BMO Financial Group
TSX : BMO
NYSE : BMO

BMO Financial Group
BMO Bank of Montreal

BMO Bank of Montreal

March 01, 2011 07:31 ET

BMO Financial Group Reports Strong Results for its First Quarter, as Net Income Increased 18% to $776 Million with Good Contributions from all Operating Groups

TORONTO, ONTARIO--(Marketwire - March 1, 2011) - BMO Financial Group (TSX:BMO)(NYSE:BMO) and BMO Bank of Montreal -



First Quarter 2011 Report to Shareholders
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BMO Financial Group Reports Strong Results for its First Quarter, as Net
Income Increased 18% to $776 Million with Good Contributions from all
Operating Groups

P&C Canada Momentum Continues with Net Income Growing 10% to $444 Million

P&C U.S. Continues to Benefit from Improved Margins

PCG Posts Excellent Results, Growing Net Income by 38% to $153 Million

BMO Capital Markets Continues to Deliver Strong Performance

Tier 1 Capital Ratio Remains Strong, at 13.02%

Financial Results Highlights:

- Net income of $776 million, our highest ever, up $119 million or 18%
from a year ago

- EPS(1) of $1.30 and cash EPS(2) of $1.32, up $0.18 or 16% and $0.19 or
17%, respectively, from a year ago

- Return on equity of 15.7%, up from 14.3% a year ago

- Revenue growth of 10.6%, with a productivity ratio of 61.2%

- Provisions for credit losses of $248 million, down $85 million from a
year ago and $5 million from the previous quarter

- Pre-Provision, Pre-Tax(2) (PPPT) contribution of $1,300 million, our
highest ever


For the first quarter ended January 31, 2011, BMO Financial Group reported net income of $776 million or $1.30 per share. There was strong performance in each of the operating groups.

Today, BMO announced a second quarter 2011 dividend of $0.70 per common share, unchanged from the preceding quarter and equivalent to an annual dividend of $2.80 per common share.

"The investments we have made in the customer experience over the past four years are differentiating BMO in the marketplace and driving strong growth in our personal and commercial banking, wealth management and capital markets businesses," said Bill Downe, President and Chief Executive Officer, BMO Financial Group. "Customers are paying more attention to their finances and this aligns with our core strengths - helping customers maintain balance when it comes to controlling spending, growing savings, borrowing smartly and investing wisely.

"P&C Canada continues to show good momentum, generating strong revenue growth in our personal and commercial businesses, driven by volume growth across most products and improved net interest margin.

"BMO Capital Markets had strong growth in both net income and revenue with good performance in investment banking, where mergers and acquisitions revenue and debt underwriting fees were up appreciably from a year ago.

"Private Client Group produced excellent results with net income up substantially from a year ago. During the quarter, we announced our agreement to acquire Hong Kong-based Lloyd George Management, a boutique asset manager that provides the scale for further expansion of BMO Asset Management and bolsters our portfolio management capabilities in Asian and emerging markets.

"Adjusting for the impact of impaired loans and acquisition costs, results in P&C U.S. were consistent with the same quarter a year ago. Deposits increased 16% year over year due to growth in our commercial segment and the impact of the Rockford, Illinois-based bank transaction, while our personal segment had solid operating leverage, driven by revenue growth, and net interest margins improved in both businesses.

"Our operating businesses are performing well. Their good performance together with our strong balance sheet, liquidity and capital position, give us the flexibility and confidence to react to opportunities to grow our customer base and build the value of the bank for shareholders. During the quarter, we announced signing an agreement to acquire Milwaukee-based Marshall & Ilsley Corporation (M&I), transforming BMO's U.S. businesses by increasing scale and providing an entry point into attractive new markets. M&I has strong customer relationships, and we will build on their well-earned reputation for providing an exemplary customer experience. Since announcing the agreement, we have moved ahead with our plans to ensure a smooth integration for customers and employees. Upon closing, our North American 'home market' will comprise more than 1,600 branches with new opportunities to grow our businesses," concluded Mr. Downe.

(1) All Earnings per Share (EPS) measures in this document refer to diluted EPS, unless specified otherwise.

(2) The adjustments that change results under generally accepted accounting principles (GAAP) to cash results and net income to income before provisions for credit losses, income taxes and non-controlling interest in subsidiaries (PPPT) are outlined in the Non-GAAP Measures section at the end of the attached Management's Discussion and Analysis, where such non-GAAP measures and their closest GAAP counterparts are outlined.

Operating Segment Overview

P&C Canada

Net income was a strong $444 million, up $41 million or 10% from a year ago. Improved profitability was driven by revenue increases in both our personal and commercial businesses from volume growth across most products and improved net interest margin.

There was strong revenue growth, driven in part by the inclusion of a full quarter of the Diners Club North American franchise financial results in the current year compared to a month in the prior year. Expense growth was also high, as expected, due to initiative spending, increased advertising and the Diners Club franchise impact.

We continue to enhance the customer experience and use our brand to help create a differentiated position built around Making Money Make Sense. We leveraged improvements in our performance management system and achieved greater customer loyalty year over year in both our personal and commercial businesses as measured by net promoter score, an objective measure of customer advocacy. This success is reflected in increases in the average number of product categories used by both personal and commercial customers.

In personal banking, including the retail cards business, we continue to improve the productivity of our sales and distribution network. The pace of new branch openings and renovations is accelerating, and we launched an innovative new branch format designed to encourage great conversations with our customers. We also made substantial improvements in our online banking customer experience with the launch of BMO MoneyLogic this quarter. This online personal financial management tool helps customers view, track and manage their money. Along with this tool, we launched BMO SmartSteps for Investing, an initiative designed to encourage more comprehensive investment conversations and promote our differentiated product offers that meet customers' needs.

In commercial banking, including corporate cards and the Diners Club business, our market share for loans to small-and medium-sized businesses has increased for four consecutive quarters and is up 60 basis points over last year. We continue to rank second in Canadian business lending market share and our goal is to become the bank of choice for businesses across Canada. We continue to focus on BMO SmartSteps for Business and BMO Business Bundles, which are designed to help our customers choose the banking products that are right for their business. More frequent interactions with our customers have improved the quality of our customer conversations, driving higher commercial banking revenues.

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

Net income of $42 million decreased $6 million or 13% from $48 million a year ago, largely due to a higher provision for credit losses under BMO's expected loss provisioning methodology. The impact of solid revenue growth from increased deposit balances and improved loan spreads, which improved net interest margin, was offset primarily by increases in the impact of impaired loans and deposit insurance premiums.

On a basis that adjusts for the impact of impaired loans and acquisition integration costs, net income was $63 million, consistent with a year ago on a comparably-adjusted basis.

We continue to focus on the customer experience, as reflected in our high loyalty scores. Our retail net promoter score was 41 for the first quarter of 2011 and 40 in the prior quarter, and remains very strong compared to the scores of our major competitors. We launched Bulls and Blackhawks affinity debit cards in the quarter, an attractive option for chequing account customers who wish to demonstrate their team pride when making everyday transactions. New chequing account openings increased 20% year over year and new household account openings were 43% higher than in the prior year. In addition, our retention of existing customers has increased from the comparable quarter a year ago.

Last year's commercial client realignment positioned us for growth, creating a larger business by doubling the number of Harris professionals that service this market. A consistent focus on commercial clients' lending and cash management needs, coupled with a disciplined sales approach, is driving customer acquisition and resulting in deeper relationships through the success of cross-selling efforts. The business has good momentum, which is reflected in strong pipelines for new deposit and loan originations that are expected to lift loan utilization. Deposits have also grown significantly year over year.

Private Client Group

Net income was $153 million, up a strong $42 million or 38% from the same quarter a year ago. Private Client Group net income, excluding the insurance business, was $81 million, up $14 million or 20% from a year ago as we continue to see growth across most of our businesses. Insurance net income was $72 million for the quarter, up $28 million or 66% primarily due to higher net premium revenue and the benefit of the effect of favourable market movements on policyholder liabilities.

Revenue was $661 million, reflecting an increase of $111 million or 20% with growth across all of our businesses, as we remain focused on continuing to deliver the high level of service and advice that our clients expect. The productivity ratio of 69.5% improved by 340 basis points from the prior year.

Assets under management and administration improved by $31 billion or 12% after adjusting to exclude the impact of the weaker U.S. dollar.

During the quarter, Private Client Group announced the signing of a definitive agreement to purchase Hong Kong-based Lloyd George Management, an independent investment manager specializing in Asian and global emerging markets. The deal will increase our assets under management by approximately US$6 billion and strengthen our portfolio management capabilities in those markets. The transaction is anticipated to close early in the third quarter of fiscal 2011.

In February 2011, BMO Guardian Funds received Lipper Awards for having delivered stronger and more consistent risk-adjusted performance than our peers in our BMO Guardian Asian Growth and Income Fund (three-year and five-year categories) and our BMO Guardian Global Technology Fund (one-year, five-year and ten-year categories).

For the fifth consecutive year, BMO Mutual Funds was the highest ranked organization for both English and French language services in Dalbar Inc's annual ranking of Canadian mutual fund companies.

BMO Capital Markets

Net income was $257 million, up $45 million or 21% from a year ago, marking a good start to the year. Revenue increased $120 million or 14% to $963 million. Our strong revenue performance was supported by our continued focus on clients, our diversified portfolio of businesses and improving economic conditions. Revenue growth was driven by increases in trading revenue, strong mergers and acquisitions activity and higher underwriting fees across our North American platform. While net income improved from both the previous quarter and the prior year, the improvement was dampened by a provision for prior periods' income taxes in the U.S. segment but results benefited from favourable market conditions.

During the quarter, our Global Securities Lending Business focus on customer service was recognized with a ranking of 17th in the "Top 100 Institutions Globally", as assessed by ISF Magazine.

For the first quarter of 2011, BMO Capital Markets was ranked 1st by Bloomberg in announced mergers and acquisitions transactions, and, based on our proprietary new issues database, ranked 3rd in equity underwriting and 2nd in debt underwriting. In fiscal 2010, we were ranked 1st in mergers and acquisitions, 3rd in equity underwriting and 4th in debt underwriting.

BMO Capital Markets participated in 158 new issues in the quarter including 63 corporate debt deals, 23 government debt deals, 65 common equity transactions and seven issues of preferred shares, raising $50 billion.

Acquisition of Marshall & Ilsley Corporation

During the quarter, we announced the signing of a definitive agreement to acquire Marshall & Ilsley Corporation (M&I), a Milwaukee, Wisconsin-based bank holding company with consolidated assets of approximately US$51 billion, in a common stock-for-common stock transaction that valued M&I at approximately Cdn$4.1 billion at the time of the announcement. In addition, we have an agreement-in-principle with the U.S. Treasury Department to purchase the Troubled Asset Relief Program ("TARP") preferred shares and warrants issued by M&I. The transaction provides the increased scale that we have long sought for our U.S. business. We considered the timing of such an acquisition to be right, given our confidence in our ability to generate attractive financial returns in our businesses both organically and through acquisitions, our strong balance sheet and capital position, increased regulatory clarity and an improving economic environment. The transaction is expected to close in the third quarter of fiscal 2011, subject to customary closing conditions including regulatory approvals and the approval of M&I's shareholders.

The combination of M&I with our existing U.S. operations would more than double our U.S. branch count to almost 700 and assets under management and administration to US$309 billion. Our U.S. on-balance sheet assets would increase by approximately 44% (based on average fourth quarter assets) and annual U.S. revenues would be approximately US$5 billion. These pro-forma numbers are based on financial positions and results as at or for the years ended October 31, 2010 for BMO and December 31, 2010 for M&I.

The acquisition provides an excellent strategic, financial, and cultural fit, transforming and strengthening our U.S. retail and commercial banking and wealth management businesses by increasing scale and providing a strong entry point into new and attractive markets. The combined businesses would have top five or better retail deposits market share in attractive, contiguous Midwest markets. The six Midwest states where we will have a significant footprint together have GDP and a population comparable to Canada's and, as such, our U.S. market will be as large as our Canadian domestic market. Our U.S. customers and communities will benefit from the combination of two organizations with complementary businesses and capabilities, a comparable focus on providing an excellent customer experience and a long history of supporting their shareholders' interests. The combination provides the opportunity to leverage the greater strengths of each organization.

Both organizations have considerable experience with integrating acquired businesses. Preparation for integration is well underway and will be overseen by a dedicated project integration management office. At the time of the announcement, we indicated that we anticipated cost savings of $250 million and we are continuing to pursue additional expense saving opportunities. We also expect there to be opportunities to add to revenues through expanded access to existing and new markets with increased brand awareness.

We currently anticipate that we may complete a common share offering of less than $400 million prior to the closing of the transaction, down from the $800 million announced on December 17.

Caution

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



Management's Discussion and Analysis


Management's Discussion and Analysis (MD&A) commentary is as of March 1, 2011. Unless otherwise indicated, all amounts are in Canadian dollars and have been derived from financial statements prepared in accordance with Canadian generally accepted accounting principles (GAAP). The MD&A should be read in conjunction with the unaudited consolidated financial statements for the period ended January 31, 2011, included in this document, and the annual MD&A for the year ended October 31, 2010, included in BMO's 2010 Annual Report. The material that precedes this section comprises part of this MD&A.



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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.
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Summary Data


(Unaudited) Increase Increase
(Canadian $ in millions, (Decrease) (Decrease)
except as noted) Q1-2011 vs. Q1-2010 vs. Q4-2010
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Net interest income 1,627 95 6% 17 1%
Non-interest revenue 1,719 226 15% 100 6%
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Revenue 3,346 321 11% 117 4%
Specific provision for
credit losses 248 (85) (26%) (5) (2%)
Increase in the general
allowance - - - - -
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Total provision for credit
losses 248 (85) (26%) (5) (2%)
Non-interest expense 2,046 207 11% 23 1%
Provision for income taxes 258 81 45% 62 31%
Non-controlling interest
in subsidiaries 18 (1) (4%) - -
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Net income 776 119 18% 37 5%

Amortization of acquisition-
related intangible
assets (after tax)(1) 8 1 19% (1) (3%)
Cash net income(2) 784 120 18% 36 5%

Earnings per share - basic ($) 1.31 0.19 17% 0.06 5%
Earnings per share - diluted ($) 1.30 0.18 16% 0.06 5%
Cash earnings per share -
diluted ($)(2) 1.32 0.19 17% 0.06 5%
Return on equity (ROE) 15.7% 1.4% 0.6%
Cash ROE(2) 15.9% 1.5% 0.6%
Productivity ratio 61.2% 0.4% (1.4%)
Cash productivity ratio(2) 60.9% 0.4% (1.4%)
Operating leverage (0.7%) nm nm
Cash operating leverage(2) (0.7%) nm nm
Net interest margin on
earning assets 1.82% (0.03%) (0.07%)
Effective tax rate 24.5% 3.7% 3.9%

Capital Ratios:
Tier 1 Capital Ratio 13.02% 0.49% (0.43%)
Total Capital Ratio 15.17% 0.35% (0.74%)

Net income:
Personal and Commercial
Banking 486 32 7% 28 6%
P&C Canada 444 41 10% 25 6%
P&C U.S. 42 (9) (17%) 3 8%
Private Client Group 153 42 38% 24 19%
BMO Capital Markets 257 45 21% 43 20%
Corporate Services, including
Technology and Operations
(T&O) (120) - - (58) (97%)
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BMO Financial Group Net Income 776 119 18% 37 5%
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(1) The amortization of non-acquisition-related intangible assets is not
added back in the determination of cash net income.
(2) These are non-GAAP amounts or non-GAAP measures. Please see the Non-GAAP
Measures section at the end of the MD&A, which outlines the use of non-
GAAP measures in this document.

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 January 31, 2011 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 January 31, 2011, 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 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 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 January 31, 2011 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 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 2010 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 harbour 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 2011 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; interest rate and currency value fluctuations; changes in monetary policy; the degree of competition in the geographic and business areas in which we operate; changes in laws; 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; operational and infrastructure risks; general political conditions; global capital market activities; the possible effects on our business of war or terrorist activities; disease or illness that impacts on local, national or international economies; disruptions to public infrastructure, such as transportation, communications, power or water supply; and technological changes.

With respect to the M&I transaction, such factors include, but are not limited to: the possibility that the proposed transaction does not close when expected or at all because required regulatory, shareholder or other approvals and other conditions to closing are not received or satisfied on a timely basis or at all; the terms of the proposed transaction may need to be modified to satisfy such approvals or conditions; the anticipated benefits from the proposed transaction such as it being accretive to earnings, expanding our North American presence and synergies are not realized in the time frame anticipated or at all as a result of changes in general economic and market conditions, interest and exchange rates, monetary policy, laws and regulations (including changes to capital requirements) and their enforcement, and the degree of competition in the geographic and business areas in which M&I operates; the ability to promptly and effectively integrate the businesses of M&I and BMO; reputational risks and the reaction of M&I's customers to the transaction; diversion of management time on merger-related issues; and increased exposure to exchange rate fluctuations. A significant amount of M&I's business involves making loans or otherwise committing resources to specific companies, industries or geographic areas. Unforeseen events affecting such borrowers, industries or geographic areas could have a material adverse effect on the performance of our integrated U.S. operations.

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 29, 30, 61 and 62 of BMO's 2010 Annual Report, which outlines in detail certain key factors that may affect BMO'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 statement, 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 and 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 and regulatory capital ratios, we have assumed our interpretation of the proposed rules 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 BCBS and 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 as proposed by BCBS and OSFI. We also assumed that existing capital instruments that are non-Basel III compliant but are Basel II compliant can be fully included in such estimates. The full impact of the Basel III proposals has been quantified based on our financial and risk positions at January 31 or as close to January 31 as was practical. The impact of IFRS conversion on our capital ratios is based on the analysis completed as of October 31, 2010. In calculating the impact of M&I and LGM on our capital position, our estimates reflect expected RWA and capital deductions at closing based on anticipated balances outstanding and credit quality at closing and our estimate of their fair value. It also reflects our assessment of goodwill, intangibles and deferred tax asset balances that would arise at closing. The Basel rules could be subject to further change, which may impact the results of our analysis. 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 performance of the Canadian and U.S. economies as well as overall market conditions and their combined effect on the bank's 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.

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

After slowing in the summer and fall, Canada's economy has improved amid strong business investment, firmer housing markets and steady consumer spending. Supported by high commodity prices and a pickup in U.S. demand, Canada's real GDP likely grew at an annual rate of more than 3% in early 2011, the best performance in a year. However, the strong Canadian dollar and a shift toward a more restrictive fiscal policy will likely constrain the expansion in 2011. Moreover, higher interest rates and stricter mortgage rules are expected to moderate consumer spending and housing activity, slowing growth in personal credit and residential mortgages. Commercial loan demand, however, should strengthen as a result of robust business investment. The economy is projected to grow at a moderate rate of 2.8% in 2011, compared with estimated growth of 3.0% in 2010. An expected resumption of tighter monetary policy in the spring, coupled with high commodity prices, should lead to the Canadian dollar trading modestly above parity with the U.S. dollar in 2011.

The U.S. economic recovery has strengthened as a result of expansive monetary and fiscal policies and healthy global demand. Business capital spending remains solid and personal consumption has picked up following a reduction in household debt. However, housing markets remain weak and employment growth is uneven. The U.S. economy is projected to grow at a moderately strong rate of 3.2% in 2011, compared with 2.9% in 2010, the best performance in seven years. Despite improved growth, the Federal Reserve will likely maintain its low-interest rate policy for a third consecutive year in the face of high unemployment and low inflation. Stronger economic growth and low interest rates should support capital markets activity.

In the Midwest, where the bulk of our U.S. operations are located, the economy has also shown further signs of improvement. As a result of solid growth in exports, pent-up demand for motor vehicles and rising agricultural prices, growth is expected to strengthen moderately in 2011 at a pace consistent with the overall U.S. economy. Consumer and business loan demand should also improve, but the outlook for housing markets remains weak and unemployment rates are expected to remain elevated in the near term.

This Economic Outlook 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 decreased relative to the first and fourth quarters of 2010 by the weakening of the U.S. dollar. The average Canadian/U.S. dollar exchange rate, expressed in terms of the Canadian dollar cost of a U.S. dollar, fell by 5% from a year ago and by 3% from the average of the fourth quarter of 2010. 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

Q1-2011
(Canadian $ in millions, except as noted) vs. Q1-2010 vs. Q4-2010
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Canadian/U.S. dollar exchange rate (average)
Current period 1.0074 1.0074
Prior period 1.0587 1.0387
Increased (decreased) revenue (39) (24)
Decreased (increased) expense 26 16
Decreased (increased) provision for credit
losses 7 4
Decreased (increased) income taxes and
non-controlling interest in subsidiaries - 1
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Increased (decreased) net income (6) (3)
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At the start of each quarter, BMO assesses whether to enter into hedging transactions that are expected to partially offset the pre-tax effects of exchange rate fluctuations in the quarter on our expected U.S.-dollar-denominated net income for that quarter. As such, these activities partially mitigate the impact of exchange rate fluctuations, but only within that quarter. As a result, the sum of the hedging gains/losses for the four quarters in a year is not directly comparable to the impact of year-over-year exchange rate fluctuation on earnings for the year. Over the course of the current quarter, the U.S. dollar weakened slightly, as the exchange rate decreased from Cdn$1.0202 per U.S. dollar at October 31, 2010 to an average of Cdn$1.0074. However, hedging transactions resulted in a minimal after-tax loss of less than $1 million in the quarter. The gain or loss from hedging transactions in future periods will be determined by both future currency fluctuations and the amount of underlying future hedging transactions, since the transactions are entered into each quarter in relation to expected U.S.-dollar-denominated net income for the next three months.

