second quarter report 2001 2001... · ond quarter of 2001, an increase of $110 million from the...

For the Period Ended April 30, 2001

Table of Contents

Financial Highlights 2

Management’s Discussion and Analysis of

Results of Operations and Financial Condition (MD&A) 3

Results Overview 3

Strategic Overview 4

Financial Targets 5

Operating Group Review 5

Personal and Commercial Client Group 6

Private Client Group 8

Investment Banking Group 10

Emfisys and Corporate Support 12

Harris Bank 14

Effects of Non-Recurring Items 15

Financial Statement Review 16

Enterprise-Wide Risk Management 18

Capital Management 19

Caution Regarding Forward-Looking Statements 20

Supplementary Tables 21

Consolidated Financial Statements 24

Second Quarter Report 2001

2 ■ Bank of Montreal First Quarter Report 2001

For the three months ended For the six months ended

Change from Change from

(Canadian $ in millions except as noted) Apr 30, 2001 Jan 31, 2001 Apr 30, 2000 Apr 30, 2000 Apr 30, 2001 Apr 30, 2000 Apr 30, 2000

Net Income StatementNet interest income (teb) (a) $ 1,092 $ 1,117 $ 1,084 0.7% $ 2,209 $ 2,165 2.0%Other income 1,393 1,076 1,200 16.2 2,469 2,242 10.1Total revenue (teb) (a) 2,485 2,193 2,284 8.8 4,678 4,407 6.1Provision for credit losses 217 100 100 117.0 317 200 58.5Non-interest expense 1,404 1,397 1,348 4.0 2,801 2,602 7.6Provision for income taxes (teb) (a) 233 260 322 (27.4) 493 601 (18.1)Non-controlling interest in subsidiaries 10 7 5 124.0 17 9 93.0Net income before goodwill 621 429 509 22.2 1,050 995 5.6Amortization of goodwill, net of applicable income tax 14 13 12 18.3 27 24 14.7Net income 607 416 497 22.3 1,023 971 5.4Taxable equivalent adjustment 32 34 35 (7.9) 66 66 (0.8)

Per Common Share ($)

Net income before goodwill • basic $ 1.16 $ 0.77 $ 0.90 $ 0.26 $ 1.93 $ 1.76 $ 0.17• diluted (d) 1.13 0.75 0.89 0.24 1.88 1.74 0.14

Net income • basic 1.13 0.74 0.88 0.25 1.87 1.72 0.15• diluted (d) 1.10 0.73 0.87 0.23 1.83 1.70 0.13

Dividends declared 0.28 0.28 0.25 0.03 0.56 0.50 0.06Book value per share 19.93 19.53 18.72 1.21 19.93 18.72 1.21Market value per share 35.20 40.89 26.88 8.32 35.20 26.88 8.32Total market value of common shares ($ billions) 17.8 21.5 14.4 3.4 17.8 14.4 3.4

As at

Change from

Apr 30, 2001 Jan 31, 2001 Apr 30, 2000 Apr 30, 2000

Balance Sheet SummaryAssets $ 235,154 $ 242,230 $ 238,414 (1.4)%Loans 136,405 139,270 136,697 (0.2)Deposits 154,415 157,875 162,067 (4.7)Capital funds 16,460 16,844 16,428 0.2Common equity 10,102 10,280 10,037 0.6Net impaired loans and acceptances (3) 148 (283) 98.7Average BalancesLoans 143,854 136,872 136,536 5.4 Assets 248,066 245,283 233,354 6.3


Apr 30, 2001 Jan 31, 2001 Apr 30, 2000 Apr 30, 2001 Apr 30, 2000

Primary Financial Measures (%) (b)

Five-year total shareholder return 20.4 23.8 18.2 20.4 18.2Earnings per share growth 26.4 (12.0) 40.3 7.6 38.2Cash earnings per share growth 28.3 (9.2) 39.4 10.1 35.6Return on common shareholders’ equity 23.7 15.3 19.8 19.4 19.4Cash return on common shareholders’ equity 24.7 16.2 20.6 20.4 20.2Net economic profit growth 55.6 (27.6) 70.1 16.5 63.1Revenue growth 8.8 3.2 16.5 6.1 13.2Expense-to-revenue ratio 56.5 63.7 59.1 59.9 59.1Provision for credit losses as a % of

average loans and acceptances 0.36 0.27 0.28 0.37 0.28Gross impaired loans and acceptances as a % of

equity and allowance for credit losses 11.52 11.94 8.71 11.52 8.71Cash and securities to total assets 26.4 26.3 30.1 26.4 30.1Tier 1 capital ratio (c) 8.94 8.87 8.06 8.94 8.06Credit rating AA- AA- AA- AA- AA-

Other Financial Ratios (% except as noted) (b)

Total shareholder return 2.7 19.3 (1.0) 2.7 (1.0)Dividend yield 2.8 2.8 4.2 3.0 3.4Price-to-earnings ratio (times) 10.2 12.8 9.5 10.2 9.5Market-to-book value (times) 1.77 2.09 1.44 1.77 1.44Cash earnings per share – basic ($) 1.18 0.79 0.92 1.97 1.79Net economic profit ($ millions) 352 146 226 498 427Return on average assets 1.00 0.67 0.87 0.84 0.84Net interest margin 1.80 1.81 1.89 1.81 1.88Other income as a % of total revenue 56.1 49.1 52.5 52.8 50.9Expense growth 4.0 11.4 6.2 7.6 4.0Total capital ratio (c) 12.74 12.12 11.13 12.74 11.13Tier 1 capital ratio – U.S. basis (c) 8.51 8.41 7.67 8.51 7.67Equity-to-assets ratio 5.4 5.2 5.1 5.4 5.1

All ratios in this report are based on unrounded numbers.(a) Reported on a taxable equivalent basis (teb). (b) For the period ended or as at, as appropriate.(c) The January 31, 2001 total capital ratio and tier 1 capital ratios reflect the inclusion of $250 of class B preferred shares which were redeemed on February 26, 2001. Excluding these shares, the total

capital ratio would have been 11.93, the tier 1 capital ratio would have been 8.68 and the tier 1 capital ratio – U.S. basis would have been 8.23 as at January 31, 2001.(d) Effective for the six months ended April 30, 2001 we changed our calculation of diluted earnings per share as required by CICA Handbook section 3500 “Earnings per Share”. We adopted this new

standard retroactively and have restated diluted earnings per share for prior periods. The net impact of the change is a decrease in our diluted earnings per share of $0.03 from $1.13 to $1.10 forthe three months, and $0.04 from $1.87 to $1.83 for the six months ended April 30, 2001.

Financial Highlights

Bank of Montreal Second Quarter Report 2001 ■ 3

Management’s Discussion and Analysis of Results of Operations and Financial Condition (MD&A)

Results Overview

On January 23, 2001 the Bank’s Board of Directors declared a 100per cent stock dividend, effectively achieving a two-for-one splitof the Bank’s common shares. All data in respect of numbers ofshares and per share amounts now reflect the effects of the splitand all prior period comparatives have been restated accordingly.

Second Quarter 2001 vs. Second Quarter 2000Bank of Montreal earned net income of $607 million for the sec-ond quarter of 2001, an increase of $110 million from the secondquarter of 2000. Excluding non-recurring items in both periods,which are itemized on page 15, net income for the second quar-ter was $422 million, a decrease of $23 million or five per centfrom the record results of last year.

Return on equity for the quarter was 23.7 per cent, comparedwith 19.8 per cent for the comparable period in 2000. Excludingnon-recurring items, return on equity declined by 1.4 percentagepoints to 16.2 per cent.

Diluted earnings per share were $1.10 versus $0.87 in the sec-ond quarter of last year. Excluding non-recurring items, dilutedearnings per share of $0.76 were $0.02 lower than in the prior year.

Net economic profit was $352 million for the quarter, com-pared with $226 million last year.

During the quarter, the Bank sold its remaining 812 millionshares in Bancomer for a non-recurring after-tax gain of $239million. The Bank was able to dispose of its investment soonerthan anticipated and the $284 million pre-tax gain realized onsale was substantially higher than the gain expected by the Bankat the end of the first quarter. The Bank first invested inBancomer in 1996 and earned an average annual 17.3 per centafter-tax cash-on-cash return over the holding period.

Excluding non-recurring items, net income declined by $23million and earnings per share by $0.02 from the record results inthe second quarter of 2000. The comparison of earnings betweenyears is affected by changes in accounting for the investment inBancomer and this year’s adoption of a new accounting standardrelated to pensions and other future employee benefits. If theaccounting used in fiscal 2001 were in effect last year, net incomefor the second quarter of fiscal 2001 would exceed net income forthe second quarter of last year by $6 million and earnings pershare would be $0.04 higher than last year.

To date, the year has been characterized by slower economicgrowth in North America, particularly in the United States. As aresult, this quarter the Bank has increased its estimate of theannual provision for credit losses for fiscal 2001 to $450 million,from its annual estimate in the first quarter of $400 million.Accordingly, the provision for credit losses recorded in the sec-ond quarter was increased to $117 million from the $100 millioncharge recorded in both the second quarter of last year and in thefirst quarter of fiscal 2001. For prudential reasons, the Bank alsorecorded a non-recurring $100 million increase in its generalprovision for credit losses during the quarter, resulting in a non-recurring after-tax charge to earnings of $58 million.

Excluding non-recurring items, results benefited from arecord performance within the Investment Banking Group.Results from the Private Client Group were down from theunusually strong second quarter of last year. Earnings from thePersonal and Commercial Client Group also declined.

Increased net income from the Investment Banking Groupreflected strong performance from Capital Markets businessesdue to higher client-driven trading revenues, the positive effectsof declining interest rates on interest-rate-sensitive businessesand, increased gains on securities, net of a write-down in certaininvestments in collateralized bond obligations. Expensesimproved, but the provision for credit losses increased year-over-year.

Net income from the Private Client Group declined due tolower client transaction-based trading revenues as less robustmarket conditions curbed full-service and direct investing rev-enues and offset improved revenues in all other lines. Expensesimproved year-over-year as lower revenue-based compensationcosts and the effects of focused expense management more thanoffset increased expenses from acquired businesses and strate-gic initiatives.

Net income from the Personal and Commercial Client Group,excluding non-recurring items, was down from the prior year asrevenue growth was more than offset by higher benefits andsales and service staffing costs, and by spending on business ini-tiatives. Revenue growth was reduced, in part, by the loss of rev-enues from branches sold over the past year. In addition, theintroduction of various initiatives and the expanded sales andservice staff in fiscal 2000, which will benefit future periods,continued to affect the success of sales efforts and slowed vol-ume growth in the current period. Revenues grew in residentialmortgages, consumer lending and card products in Canada, andin U.S. retail and business banking, while revenues in othermajor product lines in Canada declined.

Second Quarter 2001 vs. First Quarter 2001Net income for the second quarter of 2001 increased by $191 mil-lion from $416 million in the first quarter. Excluding non-recur-ring items, net income increased by $19 million or five per cent.

Return on equity of 23.7 per cent was 8.4 percentage pointshigher than in the first quarter. Excluding non-recurring items,return on equity increased 1.4 percentage points to 16.2 per cent.

Diluted earnings per share increased $0.37 from $0.73 in thefirst quarter. Excluding non-recurring items, diluted earningsper share increased $0.06 or nine per cent, notwithstanding thatthere are fewer days in the second quarter than in the other quar-ters of the year, a factor that reduces second quarter earnings relative to other quarters.

4 ■ Bank of Montreal Second Quarter Report 2001

Results Overview

Net economic profit increased by $206 million from the firstquarter of the year.

The Investment Banking Group’s results improved due to cont-inued strong results from interest-rate-sensitive businesses, higherclient-driven trading revenues and higher revenues from mergerand acquisition fees. Net income from the Private Client Groupincreased due to higher fee-based revenues and lower expenses.

The Personal and Commercial Client Group’s net incomedeclined as revenues fell because of fewer days in the secondquarter, while loan volumes and spreads were substantiallyunchanged. Expenses increased modestly, but tighter expensemanagement is now in place to better match initiative spendingto the pace of revenue growth.

Over the course of the first quarter and throughout February,the Group’s personal loan volumes in Canada had declined.However, over the last two months of the quarter, volumesimproved. Commercial loan volumes increased somewhat in thesecond quarter after declining in the first quarter. Deposit vol-umes also declined throughout the latter half of the first quarterand through the first half of the most recent quarter. However,volumes increased throughout the last six weeks of the quarter.These apparent shifts in trends are attributable to the continuingintegration and increasing effectiveness of the 1,000 front-linesales staff that were added in fiscal 2000.

Gross impaired loans and acceptances fell slightly to $1,653million in the second quarter of the year. During the quarter, theBank decided to classify approximately $200 million of loans tocertain California utilities as impaired, reflecting the deteriora-tion of these loans. The Bank also achieved a $530 million reduc-tion in impaired loans through a combination of repayments,accounts returning to performing status, economically advanta-geous sales of certain loans, and through write-offs.

In the first quarter the Bank filed a normal-course issuer bid,which expires on December 31, 2001, to repurchase up to 30 mil-lion or 5.7 per cent of its common shares. During the secondquarter, and year-to-date, the Bank repurchased 21.2 millionshares at a cost of $824 million.

Year-to-date 2001 vs. Year-to-date 2000Net income for the year-to-date was $1,023 million, an increaseof $52 million from the comparable period in fiscal 2000.Excluding non-recurring items, net income decreased $27 mil-lion or three per cent to $825 million.

Return on equity, at 19.4 per cent, was unchanged from fiscal2000 year-to-date. Excluding non-recurring items, return onequity declined by 1.4 percentage points to 15.5 per cent.

Diluted earnings per share were $1.83 versus $1.70 in the firsthalf of last year. Excluding non-recurring items, diluted earningsper share declined by $0.02 to $1.46.

Net economic profit was $498 million year-to-date, comparedwith $427 million last year.

