BMO Financial Group
TSX : BMO
NYSE : BMO

BMO Financial Group
BMO Bank of Montreal

BMO Bank of Montreal

August 28, 2012 06:45 ET

BMO Financial Group Reports Strong Quarterly Results, Increasing Net Income by 37% Year Over Year to $970 Million, and Increases Dividend by 3%

TORONTO, ONTARIO--(Marketwire - Aug. 28, 2012) - BMO Financial Group (TSX:BMO)(NYSE:BMO) and BMO Bank of Montreal -

Third Quarter 2012 Report to Shareholders

BMO Financial Group Reports Strong Quarterly Results, Increasing Net Income by 37% Year Over Year to $970 Million, and Increases Dividend by 3%

Financial Results Highlights(1):

Third Quarter 2012 Compared with Third Quarter 2011:

  • Net income of $970 million, up $262 million or 37%
  • Adjusted net income(2) of $1,013 million, up $157 million or 18%
  • Reported EPS(3) of $1.42, up 30%
  • Adjusted EPS(2)(3) of $1.49, up 11%
  • Reported ROE of 14.5%, compared with 13.3%
  • Adjusted ROE(2) of 15.2%, compared with 16.4%
  • Reported provisions for credit losses of $237 million; adjusted provisions of $116 million, down $129 million
  • Common Equity Ratio strengthens to 10.31%, using a Basel II approach
  • Announced a $0.72 dividend per common share for the fourth quarter, up $0.02 or 3%

Year-to-Date 2012 Compared with Year-to-Date 2011:

  • Net income of $3,107 million, up $761 million or 32%

  • Adjusted net income(2) of $2,967 million, up $524 million or 21%

  • Reported EPS(3) of $4.56, up 22%

  • Adjusted EPS(2)(3) of $4.35, up 11%

  • Reported provisions for credit losses of $573 million; adjusted provisions of $358 million, down $469 million

For the third quarter ended July 31, 2012, BMO Financial Group reported strong net income of $970 million or $1.42 per share. On an adjusted basis, net income was $1,013 million or $1.49 per share.

"BMO has reported strong quarterly financial results," said Bill Downe, President and Chief Executive Officer, BMO Financial Group. "Our business continues to deliver consistent and attractive profitability within a sound risk framework and the growth we are experiencing remains consistent with our strategy.

"We increased the dividend, reflecting our strong capital position and our confidence in our continued ability to generate sustained earnings growth. We also moved the target payout range to 40 to 50 per cent, which gives us more flexibility to grow the bank.

"Our core franchise, P&C Canada, experienced good volume growth across most product lines, including residential mortgages; we are attracting new customers and steadily increasing the amount of business existing customers are choosing to entrust to us. The recent changes to Canada's mortgage market announced by the Minister of Finance were prudent, responsible and timely; they align with BMO's risk practices and ongoing efforts to encourage Canadians to borrow smartly.

"Consistent with the confidence we expressed throughout our U.S. investor day in June, this quarter's earnings reflect strong performance from our U.S. businesses. The U.S. P&C business continues to generate healthy organic growth in commercial loans and is executing against its plans.

"Earnings in our wealth business were up quarter over quarter when adjusted to exclude the unfavourable impact of movements in long-term interest rates on the bank's insurance business.

"BMO Capital Markets delivered good performance with higher revenue and net income than last quarter. These results reflect the benefits of the diversified revenue mix of our capital markets' business.

"Across BMO, our sharp focus on improving efficiency will ensure we are investing in what our customers value most. Mobile PayPass, North American mobile banking and e-statements, BMO alerts that send account updates to customers' mobile devices and online appointment booking are just a few examples of the type of functionality we've rolled out for customers in the past twelve months – this in addition to a complete refresh of retail online banking in Canada that gained high approval ratings from customers and industry analysts alike.

"Overall, each of our businesses is delivering against a high standard of customer experience and is on track to finish the year with strong performance in a highly competitive environment," concluded Mr. Downe.

Concurrent with the release of results, BMO announced a fourth quarter dividend of $0.72 per common share, a two cents per share increase from the preceding quarter and equivalent to an annual dividend of $2.88 per common share.

(1) Effective the first quarter of 2012, BMO's consolidated financial statements and the accompanying Interim Management's Discussion and Analysis (MD&A) are prepared in accordance with International Financial Reporting Standards (IFRS), as described in Note 1 to the unaudited interim consolidated financial statements for the quarter ended April 30, 2012. Amounts in respect of comparative periods for 2011 have been restated to conform to the current presentation. References to GAAP mean IFRS, unless indicated otherwise.

(2) Results and measures in this document are presented on a GAAP basis. They are also presented on an adjusted basis that excludes the impact of certain items. Items excluded from third quarter 2012 results in the determination of adjusted results totalled a charge of $43 million after tax, comprised of a $47 million after-tax net benefit of credit-related items in respect of the acquired Marshall & Ilsley Corporation (M&I) performing loan portfolio; costs of $105 million ($65 million after tax) for the integration of the acquired business; a $33 million ($24 million after tax) charge for amortization of acquisition-related intangible assets on all acquisitions; a loss on run-off structured credit activities of $15 million ($15 million after tax); and a decrease in the collective allowance for credit losses of $15 million ($14 million after tax). Items excluded from the year-to-date adjusted results totalled net income of $140 million after tax and consisted of a $216 million after-tax net benefit of credit-related items in respect of the acquired M&I performing loan portfolio; a $249 million ($155 million after tax) charge for the integration of the acquired business; a $100 million ($72 million after tax) charge for amortization of acquisition-related intangible assets; the benefit of run-off structured credit activities of $197 million ($194 million after tax); restructuring charges of $99 million ($69 million after tax) to align our cost structure with the current and future business environment; and a decrease in the collective allowance for credit losses of $33 million ($26 million after tax). All of the adjusting items are reflected in results of Corporate Services except for the amortization of acquisition-related intangible assets, which is charged across the operating groups. Management assesses performance on both a GAAP basis and adjusted basis and considers both bases to be useful in assessing underlying, ongoing business performance. Presenting results on both bases provides readers with an enhanced understanding of how management views results and may enhance readers' analysis of performance. Adjusted results and measures are non-GAAP and are detailed in the Adjusted Net Income section, and (for all reported periods) in the Non-GAAP Measures section of the MD&A, where such non-GAAP measures and their closest GAAP counterparts are disclosed.

(3) All Earnings per Share (EPS) measures in this document refer to diluted EPS unless specified otherwise. EPS is calculated using net income after deductions for net income attributable to non-controlling interest in subsidiaries and preferred share dividends.

Note: All ratios and percentage changes in this report are based on unrounded numbers.

Operating Segment Overview

P&C Canada

Net income was $453 million, up $10 million or 2.4% from a year ago. Reported results reflect provisions for credit losses in BMO's operating groups on an expected loss basis. On a basis that adjusts reported results to reflect provisions on an actual loss basis, P&C Canada's net income was up $20 million or 4.6%. Results reflect higher revenues from increased volume across most products, partially offset by lower net interest margins. The volume growth was achieved while managing expenses prudently and continuing to invest in our business. There was good quarter-over-quarter growth, with loans increasing 2.9% and deposits up 1.6%, as well as improvements in market share for these products.

We are focused on our customers and helping them make money make sense. Our continued investment in our branches, automated banking machines (ABMs) and online and mobile banking platforms are making it easier for more customers to access our products and services. This year we have opened or upgraded 28 locations across the country. Our ABM network continues to grow as we have added more than 300 cash dispensing ABMs so far this year. More and more of our customers are using our online and mobile banking services including 'Tap & Go' and email notice features. In addition, cross-selling of products to both personal and commercial customers continues to grow, while customer loyalty, as measured by net promoter score, continues to improve in both our personal and commercial businesses.

In personal banking our award winning mortgage product continues to help customers become mortgage free faster, pay less interest and protect themselves against rising interest rates. With the success of this product, we have also seen improved customer retention and the foundation for new and expanded long-term relationships. We are confident that we are well positioned for future growth.

In commercial banking, our goal is to become the bank of choice for businesses across Canada by providing the knowledge, advice and guidance that customers value. BMO was the only Canadian bank to receive the prestigious 2012 Model Bank Award from the research group Celent, for our Online Banking for Business Platform. This annual award program identifies model banks and recognizes them for their achievements in the strategic development, effective deployment, and improvements to business and customer experience with banking technology. We continue to rank #2 in Canadian business banking loan market share.

P&C U.S. (all amounts in US$)

Net income of $127 million increased $32 million or 34% from $95 million in the third quarter a year ago. Adjusted net income was $143 million, up $40 million or 37% from a year ago as a result of the acquisition of Marshall & Ilsley Corporation in July 2011. Adjusted net income increased 4.1% from the second quarter.

The core commercial loan portfolio continues to grow, having now increased in three sequential quarters.

BMO Harris Bank recently launched a free mobile application for iPhone and Google Android devices. Our retail customers can now check account balances, transfer funds, locate branches, pay bills, and use remote cheque deposit with this application. We registered more than 41,500 new users in the first month of the offering in July.

On August 1, BMO Harris Bank launched its social media platform on the largest social media sites including Facebook, Twitter and LinkedIn. Social media was identified as a way to deliver on our vision to be the bank that defines a great customer experience. Through social media, we will be able to deliver more great service, more convenience, more helpful guidance and more smart advice.

During the quarter, BMO Harris Bank received the 2012 Corporate Philanthropic Award from the West Suburban Philanthropic Network for our commitment to financial support, leadership and volunteerism in Illinois' western suburbs. BMO Harris is the only financial institution to have ever received the Corporate Philanthropic Award.

Preparation for our systems conversion and rebranding of all remaining legacy M&I and Harris Bank locations under the BMO Harris Bank banner is progressing and we have successfully completed a number of technology projects to enhance system features and functionality. In addition, associated employee readiness and customer outreach programs are underway.

Private Client Group

Net income was $109 million, up $5 million or 5.7% from a year ago. Adjusted net income was $115 million, up $10 million or 8.4% from a year ago. Lower interest rates reduced net income in the insurance business by $45 million in the current quarter and by $36 million a year ago. Adjusted net income in PCG excluding insurance was $97 million, up $11 million or 10% from a year ago. Results benefited from acquisitions and higher spread-based and fee-based revenue, partly offset by lower brokerage revenue.

Assets under management and administration grew by approximately $14 billion from a year ago to $445 billion as we continue to attract new client assets.

On June 11, 2012, we completed our acquisition of CTC Consulting, LLC, a U.S.-based independent investment consulting firm. This acquisition expands and enhances our manager research and advisory capabilities, especially in the area of alternative investments, benefiting our high net worth clients in the United States as well as in Canada and Asia.

On August 1, 2012, we completed our acquisition of a 19.99% interest in COFCO Trust Co., a subsidiary of COFCO Group, one of China's largest state-owned enterprises with operations across a variety of sectors, including agriculture and financial services. COFCO Trust Co. had assets under management of approximately US$5.7 billion at December 31, 2011. The acquisition provides an effective vehicle to expand our offering to high net worth and institutional clients in China through a local partner. In addition, this strategic partnership opens more doors, broadens our capabilities and helps grow our domestic wealth management business in China.

BMO Harris Private Banking was named the Best Private Bank in Canada for the second consecutive year by World Finance. This recognition is a clear demonstration of the quality of our client relationships.

BMO's Exchange Traded Fund (ETF) business marked its three-year anniversary by surpassing $6 billion in assets under management. In the first six months of 2012, the total assets of BMO ETFs grew by 62 per cent.

BMO Capital Markets

Net income for the current quarter was $232 million, down from a strong $270 million in the prior year, but up $7 million or 2.9% from the previous quarter. The increase in net income from the previous quarter was driven by higher trading revenue and corporate banking revenue.

During the quarter we earned a number of awards, recognizing our commitment to customer experience. BMO Capital Markets was named Best Investment Bank in Canada for 2012 by World Finance. We also won Trade Finance magazine's "Best Trade Bank" in Canada award for the third year in a row. BMO Capital Markets was selected as share leader for Overall Canadian Fixed-Income Market Share and Quality Leader for Canadian Fixed-Income Research Quality by Greenwich Associates for 2012, a designation that reflects client recognition for providing unmatched coverage and quality of service for Canadian Fixed Income markets. BMO Capital Markets was also recognized for its Prime Brokerage business, earning the top spot in Canada for its capital introduction capabilities in a survey conducted by Global Custodian magazine.

BMO Capital Markets participated in 125 new issues in the quarter including 51 corporate debt deals, 29 government debt deals, 32 common equity transactions and 13 issues of preferred shares, raising $46 billion dollars.

Corporate Services

Net income for the quarter was $47 million, an increase of $246 million from a year ago. On an adjusted basis, net income was $65 million, an improvement of $127 million from a year ago. Adjusting items are detailed in the Adjusted Net Income section and in the Non-GAAP Measures section. Adjusted provisions for credit losses were lower by $164 million due in part to a $118 million ($73 million after-tax) recovery of provisions for credit losses on the M&I purchased credit impaired loan portfolio. The remaining decrease was attributable to lower provisions charged to Corporate Services under BMO's expected loss provisioning methodology, which is explained in the Corporate Services section at the end of this MD&A.

Acquisition of Marshall & Ilsley Corporation (M&I)

On July 5, 2011, BMO completed the acquisition of M&I. In this document, M&I is generally referred to as the 'acquired business' and other acquisitions are specifically identified. Activities of the acquired business are primarily reflected in the P&C U.S., Private Client Group and Corporate Services segments, with a small amount included in BMO Capital Markets.

The acquired business contributed $117 million to reported net income and $165 million to adjusted net income for the quarter. It contributed $557 million to reported net income and $561 million to adjusted net income for the year to date.

Adjusted Net Income

Management has designated certain amounts as adjusting items and has adjusted GAAP results so that we can discuss and present financial results without the effects of adjusting items to facilitate understanding of business performance and related trends. Management assesses performance on a GAAP basis and on an adjusted basis and considers both to be useful in the assessment of underlying business performance. Presenting results on both bases provides readers with a better understanding of how management assesses results. Adjusted results and measures are non-GAAP and, together with items excluded in determining adjusted results, are disclosed in more detail in the Non-GAAP Measures section, along with comments on the uses and limitations of such measures. Items excluded from third quarter 2012 results in the determination of adjusted results totalled a charge of $43 million or $0.07 per share and were comprised of:

  • the $47 million after-tax net benefit for credit-related items in respect of the acquired M&I performing loan portfolio, including $212 million for the recognition in net interest income of a portion of the credit mark on the portfolio (including $93 million for the release of the credit mark related to early repayment of loans), net of a $136 million provision for credit losses (comprised of an increase in the collective allowance of $23 million and specific provisions of $113 million) and related income taxes of $29 million. These credit-related items in respect of the acquired M&I performing loan portfolio can significantly impact both net interest income and the provision for credit losses in different periods over the life of the acquired M&I performing loan portfolio;
  • costs of $105 million ($65 million after tax) for integration of the acquired business including amounts related to system conversions, restructuring and other employee-related charges, consulting fees and marketing costs in connection with customer communications and rebranding activities;
  • a $15 million ($15 million after-tax) loss on run-off structured credit activities (our credit protection vehicle and structured investment vehicle). These vehicles are consolidated on our balance sheet under IFRS and results primarily reflect valuation changes associated with these activities that have been included in trading revenue;
  • a decrease in the collective allowance for credit losses of $15 million ($14 million after tax) on loans other than the M&I acquired loan portfolio; and
  • the amortization of acquisition-related intangible assets of $33 million ($24 million after tax).

Adjusted net income was $1,013 million for the third quarter of 2012, up $157 million or 18% from a year ago. Adjusted earnings per share were $1.49, up 11% from $1.34 a year ago. All of the above adjusting items were recorded in Corporate Services except the amortization of acquisition-related intangible assets, which is charged to the operating groups. The impact of adjusting items for comparative periods is summarized in the Non-GAAP Measures section.

Caution

The foregoing sections contain forward-looking statements. Please see the Caution Regarding Forward-Looking Statements.

The foregoing sections contain adjusted results and measures, which are non-GAAP. Please see the Non-GAAP Measures section.

