Interim Consolidated Financial Statements

Consolidated Statement of Income

(Unaudited) (Canadian $ in millions, except as noted)	For the three months ended						For the nine months ended
	July 31, 2019		April 30, 2019		July 31, 2018		July 31, 2019		July 31, 2018
Interest, Dividend and Fee Income
Loans	$	5,109	$	4,814	$	4,246	$	14,718	$	11,789
Securities (Note 2)		1,407		1,405		1,043		4,126		2,933
Deposits with banks		187		183		161		592		435
		6,703		6,402		5,450		19,436		15,157
Interest Expense
Deposits		2,224		2,110		1,626		6,413		4,199
Subordinated debt		69		69		55		208		165
Other liabilities		1,193		1,088		887		3,291		2,370
		3,486		3,267		2,568		9,912		6,734
Net Interest Income		3,217		3,135		2,882		9,524		8,423
Non-Interest Revenue (Note 1)
Securities commissions and fees		259		254		259		761		769
Deposit and payment service charges		309		290		291		890		844
Trading revenues		115		111		228		319		574
Lending fees		314		277		248		868		731
Card fees		109		116		117		330		317
Investment management and custodial fees		444		426		447		1,298		1,308
Mutual fund revenues		357		356		372		1,060		1,114
Underwriting and advisory fees		260		261		264		765		699
Securities gains, other than trading		90		42		51		181		156
Foreign exchange gains, other than trading		48		51		41		137		140
Insurance revenue		989		710		427		2,748		1,394
Investments in associates and joint ventures		31		52		44		112		129
Other		124		132		123		403		414
		3,449		3,078		2,912		9,872		8,589
Total Revenue		6,666		6,213		5,794		19,396		17,012
Provision for Credit Losses (Note 3)		306		176		186		619		487
Insurance Claims, Commissions and Changes in Policy Benefit Liabilities		887		561		269		2,374		962
Non-Interest Expense (Note 1)
Employee compensation		1,960		2,010		1,873		6,042		5,848
Premises and equipment		734		767		672		2,229		2,008
Amortization of intangible assets		135		138		126		406		378
Travel and business development		142		143		126		411		369
Communications		72		78		70		224		212
Professional fees		141		141		144		403		412
Other		307		318		348		928		1,057
		3,491		3,595		3,359		10,643		10,284
Income Before Provision for Income Taxes		1,982		1,881		1,980		5,760		5,279
Provision for income taxes (Note 12)		425		384		443		1,196		1,523
Net Income attributable to Equity Holders of the Bank	$	1,557	$	1,497	$	1,537	$	4,564	$	3,756
Earnings Per Common Share (Canadian $) (Note 11)
Basic	$	2.34	$	2.27	$	2.32	$	6.90	$	5.61
Diluted		2.34		2.26		2.31		6.88		5.60
Dividends per common share		1.03		1.00		0.96		3.03		2.82

  The accompanying notes are an integral part of these interim consolidated financial statements.

  Certain comparative figures have been reclassified to conform with the current period’s presentation and for changes in accounting policy (Note 1).

BMO Financial Group Third Quarter Report 2019 35

Interim Consolidated Financial Statements

Consolidated Statement of Comprehensive Income

(Unaudited) (Canadian $ in millions)	For the three months ended									For the nine months ended
	July 31, 2019			April 30, 2019			July 31, 2018			July 31, 2019			July 31, 2018
Net Income	$	1,557		$	1,497		$	1,537		$	4,564		$	3,756
Other Comprehensive Income (Loss), net of taxes
Items that may subsequently be reclassified to net income
Net change in unrealized gains (losses) on fair value through OCI securities
Unrealized gains (losses) on fair value through OCI debt securities arising during the period (1)		112			46			16			345			(202	)
Reclassification to earnings of (gains) in the period (2)		(14	)		(15	)		(7	)		(43	)		(43	)
		98			31			9			302			(245	)
Net change in unrealized gains (losses) on cash flow hedges
Gains (losses) on derivatives designated as cash flow hedges arising during the period (3)		290			433			(218	)		1,480			(919	)
Reclassification to earnings of losses on derivatives designated as cash flow hedges in the period (4)		36			49			101			122			216
		326			482			(117	)		1,602			(703	)
Net gains (losses) on translation of net foreign operations
Unrealized gains (losses) on translation of net foreign operations		(577	)		556			145			(46	)		114
Unrealized gains (losses) on hedges of net foreign operations (5)		94			(103	)		(43	)		4			(93	)
		(483	)		453			102			(42	)		21
Items that will not be reclassified to net income
Gains (losses) on remeasurement of pension and other employee future benefit plans (6)		(233	)		(2	)		204			(383	)		303
Gains (losses) on remeasurement of own credit risk on financial liabilities designed at fair value (7)		31			(98	)		26			12			(6	)
		(202	)		(100	)		230			(371	)		297
Other Comprehensive Income (Loss), net of taxes		(261	)		866			224			1,491			(630	)
Total Comprehensive Income attributable to Equity Holders of the Bank	$	1,296		$	2,363		$	1,761		$	6,055		$	3,126

 (1) Net of income tax (provision) recovery of $(39) million, $(17) million, $(7) million for the three months ended, and $(117) million, $47 million for the nine months ended, respectively.

 (2) Net of income tax provision of $5 million, $5 million, $3 million for the three months ended, and $15 million, $15 million for the nine months ended, respectively.

 (3) Net of income tax (provision) recovery of $(106) million, $(156) million, $78 million for the three months ended, and $(536) million, $318 million for the nine months ended, respectively.

 (4) Net of income tax (recovery) of $(13) million, $(18) million, $(37) million for the three months ended, and $(44) million, $(78) million for the nine months ended, respectively.

 (5) Net of income tax (provision) recovery of $(35) million, $38 million, $16 million for the three months ended, and $(2) million, $34 million for the nine months ended, respectively.

