Consolidated Financial Statements

Consolidated Statement of Income

(Unaudited) (Canadian $ in millions, except as noted)	For the three months ended														For the six months ended
	April 30,			January 31,			October 31,			July 31,		April 30,			April 30,			April 30,
	2008			2008			2007			2007		2007			2008			2007
Interest, Dividend and Fee Income
Loans	$	2,609		$	2,984		$	2,971		$	2,935	$	2,839		$	5,593		$	5,651
Securities		805			948			910			786		731			1,753			1,457
Deposits with banks		230			315			387			291		230			545			450
		3,644			4,247			4,268			4,012		3,800			7,891			7,558
Interest Expense
Deposits		1,842			2,297			2,328			1,968		1,833			4,139			3,609
Subordinated debt		51			49			51			46		40			100			83
Preferred shares and capital trust securities		23			23			24			24		26			46			51
Other liabilities		554			664			669			727		697			1,218			1,415
		2,470			3,033			3,072			2,765		2,596			5,503			5,158
Net Interest Income		1,174			1,214			1,196			1,247		1,204			2,388			2,400
Provision for credit losses (Note 2)		151			230			151			91		59			381			111
Net Interest Income After Provision for Credit Losses		1,023			984			1,045			1,156		1,145			2,007			2,289
Non-Interest Revenue
Securities commissions and fees		270			271			265			299		303			541			581
Deposit and payment service charges		181			182			183			180		182			363			365
Trading revenues (losses)		192			(301	)		(165	)		40		(10	)		(109	)		(362	)
Lending fees		101			92			105			102		100			193			199
Card fees		78			67			(105	)		79		70			145			133
Investment management and custodial fees		85			81			83			81		81			166			158
Mutual fund revenues		144			154			148			151		140			298			277
Securitization revenues		133			80			61			65		83			213			170
Underwriting and advisory fees		98			92			103			160		159			190			265
Securities gains (losses), other than trading		14			(2	)		148			6		48			12			92
Foreign exchange, other than trading		30			29			48			30		33			59			54
Insurance income		52			62			52			55		77			114			123
Other		68			5			78			60		58			73			139
		1,446			812			1,004			1,308		1,324			2,258			2,194
Net Interest Income and Non-Interest Revenue		2,469			1,796			2,049			2,464		2,469			4,265			4,483
Non-Interest Expense
Employee compensation (Note 8)		980			945			901			1,024		969			1,925			1,900
Premises and equipment		335			326			350			325		320			661			628
Amortization of intangible assets		10			10			11			11		13			20			24
Travel and business development		74			72			92			72		64			146			123
Communications		53			42			36			38		42			95			75
Business and capital taxes		(1	)		12			6			–		17			11			41
Professional fees		90			79			108			62		67			169			131
Other		139			128			127			127		122			267			230
		1,680			1,614			1,631			1,659		1,614			3,294			3,152
Restructuring Charge (Note 9)		–			–			24			–		–			–			135
Income Before Provision for (Recovery of) Income Taxes and Non-Controlling Interest in Subsidiaries		789			182			394			805		855			971			1,196
Income taxes		128			(91	)		(77	)		127		165			37			139
		661			273			471			678		690			934			1,057
Non-controlling interest in subsidiaries		19			18			19			18		19			37			38
Net Income	$	642		$	255		$	452		$	660	$	671		$	897		$	1,019
Preferred share dividends	$	14		$	15		$	12		$	9	$	13		$	29		$	22
Net income available to common shareholders	$	628		$	240		$	440		$	651	$	658		$	868		$	997
Average common shares (in thousands)		502,054			499,067			498,379			499,793		500,510			500,544			500,828
Average diluted common shares (in thousands)		506,638			505,572			506,173			507,913		509,943			506,099			510,131
Earnings Per Share (Canadian $)
Basic	$	1.25		$	0.48		$	0.89		$	1.30	$	1.31		$	1.73		$	1.99
Diluted		1.25			0.47			0.87			1.28		1.29			1.72			1.96
Dividends Declared Per Common Share		0.70			0.70			0.70			0.68		0.68			1.40			1.33
The accompanying notes are an integral part of these consolidated financial statements.

BMO Financial Group Second Quarter Report 2008 • 29

Consolidated Financial Statements

Consolidated Balance Sheet

(Unaudited) (Canadian $ in millions)	As at
	April 30,			January 31,			October 31,			July 31,			April 30,
	2008			2008			2007			2007			2007
Assets
Cash Resources	$	22,237		$	26,122		$	22,890		$	25,041		$	19,502
Securities
Trading		64,443			63,377			70,773			67,716			63,600
Available-for-sale		22,453			24,341			26,010			17,046			17,529
Other		1,774			1,747			1,494			1,456			1,460
Loan substitutes		–			–			–			11			11
		88,670			89,465			98,277			86,229			82,600
Loans
Residential mortgages		52,583			53,224			52,429			62,297			62,908
Consumer instalment and other personal		37,954			34,517			33,189			33,009			31,913
Credit cards		4,338			4,685			4,493			4,347			3,899
Businesses and governments		67,942			66,205			62,650			63,795			60,956
Securities borrowed or purchased under resale agreements		33,596			42,937			37,093			34,216			35,063
		196,413			201,568			189,854			197,664			194,739
Customers’ liability under acceptances		10,345			11,590			12,389			8,993			9,530
Allowance for credit losses (Note 2)		(1,336	)		(1,227	)		(1,055	)		(1,045	)		(1,059	)
		205,422			211,931			201,188			205,612			203,210
Other Assets
Derivative instruments		44,557			36,857			32,585			30,030			38,711
Premises and equipment		2,024			1,977			1,980			2,015			2,047
Goodwill		1,398			1,189			1,140			1,232			1,252
Intangible assets		208			152			124			149			174
Other		10,642			9,132			8,340			8,846			9,031
		58,829			49,307			44,169			42,272			51,215
Total Assets	$	375,158		$	376,825		$	366,524		$	359,154		$	356,527
Liabilities and Shareholders’ Equity
Deposits
Banks	$	30,938		$	34,991		$	34,100		$	30,561		$	28,256
Businesses and governments		122,707			125,312			121,748			120,757			114,504
Individuals		84,935			82,608			76,202			77,709			78,855
		238,580			242,911			232,050			229,027			221,615
Other Liabilities
Derivative instruments		40,347			32,776			33,584			30,543			40,192
Acceptances		10,345			11,590			12,389			8,993			9,530
Securities sold but not yet purchased		20,053			28,393			25,039			28,551			24,692
Securities lent or sold under repurchase agreements		29,894			28,331			31,263			30,992			31,027
Other		13,940			12,478			12,055			10,682			10,055
		114,579			113,568			114,330			109,761			115,496
Subordinated Debt (Note 10)		4,199			3,446			3,446			3,446			2,395
Preferred Share Liability (Note 11)		250			250			250			450			450
Capital Trust Securities		1,150			1,150			1,150			1,150			1,150
Shareholders’ Equity
Share capital (Note 11)		6,114			5,648			5,607			5,318			5,272
Contributed surplus		67			65			58			56			55
Retained earnings		11,327			11,056			11,166			11,158			11,017
Accumulated other comprehensive loss		(1,108	)		(1,269	)		(1,533	)		(1,212	)		(923	)
		16,400			15,500			15,298			15,320			15,421
Total Liabilities and Shareholders’ Equity	$	375,158		$	376,825		$	366,524		$	359,154		$	356,527
The accompanying notes are an integral part of these consolidated financial statements.

