News Releases

TORONTO, ONTARIO--(Marketwired - Aug. 27, 2013) - BMO Financial Group (TSX:BMO)(NYSE:BMO) and Bank of Montreal -

Financial Results Highlights:

Third Quarter 2013 Compared with Third Quarter 2012:

• Net income of $1,137 million, up 17%; adjusted net income¹ of $1,136 million, up 12%
  
  
• EPS² of $1.68, up $0.26 or 18%; adjusted EPS^1,2 of $1.68, up $0.19 or 13%
  
  
• ROE of 15.6%, compared with 14.5%; adjusted ROE¹ of 15.6%, compared with 15.2%
  
  
• Provisions for credit losses of $77 million, compared with $237 million; adjusted provisions for credit losses¹ of $13 million, compared with $116 million
  
  
• Basel III Common Equity Ratio is strong at 9.6%

Year-to-Date 2013 Compared with Year-to-Date 2012:

• Net income of $3,160 million, up 2%; adjusted net income¹ of $3,174 million, up 7%
  
  
• EPS² of $4.63, up 2%; adjusted EPS^1,2 of $4.65, up 7%
  
  
• ROE of 14.9%, compared with 15.9%; adjusted ROE¹ of 15.0%, compared with 15.2%
  
  
• Provisions for credit losses of $400 million, compared with $573 million; adjusted provisions for credit losses¹ of $219 million, compared with $358 million

For the third quarter ended July 31, 2013, BMO Financial Group reported net income of $1,137 million or $1.68 per share on a reported basis and net income of $1,136 million or $1.68 per share on an adjusted basis.

"BMO's third quarter results confirm the strength of the bank's performance to date in 2013 and reflect the benefits of our disciplined growth strategy, which is well diversified by geography and business mix," said Bill Downe, President and Chief Executive Officer, BMO Financial Group. "Operating results are underpinned by the successful execution of well-established strategies across all our businesses.

"Canadian retail businesses were particularly strong in the quarter with both Personal & Commercial Banking Canada and traditional wealth earnings reaching new highs. Our focus on deepening customer relationships and maintaining industry-leading loyalty continues to boost our ability to attract new customers and expand share in personal banking.

"Similarly, building on BMO's advantaged market share positions, our large commercial businesses are doing well on both sides of the border. In Canada, there was strong growth in commercial loans and deposits again this quarter. The U.S. commercial portfolio saw good sequential growth with continued strength in core commercial and industrial.

"Private Client Group posted record earnings in traditional wealth, up 37% year over year. Insurance results, where interest rate declines have affected financial performance over a number of quarters, benefited from changes in long-term rates.

"Good earnings performance in Capital Markets reflects the benefits of our diversified client-centric business model.

"Good credit performance continues to highlight our prudent approach to risk management and our focus on attracting high-quality earning assets. We repurchased 4 million shares under our normal course issuer bid during the quarter and maintained strong capital ratios, while providing an attractive dividend.

"Looking forward, we see opportunities for growth in each of our businesses in an improving North American economy led by the United States, and this gives us confidence we're well positioned heading into 2014," concluded Mr. Downe.

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

Concurrent with the release of results, BMO announced a fourth quarter 2013 dividend of $0.74 per common share, unchanged from the preceding quarter and up $0.02 per share from a year ago, equivalent to an annual dividend of $2.96 per common share.

Our complete Third Quarter 2013 Report to Shareholders, including our unaudited interim consolidated financial statements for the period ended July 31, 2013, is available online at www.bmo.com/investorrelations and at www.sedar.com.

Operating Segment Overview

P&C Canada

Net income was $497 million, up $38 million or 9% from a year ago. Adjusted net income was $500 million, up $38 million or 8% from the prior year. Revenue increased $58 million or 4% year over year to $1,620 million, driven by higher balance and fee volumes across most products, partially offset by the impact of lower net interest margin. Provisions for credit losses fell $21 million or 14% mainly due to lower provisions in the consumer portfolio. Expenses were up $31 million or 4% to $821 million, as we continue to invest in the business, including adding front-line resources across a number of roles. So far this year, we expanded our branch network by opening or upgrading 49 locations across the country.

We are executing on our strategy resulting in strong balance sheet growth and increasing revenues. This momentum, combined with our focus on process simplification, is expected to drive future net income growth.

In personal banking, there was strong loan growth of 10% and consistent deposit growth. We are focused on attracting new customers and deepening relationships with existing customers through our recent Spring Home Financing Campaign and our 'Make the BMOst of Summer' Campaign. We continue to have top-tier performance in customer loyalty, as measured by the net promoter score.

In commercial banking, momentum continues with strong year-over-year growth in commercial loans of 12% and deposits of 15%. Our focus on meeting the needs of our customers, at every stage of their business cycle, with the products, services and advice they value continues to generate positive results. We remain second in Canadian business banking loan market share for small and medium-sized loans. In April we tied for first place among the big banks in the Canadian Federation of Independent Business report Battle of the Banks, based on a 2012 survey of almost 13,000 small and medium-sized enterprise (SME) owners to assess how well banks are serving their SME customers.