 (6) Net of income tax (provision) recovery of $83 million, $1 million, $(74) million for the three months ended, and $138 million, $(134) million for the nine months ended, respectively.

 (7) Net of income tax (provision) recovery of $(11) million, $36 million, $(12) million for the three months ended, and $(4) million, $(1) million for the nine months ended, respectively.

  The accompanying notes are an integral part of these interim consolidated financial statements.

  Certain comparative figures have been reclassified to conform with the current period’s presentation and for changes in accounting policy (Note 1).

36 BMO Financial Group Third Quarter Report 2019

  Interim Consolidated Financial Statements

Consolidated Balance Sheet

(Unaudited) (Canadian $ in millions)	As at
	July 31, 2019			April 30, 2019			October 31, 2018
Assets
Cash and Cash Equivalents	$	38,938		$	35,839		$	42,142
Interest Bearing Deposits with Banks		6,899			7,518			8,305
Securities (Note 2)
Trading		94,906			100,991			99,697
Fair value through profit or loss		13,548			12,904			11,611
Fair value through other comprehensive income		67,434			68,668			62,440
Debt securities at amortized cost		15,024			7,881			6,485
Other		813			782			702
		191,725			191,226			180,935
Securities Borrowed or Purchased Under Resale Agreements		106,612			110,405			85,051
Loans
Residential mortgages		122,054			120,778			119,620
Consumer instalment and other personal		65,989			64,454			63,225
Credit cards		8,749			8,467			8,329
Business and government		222,857			221,253			194,456
		419,649			414,952			385,630
Allowance for credit losses (Note 3)		(1,802	)		(1,710	)		(1,639	)
		417,847			413,242			383,991
Other Assets
Derivative instruments		22,200			20,627			26,204
Customers’ liability under acceptances		24,741			21,702			18,585
Premises and equipment		1,989			1,983			1,986
Goodwill		6,329			6,500			6,373
Intangible assets		2,319			2,331			2,272
Current tax assets		1,257			1,309			1,515
Deferred tax assets		1,662			1,765			2,039
Other		16,662			16,023			14,677
		77,159			72,240			73,651
Total Assets	$	839,180		$	830,470		$	774,075
Liabilities and Equity
Deposits (Note 6)	$	553,383		$	548,837		$	520,928
Other Liabilities
Derivative instruments		23,613			21,549			24,411
Acceptances		24,741			21,702			18,585
Securities sold but not yet purchased		27,375			32,023			28,804
Securities lent or sold under repurchase agreements		89,829			87,039			66,684
Securitization and structured entities’ liabilities		25,544			25,621			25,051
Current tax liabilities		32			42			50
Deferred tax liabilities		74			73			74
Other		37,070			37,236			36,985
		228,278			225,285			200,644
Subordinated Debt (Note 6)		6,876			6,953			6,782
Equity
Preferred shares and other equity instruments (Note 7)		5,348			4,690			4,340
Common shares (Note 7)		12,958			12,939			12,929
Contributed surplus		303			307			300
Retained earnings		28,241			27,405			25,850
Accumulated other comprehensive income		3,793			4,054			2,302
Total Equity		50,643			49,395			45,721
Total Liabilities and Equity	$	839,180		$	830,470		$	774,075

  The accompanying notes are an integral part of these interim consolidated financial statements.

  Certain comparative figures have been reclassified to conform with the current period’s presentation and for changes in accounting policy (Note 1).

BMO Financial Group Third Quarter Report 2019 37

  Interim Consolidated Financial Statements

Consolidated Statement of Changes in Equity

(Unaudited) (Canadian $ in millions)	For the three months ended						For the nine months ended
	July 31, 2019			July 31, 2018			July 31, 2019			July 31, 2018
Preferred Shares and Other Equity Instruments (Note 7)
Balance at beginning of period	$	4,690		$	4,240		$	4,340		$	4,240
Issued during the period		658			-			1,008			-
Balance at End of Period		5,348			4,240			5,348			4,240
Common Shares (Note 7)
Balance at beginning of period		12,939			12,926			12,929			13,032
Issued under the Stock Option Plan		19			18			49			73
Repurchased for cancellation		-			(20	)		(20	)		(181	)
Balance at End of Period		12,958			12,924			12,958			12,924
Contributed Surplus
Balance at beginning of period		307			304			300			307
Stock option expense, net of options exercised		(3	)		(1	)		1			(10	)
Other		(1	)		(1	)		2			5
Balance at End of Period		303			302			303			302
Retained Earnings
Balance at beginning of period		27,405			24,110			25,850			23,700
Impact from adopting IFRS 9		-			-			-			99
Net income attributable to equity holders of the bank		1,557			1,537			4,564			3,756
Dividends – Preferred shares		(59	)		(50	)		(159	)		(141	)
– Common shares		(658	)		(614	)		(1,936	)		(1,810	)
Equity issue expense		(4	)		-			(8	)		-
Common shares repurchased for cancellation (Note 7)		-			(82	)		(70	)		(703	)
Balance at End of Period		28,241			24,901			28,241			24,901
Accumulated Other Comprehensive (Loss) on Fair Value through OCI Securities, net of taxes
Balance at beginning of period		(111	)		(253	)		(315	)		56
Impact from adopting IFRS 9		-			-			-			(55	)
Unrealized gains (losses) on fair value through OCI debt securities arising during the period		112			16			345			(202	)
Reclassification to earnings of (gains) in the period		(14	)		(7	)		(43	)		(43	)
Balance at End of Period		(13	)		(244	)		(13	)		(244	)
Accumulated Other Comprehensive Income (Loss) on Cash Flow Hedges, net of taxes
Balance at beginning of period		202			(768	)		(1,074	)		(182	)
Gains (losses) on derivatives designated as cash flow hedges arising during the period		290			(218	)		1,480			(919	)
Reclassification to earnings of losses on derivatives designated as cash flow hedges in the period		36			101			122			216
Balance at End of Period		528			(885	)		528			(885	)
Accumulated Other Comprehensive Income on Translation of Net Foreign Operations, net of taxes
Balance at beginning of period		4,168			3,384			3,727			3,465
Unrealized gains (losses) on translation of net foreign operations		(577	)		145			(46	)		114
Unrealized gains (losses) on hedges of net foreign operations		94			(43	)		4			(93	)
Balance at End of Period		3,685			3,486			3,685			3,486
Accumulated Other Comprehensive Income (Loss) on Pension and Other Employee Future Benefit Plans, net of taxes
Balance at beginning of period		19			7			169			(92	)
Gains (losses) on remeasurement of pension and other employee future benefit plans		(233	)		204			(383	)		303
Balance at End of Period		(214	)		211			(214	)		211
Accumulated Other Comprehensive (Loss) on Own Credit Risk on Financial Liabilities Designated at Fair Value, net of taxes
Balance at beginning of period		(224	)		(213	)		(205	)		(181	)
Gains (losses) on remeasurement of own credit risk on financial liabilities designated at fair value		31			26			12			(6	)
Balance at End of Period		(193	)		(187	)		(193	)		(187	)
Total Accumulated Other Comprehensive Income		3,793			2,381			3,793			2,381
Total Equity	$	50,643		$	44,748		$	50,643		$	44,748

