News Releases
TORONTO, ONTARIO--(Marketwire - Aug. 23, 2011) - BMO Financial Group (TSX:BMO)(NYSE:BMO) and BMO Bank of Montreal -
Third Quarter 2011 Report to Shareholders --------------------------------------------------------------------------- BMO Financial Group Reports Good Third Quarter Results, Contributing to Strong Year-to-Date Performance Financial Results Highlights: Third Quarter 2011 Compared with Third Quarter 2010: - Reported net income of $793 million, up 18% or $124 million from a year ago - Adjusted net income(1) of $843 million, up 24% or $165 million from a year ago - Reported EPS(2) of $1.27, up 12% from a year ago - Adjusted EPS(1),(2) of $1.36, up 19% from a year ago - ROE of 14.7%, up from 13.7% a year ago - Provisions for credit losses of $174 million, down $40 million from a year ago - Common Equity Ratio remains strong, at 9.11% Year-to-Date 2011 Compared with Year-to-Date 2010: - Reported net income of $2,369 million, up 14% or $298 million from a year ago - Adjusted net income(1) of $2,431 million, up 16% or $337 million from a year ago
For the third quarter ended July 31, 2011, BMO Financial Group reported net income of $793 million or $1.27 per share. On an adjusted basis, net income was $843 million or $1.36 per share.
"BMO continues to perform well, with adjusted earnings of $843 million for the quarter and more than $2.4 billion for the first nine months of the year," said Bill Downe, President and Chief Executive Officer, BMO Financial Group. "The investments we are making continue to contribute to top-line growth and this remains our priority as we steadily introduce new initiatives that further enhance the experience of our customer."
During the quarter, BMO completed the acquisition of Marshall & Ilsley Corporation (M&I). Over 26 days, M&I's operations added $117 million of revenue to BMO's third quarter results and $32 million of adjusted net income, which excludes integration and related costs.
"This purchase is transforming our U.S. presence by adding scale and providing a strong entry into attractive new markets," said Mr. Downe. "We have more than doubled our U.S. branch count to 688 branches and are competing from a position of strength in a contiguous six-state area with a population and GDP greater than Canada's. The closing process was on time and efficient. Integration efforts are moving forward as planned as we welcome M&I shareholders as shareholders of BMO.
"In addition, the transaction almost triples the size of our U.S. wealth businesses as measured by assets under management and administration and our U.S. private banking presence now operates from twice as many outlets.
"Banks succeed when customers succeed. We are focused on deepening customer relationships and developing new ones. We are growing commercial loan balances in Canada. In the United States, our goal is to be the leading commercial lender in the Midwest. And we're competing aggressively in every market in which we do business. We have committed to making an additional US$5 billion available to small and medium-sized businesses over the next two years to play our part in supporting the economic recovery by spurring business investment and job creation.
"Global economic conditions have given us every reason to be cautious. We have been vigilant and continue to be vigilant by moderating the pace of investment. At the same time, we remain confident in our ability to grow and deliver an experience to customers that stands out, while maintaining our well-earned reputation for disciplined risk management," concluded Mr. Downe.
Concurrent with the release of results, BMO announced a fourth quarter dividend of $0.70 per common share, unchanged from the preceding quarter and equivalent to an annual dividend of $2.80 per common share.
(1) Results and measures in the MD&A are presented on a GAAP basis. They
are also presented on an adjusted basis that excludes the impact of
certain items. Items excluded from third quarter 2011 results in the
determination of adjusted results totalled $50 million after tax,
comprised of $53 million ($32 million after tax) of costs for the
integration of the Marshall & Ilsley Corporation (M&I) acquisition
including integration planning, a $17 million ($12 million after tax)
charge for amortization of acquisition-related intangible assets and $9
million ($6 million after tax) of charges for the hedge of foreign
currency risk on the purchase of M&I. Management assesses performance
on both a GAAP basis and adjusted basis and considers both bases to be
useful in assessing underlying, ongoing business performance.
Presenting results on both bases provides readers with an enhanced
understanding of how management views results and may enhance readers'
analysis of performance. Adjusted results and measures are non-GAAP and
are detailed in the Adjusted Net Income section, the Net Income
section, and in the Non-GAAP Measures section of Management's
Discussion and Analysis (MD&A), where such non-GAAP measures and their
closest GAAP counterparts are disclosed.
(2) All Earnings per Share (EPS) measures in this document refer to diluted
EPS unless specified otherwise.
Operating Segment Overview
P&C Canada
Net income was $432 million, up $8 million or 1.8% from a year ago. Volume growth continued across most products but growth has slowed while net interest margin has declined slightly. Revenue increased 3.6% from the second quarter while expense growth moderated to 1.1%, as we manage our expenses prudently while investing in our strategic priorities.
We continue to make improvements in enhancing the customer experience through investment in our workforce, improved processes and leveraging our performance management discipline. Customer loyalty, as measured by net promoter score, continues to improve in both our personal and commercial businesses and we have seen an increase in the average number of product categories used by both personal and commercial customers.
In personal banking, the productivity of our sales and distribution network continues to strengthen. New branch openings and renovations continue, as we opened seven new branches and redeveloped nine in the first nine months of the year. We have enhanced our online banking features that make it more convenient for customers to access their banking information and apply for products online. Early indicators demonstrate that our investments in our business are having an impact. There were more than 10 times the number of youth accounts opened in the first three months of our BMO SmartSteps for Parents campaign as were opened in the same timeframe last year. Online sales are up 14% year over year across all retail product categories and in the three months following our online bank account application upgrade, chequing and savings account sales were up almost 50%. We are confident that we are well positioned for future growth.
In commercial banking, we continue to rank second in market share for loans to small and medium-sized businesses with market share remaining stable year over year. In June, BMO was the only Canadian bank recognized in the top international information technology awards announced in International Data Group's CIO magazine. The award recognized BMO for its Online Banking for Business platform, a multi-channel, global commercial online banking solution that allows our customers to manage all of their global cash management, foreign exchange and card services online in a secure environment. In addition, earlier this year we launched a new mobile banking service that enables our business banking customers to make payments anytime and anywhere over mobile devices safely and securely. This is consistent with our ongoing investment in delivering a great customer experience to our business banking customers. We are committed to providing seamless, simple, and personalized access to all of their business banking services from one platform. Our goal is to become the bank of choice for businesses across Canada, by providing the knowledge, advice and guidance our customers want.
P&C U.S. (all amounts in US$)
Net income of $95 million increased $45 million or 94% from $50 million a year ago, with the acquired M&I business contributing $27 million of the increase. M&I results included in P&C U.S. reflect an $18 million charge for expected credit losses on the M&I portfolio, determined on a basis consistent with BMO's methodologies and in the same manner as expected losses are determined for other loans in P&C U.S. Differences between expected losses and actual losses on the portfolio are charged (or credited) to Corporate Services.
Excluding the M&I business, net income increased $18 million or 39%, primarily due to increased revenue from improved net interest margin and higher securities gains, partially offset by lower fee revenue. Revenue increased by 47% on a reported basis and by 8.1% excluding M&I. Higher provisions for credit losses under BMO's expected loss provisioning methodology were offset by lower expenses.
During the quarter, certain impaired real estate secured assets, primarily commercial real estate loans, were transferred to Corporate Services to allow our businesses to focus on ongoing customer relationships and leverage our risk management expertise in our special assets management unit. Prior period loan balances, revenues and expenses have been restated to reflect the transfer. Similar assets acquired in the M&I transaction have also been included in Corporate Services.
The M&I acquisition substantially increases our market presence in the Midwest. We have an enviable market position that will enable us to compete aggressively everywhere we do business. We plan to increase our focus on developing new customer relationships and deepening existing relationships across our businesses, and we are making an additional $5 billion in credit available to small and medium-sized businesses in our markets over the next two years.
We continue to focus on the customer experience, as reflected in our high loyalty scores. Our personal retail net promoter score of 43 continues to improve, and with three quarters of sequential growth and an increase of one point from 42 in the prior quarter, our score remains very strong compared to the scores of our major competitors. The preceding scores do not reflect any adjustments for the M&I acquisition and M&I loyalty scores.
Private Client Group (PCG)
Net income was $120 million, up $15 million or 14% from the same quarter a year ago. Private Client Group net income, excluding the insurance business, increased $30 million or 43% to $101 million as we continue to see growth across all of these businesses. Included in the current quarter is $4 million of earnings from the wealth businesses relating to M&I. As well, the current quarter includes results of Lloyd George Management (LGM), an acquisition that was completed on April 28, 2011 and was net income neutral in the quarter. Insurance net income was $19 million for the quarter, down $15 million or 45% from a year ago, primarily due to the effect of unfavourable long-term interest rate movements on policyholder liabilities relative to the prior year.
Revenue was $617 million, up $73 million or 13% from the prior year 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 LGM acquisition and M&I wealth businesses together added $39 million to revenue. The productivity ratio of 74.7% increased by 30 basis points from the prior year.
Assets under management and administration improved by $177 billion to $429 billion as the M&I and LGM acquisitions brought $153 billion in client assets to our business. Assets in our U.S. wealth business increased from US$77 billion to US$239 billion. On a basis that excludes the impact of the M&I and LGM acquisitions and the weaker U.S. dollar, assets under management and administration grew $30 billion or 12% from a year ago.
As a result of the M&I acquisition, we have almost doubled our U.S. private banking footprint. Our Global Asset Management business is a multi-asset management firm that now manages over $100 billion in combined assets and is one of the 100 largest investment managers worldwide as measured by assets under management. By continuing to provide an exceptional client experience, we are building a strong foundation and positioning ourselves for expansion of our business.
BMO's Exchange Traded Fund (ETF) business has grown to $2.7 billion in assets under management. Since inception in June 2009, BMO's ETF product portfolio has grown to 40 funds that offer numerous benefits to investors including lower costs, diversification and tax efficiencies, while providing investment exposure to a broad range of asset classes, sectors and regions.
BMO Capital Markets
Net income for the quarter was $279 million, an increase of $149 million from a year ago. Return on equity was 25.5%, compared with 11.8% a year ago. Revenue was $837 million, up $158 million or 23% from the prior year. Trading revenues have increased significantly, as the trading environment has improved from the challenging conditions of a year ago. Mergers and acquisitions revenues have also shown strong growth over the previous year. Results also benefited from a recovery of prior periods' income taxes. BMO Capital Markets strategy remains focused on its core clients and businesses and remains on track to successfully deliver profitable growth over time.
As a testament to its expertise in trade finance, BMO Capital Markets has, for the second year in a row, been named as the winner of the "Best Trade Bank in Canada" award for excellence by Trade Finance magazine.
In the third quarter of 2011, BMO Capital Markets participated in 125 new issues, including 37 corporate debt deals, 32 government debt deals, 51 common equity transactions and five issues of preferred shares, raising $51 billion.
Corporate Services
Corporate Services net loss in the quarter was $130 million, including a $38 million loss related to M&I integration planning and foreign exchange hedging costs, up from a loss of $42 million a year ago. Revenues were $28 million worse, primarily due to the impact of the M&I acquisition and a less favourable impact year over year from hedging activities, partly offset by a lower group teb offset (see the Revenue section for an explanation of teb). Expenses were $51 million higher, mainly due to costs relating to the M&I integration. Provisions for credit losses were better by $34 million, contributing $24 million to Corporate Services net income, as a result of lower provisions charged to Corporate Services under BMO's expected loss provisioning methodology. BMO employs a methodology for segmented reporting purposes whereby expected credit losses are charged to the client operating groups, and the difference between expected losses and actual losses is charged (or credited) to Corporate Services.
Acquisition of Marshall & Ilsley Corporation (M&I)
On July 5, 2011, BMO completed the acquisition of M&I for consideration of approximately $4.0 billion in the form of approximately 67 million common shares issued to M&I shareholders. M&I Bank combined with Harris to form BMO Harris Bank. In addition, immediately prior to the closing of the transaction, a BMO subsidiary purchased from the U.S. Treasury all of M&I's outstanding Troubled Asset Relief Program (TARP) preferred shares and warrants for cash consideration of approximately US$1.7 billion.
The acquisition of M&I added $29 billion of loans, after adjustment for future expected losses, and $34 billion of deposits. The allocation of the purchase price is subject to refinement as we complete the valuation of the assets acquired and liabilities assumed. The acquisition together with our existing U.S. operations more than doubles our U.S. branch count to 688, adds approximately two million customers and increases BMO's total assets under management and administration to over $530 billion.
We expect that annual cost savings from the integration of M&I and BMO will exceed US$300 million. We also expect there to be opportunities to add to revenues through expanded access to existing and new markets with increased brand awareness and a better ability to compete in the market. As previously indicated, we also anticipate that in fiscal 2011 M&I will contribute modestly positive net income to BMO's consolidated results, excluding integration and restructuring costs.
Integration and restructuring costs are included in non-interest expense in Corporate Services and are expected to approximate a total of US$600 million over the next few years. We recorded $53 million of such expenses in the current quarter and $25 million in the immediately preceding quarter. These costs include amounts related to system conversions, severance and other employee-related charges as well as other integration amounts, such as consulting fees and marketing costs in connection with customer communications and rebranding activities.
M&I's activities are primarily reflected in our P&C U.S., Private Client Group and Corporate Services segments, with a small amount included in BMO Capital Markets.
Prior to the close of the transaction, approximately US$1.0 billion of impaired real estate secured assets, comprised primarily of commercial real estate loans, were transferred from P&C U.S. to Corporate Services to allow our businesses to focus on ongoing customer relationships and leverage our risk management expertise in our special assets management unit. Prior period loan balances, revenues and expenses have been restated to reflect the transfer. In addition, similar assets valued at approximately US$1.5 billion that were acquired on the M&I acquisition were included in Corporate Services for the same reasons.
Also included in Corporate Services are the fair value adjustments that we have established at this time for future expected losses on the M&I loan portfolio and for the valuation of loans, deposits and debt instruments at market rates on the closing date. Corporate Services results will include in the provisions for credit losses any changes in our estimate of future expected losses and will also include the adjustments to net interest income that will occur as a result of having valued assets and liabilities at market rates on the closing date. These items were not significant to Corporate Services results in the quarter. The operating groups' results will reflect the provision for credit losses on an expected loss basis and net interest income based on the contractual rates for loans and deposits.
While the acquisition of M&I adds scale and provides a strong entry into new markets, integration risk is a key focus for the organization. It includes risk of customer and employee retention and system integration. The risks are addressed by maintaining our program management office, along with experienced BMO and M&I staff focused on ensuring these risks are well managed. Both organizations have considerable experience with integrating acquired businesses and the integration is now well underway. Our first critical milestone, closing the transaction and opening the combined bank for business on July 6, was successfully completed.
Adjusted Net Income
Management assesses performance on both a GAAP basis and adjusted basis and considers both bases to be useful in assessing underlying, ongoing business performance. Adjusted results for the third quarter of 2011 exclude the following items:
- costs for M&I of $53 million ($32 million after tax) for integration costs such as professional fees for integration planning as well as costs for systems development and certain severance;
- amortization of acquisition-related intangible assets of $17 million ($12 million after tax); and
- a charge to revenue for the hedge of foreign currency risk on the purchase of M&I of $9 million ($6 million after tax).
Adjusted net income was $843 million for the third quarter of 2011, up $165 million or 24% from a year ago. Adjusted earnings per share were $1.36, up 19% from $1.14 a year ago. The adjusting items above were recorded in Corporate Services except for the amortization of acquisition-related intangibles, which is charged across the groups. Adjusted results and measures are non-GAAP. Adjusted results and items excluded in determining adjusted results are disclosed in more detail in the Non-GAAP Measures section at the end of the MD&A, together with comments on the uses and limitations of such measures.
Caution
The foregoing sections contain forward-looking statements. Please see the Caution Regarding Forward-Looking Statements.
Management's Discussion and Analysis
MD&A commentary is as of August 23, 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 July 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) Q3-2011 vs. Q3-2010 vs. Q2-2011
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Net interest income 1,692 121 8% 72 4%
Non-interest revenue 1,582 246 18% (15) (1%)
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Revenue 3,274 367 13% 57 2%
Specific provision for credit
losses 174 (40) (19%) (13) (7%)
Decrease in the general
allowance - - - (42) (+100%)
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Total provision for credit
losses 174 (40) (19%) 29 20%
Non-interest expense 2,111 213 11% 88 4%
Provision for income taxes 178 71 67% (53) (23%)
Non-controlling interest in
subsidiaries 18 (1) (2%) - -
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Net income 793 124 18% (7) (1%)
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Adjusted net income(1) 843 165 24% 39 5%
Earnings per share - basic ($) 1.28 0.15 13% (0.07) (5%)
Earnings per share -
diluted ($) 1.27 0.14 12% (0.07) (5%)
Adjusted earnings per share -
diluted ($)(1) 1.36 0.22 19% 0.01 1%
Return on equity (ROE) 14.7% 1.0% (2.0%)
Adjusted ROE(1) 15.6% 1.7% (1.2%)
Productivity ratio 64.5% (0.8%) 1.6%
Adjusted productivity ratio(1) 62.2% (2.8%) 0.6%
Operating leverage 1.5% nm nm
Adjusted operating leverage(1) 4.9% nm nm
Net interest margin on earning
assets 1.78% (0.10%) (0.11%)
Effective tax rate 18.0% 4.6% (4.0%)
Capital Ratios:
Tier 1 Capital Ratio 11.48 (2.07) (2.34)
Common Equity Ratio 9.11 (1.16) (1.56)
Net income:
Personal and Commercial Banking 524 48 10% 69 15%
P&C Canada 432 8 2% 30 8%
P&C U.S. 92 40 79% 39 72%
Private Client Group 120 15 14% 19 19%
BMO Capital Markets 279 149 +100% 44 19%
Corporate Services, including
Technology and Operations
(T&O) (130) (88) (+100%) (139) (+100%)
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BMO Financial Group Net Income 793 124 18% (7) (1%)
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(Unaudited) Increase
(Canadian $ in millions, YTD (Decrease)
except as noted) 2011 vs. YTD-2010
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Net interest income 4,939 314 7%
Non-interest revenue 4,898 542 12%
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Revenue 9,837 856 10%
Specific provision for credit
losses 609 (187) (23%)
Decrease in the general
allowance (42) 42 nm
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Total provision for credit
losses 567 (229) (29%)
Non-interest expense 6,180 613 11%
Provision for income taxes 667 176 36%
Non-controlling interest in
subsidiaries 54 (2) (2%)
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Net income 2,369 298 14%
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Adjusted net income(1) 2,431 337 16%
Earnings per share - basic ($) 3.93 0.40 11%
Earnings per share -
diluted ($) 3.91 0.40 11%
Adjusted earnings per share -
diluted ($)(1) 4.02 0.47 13%
Return on equity (ROE) 15.7% 0.9%
Adjusted ROE(1) 16.1% 1.2%
Productivity ratio 62.8% 0.8%
Adjusted productivity ratio(1) 61.5% (0.2%)
Operating leverage (1.5%) nm
Adjusted operating leverage(1) 0.2% nm
Net interest margin on earning
assets 1.83% (0.04%)
Effective tax rate 21.6% 2.8%
Capital Ratios:
Tier 1 Capital Ratio 11.48 (2.07)
Common Equity Ratio 9.11 (1.16)
Net income:
Personal and Commercial Banking 1,476 86 6%
P&C Canada 1,277 55 5%
P&C U.S. 199 31 19%
Private Client Group 374 43 13%
BMO Capital Markets 771 169 28%
Corporate Services, including
Technology and Operations
(T&O) (252) - -
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BMO Financial Group Net Income 2,369 298 14%
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(1) 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 July 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 July 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. On July 5, 2011, BMO completed the acquisition of Marshall & Ilsley Corporation (M&I) which has not been included in our evaluation of the design effectiveness of the bank's disclosure controls and procedures and internal control over financial reporting as at July 31, 2011. M&I represents 8.9% of consolidated assets, 3.8% of consolidated revenue and 3.5% of consolidated net income as at and for the period ended July 31, 2011. The estimated fair values of the assets acquired and the liabilities assumed at the date of acquisition are outlined in Note 7 of the attached unaudited interim consolidated financial statements.
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 July 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; weak, volatile or illiquid capital and/or credit markets; interest rate and currency value fluctuations; changes in monetary, fiscal or economic policy; the degree of competition in the geographic and business areas in which we operate; changes in laws or in supervisory expectations or requirements, including capital and liquidity requirements and guidance; judicial or regulatory proceedings; the accuracy and completeness of the information we obtain with respect to our customers and counterparties; our ability to execute our strategic plans and to complete and integrate acquisitions; critical accounting estimates; operational and infrastructure risks; general political conditions; global capital markets activities; the possible effects on our business of war or terrorist activities; disease or illness that affects local, national or international economies; 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 anticipated benefits from the transaction such as it being accretive to earnings and other impacts on 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 the combined businesses now operate; 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 integration and restructuring related issues; and increased exposure to exchange rate fluctuations. A significant amount of M&I's business involved 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 Bank of Montreal's future results. When relying on forward-looking statements to make decisions with respect to Bank of Montreal, investors and others should carefully consider these factors, as well as other uncertainties and potential events, and the inherent uncertainty of forward-looking statements. Bank of Montreal does not undertake to update any forward-looking statements, whether written or oral, that may be made, from time to time, by the organization or on its behalf, except as required by law. The forward-looking information contained in this document is presented for the purpose of assisting our shareholders in understanding our financial position as at and for the periods ended on the dates presented 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 July 31 or as close to July 31 as was practical. 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 and later in this document. 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.
In determining the impact of reductions to interchange fees in the U.S. Legislative Developments section, we have assumed that business volumes remain consistent with our expectations and that certain management actions are implemented that will modestly reduce the impact of the rules on our revenues.
Assumptions about the performance of the Canadian and U.S. economies as well as overall market conditions and their combined effect on 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
The global economic outlook has deteriorated in recent months. Stock markets worldwide have fallen sharply, undermining household wealth and confidence. The S&P downgrade of the U.S.'s triple-A credit rating to AA+ and the intense political resistance to raising the U.S. government's borrowing capacity have heightened concerns about the U.S. fiscal outlook, which risks damaging business confidence. The European debt crisis remains unresolved and there are concerns about European bank exposure to sovereign debt. While we do not anticipate another recession, we have revised down meaningfully our outlook for the Canadian and U.S. economies.
Following good growth earlier this year, Canada's economy has slowed as a result of weak U.S. demand and disruptions to automobile production following the earthquake and tsunami in Japan. Despite strong employment growth, consumer spending slowed due to elevated levels of debt and high gasoline prices, restraining personal loan growth. Home sales moderated as well, partly in response to mortgage rule changes that took effect in March. Economic activity is expected to improve moderately in the second half of the year in response to a recovery in auto production and firmer U.S. demand. Business investment is projected to remain healthy due to strong demand for resources from emerging-market economies, supporting commercial loan growth. After expanding 3.2% in 2010, the Canadian economy is expected to grow at more modest rates of 2.4% in 2011 and 2.3% in 2012, held back by the impact of a strong Canadian dollar and more restrictive fiscal policies. The Bank of Canada will likely refrain from raising interest rates until mid-2012 due to the uncertain global economic environment. The Canadian dollar should continue to trade above parity with the U.S. dollar in 2012, benefiting from firm commodity prices and Canada's relatively healthy fiscal standing among advanced economies. Home sales should remain healthy in response to low borrowing costs, supporting residential mortgage demand. After climbing sharply in the past year, existing house prices are expected to stabilize in 2012.
The U.S. economy slowed sharply in the first half of the year in response to higher gasoline prices, disruptions in auto production and reductions in government spending. Consumer spending stalled in the second quarter, though business investment and exports remained healthy. Employment growth slowed, raising the unemployment rate back above 9%. Real estate markets remained weak and prices declined further in most regions. Economic growth is projected to improve only modestly in the second half of the year as a result of an upturn in motor vehicle production, lower oil prices, a weak U.S. dollar and strong demand from emerging-market economies. Business investment should remain healthy, benefiting from tax incentives and the solid earnings growth of U.S. multinational corporations. However, restrictive fiscal policy will continue to temper the expansion. After expanding 3.0% in 2010, the U.S. economy is expected to grow 1.7% in 2011 and 2.5% in 2012. Inflation should decline due to steadier commodity prices and subdued wage growth. The Federal Reserve is projected to maintain its low-interest rate policy well into 2013 to address high unemployment. Continued low interest rates should support capital markets activity this year, but the uncertain economic outlook and volatile equity markets will temper the benefit.