Financial Highlights

(Unaudited)
(Canadian $ in millions, except as noted)
For the three months ended For the nine months ended
July
31, 2012
April
30, 2012
January
31, 2012
October
31, 2011
July
31, 2011
Change
from
July
31,
2011
July
31, 2012
July
31, 2011
Change
from
July
31, 2011
Income Statement Highlights
Total revenue$3,878$3,959$4,117$3,822 $3,320 16.8%$11,954$10,121 18.1%
Provision for credit losses 237 195 141 362 230 2.7 573 850 (32.7)
Non-interest expense 2,484 2,499 2,554 2,432 2,221 11.9 7,537 6,309 19.5
Net income 970 1,028 1,109 768 708 36.9 3,107 2,346 32.4
Adjusted net income (a) 1,013 982 972 832 856 18.4 2,967 2,443 21.4
Net income attributable to non-controlling interest in subsidiaries 19 18 19 19 18 1.7 56 54 1.9%
Net income attributable to Bank shareholders 951 1,010 1,090 749 690 37.8 3,051 2,292 33.2
Adjusted net income attributable to Bank shareholders (a) 994 964 953 813 838 18.7 2,911 2,389 21.9
Reported Net Income by Operating Segment
Personal & Commercial Banking Canada 453 446 446 439 443 2.4% 1,345 1,334 0.8%
Personal & Commercial Banking U.S. 129 121 137 155 90 42.7 387 197 96.0
Private Client Group 109 145 105 137 104 5.7 359 339 6.1
BMO Capital Markets 232 225 198 143 270 (14.1) 655 759 (13.6)
Corporate Services (including Technology and Operations) 47 91 223 (106) (199) nm 361 (283) nm
Common Share Data ($)
Diluted earnings per share$1.42$1.51$1.63$1.11 $1.09 $0.33 $4.56$3.74 $0.82
Diluted adjusted earnings per share (a) 1.49 1.44 1.42 1.20 1.34 0.15 4.35 3.91 0.44
Dividends declared per share 0.70 0.70 0.70 0.70 0.70 - 2.10 2.10 -
Book value per share 39.43 38.06 37.85 36.76 35.38 4.05 39.43 35.38 4.05
Closing share price 57.44 58.67 58.29 58.89 60.03 (2.59) 57.44 60.03 (2.59)
Total market value of common shares ($ billions) 37.2 37.7 37.3 37.6 38.3 (1.1) 37.2 38.3 (1.1)
As at
July
31, 2012
April
30, 2012
January
31, 2012
October
31, 2011
July
31, 2011
Change
from
July
31, 2011
Balance Sheet
Highlights
Assets$542,248$525,503$538,260$500,575$502,0368.0%
Net loans and acceptances 253,352 245,522 242,621 238,885 235,3277.7
Deposits 328,968 316,067 316,557 302,373 292,04712.6
Common shareholders' equity 25,509 24,485 24,238 23,492 22,54913.1
For the three months ended (b) For the nine months ended (b)
July
31, 2012
April
30, 2012
January
31, 2012
October
31, 2011
July
31, 2011
July
31, 2012
July
31, 2011
Financial Measures and Ratios (% except as noted)
Average annual five year total shareholder return2.5 2.0 1.6 1.9 3.9 2.5 3.9
Diluted earnings per share growth (c)30.3 14.4 21.6 (10.5)(3.5) 21.9 6.6
Diluted adjusted earnings per share growth (a)(c)11.2 15.2 7.6 (4.8)17.5 11.3 10.1
Return on equity14.5 16.2 17.2 12.7 13.3 15.9 16.1
Adjusted return on equity (a)15.2 15.4 15.0 13.9 16.4 15.2 16.8
Net economic profit ($millions) (a)278 366 434 150 151 1,078 791
Net economic profit (NEP) growth (a)(c)84.5 16.2 33.4 (21.1)31.0 36.3 53.5
Operating leverage4.9 (4.4)(5.4)(1.8)(2.6) (1.4)(0.5)
Adjusted operating leverage (a)(4.4)(3.3)(7.6)(2.6)6.9 (5.1)2.0
Revenue growth (c)16.8 18.8 18.7 18.1 13.9 18.1 12.4
Adjusted revenue growth (a)(c)8.8 14.9 8.5 13.4 16.0 10.7 11.9
Non-interest expense growth (c)11.9 23.2 24.1 19.9 16.5 19.5 12.9
Adjusted non-interest expense growth (a)(c)13.2 18.2 16.1 16.0 9.1 15.8 9.9
Non-interest expense-to-revenue ratio64.1 63.1 62.0 63.7 66.9 63.1 62.3
Adjusted non-interest expense-to-revenue ratio (a)63.7 63.2 63.5 63.8 61.2 63.5 60.7
Net interest margin on average earning assets1.88 1.89 2.05 2.01 1.76 1.94 1.79
Adjusted net interest margin on average earning assets (a)1.70 1.76 1.85 1.78 1.78 1.77 1.80
Provision for credit losses-to-average loans and acceptances (annualized)0.38 0.32 0.23 0.60 0.43 0.31 0.55
Effective tax rate16.2 18.7 22.0 25.3 18.5 19.2 20.8
Adjusted effective tax rate16.9 19.5 23.7 20.7 19.7 20.1 22.0
Gross impaired loans and acceptances-to-equity and allowance for credit losses9.15 9.34 8.74 8.98 7.94 9.15 7.94
Cash and securities-to-total assets ratio31.3 32.0 32.2 29.5 32.0 31.3 32.0
Common equity ratio (based on Basel II)10.31 9.90 9.65 9.59 9.11 10.31 9.11
Basel II tier 1 capital ratio12.40 11.97 11.69 12.01 11.48 12.40 11.48
Basel II total capital ratio14.78 14.89 14.58 14.85 14.21 14.78 14.21
Credit rating (d)
DBRSAA AA AA AA AA AA AA
FitchAA- AA- AA- AA- AA- AA- AA-
Moody'sAa2 Aa2 Aa2 Aa2 Aa2 Aa2 Aa2
Standard & Poor'sA+ A+ A+ A+ A+ A+ A+
Twelve month total shareholder return0.5 (1.0)5.7 2.4 0.0 0.5 0.0
Dividend yield4.87 4.77 4.80 4.75 4.66 4.87 4.66
Price-to-earnings ratio (times)10.1 11.0 11.3 12.1 12.0 10.1 12.1
Market-to-book value (times)1.46 1.54 1.54 1.49 1.58 1.46 1.58
Return on average assets0.68 0.76 0.81 0.56 0.59 0.75 0.68
nm-not meaningful
(a) These are non-GAAP amounts or non-GAAP measures. Please see the Non-GAAP Measures section.
(b) For the period ended, or as at, as appropriate.
(c) Amounts for periods prior to fiscal 2011 have not been restated for IFRS. As a result, growth measures for 2011 may not be meaningful.
(d) For a discussion of the significance of these credit ratings, see the Liquidity and Funding Risk section on pages 88 to 90 of BMO's Annual Management's Discussion and Analysis.

Management's Discussion and Analysis

Management's Discussion and Analysis (MD&A) commentary is as of August 28, 2012. Unless otherwise indicated, all amounts are in Canadian dollars and have been derived from financial statements prepared in accordance with International Financial Reporting Standards (IFRS). References to GAAP mean IFRS, unless indicated otherwise. The MD&A should be read in conjunction with the unaudited interim consolidated financial statements for the period ended July 31, 2012, included in this document, the unaudited interim consolidated financial statements for the quarter ended April 30, 2012, which outline the impacts of our IFRS transition, and the annual MD&A for the year ended October 31, 2011, included in BMO's 2011 Annual Report. The material that precedes this section comprises part of this MD&A.

Bank of Montreal uses a unified branding approach that links all of the organization's member companies. Bank of Montreal, together with its subsidiaries, is known as BMO Financial Group. As such, in this document, the names BMO and BMO Financial Group mean Bank of Montreal, together with its subsidiaries.

Summary Data - Reported
(Unaudited) (Canadian $ in millions, except as noted) Q3-2012 Increase
(Decrease)
vs. Q3-2011
Increase
(Decrease)
vs. Q2-2012
YTD-2012 Increase
(Decrease)
vs. YTD-2011
Net interest income 2,225 422 23 % 105 5 % 6,663 1,451 28 %
Non-interest revenue 1,653 136 9 % (186 ) (10 %) 5,291 382 8 %
Revenue 3,878 558 17 % (81 ) (2 %) 11,954 1,833 18 %
Specific provision for credit losses 229 (16 ) (7 %) 34 17 % 546 (281 ) (34 %)
Collective provision for credit losses 8 23 nm 8 nm 27 4 17 %
Total provision for credit losses 237 7 3 % 42 21 % 573 (277 ) (33 %)
Non-interest expense 2,484 263 12 % (15 ) (1 %) 7,537 1,228 19 %
Provision for income taxes 187 26 16 % (50 ) (21 %) 737 121 20 %
Net income 970 262 37 % (58 ) (6 %) 3,107 761 32 %
Attributable to bank shareholders 951 261 38 % (59 ) (6 %) 3,051 759 33 %
Attributable to non-controlling interest in subsidiaries 19 1 2 % 1 1 % 56 2 2 %
Net income 970 262 37 % (58 ) (6 %) 3,107 761 32 %
Earnings per share - basic ($) 1.42 0.32 29 % (0.10 ) (7 %) 4.59 0.79 21 %
Earnings per share - diluted ($) 1.42 0.33 30 % (0.09 ) (6 %) 4.56 0.82 22 %
Return on equity 14.5 % 1.2 % (1.7 %) 15.9 % (0.2 %)
Productivity ratio 64.1 % (2.8 %) 1.0 % 63.1 % 0.8 %
Operating leverage 4.9 % nm nm (1.4 %) nm
Net interest margin on earning assets 1.88 % 0.12 % (0.01 %) 1.94 % 0.15 %
Effective tax rate 16.2 % (2.3 %) (2.5 %) 19.2 % (1.6 %)
Capital Ratios Reported
Basel II Tier 1 Capital Ratio 12.40 % 0.92 % 0.43 % 12.40 % 0.92 %
Common Equity Ratio - using a Basel II approach 10.31 % 1.20 % 0.41 % 10.31 % 1.20 %
Net income by operating group:
Personal and Commercial Banking 582 49 9 % 15 3 % 1,732 201 13 %
P&C Canada 453 10 2 % 7 1 % 1,345 11 1 %
P&C U.S. 129 39 43 % 8 8 % 387 190 96 %
Private Client Group 109 5 6 % (36 ) (25 %) 359 20 6 %
BMO Capital Markets 232 (38 ) (14 %) 7 3 % 655 (104 ) (14 %)
Corporate Services, including T&O 47 246 nm (44 ) (50 %) 361 644 nm
BMO Financial Group net income 970 262 37 % (58 ) (6 %) 3,107 761 32 %
T&O means Technology and Operations.
nm - not meaningful
Summary Data - Adjusted(1)
(Unaudited) (Canadian $ in millions, except as noted) Q3-2012 Increase
(Decrease)
vs. Q3-2011
Increase
(Decrease)
vs. Q2-2012
YTD-2012 Increase
(Decrease)
vs. YTD-2011
Adjusted net interest income 2,012 194 11 % 43 2 % 6,073 821 16 %
Adjusted non-interest revenue 1,665 103 7 % (93 ) (5 %) 5,074 254 5 %
Adjusted revenue 3,677 297 9 % (50 ) (1 %) 11,147 1,075 11 %
Adjusted specific provision and adjusted total provision for credit losses 116 (129 ) (53 %) (35 ) (23 %) 358 (469 ) (57 %)
Adjusted non-interest expense 2,342 273 13 % (15 ) (1 %) 7,077 965 16 %
Adjusted provision for income taxes 206 (4 ) (2 %) (31 ) (14 %) 745 55 8 %
Adjusted net income 1,013 157 18 % 31 3 % 2,967 524 21 %
Attributable to bank shareholders 994 156 19 % 30 3 % 2,911 522 22 %
Attributable to non-controlling interest in subsidiaries 19 1 2 % 1 1 % 56 2 2 %
Adjusted net income 1,013 157 18 % 31 3 % 2,967 524 21 %
Adjusted earnings per share - basic ($) 1.49 0.14 10 % 0.04 3 % 4.37 0.41 10 %
Adjusted earnings per share - diluted ($) 1.49 0.15 11 % 0.05 3 % 4.35 0.44 11 %
Adjusted return on equity 15.2 % (1.2 %) (0.2 %) 15.2 % (1.6 %)
Adjusted productivity ratio 63.7 % 2.5 % 0.5 % 63.5 % 2.8 %
Adjusted operating leverage (4.4 %) nm nm (5.1 %) nm
Adjusted net interest margin on earning assets 1.70 % (0.08 %) (0.06 %) 1.77 % (0.03 %)
Adjusted effective tax rate 16.9 % (2.8 %) (2.6 %) 20.1 % (1.9 %)
Adjusted net income by operating group:
Personal and Commercial Banking 601 58 11 % 16 3 % 1,788 233 15 %
P&C Canada 456 12 2 % 7 1 % 1,353 13 1 %
P&C U.S. 145 46 48 % 9 7 % 435 220 +100 %
Private Client Group 115 10 8 % (35 ) (24 %) 375 32 9 %
BMO Capital Markets 232 (38 ) (14 %) 6 3 % 656 (103 ) (14 %)
Corporate Services, including T&O 65 127 nm 44 +100 % 148 362 nm
BMO Financial Group adjusted net income 1,013 157 18 % 31 3 % 2,967 524 21 %
(1) The above results and statistics are presented on an adjusted basis. These are non-GAAP amounts or non-GAAP measures. Please see the Non-GAAP Measures section.
nm - not meaningful

Management's Responsibility for Financial Information

Bank of Montreal's Chief Executive Officer and Chief Financial Officer have signed certifications relating to the appropriateness of the financial disclosures in our interim MD&A and unaudited interim consolidated financial statements for the period ended July 31, 2012, and relating to the design of our disclosure controls and procedures and internal control over financial reporting. Bank of Montreal's management, under the supervision of the CEO and CFO, has evaluated the effectiveness, as at July 31, 2012, of Bank of Montreal's disclosure controls and procedures (as defined in the rules of the Securities and Exchange Commission and the Canadian Securities Administrators) and has concluded that such disclosure controls and procedures are effective.

Bank of Montreal's internal control over financial reporting includes policies and procedures that: pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the transactions and dispositions of the assets of BMO; provide reasonable assurance that transactions are recorded as necessary to permit preparation of the consolidated financial statements in accordance with Canadian generally accepted accounting principles and the requirements of the Securities and Exchange Commission in the United States, as applicable; ensure receipts and expenditures of BMO are being made only in accordance with authorizations of management and directors of Bank of Montreal; and provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of BMO assets that could have a material effect on the consolidated financial statements.

Because of its inherent limitations, internal control over financial reporting can provide only reasonable assurance and may not prevent or detect misstatements. Further, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

There were no changes in our internal control over financial reporting during the quarter ended July 31, 2012, that materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

As in prior quarters, Bank of Montreal's Audit and Conduct Review Committee reviewed this document, including the unaudited interim consolidated financial statements, and Bank of Montreal's Board of Directors approved the document prior to its release.

A comprehensive discussion of our businesses, strategies and objectives can be found in Management's Discussion and Analysis in BMO's 2011 Annual Report, which can be accessed on our website at www.bmo.com/investorrelations. Readers are also encouraged to visit the site to view other quarterly financial information.

Caution Regarding Forward-Looking Statements

Bank of Montreal's public communications often include written or oral forward-looking statements. Statements of this type are included in this document, and may be included in other filings with Canadian securities regulators or the U.S. Securities and Exchange Commission, or in other communications. All such statements are made pursuant to the "safe harbor" provisions of, and are intended to be forward-looking statements under, the United States Private Securities Litigation Reform Act of 1995 and any applicable Canadian securities legislation. Forward-looking statements may involve, but are not limited to, comments with respect to our objectives and priorities for 2012 and beyond, our strategies or future actions, our targets, expectations for our financial condition or share price, and the results of or outlook for our operations or for the Canadian and U.S. economies.

By their nature, forward-looking statements require us to make assumptions and are subject to inherent risks and uncertainties. There is significant risk that predictions, forecasts, conclusions or projections will not prove to be accurate, that our assumptions may not be correct and that actual results may differ materially from such predictions, forecasts, conclusions or projections. We caution readers of this document not to place undue reliance on our forward-looking statements as a number of factors could cause actual future results, conditions, actions or events to differ materially from the targets, expectations, estimates or intentions expressed in the forward-looking statements.

The future outcomes that relate to forward-looking statements may be influenced by many factors, including but not limited to: general economic and market conditions in the countries in which we operate; weak, volatile or illiquid capital and/or credit markets; interest rate and currency value fluctuations; changes in monetary, fiscal or economic policy; the degree of competition in the geographic and business areas in which we operate; changes in laws or in supervisory expectations or requirements, including capital, interest rate and liquidity requirements and guidance; judicial or regulatory proceedings; the accuracy and completeness of the information we obtain with respect to our customers and counterparties; our ability to execute our strategic plans and to complete and integrate acquisitions; critical accounting estimates and the effect of changes to accounting standards, rules and interpretations on these estimates; operational and infrastructure risks; changes to our credit ratings; general political conditions; global capital markets activities; the possible effects on our business of war or terrorist activities; disease or illness that affects local, national or international economies; natural disasters and disruptions to public infrastructure, such as transportation, communications, power or water supply; technological changes; and our ability to anticipate and effectively manage risks associated with all of the foregoing factors.

We caution that the foregoing list is not exhaustive of all possible factors. Other factors could adversely affect our results. For more information, please see the discussion on pages 30 and 31 of BMO's 2011 annual MD&A, which outlines in detail certain key factors that may affect Bank of Montreal's future results. When relying on forward-looking statements to make decisions with respect to Bank of Montreal, investors and others should carefully consider these factors, as well as other uncertainties and potential events, and the inherent uncertainty of forward-looking statements. Bank of Montreal does not undertake to update any forward-looking statements, whether written or oral, that may be made from time to time by the organization or on its behalf, except as required by law. The forward-looking information contained in this document is presented for the purpose of assisting our shareholders in understanding our financial position as at and for the periods ended on the dates presented, as well as our strategic priorities and objectives, and may not be appropriate for other purposes.

In calculating the pro-forma impact of Basel III on our regulatory capital, risk-weighted assets (including Counterparty Credit Risk and Market Risk) and regulatory capital ratios, we have assumed that our interpretation of the proposed rules and proposals announced by the Basel Committee on Banking Supervision (BCBS) as of this date, and our models used to assess those requirements, are consistent with the final requirements that will be promulgated by the Office of the Superintendent of Financial Institutions Canada (OSFI). We have also assumed that the proposed changes affecting capital deductions, risk-weighted assets, the regulatory capital treatment for non-common share capital instruments (i.e. grandfathered capital instruments) and the minimum regulatory capital ratios are adopted by OSFI as proposed by BCBS, unless OSFI has expressly advised otherwise. We have also assumed that existing capital instruments that are non-Basel III compliant but are Basel II compliant can be fully included in the July 31, 2012, pro-forma calculations. The full impact of the Basel III proposals has been quantified based on our financial and risk positions at quarter end or as close to quarter end as was practical. In setting out the expectation that we will be able to refinance certain capital instruments in the future, as and when necessary to meet regulatory capital requirements, we have assumed that factors beyond our control, including the state of the economic and capital markets environment, will not impair our ability to do so.