  The accompanying notes are an integral part of these interim consolidated financial statements.

  Certain comparative figures have been reclassified to conform with the current period’s presentation and for changes in accounting policy (Note 1).

38 BMO Financial Group Third Quarter Report 2019

Interim Consolidated Financial Statements

Consolidated Statement of Cash Flows

(Unaudited) (Canadian $ in millions)	For the three months ended						For the nine months ended
	July 31, 2019			July 31, 2018			July 31, 2019			July 31, 2018
Cash Flows from Operating Activities
Net Income	$	1,557		$	1,537		$	4,564		$	3,756
Adjustments to determine net cash flows provided by (used in) operating activities
Provision on securities, other than trading		1			(1	)		2			1
Net (gain) on securities, other than trading		(91	)		(50	)		(183	)		(157	)
Net decrease in trading securities		5,290			830			4,814			2,626
Provision for credit losses (Note 3)		306			186			619			487
Change in derivative instruments – (increase) decrease in derivative asset		(196	)		2,233			6,130			6,824
– increase (decrease) in derivative liability		350			(1,380	)		(3,377	)		(6,213	)
Amortization of premises and equipment		110			100			326			295
Amortization of other assets		56			54			163			171
Amortization of intangible assets		135			126			406			378
Net decrease in deferred income tax asset		84			108			386			791
Net increase (decrease) in deferred income tax liability		5			43			2			(7	)
Net (increase) decrease in current income tax asset		11			320			257			(391	)
Net increase (decrease) in current income tax liability		(6	)		-			(17	)		(86	)
Change in accrued interest – (increase) decrease in interest receivable		80			(40	)		(117	)		(191	)
– increase in interest payable		131			88			303			223
Changes in other items and accruals, net		(1,934	)		(2,263	)		(2,232	)		(2,282	)
Net increase in deposits		9,149			13,584			33,047			23,042
Net (increase) in loans		(7,568	)		(5,402	)		(34,470	)		(16,587	)
Net (decrease) in securities sold but not yet purchased		(4,445	)		(1,108	)		(1,430	)		(800	)
Net increase in securities lent or sold under repurchase agreements		3,772			4,117			23,561			27,770
Net (increase) decrease in securities borrowed or purchased under resale agreements		2,528			(6,453	)		(22,086	)		(26,177	)
Net increase (decrease) in securitization and structured entities’ liabilities		18			(75	)		483			417
Net Cash Provided by Operating Activities		9,343			6,554			11,151			13,890
Cash Flows from Financing Activities
Net increase (decrease) in liabilities of subsidiaries		81			1,294			(1,267	)		2,121
Proceeds from issuance of covered bonds		2,290			-			4,168			2,706
Redemption of covered bonds		(1,511	)		-			(3,765	)		(567	)
Proceeds from issuance of subordinated debt (Note 6)		-			-			-			1,566
Repayment of subordinated debt (Note 6)		-			-			-			(900	)
Proceeds from issuance of preferred shares and other equity instruments (Note 7)		658			-			1,008			-
Equity issue expense		(4	)		-			(8	)		-
Proceeds from issuance of common shares (Note 7)		17			16			43			71
Common shares repurchased for cancellation (Note 7)		-			(102	)		(90	)		(884	)
Cash dividends paid		(687	)		(642	)		(2,035	)		(1,918	)
Net Cash Provided by (Used in) Financing Activities		844			566			(1,946	)		2,195
Cash Flows from Investing Activities
Net (increase) decrease in interest bearing deposits with banks		508			53			1,420			(1,052	)
Purchases of securities, other than trading		(16,754	)		(9,275	)		(43,019	)		(31,112	)
Maturities of securities, other than trading		2,749			4,378			10,538			9,927
Proceeds from sales of securities, other than trading		7,710			3,187			20,033			15,084
Premises and equipment – net (purchases)		(117	)		(49	)		(303	)		(168	)
Purchased and developed software – net (purchases)		(153	)		(148	)		(457	)		(415	)
Net Cash (Used in) Investing Activities		(6,057	)		(1,854	)		(11,788	)		(7,736	)
Effect of Exchange Rate Changes on Cash and Cash Equivalents		(1,031	)		(116	)		(621	)		124
Net increase (decrease) in Cash and Cash Equivalents		3,099			5,150			(3,204	)		8,473
Cash and Cash Equivalents at Beginning of Period		35,839			35,922			42,142			32,599
Cash and Cash Equivalents at End of Period	$	38,938		$	41,072		$	38,938		$	41,072
Supplemental Disclosure of Cash Flow Information
Net cash provided by operating activities includes:
Interest paid in the period	$	3,371		$	2,391		$	9,614		$	6,143
Income taxes paid in the period	$	432		$	63		$	1,145		$	1,140
Interest received in the period	$	6,328		$	4,993		$	17,945		$	13,667
Dividends received in the period	$	431		$	401		$	1,274		$	1,247

  The accompanying notes are an integral part of these interim consolidated financial statements.