In the Midwest, where the bulk of our U.S. operations are located, the economy slowed in the spring. Consumer spending and manufacturing weakened, while construction and house prices remained subdued. However, business spending was steady and credit conditions improved. In the year ahead, the Midwest economy should benefit from stronger automobile production, continued strength in exports and high agricultural prices. Growth is expected to improve modestly, consistent with the overall U.S. economy, supporting personal and business loan demand. Firmer job growth should support home sales and residential mortgage demand.
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 third quarter of 2010 by the weakening of the U.S. dollar but were unchanged relative to the second quarter of 2011. The average Canadian/U.S. dollar exchange rate, expressed in terms of the Canadian dollar cost of a U.S. dollar, fell by 7.9% from a year ago and increased by 0.1% from the average of the second quarter of 2011. The following table indicates the relevant average Canadian/U.S. dollar exchange rates and the impact of changes in the rates.
Effects of U.S. Dollar Exchange Rate Fluctuations on BMO's Results (Canadian $ in millions, Q3-2011 YTD-2011 vs. except as noted) vs. Q3-2010 vs. Q2-2011 YTD-2010 --------------------------------------------------------------------------- Canadian/U.S. dollar exchange rate (average) Current period 0.9628 0.9628 0.9777 Prior period 1.0453 0.9623 1.0439 Increased (decreased) revenue (73) - (161) Decreased (increased) expense 50 - 108 Decreased (increased) provision for credit losses 7 - 20 Decreased (increased) income taxes and non-controlling interest in subsidiaries (4) - 1 --------------------------------------------------------------------------- Increased (decreased) net income (20) - (32) --------------------------------------------------------------------------- ---------------------------------------------------------------------------
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 strengthened modestly, as the exchange rate increased from Cdn$0.9464 per U.S. dollar at April 30, 2011 to an average of Cdn$0.9628. Hedging transactions resulted in an after-tax loss of $1 million for the quarter and after-tax gain of $2 million for the year to date. 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
BMO's average annual total shareholder return for the five-year period ended July 31, 2011 was 3.9%.
Net economic profit (NEP) was $226 million, compared with $293 million in the second quarter and $158 million in the third quarter of 2010. NEP is a non-GAAP measure. The decrease from the second quarter was largely due to an increased cost of capital due to the issuance of common shares in connection with the M&I acquisition in the quarter. NEP of $226 million represents the net income that is available to common shareholders ($754 million), plus the after-tax amortization of intangible assets ($12 million), net of a charge for capital ($540 million), and is considered an effective measure of added economic value. Please see the Non-GAAP Measures section at the end of the MD&A for a discussion on the use and limitations of non-GAAP measures.
Net Income
Q3 2011 vs Q3 2010
Net income was $793 million for the third quarter of 2011, up $124 million or 18% from a year ago. Earnings per share were $1.27, up 12% from $1.13 a year ago. BMO completed the acquisition of M&I on July 5, 2011 and issued approximately 67 million BMO common shares, as disclosed in the preceding Acquisition of Marshall & Ilsley Corporation section, and its results are included with BMO's as of that date. Results for the quarter in respect of M&I included a loss of $10 million and adjusted net income of $32 million.
Management assesses performance on both a GAAP basis and adjusted basis and considers both bases to be useful in assessing underlying, ongoing business performance. Adjusted results for the third quarter of 2011 exclude the following items:
- costs for M&I of $53 million ($32 million after tax) for integration costs such as professional fees for integration planning as well as costs for systems development and certain severance;
- amortization of acquisition-related intangible assets of $17 million ($12 million after tax) including $7 million ($4 million after tax) for M&I; and
- a charge to revenue for the hedge of foreign currency risk on the purchase of M&I of $9 million ($6 million after tax).
Adjusted net income was $843 million for the third quarter of 2011, up $165 million or 24% from a year ago. Adjusted earnings per share were $1.36, up 19% from $1.14 a year ago. Adjusted results and measures are non-GAAP. Adjusted results and items excluded in determining adjusted results are disclosed in more detail in the Non-GAAP Measures section at the end of the MD&A, together with comments on the uses and limitations of such measures.
There were improved results in each of the operating groups with particularly strong growth in BMO Capital Markets due in part to a more favourable environment than a year ago, resulting in good growth in trading revenue and mergers and acquisitions revenue. P&C U.S. grew strongly, benefiting from the inclusion of M&I's results. Private Client Group net income growth was also good, with growth across all businesses except insurance. There was reduced net income in Corporate Services due to lower revenues and integration costs.
Revenue increases outpaced expense increases in all of the operating groups, although operating leverage was modestly negative in both P&C Canada and Private Client Group. Provisions for credit losses in the current quarter decreased in the improved credit environment.
Q3 2011 vs Q2 2011
Net income decreased $7 million from the second quarter and earnings per share decreased $0.07 or 5.2% from $1.34. Adjusted net income increased $39 million or 4.8% from $804 million in the second quarter. The increase was largely attributable to the inclusion of M&I results. Adjusting items are detailed in the Non-GAAP Measures section at the end of the MD&A.
Revenue increased due to the addition of M&I. Expenses increased but, excluding the impact of M&I, were lower. Specific provisions for credit losses were modestly lower than in the second quarter but overall provisions were higher due to a reduction in the general allowance in the second quarter.
Q3 YTD 2011 vs Q3 YTD 2010
Net income increased $298 million or 14% to $2,369 million. Adjusted net income increased $337 million or 16% to $2,431 million. A strong increase in reported revenue outpaced the increase in reported expense and there were reduced provisions for credit losses.
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 for the third quarter of 2011 increased $367 million or 13% from a year ago, due in part to M&I revenue of $117 million. Adjusted revenue increased $376 million or 13%. There was solid growth in net interest income and also in non-interest revenue, both due in part to M&I. The weaker U.S. dollar decreased revenue growth by $73 million or 2.5 percentage points.
Revenue increased $57 million or 1.7% from the second quarter with solid growth in net interest income. Increased revenues were in part due to M&I and the impact of three more days in the third quarter. Net interest income was higher in each of the operating groups and non-interest revenue was higher in each of the operating groups except BMO Capital Markets. Revenues were lower in Corporate Services.
Changes in net interest income and non-interest revenue are reviewed in the sections that follow.
Net Interest Income
Net interest income increased $121 million or 7.7% from a year ago, with solid growth in P&C Canada, P&C U.S. and Private Client Group. Higher average earning assets drove the overall increase.
BMO's overall net interest margin decreased by 10 basis points year over year to 1.78%. There were decreases in P&C Canada and BMO Capital Markets and increases in P&C U.S. and Private Client Group. The reduction in net interest margin in P&C Canada was mainly due to lower deposit spreads in a low interest environment. The reduction in net interest margin in BMO Capital Markets was primarily attributable to lower trading net interest income. Increased margin in P&C U.S. was mainly due to improved loan spreads, as a result of a favourable change in the mix of loan balances, and higher deposit balances. In Private Client Group, the increase was due to higher deposit balances in private banking and higher deposit spreads in the brokerage businesses.
Average earning assets increased $45.3 billion or 14% relative to a year ago, and adjusted to exclude the impact of the weaker U.S. dollar, increased by $57.1 billion. Average earning assets included approximately one month of M&I balances, which added approximately $9.9 billion to BMO's average earning asset levels. 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 Canadian private banking business. There were also higher cash balances, representing increased deposits with the U.S. Federal Reserve. Excluding the impact of M&I, P&C U.S. average earning assets were lower as credit and economic conditions continue to affect credit utilization. There was improved commercial loan growth in certain categories, in addition to increases from the acquisition of certain assets and liabilities of a Rockford, Illinois-based bank, but these were offset by planned run-off in the portfolio and new mortgage originations sold in the secondary market.
Relative to the second quarter, net interest income increased $72 million or 4.4%. There was higher net interest income in each of the groups, due to asset growth.
BMO's overall net interest margin decreased 11 basis points from the second quarter to 1.78%. Reduced net interest income in Corporate Services was a significant contributor to the overall reduction in net interest margin.
Net interest margin was stable in P&C Canada with a small decrease due to lower mortgage refinancing fees. Net interest margin in P&C U.S. was unchanged including the impact of M&I but otherwise increased by 6 basis points as a result of improved loan spreads due to the continuation of a favourable change in the mix of loan balances and increased deposit balances, partially offset by reduced spreads on deposits.
Average earning assets increased $24.4 billion or 6.9% from the second quarter due in part to the inclusion of M&I assets. There were increases across all the operating groups. There was growth in trading assets in BMO Capital Markets and growth across all lines in Private Client Group. P&C Canada average earning assets increased 5.1% year over year and 1.1% quarter over quarter.
Year to date, net interest income increased $314 million or 6.8%, due to higher revenues in all operating groups, except BMO Capital Markets. There were increased average earning assets in all operating groups and increased margins in all groups except BMO Capital Markets.
BMO's overall net interest margin decreased by 4 basis points to 1.83% for the year to date. P&C Canada was relatively unchanged. P&C U.S. margin increased due to improved loan spreads, as discussed above, and higher deposit balances. Private Client Group margin increased primarily due to improved deposit spreads in the brokerage businesses, partially offset by growth in insurance assets, which have no net interest income impact. BMO Capital Markets experienced lower trading net interest income and held higher deposits with the U.S. Federal Reserve, resulting in lower net interest margin.
Average earning assets for the year to date increased $30.3 billion or 9.2%, and by $38.9 billion adjusted to exclude the impact of the weaker U.S. dollar. M&I contributed $3.4 billion to growth as its assets were included in the average for only 26 days. On a Canadian dollar basis, there was organic growth in P&C Canada, Private Client Group and BMO Capital Markets, combined with an increase in Corporate Services. As indicated above, in P&C U.S., there was improved commercial loan growth in certain categories but the effects were offset by other factors. Private Client Group grew average earning assets across most lines of business and in BMO Capital Markets there was growth in trading assets.
Net Interest Margin (teb)(i)
Increase Increase Increase
(In basis (Decrease) (Decrease) (Decrease)
points) Q3-2011 vs. Q3-2010 vs. Q2-2011 YTD-2011 vs. YTD-2010
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P&C Canada 292 (4) (1) 295 1
P&C U.S. 447 66 - 438 72
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Personal and
Commercial
Client Group 321 11 4 319 13
Private Client
Group 289 12 (21) 297 18
BMO Capital
Markets 73 (22) (3) 76 (20)
Corporate
Services,
including
Technology and
Operations
(T&O)(ii) nm nm nm nm nm
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Total BMO 178 (10) (11) 183 (4)
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Total Canadian
Retail(iii) 292 (6) (3) 296 (1)
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(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 lowers BMO's
overall net interest margin.
(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 in the current quarter increased $246 million or 18% from a year ago. Results included $48 million related to M&I, consisting primarily of investment management fees in Private Client Group, deposit and payment service charges in P&C U.S., and other revenue. Overall growth in BMO's total non-interest revenue was mostly attributable to strong growth in BMO Capital Markets and a solid increase in Private Client Group. Non-interest revenue is detailed in the attached summary unaudited consolidated financial statements.
Non-interest revenue in the quarter improved from a year ago, due to strong growth in BMO Capital Markets mergers and acquisitions fees, as well as good growth in trading revenues, which were very low in the weak trading environment of a year ago. There were also healthy increases in Private Client Group mutual fund revenues and investment management and custodial fees. There was a $1.3 billion credit card securitization late in the second quarter; as a result, credit card fees were lowered this quarter and securitization non-interest revenue was increased.
Relative to the second quarter, non-interest revenue decreased $15 million or 1.0%. The reduction was attributable to decreases in Corporate Services and BMO Capital Markets, partially offset by improved revenues in P&C U.S. and Private Client Group. P&C U.S. non-interest revenues included increased investment securities gains and Private Client Group benefited from higher investment management fees. Private Client Group experienced declines in securities and commission fees but saw improvements in insurance revenues. The second quarter was affected by unusually high reinsurance claims from the earthquakes in Japan and New Zealand. The current quarter was affected, to a lesser extent, by increases in the adverse effects of unfavourable long-term interest rate movements on policyholder liabilities. Credit card fees decreased and securitization revenues rose, as discussed above. Corporate Services reduced non-interest revenue was due to a net reduction in a number of small items in other non-interest revenue in the third quarter and a credit card loan securitization gain in the second quarter.
Year to date, non-interest revenue increased $542 million or 12%. Non-interest revenue growth in BMO Capital Markets was very strong due to sizable increases in underwriting and advisory fees, securities commissions and trading revenues. Private Client Group also grew strongly with good growth in securities commissions, investment management and custodial fees and mutual fund revenues. Growth in insurance revenue was more than offset by the earthquake-related reinsurance claims and the adverse effect from unfavourable long-term interest rate movements on policyholder liabilities relative to the same period a year ago. P&C Canada non-interest revenue growth was driven by the inclusion of two more months of Diners Club North American franchise results in the current year and higher mutual fund revenues, offset in part by lower card fees.
Non-Interest Expense
Non-interest expense for the third quarter of 2011 increased $213 million or 11% from a year ago to $2,111 million. Adjusted non-interest expense increased $153 million or 8.0% from a year ago to $2,041 million. Adjusted expense excludes $53 million of integration costs relating to the M&I acquisition and $17 million in respect of the amortization of acquisition-related intangible assets. M&I increased expense by $137 million and adjusted non-interest expense by $76 million. Non-interest expense is detailed in the attached summary unaudited consolidated financial statements.
Increased employee compensation accounted for approximately two-thirds of the increase in reported expense and one-third of that amount was attributable to M&I. The growth was due in part to higher performance-based compensation, in line with improved revenues. There were also continued investments in the business including staffing increases across groups and higher costs from our other acquisitions. Computer and equipment costs and travel expense also increased. Professional fees increased substantially due to M&I. Lower other expenses include the benefit of a sales tax recovery. The weaker U.S. dollar reduced expense growth by $50 million or 2.6 percentage points, but the harmonized sales tax that was implemented in both Ontario and British Columbia on July 1, 2010 increased expenses year over year by approximately one-third of that amount.
Relative to the second quarter, non-interest expense increased $88 million or 4.3%, but fell when adjusted for the $137 million of M&I costs included in results in the quarter and the $25 million of pre-acquisition integration planning costs in the second quarter. On a reported basis, there were increases in employee compensation, travel and business development due to continued investment, partially offset by lower other expenses including the benefit of the sales tax recovery. The nominally stronger U.S. dollar relative to the second quarter had no impact on quarter-over-quarter expense growth.
Non-interest expense for the year to date increased $613 million or 11% to $6,180 million. Adjusted non-interest expense increased $525 million or 9.5%. M&I accounted for $162 million of expense growth and $76 million of adjusted expense growth. There was growth in employee compensation, including performance-based costs in line with improved results, increased computer and equipment costs, and higher professional fees and travel and business development expense. Expense growth was due in part to continued investment in our P&C and wealth businesses including technology development initiatives and the addition of employees, as well as the effects of our other acquisitions.
Risk Management
The global economic recovery has slowed due to heightened uncertainty surrounding both the European and U.S. economies. In the United States, continued high unemployment levels and weak real estate markets have weakened consumer confidence and increased ongoing economic uncertainty.
Loans acquired in connection with the M&I transaction were recorded at fair value at acquisition and as a result, no allowance for credit losses has been recorded on these loans. The fair value of the purchased portfolio of $29.2 billion included an adjustment for estimated future losses of $3.3 billion. In addition, an adjustment to the fair value of undrawn commitments and letters of credit of $206 million has been recorded in other liabilities. As the purchased portfolio was written down at acquisition to the amount expected to be collected, the purchased loans are not included in gross impaired loans. We expect to recover the fair value (or new carrying amount) of the purchased portfolio.
Provisions for credit losses totalled $174 million in the third quarter of 2011. Specific provisions were $174 million or an annualized 39 basis points of average net loans and acceptances, compared with $187 million or 45 basis points in the second quarter and $214 million or 50 basis points in the third quarter of 2010. The preceding ratios have been calculated excluding the impact of the purchased portfolios that were recorded at fair value at acquisition and prior quarters have been restated accordingly. There was no change in the general allowance in the current quarter or in the third quarter of 2010. There was a $42 million reduction in the general allowance in the second quarter of 2011.
On a geographic basis, specific provisions in Canada and other countries (excluding the United States) were $94 million in the third quarter of 2011, $97 million in the second quarter of 2011 and $110 million in the third quarter of 2010. Provisions in the United States for the comparable periods were $80 million, $90 million and $104 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 third quarter of 2011 were: $161 million in P&C Canada; $51 million in P&C U.S.; $7 million in BMO Capital Markets; and a recovery of $2 million in Private Client Group. In addition, there were $19 million of actual credit losses in the quarter in respect of the loans transferred from P&C U.S. to Corporate Services. The P&C Canada losses of $161 million include credit losses of $62 million related to securitized assets, which are not included in BMO's $174 million of specific provisions.
Actual credit losses in the second quarter of 2011 were: $151 million in P&C Canada; $79 million in P&C U.S.; $5 million in Private Client Group; and $nil in BMO Capital Markets. The P&C Canada losses of $151 million include credit losses of $48 million related to securitized assets, which are not included in BMO's $187 million of specific provisions.
Actual credit losses in the third quarter of 2010 were: $171 million in P&C Canada; $103 million in P&C U.S.; $nil in Private Client Group; and a recovery of $10 million in BMO Capital Markets. The P&C Canada losses of $171 million include credit losses of $50 million related to securitized assets, which are not included in BMO's $214 million of specific provisions.
Impaired loan formations totalled $252 million in the current quarter, up from $147 million in the second quarter of 2011 and $242 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 $2,290 million at the end of the current quarter, down from $2,465 million in the second quarter and from $2,801 million a year ago. Effective the third quarter of 2011, gross impaired loans exclude the purchased portfolios and prior quarters have been restated accordingly.
The acquisition of M&I has increased BMO's exposure to U.S. real estate related loans and to potential deterioration in U.S. real estate markets. However, we are satisfied that estimated future credit losses were appropriately considered in determining the fair value of the purchased portfolio at acquisition and we continue to proactively manage these exposures.
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. During the quarter, our core deposits increased to $172 billion from $136 billion primarily due to the addition of M&I's core deposit base.
Trading and Underwriting Market Value Exposure (MVE) rose quarter over quarter due to increased activity in our fixed income businesses. Exposure in the bank's available-for-sale (AFS) portfolios was virtually unchanged over the quarter and continues to be concentrated in portfolios holding significant levels of high quality, hedged bonds.
There were no significant changes in our structural market risk management practices during the quarter. Structural MVE is driven by rising interest rates and primarily reflects a lower market value for fixed-rate loans. Structural Earnings Volatility (EV) is driven by falling interest rates and primarily reflects the risk of prime-based loans repricing lower. MVE and EV increased modestly from the prior quarter primarily due to the acquisition of M&I assets and liabilities.
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) Q3-2011 Q2-2011 Q3-2010 YTD-2011 YTD-2010
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New specific provisions 273 258 316 861 1,076
Reversals of previously
established allowances (38) (21) (57) (83) (149)
Recoveries of loans
previously written off (61) (50) (45) (169) (131)
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Specific provision for
credit losses 174 187 214 609 796
Decrease in the general
allowance - (42) - (42) -
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Provision for credit
losses (PCL) 174 145 214 567 796
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Specific PCL as a % of
average net loans and
acceptances
(annualized)(1) 0.39% 0.45% 0.50% 0.47% 0.63%
PCL as a % of average
net loans and
acceptances
(annualized)(1) 0.39% 0.36% 0.50% 0.44% 0.63%
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(1) Effective Q3 2011, the calculation excludes purchased portfolios. Prior
periods were restated to reflect this change.
Changes in Gross Impaired Loans and Acceptances (GIL)(1)
(Canadian $ in millions,
except as noted)
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GIL, Beginning of Period 2,465 2,739 2,968 2,894 3,297
Additions to impaired
loans & acceptances 252 147 242 682 1,064
Reductions in impaired
loans & acceptances(2) (140) (139) (129) (428) (636)
Write-offs (287) (282) (280) (858) (924)
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GIL, End of Period 2,290 2,465 2,801 2,290 2,801
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GIL as a % of gross
loans & acceptances(4) 1.29% 1.40% 1.61% 1.29% 1.61%
GIL as a % of equity and
allowances for credit
losses(3)(4) 7.97% 10.22% 12.15% 7.97% 12.15%
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(1) Restated to exclude the U.S. portfolio acquired in Q2 2010, since the
portfolio was fair valued at the acquisition date.
(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 ($164
million in Q3 2011; $156 million in Q2 2011; and $187 million in Q3
2010).
(3) Effective Q4 2010, the calculation excludes non-controlling interest in
subsidiaries. Prior periods were restated to reflect this change.
(4) Effective Q3 2011, the calculation excludes purchased portfolios. Prior
periods were restated to reflect this change.
Total Trading and Underwriting Market Value Exposure (MVE) Summary
($ millions)(i)
As at As at
For the quarter ended July 31, 2011 April October
(Pre-tax 30, 2011 31, 2010
Canadian Quarter- Quarter- Quarter-
equivalent) end Average High Low end end
------------------------------------------------------- --------- ---------
Commodity VaR (0.6) (0.3) (0.6) (0.1) (0.1) (0.1)
Equity VaR (3.9) (4.2) (6.6) (3.4) (4.0) (7.5)
Foreign Exchange
VaR (0.6) (2.0) (4.3) (0.1) (1.8) (0.6)
Interest Rate VaR
(Mark-to-Market) (10.7) (11.3) (16.0) (8.3) (10.9) (7.5)
Diversification 4.1 5.5 nm nm 5.8 4.8
------------------------------------ --------- ---------
Trading Market
VaR (11.7) (12.3) (17.1) (9.2) (11.0) (10.9)
Trading &
Underwriting
Issuer Risk (5.0) (5.1) (8.8) (4.4) (4.1) (2.7)
------------------------------------ --------- ---------
Total Trading &
Underwriting MVE (16.7) (17.4) (22.6) (13.8) (15.1) (13.6)
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Interest Rate
VaR (AFS) (12.1) (12.7) (13.6) (12.1) (13.1) (7.4)
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(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)
---------------------------------------------------------------------------
July 31 April 30 Oct. 31
(Canadian equivalent) 2011 2011 2010
---------------------------------------------------------------------------
Market value exposure (MVE) (pre-tax) (637.8) (612.9) (564.1)
12-month earnings volatility (EV)
(after-tax) (87.9) (78.8) (63.8)
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(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 Earnings sensitivity
value over the
sensitivity next 12 months
(Canadian equivalent) (Pre-tax) (After-tax)
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July 31 Apr. 30 Oct. 31 July 31 Apr. 30 Oct. 31
2011 2011 2010 2011 2011 2010
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100 basis point
increase (514.0) (430.9) (380.5) 9.8 12.0 20.9
100 basis point
decrease 364.9 356.1 322.3 (86.8) (74.8) (70.3)
200 basis point
increase (1,082.4) (887.6) (815.1) 38.5 12.4 33.4
200 basis point
decrease 850.0 745.1 738.2 (21.7) 5.9 (12.8)
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(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 July 31, 2011 results in an increase in earnings after tax of
$97 million and an increase in before tax economic value of $302
million ($81 million and $237 million, respectively, at April 30, 2011
and $77 million and $295 million, respectively, at October 31, 2010).