30 • BMO Financial Group Second Quarter Report 2008

Consolidated Financial Statements

Consolidated Statement of Comprehensive Income

	(Unaudited) (Canadian $ in millions)	For the three months ended						For the six months ended
		April 30,			April 30,			April 30,			April 30,
		2008			2007			2008			2007
	Net income	$	642		$	671		$	897		$	1,019
	Other Comprehensive Income
	Net change in unrealized gains on available-for-sale securities		77			2			75			4
	Net change in unrealized gains (losses) on cash flow hedges		80			1			144			(44	)
	Net gain (loss) on translation of net foreign operations		4			(228	)		206			(46	)
	Total Comprehensive Income	$	803		$	446		$	1,322		$	933
Consolidated Statement of Changes in Shareholders’ Equity
	(Unaudited) (Canadian $ in millions)	For the three months ended						For the six months ended
		April 30,			April 30,			April 30,			April 30,
		2008			2007			2008			2007
	Preferred Shares
	Balance at beginning of period	$	1,196		$	946		$	1,196		$	596
	Issued during the period (Note 11)		250			–			250			350
	Balance at End of Period		1,446			946			1,446			946
	Common Shares
	Balance at beginning of period		4,452			4,279			4,411			4,231
	Issued under the Shareholder Dividend Reinvestment and Share Purchase Plan		27			27			55			55
	Issued under the Stock Option Plan		9			39			22			68
	Issued on the exchange of shares of a subsidiary corporation		–			–			–			1
	Issued on the acquisition of a business (Note 7)		180			–			180			–
	Repurchased for cancellation (Note 11)		–			(19	)		–			(29	)
	Balance at End of Period		4,668			4,326			4,668			4,326
	Contributed Surplus
	Balance at beginning of period		65			55			58			49
	Stock option expense		2			–			9			6
	Balance at End of Period		67			55			67			55
	Retained Earnings
	Balance at beginning of period		11,056			10,836			11,166			10,974
	Cumulative impact of adopting new accounting requirements for financial instruments (net of income taxes of $39)		–			–			–			(71	)
	Net income		642			671			897			1,019
	Dividends – Preferred shares		(14	)		(13	)		(29	)		(22	)
	– Common shares		(352	)		(340	)		(702	)		(665	)
	Common shares repurchased for cancellation (Note 11)		–			(137	)		–			(209	)
	Share issue expense		(5	)		–			(5	)		(9	)
	Balance at End of Period		11,327			11,017			11,327			11,017
	Accumulated Other Comprehensive Income on Available-for-Sale Securities
	Balance at beginning of period		33			5			35			–
	Impact of remeasuring available-for-sale securities to market value on November 1, 2006 (net of income taxes of $1)		–			–			–			3
	Unrealized gains on available-for-sale securities arising during the period (net of income taxes of $29, less than $1, $17 and $4)		60			1			35			8
	Reclassification to earnings of losses (gains) in the period (net of income taxes of $9, less than $1, $19 and $2)		17			1			40			(4	)
	Balance at End of Period		110			7			110			7
	Accumulated Other Comprehensive Loss on Cash Flow Hedges
	Balance at beginning of period		(102	)		(96	)		(166	)		–
	Impact of adopting new cash flow hedge accounting rules on November 1, 2006 (net of income taxes of $28)		–			–			–			(51	)
	Gains (losses) on cash flow hedges arising during the period (net of income taxes of $37, $1, $52 and $24)		77			1			104			(47	)
	Reclassification to earnings of losses on cash flow hedges (net of income taxes of $2, less than $1, $19 and $2)		3			–			40			3
	Balance at End of Period		(22	)		(95	)		(22	)		(95	)
	Accumulated Other Comprehensive Loss on Translation of Net Foreign Operations
	Balance at beginning of period		(1,200	)		(607	)		(1,402	)		(789	)
	Unrealized gain (loss) on translation of net foreign operations		26			(619	)		618			(126	)
	Impact of hedging unrealized gain (loss) on translation of net foreign operations (net of income taxes of $11, $207, $196 and $43)		(22	)		391			(412	)		80
	Balance at End of Period		(1,196	)		(835	)		(1,196	)		(835	)
	Total Accumulated Other Comprehensive Loss		(1,108	)		(923	)		(1,108	)		(923	)
	Total Shareholders’ Equity	$	16,400		$	15,421		$	16,400		$	15,421
	The accompanying notes are an integral part of these consolidated financial statements.

BMO Financial Group Second Quarter Report 2008 • 31 

Consolidated Financial Statements

Consolidated Statement of Cash Flows

(Unaudited) (Canadian $ in millions)	For the three months ended						For the six months ended
	April 30,			April 30,			April 30,			April 30,
	2008			2007			2008			2007
Cash Flows from Operating Activities
Net income	$	642		$	671		$	897		$	1,019
Adjustments to determine net cash flows provided by (used in) operating activities
Write-down of securities, other than trading		35			–			74			–
Net gain on securities, other than trading		(49	)		(48	)		(86	)		(92	)
Net (increase) decrease in trading securities		(846	)		(6,602	)		8,352			(11,897	)
Provision for credit losses		151			59			381			111
Gain on sale of securitized loans (Note 3)		(116	)		(54	)		(175	)		(114	)
Change in derivative instruments – (Increase) in derivative asset		(7,425	)		(2,944	)		(10,867	)		(8,818	)
– Increase in derivative liability		7,448			3,190			5,567			9,364
Amortization of premises and equipment		97			99			193			191
Amortization of intangible assets		10			13			20			24
Net increase (decrease) in future income taxes		28			(18	)		43			(79	)
Net decrease in current income taxes		(66	)		(83	)		(527	)		(584	)
Change in accrued interest – (Increase) decrease in interest receivable		87			(81	)		330			125
– Increase (decrease) in interest payable		(207	)		95			(262	)		33
Changes in other items and accruals, net		(2,674	)		(1,316	)		(4,507	)		752
Net Cash Used in Operating Activities		(2,885	)		(7,019	)		(567	)		(9,965	)
Cash Flows from Financing Activities
Net increase (decrease) in deposits		(6,483	)		10,024			(2,275	)		17,104
Net increase (decrease) in securities sold but not yet purchased		(8,335	)		5,413			(5,248	)		9,335
Net increase (decrease) in securities lent or sold under repurchase agreements		1,099			(8,804	)		(2,803	)		(669	)
Net increase in liabilities of subsidiaries		1,221			199			2,886			202
Repayment of subordinated debt (Note 10)		(150	)		(333	)		(150	)		(333	)
Proceeds from issuance of subordinated debt (Note 10)		900			–			900			–
Proceeds from issuance of preferred shares		250			–			250			350
Proceeds from issuance of common shares		36			66			77			123
Share issue expense		(5	)		–			(5	)		(9	)
Common shares repurchased for cancellation (Note 11)		–			(156	)		–			(238	)
Dividends paid		(366	)		(353	)		(731	)		(687	)
Net Cash Provided by (Used in) Financing Activities		(11,833	)		6,056			(7,099	)		25,178
Cash Flows from Investing Activities
Net (increase) decrease in interest bearing deposits with banks		4,016			2,009			1,270			(144	)
Purchases of securities, other than trading		(6,223	)		(8,056	)		(13,317	)		(19,517	)
Maturities of securities, other than trading		6,728			6,729			12,194			14,014
Proceeds from sales of securities, other than trading		1,826			1,214			5,798			2,312
Net (increase) in loans, customers’ liability under acceptances and loan substitute securities		(3,711	)		(7,648	)		(6,534	)		(9,300	)
Proceeds from securitization of loans (Note 3)		2,600			487			3,145			1,429
Net (increase) decrease in securities borrowed or purchased under resale agreements		9,749			5,840			4,840			(3,912	)
Premises and equipment – net purchases		(104	)		(126	)		(164	)		(155	)
Acquisitions (Note 7)		(136	)		(1	)		(176	)		(385	)
Net Cash Provided by (Used in) Investing Activities		14,745			448			7,056			(15,658	)
Effect of Exchange Rate Changes on Cash and Cash Equivalents		24			(57	)		108			40
Net Increase (Decrease) in Cash and Cash Equivalents		51			(572	)		(502	)		(405	)
Cash and Cash Equivalents at Beginning of Period		3,097			2,625			3,650			2,458
Cash and Cash Equivalents at End of Period	$	3,148		$	2,053		$	3,148		$	2,053

The accompanying notes are an integral part of these consolidated financial statements.
Certain comparative figures have been reclassified to conform with the current period’s presentation.

