bank of montreal reports second quarter earnings 2001...1 for immediate release bank of montreal...

1

FOR IMMEDIATE RELEASE Bank of Montreal Reports Second Quarter Earnings TORONTO, May 23, 2001 – Bank of Montreal reported net income of $607 million for the second quarter ended April 30, 2001. This compared with $497 million in the second quarter 2000. Excluding non-recurring items in each period, net income for the second quarter 2001 was $422 million compared with record net income of $445 million in the same period last year.

Second quarter highlights compared to the first quarter were: • = Net income of $607 million, up $191 million (excluding non-recurring items, net income was

$422 million);

• = Earnings per share of $1.10, up $0.37 (excluding non-recurring items, earnings per share were $0.76); and

• = Return on equity of 23.7 per cent, up from 15.3 per cent (excluding non-recurring items, return on equity was 16.2 per cent).

“The Bank has made significant progress this quarter,” said Tony Comper, Chairman and Chief Executive Officer. “Net income has improved over last quarter with a strong contribution from the Bank’s Investment Banking Group and a substantial gain on the sale of our remaining shares in Bancomer. Strong expense management within the Private Client Group and increased fee-based revenues from the Group’s full-service investing businesses have more than offset declines in market-driven revenues.” “Net income from Personal and Commercial Client Group declined, reflecting continued strategic spending to support growth initiatives,” he said. “Our efforts to integrate new sales and service staff continued and we’re starting to see some positive results.”

SUMMARY OF FINANCIAL RESULTS (excluding non-recurring items) Second Quarter 2001 Compared with Second Quarter 2000

• = Total revenues were $2,196 million, unchanged from the prior year;

• = Earnings per share were $0.76, compared with $0.78;

• = Return on equity was 16.2 per cent, compared with 17.6 per cent;

• = Non-interest expenses increased $56 million or four per cent;

• = The provision for credit losses increased $17 million to $117 million.

2

Second Quarter 2001 Compared with First Quarter 2001

• = Revenues increased $47 million or two per cent from $2,149 million;

• = Earnings per share increased $0.06 to $0.76;

• = Return on equity increased from 14.8 per cent to 16.2 per cent;

• = Non-interest expenses increased $7 million;

• = The provision for credit losses was $117 million, an increase of $17 million. Year-to-date Second Quarter 2001 Compared with Year-to-date Second Quarter 2000

• = Net income was $825 million, compared with $852 million in the comparable period in 2000;

• = Revenues increased $138 million or three per cent to $4,345 million;

• = Earnings per share were $1.46, compared with $1.48;

• = Return on equity was 15.5 per cent, compared with 16.9 per cent;

• = Non-interest expenses increased $199 million to $2,801 million;

• = The provision for credit losses was $217 million, an increase of $17 million from fiscal 2000.

The text of the Bank’s Second Quarter 2001 Report to Shareholders follows.

BANK OF MONTREAL - SECOND QUARTER 2001 REPORT TO SHAREHOLDERS

3

SECOND QUARTER 2001 REPORT TO SHAREHOLDERS MANAGEMENT’S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION (MD&A)

RESULTS OVERVIEW On January 23, 2001 the Bank’s Board of Directors declared a 100 per cent stock dividend, effectively achieving a two-for-one split of the Bank’s common shares. All data in respect of numbers of shares and per share amounts now reflect the effects of the split and all prior period comparatives have been restated accordingly. Second Quarter 2001 vs. Second Quarter 2000 Bank of Montreal earned net income of $607 million for the second quarter of 2001, an increase of $110 million from the second quarter of 2000. Excluding non-recurring items in both periods, which are itemized on page 27, net income for the second quarter was $422 million, a decrease of $23 million or five per cent from the record results of last year. Return on equity for the quarter was 23.7 per cent, compared with 19.8 per cent for the comparable period in 2000. Excluding non-recurring items, return on equity declined by 1.4 percentage points to 16.2 per cent. Diluted earnings per share were $1.10 versus $0.87 in the second quarter of last year. Excluding non-recurring items, diluted earnings per share of $0.76 were $0.02 lower than in the prior year. Net economic profit was $352 million for the quarter, compared with $226 million last year. During the quarter, the Bank sold its remaining 812 million shares in Bancomer for a non-recurring after-tax gain of $239 million. The Bank was able to dispose of its investment sooner than anticipated and the $284 million pre-tax gain realized on sale was substantially higher than the gain expected by the Bank at the end of the first quarter. The Bank first invested in Bancomer in 1996 and earned an average annual 17.3 per cent after-tax cash-on-cash return over the holding period. Excluding non-recurring items, net income declined by $23 million and earnings per share by $0.02 from the record results in the second quarter of 2000. The comparison of earnings between years is affected by changes in accounting for the investment in Bancomer and this year’s adoption of a new accounting standard related to pensions and other future employee benefits. If the accounting used in fiscal 2001 were in effect last year, net income for the second quarter of fiscal 2001 would exceed net income for the second quarter of last year by $6 million and earnings per share would be $0.04 higher than last year. To date, the year has been characterized by slower economic growth in North America, particularly in the United States. As a result, this quarter the Bank has increased its estimate of the annual provision for credit losses for fiscal 2001 to $450 million, from its annual estimate in the first quarter


4

of $400 million. Accordingly, the provision for credit losses recorded in the second quarter was increased to $117 million from the $100 million charge recorded in both the second quarter of last year and in the first quarter of fiscal 2001. For prudential reasons, the Bank also recorded a non-recurring $100 million increase in its general provision for credit losses during the quarter, resulting in a non-recurring after-tax charge to earnings of $58 million. Excluding non-recurring items, results benefited from a record performance within the Investment Banking Group. Results from the Private Client Group were down from the unusually strong second quarter of last year. Earnings from the Personal and Commercial Client Group also declined. Increased net income from the Investment Banking Group reflected strong performance from Capital Markets businesses due to higher client-driven trading revenues, the positive effects of declining interest rates on interest-rate-sensitive businesses and, increased gains on securities, net of a write-down in certain investments in collateralized bond obligations. Expenses improved, but the provision for credit losses increased year-over-year. Net income from the Private Client Group declined due to lower client transaction-based trading revenues as less robust market conditions curbed full-service and direct investing revenues and offset improved revenues in all other lines. Expenses improved year-over-year as lower revenue-based compensation costs and the effects of focused expense management more than offset increased expenses from acquired businesses and strategic initiatives. Net income from the Personal and Commercial Client Group, excluding non-recurring items, was down from the prior year as revenue growth was more than offset by higher benefits and sales and service staffing costs, and by spending on business initiatives. Revenue growth was reduced, in part, by the loss of revenues from branches sold over the past year. In addition, the introduction of various initiatives and the expanded sales and service staff in fiscal 2000, which will benefit future periods, continued to affect the success of sales efforts and slowed volume growth in the current period. Revenues grew in residential mortgages, consumer lending and card products in Canada, and in U.S. retail and business banking, while revenues in other major product lines in Canada declined. Second Quarter 2001 vs. First Quarter 2001 Net income for the second quarter of 2001 increased by $191 million from $416 million in the first quarter. Excluding non-recurring items, net income increased by $19 million or five per cent. Return on equity of 23.7 per cent was 8.4 percentage points higher than in the first quarter. Excluding non-recurring items, return on equity increased 1.4 percentage points to 16.2 per cent. Diluted earnings per share increased $0.37 from $0.73 in the first quarter. Excluding non-recurring items, diluted earnings per share increased $0.06 or nine per cent, notwithstanding that there are fewer days in the second quarter than in the other quarters of the year, a factor that reduces second quarter earnings relative to other quarters. Net economic profit increased by $206 million from the first quarter of the year.


5

The Investment Banking Group’s results improved due to continued strong results from interest-rate-sensitive businesses, higher client-driven trading revenues and higher revenues from merger and acquisition fees. Net income from the Private Client Group increased due to higher fee-based revenues and lower expenses. The Personal and Commercial Client Group’s net income declined as revenues fell because of fewer days in the second quarter, while loan volumes and spreads were substantially unchanged. Expenses increased modestly, but tighter expense management is now in place to better match initiative spending to the pace of revenue growth. Over the course of the first quarter and throughout February, the Group’s personal loan volumes in Canada had declined. However, over the last two months of the quarter, volumes improved. Commercial loan volumes increased somewhat in the second quarter after declining in the first quarter. Deposit volumes also declined throughout the latter half of the first quarter and through the first half of the most recent quarter. However, volumes increased throughout the last six weeks of the quarter. These apparent shifts in trends are attributable to the continuing integration and increasing effectiveness of the 1,000 front-line sales staff that were added in fiscal 2000. Gross impaired loans and acceptances fell slightly to $1,653 million in the second quarter of the year. During the quarter, the Bank decided to classify approximately $200 million of loans to certain California utilities as impaired, reflecting the deterioration of these loans. The Bank also achieved a $530 million reduction in impaired loans through a combination of repayments, accounts returning to performing status, economically advantageous sales of certain loans, and through write-offs. In the first quarter the Bank filed a normal-course issuer bid, which expires on December 31, 2001, to repurchase up to 30 million or 5.7 per cent of its common shares. During the second quarter, and year-to-date, the Bank repurchased 21.2 million shares at a cost of $824 million. Year-to-date 2001 vs. Year-to-date 2000 Net income for the year-to-date was $1,023 million, an increase of $52 million from the comparable period in fiscal 2000. Excluding non-recurring items, net income decreased $27 million or three per cent to $825 million. Return on equity, at 19.4 per cent, was unchanged from fiscal 2000 year-to-date. Excluding non-recurring items, return on equity declined by 1.4 percentage points to 15.5 per cent. Diluted earnings per share were $1.83 versus $1.70 in the first half of last year. Excluding non-recurring items, diluted earnings per share declined by $0.02 to $1.46. Net economic profit was $498 million year-to-date, compared with $427 million last year. The Bank sold its entire 1,012 million shares in Bancomer, producing a non-recurring gain on sale of $321 million ($272 million after-tax.). The Bank also recorded a non-recurring $100 million increase in its general provision for credit losses during the second quarter of 2001, resulting in a non-recurring after-tax charge to earnings of $58 million. There was no such charge for the comparable


6

year-to-date period in 2000. The effects of these and other non-recurring items are outlined on page 27. Excluding non-recurring items, net income declined by $27 million and diluted earnings per share by $0.02 from the comparable period in 2000. As explained previously, the comparison of earnings between years is affected by changes in accounting for the investment in Bancomer and this year’s adoption of the new accounting standard for employee benefits. If the accounting used in fiscal 2001 were in effect last year, net income for the six months ended April 30, 2001 would exceed net income for the comparable period last year by $44 million and earnings per share would be $0.12 higher than last year. Results, excluding non-recurring items, benefited from the strong performance of the Investment Banking Group, which was driven by improved results in Capital Markets businesses due to higher client-driven trading revenues. Net income from the Private Client Group declined, due largely to lower client-driven trading volumes. Emfisys and Corporate Support net income declined due to lower earnings recognized on the investment in Bancomer. Net income from the Personal and Commercial Client Group declined marginally, due to increased staffing and initiative spending, and lower revenue growth.