A 100 basis point decrease in interest rates at July 31, 2011 results
in a decrease in earnings after tax of $90 million and a decrease in
before tax economic value of $315 million ($76 million and $245
million, respectively, at April 30, 2011 and $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 $178 million increased $71 million from the third quarter of 2010 and decreased $53 million from the second quarter of 2011. The effective tax rate for the quarter was 18.0%, compared with 13.4% in the third quarter of 2010 and 22.0% in the second quarter of 2011. The higher effective tax rate in the current quarter, as compared to the third quarter of 2010, was primarily due to lower tax-exempt income, partially offset by a reduction in the statutory Canadian income tax rate in 2011. The lower effective tax rate in the current quarter, as compared to the second quarter of 2011, was primarily due to a higher proportion of income from lower tax-rate jurisdictions and higher recoveries of prior periods' income taxes.
As explained at the end of the Q3 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 recovery in shareholders' equity of $10 million for the quarter and an income tax charge of $170 million for the year to date. Refer to the Consolidated Statement of Changes in Shareholders' Equity included in the interim unaudited consolidated financial statements for further details.
Balance Sheet
Total assets were $476.6 billion at July 31, 2011. BMO completed the acquisition of M&I on July 5, 2011, acquiring $45.6 billion of assets. The M&I assets were comprised of loans totalling $29.2 billion, securities of $6.0 billion, cash of $2.8 billion and other items totalling $7.6 billion, including goodwill of $1.8 billion. The allocation of the purchase price for M&I is subject to refinement as we complete the valuation of the assets acquired and liabilities assumed.
Including the addition of the M&I assets, total assets increased $64.9 billion from October 31, 2010. The weaker U.S. dollar decreased the translated value of U.S.-dollar-denominated assets by $7.3 billion. There were increases in net loans and acceptances of $28.8 billion, cash and cash equivalents and interest bearing deposits with banks of $17.5 billion, securities borrowed or purchased under resale agreements of $10.2 billion, other assets of $4.9 billion and securities of $3.5 billion.
The $28.8 billion increase in net loans and acceptances was due to an increase in loans to businesses and governments of $17.0 billion, which included $19.5 billion from M&I, net of a reduction of $1.8 billion in other BMO loans due mainly to economic conditions. Spending remains weak and borrowers have reduced utilization of loan facilities. Given the low interest rate environment, more borrowers have accessed the capital markets at attractive rates and used the proceeds to pay down bank debt. There was an increase in consumer instalment and other personal loans of $6.9 billion including $4.4 billion from M&I, and a $2.8 billion increase in auto loans and home equity loans. There was a $5.8 billion increase in residential mortgages, including $3.9 billion from M&I. P&C Canada's commercial loan balances also increased. The above increases were partially offset by lower credit card loans due mainly to higher levels of securitization activity in April of this year.
The $17.5 billion increase in cash and cash equivalents and interest bearing deposits with banks was largely due to increased balances held at the Federal Reserve.
The $10.2 billion increase in securities borrowed or purchased under resale agreements was mainly due to increased client activities.
The $4.9 billion increase in other assets was all due to M&I, and included $1.8 billion of goodwill and $2.4 billion of deferred income taxes. Excluding the impact of M&I, BMO's other assets decreased due largely to lower carrying values for derivative instruments.
The $3.5 billion increase in securities resulted from an increase from M&I, partially offset by decreases in BMO's portfolios.
Liabilities and shareholders' equity totalled $476.6 billion at July 31, 2011. BMO's acquisition of M&I added $41.6 billion of liabilities including $33.9 billion of deposits on July 5, 2011. The weaker U.S. dollar decreased liabilities and shareholders' equity by $7.3 billion at July 31, 2011.
Including M&I, total liabilities and shareholders' equity increased $64.9 billion from October 31, 2010. The $64.9 billion increase primarily reflects growth in deposits of $42.2 billion, securities sold but not yet purchased of $9.0 billion, securities lent or sold under repurchase agreements of $6.8 billion, shareholders' equity of $5.1 billion, subordinated debt of $1.5 billion and other amounts totalling $4.8 billion. These factors were partially offset by a decrease in derivative financial liabilities of $4.1 billion and capital trust securities of $0.4 billion.
The $42.2 billion increase in deposits included a $17.4 billion increase in deposits from businesses and governments (which account for $148.2 billion or 51% of total deposits). Of the $17.4 billion increase, $12.4 billion was attributable to M&I. Deposits by individuals (which account for $120.2 billion or 41% of total deposits) increased $21.2 billion with virtually all of the increase attributable to M&I. Deposits by banks (which account for the remaining $23.0 billion or 8% of total deposits) increased $3.5 billion primarily due to higher wholesale deposits.
The $9.0 billion increase in securities sold but not yet purchased was mainly due to increased hedging requirements resulting from an increase in client activities.
The $6.8 billion increase in securities lent or sold under repurchase agreements was mainly due to increased client investments, mainly in Canada.
The $5.1 billion increase in shareholders' equity largely reflects the issuance of approximately 67 million common shares on the M&I acquisition at a value of $4.0 billion, a $0.3 billion issuance of preferred shares in the second quarter and an increase in retained earnings, partially offset by a decrease in accumulated other comprehensive loss due mainly to a net loss on translation of our net investment in foreign operations.
The $4.8 billion increase in other amounts included $3.2 billion from M&I.
The $1.5 billion increase in subordinated debt was due to an issuance during the second quarter.
Capital Management
Q3 2011 Regulatory Capital Review
BMO remains well capitalized at July 31, 2011, with a Basel II Tier 1 Capital Ratio of 11.48% and a Basel II Common Equity Ratio of 9.11%. Tier 1 capital was $24.3 billion, risk-weighted assets (RWA) were $212.0 billion, and regulatory common equity was $19.3 billion. At October 31, 2010, the Tier 1 Ratio was 13.45% and the Common Equity Ratio was 10.26%. The acquisition of M&I on July 5, 2011 caused reductions in the Tier 1 Ratio and Common Equity Ratio of 190 basis points and 130 basis points, respectively, while the ratios were also impacted by other items that affected both RWA and capital, as outlined below.
In the first quarter of 2011, the Office of the Superintendent of Financial Institutions (Canada) approved BMO's application to use the Advanced Internal Ratings Based (AIRB) Approach to determine credit risk RWA for Harris Bancorp, Inc. The change affected capital and RWA as noted in prior quarters.
Tier 1 capital increased $2.7 billion from October 31, 2010. The increase was due to the issuance of common shares to M&I shareholders as consideration for the acquisition, internally generated capital and the issuance of $290 million of 3.90% Preferred Shares Series 25 on March 11, 2011. These factors were partially offset by the redemption of $400 million of BMO BOaTS-Series B in the first quarter, higher Basel II capital deductions primarily related to the M&I acquisition and the adoption of the AIRB approach for Harris Bancorp Inc., as noted above.
RWA increased $50.8 billion from October 31, 2010 primarily due to the impact of the M&I acquisition, which added approximately $45 billion of RWA, and the adoption of the AIRB Approach for Harris Bancorp Inc. as outlined above. Corporate and commercial RWA and securitization RWA also increased in the third quarter. The effect of a strengthening Canadian dollar on U.S. dollar-denominated RWA partially offset the total increase in RWA.
BMO's Basel II Total Capital Ratio was 14.21% at July 31, 2011. The ratio decreased 170 basis points from 15.91% at the end of 2010. Total capital increased $4.5 billion to $30.1 billion as at July 31, 2011, primarily due to the impact of $1.5 billion of 3.979% Series G Medium Term Notes First Tranche subordinated indebtedness issued on March 2, 2011 and growth in Tier 1 capital as noted above.
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.
Qualifying Regulatory Capital
Basel II Regulatory Capital and Risk-Weighted Assets
(Canadian $ in millions) Q3-2011 Q4-2010
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Gross regulatory common shareholders' equity 23,580 18,753
Non-cumulative preferred shares 2,861 2,571
Innovative Tier 1 Capital Instruments 2,126 2,542
Non-controlling interest in subsidiaries 33 23
Goodwill and excess intangible assets (3,374) (1,619)
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Net Tier 1 Capital 25,226 22,270
Securitization-related deductions (167) (165)
Expected loss in excess of allowance - AIRB approach (270) -
Substantial investments/Investments in insurance
subsidiaries (445) (427)
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Adjusted Tier 1 Capital (Tier 1 Capital) 24,344 21,678
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Subordinated debt 5,858 3,776
Trust subordinated notes 800 800
Accumulated net after-tax unrealized gains on
available-for-sale equity securities 12 10
Eligible general allowance for credit losses 292 292
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Total Tier 2 Capital 6,962 4,878
Securitization-related deductions (29) (29)
Expected loss in excess of allowance - AIRB approach (270) -
Substantial Investments/Investment in insurance
subsidiaries (875) (890)
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Adjusted Tier 2 Capital 5,788 3,959
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Total Capital 30,132 25,637
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Risk-Weighted Assets
(Canadian $ in millions) Q3-2011 Q4-2010
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Credit risk 181,683 136,290
Market risk 5,715 5,217
Operational risk 24,588 19,658
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Total risk-weighted assets 211,986 161,165
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Outstanding Shares and Securities Convertible into Common Shares
Number of shares or
As at August 17, 2011 dollar amount
---------------------------------------------------------------------------
Common shares 637,372,000
Class B Preferred Shares
Series 5 $ 200,000,000
Series 13 $ 350,000,000
Series 14 $ 250,000,000
Series 15 $ 250,000,000
Series 16 $ 300,000,000
Series 18 $ 150,000,000
Series 21 $ 275,000,000
Series 23 $ 400,000,000
Series 25 $ 290,000,000
Convertible into common shares:
Class B Preferred Shares(1)
Series 10 US$ 300,000,000
Stock options(2)
- vested 10,192,000
- non-vested 7,702,000
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(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.
(2) Stock options include certain M&I options that were converted into BMO
options.
Details on share capital are outlined in the 2010 Annual Report in Note 20
to the audited financial statements on pages 145 to 146.
Potential Impacts of Proposed Regulatory Capital Changes and Conversion to IFRS
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 and including the estimated impact for the adoption of IFRS, BMO's pro-forma July 31, 2011 Common Equity Ratio and Tier 1 Capital Ratio would be 6.6% and 8.8%, respectively. The ratios decreased from 8.6% and 11.5%, respectively, in the second quarter primarily due to the impact of the M&I acquisition, higher RWA as noted above, and refined estimates for certain Basel III impacts.
The pro-forma calculations and statements in this section assume full implementation of announced Basel III regulatory capital requirements and include the potential impact of certain key changes associated with the adoption of IFRS.
BMO's pro-forma capital ratios are strong and the bank is well positioned to meet Basel III capital requirements in the near term.
Under Basel III, the bank's regulatory common equity (defined as common equity net of applicable regulatory capital adjustments) would decrease by approximately $4.4 billion from $19.3 billion to $14.9 billion as at July 31, 2011, and its Tier 1 capital would decrease by approximately $4.4 billion from $24.3 billion to $19.9 billion. The decrease is primarily a result of the impact of the adoption of International Financial Reporting Standards (IFRS) on retained earnings, as well as new Basel III capital deductions. These factors are partially offset by the removal of certain existing Basel II deductions from capital and their conversion to higher levels of RWA.
Our RWA as at July 31, 2011 would increase by approximately $14.7 billion from $212.0 billion to $226.7 billion, primarily due to higher counterparty credit risk RWA ($10.6 billion) and, to a lesser extent, higher market risk RWA, as well as the conversion of certain existing Basel II capital deductions to RWA ($4.2 billion), as noted above.
BMO's pro-forma Total Capital Ratio and Leverage Ratio exceed Basel III minimum requirements.
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 both our 2010 Annual Report and starting on the following page of this document. In calculating the Basel III Tier 1 Capital Ratio and commenting on the bank's Basel III Total Capital Ratio and Leverage Ratio, we also assumed existing non-common share Tier 1 and Tier 2 capital instruments are fully included in regulatory capital. These instruments do not meet Basel III capital requirements and will be subject to the grandfathering provisions 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 future 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.
Other Capital Developments
During the quarter, there were 1,137,000 shares issued through the Shareholder Dividend Reinvestment and Share Purchase Plan and the exercise of stock options, and approximately 67 million common shares issued to M&I shareholders in consideration for the M&I acquisition. We did not repurchase any Bank of Montreal common shares under our common share repurchase program during the quarter.
On August 23, 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 November 28, 2011, to shareholders of record on November 1, 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 in 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 the audited consolidated financial statements on page 130 of the 2010 Annual Report.
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 quarter, Moody's affirmed its long-term ratings of Bank of Montreal (Aa2) and returned BMO's rating outlook to stable after placing its rating under review for downgrade following the announcement of our intention to acquire M&I. 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 July 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 acquisition of M&I has increased overall levels of certain of the asset categories discussed in the Select Financial Instruments section of BMO's 2010 Annual Report.
The amount drawn on the liquidity facilities BMO provides to the Structured Investment Vehicles (SIVs) was lowered to US$2.8 billion and EUR277 million at the end of the quarter, down from US$3.2 billion and EUR313 million at the end of the second quarter and US$4.3 billion and EUR478 million at the end of fiscal 2010. The decreases were attributable to asset sales and asset maturities. The book values of the subordinated capital notes at quarter end were US$475 million and EUR107 million for Links and Parkland, respectively, compared with US$689 million and EUR141 million at the end of fiscal 2010.
Select Geographic Exposures
In the euro zone, BMO's direct credit exposures in Greece, Ireland, Italy, Spain and Portugal are primarily to banks for trade finance, lending and trading products. Exposures remain modest at $131 million at quarter end. In addition, our Irish subsidiary is required to maintain reserves with the Irish central bank. These reserves totalled approximately $164 million at quarter end.
Given the level of European sovereign debt held by European banks, we continue to proactively monitor BMO's direct exposure to these counterparties, giving appropriate consideration to the potential for indirect exposure to European sovereign debt.
The BMO-managed SIVs had exposure with a par value of approximately $34 million to counterparties in Ireland, with no exposure in Greece, Italy, Spain or Portugal. This exposure was comprised solely of government guaranteed Irish bank senior debt. We are closely monitoring our exposure to banks in other European countries.
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 substantially completed, and we have entered 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.
Pension and Other Employee Future Benefits
On transition to IFRS, we can choose to recalculate pension and other future employee benefits expense back to inception of the plans as though we had always applied the IFRS employee benefits requirements, or to record market-related amounts that exist on November 1, 2010 directly in retained earnings (the fresh start method). Market-related amounts include unrealized market-related gains or losses on pension fund assets and the impact of changes in discount rates on pension obligations. We have decided to elect the fresh start method as permitted under IFRS.
Asset Securitization
In 2010, we substantially completed our assessment of the accounting treatment under IFRS of loans and mortgages sold to the bank's securitization vehicles and to the Canada Mortgage Bond program. Our preliminary conclusion is that the loans and mortgages sold by the bank to these securitization programs will remain on our balance sheet. Under Canadian GAAP, the mortgages and loans sold through these programs are removed from our balance sheet.
In the current quarter, we substantially completed our assessment of the accounting treatment under IFRS of the bank's Canadian mortgage loans sold to the National Housing Act Mortgage-Backed Securities program (NHA MBS). We assessed whether the mortgages qualify for off-balance sheet treatment based on the transfer of the risk and rewards, as determined under the derecognition criteria contained in the IFRS financial instruments standard (IAS 39). Based on the analysis completed to date, our preliminary conclusion is that the mortgages sold through the NHA MBS program will remain on our balance sheet. Under Canadian GAAP, the mortgages sold through this program are removed from our balance sheet. If the securitized assets sold to the NHA MBS program were to be recognized on the bank's balance sheet, assets and liabilities would increase by approximately $4 billion on November 1, 2010, the beginning of our comparative year. We do not expect that this would result in any significant adjustment to opening retained earnings on November 1, 2010.
Additional information on our asset securitizations is included in Note 8 on page 126 of the consolidated financial statements in our 2010 Annual Report.
Consolidation
In 2010, we substantially completed our assessment of whether we are required to consolidate our credit protection vehicle Apex Trust ("Apex") and our structured investment vehicles ("SIVs") when we transition to IFRS. Our preliminary conclusion is that the bank would be required to consolidate Apex and the SIVs. Under Canadian GAAP, we are not required to consolidate Apex and the SIVs.
In the second quarter, we substantially completed our assessment of whether we are required to consolidate our U.S. customer securitization vehicle. We assessed the consolidation requirement based on whether the bank would, in substance, control the vehicle as determined under the criteria contained in the IFRS consolidated and separate financial statements standard (IAS 27) and, where appropriate, SIC-12 (an interpretation of IAS 27). Our preliminary conclusion is that the bank would be required to consolidate the vehicle. Under Canadian GAAP, we are not required to consolidate our U.S. customer securitization vehicle. Consolidation of the vehicle would impact the bank's balance sheet, increasing assets and liabilities by approximately $3 billion on November 1, 2010, the beginning of our comparative year. We do not expect that this would result in any significant adjustment to opening retained earnings on November 1, 2010 or the calculation of our Tier 1 Capital Ratio.
In the current quarter, we substantially completed our assessment of whether we are required to consolidate our Canadian customer securitization vehicles. We assessed the consolidation requirement based on whether the bank would, in substance, control the vehicle as determined under the criteria contained in the IFRS consolidated and separate financial statements standard (IAS 27) and, where appropriate, SIC-12 (an interpretation of IAS 27). Our analysis considered whether the activities of the vehicle are conducted on behalf of the bank, the bank's exposure to the risks and benefits of the vehicle, its decision-making power over the vehicle, and whether these considerations demonstrate that the bank, in substance, controls the vehicle and therefore must consolidate it. We determined that for five of our eight Canadian customer securitization vehicles, the requirements to consolidate were not met under IFRS, a result that is consistent with how the vehicles are accounted for under Canadian GAAP. As a result, when we transition to IFRS there will be no change in the accounting treatment of our Canadian customer securitization vehicles.
We expect to complete our assessment of other less significant VIE's in the fourth quarter of 2011.
Information on all our VIEs, including total assets, our exposure to loss and our assessment of the consolidation requirement under Canadian GAAP, is included in Note 9 on page 128 of the consolidated financial statements in our 2010 Annual Report.
Accumulated other Comprehensive Loss on Translation of Foreign Operations
On transition to IFRS, we can either recalculate translation differences on an IFRS basis as through we had always applied the IFRS requirements or reset the accumulated other comprehensive loss on translation of net foreign operations to zero. We expect to elect to reset our accumulated other comprehensive loss on translation of net foreign operations to zero.
Acquisition of Marshall & Ilsley Corporation (M&I)
Under Canadian GAAP, the M&I purchase price is based on an average of the market price of the shares over a reasonable period before and after the date the terms of the acquisition are agreed to and announced. Under IFRS, the purchase price will be based on the market price of the shares at the closing date of the transaction. Additionally acquisition costs are capitalized under Canadian GAAP and classified as goodwill. IFRS requires acquisition costs to be expensed. When we transition to IFRS in fiscal 2012, we will restate the acquisition of M&I and reflect these differences in our comparative year. We do not expect these differences will have a significant impact on our comparative year financial results.
Quantification of the impact of certain key differences
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 continue to assess 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. The change to overdraft fees as a result of Regulation E came into effect in the summer of 2010, and is now included in our results. The reductions to interchange fees under Dodd-Frank will be effective on October 1, 2011. The reductions are expected to lower P&C U.S. pre-tax income on an annual basis by approximately US$40 million, after mitigating management actions. We also 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.
Summary Quarterly Results Trends (Canadian $ in millions, except Q3 Q2 Q1 Q4 Q3 Q2 Q1 Q4 as noted) 2011 2011 2011 2010 2010 2010 2010 2009 --------------------------------------------------------------------------- Total revenue 3,274 3,217 3,346 3,229 2,907 3,049 3,025 2,989 Provision for credit losses - specific 174 187 248 253 214 249 333 386 Provision for (recovery of) credit losses - general - (42) - - - - - - Non-interest expense 2,111 2,023 2,046 2,023 1,898 1,830 1,839 1,779 Net income 793 800 776 739 669 745 657 647 Adjusted net income 843 804 784 748 678 752 664 690 --------------------------------------------------------------------------- --------------------------------------------------------------------------- Basic earnings per share ($) 1.28 1.35 1.31 1.25 1.13 1.27 1.12 1.12 Diluted earnings per share ($) 1.27 1.34 1.30 1.24 1.13 1.26 1.12 1.11 Adjusted diluted earnings per share ($) 1.36 1.35 1.32 1.26 1.14 1.28 1.13 1.18 Net interest margin on earning assets (%) 1.78 1.89 1.82 1.89 1.88 1.88 1.85 1.73 Effective income tax rate (%) 18.0 22.0 24.5 20.6 13.4 21.4 20.8 19.2 Canadian/U.S. dollar exchange rate (average) 0.96 0.96 1.01 1.04 1.05 1.03 1.06 1.08 Net income: P&C Canada 432 402 443 418 424 395 403 402 P&C U.S. 92 53 54 46 52 55 61 59 --------------------------------------------------------------------------- Personal and Commercial Banking 524 455 497 464 476 450 464 461 Private Client Group 120 101 153 129 105 115 111 106 BMO Capital Markets 279 235 257 214 130 260 212 259 Corporate Services, including T&O (130) 9 (131) (68) (42) (80) (130) (179) --------------------------------------------------------------------------- BMO Financial Group 793 800 776 739 669 745 657 647 --------------------------------------------------------------------------- --------------------------------------------------------------------------- Prior periods have been restated to give effect to the current periods' organizational structure; see Review of Operating Groups' Performance.
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 fourth quarter of fiscal 2009 through the third 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. Adjusted earnings growth has been stronger and more sustained. Expenses have been growing, reflecting acquisitions, initiative spending and business growth. Current quarter results include the impact of the acquisition of M&I, which reduced net income by $10 million, and increased revenue by $117 million and expenses by $137 million, including $53 million of integration costs. The acquisition improved results in P&C U.S. substantially and Private Client Group modestly.
P&C Canada benefited from strong volume growth in 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. Current period net income has increased but revenue and expense growth are moderating. 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. Results in 2010 were also affected by acquisition integration costs and the economic environment that year 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. Good results in the current quarter were augmented by the addition of M&I, which increased net income in P&C U.S. by US$27 million. As explained in the introduction to the Review of Operating Groups' Performance section, during the quarter certain impaired real estate secured assets were transferred to Corporate Services. Prior period loan balances, revenues and expenses have been restated to reflect the transfer.
Private Client Group results in recent quarters reflected growth in most businesses. Included in the current quarter is one month of earnings from the wealth businesses relating to the M&I acquisition, as well as a full quarter of earnings from the LGM acquisition. Results in the insurance business in the prior quarter were impacted by unusually high reinsurance claims of $47 million after tax related to the earthquakes in Japan and New Zealand.
BMO Capital Markets results in 2010 varied by quarter, with strong results in the second quarter and particularly weak net income in the third quarter. First quarter 2011 results were particularly strong, while second quarter results returned to more normal levels and third quarter results benefited from tax recoveries related to prior periods.
Corporate Services results showed continued improvement throughout 2010 due to decreased provisions for credit losses and better revenues. Results in the second quarter of 2011 benefited from reduced provisions for credit losses, including a $42 million reduction in the general allowance, and higher revenues. Results in the current quarter reflect lower interest on the settlement of certain income tax matters, lower revenues primarily due to the impact of the M&I acquisition and lower securitization-related revenues largely related to a credit card securitization in the second quarter. Results also reflect $53 million of integration costs in respect of M&I.
The effective income tax rate can vary as it depends on the timing of resolution of certain tax matters, recoveries of prior periods' income taxes and the relative proportion of earnings attributable to the different jurisdictions in which we operate.
The U.S. dollar has generally weakened over the past two years. A weaker U.S. dollar lowers the translated values of BMO's U.S.-dollar-denominated revenues and expenses.