Assumptions about the level of asset sales, expected asset sale prices, net funding cost, credit quality, risk of default and losses on default of the underlying assets of the structured investment vehicle were material factors we considered when establishing our expectations regarding the structured investment vehicle discussed in this interim MD&A, including the adequacy of first-loss protection. Key assumptions included that assets will continue to be sold with a view to reducing the size of the structured investment vehicle, under various asset price scenarios, and that the level of default and losses will be consistent with the credit quality of the underlying assets and our current expectations regarding continuing difficult market conditions.

Assumptions about the level of default and losses on default were material factors we considered when establishing our expectations regarding the future performance of the transactions into which our credit protection vehicle has entered. Among the key assumptions were that the level of default and losses on default will be consistent with historical experience. Material factors that were taken into account when establishing our expectations regarding the future risk of credit losses in our credit protection vehicle and risk of loss to BMO included industry diversification in the portfolio, initial credit quality by portfolio, the first-loss protection incorporated into the structure and the hedges that BMO has entered.

In determining the impact of reductions to interchange fees in the U.S. Regulatory Developments section, we have assumed that business volumes remain consistent with our expectations and that certain management actions are implemented that will modestly reduce the impact of the rules on our revenues.

Assumptions about the performance of the Canadian and U.S. economies, as well as overall market conditions and their combined effect on our business, are material factors we consider when determining our strategic priorities, objectives and expectations for our business. In determining our expectations for economic growth, both broadly and in the financial services sector, we primarily consider historical economic data provided by the Canadian and U.S. governments and their agencies. See the Economic Outlook and Review section of this interim MD&A.

Regulatory Filings

Our continuous disclosure materials, including our interim filings, annual MD&A and audited consolidated financial statements, Annual Information Form and Notice of Annual Meeting of Shareholders and Proxy Circular are available on our website at www.bmo.com/investorrelations, on the Canadian Securities Administrators' website at www.sedar.com and on the EDGAR section of the SEC's website at www.sec.gov.

Economic Outlook and Review

The Canadian economy is growing modestly, supported by low interest rates and a vibrant resource sector but restrained by the strong Canadian dollar and weak global demand. The economy is expected to achieve real growth of 2% this year, maintaining the unemployment rate near 7%. Households will likely continue to spend cautiously in the face of elevated debt and more restrictive credit rules. Similarly, housing market activity should moderate in response to recent changes in mortgage rules and high valuations in some markets. Fiscal policies should remain restrictive as a result of budget deficits. While exporters, consumers and governments all face challenging conditions, Canadian businesses should maintain their strong rate of investment, particularly in the resource-rich provinces of Alberta, Saskatchewan, and Newfoundland & Labrador. In addition, lower office and industrial vacancy rates will continue to support commercial construction. The Canadian dollar is expected to trade near parity with the U.S. dollar in 2013, supported by strong inflows of foreign capital. Inflation should stay low, despite expected increases in food prices, allowing the Bank of Canada to maintain its overnight rate target at 1% well into next year.

The U.S. economy continues to grow modestly, as concerns about the European debt situation and domestic fiscal issues have discouraged companies from spending and hiring. Expected real GDP growth of approximately 2% will likely result in the unemployment rate staying above 8% through 2013. Despite lower gasoline prices and improved finances, many households are struggling with weak job prospects and still-high (though declining) foreclosures. Restrictive fiscal policies will likely continue to restrain economic expansion, especially in 2013 when special tax breaks expire and scheduled spending reductions begin. However, the housing market should improve further in response to attractive affordability and growing demand due to the rising number of young prospective buyers. In the face of high unemployment and low inflation, the Federal Reserve is expected to maintain its near-zero interest rate policy for at least a couple of more years and to implement additional measures to reduce longer-term borrowing costs.

The U.S. Midwest economy is growing in line with the national trend, supported by rising automotive production and increased oil output in North Dakota but restrained by restrictive fiscal policies and weak global demand. The Midwest economy is expected to grow about 2% this year, held back by sharply lower agricultural production due to the severe drought. Growth will likely improve slightly next year, as stimulative fiscal and monetary policies in China and other emerging-market economies should support a pickup in global exports.

This Economic Outlook and Review section contains forward-looking statements. Please see the Caution Regarding Forward-Looking Statements.

Foreign Exchange

The Canadian dollar equivalents of BMO's U.S.-dollar-denominated net income, revenues, expenses, provisions for credit losses and income taxes were increased relative to the third quarter of 2011 and for the year to date relative to the comparable period in 2011 by the strengthening of the U.S. dollar. They were also raised relative to the second quarter of 2012, by a modest strengthening of the U.S. dollar. The average Canadian/U.S. dollar exchange rate for the quarter, expressed in terms of the Canadian dollar cost of a U.S. dollar, increased by 5.7% from a year ago and increased by 2.7% from the average of the second quarter. The average rate for the year to date increased by 3.1%. The following table indicates the relevant average Canadian/U.S. dollar exchange rates and the impact of changes in the rates.

Effects of U.S. Dollar Exchange Rate Fluctuations on BMO's Results
(Canadian $ in millions, Q3-2012 YTD-2012
except as noted) vs. Q3-2011 vs. Q2-2012 vs. YTD-2011
Canadian/U.S. dollar exchange rate (average)
Current period 1.0180 1.0180 1.0078
Prior period 0.9628 0.9917 0.9777
Effects on reported results
Increased (decreased) net interest income 54 26 86
Increased (decreased) non-interest revenue 26 12 43
Increased (decreased) revenues 80 38 129
Decreased (increased) expenses (50 ) (24 ) (82 )
Decreased (increased) provision for credit losses (7 ) (3 ) (4 )
Decreased (increased) income taxes (7 ) (3 ) (8 )
Increased (decreased) net income 16 8 35
Effects on adjusted results
Increased (decreased) net interest income 43 20 180
Increased (decreased) non-interest revenues 25 12 43
Increased (decreased) revenues 68 32 223
Decreased (increased) expenses (42 ) (20 ) (217 )
Decreased (increased) provision for credit losses (7 ) (3 ) (4 )
Decreased (increased) income taxes (8 ) (4 ) 50
Increased (decreased) adjusted net income 11 5 52
Adjusted results in this section are non-GAAP amounts or non-GAAP measures. Please see the Non-GAAP Measures section.

The effect of currency fluctuations on our investments in foreign operations is discussed in the Income Taxes section.

Other Value Measures

BMO's average annual total shareholder return for the five-year period ended July 31, 2012, was 2.5%.

Net economic profit (NEP) was $278 million, compared with $366 million in the second quarter and $151 million in the third quarter of 2011. Adjusted NEP was $297 million, compared with $296 million in the second quarter and $287 million in the third quarter of 2011. Changes in adjusted NEP relative to a year ago are reflective of higher earnings, including the impact of two additional months of results of the acquired business in the current year, and increased capital. Changes relative to the second quarter were attributable to increased capital, offset in part by improved earnings. NEP of $278 million represents the net income that is attributable to shareholders ($951 million), less preferred share dividends ($32 million), plus the after-tax amortization of intangible assets ($24 million), net of a charge for capital ($665 million), and is considered an effective measure of added economic value. Adjusted NEP is calculated in the same manner using adjusted net income rather than reported net income and excluding the addition of the amortization of intangible assets. NEP and adjusted NEP are non-GAAP measures. Please see the Non-GAAP Measures section for a discussion on the use and limitations of non-GAAP measures.

Net Income

Q3 2012 vs Q3 2011

Net income was $970 million for the third quarter of 2012, up $262 million or 37% from a year ago. Earnings per share were $1.42, up 30% from $1.09 a year ago.

Adjusted net income was $1,013 million for the third quarter of 2012, up $157 million or 18% from a year ago. Adjusted earnings per share were $1.49, up 11% from $1.34 a year ago. Adjusted results and items excluded in determining adjusted results are disclosed in more detail in the preceding Adjusted Net Income section and in the Non-GAAP Measures section, together with comments on the uses and limitations of such measures.

Adjusted net income growth reflects the benefits from acquisitions and organic growth. There was significant growth in P&C U.S., due largely to inclusion of results of the acquired business for three months compared to one month a year ago. PCG results improved despite lower insurance results, and P&C Canada net income was higher due to volume growth across most products, partially offset by lower net interest margin. BMO Capital Markets results were lower than the strong results of a year ago. Adjusted net income increased in Corporate Services due in large part to lower adjusted provisions for credit losses.

Provisions for credit losses increased modestly, but adjusted provisions were down $81 million after-tax due to a recovery of provisions for credit losses on M&I purchased credit impaired loans and lower specific provisions on the legacy portfolio. The effective tax rate was lower, as explained in the Income Taxes section.

Q3 2012 vs Q2 2012

Net income decreased $58 million or 5.8% from the second quarter and earnings per share decreased $0.09 or 6.0%. Adjusted net income increased $31 million or 3.1% and adjusted earnings per share increased $0.05 or 3.5%.

On an adjusted basis, there were increases in P&C U.S, P&C Canada, BMO Capital Markets and Corporate Services and a reduction in Private Client Group.

Adjusted revenues were lower than in the second quarter, and adjusted expenses also decreased, reflective of effective expense management. Adjusted provisions for credit losses decreased and the adjusted effective tax rate was also lower in the current quarter.

Q3 YTD 2012 vs Q3 YTD 2011

Net income increased $761 million or 32% to $3,107 million. Earnings per share were $4.56, up $0.82 or 22% from a year ago.

Adjusted net income increased $524 million or 21% to $2,967 million and adjusted earnings per share were $4.35, up $0.44 or 11% from a year ago. Eight additional months of results of the acquired business added $527 million to year-to-date adjusted net income compared to the same period a year ago.

This section contains adjusted results and measures which are non-GAAP. Please see the Non-GAAP Measures section.

Revenue

Total revenue increased $558 million or 17% from the third quarter a year ago. Adjusted revenue increased $297 million or 8.8%. The inclusion of results of the acquired business for three months compared to one month in the prior year increased adjusted revenue by $320 million. The stronger U.S. dollar increased adjusted revenue growth by $41 million or 1.3%, on a basis that excludes the impact of the acquired business. Excluding these two items, adjusted revenue decreased by $64 million or 2.0%, primarily due to lower BMO Capital Markets revenues, as market conditions were more favourable a year ago, lower insurance revenue and decreased revenues in Corporate Services.

Revenue decreased $81 million or 2.1% from the second quarter. Adjusted revenue decreased $50 million or 1.4%. The stronger U.S. dollar increased adjusted revenue growth by $33 million or 0.9%. Excluding the impact of the stronger U.S. dollar, adjusted revenue decreased by $83 million or 2.2%, primarily due to lower insurance revenue. P&C Canada revenues increased due to two extra days and good volume growth across all products, offset in part by lower margins. Adjusted revenues in Corporate Services were down due to a number of small items.

Revenue for the year to date increased $1,833 million or 18% and adjusted revenue increased $1,075 million or 11%. The inclusion of results of the acquired business for eight additional months in the current year to date increased adjusted revenue by $1,254 million. The stronger U.S. dollar increased adjusted revenue growth by $68 million or 0.7%, on a basis that excludes the impact of the acquired business. Excluding these two items, adjusted revenue decreased by $248 million or 2.5%, primarily due to less favourable market conditions for BMO Capital Markets.

Changes in net interest income and non-interest revenue are reviewed in the sections that follow.

This section contains adjusted results and measures which are non-GAAP. Please see the Non-GAAP Measures section.

Net Interest Income

Net interest income in the quarter increased $422 million or 23% from a year ago to $2,225 million. Adjusted net interest income increased $194 million or 11% to $2,012 million. The increase in adjusted net interest income was primarily in P&C U.S., due to the inclusion of results of the acquired business for two additional months in the current quarter relative to the same period a year ago. There was strong growth in Private Client Group due in part to the impact of the acquired business. There was a modest reduction in P&C Canada. BMO Capital Markets net interest income was consistent with results of a year ago, while Corporate Services adjusted net interest income was lower.

BMO's overall net interest margin increased by 12 basis points year over year to 1.88%. Adjusted net interest margin decreased by 8 basis points to 1.70% with decreases in each of the operating groups. The decrease in BMO Capital Markets was attributable to reduced market spreads. Decreased margin in P&C Canada was primarily driven by deposit spread compression in the low rate environment lower personal lending margins resulting from customer behaviours in our cards business and competitive pressures and loan growth exceeding deposit growth, particularly mortgages. In P&C U.S., the decrease was due to deposit spread compression, partially offset by the favourable effect of deposit growth exceeding loan growth and the positive impact from the acquired business. In Private Client Group, the decrease was mainly due to lower deposit spreads, offset in part by higher loan and deposit balances in private banking and the impact of the acquired business. Corporate Services adjusted net interest income decreased year over year and contributed to BMO's overall margin reduction.

Average earning assets in the third quarter increased $64.9 billion or 16% relative to a year ago, with a $10.3 billion increase as a result of the stronger U.S. dollar. There were higher assets in P&C U.S. due to the acquired business and good organic commercial loan growth. There were increased assets in BMO Capital Markets due to increased holdings of securities purchased under resale agreements (reverse repos) as a result of client demand and higher deposits at the Federal Reserve. There was growth in P&C Canada, driven by volume growth across most products, and Private Client Group benefited from personal loan growth in private banking and higher insurance assets.

Relative to the second quarter, net interest income increased $105 million or 4.9%. Adjusted net interest income increased $43 million or 2.1%, in part due to two more days in the current quarter. There was growth across all operating groups, partially offset by a decrease in Corporate Services.

BMO's overall net interest margin decreased 1 basis point from the second quarter. Adjusted net interest margin decreased 6 basis points. There was a modest decline in BMO Capital Markets. P&C Canada's margin decrease was primarily due to lower personal lending margins resulting from customer behaviours in our cards business and competitive pressures, deposit spread compression in the low rate environment and loan growth exceeding deposit growth, particularly mortgages. The margin decrease in Private Client Group was driven by lower deposit balances. Adjusted net interest margin increased modestly in P&C U.S. while Corporate Services adjusted net interest income decreased, which had an unfavourable impact on overall spread.

Average earning assets increased $16.0 billion or 3.5% from the second quarter, with a $4.9 billion increase as a result of the stronger U.S. dollar. There was growth in BMO Capital Markets due to higher reverse repos and securities balances. There was solid growth in P&C Canada and in Private Client Group and a more modest increase in P&C U.S.

Year to date, net interest income increased $1,451 million or 28%. Adjusted net interest income increased $821 million or 16% to $6,073 million, primarily due to the inclusion of results of the acquired business for eight additional months in P&C U.S. and Private Client Group, compared to a year ago. Private Client Group also benefited from higher earnings from a strategic investment and good organic growth. There was a decrease in BMO Capital Markets due to reduced margins, while P&C Canada net interest income was consistent with the same period a year ago. Corporate Services adjusted net interest income was lower, due in part to interest received on the settlement of certain tax matters in the prior year.

BMO's overall net interest margin increased by 15 basis points to 1.94% for the year to date. On an adjusted basis, net interest margin decreased by 3 basis points. There were reductions across most operating groups and reduced net interest income in Corporate Services. There was an increase in Private Client Group, due in large part to the impact of the acquired business and higher earnings from a strategic investment.

Average earning assets for the year to date increased $68.1 billion or 17%, and by $62.6 billion adjusted to exclude the impact of the stronger U.S. dollar. There were higher assets in P&C U.S. and in Private Client Group, due to the inclusion of results of the acquired business and organic growth. There was also strong growth in BMO Capital Markets and more modest growth in P&C Canada and Corporate Services.

Adjusted results in this section are non-GAAP amounts or non-GAAP measures. Please see the Non-GAAP Measures section.

Adjusted Net Interest Margin on Earning Assets (teb)*
(In basis points)
Q3-2012
Increase
(Decrease)
vs. Q3-2011
Increase
(Decrease)
vs. Q2-2012
YTD-2012 Increase
(Decrease)
vs. YTD-2011
P&C Canada 274 (17 ) (7 ) 282 (13 )
P&C U.S. 438 (11 ) 3 439 (2 )
Personal and Commercial Client Group 316 (4 ) (7 ) 323 4
Private Client Group 289 (6 ) (9 ) 322 19
BMO Capital Markets 63 (11 ) (2 ) 63 (15 )
Corporate Services, including T&O** nm nm nm nm nm
Total BMO adjusted net interest margin (1) 170 (8 ) (6 ) 177 (3 )
Total BMO reported net interest margin 188 12 (1 ) 194 15
Total Canadian Retail (reported and adjusted)*** 273 (18 ) (8 ) 282 (14 )
* Net interest margin is disclosed and computed with reference to average earning assets, rather than total assets. This basis provides a more relevant measure of margins and changes in margins. Operating group margins are stated on a teb basis while total BMO margin is stated on a GAAP basis.
** Corporate Services adjusted net interest income is negative in all periods and its variability affects changes in net interest margin.
*** Total Canadian retail margin represents the net interest margin of the combined Canadian business of P&C Canada and Private Client Group.
(1) These are non-GAAP amounts or non-GAAP measures. Please see the Non-GAAP Measures section.
nm - not meaningful

Non-Interest Revenue

Non-interest revenue increased $136 million or 9.0% from the third quarter a year ago to $1,653 million. Adjusted non-interest revenue increased $103 million or 6.7% to $1,665 million. There was strong growth in deposit and payment service charges and fees in P&C U.S. and in investment management fees in Private Client Group, due to the inclusion of results of the acquired business for two additional months relative to a year ago. There were also increased other revenues in P&C U.S. due to higher gains on sale of mortgages and increased lending and other fees. There were increased trading revenues in BMO Capital Markets and decreases in equity underwriting and advisory fees. Securities commissions and fees were lower in both BMO Capital Markets and Private Client Group, where insurance revenues also decreased. Non-interest revenues in P&C Canada were higher across a number of categories.