STRATEGIC OVERVIEW The Bank’s objectives, standards, approach and governance related to strategic management are outlined on page 19 of the 2000 Annual Report. Throughout fiscal 2001, the Bank has continued to make progress with the next phase of its growth strategy, the acceleration of the shift of its business mix toward higher-growth, higher-return businesses. The Bank continues to target three client markets across Canada and in high-opportunity areas of the United States:

• = personal and commercial banking clients (served by the Personal & Commercial Client Group); • = corporate and institutional clients (served by the Investment Banking Group); and • = individual investing clients (served by the Private Client Group). As a high priority, the Bank is pursuing e-business opportunities within and across all three markets. E-business continues to be an important component of the Bank’s growth strategy. On November 1, 2000, Emfisys, the Bank’s technology and e-business group, assumed responsibility for e-business activities, making it one of the largest information technology research, development and service operations in the country. During the first six months of the year, Emfisys continued to focus on increasing its market competitiveness, efficiency and quality of service. The Group’s strategy is to create new high-growth, high-return businesses; invest in technology, e-business research and development; and optimize revenue generation through its Corporate and Commercial Electronic Financial Solutions business, strategic alliances, partnerships, joint ventures and outsourcing. Personal and Commercial Client Group made further progress in integrating branch and electronic banking capabilities in order to help simplify customers’ financial lives. In the past twelve months,


7

the number of more cost-effective and convenient instore branches rose by 20 to 78. At quarter-end, there were 875 traditional branches in Canada, a reduction of 101 from the second quarter of 2000. This ongoing optimization of the distribution channels included the sales of 84 branches, to credit unions and to National Bank of Canada, and the acquisition of 12 former TD/Canada Trust branches. During the quarter, Harris Bank announced an agreement to acquire First National Bank of Joliet. This merger expands the Harris community bank network to 149 locations and 245 ABMs across Chicagoland, moving Harris aggressively into the fastest growing county in Illinois and the sixteenth fastest growing county in the United States. The Private Client Group’s strategy involves differentiation through a solid brand identity and the highest-quality advice, focusing on helping clients accumulate, protect and grow their financial assets. This is coupled with excellent product offerings and maximum choice and flexibility through targeted distribution. During the first half of the year, the Group continued to increase its North American investment professional team, completed the integration of Seattle-based Freeman Welwood and Arizona-based Century Bank and launched a number of new products and services, including Harris AdvantEdge Investing and BMO Nesbitt Burns Full-Service online trading capability. The Bank recently announced that it has agreed to acquire the Guardian Group of Funds Ltd. and its $2 billion in assets under management. This strategic transaction provides an excellent platform to continue to grow the Group’s mutual fund business, including the addition of an important new advisory channel capability. The Investment Banking Group continued to focus on increasing returns by growing high-potential businesses and reallocating capital to more-productive units. The Group’s strategy is to build on BMO Nesbitt Burns’ strong market position in Canada, expand coverage in the highly profitable U.S. Midwest mid-market sector and selectively grow its presence in the energy and media and telecommunications sectors. The Group is also building in specific high-return businesses such as merchant banking, securitization and credit investment management. During the second quarter, BMO Nesbitt Burns ranked first in Canadian equity block trading and maintained a leading share of the underwriting market. The Bank’s average annual 5-year total shareholder return for the period ended April 30, 2001 was 20.4 per cent, the lowest of Canada’s major banks. However, for the twelve months ended April 30, 2001, the 1-year total shareholder return from Bank of Montreal common stock was 35 per cent, the highest return among Canada’s major banks. By continuing to progress in the implementation of its growth strategy, Bank of Montreal intends to move closer to its objective of achieving top-tier shareholder returns relative to its Canadian and North American peers by 2002.


8

FISCAL 2001 FINANCIAL TARGETS At the end of fiscal 2000, Bank of Montreal adopted more detailed and aggressive financial targets for fiscal 2001. Excluding the effects of non-recurring items, fiscal 2001 targets are:

• = growth in earnings per share in the range of 10 to 15 per cent; • = return on shareholders’ equity of 17.0 to 17.5 per cent; • = revenue growth of 7 to 9 per cent; • = an expense-to-revenue ratio consistent with the 2000 ratio of 62.8 per cent; • = a provision for credit losses consistent with the 2000 provision of $400 million; • = a tax rate (tax equivalent basis) averaging 37 per cent; • = modest growth from $134 billion of risk-weighted assets in 2000; • = a Tier 1 capital ratio of at least 8.0 per cent; and • = a cash and securities-to-total assets ratio consistent with the 2000 ratio of 27.8 per cent. Outlook for targets Management is committed to the Bank’s annual targets. In this difficult environment, it will be challenging to achieve the revenue growth and expense-to-revenue targets. As indicated previously, the annual provision for credit losses is now estimated to be $450 million, excluding the $100 million non-recurring general provision recorded in the most recent quarter.

OPERATING GROUP REVIEW Periodically, certain business lines and units within the business lines are transferred between client groups to more closely align the Bank’s organizational structure and its strategic priorities. All comparative figures are restated to give effect to the transfers. In the second quarter the most significant change was a transfer from the Personal and Commercial Client Group to Corporate Support. The transfer was the net interest expense that remains unallocated to the lines of business in the Bank’s internal transfer pricing process.


9

PERSONAL AND COMMERCIAL CLIENT GROUP

The Personal and Commercial Client Group provides branch-based and electronic financial services to households and commercial businesses in Canada and the United States. Reported($ millions except as noted) Q2 Q1 YTD Q2 YTD

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

Net income 181 201 382 203 454

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

Excluding non-recurring items($ millions except as noted) Q2 Q1 YTD Q2 YTD

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

Fiscal 2001 Fiscal 2000


Second Quarter 2001 vs. Second Quarter 2000 Net income for the second quarter of 2001 was $181 million, compared with $203 million in the second quarter of 2000. Excluding non-recurring gains on the sales of branches in both periods, net income was $177 million, a decline of $18 million or 10 per cent from the second quarter of last year. Revenues, at $1,038 million, were $20 million higher than a year earlier. Excluding non-recurring items in both quarters, revenues increased $29 million or three per cent to $1,033 million. There have


10

been 84 branches sold and 12 acquired since the first quarter of 2000. The foregoing revenue growth consists of an increase of $39 million or four per cent on a same-branch basis and a decline of $10 million or one per cent related to branches sold and acquired. The $39 million increase was due to volume growth, slightly higher spreads, higher gains on securitizations and the effects of favourable currency translation rates on U.S. retail and business banking revenues. Revenue growth was affected by lower gains on securities sales and fewer days in the current quarter. Non-interest expenses for the second quarter of 2001 increased by $67 million or 11 per cent, mainly due to higher staffing costs associated with more front-line sales staff and higher benefits, increased initiative spending and the effects of currency translation on U.S. retail and business banking expenses. The Group’s revenue growth and profitability in fiscal 2001 have lagged expectations. In fiscal 2000 management introduced initiatives associated with the Bank’s growth strategy. The absorption of the associated changes, including the addition of approximately 1,000 front-line sales staff, has affected volume and profitability growth in fiscal 2001. Overcoming these challenges has taken longer than anticipated. As explained previously, volumes improved in the last half of the quarter as efforts to integrate new staff continued. In addition, management is exercising stronger expense control and will invest in initiatives at a more managed pace. The Business Developments section that follows outlines some of the actions being taken to address revenue growth. Second Quarter 2001 vs. First Quarter 2001 Net income of $181 million was $20 million lower than in the first quarter of 2001. Excluding non-recurring items in both quarters, net income of $177 million was $19 million or 10 per cent lower. Revenues, at $1,038 million, were $24 million lower than in the first quarter. Excluding non-recurring items, revenues declined by $22 million or two per cent to $1,033 million. The decline consisted of a reduction of $17 million on a same-branch basis and a reduction of $5 million related to branches sold and acquired. Fewer days in the second quarter caused a $25 million quarter-over-quarter decline. Revenues benefited from higher gains on securities sales and gains on securitizations. Cards service fees declined, while net interest margins were unchanged. As noted previously, indications are that trends in respect of volumes improved in the latter half of the quarter. In the United States, strong loan and deposit growth continued in retail and business banking. Non-interest expenses of $668 million increased by $9 million or one per cent from the previous quarter, due to higher initiative spending and staffing costs. Year-to-date 2001 vs. Year-to-date 2000 Net income for the year-to-date period ended April 30, 2001 was $382 million, a decrease of $72 million from the comparable period in 2000. Excluding after-tax gains on sales of branches in 2001 and fiscal 2000 gains on the sales of Partners First and branches, year-to-date net income decreased by $6 million or two per cent to $373 million in 2001. Year-to-date revenues for the period ended April 30, 2001 declined by $31 million to $2,100 million, as non-recurring revenues were much higher in the prior year due to the gain on sale of Partners First. Excluding non-recurring items in both periods, revenues increased by $83 million or four per cent to


