BMO Financial Group 200th Annual Report 2017 TOMORROW TODAY STARTS We aren’t waiting Marla Philpot Associate Project Manager Chicago, IL for the future to arrive. We’re creating it. Connecting. Learning. Ervey Ayvar Coordinator, Administrative Services, U.S. Finance Adapting. Innovating. Chicago, IL Business Review 2 Who We Are / Finding new ways Financial Snapshot 3 Reasons to Invest in BMO 4 Chairman’s Message to be relevant. 5 Chief Executive Officer’s Message 9 Priorities and Principles 10 Tomorrow Starts Today 16 Performance Highlights Ready for what Gerrick Ratliff 18 Our Strategic Footprint Human Resources 20 Executive Committee Consultant Chicago, IL 21 Board of Directors comes next. Financial Review 24 Financial Performance and Condition at a Glance 26 Management’s Discussion and Analysis 122 Supplemental Information 136 Statement of Management’s Responsibility for Financial Information 137 Independent Auditors’ Report of Registered Public Accounting Firm 138 Report of Independent Registered Public Accounting Firm 139 Consolidated Financial Statements 144 Notes to Consolidated Financial Statements Resources and Directories 202 Glossary of Financial Terms 2 017 204 Where to Find More Information IBC Shareholder Information Financial Snapshot Who We Are Reported Adjusted 1 Established in 1817, BMO Financial Group is As at or for the year ended October 31 a highly diversified financial services provider (Canadian $ in millions, except as noted) 2017 2016 2017 2016 based in North America. We are the eighth- Revenue, net of CCPB2 (p 38) 20,722 19,544 20,722 19,628 largest bank in North America by assets, with Provision for credit losses (p 42) 774 815 850 815 total assets of $710 billion and an engaged Non-interest expense (p 43) 13,302 12,997 13,007 12,544 and diverse base of employees. BMO provides Net income (p 37) 5,350 4,631 5,508 5,020 a broad range of personal and commercial banking, wealth management and investment Earnings per share – diluted ($) (p 34) 7.92 6.92 8.16 7.52 banking products and services to more than Return on equity (%) (p 35) 13.3% 12.1% 13.7% 13.1% 12 million customers. We serve eight million Operating leverage, net of CCPB (%) (p 43) 3.7% 1.1% 1.9% 2.1% customers across Canada through our Canadian Common Equity Tier 1 Ratio (%) (p 35) 11.4% 10.1% na na personal and commercial arm, BMO Bank of Montreal. We also serve customers through Net Income by Segment3 our wealth management businesses: Canadian P&C (p 47) 2,512 2,202 2,515 2,204 BMO Global Asset Management, BMO Nesbitt U.S. P&C (p 50) 1,066 1,085 1,112 1,135 Burns, BMO Private Banking, BMO Insurance Wealth Management (p 54) 953 761 1,018 862 and BMO InvestorLine. BMO Capital Markets, BMO Capital Markets (p 58) 1,315 1,253 1,317 1,254 our investment and corporate banking and Corporate Services4 (p 61) (496) (670) (454) (435) trading products division, provides a full suite of financial products and services Net income (p 37) 5,350 4,631 5,508 5,020 to North American and international clients. U.S. P&C (US$ in millions) (p 50) 817 819 853 856 In the United States, BMO serves customers through BMO Harris Bank, based in the U.S. 1 Midwest with more than two million retail, Adjusted results are non-GAAP and are discussed in the Non-GAAP Measures section on page 29. Management assesses performance on a reported basis and on an adjusted basis and considers both to be small business and commercial customers. useful in assessing underlying ongoing business performance. Presenting results on both bases provides BMO Financial Group conducts business readers with a better understanding of how management assesses results. through three operating groups: Personal and 2 Net of insurance claims, commissions and changes in policy benefit liabilities (CCPB). Commercial Banking, Wealth Management 3 Certain comparative figures have been reclassified to conform with the current year’s presentation. See page 46. and BMO Capital Markets. 4 Corporate Services, including Technology & Operations. na – not applicable Bank of Montreal brands the organization’s member companies as BMO Financial Group. Note 27 on page 197 Reporting Excellence of the financial statements lists the intercorporate relationships among Bank of Montreal and its significant subsidiaries. This year, BMO received the Chartered Professional Accountants of Canada Platinum Award for excellence in corporate reporting, recognizing exemplary quality in all four judging categories: financial reporting, corporate governance disclosure, electronic disclosure and sustainability reporting. The CPA restructured its awards system in 2017, eliminating industry sector awards. Only four companies in the entire field achieved Platinum status. This is the third consecutive year that BMO has been recognized with a CPA Award of Excellence. 