 80 Total 125 285 167 553 644 346 678 929 513

(1) Net cash proceeds represent cash proceeds less issuance costs. (2) Includes credit card securities retained on-balance sheet.

The key weighted-average assumptions used to value the deferred purchase price for all securitizations were as follows:

Residential mortgages Credit card loans

2010 2009 2010 2009

Weighted-average life (years) 4.47 3.45 1.00 0.99 Prepayment rate 17.26% 20.59% 35.70% 36.41% Interest rate 4.01% 4.41% 21.32% 21.65% Expected credit losses (1) – – 3.54% 4.43% Discount rate 2.55% 3.87% 9.33% 9.69%

(1) As the residential mortgages are fully insured, there are no expected credit losses. Notes

126 BMO Financial Group 193rd Annual Report 2010 Notes (2) 127 9 – 0 0 479 0.35 4.53 10.50 write-offs 2009 Net (1) Total 20092008 1.46 2.55 – 12 11 99 111 271 277 633 727 0–0.01 Residential Credit card Residential Credit mortgages loans 51 29 52 51 806 928 2010 2010 6,796 11,448 4,279 6,796 22,982 11,538 20,926 22,982 – 20 277 111 18.86 99.57 18.86 7,293 32 346 9,284 4,719 – 172 74,647 309 6 74,647 309 68,169 2,648 766 19,839 40 – 45,824 310 401 162,091 3,259 1,347 526 107 526 (%) 195,933 3,299 1,519 2010 Annual Report 193rd Financial Group BMO 1.65 9.50 1.65 0.2 8.4 0.2 0.7 2.6 25.7 18.2 25.7 22.1 159.4 0.1 4.2 0.1 0.4 1.3 13.0 9.8 13.0 11.0 79.8 (%) ($) ($) ($) ($) ($) ($) ($) ($) loans loans 2009 2010 Total Impaired Impaired Total (2) 2

8 418 377 2010 2010 2010

20092008 (years) (%) Credit card loans loans card Credit

write-offs – – – – – 3,025 – – (%) (1)

564 649 347 2010 2010 – 271 11 – 91 20 29 616 107 318 19,129 20,420 9,685 2009 2009 2,412 Impact of: 10% adverse change adverse 10% Impact of: change adverse 20% rate discount Weighted-average change adverse 10% Impact of: change adverse 20% as noted) except $ in millions, (Canadian valueFair deferred of purchase price life Weighted-average rate prepayment Weighted-average change adverse 10% Impact of: change adverse 20% Interest spread change adverse 10% Impact of: change adverse 20% credit losses Expected

– of the impact of changes in the other key variables. Actual experience Actual experience variables. changes key in the other of the impact of assumptions. in simultaneous result may key changes in a number of which could in changes result may in another, factor in one Changes certain or reduce sensitivities. amplify 12 79 Residential mortgages mortgages Residential loans card Credit Total 526 Total Impaired Net Impaired Total loans loans 2010 2010 off. written previously loans on recoveries of net in the year write-offs represent write-offs Net (2) presentation. year’s the current with conform to been reclassified have figures comparative Certain 7,908 – – 203 4,469 – 18,281 39 – 51,159 428 433

171,520 3,148 1,033 202,178 3,187 1,236 20092008

na

Residential mortgages mortgages Residential 3.65% 51 29 52 51 242 279 132 2010 2010 6,796 8,423 4,279 6,796 1,853 1,797 2,562 2009 na 2010

4.54%

ability under acceptances of $73 million million $73 of under acceptances ability 68,338 68,338 74,904 7,777 lions) lions)

Excludes impaired amounts for Customers’ li Customers’ amounts for Excludes impaired in 2009). million ($38 2010 31, October as at in risk the credit of a measure provide losses credit pool Static Not applicable: residential mortgages are fully insured. are mortgages residential applicable: – Not

Residential mortgages mortgages Residential loans card Credit

Total loans reported in the Consolidated Balance Sheet in the Consolidated reported loans Total Less loans securitized: loans Less mortgages Residential loans card Credit Business and government loans government and Business loans Total and retained securities mortgage-backed Less securities classified as available-for-sale Residential mortgages Residential loans personal other and instalment Consumer loans card Credit (Canadian $ in millions) millions) $ in (Canadian vehicles Cash securitization deposits with Servicing liability Retained interests Retained Investment in securitization vehicles Deferred purchase price (Canadian $ in mil Servicing fees collected Servicing collected fees deferred of purchaseReceipt price Proceeds from new securitizations securitizations new from Proceeds reinvested collections from Proceeds vehicles securitization existing in (Canadian $ in millions) $ in millions) (Canadian sensitivity of these retained interests as at October 31, 2010 to immediate to 2010 31, October as at interests these retained of sensitivity Sensitivity AnalysisSensitivity used in assumptions economic table outlines the key The adjacent measuring the deferred purchase price and servicing liability and the na balance of each pool of assets. Static pool credit losses for the years the years for credit losses pool Static assets. of each pool balance of as follows: were 2009 and 2010 31, ended October investments in securitization vehicles of $271 million ($277 million in 2009). million ($277 million $271 of vehicles in securitization investments actual pro- and totalling calculated by are They assets. our securitized the original dividing and by the result losses credit future jected Our credit exposure to securitized assets as at October 31, 2010 was was 2010 31, October as at assets securitized to Our credit exposure million in limited million to our ($727 deferred purchase $633 price of and in 2009) million ($11 million certain $12 cashdeposits of 2009), (1) (1) s for all loans reported and securitized were as follows: as follows: were securitized and reported loans all s for losse credit amounts net and impaired Principal amounts, Credit Information Credit The impact of securitizations on our Consolidated Balance Sheet as at October 31, 2010 and 2009 was as follows: was 2009 and 2010 31, October as at Balance Sheet Consolidated our on securitizations of The impact Cash flows received from securitization vehicles for the years ended October 31, 2010, 2009 and 2008 were as follows: as follows: were 2008 and 2009 2010, 31, ended October years the for vehicles securitization from received Cash flows 10% and 20% adverse changes in those assumptions. The sensitivity The sensitivity changes assumptions. in those adverse 20% and 10% the impact and is hypothetical as it caution should be used with analysis The sensitivities be linear. not may assumption changes in each key of been calculated independently have variable changesto in each key NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 9: Variable Interest Entities Variable interest entities (“VIEs”) include entities whose equity is of their expected residual returns, or both. We determine this based on considered insufficient to finance its activities or for which the equity- a quantitative assessment that involves estimating our relative exposure holders do not have a controlling financial interest. We are required to variability in the future cash flows and performance of the VIE. to consolidate VIEs if the investments we hold in these entities and/or Total assets in these VIEs and our maximum exposure to losses the relationships we have with them result in us being exposed to the are summarized in the following table, with the exception of our majority of their expected losses, being able to benefit from a majority compensation trusts, which are described in further detail below.

(Canadian $ in millions) October 31, 2010 October 31, 2009

Total Total Exposure to loss assets Exposure to loss assets

Drawn Drawn facilities facilities Undrawn and loans Securities Derivative Undrawn and loans Securities Derivative facilities (1) provided (2) held assets Total facilities (1) provided (2) held assets Total Unconsolidated VIEs in which we have a significant variable interest Canadian customer securitization vehicles (3) 2,958 – 113 14 3,085 2,976 5,819 – 328 44 6,191 5,674 U.S. customer securitization vehicle 3,905 251 – 2 4,158 4,074 6,214 158 – 2 6,374 4,943 Bank securitization vehicles (3) 5,100 – 637 100 5,837 9,469 5,100 – 625 94 5,819 9,719 Credit protection vehicle – Apex (4) (5) 1,030 – 1,128 669 2,827 2,208 918 112 833 1,236 3,099 2,322 Structured investment vehicles (6) 171 5,097 – 30 5,298 5,225 247 7,230 – 12 7,489 6,968 Structured finance vehicles na na 4,745 – 4,745 5,330 na na 1,762 – 1,762 2,451 Capital and funding trusts 43 12 2 – 57 1,277 43 12 2 – 57 1,270 Total 13,207 5,360 6,625 815 26,007 30,559 18,341 7,512 3,550 1,388 30,791 33,347 Consolidated VIEs Canadian customer securitization vehicles (3) (7) 200 – 196 – 396 196 733 – 719 – 1,452 719 Capital and funding trusts 4,081 6,919 740 76 11,816 9,673 9,013 1,987 880 45 11,925 5,190 Structured finance vehicles – – 27 – 27 27 na na 54 – 54 54 Total 4,281 6,919 963 76 12,239 9,896 9,746 1,987 1,653 45 13,431 5,963

(1) These facilities include senior funding facilities provided to our credit protection vehicle and customer securitization vehicles are comprised of asset-backed commercial paper and are structured investment vehicles as well as backstop liquidity facilities provided to our bank classified as trading securities. Assets held by all these vehicles relate to assets in Canada. securitization vehicles, our Canadian customer securitization vehicles and our U.S. customer (4) Derivatives held with this vehicle are classified as trading instruments. Changes in the fair securitization vehicle. None of the backstop liquidity facilities provided to our Canadian value of these derivatives are offset by derivatives held with third-party counterparties that customer securitization vehicles related to credit support as at October 31, 2010 and 2009. are also classified as trading instruments. Backstop liquidity facilities provided to our U.S. customer securitization vehicle include credit (5) Securities held are classified as trading securities and have a face value of $1,415 million. support and are discussed in Note 7. Our exposure to these securities has been hedged through derivatives. (2) Amounts outstanding from backstop liquidity facilities and senior funding facilities are (6) Securities held are comprised of capital notes, classified as available-for-sale securities. classified as Loans – Businesses and governments. We have written these notes down to $nil as at October 31, 2010 and 2009. (3) Securities held in our bank securitization vehicles are comprised of $105 million of asset-backed (7) Total assets held as at October 31, 2010 are comprised of a loan of $135 million ($560 million commercial paper classified as trading securities ($55 million in 2009), and $261 million of in 2009) and $61 million of other assets ($159 million in 2009). deferred purchase price ($293 million in 2009) and $271 million of asset-backed securities na – not applicable ($277 million in 2009) classified as available-for-sale securities. Securities held in our Canadian

Customer Securitization Vehicles Canadian Customer Securitization Vehicles We sponsor customer securitization vehicles (also referred to as Our exposure to our Canadian customer securitization vehicles is bank-sponsored multi-seller conduits) that assist our customers with summarized in the table above. We purchase ABCP through our role the securitization of their assets to provide them with alternate sources as a market maker and hold these securities for an interim period of funding. These vehicles provide clients with access to financing in until investors purchase them. In general, investors in the ABCP have the asset-backed commercial paper (“ABCP”) markets by allowing them recourse only to the assets of the related VIE and do not have recourse to sell their assets into these vehicles, which then issue ABCP to investors to us. To the extent that we have purchased ABCP, our exposure under to fund the purchases. In all cases, we do not service the transferred the liquidity facilities is reduced by an equal amount. We use our assets. If there are losses on the assets, the seller is the first to take credit adjudication process in deciding whether to enter into global style the loss. We do not sell assets to or service the assets held by these backstop liquidity facilities just as we do when extending credit in the customer securitization vehicles. We earn fees for providing services form of a loan. The vehicles have never drawn on these facilities to date. related to the securitizations, including liquidity, distribution and We assess whether we are required to consolidate these vehicles financial arrangement fees for supporting the ongoing operations based on a quantitative analysis of expected losses that could be absorbed of the vehicles. by us. In doing this analysis, we consider our significant variable interests,

Notes primarily our holdings of ABCP, as well as fees earned for services provided. We consolidate VIEs that are fully financed by us through our ownership of ABCP. We are not required to consolidate five of our eight Canadian customer securitization vehicles. Our exposure to loss is limited to the consolidated assets disclosed in the preceding table.

128 BMO Financial Group 193rd Annual Report 2010 Notes 129 1 billion and and €1 billion es on the open the open es on Series A. SN Trust A.– Series SN Trust h purchase our shar ed VIEs is limited to the amount the amount ed VIEs to is limited purchase a senior deposit note from from note deposit purchase a senior stors their desired exposure, and and exposure, their desired stors pport for the funding of Links the funding and of for pport 2010 Annual Report 193rd Financial Group BMO mation related to Trust II. II. Trust to related mation erms of the plan. Total assets held by our by held assets Total the plan. erms of interests in the vehicles through our liquidity facilities and our and facilities our liquidity through in the vehicles interests BMO Covered Bond Trust (“CB Trust”) was created in 2007 to to in 2007 created was Trust”) (“CB Trust Bond Covered BMO to in 2007 created was Trust”) (“SN Trust Notes Subordinated BMO Capital BMO issue to created was (the “Trust”) Capital Trust BMO We assess whether we are required to consolidate these vehicles these vehicles consolidate to required are we whether assess We solidate Trust II based on our assessment of our variable interests. interests. our variable of our assessment II based on Trust solidate Compensation Trusts Compensation our employee administer to trusts in order established have We employees’ of 50% match we Under this plan, plan. ownership share their gross of a portion contribute choose to when they contributions Our matching shares. our common of the purchase salarytoward whic trusts, into paid are contributions Capital Funding Trusts and million $450 issue to in 2009 created II”) was II (“Trust Capital Trust BMO the offering of II used the proceeds A. – Series Trust 1 Notes Tier BMO of to required not are We us. from note deposit purchase a senior to con further infor for 18 Note See of in respect the bondholders due payments to guarantee assets sell We issued. since have we Bonds Covered BMO of billion US$2 CB of The assets Trust note. a promissory for in exchange CBto Trust CB Trust issued. we the bonds of payment secure to been pledged have the to exposed are as we consolidate to required are is a VIE we that our based on returns, residual and losses its expected of majority our assessment variable interests. of Notes Subordinated Trust BMO of million $800 issue to the offering of used the proceeds our assessment based on SN Trust consolidate to required not are We us. related further information for 17 Note See interests. our variable of SN Trust. to to required are is a VIE we that The Trust BOaTS”). (“BMO Securities Trust Securities interests. our variable of our assessment based on consolidate as at billion ($2.2 billion $1.9 were 2010 31, outstanding October as at or interest non-controlling as either reported are and 2009), 31, October 18 Note Balance Sheet. See in our Consolidated securities trust capital the Trust. to related further information for than our current commitment, which included is our current than in the preceding the SIVs. to facilities additional provide to obligated not are we table, so do to in deciding whether process use our credit adjudication We a loan. of in the form credit do when extending as we just be could that losses expected of analysis a quantitative based on our significant consider we this analysis, In doing us. by absorbed variable Vehicles Finance Structured parties, third by products investment of development facilitate We investment other trusts and including investment unit mutual funds, derivatives into enter We investors. retail to sold are funds that the inve provide these funds to with in investing by these derivatives to related exposure hedge our we us expose VIEs those in which our interests consolidate We funds. other unless or both, returns, or residual losses the expected of a majority to has been passed returns residual and losses expected to the exposure base We arrangement. the derivative through investor the retail to on Our these VIEs. by units issued of our holdings on this assessment non-consolidat from loss to exposure our investment. of holdings of capital notes. We are not required to consolidate these VIEs. consolidate to required not are We capital notes. of holdings (“Links”) and Parkland Finance Corporation (“Parkland”), and act act and (“Parkland”), Corporation Finance (“Links”) Parkland and in the table is summarized loss to Our exposure manager. as asset su senior-ranked provide We above. the SIVs permit The facilities facilities. our liquidity through Parkland Other manner. orderly in an assets selling of the strategy continue to market for distribution to employees once employees are entitled to to entitled are employees once employees to distribution for market under the t the shares

of r services in support of the ongoing ongoing the r services of support in million of exposure under the senior under the senior exposure of million ments, rights and obligations related to these vehicles these vehicles to related obligations and rights ments, We assess whether we are required to consolidate this vehicle this vehicle consolidate to required are we whether assess We We assess whether we are required to consolidate this vehicle based this vehicle consolidate to required are we whether assess We We are not required to consolidate our bank securitization our bank consolidate to required not are We our of some to facilities liquidity backstop style global provide We on a quantitative analysis of expected losses that could be absorbed be absorbed could that losses expected of analysis a quantitative on a loan. During the year ended October 31, 2010, we provided funding provided we 2010, 31, ended October the year During a loan. these of the terms with in accordance million) (US$304 million $310 of Structured Investment Vehicles Investment Structured opportunities investment provide (“SIVs”) vehicles investment Structured in customized, diversified debt portfolios in a andvariety asset of Corporation Links Finance SIVs, in two interests hold We classes. rating by us. In doing this analysis, we consider our net exposure from significant from exposure our net consider we this analysis, In doing us. by funding facility. Since 2008, a third party has held its exposure to Apex Apex to its has held party exposure a third 2008, Since funding facility. notes. of million $600 us on with swap return a total through in the fair value of the swaps held with Apex are offset by changes in by offset are Apex with held the swaps of value in the fair The fair counterparties. the swap with held the swaps of value the fair table along is included Apex in the preceding with the swaps of value funding a senior facility. and Apex by issued notes of our holdings with our holdings to hedged our exposure have we 2010, 31, October As at $515 as the first as well notes of Credit Protection Vehicle Protection Credit that (“Apex”), Trust Apex vehicle, protection a credit sponsor We in corporate investments on investors to credit protection provides upon In May 2008, credit default swaps. through portfolios debt with default swaps credit into entered Apex, we of the restructuring the swaps Since Apex. with swaps offsetting and counterparties swap changes similar terms, have instruments and classified as trading are bank securitization vehicles that have objective criteria for determining criteria determining bank securitization for objective vehicles that have process adjudication use our credit We upon. can drawn be when they do when as we just these agreements into enter to in deciding whether a loan. of in the form credit extending We use bank securitization vehicles to securitize our Canadian mortgage securitize to vehicles securitization use bank We based on a quantitative analysis of expected losses that could be absorbed be absorbed could that losses expected of analysis a quantitative based on Bank SecuritizationVehicles by us. In doing this analysis, we consider our significant variable interests, interests, variable our significant consider we this analysis, In doing us. by services for as fees as well facilities, liquidity the backstop primarily securi- customer our U.S. consolidate to required not are We provide. we vehicle. tization as at October 31, 2010. The amount outstanding related to funding outstanding The amount to related 2010. 31, October as at million) as at million (US$71 $72 was advanced in years prior to 2010 included table. These amounts are in the preceding 2010. 31, October liquidity facilities, of which $179 million (US$176 million) was outstanding was million) (US$176 million which $179 of facilities, liquidity operations of the vehicle, we may advance funds under backstop funds under backstop advance may we vehicle, the of operations in deciding process use our credit adjudication We facilities. liquidity in the form credit do when extending as we just do so to whether U.S. Customer Securitization Vehicle Securitization Customer U.S. is summarized vehicle securitization customer U.S. our to Our exposure ou As of part table. in the preceding variable interests in Apex, primarily securities issued by Apex and the and Apex by issued securities in Apex, primarily interests variable not are We hedges. their related and provide fundingsenior we facility Apex. consolidate to required vehicles based on the structure of these vehicles. More information information More these vehicles. of the structure based on vehicles invest our on can be found in Note 8. Our variable interests in these vehicles are are in these vehicles interests variable Our 8. in Note can be found into entered contracts Derivative table. in the preceding summarized manage their exposure to the vehicles enable these vehicles with to interest rate fluctuations. of funding. The structure of these vehicles limits the types of activities activities limits these vehicles the types of of The structure funding. of have they and can hold, they assets the types of and can undertake they ABCP or term issue vehicles These decision-makinglimited authority. fund their activities. to securities asset-backed loans and Canadian credit card loans in order to obtain alternate sources alternate obtain to in order loans Canadian card and credit loans NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

compensation trusts amounted to $1,021 million as at October 31, 2010 the expected losses of these VIEs or allow us to benefit from a majority ($869 million in 2009). Based on our assessment of variable interests, of their expected residual returns. As a result, we are not required to we are not required to consolidate these compensation trusts and consolidate these VIEs. Transactions with these VIEs are conducted at we have no exposure to loss related to these trusts. market rates, and individual creditor investment decisions are based Other VIEs upon the analysis of the specific VIE, taking into consideration the quality of underlying assets. We record and report these transactions in the We are involved with other entities that may potentially be VIEs. same manner as other transactions. For example, derivative contracts This involvement can include, for example, acting as a derivatives are recorded in accordance with our derivatives accounting policy as counterparty, liquidity provider, investor, fund manager or trustee. outlined in Note 10. Liquidity facilities are described in Note 7. These activities do not cause us to be exposed to a majority of

Note 10: Derivative Instruments Derivative instruments are financial contracts that derive their value Options from underlying changes in interest rates, foreign exchange rates or Options are contractual agreements that convey to the purchaser other financial or commodity prices or indices. the right but not the obligation to either buy or sell a specified Derivative instruments are either regulated exchange-traded amount of a currency, commodity, interest-rate-sensitive financial contracts or negotiated over-the-counter contracts. We use these instrument or security at a fixed future date or at any time within instruments for trading purposes, as well as to manage our exposures, a fixed future period. mainly to currency and interest rate fluctuations, as part of our asset/ For options written by us, we receive a premium from the liability management program. purchaser for accepting market risk. Types of Derivatives For options purchased by us, we pay a premium for the right to exercise the option. Since we have no obligation to exercise the option, Swaps our primary exposures to risk are the ability to hedge the market risk Swaps are contractual agreements between two parties to exchange in a manner which allows us to recover the premium paid and the credit a series of cash flows. The various swap agreements that we enter into risk if the writer of an over-the-counter contract fails to meet the terms are as follows: of the contract. Interest rate swaps – counterparties generally exchange fixed Caps, collars and floors are specialized types of written and and floating rate interest payments based on a notional value in purchased options. They are contractual agreements in which the a single currency. writer agrees to pay the purchaser, based on a specified notional Cross-currency swaps – fixed rate interest payments and principal amount, the difference between the market rate and the prescribed amounts are exchanged in different currencies. rate of the cap, collar or floor. The writer receives a premium for Cross-currency interest rate swaps – fixed and floating rate interest selling this instrument. payments and principal amounts are exchanged in different currencies. Commodity swaps – counterparties generally exchange fixed and Uses of Derivatives floating rate payments based on a notional value of a single commodity. Trading Derivatives Equity swaps – counterparties exchange the return on an equity Trading derivatives include derivatives entered into with customers security or a group of equity securities for the return based on a fixed to accommodate their risk management needs, derivatives transacted or floating interest rate or the return on another equity security or group to generate trading income from our own proprietary trading positions of equity securities. and certain derivatives that do not qualify as hedges for accounting Credit default swaps – one counterparty pays the other a fee purposes (“economic hedges”). in exchange for that other counterparty agreeing to make a payment We structure and market derivative products to enable customers if a credit event occurs, such as bankruptcy or failure to pay. to transfer, modify or reduce current or expected risks. Total return swaps – one counterparty agrees to pay or receive Proprietary activities include market-making, positioning and from the other cash amounts based on changes in the value of a arbitrage activities. Market-making involves quoting bid and offer prices reference asset or group of assets, including any returns such as interest to other market participants with the intention of generating revenues earned on these assets, in exchange for amounts that are based on based on spread and volume. Positioning activities involve managing prevailing market funding rates. market risk positions with the expectation of profiting from favourable The main risks associated with these instruments are related to movements in prices, rates or indices. Arbitrage activities involve exposure to movements in interest rates, foreign exchange rates, credit identifying and profiting from price differentials between markets quality, securities values or commodities prices, as applicable, and the and products. possible inability of counterparties to meet the terms of the contracts. We may also take proprietary trading positions in various capital market instruments and derivatives that, taken together, are designed Forwards and Futures to profit from anticipated changes in market conditions. Forwards and futures are contractual agreements to either buy or sell Trading derivatives are marked to fair value. Realized and unrealized a specified amount of a currency, commodity, interest-rate-sensitive gains and losses are recorded in trading revenues (losses) in our financial instrument or security at a specific price and date in the future. Consolidated Statement of Income. Unrealized gains on trading derivatives Forwards are customized contracts transacted in the over-the- are recorded as derivative instrument assets and unrealized losses Notes counter market. Futures are transacted in standardized amounts on are recorded as derivative instrument liabilities in our Consolidated regulated exchanges and are subject to daily cash margining. Balance Sheet. The main risks associated with these instruments arise from the possible inability of over-the-counter counterparties to meet the terms Hedging Derivatives of the contracts and from movements in commodities prices, securities In accordance with our asset/liability management strategy, we enter values, interest rates and foreign exchange rates, as applicable. into various derivative contracts to hedge our interest rate and foreign currency exposures.

130 BMO Financial Group 193rd Annual Report 2010 Notes

131 ness of the hedge”), the net the net the hedge”), of ness 2010 Annual Report 193rd Financial Group BMO fair value caused by changes in interest rates. These hedges rates. changes caused in interest by value fair For cash flow hedges that are discontinued before the end of end of the before discontinued are that hedges cash flow For We record interest receivable or payable on the derivative as the derivative on or payable receivable interest record We recorded is the hedging derivative only not hedges, value fair For For fair value hedges that are discontinued, we cease adjusting adjusting cease we discontinued, are that hedges value fair For hedge is recorded in Accumulated Other Comprehensive Income (Loss) (Loss) Income Other Comprehensive in Accumulated hedge is recorded the hedge that the extent To Operations. Foreign Net of Translation on of Statement included amounts in the Consolidated are effective, is not hedge of The amount trading. than other exchange, in foreign Income the year hedges for investment net with associated ineffectiveness million (gain $10 million of $4 of a gain was 2010 31, ended October in 2008). million $11 of loss and in 2009 Net Investment Hedges Investment Net currency foreign to our exposure hedges mitigate investment Net liabilities Deposit operations. in foreign investment in our net fluctuations and investment the net both of translation currency The foreign exposure. is sold or settled, the entire unrealized gain or loss is recognized in is recognized or loss gain unrealized the entire or settled, is sold interest,dividend and fee income or interest expense, as applicable, gain unrealized of The amount Income. of Statement in our Consolidated Income of Statement our Consolidated to reclassify to expect we that This will tax). after million ($96 million is $138 months 12 the next over hedged. were that liabilities and assets on interest adjust Hedges Value Fair instru- rate changes to in a fixed hedges modify exposure value Fair ment’s item (the “ineffectiveness of the hedge”) is recorded directly in directly is recorded the hedge”) of (the “ineffectiveness item Income. of Statement Consolidated in our other revenue, non-interest in other recorded or loss gain the unrealized term, hedge the original dividend fee and interest, to is amortized income comprehensive incomeor interest expense, as applicable, in our Consolidated Statement If the hedged item affects earnings. item as the hedged Income of convert fixed rate assets and liabilities to floating rate. Our fair value value Our fair rate. floating to liabilities and assets rate fixed convert deposits subordi- and securities, rate hedges include fixed hedges of debt. nated Statement in our Consolidated income interest net to adjustment an the hedge. of the life over Income of a hedging of part are that liabilities and assets rate but fixed value fair at being the risk the changes of for in value adjusted are relationship the change that in the fair the extent To value”). fair hedged (“quasi changes value in the quasi fair offset not does the derivative of value (the “ineffective the hedged item of amount is recorded directly in non-interest revenue, other in our in our other revenue, in non-interest directly is recorded amount Income. of Statement Consolidated adjustment value The quasi fair value. quasi fair to the hedged item the interest to adjustment as an is then amortized the hedged item of to its term remaining over the hedged item on income/expense quasi fair remaining any or settled, is sold If the hedged item maturity. or loss the gain of is included adjustment in the determination value commitments during hedge any the did not sale We on or settlement. 2009. and 2010 31, ended October years denominated in foreign currencies are designated as hedges of this as hedges of designated are currencies in foreign denominated , with , with fair value fair To the extent that changes in the fair value of the derivative offset offset the derivative of changes value that in the fair the extent To We record interest that we pay or receive on the derivative as an as an the derivative on or receive pay we that interest record We Hedge effectiveness is evaluated at the inception of the hedging of the inception at is evaluated Hedge effectiveness We also sometimes economically hedge U.S. dollar earnings through through earnings dollar U.S. hedge economically sometimes also We changes in the fair value of the hedged item, they are recorded in other in other recorded are they item, the hedged of changes value in the fair the of the change value in fair of Any portion income. comprehensive the hedged of changes value in the fair offset not does that derivative adjustment to interest, dividend and fee income in our Consolidated in our Consolidated income dividend fee and interest, to adjustment the hedge. of the life over Income of Statement Cash Flow Hedges Flow Cash for in cash flows variability to hedges modifyCash exposure flow in denominated instruments assets and bearing interest rate variable a maximum which have hedges, Our cash flow currencies. foreign rate floating hedges of are years, seven maturity of to term remaining currencies. in foreign denominated as assets deposits and as well loans relationship and on an ongoing basis, retrospectively and prospectively, prospectively, and retrospectively basis, ongoing an on and relationship Any correlation. of measures statistical quantitative using primarily in non-interest is recognized in the hedging relationship ineffectiveness arises. as it Income of Statement in our Consolidated other revenue, Accounting Hedges Accounting the hedge, accounting qualify as an to a derivative for In order documented formally and must be designated hedging relationship objective management risk the particular detailing its inception, at the specific or cash the hedge and asset, liability flow for strategy and being assessed. is its effectiveness as how well as being hedged, effective be highly must the derivative of value in the fair Changes sheet on-balance of changes either value in the fair in offsetting being hedged or changes the risk in the amount causeditems by cash future flows. of Canadian dollar earnings due to the translation of our U.S. dollar earnings. earnings. dollar our U.S. of the translation due to earnings Canadian dollar recorded losses and gains with value, fair to marked are These contracts trading. than other exchange, in foreign revenue as non-interest forward foreign exchange contracts to minimize fluctuations in our fluctuations minimize to contracts exchange foreign forward forward contracts. These derivatives are marked to to marked are These derivatives contracts. forward revenue, in non-interest recorded losses and gains unrealized and realized the on losses and gains for treatment the accounting with consistent contracts forward on value in fair Changes hedged item. economically comprehensive in other recorded hedges are as accounting qualify that between (the difference differential the spot/forward with income, the at the rate and the contract of inception at rate currency the foreign the term over expense in interest being recorded the contract) end of the hedge. of Foreign Currency Risk Currency Foreign and swaps cross-currency through risk currency manage foreign We We manage interest rate risk through interest rate swaps and options, options, and swaps rate interest through risk rate manage interest We a spe- of sensitivity rate the interest adjust and to linked which are or firm commitment, or a transaction forecasted cific asset, liability, characteristics. similar risk with transactions of specific pool Risks Hedged Risks Risk Rate Interest NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Fair Value Hedging Relationships The following table presents the impact of fair value hedges on our financial results.