11

$2,088 million. The growth consisted of an increase of $98 million or five per cent on a same-branch basis and a reduction of $15 million or one per cent related to branches sold and acquired. The increase was attributable to volume growth, improved spreads, higher gains on securitizations and the effects of strategic initiatives, partly offset by lower gains on sales of securities. Non-interest expenses for the year-to-date period ended April 30, 2001 increased by $103 million or eight per cent to $1,327 million due to increased initiative spending and higher sales and service staffing costs. Business Developments The Group’s objectives for fiscal 2001 and its outlook for its businesses and the environments in which they operate were outlined on pages 30 to 33 of the Bank’s Annual Report for fiscal 2000. The Group’s objectives for fiscal 2001 remain to:

• = pursue an integrated approach to branch and electronic banking; • = pursue an integrated strategic approach to the development and marketing of personal banking

products; • = provide more customized service and target the small business banking market; and • = build on its leadership position in the commercial segment of companies with revenues of $100 to

$300 million. The Group’s economic outlook anticipates: Canadian economic growth moderating to a more sustainable pace over the next several years; a slowing economy to dampen loan growth over the year; the Canadian economy outperforming the U.S. economy for the balance of 2001; moderately strong growth rates continuing over the next few years, while the pace of spread compression levels off with the lowering of the wholesale funding rate; profitable growth through the launch of new products, the penetration of new markets, the migration to lower cost distribution channels and by leveraging the Group’s North American scale and knowledge transfer. There were a number of notable business developments in the quarter. In Canada, residential mortgages, after adding back the effects of securitizations, increased by $1.6 billion or four per cent from the second quarter of 2000, but decreased by $150 million from the first quarter of 2001. Other personal loans, adjusted for securitizations, increased by $498 million or four per cent year-over-year and by $201 million or two percent from the first quarter. Credit card loans increased by $284 million or eight percent from a year ago, but declined by $151 million or four per cent from the first quarter. Loans and acceptances to commercial enterprises, including small businesses, were $474 million or two per cent higher than a year ago and up $67 million from the first quarter. Loan growth statistics were affected by branch sales, net of acquisitions. In the United States, consumer, mortgage and business loans grew by 17 per cent from a year ago and by five per cent from the first quarter of 2001. In addition, the Hispanic Banking initiative continued with strong momentum. Through an alliance with eScout.comSM, a premier web-based e-commerce and e-business network for America’s small and mid-sized businesses and banks, Harris Bank is


12

providing small and mid-sized businesses with access to the fastest growing business-to-business (B2B) trading marketplace in North America. In Canada, the Bank recorded a gain of $5 million ($4 million after-tax) on the successful completion of the sale of the last 10 branches to National Bank of Canada and an Alberta Credit Union. The Bank of Montreal has applied for regulatory approval of BMO Life, which will be a wholly owned, federally chartered life insurance company operating across Canada. It is anticipated that final approval and licensing will be complete by the end of the summer. The Group has recently undertaken a number of initiatives to stimulate sales growth and profitability. These included: providing more pricing flexibility to front-line staff; launching various mortgage initiatives that are unique to the market, including the re-introduction of an 18-year open term mortgage priced at the 5-year fixed rate; the introduction of new term investment products, including the RateRiser GIC; providing additional leading-edge technology and enhanced merger and acquisition capabilities in the commercial segment; and perhaps most importantly, managing the introduction of major program changes in the second half of the year to relieve sales staff of change management distractions and reduce expenses. Other customer service initiatives included: the introduction of new bank statements that enable customers to consolidate multiple accounts on a statement; the launch of a Chinese language public web site to provide information on client products and services; and a new online banking feature that gives clients individual or consolidated views of their bank and investment accounts, credit cards, loans and mortgages. BMO mbanx Direct, in partnership with Amex Canada Inc., announced that for the first time in Canada, travellers cheques and foreign currency can be acquired online for delivery to customers. In Small Business Banking, the Bank announced it now offers a comprehensive dairy farm financial services program in Ontario and plans to make the program available across the country. A new online business centre now provides local Ottawa area entrepreneurs with instant access to information on market opportunities and business support. Technology initiatives included the launch of mbanx Direct Manager, a tool that provides assisted registration for telephone and online banking clients, and the introduction of a new customer-centric, customer relationship management tool to enhance the Bank’s sales and service processes.


13

PRIVATE CLIENT GROUP

The Private Client Group’s total assets under management and administration, including term deposits, was $235 billion. The Group brings together all of the Bank of Montreal Group of Companies’ wealth management businesses, offering clients a broad array of wealth management products and services, including retail investment products, direct and full-service investing, private banking and institutional asset management. Operating under Private Client Group in Canada and The Harris brand in the United States, the Group provides North American investors with the tools they need to accumulate, protect and grow their financial assets. Reported($ millions except as noted) Q2 Q1 YTD Q2 YTD

Net interest income (TEB) 129 141 270 124 234Other income 260 242 502 314 558Total revenue 389 383 772 438 792Provision for credit losses 1 0 1 0 0Non-interest expense 306 326 632 327 595Income taxes (TEB) and other 34 26 60 52 89

Net income 48 31 79 59 108

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


Second Quarter 2001 vs. Second Quarter 2000 Net income for the second quarter of 2001 was $48 million, compared with $59 million for the second quarter of 2000. Revenues for the quarter declined by $49 million or 11 per cent to $389 million, due to significantly reduced client trading revenues, partially offset by the effects of higher revenues from acquired businesses in the United States. Higher trading commission revenues in the second quarter of 2000 were from unusually strong markets. Full-service investing revenues from more stable fee-based income increased from the prior year as the Group focuses on expanding its fee products and services. Non-interest expenses of $306 million were $21 million or six per cent lower than in the prior year. The decrease was due to lower revenue-based compensation and expense management, partially


14

offset by incremental expenses from acquired businesses and strategic investment spending. The Private Client Group continued its investment in initiatives, including expansion of the North American Investment professional team, the launch of Harris AdvantEdge Investing and further development of the BMO Nesbitt Burns Full-Service online trading capability program. Second Quarter 2001 vs. First Quarter 2001 Net income rose by $17 million or 59 per cent from the first quarter of 2001. Revenues were $6 million or two per cent higher, driven by increased fee-based revenues in full-service investing and slight increases across other businesses. Non-interest expenses of $306 million were $20 million or six per cent better than in the first quarter, due to an increased focus on expense management and the inclusion of certain one-time costs in the previous quarter. Year-to-date 2001 vs. Year-to-date 2000 Net income for the year-to-date period ended April 30, 2001 was $79 million, a decline of $29 million or 27 per cent from the comparable period in 2000. Revenues for the current year-to-date declined by $20 million or three per cent to $772 million as increased revenues from acquired businesses were more than offset by revenue declines associated with lower client trading volumes. Non-interest expenses increased by $37 million or six per cent to $632 million due to higher spending to support future growth and due to the costs of acquired businesses. Revenue-driven compensation declined from the prior year-to-date. Business Developments The Group’s objectives for fiscal 2001 and its outlook for its businesses and the environments in which they operate were outlined on pages 34 to 36 of the Bank’s Annual Report for fiscal 2000. The fiscal 2001 objectives continue to be to:

• = increase the number of Canadian investment professionals in the Bank’s branches to 700 to provide more points of contact and convenience for clients;

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

• = complete the integration of all acquired U.S. companies under The Harris brand; and • = continue to build on Harris Bank’s long-standing expertise in investment management and trust

and estate services in order to develop wealth management business throughout North America. While the North American economy is expected to grow at a more moderate pace over the next few years, the demographic trends continue to point to a strong and growing demand for wealth management services. The Private Client Group is well positioned to continue to capitalize on this trend by leveraging its North American capabilities, which are built on strong foundations in both Canada and the United States. The Group expects to achieve growth in targeted U.S. markets by


15

integrating recent acquisitions and exploring further opportunities. In Canada and the United States, growth will also be achieved through placing specialized investment professionals in traditional retail banking locations. Providing an integrated approach to meeting clients’ needs for wealth accumulation, growth and preservation will continue to be a strategic focus throughout the balance of 2001. There were a number of notable business developments in the quarter. In the United States, the Group now has the full complement of wealth management products and services, with the launch of Harris AdvantEdge Investing. Harris AdvantEdge Investing provides a client-focused approach to full-service investing, offering a fee-based only relationship. BMO Nesbitt Burns launched the Portfolio Services Group to provide Investment Advisors and their clients with guidance and strategies related to fixed income markets. Private Client Group’s North American investment professional team, which encompasses all wealth management sales professionals within the Group, grew to approximately 2,150 individuals during the first half of the year, including approximately 650 Canadian investment professionals located in Bank branches. The team provides advice and services to help clients meet their wealth management needs. Responding to client demands, BMO InvestorLine launched expanded research capabilities by adding research commentary through www.briefing.com for both stock and bond securities. Furthermore, BMO InvestorLine’s web site now offers web broadcasting, which enables clients to view and listen to quarterly analyst calls and annual general meeting presentations of North American companies. BMO Term Investments introduced an expanded family of BMO RateRiser Guaranteed Investment Certificates. These new term investments offer a competitive rate of interest that is guaranteed to increase in each year of the investment term. BMO Mutual Funds’ net sales for the 2001 RRSP season were $480 million, up 180 per cent from last year. On February 13, 2001, Bank of Montreal signed a co-operation agreement with Fullgoal Fund Management Company Ltd. of China to develop China’s potential in the mutual fund industry. The alliance combines the Bank’s mutual fund expertise and marketing capabilities with Fullgoal’s understanding of the Chinese markets and business environment. The agreement is the first step to selling mutual funds following China’s expected acceptance into the World Trade Organization and liberalization of its financial markets. On May 15, 2001, Bank of Montreal announced that it has agreed to acquire the Guardian Group of Funds Ltd. and its $2 billion in assets under management. The acquisition will increase the Group’s mutual fund assets under management to approximately $30 billion. This strategic transaction provides an excellent platform to continue to grow the Group’s mutual fund business.