The Bank sold its entire 1,012 million shares in Bancomer, pro-ducing a non-recurring gain on sale of $321 million ($272 millionafter-tax). The Bank also recorded a non-recurring $100 millionincrease in its general provision for credit losses during the sec-ond quarter of 2001, resulting in a non-recurring after-tax chargeto earnings of $58 million. There was no such charge for thecomparable year-to-date period in 2000. The effects of these andother non-recurring items are outlined on page 15.

Excluding non-recurring items, net income declined by $27million and diluted earnings per share by $0.02 from the compa-rable period in 2000. As explained previously, the comparison ofearnings between years is affected by changes in accounting forthe investment in Bancomer and this year’s adoption of the newaccounting standard for employee benefits. If the accountingused in fiscal 2001 were in effect last year, net income for the sixmonths ended April 30, 2001 would exceed net income for thecomparable period last year by $44 million and earnings pershare would be $0.12 higher than last year.

Results, excluding non-recurring items, benefited from thestrong performance of the Investment Banking Group, whichwas driven by improved results in Capital Markets businessesdue to higher client-driven trading revenues. Net income fromthe Private Client Group declined, due largely to lower client-driven trading volumes. Emfisys and Corporate Support netincome declined due to lower earnings recognized on the invest-ment in Bancomer. Net income from the Personal andCommercial Client Group declined marginally, due to increasedstaffing and initiative spending, and lower revenue growth.

Strategic Overview

The Bank’s objectives, standards, approach and governancerelated to strategic management are outlined on page 19 of the2000 Annual Report.

Throughout fiscal 2001, the Bank has continued to makeprogress with the next phase of its growth strategy, the accelera-tion of the shift of its business mix toward higher-growth,higher-return businesses. The Bank continues to target threeclient markets across Canada and in high-opportunity areas ofthe United States:

■ personal and commercial banking clients (served by thePersonal and Commercial Client Group);

■ corporate and institutional clients (served by the InvestmentBanking Group); and

■ individual investing clients (served by the Private Client Group).

As a high priority, the Bank is pursuing e-business opportunitieswithin and across all three markets. E-business continues to bean important component of the Bank’s growth strategy. OnNovember 1, 2000, Emfisys, the Bank’s technology and e-businessgroup, assumed responsibility for e-business activities, makingit one of the largest information technology research, develop-ment and service operations in the country.

During the first six months of the year, Emfisys continued tofocus on increasing its market competitiveness, efficiency andquality of service. The Group’s strategy is to create new high-growth, high-return businesses; invest in technology, e-businessresearch and development; and optimize revenue generationthrough its Corporate and Commercial Electronic FinancialSolutions business, strategic alliances, partnerships, joint ven-tures and outsourcing.


Personal and Commercial Client Group made further progressin integrating branch and electronic banking capabilities inorder to help simplify customers’ financial lives. In the pasttwelve months, the number of more cost-effective and conve-nient instore branches rose by 20 to 78. At quarter-end, therewere 875 traditional branches in Canada, a reduction of 101 fromthe second quarter of 2000. This ongoing optimization of the dis-tribution channels included the sales of 84 branches, to creditunions and to National Bank of Canada, and the acquisition of 12former TD/Canada Trust branches. During the quarter, HarrisBank announced an agreement to acquire First National Bank ofJoliet. This merger expands the Harris community bank networkto 149 locations and 245 ABMs across Chicagoland, movingHarris aggressively into the fastest growing county in Illinoisand the sixteenth fastest growing county in the United States.

The Private Client Group’s strategy involves differentiationthrough a solid brand identity and the highest-quality advice,focusing on helping clients accumulate, protect and grow theirfinancial assets. This is coupled with excellent product offeringsand maximum choice and flexibility through targeted distribution.During the first half of the year, the Group continued to increaseits North American investment professional team, completed theintegration of Seattle-based Freeman Welwood and Arizona-basedCentury Bank and launched a number of new products and serv-ices, including Harris AdvantEdge Investing and BMO NesbittBurns Full-Service online trading capability. The Bank recently

announced that it has agreed to acquire the Guardian Group ofFunds Ltd. and its $2 billion in assets under management. Thisstrategic transaction provides an excellent platform to continueto grow the Group’s mutual fund business, including the additionof an important new advisory channel capability.

The Investment Banking Group continued to focus on increasingreturns by growing high-potential businesses and reallocatingcapital to more-productive units. The Group’s strategy is to buildon BMO Nesbitt Burns’ strong market position in Canada,expand coverage in the highly profitable U.S. Midwest mid-mar-ket sector and selectively grow its presence in the energy andmedia and telecommunications sectors. The Group is also buildingin specific high-return businesses such as merchant banking,securitization and credit investment management.

During the second quarter, BMO Nesbitt Burns ranked first inCanadian equity block trading and maintained a leading share ofthe underwriting market.

The Bank’s average annual 5-year total shareholder return forthe period ended April 30, 2001 was 20.4 per cent, the lowest ofCanada’s major banks. However, for the twelve months ended April 30, 2001, the 1-year total shareholder return from Bank ofMontreal common stock was 35 per cent, the highest return amongCanada’s major banks. By continuing to progress in the implemen-tation of its growth strategy, Bank of Montreal intends to movecloser to its objective of achieving top-tier shareholder returns rel-ative to its Canadian and North American peers by 2002.

Fiscal 2001 Financial Targets

At the end of fiscal 2000, Bank of Montreal adopted more detailedand aggressive financial targets for fiscal 2001.

Excluding the effects of non-recurring items, fiscal 2001 targets are:

■ growth in earnings per share in the range of 10 to 15 per cent;

■ return on shareholders’ equity of 17.0 to 17.5 per cent;

■ revenue growth of 7 to 9 per cent;

■ an expense-to-revenue ratio consistent with the 2000 ratio of62.8 per cent;

■ a provision for credit losses consistent with the 2000 provisionof $400 million;

■ a tax rate (tax equivalent basis) averaging 37 per cent;

■ modest growth from $134 billion of risk-weighted assets in 2000;

■ a Tier 1 capital ratio of at least 8.0 per cent; and

■ a cash and securities-to-total assets ratio consistent with the2000 ratio of 27.8 per cent.

Operating Group Review

Periodically, certain business lines and units within the businesslines are transferred between client groups to more closely alignthe Bank’s organizational structure and its strategic priorities.All comparative figures are restated to give effect to the trans-fers. In the second quarter the most significant change was a

transfer from the Personal and Commercial Client Group toCorporate Support. The transfer was the net interest expensethat remains unallocated to the lines of business in the Bank’sinternal transfer pricing process.

Outlook for TargetsManagement is committed to the Bank’s annual targets. In thisdifficult environment, it will be challenging to achieve the revenue growth and expense-to-revenue targets. As indicated

previously, the annual provision for credit losses is now estimated to be $450 million, excluding the $100 million non-recurring general provision recorded in the most recent quarter.


to integrate new staff continued. In addition, management isexercising stronger expense control and will invest in initiativesat a more managed pace. The Business Developments sectionthat follows outlines some of the actions being taken to addressrevenue growth.

Second Quarter 2001 vs. First Quarter 2001Net income of $181 million was $20 million lower than in the firstquarter of 2001. Excluding non-recurring items in both quarters,net income of $177 million was $19 million or 10 per cent lower.

Revenues, at $1,038 million, were $24 million lower than in thefirst quarter. Excluding non-recurring items, revenues declined by$22 million or two per cent to $1,033 million. The decline consistedof a reduction of $17 million on a same-branch basis and a reduc-tion of $5 million related to branches sold and acquired. Fewerdays in the second quarter caused a $25 million quarter-over-quar-ter decline. Revenues benefited from higher gains on securitiessales and gains on securitizations. Cards service fees declined,while net interest margins were unchanged. As noted previously,indications are that trends in respect of volumes improved in thelatter half of the quarter. In the United States, strong loan anddeposit growth continued in retail and business banking.

Non-interest expenses of $668 million increased by $9 millionor one per cent from the previous quarter, due to higher initiativespending and staffing costs.

Year-to-date 2001 vs. Year-to-date 2000Net income for the year-to-date period ended April 30, 2001 was$382 million, a decrease of $72 million from the comparableperiod in 2000. Excluding after-tax gains on sales of branches in2001 and fiscal 2000 gains on the sales of Partners First andbranches, year-to-date net income decreased by $6 million ortwo per cent to $373 million in 2001.

Year-to-date revenues for the period ended April 30, 2001declined by $31 million to $2,100 million, as non-recurring rev-enues were much higher in the prior year due to the gain on saleof Partners First. Excluding non-recurring items in both periods,revenues increased by $83 million or four per cent to $2,088 mil-lion. The growth consisted of an increase of $98 million or five

Personal and Commercial Client Group ($ millions except as noted)

Reported Q2-2001 Q1-2001 YTD-2001 Q2-2000 YTD-2000

Net interest income (teb) 735 755 1,490 704 1,412Other income 303 307 610 314 719Total revenue 1,038 1,062 2,100 1,018 2,131 Provision for credit losses 63 60 123 58 117 Non-interest expense 668 659 1,327 601 1,224Income taxes (teb) and other 126 142 268 156 336

Net Income 181 201 382 203 454

Net economic profit 110 128 238 130 299 Return on equity (%) 26.4 28.7 27.5 30.3 32.3 Total risk-weighted assets 58,590 57,825 58,590 56,620 56,620Average common equity 2,840 2,794 2,817 2,759 2,855Average assets 94,695 94,016 94,349 91,000 90,428Average net interest margin (%) 3.18 3.19 3.18 3.15 3.14 Expense-to-revenue ratio (%) 64.4 62.1 63.2 59.0 57.4

Excluding Non-Recurring Items Q2-2001 Q1-2001 YTD-2001 Q2-2000 YTD-2000

Total revenue (teb) 1,033 1,055 2,088 1,004 2,005 Provision for credit losses 63 60 123 58 117 Non-interest expense 668 659 1,327 601 1,224 Income taxes (teb) and other 125 140 265 150 285Net income 177 196 373 195 379 Return on equity (%) 25.8 28.0 26.9 29.1 27.0Expense-to-revenue ratio (%) 64.7 62.4 63.6 59.9 61.0

Personal and Commercial Client Group

The Personal and Commercial Client Group provides branch-based and electronic financial services to households and com-mercial businesses in Canada and the United States.

Second Quarter 2001 vs. Second Quarter 2000Net income for the second quarter of 2001 was $181 million, com-pared with $203 million in the second quarter of 2000. Excludingnon-recurring gains on the sales of branches in both periods, netincome was $177 million, a decline of $18 million or 10 per centfrom the second quarter of last year.

Revenues, at $1,038 million, were $20 million higher than ayear earlier. Excluding non-recurring items in both quarters,revenues increased $29 million or three per cent to $1,033 mil-lion. There have been 84 branches sold and 12 acquired since thefirst quarter of 2000. The foregoing revenue growth consists ofan increase of $39 million or four per cent on a same-branchbasis and a decline of $10 million or one per cent related tobranches sold and acquired. The $39 million increase was due tovolume growth, slightly higher spreads, higher gains on securiti-zations and the effects of favourable currency translation rateson U.S. retail and business banking revenues. Revenue growthwas affected by lower gains on securities sales and fewer days inthe current quarter.

Non-interest expenses for the second quarter of 2001 increasedby $67 million or 11 per cent, mainly due to higher staffing costsassociated with more front-line sales staff and higher benefits,increased initiative spending and the effects of currency transla-tion on U.S. retail and business banking expenses.

The Group’s revenue growth and profitability in fiscal 2001have lagged expectations. In fiscal 2000 management introducedinitiatives associated with the Bank’s growth strategy. Theabsorption of the associated changes, including the addition ofapproximately 1,000 front-line sales staff, has affected volumeand profitability growth in fiscal 2001. Overcoming these chal-lenges has taken longer than anticipated. As explained previ-ously, volumes improved in the last half of the quarter as efforts



per cent on a same-branch basis and a reduction of $15 million orone per cent related to branches sold and acquired. The increasewas attributable to volume growth, improved spreads, highergains on securitizations and the effects of strategic initiatives,partly offset by lower gains on sales of securities.

Non-interest expenses for the year-to-date period ended April30, 2001 increased by $103 million or eight per cent to $1,327 mil-lion due to increased initiative spending and higher sales andservice staffing costs.

Business DevelopmentsThe Group’s objectives for fiscal 2001 and its outlook for its busi-nesses and the environments in which they operate were outlinedon pages 30 to 33 of the Bank’s Annual Report for fiscal 2000.

The Group’s objectives for fiscal 2001 remain to:

■ pursue an integrated approach to branch and electronic banking;

■ pursue an integrated strategic approach to the developmentand marketing of personal banking products;

■ provide more customized service and target the small businessbanking market; and

■ build on its leadership position in the commercial segment ofcompanies with revenues of $100 to $300 million.

The Group’s economic outlook anticipates: Canadian economicgrowth moderating to a more sustainable pace over the next sev-eral years; a slowing economy to dampen loan growth over theyear; the Canadian economy outperforming the U.S. economy forthe balance of 2001; moderately strong growth rates continuingover the next few years, while the pace of spread compressionlevels off with the lowering of the wholesale funding rate; prof-itable growth through the launch of new products, the penetra-tion of new markets, the migration to lower cost distributionchannels and by leveraging the Group’s North American scaleand knowledge transfer.

There were a number of notable business developments in the quarter.

In Canada, residential mortgages, after adding back the effectsof securitizations, increased by $1.6 billion or four per cent fromthe second quarter of 2000, but decreased by $150 million fromthe first quarter of 2001. Other personal loans, adjusted for secu-ritizations, increased by $498 million or four per cent year-over-year and by $201 million or two per cent from the first quarter.Credit card loans increased by $284 million or eight per centfrom a year ago, but declined by $151 million or four per centfrom the first quarter. Loans and acceptances to commercialenterprises, including small businesses, were $474 million ortwo per cent higher than a year ago and up $67 million from thefirst quarter. Loan growth statistics were affected by branchsales, net of acquisitions.