  Certain comparative figures have been reclassified to conform with the current period’s presentation and for changes in accounting policy (Note 1).

BMO Financial Group Third Quarter Report 2019 39

Notes to Consolidated Financial Statements

July 31, 2019 (Unaudited)

Note 1: Basis of Presentation

Bank of Montreal (“the bank”) is a chartered bank under the Bank Act (Canada) and is a public company incorporated in Canada. We are a highly diversified financial services company, providing a broad range of personal and commercial banking, wealth management and investment banking products and services. The bank’s head office is 129 rue Saint Jacques, Montreal, Quebec. Its executive offices are 100 King Street West, 1 First Canadian Place, Toronto, Ontario. Our common shares are listed on the Toronto Stock Exchange (“TSX”) and the New York Stock Exchange.

These condensed interim consolidated financial statements have been prepared in accordance with International Accounting Standard 34, Interim Financial Reporting as issued by the International Accounting Standards Board (“IASB”) using the same accounting policies as disclosed in our annual consolidated financial statements for the year ended October 31, 2018, with the exception of the adoption of IFRS 15 Revenue from Contracts with Customers discussed below. These condensed interim consolidated financial statements should be read in conjunction with the notes to our annual consolidated financial statements for the year ended October 31, 2018 as set out on pages 148 to 209 of our 2018 Annual Report. We also comply with interpretations of International Financial Reporting Standards (“IFRS”) by our regulator, the Office of the Superintendent of Financial Institutions of Canada (“OSFI”). These interim consolidated financial statements were authorized for issue by the Board of Directors on August 27, 2019.

Changes in Accounting Policy

Effective November 1, 2018, we adopted IFRS 15 Revenue from Contracts with Customers (“IFRS 15”). We elected to retrospectively present prior periods as if IFRS 15 had always been applied. Under the new standard, the primary impact is the reclassification of amounts within the Consolidated Statement of Income. As a result, loyalty rewards and cash promotion costs on cards previously recorded in non-interest expense are presented as a reduction in non-interest revenue. In addition, when customers reimburse us for certain out-of-pocket expenses incurred on their behalf, we will record the reimbursement in non-interest revenue. Previously, these reimbursements were recorded as a reduction in the related expense. There is also minimal impact to net income resulting from the fact that IFRS 15 does not require discounting of loyalty reward liabilities and we will amortize costs to obtain card customers, which were previously expensed as incurred.

The following table summarizes the impacts of applying IFRS 15 on our prior period Consolidated Statement of Income:

(Canadian $ in millions)	For the three months ended			For the nine months ended
	July 31, 2018			July 31, 2018
Increase (decrease) in
Non-Interest Revenue
Securities commissions and fees		-			(3	)
Deposit and payment service charges		(3	)		(8	)
Card fees		(27	)		(104	)
Investment management and custodial fees		1			4
Underwriting and advisory fees		2			5
Other		1			3
		(26	)		(103	)
Non-Interest Expense
Employee compensation		-			1
Travel and business development		(31	)		(118	)
Professional fees		2			6
Other		2			6
		(27	)		(105	)
Provision for income taxes		-			1
Net Income		1			1

Future Changes in IFRS

Leases

In January 2016, the IASB issued IFRS 16 Leases (“IFRS 16”), which provides guidance whereby lessees will recognize a liability for the present value of future lease liabilities and record a corresponding asset on the balance sheet for most leases. There are minimal changes to lessor accounting. IFRS 16 is effective for our fiscal year beginning November 1, 2019.

We have substantially completed our lease assessment and our lease administration system upgrade. In addition, we are developing new processes and internal controls to enable the application of IFRS 16 beginning November 1, 2019.

The main impact for the bank will be recording real estate leases on the balance sheet. Currently, most of our real estate leases are classified as operating leases, whereby we record lease expense over the term of the lease with no asset or liability recorded on the balance sheet other than any related leasehold improvements. Under IFRS 16, we will recognize a right-of-use asset and a lease liability on the balance sheet.

When we adopt IFRS 16, we will recognize the cumulative effect of any changes in opening retained earnings with no changes to prior years.

40 BMO Financial Group Third Quarter Report 2019

Note 2: Securities

Classification of Securities

The bank’s fair value through profit or loss (“FVTPL”) securities of $13,548 million ($11,611 million as at October 31, 2018) are comprised of $2,830 million mandatorily measured at fair value and $10,718 million designated at fair value ($2,828 million and $8,783 million, respectively, as at October 31, 2018).

Our fair value through other comprehensive income (“FVOCI”) securities totalling $67,434 million ($62,440 million as at October 31, 2018), are net of allowance for credit losses of $3 million ($2 million as at October 31, 2018).

Amortized cost securities totalling $15,024 million ($6,485 million as at October 31, 2018), are net of allowance for credit losses of $1 million ($1 million as at October 31, 2018).