Relative to the second quarter, non-interest revenue decreased $186 million or 10%. Adjusted non-interest revenue decreased $93 million or 5.3%. Lower interest rates reduced insurance revenue by $61 million in the current quarter. There were reductions in securities commissions and fees, and in gains on securities, foreign exchange other than trading and equity underwriting fees.

Year to date, non-interest revenue increased $382 million or 7.8% to $5,291 million. Adjusted non-interest revenue increased $254 million or 5.3% to $5,074 million. Increases from the inclusion of results of the acquired business for eight additional months relative to a year ago were partially offset by declines in underwriting and advisory fees, securities commissions and fees, securities gains and insurance revenues.

Non-interest revenue is detailed in the attached summary unaudited interim consolidated financial statements.

Adjusted results in this section are non-GAAP amounts or non-GAAP measures. Please see the Non-GAAP Measures section.

Non-Interest Expense

Non-interest expense increased $263 million or 12% from the third quarter a year ago to $2,484 million. Adjusted non-interest expense increased $273 million or 13% to $2,342 million. The inclusion of results of the acquired business for two additional months compared to a year ago increased adjusted expense by $248 million. The stronger U.S. dollar increased adjusted expense growth by $26 million or 1.3%, on a basis that excludes the impact of the acquired business. Excluding these two items, expenses decreased by $1 million or 0.1% as the benefit from disciplined expense management was largely offset by investment in strategic initiatives.

Relative to the second quarter, non-interest expense decreased $15 million or 0.6%. Adjusted non-interest expense decreased $15 million or 0.6%. The stronger U.S. dollar increased adjusted expense growth by $20 million or 0.9%. Excluding the impact of the stronger U.S. dollar, expenses decreased by $35 million or 1.5%, due to lower employee-related costs and cost containment, despite an increase from two more days in the quarter. Our increased focus on productivity has contributed to quarter-over-quarter adjusted operating leverage of 1.2% on a basis that excludes the impact of long-term interest rates on our insurance business.

Non-interest expense for the year to date increased $1,228 million or 19% to $7,537 million. Adjusted non-interest expense increased $965 million or 16% to $7,077 million. The inclusion of results of the acquired business for eight additional months in the current year to date increased adjusted expense by $867 million. The stronger U.S. dollar increased adjusted expense growth by $44 million or 0.7%, on a basis that excludes the impact of the acquired business. Excluding these two items, expenses increased by $54 million or 0.9%, primarily due to continued investment in our businesses, including technology development initiatives, as well as increased support costs.

Non-interest expense is detailed in the attached summary unaudited interim consolidated financial statements.

Adjusted results in this section are non-GAAP amounts or non-GAAP measures. Please see the Non-GAAP Measures section.

Risk Management

Starting in the first quarter of 2012, provisions for credit losses for the current and prior periods are reported on an IFRS basis, and as such include provisions resulting from the recognition of our securitized loans and certain special purpose entities on our balance sheet. IFRS also requires that we recognize interest income on impaired loans with a corresponding increase in provision for credit losses.

The provision for credit losses totalled $237 million in the third quarter of 2012. The adjusted provision for credit losses was $116 million, after adjusting for a $113 million specific provision for the M&I purchased performing loan portfolio. Adjusting items also include a $23 million increase in the collective allowance for the M&I purchased performing loan portfolio and a $15 million reduction in the collective allowance on other loans.

The adjusted provision for credit losses of $116 million represents an annualized 21 basis points of average net loans and acceptances, compared with $151 million or an annualized 28 basis points in the second quarter of 2012 and $245 million or an annualized 48 basis points in the third quarter of 2011. Included in the adjusted specific provision for credit losses is a recovery of $118 million related to the M&I purchased credit impaired loans this quarter, compared with a $117 million recovery in the second quarter of 2012.

On a geographic basis, specific provisions in Canada and all other countries (excluding the United States) were $138 million in the third quarter of 2012, $177 million in the second quarter of 2012 and $151 million in the third quarter of 2011. Specific provisions in the United States were $91 million in the third quarter of 2012, $18 million in the second quarter of 2012 and $94 million in the third quarter of 2011. On an adjusted basis, specific provisions in the United States for the comparable periods were a $22 million recovery, a $26 million recovery and a charge of $94 million, respectively.

BMO employs a methodology for segmented reporting purposes whereby credit losses are charged to the client operating groups quarterly, based on their share of expected credit losses. The difference between quarterly charges based on expected losses and required quarterly provisions based on actual losses is charged (or credited) to Corporate Services. The table that follows outlines credit losses by client operating group based on actual credit losses.

Impaired loan formations in BMO's legacy portfolio (which excludes the M&I purchased performing loan portfolio) totalled $405 million in the current quarter, down from $455 million in the second quarter of 2012 and $429 million a year ago. Impaired loan formations related to the M&I purchased performing loan portfolio were $386 million in the current quarter, down from $444 million in the second quarter. At acquisition, we recognized the likelihood of impairment in the purchased performing loan portfolio and losses on these loans that have now been identified as impaired were adequately provided for in the credit mark established at the time of acquisition.

Total gross impaired loans, excluding the purchased credit impaired loans, were $2,867 million at the end of the current quarter, up from $2,837 million in the second quarter of 2012 and $2,290 million a year ago. At the end of the quarter, there were $926 million of gross impaired loans related to the acquired portfolios, of which $133 million is subject to a loss-sharing agreement that expires in 2015 for commercial loans and 2020 for retail loans.

An active housing market in Canada with low interest rates and high consumer debt levels could imply potential risk if there were an economic downturn or increase in interest rates. BMO's Canadian residential mortgage portfolio represents 6.5% of the total Canadian residential mortgage market of $1,142 billion (Bank of Canada, June 2012). Approximately 65% of the portfolio is insured, with an average loan-to-value ratio of 64% (adjusted for current housing values). The remaining 35% of the portfolio is uninsured, with an average loan-to-value ratio of 56%. BMO's Home Equity Line of Credit portfolio is uninsured, but 95% of the exposures represent a priority claim and there are no exposures that had a loan-to-value ratio greater than 80% at time of origination. We remain satisfied with our prudent and consistent lending standards throughout the credit cycle and will continue to monitor the portfolio closely.

BMO's liquidity and funding, market and insurance risk management practices and key measures are outlined on pages 88 to 91 of BMO's 2011 annual MD&A.

There were no significant changes to our level of liquidity and funding risk over the quarter. We remain satisfied that our liquidity and funding management framework provides us with a sound liquidity position.

Trading and Underwriting Market Value Exposure (MVE) decreased over the period, mainly due to reduced fixed income activity. Exposure in the bank's available-for-sale portfolios was relatively unchanged over the period.

There were no significant changes in our structural market risk management practices during the quarter. Structural MVE is driven by rising interest rates and primarily reflects a lower market value for fixed-rate loans. Structural Earnings Volatility (EV) is driven by falling interest rates and primarily reflects the risk of prime-based loans repricing at lower rates. MVE and economic value exposures under rising interest rates decreased from the prior quarter largely due to higher U.S. mortgage prepayments as a result of lower interest rates. MVE also decreased due to lower modelled interest rate volatility. EV and earnings exposure under the 100 basis point falling interest rate scenario were largely unchanged from the prior quarter. Earnings exposure under the 200 basis point falling interest rate scenario increased largely due to the increased impact of interest rate floors, which limit the extent that interest expense can decline when interest rates fall.

There were no significant changes in the risk management practices or risk levels of our insurance business during the quarter.

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

Provision for Credit Losses
(Canadian $ in millions, except as noted) Q3-2012 Q2-2012 Q3-2011 YTD-2012 YTD-2011
New specific provisions 484 458 344 1,354 1,080
Reversals of previously established allowances (59 ) (66 ) (38 ) (192 ) (83 )
Recoveries of loans previously written-off (196 ) (197 ) (61 ) (616 ) (170 )
Specific provision for credit losses 229 195 245 546 827
Change in collective allowance 8 - (15 ) 27 23
Provision for credit losses (PCL) 237 195 230 573 850
Adjusted specific provision for credit losses (1) 116 151 245 358 827
PCL as a % of average net loans and acceptances (annualized) 0.38 % 0.32 % 0.43 % 0.31 % 0.55 %
PCL as a % of average net loans and acceptances excluding purchased portfolios (annualized) (2) 0.39 % 0.46 % 0.44 % 0.45 % 0.56 %
Specific PCL as a % of average net loans and acceptances (annualized) 0.37 % 0.32 % 0.46 % 0.30 % 0.53 %
Adjusted specific PCL as a % of average net loans and acceptances (annualized) (1) 0.21 % 0.28 % 0.48 % 0.22 % 0.55 %
(1) Adjusted specific provision for credit losses excludes provisions related to the M&I purchased performing loan portfolio.
(2) Ratio is presented excluding purchased portfolios, to provide for better historical comparisons.
Provision for Credit Losses by Operating Group, on an Actual Loss Basis
(Canadian $ in millions, except as noted) Q3-2012 Q2-2012 Q3-2011 YTD-2012 YTD-2011
P&C Canada 141 161 150 451 469
P&C U.S. 71 55 54 182 265
Personal and Commercial Banking 212 216 204 633 734
Private Client Group 4 1 (2 ) 9 6
BMO Capital Markets (1 ) 17 8 5 14
Corporate Services, including T&O (1) 19 34 35 88 73
Purchased Credit Impaired Loans (2) (118 ) (117 ) - (377 ) -
Adjusted provision for credit losses 116 151 245 358 827
P&C U.S. 99 39 - 162 -
Private Client Group 3 5 - 10 -
Corporate Services, include T&O 11 - - 16 -
Specific provisions on purchased performing loans 113 44 - 188 -
Change in collective allowance 8 - (15 ) 27 23
Provision for credit losses 237 195 230 573 850
(1) Corporate Services includes the provision for credit losses in respect of loans transferred from P&C U.S. to Corporate Services in Q3-2011 and IFRS adjustments related to the interest on impaired loans.
(2) Includes recoveries related to the M&I purchased credit impaired loans, which are reported under Corporate Services in our financial results.
Changes in Gross Impaired Loans and Acceptances (GIL) (1)
(Canadian $ in millions, except as noted) Q3-2012 Q2-2012 Q3-2011 YTD-2012 YTD-2011
GIL, beginning of period 2,837 2,657 2,465 2,685 2,894
Additions to impaired loans and acceptances 791 899 429 2,314 1,260
Reductions in impaired loans and acceptances (2) (458 ) (427 ) (367 ) (1,264 ) (1,161 )
Write-offs (3) (303 ) (292 ) (237 ) (868 ) (703 )
GIL, end of period (1) 2,867 2,837 2,290 2,867 2,290
GIL as a % of gross loans and acceptances 1.13 % 1.15 % 0.98 % 1.13 % 0.98 %
GIL as a % of gross loans and acceptances excluding purchased portfolios (4) 0.85 % 0.98 % 1.10 % 0.85 % 1.10 %
GIL as a % of equity and allowances for credit losses 9.15 % 9.34 % 7.94 % 9.15 % 7.94 %
GIL as a % of equity and allowances for credit losses excluding purchased portfolios (4) 6.24 % 7.07 % 7.96 % 6.24 % 7.96 %
(1) GIL excludes purchased credit impaired loans.
(2) Includes impaired amounts returned to performing status, loan sales, repayments, the impact of foreign exchange fluctuations and effects for consumer write-offs which have not been recognized in formations.
(3) Excludes certain loans that are written-off directly and not classified as new formations ($106 million in Q3-2012, $106 million in Q2-2012; and $101 million in Q3-2011).
(4) Ratio is presented excluding purchased portfolios, to provide for better historical comparisons.
This section contains adjusted results and measures which are non-GAAP.
Please see the Non-GAAP Measures section.
Total Trading and Underwriting Market Value Exposure (MVE) Summary ($ millions)*
For the quarter ended July 31, 2012 As at April 30, 2012 As at October 31, 2011
(Pre-tax Canadian equivalent) Quarter-end Average High Low Quarter-end Year-end
Commodity VaR (0.6 ) (0.8 ) (1.0 ) (0.4 ) (0.5 ) (0.3 )
Equity VaR (6.9 ) (5.8 ) (7.1 ) (4.4 ) (6.3 ) (5.4 )
Foreign Exchange VaR (0.5 ) (1.6 ) (3.0 ) (0.2 ) (2.3 ) (0.9 )
Interest Rate VaR (MTM) (7.8 ) (7.8 ) (9.6 ) (6.2 ) (9.5 ) (6.3 )
Diversification 6.1 6.6 nm nm 7.9 4.2
Trading Market VaR (9.7 ) (9.4 ) (11.2 ) (7.5 ) (10.7 ) (8.7 )
Trading & Underwriting Issuer Risk (3.2 ) (5.4 ) (7.3 ) (2.8 ) (5.9 ) (3.6 )
Total Trading & Underwriting MVE (12.9 ) (14.8 ) (17.3 ) (12.3 ) (16.6 ) (12.3 )
Interest Rate VaR (AFS) (14.9 ) (15.7 ) (17.8 ) (14.7 ) (15.3 ) (11.3 )
* One-day measure using a 99% confidence interval. Losses are in brackets and benefits are presented as positive numbers.
MTM - mark-to-market
nm - not meaningful
Total Trading Market Stressed Value at Risk (VaR) Summary ($ millions)*
(Pre-tax Canadian equivalent) For the quarter ended July 31, 2012 As at April 30, 2012 As at October 31, 2011
Quarter-end Average High Low Quarter-end Year-end
Commodity Stressed VaR (0.8 ) (1.2 ) (2.5 ) (0.7 ) (1.1 ) (0.3 )
Equity Stressed VaR (13.2 ) (10.5 ) (13.4 ) (7.4 ) (9.9 ) (6.4 )
Foreign Exchange Stressed VaR (0.7 ) (2.2 ) (4.7 ) (0.5 ) (2.4 ) (1.2 )
Interest Rate Stressed VaR (Mark-to-Market) (13.0 ) (14.6 ) (21.4 ) (10.9 ) (19.9 ) (13.2 )
Diversification 9.3 11.6 nm nm 14.0 6.7
Trading Market Stressed VaR (18.4 ) (16.9 ) (21.0 ) (12.2 ) (19.3 ) (14.4 )
* One-day measure using a 99% confidence interval. Losses are in brackets and benefits are presented as positive numbers.
nm - not meaningful
Structural Balance Sheet Market Value Exposure and Earnings Volatility ($ millions)*
(Canadian equivalent) July 31, 2012 April 30, 2012 October 31, 2011
Market value exposure (MVE) (pre-tax) (608.9 ) (685.8 ) (685.9 )
12-month earnings volatility (EV) (after-tax) (80.4 ) (83.2 ) (95.0 )
Losses are in brackets. Measured at a 99% confidence interval.
Structural Balance Sheet Earnings and Value Sensitivity to Changes in Interest Rates ($ millions)* **
Economic value sensitivity (Pre-tax) Earnings sensitivity over the next 12 months (After-tax)
(Canadian equivalent) July 31, 2012 April 30, 2012 October 31, 2011 July 31, 2012 April 30, 2012 October 31, 2011
100 basis point increase (538.9 ) (562.6 ) (614.3 ) 16.5 26.1 24.8
100 basis point decrease 402.5 307.1 441.8 (79.7 ) (81.1 ) (102.5 )
200 basis point increase (1,242.9 ) (1,244.6 ) (1,295.7 ) 24.2 43.0 69.3
200 basis point decrease 806.7 724.6 829.4 (74.9 ) (34.7 ) (63.3 )
* Losses are in brackets and benefits are presented as positive numbers.
** For BMO's insurance businesses, a 100 basis point increase in interest rates at July 31, 2012, results in an increase in earnings after tax of $94 million and an increase in before tax economic value of $646 million ($96 million and $553 million, respectively, at April 30, 2012; and $88 million and $436 million, respectively, at October 31, 2011). A 100 basis point decrease in interest rates at July 31, 2012, results in a decrease in earnings after tax of $89 million and a decrease in before tax economic value of $742 million ($86 million and $634 million, respectively, at April 30, 2012; and $82 million and $494 million, respectively, at October 31, 2011). These impacts are not reflected in the table above.

Income Taxes

As explained in the Revenue section, management assesses BMO's consolidated results and associated provisions for income taxes on a GAAP basis. We assess the performance of the operating groups and associated income taxes on a taxable equivalent basis and report accordingly.

The provision for income taxes of $187 million increased $26 million from the third quarter of 2011 and decreased $50 million from the second quarter of 2012. The effective tax rate for the quarter was 16.2%, compared with 18.5% a year ago and 18.7% in the second quarter. The lower effective tax rate in the current quarter relative to the third quarter of 2011 was primarily due to a 1.6 percentage point reduction in the statutory Canadian income tax rate in 2012 and a change in Ontario statutory tax rates that resulted in a positive revaluation of deferred tax assets. The lower effective tax rate in the current quarter relative to the second quarter of 2012 was primarily due to higher tax exempt income and the change in Ontario statutory tax rates.

The adjusted effective tax rate was 16.9% in the current quarter, compared with 19.7% in the third quarter of 2011 and 19.5% in the second quarter of 2012. The adjusted tax rate is computed using adjusted net income rather than net income in the determination of income subject to tax.