In the United States, consumer, mortgage and business loansgrew by 17 per cent from a year ago and by five per cent from thefirst quarter of 2001. In addition, the Hispanic Banking initiativecontinued with strong momentum. Through an alliance witheScout.comSM, a premier web-based e-commerce and e-businessnetwork for America’s small and mid-sized businesses andbanks, Harris Bank is providing small and mid-sized businesseswith access to the fastest growing business-to-business (B2B)trading marketplace in North America.

In Canada, the Bank recorded a gain of $5 million ($4 millionafter-tax) on the successful completion of the sale of the last 10branches to National Bank of Canada and an Alberta Credit Union.

The Bank of Montreal has applied for regulatory approval ofBMO Life, which will be a wholly owned, federally chartered lifeinsurance company operating across Canada. It is anticipatedthat final approval and licensing will be complete by the end ofthe summer.

The Group has recently undertaken a number of initiatives tostimulate sales growth and profitability. These included: provid-ing more pricing flexibility to front-line staff; launching variousmortgage initiatives that are unique to the market, including there-introduction of an 18-year open term mortgage priced at the5-year fixed rate; the introduction of new term investment prod-ucts, including the RateRiser GIC; providing additional leading-edge technology and enhanced merger and acquisitioncapabilities in the commercial segment; and perhaps mostimportantly, managing the introduction of major programchanges in the second half of the year to relieve sales staff ofchange management distractions and reduce expenses.

Other customer service initiatives included: the introductionof new bank statements that enable customers to consolidatemultiple accounts on a statement; the launch of a Chinese lan-guage public web site to provide information on client productsand services; and a new online banking feature that gives clientsindividual or consolidated views of their bank and investmentaccounts, credit cards, loans and mortgages. BMO mbanx Direct,in partnership with Amex Canada Inc., announced that for thefirst time in Canada, travellers cheques and foreign currency canbe acquired online for delivery to customers.

In Small Business Banking, the Bank announced it now offersa comprehensive dairy farm financial services program inOntario and plans to make the program available across thecountry. A new online business centre now provides local Ottawaarea entrepreneurs with instant access to information on marketopportunities and business support. Technology initiativesincluded the launch of mbanx Direct Manager, a tool that pro-vides assisted registration for telephone and online bankingclients, and the introduction of a new customer-centric, cus-tomer relationship management tool to enhance the Bank’s salesand service processes.


and strategic investment spending. The Private Client Group con-tinued its investment in initiatives, including expansion of theNorth American Investment professional team, the launch ofHarris AdvantEdge Investing and further development of the BMONesbitt Burns Full-Service online trading capability program.

Second Quarter 2001 vs. First Quarter 2001Net income rose by $17 million or 59 per cent from the first quar-ter of 2001.

Revenues were $6 million or two per cent higher, driven byincreased fee-based revenues in full-service investing and slightincreases across other businesses.

Non-interest expenses of $306 million were $20 million or sixper cent better than in the first quarter, due to an increased focuson expense management and the inclusion of certain one-timecosts in the previous quarter.

Year-to-date 2001 vs. Year-to-date 2000Net income for the year-to-date period ended April 30, 2001 was$79 million, a decline of $29 million or 27 per cent from the com-parable period in 2000.

Revenues for the current year-to-date declined by $20 millionor three per cent to $772 million as increased revenues fromacquired businesses were more than offset by revenue declinesassociated with lower client trading volumes.

Non-interest expenses increased by $37 million or six per centto $632 million due to higher spending to support future growthand due to the costs of acquired businesses. Revenue-drivencompensation declined from the prior year-to-date.

Private Client Group

The Private Client Group’s total assets under management andadministration, including term deposits, was $235 billion. TheGroup brings together all of the Bank of Montreal Group ofCompanies’ wealth management businesses, offering clients abroad array of wealth management products and services,including retail investment products, direct and full-serviceinvesting, private banking and institutional asset management.Operating under Private Client Group in Canada and The Harrisbrand in the United States, the Group provides North Americaninvestors with the tools they need to accumulate, protect andgrow their financial assets.

Second Quarter 2001 vs. Second Quarter 2000Net income for the second quarter of 2001 was $48 million, com-pared with $59 million for the second quarter of 2000.

Revenues for the quarter declined by $49 million or 11 per centto $389 million, due to significantly reduced client trading rev-enues, partially offset by the effects of higher revenues fromacquired businesses in the United States. Higher trading com-mission revenues in the second quarter of 2000 were fromunusually strong markets. Full-service investing revenues frommore stable fee-based income increased from the prior year asthe Group focuses on expanding its fee products and services.

Non-interest expenses of $306 million were $21 million or sixper cent lower than in the prior year. The decrease was due tolower revenue-based compensation and expense management,partially offset by incremental expenses from acquired businesses

Private Client Group ($ millions except as noted)


Net interest income (teb) 129 141 270 124 234 Other income 260 242 502 314 558

Total revenue 389 383 772 438 792Provision for credit losses 1 0 1 0 0 Non-interest expense 306 326 632 327 595 Income taxes (teb) and other 34 26 60 52 89

Net Income 48 31 79 59 108

Net economic profit 34 15 49 46 84 Return on equity (%) 26.8 18.2 22.5 44.5 44.4Total risk-weighted assets 4,583 4,679 4,583 4,358 4,358Average common equity 835 794 814 568 509 Average assets 5,392 5,967 5,684 4,114 3,699 Assets under administration 129,202 128,242 129,202 118,540 118,540 Assets under management 70,932 69,289 70,932 68,992 68,992Average net interest margin (%) 9.82 9.37 9.58 12.21 12.70 Expense-to-revenue ratio (%) 78.6 85.2 81.8 74.7 75.1




The fiscal 2001 objectives continue to be to:

■ increase the number of Canadian investment professionals inthe Bank’s branches to 700 to provide more points of contactand convenience for clients;

■ aggressively grow U.S. wealth management business in fast-growing, affluent, technology-friendly urban centres;

■ complete the integration of all acquired U.S. companies underThe Harris brand; and

■ continue to build on Harris Bank’s long-standing expertise in investment management and trust and estate services inorder to develop wealth management business throughoutNorth America.

While the North American economy is expected to grow at a moremoderate pace over the next few years, the demographic trendscontinue to point to a strong and growing demand for wealthmanagement services. The Private Client Group is well posi-tioned to continue to capitalize on this trend by leveraging itsNorth American capabilities, which are built on strong founda-tions in both Canada and the United States. The Group expects toachieve growth in targeted U.S. markets by integrating recentacquisitions and exploring further opportunities. In Canada andthe United States, growth will also be achieved through placingspecialized investment professionals in traditional retail bankinglocations. Providing an integrated approach to meeting clients’needs for wealth accumulation, growth and preservation willcontinue to be a strategic focus throughout the balance of 2001.

There were a number of notable business developments in the quarter.

In the United States, the Group now has the full complement ofwealth management products and services, with the launch ofHarris AdvantEdge Investing. Harris AdvantEdge Investing pro-vides a client-focused approach to full-service investing, offeringa fee-based only relationship.

BMO Nesbitt Burns launched the Portfolio Services Group toprovide Investment Advisors and their clients with guidance andstrategies related to fixed income markets.

Private Client Group’s North American investment profes-sional team, which encompasses all wealth management salesprofessionals within the Group, grew to approximately 2,150individuals during the first half of the year, including approxi-mately 650 Canadian investment professionals located in Bankbranches. The team provides advice and services to help clientsmeet their wealth management needs.

Responding to client demands, BMO InvestorLine launchedexpanded research capabilities by adding research commentarythrough www.briefing.com for both stock and bond securities.Furthermore, BMO InvestorLine’s web site now offers webbroadcasting, which enables clients to view and listen to quar-terly analyst calls and annual general meeting presentations ofNorth American companies.

BMO Term Investments introduced an expanded family ofBMO RateRiser Guaranteed Investment Certificates. These newterm investments offer a competitive rate of interest that is guar-anteed to increase in each year of the investment term.

BMO Mutual Funds’ net sales for the 2001 RRSP season were$480 million, up 180 per cent from last year.

On February 13, 2001, Bank of Montreal signed a co-operationagreement with Fullgoal Fund Management Company Ltd. ofChina to develop China’s potential in the mutual fund industry.The alliance combines the Bank’s mutual fund expertise andmarketing capabilities with Fullgoal’s understanding of theChinese markets and business environment. The agreement isthe first step to selling mutual funds following China’s expectedacceptance into the World Trade Organization and liberalizationof its financial markets.

On May 15, 2001, Bank of Montreal announced that it has agreedto acquire the Guardian Group of Funds Ltd. and its $2 billion inassets under management. The acquisition will increase theGroup’s mutual fund assets under management to approximately$30 billion. This strategic transaction provides an excellent plat-form to continue to grow the Group’s mutual fund business.


Investment Banking Group

The Investment Banking Group combines all of the businessesserving corporate, government and institutional clients underone umbrella. It offers clients complete financial solutionsacross the entire balance sheet, including treasury services, for-eign exchange, trade finance, corporate lending, securitization,public and private debt and equity capital raising. The Groupalso offers leading financial advisory services in mergers andacquisitions, recapitalizations and restructurings, while provid-ing its investing clients with industry-leading research, salesand trading services and superior quality originated products.

Second Quarter 2001 vs. Second Quarter 2000The diversified nature of its suite of businesses allowed theInvestment Banking Group to post record profit for the secondquarter of 2001, exceeding the strong performance of the secondquarter of last year. Net income for the second quarter of 2001was $189 million, an increase of $20 million or 12 per cent fromlast year.

Revenues for the quarter increased $35 million or five per centto $681 million. The increase reflected continued momentum inclient-driven trading activity in Capital Markets, improved per-formance from interest-rate-sensitive businesses and improvedperformance from investment securities. Also contributing torevenue growth were strong performances from corporate lend-ing activities. Revenues from mergers and acquisitions, althoughposting an industry leading performance, and secondary equitytrading were lower this quarter due to declines from the recordvolumes experienced in the second quarter of fiscal 2000.

Strong security gains realized in the current quarter were off-set by an investment write-down related to the Bank’s ownershipinterests in certain collateralized bond obligations (CBOs).These investments were made in the Group’s own CBOs thatsponsored the establishment of its Credit Investment Managementbusiness. This quarter, the Bank adopted the provisions of arecent accounting pronouncement in the U.S., EITF 99-20, whichprovides guidance on income recognition and carrying value of

purchased and retained beneficial interests in securitized financialassets. The early adoption of this pronouncement in the currentquarter resulted in a non-cash pre-tax write-down of $47 million.

Provisions for credit losses increased by $20 million to $60million in the current quarter, primarily due to a slowing of theU.S. economy and an associated increase of non-performingloans to borrowers in various industry sectors.

Non-interest expenses of $314 million were $8 million lowerthan in the second quarter of 2000, primarily reflecting lowerrevenue-driven compensation.

Second Quarter 2001 vs. First Quarter 2001Net income increased $21 million or 12 per cent from the firstquarter of 2001.

Revenues grew by $38 million or six per cent, reflecting con-tinued strong results from interest-rate-sensitive businesses,higher revenue from client-driven trading activities in CapitalMarkets and increased merger and acquisition fee revenue. Areduction in equity market volatility lowered proprietary tradingopportunities in the current quarter.

Non-interest expenses of $314 million were $7 million or twoper cent better due to lower employee costs.

Year-to-date 2001 vs. Year-to-date 2000Net income for the year-to-date period ended April 30, 2001 was$357 million, an increase of $38 million or 12 per cent from thecomparable period in 2000.

Year-to-date revenues increased by $125 million or 10 per centto $1,324 million, primarily driven by improved client-driventrading activity in Capital Markets, higher investment securitygains and increased corporate lending volumes. Partially offset-ting those sources of revenue growth were decreased primaryand secondary equity market activities that declined from lastyear’s record levels.

Year-to-date non-interest expenses increased by $38 millionor six per cent to $635 million. The increase was attributable tohigher revenue-driven compensation and increased employeecosts related to hiring in support of the Group’s sector strategy.

Investment Banking Group ($ millions except as noted)



Total revenue 681 643 1,324 646 1,199 Provision for credit losses 60 41 101 40 76Non-interest expense 314 321 635 322 597Income taxes (teb) and other 118 113 231 115 207

Net Income 189 168 357 169 319

Net economic profit 63 45 108 43 61Return on equity (%) 16.3 14.8 15.5 15.4 14.2 Total risk-weighted assets 67,570 70,436 67,570 83,014 83,014Average common equity 4,450 4,178 4,311 4,080 4,110Average assets 148,060 144,904 146,457 138,578 138,094 Average net interest margin (%) 0.84 0.76 0.80 0.89 0.87 Expense-to-revenue ratio (%) 46.2 49.8 48.0 49.8 49.8



Pooled Investment Notes Capital LLC (PIN Capital), an innova-tive new conduit that will provide the Group’s clients withfinancing access to the medium-term market, in addition to theGroup’s existing commercial paper capability. Credit InvestmentManagement assets under management were US$9.0 billion atthe end of the quarter, up US$700 million from the prior quarter.

BMO Nesbitt Burns ranked first in Canadian equity block trad-ing and maintained a leading share of the underwriting marketin the quarter. The firm participated in 27 North Americanequity issues during the quarter, with an aggregate value of $4.5billion. In addition, the firm provided advisory services on eighttransactions with an aggregate value of $5.5 billion. Transactionsfor the quarter included advising Investors Group on its $4.1 bil-lion acquisition of Mackenzie Financial Corporation. The dealcreated Canada’s largest mutual fund company with combinedassets of $74 billion, over two times that of its closest competitor.BMO Nesbitt Burns’ involvement in the transaction was multi-faceted, including:

■ acting as advisor to Investors Group on the acquisition;

■ completing several derivative transactions for InvestorsGroup to hedge interest rate exposure on the loans; and

■ acting as lead manager on a $600 million bought deal debttransaction, a $550 million term loan that was successfullysyndicated and a $360 million preferred share bought deal.