32 • BMO Financial Group Second Quarter Report 2008

Notes to Consolidated Financial Statements

For the six months ended April 30, 2008 (Unaudited)

Note 1: Basis of Presentation

These consolidated financial statements should be read in conjunction with the notes to our consolidated financial statements for the year ended October 31, 2007 as set out on pages 96 to 137 of our 2007 Annual Report. These consolidated financial statements have been prepared in accordance

with Canadian generally accepted accounting principles (“GAAP”) using the same accounting policies and methods of computation as were used for our consolidated financial statements for the year ended October 31, 2007.

Note 2: Allowance for Credit Losses

The allowance for credit losses recorded in our Consolidated Balance Sheet is maintained at a level which we consider adequate to absorb credit-related losses on our loans, customers’ liability under acceptances and other credit instruments. The portion related to other credit instruments is recorded in

other liabilities in our Consolidated Balance Sheet. As at April 30, 2008 and April 30, 2007 there was no allowance for credit losses related to other credit instruments included in other liabilities.

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

(Canadian $ in millions)	For the three months ended
							Credit card, consumer instalment and						Business and						Customers’ liability
	Residential mortgages						other personal loans						government loans						under acceptances					Total
	April 30,			April 30,			April 30,			April 30,			April 30,			April 30,			April 30,		April 30,			April 30,			April 30,
	2008			2007			2008			2007			2008			2007			2008		2007			2008			2007
Specific Allowance at beginning of period	$	15		$	4		$	1		$	1		$	234		$	151		$	–	$	–		$	250		$	156
Provision for credit losses		(1	)		1			69			55			83			3			–		–			151			59
Recoveries		–			–			27			17			8			4			–		–			35			21
Write-offs		(2	)		–			(96	)		(72	)		(14	)		(12	)		–		–			(112	)		(84	)
Foreign exchange and other		–			–			–			–			1			6			–		–			1			6
Specific Allowance at end of period		12			5			1			1			312			152			–		–			325			158
General Allowance at beginning of period		8			19			357			355			572			509			40		39			977			922
Provision for credit losses		(1	)		–			(41	)		(19	)		30			20			12		(1	)		–			–
Foreign exchange and other		–			–			–			–			34			(21	)		–		–			34			(21	)
General Allowance at end of period		7			19			316			336			636			508			52		38			1,011			901
Total Allowance	$	19		$	24		$	317		$	337		$	948		$	660		$	52	$	38		$	1,336		$	1,059
(Canadian $ in millions)	For the six months ended
							Credit card, consumer instalment and						Business and						Customers’ liability
	Residential mortgages						other personal loans						government loans						under acceptances					Total
	April 30,			April 30,			April 30,			April 30,			April 30,			April 30,			April 30,		April 30,			April 30,			April 30,
	2008			2007			2008			2007			2008			2007			2008		2007			2008			2007
Specific Allowance at beginning of period	$	14		$	5		$	1		$	1		$	142		$	147		$	–	$	–		$	157		$	153
Provision for credit losses		–			1			137			104			184			6			–		–			321			111
Recoveries		–			–			46			35			11			8			–		–			57			43
Write-offs		(2	)		(1	)		(183	)		(139	)		(29	)		(18	)		–		–			(214	)		(158	)
Foreign exchange and other		–			–			–			–			4			9			–		–			4			9
Specific Allowance at end of period		12			5			1			1			312			152			–		–			325			158
General Allowance at beginning of period		11			23			327			340			517			506			43		36			898			905
Provision for credit losses		(4	)		(4	)		(11	)		(4	)		66			6			9		2			60			–
Foreign exchange and other		–			–			–			–			53			(4	)		–		–			53			(4	)
General Allowance at end of period		7			19			316			336			636			508			52		38			1,011			901
Total Allowance	$	19		$	24		$	317		$	337		$	948		$	660		$	52	$	38		$	1,336		$	1,059

BMO Financial Group Second Quarter Report 2008  • 33

Note 3: Securitization

During the quarter ended April 30, 2008, we securitized credit card loans totalling $550 million for total cash proceeds of $525 million. We retained responsibility for servicing these credit card loans. We recorded a gain of $10 million in non-interest revenue, securitization revenues, $13 million of deferred purchase price in available-for-sale securities and $2 million of servicing liability in other liabilities related to the securitization of those loans. The key weighted-average assumptions used to value the deferred purchase price for these securitizations were an average life of 0.4 years, a prepayment rate of 41.1%, an interest rate of 21.29% and a discount rate of 10.39%. We did not securitize any credit card loans in the quarter and six months ended April 30, 2007.

          During the quarter ended April 30, 2008, we securitized residential mortgages totalling $2,112 million for total cash proceeds of $2,075 million ($2,675 million and $2,620 million respectively, for the six months ended April 30, 2008). There are no expected credit losses as the mortgages are guaranteed by third parties. We retained responsibility for servicing these mortgages. We recorded a gain of $46 million in non-interest revenue, securitization revenues, $110 million of deferred purchase price in available-for-sale securities and $15 million of servicing liability in other liabilities related to the securitization of those loans ($51 million, $134 million and $19 million respectively, for the six months ended April 30, 2008). The key weighted-average assumptions used to value the deferred purchase price for these securitizations were an average term of 4.4 years, a prepayment rate of

14.0%, an interest rate of 5.64% and a discount rate of 4.15% (4.4 years and 13.2%, 5.55% and 4.28% respectively, for the six months ended April 30, 2008).

          During the quarter ended April 30, 2007, we securitized residential mortgages totalling $499 million for total cash proceeds of $487 million ($1,447 million and $1,429 million respectively, for the six months ended April 30, 2007). There were no expected credit losses as the mortgages are guaranteed by third parties. We retained responsibility for servicing these mortgages. We recorded a gain of $5 million in non-interest revenue, securitization revenues, $25 million of deferred purchase price in available-for-sale securities and $4 million of servicing liability in other liabilities related to the securitization of those loans ($10 million, $62 million and $12 million respectively, for the six months ended April 30, 2007). The key weighted-average assumptions used to value the deferred purchase price for these securitizations were an average term of 4.8 years, a prepayment rate of 10.0%, an interest rate of 5.21% and a discount rate of 4.19% (4.7 years and 9.3%, 5.29% and 4.19% respectively, for the six months ended April 30, 2007).