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

Other Value Measures

Net economic profit was $255 million (see the Non-GAAP Measures section), compared with $225 million in the fourth quarter and $171 million in the first quarter of 2010.

BMO's average annual total shareholder return for the five-year period ended January 31, 2011 was 1.7%.

Net Income

Q1 2011 vs Q1 2010

Net income was $776 million for the first quarter of 2011, up $119 million or 18% from a year ago. Earnings per share were $1.30, up from $1.12 a year ago.

There was strong growth in both revenue and net income in each of our three operating groups. Expenses also increased appreciably, due to continued investment spending, including acquisitions, and increased performance-based compensation in line with higher revenues. Provisions for credit losses were lower due to the improved credit environment. Income taxes were higher due primarily to a provision for prior periods' income taxes in the U.S. segment of BMO Capital Markets and higher earnings.

Q1 2011 vs Q4 2010

Net income increased $37 million or 4.9% from the fourth quarter and earnings per share increased $0.06 or 4.8% from $1.24.

Solid revenue growth outpaced expense growth in the quarter. Provisions for credit losses were modestly lower and income taxes were higher, due mostly to the provision for prior periods' income taxes discussed above.

Revenue

BMO analyzes consolidated revenues on a GAAP basis. However, like many banks, BMO analyzes the revenues of its operating groups and associated ratios computed using revenue on a taxable equivalent basis (teb). 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.

Total revenue increased $321 million or 11% from a year ago. There were solid increases in each of our groups, with particularly strong growth in Private Client Group. The weaker U.S. dollar decreased revenue growth by $39 million or 1.3 percentage points, primarily in BMO Capital Markets and P&C U.S.

Revenue increased $117 million or 3.6% from the fourth quarter of 2010. There was particularly strong growth in BMO Capital Markets and Private Client Group. The weaker U.S. dollar decreased revenue growth by $24 million or 0.7 percentage points.

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

Net Interest Income

Net interest income increased $95 million or 6.1% from a year ago, with solid growth in P&C Canada, P&C U.S. and Private Client Group. Higher BMO average earning assets drove the increase.

BMO's overall net interest margin decreased by 3 basis points year over year to 1.82%. There were solid increases in each of the groups except BMO Capital Markets. Lower net interest income in Corporate Services also contributed to the overall reduction in net interest margin. Increased margin in P&C Canada was primarily driven by higher spreads in personal lending products, partially offset by lower spreads in commercial deposits. In P&C U.S., the increase was mainly due to higher loan spread and deposit balance growth, partially offset by deposit spread compression. In Private Client Group, the increase was due to higher deposit balances and spreads in our brokerage businesses, as well as higher loan and deposit balances in private banking. The reduction in net interest margin in BMO Capital Markets was primarily attributable to lower trading net interest income.

Average earning assets increased $25.1 billion or 7.6% relative to a year ago, but adjusted to exclude the impact of the weaker U.S. dollar, increased by $31.5 billion. Higher asset levels were attributable to loan growth in P&C Canada, increased trading assets in BMO Capital Markets and increases in personal loans in Private Client Group's private banking business. There were also higher cash balances in Corporate Services representing increased deposits with the Federal Reserve. P&C U.S. average earning assets were lower as reduced business spending continues to affect credit utilization, which also contributed to lower loan balances in BMO Capital Markets. Large borrowers have been accessing debt markets and paying down bank facilities.

Relative to the fourth quarter, net interest income increased $17 million or 1.1%. Solid growth in BMO Capital Markets and P&C Canada was partially offset by lower net interest income in Corporate Services.

BMO's overall net interest margin decreased 7 basis points from the fourth quarter to 1.82% due to growth in BMO Capital Markets lower-margin assets and reduced net interest income in Corporate Services. There was good margin improvement in P&C U.S., due to improved loan spreads and higher deposit balances, and in Private Client Group, due to higher deposit spreads. There was a small improvement in P&C Canada, as the impact of higher spreads in personal lending was offset by the impact of additional personal lending interest revenue recorded in the preceding quarter. There was increased dividend income in BMO Capital Markets.

Average earning assets increased $15.3 billion or 4.5% from the fourth quarter but adjusted to exclude the impact of the weaker U.S. dollar, increased $19.2 billion. The increase was attributable to strong growth in BMO Capital Markets due to higher trading assets. Growth was more subdued in the other groups.



Net Interest Margin (teb)(i)

Increase Increase
(Decrease) (Decrease)
(In basis points) Q1-2011 vs. Q1-2010 vs. Q4-2010
----------------------------------------------------------------------------
P&C Canada 300 5 1
P&C U.S. 404 68 15
----------------------------------------------------------------------------
Personal and Commercial Client Group 317 14 3
Private Client Group 292 11 6
BMO Capital Markets 80 (13) 2
Corporate Services, including Technology
and Operations (T&O)(ii) nm nm nm
----------------------------------------------------------------------------
Total BMO 182 (3) (7)
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Total Canadian Retail(iii) 302 8 1
----------------------------------------------------------------------------
----------------------------------------------------------------------------
(i) 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.
(ii) Corporate Services net interest income is negative and lowered BMO's
overall net interest margin to a greater degree in 2011 than in 2010.
(iii) Total Canadian retail margin represents the net interest margin of
the combined Canadian business of P&C Canada and Private Client Group.
nm - not meaningful


Non-Interest Revenue

Non-interest revenue is detailed in the attached summary unaudited consolidated financial statements. Non-interest revenue increased $226 million or 15% from a year ago. The growth was mostly attributable to strong increases in BMO Capital Markets and Private Client Group.

There was strong growth in securities commissions and fees in the relatively stronger trading environment, and in equity and foreign exchange trading revenues. Insurance income also rose strongly, benefiting from both growth in net premium revenue and the effects of favourable market movements on policyholder liabilities. There were also healthy increases in mutual fund revenues and underwriting and advisory fees. Most categories of non-interest revenue were higher and the few decreases were modest.

Securitization revenues decreased $5 million from a year ago. In the quarter, we securitized $0.7 billion of residential mortgage loans.

Relative to the fourth quarter, non-interest revenue increased $100 million or 6.1%. This improvement was also attributable to significant increases in BMO Capital Markets and Private Client Group.

There was strong growth in securities commissions and fees, trading revenues and insurance income. There was good growth in underwriting and advisory fees due to better market conditions. Card fees were down due to higher rewards costs and reduced cards and payments revenue as a result of lower volumes. Securitization revenues also fell, primarily due to lower spreads on securitized assets. Trading revenues in the fourth quarter were lowered by accounting adjustments in our equity trading business and trading results in the current quarter benefited from favourable market conditions.

Non-Interest Expense

Non-interest expense is detailed in the attached summary unaudited consolidated financial statements. Non-interest expense increased $207 million or 11% from a year ago to $2,046 million. Approximately 45% of the increase was due to continued investment in our P&C businesses including technology development initiatives and the addition of staff in Canada, while 15% was due to the effects of our acquisitions of certain assets and liabilities of the Rockford, Illinois-based bank and the Diners Club North American franchise. The remaining increase was driven by higher expenses in Private Client Group and BMO Capital Markets due to increased employee compensation, resulting from higher revenues and staff additions. The weaker U.S. dollar reduced expense growth by $26 million or 1.4 percentage points, but the harmonized sales tax, implemented in both Ontario and British Columbia on July 1, 2010, increased expenses year over year by a comparable amount.

There were significant increases in employee compensation, as discussed above. Computer equipment, travel and business development and professional fees were also appreciably higher than a year ago, reflecting continued investments in the business and expenditures to support revenue growth.

Relative to the fourth quarter, non-interest expense increased $23 million or 1.2%. The weaker U.S. dollar decreased expense growth by $16 million or 0.8 percentage points. Employee compensation costs were significantly higher due largely to increases in performance-based compensation and benefits costs. Higher performance-based compensation reflects increased revenues and a $63 million charge for performance-based compensation costs in respect of employees eligible to retire, which are expensed when awards are made in the first quarter of each year. Benefits costs are typically higher in the first quarter of the year. There were reductions in computer equipment costs, travel and business development and professional fees, all of which were somewhat elevated in the fourth quarter.

Risk Management

The global economic recovery is continuing at a moderate pace. In the United States, unemployment rates remain elevated and weak commercial and residential real estate markets continue to impact the recovery. Sovereign debt issues also remain a concern.

Specific provisions for credit losses in the first quarter of 2011 were $248 million or an annualized 56 basis points of average net loans and acceptances, compared with $253 million or 58 basis points in the fourth quarter of 2010 and $333 million or 79 basis points in the first quarter of 2010. There was no general provision in the current quarter or in the comparable quarters.

On a geographic basis, specific provisions in Canada and other countries were $116 million in the first quarter of 2011, $97 million in the fourth quarter of 2010 and $143 million in the first quarter of 2010. Provisions in the United States for the comparable periods were $132 million, $156 million and $190 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 following paragraphs outline credit losses by client operating group based on actual credit losses, rather than their share of expected credit losses.

Actual credit losses in the first quarter of 2011 were: $160 million in P&C Canada; $131 million in P&C U.S.; $3 million in PCG; and nil in BMO Capital Markets. The P&C Canada losses of $160 million include credit losses of $46 million related to securitized assets, which are reflected as a reduction of non-interest revenue in Corporate Services under our securitization reporting methodology and therefore not included in BMO's $248 million of specific provisions.

Actual credit losses in the fourth quarter of 2010 were: $146 million in P&C Canada (which includes credit losses of $45 million related to securitized assets reported as a reduction of non-interest revenue in Corporate Services); $130 million in P&C U.S.; $6 million in PCG; and $16 million in BMO Capital Markets.

Actual credit losses in the first quarter of 2010 were: $190 million in P&C Canada (which includes losses of $53 million on securitized assets reported as a reduction of non-interest revenue in Corporate Services); $131 million in P&C U.S.; $5 million in PCG; and $60 million in BMO Capital Markets.

Impaired loan formations totalled $283 million in the current quarter, down from $461 million in the fourth quarter of 2010 and $456 million a year ago. Consistent with recent quarters, U.S.-related formations represented over half of BMO's total formations in the quarter.

Total gross impaired loans were $3,066 million at the end of the current quarter, down from $3,221 million at the end of the fourth quarter. Impaired loans in the first quarter of 2011 include $289 million of the loans acquired in the Rockford, Illinois-based bank transaction completed in the second quarter of 2010. Under the terms of the transaction, the Federal Deposit Insurance Corporation (FDIC) absorbs 80% of losses on the acquired loans.

BMO's liquidity and funding, market and insurance risk management practices and key measures are outlined on pages 82 to 88 of BMO's 2010 Annual Report.

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 strong liquidity position.

On December 16, 2010, the Basel Committee on Banking Supervision finalized the Basel III international framework for liquidity risk measurement, standards and monitoring. The transitional arrangements for the measures and standards consist of additional quantitative impact studies in 2011 and observation periods through to January 1, 2018. On February 1, 2011, the Office of the Superintendent of Financial Institutions Canada (OSFI) announced it will update its liquidity framework during 2011 to align with the Basel framework. Based on the Basel framework's design and calibration, the standards would result in higher costs for the banking industry, including BMO. BMO is working with the industry and regulators to understand the likely costs.

Trading and Underwriting Market Value Exposure (MVE) increased quarter over quarter. As noted on page 83 in our 2010 annual MD&A, further changes were planned in the calculation and risk governance of our available-for-sale securities (AFS) exposures for fiscal 2011. In that regard, our AFS positions are now reported separately from the trading mark-to-market exposures in our comprehensive risk and issuer risk measures. Furthermore, an enhancement incorporating additional risk factors was implemented in our AFS calculations during the quarter. The inclusion of these risk factors was a key driver of the quarter-over-quarter increase in AFS interest rate risk exposure, along with an increase in mainly U.S. denominated assets.

There were no significant changes in our structural market risk management practices during the quarter. Structural MVE is outlined on the following page and is driven by rising interest rates. The exposure has increased modestly since the prior quarter, reflecting the impact of mortgage and loan customers extending maturity term. Structural earnings volatility (EV) is driven by falling interest rates and primarily reflects the risk of prime-based loans re-pricing lower.

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.



Provisions for Credit Losses

(Canadian $ in millions, except as noted) Q1-2011 Q4-2010 Q1-2010
----------------------------------------------------------------------------
New specific provisions 330 343 401
Reversals of previously established
allowances (24) (38) (23)
Recoveries of loans previously written-
off (58) (52) (45)
----------------------------------------------------------------------------
Specific provision for credit losses 248 253 333
Increase in the general allowance - - -
----------------------------------------------------------------------------
Provision for credit losses (PCL) 248 253 333
----------------------------------------------------------------------------
----------------------------------------------------------------------------

Specific PCL as a % of average net loans
and acceptances (annualized) 0.56% 0.58% 0.79%
PCL as a % of average net loans and
acceptances (annualized) 0.56% 0.58% 0.79%


Changes in Gross Impaired Loans and Acceptances (GIL)

(Canadian $ in millions, except as noted)
----------------------------------------------------------------------------
GIL, Beginning of Period 3,221 3,128 3,297
Additions to impaired loans & acceptances 283 461 456
Additions to (reductions in) impaired
loans due to acquisitions(1) - - -
Reductions in impaired loans &
acceptances(2) (149) (76) (265)
Write-offs (289) (292) (354)
----------------------------------------------------------------------------
GIL, End of Period(1) 3,066 3,221 3,134
----------------------------------------------------------------------------
----------------------------------------------------------------------------
GIL as a % of gross loans & acceptances
(excluding acquisitions) 1.55% 1.65% 1.83%
GIL as a % of gross loans & acceptances
(including acquisitions) 1.71% 1.80% 1.83%
GIL as a % of equity and allowance for
credit losses (excluding acquisitions)(3) 11.63% 12.28% 13.89%
GIL as a % of equity and allowances for
credit losses (including acquisitions)(3) 12.84% 13.55% 13.89%
----------------------------------------------------------------------------
----------------------------------------------------------------------------
(1) The U.S. portfolio acquired in Q2 2010 included impaired loans with an
estimated value of $437 million, reduced to $327 million in Q3.
Subsequent changes in impaired loan balances on this portfolio are
included in "Additions to" or "Reductions in impaired loans &
acceptances", on a basis consistent with our other loans. All loans in
the acquired portfolio are covered by a loss-sharing agreement, with
the FDIC absorbing 80% of loan losses. There were $289 million of GIL
on this portfolio in Q1 2011 ($302 million in Q4 2010).
(2) Includes impaired amounts returned to performing status, loan sales,
repayments, the impact of foreign exchange fluctuations and offsets for
consumer write-offs which have not been recognized as formations ($170
million in Q1 2011; $172 million in Q4 2010; and $193 million in Q1
2010).
(3) Effective Q4 2010, the calculation excludes non-controlling interest in
subsidiaries. Prior periods were restated to reflect this change.



Total Trading and Underwriting Market Value Exposure (MVE) Summary ($
millions)(i)

----------------------------------------------------------------------------
----------------------------------------------------------------------------
As at
October
For the quarter ended January 31, 2011 31, 2010
(Pre-tax
Canadian Quarter- Quarter-
equivalent) end Average High Low end
----------------------------------------------------------------- ----------

Commodities risk (0.2) (0.2) (0.4) (0.1) (0.1)
Equity risk (4.6) (5.0) (7.6) (4.2) (7.5)
Foreign exchange risk (3.4) (4.6) (6.6) (0.9) (0.6)
Interest rate risk
(Mark-to-Market) (8.3) (10.5) (15.6) (7.8) (7.5)
Diversification 6.6 9.0 nm nm 4.8
-------------------------------------------- ----------
Comprehensive risk (9.9) (11.3) (14.7) (9.0) (10.9)
Issuer risk (3.5) (3.0) (4.0) (2.3) (2.7)
-------------------------------------------- ----------
Total comprehensive &
issuer risk (13.4) (14.3) (17.2) (12.0) (13.6)
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Interest rate risk
(Available-for-sale
securities portfolio) (16.6) (13.8) (18.0) (6.7) (7.4)
----------------------------------------------------------------------------
----------------------------------------------------------------------------
(i) 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)(i)

----------------------------------------------------------------------------
Jan. 31 Oct. 31
(Canadian equivalent) 2011 2010
----------------------------------------------------------------------------
Market value exposure (MVE) (pre-tax) (596.0) (564.1)
12-month earnings volatility (EV) (after-tax) (79.2) (63.8)
----------------------------------------------------------------------------
----------------------------------------------------------------------------

(i) Losses are in brackets. Measured at a 99% confidence interval.


Structural Balance Sheet Earnings and Value Sensitivity to Changes in
Interest Rates ($ millions)(i) (ii)

Economic value Earnings sensitivity
sensitivity over the next 12
(Canadian equivalent) (Pre-tax) months (After-tax)
----------------------------------------------------------------------------
Jan. 31 Oct. 31 Jan. 31 Oct. 31
2011 2010 2011 2010
----------------------------------------------------------------------------
100 basis point increase (414.3) (380.5) 18.6 20.9
100 basis point decrease 335.7 322.3 (77.6) (70.3)

200 basis point increase (866.0) (815.1) 22.0 33.4
200 basis point decrease 688.0 738.2 (6.3) (12.8)
----------------------------------------------------------------------------
----------------------------------------------------------------------------
(i) Losses are in brackets and benefits are presented as positive numbers.
(ii) For BMO's Insurance businesses, a 100 basis point increase in interest
rates at January 31, 2011 results in an increase in earnings after tax
of $80 million and an increase in before tax economic value of $255
million ($77 million and $295 million, respectively, at October 31,
2010). A 100 basis point decrease in interest rates at January 31,
2011 results in a decrease in earnings after tax of $74 million and a
decrease in before tax economic value of $270 million ($71 million and
$304 million, respectively, at October 31, 2010). 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 $258 million increased $81 million from the first quarter of 2010 and $62 million from the fourth quarter of 2010. The effective tax rate for the quarter was 24.5%, compared with 20.8% in the first quarter of 2010 and 20.6% in the fourth quarter of 2010. The higher effective tax rate in the current quarter was primarily due to a provision for prior periods' income taxes recorded in the U.S. business segment of BMO Capital Markets, partially offset by a reduction in the statutory Canadian income tax rate in 2011.

As explained at the end of the Q1 2011 Regulatory Capital Review section, to manage the impact of foreign exchange rate changes on BMO's investments in foreign operations and their effect on the bank's capital ratios to acceptable levels, BMO may partially or fully hedge foreign exchange risk by partially or fully funding its foreign investment in U.S. dollars. Under this program, the gain or loss from 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 a hedging gain or loss is a function of the fluctuation in the Canadian/U.S. exchange rate from period to period. Hedging of the investments in U.S. operations has given rise to an income tax charge in shareholders' equity of $64 million for the quarter. Refer to the Consolidated Statement of Changes in Shareholders' Equity included in the summary unaudited consolidated financial statements for further details.



Summary Quarterly Results Trends

(Canadian $
in millions, Q1- Q4- Q3- Q2- Q1- Q4- Q3- Q2-
except as noted) 2011 2010 2010 2010 2010 2009 2009 2009
----------------------------------------------------------------------------
Total revenue 3,346 3,229 2,907 3,049 3,025 2,989 2,978 2,655
Provision for credit
losses - specific 248 253 214 249 333 386 357 372
Provision for credit
losses - general - - - - - - 60 -
Non-interest expense 2,046 2,023 1,898 1,830 1,839 1,779 1,873 1,888
Net income 776 739 669 745 657 647 557 358
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Basic earnings per
share ($) 1.31 1.25 1.13 1.27 1.12 1.12 0.97 0.61
Diluted earnings per
share ($) 1.30 1.24 1.13 1.26 1.12 1.11 0.97 0.61
Net interest margin
on earning
assets (%) 1.82 1.89 1.88 1.88 1.85 1.73 1.74 1.55
Effective income tax
rate (%) 24.5 20.6 13.4 21.4 20.8 19.2 16.4 4.4
Canadian/U.S. dollar
exchange rate
(average) 1.01 1.04 1.05 1.03 1.06 1.08 1.11 1.24

Net income:
P&C Canada 444 419 425 394 403 402 366 344
P&C U.S. 42 39 40 46 51 52 58 81
----------------------------------------------------------------------------
Personal and
Commercial Banking 486 458 465 440 454 454 424 425
Private Client Group 153 129 105 115 111 106 114 72
BMO Capital Markets 257 214 130 260 212 259 309 187
Corporate Services,
including T&O (120) (62) (31) (70) (120) (172) (290) (326)
----------------------------------------------------------------------------
BMO Financial Group 776 739 669 745 657 647 557 358
----------------------------------------------------------------------------
----------------------------------------------------------------------------


BMO's quarterly earning trends were reviewed in detail on pages 94 and 95 of the 2010 Annual Report. 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 second quarter of fiscal 2009 through the first quarter of fiscal 2011.

Results in the past year have been strengthening, generally, reflecting a trend toward stronger revenues, reduced provisions for credit losses and increased net income. Expenses have been growing, reflecting acquisitions, initiative spending and business growth.