The Investment Banking group also continued to aggressivelypursue the North American energy and media and telecommuni-cations sectors. The U.S. Media and Telecom group recently waslead arranger for a bank facility for California-based SmithTelevision. In addition, the firm’s Halyard Capital Fund partici-pated in Smith’s preferred stock financing. Both transactionsallowed Smith to purchase the leading television station in theReno, Nevada market and increase its position as a leading pri-vately held television broadcasting company.

The firm exhibited its cross-border energy expertise duringthe quarter by acting as Canadian dealer manager in AnadarkoPetroleum Corporation’s acquisition of Berkley Petroleum, andin Northern Border’s term financing of recent acquisitionsthrough an agented bank facility and co-managed $225 millionsenior notes offering.

The Investment Banking Group is committed to becoming oneof the leading mid-market banks in the U.S. Midwest throughChicago-based Harris Nesbitt. Among other significant transac-tions during the quarter, the integrated corporate and invest-ment banking platform of Harris Nesbitt won the co-agent roleon a senior secured credit facility and the role as placementagent on a private placement for Beauty Alliance. This wasinstrumental in helping Beauty Alliance become one of thelargest professional-only beauty supply products distributors inthe United States.


The Group’s objectives remain to:

■ build on its Canadian leadership position in all business sectors;

■ continue to expand coverage of the highly profitable U.S.Midwest mid-market and related speciality sectors such asagribusiness and asset-based lending;

■ continue to build client relationships in the media andtelecommunications and energy sectors;

■ improve profitability of debt capital markets and treasuryactivities;

■ increase credit investment management assets under manage-ment by US$5 billion to US$13 billion; and

■ realize further significant reduction in risk-weighted assets.

The Group’s outlook for 2001 reflects lower Canadian economicgrowth at 2.1 per cent this year, which is at the low end of theBank of Canada’s expected growth rate of two to three per centfor 2001. The main risk facing the Canadian economy remainsthe uncertainty surrounding the timing and strength of anyrecovery in the U.S., with the Bank of Canada predicting U.S. eco-nomic growth to be in the range of one to two per cent in 2001.Short-term interest rates are expected to remain generally stable, after falling in the first half of the year, with long-termrates increasing moderately. As a result, continued momentum isanticipated in the Capital Markets line of business in 2001.Institutional Equities’ overall performance is expected to belower in 2001 because of the record-breaking levels experiencedin 2000. Economic conditions for the remainder of 2001 are notanticipated to favour Investment Banking’s core underwriting orgeneral advisory activities. Growth is anticipated for the remain-der of 2001 in the energy and media and telecommunication sec-tors, and in capabilities-based businesses, including merchantbanking, securitization and credit investment management.

The Investment Banking Group reduced its risk-weightedassets by $2.9 billion from the first quarter of 2001 and by $15.4billion from the prior year. This reflects a reduction of low-return assets in the corporate loan book, where associated rev-enues do not meet risk-adjusted return expectations, in favour oflending relationships that have strong potential for multi-prod-uct solutions. Additional reductions were achieved in CapitalMarkets and Institutional Equities.

The Canadian Securitization unit re-affirmed its top positionin the Canadian marketplace in asset-backed securities tradingvolumes for the year 2000, as ranked by the IDA, for a sixth con-secutive year. It also led a highly successful and over-subscribed$350 million new issue for Gloucester Trust, MBNA’s credit cardreceivable trust vehicle. The U.S. Securitization unit launched


Emfisys and Corporate Support

Emfisys is the technology and e-business group that providesinformation technology planning, strategy and developmentservices, together with information technology transaction-pro-cessing capabilities, North American cash management solu-tions, Cebra’s e-commerce solutions, and real estate operationsfor the Bank of Montreal Group of Companies and its customers.The group is also responsible for the creation and developmentof new e-businesses, such as wireless, ABM, payments, lendingand exchange businesses.

Corporate Support includes the corporate units that provideexpertise and governance support for the Bank in areas such asstrategic planning, law, finance, economics, internal audit, riskmanagement, corporate communications, human resources andlearning. Corporate Support also includes revenues andexpenses associated with certain securitization activities, thehedging of foreign source revenues, the Bank’s investment inBancomer and the management of certain treasury positions.

Second Quarter 2001 vs. Second Quarter 2000Net income for the second quarter of 2001 was $189 million, anincrease of $123 million from the second quarter of fiscal 2000.Excluding non-recurring provisions to increase the generalallowance, and non-recurring gains from the partial disposal ofthe Bank’s investment in Bancomer in the most recent quarter, netincome was $8 million, a decline of $14 million from the compa-rable quarter in 2000. The decline was attributable to a $19 millionreduction in earnings recognized on the Bank’s investment inBancomer and increased staffing and benefit costs, partially offsetby higher sundry revenues and a decline in corporate tax rates.

Second Quarter 2001 vs. First Quarter 2001Net income was $189 million, compared with $16 million in thefirst quarter of 2001. The comparability of results was affected bynon-recurring items in both periods. The first quarter’s resultsincluded a $25 million income tax charge relating to the effectsof proposed federal tax reductions on the Bank’s future taxassets. Gains on the sale of Bancomer shares were reflected inresults for both the first and most recent quarters. Excludingnon-recurring items, net income was $8 million, unchangedfrom the first quarter.

Year-to-date 2001 vs. Year-to-date 2000Net income for the year-to date period ended April 30, 2001 was$205 million, up $115 million from the comparable period in2000. Excluding non-recurring items, year-to-date net income in2001 declined by $30 million to $16 million. The decline wasattributable to a $51 million reduction in earnings recognized onthe Bank’s investment in Bancomer, higher unallocated net inter-est expense of $20 million and to increased staffing and othercosts, partially offset by higher cash management and othersundry revenues.

Emfisys The Group’s objectives for fiscal 2001 were outlined on page 41of the Bank’s Annual Report for fiscal 2000. There has been nomaterial change to the Group’s pursuit of those objectives.

Emfisys’ objectives remain to:

■ create value for the Bank, customers and shareholders throughrealigning most of the Bank’s e-business to Emfisys – maxi-mizing the value between services and product delivery, andpartnering with all banking groups on planning resource allo-cation and investment;

■ implement commercial practices, which are considered bestin class – providing preferred competitive pricing and supe-rior quality;

■ expand the enterprise-wide retail customer information sys-tem to all service delivery channels to promote high qualitycustomer service;

■ launch an integrated retail platform;

■ deliver web-enabled services to most lines of business for bothcustomer and employee use;

■ implement an enterprise-wide e-procurement system thatlowers processing costs and provides comprehensive informa-tion for greater control and better sourcing opportunities; and

■ accelerate growth in the commercial market through thedesign and delivery of North American Cash Managementproducts and services.

The e-business strategy has two key elements of focus – rein-venting the financial products and services the Bank offers itsown clients and repackaging its ‘e-capabilities’ to other financialinstitutions and companies to reach out to their clients. Thestrategy will build on several fronts to create a full suite of ‘e-enabled’ financial services – among them, wireless, ABM, payments, lending and exchange services.

Emfisys and Corporate Support ($ millions)


Net interest income (teb) (77) (57) (134) (47) (82)Other income 454 162 616 229 367

Total revenue 377 105 482 182 285Provision for credit losses 93 (1) 92 2 7 Non-interest expense 116 91 207 98 186 Income taxes (teb) and other (21) (1) (22) 16 2

Net Income 189 16 205 66 90


Total revenue (teb) 93 68 161 108 211 Provision for credit losses (7) (1) (8) 2 7 Non-interest expense 116 91 207 98 186 Income taxes (teb) and other (24) (30) (54) (14) (28)

Net Income 8 8 16 22 46



Corporate SupportCorporate Support’s objectives for 2001 remain to:

■ continue to develop state-of-the-art risk management processeswith particular focus on improving the quality of risk and con-trol management information for each line of business;

■ continue to broaden the range and reach of the Institute forLearning through a distinctive focus on people leadership andby using technology to provide learning anytime and anywhere;

■ continue to communicate and negotiate with legislators regard-ing the federal government’s initiative on improved structuralflexibility in the Canadian financial services industry;

■ implement a single financial reporting structure;

■ continue to communicate and implement enterprise gover-nance standards and monitor compliance; and

■ implement an enterprise-wide risk and control self-assess-ment process within the lines of business.

Bancomer The Bank sold its remaining 812 million shares in Bancomer dur-ing the second quarter for a non-recurring gain of $284 million($239 million after-tax). On a year-to-date basis, the Bank sold itsentire 1,012 million shares for a non-recurring gain on sale of$321 million ($272 million after-tax). The shares were sold toBanco Bilbao Vizcaya Argentaria (BBVA) pursuant to agreementsreached with BBVA and Bancomer during the first quarter. TheBank had owned approximately 20 per cent of Bancomer’s votingshares and first invested in Bancomer in 1996. Bank of Montrealearned an average annual 17.3 per cent after-tax cash-on-cashreturn over the holding period.

Following a reduction in Bank of Montreal’s ownership inter-est in Bancomer in the third quarter of fiscal 2000, the Bankadopted the cost basis of accounting, replacing the equity basisof accounting for its investment. Earnings recognized on theBank’s investment in Bancomer in the second quarter declinedby $19 million year-over-year and earnings recognized year-to-date declined by $51 million from the comparable period in theprior year.

Business Developments There were a number of notable business developments in the quarter.

In April 2001, Emfisys consolidated Cebra with its E-BusinessDivision. The consolidation was the next logical step in the evo-lution of the Bank’s e-business activities. Leveraging its consid-erable e-business assets, the Bank is focusing on profitabilityand growth by:

■ consolidating enterprise e-business governance and strategywithin the E-Business Division;

■ more aggressively supporting the e-business priorities of itslines of business; and

■ making more effective use of its resources in creating andoperating new ventures within the E-Business Division thatextend beyond its existing client base.

During the quarter, the Bank announced the expansion of wire-less banking and investment services to over 200,000Saskatchewan residents through service carrier, SaskTelMobility. SaskTel customers, comprising about 60 per cent ofSaskatchewan’s population, are now able to bank anywhere, any-time through Veev, the first venture to provide wireless financialservices in North America.

Bank of Montreal online clients continue to grow at the sub-stantial rate of 20,000 per month. A little over a year ago the Bankhad 350,000 online clients. Today, more than 930,000 clients areaccessing banking, brokerage and MasterCard online.

In an agreement with the Canadian Chamber of Commerce,the Bank also announced that more than 170,000 Canadian busi-nesses would be able to take advantage of more than $12 billionin new business each year in government tendering opportuni-ties. Under the agreement, the Chamber will provide MERX,Cebra’s electronic tendering service, to its members.

Bank of Montreal is targeting $31 million in North Americanauto purchases through its venture in dealerAccess, a newInternet Auto Dealer e-commerce portal. The Canadian ‘open-finance’ portal builds on the success of financiaLinx (a joint-venture between CIT and the Bank), and offers auto dealers anopportunity to request funding (either loan or lease rates) fromany of its three partners in one request, usually within minutes.


Harris Bank

The results of Harris Bank are included within the results of eachof Bank of Montreal’s operating groups. Harris Bank legal entityresults are provided below.

Second Quarter 2001 vs. Second Quarter 2000On a US dollar/US GAAP basis, Harris Bank net income was $64million, compared with $87 million in the same quarter a yearearlier when Harris Bank recorded a $30 million non-recurringafter-tax gain ($50 million pre-tax) on sale of its corporate trustbusiness. Excluding non-recurring items, net income increased12 per cent to $64 million. The increase was attributable to con-tinued strong earnings growth across core businesses and a morefavourable interest rate environment that contributed toincreased earnings from treasury and trading activities. Gainson sales of securities were $13 million higher than in the prioryear, while the provision for credit losses was $9 million higher.The higher provision for credit losses was due to a slowdown ofthe U.S. economy and to an associated increase in non-perform-ing assets, which increased by $79 million from a year ago to$120 million. The increase was largely attributable to higher lev-els of non-performing syndicated loans to borrowers in variousindustry sectors.

Harris Bank earnings included in the Bank’s results on aCanadian dollar/Canadian GAAP basis, were $89 million for thesecond quarter of 2001, compared with $125 million a year ago.Excluding non-recurring items, net income on a Canadian basiswas up 10 per cent from a year ago to $89 million. The netincome growth benefited from a strengthening of the averageU.S. dollar exchange rate from $1.46 to $1.55 Canadian.

Year-to-date 2001 vs. Year-to-date 2000On a US dollar/US GAAP basis, Harris Bank net income for theyear-to-date was $159 million, compared with $145 million a yearearlier. Comparability of results is affected by the $30 millionafter-tax gain on the sale of the corporate trust business in theprior year, by the current period’s $36 million after-tax gain onthe sale of Harris Bank’s merchant card business to Bank ofMontreal’s Moneris Solutions joint venture and by a $2 million

after-tax reduction of the gain on sale of the corporate trust busi-ness this year. Because the card business transaction wasbetween related companies, the gain was not included in the con-solidated results of Bank of Montreal. Excluding the foregoinggains and related charges, net income for the year-to-date was$125 million, up $11 million or 10 per cent from the prior year.Earnings grew across Harris’ core businesses: community bank-ing, private banking and mid-market corporate banking. Resultsbenefited from a $22 million increase in gains on sales of securi-ties while provisions for credit losses increased by $17 million.

Harris Bank earnings included in the Bank’s year-to-dateresults were $232 million on a Canadian dollar/Canadian GAAPbasis, compared with $203 million a year earlier. Excluding theforegoing gains and related charges, net income included in theBank’s results on a Canadian basis was $183 million, an increaseof $24 million from the prior year. The growth in earnings bene-fited from strengthening of the average U.S. dollar exchange ratefrom $1.46 to $1.53 Canadian.

Business DevelopmentsHarris Bank’s objectives for fiscal 2001 and the outlook for itsbusinesses and the environments in which they operate wereoutlined on page 40 of Bank of Montreal’s Annual Report for fiscal 2000.