Review of Operating Groups' Performance
Operating Groups' Summary Income Statements and Statistics for Q3-2011
Q3-2011
--------------------------------------------
Corporate
(Canadian $ in millions, including Total
except as noted) P&C PCG BMO CM T&O BMO
---------------------------------------------------------------------------
Net interest income (teb)(1) 1,500 111 318 (237) 1,692
Non-interest revenue 517 506 519 40 1,582
---------------------------------------------------------------------------
Total revenue (teb)(1) 2,017 617 837 (197) 3,274
Provision for credit losses 189 2 30 (47) 174
Non-interest expense 1,086 461 458 106 2,111
---------------------------------------------------------------------------
Income before income taxes
and non-controlling interest
in subsidiaries 742 154 349 (256) 989
Income taxes
(recovery)(teb)(1) 218 34 70 (144) 178
Non-controlling interest in
subsidiaries - - - 18 18
---------------------------------------------------------------------------
Net income Q3-2011 524 120 279 (130) 793
---------------------------------------------------------------------------
Net income Q2-2011 455 101 235 9 800
---------------------------------------------------------------------------
Net income Q3-2010 476 105 130 (42) 669
---------------------------------------------------------------------------
---------------------------------------------------------------------------
Other statistics
---------------------------------------------------------------------------
Net economic profit 288 81 157 (300) 226
Return on equity 23.5% 32.0% 25.5% nm 14.7%
Operating leverage 2.2% (0.5%) 14.6% nm 1.5%
Productivity ratio (teb) 53.8% 74.7% 54.7% nm 64.5%
Net interest margin on
earning assets (teb) 3.21% 2.89% 0.73% nm 1.78%
Average common equity 8,486 1,462 4,138 6,304 20,390
Average earning assets ($
billions) 185.3 15.2 172.3 3.4 376.1
Full-time equivalent
employees 25,010 6,539 2,188 13,878 47,615
---------------------------------------------------------------------------
---------------------------------------------------------------------------
YTD-2011
--------------------------------------------
Corporate
(Canadian $ in millions, including Total
except as noted) P&C PCG BMO CM T&O BMO
---------------------------------------------------------------------------
Net interest income (teb)(1) 4,244 322 951 (578) 4,939
Non-interest revenue 1,486 1,538 1,685 189 4,898
---------------------------------------------------------------------------
Total revenue (teb)(1) 5,730 1,860 2,636 (389) 9,837
Provision for credit losses 533 6 90 (62) 567
Non-interest expense 3,110 1,357 1,419 294 6,180
---------------------------------------------------------------------------
Income before income taxes
and non-controlling interest
in subsidiaries 2,087 497 1,127 (621) 3,090
Income taxes
(recovery)(teb)(1) 611 123 356 (423) 667
Non-controlling interest in
subsidiaries - - - 54 54
---------------------------------------------------------------------------
Net income Q3-2011 1,476 374 771 (252) 2,369
---------------------------------------------------------------------------
Net income Q2-2011
---------------------------------------------------------------------------
Net income Q3-2010 1,390 331 602 (252) 2,071
---------------------------------------------------------------------------
---------------------------------------------------------------------------
Other statistics
---------------------------------------------------------------------------
Net economic profit 838 270 398 (732) 774
Return on equity 24.8% 37.3% 22.9% nm 15.7%
Operating leverage (0.4%) 0.3% 3.7% nm (1.5%)
Productivity ratio (teb) 54.3% 73.0% 53.8% nm 62.8%
Net interest margin on
earning assets (teb) 3.19% 2.97% 0.76% nm 1.83%
Average common equity 7,640 1,320 4,278 6,076 19,314
Average earning assets ($
billions) 177.9 14.5 166.4 1.9 360.7
---------------------------------------------------------------------------
---------------------------------------------------------------------------
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, 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 third 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.
During the quarter, approximately US$1.0 billion of impaired real estate secured assets, comprised primarily of commercial real estate loans, were transferred to Corporate Services from P&C U.S. to allow our businesses to focus on ongoing customer relationships and leverage our risk management expertise in our special assets management unit. Prior period loan balances, revenues and expenses have been restated to reflect the transfer. Approximately US$1.5 billion of similar assets acquired in the M&I transaction have also been included in Corporate Services.
As explained in the Acquisition of Marshall & Ilsley Corporation section, during the quarter we acquired M&I. M&I's activities are primarily reflected in our P&C U.S., PCG and Corporate Services segments, with a small amount included in BMO Capital Markets.
Loans acquired in connection with the M&I acquisition were recorded at fair value at the date of acquisition and as a result no allowance for credit losses has been recorded on these loans. The fair value of the purchased portfolio of $29.2 billion included a write-down for estimated future losses of $3.3 billion (excluding a write-down for commitments and letters of credit). As the purchased portfolio was written down at acquisition to the amount expected to be collected, the purchased loans are not included in gross impaired loans. We expect to recover the fair value (or new carrying amount) of the purchased portfolio.
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. We have included expected losses in P&C US for the M&I loan portfolio on the same basis as expected losses are determined for other loans in P&C U.S.
Personal and Commercial Banking (P&C)
Increase Increase
(Canadian $ in millions, (Decrease) (Decrease)
except as noted) Q3-2011 vs. Q3-2010 vs. Q2-2011
---------------------------------------------------------------------------
Net interest income (teb) 1,500 158 12% 157 12%
Non-interest revenue 517 6 1% 38 8%
---------------------------------------------------------------------------
Total revenue (teb) 2,017 164 9% 195 11%
Provision for credit losses 189 29 18% 18 10%
Non-interest expense 1,086 69 7% 79 8%
---------------------------------------------------------------------------
Income before income taxes 742 66 10% 98 16%
Income taxes (teb) 218 18 9% 29 16%
---------------------------------------------------------------------------
Net income 524 48 10% 69 15%
---------------------------------------------------------------------------
---------------------------------------------------------------------------
Return on equity 23.5% (5.5%) (1.6%)
Operating leverage 2.2% nm nm
Productivity ratio (teb) 53.8% (1.1%) (1.5%)
Net interest margin on earning
assets (teb) 3.21% 0.11% 0.04%
Average earning assets
($ billions) 185.3 13.5 8% 11.4 7%
---------------------------------------------------------------------------
---------------------------------------------------------------------------
Increase
(Canadian $ in millions, (Decrease)
except as noted) YTD-2011 vs. YTD-2010
------------------------------------------------------------
Net interest income (teb) 4,244 362 9%
Non-interest revenue 1,486 4 -
------------------------------------------------------------
Total revenue (teb) 5,730 366 7%
Provision for credit losses 533 70 15%
Non-interest expense 3,110 208 7%
------------------------------------------------------------
Income before income taxes 2,087 88 4%
Income taxes (teb) 611 2 -
------------------------------------------------------------
Net income 1,476 86 6%
------------------------------------------------------------
------------------------------------------------------------
Return on equity 24.8% (3.4%)
Operating leverage (0.4%) nm
Productivity ratio (teb) 54.3% 0.2%
Net interest margin on earning
assets (teb) 3.19% 0.13%
Average earning assets
($ billions) 177.9 8.6 5%
------------------------------------------------------------
------------------------------------------------------------
nm - not meaningful
Personal and Commercial Banking (P&C) 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) Q3-2011 vs. Q3-2010 vs. Q2-2011
---------------------------------------------------------------------------
Net interest income (teb) 1,103 39 4% 45 4%
Non-interest revenue 424 (1) - 8 2%
----------------------------------------------------------------------------
Total revenue (teb) 1,527 38 3% 53 4%
Provision for credit losses 137 8 6% 1 -
Non-interest expense 788 23 3% 10 1%
---------------------------------------------------------------------------
Income before income taxes 602 7 1% 42 8%
Income taxes (teb) 170 (1) (1%) 12 8%
---------------------------------------------------------------------------
Net income 432 8 2% 30 8%
---------------------------------------------------------------------------
---------------------------------------------------------------------------
Personal revenue 951 23 3% 31 3%
Commercial revenue 576 15 3% 22 4%
Operating leverage (0.5%) nm nm
Productivity ratio (teb) 51.6% 0.3% (1.2%)
Net interest margin on earning
assets (teb) 2.92% (0.04%) (0.01%)
Average earning assets
($ billions) 149.7 7.0 5% 1.5 1%
---------------------------------------------------------------------------
---------------------------------------------------------------------------
Increase
(Canadian $ in millions, (Decrease)
except as noted) YTD-2011 vs. YTD-2010
------------------------------------------------------------
Net interest income (teb) 3,270 197 6%
Non-interest revenue 1,260 23 2%
------------------------------------------------------------
Total revenue (teb) 4,530 220 5%
Provision for credit losses 409 39 11%
Non-interest expense 2,340 143 7%
------------------------------------------------------------
Income before income taxes 1,781 38 2%
Income taxes (teb) 504 (17) (3%)
------------------------------------------------------------
Net income 1,277 55 5%
------------------------------------------------------------
------------------------------------------------------------
Personal revenue 2,827 124 5%
Commercial revenue 1,703 96 6%
Operating leverage (1.4%) nm
Productivity ratio (teb) 51.7% 0.7%
Net interest margin on earning
assets (teb) 2.95% 0.01%
Average earning assets
($ billions) 148.1 8.3 6%
------------------------------------------------------------
------------------------------------------------------------
nm - not meaningful
Q3 2011 vs Q3 2010
P&C Canada net income was $432 million, up $8 million or 1.8% from a year ago. Reported results reflect provisions for credit losses in BMO's operating groups on an expected loss basis. Net income increased $19 million or 4.9% on a basis that adjusts reported results to reflect provisions on an actual loss basis.
Revenue increased $38 million or 2.5%, with volume growth across most products partially offset by a lower net interest margin. Net interest margin decreased 4 basis points, driven by lower deposit spreads in a low interest environment.
In the personal banking segment, revenue increased $23 million or 2.5%. Volume growth in both loans and deposits was partially offset by lower deposits spread in the low rate environment. Total personal lending balances (including mortgages, Homeowner ReadiLine and other consumer lending products) increased 5.7% year over year. Total personal lending market share was unchanged year over year. 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.
Personal cards loan balances increased 0.9% while market share decreased year over year.
Personal deposit balances increased 0.5% year over year with an increase in retail operating deposits and a reduction in term deposits. Market share for both retail operating deposits and term deposits decreased year over year in the highly competitive environment.
In the commercial banking segment, revenue increased $15 million or 2.5% year over year. The effects of volume growth, favourable product mix and higher activity fees were partially offset by lower spread in commercial deposits and lower cards revenue.
Commercial loan balances grew 4.5% and our market share remained stable year over year. We continue to rank second in Canadian business banking market share of small and mid-sized business loans.
Commercial cards balances decreased 3.6%, primarily due to attrition in Diners Club North American franchise balances, as expected.
Commercial deposit balances grew 10.2%. We continue to invest in the size and capabilities of our commercial workforce to deepen our relationships and provide better advice to our customers.
Provisions for credit losses on an expected loss basis increased $8 million or 6.1% due to growth in the portfolio.
Non-interest expense increased $23 million or 3.0% due to increased initiative spending and growth in the sales force, partially offset by the benefit of a sales tax recovery. The group's operating leverage was negative 0.5%, as we continue to invest strategically to improve our competitive position while managing expenses prudently.
Average current loans and acceptances, including securitized loans, increased $7.3 billion or 5.1% from a year ago and personal and commercial deposits grew $3.7 billion or 3.7%.
Q3 2011 vs Q2 2011
Net income increased $30 million or 7.9% as revenue growth outpaced expense growth.
Revenue increased $53 million or 3.6%, driven by volume growth across most products and the impact of more days in the current quarter. Net interest margin decreased 1 basis point due to lower mortgage refinancing fees.
Non-interest expense increased $10 million or 1.1%, primarily due to higher employee costs and the impact of more days in the quarter, partially offset by the benefit of the sales tax recovery.
Average current loans and acceptances, including securitized loans, increased $1.7 billion or 1.1% from the preceding quarter, while personal and commercial deposits increased $2.0 billion or 2.0%.
Q3 YTD 2011 vs Q3 YTD 2010
Net income increased $55 million or 4.5% to $1,277 million.
Revenue increased $220 million or 5.1%, driven by volume growth, higher mutual funds revenue and the inclusion of two more months of results of the Diners Club business in the current year. Net interest margin improved by 1 basis point primarily due to favourable spread in lending products, partially offset by lower spread in deposits.
Non-interest expense increased $143 million or 6.5%, primarily due to increases in initiative spending, growth in the sales force and the inclusion of two more months of results of the Diners Club North American franchise business in the current year.
Average current loans and acceptances, including securitized loans, increased $8.7 billion or 6.2%, while personal and commercial deposits increased $3.2 billion or 3.3%.
Personal and Commercial Banking U.S. (P&C U.S.)
Increase Increase
(Canadian $ in millions, (Decrease) (Decrease)
except as noted) Q3-2011 vs. Q3-2010 vs. Q2-2011
---------------------------------------------------------------------------
Net interest income (teb) 397 119 43% 112 40%
Non-interest revenue 93 7 9% 30 47&
---------------------------------------------------------------------------
Total revenue (teb) 490 126 35% 142 41%
Provision for credit losses 52 21 71% 17 50%
Non-interest expense 298 46 18% 69 30%
---------------------------------------------------------------------------
Income before income taxes 140 59 75% 56 66%
Income taxes (teb) 48 19 69% 17 57%
---------------------------------------------------------------------------
Net income 92 40 79% 39 72%
---------------------------------------------------------------------------
---------------------------------------------------------------------------
Operating leverage 17.0% nm nm
Productivity ratio (teb) 60.8% (8.7%) (5.0%)
Net interest margin on earning
assets (teb) 4.47% 0.66% -
Average earning assets
($ billions) 35.6 6.5 22% 9.8 38%
---------------------------------------------------------------------------
---------------------------------------------------------------------------
U.S. Select Financial Data (US$
in millions, except as noted)
Net interest income (teb) 413 148 56% 117 40%
Non-interest revenue 96 15 18% 31 47%
---------------------------------------------------------------------------
Total revenue (teb) 509 163 47% 148 41%
Non-interest expense 310 69 29% 72 30%
Net Income 95 45 94% 40 72%
Average earning assets
(US$ billions) 37.1 9.2 33% 10.3 38%
---------------------------------------------------------------------------
---------------------------------------------------------------------------
Increase
(Canadian $ in millions, (Decrease)
except as noted) YTD-2011 vs. YTD-2010
------------------------------------------------------------
Net interest income (teb) 974 165 20%
Non-interest revenue 226 (19) (8%)
------------------------------------------------------------
Total revenue (teb) 1,200 146 14%
Provision for credit losses 124 31 34%
Non-interest expense 770 65 9%
------------------------------------------------------------
Income before income taxes 306 50 20%
Income taxes (teb) 107 19 22%
------------------------------------------------------------
Net income 199 31 19%
------------------------------------------------------------
------------------------------------------------------------
Operating leverage 4.7% nm
Productivity ratio (teb) 64.1% (2.8%)
Net interest margin on earning
assets (teb) 4.38% 0.72%
Average earning assets
($ billions) 29.7 0.2 1%
------------------------------------------------------------
------------------------------------------------------------
U.S. Select Financial Data (US$
in millions, except as noted)
Net interest income (teb) 999 225 29%
Non-interest revenue 231 (3) (1%)
------------------------------------------------------------
Total revenue (teb) 1,230 222 22%
Non-interest expense 789 114 17%
Net Income 204 43 27%
Average earning assets
(US$ billions) 30.5 2.2 8%
------------------------------------------------------------
------------------------------------------------------------
nm - not meaningful
Q3 2011 vs Q3 2010
Net income of Cdn$92 million increased Cdn$40 million or 79%. Amounts in the rest of this section are in U.S dollars. Net income of $95 million increased $45 million from $50 million a year ago, with the M&I business contributing $27 million of the increase. The inclusion of the acquired M&I business increased revenue by $135 million, the provision for credit losses by $18 million, reflecting expected loss provisions based on BMO's expected loss methodologies, and expense by $75 million.
As explained more fully in the preceding introduction to the Review of Operating Groups' Performance section, during the quarter certain impaired real estate secured assets were transferred to Corporate Services. Prior period loan balances, revenues and expenses have been restated to reflect the transfer.
Excluding the M&I business, net income increased $18 million or 39%, primarily due to increased revenues driven in part by higher net interest margins and increased securities gains. Higher provisions for credit losses under BMO's expected loss provisioning methodology were offset by lower expenses.
Revenue of $509 million increased $163 million or 47%. Adjusting for the impact of the M&I business, revenue increased by $28 million or 8.1%, primarily due to increased loan spreads as a result of a favourable change in mix of loan balances, and higher deposit balances and securities gains, partially offset by lower fee revenue.
Excluding M&I, net interest margin of 4.53% increased 72 basis points, primarily due to improved loan spreads as a result of the favourable change in mix of loan balances and higher deposit balances.
Non-interest expense of $310 million was $69 million or 29% higher primarily due to the addition of M&I. Excluding M&I, expenses were down $6 million or 2.5% from a year ago, primarily due to a valuation adjustment on our serviced mortgage portfolio recognized in the prior year.
Average current loans and acceptances of $33.7 billion increased $9.1 billion or 37% year over year. Average deposits of $37.9 billion increased $12.0 billion or 46% year over year. For both loans and deposits, the M&I balances are included in the average balances for one third of the quarter, due to the timing of the closing of the acquisition.
Q3 2011 vs Q2 2011
Net income increased Cdn$39 million or 72% from the prior quarter. Amounts in the rest of this section are stated in U.S. dollars. Net income increased $40 million or 72% from the prior quarter as results reflected the $27 million impact of M&I and higher revenue.
Revenue increased $148 million or 41%, primarily due to the addition of M&I and higher securities gains.
Excluding M&I, net interest margin increased 6 basis points as a result of improved loan spreads due to a continuation of the favourable change in the mix of loan balances and increased deposit balances, partially offset by reduced spreads on deposits.
Non-interest expense increased $72 million or 30%, primarily due to the M&I acquisition. Excluding M&I, expenses decreased $3 million or 1.1%.
Average current loans and acceptances increased $10.0 billion from the preceding quarter, while average deposits increased $10.9 billion. For both loans and deposits, the increases relate primarily to the inclusion of M&I balances for approximately one month.
Q3 YTD 2011 vs Q3 YTD 2010
Net income increased Cdn$31 million or 19% from the prior year to Cdn$199 million. Amounts in the rest of this section are stated in U.S. dollars. Net income was $204 million, up $43 million or 27% from the prior year.
The M&I business increased revenue, expense and net income as outlined above. In addition, the acquired assets and liabilities on the April 2010 Rockford transaction increased revenue by $28 million and expense by $27 million relative to the comparable period in 2010.
Revenue of $1,230 million was $222 million or 22% higher. Adjusting for the impact of M&I and the Rockford transaction, revenue increased $59 million or 6.4%, primarily driven by loan spread improvement as a result of the favourable change in the mix of loan balances and higher deposit balances and securities gains, partially offset by lower fee revenue.
Excluding M&I, net interest margin of 4.39% increased 73 basis points primarily due to improved loan spreads, as discussed above, and higher deposit balances.
Provisions for credit losses, on an expected loss basis, increased $38 million or 43%, primarily due to higher expected losses on commercial loans and M&I.
Non-interest expense of $789 million increased $114 million or 17%. Adjusting for the impact of M&I and the Rockford transaction, expenses increased $12 million or 1.8%. The increase was primarily due to higher incentives related to the improved financial results and increases in advertising costs and deposit insurance premiums.
Average current loans and acceptances of $27.3 billion increased $2.5 billion or 10% year over year, primarily due to M&I. Average deposits of $30.8 billion increased $6.2 billion or 25% year over year, with $3.2 billion due to M&I, $1.2 billion due to the Rockford acquisition and $1.8 billion due to organic growth.
Private Client Group (PCG)
Increase Increase
(Canadian $ in millions, (Decrease) (Decrease)
except as noted) Q3-2011 vs. Q3-2010 vs. Q2-2011
---------------------------------------------------------------------------
Net interest income (teb) 111 19 20% 3 3%
Non-interest revenue 506 54 12% 32 7%
---------------------------------------------------------------------------
Total revenue (teb) 617 73 13% 35 6%
Provision for credit losses 2 1 35% - -
Non-interest expense 461 57 14% 24 6%
---------------------------------------------------------------------------
Income before income taxes 154 15 12% 11 7%
Income taxes (teb) 34 - - (8) (22%)
---------------------------------------------------------------------------
Net income 120 15 14% 19 19%
---------------------------------------------------------------------------
---------------------------------------------------------------------------
Return on equity 32.0% (2.1%) (0.5%)
Operating leverage (0.5%) nm nm
Productivity ratio (teb) 74.7% 0.3% (0.3%)
Net interest margin on earning
assets (teb) 2.89% 0.12% (0.21%)
Average earning assets 15,216 1,942 15% 916 6%
---------------------------------------------------------------------------
---------------------------------------------------------------------------
U.S. Select Financial Data (US$
in millions, except as noted)
Total revenue (teb) 102 42 70% 35 51%
Non-interest expense 79 28 55% 23 41%
Net income 13 9 +100% 7 +100%
Average earning assets 2,219 166 8% 312 16%
---------------------------------------------------------------------------
---------------------------------------------------------------------------
Increase
(Canadian $ in millions, (Decrease)
except as noted) YTD-2011 vs. YTD-2010
------------------------------------------------------------
Net interest income (teb) 322 56 21%
Non-interest revenue 1,538 152 11%
------------------------------------------------------------
Total revenue (teb) 1,860 208 13%
Provision for credit losses 6 1 16%
Non-interest expense 1,357 149 12%
------------------------------------------------------------
Income before income taxes 497 58 13%
Income taxes (teb) 123 15 16%
------------------------------------------------------------
Net income 374 43 13%
------------------------------------------------------------
------------------------------------------------------------
Return on equity 37.3% 2.2%
Operating leverage 0.3% nm
Productivity ratio (teb) 73.0% (0.2%)
Net interest margin on earning
assets (teb) 2.97% 0.18%
Average earning assets 14,489 1,730 14%
------------------------------------------------------------
------------------------------------------------------------
U.S. Select Financial Data (US$
in millions, except as noted)
Total revenue (teb) 233 52 29%
Non-interest expense 193 34 21%
Net income 23 11 91%
Average earning assets 2,019 (81) (4%)
---------------------------------------------------------------
---------------------------------------------------------------
nm - not meaningful
Q3 2011 vs Q3 2010
Net income was $120 million, up $15 million or 14% from the same quarter a year ago. Private Client Group net income, excluding the insurance business, increased $30 million or 43% to $101 million as we continue to see growth across all these businesses. Included in the current quarter is one month of earnings from the wealth businesses relating to the M&I acquisition that added US$4 million of net income, US$31 million of revenue and US$25 million of expense. As well, the current quarter includes earnings from the Lloyd George Management (LGM) acquisition that was completed on April 28, 2011, adding $9 million to both revenue and expense while having minimal effect on our net income. Insurance net income was $19 million for the quarter, down $15 million or 45% from a year ago, primarily due to the adverse effect of unfavourable long-term interest rate movements on policyholder liabilities relative to the prior year.
Revenue was $617 million, up $73 million or 13% from the prior year. PCG revenue, excluding insurance, grew 20% or 12% adjusting for the impact of the M&I and LGM businesses as we continue to see improvement in client assets under management and administration. Revenue from the insurance business was down primarily due to the adverse effect of unfavourable long-term interest rate movements. Net interest income grew from the prior year primarily due to higher deposit spreads in our brokerage businesses, higher loan and deposit balances in private banking, and the M&I acquisition. The weaker U.S. dollar lowered revenue by $10 million or 1.8%.
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 expenses from the acquisitions. After adjusting for the impact of the M&I and LGM businesses, non-interest expense growth was $24 million or 5.7%. The weaker U.S. dollar reduced expenses by $7 million or 1.8%.
Assets under management and administration improved by $177 billion to $429 billion as the M&I and LGM acquisitions brought $153 billion in client assets to our business. Assets in our U.S. wealth business increased from US$77 billion to US$239 billion. On a basis that excludes the impact of the M&I and LGM acquisitions and the weaker U.S. dollar, assets under management and administration grew $30 billion or 12% from a year ago as a result of attracting new client assets and improved equity market conditions.