As explained in the Provision for Income Taxes section of BMO's 2011 annual MD&A, to manage the impact of foreign exchange rate changes on BMO's investments in foreign operations, BMO may hedge foreign exchange risk by partially or fully funding its foreign investment in U.S. dollars. The gain or loss from such hedging and the unrealized gain or loss from translation of the investments in U.S. operations are charged or credited to shareholders' equity. For income tax purposes, the gain or loss on the hedging activities results in an income tax charge or credit in the current period in shareholders' equity, while the associated unrealized gain or loss on the investments in U.S. operations does not incur income taxes until the investments are liquidated. The income tax charge or benefit arising from such hedging gains or losses is a function of the fluctuation in the Canadian/U.S. exchange rate from period to period. This hedging of the investments in U.S. operations has given rise to an income tax recovery in shareholders' equity of $24 million for the quarter and $18 million for the year to date. Refer to the Consolidated Statement of Comprehensive Income included in the unaudited interim consolidated financial statements for further details. Information on additional hedging of our foreign exchange exposure due to investments in foreign operations is, with respect to the mitigation of potential volatility in our capital ratios, described below in the Capital Management Q3 2012 Regulatory Capital Review section.

Adjusted results in this section are non-GAAP amounts or non-GAAP measures. Please see the Non-GAAP Measures section.

Summary Quarterly Results Trends (1) (2)
(Canadian $ in millions, except as noted) Q3-2012 Q2-2012 Q1-
2012
Q4-
2011
Q3-
2011
Q2-
2011
Q1-
2011
Q4-
2010(2)
Total revenue 3,878 3,959 4,117 3,822 3,320 3,333 3,468 3,236
Provision for credit losses - specific 229 195 122 299 245 265 317 253
Provision for credit losses - collective 8 - 19 63 (15 ) 32 6 -
Non-interest expense 2,484 2,499 2,554 2,432 2,221 2,030 2,058 2,030
Reported net income 970 1,028 1,109 768 708 813 825 757
Adjusted net income 1,013 982 972 832 856 770 817 766
Basic earnings per share ($) 1.42 1.52 1.65 1.12 1.10 1.34 1.36 1.25
Diluted earnings per share ($) 1.42 1.51 1.63 1.11 1.09 1.32 1.34 1.24
Adjusted diluted earnings per share ($) 1.49 1.44 1.42 1.20 1.34 1.25 1.32 1.26
Net interest margin on earning assets (%) 1.88 1.89 2.05 2.01 1.76 1.82 1.78 1.89
Adjusted net interest margin on earning assets (%) 1.70 1.76 1.85 1.78 1.78 1.83 1.79 1.89
Effective income tax rate (%) 16.2 18.7 22.0 25.3 18.5 19.2 24.1 20.6
Canadian/U.S. dollar exchange rate (average) 1.02 0.99 1.01 1.01 0.96 0.96 1.01 1.04
Reported net income:
P&C Canada 453 446 446 439 443 414 477 427
P&C U.S. 129 121 137 155 90 53 54 46
Personal and Commercial Banking 582 567 583 594 533 467 531 473
Private Client Group 109 145 105 137 104 91 144 120
BMO Capital Markets 232 225 198 143 270 229 260 214
Corporate Services, including T&O 47 91 223 (106 ) (199 ) 26 (110 ) (50 )
BMO Financial Group net income 970 1,028 1,109 768 708 813 825 757
Adjusted net income:
P&C Canada 456 449 448 441 444 417 479 429
P&C U.S. 145 136 154 172 99 57 59 51
Personal and Commercial Banking 601 585 602 613 543 474 538 480
Private Client Group 115 150 110 143 105 93 145 121
BMO Capital Markets 232 226 198 143 270 229 260 214
Corporate Services, including T&O 65 21 62 (67 ) (62 ) (26 ) (126 ) (49 )
BMO Financial Group adjusted net income 1,013 982 972 832 856 770 817 766
(1) Adjusted results in this chart are non-GAAP amounts or non-GAAP measures. Please see the Non-GAAP Measures section.
(2) Amounts for Q4-2010 have not been restated to conform to IFRS. See discussion that follows.

BMO's quarterly earning trends were reviewed in detail on pages 98 and 99 of BMO's 2011 annual MD&A. Readers are encouraged to refer to that review for a more complete discussion of trends and factors affecting past quarterly results including the modest impact of seasonal variations in results. The above table outlines summary results for the fourth quarter of fiscal 2010 through the third quarter of fiscal 2012.

Effective November 1, 2011, BMO's financial statements are prepared in accordance with IFRS. The consolidated financial statements for comparative periods in fiscal year 2011 have been restated. Our financial results for the one quarter in fiscal 2010 listed above, however, have not been restated and are still being presented in accordance with Canadian GAAP as defined at that time.

We have remained focused on our objectives and priorities and have made good progress in embracing a culture that places the customer at the centre of everything we do. Economic conditions were at times challenging for some of our businesses in 2011, but overall conditions improved and we have maintained our focus on our vision and strategy, while also reporting improved results in 2011 and 2012. These improved results generally reflect a trend toward stronger revenues, reduced provisions for credit losses and increased net income, although adjusted results in the fourth quarter of 2011 were weaker due to the impact of concerns over the European debt situation. Expenses increased in 2011, reflecting acquisitions, initiative spending and business growth. Results in the first three quarters of 2012 were strong.

In July 2011, we completed the acquisition of M&I for share consideration, significantly growing our operations in the United States.

P&C Canada has performed well with generally increasing revenues and profitability, and good revenue increase in the commercial businesses, driven by volume growth across most products. Net income has generally trended higher in 2011 and into the first nine months of 2012, with revenue and expense growth moderating during that period.

P&C U.S. has operated in a difficult economic environment since 2007. The economic environment led to a drop in loan utilization, which affected revenue growth and net income. Results improved significantly in 2011 and into 2012 as we are realizing the benefit of the acquired business late in the third quarter of 2011 and seeing commercial loan utilization starting to increase.

Beginning in the third quarter of 2011, Private Client Group results reflect the acquisitions of the Lloyd George Management group of companies and the M&I wealth management business. Recent quarterly results have generally reflected continued growth in Private Client Group excluding insurance. Insurance results were lowered in the first quarter and third quarter of 2012 by the effects of changes in long-term interest rates. Private Client Group results are subject to variability due to reinsurance charges and the effects of long-term interest rate movements on our insurance business.

BMO Capital Markets results in the first quarter of 2011 were particularly strong, while second quarter results returned to normal levels and third quarter results benefited from tax recoveries related to prior periods. Results were down in the fourth quarter of 2011 due to a difficult market environment. Net income has trended higher in 2012 although the market environment remains uncertain.

Corporate Services reported results are affected by adjusting items. Adjusted results have been generally more consistent, reflecting decreased provisions for credit losses and better revenues.

The effective income tax rate can vary as it depends on the timing of resolution of certain tax matters, recoveries of prior periods' income taxes and the relative proportion of earnings attributable to the different jurisdictions in which we operate.

The U.S. dollar has generally weakened over the past two years. It weakened further in 2011 to levels close to parity, although the decrease in its value was less pronounced than in 2010. The U.S. dollar strengthened slightly in the first quarter of 2012, weakened in the second quarter, and then strengthened again in the third quarter. A stronger U.S. dollar increases the translated values of BMO's U.S.-dollar-denominated revenues and expenses.

Balance Sheet

Total assets of $542.2 billion at July 31, 2012, increased $41.7 billion from October 31, 2011, with minimal impact from the stronger U.S. dollar. The increase primarily reflects growth in net loans and acceptances of $14.5 billion, cash and cash equivalents and interest bearing deposits with banks of $13.9 billion, securities of $8.1 billion and securities borrowed or purchased under resale agreements of $7.6 billion. All remaining assets declined by a combined $2.4 billion.

The $14.5 billion increase in net loans and acceptances was primarily due to an increase in loans to businesses and governments of $8.0 billion across most operating groups and an increase in residential mortgages of $4.5 billion in P&C Canada. Other loans and acceptances had a net increase totalling $2.0 billion.

The $13.9 billion increase in cash and cash equivalents and interest bearing deposits with banks was primarily due to increased balances held with the Federal Reserve.

The $8.1 billion increase in securities resulted primarily from an increase in available-for-sale securities.

The $7.6 billion increase in securities borrowed or purchased under resale agreements was mainly due to increased client-driven activities.

The $2.4 billion decrease in other items was primarily related to decreases in derivative assets primarily related to U.S. equities.

Liabilities and equity increased $41.7 billion from October 31, 2011. The change primarily reflects increases in deposits of $26.6 billion, securities lent or sold under repurchase agreements of $15.1 billion, securities sold but not yet purchased of $2.3 billion and shareholders' equity of $1.6 billion. All remaining liabilities decreased by a combined $3.9 billion.

The $26.6 billion increase in deposits was largely driven by a $24.5 billion increase in business and government deposits, which grew in both the United States and Canada. Deposits by banks increased $2.4 billion, while deposits by individuals decreased $0.3 billion.

The $15.1 billion increase in securities lent or sold under repurchase agreements was mainly due to increased client-driven activities.

The $3.9 billion decrease in other items was largely related to the windup of one of the bank's mortgage securitization vehicles.

The $2.3 billion increase in securities sold but not yet purchased was primarily due to increased hedging requirements in BMO Capital Markets.

The increase in shareholders' equity of $1.6 billion reflects growth in retained earnings.

Contractual obligations by year of maturity are outlined in Table 20 on page 110 of BMO's 2011 Annual Report, in accordance with Canadian GAAP as defined at that time. On this basis, there have been no material changes to contractual obligations that are outside the ordinary course of our business.

Capital Management

Q3 2012 Regulatory Capital Review

BMO's capital position remains strong, with a Common Equity Ratio (based on Basel II) of 10.31%, and a Basel II Tier 1 Capital Ratio of 12.40% at July 31, 2012. Common Equity and Tier 1 capital were $21.1 and $25.4 billion, respectively. Risk-weighted assets (RWA) were $205 billion at July 31, 2012.

The Common Equity Ratio increased 72 basis points from the end of fiscal 2011 due to higher common equity and lower RWA, as described below. The Basel II Tier 1 Capital Ratio increased 39 basis points from the end of fiscal 2011. Relative to the second quarter, the Common Equity Ratio and Tier 1 Capital Ratio increased 41 and 43 basis points, respectively.

Effective November 1, 2011, BMO adopted IFRS, which impacts our capital ratios. The transition to IFRS reduces RWA and lowers retained earnings. As such, the adoption of IFRS will ultimately reduce BMO's Basel II Tier 1 Capital Ratio and Total Capital Ratio by approximately 60 and 55 basis points, respectively, and increase the assets to capital multiple by 1.45x. Using transition guidance from the Office of the Superintendent of Financial Institutions Canada (OSFI), BMO has elected to phase in the impact of lower Tier 1 capital over a five-quarter period and, as such, the impact of IFRS lowered our Basel II Tier 1 Capital Ratio and Total Capital Ratio at the end of the third quarter by 32 and 28 basis points, respectively. The impact of lower RWA is not phased in and was fully recognized in the first quarter of 2012.

Basel II RWA of $205 billion at July 31, 2012, was $4 billion lower than October 31, 2011, due mainly to lower RWA related to the adoption of IFRS described above, improved risk assessments and lower RWA related to securitized assets. These factors were partly offset by the requirements for additional Stress VaR RWA under the Basel 2.5 rules and the impact of the weakening Canadian dollar on U.S.-dollar-denominated RWA.

Common equity (on a Basel II basis) at July 31, 2012, increased $1.1 billion from $20.0 billion at October 31, 2011, due to retained earnings growth and the issuance of common shares through the Shareholder Dividend Reinvestment and Share Purchase Plan and the exercise of stock options. These factors were partly offset by higher deductions under Basel 2.5 rules.

Common equity growth was partly offset by adjustments to retained earnings as part of the transition to IFRS, which, as noted above, is phased in over five quarters, and by higher Basel II capital deductions due to the expiry of grandfathering rules related to capital deductions for insurance subsidiaries held prior to January 1, 2007. Excluding these adjustments, common equity increased by $2.2 billion.

The bank's Basel II Tier 1 capital increased $0.3 billion from October 31, 2011, with growth in common equity partially offset by the redemption of $400 million BMO BOaTS - Series C in December 2011 and US$300 million Class B Preferred Shares Series 10 in February 2012.

BMO's Basel II Total Capital Ratio was 14.78% at July 31, 2012. The ratio was down modestly from the end of 2011 and from the second quarter. Total capital decreased $0.7 billion from the end of 2011 to $30.3 billion, primarily due to the factors outlined above and the redemption of $1.2 billion of subordinated Series D Medium-Term Notes Second Tranche in June 2012.

BMO's Assets-to-Capital Multiple, a leverage ratio monitored by OSFI, was 15.8 at July 31, 2012. Under OSFI rules, a bank's total assets should be no greater than 20 times its available capital, but OSFI may prescribe a lower multiple or approve a multiple of up to 23, depending on a bank's circumstances.

BMO's investments in U.S. operations are primarily denominated in U.S. dollars. As discussed in the preceding Income Taxes section, foreign exchange gains or losses on the translation of the investments in foreign operations to Canadian dollars are reported in shareholders' equity (although they do not attract tax until realized). When coupled with the foreign exchange impact of U.S.-dollar-denominated RWA on Canadian-dollar equivalent RWA, and with the impact of U.S.-dollar-denominated capital deductions on our Canadian dollar capital, this may result in volatility in the bank's capital ratios. BMO may, as discussed in the Income Taxes section, partially hedge this foreign exchange risk by funding its foreign investment in U.S. dollars and, to reduce the impact of foreign exchange rate changes on the bank's capital ratios, may enter into forward currency contracts or elect to fund its investment in Canadian dollars.

Pending Basel III Regulatory Capital Changes

The Basel III capital rules, which will come into effect in January 2013, have now been described by OSFI in drafts disclosed for public consultation and BMO's Basel III capital ratios are well-positioned for the adoption of the new requirements.

We consider the Common Equity Ratio to be the primary capital ratio under Basel III. Based on our analysis and assumptions, BMO's pro-forma July 31, 2012, Common Equity Ratio would be 8.3%, approximately 65 basis points higher than the pro-forma ratio at the end of the prior quarter. This increase was primarily due to common equity growth (largely from retained earnings) and lower capital deductions. OSFI indicated in a public letter dated February 1, 2011, that it expects deposit-taking institutions to meet the Basel III capital requirements, including a 7% Common Equity Ratio target (4.5% minimum plus 2.5% capital conservation buffer), early in the Basel III transition period, which commences at the start of 2013. BMO currently surpasses these expectations on a pro-forma basis.

The bank's regulatory common equity, defined as common equity net of applicable regulatory capital adjustments, would decrease by approximately $2.3 billion from $20.5 billion under Basel II, based on full phase in of IFRS impacts, to $18.2 billion under Basel III, both as at July 31, 2012.

Our RWA at July 31, 2012, would increase by approximately $16 billion from $205 billion under Basel II to $221 billion under Basel III, primarily due to higher counterparty credit risk RWA of $13.3 billion as well as the conversion of certain existing Basel II capital deductions to RWA.

The Basel III pro-forma Tier 1 Capital Ratio at July 31, 2012, would be 9.9%, an increase of approximately 35 basis points from the prior quarter.

Under Basel III, Tier 1 capital at July 31, 2012, would decrease by approximately $3.1 billion from $24.9 billion under Basel II to $21.8 billion, based on full phase in of IFRS impacts.

BMO's pro-forma Tier 1 Capital Ratio, Total Capital Ratio and Leverage Ratio exceed Basel III minimum requirements.

The pro-forma calculations and statements in this section assume full implementation of announced Basel III regulatory capital requirements and proposals. In calculating the bank's Basel III Tier 1 Capital Ratio, Basel III Total Capital Ratio and Leverage Ratio, we also assumed that BMO's current non-common share Tier 1 and Tier 2 capital instruments were fully included in regulatory capital. These instruments do not meet Basel III capital requirements and will be subject to grandfathering provisions and phased out at 10% per annum over a nine-year period beginning January 1, 2013. We expect to be able to refinance non-common share capital instruments as and when necessary in order to meet applicable non-common share capital requirements.

The Basel III pro-forma ratios do not reflect future management actions that may be taken to help mitigate the impact of the changes, the benefit of future growth in retained earnings, additional rule changes or factors beyond management's control.

Additional information on Basel III regulatory capital changes is available in the Enterprise-Wide Capital Management section on pages 61 to 65 of BMO's 2011 annual MD&A.

Other Capital Developments

During the quarter, 3,574,000 common shares were issued through the Shareholder Dividend Reinvestment and Share Purchase Plan and the exercise of stock options.

During the quarter, we redeemed all $1.2 billion of subordinated Series D Medium-Term Notes Second Tranche.

On August 28, 2012, BMO announced that the Board of Directors declared a quarterly dividend payable to common shareholders of $0.72 per share, an increase of two cents per share from a year ago and from the preceding quarter. The increase in our dividend reflects our strong capital position, the success of our business strategies and our confidence in our continued ability to generate sustained earnings growth.

The bank also changed its target dividend payout range (common share dividends as a percentage of net income attributable to shareholders less preferred share dividends) to 40-50% from 45-55%.

This change is consistent with our objective of maintaining capital flexibility to execute on our growth strategies and considers the higher capital expectations resulting from Basel III.

The dividend is payable November 28, 2012, to shareholders of record on November 1, 2012. Common shareholders may elect to have their cash dividends reinvested in common shares of the bank in accordance with the bank's Shareholder Dividend Reinvestment and Share Purchase Plan ("Plan"). Under the Plan, the Board of Directors determines whether the common shares will be purchased in the secondary market or issued by the bank from treasury. For the dividend payable on November 28 2012, given the strength of the bank's capital position, the common shares purchased under the Plan will be issued from treasury without a discount. Previously, common shares purchased under the Plan were issued at a two per cent discount from the average market price of the common shares, as defined in the Plan.