P&C Canada continues to benefit from the strong volume growth experienced over 2010 with favourable movements in market share in a number of key businesses. P&C Canada has performed well with generally increasing revenues and profitability, and good revenue increases in both personal and commercial businesses, driven by volume growth across most products and improved net interest margin. Results include the impact of the Diners Club North American franchise effective in the first quarter of 2010.

P&C U.S. has operated in a difficult economic environment since 2007 and results in 2009 and 2010 as well as the first quarter of 2011 have increasingly been impacted by the effect of impaired loans, which negatively impacts both revenues and expenses. Results in 2010 were also affected by acquisition integration costs. The economic environment in 2010 led to a drop in loan utilization, which affected revenue growth and net income. Commencing in the second quarter of 2010, P&C U.S. results reflect the acquisition of certain assets and liabilities of a Rockford, Illinois-based bank.

Private Client Group results in the most recent quarters reflect continued growth in most of our businesses. The insurance business, particularly in the most recent quarter, benefited from the effects of favourable market movements on policyholder liabilities and from higher net premium revenue. The group's asset levels remained low in the first half of 2009 but improved somewhat in the latter half of 2009 and have increased over the course of 2010 and into 2011 as equity markets strengthened. Insurance results in the third quarter of 2009 included a $23 million recovery of prior periods' income taxes.

BMO Capital Markets results in 2009 were very strong as the trading environment was very favourable. In 2010, revenues improved from 2009 but net income was down slightly and quarterly results were uneven, with strong results in the second quarter and particularly weak net income in the third quarter due primarily to a combination of the negative impact of widening credit spreads, lower trading margins and fewer trading opportunities. Results for the most recent quarter reflect increases in trading revenue, mergers and acquisitions activity and underwriting fees. They were lowered by a provision for prior periods' income taxes.

Corporate Services results had improved from the first half of 2009 due to decreased provisions for credit losses and better revenues. Results in the first nine months of 2009 were affected by reduced revenues related to both the negative carry on certain asset-liability interest rate positions, resulting from the impact of market interest changes, and the impact of funding activities that enhanced our strong liquidity position. The impact lessened over time due to management actions and more stable market conditions. Results were affected by $118 million of severance costs in the second quarter of 2009 and a $60 million increase in the general allowance for credit losses in the third quarter of 2009. Net income improved in each consecutive quarter of 2009 and 2010 until recent quarters, when net income was lowered by an upward movement in provisions for credit losses and, in the most recent quarter, reduced 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 weakened over the latter half of 2009, but has weakened at a slower pace since then. A weaker U.S. dollar lowers the translated values of BMO's U.S.-dollar-denominated revenues and expenses.

Balance Sheet

Total assets of $413.2 billion increased $1.6 billion from October 31, 2010. The weaker U.S. dollar decreased the translated value of U.S.-dollar-denominated assets by $1.7 billion. The $1.6 billion increase primarily reflects higher securities borrowed or purchased under resale agreements of $7.8 billion, higher cash and cash equivalents of $3.3 billion and higher other assets of $0.8 billion. These factors were partially offset by decreases in derivative assets of $10.4 billion.

The $7.8 billion increase in securities borrowed or purchased under resale agreements was primarily due to client driven activities.

The $3.3 billion increase in cash and cash equivalents was mainly attributable to cash invested on a short-term basis with the U.S. Federal Reserve owing to deposit growth.

Net loans and acceptances balances increased marginally. There was growth of $1.6 billion in residential mortgages and $0.6 billion in consumer instalment and other personal loans, primarily due to growth in home equity loans. This growth was offset by a reduction in loans to businesses and governments of $2.0 billion as more corporate clients have accessed the debt market and have used those funds to pay down bank facilities. Loans include $1.3 billion in balances as a result of the Rockford, Illinois-based bank transaction and $0.8 billion in loans from the Diners Club North American franchise acquisition.

The $10.4 billion decrease in derivative assets was primarily in interest rate contracts, due to higher longer-term interest rates. There was a comparable reduction in derivative financial liabilities.

Liabilities and shareholders' equity increased $1.6 billion from October 31, 2010. The weaker U.S. dollar decreased the translated value of U.S.-dollar-denominated liabilities by $1.7 billion. The $1.6 billion increase primarily reflects growth in deposits of $2.3 billion, securities sold but not yet purchased of $5.7 billion, securities lent or sold under repurchase agreements of $5.0 billion and shareholders' equity of $0.1 billion. These factors were largely offset by a decrease in derivative financial liabilities of $10.6 billion, lower capital trust securities of $0.4 billion and lower other liabilities of $0.8 billion.

Deposits by businesses and governments, which account for 53% or $133.1 billion of total deposits, increased $2.3 billion largely due to an increase in U.S. seasonal deposits. Deposits by individuals, which account for 39% or $98.6 billion of total deposits, decreased $0.4 billion and were offset by a $0.4 billion increase in deposits by banks, which account for the remaining 8% or $19.9 billion of total deposits.

Securities sold but not yet purchased increased $5.7 billion and securities lent or sold under repurchase agreements increased $5.0 billion mainly due to increased client-driven activities.

The decrease in capital trust securities was due to the $400 million redemption of all of the outstanding Trust Capital Securities Series B ("BMO BOaTS - Series B") during the quarter.

The increase in shareholders' equity of $0.1 billion reflects an increase in retained earnings, mainly offset by an increase in accumulated other comprehensive loss.

Contractual obligations by year of maturity are outlined in Table 20 on page 106 of BMO's 2010 Annual Report. There have been no material changes to contractual obligations that are outside the ordinary course of our business.

Capital Management

Q1 2011 Regulatory Capital Review

BMO remains well capitalized, with a Basel II Tier 1 Capital Ratio of 13.02% as at January 31, 2011. Tier 1 capital was $21.5 billion and risk-weighted assets (RWA) were $165.3 billion. The ratio remains strong, but decreased 43 basis points from 13.45% in the fourth quarter primarily as a result of lower Tier 1 capital, due largely to a capital redemption, and higher RWA as explained below. The Basel II Common Equity Ratio was 10.15%, down from 10.26% at the end of fiscal 2010, primarily due to higher RWA partially offset by growth in regulatory common equity net of Basel II deductions.

In the first quarter of 2011, the Office of the Superintendent of Financial Institutions Canada (OSFI) approved BMO's application to use the Advanced Internal Ratings Based (AIRB) approach to determine credit risk RWA for Harris Bancorp, Inc. The change in methodology increased Basel II capital deductions for expected losses in excess of allowances, reduced the portion of the general allowance that can be included in Tier 2 capital and increased RWA.

Tier 1 capital decreased $164 million from October 31, 2010, primarily due to the $400 million redemption of BMO BOaTS - Series B in December and higher Basel II capital deductions as noted above. These factors were partially offset by higher retained earnings and the issuance of common shares through the Shareholder Dividend Reinvestment and Share Purchase Plan and the exercise of stock options.

RWA increased $4.1 billion from October 31, 2010, primarily due to the adoption of the AIRB approach for Harris Bancorp, Inc., as outlined above, partially offset by lower trading book and securitization RWA.

BMO's Basel II Total Capital Ratio was 15.17% at January 31, 2011. The ratio decreased 74 basis points from 15.91% in the fourth quarter. Total capital decreased $563 million to $25.1 billion.

BMO's investments in U.S. operations are primarily denominated in U.S. dollars. Foreign exchange gains or losses on the translation of the investments in foreign operations to Canadian dollars are reported in shareholders' equity, which when coupled with the foreign exchange impact of U.S. dollar-denominated RWA on Canadian dollar-equivalent RWA, can create volatility in the bank's capital ratios. To manage the impact of foreign exchange rate changes on the bank's capital ratios to acceptable levels, BMO may partially or fully hedge this foreign exchange risk by partially or fully funding its foreign investment in U.S. dollars.

Potential Impacts of Proposed Regulatory Capital Changes and Conversion to IFRS

On December 16, the Basel Committee provided additional guidance on Basel III capital requirements. The rules on Basel III capital requirements have now been largely outlined and BMO's Basel III Capital Ratios are strong.

We consider the Common Equity Ratio and the Tier 1 Capital Ratio to be the primary capital ratios under Basel III. Based on our analysis and assumptions, BMO's pro-forma January 31, 2011 Common Equity Ratio and Tier 1 Capital Ratio would be 8.2% and 10.7%, respectively, up from our pro-forma estimates at October 31, 2010 of 7.8% and 10.4%, respectively. The improvements were primarily due to a lower increase in counterparty credit risk RWA under Basel III as a result of updated methodologies outlined in the December 16 Basel Committee press release. The ratios were also affected by the changes in capital and RWA referenced in the Q1 2011 Regulatory Capital Review section.



Qualifying Regulatory Capital

Basel II Regulatory Capital and Risk-Weighted Assets
(Canadian $ in millions) Q1-2011 Q4-2010
----------------------------------------------------------------------------
Common shareholders' equity 19,108 18,753
Non-cumulative preferred shares 2,571 2,571
Innovative Tier 1 capital Instruments 2,137 2,542
Non-controlling interest in subsidiaries 22 23
Goodwill and excess intangible assets (1,598) (1,619)
----------------------------------------------------------------------------
Net Tier 1 Capital 22,240 22,270
Securitization-related deductions (153) (165)
Expected loss in excess of allowance-AIRB approach (144) -
Substantial investments/Investment in insurance
subsidiaries (429) (427)
----------------------------------------------------------------------------
Adjusted Tier 1 Capital (Tier 1 Capital) 21,514 21,678
----------------------------------------------------------------------------
Subordinated debt 3,713 3,776
Trust subordinated notes 800 800
Accumulated net after-tax unrealized gains on
available-for-sale equity securities 17 10
Eligible general allowance for credit losses 36 292
----------------------------------------------------------------------------
Total Tier 2 Capital 4,566 4,878
Securitization-related deductions (19) (29)
Expected loss in excess of allowance-AIRB approach (144) -
Substantial Investments/Investment in insurance
subsidiaries (843) (890)
----------------------------------------------------------------------------
Adjusted Tier 2 Capital 3,560 3,959
----------------------------------------------------------------------------
Total Capital 25,074 25,637
----------------------------------------------------------------------------


Risk-Weighted Assets
(Canadian $ in millions) Q1-2011 Q4-2010
----------------------------------------------------------------------------
Credit risk 139,831 136,290
Market risk 5,190 5,217
Operational risk 20,266 19,658
----------------------------------------------------------------------------
Total risk-weighted assets 165,287 161,165
----------------------------------------------------------------------------
----------------------------------------------------------------------------



Outstanding Shares and Securities Convertible into Common Shares


Number of shares or
As at February 23, 2011 dollar amount
----------------------------------------------------------------------------

Common shares 567,923,000
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
Convertible into common shares:
Class B Preferred Shares(1)
Series 10 US$ 300,000,000
Stock options
- vested 8,108,000
- non-vested 7,801,000
----------------------------------------------------------------------------
(1) Convertible preferred shares may be exchanged for common shares on
specific dates on a pro-rata basis based on 95% of the average trading
price of common shares for the 20 days ending four days prior to the
exchange date.

Details on share capital are outlined in the 2010 Annual Report in Note
20 to the audited financial statements on pages 145 to 146.


The preceding pro-forma ratios do not include the impact of the Marshall & Ilsley Corporation (M&I) and Lloyd George Management (LGM) acquisitions announced in the first quarter, which are expected to close later this year. The estimated impact of the acquisitions on our capital ratios is described in the Other Capital Developments section that follows.

The pro-forma calculations in this section and the sections that follow assume full implementation of announced Basel III capital deductions and RWA changes and include the potential impact of certain key changes associated with the adoption of International Financial Reporting Standards (IFRS). The impacts of the changes from IFRS are based on our analysis to date, as set out in Transition to International Financial Reporting Standards in the Future Changes in Accounting Policies - IFRS section in our 2010 Annual Report. In calculating the Basel III Tier 1 Capital Ratio, we also assumed existing non-common share Tier 1 capital instruments are fully included in Tier 1 capital. These instruments do not meet Basel III capital requirements and will be subject to the grandfathering provisions as outlined in our 2010 Annual Report. We expect to be able to refinance non-common share capital instruments as and when necessary to meet applicable non-common share capital requirements.

The Basel III pro-forma ratios do not reflect management actions that may be taken to mitigate the impact of the changes, the benefit of retained earnings growth over time that could be available to meet these requirements, or factors beyond the control of management.

On February 1, 2011, OSFI released an advisory outlining its approach to implementing Basel III capital adequacy requirements for Canadian banks. OSFI expects minimum capital requirements to follow the Basel III transition plan and banks are expected to have in place and pursue internal capital plans and targets that will enable them to meet the Basel III capital requirements. OSFI also set out its expectations for banks that already meet the minimum ratio requirement during the transition period but do not yet meet the 7% Basel III Common Equity Tier 1 target. They are expected to meet the capital conservation buffer requirement of 2.5% to absorb losses during periods of stress as soon as reasonably possible, to maintain prudent earnings retention policies and to avoid actions that weaken their capital position. OSFI expects that the combination of sound capital management and the international guidance on prudent earnings retention will result in banks meeting the 2019 Basel III capital requirements early in the transition period.

In January 2011, the Basel Committee released guidance on non-viable contingent capital (NVCC) which outlined a new requirement that in order to qualify as regulatory capital, non-common share capital instruments must ensure investors bear losses before taxpayers in the event that the government determines that it is in the public interest to rescue a non-viable financial institution. On February 4, 2011, OSFI issued a draft advisory on NVCC seeking feedback on OSFI's implementation proposal.

On February 4, OSFI also released guidance on the grandfathering treatment that will apply to non-common share capital instruments that do not meet Basel III requirements. The guidance outlined the requirements to redeem capital instruments through a regulatory capital event. On February 7, 2011, BMO confirmed that it does not anticipate redeeming any of its outstanding regulatory capital instruments through the use of a regulatory capital event.

Other Capital Developments

On December 17, 2010, we announced an agreement to acquire M&I, and on January 11, 2011, we announced an agreement to acquire LGM. At the time of the M&I announcement, we indicated that we anticipated a common equity offering of $800 million given the acquisition and other considerations. We now anticipate that we may complete a common equity offering of less than $400 million prior to the closing of the transaction. The smaller common equity issue is now anticipated after considering the lower Basel III counterparty credit risk requirements based on new guidance from the Basel Committee on December 16, and updated BMO and M&I capital and RWA assumptions.

After incorporating the estimated capital requirements for both M&I and LGM at closing, the share exchange with M&I shareholders, and assuming no common equity is raised, the bank's pro-forma Basel II Common Equity Ratio and Tier 1 Capital Ratio would be approximately 8.8% and 11.0%, respectively, as at January 31, 2011. The bank's pro-forma Basel III Common Equity Ratio and Tier 1 Capital Ratio would be approximately 6.4% and 8.4%, respectively, as at January 31, 2011. If the pro-forma ratios were calculated assuming a $400 million common share issuance, the pro-forma ratios would be approximately 20 basis points higher. BMO's pro-forma Basel III capital ratios remain strong after considering the acquisitions and the bank is well-positioned to meet Basel III capital requirements in the near term.

During the quarter, 1,305,000 shares were issued through the Shareholder Dividend Reinvestment and Share Purchase Plan and the exercise of stock options. We did not repurchase any Bank of Montreal common shares under our common share repurchase program during the quarter. On December 13, 2010, we announced a new normal course issuer bid, commencing December 16, 2010 and ending December 15, 2011, under which we may repurchase for cancellation up to 15 million BMO common shares, representing approximately 2.6% of our public float of common shares, as defined by the Toronto Stock Exchange. No common shares were repurchased under our normal course issuer bid that expired on December 1, 2010.

On March 1, 2011, BMO announced that the Board of Directors declared a quarterly dividend payable to common shareholders of $0.70 per share, unchanged from a year ago and from the preceding quarter. The dividend is payable May 26, 2011, to shareholders of record on May 2, 2011. 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 on the secondary market or issued by the bank from treasury. At this time, the common shares purchased under the Plan will be issued from treasury without discount from the average market price of the common shares (as defined in the Plan).

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

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 senior 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 materially decrease, our cost of funds would likely increase significantly and our access to funding and capital through capital markets could be reduced. A material downgrade of our rating could have additional consequences, including those set out in Note 10 to our annual consolidated financial statements.

BMO's senior debt credit ratings were unchanged in the quarter. All four ratings are indicative of high-grade, high-quality issues. The ratings are as follows: DBRS (AA); Fitch Ratings (AA-); Moody's Investors Service (Aa2); and Standard & Poor's Ratings Services (A+). These credit ratings are also disclosed in the Financial Highlights section located near the beginning of this document.

During the first quarter, Moody's placed its rating under review for downgrade following the announcement of our intention to acquire M&I, citing execution risks and the scope of the integration work with this major transaction. The other three ratings agencies continue to maintain their ratings with a stable outlook.

Transactions with Related Parties

In the ordinary course of business, we provide banking services to our directors and executives and their 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 both discussed in Note 27 to the audited consolidated financial statements on page 159 of the 2010 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, Variable Interest Entities and Guarantees, which are described on pages 64 to 66 and 68 to 70 of the 2010 Annual Report as well as in Notes 4 and 6 to the attached unaudited interim consolidated financial statements. See the Select Financial Instruments section for comments on any significant changes to our off-balance-sheet arrangements during the quarter ended January 31, 2011.

Accounting Policies and Critical Accounting Estimates

The notes to BMO's October 31, 2010 audited consolidated financial statements outline our significant accounting policies.

Pages 68 to 70 of the 2010 Annual Report contain 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.

Select Financial Instruments

Pages 63 to 67 of BMO's 2010 Annual Report provide enhanced disclosure relating to select financial instruments that, commencing in 2008, 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, if any, in our interim MD&A.

The amount drawn on the liquidity facilities BMO provides to the Structured Investment Vehicles (SIVs) was lowered to US$3.8 billion and EUR417 million at the end of the quarter, down from US$4.3 billion and EUR478 million at the end of fiscal 2010. The decrease was attributable to asset sales and asset maturities. The book value of the subordinated capital notes at quarter end was US$536 million and EUR118 million for Links and Parkland, respectively, compared with US$689 million and EUR141 million, respectively, at October 31, 2010.

Select Geographic Exposures

In the euro zone, BMO's direct credit exposures in Greece, Ireland, Italy, Portugal and Spain are primarily to banks for trade finance, lending and trading products. Exposures remain modest, at approximately $220 million. In addition, our Irish subsidiary is required to maintain reserves with the Irish central bank. These reserves totalled approximately $240 million at quarter end.

The BMO-managed SIVs had exposure with a par value of approximately $55 million to banks in these countries as at January 31, 2011, comprised of approximately $40 million of government guaranteed Irish bank senior debt and approximately $15 million of Irish bank subordinated debt. This exposure was down from approximately $245 million at year end. As disclosed in our annual MD&A and fourth quarter earnings press release, the decline in the par value of these exposures since year end was largely due to the recognition of impairments and losses realized on the sale or exchange of Irish bank subordinated debt. These impairments and losses reduced the book value of the SIVs subordinated capital notes, as outlined in the section above, with no direct impact on BMO's financial results.

BMO's direct credit exposure to the North African countries of Egypt, Libya, Morocco, Algeria and Tunisia consists solely of trade finance products with bank counterparties. Exposures in these countries amounted to approximately $135 million at quarter end, including exposure of approximately $35 million to counterparties in Egypt, approximately $10 million to counterparties in Tunisia and negligible exposure to counterparties in Libya.

Future Changes in Accounting Policies

Transition to International Financial Reporting Standards

Canadian public companies will be required to prepare their financial statements in accordance with International Financial Reporting Standards (IFRS), as issued by the International Accounting Standards Board (IASB), for fiscal years beginning on or after January 1, 2011. Effective November 1, 2011, we will adopt IFRS as the basis for preparing our consolidated financial statements. We will report our financial results for the quarter ended January 31, 2012, prepared on an IFRS basis. We will also provide comparative data on an IFRS basis, including an opening balance sheet as at November 1, 2010 (transition date).

Our enterprise-wide project to transition to IFRS remains on track. We have completed our diagnostic review and assessment phase. Our implementation and education phase is nearing completion, and we have substantially completed detailed planning for the third and final phase of our transition. This final phase includes the development of controls and procedures necessary to restate our 2011 opening balance sheet and financial results on an IFRS basis in preparation for our transition to IFRS in 2012, and finalizing our choices on the policy decisions available under IFRS.

Based on our analysis to date, the main accounting changes that will result from the adoption of IFRS are expected to be in the areas of pension and other employee future benefits, asset securitization, consolidation and accumulated other comprehensive loss on translation of foreign operations. The differences between the bank's accounting policies and IFRS requirements associated with these areas, combined with our decisions on the optional exemptions from retroactive application of IFRS, will result in measurement and recognition differences when we transition to IFRS. The net impact of these differences will be recorded in opening retained earnings, affecting shareholders' equity. These impacts will also extend to our capital ratios, with the exception of the change related to accumulated other comprehensive loss on translation of foreign operations, which will have no impact on our capital ratios.

The main accounting changes listed should not be considered a comprehensive list of the impacts of adopting IFRS, but rather the most significant of certain key changes based on our analysis to date. Precisely quantifying all of the impacts that will result from adopting IFRS will be dependent on the completion of all our project workstreams, finalization of all decisions where choices of accounting policies are available, including optional exemptions from retroactive restatement available under IFRS, and the prevailing market conditions and economic circumstances at the time of transition. Other significant differences may be identified prior to our transition to IFRS.