Q3 2011 vs Q2 2011
Net income improved $19 million or 19% from the second quarter. PCG net income, excluding the insurance business, was up $1 million or 1.0% as the benefit from the M&I acquisition was mostly offset by lower brokerage revenue. Insurance net income was up $18 million, as the prior quarter included unusually high reinsurance claims from the earthquakes in Japan and New Zealand that reduced net income by $47 million. This impact was partly offset by the adverse effect of unfavourable long-term interest rate movements on policyholder liabilities relative to the prior quarter.
Revenue increased $35 million or 5.9%. PCG revenue excluding insurance increased 5% but decreased 2.1% adjusting for the impact of the M&I and LGM businesses, primarily due to lower revenue in brokerage businesses due to lower trading volumes, partially offset by higher mutual fund and private banking revenue. Insurance revenue improved, as the prior quarter included earthquake-related reinsurance claims that lowered revenue by $50 million, partly offset by the adverse effect of unfavourable long-term interest rate movements on policyholder liabilities relative to the second quarter. Net interest income increased relative to the prior quarter primarily due to the M&I acquisition.
Non-interest expense increased $24 million or 5.5% primarily due to the impact of the acquisitions. After adjusting for the impact of the M&I and LGM businesses, non-interest expenses were lower by $9 million or 2% primarily due to lower revenue in the brokerage businesses, in line with lower trading volumes.
Assets under management and administration increased by $145 billion, but declined by $4 billion if adjusted to exclude the impacts of the LGM and M&I acquisitions and the weaker U.S. dollar.
Q3 YTD 2011 vs Q3 YTD 2010
Net income increased $43 million or 13% from the prior year. PCG net income, excluding the insurance business, was up $73 million or 35% with growth in all of our underlying businesses. The M&I acquisition also contributed to growth. Insurance net income was down $30 million or 25% as growth in net premium revenue was more than offset by the earthquake-related reinsurance claims and the adverse effect of unfavourable long-term interest rate movements on policyholder liabilities relative to the same period a year ago.
Revenue increased $208 million or 13%. Revenue in PCG, excluding insurance, increased 17%, or 14% adjusting for the impact of the M&I and LGM acquisitions, with growth in all of our businesses, particularly in brokerage and private banking. Insurance revenue declined as growth in net premium revenues was more than offset by the earthquake-related reinsurance claims and the adverse effect of unfavourable long-term interest rate movements relative to the same period a year ago. Net interest income grew, largely due to higher deposit spreads in the brokerage businesses and higher loan and deposit balances in private banking. The weaker U.S. dollar lowered revenue by $18 million or 1.1%.
Non-interest expense increased $149 million or 12%, primarily due to higher revenue-based costs associated with the revenue growth in PCG excluding insurance, and selective investments to benefit future revenue growth. After adjusting for the impact of the LGM and M&I businesses, non-interest expense growth would be $116 million or 10%. The weaker U.S. dollar reduced expenses by $14 million or 1.1%.
BMO Capital Markets (BMO CM)
Increase Increase
(Canadian $ in millions, (Decrease) (Decrease)
except as noted) Q3-2011 vs. Q3-2010 vs. Q2-2011
---------------------------------------------------------------------------
Net interest income (teb) 318 (35) (10%) 21 7%
Non-interest revenue 519 193 59% (20) (4%)
---------------------------------------------------------------------------
Total revenue (teb) 837 158 23% 1 -
Provision for credit losses 30 (36) (55%) - -
Non-interest expense 458 36 8% (10) (2%)
---------------------------------------------------------------------------
Income before income taxes 349 158 82% 11 3%
Income taxes (teb) 70 9 14% (33) (31%)
---------------------------------------------------------------------------
Net income 279 149 +100% 44 19%
---------------------------------------------------------------------------
---------------------------------------------------------------------------
Trading Products revenue 508 112 28% 22 5%
Investment and Corporate Banking
revenue 329 46 16% (21) (6%)
Return on equity 25.5% 13.7% 4.1%
Operating leverage 14.6% nm nm
Productivity ratio (teb) 54.7% (7.3%) (1.3%)
Net interest margin on earning
assets (teb) 0.73% (0.22%) (0.03%)
Average earning assets
($ billions) 172.3 24.0 16% 11.2 7%
---------------------------------------------------------------------------
---------------------------------------------------------------------------
U.S. Select Financial Data (US$
in millions, except as noted)
Total revenue (teb) 260 30 13% 9 4%
Non-interest expense 196 25 15% 1 1%
Net Income 33 23 +100% 8 30%
Average earning assets
(US$ billions) 64.4 15.5 32% 9.7 18%
---------------------------------------------------------------------------
---------------------------------------------------------------------------
Increase
(Canadian $ in millions, (Decrease)
except as noted) YTD-2011 vs. YTD-2010
------------------------------------------------------------
Net interest income (teb) 951 (143) (13%)
Non-interest revenue 1,685 337 25%
------------------------------------------------------------
Total revenue (teb) 2,636 194 8%
Provision for credit losses 90 (108) (55%)
Non-interest expense 1,419 57 4%
------------------------------------------------------------
Income before income taxes 1,127 245 28%
Income taxes (teb) 356 76 27%
------------------------------------------------------------
Net income 771 169 28%
------------------------------------------------------------
------------------------------------------------------------
Trading Products revenue 1,589 49 3%
Investment and Corporate Banking
revenue 1,047 145 16%
Return on equity 22.9% 4.6%
Operating leverage 3.7% nm
Productivity ratio (teb) 53.8% (1.9%)
Net interest margin on earning
assets (teb) 0.76% (0.20%)
Average earning assets
($ billions) 166.4 14.4 9%
------------------------------------------------------------
------------------------------------------------------------
U.S. Select Financial Data (US$
in millions, except as noted)
Total revenue (teb) 782 39 5%
Non-interest expense 586 67 13%
Net Income 39 (25) (39%)
Average earning assets
(US$ billions) 58.3 11.2 24%
------------------------------------------------------------
------------------------------------------------------------
nm - not meaningful
Q3 2011 vs Q3 2010
Net income was $279 million, up $149 million from the previous year. Revenue increased and there was a reduction in the provision for credit losses. Provisions for credit losses are charged to the groups on an expected loss basis.
Revenue increased $158 million or 23% to $837 million. The most significant increase was in trading revenues, which were higher largely due to the more favourable trading environment than in the prior year. Mergers and acquisitions fees were significantly higher than in the previous year. Securities commissions and equity underwriting fees also increased considerably over the prior year. The weaker U.S. dollar decreased revenue by $26 million relative to a year ago. Our strategy of building out our distribution platform and continuing to diversify our business is on track and contributing to our business performance.
Non-interest expense increased $36 million or 8.4% primarily due to higher variable compensation costs, in line with revenue performance, and our initiative to invest in strategic hiring across certain lines of business. The weaker U.S. dollar decreased expenses by $13 million relative to a year ago.
Results for the current period benefited from a recovery of prior periods' income taxes.
Q3 2011 vs Q2 2011
Net income increased $44 million or 19% from the second quarter. Revenue was relatively unchanged. There were increased mergers and acquisitions fees along with increased revenue from our interest-rate-sensitive businesses. There were reductions in net securities gains and debt underwriting fees.
Non-interest expense decreased by $10 million, primarily due to lower employee costs, offset in part by higher support costs.
Results for the current period benefited from a recovery of prior periods' income taxes.
Q3 YTD 2011 vs Q3 YTD 2010
Net income increased $169 million or 28% to $771 million.
Revenue increased $194 million or 8% due to increases in investment banking fees, securities commissions and revenues from our interest-rate-sensitive businesses. Although overall revenues improved from the prior year, trading revenue decreased primarily due to the very strong results in the first half of the prior year. Provisions for credit losses were lower than in the prior year.
Non-interest expense was $57 million or 4.2% higher than in the prior year mainly due to higher employee costs, as we continue to invest in strategic hiring across certain lines of business, and increased support costs.
Results for the current period included a provision for prior periods' income taxes in the U.S. segment in the first quarter of the year as well as a recovery of prior periods' income taxes in the third quarter.
Corporate Services, Including Technology and Operations
Increase Increase
(Canadian $ in millions, (Decrease) (Decrease)
except as noted) Q3-2011 vs. Q3-2010 vs. Q2-2011
---------------------------------------------------------------------------
Net interest income before teb
offset (182) (87) (89%) (107) (+100%)
Group teb offset (55) 66 55% (2) (4%)
---------------------------------------------------------------------------
Net interest income (teb) (237) (21) (9%) (109) (87%)
Non-interest revenue 40 (7) (16%) (65) (62%)
---------------------------------------------------------------------------
Total revenue (teb) (197) (28) (17%) (174) (+100%)
Provision for credit losses (47) (34) (+100%) 11 18%
Non-interest expense 106 51 93% (5) (4%)
---------------------------------------------------------------------------
Loss before income taxes and
non-controlling
interest in subsidiaries 256 45 22% 180 +100%
Income taxes recovery (teb) 144 (44) (23%) 41 40%
Non-controlling interest in
subsidiaries 18 (1) (2%) - -
---------------------------------------------------------------------------
Net loss 130 88 +100% 139 +100%
---------------------------------------------------------------------------
---------------------------------------------------------------------------
Adjusted net loss 92 50 +100% 97 +100%
U.S. Select Financial Data (US$
in millions, except as noted)
Total revenue (teb) (141) (78) (+100%) (106) (+100%)
Provision for credit losses 6 (12) (60%) (15) (65%)
Non-interest expense 51 49 +100% 8 14%
Income tax recovery (teb) 88 52 +100% 25 34%
Net loss 115 63 +100% 75 +100%
---------------------------------------------------------------------------
---------------------------------------------------------------------------
Increase
(Canadian $ in millions, (Decrease)
except as noted) YTD-2011 vs. YTD-2010
------------------------------------------------------------
Net interest income before teb
offset (409) (83) (25%)
Group teb offset (169) 122 42%
-----------------------------------------------------------
Net interest income (teb) (578) 39 6%
Non-interest revenue 189 49 34%
-----------------------------------------------------------
Total revenue (teb) (389) 88 18%
Provision for credit losses (62) (192) (+100%)
Non-interest expense 294 199 +100%
-----------------------------------------------------------
Loss before income taxes and
non-controlling
interest in subsidiaries 621 (81) (12%)
Income taxes recovery (teb) 423 (83) (16%)
Non-controlling interest in
subsidiaries 54 (2) (2%)
-----------------------------------------------------------
Net loss 252 - -
-----------------------------------------------------------
-----------------------------------------------------------
Adjusted net loss 219 (33) (13%)
U.S. Select Financial Data (US$
in millions, except as noted)
Total revenue (teb) (248) (126) (+100%)
Provision for credit losses 100 (60) (37%)
Non-interest expense 95 104 +100%
Income tax recovery (teb) 234 125 +100%
Net loss 223 45 25%
-----------------------------------------------------------
-----------------------------------------------------------
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, the impact of our expected loss provisioning methodology, the results from certain impaired loan portfolios, and the impact of certain fair value adjustments and integration costs relating to the acquisition of M&I.
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. See the Review of Operating Groups' Performance section for more details.
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 reported a net loss in the quarter of $130 million and an adjusted net loss of $92 million. The net loss includes a loss of $39 million in respect of M&I, essentially matching the $38 million after-tax costs of integration and hedging foreign currency risk on the purchase. Excluding those items, M&I's results were virtually break-even.
The rest of the discussion that follows excludes the impact of M&I. On that basis, Corporate Services net loss in the current quarter was $91 million, an increase of $49 million from the prior year. Revenues were $15 million better, primarily due to a lower group teb offset, partially offset by a less favourable impact year over year from hedging activities. Expenses were $12 million worse, mainly due to higher employee costs and technology investment spending. Provisions for credit losses were $16 million lower as a result of lower provisions charged to Corporate Services under BMO's expected loss provisioning methodology, and income taxes were $69 million higher primarily due to a lower group teb offset.
As explained more fully in the preceding introduction to the Review of Operating Groups' Performance section, during the quarter certain impaired real estate secured assets were transferred to Corporate Services from P&C U.S. As well, certain real estate secured assets acquired on the M&I transaction are included in Corporate Services.
Corporate Services net loss in the current quarter increased $139 million from the second quarter. As explained above, results for the current quarter include a loss of $39 million in respect of M&I and a loss of $1 million in respect of M&I after adjusting for the after-tax costs of integration and hedging foreign currency risk. M&I related results in the second quarter included a loss of $25 million which was comprised entirely of the after-tax costs of integration and hedging foreign currency risk that quarter. Excluding those items, there was no loss in respect of M&I related results in the second quarter, compared with a $1 million loss on that basis in the third quarter.
The discussion that follows excludes the impact of M&I. On that basis, Corporate Services net loss in the third quarter increased $125 million from the second quarter. Revenues were $142 million lower, largely due to lower interest on the settlement of certain income tax matters and lower securitization-related revenues largely related to a credit card securitization in the second quarter. Expenses were $19 million lower, primarily due to reduced technology investment spending, and provisions for credit losses were higher, largely due to a $42 million reduction in the general allowance in the second quarter.
The net loss for the year to date of $252 million was unchanged from the prior year. The rest of the discussion that follows excludes the impact of M&I. The net loss for the year to date was $188 million, a decrease of $64 million from the prior year. Revenues were $142 million higher, primarily driven by a lower group teb offset and higher interest on the settlement of certain income tax matters. Expenses were $135 million higher, largely due to an increase in employee costs, technology investment spending and costs related to the impaired loan portfolio. The provision for credit losses decreased by $174 million.
GAAP and Related Non-GAAP Results and Measures used in the MD&A (Canadian $ in millions, except as Q3 Q2 Q3 YTD YTD noted) 2011 2011 2010 2011 2010 ---------------------------------------------------------------------------- Reported Results Revenue 3,274 3,217 2,907 9,837 8,981 Non-interest expense (2,111)(2,023)(1,898) (6,180) (5,567) ---------------------------------------------------------------------------- Pre-provision, pre-tax earnings 1,163 1,194 1,009 3,657 3,414 Provision for credit losses (174) (145) (214) (567) (796) Provision for income taxes (178) (231) (107) (667) (491) Non-controlling interest in subsidiaries (18) (18) (19) (54) (56) ---------------------------------------------------------------------------- Net Income 793 800 669 2,369 2,071 ---------------------------------------------------------------------------- ---------------------------------------------------------------------------- Reported Measures EPS ($) 1.27 1.34 1.13 3.91 3.51 Net income growth (%) 18.5 7.5 20.1 14.4 81.7 EPS growth (%) 13.2 6.3 16.3 11.5 76.6 Revenue growth (%) 12.6 5.5 (2.4) 9.5 11.2 Non-interest expense growth (%) 11.1 10.5 1.4 11.0 (0.6) Productivity ratio (%) 64.5 62.9 65.3 62.8 62.0 Operating leverage (%) 1.5 (5.0) (3.8) (1.5) 11.8 Return on equity (%) 14.7 16.7 13.7 15.7 14.8 ---------------------------------------------------------------------------- ---------------------------------------------------------------------------- Adjusting Items Charges to net interest income Acquisition-related items - hedge of foreign currency risk on the purchase of M&I (9) (11) - (20) - Charges to non-interest expense Acquisition-related items - costs of M&I integration and integration planning (53) (25) - (78) - Amortization of acquisition-related intangible assets (17) (10) (10) (36) (26) Decrease in the general allowance for credit losses - 42 - 42 - Income tax benefit (charge) related to the above 29 - 1 30 3 After-tax impact of Adjusting Items Acquisition-related items - hedge of foreign currency risk on the purchase of M&I (6) (8) - (14) - Acquisition-related items - costs of M&I integration and integration planning (32) (17) - (49) - Amortization of acquisition-related intangible assets (12) (9) (9) (29) (23) Decrease in the general allowance for credit losses - 30 - 30 - ---------------------------------------------------------------------------- Net Income (50) (4) (9) (62) (23) EPS ($) (0.09) (0.01) (0.01) (0.11) (0.04) ---------------------------------------------------------------------------- ---------------------------------------------------------------------------- Adjusted Results (Note 1) Revenue 3,283 3,228 2,907 9,857 8,981 Non-interest expense (2,041)(1,988)(1,888) (6,066) (5,541) ---------------------------------------------------------------------------- Pre-provision, pre-tax earnings 1,242 1,240 1,019 3,791 3,440 Provision for credit losses (174) (187) (214) (609) (796) Provision for income taxes (207) (231) (108) (697) (494) Non-controlling interest in subsidiaries (18) (18) (19) (54) (56) ---------------------------------------------------------------------------- Net Income 843 804 678 2,431 2,094 ---------------------------------------------------------------------------- ---------------------------------------------------------------------------- Adjusted Measures (Note 1) EPS ($) 1.36 1.35 1.14 4.02 3.55 Net income growth (%) 24.4 6.9 11.1 16.1 30.2 EPS growth (%) 19.0 5.5 8.7 13.3 25.2 Revenue growth (%) 12.9 5.9 (2.6) 9.7 5.1 Non-interest expense growth (%) 8.0 9.2 1.5 9.5 (0.5) Productivity ratio (%) 62.2 61.6 65.0 61.5 61.7 Operating leverage (%) 4.9 (3.3) (4.1) 0.2 5.6 Return on equity (%) 15.6 16.8 13.9 16.1 14.9 ---------------------------------------------------------------------------- ---------------------------------------------------------------------------- Note 1: Adjusted results and measures are non-GAAP. All of the above adjusting items are charged to Corporate Services, except the amortization of acquisition-related intangible assets which applies to all groups.
Non-GAAP Measures
Results and measures in the MD&A are presented on a GAAP basis. They are also presented on an adjusted basis that excludes the impact of certain items as set out above. Management assesses performance on both a reported and adjusted basis and considers both bases to be useful in assessing underlying, ongoing business performance. Presenting results on both bases provides readers with an enhanced understanding of how management views results. It also permits readers to assess the impact of the specified items on results for the periods presented and to better assess results excluding those items if they consider the items to not be reflective of ongoing results. As such, the presentation may facilitate readers' analysis of trends as well as comparisons with our competitors. Adjusted results and measures are non-GAAP and as such do not have standardized meaning under GAAP. They are unlikely to be comparable to similar measures presented by other companies and should not be viewed in isolation from or as a substitute for GAAP results.
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, August 23, 2011, at 2:00 p.m. (EDT). 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 Monday, December 5, 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 Monday, December 5, 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
Michael Chase, Director, michael.chase@bmo.com, 416-867-5452
Andrew Chin, Senior Manager, andrew.chin@bmo.com, 416-867-7019
Chief Financial Officer
Tom Flynn, Executive Vice-President and CFO
tom.flynn@bmo.com, 416-867-4689
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
May 2011 $61.79 Shareholder Services
June 2011 $60.09 Corporate Secretary's Department
July 2011 $61.50 One First Canadian Place, 21st Floor
Toronto, Ontario M5X 1A1
For dividend information, change Telephone: (416) 867-6785
in shareholder address or to Fax: (416) 867-6793
advise of duplicate mailings, E-mail: corp.secretary@bmo.com
please contact
Computershare Trust Company of Canada For further information on this
100 University Avenue, 9th Floor report, please contact
Toronto, Ontario M5J 2Y1 Bank of Montreal
Telephone: 1-800-340-5021 Investor Relations Department
(Canada and the United States) P.O. Box 1, One First Canadian
Telephone: (514) 982-7800 Place, 18th Floor
(international) Toronto, Ontario M5X 1A1
Fax: 1-888-453-0330
(Canada and the United States) To review financial results online,
Fax: (416) 263-9394 please visit our website at
(international) www.bmo.com
E-mail: service@computershare.com
---------------------------------------------------------------------------
(R) Registered trademark of Bank of Montreal
Annual Meeting 2012
The next Annual Meeting of Shareholders will be held on Tuesday, March 20, 2012, in Halifax, Nova Scotia.
Financial Highlights
(Unaudited)
(Canadian $
in millions,
except as
noted) For the three months ended
---------------------------------------------------------------------------
Change
from
July April January October July July
31, 2011 30, 2011 31, 2011 31, 2010 31, 2010 31, 2010
---------------------------------------------------------------------------
Income
Statement
Highlights
Total revenue $ 3,274 $ 3,217 $ 3,346 $ 3,229 $ 2,907 12.6%
Provision for
credit losses 174 145 248 253 214 (18.7)
Non-interest
expense 2,111 2,023 2,046 2,023 1,898 11.1
Net income 793 800 776 739 669 18.5
Adjusted net
income 843 804 784 748 678 24.4
---------------------------------------------------------------------------
Net Income by
Operating Segment
Personal &
Commercial
Banking Canada $ 432 $ 402 $ 443 $ 418 $ 424 1.8%
Personal &
Commercial
Banking U.S. 92 53 54 46 52 78.6
Private Client
Group 120 101 153 129 105 14.0
BMO Capital
Markets 279 235 257 214 130 +100
Corporate
Services(a) (130) 9 (131) (68) (42) (+100)
---------------------------------------------------------------------------
Common Share
Data ($)
Diluted
earnings
per share $ 1.27 $ 1.34 $ 1.30 $ 1.24 $ 1.13 $ 0.14
Diluted
adjusted
earnings per
share(b) 1.36 1.35 1.32 1.26 1.14 0.22
Dividends
declared
per share 0.70 0.70 0.70 0.70 0.70 -
Book value
per share 37.89 34.22 34.21 34.09 33.13 4.76
Closing share
price 60.03 62.14 57.78 60.23 62.87 (2.84)
Total market
value of
common shares
($ billions) 38.3 35.4 32.8 34.1 35.4 2.9
---------------------------------------------------------------------------
For the nine months ended
----------------------------------------------
Change
from
July July July
31, 2011 31, 2010 31, 2010
----------------------------------------------
Income
Statement
Highlights
Total revenue $ 9,837 $ 8,981 9.5%
Provision for
credit losses 567 796 (28.8)
Non-interest
expense 6,180 5,567 11.0
Net income 2,369 2,071 14.4
Adjusted net
income 2,431 2,094 16.1
----------------------------------------------
Net Income by
Operating Segment
Personal &
Commercial
Banking Canada $ 1,277 $ 1,222 4.5%
Personal &
Commercial
Banking U.S. 199 168 18.6
Private Client
Group 374 331 12.7
BMO Capital
Markets 771 602 28.2
Corporate
Services(a) (252) (252) 0.2
----------------------------------------------
Common Share
Data ($)
Diluted earnings
per share $ 3.91 $ 3.51 $ 0.40
Diluted adjusted
earnings per
share(b) 4.02 3.55 0.47
Dividends
declared
per share 2.10 2.10 -
Book value
per share 37.89 33.13 4.76
Closing share
price 60.03 62.87 (2.84)
Total market
value of
common shares
($ billions) 38.3 35.4 2.9
----------------------------------------------
As at
---------------------------------------------------------------------------
Change
from
July April January October July July
31, 2011 30, 2011 31, 2011 31, 2010 31, 2010 31, 2010
---------------------------------------------------------------------------
Balance Sheet
Highlights
Assets $476,557 $413,228 $413,244 $411,640 $397,386 19.9%
Net loans and
acceptances 205,441 174,696 176,914 176,643 173,555 18.4
Deposits 291,412 253,387 251,600 249,251 242,791 20.0
Common
shareholders'
equity 24,148 19,494 19,422 19,309 18,646 29.5
---------------------------------------------------------------------------
For the three months ended
------------------------------------------------------------------
July April January October July
31, 2011 30, 2011 31, 2011 31, 2010 31, 2010
------------------------------------------------------------------
Financial
Measures and
Ratios
(% except
as noted)(c)
Average annual
five year total
shareholder
return 3.9 4.4 1.7 5.9 5.6
Diluted earnings
per share growth 12.4 6.3 16.1 11.7 16.5
Diluted adjusted
earnings per
share growth(b) 19.0 5.5 16.4 6.9 8.7
Return on equity 14.7 16.7 15.7 15.1 13.7
Adjusted return
on equity(b) 15.6 16.8 15.9 15.3 13.9
Net economic
profit
($ millions)(b) 226 293 255 225 158
Net economic
profit (NEP)
growth(b) 43.0 11.3 48.6 40.8 +100
Operating leverage 1.5 (5.0) (0.7) (5.7) (3.8)
Adjusted operating
leverage(b) 4.9 (3.3) (0.7) (7.4) (4.1)
Revenue growth 12.6 5.5 10.6 8.0 (2.4)
Adjusted revenue
growth(b) 12.9 5.9 10.6 6.3 (2.6)
Non-interest
expense growth 11.1 10.5 11.3 13.7 1.4
Adjusted
non-interest
expense growth(b) 8.0 9.2 11.3 13.7 1.5
Non-interest
expense-to-revenue
ratio 64.5 62.9 61.2 62.6 65.3
Adjusted
non-interest
expense-to-revenue
ratio(b) 62.2 61.6 60.9 62.3 65.0
Provision for
credit losses-to
-average loans
and acceptances
(annualized) 0.39 0.36 0.58 0.58 0.50
Effective tax rate 18.03 22.02 24.51 20.56 13.44
Gross impaired
loans and
acceptances-to-
equity and
allowance for
credit losses 7.97 10.22 11.47 12.18 12.15
Cash and
securities-to-
total assets
ratio 34.6 35.9 35.6 35.0 34.6
Common equity
ratio 9.11 10.67 10.15 10.26 10.27
Tier 1 capital
ratio 11.48 13.82 13.02 13.45 13.55
Total capital
ratio 14.21 17.03 15.17 15.91 16.10
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 0.0 3.2 16.6 26.4 22.4
Dividend yield 4.66 4.51 4.85 4.65 4.45
Price-to-earnings
ratio (times) 11.7 12.4 11.7 12.7 13.6
Market-to-book
value (times) 1.58 1.82 1.69 1.77 1.90
Return on average
assets 0.71 0.80 0.74 0.72 0.67
Net interest margin
on average earning
assets 1.78 1.89 1.82 1.89 1.88
Non-interest
revenue-to-total
revenue 48.3 49.6 51.4 50.2 46.0
Equity-to-assets
ratio 5.7 5.4 5.3 5.3 5.3
------------------------------------------------------------------
------------------------------------------------------------------
------------------------------------
For the nine
months ended
------------------------------------
July July
31, 2011 31, 2010
------------------------------------
Financial
Measures and
Ratios
(% except
as noted)(c)
Average annual
five year total
shareholder
return 3.9 5.6
Diluted earnings
per share growth 11.4 78.2
Diluted adjusted
earnings per
share growth(b) 13.3 25.2
Return on equity 15.7 14.8
Adjusted return
on equity(b) 16.1 14.9
Net economic
profit
($ millions)(b) 774 593
Net economic
profit (NEP)
growth(b) 30.5 +100
Operating leverage (1.5) 11.8
Adjusted operating
leverage(b) 0.2 5.6
Revenue growth 9.5 11.2
Adjusted revenue
growth(b) 9.7 5.1
Non-interest
expense growth 11.0 (0.6)
Adjusted
non-interest
expense growth(b) 9.5 (0.5)
Non-interest
expense-to-revenue
ratio 62.8 62.0
Adjusted
non-interest
expense-to-revenue
ratio(b) 61.5 61.7
Provision for
credit losses-to
-average loans
and acceptances
(annualized) 0.44 0.63
Effective tax rate 21.59 18.77
Gross impaired
loans and
acceptances-to
-equity and
allowance for
credit losses 7.97 12.15
Cash and
securities-to
-total assets
ratio 34.6 34.6
Common equity
ratio 9.11 10.27
Tier 1 capital
ratio 11.48 13.55
Total capital
ratio 14.21 16.10
Credit rating(d)
DBRS AA AA
Fitch AA- AA-
Moody's Aa2 Aa2
Standard & Poor's A+ A+
Twelve month total
shareholder return 0.0 22.4
Dividend yield 4.66 4.45
Price-to-earnings
ratio (times) 11.7 13.6
Market-to-book
value (times) 1.58 1.90
Return on average
assets 0.75 0.70
Net interest margin
on average earning
assets 1.83 1.87
Non-interest
revenue-to-total
revenue 49.8 48.5
Equity-to-assets
ratio 5.7 5.3
------------------------------------
------------------------------------
All ratios in this report are based on unrounded numbers.