Qualifying Regulatory Capital
Basel II Regulatory Capital and Risk-Weighted Assets
(Canadian $ in millions)
Q3-2012 Q4-2011
Gross common shareholders' equity 25,605 24,455
IFRS phase in not applicable to common equity 44 -
Goodwill and excess intangible assets (3,732 ) (3,585 )
Securitization-related deductions (31 ) (168 )
Expected loss in excess of allowance - AIRB Approach (75 ) (205 )
Substantial investments/Investments in insurance subsidiaries (607 ) (481 )
Other deductions (86 ) -
Adjusted common shareholders' equity 21,118 20,016
Non-cumulative preferred shares 2,465 2,861
Innovative Tier 1 Capital Instruments 1,847 2,156
Non-controlling interest in subsidiaries 16 38
IFRS phase in only applicable to Tier 1 capital (44 ) -
Adjusted Tier 1 Capital 25,402 25,071
Subordinated debt 4,386 5,896
Trust subordinated notes 800 800
Accumulated net after-tax unrealized gains on available-for-sale equity securities 68 7
Eligible portion of collective allowance for credit losses 331 309
Total Tier 2 Capital 5,585 7,012
Securitization-related deductions (31 ) (31 )
Expected loss in excess of allowance - AIRB Approach (75 ) (205 )
Substantial Investments/Investment in insurance subsidiaries (607 ) (855 )
Adjusted Tier 2 Capital 4,872 5,921
Total Capital 30,274 30,992
Risk-Weighted Assets
(Canadian $ in millions) Q3-2012 Q4-2011
Credit risk 172,050 179,092
Market risk 7,320 4,971
Operational risk 25,417 24,609
Total risk-weighted assets 204,787 208,672

Caution

The foregoing Capital Management sections contain forward-looking statements. Please see the Caution Regarding Forward-Looking Statements.

The foregoing Capital Management sections contain adjusted results and measures, which are non-GAAP. Please see the Non-GAAP Measures section.

Outstanding Shares and Securities Convertible into Common Shares
As at August 22, 2012 Number of shares or
dollar amount
Common shares 646,944,000
Class B Preferred Shares
Series 5 $ 200,000,000
Series 13 $ 350,000,000
Series 14 $ 250,000,000
Series 15 $ 250,000,000
Series 16 $ 300,000,000
Series 18 $ 150,000,000
Series 21 $ 275,000,000
Series 23 $ 400,000,000
Series 25 $ 290,000,000
Stock options
- vested 8,934,000
- non-vested 7,955,000
Details on share capital are outlined in the 2011 Annual Report in Note 20 to the audited consolidated financial statements on pages 154 to 155.

Eligible Dividends Designation

For the purposes of the Income Tax Act (Canada) and any similar provincial and territorial legislation, BMO designates all dividends paid or deemed to be paid on both its common and preferred shares as "eligible dividends", unless indicated otherwise.

Credit Rating

The credit ratings assigned to BMO's short-term and senior long-term debt securities by external rating agencies are important in the raising of both capital and funding to support our business operations. Maintaining strong credit ratings allows us to access the capital markets at competitive pricing levels. Should our credit ratings experience a material downgrade, our cost of funds would likely increase significantly and our access to funding and capital through capital markets could be reduced. A material downgrade of our ratings could have other consequences, including those set out in Note 10 on page 140 of our annual consolidated financial statements.

BMO's senior debt credit ratings were unchanged in the quarter and have a stable outlook. All four ratings are indicative of high-grade, high-quality issues. The ratings are as follows: DBRS (AA); Fitch (AA-); Moody's (Aa2); and Standard & Poor's (S&P) (A+). These credit ratings are also disclosed for the current and prior periods in the Financial Highlights section located near the beginning of this document.

Transactions with Related Parties

In the ordinary course of business, we provide banking services to our directors and executives and affiliated entities, joint ventures and equity-accounted investees on the same terms that we offer to our customers for those services. A select suite of customer loan and mortgage products is offered to our employees at rates normally made available to our preferred customers. We also offer employees a fee-based subsidy on annual credit card fees.

Stock options and deferred share units granted to directors and preferred rate loan agreements for executives, relating to transfers we initiate, are all discussed in Note 27 to the audited consolidated financial statements on page 169 of BMO's 2011 Annual Report.

Off-Balance-Sheet Arrangements

BMO enters into a number of off-balance-sheet arrangements in the normal course of operations. The most significant of these are Credit Instruments, Special Purpose Entities and Guarantees, which are described on pages 66 to 68 and 70 of BMO's 2011 annual MD&A as well as in Notes 5 and 7 to the unaudited interim consolidated financial statements for the quarter ended April 30, 2012. Under IFRS, we now consolidate our structured credit vehicles, U.S. customer securitization vehicle, BMO Capital Trust II and BMO Subordinated Notes Trust. See the Select Financial Instruments section for comments on any significant changes to these arrangements during the quarter ended July 31, 2012.

Accounting Policies and Critical Accounting Estimates

Effective the first quarter of 2012, BMO's consolidated financial statements are prepared in accordance with IFRS. Significant accounting policies under IFRS are described in the notes to our unaudited interim consolidated financial statements for the quarter ended April 30, 2012, together with a discussion of certain accounting estimates that are considered particularly important as they require management to make significant judgments, some of which relate to matters that are inherently uncertain. Readers are encouraged to review that discussion. The consolidated financial statements for comparative periods have been restated to conform to the current presentation. Our consolidated financial statements were previously prepared in accordance with Canadian GAAP as defined at that time. Changes in accounting as a result of conforming to IFRS are described more fully in Note 19 to our unaudited interim consolidated financial statements for the quarter ended April 30, 2012, and on pages 73 to 77 of BMO's 2011 annual MD&A.

Future Changes in Accounting Policies

The International Accounting Standards Board has issued amendments to the standard for financial instrument disclosures, which require additional disclosure on the transfer of financial assets, including the possible effects of any residual risks that the transferring entity retains. These amendments will be effective for BMO for our annual disclosures as at October 31, 2012. In addition, effective November 1, 2013, we will also adopt new standards on Employee Benefits, Fair Value Measurement, Consolidated Financial Statements, Investment in Associates and Joint Ventures, Offsetting, and Disclosure of Interests in Other Entities. Additional information on the new standards and amendments to existing standards can be found in Note 1 to the unaudited interim consolidated financial statements for the quarter ended April 30, 2012.

The above Future Changes in Accounting Policies section contains forward-looking statements. Please see the Caution Regarding Forward-Looking Statements.

Select Financial Instruments

Pages 65 to 69 of BMO's 2011 annual MD&A provide enhanced disclosure relating to select financial instruments that, commencing in 2008 and based on subsequent assessments, markets had come to regard as carrying higher risk. Readers are encouraged to review that disclosure to assist in understanding the nature and extent of BMO's exposures. We follow a practice of reporting on significant changes in the select financial instruments, if any, in our interim MD&A.

Under IFRS, we now consolidate our structured investment vehicle, our Canadian credit protection vehicle and our U.S. customer securitization vehicle. There has been no change to the structure of our economic exposure.

The amount drawn on the liquidity facility BMO provides for the structured investment vehicle Links Finance Corporation (Links) was lowered to US$1.8 billion at the end of the quarter, down from US$2.1 billion at April 30, 2012, and US$2.6 billion at the end of fiscal 2011. The decrease was attributable to asset sales and asset maturities. The book value of the Links' subordinated capital notes at quarter-end was US$399 million, compared with US$407 million at April 30, 2012, and US$440 million at October 31, 2011.

Select Geographic Exposures

BMO's geographic exposure is subject to a country risk management framework that incorporates economic and political assessments, and management of exposure within limits based on product, entity and the country of ultimate risk. We are closely monitoring our European exposure, and our risk management processes incorporate stress tests where appropriate to assess our potential risk. Our exposure to select countries of interest, as at July 31, 2012, is set out in the tables that follow, which summarize our exposure to Greece, Ireland, Italy, Portugal and Spain (GIIPS) along with a broader group of countries of interest in Europe with gross exposures greater than $500 million.

The first table outlines portfolio total gross and net exposures for lending, securities (inclusive of credit exposures arising from credit default swap (CDS) activity), repo-style transactions and derivatives (counterparty). These totals are broken down by counterparty type in the subsequent tables. For greater clarity, CDS exposure by counterparty is detailed separately.

The bank's direct exposures to GIIPS are primarily to banks for trade finance and trading products. Net exposures remain modest at $149 million, plus $48 million of unfunded commitments. In addition, our Irish subsidiary is required to maintain reserves with the Irish central bank. These totalled $78 million at the end of the quarter.

Our net direct exposure to the other Eurozone countries (the other 12 countries that share a common Euro currency) totalled approximately $4.5 billion, of which 70% was to counterparties in countries with a Aaa/AAA rating by both Moody's and S&P, with approximately 96% rated Aaa/AAA by one or other of the rating agencies. Our net direct exposure to the rest of Europe totalled approximately $3.5 billion, of which 93% was to counterparties in countries with a Moody's/S&P rating of Aaa/AAA. A significant majority of our sovereign exposure consists of tradeable cash products, while exposure to banks was comprised of trading instruments, short-term debt, derivative positions and letters of credit and guarantees.

In addition to the exposures shown in the table, we have exposure to European supranational institutions totalling $0.47 billion, predominantly in the form of tradeable cash products, as well as $0.13 billion of European Central Bank exposure.

The bank also has exposure to entities in a number of European countries through our credit protection vehicle, U.S. customer securitization vehicle and structured investment vehicle. These exposures are not included in the tables due to the credit protection incorporated in their structures. The bank has direct credit exposure to those structures, which in turn have exposures to loans or securities originated by entities in Europe. As noted on pages 67 to 68 of BMO's 2011 annual MD&A, these structures all have first-loss protection and hedges are in place for our credit protection vehicle.

The notional exposure held in our credit protection vehicle to issuers in Greece, Italy and Spain represented 0.5%, 1.4% and 1.1%, respectively, of its total notional exposure. The credit protection vehicle had notional exposure to 7 of the other 12 countries that share the Euro currency. This exposure represented 14.3% of total notional exposure, of which 77.0% was rated investment grade by S&P (68.0% by Moody's). The notional exposure to the remainder of Europe was 16.8% of the total notional exposure, with 69.9% rated investment grade by S&P (64.9% by Moody's). The bank is well protected as a result of both first-loss protection and hedges that are in place.

The bank has exposure to GIIPS and other European countries through our U.S. customer securitization vehicle, which has reliance on 1.88% of loans or securities originated by entities in Europe. Exposure to Germany is the largest at 0.63%. Exposure to Spain is approximately 0.11%, to Italy is 0.01% and there is no exposure to Ireland, Greece or Portugal.

The structured investment vehicle's par value exposure to entities in European countries totalled $817 million, of which $0.2 million is exposure to GIIPS, $283 million to the other Eurozone countries and $534 million to the rest of Europe. The largest exposures include the United Kingdom at $469 million and Netherlands at $179 million. These values include exposure through collateralized bond obligation (CBO), collateralized loan obligation (CLO) investments and residential mortgage-backed securities, which have credit exposures to borrowers or issuers operating in Europe.

BMO's indirect exposure to Europe in the form of Euro-denominated collateral to support trading activity was EUR473 million in securities issued by entities in European countries and EUR259 million of cash collateral at July 31, 2012. Of this amount, EUR5 million was held in GIIPS related securities and EUR261 million was in German securities.

Indirect exposure by way of guarantees from entities in European countries totalled $436 million, of which $2 million is exposure to GIIPS, $208 million to the other Eurozone countries and $226 million to the rest of Europe. Indirect exposure is managed through our credit risk management framework, with a robust assessment of the counterparty. Reliance may be placed on collateral or guarantees as part of specific product structures, such as repurchase agreements.

The bank's CDS exposures in Europe are also outlined in a table that follows. As part of our credit risk management framework, purchased CDS risk is controlled through a regularly reviewed list of approved counterparties. The majority of CDS exposures are offsetting in nature, typically contain matched contractual terms and are attributable to legacy credit trading strategies that have been in run-off since 2008. Maturity mismatches in the run-off portfolio are not material, and where they exist, the purchased credit protection generally extends beyond the maturity date of the offsetting bond or CDS contract. There is one exception where the purchased protection expires prior to the maturity of the offsetting sold protection contract, and on this exception the open credit exposure is not material and extends for less than one month. This exposure is outside of the GIIPS countries and has been netted in the tables. In addition, two European exposures totalling EUR50 million of sold protection are hedged on a proxy basis. The credit benefit realized through the proxy hedge has not been netted in the tables. Of this exposure, EUR20 million is to Italian counterparties while the remainder is outside of the GIIPS countries.

European Exposure7 by Country (Canadian $ in millions)
As at July 31, 2012
Lending(1) Securities(2) Repo-Style Trans(3) Derivatives(4) Total
Country Commitments Funded Gross Net Gross Net Gross Net Gross Net
GIIPS
Greece 2 2 - - - - - - 2 2
Ireland(5) - - 28 - - - 58 1 86 1
Italy 2 2 248 25 65 5 11 7 326 39
Portugal 67 19 125 - - - - - 192 19
Spain 85 85 254 - - - 7 3 346 88
Total - GIIPS 156 108 655 25 65 5 76 11 952 149
Eurozone (excluding GIIPS)
France 40 40 1,013 768 1,828 1 336 41 3,217 850
Germany 164 164 2,229 1,735 1,924 12 85 29 4,402 1,940
Netherlands 285 169 667 542 1,311 2 92 11 2,355 724
Other(6) 398 248 914 703 - - 116 56 1,428 1,007
Total - Eurozone (excluding GIIPS) 887 621 4,823 3,748 5,063 15 629 137 11,402 4,521
Rest of Europe
Denmark 7 7 704 703 212 - 2 - 925 710
Norway 12 12 1,045 1,045 - - 19 19 1,076 1,076
Sweden 58 25 279 207 261 1 5 - 603 233
United Kingdom 360 188 1,086 553 2,362 4 516 101 4,324 846
Other(6) 610 601 597 - 132 2 47 26 1,386 629
Total - Rest of Europe 1,047 833 3,711 2,508 2,967 7 589 146 8,314 3,494
Total - All of Europe 2,090 1,562 9,189 6,281 8,095 27 1,294 294 20,668 8,164
Details of the summary amounts reflected in the columns above are provided in the tables that follow.
(1) Lending includes loans and trade finance. Amounts are net of write-offs and gross of specific allowances, both of which are not considered material.
(2) Securities include cash products, insurance investments and traded credit. Gross traded credit includes only the long positions and excludes offsetting short positions.
(3) Repo-style transactions are all with bank counterparties.
(4) Derivatives amounts are marked-to-market, incorporating transaction netting and, for counterparties where a Credit Support Annex is in effect, collateral offsets. Derivative replacement risk net of collateral for all of Europe is approximately $3.0 billion.
(5) Does not include Irish subsidiary reserves with Irish Central Bank of $78 million.
(6) Includes countries with less than $500 million in gross exposure. Other Eurozone includes exposures to Austria, Belgium, Finland, Luxembourg, Slovakia and Slovenia . Other Europe includes exposures to Croatia, Czech Republic, Hungary, Iceland, Poland, Russian Federation and Switzerland.
(7) The bank also has exposure to entities in a number of European countries through our credit protection vehicle, U.S. customer securitization vehicle and structured investment vehicle. These exposures are not included in the tables due to the credit protection incorporated in their structures.
(8) Sovereign includes sovereign-backed bank cash products.
European Lending Exposure7 by Country and Counterparty (Canadian $ in millions)
As at July 31, 2012
Lending(1)
Commitments Funded
Country Bank Corporate Sovereign Total Bank Corporate Sovereign Total
GIIPS
Greece 2 - - 2 2 - - 2
Ireland(5) - - - - - - - -
Italy 2 - - 2 2 - - 2
Portugal 19 48 - 67 19 - - 19
Spain 85 - - 85 85 - - 85
Total - GIIPS 108 48 - 156 108 - - 108
Eurozone (excluding GIIPS)
France 40 - - 40 40 - - 40
Germany 78 5 81 164 78 5 81 164
Netherlands 28 257 - 285 28 141 - 169
Other(6) 344 54 - 398 207 41 - 248
Total - Eurozone (excluding GIIPS) 490 316 81 887 353 187 81 621
Rest of Europe
Denmark 7 - - 7 7 - - 7
Norway 12 - - 12 12 - - 12
Sweden 23 35 - 58 23 2 - 25
United Kingdom 85 275 - 360 85 103 - 188
Other(6) 246 364 - 610 246 355 - 601
Total - Rest of Europe 373 674 - 1,047 373 460 - 833
Total - All of Europe 971 1,038 81 2,090 834 647 81 1,562
Refer to footnotes in first table.
European Securities Exposure7 by Country and Counterparty (Canadian $ in millions)
As at July 31, 2012
Securities(2)
Gross Net
Country Bank Corporate Sovereign (8) Total Bank Corporate Sovereign (8) Total
GIIPS
Greece - - - - - - - -
Ireland(5) - 3 25 28 - - - -
Italy 56 81 111 248 - 25 - 25
Portugal - - 125 125 - - - -
Spain 127 83 44 254 - - - -
Total - GIIPS 183 167 305 655 - 25 - 25
Eurozone (excluding GIIPS)
France 78 97 838 1,013 - - 768 768
Germany 232 327 1,670 2,229 26 39 1,670 1,735
Netherlands 457 102 108 667 433 8 101 542
Other(6) 160 108 646 914 131 37 535 703
Total - Eurozone (excluding GIIPS) 927 634 3,262 4,823 590 84 3,074 3,748
Rest of Europe
Denmark 263 1 440 704 263 - 440 703
Norway 392 - 653 1,045 392 - 653 1,045
Sweden 206 72 1 279 206 - 1 207
United Kingdom 188 423 475 1,086 36 42 475 553
Other(6) 16 52 529 597 - - - -
Total - Rest of Europe 1,065 548 2,098 3,711 897 42 1,569 2,508
Total - All of Europe 2,175 1,349 5,665 9,189 1,487 151 4,643 6,281
Refer to footnotes in first table.
European Repo & Derivatives Exposure7by Country and Counterparty (Canadian $ in millions)
As at July 31, 2012
Repo-Style Trans.(3) Derivatives(4)
Gross Net of Collateral Gross Net of Collateral
Country Total Total Bank Corporate Sovereign Total Bank Corporate Sovereign Total
GIIPS
Greece - - - - - - - - - -
Ireland(5) - - 58 - - 58 1 - - 1
Italy 65 5 6 5 - 11 2 5 - 7
Portugal - - - - - - - - - -
Spain - - 7 - - 7 3 - - 3
Total - GIIPS 65 5 71 5 - 76 6 5 - 11
Eurozone (excluding GIIPS)
France 1,828 1 336 - - 336 41 - - 41
Germany 1,924 12 85 - - 85 29 - - 29
Netherlands 1,311 2 90 2 - 92 9 2 - 11
Other(6) - - 107 5 4 116 47 5 4 56
Total - Eurozone (excluding GIIPS) 5,063 15 618 7 4 629 126 7 4 137
Rest of Europe
Denmark 212 - 2 - - 2 - - - -
Norway - - 1 - 18 19 1 - 18 19
Sweden 261 1 5 - - 5 - - - -
United Kingdom 2,362 4 499 11 6 516 84 11 6 101
Other(6) 132 2 47 - - 47 26 - - 26
Total - Rest of Europe 2,967 7 554 11 24 589 111 11 24 146
Total - All of Europe 8,095 27 1,243 23 28 1,294 243 23 28 294
Refer to footnotes in first table.
Credit Default Swaps by Country and Credit Quality (Canadian $ in millions)
As at July 31, 2012
Fair Value Notional
Purchased Written Purchased Written
Country Inv. Grade Non-Inv. Grade Inv. Grade Non-Inv. Grade Total Exposure Inv.
Grade
Non-Inv. Grade Total Inv. Grade Non-Inv. Grade Total Total Exposure
GIIPS
Greece - - - - - - - - - - - -
Ireland(5) 5 - (5 ) - - (29 ) - (29 ) 29 - 29 -
Italy 16 - (16 ) - - (236 ) - (236 ) 254 - 254 18
Portugal 28 - (28 ) - - (125 ) - (125 ) 125 - 125 -
Spain 15 - (15 ) - - (214 ) (6 ) (220 ) 210 11 221 1
Total - GIIPS 64 - (64 ) - - (604 ) (6 ) (610 ) 618 11 629 19
Eurozone (excluding GIIPS)
France 2 - (2 ) - - (330 ) - (330 ) 304 - 304 (26 )
Germany 4 - (3 ) - 1 (733 ) - (733 ) 697 25 722 (11 )
Netherlands - - - - - (167 ) (6 ) (173 ) 132 12 144 (29 )
Other(6) 2 - (2 ) - - (241 ) - (241 ) 278 - 278 37
Total - Eurozone (excluding GIIPS) 8 - (7 ) - 1 (1,471 ) (6 ) (1,477 ) 1,411 37 1,448 (29 )
Rest of Europe
Denmark - - - - - (30 ) - (30 ) 30 - 30 -
Norway - - - - - - - - - - - -
Sweden - - 1 - 1 (97 ) (6 ) (103 ) 103 - 103 -
United Kingdom 7 - (5 ) - 2 (603 ) - (603 ) 546 43 589 (14 )
Other(6) 17 - (15 ) - 2 (903 ) (25 ) (928 ) 717 8 725 (203 )
Total - Rest of Europe 24 - (19 ) - 5 (1,633 ) (31 ) (1,664 ) 1,396 51 1,447 (217 )
Total - All of Europe 96 - (90 ) - 6 (3,708 ) (43 ) (3,751 ) 3,425 99 3,524 (227 )
Refer to footnotes in first table.
Notes:
- All purchased and written exposures are with bank counterparties, with the exception of $56 million (notional) of written protection on German ($31 million) and British ($25 million) reference obligations where the counterparties are two Canadian domiciled non-bank financial counterparties.
- 25% of purchased and 28% of written exposure is subject to complete restructuring trigger events.
- 75% of purchased and 71% of written exposure is subject to modified-modified restructuring trigger events.