(Canadian $ in millions) Pre-tax gains (losses) recorded in income

Hedge ineffectiveness Amount of gain (loss) Quasi fair value recorded in non-interest Contract type on hedging derivative (1) adjustment (2) revenue – other Interest rate contracts – 2010 31 (33) (2) 2009 (100) 90 (10) 2008 747 (736) 11

(1) Unrealized gains (losses) on hedging derivatives are recorded in Other Assets – Derivative (2) Unrealized gains (losses) on hedged items are recorded in Securities – Available for sale, instruments or Other Liabilities – Derivative instruments in the Consolidated Balance Sheet. Subordinated Debt, and Deposits.

Cash Flow Hedging Relationships The following table presents the impact of cash flow hedges on our financial results.

(Canadian $ in millions) Pre-tax gains (losses) recorded in income

Reclassification of gains Amortization of (losses) on hedges from spot/forward differential on Fair value change recorded in Fair value change recorded in other comprehensive income foreign exchange contracts Contract type other comprehensive income non-interest revenue – other to net interest income to interest expense 2010 Interest rate 303 (2) 237 – Foreign exchange (80) – – (83) Total 223 (2) 237 (83) 2009 Interest rate 143 (10) 178 – Foreign exchange (360) – – (43) Total (217) (10) 178 (43) 2008 Interest rate 536 16 (92) – Foreign exchange – – – – Total 536 16 (92) –

Certain comparative figures have been reclassified to conform with the current year’s presentation.

Embedded Derivatives derivative instruments with collateral posting requirements that are in From time to time, we purchase or issue financial instruments contain- a liability position on October 31, 2010 is $7.3 billion, for which we have ing embedded derivatives. The embedded derivative is separated from posted collateral of $6.5 billion. If our credit rating had been downgraded the host contract and carried at fair value if the economic characteristics to A– on October 31, 2010 (per Standard & Poor’s Rating Services), we of the derivative are not closely related to those of the host contract, would have been required to post collateral or meet payment demands the terms of the embedded derivative are the same as those of a of an additional $1,082 million. stand-alone derivative, and the combined contract is not held for trading Fair Value or designated at fair value. To the extent that we cannot reliably identify Fair value represents point-in-time estimates that may change and measure the embedded derivative, the entire contract is carried in subsequent reporting periods due to market conditions or other at fair value, with changes in fair value reflected in earnings. Embedded factors. Fair value for exchange-traded derivatives is considered to derivatives in certain of our equity linked notes are accounted for be the price quoted on derivatives exchanges. Fair value for over- separately from the host instrument. the-counter derivatives is determined using multi-contributor prices Contingent Features or zero coupon valuation techniques further adjusted for credit, Certain over-the-counter derivative instruments contain provisions model and liquidity risks, as well as administration costs. Zero coupon that link how much collateral we are required to post or payment curves are created using generally accepted valuation techniques requirements to our credit ratings (as determined by the major credit from underlying instruments such as cash, bonds and futures rating agencies). If our credit ratings were to be downgraded, certain observable in the market. Option implied volatilities, an input into counterparties to the derivative instruments could demand immediate the valuation model, are either obtained directly from market and ongoing collateralization overnight on derivative liability positions sources or calculated from market prices. or request immediate payment. The aggregate fair value of all Notes

132 BMO Financial Group 193rd Annual Report 2010 Notes 133 9 4 0 Net 0 627 232 626 44,139 44,765 2009 – – 1,990 2010 (185) (185) – (1,828) (1,828) – (1,828) – – (2,159) (2,159) – (1,835) (1,835) 3 (25) (22) 2010 Annual Report 193rd Financial Group BMO 182 (440) (258) 182 (440) 889 (626) 263 232 231 (241) (10) 707 (186) 521 1,542 (2,158) (616) 1,990 1,235 – 1,235 1,235 1,235 – 1,235 – 1,498 2,124 (626) 2,128 (559) 1,569 2,128 (559) 3,662 2,713 (3,658) (3,168) 1,982 (455) (1,355) 2,124 745 1,749 – 1,749 1,500 (1,332) 2,937 168 – 2,937 27,233 (26,195) 1,038 45,774 64,377 (62,685) 1,692 (44,139) 1,635 45,774 47,225 47,898 47,970 47,898 (44,765) 3,133 18,475 (15,342) 3,133 (29,423) 29,423 – Assets Liabilities

assets Gross liabilities Gross 2 2009

Net 2010 2010 (933) 1,139 1,127

46,944 2,815 49,759 – Assets are shown net of liabilities to customers where we have an enforceable right to offset offset to right enforceable an have we where customers to liabilities of net shown Assets are basis. a net on contracts settle to intend amounts we and (933) (30,173)

5 (14) (9) (1,667) – (1,667) (171) – (171) (1,004) – (1,004) 87 (80) 87 7 424 (256) 168 877 (489) 388 218 – 218 218 – 1,301 (745) 556 1,514 1,514 – 1,514 1,514 – 2,070 2,815 (745) 1,754 2,398 (644) 1,398 – 1,398 1,398 1,398 – (1,029) 1,271 (2,300) 4,595 (4,116) 479 2,536 (2,950) (414) 1,462 (1,584) (122) 1,653 (2,233) (580) 1,280 1,280 – 46,944 (47,225) (281) 44,149 (43,395) 754 49,759 (47,970) 1,789 18,222 (16,433) 1,789 (31,537) 31,537 – Gross assets assets Gross liabilities Gross partially offset the changes in fair values the changes values in fair offset partially

(2)

(1) (1) forward foreign exchange contracts contracts exchange foreign – forward 1,127 trading and hedging derivatives hedging derivatives and – trading hedging derivatives – hedging derivatives trading derivatives derivatives – trading – 31,312 swaps hedges – swaps low ps Average fair value amounts are calculated using a five-quarter rolling average. calculated using a five-quarter rolling amounts are value fair Average or wholly hedging derivatives of values The fair cash financial instruments or future flows. sheet on-balance the related of a sh f

Fair value of hedging derivatives hedging derivatives of value Fair Total (Canadian $ in millions) $ in millions) (Canadian derivatives trading of value Fair Total fair value value fair Total Total fair value value fair Total value fair Average Foreign Exchange Contracts Exchange Foreign hedges Cash flow contracts exchange foreign Total swaps hedges – swaps value Fair swaps Total Average fair value value fair Average Hedging Contracts Rate Interest Ca Credit Default Swaps Default Credit Written value fair Total Purchased options options Written Contracts Equity Purchased Forward foreign exchange contracts contracts exchange foreign Forward Purchased options options Written Contracts Commodity Swaps Written options Written Contracts Exchange Foreign swaps Cross-currency swaps rate interest Cross-currency Forward rate agreements agreements rate Forward Futures Purchased options Trading Contracts Rate Interest Sw (Canadian $ in millions) $ in millions) (Canadian Less: impact of master netting agreements agreements netting master of impact Less: Total (1) (1) as follows: are Balance Sheet in our Consolidated instruments recorded Derivative (2) (2) Fair values of our derivative instruments are as follows: instruments are our derivative of values Fair NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Notional Amounts The notional amounts of our derivatives represent the amount to which a rate or price is applied in order to calculate the amount of cash that must be exchanged under the contract. Notional amounts do not represent assets or liabilities and therefore are not recorded in our Consolidated Balance Sheet.

(Canadian $ in millions) 2010 2009

Hedging Hedging

Trading Cash flow Fair value Total Trading Cash flow Fair value Total Interest Rate Contracts Over-the-counter Swaps 1,443,036 29,303 37,539 1,509,878 1,307,531 29,161 32,135 1,368,827 Forward rate agreements 406,115 – – 406,115 385,463 – – 385,463 Purchased options 41,254 – – 41,254 54,407 – – 54,407 Written options 54,898 – – 54,898 74,923 – – 74,923 1,945,303 29,303 37,539 2,012,145 1,822,324 29,161 32,135 1,883,620 Exchange-traded Futures 42,316 – – 42,316 75,761 – – 75,761 Purchased options 44,656 – – 44,656 47,580 – – 47,580 Written options 35,201 – – 35,201 38,887 – – 38,887 122,173 – – 122,173 162,228 – – 162,228 Total interest rate contracts 2,067,476 29,303 37,539 2,134,318 1,984,552 29,161 32,135 2,045,848 Foreign Exchange Contracts Over-the-counter Cross-currency swaps 27,002 – – 27,002 29,988 – – 29,988 Cross-currency interest rate swaps 179,791 – – 179,791 155,297 – – 155,297 Forward foreign exchange contracts 225,750 13,832 – 239,582 213,459 16,370 – 229,829 Purchased options 7,510 – – 7,510 6,459 – – 6,459 Written options 11,960 – – 11,960 10,840 – – 10,840 452,013 13,832 – 465,845 416,043 16,370 – 432,413 Exchange-traded Futures 2,147 – – 2,147 377 – – 377 Purchased options 10,220 – – 10,220 8,185 – – 8,185 Written options 4,205 – – 4,205 794 – – 794 16,572 – – 16,572 9,356 – – 9,356 Total foreign exchange contracts 468,585 13,832 – 482,417 425,399 16,370 – 441,769 Commodity Contracts Over-the-counter Swaps 16,400 – – 16,400 23,019 – – 23,019 Purchased options 8,745 – – 8,745 13,749 – – 13,749 Written options 6,395 – – 6,395 11,486 – – 11,486 31,540 – – 31,540 48,254 – – 48,254 Exchange-traded Futures 21,169 – – 21,169 24,078 – – 24,078 Purchased options 26,186 – – 26,186 55,716 – – 55,716 Written options 28,759 – – 28,759 58,686 – – 58,686 76,114 – – 76,114 138,480 – – 138,480 Total commodity contracts 107,654 – – 107,654 186,734 – – 186,734 Equity Contracts Over-the-counter 22,896 – – 22,896 18,359 – – 18,359 Exchange-traded 13,549 – – 13,549 10,511 – – 10,511 Total equity contracts 36,445 – – 36,445 28,870 – – 28,870 Credit Default Swaps Over-the-counter purchased 44,615 – – 44,615 56,237 – – 56,237 Over-the-counter written 40,650 – – 40,650 51,072 – – 51,072 Total credit default swaps 85,265 – – 85,265 107,309 – – 107,309 Total 2,765,425 43,135 37,539 2,846,099 2,732,864 45,531 32,135 2,810,530

Notes Included in the notional amounts is $231 million as at October 31, 2010 ($184 million in 2009) related to the Managed Futures Certificates 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.

134 BMO Financial Group 193rd Annual Report 2010 Notes

135 9 0 0 parties. parties. 6,699 7,895 14 17 19,640 43% 11,783 26 46,017 100% e risk: cost of contracts contracts of cost 2009 231 239 – 2010 171 284 – 829 2,855 – 1,542 3,662 3,948 2,994 11,441 6,695 9,323 – 21,414 – – 2,340 1,710 1,945 – 1,500 4,915 2,329 1,365 7,770 2,937 – 1,945 1,232 3,188 235 3,401 16,594 27,650 10,839 30,063 35,914 3,631 28,122 33,730 – 46,017 70,231 10,839 (29,423) (42,581) – ount owed by us and we intend intend we us and by owed ount 2010 Annual Report 193rd Financial Group BMO Replacement Credit risk Risk-weighted risk Replacement Credit to realize the asset and settle the settle and asset the realize to cost equivalent assets equivalent cost 2

2010 7,363 15 8,902 19 19,202 40% 12,450 26 47,917 100% represents the total replacement cost plus plus cost replacement the total represents represent the credit risk equivalent, weighted equivalent, weighted the credit risk represent represents the cost of replacing all contracts that that contracts all replacing of cost the represents

with a fair value of $1,842 million as at October 31, 2010 ($1,881 million in 2009). million ($1,881 2010 31, October as at million $1,842 of value a fair with

Exchange-traded derivatives have no potential for credit exposure exposure credit for no potential have derivatives Exchange-traded We also pursue opportunities to reduce our exposure to credit credit to exposure our reduce to pursue opportunities also We cost equivalent equivalent cost assets costs disclosed below represent the net of the asset and liability to a to liability and asset the of the net represent disclosedcosts below offset to right enforceable a legally have we where specific counterparty the am us with to owed the amount basis or a net on settle to either simultaneously. liability equivalent risk Credit as outlined exposure, credit future potential the representing amount an Capital Adequacy Guideline. in OSFI’s assets Risk-weighted OSFI. by as prescribed the counterparty, of the creditworthiness based on ments and entering into master netting agreements with counter counter with agreements netting master into ments entering and by eliminated is contracts favourable with associated risk The credit with contracts unfavourable that extent the to agreements netting master contracts. favourable before be settled cannot the same counterparty exchange. each with net settled are as they as follows: are table below the credit risk used in Terms cost Replacement It represents rates. market using current value, fair a positive have Replacement instruments. our derivative on gains the unrealized in effect losses on derivative instruments, including entering into collateral agree- collateral including into entering instruments, derivative on losses tions and industries. Set out below is the replacement out below Set tions and industries. Replacement Credit risk Risk-weighted Risk-weighted risk Credit Replacement

87 110 87 – 1,379 1,566 – 1,271 2,456 13,087 4,595 – 4,050 6,702 – 173 245 – – 10,089 22,490 2,477 1,462 3,612 1,666 382 – – 1,844 5,278 853 1,961 137 625 1,280 1,756 3,476 47,917 71,416 10,681 (45,706) (31,537) 16,380 25,710 10,681 –

34,079 39,931 3,738 32,613 38,255 –

(1)

Total Total Canada Canada States United Kingdom United Other countries (Canadian $ in millions, except as noted) except $ in millions, (Canadian Total Total Credit Default Swaps Default Credit derivatives Total agreements netting master of impact Less: Purchased options Purchased options contracts commodity Total Contracts Equity Total foreign exchange contracts contracts exchange foreign Total Contracts Commodity Swaps Cross-currency interest rate swaps swaps rate interest Cross-currency contracts exchange foreign Forward Purchased options Purchased options Purchased options contracts rate interest Total Contracts Exchange Foreign swaps Cross-currency Interest Rate Contracts Rate Interest Swaps agreements rate Forward (Canadian $ in millions) millions) $ in (Canadian ted in the following countries, based on country of ultimat of country based on countries, in the following loca ted customers with agreements) netting master of the impact (before or 2009. in 2010 cost our replacement of or more 10% represented country No other (1) Transactions are conducted with counterparties in various geographic loca conducted in various with are counterparties Transactions derivatives include do not exchange-traded cost replacement for agreements netting master of impact and derivatives The total Derivative-Related Credit Risk Credit Derivative-Related risk credit to subject instruments are derivative Over-the-counter their default on may counterparties that the possibility from arising is normally derivatives with associated The credit risk obligations. instrument. the derivative of amount the notional of a small fraction if credit loss potential us to expose generally contracts Derivative unfavourably position a counterparty’s affect rates changes in market is risk The credit defaults payment. on the counterparty and instrument. the derivative of value fair the positive by represented we that counterparties with dealing by risk credit limit to strive We derivatives for risk manage our credit we and creditworthy, are believe using that the other loans and is same applied to credit process risk credit assets. commodity prices and their implied as as well credit volatilities, spreads, employing by risk market limit to strive default. and We migration credit market all for processes management and governance comprehensive activities. risk-taking Derivative-Related Market Risk Market Derivative-Related arises risk risk. Market market to subject instruments are Derivative and/or sheet the balance on impact a negative for the potential from of changesthe value in adverse from resulting statement income variables. changes in certain of instruments market result as a derivative and equity rates, exchange foreign rates, include interest These variables NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Transactions are conducted with various counterparties. Set out below is the replacement cost of contracts (before the impact of master netting agreements) with customers in the following industries:

Interest rate Foreign exchange Commodity Equity Credit default (Canadian $ in millions) contracts contracts contracts contracts swaps Total

2010 2009 2010 2009 2010 2009 2010 2009 2010 2009 2010 2009 Financial institutions 29,380 26,443 6,693 6,025 654 829 382 927 312 802 37,421 35,026 Government 2,351 1,510 2,487 1,909 56 24 – – – – 4,894 3,443 Natural resources 45 13 74 57 351 389 – – – – 470 459 Energy 54 76 2 18 239 213 – – – – 295 307 Other 2,249 2,021 833 1,314 544 874 243 438 968 2,135 4,837 6,782 Total 34,079 30,063 10,089 9,323 1,844 2,329 625 1,365 1,280 2,937 47,917 46,017

Credit Derivatives and Guarantees Credit derivatives – protection sold by ratings/maturity profile: Maximum payout / Notional Fair value

As at October 31, 2010 (Canadian $ in millions) Within 1 year 1 to 5 years Over 5 years Total Liability Credit default swaps Investment grade (1) 2,514 24,752 10,498 37,764 834 Non-investment grade (1) 748 1,774 100 2,622 97 Non-rated 155 108 1 264 2

Total (2) 3,417 26,634 10,599 40,650 933

Credit derivatives – protection sold by ratings/maturity profile: Maximum payout / Notional Fair value

As at October 31, 2009 (Canadian $ in millions) Within 1 year 1 to 5 years Over 5 years Total Liability Credit default swaps Investment grade (1) 3,668 31,056 11,119 45,843 2,013 Non-investment grade (1) 1,174 3,347 513 5,034 145 Non-rated 22 173 – 195 1

Total (2) 4,864 34,576 11,632 51,072 2,159

(1) Credit ratings of AAA, AA, A and BBB represent investment grade ratings and ratings of BB (2) As at October 31, 2010, the notional value and net carrying value of credit protection sold or lower represent non-investment grade ratings. These credit ratings largely reflect those in which we held purchased protection with identical underlying assets was $2 billion and assigned by external rating agencies and represent the payment or performance risk of the $56 million ($1 billion and $49 million in 2009). underlying security or referenced asset. Term to Maturity Our derivative contracts have varying maturity dates. The remaining contractual term to maturity for the notional amounts of our derivative contracts is set out below:

(Canadian $ in millions) Term to maturity 2010 2009

Within 1 to 3 3 to 5 5 to 10 Over 10 Total notional Total notional 1 year years years years years amounts amounts Interest Rate Contracts Swaps 453,661 459,701 312,718 222,717 61,081 1,509,878 1,368,827 Forward rate agreements, futures and options 541,929 57,497 13,312 10,632 1,070 624,440 677,021 Total interest rate contracts 995,590 517,198 326,030 233,349 62,151 2,134,318 2,045,848 Foreign Exchange Contracts Cross-currency swaps 8,265 6,127 3,233 7,046 2,331 27,002 29,988 Cross-currency interest rate swaps 41,958 49,091 41,506 37,740 9,496 179,791 155,297 Forward foreign exchange contracts, futures and options 261,134 10,664 2,956 862 8 275,624 256,484 Total foreign exchange contracts 311,357 65,882 47,695 45,648 11,835 482,417 441,769 Commodity Contracts Swaps 9,341 5,625 843 476 115 16,400 23,019 Futures and options 68,993 21,203 891 167 – 91,254 163,715 Total commodity contracts 78,334 26,828 1,734 643 115 107,654 186,734 Equity Contracts 30,640 2,447 2,727 165 466 36,445 28,870 Credit Contracts 6,791 45,157 9,670 23,147 500 85,265 107,309 Notes Total notional amount 1,422,712 657,512 387,856 302,952 75,067 2,846,099 2,810,530

136 BMO Financial Group 193rd Annual Report 2010 Notes

137 - 2009 e to impairmente to he purchase price by $44 million he purchase $44 price by and equipment du 2010 Annual Report 193rd Financial Group BMO Gains and losses on disposal are included in other non-interest included disposal on non-interest are other in Gains losses and when events impairment for equipment and premises test We in our Con- reported equipment and premises for expense rent Net and 2008 was $340 million, $340 million and $326 million, respectively. million, $326 and million $340 million, $340 was 2008 and ended October 31, 2010, we reduced t reduced we 2010, 31, ended October deductible for tax purposes. This acquisition is part of our BMO Capital our BMO of is part This acquisition tax purposes. deductible for segment. reporting Markets Diners Club card- the net of the acquisition completed we 2009, 31, On December the Diners Club North American of franchise from receivables holder million), (US$839 million $882 of cash consideration total for Citigroup the year During assets. net adjustment based on a post-closing subject to of a revaluation based on million) (US$798 million $838 to million) (US$41 receivables cardholder the net of The acquisition acquired. assets the net corporate to Diners Club cards issue to right us the Diners Club gives of Canada and clients will and States in the United professional and card entertainment and in the travel expand to our initiative accelerate this As of part North America. across customers commercial for sector is that asset intangible relationship a customer acquired we acquisition, a computer and years 15 basis over accelerated an on being amortized basis a straight-line on is being amortized that asset intangible software tax is deductible for this acquisition to related Goodwill years. five over Banking Commercial and our Personal Diners Club of is part purposes. segment.Canada reporting L.L.C. Securities (“Paloma”) Paloma assets selected of the acquisition completed we 2009, 13, On December cashconsideration for Paloma of lending business used in the securities lending securities its global hired and million) (US$6 million $7 of our expand to the opportunity us with provides The acquisition team. securities lending operation. Goodwill related to this acquisition is Amortization expense for the year ended October 31, 2010 amounted amounted 2010 31, ended October year the for Amortization expense 2008, and in 2009 million $252 and million ($269 million $267 to respectively). Income. of Statement Consolidated in our revenue not their carrying may that value indicate or changes in circumstances write thembe We recoverable. to down fair value when the related no were There carrying the than value. less are cash flows undiscounted significant write-downs premises of 2008. and 2009 2010, 31, ended October during the years Commitments Lease premises for leases non-cancellable a number of into entered have We Octo as at commitments rental contractual equipment.and Our total the next of each for The commitments million. $1,520 were 2010 ber 31, 2012, for million $221 2011, for million $249 are thereafter and years five and 2015 for million $125 2014, for million $143 2013, for million $189 Included the commitments in these amounts are thereafter. million $593 2010. 31, October as at branch locations leased 688 to related 2010, 31, ended October the years for Income of Statement solidated 333 164 584 175 years 15 years 15 years 10 2009 Carrying 169 2010 1,560 1,634

– 2,852

estimated useful lives we use to use to we useful lives estimated values at the date acquisition. of Accumulated Accumulated Carrying esses using the purchase method. using the purchase method. esses Cost amortization Cost value value the terms of the acquisition, the the acquisition, of the terms able intangible assets, and the the and assets, intangible able 1,283 723 560 1,336 1,056 280 901 528 373 378 901 528 723 545 178 545 723

4,412 169

Other equipment Other equipment improvements Leasehold Total Land Land Buildings and equipment Computer software system operating (Canadian $ in millions) $ in millions) (Canadian Buildings40 software system operating and equipment Computer Other equipment improvements Leasehold years 10 a maximum of to term Lease of AMCORE accelerates our growth strategy and reinforces our already our already reinforces and strategy growth our accelerates AMCORE of in our presence expanding by Midwest in the U.S. position strong a core acquired we acquisition, this As of part Wisconsin. and Illinois accelerated an on is being amortized that asset intangible deposit this to including related goodwill, intangibles, All years. 10 basis over and assets The acquired tax purposes. deductible for are acquisition Banking Commercial and U.S. included are in our Personal liabilities segment.reporting On April 23, 2010, we completed the acquisition of certain assets and and certain assets of the acquisition completed we 2010, 23, On April Corporation Insurance Deposit the Federal from AMCORE of liabilities subject million), (US$245 million $253 of consideration total (“FDIC”) for the year During assets. net adjustment based on a post-closing to million reduced the purchase $28 we price by 2010, 31, ended October a revaluation based on million) (US$222 million $225 to million) (US$23 Under acquired. assets the net of The acquisition loans. the acquired on the losses of 80% FDIC absorbs acquired businesses are included in our consolidated financial state- included are in our consolidated businesses acquired acquisition. of the date ments on beginning Bank,AMCORE (“AMCORE”) N.A. This allocating involves the purchase price paid for a business to the including identifi acquired, assets their fair based on assumed liabilities of operations The results of as goodwill. is then recorded Any excess Note 12: Acquisitions 12: Note busin of acquisitions for account We We record all premises and equipment at cost less accumulated accumulated less cost at equipment and premises all record We computer Buildings, cost. at which land, is recorded except amortization, and equipment other software, system operating and equipment their basis over a straight-line on amortized are improvements leasehold The maximum useful lives. estimated Note 11: Premises and Equipment and Premises 11: Note amortize our assets are: our assets amortize NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Integra GRS (“Integra”) acquisition, we acquired a customer relationship intangible asset that is On November 23, 2009, we completed the acquisition of the record- being amortized using an accelerated amortization method over a period keeping business of Integra, a wholly-owned subsidiary of Integra of five years. Goodwill related to this acquisition is deductible for tax Capital Management Corporation, for cash consideration of $13 million, purposes. SOWA is part of our Private Client Group reporting segment. plus contingent consideration of $3 million paid in 2010, based on AIG Life Insurance Company of Canada additional client contracts assigned from the vendor within six months (“BMO Life Assurance”) after the closing date. The acquisition of Integra extends our existing On April 1, 2009, we completed the acquisition of all outstanding voting wealth management offering. As part of this acquisition, we acquired shares of AIG Life Insurance Company of Canada for cash consideration a customer relationship intangible asset that is being amortized on a of $330 million, subject to a post-closing adjustment based on net straight-line basis over five years and a computer software intangible assets. The post-closing adjustment was finalized during 2010 and the asset that is being amortized on a straight-line basis over three years. purchase price was reduced to $278 million. The acquisition of BMO Goodwill related to this acquisition is deductible for tax purposes. Life Assurance enables us to provide our clients with a wider range of Integra is part of our Private Client Group reporting segment. investment, financial planning and insurance solutions. As part of this Stoker Ostler Wealth Advisors, Inc. (“SOWA”) acquisition, we acquired a customer relationship intangible asset that is On September 9, 2009, we completed the acquisition of all outstanding being amortized on a straight-line basis over five years, a non-compete voting shares of Stoker Ostler Wealth Advisors, Inc. for cash consideration agreement that is being amortized on a straight-line basis over two of $12 million (US$11 million), plus contingent consideration of up years and a computer software intangible asset that is being amortized to $9 million (US$8 million) based on revenue to be generated in the on a straight-line basis over five years. Goodwill related to this future. The acquisition of SOWA provides us with the opportunity to acquisition is not deductible for tax purposes. BMO Life Assurance expand our presence in the U.S. wealth advisory market. As part of this is part of our Private Client Group reporting segment. The estimated fair values of the assets acquired and the liabilities assumed at the dates of acquisition are as follows:

(Canadian $ in millions) 2010 2009

BMO Life AMCORE Diners Club Paloma Integra SOWA Assurance

Cash resources (1) 420 – – – – 352 Securities 10 – – – – 2,638 Loans 1,551 873 – – – 54 Premises and equipment – – – – – 18 Goodwill 86 5 7 7 13 2 Intangible assets 24 63 – 9 8 15 Other assets 494 9 – – – 103 Total assets 2,585 950 7 16 21 3,182 Deposits 2,207 – – – – – Other liabilities 153 112 – – 9 2,904 Total liabilities 2,360 112 – – 9 2,904 Purchase price 225 838 7 16 12 278

(1) Cash resources acquired through the AMCORE acquisition include cash and cash equivalents and interest bearing deposits.

Note 13: Goodwill and Intangible Assets Change in Accounting Policy Goodwill On November 1, 2008, we adopted the CICA’s new accounting require- When we acquire a subsidiary, joint venture or securities over which ments for goodwill and intangible assets. We have restated prior period we exert significant influence and account for the acquisition using financial statements to reflect this change. The new standards required the equity method, we allocate the purchase price paid to the assets us to reclassify computer application software from premises and acquired, including identifiable intangible assets, and the liabilities equipment to intangible assets. assumed. Any excess of the amount paid over the fair value of those The impact of this change in accounting policy on prior periods net assets is considered to be goodwill. is as follows: Goodwill is not amortized; however, it is tested for impairment

(Canadian $ in millions) 2008 at least annually. The impairment test consists of allocating goodwill to our reporting units (groups of businesses with similar characteristics) Consolidated Statement of Income and then comparing the book value of the reporting units, including (Decrease) in premises and equipment expense (141) Increase in amortization of intangible assets 141 goodwill, to their fair values. We determine fair value primarily using discounted cash flows. The excess of carrying value of goodwill over fair value of goodwill, if any, is recorded as an impairment charge in the period in which impairment is determined. Notes There were no write-downs of goodwill due to impairment during the years ended October 31, 2010, 2009 and 2008.