Pages 71 through 73 of our 2010 Annual Report contain discussions on the key elements of our transition plan, approximate impacts to our 2011 opening balance sheet and capital ratios of certain key differences, and our assessment of the optional exemptions from retroactive application of IFRS. Readers are encouraged to review these discussions for more details.

This Transition to International Financial Reporting Standards section contains forward-looking statements. Please see the Caution Regarding Forward-Looking Statements.

U.S. Legislative Developments

On July 21, 2010, President Obama signed into law the U.S. Dodd-Frank Wall Street Reform and Consumer Protection Act. The Dodd-Frank Act is broad in scope and we are assessing the impact of the legislation on our operations. Many aspects of the Dodd-Frank Act are subject to rulemaking and will take effect over several years, making it difficult to anticipate at this time the overall financial impact on our operations or the financial industry more generally. We anticipate an increase in regulatory costs, and will be focused on managing the complexity and breadth of the regulatory changes.

The Financial Crisis Responsibility Fee that the Obama Administration has proposed levying on U.S. financial institutions that have assets exceeding a certain threshold was re-proposed in the Administration's 2012 budget. Although the details of the proposed fee have not been fully released, the proposed fee, if implemented, could apply to some or all of our U.S. operations. The proposed fee will not become law unless approved by the President and the United States Congress.



Review of Operating Groups' Performance

Operating Groups' Summary Income Statements and Statistics for Q1-2011

Q1-2011
------------------------------------------------------
(Canadian $ in Corporate
millions, except as including Total
noted) P&C PCG BMO CM T&O BMO
----------------------------------------------------------------------------
Net interest income
(teb)(1) 1,399 103 336 (211) 1,627
Non-interest revenue 491 558 627 43 1,719
----------------------------------------------------------------------------
Total revenue (teb)(1) 1,890 661 963 (168) 3,346
Provision for credit
losses 173 2 30 43 248
Non-interest expense 1,034 459 493 60 2,046
----------------------------------------------------------------------------
Income before income
taxes and non-
controlling interest
in subsidiaries 683 200 440 (271) 1,052
Income taxes
(recovery) (teb)(1) 197 47 183 (169) 258
Non-controlling
interest in
subsidiaries - - - 18 18
----------------------------------------------------------------------------
Net income Q1-2011 486 153 257 (120) 776
----------------------------------------------------------------------------
Net income Q4-2010 458 129 214 (62) 739
----------------------------------------------------------------------------
Net income Q1-2010 454 111 212 (120) 657
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Other statistics
----------------------------------------------------------------------------
Net economic profit 278 121 127 (271) 255
Return on equity 25.3% 48.3% 21.9% nm 15.7%
Cash return on equity 25.7% 48.8% 21.9% nm 15.9%
Operating leverage (1.1%) 5.6% 9.5% nm (0.7%)
Cash operating
leverage (1.1%) 5.6% 9.5% nm (0.7%)
Productivity ratio (teb) 54.7% 69.5% 51.2% nm 61.2%
Cash productivity
ratio (teb) 54.3% 69.2% 51.2% nm 60.9%
Net interest margin on
earning assets (teb) 3.17% 2.92% 0.80% nm 1.82%
Average common equity 7,306 1,244 4,425 5,729 18,704
Average earning assets
($ billions) 175.1 13.9 165.7 (0.7) 354.0
Full-time equivalent
staff 20,489 4,869 1,986 10,797 38,141
----------------------------------------------------------------------------
----------------------------------------------------------------------------
nm - not meaningful

(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.


The following sections review the financial results of each of our operating segments and operating groups for the first quarter of 2011.

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.

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.



Personal and Commercial Banking (P&C)

Increase Increase
(Canadian $ in millions, (Decrease) (Decrease)
except as noted) Q1-2011 vs. Q1-2010 vs. Q4-2010
----------------------------------------------------------------------------
Net interest income (teb) 1,399 116 9% 15 1%
Non-interest revenue 491 13 3% (24) (5%)
----------------------------------------------------------------------------
Total revenue (teb) 1,890 129 7% (9) (1%)
Provision for credit
losses 173 22 14% 10 6%
Non-interest expense 1,034 81 9% (40) (4%)
----------------------------------------------------------------------------
Income before income taxes 683 26 4% 21 3%
Income taxes (teb) 197 (6) (2%) (7) (3%)
----------------------------------------------------------------------------
Net income 486 32 7% 28 6%
----------------------------------------------------------------------------
----------------------------------------------------------------------------

Amortization of acquisition-
related intangible assets
(after tax) 6 - - - -
----------------------------------------------------------------------------
Cash net income 492 32 7% 28 6%
----------------------------------------------------------------------------

Return on equity 25.3% (1.6%) (2.0%)
Cash return on equity 25.7% (1.6%) (2.1%)
Operating leverage (1.1%) nm nm
Cash operating leverage (1.1%) nm nm
Productivity ratio (teb) 54.7% 0.6% (1.8%)
Cash productivity ratio
(teb) 54.3% 0.5% (1.8%)
Net interest margin on
earning assets (teb) 3.17% 0.14% 0.03%
Average earning assets
($ billions) 175.1 6.9 4% 0.2 -
----------------------------------------------------------------------------
----------------------------------------------------------------------------
nm - not meaningful


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)

Increase Increase
(Canadian $ in millions, (Decrease) (Decrease)
except as noted) Q1-2011 vs. Q1-2010 vs. Q4-2010
----------------------------------------------------------------------------
Net interest income (teb) 1,109 91 9% 18 2%
Non-interest revenue 419 25 7% (11) (2%)
----------------------------------------------------------------------------
Total revenue (teb) 1,528 116 8% 7 1%
Provision for credit
losses 136 16 13% 4 3%
Non-interest expense 773 62 9% (14) (2%)
----------------------------------------------------------------------------
Income before income taxes 619 38 7% 17 3%
Income taxes (teb) 175 (3) (1%) (8) (4%)
----------------------------------------------------------------------------
Net income 444 41 10% 25 6%
----------------------------------------------------------------------------
----------------------------------------------------------------------------

Amortization of acquisition-
related intangible assets
(after tax) 1 (1) nm - -
----------------------------------------------------------------------------
Cash net income 445 40 10% 25 6%
----------------------------------------------------------------------------

Personal revenue 955 61 7% (6) (1%)
Commercial revenue 573 55 11% 13 2%
Operating leverage (0.5%) nm nm
Cash operating leverage (0.4%) nm nm
Productivity ratio (teb) 50.6% 0.2% (1.1%)
Cash productivity ratio (teb) 50.5% 0.2% (1.1%)
Net interest margin on
earning assets (teb) 3.00% 0.05% 0.01%
Average earning assets
($ billions) 146.6 9.7 7% 1.6 1%
----------------------------------------------------------------------------
nm - not meaningful


Q1 2011 vs Q1 2010

P&C Canada net income was a strong $444 million, up $41 million or 10% from a year ago.

Revenue increased $116 million or 8.3%, driven by volume growth across most products, the inclusion of a full quarter of Diners Club business revenues in the current year compared to one month in the prior year and an improved net interest margin.

Net interest margin increased by 5 basis points, driven primarily by higher spread in personal lending products, partially offset by lower spread in commercial deposits.

In the personal banking segment, revenue increased $61 million or 7.0%, driven by volume growth and higher spreads in personal lending products. Total personal lending balances (including mortgages, Homeowner ReadiLine and other consumer lending products) increased 6.5% year over year. Total personal lending market share increased year over year as personal lending increased, led by Homeowner ReadiLine, and mortgage market share decreased. Our goal is to grow market share and we continue to focus on improving the total personal lending business through investment in the sales force and achieving productivity gains while remaining attentive to the credit quality of the portfolio.

While personal cards balances increased 1.5%, our net retail sales market share decreased year over year.

Personal deposits balances decreased 0.8% year over year as an increase in retail operating deposits was offset by a decline in term deposits. Market share for both retail operating and term deposits decreased in the highly competitive environment.

In the commercial banking segment, revenue increased $55 million or 11% year over year due to volume growth, favourable product mix and the inclusion of a full quarter of Diners Club business results in the current year, partially offset by lower spread in commercial deposits.

Commercial loan balances grew 7.8%. Our market share has increased for four consecutive quarters and is up 60 basis points from a year ago. We continue to rank second in Canadian business banking market share of small and mid-sized business loans.

Commercial cards balances more than doubled, primarily due to the addition of the Diners Club business.

Commercial deposit balances grew 10.4%. We continue to invest in the size and capabilities of our commercial workforce to provide more and better advice to our customers.

Provisions for credit losses under BMO's expected loss provisioning methodology increased $16 million or 13% due to growth in the portfolio and the addition of the Diners Club business.

Non-interest expense increased $62 million or 8.8% due to higher initiatives and advertising expense, higher salaries and benefits from increased staff levels, the inclusion of a full quarter of Diners Club business results in the current year (compared to one month in the prior year) and an Ontario retail sales tax settlement. The group's cash operating leverage was negative 0.4%, as we continue to invest strategically to improve our competitive position while managing our operating expenses prudently.

Average current loans and acceptances, including securitized loans, increased $10.0 billion or 7.2% from a year ago and personal and commercial deposits grew $2.7 billion or 2.7%.

Effective this quarter, we realigned our businesses to include personal cards in our personal business and include corporate and small business cards, the Diners Club business and Cards and Payment Services in our commercial business. Results for prior periods have been restated to conform to the current presentation.

Q1 2011 vs Q4 2010

Net income increased $25 million or 6.0%.

Revenue increased $7 million or 0.5%, driven by volume growth across most products, partially offset by lower personal cards revenue. Net interest margin improved by 1 basis point. There was improved spread in personal lending products this quarter but net interest margin in the preceding quarter was raised by the recognition of additional personal lending interest revenue.

Non-interest expense decreased $14 million or 1.7%, primarily due to the timing of advertising and initiatives spending and lower professional fees, partially offset by an Ontario retail sales tax settlement and stock-based compensation costs for employees eligible to retire that are recognized in the first quarter.

Average current loans and acceptances, including securitized loans, increased $1.5 billion or 1.0% from the preceding quarter, while personal and commercial deposits increased $1.2 billion or 1.2%.



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

Increase Increase
(Canadian $ in millions, (Decrease) (Decrease)
except as noted) Q1-2011 vs. Q1-2010 vs. Q4-2010
----------------------------------------------------------------------------
Net interest income (teb) 290 25 10% (3) (1%)
Non-interest revenue 72 (12) (15%) (13) (16%)
----------------------------------------------------------------------------
Total revenue (teb) 362 13 4% (16) (4%)
Provision for credit
losses 37 6 18% 6 18%
Non-interest expense 261 19 8% (26) (9%)
----------------------------------------------------------------------------
Income before income taxes 64 (12) (15%) 4 8%
Income taxes (teb) 22 (3) (11%) 1 7%
----------------------------------------------------------------------------
Net income 42 (9) (17%) 3 8%
----------------------------------------------------------------------------
----------------------------------------------------------------------------

Amortization of acquisition-
related intangible assets
(after tax) 5 1 25% - -
----------------------------------------------------------------------------
Cash net income 47 (8) (15%) 3 6%
----------------------------------------------------------------------------

Operating leverage (4.1%) nm nm
Cash operating leverage (4.1%) nm nm
Productivity ratio (teb) 72.0% 2.8% (3.9%)
Cash productivity ratio (teb) 70.3% 2.7% (3.9%)
Net interest margin on
earning assets (teb) 4.04% 0.68% 0.15%
Average earning assets
($ billions) 28.5 (2.8) (9%) (1.4) (5%)
----------------------------------------------------------------------------
----------------------------------------------------------------------------

U.S. Select Financial Data
(US$ in millions,
except as noted)

Net interest income (teb) 288 38 15% 5 2%
Non-interest revenue 71 (9) (11%) (10) (13%)
----------------------------------------------------------------------------
Total revenue (teb) 359 29 9% (5) (1%)
Non-interest expense 259 31 13% (17) (7%)
Net Income 42 (6) (13%) 4 12%
Average earning assets
(US$ billions) 28.3 (1.2) (4%) (0.5) (2%)
----------------------------------------------------------------------------
----------------------------------------------------------------------------
nm - not meaningful


Q1 2011 vs Q1 2010

Net income of Cdn$42 million decreased Cdn$9 million or 17%, of which Cdn$3 million was due to the effects of currency translation. Amounts in the rest of this section are in U.S. dollars. Net income of $42 million was down $6 million or 13% from $48 million a year ago, largely driven by a 23% increase in provisions for credit losses under BMO's expected loss provisioning methodology. The impact of solid revenue growth from increased deposit balances and improved loan spreads was offset by higher expenses. The inclusion of assets and liabilities acquired in the Rockford, Illinois-based bank transaction increased revenue by $17 million and expenses by $16 million (including acquisition integration costs of $2 million pre-tax; $1 million after-tax).

On a basis that adjusts for the impact of impaired loans and acquisition integration costs, net income was $63 million, consistent with results of a year ago on a comparably-adjusted basis. On this same basis, the cash productivity ratio was 62.4%.

Revenue of $359 million increased $29 million or 8.8%, primarily due to the impact of the Rockford transaction, higher deposit balances and improved loan spreads. Deposit spread compression and lower deposit and lending fees impacted revenue growth.

Net interest margin increased due to higher loan spreads and deposit balance growth, partially offset by deposit spread compression.

Non-interest expense of $259 million was $31 million or 13% higher, primarily driven by the Rockford transaction, increases in costs of managing impaired loans, higher deposit insurance premiums and other variable employee-related costs. Expenses were reduced by a recovery of a prior period valuation adjustment on the serviced mortgage portfolio related to increased long-term interest rates.

Q1 2011 vs Q4 2010

Net income increased Cdn$3 million or 8.0% from the prior quarter. Amounts in the rest of this section are in U.S. dollars. Net income increased $4 million or 12% from the prior quarter due to reduced expenses.

Revenue decreased $5 million or 1.3%, primarily driven by lower deposit and lending fees.

Net interest margin increased due to improved loan spreads and higher deposit balances.

Non-interest expense decreased $17 million or 6.5%, primarily due to lower integration costs related to the Rockford transaction.



Private Client Group (PCG)

Increase Increase
(Canadian $ in millions, (Decrease) (Decrease)
except as noted) Q1-2011 vs. Q1-2010 vs. Q4-2010
----------------------------------------------------------------------------
Net interest income (teb) 103 16 18% 4 5%
Non-interest revenue 558 95 20% 64 13%
----------------------------------------------------------------------------
Total revenue (teb) 661 111 20% 68 12%
Provision for credit
losses 2 - - - -
Non-interest expense 459 57 14% 42 10%
----------------------------------------------------------------------------
Income before income taxes 200 54 36% 26 15%
Income taxes (teb) 47 12 30% 2 3%
----------------------------------------------------------------------------
Net income 153 42 38% 24 19%
----------------------------------------------------------------------------
----------------------------------------------------------------------------

Amortization of acquisition-
related intangible assets
(after tax) 2 1 nm 1 nm
----------------------------------------------------------------------------
Cash net income 155 43 38% 25 19%
----------------------------------------------------------------------------

Return on equity 48.3% 14.6% 7.1%
Cash return on equity 48.8% 14.7% 7.1%
Operating leverage 5.6% nm nm
Cash operating leverage 5.6% nm nm
Productivity ratio (teb) 69.5% (3.4%) (0.8%)
Cash productivity ratio (teb) 69.2% (3.5%) (0.9%)
Net interest margin on
earning assets (teb) 2.92% 0.11% 0.06%
Average earning assets 13,943 1,611 13% 301 2%
----------------------------------------------------------------------------
----------------------------------------------------------------------------

U.S. Select Financial Data
(US$ in millions,
except as noted)

Total revenue (teb) 64 2 5% 2 5%
Non-interest expense 58 4 8% 4 7%
Net income 4 (1) (22%) - -
Cash net income 4 (1) (22%) (1) (11%)
Average earning assets 1,928 (222) (10%) (80) (4%)
----------------------------------------------------------------------------
----------------------------------------------------------------------------
nm - not meaningful


Q1 2011 vs Q1 2010

Net income of $153 million increased $42 million or 38% from the same quarter a year ago. PCG net income, excluding the insurance business, was $81 million, up $14 million or 20%, driven by growth across most of our businesses. Insurance net income was $72 million for the quarter, up $28 million or 66%. The insurance business generated solid growth in net premium revenue and benefited from the effects of favourable market movements on policyholder liabilities relative to the same quarter a year ago.

Revenue increased $111 million or 20% with growth across all of our businesses. PCG, excluding insurance, revenue growth was driven by a 10% (12% in source currency) improvement in client assets under management and administration, as we remain focused on delivering the high level of service and advice that our clients expect. Revenue from the insurance business was up year over year, benefiting from higher net premium revenue and the favourable effect of the market movements outlined above. Net interest income grew from the prior year primarily due to higher deposit balances and spreads in our brokerage businesses, as well as higher loan and deposit balances in private banking. The weaker U.S. dollar lowered revenue by $4 million or 0.7%.

Non-interest expense increased $57 million or 14%, primarily due to higher revenue-based costs associated with the revenue growth in PCG excluding insurance and selective investments to benefit future revenue growth. The weaker U.S. dollar reduced expenses by $3 million or 0.7%. The productivity ratio of 69.5% improved 340 basis points from the prior year. Operating leverage was 5.6% in the current quarter.

After adjusting to exclude the impact of the weaker U.S. dollar, assets under management and administration grew $31 billion or 12%, benefiting from attracting new client assets and improved equity market conditions.

Q1 2011 vs Q4 2010

Net income increased $24 million or 19% from the fourth quarter. PCG net income, excluding the insurance business, was down $5 million or 6.0% as the impact of stock-based compensation costs for employees eligible to retire that are recognized in the first quarter of each year was only partially offset by revenue growth. Insurance net income was up $29 million or 70%.

Revenue increased $68 million or 12%, with growth across all of our businesses, particularly in brokerage and private banking. Insurance revenue also improved, benefiting largely from the effects of favourable market movements on policyholder liabilities relative to the fourth quarter and from higher net premium revenues. Net interest income also grew, largely due to higher deposit spreads in the brokerage businesses and higher loan and deposit balances in private banking.

Non-interest expense was up $42 million or 10%, primarily due to stock-based compensation costs for employees eligible to retire that are recognized in the first quarter and higher revenue-based costs in line with revenue growth. The productivity ratio of 69.5% improved 80 basis points from the prior quarter.

Assets under management and administration increased by $12 billion or 5%.



BMO Capital Markets (BMO CM)

Increase Increase
(Canadian $ in millions, (Decrease) (Decrease)
except as noted) Q1-2011 vs. Q1-2010 vs. Q4-2010
----------------------------------------------------------------------------
Net interest income (teb) 336 (25) (7%) 36 12%
Non-interest revenue 627 145 30% 91 17%
----------------------------------------------------------------------------
Total revenue (teb) 963 120 14% 127 15%
Provision for credit
losses 30 (35) (54%) (36) (54%)
Non-interest expense 493 22 5% 30 7%
----------------------------------------------------------------------------
Income before income taxes 440 133 43% 133 44%
Income taxes (teb) 183 88 93% 90 97%
----------------------------------------------------------------------------
Net income 257 45 21% 43 20%
----------------------------------------------------------------------------
----------------------------------------------------------------------------

Amortization of acquisition-
related intangible assets
(after tax) - (1) nm (1) nm
----------------------------------------------------------------------------
Cash net income 257 44 21% 42 20%
----------------------------------------------------------------------------

Trading Products revenue 595 68 13% 95 19%
Investment and Corporate
Banking revenue 368 52 17% 32 10%
Return on equity 21.9% 3.5% 1.8%
Cash return on equity 21.9% 3.5% 1.8%
Operating leverage 9.5% nm nm
Cash operating leverage 9.5% nm nm
Productivity ratio (teb) 51.2% (4.7%) (4.2%)
Cash productivity ratio (teb) 51.2% (4.7%) (4.2%)
Net interest margin on
earning assets (teb) 0.80% (0.13%) 0.02%
Average earning assets
($ billions) 165.7 12.4 8% 13.2 9%
----------------------------------------------------------------------------
----------------------------------------------------------------------------

U.S. Select Financial Data
(US$ in millions,
except as noted)

Total revenue (teb) 271 (3) (1%) 21 9%
Non-interest expense 195 33 21% (12) (6%)
Net Income (19) (70) (+100%) (22) (+100%)
Average earning assets
(US$ billions) 55.8 8.7 19% 4.2 8%
----------------------------------------------------------------------------
----------------------------------------------------------------------------
nm - not meaningful


Q1 2011 vs Q1 2010

Net income was a strong $257 million, an increase of $45 million or 21% from a year ago. The improvement in net income was lowered by a provision for prior periods' income taxes in the U.S. segment but results benefited from favourable market conditions. Revenue increased and there was a decrease in the provision for credit losses under BMO's expected loss provisioning methodology. Expenses also increased, in part due to higher employee costs, as we continue to invest in strategic hiring across the business. ROE was 21.9%, up from 18.4% a year ago.

Revenue increased $120 million or 14% to $963 million. Our revenue growth was supported by our continued focus on core clients and businesses and the impact of building our capabilities and infrastructure, as well as improving economic conditions. Non-interest revenues increased significantly, primarily due to higher equity and foreign exchange trading revenue. As market conditions improve, we have seen an increase in our investment banking activity, particularly in strong mergers and acquisitions revenue. The weaker U.S. dollar decreased revenue by $15 million relative to a year ago.