Harris Bank’s objectives are to continue to:

■ sustain double-digit earnings growth;

■ build on Harris Bank’s longstanding expertise in investmentmanagement and personal trust services to develop its wealthmanagement business throughout North America;

■ ramp up retail and small business lending, targeting toincrease retail and small business loans outstanding by morethan US$1 billion per year for the next several years; and

■ develop Harris Nesbitt as the premier mid-market corporateand investment banking organization in the U.S. Midwest.

In addition to double-digit earnings growth for Harris Bank,there were notable business developments across the core busi-nesses. In the United States, the Private Client Group launched

Harris Bank (US$ millions except as noted/US GAAP)



Total revenue 297 341 638 329 617Provision for credit losses 16 13 29 7 12 Non-interest expense 178 174 352 178 367 Income taxes (teb) 35 55 90 53 85

Net income before goodwill net of tax 68 99 167 91 153 Goodwill net of tax 4 4 8 4 8

Net Income 64 95 159 87 145

Cash basis net economic profit 21 54 75 50 70Cash basis return on equity (U.S. basis %) 16.7 26.3 21.3 28.8 23.6 Total risk-weighted assets (period-end) 22,052 22,487 22,052 21,838 21,838 Average common equity 1,775 1,651 1,712 1,464 1,475 Average assets 28,456 28,947 28,706 27,398 27,165 Net interest margin (U.S. basis %) 2.94 2.75 2.84 2.87 2.87 Cash expense-to-revenue ratio (%) 59.9 51.0 55.2 54.0 59.5


Effects of Non-Recurring Items ($ millions except as noted)


Revenues (teb) 2,485 2,193 4,678 2,284 4,407 Non-interest expenses 1,404 1,397 2,801 1,348 2,602Provision for credit losses 217 100 317 100 200 Net income 607 416 1,023 497 971 Return on equity (%) 23.7 15.3 19.4 19.8 19.4Earnings per share – diluted ($) 1.10 0.73 1.83 0.87 1.70 Expense-to-revenue ratio (%) 56.5 63.7 59.9 59.1 59.1

Non-Recurring Items Operating Group Q2-2001 Q1-2001 YTD-2001 Q2-2000 YTD-2000

Increased revenuesGain on sale of Partners First P&C 112Gain on sale of U.S. corporate trust Corp. 74 74 Gains on sales of branches P&C 5 7 12 14 14 Gain on sale of Bancomer Corp. 284 37 321

Total Non-Recurring Revenues 289 44 333 88 200Increased General Provision for Credit Losses Corp. 100 100

Increased/(Decreased) Pre-Tax Income 189 44 233 88 200

Increased Income TaxesIncome taxes on non-recurring items 4 6 10 36 81 Adjustment of future tax asset due to proposed

reductions in federal tax rates Corp. 25 25

4 31 35 36 81

Increased/(Decreased) Net Income 185 13 198 52 119


Revenues (teb) 2,196 2,149 4,345 2,196 4,207 Non-interest expenses 1,404 1,397 2,801 1,348 2,602Provision for credit losses 117 100 217 100 200Net income 422 403 825 445 852 Return on equity (%) 16.2 14.8 15.5 17.6 16.9 Earnings per share – diluted ($) 0.76 0.70 1.46 0.78 1.48 Expense-to-revenue ratio (%) 63.9 65.0 64.5 61.4 61.9

Harris AdvantEdge Investing full-service brokerage, whichoffers full-service investing on a fee-based relationship. In retailand business banking, Harris had strong performance with con-sumer, mortgage and business loans increasing 17 per cent fromthe prior year. The Hispanic Banking initiative continued withstrong momentum. With 21 fully bilingual branches, a Spanishlanguage web site, a fully bilingual call centre and approximately50,000 customers, deposits continued to grow at double-digitrates. Through an alliance with eScout.comSM, a premier web-based e-commerce and e-business network for America’s smalland mid-sized businesses and banks, Harris Bank is providingsmall and mid-sized businesses with access to the fastest grow-ing business-to-business (B2B) trading marketplace in NorthAmerica. Harris Nesbitt continued to capitalize on cross-sellingopportunities from the integration of mid-market corporate andinvestment banking.

During the quarter Harris Bank announced an agreement toacquire First National Bank of Joliet. The merger expands theHarris community bank network to 149 locations and 245 ABMsacross Chicagoland, and gives Harris Bank the opportunity toprovide a full array of services to thousands of new individualand business customers – in what has become the fastest grow-ing market in Chicagoland.

Harris Bank believes that the U.S. economy may continue toslow in 2001, which may impact the demand for financial serv-ices in general and result in some decline in asset quality fromthe very high level experienced in recent years. Harris Bank isone of a handful of banks well positioned to take advantage of theopportunity represented by the large, fragmented and under-served market in the Chicago area. With this opportunity, itsexpanding distribution of wealth management services in afflu-ent U.S. markets, and comprehensive corporate/investmentbanking service offerings to mid-market companies in theMidwest and beyond, Harris Bank is well positioned for prof-itable growth.


Net interest margins declined by one basis point to 1.80 percent. The decline in net interest income was attributable to threefewer days in the current quarter, which reduced net interestincome by approximately $37 million from the first quarter.Retail banking spreads were substantially unchanged, while theyimproved in the Capital Markets line of business.

Other income was $1,393 million, up $317 million from thefirst quarter. Other fees and commissions in the first quarterincluded $7 million of non-recurring gains on sales of branchesand a non-recurring $37 million gain on the partial sale of theinvestment in Bancomer. Excluding non-recurring items in bothperiods, other income was up $72 million or seven per cent to$1,104 million. The increase was attributable to stronger capitalmarket fees, including client-driven trading commissions andhigher merger and acquisition fees. Lending fees were higherand securitization revenues increased due to gains in the mostrecent quarter. Excluding non-recurring items, other fees andcommissions rose $15 million. Gains on sales of investments areincluded in other fees and commissions and, excluding non-recurring items, declined $11 million from the first quarter.

Year-to-date 2001 vs. Year-to-date 2000Year-to-date revenues of $4,678 million increased $271 millionfrom the comparable period in the prior year. Excluding non-recurring items in both periods, revenues were $4,345 million,an increase of $138 million or three per cent from the prior year.

Net interest income for the year-to-date was $2,209 million, anincrease of $44 million or two per cent from the comparableperiod in 2000. The increase was attributable to higher volumesacross each of the business groups, partially offset by a $51 millionreduction in earnings recognized on the investment in Bancomer.

Net interest margins declined by seven basis points to 1.81 percent, as modest increases in retail banking were offset byreduced spreads in other operating groups and by the lowerearnings recognized on the investment in Bancomer.

Other income rose $227 million to $2,469 million. Excludingnon-recurring items in both periods, other income was $94 mil-lion or five per cent higher than for the comparable year-to-dateperiod in fiscal 2000. The increase was attributable to highertrading revenues from client-driven trading activity in theCapital Markets line of business and higher lending fees andsecuritization revenues. Other fees and commissions, excludingnon-recurring items, rose $28 million, largely related to gains onsales of securities, which rose $21 million.

Capital markets fees declined $67 million due to lower client-driven trading commissions which were unusually strong in theprior year. Investment management and custodial fees declined$40 million due to the sales of corporate trust businesses in fis-cal 2000.

Non-Interest Expenses

Second Quarter 2001 vs. Second Quarter 2000Non-interest expenses were $1,404 million, an increase of $56million or four per cent from the second quarter of 2000.

The expense-to-revenue ratio was 56.5 per cent, comparedwith 59.1 per cent in the second quarter of 2000. The expense-to-revenue ratio, excluding non-recurring items, increased 2.5 per-centage points to 63.9 per cent.

Expense growth was largely due to increased strategic initiativespending and increased front-line staffing costs in the Personaland Commercial Client Group. Benefits costs increased, partlydue to changes in accounting for pensions and future benefitscosts that were adopted in the first quarter of this year. The net

Financial Statement Review

Revenues

Second Quarter 2001 vs. Second Quarter 2000Total revenues for the second quarter of 2001 were $2,485 mil-lion, an increase of $201 million from the second quarter of 2000.Excluding non-recurring items, revenues were unchanged at$2,196 million.

Net interest income at $1,092 million increased $8 millionfrom a year earlier. Net interest income is comprised of earningson assets, including interest and dividend income and the Bank’sshare of income from investments accounted for using the equitymethod of accounting, less interest paid on liabilities. Net inter-est margin is the ratio of net interest income to average assets.

The increase in net interest income was largely due to growthin retail and commercial banking volumes, partially offset by a$19 million reduction in earnings recognized on the investmentin Bancomer. Average assets rose by six per cent to $248 billionand average loans rose by five per cent to $144 billion. Branchessold net of branches acquired resulted in the disposal of approx-imately $440 million of assets.

Net interest margins declined by nine basis points to 1.80 percent, as modest increases in retail banking were offset byreduced spreads in other operating groups and by lower earningsrecognized on the investment in Bancomer.

Other income was $1,393 million, an increase of $193 millionfrom the prior year. Other income is comprised of all incomeother than net interest income.

Other income for the most recent quarter included non-recur-ring revenues of $289 million, consisting of a $284 million gainon sale of Bancomer and a $5 million gain on sales of branches,reflected in other fees and commissions in the consolidatedfinancial statements. Other fees and commissions for the secondquarter of fiscal 2000 benefited from non-recurring gains of $74million on the sale of the U.S. corporate trust business and $14million on the sales of branches.

Excluding non-recurring items, other income decreased $8million or one per cent to $1,104 million. The decrease waslargely reflective of a $71 million decline in capital market feesrelated to reduced securities trading activities and reducedmerger and acquisition fees. Capital markets were unusuallystrong in the second quarter of last year. Investment manage-ment and custodial fees declined by $18 million, largely due tothe sale of the U.S. corporate trust business.

Lending fees increased by $24 million on higher volumes,while securitization revenues increased by $16 million, largelyrelated to gains on securitizing assets in the most recent quarter.Other fees and commissions increased by $218 million to $421million, but excluding non-recurring items, increased by $17million to $132 million. Gains on sales of investment securities,which are included in other fees and commissions, rose mod-estly year-over-year but, as discussed in the Investment BankingGroup analysis, included substantial gains on sale that werereduced by write-downs on investments in collateral bond obli-gations on the current quarter’s application of a new U.S.accounting pronouncement.

Second Quarter 2001 vs. First Quarter 2001Revenues of $2,485 million were up $292 million from the firstquarter of 2001. Excluding non-recurring items, revenuesincreased $47 million or two per cent.

Net interest income at $1,092 million decreased $25 million ortwo per cent from the first quarter. Average assets rose by oneper cent to $248 billion and average loans rose by five per cent to$144 billion. Much of the loan growth was in low-margin securi-ties purchased under resale agreements.


effect on expenses from business dispositions and acquisitionswas slightly favourable. Revenue-based compensation costsdeclined year-over-year.

Because of changes in the shareholder agreements governingthe Bank’s rights in respect of Symcor, its items processing affil-iate, the accounting related to Symcor changed in the first quar-ter of 2001. The Bank had accounted for its share of the results ofSymcor using the proportionate consolidation method, wherebythe Bank’s proportionate share of salaries and other Symcor costswere reflected in the Bank’s results as though those costs wereincurred directly by the Bank. These costs are now invoiced tothe Bank and reflected in other expenses.

Second Quarter 2001 vs. First Quarter 2001Non-interest expenses were up $7 million or 0.4 per cent fromthe first quarter of 2001.

Expense growth was largely due to increased strategic initia-tive spending and higher revenue-driven compensation costs.The effects of fewer days in the second quarter lowered the quar-ter-over-quarter growth.

The expense-to-revenue ratio was 56.5 per cent, comparedwith 63.7 per cent in the first quarter. The expense-to-revenueratio, excluding non-recurring items, improved 1.1 percentagepoints to 63.9 per cent.

Year-to-date 2001 vs. Year-to-date 2000Non-interest expenses were $2,801 million, an increase of $199million or eight per cent from the comparable year-to-dateperiod in 2000.

The expense-to-revenue ratio was 59.9 per cent, comparedwith 59.1 per cent for the prior year. Excluding non-recurringitems, the expense-to-revenue ratio was 64.5 per cent, up from61.9 per cent a year earlier.

Expense growth was largely due to increased strategic initia-tive spending and increased front-line staffing costs in thePersonal and Commercial Client Group. Benefits costsincreased, partly due to the changes in accounting for pensionsand future benefits costs. Revenue-based compensation costsincreased year-over-year. Business dispositions and acquisitionshad a negligible net effect on expenses.

In the first quarter of fiscal 2001 the Bank adopted a new stan-dard for accounting for pensions and other benefits. The stan-dard was adopted on a retroactive basis by charging $250 million(net of $171 million of income tax) to retained earnings at thebeginning of fiscal 2001. The new standard results in theaccounting recognition of increased quarterly benefits expensesof approximately $17 million ($10 million after-tax) in 2001.

Income Taxes

The provision for income taxes that is reflected in the consoli-dated statement of income is based upon transactions recordedin income, regardless of when such transactions are subject toincome taxes. Non-recurring items and income taxes thereon areoutlined on page 15. In the first quarter of fiscal 2001, a non-recurring $25 million charge for income taxes was reflected inresults. The charge related to the effect of proposed federal taxrate reductions on the Bank’s future tax assets.

Excluding non-recurring items, the effective tax rate was 33.8per cent in the second quarter, an improvement from 35.1 per centin the first quarter of fiscal 2001 and from 38.2 per cent in thesecond quarter of last year. The effective rate for the year-to-date

period ended April 30, 2001 was 34.5 per cent, an improvementfrom 37.0 per cent for the comparable period last year. The year-over-year improvements related to lower statutory tax rates andto a shift in the proportion of income taxed in lower tax ratejurisdictions. The improvement from the first quarter related to an increase in the proportion of income taxed in lower tax rate jurisdictions.

Balance Sheet

Total assets increased $1.8 billion from October 31, 2000 to$235.2 billion at April 30, 2001.

SecuritiesInvestment securities declined by $2.4 billion from October 31,2000 to $22.1 billion. The decline related to reduced holdings offederal government securities in the United States and Canada,and to the sale of the investment in Bancomer.