138 BMO Financial Group 193rd Annual Report 2010 Notes

139 9 0 0 Total y g o l o n h Services c e 2 1,619 2 (7) Accumulated Carrying Accumulated cost. Intangible cost. assets Markets Markets

ible assets due impairmentible assets to 2010 Annual Report 193rd Financial Group BMO 70 – 70 85 41 24 44 23 1 Client Client Capital Corporate 237 163 546 175 142 435 62 21 111 Group Group 797 446 351 Private Private BMO 1,922 1,262 660 2 2 363 113 (6) 2010 77 (5) We test intangible assets for impairment when events or changes when events in impairment for assets intangible test We existing to related expense amortization estimated The total

Relates to Gerard Klauer Mattison & Co., Inc., BMO Nesbitt Burns Corporation Limited, Griffin, Griffin, Limited, Inc., Burns Corporation Nesbitt BMO & Co., Klauer Mattison Gerard to Relates L.L.C. Securities Inc.Kubik, & Thompson, Paloma and Stephens during the years ended October 31, 2010, 2009 and 2008. 2008. and 2009 2010, 31, ended October during the years circumstances indicate that their carrying value may not be recoverable. be recoverable. not their carrying may that value indicate circumstances write themWe to down fair value when the related undiscounted the carrying of value. recovery for allow to expected not are cash flows intang no write-downs of were There 2011, for million is $202 years five the next each of for assets intangible and 2014 for million $80 2013, for million $135 2012, for million $190 2015. for million $15 (4) Relates to BMO Nesbitt Burns Corporation Limited. Burns Corporation Nesbitt BMO to Relates (4) GRS. Integra and plc International Pyrford Ltd., Funds of Group Guardian to Relates (5) Inc. Advisors, Wealth Ostler Inc. Stoker and myCFO, Harris to primarily Relates (6) (7) 216 (4)

Accumulated Carrying Accumulated 817 636 185

3,991 1,795 1,330 8,754 26 25 1 Cost amortization value amortization amortization Cost Cost value 173 81 92 247 179 68 151 142 9 543 451 92 917 513 404 146 146 – 2,203 1,391 812 2009 1,141 68 1,141 Commercial Commercial 2010 Personal and and Personal (3) 3,792 879 399 2,018 204 1,900 9,192

1,020 (2) T 5 86 91 – 7 – – 7 7 – 105 – – – – 6 13 1 20 – – 20 (3) (50) (53) – (2) (1) 1 (2) – – (55) 14 (86) (72) – (1) (10) – (11) (3) – (86) assets acquired during the years acquired assets P&C P&C Client Investment Private and Private Investment Client P&C P&C 105 1,070 1,175 68 206 75 – 349 109 2 1,635 121 119 984 1,103 68 211 78 1 358 106 2 1,569 Canada U.S. Total Investing Products Banking Insurance Total Operations

– amortizing lions) Banking lions) (Note 23) (Note (1) (1) The aggregate amount of intangible of amount The aggregate Other changes in goodwill include the effects of translating goodwill denominated in denominated goodwill translating include of the effects Other changes in goodwill adjustments related purchase accounting and Canadian dollars into currencies foreign purchases. to prior-year Bank, State Bank Joliet, Household Bank of National First Lenox New to primarily Relates Savings Bank, Inc., Bank & Trust, Trust National Villa First Park Bancorp, Mercantile branches, Bank,Ozaukee Inc. AMCORE. Merchants and Bancorporation, Manufacturers and

Insurance asset asset Insurance asset Pension Total Accrued interest receivable brokers and dealers clients, Due from receivable Tax (Canadian $ in millions) $ in millions) (Canadian expenses prepaid receivable, Accounts items other and (Canadian $ in mil Software under development under development Software Other Total Core deposits Core networks Branch distribution – amortizing Purchased software software Developed (Canadian $ in millions) millions) $ in (Canadian relationships Customer Goodwill as at October 31, 2010 2010 31, October as at Goodwill 2009 31, October as at Goodwill Acquisitions during the year Other Goodwill as at October 31, 2008 2008 31, October at as Goodwill Acquisitions during the year Other

Note 14: Other Assets 14: Note deposits 11 years, branch distribution networks 15 years, purchased years, 15 networks branch distribution years, 11 deposits years. 6 other and 5 years software developed and amortization core period years, for customer relationships10 is presentation. year’s the current with conform to been reclassified have figures comparative Certain Intangible assets amortized are to income the over period during or a straight-line either us on benefit will assets the believe which we have no We years. 15 an accelerated a basis, period over not to exceed The weighted-average lives. indefinite with assets intangible significant Intangible Assets Intangible at is recorded Software date. the acquisition at value their fair at recorded are our acquisitions to related Intangible assets (1) (1) Canada Diners Club. bcpbank and Corporation, Solutions Moneris to primarily Relates (2) (3) as follows: category are by A continuity of our goodwill by reporting unit for the years ended October 31, 2010 and 2009 is as follows: is as 2009 and 2010 31, ended October the years for unit reporting by goodwill our of A continuity ended October 31, 2010, 2009 and 2008 was $370 million, $199 million million $199 million, $370 was 2008 and 2009 2010, 31, ended October respectively. million, $244 and NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 15: Deposits Payable on demand Payable Payable on (Canadian $ in millions) Interest bearing Non-interest bearing after notice a fixed date Total

2010 2009 2010 2009 2010 2009 2010 2009 2010 2009 Deposits by: Banks 606 668 388 495 2,346 2,194 16,095 19,616 19,435 22,973 Businesses and governments (1) (2) 9,052 7,376 14,701 12,338 24,949 22,048 82,071 71,976 130,773 113,738 Individuals 6,664 7,082 8,919 7,884 41,494 39,174 41,966 45,305 99,043 99,445

Total (3) 16,322 15,126 24,008 20,717 68,789 63,416 140,132 136,897 249,251 236,156 Booked in: Canada 15,657 14,619 20,654 18,161 46,996 44,017 90,286 81,949 173,593 158,746 United States 282 276 3,345 2,552 21,274 18,949 35,800 37,645 60,701 59,422 Other countries 383 231 9 4 519 450 14,046 17,303 14,957 17,988 Total 16,322 15,126 24,008 20,717 68,789 63,416 140,132 136,897 249,251 236,156

(1) The senior deposit notes of $800 million (2009 – $800 million) issued to BMO Subordinated (3) Total deposits payable on a fixed date included $15,844 million and $16,994 million, Notes Trust and $450 million (2009 – $450 million) issued to BMO Capital Trust II are included respectively, of federal funds purchased, commercial paper issued and other deposit liabilities. in business and government deposits. Please refer to Note 17 and Note 18, respectively, Included in deposits as at October 31, 2010 and 2009 are $92,213 million and $89,777 million, for further details. respectively, of deposits denominated in U.S. dollars, and $5,207 million and $7,271 million, (2) Included in business and government deposits are Covered Bond issuances of €1 billion respectively, of deposits denominated in other foreign currencies. maturing in January 2013 and US$2 billion maturing in June 2015, which pay interest of 4.25% and 2.85%, respectively (2009 – €1 billion maturing in January 2013, 4.25%). Please refer to Note 9 for further details. Deposits $36,763 million and $17,303 million, respectively, in 2009). Of the Deposits payable on demand are comprised primarily of our customers’ $67,321 million of deposits booked in Canada, $35,191 million mature chequing accounts, some of which we pay interest on. Our customers need in less than three months, $1,349 million mature in three to six months, not notify us prior to withdrawing money from their chequing accounts. $6,171 million mature in six to 12 months and $24,610 million mature Deposits payable after notice are comprised primarily of our after 12 months ($56,766 million, $22,770 million, $2,609 million, customers’ savings accounts, on which we pay interest. $7,091 million and $24,296 million, respectively, in 2009). We have liquid Deposits payable on a fixed date are comprised of: assets of $143,953 million to support these and other deposit liabilities • Various investment instruments purchased by our customers to earn ($124,108 million in 2009). A portion of these liquid assets have been interest over a fixed period, such as term deposits and guaranteed pledged (see Note 28). investment certificates. The terms of these deposits can vary from The following table presents the maturity schedule for our deposit one day to 10 years. liabilities. • Federal funds purchased, which are overnight borrowings of other Contractual Obligations banks’ excess reserve funds at a United States Federal Reserve Bank. (Canadian $ in millions) 2010 2009 As at October 31, 2010, we had purchased $732 million of federal funds Within 1 year 102,184 90,896 ($1,012 million in 2009). 1 to 2 years 11,780 18,127 • Commercial paper, which totalled $1,816 million as at October 31, 2010 2 to 3 years 12,491 13,855 ($1,303 million in 2009). 3 to 4 years 2,139 5,356 4 to 5 years 6,000 2,755 Included in our deposits payable on a fixed date as at October 31, 2010 Over 5 years (1) 114,657 105,167 were $116,452 million of deposits, each greater than one hundred Total (2) 249,251 236,156 thousand dollars, of which $67,321 million were booked in Canada, $35,085 million were booked in the United States and $14,046 million (1) The over 5 years category includes deposits with no fixed maturity date. (2) Includes structured notes designated under the fair value option. were booked in other countries ($110,832 million, $56,766 million, The following table presents the average deposit balances and average rates of interest paid during 2010 and 2009:

Average balances Average rate paid (%)

2010 2009 2010 2009 Deposits Booked in Canada Demand deposits – interest bearing 15,331 13,640 0.24 0.34 Demand deposits – non-interest bearing 19,213 16,383 – – Payable after notice 45,384 42,480 0.29 0.48 Payable on a fixed date 87,208 89,155 1.88 2.92 Total deposits booked in Canada 167,136 161,658 1.08 1.76 Deposits Booked in the United States and Other Countries Banks located in the United States and other countries 8,022 9,327 0.98 0.72 Governments and institutions in the United States and other countries 8,862 9,607 0.51 1.08 Notes Other demand deposits 3,114 7,847 0.03 0.02 Other deposits payable after notice or on a fixed date 54,829 64,126 0.78 1.59 Total deposits booked in the United States and other countries 74,827 90,907 0.74 1.31 Total average deposits 241,963 252,565 0.98 1.60

As at October 31, 2010 and 2009, deposits by foreign depositors in our Canadian bank offices amounted to $14,129 million and $14,392 million, respectively.

140 BMO Financial Group 193rd Annual Report 2010 Notes 141 2008 (1) 575 281 983 492 (408) (211) 2009 2010 Insurance-related liabilities. liabilities. – Insurance-related 2010 Annual Report 193rd Financial Group BMO ned using the Canadian Asset Liability Liability ned using the Canadian Asset Life Assurance acquisition on April 1, 2009. 1, April on acquisition Assurance Life ratings to minimize our exposure our exposure minimize to ratings (462) 1,256 794 Insurance claims and policy benefit liabilities represent current current represent claims liabilities Insurance benefit policy and business insurance our life to related recoverables Reinsurance insurance revenue, amounts included non-interest in Reinsurance The change in fair value related to changes to in our credit related The change value in fair maturity contractual due amount at and value The fair Direct premium income premium Direct reinsurance from premiums Ceded (Canadian $ in millions) $ in millions) (Canadian spread that has been recognized since these notes were designated designated were notes these since recognized has been that spread of loss unrealized an was 2010 31, October to trading for as held changes to the exposure hedged we in 2009, Starting million. $29 spread. in our credit and million $3,976 were 2010 31, October as at these notes of million, $3,377 and million ($3,073 respectively million, $4,084 in 2009). respectively, Includes the BMO the financial results of (1) Reinsurance In the ordinary course business, of our insurance subsidiaries reinsure provide to in order companies reinsurance and insurance other to risks provide and risks large to exposure loss limit diversification, greater These ceding reinsurance growth. future capacity for additional our insurance subsidiariesarrangements their direct relieve from not do the of the financial condition evaluate We the insureds. to obligation their credit monitor and reinsurers Included in non-controlling interest in subsidiaries as at October 31, 31, in subsidiariesIncluded October interest as at in non-controlling totalling including interest securities accrued trust capital were 2010 7.375% and 18) (see Note in 2009) million ($1,060 million $1,060 by issued in 2009) million (US$250 million US$250 of shares preferred part forms that subsidiary, a U.S. Capital Corporation, Preferred Harris 1 regulatory capital. our Tier of Liabilities Insurance-Related health and life to related businesses engaged in insurance are We reinsurance. and products annuities insurance, for Liabilities benefits. policy insurance future claims for estimates and determi are contracts insurance life mortality, for assumptions best-estimate which incorporates Method, dividends, policy yields, investment surrenders, lapses, policy morbidity, These assump- deviation. adverse for margins and costs administration actual reflect to updated and annually least at reviewed are tions claims Insurance benefit policy and conditions. market and experience included are liabilities in Other liabilities liabilities benefit policy on changes in actuarial of assumptions The effect or 2010. during 2009 material either not was insolvency. reinsurer from losses to offset to liabilities included – Insurance-related are in Other liabilities ceded of net are liabilities Insurance-related liabilities. the related in 2009). million ($758 in 2010 million $872 of reinsurance ended the years for Income of Statement in our Consolidated income in the table below. shown are 31 October

36 735 736 5,791 1,152 1,355 2,588 3,545 7,640 46,312 66,016 15,938 12,064 2009 2009 23 902 2010 2010 1,024 1,338 2,430 4,185 7,001 17,414 70,549 16,438 the same securities at a specified at the same securities hase agreements represent short-term represent hase agreements nder acceptances is recorded as is recorded nder acceptances

6,741 771 (Note 23) (Note 47,110 (Note 23) (Note Total Total Pension liability liability Pension payable Tax benefits future Other employee liability Accrued interest payable payable interest Accrued Non-controlling interest in subsidiaries than other subsidiaries, depositsLiabilities of liabilities Insurance-related Other expenses accrued payable, Accounts items other and (Canadian $ in millions) $ in millions) (Canadian

Securities sold but not yet purchased yet but not sold Securities under repurchase or sold lent Securities agreements (Canadian $ in millions) $ in millions) (Canadian Acceptances Securities lent or sold under repurc or sold lent Securities and own we that securities sell in which we funding transactions repurchase simultaneously to commit repurchase to price on a specified date in the The obligation future. expense The interest owing. the amount at is recorded these securities basis. accrual an on is recorded these liabilities to related Securities Lent or Sold Under Repurchase Agreements Under Repurchase Sold or Lent Securities Securities sold but not yet purchased represent our obligation to deliver deliver to our obligation represent purchased yet but not sold Securities are These obligations sale. the time of at own did not we that securities as at value Adjustments the market to value. their market at recorded these of the settlement on losses and gains and date the balance sheet (losses) in our Consolidated revenues in trading recorded are obligations Income. of Statement Securities Sold but not yet Purchased yet but not Sold Securities a liability and our corresponding claim is recorded as a loan in our as a loan claim corresponding our is recorded and a liability Balance Sheet. Consolidated Acceptances is that debt short-term negotiable of a form represent Acceptances have We a fee. for guarantee which and we our customers by issued against the acceptances, claim, of the amount equal to offsetting an due u The amount our customers. Note 16: Other Liabilities 16: Note A portion of our structured note liabilities are designated as trading as trading designated are liabilities note our structured of A portion which value, fair at for accounted are and option value the fair under is the portfolio the way with result the accounting aligns better a was notes these structured of change The value in fair managed. million $110 of revenues trading revenue, in non-interest decrease in 2009), million (increase $53 of 2010 31, ended October the year for changes to in our attributable million $13 including of increase an offsetting recognized We in 2009). million $158 of (charge spread credit that contracts financial instrument other and derivatives amounts on notes. these structured of changes hedge value to in the fair held are NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 17: Subordinated Debt Subordinated debt represents our direct unsecured obligations, in the Subordinated Notes Trust (“SN Trust”). SN Trust is a variable interest form of notes and debentures, to our debt holders and forms part of our entity which we are not required to consolidate (see Note 9); therefore, regulatory capital. The rights of the holders of our notes and debentures the BMO TSNs – Series A issued by SN Trust are not reported in our are subordinate to the claims of depositors and certain other creditors. Consolidated Balance Sheet. SN Trust used the proceeds of the issuance We require approval from OSFI before we can redeem any part of our to purchase a senior deposit note from us which is reported as a business subordinated debt. Where appropriate, we enter into fair value hedges and government deposit liability in our Consolidated Balance Sheet. to hedge the risks caused by changes in interest rates (see Note 10). All of the BMO TSNs – Series A will be exchanged automatically, without During the year ended October 31, 2010, we redeemed all of the consent of the holders, into our Series E Subordinated Notes upon our 4.00% Series C Medium-Term Notes, Tranche 1, due 2015, totalling the occurrence of specific events, such as a wind-up of Bank of Montreal, $500 million. The notes were redeemed at a redemption price of a regulatory requirement to increase capital, violations of regulatory 100% of the principal amount plus unpaid accrued interest to the capital requirements or changes to tax legislation. redemption date. We have guaranteed the payments of principal, interest and During the year ended October 31, 2009, our $140 million 10.85% redemption price, if any, and any other amounts on the BMO TSNs – Debentures, Series 12 matured. Series A when they become due and payable. This guarantee is During the year ended October 31, 2008, we issued Series F subordinate to our deposit liabilities and all other liabilities, except for Medium-Term Notes, Tranche 1, totalling $900 million. We redeemed all other guarantees, obligations or liabilities that are designated as ranking of our 5.75% Series A Medium-Term Notes, Tranche 2, due 2013, totalling either equally with or subordinate to the subordinated indebtedness. $150 million. The notes were redeemed at a redemption price of 100% of The senior deposit note we issued to SN Trust bears interest at an the principal amount plus unpaid accrued interest to the redemption date. annual rate of 5.90% and will mature on September 26, 2022. We have issued $800 million of innovative subordinated debentures, BMO Trust Subordinated Notes (“BMO TSNs – Series A”) through BMO The term to maturity and repayments of our subordinated debt are as follows:

(Canadian $ in millions, Interest Redeemable at our option 2010 2009 except as noted) Face value Maturity date rate (%) beginning in Total (8) Total

Debentures Series 16 100 February 2017 10.00 February 2012 (1) 100 100 Debentures Series 20 150 December 2025 to 2040 8.25 Not redeemable 150 150 Series C Medium-Term Notes Tranche 1 500 January 2015 4.00 Redeemed – 500 Tranche 2 500 April 2020 4.87 April 2015 (2) 500 500 Series D Medium-Term Notes Tranche 1 700 April 2021 5.10 April 2016 (3) 700 700 Tranche 2 1,200 June 2017 5.20 June 2012 (4) 1,200 1,200 Series F Medium-Term Notes Tranche 1 900 March 2023 6.17 March 2018 (5) 900 900

3,550 (7) 4,050 (7) BMO Trust Subordinated Notes – Series A 800 September 2022 5.75 September 2017 (6) 800 800 Total 4,350 4,850

(1) Redeemable at the greater of par and the Canada Yield Price after their redemption date (6) Redeemable at the greater of par and the Canada Yield Price prior to September 26, 2017, of February 20, 2012 until their maturity date of February 20, 2017. and redeemable at par commencing September 26, 2017. (2) Redeemable at the greater of par and the Canada Yield Price prior to April 22, 2015, (7) Certain subordinated debt recorded amounts include quasi fair value adjustments that and redeemable at par commencing April 22, 2015. increase their carrying value by $226 million ($186 million in 2009) as they are part of (3) Redeemable at the greater of par and the Canada Yield Price prior to April 21, 2016, fair value hedges (see Note 10). and redeemable at par commencing April 21, 2016. (8) All of our subordinated debt has a term to maturity of over five years. (4) Redeemable at the greater of par and the Canada Yield Price prior to June 21, 2012, Please refer to the offering circular related to each of the issues above for further details and redeemable at par commencing June 21, 2012. on Canada Yield Price calculations and definitions of Government of Canada Yield. (5) Redeemable at the greater of par and the Canada Yield Price prior to March 28, 2018, and redeemable at par commencing March 28, 2018.

Note 18: Capital Trust Securities We issue BMO Capital Trust Securities (“BMO BOaTS”) through our are redeemable, at the option of Trust II, subject to certain conditions consolidated subsidiary BMO Capital Trust (the “Trust”). The proceeds on or after December 31, 2013. In certain circumstances, the BMO T1Ns – of the BMO BOaTS are used to purchase mortgages. We consolidate Series A may be automatically exchanged for, or interest payable the Trust, and the BMO BOaTS are reported in our Consolidated Balance thereon may be paid by, the issuance of Class B non-cumulative preferred Sheet either as non-controlling interest in subsidiaries or as capital shares of Bank of Montreal. The senior deposit note we issued to Trust II trust securities, depending on the terms of the BMO BOaTS. bears interest at an annual rate of 10.421%, which will be reset on During the year ended October 31, 2009, we issued $450 million of December 31, 2018 and on every fifth anniversary of that date thereafter

Notes BMO Tier 1 Notes – Series A (“BMO T1Ns – Series A”) through BMO Capital until December 31, 2103. BMO T1Ns – Series A and the senior deposit Trust II (“Trust II”). Trust II is a variable interest entity which we are not note will mature on December 31, 2107. required to consolidate (see Note 9); therefore, the BMO T1Ns – Series A Holders of the BMO BOaTS and BMO T1Ns – Series A are entitled issued by Trust II are not reported in our Consolidated Balance Sheet. to receive semi-annual fixed cash distributions as long as we declare Trust II used the proceeds of the issuance to purchase a senior deposit dividends on our preferred shares or, if no such shares are outstanding, note from us which is reported as a business and government deposit on our common shares in accordance with our ordinary dividend practice. liability in our Consolidated Balance Sheet. The BMO T1Ns – Series A

142 BMO Financial Group 193rd Annual Report 2010 Notes

143 450 350 400 600 450 400

2,200 1,150 1,050 2009 – Principal amount Principal 400 400 800 2010 450 1,050 Series A will be reset to an an to be reset A will – Series 2010 Annual Report 193rd Financial Group BMO eported as non-interest sensitive. as non-interest eported

na 600 1,850 450

At the option At of the holder the holder of

Interest bearing deposits on which the customer interest rate rate interest which deposits on the customer bearing Interest no defined with liabilities bearing non-interest and rate Fixed Trading and underwriting (mark-to-market) assets and interest interest and assets (mark-to-market) underwriting and Trading non-interest as reported are assets fixed and intangible and Goodwill December 31, 2013 2013 31, December until such thereafter date of fifth anniversary every on and 2018 31, December on Starting 1 Notes Tier the BMO on rate the interest 2103, 31, December 10.50%. plus Canada Yield of the Government equal to per annum rate interest not applicable – not sensitive. Other fixed rate and non-interest bearing assets with no with assets bearing non-interest and rate Other fixed sensitive. maturity profile assumed an based on reported maturity are defined in balances. trends forecasted and historical considers that exchanged for 40 of our Class B Preferred shares, Series 8, 9, 11, 12 and and 12 11, 9, 8, Series shares, our Class B Preferred 40 of for exchanged the occurrence on the holders of the consent without respectively, 20, Capital is r equity shareholders’ Common Yields or the assets for rates interest the effective based upon are Yields 2010. 31, October on liabilities Automatic Exchange Automatic each be automatically T1Ns will BMO E and C, D, B, Series BOaTS The BMO a regulatory Montreal, Bank such of of as a wind-up specific events, of regulatory capital of capital or violations increase to requirement requirements. Liabilities are certificates, such as investment liabilities, term fixed rate, Fixed reflect that redemptions scheduled estimated at with maturity reported behaviour. depositor expected are rates market short-term or other changes rate the prime with category. months three to in the zero reported that maturity profile assumed an on based reported maturity are in balances. trends forecasted and historical considers Conversion by the Holders by Conversion B Series BOaTS the BMO above, indicated dates the conversion On or after 8 Series shares, our Class B Preferred for be exchanged C may and E D, Series BOaTS BMO the holders. of the option at respectively, 9, and the holder. of the option at be converted T1Ns cannot BMO and bearing assets on which the customer interest rate changes the with rate interest which on the customer assets bearing to in the zero reported are rates market short-term or other rate prime category. months three 2009 31, December 2010 31, December

(2) (3) (4) date Redemption date option the At Conversion Redeemed 2006 30, June 2006 31, December 2012 June 30, 2011 30, June (4) na

(1)/

- 33.24 33.43

BMO T1Ns BMO Trust the of Distribution per BOaTS per 34.52 27.37 23.17 51.11 . , December 31 , December June 30, December 31 December June 30, June 30, December 31 December June 30, 31 December June 30, June 30 June 30, December 31 31 December June 30, June 30, December 31 31 December June 30,

Distribution dates dates Distribution

, representing an aggregate aggregate an , representing Series B”) B”) – Series BOaTS B (“BMO – Series

dicated above, and subject to the and subject prior to dicated above, $1,000 plus unpaid indicated distributions indicated unpaid plus Series A”) at a at A”) – Series BOaTS A (“BMO – Series Series A – Series During the year ended October 31, 2010, we redeemed all of our of all redeemed we 2010, 31, ended October the year During On November 23, 2010, we also announced our intention to redeem to our intention announced also we 2010, 23, On November The gap position presented is as at October 31 of each year. each year. of 31 October is as at presented position The gap Total Capital Trust Securities Securities Capital Trust Total BMO T1Ns Distribution) except $ in millions, (Canadian E Series Non-Controlling Interest Non-Controlling D Series Capital Trust Securities Capital Trust A Series

Series C Series Series B Series BMO Capital Trust Securities Securities Capital Trust BMO approval of OSFI, the Trusts may redeem the securities redeem may in whole without OSFI, the Trusts of approval the holders. of the consent tion of $350 million, plus unpaid indicated distributions. distributions. indicated plus unpaid million, $350 of tion Fixed rate, fixed term assets, such as residential mortgage loans and and loans mortgage such as residential assets, term fixed rate, Fixed and the scheduled based upon repayments reported are loans, consumer behaviour. borrower expected reflect that prepayments estimated The assumptions for the year ended October 31, 2010 were as follows: were 2010 31, ended October the year for The assumptions Assets Interest Rate Gap Position Rate Interest by position or gap sensitivity rate the interest of The determination the earlier It is based on assumptions. numerous encompasses necessity theof repricing date or maturity liabilities date assets, and of derivatives risk. rate manage interest used to Note 19: Interest Rate Risk Rate Interest 19: Note on interest pay we and assets bearing interest on interest earn We such instruments, derivative have also We liabilities. bearing interest are values whose options, rate interest and swaps rate as interest assets, have we that the extent To rates. changes to in interest sensitive liabilities and derivative instruments maturing or repricing different at risk. rate interest to exposed are we in time, points all of our BMO Capital Trust Securities Securities Capital Trust our BMO of all equal to amount a redemption at redemption amount equal to $1,000, representing an aggregate redemp aggregate an representing $1,000, equal to amount redemption Redemption by the Trust by Redemption dates in On or after the redemption $1,000. of which value has a par security trust each on is paid Distribution (1) 1.5%. plus Rate Acceptance the Bankers’ be at will the distribution 2014, 31, December After (2) 1.5%. plus Rate Acceptance the Bankers’ be at will the distribution 2015, 31, December After (3) redemption of $400 million, million, $400 of redemption It represents the position outstanding at the close of the business the business outstanding the close of the position at It represents day change and may significantlyin subsequent periods based on customer behaviour and the application our of and asset liability policies. management NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Interest Rate Gap Position (Canadian $ in millions, except as noted) Total Effective Effective Effective Non- 0 to 3 4 to 6 7 to 12 within interest 1 to 5 interest Over 5 interest interest As at October 31 months months months 1 year rate (%) years rate (%) years rate (%) sensitive Total Canadian Dollar Assets Cash and cash equivalents (4,107) 74 (1,221) (5,254) 0.18 319 0.18 – – (1,594) (6,529) Interest bearing deposits with banks 586 – – 586 0.71 – – – – – 586 Securities 50,788 1,134 1,920 53,842 2.47 16,232 3.52 4,709 4.63 750 75,533 Securities borrowed or purchased under resale agreements 7,490 369 20 7,879 1.01 – – – – – 7,879 Loans 79,361 3,624 6,160 89,145 3.95 29,491 5.60 2,246 5.54 8,075 128,957 Other assets 88,538 611 5,578 94,727 na 10,828 na 650 na 2,983 109,188 Total assets 222,656 5,812 12,457 240,925 56,870 7,605 10,214 315,614 Liabilities and Shareholders’ Equity Deposits 76,365 5,324 11,179 92,868 1.34 54,048 1.23 4,915 4.89 – 151,831 Securities sold but not yet purchased 11,013 – – 11,013 2.24 – – – – – 11,013 Securities lent or sold under repurchase agreements 21,826 103 – 21,929 1.00 – – – – – 21,929 Other liabilities 88,819 163 295 89,277 na 3,242 na 3,254 na 8,918 104,691 Subordinated debt and Capital trust securities 626 – – 626 – 2,200 4.53 1,750 6.14 – 4,576 Shareholders’ equity 659 – – 659 – 1,925 – 250 – 18,740 21,574 Total liabilities and shareholders’ equity 199,308 5,590 11,474 216,372 61,415 10,169 27,658 315,614 Asset/liability gap position 23,348 222 983 24,553 (4,545) (2,564) (17,444) – Notional amounts of derivatives (18,416) (63) (1,382) (19,861) 15,575 4,286 – – Total Canadian dollar interest rate gap position 2010 4,932 159 (399) 4,692 11,030 1,722 (17,444) – 2009 (1,681) 967 3,968 3,254 11,510 1,067 (15,831) –