(a) Corporate Services includes Technology and Operations.
(b) These are non-GAAP measures. Refer to the Non-GAAP Measures section at
the end of Management's Discussion and Analysis for an explanation of
the use and limitations of Non-GAAP measures and detail on the items
that have been excluded from results in the determination of adjusted
measures. NEP, a non-GAAP measure, is explained in the Other Value
Measures section in the MD&A. 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 Rating" on p.15 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
---------------------------------------------------------------------------
July 31, April 30, January 31, October 31, July 31,
2011 2011 2011 2010 2010
---------------------------------------------------------------------------
Interest, Dividend
and Fee Income
Loans $ 1,990 $ 1,907 $ 1,932 $ 1,925 $ 1,845
Securities 633 597 634 563 543
Deposits with
banks 35 34 21 23 18
---------------------------------------------------------------------------
2,658 2,538 2,587 2,511 2,406
---------------------------------------------------------------------------
Interest Expense
Deposits 660 639 679 666 610
Subordinated debt 44 38 33 32 30
Capital trust
securities 7 6 12 14 18
Other liabilities 255 235 236 189 177
---------------------------------------------------------------------------
966 918 960 901 835
---------------------------------------------------------------------------
Net Interest
Income 1,692 1,620 1,627 1,610 1,571
Provision for
credit losses (Note 2) 174 145 248 253 214
---------------------------------------------------------------------------
Net Interest
Income After
Provision for
Credit Losses 1,518 1,475 1,379 1,357 1,357
---------------------------------------------------------------------------
Non-Interest Revenue
Securities
commissions and
fees 290 309 302 266 258
Deposit and
payment service
charges 205 188 195 199 206
Trading revenues
(losses) 141 137 208 166 (1)
Lending fees 141 138 149 144 148
Card fees 20 50 45 65 67
Investment
management and
custodial fees 128 95 92 91 90
Mutual fund
revenues 164 158 154 144 139
Securitization
revenues 211 179 167 188 167
Underwriting and
advisory fees 141 143 152 135 91
Securities gains,
other than
trading 32 48 32 40 9
Foreign exchange,
other than
trading 22 33 23 22 22
Insurance income 47 40 122 83 70
Other 40 79 78 76 70
---------------------------------------------------------------------------
1,582 1,597 1,719 1,619 1,336
---------------------------------------------------------------------------
Net Interest
Income and Non-
Interest Revenue 3,100 3,072 3,098 2,976 2,693
---------------------------------------------------------------------------
Non-Interest Expense
Employee
compensation
(Note 8) 1,207 1,131 1,210 1,120 1,062
Premises and
equipment 386 376 343 379 337
Amortization of
intangible
assets 58 42 50 46 52
Travel and
business
development 100 90 86 109 85
Communications 63 61 60 60 61
Business and
capital taxes 12 14 11 10 19
Professional fees 132 130 99 118 98
Other 153 179 187 181 184
---------------------------------------------------------------------------
2,111 2,023 2,046 2,023 1,898
---------------------------------------------------------------------------
Income Before
Provision for
Income Taxes and
Non-Controlling
Interest in
Subsidiaries 989 1,049 1,052 953 795
Provision for
income taxes 178 231 258 196 107
---------------------------------------------------------------------------
811 818 794 757 688
Non-controlling
interest in
subsidiaries 18 18 18 18 19
---------------------------------------------------------------------------
Net Income $ 793 $ 800 $ 776 $ 739 $ 669
---------------------------------------------------------------------------
---------------------------------------------------------------------------
Preferred share
dividends $ 39 $ 34 $ 34 $ 34 $ 33
Net income
available to
common
shareholders $ 754 $ 766 $ 742 $ 705 $ 636
Average common
shares (in
thousands) 589,849 568,829 567,301 565,088 561,839
Average diluted
common shares
(in thousands) 592,146 571,407 569,938 568,083 565,196
---------------------------------------------------------------------------
Earnings Per Share
(Canadian $)
(Note 12)
Basic $ 1.28 $ 1.35 $ 1.31 $ 1.25 $ 1.13
Diluted 1.27 1.34 1.30 1.24 1.13
Dividends
Declared Per
Common Share 0.70 0.70 0.70 0.70 0.70
---------------------------------------------------------------------------
---------------------------------------------------------------------------
(Unaudited)
(Canadian $
in millions,
except as
noted) For the nine months ended
----------------------------------------
July 31, July 31,
2011 2010
----------------------------------------
Interest, Dividend
and Fee Income
Loans $ 5,829 $ 5,345
Securities 1,864 1,571
Deposits with
banks 90 51
----------------------------------------
7,783 6,967
----------------------------------------
Interest Expense
Deposits 1,978 1,696
Subordinated debt 115 87
Capital trust
securities 25 57
Other liabilities 726 502
----------------------------------------
2,844 2,342
----------------------------------------
Net Interest
Income 4,939 4,625
Provision for
credit losses
(Note 2) 567 796
----------------------------------------
Net Interest
Income After
Provision for
Credit Losses 4,372 3,829
----------------------------------------
Non-Interest Revenue
Securities
commissions and
fees 901 782
Deposit and
payment service
charges 588 603
Trading revenues
(losses) 486 338
Lending fees 428 428
Card fees 115 168
Investment
management and
custodial fees 315 264
Mutual fund
revenues 476 406
Securitization
revenues 557 490
Underwriting and
advisory fees 436 310
Securities gains,
other than
trading 112 110
Foreign exchange,
other than
trading 78 71
Insurance income 209 238
Other 197 148
----------------------------------------
4,898 4,356
----------------------------------------
Net Interest
Income and Non-
Interest Revenue 9,270 8,185
----------------------------------------
Non-Interest Expense
Employee
compensation
(Note 8) 3,548 3,244
Premises and
equipment 1,105 964
Amortization of
intangible
assets 150 157
Travel and
business
development 276 234
Communications 184 169
Business and
capital taxes 37 42
Professional fees 361 254
Other 519 503
----------------------------------------
6,180 5,567
----------------------------------------
Income Before
Provision for
Income Taxes and
Non-Controlling
Interest in
Subsidiaries 3,090 2,618
Provision for
income taxes 667 491
----------------------------------------
2,423 2,127
Non-controlling
interest in
subsidiaries 54 56
----------------------------------------
Net Income $ 2,369 $ 2,071
----------------------------------------
----------------------------------------
Preferred share
dividends $ 107 $ 102
Net income
available to
common
shareholders $ 2,262 $ 1,969
Average common
shares (in
thousands) 575,398 558,047
Average diluted
common shares
(in thousands) 577,901 561,454
----------------------------------------
Earnings Per Share
(Canadian $)
(Note 12)
Basic $ 3.93 $ 3.53
Diluted 3.91 3.51
Dividends
Declared Per
Common Share 2.10 2.10
----------------------------------------
----------------------------------------
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
---------------------------------------------------------------------------
July 31, April 30, January 31, October 31, July 31,
2011 2011 2011 2010 2010
---------------------------------------------------------------------------
Assets
Cash and Cash
Equivalents $ 33,026 $ 24,415 $ 20,717 $ 17,368 $ 15,083
---------------------------------------------------------------------------
Interest Bearing
Deposits with
Banks 5,035 3,336 3,522 3,186 3,121
---------------------------------------------------------------------------
Securities
Trading 73,882 73,215 74,377 71,710 66,300
Available-for-
sale 51,954 46,276 47,367 50,543 51,899
Other 1,079 1,093 1,137 1,146 1,151
---------------------------------------------------------------------------
126,915 120,584 122,881 123,399 119,350
---------------------------------------------------------------------------
Securities
Borrowed or
Purchased Under
Resale
Agreements 38,301 33,040 35,887 28,102 24,317
---------------------------------------------------------------------------
Loans
Residential
mortgages 54,493 49,560 50,294 48,715 47,097
Consumer
instalment and
other personal 58,035 52,189 51,751 51,159 49,741
Credit cards 2,239 1,936 3,221 3,308 3,304
Businesses and
governments 85,363 66,127 66,334 68,338 68,407
---------------------------------------------------------------------------
200,130 169,812 171,600 171,520 168,549
Customers'
liability under
acceptances 7,000 6,620 7,194 7,001 6,885
Allowance for
credit losses
(Note 2) (1,689) (1,736) (1,880) (1,878) (1,879)
---------------------------------------------------------------------------
205,441 174,696 176,914 176,643 173,555
---------------------------------------------------------------------------
Other Assets
Derivative
instruments 47,767 44,268 39,354 49,759 47,947
Premises and
equipment 1,977 1,519 1,537 1,560 1,565
Goodwill 3,374 1,584 1,598 1,619 1,627
Intangible
assets 1,511 848 822 812 748
Other 13,210 8,938 10,012 9,192 10,073
---------------------------------------------------------------------------
67,839 57,157 53,323 62,942 61,960
---------------------------------------------------------------------------
Total Assets $ 476,557 $ 413,228 $ 413,244 $ 411,640 $ 397,386
---------------------------------------------------------------------------
---------------------------------------------------------------------------
Liabilities and
Shareholders'
Equity
Deposits
(Note 10)
Banks $ 22,983 $ 18,957 $ 19,882 $ 19,435 $ 19,262
Businesses and
governments 148,180 135,233 133,084 130,773 123,882
Individuals 120,249 99,197 98,634 99,043 99,647
---------------------------------------------------------------------------
291,412 253,387 251,600 249,251 242,791
---------------------------------------------------------------------------
Other Liabilities
Derivative
instruments 43,890 41,145 37,393 47,970 45,110
Acceptances 7,000 6,620 7,194 7,001 6,885
Securities sold
but not yet
purchased 25,412 23,631 22,152 16,438 18,424
Securities lent
or sold under
repurchase
agreements 53,893 43,912 52,143 47,110 42,237
Other 22,257 16,570 16,656 17,414 16,175
---------------------------------------------------------------------------
152,452 131,878 135,538 135,933 128,831
---------------------------------------------------------------------------
Subordinated
Debt (Note 9) 5,284 5,208 3,713 3,776 3,747
---------------------------------------------------------------------------
Capital Trust
Securities
(Note 10) 400 400 400 800 800
---------------------------------------------------------------------------
Shareholders'
Equity
Share capital
(Note 11) 13,972 9,951 9,572 9,498 9,311
Contributed
surplus 112 102 102 92 90
Retained
earnings 13,863 13,556 13,192 12,848 12,539
Accumulated
other
comprehensive
loss (938) (1,254) (873) (558) (723)
---------------------------------------------------------------------------
27,009 22,355 21,993 21,880 21,217
---------------------------------------------------------------------------
Total
Liabilities and
Shareholders'
Equity $ 476,557 $ 413,228 $ 413,244 $ 411,640 $ 397,386
---------------------------------------------------------------------------
---------------------------------------------------------------------------
The accompanying notes are an integral part of these interim consolidated
financial statements.
Interim Consolidated Financial Statements
Consolidated Statement of Comprehensive Income
(Unaudited) (Canadian $ For the three months For the nine months
in millions) ended ended
---------------------------------------------------------------------------
July 31, July 31, July 31, July 31,
2011 2010 2011 2010
---------------------------------------------------------------------------
Net income $ 793 $ 669 $ 2,369 $ 2,071
Other Comprehensive Income
Net change in unrealized
gains (losses) on
available-for-sale
securities 49 39 (66) (64)
Net change in unrealized
gains (losses) on cash
flow hedges 228 217 78 (54)
Net gain (loss) on
translation of net
foreign operations 39 54 (392) (206)
---------------------------------------------------------------------------
Total Comprehensive Income $ 1,109 $ 979 $ 1,989 $ 1,747
---------------------------------------------------------------------------
---------------------------------------------------------------------------
Consolidated Statement of Changes in Shareholders' Equity
(Unaudited) (Canadian $ For the three months For the nine months
in millions) ended ended
---------------------------------------------------------------------------
July 31, July 31, July 31, July 31,
2011 2010 2011 2010
---------------------------------------------------------------------------
Preferred Shares
Balance at beginning of
period $ 2,861 $ 2,571 $ 2,571 $ 2,571
Issued during the period
(Note 11) - - 290 -
---------------------------------------------------------------------------
Balance at End of Period 2,861 2,571 2,861 2,571
---------------------------------------------------------------------------
Common Shares
Balance at beginning of
period 7,090 6,590 6,927 6,198
Issued during the period
(Notes 7 and 11) 3,961 - 3,961 -
Issued under the
Shareholder Dividend
Reinvestment and Share
Purchase Plan 43 124 135 381
Issued under the Stock
Option Plan 17 26 88 161
---------------------------------------------------------------------------
Balance at End of Period 11,111 6,740 11,111 6,740
---------------------------------------------------------------------------
Contributed Surplus
Balance at beginning of
period 102 88 92 79
Stock option
expense/exercised 10 2 20 11
---------------------------------------------------------------------------
Balance at End of Period 112 90 112 90
---------------------------------------------------------------------------
Retained Earnings
Balance at beginning of
period 13,556 12,299 12,848 11,748
Net income 793 669 2,369 2,071
Dividends - Preferred
shares (39) (33) (107) (102)
- Common shares (446) (393) (1,242) (1,175)
Share issue expense (1) (3) (5) (3)
---------------------------------------------------------------------------
Balance at End of Period 13,863 12,539 13,863 12,539
---------------------------------------------------------------------------
Accumulated Other
Comprehensive Income on
Available-for-Sale
Securities
Balance at beginning of
period 400 377 515 480
Unrealized gains (losses)
on available-for-sale
securities arising
during the period (net
of income tax (provision)
recovery of $(33), $(19),
$17 and $7) 54 36 (44) (12)
Reclassification to
earnings of (gains)
losses in the period
(net of income tax
(provision)
recovery of $nil,
$(1), $9 and $23) (5) 3 (22) (52)
---------------------------------------------------------------------------
Balance at End of Period 449 416 449 416
---------------------------------------------------------------------------
Accumulated Other
Comprehensive Income
(Loss) on Cash Flow
Hedges
Balance at beginning of
period (88) (257) 62 14
Gains on cash flow hedges
arising during the
period (net of income
tax provision of $(92),
$(124), $(39) and $(15)) 228 261 75 29
Reclassification to
earnings of (gains)
losses on cash flow
hedges (net of income
tax recovery of $nil,
$20, less than $1 and $38) - (44) 3 (83)
---------------------------------------------------------------------------
Balance at End of Period 140 (40) 140 (40)
---------------------------------------------------------------------------
Accumulated Other
Comprehensive Loss on
Translation of Net Foreign
Operations
Balance at beginning of
period (1,566) (1,153) (1,135) (893)
Unrealized gain (loss) on
translation of net
foreign operations 62 157 (832) (628)
Impact of hedging
unrealized gain (loss)
on translation of net
foreign operations (net
of income tax
(provision) recovery of
$10, $45, $(170) and
$(175)) (23) (103) 440 422
---------------------------------------------------------------------------
Balance at End of Period (1,527) (1,099) (1,527) (1,099)
---------------------------------------------------------------------------
Total Accumulated Other
Comprehensive Loss (938) (723) (938) (723)
---------------------------------------------------------------------------
Total Shareholders' Equity $ 27,009 $ 21,217 $ 27,009 $ 21,217
---------------------------------------------------------------------------
---------------------------------------------------------------------------
The accompanying notes are an integral part of these interim consolidated
financial statements.
Interim Consolidated Financial Statements
Consolidated Statement of Cash Flows
(Unaudited) (Canadian $ For the three months For the nine months
in millions) ended ended
---------------------------------------------------------------------------
July 31, July 31, July 31, July 31,
2011 2010 2011 2010
---------------------------------------------------------------------------
Cash Flows from Operating
Activities
Net income $ 793 $ 669 $ 2,369 $ 2,071
Adjustments to determine net
cash flows provided by (used
in) operating activities
Impairment write-down
of securities, other than
trading 1 8 2 36
Net (gain) on
securities, other than
trading (33) (17) (114) (146)
Net (increase)
decrease in trading
securities (356) 4,926 (3,525) (8,140)
Provision for credit
losses 174 214 567 796
(Gain) on sale of
securitized loans (Note 3) (158) (127) (424) (374)
Change in derivative
instruments
- (increase) decrease in
derivative asset (3,571) (6,738) 1,710 (1,266)
- Increase (decrease) in
derivative liability 2,672 5,509 (3,107) 1,976
Amortization of
premises and equipment 73 66 216 195
Amortization of
intangible assets 58 52 150 157
Net (increase) decrease
in future income taxes 48 (93) (56) 1
Net (increase) decrease
in current income taxes (107) 225 (6) (838)
Change in accrued interest
- decrease in interest
receivable 167 124 159 73
- increase (decrease) in
interest payable - 33 (48) (176)
Changes in other items
and accruals, net 2,964 1,259 998 167
(Gain) on sale of land
and buildings - - (1) (4)
---------------------------------------------------------------------------
Net Cash Provided by (Used
in) Operating Activities 2,725 6,110 (1,110) (5,472)
---------------------------------------------------------------------------
Cash Flows from Financing
Activities
Net increase in deposits 3,404 2,644 13,218 9,957
Net increase in securities
sold but not yet purchased 1,764 1,877 9,373 6,608
Net increase (decrease) in
securities lent or sold
under repurchase agreements 9,812 (4,226) 8,293 (2,895)
Net increase (decrease) in
liabilities of subsidiaries (2,201) 25 (2,201) 25
Proceeds from issuance of
Covered Bonds (Note 10) - - 1,500 -
Proceeds from issuance of
subordinated debt (Note 9) - - 1,500 -
Repayment of subordinated
debt - - - (500)
Proceeds from issuance of
preferred shares (Note 11) - - 290 -
Redemption of Capital Trust
Securities (Note 10) - (350) (400) (350)
Share issue expense (1) (3) (5) (3)
Proceeds from issuance of
common shares 19 27 93 165
Cash dividends paid (444) (303) (1,219) (900)
---------------------------------------------------------------------------
Net Cash Provided by (Used
in) Financing Activities 12,353 (309) 30,442 12,107
---------------------------------------------------------------------------
Cash Flows from Investing
Activities
Net (increase) decrease in
interest bearing deposits
with banks 348 (206) (190) 477
Purchases of securities,
other than trading (4,589) (6,308) (13,733) (21,716)
Maturities of securities,
other than trading 2,659 1,698 11,391 6,300
Proceeds from sales of
securities, other than
trading 3,154 4,421 8,114 14,554
Net (increase) in loans (3,076) (6,303) (9,746) (13,387)
Proceeds from securitization
of loans (Note 3) 995 1,691 4,331 3,534
Net (increase) decrease in
securities borrowed or
purchased under resale
agreements (5,106) 805 (11,413) 10,549
Proceeds from sales of land
and buildings - - 1 5
Premises and equipment -
net purchases (137) (70) (247) (140)
Purchased and developed
software - net purchases (69) (42) (187) (162)
Purchase of Troubled Asset Relief
Program preferred shares and
warrants (1,642) - (1,642) -
Acquisitions (Note 7) 789 (107) 683 (1,029)
---------------------------------------------------------------------------
Net Cash (Used in)
Investing Activities (6,674) (4,421) (12,638) (1,015)
---------------------------------------------------------------------------
Effect of Exchange Rate
Changes on Cash and Cash
Equivalents 207 80 (1,036) (492)
---------------------------------------------------------------------------
Net Increase in Cash and
Cash Equivalents 8,611 1,460 15,658 5,128
Cash and Cash Equivalents at
Beginning of Period 24,415 13,623 17,368 9,955
---------------------------------------------------------------------------
Cash and Cash Equivalents at
End of Period $ 33,026 $ 15,083 $ 33,026 $ 15,083
---------------------------------------------------------------------------
---------------------------------------------------------------------------
Represented by:
Cash and non-interest
bearing deposits with Bank
of Canada and other banks $ 31,584 $ 14,102 $ 31,584 $ 14,102
Cheques and other items in
transit, net 1,442 981 1,442 981
---------------------------------------------------------------------------
$ 33,026 $ 15,083 $ 33,026 $ 15,083
---------------------------------------------------------------------------
---------------------------------------------------------------------------
Supplemental Disclosure of
Cash Flow Information
Amount of interest paid in
the period $ 966 $ 803 $ 2,899 $ 2,529
Amount of income taxes paid
in the period $ 283 $ 85 $ 558 $ 1,153
---------------------------------------------------------------------------
---------------------------------------------------------------------------
The accompanying notes are an integral part of these interim consolidated
financial statements.