Net interest income decreased due to lower trading net interest income, which lowered our net interest margin by 13 basis points to 0.80%.

Non-interest expense increased $22 million or 4.8% mainly due to higher employee costs as discussed above. The weaker U.S. dollar decreased expenses by $9 million relative to a year ago.

Q1 2011 vs Q4 2010

Net income increased $43 million or 20% from the previous quarter. The improvement in net income was lowered by the provision for prior periods' income taxes, but results benefited from favourable market conditions. Revenue was $127 million or 15% higher, as equity trading revenue increased considerably due to an unfavourable accounting adjustment in the previous quarter. Revenue growth was also driven by an increase in investment banking activity, particularly in the mergers and acquisitions area. Net interest margin was modestly higher. The weaker U.S. dollar decreased revenue by $9 million relative to the previous quarter.

Non-interest expense increased $30 million mainly due to higher variable compensation costs, in line with revenue performance and stock-based compensation costs for employees eligible to retire that are recognized in the first quarter of the year. The weaker U.S. dollar decreased expenses by $6 million.



Corporate Services, Including Technology and Operations

Increase Increase
(Canadian $ in millions, (Decrease) (Decrease)
except as noted) Q1-2011 vs. Q1-2010 vs. Q4-2010
----------------------------------------------------------------------------
Net interest income before
group teb offset (150) (16) (12%) (41) (40%)
Group teb offset (61) 4 6% 3 5%
----------------------------------------------------------------------------
Net interest income (teb) (211) (12) (6%) (38) (23%)
Non-interest revenue 43 (27) (40%) (31) (43%)
----------------------------------------------------------------------------
Total revenue (teb) (168) (39) (31%) (69) (73%)
Provision for credit
losses 43 (72) (63%) 21 95%
Non-interest expense 60 47 +100% (9) (14%)
----------------------------------------------------------------------------
Loss before income taxes
and non-controlling
interest in subsidiaries 271 14 6% 81 45%
Income tax recovery (teb) 169 13 9% 23 17%
Non-controlling interest
in subsidiaries 18 (1) (2%) - -
----------------------------------------------------------------------------
Net loss 120 - - 58 97%
----------------------------------------------------------------------------
----------------------------------------------------------------------------

U.S. Select Financial Data
(US$ in millions,
except as noted)

Total revenue (teb) (71) (36) (+100%) (30) (76%)
Provision for credit
losses 73 (34) (31%) 6 9%
Non-interest expense (17) 3 17% - -
Income tax recovery (teb) 76 27 59% 41 +100%
Net loss 56 (22) (28%) (4) (6%)
----------------------------------------------------------------------------
----------------------------------------------------------------------------


Corporate Services

Corporate Services consists of the corporate units that provide enterprise-wide expertise and governance support in a variety of areas, including strategic planning, risk management, finance, legal and compliance, communications and human resources. Operating results reflect the impact of certain securitization and asset-liability management activities, the elimination of teb adjustments and the impact of our expected loss provisioning methodology.

BMO's practice is to charge loss provisions to the client operating groups each year, using an expected loss provisioning methodology based on each group's share of expected credit losses. Corporate Services is generally charged (or credited) with differences between the periodic provisions for credit losses charged to the client operating groups under our expected loss provisioning methodology and provisions required under GAAP.

Technology and Operations

Technology and Operations (T&O) manages, maintains and provides governance over information technology, operations services, real estate and sourcing for BMO Financial Group. T&O focuses on enterprise-wide priorities that improve service quality and efficiency to deliver an excellent customer experience.

Financial Performance Review

Technology and Operations operating results are included with Corporate Services for reporting purposes. However, the costs of T&O services are transferred to the three operating groups (P&C, PCG and BMO Capital Markets) and only minor amounts are retained in T&O results. As such, results in this section largely reflect the corporate activities outlined in the preceding description of the Corporate Services unit.

Corporate Services incurred a net loss in the quarter of $120 million, unchanged from the prior year. Revenue was $39 million lower, mostly due to a $27 million reduction in non-interest revenue due in approximately equal parts to higher funding transaction fees, higher mark-to-market losses on securitization-related swaps and the impact of hedge ineffectiveness. There were also increases in technology investment expenses. Reduced revenues and increased expenses were offset by substantially lower provisions for credit losses.

The net loss in the current quarter was $58 million higher than in the fourth quarter of 2010. Reduced revenues and increased provisions for credit losses were partially offset by slightly lower expenses. Revenues were lower primarily due to a large number of small items including lower securitization-related revenues and lower interest on income tax refunds.



GAAP and Related Non-GAAP Measures used in the MD&A

(Canadian $ in millions, except as noted) Q1-2011 Q4-2010 Q1-2010
----------------------------------------------------------------------------
Total non-interest expense (a) 2,046 2,023 1,839
Amortization of acquisition-related intangible
assets (note 1) (9) (10) (8)
----------------------------------------------------------------------------
Cash-based non-interest expense (b) (note 2) 2,037 2,013 1,831
----------------------------------------------------------------------------
Net income 776 739 657
Amortization of acquisition-related intangible
assets, net of income taxes 8 9 7
----------------------------------------------------------------------------
Cash net income (note 2) 784 748 664
Preferred share dividends 34 34 35
Charge for capital (note 2) 495 489 458
----------------------------------------------------------------------------
Net economic profit (note 2) 255 225 171
----------------------------------------------------------------------------
Net income 776 739 657
Provision for credit losses 248 253 333
Income taxes and non-controlling interest in
subsidiaries 276 214 196
----------------------------------------------------------------------------
Income before provision for credit losses,
income taxes and non-controlling interest in
subsidiaries (PPPT) (note 2) 1,300 1,206 1,186
----------------------------------------------------------------------------
Revenue (c) 3,346 3,229 3,025
Revenue growth (%) (d) 10.6 8.0 23.9
Productivity ratio (%) ((a/c) x 100) 61.2 62.6 60.8
Cash productivity ratio (%)
((b/c) x 100) (note 2) 60.9 62.3 60.5
Non-interest expense growth (%) (e) 11.3 13.7 (0.1)
Cash-based non-interest expense growth (%) (f)
(note 2) 11.3 13.7 -
Operating leverage (%) (d-e) (0.7) (5.7) 24.0
Cash operating leverage (%) (d-f) (note 2) (0.7) (5.7) 23.9
EPS (uses net income) ($) 1.30 1.24 1.12
Cash EPS (note 1) (uses cash net income)
($) (note 2) 1.32 1.26 1.13
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Note 1: The amortization of non-acquisition-related intangible assets is
not added back in the determination of cash-based non-interest
expense and cash net income.
Note 2: These are non-GAAP amounts or non-GAAP measures.


Non-GAAP Measures

BMO uses both GAAP and certain non-GAAP measures to assess performance. Securities regulators require that companies caution readers that earnings and other measures adjusted to a basis other than GAAP do not have standardized meanings under GAAP and are unlikely to be comparable to similar measures used by other companies. The above table reconciles the non-GAAP measures, which management regularly monitors, to their GAAP counterparts.

At times, we indicate that certain amounts or measures exclude the effects of items but we generally do so in conjunction with disclosure of the nearest GAAP measure and provide details of the reconciling item. Amounts and measures stated on such a basis are considered useful as they could be expected to reflect ongoing operating results or assist readers' understanding of performance. To assist readers and when appropriate, we also provide a schedule in the Notable Items section that summarizes notable items that have affected results in certain of the reporting periods.

Cash earnings, cash productivity and cash operating leverage measures may enhance comparisons between periods when there has been an acquisition, particularly because the purchase decision may not consider the amortization of acquisition-related intangible assets to be a relevant expense. Cash EPS measures are also disclosed because analysts often focus on this measure, and cash EPS is used by Thomson First Call to track third-party earnings estimates that are frequently reported in the media. Cash measures add the after-tax amortization of acquisition-related intangible assets to GAAP earnings to derive cash net income (and associated cash EPS) and deduct the amortization of acquisition-related intangible assets from non-interest expense to derive cash productivity and cash operating leverage measures.

Net economic profit represents cash net income available to common shareholders, less a charge for capital, and is considered an effective measure of added economic value.

Income before provision for credit losses, income taxes and non-controlling interest in subsidiaries is considered a useful measure as it provides a measure of performance that excludes the impacts of credit losses and income taxes, which can at times mask performance because of their size and variability.

Notable items

From time to time, we designate certain amounts as notable items to assist in discussing their impact on our financial results. There were no items designated as notable in the current quarter or the comparable periods in 2010.

INVESTOR AND MEDIA PRESENTATION

Investor Presentation Materials

Interested parties are invited to visit our website at www.bmo.com/investorrelations to review our 2010 annual report, this quarterly news release, presentation materials and a supplementary financial information package online.

Quarterly Conference Call and Webcast Presentations

Interested parties are also invited to listen to our quarterly conference call on Tuesday, March 1, 2011, at 2:00 p.m. (EST). At that time, senior BMO executives will comment on results for the quarter and respond to questions from the investor community. The call may be accessed by telephone at 416-695-9753 (from within Toronto) or 1-888-789-0089 (toll-free outside Toronto). A replay of the conference call can be accessed until Tuesday, May 24, 2011, by calling 905-694-9451 (from within Toronto) or 1-800-408-3053 (toll-free outside Toronto) and entering passcode 6850310.

A live webcast of the call can be accessed on our website at www.bmo.com/investorrelations. A replay can be accessed on the site until Tuesday, May 24, 2011.



Media Relations Contacts

Ralph Marranca, Toronto, ralph.marranca@bmo.com, 416-867-3996
Ronald Monet, Montreal, ronald.monet@bmo.com, 514-877-1873

Investor Relations Contacts

Viki Lazaris, Senior Vice-President, viki.lazaris@bmo.com, 416-867-6656
Terry Glofcheskie, Director, terry.glofcheskie@bmo.com, 416-867-5452
Andrew Chin, Senior Manager, andrew.chin@bmo.com, 416-867-7019

Chief Financial Officer

Russel Robertson, Chief Financial Officer
russ.robertson@bmo.com, 416-867-7360

Corporate Secretary

Blair Morrison, Senior Vice-President, Deputy General Counsel,
Corporate Affairs and Corporate Secretary
corp.secretary@bmo.com, 416-867-6785

----------------------------------------------------------------------------

Shareholder Dividend Reinvestment For other shareholder information,
and Share Purchase Plan please contact
Average market price Bank of Montreal
November 2010 $60.22 Shareholder Services
December 2010 $57.35 Corporate Secretary's Department
January 2011 $59.05 One First Canadian Place, 21st Floor
Toronto, Ontario M5X 1A1
For dividend information, change in Telephone: (416) 867-6785
shareholder address Fax: (416) 867-6793
or to advise of duplicate mailings, E-mail: corp.secretary@bmo.com
please contact
Computershare Trust Company For further information on this
of Canada report, please contact
100 University Avenue, 9th Floor Bank of Montreal
Toronto, Ontario M5J 2Y1 Investor Relations Department
Telephone: 1-800-340-5021 P.O. Box 1, One First Canadian
(Canada and the United States) Place, 18th Floor
Telephone: (514) 982-7800 Toronto, Ontario M5X 1A1
(international)
Fax: 1-888-453-0330 To review financial results online,
(Canada and the United States) please visit our website at
Fax: (416) 263-9394 (international) www.bmo.com
E-mail: service@computershare.com

----------------------------------------------------------------------------

® Registered trademark of Bank of Montreal

----------------------------------------------------------------------------
Annual Meeting 2011
The next Annual Meeting of Shareholders will be held on
Tuesday, March 22, 2011, in Vancouver, British Columbia.
----------------------------------------------------------------------------



Financial Highlights

(Unaudited)
(Canadian $
in millions,
except as
noted) For the three months ended
----------------------------------------------------------------------------
Change
from
January October July April January January
31, 2011 31, 2010 31, 2010 30, 2010 31, 2010 31, 2010
----------------------------------------------------------------------------
Income
Statement
Highlights
Total revenue $ 3,346 $ 3,229 $ 2,907 $ 3,049 $ 3,025 10.6%
Provision for
credit losses 248 253 214 249 333 (25.6)
Non-interest
expense 2,046 2,023 1,898 1,830 1,839 11.3
Net income 776 739 669 745 657 18.1
----------------------------------------------------------------------------
Net Income by
Operating Segment
Personal &
Commercial
Banking Canada $ 444 $ 419 $ 425 $ 394 $ 403 10.0%
Personal &
Commercial
Banking U.S. 42 39 40 46 51 (17.3)
Private Client
Group 153 129 105 115 111 37.8
BMO Capital
Markets 257 214 130 260 212 21.1
Corporate
Services(a) (120) (62) (31) (70) (120) 0.4
----------------------------------------------------------------------------
Common Share
Data ($)
Diluted
earnings
per share $ 1.30 $ 1.24 $ 1.13 $ 1.26 $ 1.12 $ 0.18
Diluted cash
earnings per
share(b) 1.32 1.26 1.14 1.28 1.13 0.19
Dividends
declared
per share 0.70 0.70 0.70 0.70 0.70 0.00
Book value
per share 34.21 34.09 33.13 32.04 32.51 1.70
Closing share
price 57.78 60.23 62.87 63.09 52.00 5.78
Total market
value of
common shares
($ billions) 32.8 34.1 35.4 35.3 28.9 3.9
----------------------------------------------------------------------------



As at
----------------------------------------------------------------------------
Change
from
January October July April January January
31, 2011 31, 2010 31, 2010 30, 2010 31, 2010 31, 2010
----------------------------------------------------------------------------
Balance Sheet
Highlights
Assets $ 413,244 $ 411,640 $ 397,386 $ 390,166 $ 398,623 3.7%
Net loans and
acceptances 176,914 176,643 173,555 169,753 169,588 4.3
Deposits 251,600 249,251 242,791 239,260 240,299 4.7
Common
shareholders'
equity 19,422 19,309 18,646 17,944 18,054 7.6
----------------------------------------------------------------------------


For the three months ended
--------------------------------------------------------------------


January October July April January
31, 2011 31, 2010 31, 2010 30, 2010 31, 2010
-------------------------------------------------------------------
Financial
Measures and
Ratios
(% except
as noted)(c)
Average annual
five year total
shareholder
return 1.7 5.9 5.6 7.2 3.5
Diluted earnings
per share
growth 16.1 11.7 16.5 +100 +100
Diluted cash
earnings per
share growth(b) 16.8 11.5 16.3 +100 +100
Return on equity 15.7 15.1 13.7 16.4 14.3
Cash return on
equity(b) 15.9 15.3 13.9 16.6 14.4
Net economic
profit (NEP)
growth(b) 48.6 40.8 +100 +100 +100
Operating
leverage (0.7) (5.7) (3.8) 17.9 24.0
Cash operating
leverage(b) (0.7) (5.7) (3.9) 17.7 23.9
Revenue growth 10.6 8.0 (2.4) 14.8 23.9
Non-interest
expense growth 11.3 13.7 1.4 (3.1) (0.1)
Cash non-interest
expense growth(b) 11.3 13.7 1.5 (2.9) 0.0
Non-interest
expense-to-
revenue ratio 61.2 62.6 65.3 60.0 60.8
Cash non-interest
expense-to-revenue
ratio(b) 60.9 62.3 65.0 59.7 60.5
Provision for
credit losses-
to-average
loans and
acceptances
(annualized) 0.56 0.58 0.50 0.59 0.79
Gross impaired
loans and
acceptances-to-
equity and
allowance for
credit losses 12.84 13.55 13.54 15.20 13.89
Cash and
securities-to-
total assets
ratio 35.6 35.0 34.6 35.8 33.9
Tier 1 capital
ratio 13.02 13.45 13.55 13.27 12.53
Total capital
ratio 15.17 15.91 16.10 15.69 14.82
Credit rating (d)
DBRS AA AA AA AA AA
Fitch AA- AA- AA- AA- AA-
Moody's Aa2 Aa2 Aa2 Aa2 Aa2
Standard & Poor's A+ A+ A+ A+ A+
Twelve month
total
shareholder
return 16.6 26.4 22.4 68.7 67.1
Dividend yield 4.85 4.65 4.45 4.44 5.38
Price-to-
earnings ratio
(times) 11.7 12.7 13.6 14.1 13.6
Market-to-book
value (times) 1.69 1.77 1.90 1.97 1.60
Net economic
profit (loss)
($ millions)(b) 255 225 158 264 171
Return on average
assets 0.74 0.72 0.67 0.78 0.66
Net interest
margin on
average earning
assets 1.82 1.89 1.88 1.88 1.85
Non-interest
revenue-to-total
revenue 51.4 50.2 46.0 50.1 49.3
Equity-to-assets
ratio 5.3 5.3 5.3 5.3 5.2
--------------------------------------------------------------------
--------------------------------------------------------------------
All ratios in this report are based on unrounded numbers.
(a) Corporate Services includes Technology and Operations.
(b) Refer to the "Non-GAAP Measures" section of Management's
Discussion and Analysis for an explanation of cash results and
net economic profit. Securities regulators require that companies
caution readers that earnings and other measures adjusted to a
basis other than generally accepted accounting principles (GAAP)
do not have standardized meanings under GAAP and are unlikely to
be comparable to similar measures used by other companies.
(c) For the period ended, or as at, as appropriate.
(d) For a discussion of the significance of these credit ratings, see
"Credit Ratings" on p.16 of Management's Discussion and Analysis.

Certain comparative figures have been reclassified to conform with the
current period's presentation.



Interim Consolidated Financial Statements

Consolidated Statement of Income

(Unaudited) (Canadian $
in millions, except
as noted) For the three months ended
----------------------------------------------------------------------------
January October July April January
31, 2011 31, 2010 31, 2010 30, 2010 31, 2010
----------------------------------------------------------------------------
Interest, Dividend
and Fee Income
Loans $ 1,932 $ 1,925 $ 1,845 $ 1,737 $ 1,763
Securities 634 563 543 510 518
Deposits with banks 21 23 18 16 17
----------------------------------------------------------------------------
2,587 2,511 2,406 2,263 2,298
----------------------------------------------------------------------------
Interest Expense
Deposits 679 666 610 527 559
Subordinated debt 33 32 30 28 29
Capital trust
securities 12 14 18 19 20
Other liabilities 236 189 177 167 158
----------------------------------------------------------------------------
960 901 835 741 766
----------------------------------------------------------------------------
Net Interest Income 1,627 1,610 1,571 1,522 1,532
Provision for credit
losses (Note 2) 248 253 214 249 333
----------------------------------------------------------------------------
Net Interest Income
After Provision for
Credit Losses 1,379 1,357 1,357 1,273 1,199
----------------------------------------------------------------------------
Non-Interest Revenue
Securities
commissions and fees 302 266 258 261 263
Deposit and payment
service charges 195 199 206 197 200
Trading revenues
(losses) 208 166 (1) 213 126
Lending fees 149 144 148 138 142
Card fees 45 65 67 66 35
Investment management
and custodial fees 92 91 90 86 88
Mutual fund revenues 154 144 139 134 133
Securitization
revenues 167 188 167 151 172
Underwriting and
advisory fees 152 135 91 97 122
Securities gains,
other than trading 32 40 9 54 47
Foreign exchange,
other than trading 23 22 22 28 21
Insurance income 122 83 70 86 82
Other 78 76 70 16 62
----------------------------------------------------------------------------
1,719 1,619 1,336 1,527 1,493
----------------------------------------------------------------------------
Net Interest Income
and Non-Interest
Revenue 3,098 2,976 2,693 2,800 2,692
----------------------------------------------------------------------------
Non-Interest Expense
Employee compensation
(Note 8) 1,210 1,120 1,062 1,071 1,111
Premises and equipment 343 379 337 319 308
Amortization of
intangible assets 50 46 52 55 50
Travel and business
development 86 109 85 77 72
Communications 60 60 61 58 50
Business and capital
taxes 11 10 19 12 11
Professional fees 99 118 98 79 77
Other 187 181 184 159 160
----------------------------------------------------------------------------
2,046 2,023 1,898 1,830 1,839
----------------------------------------------------------------------------
Income Before
Provision for
Income Taxes and
Non-Controlling
Interest in
Subsidiaries 1,052 953 795 970 853
Provision for
income taxes 258 196 107 207 177
----------------------------------------------------------------------------
794 757 688 763 676
Non-controlling
interest in
subsidiaries 18 18 19 18 19
----------------------------------------------------------------------------
Net Income $ 776 $ 739 $ 669 $ 745 $ 657
----------------------------------------------------------------------------
----------------------------------------------------------------------------

Preferred share
dividends $ 34 $ 34 $ 33 $ 34 $ 35
Net income available
to common
shareholders $ 742 $ 705 $ 636 $ 711 $ 622
Average common shares
(in thousands) 567,301 565,088 561,839 558,320 553,992
Average diluted common
shares (in thousands) 569,938 568,083 565,196 561,868 557,311
----------------------------------------------------------------------------
Earnings Per Share
(Canadian $) (Note 12)
Basic $ 1.31 $ 1.25 $ 1.13 $ 1.27 $ 1.12
Diluted 1.30 1.24 1.13 1.26 1.12
Dividends Declared Per
Common Share 0.70 0.70 0.70 0.70 0.70
----------------------------------------------------------------------------
----------------------------------------------------------------------------
The accompanying notes are an integral part of these interim consolidated
financial statements.