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

Net income of $147 million increased $10 million or 7% from $137 million in the third quarter a year ago. Adjusted net income was $160 million, an increase of $7 million or 4% from a year ago due to lower provisions for credit losses and reduced expenses. Revenue was 5% lower as the effect of loan growth was more than offset by the effects of lower net interest margin, reductions in certain loan portfolios and lower deposit fees.

Total loans continued to grow, with year-over-year and sequential increases in average loans, led by continued strong growth in the core commercial and industrial (C&I) loan portfolio. The core C&I portfolio increased by $3.9 billion from a year ago to $23.0 billion.

Deposits grew from the prior year in our commercial business and personal chequing and savings accounts, despite our planned reductions in higher cost deposit products.

The annual American Banker/Reputation Institute Survey of Bank Reputations showed the confidence customers have in BMO Harris Bank. BMO Harris Bank ranked number one out of 30 major U.S. banks in long-term trust, outscoring the field when consumers were asked whether they would give their bank the benefit of the doubt when the next financial crisis hit. We also ranked number five in overall bank reputation.

For the third year in a row, BMO Harris Bank received the Community Service Leadership Award from The Financial Services Roundtable in recognition of our dedication and service to the communities in which we operate. We were specifically recognized for our implementation of financial literacy projects, collective volunteer efforts from our employees and monetary contributions - all which helped to improve the vitality of our communities.

Private Client Group

Private Client Group (PCG) produced strong results for the quarter. Net income of $218 million doubled from a year ago. Adjusted net income of $225 million increased $111 million or 97% from a year ago. Adjusted net income in our traditional wealth businesses was a record $131 million, up $35 million or 37% from a year ago. Results reflect growth in client assets, increased transaction volumes and a continued focus on productivity. Adjusted net income in Insurance was $94 million, up $76 million from a year ago. The increase was due to a $42 million after-tax benefit from increases in long-term interest rates in the current quarter relative to a $45 million after-tax charge a year ago, partially offset by benefits from changes in our investment portfolio to improve asset-liability management in the prior year. The underlying Insurance business continues to perform well.

Assets under management and administration grew by $63 billion or 13% from a year ago to $527 billion, with assets under management up 11% year over year, driven mainly by growth in new client assets coupled with market appreciation.

In June, BMO Global Asset Management announced the intended expansion of its international footprint through the opening of a new office in Australia. Once open, the office will focus on sales and serving the needs of Australia's institutional investors.

BMO Global Asset Management was named one of Pensions & Investments Top 100 Money Managers based on worldwide assets under management, ranking 75th internationally on this prestigious list. In 2012, the firm ranked 85th.

BMO Capital Markets

Net income was $280 million, up $30 million or 12% from the prior year, driven by good performance across our diversified businesses in general, with increases in trading revenue and equity underwriting.

We were recognized during the quarter with a number of awards, reflecting our ongoing commitment to our clients. BMO Capital Markets was selected as a 2013 Greenwich Quality and Share Leader in Canadian equities by Greenwich Associates, reflecting client recognition for providing the industry's best coverage in equity research/advisory vote and trading share and high service quality for equity sales and trading. In the Global Custodian Magazine 2013 Prime Brokerage Survey, BMO Capital Markets ranked Best in Class for our Prime Brokerage business in 9 of 12 categories, and was the recipient of Trade Finance Magazine's Best Trade Bank in Canada award for the fourth consecutive year.

BMO Capital Markets participated in 136 new issues in the quarter including 55 corporate debt deals, 45 government debt deals, 28 common equity transactions and eight issues of preferred shares, raising $56 billion.

Corporate Services

Corporate Services net loss for the quarter was $11 million, compared with net income of $13 million a year ago. On an adjusted basis, the net loss was $35 million, compared with net income of $32 million a year ago. The decrease in reported results was smaller than the decrease in adjusted results primarily due to lower integration costs in the reported results in the current year. Adjusting items are detailed in the Adjusted Net Income section and in the Non-GAAP Measures section. Adjusted revenues were lower primarily due to a higher group taxable equivalent basis (teb) offset. Adjusted non-interest expenses were higher primarily due to higher technology costs. Adjusted recoveries of credit losses increased, primarily due to higher recoveries on the Marshall & Ilsley (M&I) purchased credit impaired loan portfolio.

Adjusted Net Income

Adjusted net income was $1,136 million for the third quarter of 2013, up $123 million or 12% from a year ago. Adjusted earnings per share were $1.68, up 13% from $1.49 a year ago.