16

INVESTMENT BANKING GROUP

The Investment Banking Group combines all of the businesses serving corporate, government and institutional clients under one umbrella. It offers clients complete financial solutions across the entire balance sheet, including treasury services, foreign exchange, trade finance, corporate lending, securitization, public and private debt and equity capital raising. The Group also offers leading financial advisory services in mergers and acquisitions, recapitalizations and restructurings, while providing its investing clients with industry-leading research, sales and trading services and superior quality originated products. Reported($ millions except as noted) Q2 Q1 YTD Q2 YTD

Net interest income (TEB) 305 278 583 303 601Other income 376 365 741 343 598Total revenue 681 643 1,324 646 1,199Provision for credit losses 60 41 101 40 76Non-interest expense 314 321 635 322 597Income taxes (TEB) and other 118 113 231 115 207

Net income 189 168 357 169 319

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


Second Quarter 2001 vs. Second Quarter 2000 The diversified nature of its suite of businesses allowed the Investment Banking Group to post record profit for the second quarter of 2001, exceeding the strong performance of the second quarter of last year. Net income for the second quarter of 2001 was $189 million, an increase of $20 million or 12 per cent from last year. Revenues for the quarter increased $35 million or five per cent to $681 million. The increase reflected continued momentum in client-driven trading activity in Capital Markets, improved performance from interest-rate-sensitive businesses and improved performance from investment securities. Also contributing to revenue growth were strong performances from corporate lending activities. Revenues from mergers and acquisitions, although posting an industry leading performance, and secondary equity trading were lower this quarter due to declines from the record volumes experienced in the second quarter of fiscal 2000.


17

Strong security gains realized in the current quarter were offset by an investment write-down related to the Bank’s ownership interests in certain collateralized bond obligations (CBOs). These investments were made in the Group’s own CBOs that sponsored the establishment of its Credit Investment Management business. This quarter, the Bank adopted the provisions of a recent accounting pronouncement in the U.S., EITF 99-20, which provides guidance on income recognition and carrying value of purchased and retained beneficial interests in securitized financial assets. The early adoption of this pronouncement in the current quarter resulted in a non-cash pre-tax write-down of $47 million. Provisions for credit losses increased by $20 million to $60 million in the current quarter, primarily due to a slowing of the U.S. economy and an associated increase of non-performing loans to borrowers in various industry sectors. Non-interest expenses of $314 million were $8 million lower than in the second quarter of 2000, primarily reflecting lower revenue-driven compensation. Second Quarter 2001 vs. First Quarter 2001 Net income increased $21 million or 12 per cent from the first quarter of 2001. Revenues grew by $38 million or six per cent, reflecting continued strong results from interest-rate-sensitive businesses, higher revenue from client-driven trading activities in Capital Markets and increased merger and acquisition fee revenue. A reduction in equity market volatility lowered proprietary trading opportunities in the current quarter. Non-interest expenses of $314 million were $7 million or two per cent better due to lower employee costs. Year-to-date 2001 vs. Year-to-date 2000 Net income for the year-to-date period ended April 30, 2001 was $357 million, an increase of $38 million or 12 per cent from the comparable period in 2000. Year-to-date revenues increased by $125 million or 10 per cent to $1,324 million, primarily driven by improved client-driven trading activity in Capital Markets, higher investment security gains and increased corporate lending volumes. Partially offsetting those sources of revenue growth were decreased primary and secondary equity market activities that declined from last year’s record levels. Year-to-date non-interest expenses increased by $38 million or six per cent to $635 million. The increase was attributable to higher revenue-driven compensation and increased employee costs related to hiring in support of the Group’s sector strategy.


18

Business Developments The Group’s objectives for fiscal 2001 and its outlook for its businesses and the environments in which they operate were outlined on pages 37 to 39 of the Bank’s Annual Report for fiscal 2000. The Group’s objectives remain to:

• = build on its Canadian leadership position in all business sectors; • = continue to expand coverage of the highly profitable U.S. Midwest mid-market and related

speciality sectors such as agribusiness and asset-based lending; • = continue to build client relationships in the media and telecommunications and energy sectors; • = improve profitability of debt capital markets and treasury activities; • = increase credit investment management assets under management by US$5 billion to US$13

billion; and • = realize further significant reduction in risk-weighted assets. The Group’s outlook for 2001 reflects lower Canadian economic growth at 2.1 per cent this year, which is at the low end of the Bank of Canada’s expected growth rate of two to three per cent for 2001. The main risk facing the Canadian economy remains the uncertainty surrounding the timing and strength of any recovery in the U.S., with the Bank of Canada predicting U.S. economic growth to be in the range of one to two per cent in 2001. Short-term interest rates are expected to remain generally stable, after falling in the first half of the year, with long-term rates increasing moderately. As a result, continued momentum is anticipated in the Capital Markets line of business in 2001. Institutional Equities’ overall performance is expected to be lower in 2001 because of the record-breaking levels experienced in 2000. Economic conditions for the remainder of 2001 are not anticipated to favour Investment Banking’s core underwriting or general advisory activities. Growth is anticipated for the remainder of 2001 in the energy and media and telecommunication sectors, and in capabilities-based businesses, including merchant banking, securitization and credit investment management. The Investment Banking Group reduced its risk-weighted assets by $2.9 billion from the first quarter of 2001 and by $15.4 billion from the prior year. This reflects a reduction of low-return assets in the corporate loan book, where associated revenues do not meet risk-adjusted return expectations, in favour of lending relationships that have strong potential for multi-product solutions. Additional reductions were achieved in Capital Markets and Institutional Equities. The Canadian Securitization unit re-affirmed its top position in the Canadian marketplace in asset-backed securities trading volumes for the year 2000, as ranked by the IDA, for a sixth consecutive year. It also led a highly successful and over-subscribed $350 million new issue for Gloucester Trust, MBNA's credit card receivable trust vehicle. The U.S. Securitization unit launched Pooled Investment Notes Capital LLC (PIN Capital), an innovative new conduit that will provide the Group’s clients with financing access to the medium-term market, in addition to the Group’s existing commercial paper capability. Credit Investment Management assets under management were US$9.0 billion at the end of the quarter, up US$700 million from the prior quarter. BMO Nesbitt Burns ranked first in Canadian equity block trading and maintained a leading share of the underwriting market in the quarter. The firm participated in 27 North American equity issues


19

during the quarter, with an aggregate value of $4.5 billion. In addition, the firm provided advisory services on eight transactions with an aggregate value of $5.5 billion. Transactions for the quarter included advising Investors Group on its $4.1 billion acquisition of Mackenzie Financial Corporation. The deal created Canada’s largest mutual fund company with combined assets of $74 billion, over two times that of its closest competitor. BMO Nesbitt Burns’ involvement in the transaction was multi-faceted, including:

• = acting as advisor to Investors Group on the acquisition; • = completing several derivative transactions for Investors Group to hedge interest rate exposure on

the loans; and • = acting as lead manager on a $600 million bought deal debt transaction, a $550 million term loan

that was successfully syndicated and a $360 million preferred share bought deal. The Investment Banking group also continued to aggressively pursue the North American energy and media and telecommunications sectors. The U.S. Media and Telecom group recently was lead arranger for a bank facility for California-based Smith Television. In addition, the firm's Halyard Capital Fund participated in Smith's preferred stock financing. Both transactions allowed Smith to purchase the leading television station in the Reno, Nevada market and increase its position as a leading privately held television broadcasting company. The firm exhibited its cross-border energy expertise during the quarter by acting as Canadian dealer manager in Anadarko Petroleum Corporation’s acquisition of Berkley Petroleum, and in Northern Border’s term financing of recent acquisitions through an agented bank facility and co-managed $225 million senior notes offering. The Investment Banking Group is committed to becoming one of the leading mid-market banks in the U.S. Midwest through Chicago-based Harris Nesbitt. Among other significant transactions during the quarter, the integrated corporate and investment banking platform of Harris Nesbitt won the co-agent role on a senior secured credit facility and the role as placement agent on a private placement for Beauty Alliance. This was instrumental in helping Beauty Alliance become one of the largest professional-only beauty supply products distributors in the United States.


20

EMFISYS AND CORPORATE SUPPORT

Emfisys is the technology and e-business group that provides information technology planning, strategy and development services, together with information technology transaction-processing capabilities, North American cash management solutions, Cebra’s e-commerce solutions, and real estate operations for the Bank of Montreal Group of Companies and its customers. The group is also responsible for the creation and development of new e-businesses, such as wireless, ABM, payments, lending and exchange businesses. Corporate Support includes the corporate units that provide expertise and governance support for the Bank in areas such as strategic planning, law, finance, economics, internal audit, risk management, corporate communications, human resources and learning. Corporate Support also includes revenues and expenses associated with certain securitization activities, the hedging of foreign source revenues, the Bank’s investment in Bancomer and the management of certain treasury positions. Reported($ millions except as noted) Q2 Q1 YTD Q2 YTD

Net interest income (TEB) (77) (57) (134) (47) (82)Other income 454 162 616 229 367Total revenue 377 105 482 182 285Provision for credit losses 93 (1) 92 2 7Non-interest expense 116 91 207 98 186Income taxes (TEB) and other (21) (1) (22) 16 2

Net income 189 16 205 66 90

Excluding non-recurring items($ millions except as noted) Q2 Q1 YTD Q2 YTD

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

Net income 8 8 16 22 46



Second Quarter 2001 vs. Second Quarter 2000 Net income for the second quarter of 2001 was $189 million, an increase of $123 million from the second quarter of fiscal 2000. Excluding non-recurring provisions to increase the general allowance, and non-recurring gains from the partial disposal of the Bank’s investment in Bancomer in the most recent quarter, net income was $8 million, a decline of $14 million from the comparable quarter in 2000. The decline was attributable to a $19 million reduction in earnings recognized on the Bank’s investment in Bancomer and increased staffing and benefit costs, partially offset by higher sundry revenues and a decline in corporate tax rates.