Interim Consolidated Financial Statements

Consolidated Balance Sheet

(Unaudited) (Canadian $
in millions) As at
----------------------------------------------------------------------------
January October July April January
31, 2011 31, 2010 31, 2010 30, 2010 31, 2010
----------------------------------------------------------------------------
Assets
Cash and Cash Equivalents $ 20,717 $ 17,368 $ 15,083 $ 13,623 $ 12,341
----------------------------------------------------------------------------
Interest Bearing Deposits
with Banks 3,522 3,186 3,121 2,741 3,563
----------------------------------------------------------------------------
Securities
Trading 74,377 71,710 66,300 70,978 64,874
Available-for-sale 47,367 50,543 51,899 50,886 52,644
Other 1,137 1,146 1,151 1,534 1,552
----------------------------------------------------------------------------
122,881 123,399 119,350 123,398 119,070
----------------------------------------------------------------------------
Securities Borrowed or
Purchased Under Resale
Agreements 35,887 28,102 24,317 25,053 34,498
----------------------------------------------------------------------------
Loans
Residential mortgages 50,294 48,715 47,097 46,671 46,535
Consumer instalment and
other personal 51,751 51,159 49,741 47,774 46,813
Credit cards 3,221 3,308 3,304 3,318 3,324
Businesses and
governments 66,334 68,338 68,407 66,894 67,690
----------------------------------------------------------------------------
171,600 171,520 168,549 164,657 164,362
Customers' liability
under acceptances 7,194 7,001 6,885 6,981 7,169
Allowance for credit
losses (Note 2) (1,880) (1,878) (1,879) (1,885) (1,943)
----------------------------------------------------------------------------
176,914 176,643 173,555 169,753 169,588
----------------------------------------------------------------------------
Other Assets
Derivative instruments 39,354 49,759 47,947 41,469 45,702
Premises and equipment 1,537 1,560 1,565 1,552 1,628
Goodwill 1,598 1,619 1,627 1,609 1,584
Intangible assets 822 812 748 749 712
Other 10,012 9,192 10,073 10,219 9,937
----------------------------------------------------------------------------
53,323 62,942 61,960 55,598 59,563
----------------------------------------------------------------------------
Total Assets $ 413,244 $ 411,640 $ 397,386 $ 390,166 $ 398,623
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Liabilities and
Shareholders' Equity
Deposits (Note 10)
Banks $ 19,882 $ 19,435 $ 19,262 $ 24,399 $ 22,318
Businesses and
governments 133,084 130,773 123,882 115,251 119,568
Individuals 98,634 99,043 99,647 99,610 98,413
----------------------------------------------------------------------------
251,600 249,251 242,791 239,260 240,299
----------------------------------------------------------------------------
Other Liabilities
Derivative instruments 37,393 47,970 45,110 39,523 42,867
Acceptances 7,194 7,001 6,885 6,981 7,169
Securities sold but
not yet purchased 22,152 16,438 18,424 16,475 15,953
Securities lent or sold
under repurchase
agreements 52,143 47,110 42,237 46,323 50,226
Other 16,656 17,414 16,175 16,257 16,592
----------------------------------------------------------------------------
135,538 135,933 128,831 125,559 132,807
----------------------------------------------------------------------------
Subordinated Debt
(Note 9) 3,713 3,776 3,747 3,682 3,742
----------------------------------------------------------------------------
Capital Trust
Securities (Note 10) 400 800 800 1,150 1,150
----------------------------------------------------------------------------
Shareholders' Equity
Share capital (Note 11) 9,572 9,498 9,311 9,161 8,939
Contributed surplus 102 92 90 88 89
Retained earnings 13,192 12,848 12,539 12,299 11,981
Accumulated other
comprehensive loss (873) (558) (723) (1,033) (384)
----------------------------------------------------------------------------
21,993 21,880 21,217 20,515 20,625
----------------------------------------------------------------------------
Total Liabilities and
Shareholders' Equity $ 413,244 $ 411,640 $ 397,386 $ 390,166 $ 398,623
----------------------------------------------------------------------------
----------------------------------------------------------------------------
The accompanying notes are an integral part of these interim consolidated
financial statements.

Interim Consolidated Financial Statements

Consolidated Statement of Comprehensive Income

For the three
(Unaudited) (Canadian $ in millions) months ended
----------------------------------------------------------------------------
January January
31, 2011 31, 2010
----------------------------------------------------------------------------
Net income $ 776 $ 657
Other Comprehensive Income
Net change in unrealized losses on
available-for-sale securities (94) (23)
Net change in unrealized gains (losses) on cash
flow hedges (156) 85
Net loss on translation
of net foreign operations (65) (47)
----------------------------------------------------------------------------
Total Comprehensive Income $ 461 $ 672
----------------------------------------------------------------------------
----------------------------------------------------------------------------


Consolidated Statement of Changes in Shareholders' Equity

For the three
(Unaudited) (Canadian $ in millions) months ended
----------------------------------------------------------------------------
January January
31, 2011 31, 2010
----------------------------------------------------------------------------
Preferred Shares
Balance at beginning of period $ 2,571 $ 2,571
----------------------------------------------------------------------------
Balance at End of Period 2,571 2,571
----------------------------------------------------------------------------
Common Shares
Balance at beginning of period 6,927 6,198
Issued under the Shareholder Dividend Reinvestment
and Share Purchase Plan 50 126
Issued under the Stock Option Plan 24 44
----------------------------------------------------------------------------
Balance at End of Period 7,001 6,368
----------------------------------------------------------------------------
Contributed Surplus
Balance at beginning of period 92 79
Stock option expense/exercised 10 10
----------------------------------------------------------------------------
Balance at End of Period 102 89
----------------------------------------------------------------------------
Retained Earnings
Balance at beginning of period 12,848 11,748
Net income 776 657
Dividends - Preferred shares (34) (35)
- Common shares (398) (389)
----------------------------------------------------------------------------
Balance at End of Period 13,192 11,981
----------------------------------------------------------------------------
Accumulated Other Comprehensive Income on
Available-for-Sale Securities
Balance at beginning of period 515 480
Unrealized losses on available-for-sale securities
arising during the period
(net of income tax recovery of $39 and $9) (86) (21)
Reclassification to earnings of gains in the period
(net of income tax recovery of $4 and less than $1) (8) (2)
----------------------------------------------------------------------------
Balance at End of Period 421 457
----------------------------------------------------------------------------
Accumulated Other Comprehensive Income (Loss)
on Cash Flow Hedges
Balance at beginning of period 62 14
Gains (losses) on cash flow
hedges arising during the period
(net of income tax (provision)
recovery of $68 and $(26)) (183) 77
Reclassification to earnings of losses
on cash flow hedges
(net of income tax provision of $(10) and $(6)) 27 8
----------------------------------------------------------------------------
Balance at End of Period (94) 99
----------------------------------------------------------------------------
Accumulated Other Comprehensive Loss on
Translation of Net Foreign Operations
Balance at beginning of period (1,135) (893)
Unrealized loss on translation of net foreign
operations (229) (141)
Impact of hedging unrealized loss on translation
of net foreign operations
(net of income tax provision of $(64) and $(39)) 164 94
----------------------------------------------------------------------------
Balance at End of Period (1,200) (940)
----------------------------------------------------------------------------
Total Accumulated Other Comprehensive Loss (873) (384)
----------------------------------------------------------------------------
Total Shareholders' Equity $ 21,993 $ 20,625
----------------------------------------------------------------------------
----------------------------------------------------------------------------
The accompanying notes are an integral part of these interim consolidated
financial statements.

Interim Consolidated Financial Statements

Consolidated Statement of Cash Flows

For the three
(Unaudited) (Canadian $ in millions) months ended
----------------------------------------------------------------------------
January January
31, 2011 31, 2010
----------------------------------------------------------------------------
Cash Flows from Operating Activities
Net income $ 776 $ 657
Adjustments to determine net cash flows provided
by (used in) operating activities
Impairment write-down of securities, other
than trading 1 18
Net (gain) on securities, other than trading (33) (65)
Net (increase) in trading securities (3,220) (6,000)
Provision for credit losses 248 333
(Gain) on sale of securitized loans (Note 3) (126) (122)
Change in derivative instruments
- decrease in derivative asset 9,865 1,637
- (decrease) in derivative liability (9,786) (1,409)
Amortization of premises and equipment 75 65
Amortization of intangible assets 50 50
Net (increase) decrease in future income
tax asset (57) 21
Net (increase) decrease in current income
tax asset 155 (660)
Change in accrued interest
- decrease in interest receivable 159 101
- (decrease) in interest payable (155) (268)
Changes in other items and accruals, net (2,475) 272
(Gain) on sale of land and buildings (1) (4)
----------------------------------------------------------------------------
Net Cash (Used in) Operating Activities (4,524) (5,374)
----------------------------------------------------------------------------
Cash Flows from Financing Activities
Net increase in deposits 2,758 5,572
Net increase in securities sold but not
yet purchased 5,829 3,926
Net increase in securities lent or sold under
repurchase agreements 5,405 4,227
Proceeds from issuance of covered bond
deposit (Note 10) 1,500 -
Repayment of subordinated debt (Note 9) - (500)
Proceeds from issuance of common shares 27 44
Redemption of Capital Trust Securities (Note 10) (400) -
Cash dividends paid (385) (298)
----------------------------------------------------------------------------
Net Cash Provided by Financing Activities 14,734 12,971
----------------------------------------------------------------------------
Cash Flows from Investing Activities
Net (increase) in interest bearing deposits
with banks (376) (261)
Purchases of securities, other than trading (4,337) (8,045)
Maturities of securities, other than trading 5,449 2,322
Proceeds from sales of securities, other
than trading 2,176 2,797
Net (increase) in loans (2,056) (2,517)
Proceeds from securitization of loans (Note 3) 703 333
Net (increase) decrease in securities borrowed or
purchased under resale agreements (8,072) 1,154
Proceeds from sales of land and buildings 1 5
Premises and equipment - net purchases (39) (54)
Purchased and developed software - net purchases (67) (43)
Acquisitions (Note 7) (20) (898)
----------------------------------------------------------------------------
Net Cash (Used in) Investing Activities (6,638) (5,207)
----------------------------------------------------------------------------
Effect of Exchange Rate Changes on Cash and Cash
Equivalents (223) (4)
----------------------------------------------------------------------------
Net Increase in Cash and Cash Equivalents 3,349 2,386
Cash and Cash Equivalents at Beginning of Period 17,368 9,955
----------------------------------------------------------------------------
Cash and Cash Equivalents at End of Period $ 20,717 $ 12,341
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Represented by:
Cash and non-interest bearing deposits with Bank
of Canada and other banks 19,810 11,341
Cheques and other items in transit, net 907 1,000
----------------------------------------------------------------------------
$ 20,717 $ 12,341
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Supplemental Disclosure of Cash Flow Information
Amount of interest paid in the period $ 1,118 $ 1,039
Amount of income taxes paid (refunded) in the
period $ (23) $ 810
----------------------------------------------------------------------------
----------------------------------------------------------------------------
The accompanying notes are an integral part of these interim consolidated
financial statements.

Notes to Consolidated Financial Statements

January 31, 2011 (Unaudited)
----------------------------------------------------------------------------


Note 1: Basis of Presentation

These interim consolidated financial statements should be read in conjunction with the notes to our annual consolidated financial statements for the year ended October 31, 2010 as set out on pages 114 to 168 of our 2010 Annual Report. These interim consolidated financial statements have been prepared in accordance with Canadian generally accepted accounting principles ("GAAP") using the same accounting policies and methods of computation as were used for our annual consolidated financial statements for the year ended October 31, 2010 and include all normal recurring adjustments which, in the opinion of management, are necessary for a fair presentation of the results for the periods presented.

Note 2: Allowance for Credit Losses

The allowance for credit losses recorded in our Consolidated Balance Sheet is maintained at a level that we consider adequate to absorb credit-related losses on our loans, customers' liability under acceptances and other credit instruments. The portion related to other credit instruments is recorded in other liabilities in our Consolidated Balance Sheet. As at January 31, 2011, there was a $13 million ($nil as at January 31, 2010) allowance for credit losses related to other credit instruments included in other liabilities.

A continuity of our allowance for credit losses is as follows:



(Canadian $ in millions)
----------------------------------------------------------------------------
Credit card,
consumer instalment
Residential and other Business and
mortgages personal loans government loans
----------------------------------------------------------------------------
For the three January January January January January January
months ended 31, 2011 31, 2010 31, 2011 31, 2010 31, 2011 31, 2010
----------------------------------------------------------------------------
Specific
Allowance at
beginning of
period 52 33 47 51 481 507
Provision for
credit losses 31 24 125 146 92 158
Recoveries 3 2 29 30 26 13
Write-offs (23) (22) (147) (171) (119) (161)
Foreign exchange
and other 2 - 2 - (3) (7)
----------------------------------------------------------------------------
Specific
Allowance at
end of period 65 37 56 56 477 510
----------------------------------------------------------------------------

General
Allowance at
beginning of
period 22 18 340 266 891 968
Provision for
credit losses 6 5 39 44 (47) (40)
Foreign exchange
and other - - - 24 (12) -
----------------------------------------------------------------------------
General
Allowance at
end of period 28 23 379 334 832 928
----------------------------------------------------------------------------
Total Allowance 93 60 435 390 1,309 1,438
----------------------------------------------------------------------------
Comprised of:
Loans 93 60 435 390 1,296 1,438
Other credit
instruments - - - - 13 -
----------------------------------------------------------------------------
----------------------------------------------------------------------------

(Canadian $ in
millions)
-------------------------------------------------------
Customers'
liability
under acceptances Total
-------------------------------------------------------

For the three January January January January
months ended 31, 2011 31, 2010 31, 2011 31, 2010
-------------------------------------------------------
Specific
Allowance at
beginning of
period 10 5 590 596
Provision for
credit losses - 5 248 333
Recoveries - - 58 45
Write-offs - - (289) (354)
Foreign exchange
and other - - 1 (7)
-------------------------------------------------------
Specific
Allowance at
end of period 10 10 608 613
-------------------------------------------------------

General
Allowance at
beginning of
period 44 54 1,297 1,306
Provision for
credit losses 2 (9) - -
Foreign exchange
and other - - (12) 24
-------------------------------------------------------
General
Allowance at
end of period 46 45 1,285 1,330
-------------------------------------------------------
Total Allowance 56 55 1,893 1,943
-------------------------------------------------------
Comprised of:
Loans 56 55 1,880 1,943
Other credit
instruments - - 13 -
-------------------------------------------------------
-------------------------------------------------------
Certain comparative figures have been reclassified to conform with the
current period's presentation.


Loans acquired as part of our acquisition of AMCORE Bank are subject to a loss share agreement with the Federal Deposit Insurance Corporation ("FDIC"). Under this agreement, the FDIC reimburses us for 80% of the net losses we incur on these loans. For the quarter ended January 31, 2011, we recorded new provisions for credit losses of $2 million and recoveries of $6 million related to loans covered by the FDIC loss share agreement. These amounts are net of the amounts expected to be reimbursed by the FDIC.

Note 3: Securitization

The following tables summarize our securitization activity related to our assets and its impact on our Consolidated Statement of Income for the quarter ended January 31, 2011 and 2010:



(Canadian $ in millions)
----------------------------------------------------------------------------
Residential
mortgages Credit card loans Total
----------------------------------------------------------------------------
For the three January January January January January January
months ended 31, 2011 31, 2010 31, 2011 31, 2010 31, 2011 31, 2010
----------------------------------------------------------------------------
Net cash
proceeds(1) 699 331 - - 699 331
Deferred
purchase price 29 18 - - 29 18
Servicing
liability (4) (3) - - (4) (3)
----------------------------------------------------------------------------
724 346 - - 724 346
Loans sold 709 337 - - 709 337
----------------------------------------------------------------------------
Gain on sale of
loans from new
securitizations 15 9 - - 15 9
----------------------------------------------------------------------------
Gain on sale of
loans sold to
revolving
securitization
vehicles 12 18 99 95 111 113
----------------------------------------------------------------------------
----------------------------------------------------------------------------
(1) Net cash proceeds represent cash proceeds less issuance costs.

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

----------------------------------------------------------------------------
Residential Credit card
mortgages loans
----------------------------------------------------------------------------
January January January January
For the three months ended 31, 2011 31, 2010 31, 2011 31, 2010
----------------------------------------------------------------------------
Weighted-average life (years) 3.76 4.87 1.00 1.00
Prepayment rate (%) 17.50 16.00 37.63 36.52
Interest rate (%) 4.10 4.19 21.71 21.47
Expected credit losses (%)(1) - - 3.90 4.45
Discount rate (%) 2.40 2.87 9.22 9.23
----------------------------------------------------------------------------
----------------------------------------------------------------------------
(1) As the residential mortgages are fully insured, there are no
expected credit losses.


Note 4: Variable Interest Entities

Total assets in our Variable Interest Entities ("VIEs") and our maximum exposure to losses are summarized in the following table. For additional information on our VIEs, refer to Note 9 on pages 128 to 130 of our 2010 Annual Report.



(Canadian $ in millions) January 31, 2011
----------------------------------------------------------------------------
Total
Exposure to loss assets
---------------------------------------------------- ------
Drawn
facilities Secur- Deriv-
Undrawn and loans ities ative
facilities(1) provided(2) held assets Total
----------------------------------------------------------------------------
Unconsol-
idated VIEs
in which we
have a
significant
variable
interest
Canadian
customer
securitization
vehicles(3) 2,603 - 108 10 2,721 2,269
U.S. customer
securitization
vehicle 3,610 165 - 10 3,785 3,703
Bank
securitization
vehicles(3) 5,100 - 641 55 5,796 9,469
Credit
protection
vehicle
- Apex(4)(5) 1,030 - 1,202 349 2,581 2,211
Structured
investment
vehicles(6) 91 4,356 - 24 4,471 4,434
Structured
finance
vehicles na na 6,020 - 6,020 6,727
Capital and
funding
trusts 43 12 2 - 57 1,279
----------------------------------------------------------------------------
Total 12,477 4,533 7,973 448 25,431 30,092
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Consolidated
VIEs
Canadian
customer
securitization
vehicles(3)(7) 127 - 125 - 252 125
Capital and
funding trusts 3,548 7,452 580 51 11,631 9,510
Structured
finance
vehicles - - 26 - 26 26
----------------------------------------------------------------------------
Total 3,675 7,452 731 51 11,909 9,661
----------------------------------------------------------------------------
----------------------------------------------------------------------------

(Canadian $ in millions) October 31, 2010
----------------------------------------------------------------------------
Total
Exposure to loss assets
------------------------------------------------------ ------
Drawn
facilities Secur- Deriv-
Undrawn and loans ities ative
facilities(1) provided(2) held assets Total
----------------------------------------------------------------------------
Unconsol-
idated VIEs
in which we
have a
significant
variable
interest
Canadian
customer
securitization
vehicles(3) 2,958 - 113 14 3,085 2,976
U.S. customer
securitization
vehicle 3,905 251 - 2 4,158 4,074
Bank
securitization
vehicles(3) 5,100 - 637 100 5,837 9,469
Credit
protection
vehicle
- Apex(4)(5) 1,030 - 1,128 669 2,827 2,208
Structured
investment
vehicles(6) 171 5,097 - 30 5,298 5,225
Structured
finance
vehicles na na 4,745 - 4,745 5,330
Capital and
funding
trusts 43 12 2 - 57 1,277
----------------------------------------------------------------------------
Total 13,207 5,360 6,625 815 26,007 30,559
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Consolidated
VIEs
Canadian
customer
securitization
vehicles(3)(7) 200 - 196 - 396 196
Capital and
funding trusts 4,081 6,919 740 76 11,816 9,673
Structured
finance
vehicles - - 27 - 27 27
----------------------------------------------------------------------------
Total 4,281 6,919 963 76 12,239 9,896
----------------------------------------------------------------------------
----------------------------------------------------------------------------
(1) These facilities include senior funding facilities provided to our
credit protection vehicle and structured investment vehicles as well
as backstop liquidity facilities provided to our bank securitization
vehicles, our Canadian customer securitization vehicles and our U.S.
customer securitization vehicle. None of the backstop liquidity
facilities provided to our Canadian customer securitization vehicles
related to credit support as at January 31, 2011 and October 31, 2010.
Backstop liquidity facilities provided to our U.S. customer
securitization vehicle include credit support and are discussed in
Note 6.
(2) Amounts outstanding from backstop liquidity facilities and senior
funding facilities are classified as Loans - Businesses and governments.
(3) Securities held in our bank securitization vehicles are comprised of
$115 million of asset-backed commercial paper classified as trading
securities ($105 million in 2010), $255 million of deferred purchase
price ($261 million in 2010) and $271 million of asset-backed securities
($271 million in 2010) classified as available-for-sale securities.
Securities held in our Canadian customer securitization vehicles are
comprised of asset-backed commercial paper and are classified as trading
securities. Assets held by all these vehicles relate to assets in
Canada.
(4) Derivatives held with this vehicle are classified as trading
instruments. Changes in the fair value of these derivatives are offset
by derivatives held with third-party counterparties that are also
classified as trading instruments.
(5) Securities held are classified as trading securities and have a face
value of $1,415 million. Our exposure to these securities has been
hedged through derivatives.
(6) Securities held are comprised of capital notes, classified as
available-for-sale securities. We have written these notes down to
$nil as at January 31, 2011 and October 31, 2010.
(7) Total assets held as at January 31, 2011 are comprised of a loan of
$91 million ($135 million as at October 31, 2010) and $34 million of
other assets ($61 million as at October 31, 2010).
na - not applicable


Note 5: Financial Instruments

Change in Accounting Policy

On August 1, 2008, we elected to transfer from trading to available-for-sale those securities for which we had a change in intent to hold the securities for the foreseeable future rather than to exit or trade them in the short term due to market circumstances at that time.