          In addition, gains on sales of loans sold to all revolving securitization vehicles were $60 million for the quarter ended April 30, 2008 ($114 million for the six months ended April 30, 2008). Gains on sales of loans sold to all revolving securitization vehicles were $49 million for the quarter ended April 30, 2007 ($104 million for the six months ended April 30, 2007).

Note 4: Financial Instruments

Fair Value Option

Management can elect to account for any financial instruments that would not otherwise be accounted for at fair value as trading instruments with changes in fair value recorded in income provided they meet certain criteria.

          The Bank has designated bonds purchased to support our Municipal Tender Option Bond Program as trading under the fair value option. These bonds would otherwise be accounted for as available-for-sale securities with unrealized gains and losses recorded in Other Comprehensive Income. In managing this program, we enter into derivatives to hedge against changes in the fair value of those bonds that arise due to changes in interest rates. Electing the fair value option for the bonds better aligns the accounting result with how the portfolio is managed. The fair value of the bonds as at April 30, 2008 was $28 million. The impact of recording the bonds as trading securities was a decrease in non-interest revenue, trading revenues of less than $1 million for the quarter ended April 30, 2008 and an increase in non-interest revenue, trading losses of less than $1 million for the six months ended April 30, 2008.

          The change in fair value of our structured notes designated as held for trading was an increase in non-interest revenue, trading revenues of $9 million for the quarter ended April 30, 2008 and an increase in non-interest revenue, trading losses of $3 million for the six months ended April 30, 2008. The portion of the change in fair value attributable to changes in our own credit risk was an unrealized gain of $13 million for the quarter and six months ended April 30, 2008.

Fair Value Measurement

We use a fair value hierarchy to categorize the inputs we use in valuation techniques to measure fair value. The extent of our use of quoted market prices (Level 1), internal models using observable market information as inputs (Level 2) and internal models without observable market information (Level 3) in the valuation of securities, fair value liabilities, derivative assets and derivative liabilities as at April 30, 2008 were as follows:

										Derivative Instruments
	Available-for-sale			Trading			Fair value
	securities			securities			liabilities			Asset			Liability
Valued using quoted market prices		57	%		98	%		–	%		10	%		12	%
Valued using internal models (with observable inputs)		41			–			100			85			87
Valued using internal models (without observable inputs)		2			2			–			5			1
Total		100	%		100	%		100	%		100	%		100	%

Sensitivity analysis for the most significant items valued using internal models without observable inputs was as follows:

Trading Securities

Within trading securities as at April 30, 2008 was $229 million of third party Asset-Backed Commercial Paper (“ABCP”) with a face value of $325 million. This ABCP is considered Level 3 as its value has been determined by management based on expected discounted cash flows and expectations of the probability of restructuring the vehicles in accordance with the Montreal Accord versus the liquidation value. The determination of the discount rate used in the discounted cash flow model has the most significant impact on the

34 • BMO Financial Group Second Quarter Report 2008

valuation of the ABCP. The impact of assuming the discount rate increased or decreased by 50 basis points would result in a change in fair value of $8 million and $(8) million, respectively. The impact on net income for the quarter ended April 30, 2008 related to changes in fair value of this investment was a charge of $36 million before tax.

          Our exposure to Apex/Sitka totals $580 million as at April 30, 2008, of which $436 million is ABCP (with a face value of $530 million) included in trading securities, and $144 million is guarantees. These amounts are considered Level 3 as their value has been determined by management based on expected discounted cash flows and expectations of the probability of restructuring the vehicles versus the liquidation value. The determination of the discount rate used in the discounted cash flow model has the most significant impact on the valuation of the ABCP. The impact of assuming the discount rate increased or decreased by 50 basis points would result in a change in fair value of $20 million and $(20) million, respectively. The impact

on net income for the quarter ended April 30, 2008 related to changes in fair value of our exposure to Apex/Sitka was a recovery of $85 million before tax.

Derivative Instruments

Within derivative assets and derivative liabilities as at April 30, 2008 was $1,913 million and $3,582 million, respectively, related to the mark-to-market of credit default swaps and total return swaps on structured products. These derivatives are considered Level 3 as their values have been determined by management, based on estimates of current market spreads for similar structured products. The impact of assuming a 10 basis point increase or decrease in that spread would result in a change in fair value of $12 million or $(12) million, respectively. The impact on net income in the quarter ended April 30, 2008 related to the change in fair value of these derivatives was a charge of $48 million before tax.

Note 5: Variable Interest Entities

Canadian Customer Securitization Vehicles

Customer securitization vehicles assist our customers with the securitization of their assets to provide them with alternative sources of funding. Assets held by our unconsolidated Canadian customer securitization vehicles amounted to $14,799 million as at April 30, 2008 ($17,536 million as at October 31, 2007). Our exposure to losses relates to our investment in commercial paper issued by the vehicles, derivative contracts we have entered into with the vehicles and the liquidity support we provide through commitments to extend credit. As at April 30, 2008, we have a net exposure of $3,013 million from commercial paper held ($5,564 million as at October 31, 2007) classified as trading securities, and undrawn backstop liquidity facilities of $15,512 million ($20,756 million as at October 31, 2007). As at April 30, 2008, $nil had been drawn against these Canadian facilities ($nil as at October 31, 2007). The fair value of derivatives outstanding with these Variable Interest Entities (“VIEs”) and recorded in our Consolidated Balance Sheet was a derivative asset of $44 million as at April 30, 2008 (derivative liability of $20 million as at October 31, 2007).

          Included in our Consolidated Balance Sheet as at April 30, 2008 were other assets totalling $283 million and $nil as a deposit liability ($311 million and $65 million, respectively, as at October 31, 2007) as a result of consolidating two Canadian customer securitization vehicles.

U.S. Customer Securitization Vehicle

Our exposure to losses in our U.S. customer securitization vehicle relates to liquidity support we provide through backstop liquidity facilities. Assets held by our unconsolidated U.S. customer securitization vehicle amounted to $7,538 million as at April 30, 2008 ($7,929 million as at October 31, 2007). As at April 30, 2008, exposure from undrawn backstop liquidity facilities amounted to $9,895 million ($10,719 million as at October 31, 2007). As at April 30, 2008, the Bank has provided funding of US$851 million in accordance with the terms of these liquidity facilities. We are not required to consolidate our U.S. customer securitization vehicle.

Bank Securitization Vehicles

We use bank securitization vehicles to securitize our Canadian mortgage loans and Canadian credit card loans either for capital management purposes or to obtain alternate sources of funding. Total assets held by these vehicles amounted to $7,050 million as at April 30, 2008 ($6,552 million as at October 31, 2007). We are not required to consolidate our bank securitization vehicles. We held $133 million of the commercial paper issued by these vehicles as at April 30, 2008 ($367 million as at October 31, 2007). We also provide liquidity support to certain of our bank securitization vehicles for the face value of the commercial paper outstanding. The total contract amount of the liquidity support was $5,100 million as at April 30, 2008 and October 31, 2007. No amounts were drawn as at April 30, 2008 and October 31, 2007. The fair value of derivatives outstanding with these vehicles and recorded in our Consolidated Balance Sheet was a derivative asset of $63 million as at April 30, 2008 (derivative liability of $52 million as at October 31, 2007).