The market value of the Bank’s investment portfolio exceededits book value by $170 million at April 30, 2001, an improvementof $262 million from last year-end, after adjusting for the unreal-ized gain on Bancomer. The improvement in the excess of marketvalues relative to book values was attributable to an increase inthe market value of fixed income securities, particularly in theUnited States, largely due to lower interest rates. This favourableeffect was partially offset by a decline in the market value of theBank’s holdings in 724 Solutions Inc., which fell in the weakerenvironment for technology stocks.

Trading securities declined by $1.1 billion from October 31,2000 to $20.8 billion. The decline was attributable to reducedholdings of federal government securities in the United Statesand Canada.

Loans Net loans and acceptances increased $3.4 billion from October31, 2000 to $145.9 billion. Table 1 on page 21 provides a compar-ative summary of net loans by product and industry. Securitiespurchased under resale agreements increased by $3.7 billion, butbalances remained within normal levels. The use of these low-risk, low-margin products is driven by market preferences andoverall liquidity management in the financial markets. Loans toCommercial, Corporate and Institutional borrowers declinedslightly overall, reflecting an increase of approximately $2.5 bil-lion in loans to financial institutions, offset principally by reduc-tions in loans to the manufacturing sector, which hasexperienced reduced demand in the first half of 2001.

Loan balances were reduced by $440 million due to branchsales, net of acquisitions, during the first six months of the year.Loan balances were also reduced by securitizations of leasereceivables and residential mortgages, totalling approximately$690 million.

Table 2 on page 21 provides a comparative summary of loansby geographic location and diversification ratios by product andgeographic location. The portfolio remains well-diversified withminimal change in the geographic breakdown from last year-end, as loan growth was concentrated in the relatively strongerOntario region.

DepositsDeposits declined by $2.3 billion to $154.4 billion at April 30,2001. Deposits from individuals, which tend to be more stable,rose by $1.6 billion to 42.4 per cent of deposits.


Interest Rate Sensitivity (a) As at April 30, 2001 As at October 31, 2000

Structural and money market portfolios Structural and money market portfolios

100 basis point 100 basis point 100 basis point 100 basis point

(After-tax Canadian equivalent $ millions) increase decrease increase decrease

Earnings at risk over the next 12 months 45.3 (53.3) 40.1 (20.5)Market value exposure 208.0 (130.7) 215.8 (250.6)

(a) Risk measures include the impact of minimum rates on deposits and embedded options but exclude actions that the Bank would take to reduce risk or the actions that clients might take inresponse to changing rates.

Total Trading and Underwriting VaR Summary for the period from November 1, 2000 to April 30, 2001

(Pre-tax Canadian equivalent As at Average for High for Low for Average for the High for the Low for the

$ millions)* April 30, 2001 the quarter the quarter the quarter year-to-date year-to-date year-to-date

Interest rate 19.0 14.2 20.0 11.5 14.3 20.0 11.5Foreign exchange 5.1 5.1 6.7 3.4 5.8 10.4 3.6Commodity 1.0 1.3 1.7 0.6 1.5 1.9 0.6Equity 3.2 6.0 15.2 2.7 5.4 15.2 2.6Correlation effect (5.3) (4.7) (6.4) (3.3) (4.5) (6.4) (2.2)

Total 23.0 21.9 n/a n/a 22.5 n/a n/a

* One-day measure using 99% confidence level.

Market Risk Sensitivity (a,b) – Adverse Changes in Market Rates/Prices April 30, 2001 October 31, 2000

(After-tax Canadian equivalent $ millions) Cdn$ US$ Cdn$ US$

Earnings volatility over the next 12 months 30.6 39.2 51.2 53.8Market value exposure 183.5 77.3 209.5 72.5

(a) Earnings volatility and market value exposure include Cdn$3.8 and US$5.6 as at April 30, 2001 and Cdn$5.4 and US$6.6 as at October 31, 2000 related to trading portfolios.

(b) Risk measures are based upon statistical analysis of market exposures using a 99% confidence level.

Enterprise-Wide Risk Management

The Bank’s enterprise-wide objectives, strategy, approach andgovernance related to risk management were set out in pages 19to 27 of the 2000 Annual Report. There have been no materialchanges in risk management practices from those described inthe Annual Report, other than the formation of an OperationalRisk Committee, which brings focused senior managementattention to all forms of operational risk. The Operational RiskCommittee is a sub-committee of the Risk ManagementCommittee, which remains as described in the Annual Report.

Credit Risk

Prospects for improvement in operating conditions for many ofthe Bank’s borrowing clients have been adversely affected by theslowdown in economic conditions in the United States. As aresult, the Bank has increased the provision for credit losses to$450 million for the year, an increase of $50 million. The generalallowance for credit losses was also prudently increased by $100million in the second quarter, through a non-recurring charge tonet income. At $1,180 million, the general allowance represents89 basis points of risk-weighted assets. These actions are consis-tent with the Bank’s methodologies for planning loan loss provi-sions, as set out on pages 21 and 22 of the Annual Report. Theexpected loss remains within the previous forecast range,whereas the loss volatility has increased as a result of generallyhigher volatility in credit market conditions. The latter is partic-ularly noticeable in several instances of former highly-ratedcompanies rapidly falling to non-investment grade or even intobankruptcy, sometimes as a result of fraud.

Tables 1 to 5 attached at the end of this MD&A provide relevantsummary detail in respect of aspects of the company’s loan portfo-lio, impaired loans and provisions and allowances for credit losses.

Gross impaired loans at April 30, 2001 were $1,653 million,down from $1,702 million at the end of the first quarter. In theearly part of the quarter, the Bank classified its loans to twoCalifornian utilities as impaired, because of the lack of progresstoward a political resolution of the energy crisis affecting thecompanies’ operations. Subsequently, one of the companies filedfor bankruptcy protection. Also, during the second quarter, theBank sold certain impaired loans in the secondary market, as thecurrently realizable values were considered advantageous incomparison to the potentially achievable values of these assetsunder restructuring or ‘continued-hold’ alternatives. Such dis-posal decisions are made on a case-by-case basis. Grossimpaired loans and acceptances represented 1.12 per cent oftotal loans and acceptances, down from 1.13 per cent at January31, 2001. The Bank’s level of impaired loans remained wellwithin the historical range over a full economic cycle. Loanscontinue to be well provisioned, with an allowance for creditlosses – both specific and general – totalling $1,656 million at theend of the second quarter. The Bank’s allowances represented100 per cent of gross impaired loans, versus 124 per cent at theend of the second quarter of fiscal 2000 and 91 per cent at the endof the first quarter of 2001.

Market Risk

The Bank’s market risk of loss associated with changes in inter-est rates, foreign exchange rates, and equity and commodityprices, as at April 30, 2001, was within the Bank’s CorporateStandard for Market Value Exposure.

The methodologies used for Market Risk measurement remainas set out in the Annual Report, except that the Rising InterestRate Risk scenario has been replaced by the 100 Basis PointDecrease scenario, as displayed below.


The Bank’s capital management objectives, strategy andapproach to management were outlined on page 28 of the 2000Annual Report.

At April 30, 2001, the Bank’s Tier 1 Capital Ratio was 8.94 percent, compared with 8.06 per cent at the end of the second quar-ter of 2000 and 8.87 per cent at the end of the first quarter of2001. At April 30, 2001, the Bank’s Total Capital Ratio was 12.74per cent, up from 11.13 per cent a year ago and from 12.12 per

On January 23, 2001 the Bank’s Board of Directors declared a100 per cent stock dividend, effectively achieving a two-for-onesplit of the Bank’s common shares and making the shares moreaccessible for retail investors. The shares began trading on apost-stock dividend basis on March 1, 2001 on the Toronto StockExchange. The Bank also announced a program to repurchase upto 30 million common shares or approximately 5.7 per cent of thethen-issued and outstanding common shares through a normal-course issuer bid expiring December 31, 2001. In the secondquarter of 2001, the Bank repurchased 21.2 million shares at acost of $824 million.

In January 2001 the Basel Committee on Banking Supervisionintroduced a new draft capital accord for consultation. This pro-posed accord is expected to replace the original 1988 accord in2004 and is intended to improve safety and soundness in thefinancial system by providing more flexibility to financial insti-

The Bank’s cash and securities-to-total assets ratio and thelevel of deposits by individuals as at the end of the second quar-ter of 2001 are within acceptable ranges and represent a strongliquidity position.

Operational Risk

There have been no significant changes in risk measurementmethodologies for management of Operational Risk from thosedescribed in the Annual Report. There were no incidences ofOperational Risk during the first half of fiscal 2001 that causedmaterial losses. The Bank is continuing to enhance its measure-ment approaches in this area, through the use of industry data-bases and participation in industry surveys.

cent at the end of the previous quarter. Risk-weighted assetswere $132.4 billion, down from $140.5 billion at April 30, 2000and from $133.4 billion last quarter.

Capital ratios remain above the levels Canadian regulatorsconsider necessary for a bank to be considered well-capitalized,and have been above the average levels of Canada’s major banks.Capital levels at the end of the second quarter were higher thanat the end of the prior year. The components of the improvementare outlined below.

tutions in determining capital levels related to risk sensitivity.The key elements of the framework provide a spectrum ofapproaches, from simple to advanced methodologies, for themeasurement of both credit and operational risk. It provides aflexible structure in which each bank, subject to supervisoryreview, will adopt approaches that best fit its level of sophistica-tion and risk profile. The accord seeks to reward stronger andmore accurate risk measurement by reduced regulatory capitalthan would apply under less rigorous approaches.

Current initiatives within the financial services industryinclude providing consolidated comments on the draft accord,working with national regulators on domestic issues and withnational supervisors on issues associated with implementationof this framework over the next three years. The Bank is currentlyconducting internal reviews of systems and processes to estab-lish the requirements for implementation of the accord by 2004.

Source and Utilization of Capital in 2001Total Tier 1 Risk-Weighted Tier 1

($ millions except as noted) Capital Assets Capital Ratio

October 31, 2000 11,864 October 31, 2000 134,360 8.83%Net Income 1,023 Increases (decreases)Dividends (335) Personal and Commercial Client Group 214Goodwill (30) Private Client Group (272)Issues of capital 96 Investment Banking Group (4,927)Repurchase of shares (824) Corporate Support 3,029 Translation and other 42

April 30, 2001 11,836 April 30, 2001 132,404 8.94%

Capital Management

Liquidity Risk

Liquid assets, consisting of cash resources and securities,declined $9.7 billion from the end of the second quarter of 2000,to $62.0 billion. The decline was attributable to reduced tradingpositions. The Bank’s ratio of cash and securities-to-total assetsas at April 30, 2001 was 26.4 per cent, down from 30.1 per cent asat April 30, 2000, but up from 26.3 per cent as at January 31, 2001.

To maintain strong liquidity, the Bank continues to ensure thatit has well diversified funding sources, with deposits broadlydiversified by customer, type, currency and geography. The Bank’slarge stable base of deposits by individuals provides a strong andsecure source of funding in both the Canadian and U.S. dollarmarkets. These deposits, along with the Bank’s strong capital base,reduce reliance on other more volatile sources of funds.


Caution Regarding Forward-looking Statements

From time to time we make written and verbal forward-looking statements. These may be included in this quarterly report, in filings with

Canadian regulators or the U.S. Securities and Exchange Commission, in reports to shareholders and in other communications. These forward-

looking statements include, but are not limited to, comments with respect to our objectives, targets, strategies, financial condition, the results of

our operations and our businesses, our outlook for our businesses and for the Canadian and U.S. economies and our risk management discussion.

However, by their nature these forward-looking statements involve numerous assumptions, inherent risks and uncertainties, both general

and specific, and the risk that predictions and other forward-looking statements will not be achieved. We caution readers of this report not to

place undue reliance on these forward-looking statements as a number of important factors could cause actual future results to differ materi-

ally from the plans, objectives, expectations, estimates and intentions expressed in such forward-looking statements.

Forward-looking statements may be influenced by the following factors: fluctuations in interest rates and currency values; regulatory devel-

opments; statutory changes; the effects of competition in the geographic and business areas in which we operate, including continued pric-

ing pressure on loan and deposit products; and changes in political and economic conditions including, among other things, inflation and

technological changes. We caution that the foregoing list of important factors is not exhaustive and that when relying on forward-looking

statements to make decisions with respect to Bank of Montreal, investors and others should carefully consider the foregoing factors as well

as other uncertainties and events.

The Bank’s credit rating, as measured by a composite of Moody’sand Standard & Poor’s senior debt ratings, remained unchangedat AA- during the first six months of 2001.

Tables 1 to 5 are an integral part of this MD&A.

Users of the interim MD&A are assumed to have read or haveaccess to the annual MD&A, which is available in the Bank’s 2000Annual Report at www.bmo.com. Readers are encouraged to

refer to the annual MD&A for a more comprehensive under-standing of the Bank’s operations.