A continuity of the transferred securities is as follows:



(Canadian $ in millions)
----------------------------------------------------------------------------
For the three January October July April January
months ended 31, 2011 31, 2010 31, 2010 30, 2010 31, 2010
----------------------------------------------------------------------------
Fair value of securities
at beginning of period 435 606 791 1,038 1,378
Net (sales/maturities)
purchases (41) (175) (183) (227) (343)
Fair value change recorded
in other
comprehensive income (3) (2) (5) 24 38
Other than temporary
impairment recorded
in income - - - (8) (9)
Impact of foreign exchange (4) 6 3 (36) (26)
----------------------------------------------------------------------------
Fair value of securities
at end of period 387 435 606 791 1,038
----------------------------------------------------------------------------
----------------------------------------------------------------------------


Book Value and Fair Value of Financial Instruments

Set out in the following table are the amounts that would be reported if all of our financial instrument assets and liabilities were reported at their fair values. Refer to the notes to our annual consolidated financial statements on pages 117, 132 and 160 to 161 in our 2010 Annual Report for further discussion on the determination of fair value.




(Canadian $ in millions) January 31, 2011 October 31, 2010
----------------------------------------------------------------------------
Fair value Fair value
over over
Book Fair (under) Book Fair (under)
value value book value value value book value
----------------------------------------------------------------------------
Assets
Cash and cash
equivalents 20,717 20,717 - 17,368 17,368 -
Interest bearing
deposits with banks 3,522 3,522 - 3,186 3,186 -
Securities 122,881 122,920 39 123,399 123,433 34
Securities borrowed
or purchased under
resale agreements 35,887 35,887 - 28,102 28,102 -
Loans
Residential
mortgages 50,294 50,985 691 48,715 49,531 816
Consumer
instalment
and other personal 51,751 51,869 118 51,159 51,223 64
Credit cards 3,221 3,221 - 3,308 3,308 -
Business and
governments 66,334 66,118 (216) 68,338 68,084 (254)
----------------------------------------------------------------------------
171,600 172,193 593 171,520 172,146 626
Customers' liability
under acceptances 7,194 7,192 (2) 7,001 6,998 (3)
Allowance for credit
losses (1,880) (1,880) - (1,878) (1,878) -
----------------------------------------------------------------------------
Total loans and
customers' liability
under acceptances,
net of allowance for
credit losses 176,914 177,505 591 176,643 177,266 623
Derivative
instruments 39,354 39,354 - 49,759 49,759 -
Premises and
equipment 1,537 1,537 - 1,560 1,560 -
Goodwill 1,598 1,598 - 1,619 1,619 -
Intangible assets 822 822 - 812 812 -
Other assets 10,012 10,012 - 9,192 9,192 -
----------------------------------------------------------------------------
413,244 413,874 630 411,640 412,297 657
----------------------------------------------------------------------------
Liabilities
Deposits 251,600 251,725 125 249,251 249,544 293
Derivative
instruments 37,393 37,393 - 47,970 47,970 -
Acceptances 7,194 7,194 - 7,001 7,001 -
Securities sold but
not yet purchased 22,152 22,152 - 16,438 16,438 -
Securities lent or
sold under
repurchase
agreements 52,143 52,143 - 47,110 47,110 -
Other liabilities 16,656 16,727 71 17,414 17,504 90
Subordinated debt 3,713 3,862 149 3,776 3,947 171
Capital trust
securities 400 416 16 800 823 23
Shareholders' equity 21,993 21,993 - 21,880 21,880 -
----------------------------------------------------------------------------
413,244 413,605 361 411,640 412,217 577
----------------------------------------------------------------------------
Total fair value
adjustment 269 80
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Certain comparative figures have been reclassified to conform with the
current period's presentation.


Financial Instruments Designated as Held for Trading

A portion of our structured note liabilities has been designated as trading under the fair value option and are accounted for at fair value, which better aligns the accounting result with the way the portfolio is managed. The change in fair value of these structured notes was an increase in non-interest revenue, trading revenues of $47 million for the quarter ended January 31, 2011. This includes an increase of $4 million for the quarter ended January 31, 2011 attributable to changes in our credit spread (a decrease in non-interest revenue, trading revenues of $26 million and a charge of $6 million, respectively, for the quarter ended January 31, 2010). We recognized offsetting amounts on derivatives and other financial instrument contracts that are held to hedge changes in the fair value of these structured notes.

The change in fair value related to changes in our credit spread that has been recognized since they were designated as held for trading to January 31, 2011 was an unrealized loss of $25 million. Starting in 2009, we hedged the exposure to changes in our credit spreads.

The fair value and amount due at contractual maturity of these structured notes accounted for as held for trading as at January 31, 2011 were $3,947 million and $4,086 million, respectively ($3,976 million and $4,084 million, respectively, as at October 31, 2010).

We designate certain insurance investments as trading under the fair value option since the actuarial calculation of insurance liabilities is based on the fair value of the investments supporting them. Electing the fair value option for these investments better aligns the accounting result with the way the portfolio is managed. The fair value of these securities as at January 31, 2011 was $4,349 million ($4,153 million as at October 31, 2010). The impact of recording these as trading securities was a decrease in non-interest revenue, insurance income of $62 million for the quarter ended January 31, 2011 (increase of $92 million for the quarter ended January 31, 2010). Changes in the insurance liability balances are also recorded in non-interest revenue, insurance income.

Fair Value Measurement

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



(Canadian $ in millions) January 31, 2011
----------------------------------------------------------------------------
Valued using Valued using
Valued using models (with models (without
quoted market observable observable
prices inputs) inputs)
----------------------------------------------------------------------------
Trading Securities
Issued or guaranteed by:
Canadian federal
government 17,137 33 -
Canadian provincial and
municipal governments 3,895 25 -
U.S. federal government 8,863 - -
U.S. states,
municipalities
and agencies 837 183 -
Other governments 1,071 - -

Mortgage-backed securities
and collateralized mortgage
obligations 819 198 -
Corporate debt 7,516 3,511 1,302
Corporate equity 28,052 935 -
----------------------------------------------------------------------------
68,190 4,885 1,302
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Available-for-Sale
Securities
Issued or guaranteed by:
Canadian federal
government 13,868 - -
Canadian provincial and
municipal governments 1,377 279 -
U.S. federal government 5,692 - -
U.S. states,
municipalities
and agencies - 4,001 18
Other governments 7,779 732 -

Mortgage-backed securities
and collateralized mortgage
obligations 656 7,450 -
Corporate debt 3,246 163 1,429
Corporate equity 137 180 360
----------------------------------------------------------------------------
32,755 12,805 1,807
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Fair Value Liabilities
Securities sold but not
yet purchased 22,152 - -
Structured note liabilities - 3,947 -
----------------------------------------------------------------------------
22,152 3,947 -
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Derivative Assets
Interest rate contracts 25 23,620 182
Foreign exchange contracts 30 9,794 -
Commodity contracts 2,020 418 -
Equity contracts 1,508 715 3
Credit default swaps - 898 141
----------------------------------------------------------------------------
3,583 35,445 326
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Derivative Liabilities
Interest rate contracts 27 22,816 39
Foreign exchange contracts 17 9,111 -
Commodity contracts 1,689 342 -
Equity contracts 97 2,429 68
Credit default swaps - 755 3
----------------------------------------------------------------------------
1,830 35,453 110
----------------------------------------------------------------------------
----------------------------------------------------------------------------

(Canadian $ in millions) October 31, 2010
----------------------------------------------------------------------------
Valued using Valued using
Valued using models (with models (without
quoted market observable observable
prices inputs) inputs)
----------------------------------------------------------------------------
Trading Securities
Issued or guaranteed by:
Canadian federal
government 15,932 72 -
Canadian provincial and
municipal governments 3,910 5 -
U.S. federal government 8,060 - -
U.S. states,
municipalities
and agencies 849 205 -
Other governments 1,365 - -

Mortgage-backed securities
and collateralized mortgage
obligations 859 - 211
Corporate debt 7,419 3,595 1,358
Corporate equity 27,267 603 -
----------------------------------------------------------------------------
65,661 4,480 1,569
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Available-for-Sale Securities
Issued or guaranteed by:
Canadian federal government 14,701 - -
Canadian provincial and
municipal governments 1,442 253 -
U.S. federal government 5,658 - -
U.S. states, municipalities
and agencies - 4,237 20
Other governments 9,455 587 -

Mortgage-backed securities
and collateralized mortgage
obligations 688 8,204 20
Corporate debt 2,959 133 1,500
Corporate equity 139 178 369
----------------------------------------------------------------------------
35,042 13,592 1,909
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Fair Value Liabilities
Securities sold but not
yet purchased 16,438 - -
Structured note
liabilities - 3,976 -
----------------------------------------------------------------------------
16,438 3,976 -
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Derivative Assets
Interest rate contracts 24 33,862 217
Foreign exchange contracts 45 10,089 -
Commodity contracts 2,207 382 -
Equity contracts 1,028 617 8
Credit default swaps - 1,120 160
----------------------------------------------------------------------------
3,304 46,070 385
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Derivative Liabilities
Interest rate contracts 38 32,593 48
Foreign exchange contracts 20 9,517 -
Commodity contracts 2,087 501 -
Equity contracts 53 2,109 71
Credit default swaps - 930 3
----------------------------------------------------------------------------
2,198 45,650 122
----------------------------------------------------------------------------
----------------------------------------------------------------------------


Valuation Techniques and Significant Inputs

We determine the fair value of publicly traded fixed maturity and equity securities using quoted market prices in active markets (Level 1) when these are available. When quoted prices in active markets are not available, we determine the fair value of financial instruments using models such as discounted cash flows with observable market data for inputs such as yield and prepayment rates or broker quotes and other third-party vendor quotes (Level 2). Fair value may also be determined using models where the significant market inputs are unobservable due to inactive or minimal market activity (Level 3). We maximize the use of market inputs to the extent possible.

Our Level 2 trading securities are primarily valued using discounted cash flow models with observable spreads or based on broker quotes. The fair value of Level 2 available-for-sale securities is determined using discounted cash flow models with observable spreads or third-party vendor quotes. Level 2 structured note liabilities are valued using models with observable market information. Level 2 derivative assets and liabilities are valued using industry standard models and observable market information.

Sensitivity analysis at January 31, 2011 for the most significant Level 3 instruments is provided below.

Within Level 3 trading securities is corporate debt of $1,234 million that relates to securities that are hedged with total return swaps and credit default swaps that are also considered a Level 3 instrument. The sensitivity analysis for the structured product is performed on an aggregate basis and is described as part of the discussion on derivatives below.

Within Level 3 available-for-sale corporate debt securities is the deferred purchase price of $602 million related to our off-balance sheet securitization activities. We have determined the valuation of the deferred purchase price (excess spread) based on expected future cash flows. The significant inputs for the valuation model include interest rate, weighted-average prepayment rate, weighted-average maturity, expected credit losses and weighted-average discount rate. The determination of interest rates has the most significant impact on the valuation of the deferred purchase price. The impact of assuming a 10 percent increase or decrease in the interest rate would result in a change in fair value of $86 million and $(86) million, respectively.

Within derivative assets and derivative liabilities as at January 31, 2011 was $322 million and $41 million, respectively, related to the mark-to-market of credit default swaps and total return swaps on structured products. We have determined the valuation of these derivatives and the related securities based on estimates of current market spreads for similar structured products. The impact of assuming a 10 basis point increase or decrease in that spread would result in a change in fair value of $(4) million and $4 million, respectively.

Significant Transfers

Transfers are made between the various fair value hierarchy levels due to changes in the availability of quoted market prices or observable market inputs due to changing market conditions. The following is a discussion of the significant transfers between Level 1, Level 2 and Level 3 balances for the quarter ended January 31, 2011.

During the quarter ended January 31, 2011, $207 million and $20 million of mortgage-backed securities and collateralized mortgage obligations were transferred from Level 3 to Level 2 within trading securities and available-for-sale securities, respectively, as values for these securities are now obtained through a third party vendor and are based on market prices. Similarly, during the quarter ended January 31, 2011, corporate debt securities within trading securities were transferred from Level 3 to Level 2 as values for these securities are now obtained through a third party vendor and are based on market prices.

During the quarter ended January 31, 2011, derivative assets of $6 million and derivative liabilities of $9 million were transferred from Level 3 to Level 2 as market information became available for certain over-the-counter equity contracts.

During the year ended October 31, 2010, a portion of the asset-backed commercial paper issued by the conduits known as the Montreal Accord were transferred from Level 3 to Level 2 within corporate debt trading securities because we are now valuing the notes based on broker quotes rather than internal models due to increased broker/dealer trading of these securities, resulting in improved liquidity. In addition, certain available-for-sale corporate debt securities that were previously valued using observable market information were transferred from Level 2 to Level 1 as values for these securities became available in active markets.

Changes in Level 3 Fair Value Measurements

The table on the following page presents a reconciliation of all changes in Level 3 financial instruments during the quarter ended January 31, 2011, including realized and unrealized gains (losses) included in earnings and other comprehensive income.



(Canadian $ in millions)
----------------------------------------------------------------------------
Change in Fair Value
------------------------
Included in
Balance, Included other
For the three months October 31, in comprehensive
ended January 31, 2011 2010 earnings income Purchases Sales
----------------------------------------------------------------------------
Trading Securities
Mortgage-backed
securities and
collateralized
mortgage obligations 211 (4) - - -
Corporate debt 1,358 (3) - 42 (1)
----------------------------------------------------------------------------
Total trading
securities 1,569 (7) - 42 (1)
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Available-for-Sale
Securities
Issued or guaranteed by:
U.S. states,
municipalities and
agencies 20 1 - - (3)
Mortgage-backed
securities and
collateralized
mortgage obligations 20 - - - -
Corporate debt 1,500 (60) (4) 36 (8)
Corporate equity 369 (5) (6) 5 (3)
----------------------------------------------------------------------------
Total available-for-
sale securities 1,909 (64) (10) 41 (14)
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Derivative Assets
Interest rate
contracts 217 (5) - - -
Equity contracts 8 1 - - -
Credit default swaps 160 (10) - - -
----------------------------------------------------------------------------
Total derivative
assets 385 (14) - - -
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Derivative Liabilities
Interest rate contracts 48 - - - -
Equity contracts 71 6 - - -
Credit default swaps 3 - - - -
----------------------------------------------------------------------------
Total derivative
liabilities 122 6 - - -
----------------------------------------------------------------------------
----------------------------------------------------------------------------

(Canadian $ in millions)
-----------------------------------------------------------------------


Fair Value
Transfers as at Unrealized
For the three months out of January Gains
ended January 31, 2011 Maturities(1) Level 3 31, 2011 (losses)(2)
-----------------------------------------------------------------------
Trading Securities
Mortgage-backed
securities and
collateralized
mortgage obligations - (207) - -
Corporate debt - (94) 1,302 4
-----------------------------------------------------------------------
Total trading securities - (301) 1,302 4
-----------------------------------------------------------------------
-----------------------------------------------------------------------
Available-for-Sale
Securities
Issued or guaranteed by:
U.S. states,
municipalities and
agencies - - 18 -
Mortgage-backed
securities and
collateralized
mortgage obligations - (20) - -
Corporate debt (35) - 1,429 (4)
Corporate equity - - 360 (6)
-----------------------------------------------------------------------
Total available-for-
sale securities (35) (20) 1,807 (10)
-----------------------------------------------------------------------
-----------------------------------------------------------------------
Derivative Assets
Interest rate contracts (30) - 182 182
Equity contracts - (6) 3 3
Credit default swaps (9) - 141 141
-----------------------------------------------------------------------
Total derivative assets (39) (6) 326 326
-----------------------------------------------------------------------
-----------------------------------------------------------------------
Derivative Liabilities
Interest rate
contracts (9) - 39 39
Equity contracts - (9) 68 68
Credit default swaps - - 3 3
-----------------------------------------------------------------------
Total derivative
liabilities (9) (9) 110 110
-----------------------------------------------------------------------
-----------------------------------------------------------------------
(1) Includes cash settlement of derivative assets and derivative
liabilities.

(2) Unrealized gains or losses on trading securities, derivative
assets and derivative liabilities still held on January 31, 2011
are included in earnings in the period. For available-for-sale
securities, the unrealized gains or losses on securities still held
on January 31, 2011 are included in Accumulated Other Comprehensive
Income.


Other Items Measured at Fair Value

Certain assets such as foreclosed assets are measured at fair value at initial recognition but are not required to be measured at fair value on an ongoing basis.

As at January 31, 2011, the bank held $159 million of foreclosed assets measured at fair value at inception, all of which were classified as Level 2. For the quarter ended January 31, 2011, we recorded write-downs of $12 million on these assets.

Note 6: Guarantees

In the normal course of business we enter into a variety of guarantees. The most significant guarantees are as follows:

Standby Letters of Credit and Guarantees

Standby letters of credit and guarantees represent our obligation to make payments to third parties on behalf of another party if that party is unable to make the required payments or meet other contractual requirements. The maximum amount payable under standby letters of credit and guarantees totalled $10,154 million as at January 31, 2011 ($10,163 million as at October 31, 2010). None of the standby letters of credit or guarantees had an investment rating as at January 31, 2011 or October 31, 2010. The majority have a term of one year or less. Collateral requirements for standby letters of credit and guarantees are consistent with our collateral requirements for loans. A large majority of these commitments expire without being drawn upon. As a result, the total contractual amounts may not be representative of the funding likely to be required for these commitments.

As at January 31, 2011, $13 million ($9 million as at October 31, 2010) was included in other liabilities related to guaranteed parties that were unable to meet their obligation to third parties (See Note 2). No other amount was included in our Consolidated Balance Sheet as at January 31, 2011 and October 31, 2010 related to those standby letters of credit and guarantees.

Backstop and Other Liquidity Facilities

Backstop liquidity facilities are provided to asset-backed commercial paper ("ABCP") programs administered by either us or third parties as an alternative source of financing in the event that such programs are unable to access ABCP markets or when predetermined performance measures of the financial assets owned by these programs are not met. The terms of the backstop liquidity facilities do not require us to advance money to these programs in the event of bankruptcy of the borrower. The facilities' terms are generally no longer than one year, but can be several years.

The maximum amount payable under these backstop and other liquidity facilities totalled $13,176 million as at January 31, 2011 ($14,009 million as at October 31, 2010), of which $10,587 million relates to facilities that are investment grade, $1,559 million that are non-investment grade and $1,030 million that are not rated ($11,036 million, $625 million and $2,348 million, respectively, as at October 31, 2010). As at January 31, 2011, $195 million was outstanding from facilities drawn in accordance with the terms of the backstop liquidity facilities ($292 million as at October 31, 2010), of which $165 million (US$165 million) ($251 million or US$246 million as at October 31, 2010) related to the U.S. customer securitization vehicle discussed in Note 4.

Credit Enhancement Facilities

Where warranted, we provide partial credit enhancement facilities to transactions within ABCP programs administered by either us or third parties. Credit enhancement facilities are included in backstop liquidity facilities. These facilities include amounts that relate to our U.S. customer securitization vehicle discussed in Note 4.

Senior Funding Facilities

We also provide senior funding support to our structured investment vehicles ("SIVs") and our credit protection vehicle. As at January 31, 2011, $4,356 million had been drawn ($5,097 million as at October 31, 2010) in accordance with the terms of the funding facilities related to the SIVs. As at January 31, 2011, no amounts had been drawn down in accordance with the terms of the funding facility provided to our credit protection vehicle ($nil as at October 31, 2010) (See Note 4).

In addition to our investment in the notes subject to the Montreal Accord, we have provided a senior loan facility of $300 million. No amounts were drawn as at January 31, 2011 or October 31, 2010.

Derivatives

Certain of our derivative instruments meet the accounting definition of a guarantee when we believe they are related to an asset, liability or equity security held by the guaranteed party at the inception of a contract. In order to reduce our exposure to these derivatives, we enter into contracts that hedge the related risks.

Written credit default swaps require us to compensate a counterparty following the occurrence of a credit event in relation to a specified reference obligation, such as a bond or a loan. The maximum amount payable under credit default swaps is equal to their notional amount of $39,115 million as at January 31, 2011 ($40,650 million as at October 31, 2010), of which $36,544 million relates to swaps that are investment grade, $2,349 million are non-investment grade swaps and $222 million are not rated ($37,764 million, $2,622 million and $264 million, respectively, as at October 31, 2010). The terms of these contracts range from one day to 12 years. The fair value of the related derivative liabilities included in derivative instruments in our Consolidated Balance Sheet was $758 million as at January 31, 2011 ($933 million as at October 31, 2010).

Written options include contractual agreements that convey to the purchaser the right, but not the obligation, to require us to buy a specific amount of a currency, commodity, debt or equity instrument at a fixed price, either at a fixed future date or at any time within a fixed future period. The maximum amount payable under these written options cannot be reasonably estimated due to the nature of these contracts. The terms of these contracts range from less than one month to eight years. The fair value of the related derivative liabilities included in derivative instruments in our Consolidated Balance Sheet was $453 million as at January 31, 2011 ($599 million as at October 31, 2010), none of which had an investment rating (none of which had an investment rating as at October 31, 2010).