Management has designated certain amounts as adjusting items and has adjusted GAAP results so that we can discuss and present financial results without the effects of adjusting items to facilitate understanding of business performance and related trends. Management assesses performance on a GAAP basis and on an adjusted basis and considers both to be useful in the assessment of underlying business performance. Presenting results on both bases provides readers with a better understanding of how management assesses results. Adjusted results and measures are non-GAAP and, together with items excluded in determining adjusted results, are disclosed in more detail in the Non-GAAP Measures section, along with comments on the uses and limitations of such measures. Items excluded from third quarter 2013 results in the determination of adjusted results totalled $1 million of net income and had no impact on EPS, and were comprised of:

• the $68 million after-tax net benefit for credit-related items in respect of the M&I purchased performing loan portfolio, consisting of $154 million for the recognition in net interest income of a portion of the credit mark on the portfolio (including $55 million for the release of the credit mark related to early repayment of loans), net of a $44 million specific provision for credit losses and related income taxes of $42 million. These credit-related items in respect of the acquired M&I performing loan portfolio can significantly impact both net interest income and the provision for credit losses in different periods over the life of the M&I purchased performing loan portfolio;
• costs of $49 million ($30 million after tax) for the integration of M&I including amounts related to system conversions, restructuring and other employee-related charges, consulting fees and marketing costs related to rebranding activities;
• an increase in the collective allowance for credit losses of $20 million ($15 million after tax) on loans other than the M&I purchased loan portfolio;
• the $1 million before and after-tax benefit from run-off structured credit activities; and
• the amortization of acquisition-related intangible assets of $32 million ($23 million after tax).

All of the above adjusting items were recorded in Corporate Services except the amortization of acquisition-related intangible assets, which is charged to the operating groups.

The impact of adjusting items for comparative periods is summarized in the Non-GAAP Measures section.

Caution

This Operating Segment Overview section contains forward-looking statements. Please see the Caution Regarding Forward-Looking Statements that follows.

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

Management's Discussion and Analysis

Management's Discussion and Analysis (MD&A) commentary is as of August 27, 2013. Unless otherwise indicated, all amounts are in Canadian dollars and have been derived from financial statements prepared in accordance with International Financial Reporting Standards (IFRS). References to GAAP mean IFRS. The MD&A should be read in conjunction with the unaudited interim consolidated financial statements for the period ended July 31, 2013, as well as the audited consolidated financial statements for the year ended October 31, 2012, and Management's Discussion and Analysis for fiscal 2012. The material that precedes this section comprises part of this MD&A.

The annual MD&A includes a comprehensive discussion of our businesses, strategies and objectives, and can be accessed on our website at www.bmo.com/investorrelations. Readers are also encouraged to visit the site to view other quarterly financial information.

Caution Regarding Forward-Looking Statements

Bank of Montreal's public communications often include written or oral forward-looking statements. Statements of this type are included in this document, and may be included in other filings with Canadian securities regulators or the U.S. Securities and Exchange Commission, or in other communications. All such statements are made pursuant to the "safe harbor" provisions of, and are intended to be forward-looking statements under, the United States Private Securities Litigation Reform Act of 1995 and any applicable Canadian securities legislation. Forward-looking statements may involve, but are not limited to, comments with respect to our objectives and priorities for 2013 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, U.S. and international economies.

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

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

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

Effective the first quarter of 2013, our regulatory capital, risk-weighted assets and regulatory capital ratios have been calculated pursuant to the Capital Adequacy Requirement (CAR) Guideline released by the Office of the Superintendent of Financial Institutions (OSFI) in December 2012 to implement the Basel III Accord in Canada. When calculating the pro-forma impact of Basel III on our regulatory capital (including capital deductions and qualifying and grandfathered ineligible capital), risk-weighted assets and regulatory capital ratios in prior periods, we assumed that our interpretation of OSFI's draft implementation guideline of rules and amendments announced by the Basel Committee on Banking Supervision (BCBS), and our models used to assess those requirements, were consistent with the final requirements that would be promulgated by OSFI. We have not recalculated our pro-forma Basel III regulatory capital, risk-weighted assets or capital ratios based on the CAR Guideline and references to Basel III pro-forma items refer to these items as previously estimated.

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

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

Economic Review and Outlook

The Canadian economy is growing modestly, held back by slower household borrowing, a moderation in housing market activity and tighter fiscal policies. Weak global demand and a strong currency continue to impact exports. The Eurozone economy is showing some signs of emerging from its lengthy recession, while China's economy has weakened in response to government policies to restrain credit growth and reduce the risk of financial imbalances. In the year ahead, Canadian consumer spending is projected to grow moderately, while residential construction should decline somewhat further. However, exports are expected to increase as U.S. demand improves, while business investment should strengthen in response to low commercial real estate vacancy rates and ongoing development of energy resources. Buoyant business loan growth should partly offset slowing consumer credit and residential mortgages. GDP growth is expected to increase from 1.6% in 2013 to 2.3% in 2014. The unemployment rate is projected to decline to 6.8% next year, below the average of the past decade. The Canadian dollar will likely trade below parity with the U.S. dollar this year, held back by the sizeable trade deficit. Modest growth and low inflation should encourage the Bank of Canada to keep overnight lending rates at 1% until the second half of 2014.