Credit Investment Management Vehicles

Credit investment management vehicles provide investment opportunities in customized, diversified debt portfolios in a variety of asset and rating classes. We hold an interest in high grade Structured Investment Vehicles (“SIVs”) and act as asset manager. Assets held by these vehicles amounted to $10,634 million, including cash of $49 million, as at April 30, 2008 (assets of $22,754 million as at October 31, 2007). Our exposure to loss relates to our investments in these vehicles, derivative contracts we have entered into with the vehicles and senior funding we provide through a liquidity facility in order to backstop the repayment of senior notes. Our investment in the capital notes of the SIVs is recorded in available-for-sale securities in our Consolidated Balance Sheet and was $10 million as at April 30, 2008 ($53 million as at October 31, 2007), net of write-downs of $23 million for the quarter ended April 30, 2008 and $46 million for the six months ended April 30, 2008 ($13 million for the quarter ended October 31, 2007). Amounts drawn from the liquidity facility provided to the SIVs totalled $427 million as at April 30, 2008 ($nil as at October 31, 2007). Our exposure includes undrawn facilities of $9.6 billion as at April 30, 2008 ($221 million as at October 31, 2007). The fair value of our derivative contracts outstanding with these SIVs and recorded in our Consolidated Balance Sheet was a derivative asset of

BMO Financial Group Second Quarter Report 2008 • 35

$1 million as at April 30, 2008 (derivative liability of $11 million as at October 31, 2007). We are not required to consolidate these VIEs.

Structured Finance Vehicles

We facilitate development of investment products by third parties including mutual funds, unit investment trusts and other investment funds that are sold to retail investors. We enter into derivatives with these funds to provide the investors their desired exposure and hedge our exposure from these derivatives by investing in other funds. We consolidate those VIEs where our interests expose us to a majority of the expected losses or residual returns, or both. Total assets and our exposure to losses in these consolidated VIEs were $394 million as at April 30, 2008 ($440 million as at October 31, 2007). Assets held by these VIEs in which we have a significant variable interest but we do not consolidate totalled $274 million as at April 30, 2008 ($353 million as at October 31, 2007). Our exposure to loss from VIEs related to this activity is limited to the amount of our investment, which totalled $76 million as at April 30, 2008 ($99 million as at October 31, 2007).

          We also sponsor Apex/Sitka, a VIE that provides investors credit protection on investments in debt portfolios through credit default swaps. Assets held by Apex/Sitka were $2,013 million and $2,012 million as at April 30, 2008 and October 31, 2007, respectively. As at April 30, 2008, our exposure to loss in Apex/Sitka was comprised of investments in asset-backed commercial paper of $436 million (with a face value of $530 million); guarantees provided to third parties of $144 million; and advances of $200 million on a senior funding facility, which was repaid subsequent to April 30, 2008.

Subsequent to April 30, 2008, we successfully restructured Apex/Sitka and transferred the credit default swaps and collateral in Sitka into Apex Trust (Apex). The commercial paper and notes in both trusts were exchanged for mid-term notes in Apex with maturities ranging from approximately five to eight years to better match the term of the positions in Apex. To satisfy collateral calls, an additional senior funding facility of $1,130 million will be provided of which we will provide $1,030 million. After the restructuring, our total exposure to Apex will be approximately $815 million of the subordinated mid-term notes and approximately $1,030 million of the senior funding facility.

          The Bank does not consider the May 2008 purchase of mid-term notes to be an indicator of our intent to imply or provide support to other mid-term note holders. Instead, the purchase was a one-time, isolated event, upon the restructuring of Apex. We do not intend to purchase additional mid-term notes of Apex nor do we intend to reimburse any other mid-term note holders for any losses they may incur. Our investment in the $815 million of mid-term notes should not be considered a commitment by us to provide additional subordinated support to Apex. We are not required to consolidate Apex.

Capital Trusts

BMO Covered Bond Trust (the “CB Trust”) was created in 2007 to guarantee payments due to the bondholders in respect of €1 billion BMO Covered Bonds issued by the Bank in the first quarter of 2008. The guarantee is secured by the assets of the CB Trust. The CB Trust is a variable interest entity which we are required to consolidate as we are exposed to the majority of the expected losses and residual returns. Total assets in the vehicle as at April 30, 2008 were $6.5 billion of residential mortgages and $196 million of cash.

Note 6: Guarantees

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

Standby Letters of Credit and Guarantees

Standby letters of credit and guarantees represent our obligation to make payments to third parties on behalf of another party if they are unable to make the required payments or meet other contractual requirements.

          The maximum amount payable under standby letters of credit and guarantees was $14,302 million as at April 30, 2008 ($12,395 million as at October 31, 2007). Collateral requirements for standby letters of credit and guarantees are consistent with our collateral requirements for loans.

          No amount was included in our Consolidated Balance Sheet as at April 30, 2008 and October 31, 2007 related to these standby letters of credit and guarantees.

Backstop Liquidity Facilities

Backstop liquidity facilities are provided to asset-backed commercial paper programs administered by either us or third parties and to our credit investment management vehicles as an alternative source of financing in the event that such programs are unable to access asset-backed commercial paper markets or, in limited circumstances, when predetermined performance

measures of the financial assets owned by these programs are not met. The terms of the backstop liquidity facilities do not require us to advance money to these programs in the event of bankruptcy of the borrower. The facilities’ terms are generally no longer than one year, but can be several years. The undrawn backstop liquidity facilities totalled $41,399 million as at April 30, 2008 ($38,466 million as at October 31, 2007). As at April 30, 2008, $1,286 million was drawn ($16 million as at October 31, 2007), in accordance with the terms of the liquidity facilities, of which $1,285 million relates to VIEs discussed in Note 5.

Credit Enhancement Facilities

Where warranted, we provide partial credit enhancement facilities to transactions within asset-backed commercial paper programs administered by either us or third parties. Credit enhancement facilities were included in $4,310 million of backstop liquidity facilities as at April 30, 2008 ($5,449 million as at October 31, 2007). Credit enhancement was also provided in the form of program letters of credit; $nil was included in standby letters of credit and guarantees as at April 30, 2008 and October 31, 2007. The facilities’ terms are generally no longer than one year, but can be several years.

36 • BMO Financial Group Second Quarter Report 2008

Note 7: Acquisitions

Merchants and Manufacturers Bancorporation, Inc.

On February 29, 2008, we completed the acquisition of Merchants and Manufacturers Bancorporation, Inc. (“Merchants and Manufacturers”), for total cash consideration of $135 million. The results of Merchants and Manufacturers’ operations have been included in our consolidated financial statements since that date. The acquisition of Merchants and Manufacturers will provide us with the opportunity to expand our banking locations into Wisconsin. As part of this acquisition, we acquired a core deposit intangible asset, which will be amortized on an accelerated basis over a period not to exceed 10 years. Goodwill related to this acquisition is not deductible for tax purposes. Merchants and Manufacturers is part of our Personal and Commercial Banking U.S. reporting segment.

Ozaukee Bank

On February 29, 2008, we completed the acquisition of Ozaukee Bank (“Ozaukee”), a Wisconsin-based community bank, for 3,283,190 shares of Bank of Montreal with a market value of $54.97 per share for total consideration of $180 million. The results of Ozaukee’s operations have been included in our consolidated financial statements since that date. The acquisition of Ozaukee will provide us with the opportunity to expand our banking locations into Wisconsin. As part of this acquisition, we acquired a core deposit intangible asset, which will be amortized on an accelerated basis over a period not to exceed 10 years. Goodwill related to this acquisition is not deductible for tax purposes. Ozaukee is part of our Personal and Commercial Banking U.S. reporting segment.