Credit Rating Supplementary Tables

Annual MD&A


Net Loans and Acceptances – Segmented InformationAs at

($ millions) April 30, 2001 October 31, 2000 April 30, 2000

Net Loans and Acceptances by Product and Industry (2)

IndividualsResidential mortgages 36,383 36,553 36,288Cards 1,459 1,407 1,275Personal loans 18,244 18,033 17,581

Total Loans to Individuals 56,086 55,993 55,144

Diversified Commercial, Corporate and InstitutionalFinancial institutions 16,331 13,847 14,316Commercial mortgages 6,774 6,612 6,464Construction (non-real estate) 1,269 1,556 1,479Real estate 3,438 3,895 3,892Manufacturing 13,297 14,635 13,928Mining/Energy 3,073 3,847 4,114Service industries 6,402 7,107 7,225Retail trade 3,133 3,173 3,567Wholesale trade 3,137 3,434 3,557 Agriculture 2,465 2,608 2,493Transportation/Utilities 4,431 4,532 3,863Communications 3,487 3,262 2,423Other 3,360 2,496 1,982

Total Diversified Commercial, Net of Specific Allowances 70,597 71,004 69,303

Securities purchased under resale agreements 20,054 16,308 21,228Total Commercial, Corporate and Institutional 90,651 87,312 90,531

General allowance (1,180) (1,080) (970)Designated lesser developed countries (1) 316 222 247

Total Loans and Acceptances 145,873 142,447 144,952

Net Loans and Acceptances – Segmented Information (cont’d)As at

($ millions except as noted) April 30, 2001 October 31, 2000 April 30, 2000

Net Loans and Acceptances by Location (1), (3) and (4)

Canada 95,329 90,698 90,114United States 48,698 49,307 50,653 Other Countries Designated LDC 316 222 247

Other 2,710 3,300 4,908 General allowance Canada (930) (930) (820)

United States (250) (150) (150)

Total Net Loans and Acceptances 145,873 142,447 144,952

Net Loans and Acceptances in Canada by Province (3)

Atlantic Provinces 4,508 4,460 4,494Quebec 13,130 14,602 13,499Ontario 51,518 43,794 43,879Prairie Provinces 13,518 14,722 14,674British Columbia and Territories 12,655 13,120 13,568General allowance (930) (930) (820)

Total Net Loans and Acceptances in Canada 94,399 89,768 89,294

Diversification Ratios (2)

(As a % of Total Net Loans & Acceptances)

Individual 38.1 39.0 37.8Commercial, Corporate and Institutional 61.7 60.8 62.0Designated LDC 0.2 0.2 0.2

Canada 64.7 63.0 61.6United States 33.2 34.5 34.8Other Countries Designated LDC 0.2 0.2 0.2

Other 1.9 2.3 3.4

Table 1

Table 2

Notes:

(1) Remaining designated LDC securities received as part of prior year debt restructuring weredisposed of in Q4, 2000.

(2) Includes impact of asset securitizations.

Notes:

(1) Geographic location is based on the ultimate risk of the underlying asset.(2) Total net loans and acceptances excluding general allowance.

(3) Includes impact of asset securitization.

(4) Remaining designated LDC securities received as part of prior year debt restructuring weredisposed of in Q4, 2000.

Supplementary Tables


Impaired Loans and Acceptances by Accounting Classification

(As at balances, $ millions) Q2-2001 Q1-2001 YTD-2001 Q2-2000 YTD-2000

Total Impaired Loans and Acceptances

Gross impaired loans and acceptances (GIL), beginning of period 1,702 1,501 1,501 1,164 1,092 Additions to impaired loans and acceptances 481 498 979 205 414Reductions in impaired loans and acceptances (1) (397) (151) (548) (131) (219)Net new additions (reductions) 84 347 431 74 195Write-offs (133) (146) (279) (49) (98)

Gross Impaired Loans and Acceptances, End of Period 1,653 1,702 1,653 1,189 1,189

Allowances for credit losses (ACL) (2), beginning of period 1,554 1,597 1,597 1,404 1,348Increases – specific allowance 135 103 238 117 222Increases – general allowance 100 0 100 0 0Transfer of allowance 0 0 0 0 0Write – offs (133) (146) (279) (49) (98)

Allowances for Credit Losses (2) and (3), End of Period 1,656 1,554 1,656 1,472 1,472

Net impaired loans and acceptances (NIL), beginning of period 148 (96) (96) (240) (256)Change in gross impaired loans (49) 201 152 25 97Change in allowance for credit losses (102) 43 (59) (68) (124)

Net Impaired Loans and Acceptances (NIL), End of Period (3) 148 (3) (283) (283)

Net Impaired Loans and Acceptances (NIL) – Segmented Information As at

($ millions except as noted) April 30, 2001 October 31, 2000 April 30, 2000

Net Impaired Loans and Acceptances by Location (1)

Canada 539 521 441United States 614 432 177Other Countries Designated LDC 0 0 0

Other 24 31 69General allowance Canada (930) (930) (820)

United States (250) (150) (150)

Total Net Impaired Loans and Acceptances (3) (96) (283)

Condition Ratios (%)

Gross Impaired Loans as a % of Equity and Allowance for Credit Losses 11.52 10.51 8.71NIL as a % of Net Loans and Acceptances 0.00 (0.07) (0.19)NIL as a % of segment Net Loans and Acceptances

Individuals 0.37 0.33 0.31Diversified Commercial 1.38 1.12 0.74Canada (0.41) (0.46) (0.42)United States 0.75 0.57 0.05

Other Countries Designated LDC 0.00 0.00 0.00Other 0.89 0.94 1.41

(1) Geographic location is based on the ultimate risk of the underlying asset.

Retail Loans As at

90 Days & Over Delinquency Ratio April 30, 2001 October 31, 2000 April 30, 2000

Personal Loans 0.40 0.36 0.32Credit Card 0.65 0.66 0.61 Mortgages (excluding household) 0.37 0.35 0.34Total Retail (excluding household) 0.39 0.37 0.34Household Portfolio 1.95 2.30 2.06Total Retail 0.48 0.47 0.45

Table 3

Table 4

Notes:

(1) Loans and acceptances returning to performing status, sales and repayments.(2) Excludes ACL for off-balance sheet exposure and LDC reservations in excess of

impaired loans.

(3) Includes general allowance for credit losses.

Supplementary Tables


Net Impaired Loans and Acceptances (Nil) – Segmented Information (cont'd)As at

($ millions) April 30, 2001 October 31, 2000 April 30, 2000

IndividualsResidential mortgages 142 138 128Consumer instalments and other personal loans 63 48 44

Total Individuals (1) 205 186 172

Commercial, Corporate and InstitutionalFinancial institutions 72 108 11Commercial mortgages 34 19 24Construction (non-real estate) 49 6 5Commercial Real Estate 23 27 45Manufacturing 175 143 145Mining/Energy 58 97 143Service industries 111 109 122Retail trade 20 89 19Wholesale trade 43 11 43Agriculture 14 17 18Transportation/Utilities 340 138 61Communications 31 13 23Other (2) 2 21 (144)

Total Diversified Commercial 972 798 515

Securities purchased under resale agreements 0 0 0

Total Commercial, Corporate and Institutional 972 798 515

General allowance (1,180) (1,080) (970)Designated lesser developed countries 0 0 0

Total Net Impaired Loans and Acceptances (3) (96) (283)

Table 5

Notes:

(1) Includes loans to individuals for business purposes. (2) Includes allowance for a United States subsidiary in excess of impaired loans.


Consolidated Financial Statements

Consolidated Statement of Income


(Unaudited) (Canadian $ in millions except per share amounts) April 30, 2001 January 31, 2001 April 30, 2000 April 30, 2001 April 30, 2000

Interest, Dividend and Fee IncomeLoans $ 2,563 $ 2,694 $ 2,654 $ 5,257 $ 5,103Securities 615 726 673 1,341 1,374Deposits with banks 229 269 263 498 494

3,407 3,689 3,590 7,096 6,971

Interest ExpenseDeposits 1,630 1,936 1,905 3,566 3,659Subordinated debt 87 90 83 177 169Other liabilities 630 580 553 1,210 1,044

2,347 2,606 2,541 4,953 4,872

Net Interest Income 1,060 1,083 1,049 2,143 2,099Provision for credit losses 217 100 100 317 200

Net Interest Income After Provision for Credit Losses 843 983 949 1,826 1,899

Other IncomeDeposit and payment service charges 164 161 159 325 323Lending fees 96 83 72 179 152Capital market fees 270 228 341 498 565Card services 44 51 47 95 100Investment management and custodial fees 82 82 100 164 204Mutual fund revenues 61 59 57 120 109Trading revenues 158 166 140 324 217Securitization revenues 97 85 81 182 151Other fees and commissions 421 161 203 582 421

1,393 1,076 1,200 2,469 2,242

Net Interest and Other Income 2,236 2,059 2,149 4,295 4,141

Non-Interest ExpenseSalaries and employee benefits 827 803 805 1,630 1,539Premises and equipment 274 272 272 546 529Communications 49 53 64 102 129Other expenses 244 259 201 503 395

1,394 1,387 1,342 2,781 2,592 Amortization of intangible assets 10 10 6 20 10

1,404 1,397 1,348 2,801 2,602Restructuring charge – – – – –

Total non-interest expense 1,404 1,397 1,348 2,801 2,602

Income Before Provision for Income Taxes, Non-Controlling Interest in Subsidiaries and Goodwill 832 662 801 1,494 1,539

Income taxes 201 226 287 427 535

631 436 514 1,067 1,004Non-controlling interest 10 7 5 17 9

Net Income Before Goodwill 621 429 509 1,050 995Amortization of goodwill, net of applicable income tax 14 13 12 27 24

Net Income $ 607 $ 416 $ 497 $ 1,023 $ 971

Dividends Declared • Preferred shares $ 20 $ 26 $ 26 $ 46 $ 51• Common shares $ 142 $ 147 $ 134 $ 289 $ 268

Average Number of Common Shares Outstanding 519,403,391 524,620,572 535,640,018 522,055,218 535,062,449Average Assets $ 248,066 $ 245,283 $ 233,354 $ 246,650 $ 231,757

Net Income Per Common Share Before GoodwillBasic $ 1.16 $ 0.77 $ 0.90 $ 1.93 $ 1.76Diluted (note 2) 1.13 0.75 0.89 1.88 1.74Net Income Per Common ShareBasic 1.13 0.74 0.88 1.87 1.72Diluted (note 2) 1.10 0.73 0.87 1.83 1.70

The accompanying notes to consolidated financial statements are an integral part of this statement.


Consolidated Balance Sheet

As at

(Unaudited) (Canadian $ in millions) April 30, 2001 January 31, 2001 October 31, 2000 April 30, 2000

AssetsCash resources $ 19,059 $ 20,508 $ 18,508 $ 23,257 Securities

Investment 22,072 22,237 24,469 25,856Trading 20,846 21,023 21,994 22,542

42,918 43,260 46,463 48,398Loans

Residential mortgages 39,350 39,446 39,485 39,190Consumer instalment and other personal loans 18,255 17,873 18,038 17,589Credit card loans 1,459 1,448 1,407 1,275Loans to businesses and governments 58,943 61,728 60,176 58,887Securities purchased under resale agreements 20,054 20,329 16,308 21,228

138,061 140,824 135,414 138,169Allowance for credit losses (1,656) (1,554) (1,597) (1,472)

136,405 139,270 133,817 136,697

Other assetsCustomers’ liability under acceptances 9,468 9,149 8,630 8,227 Premises and equipment 2,083 2,088 2,171 2,088 Other 25,221 27,955 23,807 19,747

36,772 39,192 34,608 30,062

Total Assets $ 235,154 $ 242,230 $ 233,396 $ 238,414

Liabilities and Shareholders’ EquityDeposits

Banks $ 22,004 $ 25,447 $ 23,385 $ 30,248Businesses and governments 66,968 68,567 69,454 68,253Individuals 65,443 63,861 63,858 63,566

154,415 157,875 156,697 162,067

Other LiabilitiesAcceptances 9,468 9,149 8,630 8,227Securities sold but not yet purchased 6,562 11,266 9,353 14,334Securities sold under repurchase agreements 24,127 21,983 19,749 18,425Other 24,122 25,113 22,115 18,933

64,279 67,511 59,847 59,919

Subordinated debt 4,924 4,889 4,911 4,721

Shareholders’ equityShare capital (note 5) 4,507 4,916 4,854 4,889Retained earnings 7,029 7,039 7,087 6,818

11,536 11,955 11,941 11,707

Total Liabilities and Shareholders’ Equity $ 235,154 $ 242,230 $ 233,396 $ 238,414



For the six months ended

(Unaudited) (Canadian $ in millions) April 30, 2001 April 30, 2000

Preferred SharesBalance at beginning of period $ 1,681 $ 1,668 Redemption of preferred shares (250) – Translation adjustment on shares issued in a foreign currency 3 2

Balance at End of Period 1,434 1,670

Common SharesBalance at beginning of period 3,173 3,190 Issued under the Shareholder Dividend Reinvestment and Share Purchase Plan 17 19Issued under the Stock Option Plan 77 4 Issued on the exchange of shares of subsidiary corporations 2 6Cancellation of stock options granted on acquisition of an investment (note 3) (22) –Repurchased for cancellation (174) –


Retained EarningsBalance at beginning of period 7,087 6,123 Cumulative impact of adopting Employee Future Benefits standard (note 2) (250) –

6,837 6,123 Net income 1,023 971 Dividends • Preferred shares (46) (51)

• Common shares (289) (268)Unrealized gain (loss) on translation of net investment in foreign operations,

net of hedging activities and applicable income tax 37 43Recognition of unrealized translation loss on disposition of an investment

in a foreign operation, net of applicable tax (note 3) 99 –Gain on cancellation of stock options granted on acquisition of an investment,

net of applicable income tax (note 3) 18 –Common shares repurchased for cancellation (650) –


Total Shareholders’ Equity $ 11,536 $ 11,707


Consolidated Statement of Changes in Shareholders’ Equity



Consolidated Statement of Cash Flow


(Unaudited) (Canadian $ in millions) April 30, 2001 April 30, 2000 April 30, 2001 April 30, 2000

Cash Flows From (Used in) Operating ActivitiesNet income $ 607 $ 497 $ 1,023 $ 971 Adjustments to determine net cash flows

Provision for credit losses 217 100 317 200Amortization of premises and equipment 97 99 193 203Amortization of intangible assets 13 11 26 15Amortization of goodwill 15 14 30 27Write-down of investment securities 47 – 47 –Future income tax expense 33 21 (211) 15Net (gain) loss on sale of investment securities (337) 1 (391) (114)Change in accrued interest

(Increase) decrease in interest receivable 80 (83) 349 (40)Increase (decrease) in interest payable (247) (23) (188) 94