2 BMO Financial Group 200th Annual Report 2017 Reasons to Invest in BMO Strong, diversified businesses that continue to Well-capitalized with an attractive deliver robust earnings growth and long-term dividend yield. value for shareholders. Efficiency-focused, enabled by technology Large North American commercial banking innovation, simplification, process enhancement business with advantaged market share. and increased digitalization across channels. Well-established, highly profitable core banking Customer-centric operating model guided by business in Canada. a disciplined loyalty measurement program. Diversified U.S. banking operations well Adherence to the highest standards of positioned to benefit from growth opportunities. corporate governance, including sustainability principles that ensure we consider social, Award-winning wealth franchise with an active economic and environmental impacts as we presence in markets across Canada, the United pursue sustainable growth. States, Europe and Asia. Competitively advantaged Canadian and growing mid-cap focused U.S. capital markets business. A 189-Year Dividend Record Compound annual growth rate: BMO Financial Group has the longest-running dividend payout record % % of any company in Canada, at 189 years. BMO common shares had an 7. 5 4.8 annual dividend yield of 3.6% at October 31, 2017. BMO 15-year BMO 5-year Dividends Declared ($ per share) 3.40 3.56 3.08 3.24 2.71 2.80 2.80 2.80 2.80 2.82 2.94 2.26 1.85 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 BMO Financial Group 200th Annual Report 2017 3 Chairman’s Message the next generation. We have seen this team develop in The next chapter recent years, and it is a winning team. We believe they and the bank are well positioned to face the new challenges that await us. They have our full support and confidence and we look forward to working closely with them as they continue to pursue the strategy that has delivered such J. Robert S. Prichard strong results for the bank. We endorse Darryl’s focus on Chairman of the Board enabling competitive advantage and his commitment to delivering industry-leading customer experience ever more We have just completed a milestone year in Bank of efficiently, while relentlessly promoting employee engage- Montreal’s remarkable history as we celebrated 200 years ment and BMO’s strong culture of corporate citizenship. of achievement, during which Canada’s first bank has On behalf of all BMO shareholders, I extend our thanks continually played an important role in the growth and to all the bank’s employees for their contributions to our development of the Canadian and North American success in 2017. BMO’s employees have been quick to economies. Fittingly, it was also a year of record recognize their customers’ changing needs, and have performance, with solid growth across all markets served responded efficiently and effectively, without jeopardizing by the bank. In all respects, it was a very good year. the human touch that sets BMO apart. As the pace of change BMO’s bicentennial also marked an important transition in accelerates, this ability to adapt will give BMO a competitive the bank’s leadership, with the carefully planned succession edge. We thank them for all they do so well. from one chief executive to another. On October 31, 2017, We also thank you – the bank’s shareholders – for your faith Bill Downe ended his term as the bank’s CEO after ten in us to represent your interests at the boardroom table. All of exceptional years of leadership, and Darryl White assumed us take great pride in the bank and we consider it a privilege the helm. to serve you as the bank begins its third century. Strong as our The Board of Directors and I thank Bill for his 34 years of past has been, we believe the best is yet to come. service to Bank of Montreal and for the close and effective Warm regards, working relationship he developed with the board over the past ten years. He was a terrific leader and made our bank stronger and better. The numbers tell part of the story. On Bill’s watch, the bank has delivered shareholders 10 percent returns, on average, every year for 10 years. Better still, after putting in place his strategy and building his team, Bill accelerated the bank’s performance and delivered 15 percent returns, on average, every year for the past five. Revenue, income and total assets have all more than doubled, while common shareholders’ equity has nearly tripled and the bank’s market capitalization has increased by $29 billion. That’s almost $3 billion of added value every year for ten years. Outstanding. But the business performance Bill delivered is about much more than the numbers. He leaves the bank ever more competitive with a superb leadership team, a leading North American platform, great customer focus, a corporate culture marked by ethical conduct and employee loyalty, and a powerful commitment to diversity.