Pyrford International plc

On December 14, 2007, we completed the acquisition of Pyrford International plc (“Pyrford”), a London, U.K.-based asset manager, for total cash consideration of $41 million, plus contingent consideration up to $10 million based on our retention of the assets under management one year from the closing date. The results of Pyrford’s operations have been included in our consolidated financial statements since that date. The acquisition of Pyrford will provide us with the opportunity to expand our investment management capabilities outside of North America. As part of this acquisition, we acquired a customer relationship intangible asset, which will be amortized on a straight

line basis over a period not to exceed 15 years. Goodwill related to this acquisition is not deductible for tax purposes. Pyrford is part of our Private Client Group reporting segment.

First National Bank & Trust

On January 4, 2007, we completed the acquisition of First National Bank & Trust (“First National”) for total cash consideration of $345 million. The results of First National’s operations have been included in our consolidated financial statements since that date. The acquisition of First National provides us with the opportunity to expand our banking services in the Indianapolis, Indiana market. As part of this acquisition, we acquired a core deposit intangible asset, which will be amortized on an accelerated basis over a period not to exceed 10 years. Goodwill related to this acquisition is deductible for tax purposes. First National is part of our Personal and Commercial Banking U.S. reporting segment.

bcpbank Canada

On December 4, 2006, we completed the acquisition of bcpbank Canada, a full-service chartered bank, for total cash consideration of $41 million. The results of bcpbank Canada’s operations have been included in our consolidated financial statements since that date. The acquisition of bcpbank Canada expands our branch network and provides our customers with greater access to banking services across the greater Toronto area. As part of this acquisition, we acquired a core deposit intangible asset, which will be amortized on an accelerated basis over 10 years. Goodwill related to this acquisition is not deductible for tax purposes. bcpbank Canada is part of our Personal and Commercial Banking Canada reporting segment.

Future Acquisitions

On April 21, 2008, we announced that we had reached a definitive agreement to purchase Chicago-based Griffin, Kubik, Stephens & Thompson Inc. (“GKST”) for total cash consideration of approximately $33 million. The exact amount will be subject to a post-closing adjustment based on net equity. This acquisition closed on May 1, 2008, and will be recorded in our consolidated financial statements as the acquisition of a business. GKST will be part of our BMO Capital Markets reporting segment.

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

	April 30,						October 31,
(Canadian $ in millions)	2008						2007
	Merchants and						First		bcpbank
	Manufacturers		Ozaukee		Pyrford		National		Canada
Cash resources	$	47	$	51	$	1	$	110	$	47
Securities		134		115		–		317		23
Loans		1,021		517		–		1,009		293
Premises and equipment		31		8		1		30		9
Goodwill		79		122		7		175		13
Core deposit/Customer relationship intangible asset		39		24		30		37		5
Other assets		15		14		4		52		2
Total assets		1,366		851		43		1,730		392
Deposits		1,029		584		–		1,375		339
Other liabilities		202		87		2		10		12
Total liabilities		1,231		671		2		1,385		351
Purchase price	$	135	$	180	$	41	$	345	$	41

The allocations of the purchase price for Merchants and Manufacturers, Ozaukee and Pyrford are subject to refinement as we complete the valuation of the assets acquired and liabilities assumed.

BMO Financial Group Second Quarter Report 2008 • 37

Note 8: Employee Compensation

Stock Options

During the six months ended April 30, 2008, we granted a total of 1,404,213 stock options. The weighted-average fair value of these options was $8.25 per option and was determined using a trinomial option pricing model, based on the following weighted-average assumptions.

For stock options granted during the six months ended April 30, 2008
Expected dividend yield		4.0	%
Expected share price volatility		19.4	%
Risk-free rate of return		4.1	%
Expected period until exercise	7.4 years

Pension and Other Employee Future Benefit Expenses

We recorded pension and other employee future benefit expenses in our Consolidated Statement of Income as follows:

(Canadian $ in millions)	Pension benefit plans						Other employee future benefit plans
	For the three months ended						For the three months ended
	April 30,			April 30,			April 30,			April 30,
	2008			2007			2008			2007
Benefits earned by employees	$	46		$	39		$	5		$	6
Interest cost on accrued benefit liability		56			55			12			13
Actuarial loss recognized in expense		2			14			3			4
Amortization of plan amendment costs		3			3			(2	)		(2	)
Expected return on plan assets		(73	)		(70	)		(2	)		(2	)
Benefits expense		34			41			16			19
Canada and Quebec pension plan expense		18			17			–			–
Defined contribution expense		4			4			–			–
Total pension and other employee future benefit expenses	$	56		$	62		$	16		$	19
(Canadian $ in millions)	Pension benefit plans						Other employee future benefit plans
	For the six months ended						For the six months ended
	April 30,			April 30,			April 30,			April 30,
	2008			2007			2008			2007
Benefits earned by employees	$	80		$	79		$	10		$	11
Interest cost on accrued benefit liability		114			110			25			25
Actuarial loss recognized in expense		6			30			6			8
Amortization of plan amendment costs		5			5			(3	)		(3	)
Expected return on plan assets		(145	)		(139	)		(3	)		(3	)
Benefits expense		60			85			35			38
Canada and Quebec pension plan expense		32			30			–			–
Defined contribution expense		7			8			–			–
Total pension and other employee future benefit expenses	$	99		$	123		$	35		$	38

Note 9: Restructuring Charge

The continuity of our restructuring charge is as follows:

	Severance-			Premises-
	related			related
(Canadian $ in millions)	charges			charges			Other			Total
Year Ended October 31, 2007
Opening balance	$	117		$	11		$	7		$	135
Paid in the year		(46	)		(10	)		(7	)		(63	)
Reversal in the year		(15	)		(1	)		–			(16	)
Additional charge in the year		40			–			–			40
Balance as at October 31, 2007		96			–			–			96
Paid in the quarter		(12	)		–			–			(12	)
Balance as at January 31, 2008		84			–			–			84
Paid in the quarter		(12	)		–			–			(12	)
Balance as at April 30, 2008	$	72		$	–		$	–		$	72

38 • BMO Financial Group Second Quarter Report 2008

Note 10: Subordinated Debt

During the quarter ended April 30, 2008, we issued $900 million of subordinated debt under our Canadian Medium-Term Note Program. The issue, Series F Medium-Term Notes, First Tranche, is due March 2023. Interest on this issue is payable semi-annually at a fixed rate of 6.17% until March 28, 2018, and at a floating rate equal to the rate on three month Bankers’ Acceptances plus 2.50%, paid quarterly, thereafter to maturity.

During the quarter ended April 30, 2008, we redeemed all of our 5.75% Series A Medium-Term Notes, Second Tranche, due 2013, totalling $150 million. The notes were redeemed at a redemption price of 100 percent of the principal amount plus unpaid accrued interest to the redemption date.

          During the quarter ended April 30, 2007, our US $300 million 7.80% Notes matured.

Note 11: Share Capital

During the quarter ended April 30, 2008, we issued 10,000,000 5.8% Non-Cumulative Perpetual Class B Preferred Shares, Series 15, at a price of $25.00 per share, representing an aggregate issue price of $250 million.

          During the six months ended April 30, 2007, we issued 14,000,000 4.5% Non-Cumulative Perpetual Class B Preferred Shares, Series 13, at a price of $25.00 per share, representing an aggregate issue price of $350 million.

          During the quarter ended April 30, 2008, we did not repurchase any common shares. During the quarter ended April 30, 2007, we repurchased

2,210,500 common shares at an average cost of $70.75 per share, totalling $156 million. During the six months ended April 30, 2008, we did not repurchase any common shares. During the six months ended April 30, 2007, we repurchased 3,405,400 common shares at an average cost of $70.16 per share, totalling $238 million.