U.S. Dollar and Other Currencies Assets Cash and cash equivalents 21,992 221 1,521 23,734 2.20 268 – 237 – (342) 23,897 Interest bearing deposits with banks 2,600 – – 2,600 0.44 – – – – – 2,600 Securities 40,014 864 647 41,525 1.19 2,196 8.01 4,099 3.61 46 47,866 Securities borrowed or purchased under resale agreements 17,614 1,786 720 20,120 0.36 103 0.36 – – – 20,223 Loans 33,010 2,894 2,722 38,626 3.43 6,728 6.03 1,809 6.08 523 47,686 Other assets (40,750) (402) (3,991) (45,143) na (2,478) na (509) na 1,884 (46,246) Total assets 74,480 5,363 1,619 81,462 6,817 5,636 2,111 96,026 Liabilities and Shareholders’ Equity Deposits 72,248 2,073 3,461 77,782 0.44 17,437 1.08 2,201 0.19 – 97,420 Securities sold but not yet purchased 5,425 – – 5,425 0.81 – – – – – 5,425 Securities lent or sold under repurchase agreements 24,720 359 102 25,181 0.21 – – – – – 25,181 Other liabilities (34,714) 87 174 (34,453) na 1,372 na 252 na 523 (32,306) Shareholders’ equity – – – – – 306 – – – – 306 Total liabilities and shareholders’ equity 67,679 2,519 3,737 73,935 19,115 2,453 523 96,026 Asset/liability gap position 6,801 2,844 (2,118) 7,527 (12,298) 3,183 1,588 – Notional amounts of derivatives (5,306) (918) 2,310 (3,914) 6,611 (2,697) – – Total U.S. dollar and other currencies interest rate gap position 2010 1,495 1,926 192 3,613 (5,687) 486 1,588 – 2009 5,184 (1,374) (128) 3,682 (4,638) (1,162) 2,118 –

na – not applicable Certain comparative figures have been reclassified to conform with the current year’s presentation. Notes

144 BMO Financial Group 193rd Annual Report 2010 Notes

145 na Dividends 250 1,746 – – – – – – – – – – – of shares shares of Amount per share 25, 2007, or an equivalent value value equivalent or an 2007, 25, 2010 Annual Report 193rd Financial Group BMO (1,469,949) (65) were redeemed during the year during the year redeemed were na Dividends Dividends – 2,571 – – – – 3,283,190 180 – – – 10,000,000 250 1.19 10,890 – 7,260 – 8,000,000 200 1.33 8,000,000 200 1.33 2,917,490 87 1,778,586 60 6,000,000 150 1.55 12,000,000 396 1.49 12,000,000 396 1.49 10,000,000 250 1.31 10,000,000 250 1.48 12,000,000 300 1.30 12,000,000 300 0.55 16,000,000 400 0.59 10,000,000 250 1.45 10,000,000 250 0.94 11,000,000 275 1.11 506,044,982 4,773 498,562,702 4,411 not applicable – not shares, Series 16, at a price of $25.00 per share, representing an representing share, per $25.00 a price of at 16, Series shares, million. aggregateissue $300 price of 12,000,000 5.2% Non-Cumulative 5-year Rate Reset Class B Preferred Class B Preferred Reset Rate Non-Cumulative 5-year 5.2% 12,000,000 During the year ended October 31, 2008, we did not redeem any any redeem did not we 2008, 31, ended October the year During shares. preferred carry a non-cumulative quarterly dividend of US$0.371875 per share. carry US$0.371875 a non-cumulative dividend quarterly of starting our option at redeemable are shares 13 – Series B Class if we a premium plus cash per share, $25.00 for 2012 25, February carry a The shares 2016. 25, February before the shares redeem per share. $0.28125 non-cumulative dividend quarterly of starting our option at redeemable are shares 14 – Series B Class if we a premium plus cash per share, $25.00 for 2012 25, November carry The shares a 2016. 25, November before the shares redeem per share. $0.328125 non-cumulative dividend quarterly of into our common shares. The shares shares. our common into 2012 25, February starting our option na • Privileges and Rights Share Preferred starting Febru- our option at redeemable are 5 shares – Series B Class The shares convertible. not are and cash per share, $25.00 for 2013 ary 25, carry a non-cumulative quarterly dividend of $0.33125 per share. carry $0.33125 a non-cumulative dividend quarterly of starting our option at redeemable were 6 shares – Series B Class if we a premium plus cash per share, $25.00 for 2005 25, November November before the shares redeemed The shares shares. our common of a non-cumulative quarterly carried The shares 2009. 31, ended October per share. $0.296875 dividend of starting our option at redeemable are shares 10 – Series B Class at convertible are and cash per share, US$25.00 for 2012 25, February

9,402,542 338 2,413,244 122 8,769 6,454 8,769 2009 2008 2009 33,340,000 1,000 na 2010 1.49 1.31 1.33 1.63 2.80 551,715,904 6,198 2.80 506,044,982 4,773 2.80 1.45 1.63 1.30 1.13 14,000,000 350 1.13 14,000,000 350 1.13

rep-

– – 396 250 200 150 300 350 250 275 6,927 6,198 2,571

9,498 Dividends – – – – – – Number declared Number declared declared Number Number declared Number of shares shares of Amount per share shares of Amount per share 8,000,000 16,000,000 400 1.35 5,002,174 192 9,749,878 537 – – – s to issue an unlimited number of of number unlimited an issue s to (Note 22) (Note 551,715,904 484 566,468,440 – 12,000,000

(2)

11,000,000 14,000,000 Classified as Equity as – Classified Classified as Liabilities – Classified 6,000,000 10,000,000 12,000,000 10,000,000 (1)

During the year ended October 31, 2008, we issued the following the following issued we 2008, 31, ended October the year During During the year ended October 31, 2010, we did not issue or redeem issue did not we 2010, 31, ended October the year During During the year ended October 31, 2009, we issued the following the following issued we 2009, 31, ended October the year During Treasury Shares Treasury Capital Share Issued on the acquisition of a business a business of the acquisition on Issued year Balance end of at Issued under the Shareholder Dividend under the Shareholder Issued Purchase Plan Share and Reinvestment Plan Option under the Stock Issued of shares of the exchange on Issued a subsidiary corporation Common Shares Common year beginning of Balance at during the year Issued Series 18 – Series B Class – Series 21 B Class – Series 23 B Class Series 13 – Series B Class 14 – Series B Class 15 – Series B Class 16 – Series B Class Shares Preferred – Series 5 B Class 10 – Series B Class Preferred Shares Shares Preferred Outstanding as noted) except $ in millions, (Canadian – Series 6 B Class Series 15, at a price of $25.00 per share, representing an aggregate an aggregate representing per share, $25.00 a price of at 15, Series million. issue price $250 of shares, Series 23, at a price of $25.00 per share, representing an representing per share, $25.00 a price of at Series 23, shares, aggregate million. issue $400 price of shares, Series 18, at a price of $25.00 per share, representing an representing per share, $25.00 a price of at 18, Series shares, million. aggregate issue $150 price of an representing per share, $25.00 a price of at Series 21, shares, million. aggregate issue $275 price of 10,000,000 5.8% Non-Cumulative Perpetual Class B Preferred shares, shares, Non-Cumulative Class B Preferred Perpetual 5.8% 10,000,000 16,000,000 5.4% Non-Cumulative 5-year Rate Reset Class B Preferred Class B Preferred Reset Rate Non-Cumulative 5-year 5.4% 16,000,000 6,000,000 6.5% Non-Cumulative 5-year Rate Reset Class B Preferred Class B Preferred Reset Rate Non-Cumulative 5-year 6.5% 6,000,000 Class B Preferred Reset Rate Non-Cumulative 5-year 6.5% 11,000,000 resented an aggregate redemption price of approximately $253 million. $253 approximately price of redemption an aggregate resented During the year ended October 31, 2009, we redeemed all of our of all redeemed we 2009, 31, ended October the year During were 6 that Series shares, Non-Cumulative Class B Preferred 10,000,000 plus per share $25.00 a price of at liabilities, classified share as preferred This redemption. of the date dividends to unpaid declared and any • • • • Class A Preferred shares and Class B Preferred shares without par value, value, par without shares Class and B Preferred shares Class A Preferred be may shares Class B Preferred consideration. unlimited for in series, currency. in a foreign issued Preferred Shares Preferred our shareholder by authorized are We in 2009. Redeemed (1) dollars. Dividend amounts in U.S. (2) Note 20: Share Capital Share 20: Note preferred shares: preferred preferred shares: preferred any preferred shares. shares. preferred any NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Class B – Series 15 shares are redeemable at our option starting the Superintendent of Financial Institutions Canada (“OSFI”) and the May 25, 2013 for $25.00 cash per share, plus a premium if we redeem Toronto Stock Exchange under which we may repurchase for cancellation the shares before May 25, 2017. The shares carry a non-cumulative up to 15,000,000 BMO common shares (representing approximately quarterly dividend of $0.3625 per share. 2.7% of our common shares outstanding). We participated in a normal course issuer bid during the period Class B – Series 16 shares are redeemable at our option on from December 2, 2009 to December 1, 2010 under which we were August 25, 2013 and every five years thereafter for $25.00 cash per able to repurchase for cancellation up to 15,000,000 common shares, share. If the shares are not redeemed on the redemption dates, approximately 2.7% of our common shares then outstanding. investors have the option to convert the shares into Class B – Series 17 During the years ended October 31, 2010, 2009 and 2008, we did Preferred shares and, if converted, have the option to convert back to not repurchase any common shares. Series 16 Preferred shares on subsequent redemption dates. The Series 16 shares carry a non-cumulative quarterly dividend of $0.325 per share Issuances Exchangeable into Common Shares until August 25, 2013. Dividends payable after August 25, 2013 on One of our subsidiaries, Bank of Montreal Securities Canada Limited the Series 16 and Series 17 Preferred shares will be set based on (“BMSCL”), has issued various classes of non-voting shares that can prevailing market rates plus a predetermined spread. be exchanged at the option of the holder for our common shares, based on a formula. If all of these BMSCL shares had been converted into Class B – Series 18 shares are redeemable at our option on our common shares, up to 252,023, 252,507 and 263,397 of our common February 25, 2014 and every five years thereafter for $25.00 cash shares would have been needed to complete the exchange as at per share. If the shares are not redeemed on the redemption dates, October 31, 2010, 2009 and 2008, respectively. investors have the option to convert the shares into Class B – Series 19 Preferred shares and, if converted, have the option to convert back to Share Redemption and Dividend Restrictions Series 18 Preferred shares on subsequent redemption dates. The Series 18 OSFI must approve any plan to redeem any of our preferred share shares carry a non-cumulative quarterly dividend of $0.40625 per share issues for cash. until February 25, 2014. Dividends payable after February 25, 2014 We are prohibited from declaring or paying dividends on our on the Series 18 and Series 19 Preferred shares will be set based on preferred or common shares when we would be, as a result of paying prevailing market rates plus a predetermined spread. such a dividend, in contravention of the capital adequacy, liquidity or any other regulatory directives issued under the Bank Act. In addition, Class B – Series 21 shares are redeemable at our option on common share dividends cannot be paid unless all dividends declared May 25, 2014 and every five years thereafter for $25.00 cash per and payable on our preferred shares have been paid or sufficient funds share. If the shares are not redeemed on the redemption dates, have been set aside to do so. investors have the option to convert the shares into Class B – Series 22 In addition, we have agreed that if either BMO Capital Trust or Preferred shares and, if converted, have the option to convert back to BMO Capital Trust II (the “Trusts”), two of our subsidiaries, fail to pay any Series 21 Preferred shares on subsequent redemption dates. The Series 21 required distribution on their capital trust securities, we will not declare shares carry a non-cumulative quarterly dividend of $0.40625 per share dividends of any kind on any of our preferred or common shares for a until May 25, 2014. Dividends payable after May 25, 2014 on the Series 21 period of time following the Trusts’ failure to pay the required distribution and Series 22 Preferred shares will be set based on prevailing market (as defined in the applicable prospectuses) unless the Trusts first pay such rates plus a predetermined spread. distribution to the holders of their capital trust securities (see Note 18). Class B – Series 23 shares are redeemable at our option on Shareholder Dividend Reinvestment February 25, 2015 and every five years thereafter for $25.00 cash and Share Purchase Plan (“the Plan”) per share. If the shares are not redeemed on the redemption dates, We offer a dividend reinvestment and share purchase plan for our investors have the option to convert the shares into Class B – Series 24 share holders. Participation in the Plan is optional. Under the terms of Preferred shares and, if converted, have the option to convert back to the Plan, cash dividends on common shares are reinvested to purchase Series 23 Preferred shares on subsequent redemption dates. The Series 23 additional common shares. Shareholders also have the opportunity shares carry a non-cumulative quarterly dividend of $0.3375 per share to make optional cash payments to acquire additional common shares. until February 25, 2015. Dividends payable after February 25, 2015 We may issue common shares from treasury at an average of on the Series 23 and Series 24 Preferred shares will be set based on the closing price of our common shares on the Toronto Stock Exchange prevailing market rates plus a predetermined spread. based on the five trading days prior to the last business day of the Common Shares month or we may purchase them on the open market at market prices. We are authorized by our shareholders to issue an unlimited number During the year ended October 31, 2010, we issued a total of 9,749,878 of our common shares, without par value, for unlimited consideration. common shares (9,402,542 in 2009) under the Plan. Our common shares are not redeemable or convertible. Dividends Potential Share Issuances are declared by the Board of Directors on a quarterly basis and the As at October 31, 2010, we had reserved 24,076,259 common shares amount can vary from quarter to quarter. for potential issuance in respect of the Plan and 252,017 common shares During the year ended October 31, 2010, we issued 14,752,536 in respect of the exchange of certain shares of BMSCL. We also have common shares primarily through our dividend reinvestment and share reserved 15,232,139 common shares for the potential exercise of stock purchase plan and the exercise of stock options. We did not issue any options, as further described in Note 22. common shares through a public offering. During the year ended October 31, 2009, we issued 33,340,000 Treasury Shares

Notes common shares through a public offering at a price of $30.00 per share, When we purchase our common shares as part of our trading business, representing an aggregate issuance of $1.0 billion. We also issued we record the cost of those shares as a reduction in shareholders’ equity. 12,330,922 common shares primarily through our dividend reinvestment If those shares are resold at a price higher than their cost, the premium and share purchase plan and the exercise of stock options. is recorded as an increase in contributed surplus. If those shares are Normal Course Issuer Bid resold at a price below their cost, the discount is recorded as a reduction first to contributed surplus and then to retained earnings for any amounts On October 27, 2010, we announced our intention to renew our in excess of total contributed surplus related to treasury shares. normal course issuer bid, subject to the approval of the Office of

146 BMO Financial Group 193rd Annual Report 2010 Notes 147 4,397 9.21% 20,462 24,859 12.24% 14.87% 167,201 14.09 2009 2010 21,678 3,959 25,637 161,165 13.45% 10.47% 15.91%

14.46 BMO Financial Group 193rd Annual Report 2010 Annual Report 193rd Financial Group BMO ogether with the amount recorded in recorded the amount with ogether 3.37% 3.96% 3.37% 488,777 31.99 262,558 42.63 488,777 31.99 290,849 39.21 2,700 50.23 290,849 39.21 2,917,490 28.95 1,778,586 31.65 2,917,490 28.95 2,220,027 34.12 1,442,833 59.14 2,220,027 34.12 18,578,613 45.23 20,055,702 43.68 18,578,613 45.23 11,506,035 2,985,056 14,332,077 37.69 11,575,233 41.47 11,506,035 20,055,702 43.68 20,656,713 41.55 20,055,702 43.68 Our Tier 1 Capital Ratio, Tangible Common Equity Ratio, Total Capital Total Ratio, Equity Common Tangible Capital1 Ratio, Our Tier We determine the fair value of stock options on their grant date date their grant on options stock of value the fair determine We options stock price exercise options stock price exercise Basel II Regulatory Capital and Risk-Weighted Assets Capital and Risk-Weighted Basel II Regulatory as noted) except $ in millions, (Canadian 1 Tier Capital 2 CapitalTier Capital Total Assets Risk-Weighted Total 1 Capital Ratio Tier Ratio Equity Common Tangible Capital Ratio Total Assets-to-Capital Multiple shareholders’ equity less goodwill and intangibles, divided intangibles, and goodwill less equity shareholders’ assets. risk-weighted by assets. risk-weighted by The Tier 1 Capital Ratio is defined as Tier 1 capital divided Tier as is defined Capital1 Ratio The Tier assets. risk-weighted by dividing is calculated Multiple by The Assets-to-Capital total other of net items sheet including specified off-balance assets, capital. total by specified deductions, common as is defined Ratio Equity Common Tangible The capital divided as total is defined Capital Ratio The Total $104 million, respectively. The aggregate intrinsic value of stock options options stock of value intrinsic The aggregate respectively. million, $104 million, $119 was 2008 and 2009 2010, 31, October at exercisable respectively. million, $101 and million $120 Both our Tier 1 and Total Capital Ratios remain above OSFI’s stated stated OSFI’s above remain Capital Ratios Total 1 and our Tier Both a well- for respectively, 10%, and 7% of minimum ratios capital remains Multiple Our Assets-to-Capital financial institution. capitalized OSFI. by the maximum permitted below Ratio and Assets-to-Capital Multiple are the primary capital measures. are Multiple Assets-to-Capital and Ratio • • • • option. The aggregate intrinsic value of stock options outstanding options stock of value intrinsic The aggregate option. and million $158 million, $189 was 2008 and 2009 2010, 31, October at contributed surplus, in share capital. Stock options granted to employees employees to granted options Stock capital. share in surplus, contributed grant. of the date at expensed are retire to eligible and record thisand record amount as compensation expense the over period that contributed to increase a corresponding vest, with options the stock and shares issue we exercised, are options When these stock surplus. t proceeds, of the amount record Weighted- Weighted- Weighted- Weighted- 2008 2009 2010 2.69% 57,547 56.00 23,957 56.46 Number of average Number of of average Number of of Number average Number average 5,002,174 37.21 1,737,204 53.45 7,533,698 45.14 9,850,335 stock options options stock price exercise 15,232,139 48.74 18,578,613 45.23 ng from their grant date. A portion their date. grant ng from

ating groups’ business strategies; strategies; business groups’ ating

The intrinsic value of a stock option is the difference between the between is the difference option a stock of value The intrinsic Tier 1 capital represents more permanent forms of capital, and capital, and of forms permanent more 1 capital represents Tier Regulatory capital requirements and risk-weighted assets for the for assets risk-weighted and Regulatory capital requirements Our approach includes establishing goals and performance limits, Exercisable at end of year year end of at Exercisable for grant Available as a Outstanding options stock outstanding of percentage shares Forfeited/cancelled Expired Outstanding year end of at Outstanding at beginning of year Outstanding beginning of at Granted Exercised (Canadian $, except as noted) $, except (Canadian

current market price our of common shares and the strike price the of Employee compensation expense related to this plan for the years the years for this plan to related expense compensation Employee million $8 million, $17 was 2008 and 2009 2010, 31, ended October and million $7 million, tax, ($16 before respectively million $12 and tax, after million respectively). $11 of the options can only be exercised once certain performance targets targets certain performance once can be exercised only the options of date. their grant from years 10 expire options met. All are Plan: Option about our Stock information table summarizes The following We maintain a Stock Option Plan for designated officers and employees. employees. and officers designated Plan for Option maintain a Stock We Options granted are an at exercise price equal to the closing price of our common shares on the day prior to the grant date. Options vest 25% period starti a four-year over per year Stock-Based Compensation – Stock-Based Compensation 22: Employee Note Plan Option Stock primarily includes common shareholders’ equity, preferred shares shares preferred equity, includes shareholders’ primarily common and goodwill for a deduction less instruments, hybrid innovative and Basel under II. required deductions other and assets intangible excess certain deductions. of 2 capital, net Tier 1 and capital includes Tier Total and debentures subordinated of comprised is primarily 2 capital Tier Deductions credit losses. for allowance the general of portion the eligible in insurance our investment of comprised primarily are 2 capital Tier from subsidiaries substantial and other investments along with Basel other II in presented are position our capital of components of Details deductions. and 18 20. 17, 16, Notes consolidated entity are determined on a Basel on II basis. determined are entity consolidated measures for the management of balance sheet positions, risk levels levels risk positions, sheet balance of the management for measures capital redeeming and as issuing as well minimumand amounts, capital possible. structure capital cost-effective the most obtain instruments to credit ratings; underpins our oper our underpins ratings; credit value. shareholder long-term and confidence builds depositor and Our objective is to maintain a strong capital position in a cost-effective in a cost-effective position capital maintain a strong is to Our objective internal and ratios capital regulatory that:structure our target meets our targeted with is consistent capital; economic required of assessment Note 21: Capital Management 21: Note NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Options outstanding and options exercisable as at October 31, 2010 and 2009 by range of exercise price were as follows:

(Canadian $, except as noted) 2010 2009

Options outstanding Options exercisable Options outstanding Options exercisable

Weighted- Weighted- Weighted- Weighted- average Weighted- average Weighted- average Weighted- average Weighted- Number remaining average Number remaining average Number remaining average Number remaining average of stock contractual exercise of stock contractual exercise of stock contractual exercise of stock contractual exercise Range of exercise prices options life (years) price options life (years) price options life (years) price options life (years) price $20.01 to $30.00 – – – – – – 347,862 0.1 25.60 347,862 0.1 25.60 $30.01 to $40.00 5,389,919 3.5 35.46 3,530,925 2.0 35.71 9,555,366 3.2 36.28 7,188,519 1.7 36.77 $40.01 to $50.00 1,590,797 2.4 41.22 1,371,877 2.3 41.08 1,974,686 3.4 41.16 1,730,075 3.2 40.97 $50.01 to $60.00 4,447,969 5.8 54.53 1,258,120 3.6 55.24 2,867,545 4.6 55.21 1,380,358 4.6 55.22 $60.01 and over 3,803,454 6.1 63.95 1,372,776 5.9 64.23 3,833,154 7.1 63.95 928,419 6.8 64.39

The following table summarizes nonvested stock option activity for the Other Stock-Based Compensation Plans years ended October 31, 2010 and 2009: Share Purchase Plan

(Canadian $, except as noted) 2010 2009 We offer our employees the option of directing a portion of their gross salary toward the purchase of our common shares. We match 50% Weighted- Weighted- average average of employee contributions up to 6% of their individual gross salary. Number of grant date Number of grant date The shares held in the employee share purchase plan are purchased stock options fair value stock options fair value on the open market and are considered outstanding for purposes of Nonvested at computing earnings per share. The dividends earned on our common beginning of year 7,003,380 7.38 5,723,625 8.36 shares held by the plan are used to purchase additional common Granted 1,737,204 9.97 2,220,027 5.57 Vested 1,023,394 7.61 934,062 9.05 shares on the open market. Forfeited/cancelled 18,749 11.65 6,210 8.35 We account for our contribution as employee compensation expense when it is contributed to the plan. Nonvested at end of year 7,698,441 7.93 7,003,380 7.38 Employee compensation expense related to this plan for the years ended October 31, 2010, 2009 and 2008 was $41 million, $42 million The following table summarizes further information about our and $41 million, respectively. There were 17,244,042, 17,360,921 and Stock Option Plan: 14,958,315 common shares held in this plan for the years ended (Canadian $ in millions, except as noted) 2010 2009 2008 October 31, 2010, 2009 and 2008, respectively. Unrecognized compensation cost Mid-Term Incentive Plans for nonvested stock option awards 11 11 8 Weighted-average period over We offer mid-term incentive plans for executives and certain senior which it will be recognized (in years) 2.6 2.5 2.7 employees. Depending on the plan, these pay either a single cash Total intrinsic value of payment at the end of the three-year period of the plan, or three annual stock options exercised 107 52 30 cash payments in each of the three years of the plan. The amount Cash proceeds from stock of the payment is adjusted to reflect reinvested dividends and changes 186 84 56 options exercised in the market value of our common shares. For units granted prior to Actual tax benefits realized 2009, for certain executive and some senior employee grants, a portion on stock options exercised 1 2 3 Weighted-average share price of the incentive payment also varies based on performance targets for stock options exercised 58.6 46.7 49.4 driven by annualized total shareholder return compared with that of our Canadian competitors. The fair value of options granted was estimated using an option pricing Mid-term incentive plan units granted during the years ended model. The weighted-average fair value of options granted during the October 31, 2010, 2009 and 2008 totalled 5,651,067, 5,950,028 and years ended October 31, 2010, 2009 and 2008 was $9.97, $5.57 and $8.24, 4,548,827, respectively. We entered into agreements with third parties respectively. The following weighted-average assumptions were used to assume most of our obligations related to these plans in exchange to determine the fair value of options on the date of grant: for cash payments of $268 million, $187 million and $267 million in the years ended October 31, 2010, 2009 and 2008, respectively. Amounts 2010 2009 2008 paid under these agreements were recorded in our Consolidated Balance 6.6% 5.9% 4.1% Expected dividend yield Sheet in other assets and are recorded as employee compensation Expected share price volatility 27.5% 23.8% 19.5% expense evenly over the period prior to payment to employees. Risk-free rate of return 2.9% 2.6% 4.0% Expected period until exercise (in years) 6.5 6.5 7.3 Amounts related to units granted to employees who are eligible to retire are expensed at the time of grant. We no longer have any liability for Changes to the input assumptions can result in different fair value estimates. the obligations transferred to third parties because any future payments Expected dividend yield is determined using the historic yield for required will be the responsibility of the third parties. The amount the prior year. Expected volatility is based on an equal weighting of the deferred and recorded in other assets in our Consolidated Balance Sheet implied volatility from traded options on our common shares and the totalled $127 million and $106 million as at October 31, 2010 and 2009, historical volatility of our share price. The risk-free rate is based on respectively. The deferred amount as at October 31, 2010 is expected to

Notes the yields of Canadian strip bonds with a maturity similar to the expected be recognized over a weighted-average period of 1.8 years (1.7 years period until exercise of the options. The weighted-average exercise in 2009). Employee compensation expense related to these plans price on the grant date for the years ended October 31, 2010, 2009 and for the years ended October 31, 2010, 2009 and 2008 was $234 million, 2008 was $53.45, $34.12 and $59.14, respectively. $202 million and $239 million before tax, respectively ($164 million, $137 million and $160 million after tax, respectively).