21

Second Quarter 2001 vs. First Quarter 2001 Net income was $189 million, compared with $16 million in the first quarter of 2001. The comparability of results was affected by non-recurring items in both periods. The first quarter’s results included a $25 million income tax charge relating to the effects of proposed federal tax reductions on the Bank’s future tax assets. Gains on the sale of Bancomer shares were reflected in results for both the first and most recent quarters. Excluding non-recurring items, net income was $8 million, unchanged from the first quarter. Year-to-date 2001 vs. Year-to-date 2000 Net income for the year-to date period ended April 30, 2001 was $205 million, up $115 million from the comparable period in 2000. Excluding non-recurring items, year-to-date net income in 2001 declined by $30 million to $16 million. The decline was attributable to a $51 million reduction in earnings recognized on the Bank’s investment in Bancomer, higher unallocated net interest expense of $20 million and to increased staffing and other costs, partially offset by higher cash management and other sundry revenues. Emfisys The Group’s objectives for fiscal 2001 were outlined on page 41 of the Bank’s Annual Report for fiscal 2000. There has been no material change to the Group’s pursuit of those objectives. Emfisys’ objectives remain to:

• = create value for the Bank, customers and shareholders through realigning most of the Bank’s e-business to Emfisys - maximizing the value between services and product delivery, and partnering with all banking groups on planning resource allocation and investment;

• = implement commercial practices, which are considered best in class - providing preferred competitive pricing and superior quality;

• = expand the enterprise-wide retail customer information system to all service delivery channels to promote high quality customer service;

• = launch an integrated retail platform; • = deliver web-enabled services to most lines of business for both customer and employee use; • = implement an enterprise-wide e-procurement system that lowers processing costs and provides

comprehensive information for greater control and better sourcing opportunities; and • = accelerate growth in the commercial market through the design and delivery of North American

Cash Management products and services. The e-business strategy has two key elements of focus - reinventing the financial products and services the Bank offers its own clients and repackaging its ‘e-capabilities’ to other financial institutions and companies to reach out to their clients. The strategy will build on several fronts to create a full suite of ‘e-enabled’ financial services - among them, wireless, ABM, payments, lending and exchange services. Business Developments There were a number of notable business developments in the quarter.


22

In April 2001, Emfisys consolidated Cebra with its E-Business Division. The consolidation was the next logical step in the evolution of the Bank’s e-business activities. Leveraging its considerable e-business assets, the Bank is focusing on profitability and growth by:

• = consolidating enterprise e-business governance and strategy within the E-Business Division; • = more aggressively supporting the e-business priorities of its lines of business; and • = making more effective use of its resources in creating and operating new ventures within the

E-Business Division that extend beyond its existing client base. During the quarter, the Bank announced the expansion of wireless banking and investment services to over 200,000 Saskatchewan residents through service carrier, SaskTel Mobility. SaskTel customers, comprising about 60 per cent of Saskatchewan’s population, are now able to bank anywhere, anytime through Veev, the first venture to provide wireless financial services in North America. Bank of Montreal online clients continue to grow at the substantial rate of 20,000 per month. A little over a year ago the Bank had 350,000 online clients. Today, more than 930,000 clients are accessing banking, brokerage and MasterCard online. In an agreement with the Canadian Chamber of Commerce, the Bank also announced that more than 170,000 Canadian businesses would be able to take advantage of more than $12 billion in new business each year in government tendering opportunities. Under the agreement, the Chamber will provide MERX, Cebra’s electronic tendering service, to its members. Bank of Montreal is targeting $31 million in North American auto purchases through its venture in dealerAccess, a new Internet Auto Dealer e-commerce portal. The Canadian ‘open-finance’ portal builds on the success of financiaLinx (a joint-venture between CIT and the Bank), and offers auto dealers an opportunity to request funding (either loan or lease rates) from any of its three partners in one request, usually within minutes. Corporate Support Corporate Support’s objectives for 2001 remain to:

• = continue to develop state-of-the-art risk management processes with particular focus on improving the quality of risk and control management information for each line of business;

• = continue to broaden the range and reach of the Institute for Learning through a distinctive focus on people leadership and by using technology to provide learning anytime and anywhere;

• = continue to communicate and negotiate with legislators regarding the federal government’s initiative on improved structural flexibility in the Canadian financial services industry;

• = implement a single financial reporting structure; • = continue to communicate and implement enterprise governance standards and monitor

compliance; and • = implement an enterprise-wide risk and control self-assessment process within the lines of

business.


23

Bancomer The Bank sold its remaining 812 million shares in Bancomer during the second quarter for a non-recurring gain of $284 million ($239 million after-tax). On a year-to-date basis, the Bank sold its entire 1,012 million shares for a non-recurring gain on sale of $321 million ($272 million after-tax). The shares were sold to Banco Bilbao Vizcaya Argentaria (BBVA) pursuant to agreements reached with BBVA and Bancomer during the first quarter. The Bank had owned approximately 20 per cent of Bancomer’s voting shares and first invested in Bancomer in 1996. Bank of Montreal earned an average annual 17.3 per cent after-tax cash-on-cash return over the holding period. Following a reduction in Bank of Montreal’s ownership interest in Bancomer in the third quarter of fiscal 2000, the Bank adopted the cost basis of accounting, replacing the equity basis of accounting for its investment. Earnings recognized on the Bank’s investment in Bancomer in the second quarter declined by $19 million year-over-year and earnings recognized year-to-date declined by $51 million from the comparable period in the prior year.


24

HARRIS BANK

The results of Harris Bank are included within the results of each of Bank of Montreal’s operating groups. Harris Bank legal entity results are provided below. Reported(US$ millions except as noted/US GAAP) Q2 Q1 YTD Q2 YTD

Net interest income (TEB) 184 178 362 173 346Other income 113 163 276 156 271Total revenue 297 341 638 329 617Provision for credit losses 16 13 29 7 12Non-interest expense 178 174 352 178 367Income taxes (TEB) 35 55 90 53 85Net income before goodwill net of tax 68 99 167 91 153Goodwill net of tax 4 4 8 4 8

Net income 64 95 159 87 145

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


Second Quarter 2001 vs. Second Quarter 2000 On a US dollar/US GAAP basis, Harris Bank net income was $64 million, compared with $87 million in the same quarter a year earlier when Harris Bank recorded a $30 million non-recurring after-tax gain ($50 million pre-tax) on sale of its corporate trust business. Excluding non-recurring items, net income increased 12 per cent to $64 million. The increase was attributable to continued strong earnings growth across core businesses and a more favourable interest rate environment that contributed to increased earnings from treasury and trading activities. Gains on sales of securities were $13 million higher than in the prior year, while the provision for credit losses was $9 million higher. The higher provision for credit losses was due to a slowdown of the U.S. economy and to an associated increase in non-performing assets, which increased by $79 million from a year ago to $120 million. The increase was largely attributable to higher levels of non-performing syndicated loans to borrowers in various industry sectors. Harris Bank earnings included in the Bank’s results on a Canadian dollar/Canadian GAAP basis, were $89 million for the second quarter of 2001, compared with $125 million a year ago. Excluding non-recurring items, net income on a Canadian basis was up 10 per cent from a year ago to $89 million. The net income growth benefited from a strengthening of the average U.S. dollar exchange rate from $1.46 to $1.55 Canadian.


25

Year-to-date 2001 vs. Year-to-date 2000 On a US dollar/US GAAP basis, Harris Bank net income for the year-to-date was $159 million, compared with $145 million a year earlier. Comparability of results is affected by the $30 million after-tax gain on the sale of the corporate trust business in the prior year, by the current period’s $36 million after-tax gain on the sale of Harris Bank’s merchant card business to Bank of Montreal’s Moneris Solutions joint venture and by a $2 million after-tax reduction of the gain on sale of the corporate trust business this year. Because the card business transaction was between related companies, the gain was not included in the consolidated results of Bank of Montreal. Excluding the foregoing gains and related charges, net income for the year-to-date was $125 million, up $11 million or 10 per cent from the prior year. Earnings grew across Harris’ core businesses: community banking, private banking and mid-market corporate banking. Results benefited from a $22 million increase in gains on sales of securities while provisions for credit losses increased by $17 million. Harris Bank earnings included in the Bank’s year-to-date results were $232 million on a Canadian dollar/Canadian GAAP basis, compared with $203 million a year earlier. Excluding the foregoing gains and related charges, net income included in the Bank’s results on a Canadian basis was $183 million, an increase of $24 million from the prior year. The growth in earnings benefited from strengthening of the average U.S. dollar exchange rate from $1.46 to $1.53 Canadian. Business Developments Harris Bank’s objectives for fiscal 2001 and the outlook for its businesses and the environments in which they operate were outlined on page 40 of Bank of Montreal’s Annual Report for fiscal 2000. Harris Bank’s objectives are to continue to:

• = sustain double-digit earnings growth; • = build on Harris Bank’s longstanding expertise in investment management and personal trust

services to develop its wealth management business throughout North America; • = ramp up retail and small business lending, targeting to increase retail and small business loans

outstanding by more than US$1 billion per year for the next several years; and • = develop Harris Nesbitt as the premier mid-market corporate and investment banking organization

in the U.S. Midwest. In addition to double-digit earnings growth for Harris Bank, there were notable business developments across the core businesses. In the United States, the Private Client Group launched Harris AdvantEdge Investing full-service brokerage, which offers full-service investing on a fee-based relationship. In retail and business banking, Harris had strong performance with consumer, mortgage and business loans increasing 17 per cent from the prior year. The Hispanic Banking initiative continued with strong momentum. With 21 fully bilingual branches, a Spanish language web site, a fully bilingual call centre and approximately 50,000 customers, deposits continued to grow at double-digit rates. Through an alliance with eScout.comSM, a premier web-based e-commerce and e-business network for America’s small and mid-sized businesses and banks, Harris Bank is providing small and mid-sized businesses with access to the fastest growing business-to-business (B2B) trading marketplace in North America. Harris Nesbitt continued to capitalize on cross-selling opportunities from the integration of mid-market corporate and investment banking.