U.S. Regulatory Developments

On July 21, 2010, U.S. President Obama signed into law the Dodd-Frank Wall Street Reform and Consumer Protection Act (the Dodd-Frank Act). The Act is broad in scope and the reforms include heightened consumer protection, regulation of the over-the-counter derivatives markets, restrictions on proprietary trading and sponsorship of private investment funds by banks (referred to as the Volcker Rule), imposition of heightened prudential standards and broader application of leverage and risk-based capital requirements. The reforms also include greater supervision of systemically significant payment, clearing or settlement systems, restrictions on interchange fees, and the creation of a new financial stability oversight council of regulators with the objective of increasing stability by monitoring systemic risks posed by financial services companies and their activities. Many provisions of the Dodd-Frank Act continue to be subject to rulemaking and will take effect over several years, making it difficult to anticipate at this time the overall impact on BMO or the financial services industry as a whole. As rulemaking evolves, we are continually monitoring developments to ensure we are well-positioned to respond to and implement any required changes. We anticipate an increase in regulatory compliance costs, and will be focused on managing the complexity and breadth of the regulatory changes.

The U.S. federal banking agencies, the Securities and Exchange Commission and the Commodity Futures Trading Commission have issued proposed rules to implement the Volcker Rule, which prohibits banking entities and their affiliates from certain proprietary trading and specified relationships with hedge funds and private equity funds. The agencies recently confirmed that banking entities have two years from July 21, 2012, to conform all of their activities and investments, or longer if the period is extended. Banking entities are expected to engage in good-faith planning efforts and work toward compliance during this period.

In addition, under the Dodd-Frank Act, over-the-counter derivatives will be subject to a comprehensive regulatory regime. Certain derivatives will be required to be centrally cleared or traded on an exchange. Registration, reporting and business conduct requirements in respect of derivatives have been finalized and are expected to become effective in October. Capital and margin requirements relating to derivatives are currently being reviewed by national and international regulators.

The Board of Governors of the Federal Reserve System (FRB) has issued for comment a proposed rulemaking (the Proposed Rule) that would implement the Dodd-Frank Act's enhanced prudential standards and early remediation requirements. The Proposed Rule would establish new requirements relating to risk-based capital, leverage limits, liquidity standards, risk-management framework, concentration and credit exposure limits, resolution planning and credit exposure reporting. If implemented in its current form, the Proposed Rule would apply to BMO's U.S. bank holding company subsidiary but not to BMO. The FRB has indicated that it intends to propose later this year a rule designed specifically for the top level of foreign-domiciled bank holding companies, such as BMO.

BMO is currently assessing and preparing for the impact of these proposed rules on its operations.

The restrictions on interchange fees under the Dodd-Frank Act became effective on October 1, 2011, and are expected to lower P&C U.S. pre-tax net income on an annual basis by approximately US$40 million, after the mitigating effects of related management actions.

Pursuant to FRB requirements, our U.S. subsidiary BMO Financial Corp. (BFC) submitted a three year capital plan to the FRB in January 2012. The FRB has informed BFC that it completed its 2012 Capital Plan Review and it did not object to the proposed capital actions submitted to the FRB pursuant to the Capital Plan Review. Under current FRB rules, as a bank holding company with more than $50 billion in assets, BFC is required to participate in an annual stress test exercise conducted by the FRB and to submit an annual capital plan to the FRB.

This U.S. Regulatory Developments section contains forward-looking statements. Please see the Caution Regarding Forward-Looking Statements.

Review of Operating Groups' Performance

Operating Groups' Summary Income Statements and Statistics for Q3-2012

Q3-2012 YTD-2012
(Canadian $ in millions, except as noted)P&C PCG BMO CM
Corp
Total BMO P&C PCG BMO CM Corp Total BMO
Net interest income (teb)(1)1,699 132 317 77 2,225 5,101 424 912 226 6,663
Non-interest revenue608 546 489 10 1,653 1,798 1,692 1,455 346 5,291
Total revenue (teb)(1)2,307 678 806 87 3,878 6,899 2,116 2,367 572 11,954
Provision for credit losses228 4 25 (20)237 676 11 73 (187)573
Non-interest expense1,272 544 480 188 2,484 3,823 1,654 1,434 626 7,537
Income before income taxes807 130 301 (81)1,157 2,400 451 860 133 3,844
Income taxes (recovery) (teb)(1)225 21 69 (128)187 668 92 205 (228)737
Reported net income Q3-2012582 109 232 47 970 1,732 359 655 361 3,107
Reported net income Q2-2012567 145 225 91 1,028
Reported net income Q3-2011533 104 270 (199)708 1,531 339 759 (283)2,346
Adjusted net income Q3-2012601 115 232 65 1,013 1,788 375 656 148 2,967
Adjusted net income Q2-2012585 150 226 21 982
Adjusted net income Q3-2011543 105 270 (62)856 1,555 343 759 (214)2,443
Other statistics
Net economic profit(2)251 56 102 (131)278 735 202 270 (129)1,078
Return on equity17.9%19.8%19.3%nm 14.5%17.7%22.2%18.5%nm 15.9%
Adjusted return on equity18.5%20.8%19.3%nm 15.2%18.3%23.2%18.5%nm 15.2%
Operating leverage(4.0%)(2.9%)(7.6%)nm 4.9%(4.3%)(3.7%)(10.9%)nm (1.4%)
Adjusted operating leverage(3.1%)(2.1%)(7.6%)nm (4.4%)(2.9%)(2.7%)(11.0%)nm (5.1%)
Productivity ratio (teb)55.1%80.3%59.6%nm 64.1%55.4%78.2%60.6%nm 63.1%
Adjusted productivity ratio (teb)54.0%79.2%59.6%nm 63.7%54.3%77.2%60.6%nm 63.5%
Net interest margin on earning assets (teb)3.16%2.89%0.63%nm 1.88%3.23%3.22%0.63%nm 1.94%
Adjusted net interest margin (teb)3.16%2.89%0.63%nm 1.70%3.23%3.22%0.63%nm 1.77%
Average common equity12,536 2,164 4,587 5,921 25,208 12,636 2,129 4,543 5,407 24,715
Average earning assets ($ billions)214.0 18.1 200.7 38.3 471.1 210.7 17.6 193.2 36.9 458.4
Full-time equivalent staff23,990 6,502 2,271 13,831 46,594
(1)Operating group revenues, income taxes and net interest margin are stated on a taxable equivalent basis (teb). The group teb adjustments are offset in Corporate Services, and Total BMO revenue, income taxes and net interest margin are stated on a GAAP basis.
(2)Net economic profit is a non-GAAP measure. Please see the Non-GAAP Measures section.
Adjusted results in this chart are non-GAAP amounts or non-GAAP measures. Please see the Non-GAAP Measures section.
Corp means Corporate Services including T&O.
nm - not meaningful

The following sections review the financial results of each of our operating segments and operating groups for the third quarter of 2012.

Periodically, certain business lines and units within the business lines are transferred between client groups to more closely align BMO's organizational structure with its strategic priorities. Results for prior periods are restated to conform to the current presentation.

Effective in the first quarter of 2012, Private Client Group and P&C Canada entered into a revised agreement sharing the financial results related to retail Mutual Fund sales. Prior periods have been restated.

Corporate Services is generally charged (or credited) with differences between the periodic provisions for credit losses charged to the client groups under our expected loss provisioning methodology and the periodic provisions required under GAAP.

BMO analyzes revenue at the consolidated level based on GAAP revenues reflected in the consolidated financial statements rather than on a taxable equivalent basis (teb), which is consistent with our Canadian peer group. Like many banks, we continue to analyze revenue on a teb basis at the operating group level. This basis includes an adjustment that increases GAAP revenues and the GAAP provision for income taxes by an amount that would raise revenues on certain tax-exempt items to a level equivalent to amounts that would incur tax at the statutory rate. The offset to the group teb adjustments is reflected in Corporate Services revenues and income tax provisions. The teb adjustments for the third quarter of 2012 totalled $67 million, up from $55 million in the third quarter of 2011 and up from $56 million in the second quarter.

Personal and Commercial Banking (P&C)

(Canadian $ in millions, except as noted)Q3-2012 Increase
(Decrease)
vs. Q3-2011
Increase
(Decrease)
vs. Q2-2012
YTD-2012Increase (Decrease)
vs. YTD-2011
Net interest income (teb)1,699 207 14% 382%5,101 86420%
Non-interest revenue608 73 14% 142%1,798 24015%
Total revenue (teb)2,307 280 14% 522%6,899 1,10419%
Provision for credit losses228 39 21% 42%676 14427%
Non-interest expense1,272 193 18% 272%3,823 72523%
Income before income taxes807 48 6% 213%2,400 23511%
Income taxes (teb)225 (1)- 63%668 346%
Reported net income582 49 9% 153%1,732 20113%
Adjusted net income601 58 11% 163%1,788 23315%
Return on equity17.9% (5.9%) 0.1%17.7% (8.0%)
Adjusted return on equity18.5% (5.8%) 0.1%18.3% (7.8%)
Operating leverage(4.0%) nm nm (4.3%) nm
Adjusted operating leverage(3.1%) nm nm (2.9%) nm
Productivity ratio (teb)55.1% 1.9% (0.1%)55.4% 1.9%
Adjusted productivity ratio (teb)54.0% 1.5% (0.1%)54.3% 1.3%
Net interest margin on earning assets (teb)3.16% (0.04%) (0.07%)3.23% 0.04%
Average earning assets ($ billions)214.0 29.0 16% 4.92%210.7 33.119%
Adjusted results in this chart are non-GAAP amounts or non-GAAP measures. Please see the Non-GAAP Measures section.
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The Personal and Commercial Banking (P&C) operating group represents the sum of our two retail and business banking operating segments, Personal and Commercial Banking Canada (P&C Canada) and Personal and Commercial Banking U.S. (P&C U.S.). These operating segments are reviewed separately in the sections that follow.

Personal and Commercial Banking Canada (P&C Canada)

(Canadian $ in millions, except as noted)Q3-2012 Increase
(Decrease)
vs. Q3-2011
Increase (Decrease)
vs. Q2-2012
YTD-2012 Increase (Decrease)
vs. YTD-2011
Net interest income (teb)1,087 (8)(1%) 242%3,259 (4)-
Non-interest revenue469 22 5% 92%1,376 29 2%
Total revenue (teb)1,556 14 1% 332%4,635 25 1%
Provision for credit losses143 6 5% 23%422 13 3%
Non-interest expense795 10 1% 192%2,384 44 2%
Income before income taxes618 (2)(1%) 122%1,829 (32)(2%)
Provision for income taxes (teb)165 (12)(7%) 52%484 (43)(8%)
Reported net income453 10 2% 71%1,345 11 1%
Adjusted net income456 12 2% 71%1,353 13 1%
Personal revenue963 - - 2- 2,887 27 1%
Commercial revenue593 14 3% 316%1,748 (2)-
Operating leverage(0.5%) nm nm (1.4%) nm
Productivity ratio (teb)51.1% 0.2% 0.1%51.4% 0.6%
Net interest margin on earning assets (teb)2.74% (0.17%) (0.07%)2.82% (0.13%)
Average earning assets ($ billions)157.7 8.2 5% 4.13%154.6 6.5 4%
Adjusted results in this chart are non-GAAP amounts or non-GAAP measures. Please see the Non-GAAP Measures section.
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Q3 2012 VS Q3 2011

P&C Canada net income of $453 million was up $10 million or 2.4% from a year ago. Reported results reflect provisions for credit losses in BMO's operating groups on an expected loss basis. On a basis that adjusts reported results to reflect provisions on an actual loss basis, P&C Canada's net income was up $20 million or 4.6%.

Revenue increased $14 million or 0.8%. Results reflect higher volumes across most products, partially offset by lower net interest margin. Net interest margin declined 17 basis points primarily driven by deposit spread compression in the low rate environment, lower personal lending margins resulting from customer behaviours in our cards business and competitive pressures and loan growth exceeding deposit growth, particularly mortgages.

In the personal banking segment, revenue was relatively unchanged. Higher volume growth across most products was offset by lower net interest margin. Total personal lending balances (including mortgages, Homeowner ReadiLine and other consumer lending products) increased 6.3% year over year, while total personal lending market share was up slightly and further increased from the second quarter.

Our goal is to grow market share while remaining attentive to the credit quality of the portfolio. We continue to focus on improving the total personal lending business through focused investment and improved productivity in the sales force.

Personal deposit balances increased 4.0% year over year due to increases in retail operating deposits. Market share for personal deposits decreased year over year.

In the commercial banking segment, revenue increased by $14 million mainly due to higher volume growth across most products, partially offset by lower deposit spreads in the low interest rate environment.

Commercial loan balances increased 6.6% year over year. We continue to rank second in Canadian business banking market share of small and mid-sized business loans.

Commercial deposit balances grew 3.6% while commercial cards balances were flat.

Non-interest expense was up $10 million or 1.3% from the prior year due to higher initiative spending, partially offset by lower employee-related costs. We continue to actively manage costs while still investing in the business.

Average current loans and acceptances increased $9.0 billion or 5.9% from a year ago, while personal and commercial deposits grew $3.9 billion or 3.8%.

Q3 2012 vs Q2 2012

Net income was up $7 million or 1.5% from the second quarter. On a basis that adjusts reported results to reflect provisions on an actual loss basis, net income was up $22 million or 5.3% from the second quarter.