          There have been 27,800 common shares repurchased under the existing normal course issuer bid that expires on September 5, 2008 and pursuant to which we are permitted to purchase up to 25,000,000 common shares.

Share Capital Outstanding (a)

(Canadian $ in millions, except as noted)	April 30, 2008
	Number of shares		Amount		Convertible into...
Preferred Shares – Classified as Liabilities
Class B – Series 6		10,000,000	$	250	common shares (b)
				250
Preferred Shares – Classified as Equity
Class B – Series 5		8,000,000		200	–
Class B – Series 10 (c)		12,000,000		396	common shares (b)
Class B – Series 13		14,000,000		350	–
Class B – Series 14		10,000,000		250	–
Class B – Series 15		10,000,000		250	–
				1,446
Common Shares		503,434,651		4,668	–
Share Capital			$	6,114
Stock options issued under stock option plan				n/a	21,439,528 common shares

(a)	For additional information refer to Notes 21 and 22 to our consolidated financial statements for the year ended October 31, 2007 on pages 121 to 124 of our 2007 Annual Report.
(b)	The number of shares issuable on conversion is not determinable until the date of conversion.

(c)	Face value is US$300 million.
n/a – not applicable

Note 12: Capital Management

Our capital management framework is designed to maintain the level of capital that: meets target ratios as set out by our regulator, the Superintendent of Financial Institutions Canada; supports our internal assessment of required capital; results in targeted credit ratings; funds our operating groups’ business strategies; and builds long-term shareholder value.

          Our policies and processes for managing capital as well as the nature of our capital are outlined in the Enterprise-Wide Capital Management section of Management’s Discussion and Analysis on page 57 of our 2007 Annual Report.

Effective November 1, 2007, a new regulatory capital management framework was implemented in Canada. The new framework, Basel II, replaced Basel I, the framework utilized for the past 20 years. It establishes regulatory capital requirements that are more sensitive to a bank’s risk profile.

          We have met our capital targets as at April 30, 2008. Our capital position as at April 30, 2008 is detailed in the Capital Management section on page 15 of Management’s Discussion and Analysis of the Second Quarter Report to Shareholders.

BMO Financial Group Second Quarter Report 2008 • 39

Note 13: Risk Management

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

Credit and Counterparty Risk

We are exposed to credit risk from the possibility that counterparties may default on their financial obligations to us. This is the most significant measurable risk that we face. Our risk management practices and key measures are disclosed in Management’s Discussion and Analysis on pages 67 to 68 of our 2007 Annual Report. Key measures as at April 30, 2008 are outlined in the Risk Management section on pages 11 to 12 of Management’s Discussion and Analysis of the Second Quarter Report to Shareholders.

Market, Liquidity and Funding Risk

Market risk is the potential for a negative impact on the balance sheet and/or income statement resulting from adverse changes in the value of financial instruments as a result of changes in certain market variables. These variables include interest rates, foreign exchange rates, equity or commodity

prices and their implied volatilities, as well as credit spreads, credit migration and default. We incur market risk in our trading and underwriting activities and structural banking activities.

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

          Our market risk and liquidity funding management practices and key measures are outlined on pages 68 to 71 of our 2007 Annual Report. Key measures as at April 30, 2008 are outlined in the Risk Management section on pages 11 to 12 of Management’s Discussion and Analysis of the Second Quarter Report to Shareholders.

          Financial liabilities are comprised of trading and non-trading liabilities. As liabilities in trading portfolios are typically held for short periods of time, they are not included in the table below. Contractual maturities of non-trading financial liabilities as at April 30, 2008 were as follows:

(Canadian $ in millions)
	Less than								No fixed
	1 year		1 to 3 years		4 to 5 years		Over 5 years		maturity		Total
Deposits	$	115,190	$	22,563	$	9,661	$	4,281	$	86,106	$	237,801
Subordinated debt (1)		421		879		554		6,666		–		8,520
Capital trust securities		–		750		400		1,050		–		2,200
Preferred share liability		250		–		–		–		–		250
Other financial liabilities (1)		38,945		281		223		2,829		44		42,322
Commitments to extend credit		47,147		22,123		19,305		1,266		–		89,841
Total	$	201,953	$	46,596	$	30,143	$	16,092	$	86,150	$	380,934

(1) Includes interest payments.

Note 14: United States Generally Accepted Accounting Principles

Reporting under United States GAAP would have resulted in the following:

(Canadian $ in millions, except earnings per share figures)	For the three months ended					For the six months ended
	April 30,		April 30,			April 30,		April 30,
	2008		2007			2008		2007
Net Income – Canadian GAAP	$	642	$	671		$	897	$	1,019
United States GAAP adjustments		13		(12	)		18		(24	)
Net Income – United States GAAP	$	655	$	659		$	915	$	995
Earnings Per Share
Basic – Canadian GAAP	$	1.25	$	1.31		$	1.73	$	1.99
Basic – United States GAAP		1.28		1.29			1.77		1.94
Diluted – Canadian GAAP		1.25		1.29			1.72		1.96
Diluted – United States GAAP		1.27		1.27			1.75		1.91

Fair Value Option

During the quarter ended January 31, 2008, we adopted the new United States accounting standard which allows the option to report selected financial assets and liabilities at fair value and establishes new disclosure

requirements for assets and liabilities to which the fair value option is applied. The new standard eliminated a difference between Canadian and United States GAAP.

40 • BMO Financial Group Second Quarter Report 2008

Note 15: Operating and Geographic Segmentation

Operating Groups

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

Personal and Commercial Banking

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

Personal and Commercial Banking Canada

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

Personal and Commercial Banking U.S.

Personal and Commercial Banking U.S. (“P&C U.S.”) offers a full range of products and services to personal and business clients in select markets of the U.S. Midwest through branches and direct banking channels such as telephone banking, online banking and a network of automated banking machines.

Private Client Group

Private Client Group (“PCG”) brings together all of our wealth management businesses. Operating under the BMO brand in Canada and Harris in the United States, PCG serves a full range of client segments, from mainstream to ultra-high net worth, as well as select institutional market segments. We offer our clients a broad range of wealth management products and services, including full-service and online brokerage in Canada, and private banking and investment products in Canada and the United States.

BMO Capital Markets

BMO Capital Markets (“BMO CM”) combines all of our businesses serving corporate, institutional and government clients. In Canada and the United States, its clients span a broad range of industry sectors. BMO CM also serves clients in the United Kingdom, Europe, Asia and Australia. It offers clients complete financial solutions, including equity and debt underwriting, corporate lending and project financing, mergers and acquisitions, advisory services, merchant banking, securitization, treasury and market risk management, debt and equity research and institutional sales and trading.

Corporate Services

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

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

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

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

Basis of Presentation

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

Taxable Equivalent Basis

We analyze net interest income on a taxable equivalent basis (“teb”) at the operating group level. This basis includes an adjustment which increases GAAP revenues and the GAAP provision for income taxes by an amount that would raise revenues on certain tax-exempt securities to a level that would incur tax at the statutory rate.

          Analysis on a teb basis neutralizes the impact of investing in tax-exempt or tax-advantaged securities rather than fully taxable securities with higher yields. It reduces distortions in net interest income related to the choice of tax-advantaged and taxable investments.