26

During the quarter Harris Bank announced an agreement to acquire First National Bank of Joliet. The merger expands the Harris community bank network to 149 locations and 245 ABMs across Chicagoland, and gives Harris Bank the opportunity to provide a full array of services to thousands of new individual and business customers - in what has become the fastest growing market in Chicagoland. Harris Bank believes that the U.S. economy may continue to slow in 2001, which may impact the demand for financial services in general and result in some decline in asset quality from the very high level experienced in recent years. Harris Bank is one of a handful of banks well positioned to take advantage of the opportunity represented by the large, fragmented and underserved market in the Chicago area. With this opportunity, its expanding distribution of wealth management services in affluent U.S. markets, and comprehensive corporate/investment banking service offerings to mid-market companies in the Midwest and beyond, Harris Bank is well positioned for profitable growth.


27

Effects of Non-Recurring Items ($ Millions)

Reported Q2 Q1 YTD Q2 YTD

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

Non-recurring items Operating Group Q2 Q1 YTD Q2 YTD

Increased revenuesGain on sale of Partners First P&C 112Gain on sale of U.S. corporate trust Corp. 74 74Gains on sales of branches P&C 5 7 12 14 14Gain on sale of Bancomer Corp. 284 37 321Total non-recurring revenues 289 44 333 88 200

Increased general provision for credit losses Corp. 100 100

Increased / (Decreased) pre-tax income 189 44 233 88 200

Increased income taxesIncome taxes on non-recurring items 4 6 10 36 81Adjustment of future tax asset due to proposed reductions in federal tax rates 25 25

4 31 35 36 81

Increased / (Decreased) net income 185 13 198 52 119

Excluding non-recurring items Q2 Q1 YTD Q2 YTD

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


Fiscal 2000Fiscal 2001



28

FINANCIAL STATEMENT REVIEW

REVENUES

Second Quarter 2001 vs. Second Quarter 2000 Total revenues for the second quarter of 2001 were $2,485 million, an increase of $201 million from the second quarter of 2000. Excluding non-recurring items, revenues were unchanged at $2,196 million. Net interest income at $1,092 million increased $8 million from a year earlier. Net interest income is comprised of earnings on assets, including interest and dividend income and the Bank’s share of income from investments accounted for using the equity method of accounting, less interest paid on liabilities. Net interest margin is the ratio of net interest income to average assets. The increase in net interest income was largely due to growth in retail and commercial banking volumes, partially offset by a $19 million reduction in earnings recognized on the investment in Bancomer. Average assets rose by six per cent to $248 billion and average loans rose by five per cent to $144 billion. Branches sold net of branches acquired resulted in the disposal of approximately $440 million of assets. Net interest margins declined by nine basis points to 1.80 per cent, as modest increases in retail banking were offset by reduced spreads in other operating groups and by lower earnings recognized on the investment in Bancomer. Other income was $1,393 million, an increase of $193 million from the prior year. Other income is comprised of all income other than net interest income. Other income for the most recent quarter included non-recurring revenues of $289 million, consisting of a $284 million gain on sale of Bancomer and a $5 million gain on sales of branches, reflected in other fees and commissions in the consolidated financial statements. Other fees and commissions for the second quarter of fiscal 2000 benefited from non-recurring gains of $74 million on the sale of the U.S. corporate trust business and $14 million on the sales of branches. Excluding non-recurring items, other income decreased $8 million or one per cent to $1,104 million. The decrease was largely reflective of a $71 million decline in capital market fees related to reduced securities trading activities and reduced merger and acquisition fees. Capital markets were unusually strong in the second quarter of last year. Investment management and custodial fees declined by $18 million, largely due to the sale of the U.S. corporate trust business. Lending fees increased by $24 million on higher volumes, while securitization revenues increased by $16 million, largely related to gains on securitizing assets in the most recent quarter. Other fees and commissions increased by $218 million to $421 million, but excluding non-recurring items, increased by $17 million to $132 million. Gains on sales of investment securities, which are included in other fees and commissions, rose modestly year-over-year but, as discussed in the Investment Banking Group analysis, included substantial gains on sale that were reduced by write-downs on investments


29

in collateral bond obligations on the current quarter’s application of a new U.S. accounting pronouncement. Second Quarter 2001 vs. First Quarter 2001 Revenues of $2,485 million were up $292 million from the first quarter of 2001. Excluding non-recurring items, revenues increased $47 million or two per cent. Net interest income at $1,092 million decreased $25 million or two per cent from the first quarter. Average assets rose by one per cent to $248 billion and average loans rose by five per cent to $144 billion. Much of the loan growth was in low-margin securities purchased under resale agreements. Net interest margins declined by one basis point to 1.80 per cent. The decline in net interest income was attributable to three fewer days in the current quarter, which reduced net interest income by approximately $37 million from the first quarter. Retail banking spreads were substantially unchanged, while they improved in the Capital Markets line of business. Other income was $1,393 million, up $317 million from the first quarter. Other fees and commissions in the first quarter included $7 million of non-recurring gains on sales of branches and a non-recurring $37 million gain on the partial sale of the investment in Bancomer. Excluding non-recurring items in both periods, other income was up $72 million or seven per cent to $1,104 million. The increase was attributable to stronger capital market fees, including client-driven trading commissions and higher merger and acquisition fees. Lending fees were higher and securitization revenues increased due to gains in the most recent quarter. Excluding non-recurring items, other fees and commissions rose $15 million. Gains on sales of investments are included in other fees and commissions and, excluding non-recurring items, declined $11 million from the first quarter. Year-to-date 2001 vs. Year-to-date 2000 Year-to-date revenues of $4,678 million increased $271 million from the comparable period in the prior year. Excluding non-recurring items in both periods, revenues were $4,345 million, an increase of $138 million or three per cent from the prior year. Net interest income for the year-to-date was $2,209 million, an increase of $44 million or two per cent from the comparable period in 2000. The increase was attributable to higher volumes across each of the business groups, partially offset by a $51 million reduction in earnings recognized on the investment in Bancomer. Net interest margins declined by seven basis points to 1.81 per cent, as modest increases in retail banking were offset by reduced spreads in other operating groups and by the lower earnings recognized on the investment in Bancomer. Other income rose $227 million to $2,469 million. Excluding non-recurring items in both periods, other income was $94 million or five per cent higher than for the comparable year-to-date period in fiscal 2000. The increase was attributable to higher trading revenues from client-driven trading activity in the Capital Markets line of business and higher lending fees and securitization revenues. Other fees and commissions, excluding non-recurring items, rose $28 million, largely related to gains on sales of securities, which rose $21 million.


30

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

NON-INTEREST EXPENSES

Second Quarter 2001 vs. Second Quarter 2000 Non-interest expenses were $1,404 million, an increase of $56 million or four per cent from the second quarter of 2000. The expense-to-revenue ratio was 56.5 per cent, compared with 59.1 per cent in the second quarter of 2000. The expense-to-revenue ratio, excluding non-recurring items, increased 2.5 percentage points to 63.9 per cent. Expense growth was largely due to increased strategic initiative spending and increased front-line staffing costs in the Personal and Commercial Client Group. Benefits costs increased, partly due to changes in accounting for pensions and future benefits costs that were adopted in the first quarter of this year. The net effect on expenses from business dispositions and acquisitions was slightly favourable. Revenue-based compensation costs declined year-over-year. Because of changes in the shareholder agreements governing the Bank’s rights in respect of Symcor, its items processing affiliate, the accounting related to Symcor changed in the first quarter of 2001. The Bank had accounted for its share of the results of Symcor using the proportionate consolidation method, whereby the Bank’s proportionate share of salaries and other Symcor costs were reflected in the Bank’s results as though those costs were incurred directly by the Bank. These costs are now invoiced to the bank and reflected in other expenses. Second Quarter 2001 vs. First Quarter 2001 Non-interest expenses were up $7 million or 0.4 per cent from the first quarter of 2001. Expense growth was largely due to increased strategic initiative spending and higher revenue-driven compensation costs. The effects of fewer days in the second quarter lowered the quarter-over-quarter growth. The expense-to-revenue ratio was 56.5 per cent, compared with 63.7 per cent in the first quarter. The expense-to-revenue ratio, excluding non-recurring items, improved 1.1 percentage points to 63.9 per cent. Year-to-date 2001 vs. Year-to-date 2000 Non-interest expenses were $2,801 million, an increase of $199 million or eight per cent from the comparable year-to-date period in 2000.