Unrealized Gains and Losses on FVOCI Securities

The following table summarizes the unrealized gains and losses:

(Canadian $ in millions)	July 31, 2019												October 31, 2018
	Cost/		Gross		Gross				Cost/		Gross		Gross
	Amortized cost		unrealized gains		unrealized losses		Fair value		Amortized cost		unrealized gains		unrealized losses		Fair value
Issued or guaranteed by:
Canadian federal government		10,987		65		8		11,044		12,884		1		80		12,805
Canadian provincial and municipal governments		7,045		103		1		7,147		6,896		8		42		6,862
U.S. federal government		17,087		443		14		17,516		17,403		4		584		16,823
U.S. states, municipalities and agencies		4,095		73		3		4,165		3,694		16		55		3,655
Other governments		6,939		128		2		7,065		4,818		2		30		4,790
National Housing Act (NHA) mortgage-backed securities (MBS)		2,114		24		1		2,137		2,382		6		18		2,370
U.S. agency MBS and collateralized mortgage obligations (CMO)		12,828		69		91		12,806		11,811		2		496		11,317
Corporate debt		5,379		97		1		5,475		3,783		6		33		3,756
Corporate equity		79		-		-		79		62		-		-		62
Total		66,553		1,002		121		67,434		63,733		45		1,338		62,440

  Unrealized gains (losses) are disclosed before the impact of any accounting hedges.

Interest Income on Debt Securities

The following table presents interest income calculated using the effective interest method:

(Canadian $ in millions)	For the three months ended				For the nine months ended
	July 31, 2019		July 31, 2018		July 31, 2019		July 31, 2018
FVOCI - Debt		403		311		1,202		783
Amortized cost		75		42		163		134
Total		478		353		1,365		917

BMO Financial Group Third Quarter Report 2019 41

Note 3: Loans and Allowance for Credit Losses

Credit Risk Exposure

The following table sets out our credit risk exposure for all loans carried at amortized cost or FVTPL. Stage 1 represents those performing loans carried with a 12 month expected credit loss, Stage 2 represents those performing loans carried with a lifetime expected credit loss, and Stage 3 represents those loans with a lifetime credit loss that are credit impaired.

(Canadian $ in millions)							July 31, 2019
	Stage 1		Stage 2		Stage 3		Total
Loans: Residential mortgages
Exceptionally low		-		-		-		-
Very low		75,567		138		-		75,705
Low		20,513		2,698		-		23,211
Medium		12,639		4,875		-		17,514
High		99		425		-		524
Not rated		4,372		311		-		4,683
Impaired		-		-		417		417
Allowance for credit losses		14		34		17		65
Carrying amount		113,176		8,413		400		121,989
Loans: Consumer instalment and other personal
Exceptionally low		20,704		23		-		20,727
Very low		15,735		169		-		15,904
Low		9,992		343		-		10,335
Medium		10,161		4,139		-		14,300
High		383		1,412		-		1,795
Not rated		2,328		103		-		2,431
Impaired		-		-		497		497
Allowance for credit losses		84		306		134		524
Carrying amount		59,219		5,883		363		65,465
Loans: Credit cards
Exceptionally low		2,429		1		-		2,430
Very low		1,187		22		-		1,209
Low		919		187		-		1,106
Medium		1,947		890		-		2,837
High		129		443		-		572
Not rated		595		-		-		595
Impaired		-		-		-		-
Allowance for credit losses		42		203		-		245
Carrying amount		7,164		1,340		-		8,504
Loans: Business and government (1)
Acceptable
Investment grade		134,344		989		-		135,333
Sub-investment grade		94,577		11,107		-		105,684
Watchlist		-		5,063		-		5,063
Impaired		-		-		1,518		1,518
Allowance for credit losses		269		403		296		968
Carrying amount		228,652		16,756		1,222		246,630
Commitments and financial guarantee contracts
Acceptable
Investment grade		129,427		290		-		129,717
Sub-investment grade		45,286		7,227		-		52,513
Watchlist		-		2,079		-		2,079
Impaired		-		-		316		316
Allowance for credit losses		127		106		23		256
Carrying amount		174,586		9,490		293		184,369

 (1) Includes customers’ liability under acceptances.

42 BMO Financial Group Third Quarter Report 2019

(Canadian $ in millions)	October 31, 2018
	Stage 1		Stage 2		Stage 3		Total
Loans: Residential mortgages
Exceptionally low		-		-		-		-
Very low		76,314		125		-		76,439
Low		18,975		2,479		-		21,454
Medium		12,621		3,765		-		16,386
High		90		445		-		535
Not rated		4,250		181		-		4,431
Impaired		-		-		375		375
Allowance for credit losses		20		37		19		76
Carrying amount		112,230		6,958		356		119,544
Loans: Consumer instalment and other personal
Exceptionally low		20,236		20		-		20,256
Very low		13,364		222		-		13,586
Low		12,581		364		-		12,945
Medium		7,707		4,153		-		11,860
High		357		1,427		-		1,784
Not rated		2,105		168		-		2,273
Impaired		-		-		521		521
Allowance for credit losses		83		312		143		538
Carrying amount		56,267		6,042		378		62,687
Loans: Credit cards
Exceptionally low		2,403		4		-		2,407
Very low		1,140		11		-		1,151
Low		943		107		-		1,050
Medium		1,742		874		-		2,616
High		108		428		-		536
Not rated		568		1		-		569
Impaired		-		-		-		-
Allowance for credit losses		39		191		-		230
Carrying amount		6,865		1,234		-		8,099
Loans: Business and government (1)
Acceptable
Investment grade		109,774		2,148		-		111,922
Sub-investment grade		88,348		7,308		-		95,656
Watchlist		-		4,423		-		4,423
Impaired		-		-		1,040		1,040
Allowance for credit losses		232		355		208		795
Carrying amount		197,890		13,524		832		212,246
Commitments and financial guarantee contracts
Acceptable
Investment grade		116,108		1,722		-		117,830
Sub-investment grade		44,895		3,426		-		48,321
Watchlist		-		1,650		-		1,650
Impaired		-		-		242		242
Allowance for credit losses		108		96		27		231
Carrying amount		160,895		6,702		215		167,812

 (1) Includes customers’ liability under acceptances.