Provisions for Credit Losses

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

Inter-Group Allocations

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

Geographic Information

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

BMO Financial Group Second Quarter Report 2008  • 41

Our results and average assets, allocated by operating segment, are as follows:

(Canadian $ in millions)
	P&C		P&C							Corporate			Total
For the three months ended April 30, 2008 (2)	Canada		U.S.		PCG		BMO CM			Services (1)			(GAAP basis)
Net interest income	$	786	$	172	$	165	$	234		$	(183	)	$	1,174
Non-interest revenue		433		84		345		451			133			1,446
Total Revenue		1,219		256		510		685			(50	)		2,620
Provision for credit losses		82		10		1		29			29			151
Non-interest expense		657		199		348		441			35			1,680
Income before taxes and non-controlling interest in subsidiaries		480		47		161		215			(114	)		789
Income taxes		149		17		52		33			(123	)		128
Non-controlling interest in subsidiaries		–		–		–		–			19			19
Net Income	$	331	$	30	$	109	$	182		$	(10	)	$	642
Average Assets	$	124,694	$	25,481	$	8,024	$	231,812		$	4,058		$	394,069
Goodwill (As At)	$	104	$	876	$	323	$	93		$	2		$	1,398
	P&C		P&C							Corporate			Total
For the three months ended April 30, 2007 (2)	Canada		U.S.		PCG		BMO CM			Services (1)			(GAAP basis)
Net interest income	$	735	$	191	$	153	$	256		$	(131	)	$	1,204
Non-interest revenue		473		46		365		395			45			1,324
Total Revenue		1,208		237		518		651			(86	)		2,528
Provision for credit losses		81		9		–		19			(50	)		59
Non-interest expense		648		183		364		397			22			1,614
Income before taxes and non-controlling interest in subsidiaries		479		45		154		235			(58	)		855
Income taxes		152		16		55		38			(96	)		165
Non-controlling interest in subsidiaries		–		–		–		–			19			19
Net Income	$	327	$	29	$	99	$	197		$	19		$	671
Average Assets	$	117,777	$	24,830	$	6,884	$	204,411		$	3,642		$	357,544
Goodwill (As At)	$	99	$	732	$	323	$	96		$	2		$	1,252
	P&C		P&C							Corporate			Total
For the six months ended April 30, 2008 (2)	Canada		U.S.		PCG		BMO CM			Services (1)			(GAAP basis)
Net interest income	$	1,579	$	339	$	320	$	537		$	(387	)	$	2,388
Non-interest revenue		851		132		709		414			152			2,258
Total Revenue		2,430		471		1,029		951			(235	)		4,646
Provision for credit losses		165		19		2		58			137			381
Non-interest expense		1,352		365		716		824			37			3,294
Income before taxes and non-controlling interest in subsidiaries		913		87		311		69			(409	)		971
Income taxes		280		31		104		(79	)		(299	)		37
Non-controlling interest in subsidiaries		–		–		–		–			37			37
Net Income	$	633	$	56	$	207	$	148		$	(147	)	$	897
Average Assets	$	124,033	$	24,836	$	7,939	$	232,408		$	3,483		$	392,699
Goodwill (As At)	$	104	$	876	$	323	$	93		$	2		$	1,398
	P&C		P&C							Corporate			Total
For the six months ended April 30, 2007 (2)	Canada		U.S.		PCG		BMO CM			Services (1)			(GAAP basis)
Net interest income	$	1,495	$	377	$	304	$	488		$	(264	)	$	2,400
Non-interest revenue		879		88		720		370			137			2,194
Total Revenue		2,374		465		1,024		858			(127	)		4,594
Provision for credit losses		161		18		1		39			(108	)		111
Non-interest expense		1,290		357		728		727			185			3,287
Income before taxes and non-controlling interest in subsidiaries		923		90		295		92			(204	)		1,196
Income taxes		299		32		105		(85	)		(212	)		139
Non-controlling interest in subsidiaries		–		–		–		–			38			38
Net Income	$	624	$	58	$	190	$	177		$	(30	)	$	1,019
Average Assets	$	117,446	$	24,159	$	6,923	$	198,495		$	3,351		$	350,374
Goodwill (As At)	$	99	$	732	$	323	$	96		$	2		$	1,252

(1)	Corporate Services includes Technology and Operations.
(2)	Operating groups report on a taxable equivalent basis – see Basis of Presentation section.

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

42 • BMO Financial Group Second Quarter Report 2008

Our results and average assets, allocated by geographic region, are as follows:

(Canadian $ in millions)
						Other
For the three months ended April 30, 2008	Canada		United States			countries			Total
Net interest income	$	851	$	247		$	76		$	1,174
Non-interest revenue		1,155		287			4			1,446
Total Revenue		2,006		534			80			2,620
Provision for credit losses		79		73			(1	)		151
Non-interest expense		1,241		397			42			1,680
Income before taxes and non-controlling interest in subsidiaries		686		64			39			789
Income taxes		134		1			(7	)		128
Non-controlling interest in subsidiaries		15		4			–			19
Net Income	$	537	$	59		$	46		$	642
Average Assets	$	233,857	$	128,427		$	31,785		$	394,069
Goodwill (As At)	$	421	$	970		$	7		$	1,398
						Other
For the three months ended April 30, 2007	Canada		United States			countries			Total
Net interest income	$	876	$	249		$	79		$	1,204
Non-interest revenue		1,061		189			74			1,324
Total Revenue		1,937		438			153			2,528
Provision for credit losses		60		3			(4	)		59
Non-interest expense		1,149		421			44			1,614
Income before taxes and non-controlling interest in subsidiaries		728		14			113			855
Income taxes		150		(4	)		19			165
Non-controlling interest in subsidiaries		13		6			–			19
Net Income	$	565	$	12		$	94		$	671
Average Assets	$	208,458	$	115,547		$	33,539		$	357,544
Goodwill (As At)	$	417	$	835		$	–		$	1,252
						Other
For the six months ended April 30, 2008	Canada		United States			countries			Total
Net interest income	$	1,758	$	460		$	170		$	2,388
Non-interest revenue		1,746		576			(64	)		2,258
Total Revenue		3,504		1,036			106			4,646
Provision for credit losses		153		221			7			381
Non-interest expense		2,391		811			92			3,294
Income before taxes and non-controlling interest in subsidiaries		960		4			7			971
Income taxes		143		(47	)		(59	)		37
Non-controlling interest in subsidiaries		28		9			–			37
Net Income	$	789	$	42		$	66		$	897
Average Assets	$	235,054	$	125,475		$	32,170		$	392,699
Goodwill (As At)	$	421	$	970		$	7		$	1,398
						Other
For the six months ended April 30, 2007	Canada		United States			countries			Total
Net interest income	$	1,762	$	482		$	156		$	2,400
Non-interest revenue		2,063		28			103			2,194
Total Revenue		3,825		510			259			4,594
Provision for credit losses		111		4			(4	)		111
Non-interest expense		2,365		839			83			3,287
Income before taxes and non-controlling interest in subsidiaries		1,349		(333	)		180			1,196
Income taxes		286		(182	)		35			139
Non-controlling interest in subsidiaries		27		11			–			38
Net Income	$	1,036	$	(162	)	$	145		$	1,019
Average Assets	$	205,846	$	111,670		$	32,858		$	350,374
Goodwill (As At)	$	417	$	835		$	–		$	1,252
Prior periods have been restated to give effect to the current period’s organization structure and presentation changes.

BMO Financial Group Second Quarter Report 2008  • 43