The U.S. economy has been restrained by restrictive fiscal policies. However, private domestic demand is improving, with automobile and home sales at a five-year high and job growth firming. Improved household finances, easier credit conditions and pent-up replacement demand for motor vehicles should lead to stronger economic growth in the second half of 2013. Increased shale-energy output will continue to support activity in several states, including Texas and North Dakota, while the impact of fiscal restraint should diminish as the federal budget deficit declines. GDP growth is projected to increase from 1.8% in 2013 to 3.0% in 2014. The unemployment rate is expected to decline from 7.5% this year to 6.8% next year. The Federal Reserve will likely maintain its low interest-rate policy until mid-2015, while continuing to purchase fixed-income securities, albeit at a slower pace, into next year to supress long-term interest rates.

Similar to the national economy, the U.S. Midwest economy is growing modestly. It is expected to strengthen in response to rising automotive production, a rebound in agricultural output following last year's drought, and, indirectly, a resurgent energy sector.

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

Other Value Measures

BMO's average annual total shareholder returns for the one-year, three-year and five-year periods ending July 31, 2013, were 16.5%, 5.4% and 11.7%, respectively.

Foreign Exchange

The Canadian dollar equivalents of BMO's U.S.-dollar-denominated net income, revenues, expenses, recoveries of credit losses and income taxes were increased relative to the second quarter of 2013, the third quarter of 2012 and the prior year to date by the strengthening of the U.S. dollar. The average Canadian/U.S. dollar exchange rate for the quarter, expressed in terms of the Canadian dollar cost of a U.S. dollar, increased by 2.0% from a year ago and from the average of the second quarter. The average rate for the year to date increased by 0.9% from a year ago. The following table indicates the relevant average Canadian/U.S. dollar exchange rates and the impact of changes in the rates.

At the start of each quarter, BMO assesses whether to enter into hedging transactions that are designed 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.

The gain or loss from hedging transactions in future periods will be determined by both future currency fluctuations and the amount of any underlying future hedging transactions.

Net Income

Q3 2013 vs Q3 2012

Net income was $1,137 million for the third quarter of 2013, up $167 million or 17% from a year ago. Earnings per share were $1.68, up 18% from $1.42 a year ago.

Adjusted net income was $1,136 million, up $123 million or 12% from a year ago. Adjusted earnings per share were $1.68, up 13% from $1.49 a year ago. Adjusted results and items excluded in determining adjusted results are disclosed in detail in the preceding Adjusted Net Income section and in the Non-GAAP Measures section, together with comments on the uses and limitations of such measures.

On an adjusted basis, revenues increased by more than expenses, with particularly strong growth in non-interest revenue, and provisions for credit losses declined. P&C Canada had good results, driven by higher balance and fee volumes across most products and lower provisions for credit losses, partially offset by the impact of lower net interest margin and increased expenses. PCG produced strong results, benefiting from higher Insurance net income as well as a 37% increase from the traditional wealth businesses due to growth in client assets and increased transaction volumes. BMO Capital Markets adjusted net income improved from a year ago, driven by good performance across our diversified businesses. Increases in trading revenue and equity underwriting, more than offset a decline in mergers and acquisitions and in interest-rate-sensitive businesses and higher employee costs. P&C U.S. results also increased due to the benefits of lower provisions for credit losses and reduced expenses, partially offset by lower revenues. Corporate Services adjusted results declined due to lower revenues and higher expenses and low taxes a year ago, partially offset by higher recoveries of credit losses.

Q3 2013 vs Q2 2013

Net income increased $162 million or 17% and earnings per share increased $0.26 or 18%. Adjusted net income increased $139 million or 14%, and adjusted earnings per share increased $0.22 or 15%.

Adjusted net income grew due to higher revenues and lower provisions for credit losses, partially offset by increased expenses. Net income growth was driven by strong growth in P&C Canada and PCG. P&C Canada adjusted net income increased due to higher revenues as a result of higher balance and fee volumes across most products and three extra days, and lower provisions for credit losses, partially offset by increased expenses. PCG overall results were significantly higher due to improved results in its Insurance business as well as 16% growth in its traditional wealth businesses. BMO Capital Markets results grew, as higher revenues more than offset higher expenses and increased provisions for credit losses. P&C U.S. adjusted net income declined due to reduced revenue, primarily due to a decline in net interest margin, partially offset by lower provisions for credit losses. Corporate Services adjusted results declined due to lower revenues and higher expenses and taxes, partially offset by higher recoveries of credit losses.

Q3 YTD 2013 vs Q3 YTD 2012

Net income increased $53 million or 2% to $3,160 million and earnings per share were $4.63, up $0.07 or 2% from a year ago.