148 BMO Financial Group 193rd Annual Report 2010 Notes

149 our benefit liabilities for represent benefits earned in the benefits earned represent 2010 Annual Report 193rd Financial Group BMO abilities represent the amount of of the amount represent abilities The discount rates for the main Canadian and U.S. pension and and pension the main Canadian U.S. and for rates The discount over year liabilities the change in our benefit of Components employees Benefits by earned Our of actuaries valuations perform Deferred incentive payments are paid upon retirement or resig- retirement upon paid are payments incentive Deferred plans is recorded these for expense compensation Employee ended during the years units plan granted incentive Deferred in liabilities in other recorded these plans are to related Liabilities Employee compensation expense (recovery) related to these plans these to related (recovery) expense compensation Employee plan incentive deferred 3,101,995 and 3,139,730 3,544,651, of A total pension and other employee future benefits as at October 31 of each each of 31 October benefits as at future employee other and pension using the plans), our U.S. for 30 our Canadian (September plans for year management’s service, based on on prorated method benefit projected increase, compensation of rate rates, about discount assumptions rates. trend cost care mortality health and age, retirement using high-quality selected were plans benefit future employee other matching the plans’ specific terms cash with flows. bonds corporate are expense benefit future employee other and our pension and year as follows: workforce the current to reference with determined are They year. current Pension and Other Employee Future Benefit Liabilities Benefit Future Other Employee and Pension benefit defined liabilities: benefit types of the following have We future employee other and liabilities pension contribution defined and li These benefit liabilities. benefit and our employees benefits that future employee other and pension end. year as at earned have retirees our Consolidated Balance Sheet and totalled $233 million and $172 million $172 and million $233 totalled and Balance Sheet our Consolidated and the amount of benefits to which employees will be entitled upon upon be entitled will which employees benefits to of the amount and plans. our benefit of the provisions based on retirement, These stock units are fully vested on the grant date. The value of these these of The value date. grant the on fully vested units are stock These dividends changes and in reinvested reflect to units adjusted is stock shares. our common of value the market can be made in cash payments or shares. incentive The deferred nation. are commissions and/or payments incentive fees, the in the year as a result payments the incentive of in the amount Changes earned. as employee dividends recorded of are price movements and share compensation expense in the periodthe of change. 379,034, and 456,943 283,791, totalled 2008 and 2009 2010, 31, October the units of value fair date grant The weighted-average respectively. 2008 and 2009 2010, 31, October ended during the years granted respectively. million, $20 and million $19 million, $16 was as at October 31, 2010 and 2009, respectively. Payments made under Payments respectively. 2009, and 2010 31, October as at were 2008 and 2009 2010, 31, ended October the years these plans for respectively. million, $5 and million $12 million, $3 million, $52 was 2008 and 2009 2010, 31, ended October the years for million, tax, ($36 before respectively million $(46) and million $38 entered have We tax, after respectively). million $(31) and million $26 these plans. to hedge our exposure instruments to derivative into as employee recorded are these derivatives of value in the fair Changes in the period in whichcompensation expense Hedging arise. they gains of 2008 and 2009 2010, 31, ended October the years (losses) for were tax, before respectively, million $(52) and million $36 million, $48 of expense compensation employee in net resulting recognized, also million, tax, ($3 before respectively million $6 and million $2 million, $4 tax, after million respectively). $4 and million $1 and 2009 2010, 31, ended October outstanding the years units for were respectively. 2008, Pension and – Pension counter- ended et value of our common shares shares our common of value et Employee Compensation Compensation Employee Other Employee Future Benefits Future Other Employee We also provide other employee future benefits, including benefits, future employee other provide also We We recognize the cost of our pension plans in employee compen- in employee plans our pension of the cost recognize We We also provide defined contribution pension plans to employees employees plans to pension contribution defined provide also We Pension arrangements include statutory arrangements pension benefit defined Pension Employee compensation expense related to plans for which plans for to related expense compensation Employee For the remaining obligations related to plans for which we have have which we for plans to related obligations the remaining For A total of 14,343,868, 12,491,078 and 9,900,297 mid-term incentive incentive mid-term 9,900,297 and 12,491,078 14,343,868, of A total party. Hedging gains of $7 million were recognized for the year for recognized were million $7 of Hedging gains party. health and dental care benefits and life insurance, for current and and current for insurance, life benefits and dental and care health employees. retired sation expense as the employees work for us. for work as the employees expense sation in some of our subsidiaries. Under these plans, we are responsible responsible are our we subsidiaries.in some of Under these plans, retirement a participant’s to amount a predetermined contributing for salary. employee’s that of a percentage based on savings, employees. Voluntary contributions can be made by employees but employees can be made by contributions Voluntary employees. required. not are plans, as well as supplemental arrangements that provide pension pension provide that arrangements as supplemental as well plans, under these plans statutory Generally, limits. of benefits in excess service of years employee’s an benefits based on retirement provide we and annual average earnings a period over time of prior to retirement. plans the statutory pension that ensuring for responsible are We of retirement benefits upon the pension pay to assets sufficient have Pension and Other Employee Future Benefit Plans Benefit Future Employee Other and Pension and States the United in Canada, arrangements a number of have We future employee other and pension provide that Kingdom the United employees. current and our retired benefits to Note 23: 23: Note Deferred Incentive Plans Incentive Deferred Directors, of our Board of members for plans incentive deferred offer We Private and Capital Markets in BMO employees key and executives, and/or payments incentive annual fees, Under these plans, Group. Client shares. our common units of as stock can be deferred commissions plan units were outstanding for the years ended October 31, 2010, 2009 2009 2010, 31, ended October outstanding the years unitsplan for were respectively. 2008, and we have not entered into agreements with third parties for the years the years for parties third with agreements into entered not have we million $24 million, $32 was 2008 and 2009 2010, 31, ended October and million $16 million, tax, ($22 before respectively million $4 and hedging economically commenced We tax, after million respectively). $3 the changethe mark in of the impact external an with swaps return total into entering by in fiscal 2008 not entered into agreements with third parties, the amount of com- of the amount parties, third with agreements into entered not pensation expense is amortized the over period prior to payment to dividends the current and reinvested reflect to adjusted and employees units plan incentive Mid-term shares. our common of value market 2010, 31, October ended during under these plans the years granted respectively. 255,286, and 572,348 512,649, totalled 2008 and 2009 during the units granted of value fair date grant The weighted-average million, $27 was 2008 and 2009 2010, 31, October ended the years made under these Payments respectively. million, $16 and million $22 were 2008 and 2009 2010, 31, ended October years the plans for related The liability respectively. million, $11 and million $13 million, $18 and million $52 was 2009 and 2010 31, October these plans as at to respectively. million, $32 October 31, 2010 (hedging gains of $11 million in 2009 and hedging and in 2009 million (hedging $11 of gains 2010 31, October compensation employee in net resulting in 2008), million $4 of losses million tax) ($13 after million tax ($17 before million $25 of expense tax before million $8 and tax) in 2009 after million tax ($9 before tax) in 2008). after million ($6 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Interest cost on benefit liabilities represents the increase in the classes are set to reflect the relative risks of these classes as compared liabilities that results from the passage of time. to fixed income and equity assets. Differences between expected Actuarial gains or losses may arise in two ways. First, each year and actual returns on assets are included in our actuarial gain or loss our actuaries recalculate the benefit liabilities and compare them to balance, as described above. those estimated as at the previous year end. Any differences that result Settlements occur when benefit liabilities for plan participants from changes in assumptions or from plan experience being different are settled, usually through lump sum cash payments, and as a result from management’s expectations at the previous year end are considered we no longer have any obligation to provide such participants with actuarial gains or losses. Secondly, actuarial gains and losses arise benefit payments in the future. when there are differences between expected and actual returns on Funding of Pension and Other Employee plan assets. Future Benefit Plans At the beginning of each year, we determine whether the unrecog- Our statutory pension plans in Canada, the United States and the United nized actuarial gain or loss is more than 10% of the greater of our Kingdom are funded by us and the assets in these plans are used to plan asset or benefit liability balances. Any unrecognized actuarial gain pay benefits to retirees. or loss in excess of this 10% threshold is recognized in expense over Our supplementary pension plans in Canada are partially funded, the expected remaining service period of active employees. Amounts while in the United States the plan is unfunded. Our other employee below the 10% threshold are not recognized in income. future benefit plans in the United States and Canada are either partially Plan amendments are changes in our benefit liabilities as a result funded or unfunded. Pension and benefit payments related to these of changes to provisions of the plans. These amounts are recognized plans are either paid through the respective plan or paid directly by us. in expense over the remaining service period of active employees for We measure the fair value of plan assets as at October 31 for pension plans and over the expected average remaining period to full our Canadian plans (September 30 for our U.S. plans). In addition to benefit eligibility for other employee future benefit plans. actuarial valuations for accounting purposes, we are required to prepare Expected return on assets represents management’s best valuations for determining our pension contributions (our “funding estimate of the long-term rate of return on plan assets applied to valuation”). The most recent funding valuation for our main Canadian plan the fair value of plan assets. We establish our estimate of the expected was performed as at October 31, 2010. The next funding valuation will rate of return on plan assets based on the plan’s target asset allocation be performed as at October 31, 2011. An annual funding valuation and estimated rates of return for each asset class. Estimated rates is required for our U.S. statutory plan. The most recent valuation was of return are based on expected returns from fixed income securities, performed as at January 1, 2010. which take into consideration bond yields. An equity risk premium is then applied to estimate equity returns. Returns from other asset

Summarized information for the past five years is as follows:

(Canadian $ in millions) Pension benefit plans Other employee future benefit plans

2010 2009 2008 2007 2006 2010 2009 2008 2007 2006 Defined benefit liability 4,839 4,125 3,634 4,082 4,248 975 898 705 908 952 Fair value of plan assets 5,185 4,122 3,476 4,533 4,339 67 63 71 68 68 Surplus (deficit) 346 (3) (158) 451 91 (908) (835) (634) (840) (884) (Gain) loss in the benefit liability arising from changes in assumptions 586 436 (832) (269) 121 38 166 (264) (60) 58 (Excess) shortfall of actual returns over expected returns on plan assets (279) (254) 1,422 (157) (231) (3) 6 20 (6) (1)

Asset Allocations Plan assets are rebalanced within ranges around target allocations. The investment policy for plan assets is to have a diversified mix Allocations as at the end of each year and the target allocations for of quality investments that are expected to provide a superior real rate October 31 are as follows: of return over the long term, while limiting performance volatility.

Pension benefit plans (1) Other employee future benefit plans

Target Actual Actual Actual Target Actual Actual Actual 2010 2010 2009 2008 2010 2010 2009 2008 Equities 53% 55% 49% 45% 50% 50% 52% 65% Fixed income investments 35% 35% 39% 44% 50% 49% 33% 35% Other 12% 10% 12% 11% – 1% 15% –

(1) Excludes the Canadian supplementary plan, whose assets are fully invested in fixed income investments. Notes

150 BMO Financial Group 193rd Annual Report 2010 Notes (3) 151 7.1% (2) – 12 – – – – – 8 8 6 20 (8) (8) (6) (8) (5) 14 12 50 51 19 13 50 68 50 50 68 50 68 11 10 230 (180) 166 (276) 7.3% 5.5% 8.0% 8.0% 3.7% 3.9% 7.4% 2009 2008 (1) 2009 2008 – – – – Other employee future benefit plans benefit future Other employee 2010 2010 2010 Annual Report 193rd Financial Group BMO 10 7.3% na

8 9 – 8 na 11 11 13 4 10 76 16 14 (8) 58 56 – 19 141 19 115 287 168 67 287 168 67 379 734 106 (14) (14) 8 259 236 57 221 103 67 360 (842) 34 7.3% 5.6% 6.4% 6.6% 6.6% 8.0% 3.7% 3.9% 3.0% (245) (298) (5) (254) 1,422 (3) Pension benefit plans plans benefit Pension Pension benefit plans plans benefit Pension plans benefit future Other employee 2009 2008 2009 2008 na na na na (3) – – not applicable – not 511 2010 2010 3.0%

11 6.2% 6.5% 128 128 254 75 14 (292) 176 59 7 242

474 (279)

(in years) t Expenses t 242 (in years)

– to fullto benefit eligibility

cognized in the Consolidated Statement of Income of Statement the Consolidated in cognized e r Discount rate at beginning of year year beginning of at rate Discount plan assets on return of rate long-term Expected increase compensation of Rate rate trend cost care health overall Assumed Weighted-average assumptions used to determine benefit expenses expenses benefit determine used to assumptions Weighted-average Estimated serviceaverage period active of employees period remaining Expected average Total pro forma annual pension and other employee future benefit benefit future employee other and pension annual forma pro Total benefits during and costs the year all recognized had if we expenses (Excess) shortfall of actual returns over expected returns on planassets on returns expected actual over returns of shortfall (Excess) actuarial (gains) of shortfall amortized (Excess) losses actuarial (gains) arising over losses amortized costs plan amendment of shortfall (Excess) arising costs amendment plan over The impact on annual benefits expense if we had recognized had recognized The impact on annual if we benefits expense arose and benefits as they all costs expenses benefit future employee other and pension annual Total (Canadian $ in millions, except as noted) except $ in millions, (Canadian Canada and Quebec pension plan expense expense plan Canada Quebec pension and expense contribution Defined expenses benefit future employee other and pension annual Total Income of Statement in the Consolidated recognized gain Settlement plan assets on return Expected Annual benefits expense Interest cost on accrued benefit liability liability benefit accrued on cost Interest in expense recognized Actuarial loss costs amendment plan Amortization of (Canadian $ in millions) $ in millions) (Canadian Annual Benefits Expense employees by Benefits earned

thereafter. level that at remaining and in 2029 4.4% to Trending (1) thereafter. level that at remaining and in 2018 4.4% to Trending (2) thereafter. level that at remaining and in 2013 4.5% to Trending (3) na Pension and Other Employee Future Benefi Future Other Employee and Pension as follows: determined are expenses benefit future employee other and Pension NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Changes in the estimated financial positions of our pension benefit plans and other employee future benefit plans are as follows:

(Canadian $ in millions, except as noted) Pension benefit plans Other employee future benefit plans

2010 2009 2008 2010 2009 2008 Benefit liability Benefit liability at beginning of year 4,125 3,634 4,082 898 705 908 Opening adjustment for the inclusion of the United Kingdom plan – – 101 – – – Benefits earned by employees 128 115 141 19 13 19 Interest cost on benefit liability 254 259 236 57 50 51 Benefits paid to pensioners and employees (236) (258) (228) (29) (26) (26) Voluntary employee contributions 8 8 7 – – – (Gain) loss on the benefit liability arising from changes in assumptions 586 436 (832) 38 166 (264) Plan settlement 4 3 (6) – – – Plan amendments (b) 14 2 – – – – Other, primarily foreign exchange (44) (74) 133 (8) (10) 17 Benefit liability at end of year 4,839 4,125 3,634 975 898 705 Wholly or partially funded benefit liability 4,815 4,107 3,600 67 63 71 Unfunded benefit liability 24 18 34 908 835 634 Total benefit liability 4,839 4,125 3,634 975 898 705 Weighted-average assumptions used to determine the benefit liability Discount rate at end of year 5.2% 6.2% 7.3% 5.4% 6.4% 7.3% Rate of compensation increase 3.0% 3.0% 3.7% 3.0% 3.7% 3.7% Assumed overall health care cost trend rate na na na 5.6%(1) 7.3%(2) 7.4%(3) Fair value of plan assets Fair value of plan assets at beginning of year 4,122 3,476 4,533 63 71 68 Opening adjustment for the inclusion of the United Kingdom plan – – 80 – – – Actual return on plan assets 571 499 (1,124) 8 (1) (14) Employer contributions 766 464 105 29 26 26 Voluntary employee contributions 8 8 7 – – – Benefits paid to pensioners and employees (231) (250) (228) (29) (26) (26) Settlement payments (4) (7) (6) – – – Other, primarily foreign exchange (47) (68) 109 (4) (7) 17 Fair value of plan assets at end of year 5,185 4,122 3,476 67 63 71 Plan funded status 346 (3) (158) (908) (835) (634) Unrecognized actuarial (gain) loss (a) 1,445 1,210 1,129 162 130 (41) Unrecognized cost (benefit) of plan amendments (b) 86 87 103 (25) (30) (38) Net benefit asset (liability) at end of year 1,877 1,294 1,074 (771) (735) (713) Recorded in: Other assets 1,900 1,330 1,121 – – – Other liabilities (23) (36) (47) (771) (735) (713) Net benefit asset (liability) at end of year 1,877 1,294 1,074 (771) (735) (713)

The plans paid $3 million for the year ended October 31, 2010 ($2 million in 2009; $3 million (1) Trending to 4.4% in 2030 and remaining at that level thereafter. in 2008) to us and certain of our subsidiaries for investment management, record-keeping, (2) Trending to 4.4% in 2029 and remaining at that level thereafter. custodial and administrative services rendered on the same terms that we offer to (3) Trending to 4.4% in 2018 and remaining at that level thereafter. our customers for these services. The plans did not hold any of our shares directly as na – not applicable at October 31, 2010, 2009 and 2008.

The benefit liability and the fair value of plan assets in respect of plans that are not fully funded are as follows:

(Canadian $ in millions) Pension benefit plans Other employee future benefit plans

2010 2009 2008 2010 2009 2008 Accrued benefit liability 133 126 3,407 975 898 705 Fair value of plan assets 106 90 3,234 67 63 71 Net benefit liability 27 36 173 908 835 634 Notes

152 BMO Financial Group 193rd Annual Report 2010 Notes (2) 153 7.3 (1) 8.0 (1) 1 na na na Other employee Other – (12) – – – – – – – 6 20 8 – 8 – 26 26 (1) 4 (38) (46) (41) 211 (41) (30) (38) 130 (41) 166 (264) 5.6 142 13 (114) (10) na na na

2009 2008 2009 2008 20092008 1 – – – – 6.5 (45) 44 Pension Pension benefits future 29 29 26 26 na na na na na na 2010 2010 2010 5.2 6.2 5.4 6.4 Benefit Benefit Benefit Benefit Benefit Benefit Benefit

2010 Annual Report 193rd Financial Group BMO 3.0 3.0 3.0 3.0 (%) (%) (34) (4) (1) – 1 – 34 4 ($) ($) 719 17 166 4 166 17 719

(578) (17) (130) (4) (130) (17) (578)

($) ($) ($) ($) ($) ($) (%)

our pension benefit plans and $40 million to our other employee employee our other to million $40 and plans benefit our pension – 21 – 2 – – 8 9 87 103 (25) lions, except as noted) except lions, liability expense liability expense (2) 1 (3) (25) 12 (%) 103 95 (30) (76) (10) (4) (16) (14) 8 436 (832) 38 (254) 1,422 (3) 1,210 1,129 162 130 537 130 1,129 1% increase increase 1% increase 1% Pension benefit plans plans benefit Pension plans benefit future Other employee Pension benefit plans plans benefit Pension plans benefit future Other employee plans benefit Pension plans benefit future Other employee 20092008 2009 2008 2009 2008 not applicable – not 7 22 31 15 Discount rate rate Discount increase 1% Impact of: decrease 1% increase compensation of Rate increase 0.25% Impact of: decrease 0.25% assets on return of rate Expected Impact of: decrease 1% health Assumed overall rate trend cost care Impact of: decrease 1% thereafter. level that at remaining and in 2030 4.4% to Trending (1) thereafter. level that at remaining and in 2029 4.4% to Trending (2) (Canadian $ in mil 472 114 773 472 744 433 90 2010 2010 2010 na 86 586 586 (279) (75) 3 1,445 87 – 14 (14) (1)

38 40 43 47 49 293 1,210 1,210

262 271 283 251 293 Pension Pension Other employee

her employee future benefit liability liability benefit future her employee

future benefit plans. plans. benefit future 2011

Our best estimate of the amounts we expect to contribute for the year ending October 31, 2011 is approximately $165 million to million to $165 is approximately 2011 31, ending October the year for contribute to the amounts of expect Our estimate best we $ in millions) (Canadian 2012 2013 2014 2015 2016–2020 1,617 plans benefit plans benefit future Contributions to defined contribution plans contribution defined to Contributions pensioners to directly Benefits paid Total (Canadian $ in millions) $ in millions) (Canadian plans benefit defined to Contributions

Unrecognized cost (benefit) of plan amendments at end of year year (benefit) end of amendments plan at cost of Unrecognized during the year amendments plan initiated of Cost the unrecognized of a portion of in expense Recognition (benefit) amendments plan cost of other and exchange foreign Impact of Unrecognized cost (benefit) of plan amendments at beginning of year year (benefit) beginning of amendments plan at cost of Unrecognized plan Kingdom the United the inclusion of for Opening adjustment year actuarial (gain)end of at Unrecognized loss $ in millions) (Canadian plan on assets returns expected actual over of returns (excess) Shortfall actuarial loss the unrecognized of portion a of expense in Recognition other and exchange foreign Impact of Unrecognized actuarial (gain) loss at beginning of year year actuarial (gain) beginning of at Unrecognized loss changes in assumptions from arising liability the benefit on loss (Gain) (Canadian $ in millions) $ in millions) (Canadian Estimated future benefit payments in the next five years and thereafter thereafter and years five in the next payments benefit future Estimated as follows: are Payments Benefit Future Estimated Cash Flows Cash Flows as follows: are plans benefit future our employee with in connection made during the year Cash we payments Key weighted-average economic assumptions used in measuring the used in measuring assumptions economic weighted-average Key the ot liability, benefit pension The sensitivity table. adjoining outlined in the are expenses related and is as it caution the table in should be used with analysis provided may assumption changes key in each of impact the and hypothetical have variable changes to in each key The sensitivities be linear. not changes key in other of the impact been calculated of independently in simultaneous result may changes Actual experience in a variables. in changes result may factor in one Changes assumptions. key number of certain or reduce sensitivities. which amplify could in another, Sensitivity of Assumptions of Sensitivity (b) A continuity of the unrecognized cost (benefit) amendments plan is as follows: cost of the unrecognized of (b) A continuity (a) A continuity of our actuarial (gains) of as follows: is losses continuity (a) A NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Fair Value Hierarchy table for the financial instruments held by the bank, provided in Note 29. We determine the fair value of our pension benefit and other employee The extent of our use of quoted market prices (Level 1), internal models future benefit plan assets using the methods described in Note 29. using observable market information as inputs (Level 2) and internal models We use a fair value hierarchy to categorize the inputs we use in valuation without observable market information as inputs (Level 3) in the valuation techniques to measure fair value, consistent with the fair value hierarchy of securities, derivative assets and derivative liabilities was as follows:

Pension Benefit Plans Valued using Valued using Valued using quoted models (with models (without As at October 31, 2010 (Canadian $ in millions) market prices observable inputs) observable inputs) Cash and Cash Equivalents 218 – – Securities issued or guaranteed by: Canadian federal government 562 – – Canadian provincial and municipal governments 919 35 2 U.S. federal government 10 – – U.S. states, municipalities and agencies 11 24 – Other governments 66 3 – Mortgage-backed securities and collateralized mortgage obligations – 27 24 Corporate debt 388 318 36 Corporate equity 1,626 672 226 Total securities 3,582 1,079 288 Derivative Assets Interest rate contracts 40 – – Foreign exchange contracts – 448 – Equity contracts 333 – 1 Total derivative assets 373 448 1 Derivative Liabilities Interest rate contracts 39 – – Foreign exchange contracts – 442 – Equity contracts 323 – – Total derivative liabilities 362 442 – Total 3,811 1,085 289

Other Employee Future Benefit Plans Valued using Valued using Valued using quoted models (with models (without As at October 31, 2010 (Canadian $ in millions) market prices observable inputs) observable inputs) Cash and Cash Equivalents 1 – – Securities issued or guaranteed by: U.S. federal government 1 – – U.S. states, municipalities and agencies – 2 – Corporate debt 8 19 – Corporate equity 36 – – Total securities 45 21 – Total 46 21 –

The table below presents a reconciliation of all changes in plan assets categorized as Level 3 financial instruments for the year ended October 31, 2010:

Pension Benefit Plans Unrealized gains (losses) on assets Fair value and liabilities Balance at Realized Unrealized Transfers Transfers as at still held at For the year ended October 31, 2010 October 31, gains gains into out of October 31, October 31, (Canadian $ in millions) 2009 (losses) (losses) Purchases Sales Maturities (1) Level 3 Level 3 2010 2010 Securities issued or guaranteed by: Canadian provincial and municipal governments 10 – 2 – – – 2 (12) 2 – U.S. states, municipalities and agencies 1 – – – – – – (1) – – Mortgage-backed securities and collateralized mortgage obligations 20 – – 9 (2) – – (3) 24 – Corporate debt 20 – 3 28 (2) – – (13) 36 2 Corporate equity 223 – 2 2 – – – (1) 226 2 Notes Total securities 274 – 7 39 (4) – 2 (30) 288 4 Derivative Assets Equity contracts 1 – – 2 (2) – – – 1 – Total derivative assets 1 – – 2 (2) – – – 1 –

(1) Includes cash settlement of derivative assets and derivative liabilities.

154 BMO Financial Group 193rd Annual Report 2010 Notes

155 69 (27) (13) (7) (87) (104) 544 (525) 290 (217) 834 (742) 120 (16) 189 (43) 757 (808) 279 (53) 279 (881) 382 (108) 204 (108) (179) 81 (266) (23) 1,023 (785) 757 (808)

20092008 20092008 ve income tax rates tax rates income ve 2010 2010 (4) 21 206 2 912 120 46 120 786 (71) (117) (99) 97 217 687 639 639 341 980 (20) (12) (32) 948 34 (70) (36) 912 2010 Annual Report 193rd Financial Group BMO 2009 2008 2009 in 2008. 2010 Provincial Provincial Provincial taxes income Future

Gains hedges (losses) cash on flow Income that we earn in foreign countries through our branches our branches through countries in foreign earn we that Income – Current – Future

hedging unrealized Impact of translation (losses) gains on Other operations foreign net of Total of) Taxes Income (Recovery for Provision Total of Components millions) $ in (Canadian taxes Canada: income Current Federal Canada: taxes income Future Federal Canadian Total taxes income Current Foreign: foreign Total Total Provision for (Recovery of) Taxes Income (Recovery for Provision $ in millions) (Canadian Income of Statement Consolidated of) taxes income (recovery for Provision Equity Shareholders’ to: related (recovery) taxIncome expense securities, (losses) gains on Unrealized available-for-sale hedging activities of net

of such earnings is not planned in the foreseeable future, we have have we future, foreseeable in the planned is not such earnings of The Canadian and tax liability. income future the related recorded not our of if all tax rates, existing at be payable, would that taxes foreign 2010, 31, October at as repatriated subsidiaries’ were foreign earnings and million $266 million, be $236 to estimated are 2008 and 2009 respectively. million, $329 would be required to pay tax on certain of these earnings. As repatriation these earnings. certain of tax on pay to be required would or subsidiaries is generally subject to tax in those countries. We are are or subsidiaries We is tax subject generally in those to countries. foreign in our earned income the on Canadian taxation to subject also this income. on paid taxes foreign for a credit Canada allows branches. Uponrepatriation earnings of from certain foreign subsidiaries, we (83) (2.3) (212) (10.2) (317) (16.0) (80) (3.7) (219) (11.0) (85) (2.4) (80) (3.7) 8 0.3 9 0.4 3 0.3 9 – 8 687 19.2% 217 (71) 10.5% (3.6)% (240) (6.7) (161) (7.7) (197) (9.9) 6 0.2 5 0.2 5 0.2

657 1,086 648 30.4% 31.6% 32.7%

17 84 547 222 197 135 (100) 1,102 (196) 2009 (23)

202 2010 1,202 1,383

(95) (100) (193) (184) (1,031) (919)

(125) (563) (416) 1,258 (186) 6 212 536 17 213 203

(1)

The future income tax balances included in other assets of tax balances included of income The future assets in other In addition, we record an income tax expense or benefit directly directly or benefit tax expense income an record we In addition, Provision for (recovery of) income taxes and effective tax rate effective and of) taxes income (recovery for Provision tax rates different subject to operations Foreign taxes income future for in tax rate Change tax purposes deductible for not Intangible assets Other Combined Canadian federal and provincial income taxes taxes income provincial and Canadian federal Combined the statutory at tax rate from: resulting (decrease) Increase income Tax-exempt (Canadian $ in millions, except as noted) except $ in millions, (Canadian Premises and equipment equipment and Premises Intangible assets Securities Other tax liabilities income future Total Future Income Tax Liabilities Tax Income Future benefits Pension allowance Valuation tax assets income future Total Employee future benefits future Employee benefits compensation Deferred income Other comprehensive carryforwards loss Tax Other (Canadian $ in millions) millions) $ in (Canadian Assets Tax Income Future credit losses for Allowance Components of Future Income Tax Balances Balances Tax Income Future of Components and provision for (recovery of) income taxes that we have recorded in our Consolidated Statement of Income: of Statement in our Consolidated recorded have we that of) taxes income (recovery for provision and million and $160 million in 2009 $75 Includes prior recovery years’ of income (1) taxes million in in the 2010, amount $54 of Set out below is a reconciliation of our statutory tax rates and income tax that would be payable at these rates to the effecti to these rates at be payable would tax that income and our statutory tax rates of is a reconciliation out below Set tax loss carryforwards that will expire in 2030, $24 million (net of of (net million $24 in 2030, expire will that carryforwards tax loss in 2031 expire will that operations U.S. to related allowance) valuation in 2016. expire will that Chinese operations to related million $1 and is primarily 2009 and 2010 31, October as at allowance The valuation states in certain U.S. generated tax assets income future to attributable realiza- that not than likely is more it which believes management for occur. not will these assets of tion presentation. year’s the current with conform to been reclassified have figures comparative Certain Canadian to related million Included is $80 tax assets income in future $559 million and in other liabilities of $332 million as at October 31, 2010 2010 31, October as at million $332 of liabilities in other and million $559 the cumulative are 2009) in respectively, million, $330 and million ($513 amount tax of applicable to temporary differences between the income Future liabilities. and our assets of tax values and accounting to expected the tax rates at measured are liabilities and tax assets tax income in future Changes reverse. when these differences apply recorded are a change to in tax rates related liabilities and assets in thein income period the change tax rate is substantively enacted. hensive income (loss) on translation of net foreign operations. foreign net of translation (loss) on income hensive s relate to amounts recorded in amounts recorded to s relate when the taxe equity in shareholders’ on (recovery) tax expense income example, For equity. shareholders’ operations in foreign investment our net to (losses) related hedging gains compre- other accumulated of as part equity in shareholders’ is recorded We report our provision for income taxes in our Consolidated Statement Statement in our Consolidated taxes income for our provision report We financial in our consolidated recorded transactions based upon Income of tax income for recognized are when they of regardless statements from earnings retained of repatriation of the exception with purposes, our foreign subsidiaries, as noted below. Note 24: Income Taxes Income 24: Note NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

The difference between the tax benefit recognized in the financial accrual for interest, was $300 million and $376 million, respectively, statements and the tax benefit claimed on a tax return position all of which affects our tax rate. It is difficult to predict changes in UTBs is referred to as an unrecognized tax benefit (“UTB”). A reconciliation over the next 12 months. of the change in the UTB balance (excluding any related accrual for We accrue applicable income tax-related penalties within income interest) is as follows: tax expense on our UTBs. We accrue applicable income tax-related interest as interest expense. As at October 31, 2010 and 2009, our accrual Reconciliation of the Change in Unrecognized Tax Benefits (Canadian $ in millions) 2010 2009 for interest and penalties related to income taxes, net of payments on deposit to taxing authorities, was $20 million and $17 million, respectively. Unrecognized tax benefits, beginning of year 376 417 Increases related to positions taken There was a net increase of $3 million in the accrual for interest and during prior years – 25 penalties during the year ended October 31, 2010. Increases related to positions taken We and our subsidiaries are subject to Canadian federal and during the current year 40 40 provincial income tax, U.S. federal, state and local income tax, and Decreases related to positions taken income tax in other foreign jurisdictions. The following are the major tax during prior years (38) (81) jurisdictions in which we and our subsidiaries operate and the earliest Decreases due to lapse of statute of limitations (16) (23) Settlements and reassessments (62) (2) tax year not yet closed by tax authorities: Jurisdiction Tax year Unrecognized tax benefits, end of year 300 376 Canada 2003 As at October 31, 2010 and 2009, the balance of our UTBs recorded in United States 2004 Other liabilities in our Consolidated Balance Sheet, excluding any related

Note 25: Earnings Per Share Basic Earnings per Share Employee Stock Options Our basic earnings per share is calculated by dividing our net income, In determining diluted earnings per share, we increase the average after deducting total preferred share dividends, by the daily average number of common shares outstanding by the number of shares that number of fully paid common shares outstanding throughout the year. would have been issued if all stock options with a strike price below the average share price for the year had been exercised. When performance Basic Earnings per Share (Canadian $ in millions, except as noted) 2010 2009 2008 targets have not been met, affected options are excluded from the calculation. We also decrease the average number of common shares Net income 2,810 1,787 1,978 Dividends on preferred shares (136) (120) (73) outstanding by the number of our common shares that we could have repurchased if we had used the proceeds from the exercise of stock Net income available to options to repurchase them on the open market at the average share common shareholders 2,674 1,667 1,905 price for the year. We do not adjust for stock options with a strike price Average number of common shares above the average share price for the year because including them outstanding (in thousands) 559,822 540,294 502,062 would increase our earnings per share, not dilute it. Basic earnings per share (Canadian $) 4.78 3.09 3.79 Diluted Earnings per Share (Canadian $ in millions, except as noted) 2010 2009 2008 Diluted Earnings per Share Net income available to Diluted earnings per share represents what our earnings per share would common shareholders have been if instruments convertible into common shares that had the adjusted for dilution effect 2,675 1,668 1,905 impact of reducing our earnings per share had been converted either at Average number of common shares the beginning of the year for instruments that were outstanding all year outstanding (in thousands) 559,822 540,294 502,062 or from the date of issue for instruments issued during the year. Convertible shares 252 253 263 Convertible Shares Stock options potentially exercisable (1) 10,732 7,700 14,150 In determining diluted earnings per share, we increase net income Common shares potentially repurchased (7,681) (5,934) (9,778) available to common shareholders by dividends paid on convertible Average diluted number of common preferred shares as these dividends would not have been paid if the shares outstanding (in thousands) 563,125 542,313 506,697 shares had been converted at the beginning of the year. These dividends Diluted earnings per share (Canadian $) 4.75 3.08 3.76 were less than $1 million for the years ended October 31, 2010, 2009 and 2008. Similarly, we increase the average number of common shares (1) In computing diluted earnings per share we excluded average stock options outstanding of 2,317,074, 8,244,478 and 2,818,599 with weighted-average exercise prices of $61.52, $46.92 outstanding by the number of shares that would have been issued and $60.68 for the years ended October 31, 2010, 2009 and 2008, respectively. had the conversion taken place at the beginning of the year. Our Series 10 Class B Preferred shares, in certain circumstances, are convertible into common shares. These conversions are not included in the calculation of diluted earnings per share as we have the option

Notes to settle the conversion in cash instead of common shares.