Certain comparative figures have been reclassified to conform with the
current period's presentation.
Notes to Consolidated Financial Statements
July 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: Loans and 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 July 31, 2011, there was a $42 million ($nil as at July 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 and
Residential other Business and
mortgages personal loans government loans
---------------------------------------------------------------------------
For the three July 31, July 31, July 31, July 31, July 31, July 31,
months ended 2011 2010 2011 2010 2011 2010
---------------------------------------------------------------------------
Specific
Allowance at
beginning of
period 68 39 59 54 427 491
Provision for
credit losses 15 19 107 127 52 68
Recoveries 1 2 34 31 26 12
Write-offs (22) (22) (142) (165) (123) (93)
Foreign exchange
and other 5 - 7 - 6 4
---------------------------------------------------------------------------
Specific
Allowance at end
of period 67 38 65 47 388 482
---------------------------------------------------------------------------
General Allowance
at beginning of
period 30 20 354 314 783 912
Provision for
credit losses (1) 2 17 24 (14) (21)
Foreign exchange
and other - - - - 6 11
---------------------------------------------------------------------------
General Allowance
at end of period 29 22 371 338 775 902
---------------------------------------------------------------------------
Total Allowance 96 60 436 385 1,163 1,384
---------------------------------------------------------------------------
Comprised of:
Loans 96 60 436 385 1,121 1,384
Other credit
instruments - - - - 42 -
---------------------------------------------------------------------------
---------------------------------------------------------------------------
(Canadian $ in millions)
-------------------------------------------------------
Customers'
liability
under
acceptances Total
-------------------------------------------------------
For the three July 31, July 31, July 31, July 31,
months ended 2011 2010 2011 2010
--------------------------------------------------------
Specific
Allowance at
beginning of
period - 10 554 594
Provision for
credit losses - - 174 214
Recoveries - - 61 45
Write-offs - - (287) (280)
Foreign exchange
and other - - 18 4
--------------------------------------------------------
Specific
Allowance at end
of period - 10 520 577
--------------------------------------------------------
General Allowance
at beginning of
period 38 45 1,205 1,291
Provision for
credit losses (2) (5) - -
Foreign exchange
and other - - 6 11
--------------------------------------------------------
General Allowance
at end of period 36 40 1,211 1,302
--------------------------------------------------------
Total Allowance 36 50 1,731 1,879
--------------------------------------------------------
Comprised of:
Loans 36 50 1,689 1,879
Other credit
instruments - - 42 -
--------------------------------------------------------
--------------------------------------------------------
---------------------------------------------------------------------------
Credit card,
consumer
instalment and
Residential other Business and
mortgages personal loans government loans
---------------------------------------------------------------------------
For the nine July 31, July 31, July 31, July 31, July 31, July 31,
months ended 2011 2010 2011 2010 2011 2010
---------------------------------------------------------------------------
Specific
Allowance at
beginning of
period 52 33 47 51 481 507
Provision for
credit losses 66 69 341 416 212 306
Recoveries 4 7 93 89 72 35
Write-offs (64) (71) (426) (509) (368) (344)
Foreign exchange
and other 9 - 10 - (9) (22)
---------------------------------------------------------------------------
Specific
Allowance at end
of period 67 38 65 47 388 482
---------------------------------------------------------------------------
General Allowance
at beginning
of period 22 18 340 266 891 968
Provision for
credit losses 7 4 31 48 (72) (38)
Foreign exchange
and other - - - 24 (44) (28)
---------------------------------------------------------------------------
General Allowance
at end of period 29 22 371 338 775 902
---------------------------------------------------------------------------
Total Allowance 96 60 436 385 1,163 1,384
---------------------------------------------------------------------------
Comprised of:
Loans 96 60 436 385 1,121 1,384
Other credit
instruments - - - - 42 -
---------------------------------------------------------------------------
---------------------------------------------------------------------------
-------------------------------------------------------
Customers'
liability
under acceptances Total
-------------------------------------------------------
For the nine July 31, July 31, July 31, July 31,
months ended 2011 2010 2011 2010
-------------------------------------------------------
Specific
Allowance at
beginning of
period 10 5 590 596
Provision for
credit losses (10) 5 609 796
Recoveries - - 169 131
Write-offs - - (858) (924)
Foreign exchange
and other - - 10 (22)
-------------------------------------------------------
Specific
Allowance at end
of period - 10 520 577
-------------------------------------------------------
General Allowance
at beginning of
period 44 54 1,297 1,306
Provision for
credit losses (8) (14) (42) -
Foreign exchange
and other - - (44) (4)
-------------------------------------------------------
General Allowance
at end of period 36 40 1,211 1,302
-------------------------------------------------------
Total Allowance 36 50 1,731 1,879
-------------------------------------------------------
Comprised of:
Loans 36 50 1,689 1,879
Other credit
instruments - - 42 -
-------------------------------------------------------
-------------------------------------------------------
Certain comparative figures have been reclassified to conform with the
current period's presentation.
Purchased Loans
We record loans that we purchase at fair value on the day that we acquire the loans, which includes an estimate of expected future credit losses on the acquisition date. As a result, no allowance for credit losses is recorded in our Consolidated Balance Sheet on the day we acquire the loans. Fair value is determined by estimating the principal and interest cash flows expected to be collected on the loans and discounting those cash flows at a market rate of interest. We estimate cash flows expected to be collected based on specific loan reviews for commercial loans. For retail loans, we use models that incorporate management's best estimate of current key assumptions such as default rates, loss severity, timing of prepayments and collateral. Subsequent to the acquisition date, we will periodically re-evaluate what we expect to collect on the purchased loans. Decreases in expected cash flows will result in a charge to the provision for credit losses and an increase to the allowance for credit losses. Increases in expected cash flows will result in a recovery in the provision for credit losses and either a reduction in any previously recorded allowance for credit losses or if no allowance exists, an increase in the current carrying value of the purchased loans. Because purchased loans are recorded at fair value at acquisition based on the amount expected to be collectible, none of the purchased loans are considered to be impaired as long as expected cash flows continue to equal or exceed the amounts expected at acquisition. Loans purchased as part of our acquisition of Marshall & Ilsley Corporation ("M&I"), had a fair value of $29,240 million as at July 5, 2011. Included in the fair value of these loans is a write-down for estimated future losses of $3,306 million.
FDIC Covered Loans
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.
We recorded new provisions for (recoveries of) credit losses of $5 million and $(10) million, respectively, for the three and nine months ended July 31, 2011 ($nil and $nil million, respectively, for the three and nine months ended July 31, 2010) 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 three and nine months ended July 31, 2011 and 2010:
(Canadian $ in millions)
---------------------------------------------------------------------------
Residential
mortgages Credit card loans Total
---------------------------------------------------------------------------
For the three July 31, July 31, July 31, July 31, July 31, July 31,
months ended 2011 2010 2011 2010 2011 2010
---------------------------------------------------------------------------
Net cash
proceeds(1) 992 1,677 - - 992 1,677
Investment in
securitization
vehicle(2) - - 34 - 34 -
Deferred
purchase price 35 51 1 - 36 51
Servicing
liability (6) (11) - - (6) (11)
---------------------------------------------------------------------------
1,021 1,717 35 - 1,056 1,717
Loans sold 1,003 1,697 35 - 1,038 1,697
---------------------------------------------------------------------------
Gain on sale of
loans from new
securitizations 18 20 - - 18 20
---------------------------------------------------------------------------
Gain on sale of
loans sold to
revolving
securitization
vehicles 14 14 126 93 140 107
---------------------------------------------------------------------------
---------------------------------------------------------------------------
Residential
mortgages Credit card loans Total
---------------------------------------------------------------------------
For the nine July 31, July 31, July 31, July 31, July 31, July 31,
months ended 2011 2010 2011 2010 2011 2010
---------------------------------------------------------------------------
Net cash
proceeds(1) 3,114 3,500 1,200 - 4,314 3,500
Investment in
securitization
vehicle(2) - - 115 - 115 -
Deferred
purchase price 103 135 37 - 140 135
Servicing
liability (18) (25) (5) - (23) (25)
---------------------------------------------------------------------------
3,199 3,610 1,347 - 4,546 3,610
Loans sold 3,156 3,554 1,319 - 4,475 3,554
---------------------------------------------------------------------------
Gain on sale of
loans from new
securitizations 43 56 28 - 71 56
---------------------------------------------------------------------------
Gain on sale of
loans sold to
revolving
securitization
vehicles 36 44 317 274 353 318
---------------------------------------------------------------------------
---------------------------------------------------------------------------
(1) Net cash proceeds represent cash proceeds less issuance costs.
(2) Includes credit card securities retained on-balance sheet by the bank.
The key weighted-average assumptions used to value the deferred purchase price for securitizations were as follows:
---------------------------------------------------------------------------
Residential mortgages Credit card loans
---------------------------------------------------------------------------
July 31, July 31, July 31, July 31,
For the three months ended 2011 2010 2011 2010
---------------------------------------------------------------------------
Weighted-average life (years) 4.19 4.16 0.87 1.00
Prepayment rate (%) 18.37 18.70 37.64 35.58
Interest rate (%) 3.82 3.85 21.73 21.39
Expected credit losses (%)(1) - - 5.52 4.40
Discount rate (%) 2.43 2.42 9.45 9.49
---------------------------------------------------------------------------
---------------------------------------------------------------------------
Residential mortgages Credit card loans
---------------------------------------------------------------------------
July 31, July 31, July 31, July 31,
For the nine months ended 2011 2010 2011 2010
---------------------------------------------------------------------------
Weighted-average life (years) 3.99 4.47 0.91 1.00
Prepayment rate (%) 21.09 17.21 36.98 35.42
Interest rate (%) 3.81 4.01 21.65 21.35
Expected credit losses (%)(1) - - 5.52 4.40
Discount rate (%) 2.30 2.61 9.36 9.27
---------------------------------------------------------------------------
---------------------------------------------------------------------------
(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) July 31, 2011
---------------------------------------------------------------------------
Total
Exposure to loss assets
---------------------------------------------------
Drawn
facilities Secur- Deriv-
Undrawn and loans ities ative
facilities(1) provided(2) held assets Total
---------------------------------------------------------------------------
Unconsolidated
VIEs in which
we have a
significant
variable
interest
Canadian
customer
securitization
vehicles(3) 2,283 - 132 4 2,419 1,991
U.S. customer
securitization
vehicle 3,766 123 - 4 3,893 3,352
Bank
securitization
vehicles(3) 5,100 - 720 69 5,889 10,787
Credit
protection
vehicle -
Apex(4)(5) 1,030 - 1,270 400 2,700 2,213
Structured
investment
vehicles(6) 89 3,090 - 23 3,202 3,255
Structured
finance
vehicles na na 7,918 - 7,918 11,756
Capital and
funding
trusts 43 12 2 - 57 1,280
---------------------------------------------------------------------------
Total 12,311 3,225 10,042 500 26,078 34,634
---------------------------------------------------------------------------
---------------------------------------------------------------------------
Consolidated
VIEs
Canadian
customer
securitization
vehicles(3)(7) 25 - 25 - 50 25
Capital and
funding
trusts 3,513 7,487 1,160 85 12,245 9,940
Structured
finance
vehicles - - 26 - 26 26
---------------------------------------------------------------------------
Total 3,538 7,487 1,211 85 12,321 9,991
---------------------------------------------------------------------------
---------------------------------------------------------------------------
(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
---------------------------------------------------------------------------
Unconsolidated
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 July 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
$61 million of asset-backed commercial paper classified as trading
securities ($105 million in 2010), $268 million of deferred purchase
price ($261 million in 2010) and $391 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 July 31, 2011 and October 31, 2010.
(7) Total assets held as at July 31, 2011 are comprised of a loan of $nil
million ($135 million as at October 31, 2010) and $25 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 July 31, April 30, January 31, October 31, July 31, months ended 2011 2011 2011 2011 2010 --------------------------------------------------------------------------- Fair value of securities at beginning of period 307 387 435 606 791 Net sales/maturities (48) (82) (41) (175) (183) Fair value change recorded in other comprehensive income 9 3 (3) (2) (5) Other than temporary impairment recorded in income - - - - - Impact of foreign exchange (1) (1) (4) 6 3 --------------------------------------------------------------------------- Fair value of securities at end of period 267 307 387 435 606 --------------------------------------------------------------------------- --------------------------------------------------------------------------- --------------------------------------- For the nine July 31, July 31, months ended 2011 2010 --------------------------------------- Fair value of securities at beginning of period 435 1,378 Net sales/maturities (171) (753) Fair value change recorded in Other Comprehensive Income 9 57 Other than temporary impairment recorded in income - (17) Impact of foreign exchange (6) (59) --------------------------------------- Fair value of securities at end of period 267 606 --------------------------------------- ---------------------------------------
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) July 31, 2011 October 31, 2010
---------------------------------------------------------------------------
Fair Fair
value value
over over
(under) (under)
Book Fair book Book Fair book
value value value value value value
---------------------------------------------------------------------------
Assets
Cash and cash
equivalents 33,026 33,026 - 17,368 17,368 -
Interest bearing
deposits with
banks 5,035 5,035 - 3,186 3,186 -
Securities 126,915 127,028 113 123,399 123,433 34
Securities
borrowed or
purchased under
resale
agreements 38,301 38,301 - 28,102 28,102 -
Loans
Residential
mortgages 54,493 55,123 630 48,715 49,531 816
Consumer
instalment and
other personal 58,035 58,144 109 51,159 51,223 64
Credit cards 2,239 2,239 - 3,308 3,308 -
Businesses and
governments 85,363 85,089 (274) 68,338 68,084 (254)
---------------------------------------------------------------------------
200,130 200,595 465 171,520 172,146 626
Customers'
liability under
acceptances 7,000 7,000 - 7,001 6,998 (3)
Allowance for
credit losses (1,689) (1,689) - (1,878) (1,878) -
---------------------------------------------------------------------------
Total loans and
customers'
liability under
acceptances,
net of allowance
for credit
losses 205,441 205,906 465 176,643 177,266 623
Derivative
instruments 47,767 47,767 - 49,759 49,759 -
Premises and
equipment 1,977 1,977 - 1,560 1,560 -
Goodwill 3,374 3,374 - 1,619 1,619 -
Intangible
assets 1,511 1,511 - 812 812 -
Other assets 13,210 13,210 - 9,192 9,192 -
---------------------------------------------------------------------------
476,557 477,135 578 411,640 412,297 657
---------------------------------------------------------------------------
Liabilities
Deposits 291,412 291,568 156 249,251 249,544 293
Derivative
instruments 43,890 43,890 - 47,970 47,970 -
Acceptances 7,000 7,000 - 7,001 7,001 -
Securities sold
but not yet
purchased 25,412 25,412 - 16,438 16,438 -
Securities lent
or sold under
repurchase
agreements 53,893 53,893 - 47,110 47,110 -
Other
liabilities 22,257 22,345 88 17,414 17,504 90
Subordinated
debt 5,284 5,505 221 3,776 3,947 171
Capital trust
securities 400 407 7 800 823 23
Shareholders'
equity 27,009 27,009 - 21,880 21,880 -
---------------------------------------------------------------------------
476,557 477,029 472 411,640 412,217 577
---------------------------------------------------------------------------
Total fair
value
adjustment 106 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 a decrease of $76 million and $30 million in non-interest revenue, trading revenues, respectively, for the three and nine months ended July 31, 2011 (decrease of $74 million and $70 million, respectively, for the three and nine months ended July 31, 2010). This includes an increase of $6 million and a decrease of $1 million, respectively, for the three and nine months ended July 31, 2011 attributable to changes in our credit spread (increase of $4 million and $15 million, respectively, for the three and nine months ended July 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 July 31, 2011 was an unrealized loss of $30 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 July 31, 2011 were $4,355 million and $4,462 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 July 31, 2011 was $4,676 million ($4,153 million as at October 31, 2010). The impact of recording these as trading securities was an increase of $107 million and $82 million in non-interest revenue, insurance income, respectively, for the three and nine months ended July 31, 2011 (increase of $46 million and $174 million, respectively, for the three and nine months ended July 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) July 31, 2011
---------------------------------------------------------------------------
Valued Valued
using models using models
Valued using (with (without
quoted market observable observable
prices inputs) inputs)
---------------------------------------------------------------------------
Trading Securities
Issued or
guaranteed by:
Canadian federal
government 17,942 - -
Canadian
provincial and
municipal
governments 5,556 108 -
U.S. federal
government 5,296 - -
U.S. states,
municipalities
and agencies 315 128 -
Other governments 1,783 - -
Mortgage-backed
securities and
collateralized
mortgage
obligations 717 199 -
Corporate debt 8,237 3,484 1,232
Corporate equity 26,232 2,653 -
---------------------------------------------------------------------------
66,078 6,572 1,232
---------------------------------------------------------------------------
---------------------------------------------------------------------------
Available-for-Sale
Securities
Issued or
guaranteed by:
Canadian federal
government 14,275 - -
Canadian
provincial and
municipal
governments 1,318 268 -
U.S. federal
government 4,778 - -
U.S. states,
municipalities
and agencies 555 2,736 35
Other governments 8,251 748 -
Mortgage-backed
securities and
collateralized
mortgage
obligations 4,826 8,178 -
Corporate debt 3,450 223 1,411
Corporate equity 190 183 529
---------------------------------------------------------------------------
37,643 12,336 1,975
---------------------------------------------------------------------------
---------------------------------------------------------------------------
Fair Value
Liabilities
Securities sold but
not yet purchased 25,412 - -
Structured note
liabilities - 4,355 -
---------------------------------------------------------------------------
25,412 4,355 -
---------------------------------------------------------------------------
---------------------------------------------------------------------------
Derivative Assets
Interest rate
contracts 17 29,798 125
Foreign exchange
contracts 23 11,441 -
Commodity contracts 1,492 235 -
Equity contracts 2,732 1,047 4
Credit default
swaps - 710 143
---------------------------------------------------------------------------
4,264 43,231 272
---------------------------------------------------------------------------
---------------------------------------------------------------------------
Derivative
Liabilities
Interest rate
contracts 27 28,459 41
Foreign exchange
contracts 16 10,566 -
Commodity contracts 1,325 253 -
Equity contracts 113 2,428 66
Credit default
swaps - 594 2
---------------------------------------------------------------------------
1,481 42,300 109
---------------------------------------------------------------------------
---------------------------------------------------------------------------
(Canadian $ in millions) October 31, 2010
---------------------------------------------------------------------------
Valued Valued
using models using models
Valued using (with (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 July 31, 2011 for the most significant Level 3 instruments is provided below.
Within Level 3 trading securities is corporate debt of $1,208 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 $599 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 $83 million and $(83) million, respectively.
Within derivative assets and derivative liabilities as at July 31, 2011 was $267 million and $43 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 $(3) million and $3 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 three and nine months ended July 31, 2011.
During the quarter ended July 31, 2011, no significant transfers were made into or out of Level 3. Securities purchased as part of the M&I acquisition that are classified as Level 3 totalled $326 million, of which $124 million were sold in the quarter. These securities held as at July 31, 2011 are primarily private equity investments for which fair values are determined based on the net assets of the entities.
During the nine months ended July 31, 2011, $139 million of 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 nine months ended July 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 a larger volume of market prices.
During the nine months ended July 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 tables on the following page present a reconciliation of all changes in Level 3 financial instruments during the three and nine months ended July 31, 2011, including realized and unrealized gains (losses) included in earnings and other comprehensive income.
(Canadian $ in millions)
---------------------------------------------------------------------------
Change in Fair Value
---------------------------
Included in
For the three Balance, other
months ended April 30, Included in comprehensive
July 31, 2011 2011 earnings income Purchases Sales
---------------------------------------------------------------------------
Trading
Securities
Corporate debt 1,199 35 - - -
---------------------------------------------------------------------------
Total trading
securities 1,199 35 - - -
---------------------------------------------------------------------------
---------------------------------------------------------------------------
Available-for-
Sale Securities
Issued or
guaranteed by:
U.S. states,
municipalities
and agencies 12 - - 23 -
Corporate debt 1,547 (26) (1) 45 (124)
Corporate equity 342 (2) 6 312 (129)
---------------------------------------------------------------------------
Total available-
for-sale
securities 1,901 (28) 5 380 (253)
---------------------------------------------------------------------------
---------------------------------------------------------------------------
Derivative
Assets
Interest rate
contracts 136 (19) - 8 -
Equity contracts 3 4 - - -
Credit default
swaps 147 (4) - - -
---------------------------------------------------------------------------
Total derivative
assets 286 (19) - 8 -
---------------------------------------------------------------------------
---------------------------------------------------------------------------
Derivative
Liabilities
Interest rate
contracts 42 - - - -
Equity contracts 74 (8) - 3 -
Credit default
swaps 2 - - - -
---------------------------------------------------------------------------
Total derivative
liabilities 118 (8) - 3 -
---------------------------------------------------------------------------
---------------------------------------------------------------------------
(Canadian $ in millions)
-------------------------------------------------------------------
Unreal-
Fair Value ized
For the three Transfers as at Gains
months ended Maturities out of July 31, (losses)
July 31, 2011 (1) Level 3 2011 (2)
-------------------------------------------------------------------
Trading
Securities
Corporate debt (2) - 1,232 35
-------------------------------------------------------------------
Total trading
securities (2) - 1,232 35
-------------------------------------------------------------------
-------------------------------------------------------------------
Available-for-
Sale Securities
Issued or
guaranteed by:
U.S. states,
municipalities
and agencies - - 35 -
Corporate debt (30) - 1,411 2
Corporate equity - - 529 6
-------------------------------------------------------------------
Total available-
for-sale
securities (30) - 1,975 8
-------------------------------------------------------------------
-------------------------------------------------------------------
Derivative
Assets
Interest rate
contracts - - 125 (18)
Equity contracts (3) - 4 4
Credit default
swaps - - 143 (4)
-------------------------------------------------------------------
Total derivative
assets (3) - 272 (18)
-------------------------------------------------------------------
-------------------------------------------------------------------
Derivative
Liabilities
Interest rate
contracts (1) - 41 -
Equity contracts (3) - 66 7
Credit default
swaps - - 2 -
-------------------------------------------------------------------
Total derivative
liabilities (4) - 109 7
-------------------------------------------------------------------
-------------------------------------------------------------------
(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 July 31, 2011 are included in
earnings in the period. For available-for-sale securities, the
unrealized gains or losses on securities still held on July 31, 2011
are included in Accumulated Other Comprehensive Income.