Net increase (decrease) in deferred loan fees 4 (9) (2) (3)Net (increase) decrease in unrealized gains and amounts receivable

on derivative contracts 1,727 (1,662) (1,692) (1,333)Net increase (decrease) in unrealized losses and amounts payable

on derivative contracts (1,191) 1,719 2,469 925Net (increase) decrease in trading securities 177 (1,437) 1,148 (5,296)Net (decrease) in current income taxes payable (87) (51) (11) (265)Changes in other items and accruals, net 528 780 (494) 824

Net Cash Provided by (Used in) Operating Activities 1,683 (23) 2,613 (3,777)

Cash Flows From (Used in) Financing ActivitiesNet increase (decrease) in deposits (3,459) 7,598 (2,374) 5,193 Net increase (decrease) in securities sold but not yet purchased (4,704) 173 (2,791) 3,884Net increase (decrease) in securities sold under repurchase agreements 2,144 (1,079) 4,378 (5,752)Net increase (decrease) in liabilities of subsidiaries 355 (915) (407) (1,304)Proceeds from issuance of securities of a subsidiary 750 – 750 –Redemption of preferred shares (250) – (250) –Proceeds from issuance of common shares 28 14 96 29Common shares repurchased for cancellation (824) – (824) –Dividends paid (179) (167) (335) (319)

Net Cash Provided by (Used in) Financing Activities (6,139) 5,624 (1,757) 1,731

Cash Flows From (Used in) Investing ActivitiesNet increase (decrease) in interest bearing deposits with banks 1,332 41 (121) 1,082Purchase of investment securities (10,358) (7,484) (18,336) (16,906)Maturities of investment securities 7,212 4,549 14,064 13,351Proceeds from sales of investment securities 3,601 886 7,052 3,840Net (increase) decrease in loans and loan substitute securities 1,694 (379) 202 (2,758)Proceeds from securitization of assets 679 – 679 –Net (increase) decrease in securities purchased under resale agreements 275 (3,270) (3,746) 3,862Premises and equipment – net purchase (92) (28) (99) (63)Acquisition of businesses (4) (59) (121) (59)

Net Cash Provided by (Used in) Investing Activities 4,339 (5,744) (426) 2,349

Net Increase (Decrease) in Cash and Cash Equivalents (117) (143) 430 303Cash and Cash Equivalents at Beginning of Period 2,691 2,865 2,144 2,419

Cash and Cash Equivalents at End of Period $ 2,574 $ 2,722 $ 2,574 $ 2,722



Notes to Consolidated Financial Statements For the six months ended April 30, 2001 (Unaudited) (Canadian $ in millions except as noted)

1. Basis of PresentationThese consolidated financial statements should be read in con-junction with our consolidated financial statements for the yearended October 31, 2000 as set out on pages 43 to 69 of our 2000Annual Report. These consolidated financial statements havebeen prepared in accordance with Canadian generally acceptedaccounting principles, including the requirements of theSuperintendent of Financial Institutions Canada, using the sameaccounting policies and methods of computation as were usedfor our consolidated financial statements for the year endedOctober 31, 2000, except as described in note 2.

2. Changes in Accounting PoliciesIn fiscal 2001, we changed our calculation of diluted earnings pershare as required by CICA Handbook section 3500 “Earnings perShare”. We adopted this new standard retroactively and haverestated diluted earnings per share for prior periods. The netimpact of the change is a decrease in our diluted earnings pershare of $0.03 from $1.13 to $1.10 for the three months, and $0.04from $1.87 to $1.83 for the six months ended April 30, 2001.

On November 1, 2000 we changed our accounting for pensionand other future employee benefits as required by CICAHandbook section 3461 “Employee Future Benefits”. We adoptedthis new standard retroactively without restating prior periods.The net impact of the increase in our prepaid pension asset andthe decrease in our non-pension liability, reduced openingretained earnings by $250 (net of tax of $171). For the six monthsended April 30, 2001 the expense for pension and other futureemployee benefits increased by $34 ($20 after tax).

Further information on these new accounting policies is con-tained in notes 16 and 17, respectively, to our consolidated finan-cial statements for the year ended October 31, 2000 on pages 58and 59 of our 2000 Annual Report.

3. Sale of investment in Grupo Financiero BBVA BancomerDuring the six months ended April 30, 2001 we sold our invest-ment in Grupo Financiero BBVA Bancomer (Bancomer) for again of $321 ($272 after tax) of which $284 ($239 after tax) wasrecognized in the three months ended April 30, 2001 and $37($33 after tax) was recognized in the three months endedJanuary 31, 2001. The gain is net of unrealized foreign exchangelosses of $99 after tax. Stock options valued at $22 that weregranted when the investment in Bancomer was acquired werecancelled as part of the sale agreement. An after tax gain of $18on cancellation of these options was recognized directly inretained earnings.

4. Allowance for Credit LossesThe allowance for credit losses recorded in our ConsolidatedBalance Sheet is maintained at a level which we consider ade-quate to absorb probable credit losses in our on- and off-balancesheet portfolios. The change in our allowance for credit losses isset out in the following table. Included in our provision for creditlosses for the three months ended April 30, 2001 is a $100increase in our general allowance.

Changes in our allowance for credit losses are:For the three months ended For the six months ended

Apr 30, 2001 Jan 30, 2001 Apr 30, 2000 Apr 30, 2001 Apr 30, 2000

Balance at beginning of period $ 1,554 $ 1,597 $ 1,483 $ 1,597 $ 1,427Provision for credit losses 217 100 100 317 200Recoveries 7 11 7 18 20Write-offs (133) (146) (49) (279) (98)Other, including foreign exchange rate changes 11 (8) 11 3 3

Balance at end of period $ 1,656 $ 1,554 $ 1,552 $ 1,656 $ 1,552



5. Share CapitalDuring the six months ended April 30, 2001, we announced aprogram to repurchase, through recognized exchanges, up to30,000,000 of our common shares beginning February 5, 2001, tobe completed no later than December 31, 2001. We had repur-chased 21,161,600 shares as at April 30, 2001, at an average priceof $38.94 per share.

During the six months ended April 30, 2001, we paid a stockdividend of one common share, with no value, for each outstand-ing common share. The dividend was paid on March 1, 2001 onthe Toronto and London Stock Exchanges and March 15, 2001 onthe New York Stock Exchange.

During the six months ended April 30, 2001, we redeemed allof our outstanding Series 1 Class B Preferred shares for $25.00per share or $250.

6. United States Generally Accepted Accounting PrinciplesReporting under United States generally accepted accountingprinciples would have resulted in consolidated net income of$610, basic net income per common share of $1.14 and diluted netincome per common share of $1.11 for the three months and$1,041, $1.91 and $1.86, respectively, for the six months endedApril 30, 2001.

Share Capital Information (b) April 30, 2001

PrincipalNumber Amount Convertible into…

Preferred Shares outstanding Class B – Series 2 10,000,000 $ 384 common shares (a)

Class B – Series 3 16,000,000 400 common shares (a)

Class B – Series 4 8,000,000 200 common shares (a)

Class B – Series 5 8,000,000 200 –Class B – Series 6 10,000,000 250 common shares (a)

Total Preferred Share Capital 1,434Common Shares outstanding 506,764,336 3,073 –

Total Share Capital 4,507

Stock options issued under Stock Option Plan 35,346,551 n/a 35,346,551 common shares

(a) The number of shares issuable on conversion is not determinable until the date of conversion.

(b) For additional information refer to pages 55 and 56 of our 2000 Annual Report.

n/a – not applicable


7. Operating and Geographic Segmentation

Revenue, Net Income and Average Assets by Operating Group

Personal and Commercial Private Investment Emfisys and

Client Group (a) Client Group (b) Banking Group (c) Corporate Support (d) Total Consolidated

April 30, January 31, April 30, January 31, April 30, January 31, April 30, January 31, April 30, January 31,

For the three months ended 2001 2001 2001 2001 2001 2001 2001 2001 2001 2001

Net Interest Income and Other Income (e)

Canada $ 875 $ 894 $ 295 $ 286 $ 268 $ 318 $ (16) $ (15) $1,422 $ 1,483United States 146 153 91 92 361 270 102 77 700 592Other Countries 17 15 3 5 52 55 291 43 363 118

Total $1,038 $ 1,062 $ 389 $ 383 $ 681 $ 643 $ 377 $ 105 $2,485 $ 2,193

Net IncomeCanada $ 154 $ 169 $ 41 $ 27 $ 38 $ 77 $ (14) $ (40) $ 219 $ 233United States 14 20 4 2 129 68 (41) 21 106 111Other Countries 13 12 3 2 22 23 244 35 282 72

Total $ 181 $ 201 $ 48 $ 31 $ 189 $ 168 $ 189 $ 16 $ 607 $ 416

Average Assets ($ billions)

Canada $ 80.1 $ 80.1 $ 2.2 $ 2.4 $ 62.6 $ 59.4 $ (6.1) $ (5.3) $138.8 $ 136.6United States 14.3 13.6 3.2 3.5 64.5 62.7 5.3 4.9 87.3 84.7Other Countries 0.3 0.2 0.1 0.1 20.9 22.8 0.7 0.9 22.0 24.0

Total $ 94.7 $ 93.9 $ 5.5 $ 6.0 $148.0 $ 144.9 $ (0.1) $ 0.5 $248.1 $ 245.3

Revenue, Net Income and Average Assets by Operating Group

Personal and Commercial Private Investment Emfisys and

Client Group (a) Client Group (b) Banking Group (c) Corporate Support (d) Total Consolidated

April 30, April 30, April 30, April 30, April 30, April 30, April 30, April 30, April 30, April 30,

For the six months ended 2001 2000 2001 2000 2001 2000 2001 2000 2001 2000

Net Interest and Other Income (e)

Canada $1,769 $ 1,684 $ 581 $ 636 $ 586 $ 599 $ (31) $ (18) $2,905 $ 2,901United States 299 412 183 145 631 473 179 242 1,292 1,272Other Countries 32 35 8 11 107 127 334 61 481 234

Total $2,100 $ 2,131 $ 772 $ 792 $1,324 $ 1,199 $ 482 $ 285 $4,678 $ 4,407

Net IncomeCanada $ 323 $ 325 $ 68 $ 92 $ 115 $ 131 $ (54) $ (45) $ 452 $ 503United States 34 101 6 13 197 133 (20) 77 217 324Other Countries 25 28 5 3 45 55 279 58 354 144

Total $ 382 $ 454 $ 79 $ 108 $ 357 $ 319 $ 205 $ 90 $1,023 $ 971

Average Assets ($ billions)

Canada $ 80.1 $ 78.0 $ 2.3 $ 1.5 $ 61.0 $ 53.4 $ (5.7) $ (6.5) $137.7 $ 126.4United States 13.9 12.2 3.3 2.1 63.6 57.0 5.1 5.1 85.9 76.4Other Countries 0.3 0.2 0.1 0.1 21.9 27.7 0.8 1.0 23.1 29.0

Total $ 94.3 $ 90.4 $ 5.7 $ 3.7 $146.5 $ 138.1 $ 0.2 $ (0.4) $246.7 $ 231.8

(a) Personal and Commercial Client Group (P&C) provides financial services, including Electronic Financial Services, to households in Canada and the United States through its branch and automatedbanking machine networks, electronic banking products including BMO mbanx Direct services, credit card and telebanking.

(b) Private Client Group (PCG) offers its clients a broad array of wealth management products and services, including retail investment products, direct and full service investing, private banking andinstitutional asset management.

(c) Investment Banking Group (IBG) combines all of the businesses serving corporate, government and institutional clients under one umbrella. It offers clients complete financial solutions across theentire balance sheet, including treasury services, foreign exchange, trade finance, corporate lending, securitization, public and private debt and equity capital raising. IBG also offers financialadvisory services in mergers and acquisitions, recapitalizations and restructurings, while providing its investing clients with research, sales and trading services.

(d) Risk management and other corporate support services are provided to operating groups by Corporate Support. The Emfisys Group is responsible for the creation and development of new e-business, information technology planning, strategy and development services, together with information technology transaction processing capabilities, North American cash managementsolutions, Cebra’s e-commerce solutions, and real estate operations for the Bank of Montreal Group of Companies and its customers. Emfisys and Corporate Support includes generalprovision/allowances for credit losses and any residual revenues and expenses representing the differences between actual amounts incurred and the amounts allocated to operating groups.

(e) Reported on a taxable equivalent basis.

Prior periods are restated to give effect to the current period’s organization structure and presentation changes.

The most significant change in the three months ended April 30, 2001 is the transfer from the Personal and Commercial Client Group to Emfisys and Corporate Support of the net interest expense thatremains unallocated to the businesses as a result of our internal transfer pricing process.

Basis of presentation of results of operating groups:

Expenses are matched against the revenues to which they relate. Indirect expenses, such as overhead expenses and any revenue that may be associated thereto, are allocated to the operating groupsusing appropriate allocation formulas applied on a consistent basis. For each currency, the net income effect of funds transferred from any group with a surplus to any group with a shortfall is at marketrates for the currency and appropriate term. Segmentation of assets by geographical region is based upon the ultimate risk of the underlying assets. Segmentation of net income is based upon thegeographic location of the unit responsible for managing the related assets, liabilities, revenues and expenses.


For dividend information, change inshareholder address or to advise of duplicate mailings, please contactThe Trust Company of Bank of Montreal129 Saint–Jacques StreetB Level NorthMontreal, QuebecH2Y 1L6Telephone: (514) 877–2500Fax: (514) 877–9676

For other shareholder information, please contactShareholder ServicesCorporate Secretary’s Department21st Floor1 First Canadian PlaceToronto, OntarioM5X 1A1Telephone: (416) 867–6785Fax: (416) 867–6793E–mail: [email protected]

For further information on this report, please contactInvestor Relations Department18th FloorP.O. Box 11 First Canadian PlaceToronto, OntarioM5X 1A1

To review financial results online,please visit our web site at www.bmo.com

Shareholder Dividend Reinvestment and Share Purchase Plan

Average market priceFebruary 2001 $ 40.48March 2001 $ 38.92April 2001 $ 35.75

second quarter report 2001 2001... · ond quarter of 2001, an increase of $110 million from the...

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