Revenue increased $33 million or 2.1% as a result of two extra days in the quarter and good volume growth across all products, partially offset by lower net interest margin. Net interest margin was down 7 basis points. The decline was primarily due to lower personal lending margins resulting from customer behaviours in our cards business and competitive pressures, deposit spread compression in the low rate environment and loan growth exceeding deposit growth, particularly mortgages. Personal revenue was consistent with the prior quarter as the effects of good volume growth across all products and two extra days were offset by lower net interest margin. Quarter-over-quarter personal lending market share was up 16 basis points and personal deposits market share was up 5 basis points.

Commercial revenue benefited from two more days and good volume growth.

Non-interest expense was $19 million or 2.3% higher due to increased initiative spending and two extra days, partially offset by lower employee-related costs.

Average current loans and acceptances increased $4.5 billion or 2.9% from last quarter, while personal and commercial deposits increased $1.7 billion or 1.6%. There was good growth in loan and deposit balances and improvements in market share for these products in the third quarter.

Q3 YTD 2012 vs Q3 YTD 2011

Net income increased $11 million or 0.8% year over year. Revenue increased $25 million or 0.5% due to higher volumes across most products, partially offset by lower net interest margin and a securities gain in the first quarter a year ago. Net interest margin declined by 13 basis points primarily due to lower deposit spreads in the low rate environment and competitive pricing pressure.

Non-interest expense increased $44 million or 1.9% primarily due to higher initiative spending, partially offset by lower employee-related costs and the benefit of our focus on productivity.

Average current loans and acceptances increased $7.2 billion or 4.8%, while personal and commercial deposits increased $4.5 billion or 4.4%.

Personal and Commercial Banking U.S. (P&C U.S.)

(Canadian $ in millions, except as noted)Q3-2012 Increase (Decrease)
vs. Q3-2011
Increase (Decrease)
vs. Q2-2012
YTD-2012 Increase (Decrease)
vs. YTD-2011
Net interest income (teb)612 21554% 14 2%1,842 86889%
Non-interest revenue139 5159% 5 5%422 211100%
Total revenue (teb)751 26655% 19 3%2,264 1,07991%
Provision for credit losses85 3363% 2 2%254 131+100%
Non-interest expense477 18362% 8 2%1,439 68190%
Income before income taxes189 5038% 9 6%571 26788%
Provision for income taxes (teb)60 1126% 1 4%184 7772%
Reported net income129 3943% 8 8%387 19096%
Adjusted net income145 4648% 9 7%435 220+100%
Operating leverage(6.9%) nm nm 1.3% nm
Adjusted operating leverage(5.2%) nm nm 5.0% nm
Productivity ratio (teb)63.3% 2.7% (0.8%)63.5% (0.5%)
Adjusted productivity ratio (teb)60.2% 2.0% (0.7%)60.4% (1.6%)
Net interest margin on earning assets (teb)4.38% (0.11%) 0.03%4.39% (0.02%)
Adjusted net interest margin on earning assets4.38% (0.11%) 0.03%4.39% (0.02%)
Average earning assets ($ billions)56.2 20.859% 0.9 2%56.1 26.690%
U.S. Select Financial Data (US$ in millions)
Net interest income (teb)602 18946% (2)- 1,829 83083%
Non-interest revenue137 4651% 3 2%419 20394%
Total revenue (teb)739 23547% 1 - 2,248 1,03385%
Non-interest expense468 16353% (5)(1%)1,428 65284%
Reported net Income127 3234% 5 5%384 18190%
Adjusted net income143 4037% 6 4%432 21195%
Average earning assets (US$ billions)55.2 18.450% (0.6)(1%)55.7 25.484%
Adjusted results in this chart are non-GAAP amounts or non-GAAP measures. Please see the Non-GAAP Measures section.
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Q3 2012 vs Q3 2011 (in U.S. $)

Net income of $127 million increased $32 million or 34% from $95 million a year ago. Adjusted net income, which adjusts for the amortization of acquisition-related intangible assets, was $143 million, up $40 million or 37% from a year ago primarily due to the acquired business.

Revenue of $739 million increased $235 million from a year ago due to the $236 million of incremental revenue from two additional months of the acquired business' results, compared with a year ago. The effects of deposit spread compression, a change in mix of loan balances, a reduction in interchange fees and lower securities gains were largely offset by increased deposit balances, higher gains on sale of mortgages and higher lending fees.

Net interest margin decreased by 11 basis points due to deposit spread compression, partially offset by the favourable effect of deposit growth exceeding loan growth and the positive impact from the acquired business.

Non-interest expense of $468 million increased $163 million. Adjusted non-interest expense of $445 million was $151 million higher, with $141 million due to the inclusion of the acquired business' results for two additional months in the current year. The remaining increase was primarily attributable to increased regulatory and other support costs.

Average current loans and acceptances increased $16.8 billion year over year to $50.2 billion as a result of the acquired business and strong organic commercial loan growth.

Average deposits increased $21.9 billion year over year to $58.9 billion as a result of the acquired business and growth in our organic commercial business.

Q3 2012 vs Q2 2012 (in U.S. $)

Net income increased $5 million or 4.7% from the prior quarter. Adjusted net income increased 4.1%, primarily due to the benefit of lower expenses.

Revenue increased $1 million or 0.1% and net interest margin increased 3 basis points.

Non-interest expense and adjusted non-interest expense both decreased $5 million, or 1.0% and 1.1%, respectively.

Average current loans and acceptances decreased $0.6 billion from the prior quarter as commercial banking loan growth in key segments was more than offset by decreases in personal banking loans and a decline in the commercial run-off portfolio, as expected. Commercial loans, excluding the commercial real estate and run-off portfolio, have seen three sequential quarters of growth post acquisition.

Average deposits decreased $0.2 billion from the prior quarter, as reductions in personal money market accounts and time deposits outpaced increases in chequing and savings accounts in the low rate environment.

Q3 YTD 2012 vs Q3 YTD 2011 (in U.S. $)

Net income of $384 million increased $181 million from $203 million a year ago. Adjusted net income was $432 million, up $211 million from a year ago primarily due to the acquired business.

Revenue of $2,248 million increased $1,033 million from a year ago, of which $1,008 million was attributable to the acquired business. The remaining increase of $25 million or 2.1% was primarily due to higher gains on the sale of mortgages and higher lending fees.

Net interest margin decreased by 2 basis points.

Non-interest expense of $1,428 million increased $652 million. Adjusted non-interest expense of $1,357 million was $604 million higher, with $560 million due to the impact of the acquired business. The remaining increase of $44 million was largely attributable to increased regulatory and other support costs and litigation accruals.

Average current loans and acceptances increased $23.6 billion year over year to $50.7 billion primarily due to the acquired business and strong organic commercial loan growth.

Average deposits increased $28.9 billion year over year to $58.8 billion as a result of the acquired business and growth in our organic commercial business.

Adjusted results in this section are non-GAAP amounts or non-GAAP measures. Please see the Non-GAAP Measures section.

Private Client Group (PCG)

(Canadian $ in millions, except as noted)Q3-2012 Increase (Decrease)
vs. Q3-2011
Increase (Decrease)
vs. Q2-2012
YTD-2012 Increase (Decrease)
vs. YTD-2011
Net interest income (teb)132 18 14% 4 2%424 91 27%
Non-interest revenue546 38 7% (69)(11%)1,692 146 9%
Total revenue (teb)678 56 9% (65)(9%)2,116 237 13%
Provision for credit losses4 1 33% 1 3%11 4 54%
Non-interest expense544 56 12% (9)(2%)1,654 232 16%
Income before income taxes130 (1)- (57)(31%)451 1 -
Provision for income taxes (teb)21 (6)(30%) (21)(52%)92 (19)(18%)
Reported net income109 5 6% (36)(25%)359 20 6%
Adjusted net income115 10 8% (35)(24%)375 32 9%
Adjusted return on equity20.8% (7.3%) (7.5%)23.2% (11.1%)
Return on equity19.8% (7.8%) (7.5%)22.2% (11.6%)
Operating leverage(2.9%) nm nm (3.7%) nm
Productivity ratio (teb)80.3% 2.1% 5.9%78.2% 2.6%
Adjusted productivity ratio (teb)79.2% 1.5% 5.8%77.2% 1.9%
Net interest margin on earning assets (teb)2.89% (0.06%) (0.09%)3.22% 0.19%
Average earning assets18,099 2,663 17% 588 3%17,589 2,881 20%
U.S. Select Financial Data (US$ in millions, except as noted)
Total revenue (teb)171 60 54% 5 4%527 267 +100%
Non-interest expense136 49 56% - - 411 196 91%
Reported net income22 7 50% 5 27%71 44 +100%
Adjusted net income26 11 72% 4 22%83 55 +100%
Average earning assets2,913 466 19% (47)(2%)2,948 705 31%
Adjusted results in this chart are non-GAAP amounts or non-GAAP measures. Please see the Non-GAAP Measures section.
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Q3 2012 vs Q3 2011

Net income was $109 million, up $5 million or 5.7% from a year ago. Adjusted net income, which adjusts for the amortization of acquisition-related intangible assets, was $115 million, up $10 million or 8.4% from a year ago. Lower interest rates reduced net income in the insurance business by $45 million in the current quarter and by $36 million a year ago. On a basis that excludes this impact, PCG adjusted net income was $160 million, up $19 million or 13% from a year ago and adjusted net income in insurance was $63 million, up $8 million or 16% from a year ago. Adjusted net income in PCG excluding insurance was $97 million, up $11 million or 10% from a year ago.

Revenue was $678 million, up $56 million or 8.7% from a year ago. Revenue in PCG excluding insurance was up 11% from a year ago. Higher revenues from acquisitions and spread-based and fee-based products were partly offset by lower brokerage revenue. Insurance revenue declined 22% from a year ago due to the effects of the movements in interest rates. The stronger U.S. dollar increased revenue by $10 million or 1.7%.

Non-interest expense was $544 million, up $56 million or 12%. Adjusted non-interest expense was $537 million, up $52 million or 11%, primarily due to acquisitions. The stronger U.S. dollar increased adjusted expense by $7 million or 1.5%.

Assets under management and administration grew by approximately $14 billion to $445 billion as we continue to attract new client assets.

Q3 2012 vs Q2 2012

Net income decreased $36 million or 25% and adjusted net income decreased $35 million or 24% from the second quarter. Adjusted net income in PCG excluding insurance was relatively unchanged from the prior quarter. Adjusted insurance net income declined $34 million from the prior quarter due to the effect of lower interest rates.

Revenue decreased $65 million or 8.8%. PCG revenue excluding insurance decreased marginally, with lower brokerage revenues partially offset by higher spread-based and fee-based revenues. Insurance revenue declined 65% from the prior quarter due to lower interest rates. The stronger U.S. dollar increased revenue by $5 million or 0.7%.

Adjusted non-interest expense decreased $9 million or 1.6% on lower revenue-driven costs in brokerage and continued cost
management. The stronger U.S. dollar increased adjusted expense by $4 million or 0.6%.

Assets under management and administration were essentially unchanged from the prior quarter, as growth in new client assets was offset by weaker equity market conditions.

Q3 YTD 2012 vs Q3 YTD 2011

Net income was $359 million, up $20 million or 6.1% from a year ago. Adjusted net income was $375 million, up $32 million or 8.9% from a year ago. Adjusted net income in PCG excluding insurance was $293 million, up $41 million or 16% from the prior year. Adjusted net income in insurance was $82 million, down $9 million or 9.6% from the prior year.

Revenue was $2,116 million, up $237 million or 13% from a year ago. Revenue in PCG excluding insurance was up 16% as higher revenues from acquisitions and spread-based and fee-based products were partly offset by lower brokerage revenue. Net interest income increased due to earnings from acquisitions, higher earnings from a strategic investment and higher private banking loan and deposit balances. The stronger U.S. dollar increased revenue by $17 million or 0.9%. Insurance revenue declined 18% primarily due to lower interest rates, offset in part by higher than usual earthquake-related reinsurance claims in the prior year.

Non-interest expense was $1,654 million, up $232 million or 16%. Adjusted non-interest expense was $1,633 million, up $217 million or 15% primarily due to acquisitions. The stronger U.S. dollar increased adjusted expense by $12 million or 0.9%.

Adjusted results in this section are non-GAAP amounts or non-GAAP measures. Please see the Non-GAAP Measures section.

BMO Capital Markets

(Canadian $ in millions, except as noted)Q3-2012 Increase (Decrease)
vs. Q3-2011
Increase (Decrease)
vs. Q2-2012
YTD-2012 Increase (Decrease)
vs. YTD-2011
Net interest income (teb)317 - - 9 3%912 (44)(5%)
Non-interest revenue489 (16)(3%) 8 2%1,455 (195)(12%)
Total revenue (teb)806 (16)(2%) 17 2%2,367 (239)(9%)
Provision for credit losses25 (4)(18%) 1 1%73 (16)(19%)
Non-interest expense480 25 6% 9 2%1,434 24 2%
Income before income taxes301 (37)(11%) 7 3%860 (247)(22%)
Provision for income taxes (teb)69 1 3% - - 205 (143)(41%)
Reported net income232 (38)(14%) 7 3%655 (104)(14%)
Adjusted net income232 (38)(14%) 6 3%656 (103)(14%)
Trading Products revenue488 (12)(3%) 15 3%1,474 (102)(7%)
Investment and Corporate Banking revenue318 (4)(1%) 2 1%893 (137)(13%)
Return on equity19.3% (9.1%) 0.7%18.5% (7.7%)
Operating leverage(7.6%) nm nm (10.9%) nm
Productivity ratio (teb)59.6% 4.3% (0.1%)60.6% 6.5%
Adjusted productivity ratio (teb)59.6% 4.4% (0.1%)60.6% 6.5%
Net interest margin on earning assets (teb)0.63% (0.11%) (0.02%)0.63% (0.15%)
Average earning assets ($ billions)200.7 29.8 17% 8.2 4%193.2 28.7 17%
U.S. Select Financial Data (US$ in millions, except as noted)
Total revenue (teb)276 15 6% 35 14%761 (34)(4%)
Non-interest expense202 6 3% (3)(1%)607 20 3%
Reported net income42 9 31% 28 +100%77 26 52%
Adjusted net income43 10 31% 29 +100%78 27 52%
Average earning assets (US$ billions)75.8 8.5 13% 5.0 7%72.0 10.4 17%
Adjusted results in this chart are non-GAAP amounts or non-GAAP measures. Please see the Non-GAAP Measures section.
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Q3 2012 vs Q3 2011

Net income was $232 million, $38 million or 14% lower than the very strong results of a year ago. Revenues decreased $16 million or 2.0% from the levels of a year ago to $806 million. In the current quarter we saw improvement in trading revenues, particularly in interest rate and commodities trading, as market conditions were more favourable. Corporate banking revenues and debt underwriting fees also improved from the previous year. Offsetting these improvements were decreases in mergers and acquisitions fees and equity underwriting fees, as market uncertainty, mainly driven by concerns over the Eurozone and China, continues to impede activity. The stronger U.S. dollar increased revenue by $17 million relative to a year ago.

There was a reduction in the provision for credit losses, which is charged to the groups on an expected loss basis. Non-interest expense increased $25 million or 5.6% primarily due to higher employee costs and increased technology and support costs as a result of making investments in our business and responding to the changing regulatory environment. The stronger U.S. dollar increased expenses by $10 million relative to a year ago.

Return on equity was 19.3% compared with 28.4% a year ago, in part reflecting increased regulatory capital requirements compared to the previous year.

Q3 2012 vs Q2 2012

Net income increased $7 million or 2.9% from the previous quarter. Revenue was $17 million or 2.2% higher. Revenue growth was attributable to an improvement in trading revenue, primarily commodities and interest rate trading, and increases in corporate banking revenue and debt underwriting fees. Offsetting these increases were lower net investment securities gains, mergers and acquisitions fees, and equity underwriting fees. The stronger U.S. dollar increased revenue by $8 million relative to the previous quarter.

Non-interest expense increased $9 million or 2.0% primarily due to the timing of technology and support spending. The stronger U.S. dollar increased expenses by $5 million relative to the previous quarter.

Q3 YTD 2012 vs Q3 YTD 2011

Net income decreased $104 million or 14% from the previous year's strong results to $655 million. Revenue was $239 million or 9.2% lower, primarily due to less favourable market conditions, which resulted in lower investment banking fees, net investment securities gains, trading revenues and securities commissions. These reductions were partly offset by increases in corporate banking revenues. The stronger U.S. dollar increased revenue by $28 million relative to the comparable period in 2011.

There was a reduction in the provision for credit losses, which is charged to the groups on an expected loss basis. Non-interest expense was $24 million or 1.7% higher than in the prior year, mainly due to higher technology and support costs as a result of making investments in our business and responding to the changing regulatory environment. The stronger U.S. dollar increased expenses by $15 million relative to a year ago.

Return on equity was 18.5%, compared with 26.2% a year ago.

Corporate Services, Including Technology and Operations

(Canadian $ in millions, except as noted)Q3-2012 Increase (Decrease)
vs. Q3-2011
Increase (Decrease)
vs. Q2-2012
YTD-2012 Increase (Decrease)
vs. YTD-2011
Net interest income before group teb offset144 209 nm 65 82%400 545 nm
Group teb offset(67)(12)(22%) (11)(20%)(174)(5)(3%)
Net interest income (teb)77 197 nm 54 nm 226 540 nm
Non-interest revenue10 41 nm (139)(94%)346 191 +100%
Total revenue (teb)87 238 nm (85)(50%)572 731 nm
Provision for (recovery of) credit losses(20)(29)(+100%) 36 65%(187)(409)nm
Non-interest expense188 (11)(5%) (42)(18%)626 247 65%
Profit before income taxes(81)278 77% (79)nm 133