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

BMO Financial Group Third Quarter Report 2019 43

Allowance for Credit Losses (“ACL”)

The allowance for credit losses recorded in our Consolidated Balance Sheet is maintained at a level we consider adequate to absorb credit-related losses on our loans and other credit instruments. The allowance for credit losses amounted to $2,058 million at July 31, 2019 ($1,870 million at October 31, 2018) of which $1,802 million ($1,639 million at October 31, 2018) was recorded in loans and $256 million ($231 million at October 31, 2018) was recorded in other liabilities in our Consolidated Balance Sheet.

Changes in the gross balances, including originations, maturities and repayments in the normal course of operations, impact the allowance for credit losses.

The following table shows the continuity in the loss allowance by each product type for the three months ended July 31, 2019:

(Canadian $ in millions)
For the three months ended	Stage 1			Stage 2			Stage 3			Total
Loans: Residential mortgages
Balance as at April 30, 2019		16			37			44			97
Transfer to Stage 1		7			(6	)		(1	)		-
Transfer to Stage 2		(1	)		2			(1	)		-
Transfer to Stage 3		-			(3	)		3			-
Net remeasurement of loss allowance		(9	)		6			-			(3	)
Loan originations		2			-			-			2
Derecognitions and maturities		(1	)		(1	)		-			(2	)
Total Provision for Credit Losses (“PCL”) (1)		(2	)		(2	)		1			(3	)
Write-offs		-			-			(6	)		(6	)
Recoveries of previous write-offs		-			-			7			7
Foreign exchange and other		-			-			(8	)		(8	)
Balance as at July 31, 2019		14			35			38			87
Loans: Consumer instalment and other personal
Balance as at April 30, 2019		86			324			128			538
Transfer to Stage 1		44			(42	)		(2	)		-
Transfer to Stage 2		(4	)		18			(14	)		-
Transfer to Stage 3		(1	)		(32	)		33			-
Net remeasurement of loss allowance		(40	)		66			52			78
Loan originations		12			-			-			12
Derecognitions and maturities		(4	)		(13	)		-			(17	)
Total PCL (1)		7			(3	)		69			73
Write-offs		-			-			(80	)		(80	)
Recoveries of previous write-offs		-			-			25			25
Foreign exchange and other		(1	)		(1	)		(7	)		(9	)
Balance as at July 31, 2019		92			320			135			547
Loans: Credit cards
Balance as at April 30, 2019		77			231			-			308
Transfer to Stage 1		28			(28	)		-			-
Transfer to Stage 2		(5	)		5			-			-
Transfer to Stage 3		(1	)		(46	)		47			-
Net remeasurement of loss allowance		(24	)		79			24			79
Loan originations		5			-			-			5
Derecognitions and maturities		(1	)		(6	)		-			(7	)
Total PCL (1)		2			4			71			77
Write-offs		-			-			(91	)		(91	)
Recoveries of previous write-offs		-			-			20			20
Foreign exchange and other		-			1			-			1
Balance as at July 31, 2019		79			236			-			315
Loans: Business and government
Balance as at April 30, 2019		336			423			260			1,019
Transfer to Stage 1		31			(30	)		(1	)		-
Transfer to Stage 2		(16	)		17			(1	)		-
Transfer to Stage 3		(1	)		(14	)		15			-
Net remeasurement of loss allowance		(23	)		91			89			157
Loan originations		53			-			-			53
Derecognitions and maturities		(28	)		(22	)		-			(50	)
Total PCL (1)		16			42			102			160
Write-offs		-			-			(52	)		(52	)
Recoveries of previous write-offs		-			-			2			2
Foreign exchange and other		(1	)		(4	)		(15	)		(20	)
Balance as at July 31, 2019		351			461			297			1,109
Total as at July 31, 2019		536			1,052			470			2,058
Comprised of: Loans		409			946			447			1,802
Other credit instruments (2)		127			106			23			256

(1) Excludes provision for credit losses on other assets of $(1) million.

(2) Recorded in other liabilities on the Consolidated Balance Sheet.

44 BMO Financial Group Third Quarter Report 2019

The following table shows the continuity in the loss allowance by each product type for the nine months ended July 31, 2019:

(Canadian $ in millions)
For the nine months ended	Stage 1			Stage 2			Stage 3			Total
Loans: Residential mortgages
Balance as at October 31, 2018		20			38			44			102
Transfer to Stage 1		21			(19	)		(2	)		-
Transfer to Stage 2		(2	)		5			(3	)		-
Transfer to Stage 3		-			(7	)		7			-
Net remeasurement of loss allowance		(29	)		21			7			(1	)
Loan originations		5			-			-			5
Derecognitions and maturities		(1	)		(3	)		-			(4	)
Total PCL (1)		(6	)		(3	)		9			-
Write-offs		-			-			(13	)		(13	)
Recoveries of previous write-offs		-			-			12			12
Foreign exchange and other		-			-			(14	)		(14	)
Balance as at July 31, 2019		14			35			38			87
Loans: Consumer instalment and other personal
Balance as at October 31, 2018		90			326			144			560
Transfer to Stage 1		131			(122	)		(9	)		-
Transfer to Stage 2		(13	)		62			(49	)		-
Transfer to Stage 3		(4	)		(84	)		88			-
Net remeasurement of loss allowance		(134	)		168			112			146
Loan originations		35			-			-			35
Derecognitions and maturities		(12	)		(30	)		-			(42	)
Total PCL (1)		3			(6	)		142			139
Write-offs		-			-			(233	)		(233	)
Recoveries of previous write-offs		-			-			97			97
Foreign exchange and other		(1	)		-			(15	)		(16	)
Balance as at July 31, 2019		92			320			135			547
Loans: Credit cards
Balance as at October 31, 2018		74			219			-			293
Transfer to Stage 1		78			(78	)		-			-
Transfer to Stage 2		(16	)		16			-			-
Transfer to Stage 3		(1	)		(125	)		126			-
Net remeasurement of loss allowance		(68	)		221			58			211
Loan originations		15			-			-			15
Derecognitions and maturities		(3	)		(18	)		-			(21	)
Total PCL (1)		5			16			184			205
Write-offs		-			-			(250	)		(250	)
Recoveries of previous write-offs		-			-			66			66
Foreign exchange and other		-			1			-			1
Balance as at July 31, 2019		79			236			-			315
Loans: Business and government
Balance as at October 31, 2018		298			408			209			915
Transfer to Stage 1		139			(135	)		(4	)		-
Transfer to Stage 2		(41	)		53			(12	)		-
Transfer to Stage 3		(1	)		(41	)		42			-
Net remeasurement of loss allowance		(141	)		230			159			248
Loan originations		163			-			-			163
Derecognitions and maturities		(75	)		(57	)		-			(132	)
Total PCL (1)		44			50			185			279
Write-offs		-			-			(123	)		(123	)
Recoveries of previous write-offs		-			-			61			61
Foreign exchange and other		9			3			(35	)		(23	)
Balance as at July 31, 2019		351			461			297			1,109
Total as at July 31, 2019		536			1,052			470			2,058
Comprised of: Loans		409			946			447			1,802
Other credit instruments (2)		127			106			23			256