Adjusted net income increased $207 million or 7% to $3,174 million. Adjusted earnings per share were $4.65, up $0.30 or 7% from a year ago. On an adjusted basis, there was strong growth in PCG and BMO Capital Markets and good growth in P&C Canada and P&C U.S. Adjusted net income in Corporate Services was lower relative to the same period a year ago.

The foregoing Net Income section contains adjusted results and measures, which are non-GAAP. Please see the Non-GAAP Measures section.

Revenue

Total revenue of $4,050 million increased $172 million from the third quarter last year. Adjusted revenue increased $215 million or 6% to $3,892 million. P&C Canada had good results, driven by higher balance and fee volumes across most products, partially offset by the impact of lower net interest margin. Revenue significantly increased in PCG due to higher Insurance revenue and a 12% increase in its traditional wealth businesses. Revenue was higher in BMO Capital Markets as increases in trading revenue and equity underwriting more than offset a decline in mergers and acquisitions and in interest-rate-sensitive businesses. P&C U.S. revenues decreased as the effect of loan growth was more than offset by the effects of lower net interest margin, reductions in certain loan portfolios and lower deposit fees. Corporate Services' adjusted revenues decreased primarily due to a higher group taxable equivalent basis (teb) offset in the current quarter. The stronger U.S. dollar increased adjusted revenue growth by less than 1%, net of hedging impacts.

Revenue increased $106 million or 3% from the second quarter. Adjusted revenue increased $133 million or 4%. P&C Canada had strong revenue growth, due to the effects of higher balance and fee volumes across most products and three extra days. PCG revenue increased significantly, with higher Insurance revenue and record results in the traditional wealth businesses. Revenue grew in BMO Capital Markets, driven by strong client-driven trading performance and better equity and debt underwriting, which more than offset a reduction in merger and acquisition revenues and lower investment securities gains. P&C U.S. revenues decreased on a U.S. dollar basis primarily due to a decline in net interest margin. Adjusted revenues decreased in Corporate Services primarily due to a higher group teb offset in the current quarter. The stronger U.S. dollar increased adjusted revenue growth by less than 1%, net of hedging impacts.

Revenue for the year to date increased $121 million or 1% and adjusted revenue increased $365 million or 3%. P&C Canada revenues increased modestly due to the effects of higher balance and fee volumes across most products, partially offset by the impact of lower net interest margin. PCG revenue increased significantly due to higher Insurance results and increased traditional wealth revenue from growth across most businesses. There was growth in BMO Capital Markets, driven by higher trading revenue and investment banking fees. There was a reduction in P&C U.S. revenues as the benefits of increased commercial loans and fees and higher gains on the sales of newly originated mortgages were more than offset by the effects of lower net interest margin and reductions in deposit fees and securities gains. Corporate Services adjusted revenues declined with half of the decrease due to a higher group teb offset and the remaining half due to lower revenue from a variety of items, none of which were individually significant. The stronger U.S. dollar increased adjusted revenue growth by less than 1%, net of hedging impacts.

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

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

Net Interest Income

Net interest income decreased $79 million or 3% from a year ago to $2,146 million in the third quarter of 2013. Adjusted net interest income excludes amounts for the recognition of a portion of the credit mark on the M&I purchased performing loan portfolio. Adjusted net interest income decreased $19 million or 1% to $1,993 million.

BMO's overall net interest margin decreased on a reported basis by 13 basis points from a year ago to 1.75%. Adjusted net interest margin decreased by 7 basis points to 1.63%. Changes are discussed in the Review of Operating Groups' Performance section.

Average earning assets in the third quarter of 2013 increased $15 billion or 3% relative to a year ago, including a $4 billion increase as a result of the stronger U.S. dollar. There was strong growth in P&C Canada and PCG and good growth in P&C U.S., with modest growth in BMO Capital Markets and a reduction in Corporate Services.

Relative to the second quarter, net interest income increased $48 million or 2%. Adjusted net interest income increased $70 million or 4%, in part due to three more days in the current quarter.

BMO's overall net interest margin decreased by 4 basis points from the second quarter. Adjusted net interest margin decreased by just 1 basis point.

Average earning assets increased $6 billion or 1% from the second quarter, of which $4 billion related to the stronger U.S. dollar. There was good growth in P&C Canada, with moderate increases in the other operating groups and a reduction in Corporate Services.

Year to date, net interest income decreased $203 million or 3%. Adjusted net interest income decreased $153 million or 3% to $5,920 million, due to lower net interest margin.

BMO's overall net interest margin decreased by 14 basis points to 1.80%. On an adjusted basis, net interest margin decreased by 12 basis points to 1.65%.

Average earning assets for the year to date increased $22 billion or 5%, including a $2 billion increase as a result of the stronger U.S. dollar. There was strong growth in P&C Canada, PCG and BMO Capital Markets, good growth in P&C U.S., and a reduction in Corporate Services.