31

The expense-to-revenue ratio was 59.9 per cent, compared with 59.1 per cent for the prior year. Excluding non-recurring items, the expense-to-revenue ratio was 64.5 per cent, up from 61.9 per cent a year earlier. Expense growth was largely due to increased strategic initiative spending and increased front-line staffing costs in the Personal and Commercial Client Group. Benefits costs increased, partly due to the changes in accounting for pensions and future benefits costs. Revenue-based compensation costs increased year-over-year. Business dispositions and acquisitions had a negligible net effect on expenses. In the first quarter of fiscal 2001 the Bank adopted a new standard for accounting for pensions and other benefits. The standard was adopted on a retroactive basis by charging $250 million (net of $171 million of income tax) to retained earnings at the beginning of fiscal 2001. The new standard results in the accounting recognition of increased quarterly benefits expenses of approximately $17 million ($10 million after-tax) in 2001. INCOME TAXES

The provision for income taxes that is reflected in the consolidated statement of income is based upon transactions recorded in income, regardless of when such transactions are subject to income taxes. Non-recurring items and income taxes thereon are outlined on page 27. In the first quarter of fiscal 2001, a non-recurring $25 million charge for income taxes was reflected in results. The charge related to the effect of proposed federal tax rate reductions on the Bank’s future tax assets. Excluding non-recurring items, the effective tax rate was 33.8 per cent in the second quarter, an improvement from 35.1 per cent in the first quarter of fiscal 2001 and from 38.2 per cent in the second quarter of last year. The effective rate for the year-to-date period ended April 30, 2001 was 34.5 per cent, an improvement from 37.0 per cent for the comparable period last year. The year-over-year improvements related to lower statutory tax rates and to a shift in the proportion of income taxed in lower tax rate jurisdictions. The improvement from the first quarter related to an increase in the proportion of income taxed in lower tax rate jurisdictions.


32

BALANCE SHEET

Total assets increased $1.8 billion from October 31, 2000 to $235.2 billion at April 30, 2001. Securities Investment securities declined by $2.4 billion from October 31, 2000 to $22.1 billion. The decline related to reduced holdings of federal government securities in the United States and Canada, and to the sale of the investment in Bancomer. The market value of the Bank’s investment portfolio exceeded its book value by $170 million at April 30, 2001, an improvement of $262 million from last year-end, after adjusting for the unrealized gain on Bancomer. The improvement in the excess of market values relative to book values was attributable to an increase in the market value of fixed income securities, particularly in the United States, largely due to lower interest rates. This favourable effect was partially offset by a decline in the market value of the Bank’s holdings in 724 Solutions Inc., which fell in the weaker environment for technology stocks. Trading securities declined by $1.1 billion from October 31, 2000 to $20.8 billion. The decline was attributable to reduced holdings of federal government securities in the United States and Canada. Loans Net loans and acceptances increased $3.4 billion from October 31, 2000 to $145.9 billion. Table 1 on page 39 provides a comparative summary of net loans by product and industry. Securities purchased under resale agreements increased by $3.7 billion, but balances remained within normal levels. The use of these low-risk, low-margin products is driven by market preferences and overall liquidity management in the financial markets. Loans to Commercial, Corporate and Institutional borrowers declined slightly overall, reflecting an increase of approximately $2.5 billion in loans to financial institutions, offset principally by reductions in loans to the manufacturing sector, which has experienced reduced demand in the first half of 2001. Loan balances were reduced by $440 million due to branch sales, net of acquisitions, during the first six months of the year. Loan balances were also reduced by securitizations of lease receivables and residential mortgages, totalling approximately $690 million. Table 2 on page 40 provides a comparative summary of loans by geographic location and diversification ratios by product and geographic location. The portfolio remains well-diversified with minimal change in the geographic breakdown from last year-end, as loan growth was concentrated in the relatively stronger Ontario region. Deposits Deposits declined by $2.3 billion to $154.4 billion at April 30, 2001. Deposits from individuals, which tend to be more stable, rose by $1.6 billion to 42.4 per cent of deposits.


33

ENTERPRISE-WIDE RISK MANAGEMENT The Bank’s enterprise-wide objectives, strategy, approach and governance related to risk management were set out in pages 19 to 27 of the 2000 Annual Report. There have been no material changes in risk management practices from those described in the Annual Report, other than the formation of an Operational Risk Committee, which brings focused senior management attention to all forms of operational risk. The Operational Risk Committee is a sub-committee of the Risk Management Committee, which remains as described in the Annual Report.

CREDIT RISK

Prospects for improvement in operating conditions for many of the Bank’s borrowing clients have been adversely affected by the slowdown in economic conditions in the United States. As a result, the Bank has increased the provision for credit losses to $450 million for the year, an increase of $50 million. The general allowance for credit losses was also prudently increased by $100 million in the second quarter, through a non-recurring charge to net income. At $1,180 million, the general allowance represents 89 basis points of risk-weighted assets. These actions are consistent with the Bank’s methodologies for planning loan loss provisions, as set out on pages 21 and 22 of the Annual Report. The expected loss remains within the previous forecast range, whereas the loss volatility has increased as a result of generally higher volatility in credit market conditions. The latter is particularly noticeable in several instances of former highly-rated companies rapidly falling to non-investment grade or even into bankruptcy, sometimes as a result of fraud. Tables 1 to 5 attached at the end of this MD&A provide relevant summary detail in respect of aspects of the company’s loan portfolio, impaired loans and provisions and allowances for credit losses. Gross impaired loans at April 30, 2001 were $1,653 million, down from $1,702 million at the end of the first quarter. In the early part of the quarter, the Bank classified its loans to two Californian utilities as impaired, because of the lack of progress toward a political resolution of the energy crisis affecting the companies’ operations. Subsequently, one of the companies filed for bankruptcy protection. Also, during the second quarter, the Bank sold certain impaired loans in the secondary market, as the currently realizable values were considered advantageous in comparison to the potentially achievable values of these assets under restructuring or “continued-hold” alternatives. Such disposal decisions are made on a case-by-case basis. Gross impaired loans and acceptances represented 1.12 per cent of total loans and acceptances, down from 1.13 per cent at January 31, 2001. The Bank’s level of impaired loans remained well within the historical range over a full economic cycle. Loans continue to be well provisioned, with an allowance for credit losses - both specific and general - totalling $1,656 million at the end of the second quarter. The Bank’s allowances represented 100 per cent of gross impaired loans, versus 124 per cent at the end of the second quarter of fiscal 2000 and 91 per cent at the end of the first quarter of 2001.


34

MARKET RISK

The Bank’s market risk of loss associated with changes in interest rates, foreign exchange rates, and equity and commodity prices, as at April 30, 2001, was within the Bank’s Corporate Standard for Market Value Exposure. The methodologies used for Market Risk measurement remain as set out in the Annual Report, except that the Rising Interest Rate Risk scenario has been replaced by the 100 Basis Point Decrease scenario, as displayed below. Interest Rate Sensitivity (a)

100 basis point 100 basis point 100 basis point 100 basis point(After-tax Canadian equivalent $ millions) increase decrease increase decrease

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

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

Structural and money market portfolios

Structural and money market portfolios

As at April 30, 2001 As at October 31, 2000

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

(Pre-tax Canadian equivalent $ millions)*As at

April 30, 2001

Average for the quarter

High for the

quarter

Low for the

quarter

Average for the year-to-

date

High for the year-to-date

Low for the year-to-date

Interest rate 19.0 14.2 20.0 11.5 14.3 20.0 11.5Foreign exchange 5.1 5.1 6.7 3.4 5.8 10.4 3.6Commodity 1.0 1.3 1.7 0.6 1.5 1.9 0.6Equity 3.2 6.0 15.2 2.7 5.4 15.2 2.6Correlation effect (5.3) (4.7) (6.4) (3.3) (4.5) (6.4) (2.2)Total 23.0 21.9 n/a n/a 22.5 n/a n/a

* One-day measure using 99% confidence level.


35

Market Risk Sensitivity (a, b)

Adverse Changes in Market Rates/Prices

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

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

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

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

April 30, 2001 October 31, 2000

LIQUIDITY RISK

Liquid assets, consisting of cash resources and securities, declined $9.7 billion from the end of the second quarter of 2000, to $62.0 billion. The decline was attributable to reduced trading positions. The Bank's ratio of cash and securities-to-total assets as at April 30, 2001 was 26.4 per cent, down from 30.1 per cent as at April 30, 2000, but up from 26.3 per cent as at January 31, 2001. To maintain strong liquidity, the Bank continues to ensure that it has well diversified funding sources, with deposits broadly diversified by customer, type, currency and geography. The Bank’s large stable base of deposits by individuals provides a strong and secure source of funding in both the Canadian and U.S. dollar markets. These deposits, along with the Bank’s strong capital base, reduce reliance on other more volatile sources of funds. The Bank’s cash and securities-to-total assets ratio and the level of deposits by individuals as at the end of the second quarter of 2001 are within acceptable ranges and represent a strong liquidity position.

OPERATIONAL RISK

There have been no significant changes in risk measurement methodologies for management of Operational Risk from those described in the Annual Report. There were no incidences of Operational Risk during the first half of fiscal 2001 that caused material losses. The Bank is continuing to enhance its measurement approaches in this area, through the use of industry data-bases and participation in industry surveys.