Written options also include contractual agreements where we agree to pay the purchaser, based on a specified notional amount, the difference between a market price or rate and the strike price or rate of the underlying instrument. The maximum amount payable under these contracts is not determinable due to their nature. The terms of these contracts range from 11 months to 25 years. The fair value of the related derivative liabilities included in derivative instruments in our Consolidated Balance Sheet was $93 million as at January 31, 2011 ($87 million as at October 31, 2010), none of which had an investment rating (none of which had an investment rating as at October 31, 2010).

Note 7: Acquisitions

We account for acquisitions of businesses using the purchase method. This involves allocating the purchase price paid for a business to the assets acquired, including identifiable intangible assets and the liabilities assumed based on their fair values at the date of acquisition. Any excess is then recorded as goodwill. The results of operations of acquired businesses are included in our consolidated financial statements beginning on the date of acquisition.

AMCORE Bank, N.A. ("AMCORE")

On April 23, 2010, we completed the acquisition of certain assets and liabilities of AMCORE from the FDIC for total consideration of $253 million, subject to a post-closing adjustment based on net assets. During the year ended October 31, 2010, we reduced the purchase price by $28 million based on a revaluation of the net assets acquired. As part of the acquisition, we had the option to purchase certain AMCORE branches after the close of the transaction. During the quarter ended January 31, 2011, we increased the purchase price by $20 million to $245 million as a result of the purchase of certain of these branches. The acquired assets and liabilities are included in our Personal and Commercial Banking U.S. reporting segment.

Future Acquisitions

Marshall & Ilsley Corporation ("M&I")

On December 17, 2010, we announced that we had reached a definitive agreement to purchase M&I in a common stock-for-common stock transaction. The purchase price will depend on the number of M&I common shares outstanding at the closing date and is estimated at $4.1 billion. In addition, we have agreed to purchase M&I's Troubled Asset Relief Program ("TARP") preferred shares and warrants from the U.S. Treasury. The acquisition of M&I will strengthen our competitive position in the U.S. Midwest markets. Subject to regulatory approval and shareholders' vote, the acquisition is expected to close in the third quarter of fiscal 2011. M&I will primarily be part of our Personal and Commercial Banking U.S. reporting segment.

Lloyd George Management ("LGM")

On January 11, 2011, we announced that we had reached a definitive agreement to purchase Hong Kong-based LGM. The acquisition will allow us to expand our portfolio management capabilities in Asia and emerging markets. The acquisition is anticipated to close early in the third quarter of fiscal 2011. LGM will be part of our Private Client Group reporting segment.

The estimated fair values of the assets acquired and the liabilities assumed at the date of acquisition are as follows:



(Canadian $ in millions)
----------------------------------------------------------------------------
AMCORE
----------------------------------------------------------------------------
Cash resources(1) 420
Securities 10
Loans 1,551
Premises and equipment 20
Goodwill 86
Intangible assets 24
Other assets 494
----------------------------------------------------------------------------
Total assets 2,605
----------------------------------------------------------------------------
Deposits 2,207
Other liabilities 153
----------------------------------------------------------------------------
Total liabilities 2,360
----------------------------------------------------------------------------
Purchase price 245
----------------------------------------------------------------------------
----------------------------------------------------------------------------
(1) Cash resources, acquired through the AMCORE acquisition include cash and
cash equivalents and interest bearing deposits.


Note 8: Employee Compensation

Stock Options

During the quarter ended January 31, 2011, we granted a total of 1,798,913 stock options (1,737,204 stock options during the quarter ended January 31, 2010). The weighted-average fair value of options granted during the quarter ended January 31, 2011 was $10.60 per option. The following weighted-average assumptions were used to determine the fair value of options on the date of grant:



For stock options granted during the three months ended January 31, 2011
----------------------------------------------------------------------------
Expected dividend yield 4.7%
Expected share price volatility 24.0%
Risk-free rate of return 2.9%
Expected period until exercise (in years) 6.5
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Changes to the input assumptions can result in different fair value
estimates.

Pension and Other Employee Future Benefit Expenses

Pension and other employee future benefit expenses are determined as
follows:

(Canadian $ in millions)
----------------------------------------------------------------------------
Other employee future
Pension benefit plans benefit plans
----------------------------------------------------------------------------
January January January January
For the three months ended 31, 2011 31, 2010 31, 2011 31, 2010
----------------------------------------------------------------------------
Benefits earned by employees 38 33 6 5
Interest cost on accrued
benefit liability 63 64 13 14
Actuarial loss recognized in
expense 21 18 1 1
Amortization of plan amendment
costs 4 4 (2) (2)
Expected return on plan assets (82) (71) (1) (1)
----------------------------------------------------------------------------
Benefits expense 44 48 17 17
Canada and Quebec pension plan
expense 15 14 - -
Defined contribution expense 2 2 - -
----------------------------------------------------------------------------
Total pension and other
employee future benefit
expenses 61 64 17 17
----------------------------------------------------------------------------
----------------------------------------------------------------------------


Note 9: Subordinated Debt

During the quarter ended January 31, 2010, we redeemed all of our 4.00% Series C Medium-Term Notes, First Tranche, due 2015, totalling $500 million. The notes were redeemed at a redemption price of 100 percent of the principal amount plus unpaid accrued interest to the redemption date.

Note 10: Deposits and Capital Trust Securities

Deposits

During the quarter ended January 31, 2011, we had a deposit related to the issuance of US$1.5 billion Covered Bond - Series 3. This deposit pays interest of 2.625% and matures in January 25, 2016.

Capital Trust Securities

During the quarter ended January 31, 2011, we redeemed all of our BMO Capital Trust Securities - Series B ("BMO BOaTs - Series B") at a redemption amount equal to $1,000, for an aggregate redemption of $400 million, plus unpaid distributions.

Note 11: Share Capital

During the quarter ended January 31, 2011, and January 31, 2010 we did not issue or redeem any preferred shares.

On December 13, 2010, we announced the renewal of our normal course issuer bid, which allows us to repurchase up to 15,000,000 of our common shares during the period from December 16, 2010 to December 15, 2011.

We did not repurchase any shares under our previous normal course issuer bid, which expired on December 1, 2010. The previous normal course issuer bid authorized the repurchase for cancellation up to 15,000,000 of our common shares commencing December 2, 2009.

During the quarters ended January 31, 2011 and January 31, 2010, we did not repurchase any common shares under our normal course issuer bid.



Share Capital Outstanding (a)

(Canadian $ in millions, January October
except as noted) 31, 2011 31, 2010
----------------------------------------------------------------------------
Number of Number of
shares Amount shares Amount Convertible into...
----------------------------------------------------------------------------
Preferred Shares
- Classified as
Equity
Class B -
Series 5 8,000,000 200 8,000,000 200 -

Class B - common shares (c)
Series 10 (b)12,000,000 396 12,000,000 396

Class B -
Series 13 14,000,000 350 14,000,000 350 -

Class B -
Series 14 10,000,000 250 10,000,000 250 -

Class B -
Series 15 10,000,000 250 10,000,000 250 -

Class B - preferred shares -
Series 16 12,000,000 300 12,000,000 300 class B-series 17 (d)

Class B - preferred shares -
Series 18 6,000,000 150 6,000,000 150 class B-series 19 (d)

Class B - preferred shares -
Series 21 11,000,000 275 11,000,000 275 class B-series 22 (d)

Class B - preferred shares -
Series 23 16,000,000 400 16,000,000 400 class B-series 24 (d)
----------------------------------------------------------------------------
2,571 2,571
Common Shares 567,773,318 7,001 566,468,440 6,927
----------------------------------------------------------------------------
Share Capital 9,572 9,498
----------------------------------------------------------------------------
----------------------------------------------------------------------------
(a) For additional information refer to Notes 20 and 22 to our consolidated
financial statements for the year ended October 31, 2010 on pages 145
to 149 of our 2010 Annual Report.
(b) Face value is US$300 million.
(c) The number of shares issuable on conversion is not determinable until
the date of conversion.
(d) If converted, the holders have the option to convert back to the
original preferred shares on subsequent redemption dates.
(e) The stock options issued under stock option plan are convertible into
16,058,605 common shares as at January 31, 2011 (15,232,139 common
shares as at October 31, 2010).

Note 12: Earnings Per Share

The following tables present the bank's basic and diluted earnings
per share:

Basic earnings per share

For the three
(Canadian $ in millions, except as noted) months ended
----------------------------------------------------------------------------
January January
31, 2011 31, 2010
----------------------------------------------------------------------------
Net income 776 657
Dividends on preferred shares (34) (35)
----------------------------------------------------------------------------
Net income available to common shareholders 742 622
----------------------------------------------------------------------------
Average number of common shares
outstanding (in thousands) 567,301 553,992
----------------------------------------------------------------------------
Basic earnings per share (Canadian $) 1.31 1.12
----------------------------------------------------------------------------
----------------------------------------------------------------------------


Diluted earnings per share
For the three
(Canadian $ in millions, except as noted) months ended
----------------------------------------------------------------------------
January January
31, 2011 31, 2010
----------------------------------------------------------------------------
Net income available to common shareholders
adjusted for dilution effect 742 622
----------------------------------------------------------------------------
Average number of common shares
outstanding (in thousands) 567,301 553,992
----------------------------------------------------------------------------
Convertible shares 248 253
Stock options potentially exercisable(1) 10,298 10,454
Common shares potentially repurchased (7,909) (7,388)
----------------------------------------------------------------------------
Average diluted number of common shares
outstanding (in thousands) 569,938 557,311
----------------------------------------------------------------------------
Diluted earnings per share (Canadian $) 1.30 1.12
----------------------------------------------------------------------------
----------------------------------------------------------------------------
(1) In computing diluted earnings per share we excluded average stock
options outstanding of 458,124 with a weighted-average exercise price of
$63.92 for the three months ended January 31, 2011 (1,108,825 with a
weighted-average exercise price of $58.39 for the three months ended
January 31, 2010) as the average share price for the period did not
exceed the exercise price.


Note 13: Capital Management

Our objective is to maintain a strong capital position in a cost-effective structure that: meets our target regulatory capital ratios and internal assessment of risk-based capital; is consistent with our targeted credit ratings; underpins our operating groups' business strategies; and builds depositor confidence and long-term shareholder value.

We have met our capital targets as at January 31, 2011. Our capital position as at January 31, 2011 is detailed in the Capital Management section on page 14 of Management's Discussion and Analysis of the First Quarter Report to Shareholders.

Note 14: Risk Management

We have an enterprise-wide approach to the identification, measurement, monitoring and management of risks faced across the organization. The key financial instrument risks are classified as credit and counterparty, market, liquidity and funding risk.

Credit and Counterparty Risk

We are exposed to credit risk from the possibility that counterparties may default on their financial obligations to us. Credit risk arises predominantly with respect to loans, over-the-counter derivatives and other credit instruments. This is the most significant measurable risk that we face.

Market Risk

Market risk is the potential for a negative impact on the balance sheet and/or statement of income resulting from adverse changes in the value of financial instruments as a result of changes in certain market variables. These variables include interest rates, foreign exchange rates, equity and commodity prices and their implied volatilities, as well as credit spreads, credit migration and default. We incur market risk in our trading and underwriting activities and structural banking activities.

Liquidity and Funding Risk

Liquidity and funding risk is the potential for loss if we are unable to meet financial commitments in a timely manner at reasonable prices as they fall due. It is our policy to ensure that sufficient liquid assets and funding capacity are available to meet financial commitments, including liabilities to depositors and suppliers, and lending, investment and pledging commitments, even in times of stress. Managing liquidity and funding risk is essential to maintaining both depositor confidence and stability in earnings.

Key measures as at January 31, 2011 are outlined in the Risk Management section on page 9 of Management's Discussion and Analysis of the First Quarter Report to Shareholders.

Note 15: Operating and Geographic Segmentation

Operating Groups

We conduct our business through three operating groups, each of which has a distinct mandate. We determine our operating groups based on our management structure and therefore these groups, and results attributed to them, may not be comparable with those of other financial services companies. We evaluate the performance of our groups using measures such as net income, revenue growth, return on equity, net economic profit and non-interest expense-to-revenue (productivity) ratio, as well as cash operating leverage.

Personal and Commercial Banking

Personal and Commercial Banking ("P&C") is comprised of two operating segments: Personal and Commercial Banking Canada and Personal and Commercial Banking U.S.

Personal and Commercial Banking Canada

Personal and Commercial Banking Canada ("P&C Canada") offers a full range of consumer and business products and services, including everyday banking, financing, investing and credit cards, as well as a full suite of commercial and capital market products and financial advisory services, through a network of branches, telephone banking, online banking, mortgage specialists and automated banking machines.

Personal and Commercial Banking U.S.

Personal and Commercial Banking U.S. ("P&C U.S.") offers a full range of products and services to personal and business clients in select U.S. Midwest markets through branches and direct banking channels such as telephone banking, online banking and a network of automated banking machines. Effective in the year ended October 31, 2010, we identified U.S. mid-market client accounts that would be better served by a commercial banking model and transferred their balances to P&C U.S. from BMO Capital Markets. Prior periods have been restated to reflect this reclassification.

Private Client Group

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

BMO Capital Markets

BMO Capital Markets ("BMO CM") combines all of our businesses serving corporate, institutional and government clients. In Canada and the United States, these clients span a broad range of industry sectors. BMO CM also serves clients in the United Kingdom, Europe, Asia and Australia. It offers clients complete financial solutions, including equity and debt underwriting, corporate lending and project financing, mergers and acquisitions, advisory services, merchant banking, securitization, treasury and market risk management, debt and equity research and institutional sales and trading. Effective in the year ended October 31, 2010, we identified U.S. mid-market client accounts that would be better served by a commercial banking model and transferred the accounts to P&C U.S. from BMO CM. Prior periods have been restated to reflect this reclassification.

Corporate Services

Corporate Services includes the corporate units that provide expertise and governance support in areas such as Technology and Operations ("T&O"), strategic planning, law, finance, internal audit, risk management, corporate communications, economics, corporate marketing, human resources and learning. Operating results include revenues and expenses associated with certain securitization activities, the hedging of foreign-source earnings, and activities related to the management of certain balance sheet positions and our overall asset liability structure.

T&O manages, maintains and provides governance over our information technology, operations services, real estate and sourcing. T&O focuses on enterprise-wide priorities that improve quality and efficiency to deliver an excellent customer experience.

Operating results for T&O are included with Corporate Services for reporting purposes. However, costs of T&O services are transferred to the three operating groups. As such, results for Corporate Services largely reflect the activities outlined above.

Corporate Services also includes residual revenues and expenses representing the differences between actual amounts earned or incurred and the amounts allocated to operating groups.

Basis of Presentation

The results of these operating segments are based on our internal financial reporting systems. The accounting policies used in these segments are generally consistent with those followed in the preparation of our consolidated financial statements as disclosed in Note 1 and throughout the consolidated financial statements. Notable accounting measurement differences are the taxable equivalent basis adjustment and the provisions for credit losses, as described below.

Taxable Equivalent Basis

We analyze net interest income on a taxable equivalent basis ("teb") at the operating group level. This basis includes an adjustment which increases GAAP revenues and the GAAP provision for income taxes by an amount that would raise revenues on certain tax-exempt securities to a level that incurs tax at the statutory rate. The operating groups' teb adjustments are eliminated in Corporate Services.

During the year ended October 31, 2010, we changed the accounting for certain BMO CM transactions on a basis that reflects their teb. We believe these adjustments are useful and reflect how BMO CM manages its business, since it enhances the comparability of taxable revenues and tax-advantaged revenues. The change results in increases in net interest income and income taxes in BMO CM with offsetting amounts reflected in Corporate Services. There was no overall net income change in either of the two groups. Prior periods have been restated to reflect this reclassification.

Provisions for Credit Losses

Provisions for credit losses are generally allocated to each group based on expected losses for that group. Differences between expected loss provisions and provisions required under GAAP are included in Corporate Services.

Securitization Accounting

During the year ended October 31, 2010, we changed the manner in which we report securitized assets in our segmented disclosure. Previously, certain securitized mortgage assets were not reported in P&C Canada's balance sheet. We now report all securitized mortgage assets in P&C Canada, with offsetting amounts in Corporate Services, and net interest income earned on all securitized mortgage assets is included in P&C Canada net interest income. Previously, net interest income earned on certain securitized mortgage assets was included in P&C Canada non-interest revenue. Prior periods have been restated to conform to this new presentation.

Inter-Group Allocations

Various estimates and allocation methodologies are used in the preparation of the operating groups' financial information. We allocate expenses directly related to earning revenue to the groups that earned the related revenue. Expenses not directly related to earning revenue, such as overhead expenses, are allocated to operating groups using allocation formulas applied on a consistent basis. Operating group net interest income reflects internal funding charges and credits on the groups' assets, liabilities and capital, at market rates, taking into account relevant terms and currency considerations. The offset of the net impact of these charges and credits is reflected in Corporate Services.

Geographic Information

We operate primarily in Canada and the United States but we also have operations in the United Kingdom, Europe, the Caribbean and Asia, which are grouped in Other countries. We allocated our results by geographic region based on the location of the unit responsible for managing the related assets, liabilities, revenues and expenses, except for the consolidated provision for credit losses, which is allocated based upon the country of ultimate risk.

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



(Canadian $ in millions)
----------------------------------------------------------------------------
For the three Total
months ended P&C P&C Corporate (GAAP
January 31, 2011(2) Canada U.S. PCG BMO CM Services(1) basis)
----------------------------------------------------------------------------
Net interest income 1,109 290 103 336 (211) 1,627
Non-interest revenue 419 72 558 627 43 1,719
----------------------------------------------------------------------------
Total Revenue 1,528 362 661 963 (168) 3,346
Provision for credit
losses 136 37 2 30 43 248
Amortization 34 19 9 7 49 118
Non-interest expense 739 242 450 486 11 1,928
----------------------------------------------------------------------------
Income before taxes
and non-controlling
interest in
subsidiaries 619 64 200 440 (271) 1,052
Income taxes 175 22 47 183 (169) 258
Non-controlling
interest in
subsidiaries - - - - 18 18
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Net Income 444 42 153 257 (120) 776
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Average Assets 151,320 31,425 14,991 209,933 10,251 417,920
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Goodwill (As At) 120 1,002 362 112 2 1,598
----------------------------------------------------------------------------
----------------------------------------------------------------------------

For the three Total
months ended P&C P&C Corporate (GAAP
January 31, 2010(2) Canada U.S. PCG BMO CM Services(1) basis)
----------------------------------------------------------------------------
Net interest income 1,018 265 87 361 (199) 1,532
Non-interest revenue 394 84 463 482 70 1,493
----------------------------------------------------------------------------
Total Revenue 1,412 349 550 843 (129) 3,025
Provision for credit
losses 120 31 2 65 115 333
Amortization 33 16 9 9 48 115
Non-interest expense 678 226 393 462 (35) 1,724
----------------------------------------------------------------------------
Income before taxes
and non-controlling
interest in
subsidiaries 581 76 146 307 (257) 853
Income taxes 178 25 35 95 (156) 177
Non-controlling
interest in
subsidiaries - - - - 19 19
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Net Income 403 51 111 212 (120) 657
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Average Assets 141,347 33,152 13,593 201,538 4,090 393,720
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Goodwill (As At) 128 973 365 116 2 1,584
----------------------------------------------------------------------------
----------------------------------------------------------------------------

For the three months ended Other Total
January 31, 2011(2) Canada United States countries (GAAP basis)
----------------------------------------------------------------------------
Net interest income 1,256 348 23 1,627
Non-interest revenue 1,321 305 93 1,719
----------------------------------------------------------------------------
Total Revenue 2,577 653 116 3,346
Provision for credit losses 116 132 - 248
Amortization 88 29 1 118
Non-interest expense 1,396 480 52 1,928
----------------------------------------------------------------------------
Income before taxes and
non-controlling interest
in subsidiaries 977 12 63 1,052
Income taxes 224 29 5 258
Non-controlling interest
in subsidiaries 13 5 - 18
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Net Income 740 (22) 58 776
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Average Assets 273,120 121,858 22,942 417,920
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Goodwill (As At) 447 1,130 21 1,598
----------------------------------------------------------------------------
----------------------------------------------------------------------------

For the three months ended Other Total
January 31, 2010 (2) Canada United States countries (GAAP basis)
----------------------------------------------------------------------------
Net interest income 1,149 347 36 1,532
Non-interest revenue 1,076 333 84 1,493
----------------------------------------------------------------------------
Total Revenue 2,225 680 120 3,025
Provision for credit losses 138 190 5 333
Amortization 87 27 1 115
Non-interest expense 1,256 425 43 1,724
----------------------------------------------------------------------------
Income before taxes and
non-controlling interest
in subsidiaries 744 38 71 853
Income taxes 168 1 8 177
Non-controlling interest
in subsidiaries 14 5 - 19
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Net Income 562 32 63 657
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Average Assets 257,126 110,612 25,982 393,720
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Goodwill (As At) 452 1,110 22 1,584
----------------------------------------------------------------------------
----------------------------------------------------------------------------
(1) Corporate Services includes Technology and Operations.
(2) Operating groups report on a taxable equivalent basis - see Basis of
Presentation section.

Prior periods have been restated to give effect to the current period's
organizational structure and presentation changes.


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