156 BMO Financial Group 193rd Annual Report 2010 Notes

157 BMO Financial Group 193rd Annual Report 2010 Annual Report 193rd Financial Group BMO Corporate Services also includes residual revenues and expenses expenses and revenues includes also Services residual Corporate T&O manages, maintains and provides governance over our over governance maintains provides and T&O manages, Services for included Corporate T&O are with results for Operating We now account for certain BMO CM transactions on a basis on CM certain BMO transactions for account now We reflect the activities outlined above. the activities reflect actual or incurred amounts earned between the differences representing groups. operating to the amounts and allocated During the year ended October 31, 2010, we changed the manner we 2010, 31, ended October the year During disclosure. in our segmented assets securitized report in which we reported not were assets mortgage certain securitized Previously, mortgage securitized all report now balance sheet. We in P&C Canada’s Services, amounts in Corporate offsetting with in P&C Canada, assets assets mortgage securitized all on earned income interest net and interest net Previously, income. is included interest in P&C Canada net included was assets mortgage certain on securitized earned income been restated Prior periods have revenue. in P&C Canada non-interest presentation. this new to conform to Taxable Equivalent Basis Equivalent Taxable basis (“teb”) equivalent a taxable on income interest net analyze We This basis includes which adjustment an level. group the operating at taxes income for the GAAP provision and GAAP revenues increases securities certain tax-exempt on revenues raise would that amount an by Losses Credit for Provisions each group to allocated generally are credit losses for Provisions expected between Differences group. that for losses expected based on included in under GAAP are required provisions and provisions loss Corporate Services. Accounting Securitization Corporate Services Corporate expertise provide units that Services includes corporate the Corporate Operations and such as Technology in areas support governance and audit, management, internal risk finance, planning, law, strategic (“T&O”), human marketing, corporate economics, communications, corporate expenses and results include Operating revenues learning. and resources foreign- the hedging of activities, certain with securitization associated certain of the management to related activities and earnings, source structure. liability asset our overall and positions balance sheet sourcing. and estate real services, operations technology, information qualityT&O focuses and on enterprise-widepriorities that improve experience. customer excellent an deliver to efficiency to transferred T&O services are of costs However, purposes. reporting largely Services As such, Corporate results for groups. operating the three Presentation Basis of our internal segments based on are operating these The results of these used in policies The accounting systems. financial reporting in the prepara- followed those with consistent generally segments are 1 and as disclosed in Note financial statements our consolidated of tion accounting Notable financialstatements. the consolidated throughout basis adjustment equivalent taxable the are differences measurement below. as described losses, credit for the provisions and to a level that incurs tax at the statutory rate. The operating groups’ groups’ The operating the statutory rate. incurs tax at that a level to Services. Corporate in eliminated adjustmentsteb are and useful these adjustments are believe We reflects their teb. that the enhances it since CM BMO manages its how business, reflect revenues. tax-advantaged and revenues taxable of comparability income and income interest The change in net results in increases Services. in Corporate amounts reflected CM in BMO offsetting with taxes groups. the two change of income in either net no overall was There this reflect to reclassification. restated been Prior periods have sets together as part of our wealth our wealth of as part sets together to them, may not be comparable with those of other financial other of those with be comparable not may them, to services companies. We evaluate the performance of our groups using our groups of the performance evaluate We services companies. net equity, on return growth, revenue income, such net as measures (productivity) expense-to-revenue non-interest and profit economic leverage. as cash operating as well ratio, securitization, treasury and market risk management, debt and equity equity management, and risk debt market and treasury securitization, year in the Effective sales trading. institutional and and research accounts client mid-market U.S. identified we 2010, 31, ended October banking and model a commercial served by be better would that CM. BMO Prior periods have from P&C U.S. the accounts to transferred this reclassification. reflect to been restated mergers and acquisitions, advisory services, merchant banking, merchant advisory services, acquisitions, and mergers BMO Capital Markets (“BMO CM”) combines all of our businesses our businesses CM”) of all combines (“BMO Capital Markets BMO In clients. Canada and government and institutional serving corporate, industry of sectors. range these clients broad a span States, the United Asia CMBMO serves clients also Europe, Kingdom, in the United including financial solutions, clients complete It offers Australia. and financing, lending project and underwriting, debt corporate and equity BMO Capital Markets BMO management offering. Prior periods have been restated to reflect reflect to been restated Prior periodsmanagement have offering. this reclassification. Private Client Group Client Private management wealth of our group (“PCG”), Group Client Private mainstream from client segments, of serves a full range businesses, markets, as select institutional as well worth, net ultra-high to solutions. and products management wealth of offering a broad with as in China as well States, Canada the United in both and operates PCG 2009, 31, ended October in the year Effective Kingdom. the United and bringing included PCG, are within operations our insurance of all skill and capabilities our insurance Personal and Commercial Banking U.S. Commercial and Personal a full range offers U.S.”) (“P&C Banking Commercial and U.S. Personal clients business and in select services personal and products to of banking channels direct branches and through markets Midwest U.S. automated of banking, such as telephone banking a network online and we 2010, 31, ended October in the year banking Effective machines. served be better would that accounts client mid-market U.S. identified their balances to transferred and banking model a commercial by been restated Prior periods have Capital BMO Markets. from P&C U.S. this reclassification. reflect to Personal and Commercial Banking Canada Commercial and Personal a Banking Canada”) offers Commercial Canada and (“P&C Personal including services, and products business and consumer of full range as as well banking, credit cards, and financing,everyday investing financial and products markets capital and commercial of a full suite banking, telephone branches, of a network through advisory services, banking,online banking machines. specialists mortgage automated and our term the results of 2009, 31, ended October in the year Effective Client included Private than in P&C Canada are rather deposits business P&C Canada’s with aligned better is now the business where Group, reflect to been restated Prior periods have strategy. product retail this reclassification. Personal and Commercial Banking (“P&C”) is comprised of two operating operating two of Banking is comprised Commercial and (“P&C”) Personal and Banking Commercial Canada Personal and and segments: Personal BankingCommercial U.S. Personal and Commercial Banking Commercial and Personal attributed Operating Groups Operating of each groups, operating three through our business conduct We based groups our operating determine We which has a distinct mandate. results and these groups, therefore and structure our management on Note 26: Operating and Geographic Segmentation and Geographic Operating 26: Note NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Inter-Group Allocations Geographic Information Various estimates and allocation methodologies are used in the We operate primarily in Canada and the United States but we also preparation of the operating groups’ financial information. We allocate have operations in the United Kingdom, Europe, the Caribbean and expenses directly related to earning revenue to the groups that earned Asia, which are grouped in Other countries. We allocate our results the related revenue. Expenses not directly related to earning revenue, by geographic region based on the location of the unit responsible for such as overhead expenses, are allocated to operating groups using managing the related assets, liabilities, revenues and expenses, except allocation formulas applied on a consistent basis. Operating group net for the consolidated provision for credit losses, which is allocated interest income reflects internal funding charges and credits on the based upon the country of ultimate risk. 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.

Our results and average assets, grouped by operating segment and geographic region, are as follows:

P&C P&C Corporate United Other (Canadian $ in millions) Canada U.S. PCG BMO CM Services (1) Total Canada States countries

2010 (2) Net interest income 4,164 1,092 365 1,394 (780) 6,235 4,766 1,351 118 Non-interest revenue 1,666 332 1,880 1,885 212 5,975 4,408 1,288 279 Total Revenue 5,830 1,424 2,245 3,279 (568) 12,210 9,174 2,639 397 Provision for credit losses 502 124 7 264 152 1,049 485 573 (9) Amortization 130 65 36 42 197 470 351 114 5 Non-interest expense 2,848 967 1,575 1,780 (50) 7,120 5,088 1,861 171 Income before taxes and non-controlling interest in subsidiaries 2,350 268 627 1,193 (867) 3,571 3,250 91 230 Income taxes 706 93 157 373 (642) 687 659 13 15 Non-controlling interest in subsidiaries – – – – 74 74 55 19 – Net Income 1,644 175 470 820 (299) 2,810 2,536 59 215 Average Assets 145,468 32,477 14,214 200,866 5,449 398,474 256,611 114,334 27,529 Goodwill (As at) 121 1,020 363 113 2 1,619 447 1,150 22

2009 (2) Net interest income 3,811 1,220 353 1,528 (1,342) 5,570 3,683 1,582 305 Non-interest revenue 1,476 348 1,659 1,561 450 5,494 4,031 1,238 225 Total Revenue 5,287 1,568 2,012 3,089 (892) 11,064 7,714 2,820 530 Provision for credit losses 387 92 5 146 973 1,603 517 1,065 21 Amortization 133 79 31 44 185 472 335 132 5 Non-interest expense 2,704 963 1,538 1,700 4 6,909 4,895 1,857 157 Income before taxes and non-controlling interest in subsidiaries 2,063 434 438 1,199 (2,054) 2,080 1,967 (234) 347 Income taxes 648 148 79 326 (984) 217 351 (145) 11 Non-controlling interest in subsidiaries – – – – 76 76 55 21 – Net Income 1,415 286 359 873 (1,146) 1,787 1,561 (110) 336 Average Assets 139,945 41,674 11,594 248,194 (2,859) 438,548 266,649 142,478 29,421 Goodwill (As at) 119 984 358 106 2 1,569 436 1,109 24

2008 (2) Net interest income 3,428 997 376 1,048 (777) 5,072 3,659 1,110 303 Non-interest revenue 1,366 345 1,770 1,130 522 5,133 3,952 1,182 (1) Total Revenue 4,794 1,342 2,146 2,178 (255) 10,205 7,611 2,292 302 Provision for credit losses 341 63 4 97 825 1,330 340 942 48 Amortization 133 74 23 42 163 435 312 119 4 Non-interest expense 2,600 841 1,546 1,594 (122) 6,459 4,699 1,591 169 Income before taxes and non-controlling interest in subsidiaries 1,720 364 573 445 (1,121) 1,981 2,260 (360) 81 Income taxes 567 122 147 (123) (784) (71) 197 (195) (73) Non-controlling interest in subsidiaries – – – – 74 74 55 19 – Net Income 1,153 242 426 568 (411) 1,978 2,008 (184) 154

Notes Average Assets 134,402 36,507 8,658 224,289 (6,247) 397,609 236,495 129,260 31,854 Goodwill (As at) 105 1,070 349 109 2 1,635 424 1,192 19

(1) Corporate Services includes Technology and Operations. (2) Operating groups report on a taxable equivalent basis – see Basis of Presentation section. Prior years have been restated to give effect to the current year’s organizational structure and presentation changes.

158 BMO Financial Group 193rd Annual Report 2010 Notes

159 cial position cial position ount of their annual retainers retainers their annual of ount 2010 Annual Report 193rd Financial Group BMO ast 50% of their annual retainers retainers their annual of 50% ast Bank of Montreal and itsBank Montreal subsidiaries of legal other party to are Our common share investment in a joint venture of which we own own which we of venture in a joint investment share Our common Our investments in entities over which we exert significant influence significant exert which we over in entities Our investments l Corp. Board of Directors are are Directors of Board Financia l Corp. the Harris Members of unit share under these deferred units allocated share Deferred in liabilities in other recorded these plans are to related Liabilities or the results of operations of Bank of Montreal. Bank of of operations or the results of million ($15,479 2010 31, October as at million $24,733 was or repledged in 2009). Employees to is offered products mortgage and loan customer of A select suite also We customers. preferred to normally accorded rates at employees fees. credit card annual a fee-based on subsidy employees offer in the involved were that certain parties against these authorities by these proceedings. to a party not are We losses. trading commodities these authorities. of all with cooperating are We course in the ordinary including investigations, regulatory proceedings, difficulty the in predicting is inherent While there businesses. their of the out- expect not does management these proceedings, of outcome individually or in the aggregate, proceedings, these other of any of come finan the consolidated on effect adverse a material have to Collateral (b) repurchase such activities as reverse trading into When entering or financing lending and and activities borrowing securities agreements, us with provide to our counterparty require we transactions, derivative the counter- of in the event losses us from protect will that collateral sell to permitted are we that collateral default. of value The fair party’s the collateral) of (in the owner or repledge default by of the absence in 2009). million ($21,905 2010 31, October as at million $32,837 was sold have we that as collateral accepted financial assets of value The fair Joint Ventures and Equity-Accounted Investees Equity-Accounted and Ventures Joint equity-accounted and ventures our joint banking services to provide We these for our customers to offer we that the same terms on investees services. in 2009), million ($335 2010 31, October as at million $366 totalled 50% consolidation. proportionate upon eliminated which was requests for documents or subpoenas pertaining to those trading losses losses trading those pertaining documents to or subpoenas for requests authorities. enforcement law banking and commodities, securities, from commenced were proceedings a number of 2008, 18, On November their annual retainers as directors. After this threshold is reached, reached, is this threshold After as directors. retainers their annual le at take to required are directors in this form. a specified minimum take to am required units. share deferred of in the form fees other and value dividends changes and reflect in the market to adjusted are plans units is paid share these deferred of The value shares. our common of service as a director. of termination upon million $22 and million $28 totalled and Balance Sheet our Consolidated these plans Expenses for respectively. 2009, and 2010 31, October as at Income of Statement in our Consolidated included expenses in other are ended the years for million $4 and million $4 million, $4 totalled and respectively. 2008, and 2009 2010, 31, October totalled $196 million as at October 31, 2010 ($613 million in 2009). million ($613 2010 31, October as at million $196 totalled

e required to take 100% of their of 100% take to e required the form of either our common our common either of the form The Complaint alleged various federal various alleged The Complaint ectors’ shareholdings are greater than six times than greater are shareholdings ectors’ BMO Nesbitt Burns Inc., an indirect subsidiary of Bank of Montreal, Burns Inc., Montreal, Nesbitt BankBMO subsidiary of indirect an of Stock option expense for this plan is calculated this plan in the same manner for expense option Stock Following our disclosures of mark-to-market losses in our commod- losses mark-to-market of our disclosures Following We provide certain banking services to our directors on the same on certain banking services our directors to provide We or their successor, the Adelphia Recovery Trust (“ART”), filed a Complaint filed a Complaint (“ART”), Trust Recovery Adelphia the or their successor, (previously Harris Corp. Capital Markets BMO Montreal, Bank of against ities trading businesses on April 27, 2007 and May 17, 2007 aggregating aggregating 2007 17, May and 2007 27, April on businesses trading ities inquiries, received have we 2007, 30, April (pre-tax) as of million $680 has been named as a defendant in several individual and actions in several has been named as a defendant on brought in Canada States class the United and actions proposed have the actions of Many Ltd. Minerals Bre-X of shareholders behalf of Burns Inc., Nesbitt BMO as to including during the two been resolved strong are there that believes Management 2010. 31, ended October year them. defend claims the remaining vigorously to will and defences Nesbitt Corp.), BMO Capital Markets Financing Inc. (the “BMO Defendants”), Defendants”), Financing Capital Inc. Markets BMO “BMO (the Corp.), Nesbitt financial and other institutions. In the bankruptcy of Adelphia Communications Corporation (“Adelphia”), (“Adelphia”), Corporation Communications Adelphia of In the bankruptcy Holders Security Equity and Creditors Unsecured of the Official Committees statutory claims and common law and sought damages approximately of during the year settled was the ART by brought The action billion. $5 including financial institutions, many as against 2010 31, ended October plaintiffs of a group by brought action A separate Defendants. the BMO investors by brought a class action of the settlement out of opted that Corp. Capital Markets BMO pending against remains securities in Adelphia strong are there that believes Management Montreal. Bankand of the action. defend this claim vigorously to will defences and Note 28: Contingent Liabilities Contingent 28: Note Proceedings (a) Legal Deferred Share Units Share Deferred ar Directors of our Board Members of as employee stock option expense. The expense related to this plan to related The expense expense. option stock as employee 2007. 1, November fully prior to amortized was in fees other and retainers annual units until share (purchased or deferred market) shares the open on such the dir time as the plan for designated officers and employees described in Note 22. 22. in Note described employees and officers designated for the plan granted were shares common 147,000 of purchase a total to Options options of The granting Plan. Option Stock under the Non-Officer Director 2003. 1, November effective discontinued was under this plan Board of Directors Compensation Directors of Board Plan Option Stock option a stock introduced we 2002, 31, ended October year the During the same as which are of the terms directors, non-officer plan for terms that we offer to our customers for these services. Loans to to Loans these services. for customers our to offer we that terms and 2010 31, October at million $5 and million $26 totalled directors respectively. 2009, Loans are available to executives at preferred rates related to to related rates preferred at executives to available are Loans amounts outstanding loan under The transferee initiate. we transfers and million $47 were agreements loan mortgage rate preferred The interest respectively. 2009, and 2010 31, October at million $53 dividend fee and in interest, is recorded loans these on earned Income. of Statement in our Consolidated income Related parties include directors, executives and their affiliates, along along their affiliates, and executives include parties directors, Related investees. equity-accounted and ventures joint with Their Affiliates and Executives Directors, Note 27: Related Party Transactions Party Related 27: Note NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Collateral transactions are conducted under terms that are usual (Canadian $ in millions) 2010 2009 and customary in standard trading activities. If there is no default, Assets pledged to: (1) the securities or their equivalent must be returned to the counterparty Clearing systems, payment systems at the end of the contract. and depositories 1,025 1,714 Bank of Canada 2,305 1,200 (c) Pledged Assets Foreign governments and central banks 936 1,017 In the normal course of our business, we pledge assets as security Assets pledged in relation to: for various liabilities that we incur. The following tables summarize Obligations related to securities lent our pledged assets, to whom they are pledged and in relation or sold under repurchase agreements 38,097 39,796 to what activity: Securities borrowing and lending 16,911 11,498 Derivatives transactions 7,620 7,000 (Canadian $ in millions) 2010 2009 Mortgages 9,927 5,878 Cash resources 3,048 965 Other 2,654 2,734 Securities Total 79,475 70,837 Issued or guaranteed by Canada 14,231 11,095 Issued or guaranteed by a Canadian Excludes cash pledged with central banks disclosed as restricted cash in Note 2. province, municipality or school (1) Includes assets pledged in order to participate in clearing and payment systems and corporation 3,087 2,986 depositories or to have access to the facilities of central banks in foreign jurisdictions. Other securities 29,547 24,266 Certain comparative figures have been reclassified to conform with the current year’s presentation. Mortgages, securities borrowed or purchased under resale agreements and other 29,562 31,525 Total assets pledged 79,475 70,837

Excludes restricted cash resources disclosed in Note 2.

Note 29: Fair Value of Financial Instruments We record trading assets and liabilities, derivatives, available-for-sale Financial Instruments Whose Book Value securities and securities sold but not yet purchased at fair value and Approximates Fair Value other non-trading assets and liabilities at amortized cost less allowances Fair value is assumed to equal book value for acceptance-related or write-downs for impairment. Where there is no quoted market value, liabilities and securities lent or sold under repurchase agreements, due fair value is determined using a variety of valuation techniques and to the short-term nature of these assets and liabilities. Fair value is also assumptions. These fair values are based upon the estimated amounts assumed to equal book value for our cash resources, certain other assets for individual assets and liabilities and do not include an estimate of and certain other liabilities. the fair value of any of the legal entities or underlying operations that Loans comprise our business. In determining the fair value of our loans, we incorporate the following Fair value amounts disclosed represent point-in-time estimates assumption: that may change in subsequent reporting periods due to market • For fixed rate and floating rate performing loans and customers’ con ditions or other factors. Fair value represents our estimate of the liability under acceptances, we discount the remaining contractual amounts for which we could exchange the financial instruments with cash flows, adjusted for estimated prepayment, at market interest willing third parties who were interested in acquiring the instruments. rates currently offered for loans with similar terms. In most cases, however, the financial instruments are not typically exchangeable or exchanged and therefore it is difficult to determine The value of our loan balances determined using the above assumption their fair value. In those cases, we have estimated fair value taking is further reduced by the allowance for credit losses to determine the into account only changes in interest rates and credit risk that have fair value of our loan portfolio. occurred since we acquired them or entered into the underlying contracts. Securities These calculations represent management’s best estimates based on a The fair value of our securities, both trading and available-for-sale, range of methodologies and assumptions; since they involve uncertain- by instrument type and the methods used to determine fair value ties, the fair values may not be realized in an actual sale or immediate are provided in Note 3. settlement of the instruments. Interest rate changes are the main cause of changes in the fair Derivative Instruments value of our financial instruments. The methods used to determine the fair value of derivative instruments are provided in Note 10. Notes

160 BMO Financial Group 193rd Annual Report 2010 Notes 161 9 0 0 value et frequently. frequently. et 660 660 – 1,569 1,569 – 9,955 9,955 3,340 – 3,340 2,574 – 2,574 7,640 7,642 – 1,634 2 1,634 8,754 8,754 – 7,640 – 7,640 – 1,218 68 4,236 1,150 4,405 169 (1,902) (1,902) – (1,902) 46,312 46,312 – 46,312 47,898 47,898 – 44,765 12,064 – 44,765 – 12,064 15,938 15,976 38 36,006 36,006 45,524 45,824 46,067 45,913 68,169 – 543 67,895 89 (274) t and capital trust securities is securities trust capital t and 388,458 389,623 1,165 388,458 388,458 388,836 378 162,091 162,449 358 236,156 237,046 890 167,829 168,189 360 110,813 110,831 18 reprice to mark to reprice (787) 2010 Annual Report 193rd Financial Group BMO Book Fair over (under) over Book Fair value value book value Fair book value value 2 2010

Fair value Fair mined by referring to current market prices for similar for prices instruments. current market to referring mined by

Set out in the following table are the amounts that would be would the amounts that table are in the following out Set impact since on fair value deposits value. book equal to is assumed value fair basis, On that For floating rate deposits, changes in interest rates have minimal have rates changes in interest deposits, rate floating For • Securities Trust Capital and Debt Subordinated deb our subordinated of value The fair deter reported if all of our financial instrument assets and liabilities were were liabilities and assets our financial instrument of if all reported values. their fair at reported

Book value (under) value Fair value over book 411,640 412,297 657 171,520 172,146 626 249,251 249,544 293 47,110 47,110 – (1,878) (1,878) (1,878) – 176,643 177,266 49,759 49,759 623 1,560 1,560 – – 812 812 – 9,192 9,192 – 47,970 47,970 7,001 7,001 – 16,438 16,438 – – 17,414 17,496 3,776 3,947 82 171 800 823 23 17,368 17,368 17,368 17,368 3,186 3,186 – 123,399 123,433 – 28,102 28,102 34 – 48,715 49,531 51,159 51,223 816 3,308 3,308 64 68,338 68,084 – (254) 7,001 6,998 (3) 88 88 21,880 21,880 – 20,197 20,197 –

411,640 412,209 569

1,619 1,619 –

ased under resale agreements agreements ased under resale under repurchase agreements agreements under repurchase

Total fair value adjustment adjustment value fair Total Subordinated debt debt Subordinated securities Capital trust equity Shareholders’ Acceptances purchased yet but not sold Securities or sold lent Securities Other liabilities Liabilities Deposits instruments Derivative Goodwill Intangible assets Other assets Total loans and customers’ liability under acceptances, liability customers’ and loans Total credit losses for allowance of net instruments Derivative equipment and Premises under acceptances liability Customers’ credit losses for Allowance personal other and instalment Consumer cards Credit governments and Businesses Interest bearing deposits banks with bearing Interest Securities or purch borrowed Securities Loans mortgages Residential Assets Cash cash and equivalents (Canadian $ in millions) $ in millions) (Canadian value to equal book value based on book value being equivalent to to being equivalent value book on based value equal book to value date. the reporting on payable the amount contractual cash flows for these deposits, adjusted for expected expected for adjusted these deposits, for cash flows contractual deposits for offered currently rates interest market at redemptions, risks. and similar terms with For fixed rate deposits with no defined maturities, we consider fair fair consider we maturities, no defined deposits with rate fixed For For fixed rate, fixed maturity deposits, we discount the remaining the remaining discount we deposits, maturity fixed rate, fixed For presentation. year’s the current with conform to been reclassified have figures comparative Certain • • Deposits the incorporate we our deposits, of value the fair In determining assumptions: following NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Fair Value Hierarchy market information as inputs (Level 2) and internal models without We use a fair value hierarchy to categorize the inputs we use in observable market information as inputs (Level 3) in the valuation of valuation techniques to measure fair value. The extent of our use of securities, fair value liabilities, derivative assets and derivative quoted market prices (Level 1), internal models using observable liabilities was as follows:

As at October 31 (Canadian $ in millions) 2010 2009

Fair value measurement using Fair value measurement using

Level 1 Level 2 Level 3 Level 1 Level 2 Level 3 Trading Securities Issued or guaranteed by: Canadian federal government 15,932 72 – 16,607 – – Canadian provincial and municipal governments 3,910 5 – 2,882 – – U.S. federal government 8,060 – – 3,021 – – U.S. states, municipalities and agencies 849 205 – 54 653 49 Other governments 1,365 – – 1,712 – – Mortgage-backed securities and collateralized mortgage obligations 859 – 211 584 238 204 Corporate debt 7,419 3,595 1,358 7,313 2,293 1,476 Corporate equity 27,267 603 – 21,985 – – 65,661 4,480 1,569 54,158 3,184 1,729 Available-for-Sale Securities Issued or guaranteed by: Canadian federal government 14,701 – – 17,359 – – Canadian provincial and municipal governments 1,442 253 – 1,688 – – U.S. federal government 5,658 – – 1,111 – – U.S. states, municipalities and agencies – 4,237 20 4,584 1,418 86 Other governments 9,455 587 – 8,220 9 – Mortgage-backed securities and collateralized mortgage obligations 688 8,204 20 826 9,530 39 Corporate debt 2,959 133 1,500 1,499 1,078 1,960 Corporate equity 139 178 369 303 236 311 35,042 13,592 1,909 35,590 12,271 2,396 Fair Value Liabilities Securities sold but not yet purchased 16,438 – – 12,064 – – Structured note liabilities – 3,976 – – 3,073 – 16,438 3,976 – 12,064 3,073 – Derivative Assets Interest rate contracts 24 33,862 217 42 30,062 1 Foreign exchange contracts 45 10,089 – 61 9,323 – Commodity contracts 2,207 382 – 1,160 2,330 – Equity contracts 1,028 617 8 618 1,353 11 Credit default swaps – 1,120 160 – 2,370 567 3,304 46,070 385 1,881 45,438 579 Derivative Liabilities Interest rate contracts 38 32,593 48 61 28,781 73 Foreign exchange contracts 20 9,517 – 8 9,161 – Commodity contracts 2,087 501 – 744 2,201 – Equity contracts 53 2,109 71 – 1,480 97 Credit default swaps – 930 3 – 2,156 3 2,198 45,650 122 813 43,779 173

Certain comparative figures have been reclassified to conform with the current year’s presentation.

Valuation Techniques and Signifi cant Inputs Our Level 2 trading securities are primarily valued using discounted We determine the fair value of publicly traded fixed maturity and cash flow models with observable spreads or based on broker quotes. equity securities using quoted market prices in active markets (Level 1) The fair value of Level 2 available-for-sale securities is determined using when these are available. When quoted prices in active markets are discounted cash flow models with observable spreads or third-party vendor not available, we determine the fair value of financial instruments using quotes. Level 2 structured note liabilities are valued using models with models such as discounted cash flows with observable market inputs observable market information. Level 2 derivative assets and liabilities are Notes for inputs such as yield and prepayment rates or broker quotes and other valued using industry standard models and observable market information. third-party vendor quotes (Level 2). Fair value may also be determined Sensitivity analysis at October 31, 2010 for the most significant using models where the significant market inputs are unobservable Level 3 instruments is provided below. due to inactive or minimal market activity (Level 3). We maximize the Within Level 3 trading securities is corporate debt of $1,242 million use of market inputs to the extent possible. that relates to securities that are hedged with total return swaps and credit default swaps that are also considered a Level 3 instrument.