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

Non-Interest Revenue

Non-interest revenue increased $251 million or 15% from the third quarter a year ago to $1,904 million. Adjusted non-interest revenue increased $234 million or 14% to $1,899 million. Adjusting items in non-interest revenue relate to the run-off of structured credit activities, which are reflected in trading revenues recorded in Corporate Services. There were significant increases in insurance revenues, due to favourable movements in long-term interest rates and increases in trading and mutual fund revenues. Most other types of non-interest revenue were also up, with the exception of underwriting fees, and there were no securities gains in the current quarter.

Relative to the second quarter, non-interest revenue increased $58 million or 3%, and adjusted non-interest revenue increased $63 million or 3%. Insurance revenues were up $79 million, primarily due to favourable movements in long-term interest rates. There were also increases in most other types of non-interest revenue. Non-interest trading revenues were lower, despite higher overall trading revenues, and there were no securities gains in the current quarter.

Year to date, non-interest revenue increased $324 million or 6% to $5,615 million. Adjusted non-interest revenue increased $518 million or 10% to $5,592 million. There were significant increases in trading revenues, insurance revenues, mutual fund revenues and lending fees. Most other categories of non-interest revenue were also up, with the exception of deposit and payment service charges and securities gains.

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

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

Non-Interest Expense

Non-interest expense increased $58 million or 2% from the third quarter a year ago to $2,542 million. Adjusted non-interest expense increased $116 million or 5% to $2,458 million primarily due to higher employee-related costs, including continued investment in the business with increases in front-line roles, higher revenue-based costs in line with revenue growth, and higher severance and technology costs. The stronger U.S. dollar increased adjusted non-interest expense growth by less than 1%.

Relative to the second quarter, non-interest expense decreased $26 million or 1%. Adjusted non-interest expense increased $56 million or 2%, primarily due to three more days and higher employee-related costs, including continued investment in the business and growth in revenue-based costs. The stronger U.S. dollar increased adjusted non-interest expense growth by less than 1%.

Year-over-year operating leverage on a reported basis was 2.2% and adjusted operating leverage was 0.9%. Quarter-over-quarter operating leverage on a reported basis was 3.7% and adjusted operating leverage was 1.2%.

Non-interest expense for the year to date increased $163 million or 2% to $7,700 million. Adjusted non-interest expense increased $247 million or 3% to $7,324 million, primarily due to higher employee-related costs, including higher revenue-based costs in line with revenue growth, and higher benefit and pension costs. We continued to invest in the business, including increased technology costs. These factors were partially offset by benefits from a continued focus on productivity. The stronger U.S. dollar increased adjusted non-interest expense growth by less than 1%.

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

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

Income Taxes

The provision for income taxes of $294 million increased $107 million from the third quarter of 2012 and increased $38 million from the second quarter of 2013. The effective tax rate for the quarter was 20.6%, compared with 16.2% a year ago and 20.8% in the second quarter.

The adjusted provision for income taxes of $285 million increased $79 million from a year ago and increased $35 million from the second quarter. The adjusted effective tax rate was 20.1% in the current quarter, compared with 16.9% in the third quarter of 2012 and 20.0% in the second quarter of 2013. The higher adjusted tax rate in the current quarter relative to the third quarter of 2012 was primarily due to lower recoveries of prior periods' income taxes and a change in Ontario statutory tax rates that resulted in a positive revaluation of deferred tax assets in 2012. The adjusted tax rate is computed using adjusted net income rather than net income in the determination of income subject to tax.

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

Risk Management

Our risk management practices and key measures have not changed significantly from those outlined on pages 75 to 92 of BMO's 2012 annual MD&A.

Provisions for Credit Losses

Q3 2013 vs Q3 2012

The provision for credit losses (PCL) was $77 million, a decrease of $160 million from the prior year. Adjusted PCL was $13 million, a decrease of $103 million. Adjusting items this quarter included a $44 million specific provision on the M&I purchased performing loan portfolio and a $20 million increase in the collective allowance related to the Canadian loan portfolios. The decrease in adjusted PCL was mainly due to lower provisions in P&C Canada and P&C U.S., coupled with higher recoveries of credit losses on the M&I purchased credit impaired loan portfolio in Corporate Services.

P&C Canada provisions of $126 million decreased by $21 million mainly due to lower provisions in the consumer portfolio. PCG provisions decreased by $6 million due to higher recoveries of previously written-off amounts. BMO Capital Markets provisions were relatively stable year over year. P&C U.S. provisions of $40 million decreased by $36 million, due to lower provisions in the commercial portfolio resulting from lower new reservations and higher recoveries of previously written-off amounts. Corporate Services adjusted recoveries of credit losses increased $42 million, including higher recoveries on the M&I purchased credit impaired loan portfolio.

Q3 2013 vs Q2 2013

The PCL decreased $68 million from the prior quarter. Adjusted PCL was down $97 million from the prior quarter mainly due to lower provisions in P&C Canada and P&C U.S., coupled with higher recoveries of credit losses on the M&I purchased credit impaired loan portfolio in Corporate Services.