36

CAPITAL MANAGEMENT The Bank’s capital management objectives, strategy and approach to management were outlined on page 28 of the 2000 Annual Report. At April 30, 2001, the Bank’s Tier 1 Capital Ratio was 8.94 per cent, compared with 8.06 per cent at the end of the second quarter of 2000 and 8.87 per cent at the end of the first quarter of 2001. At April 30, 2001, the Bank’s Total Capital Ratio was 12.74 per cent, up from 11.13 per cent a year ago and from 12.12 per cent at the end of the previous quarter. Risk-weighted assets were $132.4 billion, down from $140.5 billion at April 30, 2000 and from $133.4 billion last quarter. Capital ratios remain above the levels Canadian regulators consider necessary for a bank to be considered well-capitalized, and have been above the average levels of Canada’s major banks. Capital levels at the end of the second quarter were higher than at the end of the prior year. The components of the improvement are outlined below. Source and Utilization of Capital in 2001 ($ millions, except as noted)

Total Tier 1 Risk-weighted Tier 1Capital Assets Capital Ratio

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

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

On January 23, 2001 the Bank’s Board of Directors declared a 100 per cent stock dividend, effectively achieving a two-for-one split of the Bank’s common shares and making the shares more accessible for retail investors. The shares began trading on a post-stock dividend basis on March 1, 2001 on the Toronto Stock Exchange. The Bank also announced a program to repurchase up to 30 million common shares or approximately 5.7 per cent of the then-issued and outstanding common shares through a normal-course issuer bid expiring December 31, 2001. In the second quarter of 2001, the Bank repurchased 21.2 million shares at a cost of $824 million. In January 2001 the Basel Committee on Banking Supervision introduced a new draft capital accord for consultation. This proposed accord is expected to replace the original 1988 accord in 2004 and is intended to improve safety and soundness in the financial system by providing more flexibility to financial institutions in determining capital levels related to risk sensitivity. The key elements of the


37

framework provide a spectrum of approaches, from simple to advanced methodologies, for the measurement of both credit and operational risk. It provides a flexible structure in which each bank, subject to supervisory review, will adopt approaches that best fit its level of sophistication and risk profile. The accord seeks to reward stronger and more accurate risk measurement by reduced regulatory capital than would apply under less rigorous approaches. Current initiatives within the financial services industry include providing consolidated comments on the draft accord, working with national regulators on domestic issues and with national supervisors on issues associated with implementation of this framework over the next three years. The Bank is currently conducting internal reviews of systems and processes to establish the requirements for implementation of the accord by 2004.

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

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

ANNUAL MD&A Users of the interim MD&A are assumed to have read or have access to the annual MD&A, which is available in the Bank’s 2000 Annual Report at www.bmo.com. Readers are encouraged to refer to the annual MD&A for a more comprehensive understanding of the Bank’s operations.

CAUTION REGARDING FORWARD-LOOKING STATEMENTS From time to time we make written and verbal forward-looking statements. These may be included in this quarterly report, in filings with Canadian regulators or the U.S. Securities and Exchange Commission, in reports to shareholders and in other communications. These forward-looking statements include, but are not limited to, comments with respect to our objectives, targets, strategies, financial condition, the results of our operations and our businesses, our outlook for our businesses and for the Canadian and U.S. economies and our risk management discussion. However, by their nature these forward-looking statements involve numerous assumptions, inherent risks and uncertainties, both general and specific and the risk that predictions and other forward-looking statements will not be achieved. We caution readers of this report not to place undue reliance on these forward-looking statements as a number of important factors could cause actual future results to differ materially from the plans, objectives, expectations, estimates and intentions expressed in such forward-looking statements. Forward-looking statements may be influenced by the following factors: fluctuations in interest rates and currency values; regulatory developments; statutory changes; the effects of competition in the geographic and business areas in which we operate, including continued pricing pressure on loan and


38

deposit products; and changes in political and economic conditions including, among other things, inflation and technological changes. We caution that the foregoing list of important factors is not exhaustive and that when relying on forward-looking statements to make decisions with respect to Bank of Montreal, investors and others should carefully consider the foregoing factors as well as other uncertainties and events.

-30-

Media Relations Contacts: Investor Relations Contacts: Ralph Marranca (416) 927-2740 Karen Maidment (416) 867-6776 Ronald Monet (514) 877-1101 Susan Payne (416) 867-6656 Lynn Inglis (416) 867-5452 Internet: http://www.bmo.com Notes: A live Internet broadcast of the second quarter investor community conference call will take place on Wednesday May 23, 2001 at 1:15 p.m. (EST) and is accessible to investors, analysts and the media at www.bmo.com/investorrelations. The web site will contain the press release, presentations and other related documents. Retail investors and the media can access the conference call, in listen-only mode, by dialling toll free 1-877-871-4065 from outside Toronto and 416-641-6449 for Toronto area callers. The conference call will be available in rebroadcast mode until midnight on Friday June 1, 2001 by calling 1-800-558-5253 and quoting reservation number 171-140-37. The web cast will be accessible for three months following the date of the original broadcast through the investor relations section of the Bank’s web site (www.bmo.com/investorrelations).

BANK OF MONTREAL TABLE 1NET LOANS AND ACCEPTANCES - SEGMENTED INFORMATION

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

Net Loans and Acceptances by Product and Industry (2)

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

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

Diversified Commercial, Corporate and Institutional Financial institutions 16,331 13,847 14,316Commercial mortgages 6,774 6,612 6,464Construction (non-real estate) 1,269 1,556 1,479Real estate 3,438 3,895 3,892Manufacturing 13,297 14,635 13,928Mining/Energy 3,073 3,847 4,114Service industries 6,402 7,107 7,225Retail trade 3,133 3,173 3,567Wholesale trade 3,137 3,434 3,557Agriculture 2,465 2,608 2,493Transportation/Utilities 4,431 4,532 3,863Communications 3,487 3,262 2,423Other 3,360 2,496 1,982Total Diversified Commercial, Net of Specific Allowances 70,597 71,004 69,303

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

General allowance (1,180) (1,080) (970)Designated lesser developed countries (1) 316 222 247Total Loans and Acceptances 145,873 142,447 144,952

Notes: (1) Remaining designated LDC securities received as part of prior year debt restructuring were disposed of in Q4, 2000. (2) Includes impact of asset securitizations.

As at

BANK OF MONTREAL - SECOND QUARTER 2001 REPORT TO SHAREHOLDERS 39

BANK OF MONTREAL TABLE 2NET LOANS AND ACCEPTANCES - SEGMENTED INFORMATION cont'd

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

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

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

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

United States (250) (150) (150)Total Net Loans and Acceptances 145,873 142,447 144,952

Net Loans and Acceptances in Canada by Province (3)

Atlantic Provinces 4,508 4,460 4,494Quebec 13,130 14,602 13,499Ontario 51,518 43,794 43,879Prairie Provinces 13,518 14,722 14,674British Columbia and Territories 12,655 13,120 13,568General allowance (930) (930) (820)Total Net Loans and Acceptances in Canada 94,399 89,768 89,294

Diversification Ratios (2)(As a % of Total Net Loans & Acceptances)Individual 38.1 39.0 37.8Commercial , Corporate and Institutional 61.7 60.8 62.0Designated LDC 0.2 0.2 0.2Canada 64.7 63.0 61.6United States 33.2 34.5 34.8Other Countries Designated LDC 0.2 0.2 0.2

Other 1.9 2.3 3.4

Notes: (1) Geographic location is based on the ultimate risk of the underlying asset. (2) Total net loans and acceptances excluding general allowance. (3) Includes impact of asset securitization. (4) Remaining designated LDC securities received as part of prior year debt restructuring were disposed of in Q4, 2000.

As at


BANK OF MONTREAL TABLE 3

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

Total Impaired Loans and Acceptances

Gross impaired loans and acceptances (GIL), beginning of period 1,702 1,501 1,501 1,164 1,092Additions to impaired loans and acceptances 481 498 979 205 414Reductions in impaired loans and acceptances (1) (397) (151) (548) (131) (219)Net new additions (reductions) 84 347 431 74 195Write-offs (133) (146) (279) (49) (98)Gross Impaired Loans and Acceptances, End of Period 1,653 1,702 1,653 1,189 1,189

Allowances for credit losses (ACL) (2), beginning of period 1,554 1,597 1,597 1,404 1,348Increases - specific allowance 135 103 238 117 222Increases - general allowance 100 0 100 0 0Transfer of allowance 0 0 0 0 0Write - offs (133) (146) (279) (49) (98)Allowances for Credit Losses (2) and (3), End of Period 1,656 1,554 1,656 1,472 1,472

Net impaired loans and acceptances (NIL), beginning of period 148 (96) (96) (240) (256)Change in gross impaired loans (49) 201 152 25 97Change in allowance for credit losses (102) 43 (59) (68) (124)Net Impaired Loans and Acceptances (NIL), End of Period (3) 148 (3) (283) (283)

Notes: (1) Loans and acceptances returning to performing status, sales and repayments. (2) Excludes ACL for off-balance sheet exposure and LDC reservations in excess of impaired loans. (3) Includes general allowance for credit losses.

IMPAIRED LOANS AND ACCEPTANCES BY ACCOUNTING CLASSIFICATION


BANK OF MONTREAL TABLE 4NET IMPAIRED LOANS AND ACCEPTANCES (NIL) - SEGMENTED INFORMATION

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

Net Impaired Loans and Acceptances by Location (1)

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

Other 24 31 69General allowance Canada (930) (930) (820) United States (250) (150) (150)Total Net Impaired Loans and Acceptances (3) (96) (283)

Condition Ratios (%)

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

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

Other Countries Designated LDC 0.00 0.00 0.00Other 0.89 0.94 1.41

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

RETAIL LOANS90 Days & Over Delinquency Ratio April 30, 2001 October 31, 2000 April 30, 2000

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

As at

As at


BANK OF MONTREAL TABLE 5NET IMPAIRED LOANS AND ACCEPTANCES (NIL) - SEGMENTED INFORMATION cont'd

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

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

Total Individuals (1) 205 186 172

Commercial, Corporate and InstitutionalFinancial institutions 72 108 11Commercial mortgages 34 19 24Construction (non-real estate) 49 6 5Commercial Real Estate 23 27 45Manufacturing 175 143 145Mining/Energy 58 97 143Service industries 111 109 122Retail trade 20 89 19Wholesale trade 43 11 43Agriculture 14 17 18Transportation/Utilities 340 138 61Communications 31 13 23Other (2) 2 21 (144)Total Diversified Commercial 972 798 515

Securities purchased under resale agreements 0 0 0Total Commercial, Corporate and Institutional 972 798 515

General allowance (1,180) (1,080) (970)Designated lesser developed countries 0 0 0Total Net Impaired Loans and Acceptances (3) (96) (283)

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

As at


bank of montreal reports second quarter earnings 2001...1 for immediate release bank of montreal...

Documents