162 BMO Financial Group 193rd Annual Report 2010 Notes

(2) 163 including realized including realized 2010 Annual Report 193rd Financial Group BMO 3 Level 3 Level 2010 (losses) (1) cantTransfers During the year ended October 31, 2010, a portion of the asset- of a portion 2010, 31, October ended the year During and notes the mid-term 2009, 31, ended October year the During securities, the unrealized gains or losses on securities still held on October 31, 2010 are included are 2010 31, October on held still securities on or losses gains the unrealized securities, Income. Other Comprehensive in Accumulated to the issuer’s bankruptcy protection filing. As at October 31, 2010, 2010, 31, October As at filing. protection bankruptcy the issuer’s to estimated using discounted these securities valued management amounts. recoverable assuming a 10 basis point increase or decrease in that spread would result result would spread in that or decrease increase basis point 10 a assuming respectively. million, $4 and million $(4) of in a change value in fair Signifi levels hierarchy value fair the various made between are Transfers due to changes in the availability quotedof market pricesor observable is The following conditions. inputs changing due to market market 2 and Level 1, Level between transfers significant the of a discussion 2009. and 2010 31, ended October the years 3 balances for Level as the Montreal known the conduits by issued paper commercial backed debt corporate 2 within Level 3 to Level from transferred were Accord broker based on the notes valuing now are because we securities trading trading broker/dealer increased due models to internal than rather quotes certain In addition, liquidity. in improved resulting these securities, of valued previously were that securities debt corporate available-for-sale 2 to Level from transferred were information market using observable markets. in active became available these securities for 1 as values Level vehicle our credit protection to related swap return total associated liquidity improved was 2 as there Level 3 to Level from transferred were as value fair of transparency greater and in the inputs our model to trading of million $23 in 2009, Also our hedging transactions. of a result 3 Level 1 to Level from transferred were debt corporate securities, subsequent market active in an quoted no longer were as the securities presentation. year’s the current with conform to been reclassified have figures comparative Certain lying Change in fair value value Change in fair (282) (274) 1,909 (3) 322 (210) 19 (59) 46 34 – 8 (3) (32) – – 211 20 211 – – (32) (3) 34 – 8 (57) – 31 – (25) – – 122 122 122 (25) – 31 (57) – – – – – – – – – – 3 3 – – – – – (7) – – (42) – – – – – – (42) – – (7) (57) – 31 – – – – 71 71 71 31 – – – – – (57) – – – – (25) – – 48 48 48 – – (25) – – – – 10 – 104 (45) (33) 14 (210) 1,569 30 (210) 10 (33) 14 104 (45) – 369 (2) 6 – 78 (2) – (18) (4) Included in hensive into out of October 31, gains 31, October Unrealized of at out into as Transfers Transfers hensive in Included compre-

earnings earnings Purchases income Maturities Sales 20 – 196 – – – – 217 217 217 196 – – – – 20 – 3 1 2 (16) – (52) – – – 20 – – – – (52) – (16) 2 86 20 1 – – (20) 1 – – – 39 (34) – 31 – – – – 8 8 – (34) 11 97 73 173 (53) – 3 – (357) – – 160 160 160 – – (357) – 3 – (53) 567 (67) – 230 – (357) – – 385 385 385 (357) – – 230 – (67) – 579 (281) 31 244 (156) (252) 13 (59) 1,500 45 (252) 13 (59) (156) 244 (281) 31 1,960 2,396 (17) – 96 – (1) 14 (210) 1,358 10 1,358 (210) 14 96 (17) – – (1) 1,476

311 1,729 October 31, Balance, 31, October 49 ined the fair value of the structured the structured of value ined the fair 204

in Note 8. in Note S. states, municipalities agencies and states, S. S. states, municipalities agencies and states, S. est rate contracts est rate contracts . . Within Level 3 derivative assets and derivative liabilities was was liabilities derivative and assets 3 derivative Level Within Unrealized gains or losses on trading securities, derivative assets and derivative liabilities liabilities derivative and assets derivative securities, trading on losses or gains Unrealized available-for-sale For included in the year. are in earnings 2010 31, October on held still Within Level 3 available-for-sale corporate debt securities is a securities debt corporate available-for-sale 3 Level Within Within Level 3 trading securities are mortgage-backed securities securities mortgage-backed are securities 3 trading Level Within Equity contracts Equity default swaps Credit liabilities derivative Total Credit default swaps Credit assets derivative Total Liabilities Derivative Derivative Assets Derivative Inter contracts Equity Inter Corporate debt debt Corporate equity Corporate available-for-sale securities Total Available-for-Sale Securities Available-for-Sale by: or guaranteed Issued U and securities Mortgage-backed obligations mortgage collateralized Corporate debt debt Corporate trading securitiesTotal Trading Securities Trading by: or guaranteed Issued U and securities Mortgage-backed obligations mortgage collateralized For the year ended October 31, 2010 (Canadian $ in millions) $ in millions) (Canadian 2010 31, ended October the year For in other Fair value Fair other in 2009 Included liabilities. derivative and assets derivative Includes of cash (1) settlement (2) and unrealized gains (losses) included in earnings and other comprehensive income. comprehensive (losses) other included gains and in earnings unrealized and Changes in Level 3 Fair Value Measurements Value 3 Fair in Level Changes 2010, 31, ended October the year 3 financial instruments for changes all in Level of a reconciliation presents The table below securities, respectively. We have determ have We respectively. securities, with a model based on together), derivatives and (securities product the under of margin The discount inputs. unobservable and observable credit losses and weighted-average discount rate. The determination The determination rate. discount weighted-average and credit losses the of the valuation on impact significant has the most rates interest of deferred purchase price. Sensitivity analysis for the deferred purchase price is included credit of the mark-to-market to related million $51 and million $377 trading noted the above on swaps return total and default swaps sheet securitization activities. We have determined the valuation of the of the valuation determined have We activities. securitization sheet future cash spread) based on expected purchasedeferred price (excess rate, include model interest the valuation inputs for The significant flows. expected maturity, weighted-average rate, prepayment weighted-average result in a change in fair value of $(4) million and $5 million, respectively. million, $5 and million $(4) of in a changeresult value in fair deferred million purchase related to our price off-balance amount $633 of of The impact the valuation. on impact significant the most has securities The significant inputs for the valuation model include market yields yields include model market the valuation inputs for The significant has the most yields market of The determination assumptions. spread and of The impact these securities. of the valuation on impact significant would yield the market in or decrease increase basis point a 50 assuming the fair value of these securities based on expected discounted cash flows. cash flows. discounted expected based on securities these of value the fair The sensitivity analysis for the structured product is performed on an aggre- an on is performed product the structured for analysis The sensitivity below. derivatives on the discussion of as part is described and basis gate and collateralized mortgage obligations of $211 million. We determined determined We million. $211 of obligations mortgage collateralized and NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

The table below presents a reconciliation of all changes in Level 3 financial instruments for the year ended October 31, 2009, including realized and unrealized gains (losses) included in earnings and other comprehensive income.

For the year ended October 31, 2009 (Canadian $ in millions)

Change in fair value

Included in other Fair value Balance, compre- Transfers Transfers as at Unrealized October 31, Included in hensive into out of October 31, gains 2008 earnings income Purchases Sales Maturities (1) Level 3 Level 3 2009 (losses) (2) Trading Securities Issued or guaranteed by: U.S. states, municipalities and agencies – (4) – 55 (2) – – – 49 8 Mortgage-backed securities and collateralized mortgage obligations – 8 – 232 (59) – 23 – 204 (8) Corporate debt 1,535 (201) – 691 (1) – – (548) 1,476 (198) Total trading securities 1,535 (197) – 978 (62) – 23 (548) 1,729 (198) Available-for-Sale Securities Issued or guaranteed by: U.S. states, municipalities and agencies – (11) (3) 116 (16) – – – 86 – Mortgage-backed securities and collateralized mortgage obligations – – 1 42 (4) – – – 39 – Corporate debt 2,545 (331) 41 565 (225) – – (635) 1,960 (335) Corporate equity 343 (14) (33) 16 (1) – – – 311 – Total available-for-sale securities 2,888 (356) 6 739 (246) – – (635) 2,396 (335) Derivative Assets Interest rate contracts – 1 – – – – – – 1 1 Equity contracts 35 207 – 12 – (1) – (242) 11 208 Credit default swaps 1,250 (10) – – – (673) – – 567 567 Total derivative assets 1,285 198 – 12 – (674) – (242) 579 776 Derivative Liabilities Interest rate contracts 49 526 – – – (502) – – 73 (73) Equity contracts 79 (8) – 41 – (15) – – 97 9 Credit default swaps 3 – – – – – – – 3 (3) Total derivative liabilities 131 518 – 41 – (517) – – 173 (67)

(1) Includes cash settlement of derivative assets and derivative liabilities. securities, the unrealized gains or losses on securities still held on October 31, 2009 are included (2) Unrealized gains or losses on trading securities, derivative assets and derivative liabilities in Accumulated Other Comprehensive Income. still held on October 31, 2009 are included in earnings in the year. For available-for-sale Certain comparative figures have been reclassified to conform with the current year’s presentation. Other Items Measured at Fair Value As at October 31, 2010, we held $137 million of foreclosed Certain assets such as foreclosed assets are measured at fair value assets measured at fair value at inception, all of which were classified at initial recognition but are not required to be measured at fair value as Level 2. For the year ended October 31, 2010, we recorded on an ongoing basis. write-downs of $90 million on these assets. Notes

164 BMO Financial Group 193rd Annual Report 2010 Notes (2)

165 9 0 0 – 6 – – – (1) – – 3 6 – 5 79 79 (1) (5) 92 (2) 80 91 91 (183) (49) 58 (23) – 3.09 3.79 3.31 3.57 3.08 3.76 3.30 3.54 2009 2008 – – – (9) (8) (6) 2010 Annual Report 193rd Financial Group BMO 74 76 74 71 71 92 13 (65) (73) 145 155 153 211 2010 7,640 – 7,640 7,640 – 3,110 2,062 2,021 2,965 1,907 1,868 12,064 – 12,064 12,064 – 2,884 1,863 2,052 4.78 5.05 4.75 5.03

Canadian Increase United States 2 United Canadian Increase

2010

(c)

Prior year has been restated to give effect to the adoption of the new U.S. accounting standard standard accounting U.S. the new of the adoption to effect give to has been restated year Prior (n). financial statements in consolidated interests non-controlling for Balance Sheet, Consolidated Statement of Income, Consolidated Consolidated Income, of Statement Balance Sheet, Consolidated Statement Consolidated and Income Comprehensive of Statement included not have We Loss. Other Comprehensive Accumulated of the differences as Cash Flows of Statement our Consolidated immaterial. are (2) (2)

(j)

800 (800) (1,150) – 1,150 – 812 – 812 660 660 – 812 – GAAP (Decrease) GAAP (Decrease) GAAP (Decrease) GAAP GAAP

7,001 – 7,001 7,001 – 3,776 4,236 – 4,236 3,776 – 3,186 (1,925) 1,261 3,186 (1,925) 3,340 (2,117) 1,223 1,066 1,485 1,478 1,146 (80) (7) 1,557 1,634 1,630 (4) 1,575 1,569 1,560 (3) 1,532 (37) 1,619 (44) 14,986 15,905 8,754 6,232 9,192 6,713 47,970 (32,683) 15,287 16,438 15,719 44,765 (29,046) 47,110 46,312 16,438 – – 46,312 47,110 – 17,414 11,076 28,490 15,938 4,483 20,421 23,159 20,197 1,749 21,946 21,880 1,279 17,368 – 17,368 9,955 9,955 – 17,368 – 55,170 69,214 59,071 (3,901) 71,710 (2,496) 58,008 50,257 2,799 53,056 50,543 7,465 28,102 36,006 – 36,006 28,102 – 49,759 (33,631) 16,128 17,602 47,898 (30,296) (o) Canadian Increase United States United Canadian Increase 388,458 (25,262) 363,196 388,418 388,458 (25,262) 411,640 (23,222) 176,643 779 177,422 167,829 2,069 169,898 176,643 779 363,196 388,418 388,458 (25,262) 411,640 (23,222) 247,157 236,156 234,858 (1,298) 249,251 (2,094)

(q)

(k) (i)

(p)

(m) (including above) listed adjustments items due to (l) (f)

(a,g)

he preparation of our Consolidated of he preparation

(h)

(d) (a) (b,c,d,e,o) ased under resale agreements agreements ased under resale

Canadian GAAP net income income – Canadian GAAP net income GAAP net States – United income – Canadian GAAP net income GAAP net States – United Other-than-temporary impairment impairment Other-than-temporary

(i) Stock-based compensation compensation – Stock-based costs development – Software benefits future employee other and – Pension assets other and – Goodwill combination – Business Merchant banking– Merchant securities available-for-sale to securities trading from – Reclassification – Insurance – Derivatives

Liabilities and equity equity and – Liabilities (g) (g) (l) under repurchase agreements agreements under repurchase (c,d,f,h,i,j,k,l,n,o,p) (1) (c,d,f,h,i,j,k,l,n,o,p)

(b,c,d)

(f) Reconciliation of Canadian and United States States United and Canadian of Reconciliation Principles Accounting Accepted Generally (i) (b,d,e,j,m,n) (b,d,e,j,m,n) (b,d,f,j,k,m,o,p)

Available-for-sale – Available-for-sale – Other Trading – Trading (i,p) (g) Under United States GAAP, shareholders’ equity includes non-controlling interest interest includes equity non-controlling shareholders’ GAAP, States Under United in 2009). million ($2,505 million $2,138 of We have included here the significant differences that would result result would that differences included significant the here have We – Earnings per share: diluted diluted Earnings per share: Net income available to common shareholders, based on United States GAAP States United based on shareholders, common to available income Net basic Earnings per share: Non-controlling interest in subsidiaries, as reported under Canadian as reported in subsidiaries, GAAP interest Non-controlling GAAP States United at arrive to interest non-controlling Adjustment to GAAP based on United States in subsidiaries, interest Non-controlling change taxes in income net and taxes Income GAAP States United based on interest, non-controlling before income Net Non-Interest Expense Non-Interest Non-Interest Revenue Revenue Non-Interest Net income before non-controlling interest, as reported under Canadian GAAP as reported interest, non-controlling before income Net GAAP: States United at Adjustments arrive to Income Interest Net Reconciliation of Income of Reconciliation amounts) per share except $ in millions, (Canadian 31 Ended October the Year For Shareholders’ equity equity Shareholders’ Equity Shareholders’ and Liabilities Total (1) Securities lent or sold or sold lent Securities Other liabilities debt Subordinated securities Capital trust Liabilities and Shareholders’ Equity Liabilities and Shareholders’ Deposits instruments Derivative Acceptances purchased yet but not sold Securities Intangible assets Other assets Assets Total Derivative instruments Derivative equipment and Premises Goodwill or purch borrowed Securities under acceptances, liability customers’ and Loans credit losses for the allowance of net Assets Cash cash and equivalents deposits banks with bearing Interest Securities As at October 31 (Canadian $ in millions) millions) $ in (Canadian 31 October As at Condensed Consolidated Balance Sheet Balance Consolidated Condensed presentation. year’s the current with conform to been reclassified have figures comparative Certain presentation. year’s the current with conform to been reclassified have figures comparative Certain

We prepare our consolidated financial statements in accordance with with in accordance financial statements our consolidated prepare We the regulator, our GAAP by of includingGAAP in Canada, interpretations Canada (“OSFI”). Financial Institutions of the Superintendent of Office Note 30: 30: Note if United States GAAP were applied in t GAAP were if United States NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Reconciliation of Comprehensive Income For the Year Ended October 31 (Canadian $ in millions) 2010 2009 2008 Total Comprehensive Income, as reported under Canadian GAAP 2,651 1,639 3,260 Adjustments to arrive at United States GAAP: Net income adjustments, as per Reconciliation of Income 155 120 (110) Unrealized gain (loss) on reclassification from trading securities to available-for-sale securities (c) (1) (64) (61) 123 Unrealized (gain) loss on derivatives that do not qualify as cash flow hedges under United States GAAP (h) (2) (147) (2) – Adjustment to unrealized gain (loss) on translation of net foreign operations, net of hedging activities (i) 2 5 (12) Unrealized actuarial (loss) on pension and other employee future benefits (j) (3) (200) (176) (254) Unrealized gain on insurance securities designated as held for trading under Canadian GAAP (d) (4) 153 226 – Adjustment to other-than-temporary impairment (o) (2) (16) –

Total Comprehensive Income available to common shareholders based on United States GAAP (5) 2,548 1,735 3,007

(1) Net of income taxes of $28 million in 2010, $30 million in 2009 and $60 million in 2008. (5) Total comprehensive income is $2,693 million in 2010 ($1,890 million in 2009 and $3,160 million (2) Net of income taxes of $64 million in 2010 and $1 million in 2009. in 2008) including non-controlling interest of $145 million in 2010 ($155 million in 2009 and (3) Net of income taxes of $71 million in 2010, $68 million in 2009 and $102 million in 2008. $153 million in 2008). (4) Net of income taxes of $68 million in 2010 and $104 million in 2009.

Reconciliation of Accumulated Other Comprehensive Loss For the Year Ended October 31 (Canadian $ in millions) 2010 2009 Total Accumulated Other Comprehensive Loss, as reported under Canadian GAAP (558) (399) Adjustments to arrive at United States GAAP: Unrealized gain (loss) on reclassification from trading securities to available-for-sale securities (c) (2) 62 Fair value adjusted for derivatives that do not qualify as cash flow hedges under United States GAAP (h) (149) (2) Adjustment to unrealized gain on translation of net foreign operations, net of hedging activities (i) 36 34 Unrealized actuarial (loss) on pension and other employee future benefits (j) (1,148) (948) Unrealized gain on insurance securities classified as held for trading under Canadian GAAP (d) 379 226 Adjustment to other-than-temporary impairment (o) (18) (16) Total Accumulated Other Comprehensive Loss based on United States GAAP (1,460) (1,043)

(a) Bankers’ Acceptances investment-type contracts, liabilities represent policyholder account Under United States GAAP, bankers’ acceptances purchased from other balances and include a reserve calculated using the net level premium banks are classified as loans. Under Canadian GAAP, bankers’ acceptances method for some contracts. Under Canadian GAAP, liabilities for life insur- purchased from other banks are recorded as interest bearing deposits ance contracts are determined using the Canadian asset liability method. with banks in our Consolidated Balance Sheet. Under United States GAAP, premiums received for universal life and (b) Accounting for Securities Transactions other investment-type contracts are recorded as a liability. Under Canadian Under United States GAAP, securities transactions are recognized in GAAP, these premiums are recorded in income and a liability for future our Consolidated Balance Sheet when we enter into the transaction. policy benefits is established that is an offsetting charge to income. Under Canadian GAAP, securities transactions are recognized in our Under both United States and Canadian GAAP, premiums from Consolidated Balance Sheet when the transaction is settled. long-duration contracts are recognized in income when due and premiums, net of reinsurance, for short-duration contracts are recorded in income (c) Reclassification from Trading Securities to Available-for-Sale Securities over the related contract period. During the year ended October 31, 2008, we adopted new Canadian Under United States GAAP, reinsurance recoverables, deferred accounting guidance which allows, in rare circumstances, certain reclas- acquisition costs for life insurance and annuity contracts and the value of sifications of non-derivative financial assets from the trading category in-force life insurance business acquired (“VOBA”) are recorded as assets. to either the available-for-sale or held-to-maturity categories. This new Deferred acquisition costs and VOBA are then amortized. Under Canadian guidance is consistent with United States GAAP, except that United GAAP, these items are included in the insurance-related liability balance. States GAAP requires that the reclassification be recorded on the date the transfer is completed. We elected to transfer from trading to (e) Non-Cash Collateral available-for-sale those securities for which we had a change in intent Under United States GAAP, non-cash collateral received in securities caused by market circumstances at that time to hold the securities for lending transactions that we are permitted by contract to sell or the foreseeable future rather than to exit or trade them in the short repledge is recorded as an asset in our Consolidated Balance Sheet term. The Canadian accounting guidance was applicable on a retroactive and a corresponding liability is recorded for the obligation to return basis to August 1, 2008 and the transfers took place at the fair value the collateral. Under Canadian GAAP, such collateral and the related of the securities on August 1, 2008. We reclassified these securities obligation are not recorded in our Consolidated Balance Sheet. under United States GAAP effective October 31, 2008 at their fair value As a result of this difference, available-for-sale securities and other at that date. This difference will reverse as these securities are sold. liabilities have been increased by $3,294 million and $197 million as at October 31, 2010 and 2009, respectively. (d) Insurance Accounting Under United States GAAP, fixed income and equity investments (f) Merchant Banking Investments supporting the policy benefit liabilities of life and health insurance Under United States GAAP, our merchant banking subsidiaries account contracts are classified as available-for-sale securities. Under Canadian for their investments at cost or under the equity method. Under Canadian Notes GAAP, fixed income and equity investments supporting the policy GAAP, these subsidiaries account for their investments at fair value, benefit liabilities of life and health insurance contracts are designated with changes in fair value recorded in income as they occur. as held-for-trading securities using the fair value option. (g) Offsetting of Amounts Related to Certain Contracts Under United States GAAP, liabilities for life insurance contracts, Under United States GAAP, our right to reclaim cash collateral or the except universal life and other investment-type contracts, are determined obligation to return cash collateral arising from derivative instruments using the net level premium method. For universal life and other are netted against the derivative instruments if they are executed

166 BMO Financial Group 193rd Annual Report 2010 Notes 167 9 9 0 0 0 0 status employee employee Other able number of our common shares shares our common number of able 2010 Annual Report 193rd Financial Group BMO 87 (30) 57 1, 2005 was fully amortized. was 2005 1, 1,297 100 1,397 1,297 100 Pension future benefits future Pension Total Other assets Other liabilities 2 2 Included in Included in Plan funded 2010 2010 status 1,668

adopted new Canadian accounting guidance on stock-based compensation compensation stock-based on guidance Canadian accounting new adopted (m) Income Taxes (m) Income Canadian between differences other of the tax impact to In addition changes tax rate GAAP, States under United GAAP, States United and tax income our future of measurement the on impact any have do not tax rate Under Canadian GAAP, law. into passed are they until balances in the in income period the change tax rate is changes recorded are enacted. substantively Financial Statements in Consolidated Interests (n) Non-controlling guidance States United the new adopted we 2009, 1, November Effective on non-controlling interestsin subsidiaries issued the by Financial under United States GAAP. Under United States GAAP, amounts related amounts related GAAP, States Under United GAAP. States under United plans benefit future employee other and plans benefit our pension to as follows: Balance Sheet in our Consolidated recognized are the with which conformed 2006, 31, ended October during the year in the methods the differences Due to standard. accounting States United of Statement our Consolidated to adjustment an was there adoption, of when the compen-Income stock-based in the periods before fiscal 2010, November sation granted prior to (l) Liabilities and Equity that securities trust our capital certain of GAAP, States Under United a vari into convertible ultimately are Under Canadian GAAP, we accounted for this acquisition using the using this acquisition for accounted we CanadianUnder GAAP, amortization and recognition in the which resulted purchase method, assets intangible and goodwill buildings, increments on value fair of goodwill 2001, 1, November Effective the acquisition. with associated or States United either under income to amortized is no longer amortization the to relates difference The remaining Canadian GAAP. assets intangible buildings and increments on value the fair of under Canadian GAAP. Benefits Future and Other Employee (j) Pension the fair of the excess recognize us to GAAP requires States United assets plan benefit future employee other and our pension of value the shortfall and asset as an obligation benefit the corresponding over the corresponding to compared our plan assets of value the fair of basis. a plan-by-plan on This is done as a liability. obligation benefit (benefit) (losses) actuarial cost the gains The unamortized and of Other Comprehensive in Accumulated recorded amendmentsplan are recorded these amounts are Under Canadian GAAP, Loss. (Income) liabilities. or other assets in other Balance Sheet in our Consolidated other and pension the is no change of in the calculation There the GAAP, States Under United benefits expense. future employee amounts included Other Comprehensive pre-tax in Accumulated as follows: are Loss (Income) with interest, classified as non-controlling are option the holder’s at capital Under Canadian GAAP, interest. as minority recognized payments classified as liabilities, are feature this conversion with securities trust expense. as interest recognized payments with

Other employee employee Other actively actively – (835) (835) (835) (908) – – (908) different different 86 (25) 61 33 (36) (3) (36) 346 33 373 (27) 1,445 162 1,607 1,210 130 1,340 1,445 162 Pension future benefits future Pension Total Included in Included in Plan funded Other assets Other assets Other liabilities 1,531 137 1,531 Effective November 1, 2000, we adopted a new Canadian account- a new adopted we 2000, 1, November Effective

Pension benefits future Other employee (Canadian $ in millions) millions) $ in (Canadian Cost (benefit)Cost plan of amendments in Accumulated amounts recognized Pre-tax Loss (Income) Other Comprehensive (Canadian $ in millions) millions) $ in (Canadian Net actuarial loss ing standard on pension and other employee future benefits that benefits that future employee other and pension on ing standard Canadian United and between differences the then existing eliminated for accounted we standard, this new adopted When we GAAP. States As a result, earnings. retained to as a charge the change in accounting Statement our Consolidated to adjustment be an to continue will there GAAP States under United deferred amounts until previously Income of income. to been fully amortized have The estimated net actuarial loss and cost of plan amendments for plan amendments for of cost and actuarial loss net The estimated Other Accumulated from be amortized will that plans benefit the pension in pension increase as an basis, a pre-tax on Income, Comprehensive respectively. million, $15 and million $92 are during fiscal 2011 expense plan amendments for of benefit and actuarial loss net The estimated Accumu- from be amortized will that plans benefit future employee other increase as an basis, a pre-tax on Income, Other Comprehensive lated during fiscal 2011 expense benefit future employee in other (decrease) Under Canadian GAAP, respectively. million, $(8) and million $6 are on liabilities, or other assets other from amortized these amounts are expense. benefit future employee other and pension to basis, a pre-tax prospectively, beginning with grants issued in fiscal 2006. We retro retro We in fiscal 2006. issued grants beginning with prospectively, (k) Stock-based Compensation (k) Stock-based stock-based GAAP, States under United 2005, 1, November Effective retire to eligible who are employees to granted compensation standard this new adopted We grant. the time of at expensed was Since we have reclassified amounts from other assets and other liabilities other and assets other amounts reclassified from have we Since employee other and the pension income, comprehensive other to are liabilities amounts other includedbenefit and assets in other (i) Goodwill and Other Assets Inc. Bancorp, Suburban of our acquisition GAAP, States Under United method. interests of using the pooling for accounted was 1994 in (h) Derivatives hedges as cash flow designated swaps rate our interest Certain of income through market to under Canadian be marked GAAP must accounting. hedge qualify for do not GAAP as they States under United are and hedge accounting qualify for they Under Canadian GAAP, income. comprehensive other through value fair at measured on a gross basis. As a result of offsetting, the fair value amounts of amounts of value fair the offsetting, of As a result basis. a gross on assets derivative against netted been have instruments that derivative 2010 31, October at million $31,537 was liabilities derivative and in 2009). million ($28,998 Under Canadian GAAP, these derivative assets and liabilities are reported reported are liabilities and assets derivative these Under Canadian GAAP, and derivative liabilities was $2,094 million and $1,146 million as at as at million $1,146 and million $2,094 was liabilities derivative and in 2009, million $48 and million ($1,298 respectively 2010, 31, October and assets derivative GAAP, States United under Also respectively). basis. net a on reported are set-off of rights valid having liabilities with the same counterparty under a master netting agreement. Under Under agreement. netting under a master the same counterparty with net. Cash collateral presented not amounts these are Canadian GAAP, as is recorded received cashand collateral as a loan recorded is posted assets derivative applied against The cash collateral a deposit liability. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Accounting Standards Board (“FASB”). Under this new standard, all only costs related to internally developed software paid to third parties non-controlling interests held by parties other than the parent entity are were capitalized and amortized over the expected useful life of the reported as equity for United States GAAP reporting purposes. Under software. Effective November 1, 2003, we adopted a new Canadian Canadian GAAP, all non-controlling interests are reported as other liabilities. accounting standard that eliminated this difference for software develop- A continuity of non-controlling interest recorded in equity for ment costs incurred after October 31, 2003. There was an adjustment the years ended October 31, 2009 and 2010 is as follows: to our Consolidated Statement of Income in the periods before fiscal 2009,