P&C Canada provisions decreased by $28 million, with lower provisions in both the consumer and commercial portfolios. PCG provisions were relatively stable quarter over quarter. BMO Capital Markets provisions increased by $8 million. P&C U.S. provisions decreased by $15 million, primarily due to lower provisions in the commercial portfolio, driven by lower new reservations and higher recoveries from previously written-off amounts. Corporate Services adjusted recoveries of credit losses increased $60 million including higher recoveries on the M&I purchased credit impaired loan portfolio.

Impaired Loans

Total gross impaired loans were $2,650 million at the end of the current quarter, down from $2,848 million in the second quarter of 2013 and from $2,867 million a year ago. The stronger U.S. dollar raised gross impaired loans by $35 million relative to the second quarter of 2013 and $43 million relative to a year ago. Included in the amount above at the end of the quarter was $1,020 million of gross impaired loans related to acquired portfolios, of which $151 million is subject to a loss-sharing agreement with the Federal Deposit Insurance Corporation that expires in 2015 for commercial loans and in 2020 for retail loans.

Impaired loan formations (excluding the M&I purchased performing loan portfolio) totalled $399 million in the current quarter, up from $347 million in the second quarter of 2013 and down from $405 million a year ago. Impaired loan formations related to the M&I purchased performing loan portfolio were $211 million in the current quarter, compared with $248 million in the second quarter of 2013 and $386 million a year ago.

Real Estate Secured Lending

Residential mortgage and home equity line of credit (HELOC) exposures are areas of interest in the current environment. BMO regularly performs stress testing on its mortgage and HELOC portfolios to evaluate the potential impact of tail events. These stress tests incorporate moderate to severe adverse scenarios. The resulting credit losses vary depending on the severity of the scenario and are considered to be manageable.

In 2012, new residential real estate lending rules were introduced for federally regulated lenders in Canada including restrictions on loan-to-value (LTV) for revolving HELOCs, waiver of confirmation of income, debt service ratio maximums, as well as maximum amortization of 25 years and maximum home value of $1 million for high ratio insured mortgages (LTV greater than 80%). The regulatory changes resulted in some adjustments to loan underwriting practices including reducing the maximum LTV on revolving HELOCs to 65% from 80% previously.

Market Risk

Total Trading Value at Risk (VaR) increased over the quarter largely because of less diversification benefit, increased market volatility and moderately higher exposures in equity and credit. The available-for-sale (AFS) VaR increase is the result of additional asset holdings and the impact of higher interest rates.

Total Trading Stressed VaR increased with additional commodity and credit exposures partly offset by reduced interest rate risk, broadly reflecting the changes in Total Trading VaR for the quarter.

There were no significant changes in our structural market risk management practices during the quarter. Structural Market Value Exposure (MVE) is driven by rising interest rates and primarily reflects a lower market value for fixed-rate loans. Structural Earnings Volatility (EV) is driven by falling interest rates and primarily reflects the risk of prime-based loans repricing at lower rates. MVE and economic value exposures under rising interest rate scenarios decreased from the prior quarter primarily due to higher short term asset sensitivity and lower seasonal mortgage commitment volume. EV and earnings exposures under falling interest rate scenarios increased from the prior quarter due to higher short term asset sensitivity.

BMO's market risk management practices and key measures are outlined on pages 82 to 86 of BMO's 2012 Annual Report.

Liquidity and Funding Risk

Liquidity and funding risk is managed under a robust management framework. There were no material changes in the framework during the quarter.

BMO's liquid assets are primarily held in our trading businesses and in supplemental liquidity pools that are maintained for contingency purposes. Liquid assets include high-quality assets that are marketable, can be pledged as security for borrowings and can be converted to cash in a time frame that meets our liquidity and funding requirements. As at July 31, 2013, BMO owned liquid assets were $178 billion, compared with $176 billion as at April 30, 2013. The slight increase in liquid assets from April 30, 2013, was primarily attributable to higher security balances offset by lower cash balances. BMO's cash and securities as a percentage of total assets was 30.8% as at July 31, 2013, compared with 30.1% as at April 30, 2013.

Liquid assets are primarily held at the parent bank level, in our U.S. legal entity BMO Harris Bank and in BMO's broker/dealer operations in Canada and internationally. In some cases, a portion of those liquid assets have been pledged by certain entities to others in exchange for funding.

In the ordinary course of the bank's day-to-day business activities, BMO may pledge certain cash and security holdings as collateral to support its trading activities and participation in clearing and payment systems. In addition, BMO may receive highly liquid assets as collateral and may re-pledge these assets in exchange for cash or as collateral for trading activities. Net unencumbered liquid assets, defined as BMO owned cash and securities plus eligible collateral received less collateral encumbered, totalled $153 billion at July 31, 2013, compared with $161 billion at April 30, 2013. BMO may also pledge mortgage and loan assets to raise secured long-term funding.