(Canadian $ in millions)
---------------------------------------------------------------------------
Change in Fair Value
---------------------------
Included in
For the nine Balance, other
months ended October 31, Included in comprehensive
July 31, 2011 2010 earnings income Purchases Sales
---------------------------------------------------------------------------
Trading Securities
Mortgage-backed
securities and
collateralized
mortgage
obligations 211 (4) - - -
Corporate debt 1,358 (24) - 42 (1)
---------------------------------------------------------------------------
Total trading
securities 1,569 (28) - 42 (1)
---------------------------------------------------------------------------
---------------------------------------------------------------------------
Available-for-Sale
Securities
Issued or
guaranteed by:
U.S. states,
municipalities and
agencies 20 1 (1) 23 (8)
Mortgage-backed
securities and
collateralized
mortgage obligations 20 - - - -
Corporate debt 1,500 (31) 19 169 (151)
Corporate equity 369 (8) (19) 320 (133)
---------------------------------------------------------------------------
Total available-for-
sale securities 1,909 (38) (1) 512 (292)
---------------------------------------------------------------------------
---------------------------------------------------------------------------
Derivative Assets
Interest rate
contracts 217 (32) - 8 -
Equity contracts 8 5 - - -
Credit default swaps 160 (11) - 3 -
---------------------------------------------------------------------------
Total derivative
assets 385 (38) - 11 -
---------------------------------------------------------------------------
---------------------------------------------------------------------------
Derivative
Liabilities
Interest rate
contracts 48 - - 3 -
Equity contracts 71 6 - 3 -
Credit default swaps 3 - - - -
---------------------------------------------------------------------------
Total derivative
liabilities 122 6 - 6 -
---------------------------------------------------------------------------
---------------------------------------------------------------------------
(Canadian $ in millions)
-------------------------------------------------------------------
Unreal-
Fair Value ized
For the nine Transfers as at Gains
months ended Maturities out of July 31, (losses)
July 31, 2011 (1) Level 3 2011 (2)
-------------------------------------------------------------------
Trading Securities
Mortgage-backed
securities and
collateralized
mortgage obligations - (207) - -
Corporate debt (4) (139) 1,232 (30)
-------------------------------------------------------------------
Total trading
securities (4) (346) 1,232 (30)
-------------------------------------------------------------------
-------------------------------------------------------------------
Available-for-Sale
Securities
Issued or
guaranteed by:
U.S. states,
municipalities and
agencies - - 35 (1)
Mortgage-backed
securities and
collateralized
mortgage obligations - (20) - -
Corporate debt (95) - 1,411 22
Corporate equity - - 529 (19)
-------------------------------------------------------------------
Total available-for-
sale securities (95) (20) 1,975 2
-------------------------------------------------------------------
-------------------------------------------------------------------
Derivative Assets
Interest rate
contracts (68) - 125 118
Equity contracts (3) (6) 4 7
Credit default swaps (9) - 143 143
-------------------------------------------------------------------
Total derivative
assets (80) (6) 272 268
-------------------------------------------------------------------
-------------------------------------------------------------------
Derivative
Liabilities
Interest rate
contracts (10) - 41 (42)
Equity contracts (5) (9) 66 (67)
Credit default swaps (1) - 2 (2)
-------------------------------------------------------------------
Total derivative
liabilities (16) (9) 109 (111)
-------------------------------------------------------------------
-------------------------------------------------------------------
(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 July 31, 2011 are included in
earnings in the period. For available-for-sale securities, the
unrealized gains or losses on securities still held on July 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 July 31, 2011, the bank held $182 million of foreclosed assets measured at fair value at inception, all of which were classified as Level 2. For the nine months ended July 31, 2011, we recorded write-downs of $36 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 $12,117 million as at July 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 July 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 July 31, 2011, $42 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 July 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 $13,065 million as at July 31, 2011 ($14,009 million as at October 31, 2010), of which $11,403 million relates to facilities that are investment grade, $622 million that are non-investment grade and $1,040 million that are not rated ($11,036 million, $625 million and $2,348 million, respectively, as at October 31, 2010). As at July 31, 2011, $172 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 $123 million (US$129 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 July 31, 2011, $3,090 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 July 31, 2011 and October 31, 2010, no amounts had been drawn down in accordance with the terms of the funding facility provided to our credit protection vehicle (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 July 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 $36,288 million as at July 31, 2011 ($40,650 million as at October 31, 2010), of which $34,261 million relates to swaps that are investment grade, $1,824 million are non-investment grade swaps and $203 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 less than one month to seven years. The fair value of the related derivative liabilities included in derivative instruments in our Consolidated Balance Sheet was $596 million as at July 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 one day to eight years. The fair value of the related derivative liabilities included in derivative instruments in our Consolidated Balance Sheet was $415 million as at July 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 two months to 25 years. The fair value of the related derivative liabilities included in derivative instruments in our Consolidated Balance Sheet was $85 million as at July 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).
Indemnification Agreements
In the normal course of operations, we enter into various agreements that provide general indemnifications. These indemnifications typically occur in connection with sales of assets, securities offerings, service contracts, membership agreements, clearing arrangements, derivatives contracts and leasing transactions. As part of the acquisition of M&I, we acquired a securities lending business that lends securities owned by clients to borrowers who have been evaluated for credit risk using the same credit risk process that is applied to loans and other credit assets. In connection with these activities, we provide an indemnification to lenders against losses resulting from the failure of the borrower to return loaned securities when due. All borrowings are fully collateralized with cash or marketable securities. As securities are loaned, collateral is maintained at a minimum of 100% of the fair value of the securities and the collateral is revalued on a daily basis. The amount of securities loaned subject to indemnification was $4,778 million as at July 31, 2011. No amount was included in our consolidated balance sheet as at July 31, 2011 related to these indemnifications.
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.
Marshall & Ilsley Corporation ("M&I")
On July 5, 2011, we completed the acquisition of Milwaukee-based Marshall & Ilsley Corporation for consideration of approximately $4.0 billion (US $4.2 billion) paid in common shares, with fractional entitlements to our common shares paid in cash. Each common share of M&I was exchanged for 0.1257 of a common share, resulting in the issuance of approximately 67 million common shares. The value of our common shares was arrived at using the average of our common share price prevailing during the five day period before and after December 17, 2010, the day the terms of the business combination were agreed to and announced. In addition, immediately prior to the completion of the transaction, we purchased M&I's Troubled Asset Relief Program preferred shares and warrants from the U.S. Treasury for $1.6 billion (US $1.7 billion). The acquisition of M&I allows us to strengthen our competitive position in the U.S. Midwest markets. As part of this acquisition, we acquired a core deposit intangible asset that is being amortized on an accelerated basis over a period of 10 years, a customer relationship intangible asset which is being amortized on an accelerated basis over a period of 15 years, a credit card portfolio intangible asset which is being amortized on an accelerated basis over a period of 15 years, and a trade name intangible asset which is being amortized on an accelerated basis over a period of five years. Goodwill related to this acquisition is not deductible for tax purposes. M&I is part of our Personal and Commercial Banking U.S., Private Client Group, BMO Capital Markets and Corporate reporting segments. Goodwill was allocated to these segments except for Corporate.
Lloyd George Management ("LGM")
On April 28, 2011, we completed the acquisition of all outstanding voting shares of Hong Kong-based Lloyd George Management, for cash consideration of $89 million subject to a post-closing adjustment based on working capital, plus contingent consideration based on meeting certain revenue thresholds over three years. Contingent consideration of approximately $13 million is expected to be paid in future years related to this acquisition. During the quarter ended July 31, 2011, we increased the purchased price by $2 million to $89 million based on a revaluation of net assets acquired. The acquisition of LGM allows us to expand our investment management capabilities in Asia and emerging markets to meet clients' growing demand for global investment strategies. As part of this acquisition, we acquired a customer relationship intangible asset which is being amortized on a straight-line basis over a period of 15 years. Goodwill related to this acquisition is not deductible for tax purposes. LGM is part of our Private Client Group reporting segment.
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.
The estimated fair values of the assets acquired and the liabilities assumed at the date of acquisition are as follows:
(Canadian $ in millions)
---------------------------------------------------------------------------
M&I LGM AMCORE
---------------------------------------------------------------------------
Cash resources (1) 2,838 3 420
Securities 5,975 3 10
Loans 29,240 - 1,551
Premises and equipment 390 - 20
Goodwill 1,770 59 86
Intangible assets 649 31 24
Deferred tax asset 2,421 - -
Other assets 2,292 - 494
---------------------------------------------------------------------------
Total assets 45,575 96 2,605
---------------------------------------------------------------------------
Deposits 33,860 - 2,207
Other liabilities 7,726 7 153
---------------------------------------------------------------------------
Total liabilities 41,586 7 2,360
---------------------------------------------------------------------------
Purchase price 3,989 89 245
---------------------------------------------------------------------------
---------------------------------------------------------------------------
The allocation of the purchase price for M&I and LGM is subject to
refinement as we complete the valuation of the assets acquired and
liabilities assumed.
(1) Cash resources, acquired through the M&I and AMCORE acquisitions
include cash and cash equivalents and interest bearing deposits.
Note 8: Employee Compensation
Stock Options
During the three months ended July 31, 2011, we granted a total of 3,676,632 stock options (nil during the three months ended July 31, 2010). All grants relate to the stock options granted as part of the M&I acquisition. The weighted-average fair value of options granted during the three months ended July 31, 2011 was $2.22 per option ($nil per option for the three months ended July 31, 2010). The following weighted-average assumptions were used to determine the fair value of options on the date of grant for the three months ended July 31, 2011:
For stock options granted during July 31, July 31, the three months ended 2011 2010 --------------------------------------------------------------------------- Expected dividend yield 5.5% na Expected share price volatility 18.7% na Risk-free rate of return 1.8% na Expected period until exercise (in years) 4.6 na --------------------------------------------------------------------------- --------------------------------------------------------------------------- Changes to the input assumptions can result in different fair value estimates. na - not applicable
Pension and Other Employee Future Benefit Expenses
Pension and other employee future benefit expenses are determined as follows:
(Canadian $ in millions)
---------------------------------------------------------------------------
Other
Pension employee future
benefit plans benefit plans
---------------------------------------------------------------------------
July 31, July 31, July 31, July 31,
For the three months ended 2011 2010 2011 2010
---------------------------------------------------------------------------
Benefits earned by employees 41 32 5 5
Interest cost on accrued
benefit liability 63 63 14 15
Actuarial loss recognized
in expense 23 18 1 -
Amortization of plan
amendment costs 5 4 (1) (2)
Expected return on plan
assets (81) (73) (1) (2)
---------------------------------------------------------------------------
Benefits expense 51 44 18 16
Canada and Quebec pension
plan expense 15 17 - -
Defined contribution expense 2 2 - -
---------------------------------------------------------------------------
Total pension and other
employee future benefit
expenses 68 63 18 16
---------------------------------------------------------------------------
---------------------------------------------------------------------------
---------------------------------------------------------------------------
Other
Pension employee future
benefit plans benefit plans
---------------------------------------------------------------------------
July 31, July 31, July 31, July 31,
For the nine months ended 2011 2010 2011 2010
---------------------------------------------------------------------------
Benefits earned by employees 118 96 16 15
Interest cost on accrued
benefit liability 189 191 40 43
Actuarial loss recognized
in expense 67 55 4 2
Amortization of plan
amendment costs 12 12 (5) (5)
Expected return on plan
assets (243) (218) (3) (4)
---------------------------------------------------------------------------
Benefits expense 143 136 52 51
Canada and Quebec pension
plan expense 53 49 - -
Defined contribution expense 7 7 - -
---------------------------------------------------------------------------
Total pension and other
employee future benefit
expenses 203 192 52 51
---------------------------------------------------------------------------
---------------------------------------------------------------------------
Note 9: Subordinated Debt
During the quarter ended April 30, 2011, we issued $1.5 billion of subordinated debt under our Canadian Medium-Term Note Program. The issue, Series G Medium-Term Notes, First Tranche, is due July 8, 2021. Interest on this issue is payable semi-annually at a fixed rate of 3.979% until July 8, 2016, and at a floating rate equal to the rate on three month Bankers' Acceptances plus 1.09%, paid quarterly, thereafter to maturity. This issue is redeemable at our option with the prior approval of the Office of Superintendent of Financial Institutions of Canada ("OSFI") at par commencing July 8, 2016.
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 issued US$1.5 billion Covered Bonds - Series 3. This deposit pays interest of 2.625% and matures on 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.
During the quarter ended July, 31, 2010, we redeemed all of our Capital Trust Securities - Series A ("BMO BOaTS") at a redemption amount equal to $1,000 plus unpaid indicated distributions, representing an aggregate redemption of $350 million.
Note 11: Share Capital
During the quarter ended July 31, 2011 and 2010, we did not issue or redeem any preferred shares.
During the quarter ended July 31, 2011, we issued 66,519,673 common shares to M&I shareholders as consideration for the acquisition of M&I.
During the quarter ended April 30, 2011, we issued 11,600,000 3.9% Non-Cumulative 5-year Rate Reset Class B Preferred Shares, Series 25, at a price of $25.00 per share, representing an aggregate issue price of $290 million.
On December 13, 2010, we announced the renewal of our normal course issuer bid, which allows us to repurchase for cancellation 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 common shares under the existing normal course issuer bid. We did not repurchase any common shares under our previous normal course issuer bid, which expired on December 1, 2010.
Share Capital Outstanding (1)
(Canadian $
in millions,
except as noted) July 31, 2011 October 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 -
Series 10 (2) 12,000,000 396 12,000,000 396 common shares (3)
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 (4)
Class B - preferred shares -
Series 18 6,000,000 150 6,000,000 150 class B-series 19 (4)
Class B - preferred shares -
Series 21 11,000,000 275 11,000,000 275 class B-series 22 (4)
Class B - preferred shares -
Series 23 16,000,000 400 16,000,000 400 class B-series 24 (4)
Class B - preferred shares -
Series 25 11,600,000 290 - - class B-series 26 (4)
---------------------------------------------------------------------------
2,861 2,571
Common Shares 637,353,972 11,111 566,468,440 6,927
---------------------------------------------------------------------------
Share Capital 13,972 9,498
---------------------------------------------------------------------------
---------------------------------------------------------------------------
(1) 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.
(2) Face value is US$300 million.
(3) The number of shares issuable on conversion is not determinable until
the date of conversion.
(4) If converted, the holders have the option to convert back to the
original preferred shares on subsequent redemption dates.
(5) The stock options issued under stock option plan are convertible into
17,969,488 common shares as at July 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
(Canadian $ in For the three months For the nine months
millions, except as noted) ended ended
---------------------------------------------------------------------------
July 31, July 31, July 31, July 31,
2011 2010 2011 2010
---------------------------------------------------------------------------
Net income 793 669 2,369 2,071
Dividends on
preferred shares (39) (33) (107) (102)
---------------------------------------------------------------------------
Net income available
to common
shareholders 754 636 2,262 1,969
---------------------------------------------------------------------------
Average number of
common shares
outstanding (in
thousands) 589,849 561,839 575,398 558,047
---------------------------------------------------------------------------
Basic earnings
per share (Canadian $) 1.28 1.13 3.93 3.53
---------------------------------------------------------------------------
---------------------------------------------------------------------------
Diluted earnings per share
(Canadian $ in For the three months For the nine months
millions, except as noted) ended ended
---------------------------------------------------------------------------
July 31, July 31, July 31, July 31,
2011 2010 2011 2010
---------------------------------------------------------------------------
Net income available
to common
shareholders
adjusted for
dilution effect 754 636 2,262 1,970
---------------------------------------------------------------------------
Average number of
common shares
outstanding (in
thousands) 589,849 561,839 575,398 558,047
---------------------------------------------------------------------------
Convertible shares 248 252 248 252
Stock options
potentially
exercisable(1) 9,970 11,073 10,266 11,060
Common shares
potentially
repurchased (7,921) (7,968) (8,011) (7,905)
---------------------------------------------------------------------------
Average diluted
number of common
shares outstanding
(in thousands) 592,146 565,196 577,901 561,454
---------------------------------------------------------------------------
Diluted earnings
per share (Canadian $) 1.27 1.13 3.91 3.51
---------------------------------------------------------------------------
---------------------------------------------------------------------------
(1) In computing diluted earnings per share we excluded average stock
options outstanding of 2,291,209 and 1,774,297, with a weighed-average
exercise price of $139.93 and $97.41, respectively, for the three
months and nine months ended July 31, 2011 (1,207,385 and 2,484,804
with a weighted-average exercise price of $65.80 and $60.93,
respectively, for the three months and nine months ended July 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 OSFI's stated minimum capital ratios requirement as at July 31, 2011. Our capital position as at July 31, 2011 is detailed in the Capital Management section on page 14 of Management's Discussion and Analysis of the Third 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 July 31, 2011 are outlined in the Risk Management section on page 10 of Management's Discussion and Analysis of the Third Quarter Report to Shareholders.
Note 15: Contingent Liabilities
BMO Capital Markets Corp. (previously Harris Nesbitt Corp.) and Bank of Montreal were named defendants in an action brought by investors in securities of Adelphia Communications Corporation ("Adelphia"). During the quarter ended July 31, 2011, we settled this action, which resolves all outstanding litigation related to Adelphia.
Note 16: 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 adjusted 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.
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.
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.
Acquisition of Marshall & Ilsley Corporation
Commencing on July 5, 2011, our P&C U.S., PCG, BMO CM and Corporate Services segments include a portion of M&I's acquired business. Within Corporate Services we have included the fair value adjustments for future expected losses on the M&I loan portfolio and the valuation of loans and deposits at current market rates. Corporate Services results will include any changes in our estimate of future expected losses as well as adjustments to net interest income to reflect current market rates. The operating groups' results will reflect the provision for credit losses on an expected loss basis and net interest income based on the contractual rates for loans and deposits.
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.
U.S. Mid-Market Client Accounts
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 CM. Prior periods have been restated to reflect this reclassification.
Impaired Real Estate Secured Loans
During the quarter ended July 31, 2011, approximately $0.9 billion of impaired real estate secured loans comprised primarily of commercial real estate loans were transferred to Corporate Services from P&C U.S. to allow our businesses to focus on ongoing customer relationships and leverage our risk management expertise in our special assets management unit. Prior periods have been restated to reflect this transfer.
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, are as follows:
(Canadian $ in millions)
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For the three Total
months ended P&C P&C Corporate (GAAP
July 31, 2011 (2) Canada U.S. PCG BMO CM Services(1) basis)
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Net interest income 1,103 397 111 318 (237) 1,692
Non-interest revenue 424 93 506 519 40 1,582
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Total Revenue 1,527 490 617 837 (197) 3,274
Provision for credit
losses 137 52 2 30 (47) 174
Amortization 35 28 10 7 51 131
Non-interest expense 753 270 451 451 55 1,980
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Income before taxes
and non-controlling
interest in
subsidiaries 602 140 154 349 (256) 989
Income taxes 170 48 34 70 (144) 178
Non-controlling
interest in
subsidiaries - - - - 18 18
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Net Income 432 92 120 279 (130) 793
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Average Assets 154,539 39,175 16,671 217,208 13,656 441,249
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Goodwill (As At) 120 2,336 736 180 2 3,374
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For the three Total
months ended P&C P&C Corporate (GAAP
July 31, 2010 (2) Canada U.S. PCG BMO CM Services(1) basis)
---------------------------------------------------------------------------
Net interest income 1,064 278 92 353 (216) 1,571
Non-interest revenue 425 86 452 326 47 1,336
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Total Revenue 1,489 364 544 679 (169) 2,907
Provision for credit
losses 129 31 1 66 (13) 214
Amortization 34 17 9 9 49 118
Non-interest expense 731 235 395 413 6 1,780
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Income before taxes
and non-controlling
interest in
subsidiaries 595 81 139 191 (211) 795
Income taxes 171 29 34 61 (188) 107
Non-controlling
interest in
subsidiaries - - - - 19 19
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Net Income 424 52 105 130 (42) 669
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Average Assets 147,194 31,759 14,424 197,636 6,604 397,617
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Goodwill (As At) 121 1,026 364 114 2 1,627
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For the nine Total
months ended P&C P&C Corporate (GAAP
July 31, 2011 (2) Canada U.S. PCG BMO CM Services(1) basis)
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Net interest income 3,270 974 322 951 (578) 4,939
Non-interest revenue 1,260 226 1,538 1,685 189 4,898
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Total Revenue 4,530 1,200 1,860 2,636 (389) 9,837
Provision for credit
losses 409 124 6 90 (62) 567
Amortization 105 64 27 21 149 366
Non-interest expense 2,235 706 1,330 1,398 145 5,814
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Income before taxes
and non-controlling
interest in
subsidiaries 1,781 306 497 1,127 (621) 3,090
Income taxes 504 107 123 356 (423) 667
Non-controlling
interest in
subsidiaries - - - - 54 54
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Net Income 1,277 199 374 771 (252) 2,369
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Average Assets 152,841 32,752 15,723 210,569 11,852 423,737
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Goodwill (As At) 120 2,336 736 180 2 3,374
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For the nine Total
months ended P&C P&C Corporate (GAAP
July 31, 2010 (2) Canada U.S. PCG BMO CM Services(1) basis)
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Net interest income 3,073 809 266 1,094 (617) 4,625
Non-interest revenue 1,237 245 1,386 1,348 140 4,356
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Total Revenue 4,310 1,054 1,652 2,442 (477) 8,981
Provision for credit
losses 370 93 5 198 130 796
Amortization 101 48 28 26 149 352
Non-interest expense 2,096 657 1,180 1,336 (54) 5,215
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Income before taxes
and non-controlling
interest in
subsidiaries 1,743 256 439 882 (702) 2,618
Income taxes 521 88 108 280 (506) 491
Non-controlling
interest in
subsidiaries - - - - 56 56
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Net Income 1,222 168 331 602 (252) 2,071
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Average Assets 144,068 31,703 14,037 199,414 5,651 394,873
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Goodwill (As At) 121 1,026 364 114 2 1,627
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(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.
Our results and average assets, allocated by geographic region, are as
follows:
(Canadian $ in millions)
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Total
For the three months United Other (GAAP
ended July 31, 2011 Canada States countries basis)
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Net interest income 1,263 404 25 1,692
Non-interest revenue 1,185 322 75 1,582
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Total Revenue 2,448 726 100 3,274
Provision for credit losses 94 80 - 174
Amortization 90 40 1 131
Non-interest expense 1,353 583 44 1,980
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Income before taxes and
non-controlling interest
in subsidiaries 911 23 55 989
Income taxes 185 (11) 4 178
Non-controlling interest
in subsidiaries 13 5 - 18
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Net Income 713 29 51 793
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Average Assets 279,657 140,807 20,785 441,249
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Goodwill (As At) 452 2,901 21 3,374
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Total
For the three months United Other (GAAP
ended July 31, 2010 Canada States countries basis)
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Net interest income 1,198 346 27 1,571
Non-interest revenue 1,004 281 51 1,336
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Total Revenue 2,202 627 78 2,907
Provision for credit losses 110 104 - 214
Amortization 88 29 1 118
Non-interest expense 1,270 467 43 1,780
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Income before taxes and
non-controlling interest
in subsidiaries 734 27 34 795
Income taxes 102 8 (3) 107
Non-controlling interest
in subsidiaries 15 4 - 19
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Net Income 617 15 37 669
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Average Assets 252,642 116,854 28,121 397,617
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Goodwill (As At) 448 1,158 21 1,627
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Total
For the nine months United Other (GAAP
ended July 31, 2011 Canada States countries basis)
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Net interest income 3,770 1,092 77 4,939
Non-interest revenue 3,772 926 200 4,898
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Total Revenue 7,542 2,018 277 9,837
Provision for credit losses 279 289 (1) 567
Amortization 266 97 3 366
Non-interest expense 4,109 1,559 146 5,814
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Income before taxes and
non-controlling interest
in subsidiaries 2,888 73 129 3,090
Income taxes 650 5 12 667
Non-controlling interest
in subsidiaries 40 14 - 54
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Net Income 2,198 54 117 2,369
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Average Assets 275,764 126,691 21,282 423,737
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Goodwill (As At) 452 2,901 21 3,374
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Total
For the nine months United Other (GAAP
ended July 31, 2010 Canada States countries basis)
---------------------------------------------------------------------------
Net interest income 3,521 1,012 92 4,625
Non-interest revenue 3,238 944 174 4,356
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Total Revenue 6,759 1,956 266 8,981
Provision for credit losses 387 417 (8) 796
Amortization 264 85 3 352
Non-interest expense 3,747 1,341 127 5,215
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Income before taxes and
non-controlling interest
in subsidiaries 2,361 113 144 2,618
Income taxes 462 26 3 491
Non-controlling interest
in subsidiaries 42 14 - 56
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Net Income 1,857 73 141 2,071
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Average Assets 256,020 111,248 27,605 394,873
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Goodwill (As At) 448 1,158 21 1,627
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Prior periods have been restated to give effect to the current period's organizational structure and presentation changes.
Ralph Marranca, Toronto
416-867-3996
ralph.marranca@bmo.com
Ronald Monet, Montreal
514-877-1873
ronald.monet@bmo.com