(Canadian $ in millions) when the software development costs capitalized prior to fiscal 2004 were fully amortized. Non-controlling interest in subsidiaries, November 1, 2008 2,550 Net income attributable to non-controlling interest (155) (r) Restricted Net Assets Change in non-controlling interest ownership 110 Certain of our subsidiaries and equity investments are subject to regula- Non-controlling interest in subsidiaries, October 31, 2009 2,505 tory requirements of the jurisdictions in which they operate. As a result, Net income attributable to non-controlling interest (145) these subsidiaries and equity investees may be restricted from transferring Change in non-controlling interest ownership (222) to us our proportionate share of their assets in the form of cash dividends, Non-controlling interest in subsidiaries, October 31, 2010 2,138 loans or advances. At October 31, 2010 and 2009, restricted net assets of these subsidiaries were $6.2 billion and $5.9 billion, respectively. (o) Other-than-Temporary Impairment Changes in Accounting Policy Effective May 1, 2009, we adopted the new FASB guidance that amended Convertible Debt Instruments the impairment assessment and recognition principles of other-than- Effective November 1, 2009, new guidance was issued by the FASB temporary impairment for debt securities and enhanced the presentation on the accounting for convertible debt instruments that may be settled and disclosure requirements for debt and equity securities. Under the new in cash (or other assets) upon conversion, including partial cash settle- guidance, if a debt security is determined to be other-than-temporarily ment. This new guidance requires that we account for the liability impaired, the amount of the impairment charge equal to the credit loss and equity components separately. This guidance did not have any impact will be recorded in income and the remaining impairment charge will on our United States GAAP reconciliation because we do not have any be recorded in accumulated other comprehensive income. Under Canadian convertible debt instruments, as all of our convertible preferred shares GAAP, all impairment is recorded in income. and capital trust securities are classified as equity instruments under As a result of the adoption of this new guidance, we recorded a United States GAAP. cumulative-effect adjustment to reclassify $24 million before tax ($16 mil- lion after tax) from retained earnings to accumulated other comprehensive Future Changes in Accounting Policy income as of May 1, 2009 for United States GAAP reporting purposes. Accounting for Transfers of Financial Assets During the year ended October 31, 2010, we recorded total other-than- The FASB has issued a new standard on the accounting for transfers of temporary impairment losses of $36 million after taxes of $15 million financial assets that removes the concept of a qualifying special-purpose ($351 million after taxes of $113 million in 2009), of which $34 million entity (“QSPE”). The new standard also creates more stringent conditions ($339 million in 2009) were recorded in income and $2 million ($12 million for reporting the transfer of a portion of a financial asset as a sale. in 2009) were recorded in accumulated other comprehensive income. This standard will impact some of the mortgages and credit card receiv- A continuity of the credit losses recorded in income before tax ables we securitize to QSPEs. These QSPEs will be consolidated under on available-for-sale debt securities held at year end is as follows: the new guidance on the Consolidation of Variable Interest Entities (see below). This standard is effective November 1, 2010 for United States (Canadian $ in millions) 2010 2009 GAAP reporting purposes. Balance, beginning of year (286) – Amendments to Guidance on the Consolidation of Variable Interest Entities Credit impairments recognized in earnings The FASB has issued a new standard that changes the criteria by which on debt securities not previously an enterprise determines whether it must consolidate a variable interest determined to be impaired (38) (296) Credit impairments recognized in earnings entity (“VIE”). This new standard amends the existing guidance to require on debt securities that have previously an enterprise to consolidate a VIE if it has both the power to direct the been determined to be impaired (3) (13) activities that most significantly affect the VIE’s economic performance Reduction for securities that were sold or and the obligation to absorb losses or the right to receive benefits from matured during the year 41 23 the VIE. Existing guidance requires an enterprise to consolidate a VIE Balance, end of year (286) (286) if it absorbs a majority of the expected losses or residual returns, or both. A continuous assessment of which party must consolidate a VIE will Under Canadian GAAP, impairment losses recorded against net income be required, rather than an assessment only when certain trigger events relating to an available-for-sale debt security may be reversed through occur. In addition, the new standard requires an enterprise to assess if net income if the fair value of the security increases in a subsequent VIEs that were previously QSPEs must be consolidated by the enterprise. period and the increase can be objectively related to an event occurring We have not finalized our assessment of the impact associated with after the impairment loss was recognized in net income. This is not this amendment. This standard is effective November 1, 2010 for United permitted under United States GAAP. States GAAP reporting purposes. (p) Business Combinations Credit Quality of Financing Receivables and the Allowance for Credit Losses Under United States GAAP, acquisition-related costs, except costs to issue The FASB has issued new disclosure requirements that increase the level debt or equity securities, are recorded as expenses in the period in which of disclosure about the credit quality of loans and receivables and the

Notes the costs are incurred. Under Canadian GAAP, acquisition-related costs allowance held against them. This guidance requires the bank to provide are included in the cost of the purchase. greater levels of disaggregation for existing credit loss information. Other new disclosures include aging of past due receivables, credit quality (q) Software Development Costs information such as credit risk scores or external credit agency ratings, Under United States GAAP, costs of internally developed software are and the modification of our financing receivables. This requirement is required to be capitalized and amortized over the expected useful life effective November 1, 2010 for United States GAAP reporting purposes. of the software. Under Canadian GAAP, prior to November 1, 2003,

168 BMO Financial Group 193rd Annual Report 2010 Principal Subsidiaries

Book value of Entities in which the bank owns more than 50% shares owned by the bank of the issued and outstanding voting shares Head or principal offi ce (Canadian $ in millions) Bank of Montreal Assessoria e Serviços Ltda. Rio de Janeiro, Brazil – Bank of Montreal Capital Markets (Holdings) Limited London, England 148 BMO Capital Markets Limited London, England Pyrford International Limited London, England Bank of Montreal (China) Co. Ltd. Beijing, China 256 Bank of Montreal Finance Ltd. Toronto, Canada 27 Bank of Montreal Holding Inc. Calgary, Canada 19,950 Bank of Montreal Holding Enterprise Inc. Calgary, Canada Bank of Montreal Holding Investments Inc. Calgary, Canada Bank of Montreal Securities Canada Limited Toronto, Canada BMO Nesbitt Burns Corporation Limited Montreal, Canada BMO Nesbitt Burns Inc. and subsidiaries Toronto, Canada BMO Group Retirement Services Inc. Toronto, Canada BMO Holding Finance, LLC Wilmington, United States BMO Investments Inc. and subsidiary Toronto, Canada BMO Investments Limited Hamilton, Bermuda Bank of Montreal (Barbados) Limited St. Michael, Barbados Bank of Montreal Insurance (Barbados) Limited St. Michael, Barbados BMO InvestorLine Inc. Toronto, Canada BMO Nesbitt Burns Trading Corp. S.A. Münsbach, Luxembourg BMO Service Inc. Calgary, Canada Bank of Montreal Ireland plc Dublin, Ireland 1,537 Bank of Montreal Mortgage Corporation Calgary, Canada 1,832 BMO Mortgage Corp. Vancouver, Canada BMRI Realty Investments Toronto, Canada Bay Street Holdings, LLC Chicago, United States – BMO Capital Corporation Toronto, Canada 97 BMO Funding, L.P. Chicago, United States 171 BMO GP Inc. Toronto, Canada – BMO Ireland Finance Company Dublin, Ireland 523 BMO Life Insurance Company Toronto, Canada 479 BMO Life Holdings (Canada), ULC Halifax, Canada BMO Life Assurance Company Toronto, Canada BMO Nevada LP Chicago, United States 190 BMO (NS) Capital Funding Company and subsidiary Halifax, Canada BMO Private Equity (Canada) Inc. Toronto, Canada 118 BMO Nesbitt Burns Employee Co-Investment Fund I Management (Canada) Inc. and subsidiaries Toronto, Canada BMO Trust Company Toronto, Canada 836 BMO (US) Credit Corp. Chicago, United States 12 Clark Street Holdings, LLC Chicago, United States BMO (US) Lending, LLC Chicago, United States 285 Harris Financial Corp. Chicago, United States 6,201 BMO Capital Markets Corp. New York, United States BMO Capital Markets Equity Group (U.S.), Inc. and subsidiaries Chicago, United States BMO Capital Markets GKST Inc. Chicago, United States BMO Financial, Inc. Wilmington, United States BMO Financial Products Corp. Wilmington, United States BMO Global Capital Solutions, Inc. Chicago, United States BMO Harris Financing, Inc. and subsidiary Chicago, United States Harris Bancorp Insurance Services, Inc. Chicago, United States Harris Bankcorp, Inc. Chicago, United States Harris Central N.A. Roselle, United States Harris Investment Management, Inc. and subsidiary Chicago, United States Harris Investor Services, Inc. Chicago, United States Harris Life Insurance Company Scottsdale, United States Harris National Association and subsidiaries Chicago, United States Harris Trade Services Limited Hong Kong, China The Harris Bank N.A. Scottsdale, United States Harris RIA Holdings, Inc. and subsidiaries Wilmington, United States psps Holdings, LLC and subsidiary Chicago, United States Stoker Ostler Wealth Advisors, Inc. Scottsdale, United States

The book value of the subsidiaries represents the total common We directly or indirectly own 100% of the outstanding voting shares and preferred equity value of our holdings or our partnership interest of the above subsidiaries. where appropriate.

BMO Financial Group 193rd Annual Report 2010 169 GLOSSARY Glossary of Financial Terms

Allowance for Credit Losses modification or reduction of current or Forwards are customized contracts Liquidity and Funding Risk is represents an amount deemed expected risks from changes in rates transacted in the over-the-counter the potential for loss if BMO is unable adequate by management to absorb and prices. market. Futures are transacted in to meet financial commitments in a credit-related losses on loans and standardized amounts on regulated timely manner at reasonable prices as Dividend Payout Ratio: Common acceptances and other credit instru- exchanges and are subject to daily they fall due. Financial commitments dividends as a percentage of ments. Allowances for credit losses cash margining. include liabilities to depositors and net income after preferred share can be specific or general and are P 130 suppliers, and lending, investment dividends. recorded on the balance sheet as a and pledging commitments. deduction from loans and acceptances Earnings Per Share (EPS) is General Allowance is maintained P 85, 124 or, as they relate to credit instruments, calculated by dividing net income, to cover impairment in the existing as other liabilities. after deduction of preferred dividends, credit portfolio that cannot yet be Mark-to-Market represents the P 37, 81, 120 by the average number of common associated with specific credit assets. valuation of securities and derivatives

shares outstanding. Diluted EPS, Our approach to establishing and at market rates as of the balance Assets under Administration which is our basis for measuring maintaining the general allowance is sheet date, where required by and under Management refers to performance, adjusts for possible based on the guideline issued by our accounting rules. assets administered or managed by conversions of financial instruments regulator, OSFI. The general allowance Market Risk is the potential for a a financial institution that are benefi- into common shares if those is reviewed on a quarterly basis and negative impact on the balance sheet cially owned by clients and therefore conversions would reduce EPS. a number of factors are considered and/or income statement resulting not reported on the balance sheet P 33, 156 when determining its appropriate from adverse changes in the value of the administering or managing level. We employ a general allowance of financial instruments as a result of financial institution. Earnings Volatility (EV) is a measure model that applies historical expected changes in certain market variables. of the adverse impact of potential and unexpected loss rates, based on Asset-Backed Commercial Paper These variables include interest rates, changes in market parameters on probabilities of default and loss given (ABCP) is a short-term investment foreign exchange rates, equity and the projected 12-month after-tax default factors, to current balances. with a maturity that is typically less commodity prices and their implied net income of a portfolio of assets, P 40, 81, 120 than 180 days. The commercial paper volatilities, as well as credit spreads, liabilities and off-balance sheet posi- is backed by physical assets such credit migration and default. tions, measured at a 99% confidence Hedging is a risk management tech- as trade receivables, and is generally P 82, 124 level over a specified holding period. nique used to neutralize or manage used for short-term financing needs. P 82 interest rate, foreign currency, equity, Market Value Exposure (MVE) is a Assets-to-Capital Multiple is commodity or credit exposures arising measure of the adverse impact of defined as assets plus guarantees Economic Capital is our internal from normal banking activities. changes in market parameters on the and letters of credit, net of specified assessment of the risks underlying Impaired Loans are loans for market value of a portfolio of assets, deductions (or adjusted assets), BMO’s business activities. It represents which there is no longer reasonable liabilities and off-balance sheet posi- divided by total capital. management’s estimation of the assurance of the timely collection tions, measured at a 99% confidence likely magnitude of economic losses Average Earning Assets represents of principal or interest. level over a specified holding period. that could occur if adverse situations the daily or monthly average balance The holding period considers current arise, and allows returns to be Innovative Tier 1 Capital: OSFI of deposits with other banks and loans market conditions and the composition adjusted for risks. Economic capital allows banks to issue instruments that and securities, over a one-year period. of the portfolios to determine how is calculated for various types of qualify as “Innovative” Tier 1 capital. long it would take to neutralize the Bankers’ Acceptances (BAs) are risk – credit, market (trading and non- In order to qualify, these instruments market risk without adversely affecting bills of exchange or negotiable trading), operational and business – must be issued indirectly through a market prices. For trading and under- instruments drawn by a borrower for where measures are based on a time special purpose vehicle, be perma- writing activities, MVE is comprised of payment at maturity and accepted horizon of one year. (For further dis- nent in nature and receive acceptable Value at Risk and Issuer Risk. by a bank. BAs constitute a guarantee cussion of these risks, refer to the accounting treatment. Innovative P 82 of payment by the bank and can Enterprise-Wide Risk Management Tier 1 capital cannot comprise more be traded in the money market. section on page 75.) Economic capital than 20% of net Tier 1 capital, at time Model Risk is the potential loss due The bank earns a “stamping fee” is a key element of our risk-based of issue, with 15% qualifying as Tier 1 to the risk of a model not performing for providing this guarantee. capital management process. capital and the remaining 5% included or capturing risk as designed. It also P 34, 91 in total capital. Basis Point: One one-hundredth arises from the possibility of the of a percentage point. Insurance Risk is the risk of loss use of an inappro priate model or Environmental Risk is the risk of due to actual experience being the inappropriate use of a model. Business Risk arises from the specific loss or damage to BMO’s reputation different than that assumed when business activities of a company resulting from environmental concerns Net Economic Profit (NEP) represents an insurance product was designed and the effects these could have related to BMO or its customers. cash net income available to common and priced. Insurance risk exists on its earnings. Environmental risk is often associated shareholders, less a charge for in all our insurance businesses, P 88 with credit and operational risk. capital. NEP is an effective measure including annuities and life, accident P 90 of economic value added. NEP is a and sickness, and creditor insurance, Credit and Counterparty Risk is the non-GAAP measure. as well as our reinsurance business. potential for loss due to the failure Fair Value is the amount of consider- P 34, 91

of a borrower, endorser, guarantor ation that would be agreed upon in Issuer Risk arises in BMO’s trading or counterparty to repay a loan or an arm’s length transaction between and underwriting portfolios, and Net Interest Income is comprised honour another predetermined knowledgeable, willing parties who measures the adverse impact of credit of earnings on assets, such as loans financial obligation. are under no compulsion to act. spread, credit migration and default and securities, including interest and P 80 risks on the market value of fixed dividend income and BMO’s share of Forwards and Futures are contractual income instruments and similar income from investments accounted agreements to either buy or sell Derivatives are contracts whose securities. Issuer risk is measured for using the equity method of a specified amount of a currency, value is “derived” from movements at a 99% confidence level over a accounting, less interest expense commodity, interest-rate-sensitive in interest or foreign exchange rates, specified holding period. paid on liabilities, such as deposits. financial instrument or security at a or equity or commodity prices. P 82 P 37 specific price and date in the future. Derivatives allow for the transfer,

170 BMO Financial Group 193rd Annual Report 2010 Net Interest Margin is the ratio of environment and the allowance for rate payments based on a notional Total Capital includes Tier 1 and net interest income to earning assets, credit losses already established. value of a single commodity. Tier 2 capital, net of certain deductions. expressed as a percentage or in basis P 40, 81, 120 Tier 2 capital is primarily comprised of • Credit default swaps – one counter- points. Net interest margin is some- subordinated debentures and the eligi- party pays the other a fee in times computed using total assets. Regulatory Risk is the risk of ble portion of the general allowance exchange for that other counterparty P 37 not complying with regulatory for credit losses. Deductions from Tier 2 agreeing to make a payment requirements, regulatory change capital are primarily comprised of our if a credit event occurs, such as Notional Amount refers to the or regulators’ expectations. Failing investments in non-consolidated subsid- bankruptcy or failure to pay. principal used to calculate interest to properly manage regulatory iaries and other substantial investments. and other payments under derivative risk may result in regulatory sanctions • Cross-currency interest rate swaps – Total Capital Ratio is defined as total contracts. The principal amount does being imposed and could harm fixed and floating rate interest capital divided by risk-weighted assets. not change hands under the terms our reputation. payments and principal amounts are P 60, 147 of a derivative contract, except in the exchanged in different currencies. Reputation Risk is the risk of a case of cross-currency swaps. negative impact to BMO that results • Cross-currency swaps – fixed rate Total Shareholder Return (TSR): The Off-Balance Sheet Financial from the deterioration of BMO’s interest payments and principal five-year average annual total share- Instruments: A variety of financial reputation among stakeholders. amounts are exchanged in different holder return (TSR) represents the arrangements offered to clients, which These potential impacts include currencies. average annual total return earned on include credit derivatives, written put revenue loss, reduced client loyalty, an investment in BMO common shares • Equity swaps – counterparties options, backstop liquidity facilities, litigation, regulatory sanction or made at the beginning of a five-year exchange the return on an equity standby letters of credit, performance additional oversight, and declines period. The return includes the change security or a group of equity guarantees, credit enhancements, in BMO’s share price. in share price and assumes that divi- securities for the return based on commitments to extend credit, P 90 dends received were reinvested in a fixed or floating interest rate or securities lending, documentary additional common shares. The one- the return on another equity security and commercial letters of credit, Return on Equity or Return on year TSR also assumes that dividends or group of equity securities. and other indemnifications. Common Shareholders’ Equity (ROE) were reinvested in shares. is calculated as net income, less • Interest rate swaps – counterparties P 32 Operating Leverage is the difference preferred dividends, as a percentage generally exchange fixed and float- between revenue and expense of average common shareholders’ ing rate interest payments based on Trading-Related Revenues include growth rates. Cash operating leverage equity. Common shareholders’ equity a notional value in a single currency. net interest income and non-interest is the difference between revenue is comprised of common share capital, P 130 revenue earned from on- and off- and cash-based expense growth rates. contributed surplus, accumulated balance sheet positions undertaken P 27 other comprehensive income (loss) Tangible Common Equity reflects for trading purposes. The manage- and retained earnings. common equity net of certain deduc- ment of these positions typically Operational Risk is the potential P 34 tions. There is no standard industry includes marking them to market for loss resulting from inadequate or definition of this measure. on a daily basis. Trading revenues failed internal processes or systems, Securities Borrowed or Purchased P 60 include income (expense) and gains human interactions or external events, under Resale Agreements are (losses) from both cash instruments but excludes business risk. low-cost, low-risk instruments, often Tangible Common Equity to Risk- and interest rate, foreign exchange P 87 supported by the pledge of cash Weighted Assets Ratio represents (including spot positions), equity, collateral, which arise from trans- tangible common equity divided by commodity and credit contracts. Options are contractual agreements actions that involve the borrowing risk-weighted assets. P 39 that convey to the buyer the right or purchasing of securities. but not the obligation to either buy or P 60 Value at Risk (VaR) is measured for sell a specified amount of a currency, Securities Lent or Sold under Taxable Equivalent Basis (teb): Rev- specific classes of risk in BMO’s trading commodity, interest-rate-sensitive Repurchase Agreements are enues of operating groups reflected in and underwriting activities: interest financial instrument or security at a low-cost, low-risk liabilities, often our MD&A are presented on a taxable rate, foreign exchange rate, equity and fixed future date or at any time within supported by cash collateral, which equivalent basis (teb). The teb adjust- commodity prices and their implied a fixed future period. arise from transactions that involve ment increases GAAP revenues and volatilities. This measure calculates the P 130 the lending or selling of securities. the provision for income taxes by an maximum likely loss from portfolios, Specific Allowances reduce the amount that would increase revenues measured at a 99% confidence level Productivity Ratio (or Expense-to- carrying value of specific credit assets on certain tax-exempt securities to a over a specified holding period. Revenue Ratio or Efficiency Ratio) to the amount we expect to recover level that would incur tax at the statu- P 82 is our key measure of productivity. if there is evidence of deterioration tory rate, to facilitate comparisons. It is calculated as non-interest in credit quality. P 37 Variable Interest Entities (VIEs) expense divided by total revenues, P 40, 81, 120 include entities with equity that is expressed as a percentage. The cash Tier 1 Capital represents more per- considered insufficient to finance the productivity ratio is calculated in the Strategic Risk is the potential for manent forms of capital, and primarily entity’s activities or in which the equity- same manner, after removing the loss due to fluctuations in the external consists of common shareholders’ holders do not have a controlling amortization of acquisition-related business environment and/or failure to equity, preferred shares and innova- financial interest. We are required to intangible assets from non-interest property respond to these fluctuations tive hybrid instruments, less a deduc- consolidate VIEs if the investments we expenses. due to inaction, ineffective strategies tion for goodwill and excess intangible hold in these entities and/or the rela- P 41, 91 or poor implementation of strategies. assets and certain other deductions tionships we have with them result required under Basel II. in us being exposed to the majority Provision for Credit Losses is a Swaps are contractual agreements of their expected losses and/or charge to income that represents between two parties to exchange Tier 1 Capital Ratio is defined as being able to benefit from a majority an amount deemed adequate by a series of cash flows. The various Tier 1 capital divided by risk-weighted of their expected residual returns, management to fully provide for swap agreements that we enter into assets. based on a calculation determined impairment in loans and acceptances are as follows: P 60, 147 by standard setters. and other credit instruments, given • Commodity swaps – counterparties P 69 the composition of the portfolios, the generally exchange fixed and floating probability of default, the economic

BMO Financial Group 193rd Annual Report 2010 171 Shareholder Information

Market for Shares of Bank of Montreal Credit Ratings The common shares of Bank of Montreal are listed on the Toronto and New York stock exchanges. Credit rating information appears on page 25 The preferred shares of Bank of Montreal are listed on the Toronto Stock Exchange. of this annual report and on our website. Common Share Trading in Fiscal 2010 www.bmo.com/creditratings Primary stock Closing price Total volume of exchanges Ticker October 31, 2010 High Low shares traded Auditors KPMG LLP Toronto BMO $60.23 $65.71 $49.78 464.9 million New York BMO US$59.25 US$65.68 US$46.09 50.8 million Important Dates Fiscal Year End October 31 Common Share History Annual Meeting March 22, 2011, Date Action Common share effect 9:30 a.m. (local time) The annual meeting of shareholders March 14, 2001 100% stock dividend Equivalent to a 2-for-1 stock split will be held in Vancouver, British Columbia, March 20, 1993 100% stock dividend Equivalent to a 2-for-1 stock split June 23, 1967 Stock split 5-for-1 stock split at the Four Seasons Hotel, Park Ballroom, 791 West Georgia Street. Dividends Paid per Share in 2010 and Prior Years The meeting will be webcast. Details are available on our website. Bank of Montreal has paid dividends for 182 years – the longest-running dividend payout www.bmo.com/investorrelations record of any company in Canada. 2011 Dividend Payment Dates* Shares outstanding Issue/Class Ticker at October 31, 2010 2010 2009 2008 2007 2006 Common and preferred shares record dates February 1 May 2 Common BMO 566,468,440 $ 2.80 $ 2.80 $ 2.80 $ 2.71 $ 2.26 August 2 November 1 Preferred Class B Series 4 (a) BMO G – – – – $ 0.91 $ 1.20 Common shares payment dates Series 5 BMO H 8,000,000 $ 1.33 $ 1.33 $ 1.33 $ 1.33 $ 1.33 February 28 May 26 Series 6 (b) BMO I – – – $ 1.19 $ 1.19 $ 1.19 August 26 November 28 Series 10 BMO V 12,000,000 US$ 1.49 US$ 1.49 US$ 1.49 US$ 1.49 US$ 1.49 Preferred shares payment dates Series 13 (c) BMO J 14,000,000 $ 1.13 $ 1.13 $ 1.13 $ 0.96 – February 25 May 25 Series 14 (d) BMO K 10,000,000 $ 1.31 $ 1.31 $ 1.48 – – Series 15 (e) BMO L 10,000,000 $ 1.45 $ 1.45 $ 0.94 – – August 25 November 25

Series 16 (f) BMO M 12,000,000 $ 1.30 $ 1.30 $ 0.55 – – *Subject to approval by the Board of Directors Series 18 (g) BMO N 6,000,000 $ 1.63 $ 1.55 – – – Series 21 (h) BMO O 11,000,000 $ 1.63 $ 1.11 – – – The Bank Act prohibits a bank from Series 23 (i) BMO P 16,000,000 $ 1.35 $ 0.59 – – – paying or declaring a dividend if it is or would thereby be in contravention of (a) The Class B Preferred Shares Series 4 were issued in February 1998 and were redeemed in August 2007. (b) The Class B Preferred Shares Series 6 were issued in May 1998 and were redeemed in November 2008. capital adequacy regulations. Currently, (c) The Class B Preferred Shares Series 13 were issued in January 2007. (d) The Class B Preferred Shares Series 14 were issued in September 2007. this limitation does not restrict the (e) The Class B Preferred Shares Series 15 were issued in March 2008. payment of dividends on Bank of (f) The Class B Preferred Shares Series 16 were issued in June 2008. (g) The Class B Preferred Shares Series 18 were issued in December 2008. Montreal’s common or preferred shares. (h) The Class B Preferred Shares Series 21 were issued in March 2009. (i) The Class B Preferred Shares Series 23 were issued in June 2009.

Managing Your Shares to purchase additional BMO common shares Our Transfer Agent and Registrar without paying a commission or service charge. Employee Ownership* 81% of Canadian employees participate in Computershare Trust Company of Canada serves You can also purchase additional common the BMO Employee Share Ownership Plan – as Transfer Agent and Registrar for common shares in amounts up to $40,000 per fiscal year. a clear indication of their commitment to and preferred shares, with transfer facilities in Contact Computershare Trust Company of Canada the company. Halifax, Montreal, Toronto, Winnipeg, Calgary and or Shareholder Services for details. *As of October 31, 2010 Vancouver. Computershare Investor Services PLC Direct Deposit and Computershare Trust Company, N.A. serve as You can choose to have your dividends deposited Transfer Agents and Registrars for common shares directly to an account in any financial institution Normal Course Issuer Bid in London, England and Golden, Colorado, respec- in Canada or the United States that provides tively. See next page for contact information. On December 13, 2010, we announced a electronic funds transfer. new normal course issuer bid, commencing Reinvesting Your Dividends and Personal Information Security December 16, 2010 and ending December 15, 2011, Purchasing Additional Common Shares We advise our shareholders to be diligent in under which we may repurchase for cancellation Through the Shareholder Dividend Reinvestment protecting their personal information. Details up to 15 million BMO common shares, repre- and Share Purchase Plan, you can reinvest are available at: www.bmo.com/security senting approximately 2.6% of the “public float” cash dividends from your BMO common shares (as defined by the TSX) of our common shares.

172 BMO Financial Group 193rd Annual Report 2010 Where to Find More Information

Corporate Governance Computershare Trust Company of Canada Our website provides information on our Shareholders Contact our Transfer Agent and Registrar for: 100 University Avenue, 9th Floor, Toronto, ON M5J 2Y1 corporate governance practices, including • Dividend information Email: [email protected] our code of conduct, FirstPrinciples, our • Change in share registration or address www.computershare.com/investor Director Independence Standards and our • Lost certificates Canada and United States board and committee charters. • Estate transfers Call: 1-800-340-5021 Fax: 1-888-453-0330 www.bmo.com/investorrelations • Duplicate mailings • Direct registration International Call: 514-982-7800 Fax: 416-263-9394 Proxy Circular Computershare Trust Company, N.A. Our proxy circular contains information on Co-Transfer Agent (U.S.) our directors, board committee reports and a detailed discussion of our corporate governance Online filing information: BMO filings in Canada practices. It will be published in February 2011 Canadian Securities Administrators’ website and will be available online at: www.sedar.com www.bmo.com/investorrelations BMO filings in the United States Securities and Exchange Commission website New York Stock Exchange www.sec.gov/edgar.shtml

Governance Requirements For all other shareholder inquiries: Shareholder Services A summary of the significant ways in BMO Financial Group, Corporate Secretary’s Department which our corporate governance practices 21st Floor, 1 First Canadian Place, Toronto, ON M5X 1A1 differ from the corporate governance practices Email: [email protected] required to be followed by U.S. domestic Call: 416-867-6785 Fax: 416-867-6793 companies under New York Stock Exchange Senior Vice-President, Investor Relations Listing Standards is posted on our website. Institutional Investors and Research Analysts BMO Financial Group, 18th Floor, 1 First Canadian Place To obtain additional financial information: Toronto, ON M5X 1A1 Corporate Responsibility Email: [email protected] The BMO Corporate Responsibility Report, which Call: 416-867-6656 Fax: 416-867-3367 includes our Public Accountability Statement, documents our corporate citizenship activities Employees Call: 1-877-266-6789 throughout the year. The 2010 report will be For information on BMO’s Employee Share released in February 2011. You can find more Ownership Plan: information about our corporate responsibility General Corporate Communications Department activities online at: To obtain additional printed copies BMO Financial Group, 302 Bay Street, 10th Floor www.bmo.com/corporateresponsibility of the annual report or make inquiries Toronto, ON M5X 1A1 about company news and initiatives: www.bmo.com We report on the economic, social and On peut obtenir sur demande un environmental components of our performance exemplaire en français. and activities according to the Global Reporting BMO Bank of Montreal Initiative (GRI) framework. To learn more Customers For assistance with your investment portfolio English and French: 1-877-225-5266 about the GRI, visit: or other financial needs: Cantonese and Mandarin: 1-800-665-8800 www.globalreporting.org Outside Canada and the continental United States: 416-286-9992 TTY Service for Hearing Impaired Customers: Have Your Say 1-866-889-0889 If you have a question you would like to ask www.bmo.com at our annual meeting of shareholders, you Type: Moveable Inc. Moveable Type: www.ovedesign.com can submit your question in person or during BMO InvestorLine: 1-888-776-6886 the webcast. You can also submit a question to www.bmoinvestorline.com the board by writing to the Corporate Secretary at Corporate Secretary’s Office, 21st Floor, Harris/Harris Private Bank/Harris Business Banking United States: 1-888-340-2265 1 First Canadian Place, Toronto, ON M5X 1A1, Outside the United States: 1-847-238-2265 or emailing [email protected]. www.harrisbank.com

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