Our funding philosophy requires that secured and unsecured wholesale funding used to support loans and less liquid assets be longer term (typically maturing in two to ten years) to better match the term to maturity for these assets. Wholesale secured and unsecured funding for liquid trading assets is generally shorter term (maturing in less than one year), and is aligned with the liquidity of the assets being funded. Trading assets are subject to haircuts in order to reflect the potential for lower market values during times of market stress. Supplemental liquidity pools are funded with a mix of wholesale term funding to prudently balance the benefits of holding supplemental liquid assets against the cost of funding.

Diversification of our wholesale funding sources is an important part of our overall liquidity management strategy. During the third quarter, BMO issued $7.0 billion of wholesale term funding in Canada and internationally. Total wholesale term funding outstanding was $81.6 billion at July 31, 2013, compared with $77.0 billion at April 30, 2013. The increase was used to refinance upcoming wholesale term funding maturities and fund net asset growth. The bank expects to continue accessing the wholesale term funding markets in 2013, primarily to refinance wholesale term funding maturities and net asset growth that may occur over the course of the year.

BMO's liquidity and funding management practices and key measures are outlined on pages 86 to 88 of BMO's 2012 Annual Report.

Credit Rating

The credit ratings assigned to BMO's short-term and senior long-term debt securities by external rating agencies are important in the raising of both capital and funding to support our business operations. Maintaining strong credit ratings allows us to access the capital markets at competitive pricing levels. Should our credit ratings experience a material downgrade, our cost of funds would likely increase significantly and our access to funding and capital through capital markets could be reduced. A material downgrade of our ratings could have other consequences, including those set out in Note 10 to the audited consolidated financial statements on page 143 of BMO's 2012 Annual Report.

The credit ratings assigned to BMO's senior debt by the rating agencies are indicative of high-grade, high-quality issues. The ratings are as follows: DBRS (AA); Fitch (AA-); Moody's (Aa3); and Standard & Poor's (S&P) (A+).

We are required to deliver collateral to certain counterparties in the event of a downgrade to our current credit rating. The incremental collateral required is based on mark-to-market exposure, collateral valuations and collateral threshold arrangements, as applicable. As at July 31, 2013, the bank would be required to provide additional collateral to counterparties totalling $106 million and $322 million under a one-notch and two-notch downgrade, respectively.

Insurance Risk

There were no significant changes in the risk management practices or risk levels of our insurance business during the quarter. BMO's insurance risk management practices are outlined on page 89 of BMO's 2012 Annual Report.

Information Management and Security Risk

As described in the Operational Risk section on pages 88 to 89 of BMO's 2012 annual MD&A, information security risks for financial institutions like BMO have increased in recent years. Our operations include online and mobile financial services that feature the secure processing, transmission and storage of confidential information. Given our use of the Internet and reliance on digital technologies, we face cyber security risks, which could include information security risk such as threats of hacking, identity theft and corporate espionage, and denial of service risk such as threats targeted at causing system failure and service disruption. BMO maintains systems and procedures to prevent, monitor, react to and manage cyber security threats. It is possible that we, or those with whom we do business, may not anticipate or implement effective measures against all such security threats because the techniques used change frequently and can originate from a wide variety of sources, which have become increasingly sophisticated. In the event of such an occurrence, BMO may experience losses or reputational damage.

Derivative Transactions

As discussed in the Select Financial Instruments section, the Enhanced Disclosure Task Force has recommended enhanced disclosures in a numbers of areas including counterparty credit risk arising from derivative transactions. With limited exceptions, we utilize the International Swaps and Derivatives Association (ISDA) Master Agreement to document our contractual trading relationships for over-the-counter (OTC) derivatives with our counterparties. ISDA Master Agreements set out the legal framework and standard terms that apply to all the derivative transactions entered into bilaterally between the parties. In addition to providing "Events of Default" and "Termination Events", which can lead to the early termination of transactions prior to their maturity date, ISDA Master Agreements also contain rules for the calculation and netting of termination values (also known as "Close-out Amounts") for transactions between counterparties to produce a single net aggregate amount payable by one party to the other.

Credit Support Annexes (CSAs) are commonly included with ISDA Master Agreements to provide for the exchange of collateral between the parties where one party's OTC derivatives exposure to the other party exceeds an agreed amount (Threshold). The purpose of collateralization is to mitigate counterparty credit risk. Collateral can be exchanged as initial margin and/or variation margin. CSAs outline, among other things, provisions setting out acceptable collateral types (e.g. government treasuries and cash) and how they will be valued (discounts are often applied to the market values), as well as Thresholds, whether or not the collateral can be re-pledged by the recipient and how interest is calculated. The following table represents the notional amounts of our OTC derivative contracts comprised of those which are centrally cleared and settled through a designated clearing house and those which are non-centrally cleared. The notional amounts of our derivatives represent the amount to which a rate or price is applied in order to calculate the amount of cash that must be exchanged under the contract. Notional amounts do not represent assets or liabilities and therefore are not recorded in our Consolidated Balance Sheet.