(1) Excludes provision for credit losses on other assets of $(4) million.

(2) Recorded in other liabilities on the Consolidated Balance Sheet.

BMO Financial Group Third Quarter Report 2019 45

The following table shows the continuity in the loss allowance by each product type for the three months ended July 31, 2018:

(Canadian $ in millions)
For the three months ended	Stage 1			Stage 2			Stage 3			Total
Loans: Residential mortgages
Balance as at April 30, 2018		19			31			46			96
Transfer to Stage 1		7			(6	)		(1	)		-
Transfer to Stage 2		-			2			(2	)		-
Transfer to Stage 3		-			(1	)		1			-
Net remeasurement of loss allowance		(7	)		11			9			13
Loan originations		2			-			-			2
Derecognitions and maturities		(1	)		(1	)		-			(2	)
Total PCL (1)		1			5			7			13
Write-offs		-			-			(5	)		(5	)
Recoveries of previous write-offs		-			-			1			1
Foreign exchange and other		1			1			(4	)		(2	)
Balance as at July 31, 2018		21			37			45			103
Loans: Consumer instalment and other personal
Balance as at April 30, 2018		86			328			147			561
Transfer to Stage 1		44			(41	)		(3	)		-
Transfer to Stage 2		(3	)		20			(17	)		-
Transfer to Stage 3		(1	)		(29	)		30			-
Net remeasurement of loss allowance		(40	)		81			39			80
Loan originations		10			-			-			10
Derecognitions and maturities		(5	)		(13	)		-			(18	)
Total PCL (1)		5			18			49			72
Write-offs		-			-			(75	)		(75	)
Recoveries of previous write-offs		-			-			28			28
Foreign exchange and other		(1	)		2			(3	)		(2	)
Balance as at July 31, 2018		90			348			146			584
Loans: Credit cards
Balance as at April 30, 2018		77			246			-			323
Transfer to Stage 1		33			(33	)		-			-
Transfer to Stage 2		(6	)		6			-			-
Transfer to Stage 3		-			(51	)		51			-
Net remeasurement of loss allowance		(34	)		75			2			43
Loan originations		4			-			-			4
Derecognitions and maturities		(1	)		(11	)		-			(12	)
Total PCL (1)		(4	)		(14	)		53			35
Write-offs		-			-			(79	)		(79	)
Recoveries of previous write-offs		-			-			26			26
Foreign exchange and other		-			1			-			1
Balance as at July 31, 2018		73			233			-			306
Loans: Business and government
Balance as at April 30, 2018		291			368			233			892
Transfer to Stage 1		44			(40	)		(4	)		-
Transfer to Stage 2		(8	)		12			(4	)		-
Transfer to Stage 3		(1	)		(22	)		23			-
Net remeasurement of loss allowance		(54	)		81			53			80
Loan originations		51			-			-			51
Derecognitions and maturities		(25	)		(31	)		-			(56	)
Model changes		(7	)		(3	)		-			(10	)
Total PCL (1)		-			(3	)		68			65
Write-offs		-			-			(60	)		(60	)
Recoveries of previous write-offs		-			-			14			14
Foreign exchange and other		1			3			(9	)		(5	)
Balance as at July 31, 2018		292			368			246			906
Total as at July 31, 2018		476			986			437			1,899
Comprised of: Loans		369			882			409			1,660
Other credit instruments (2)		107			104			28			239

(1) Excludes provision for credit losses on other assets of $1 million.

(2) Recorded in other liabilities on the Consolidated Balance Sheet.

46 BMO Financial Group Third Quarter Report 2019

The following table shows the continuity in the loss allowance by each product type for the nine months ended July 31, 2018:

(Canadian $ in millions)
For the nine months ended	Stage 1			Stage 2			Stage 3			Total
Loans: Residential mortgages
Balance as at November 1, 2017		16			34			49			99
Transfer to Stage 1		25			(23	)		(2	)		-
Transfer to Stage 2		(1	)		6			(5	)		-
Transfer to Stage 3		-			(7	)		7			-
Net remeasurement of loss allowance		(26	)		31			14			19
Loan originations		8			-			-			8
Derecognitions and maturities		(2	)		(4	)		-			(6	)
Total PCL (1)		4			3			14			21
Write-offs		-			-			(15	)		(15	)
Recoveries of previous write-offs		-			-			5			5
Foreign exchange and other		1			-			(8	)		(7	)
Balance as at July 31, 2018		21			37			45			103
Loans: Consumer instalment and other personal
Balance as at November 1, 2017		76			357			137			570
Transfer to Stage 1		171			(160	)		(11	)		-
Transfer to Stage 2		(17	)		82			(65	)		-
Transfer to Stage 3		(3	)		(132	)		135			-
Net remeasurement of loss allowance		(151	)		235			113			197
Loan originations		28			-			-			28
Derecognitions and maturities		(14	)		(36	)		-			(50	)
Total PCL (1)		14			(11	)		172			175
Write-offs		-			-			(219	)		(219	)
Recoveries of previous write-offs		-			-			67			67
Foreign exchange and other		-			2			(11	)		(9	)
Balance as at July 31, 2018		90			348			146			584
Loans: Credit cards
Balance as at November 1, 2017		83			254			-			337
Transfer to Stage 1		149			(149	)		-			-
Transfer to Stage 2		(32	)		32			-			-
Transfer to Stage 3		(1	)		(152	)		153			-
Net remeasurement of loss allowance		(139	)		282			13			156
Loan originations		15			-			-			15
Derecognitions and maturities		(2	)		(35	)		-			(37	)
Total PCL (1)		(10	)		(22	)		166			134
Write-offs		-			-			(242	)		(242	)
Recoveries of previous write-offs		-			-			76			76
Foreign exchange and other		-			1			-			1
Balance as at July 31, 2018		73			233			-			306
Loans: Business and government
Balance as at November 1, 2017		268			410			234			912
Transfer to Stage 1		95			(90	)		(5	)		-
Transfer to Stage 2		(21	)		35			(14	)		-
Transfer to Stage 3		(1	)		(50	)		51			-
Net remeasurement of loss allowance		(99	)		135			139			175
Loan originations		117			-			-			117
Derecognitions and maturities		(59	)		(71	)		-			(130	)
Model changes		(7	)		(3	)		-			(10	)
Total PCL (1)		25			(44	)		171			152
Write-offs		-			-			(190	)		(190	)
Recoveries of previous write-offs		-			-			45			45
Foreign exchange and other		(1	)		2			(14	)		(13	)
Balance as at July 31, 2018		292			368			246			906
Total as at July 31, 2018		476			986			437			1,899
Comprised of: Loans		369			882			409			1,660
Other credit instruments (2)		107			104			28			239

(1) Excludes provision for credit losses on other assets of $5 million.

(2) Recorded in other liabilities on the Consolidated Balance Sheet.

Loans and allowance for credit losses by geographic region are as follows:

(Canadian $ in millions)	July 31, 2019				October 31, 2018
	Gross amount	Allowance for credit losses on impaired loans (2)	Allowance for credit losses on performing loans (3)	Net Amount	Gross amount	Allowance for credit losses on impaired loans (2)	Allowance for credit losses on performing loans (3)	Net Amount
By geographic region (1):
Canada	255,070	192	732	254,146	243,261	189	689	242,383
United States	154,107	255	608	153,244	132,789	181	574	132,034
Other countries	10,472	-	15	10,457	9,580	-	6	9,574
Total	419,649	447	1,355	417,847	385,630	370	1,269	383,991

(1) Geographic region is based upon country of ultimate risk.

(2) Excludes allowance for credit losses on impaired loans of $23 million for other credit instruments, which is included in other liabilities ($27 million as at October 31, 2018).

(3) Excludes allowance for credit losses on performing loans of $233 million for other credit instruments, which is included in other liabilities ($204 million as at October 31, 2018).

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

BMO Financial Group Third Quarter Report 2019 47

Renegotiated Loans

The carrying value of our renegotiated loans was $1,023 million as at July 31, 2019 ($1,129 million as at October 31, 2018), with $427 million classified as performing as at July 31, 2019 ($541 million as at October 31, 2018). Renegotiated loans of $18 million and $26 million, respectively, were written off in the three and nine months ended July 31, 2019 ($9 million and $42 million, respectively, for the three and nine months ended July 31, 2018).

Note 4: Transfer of Assets

Loan Securitization

We sell Canadian mortgage loans to bank-sponsored and third-party Canadian securitization programs, including the Canadian Mortgage Bond program, directly to third-party investors under the NHA-MBS program and under our own program. We assess whether substantially all of the risks and rewards of or control over the loans have been transferred to determine if they qualify for derecognition.

During the three and nine months ended July 31, 2019, we sold $1,084 million and $4,004 million, respectively, of loans to these programs ($2,651 million and $6,682 million, respectively, for the three and nine months ended July 31, 2018).

The following table presents the carrying amount and fair value of transferred assets that did not qualify for derecognition and the associated liabilities:

(Canadian $ in millions)			July 31, 2019				October 31, 2018
	Carrying amount of assets (1)		Carrying amount of associated liabilities		Carrying amount of assets (1)		Carrying amount of associated liabilities
Residential mortgages		6,290				5,569
Other related assets (2)		11,148				11,640
Total (3)		17,438		16,959		17,209		16,925

(1) Carrying amount of loans is net of allowance for credit losses.

(2) Other related assets represent payments received on account of loans pledged under securitization that have not been applied against the associated liabilities. The payments received are held on behalf of the investors in the securitization vehicles until principal payments are required to be made on the associated liabilities. In order to compare all assets supporting the associated liabilities, this amount is added to the carrying amount of the securitized assets in the above table.

(3) The fair values of assets and associated liabilities are $17,459 million and $17,200 million, respectively, as at July 31, 2019 ($17,105 million and $16,763 million, respectively, as at October 31, 2018).

During the three and nine months ended July 31, 2019, we sold and derecognized $121 million and $302 million, respectively, of mortgage loans purchased or originated in the U.S. ($278 million and $708 million, respectively, for the three and nine months ended July 31, 2018). We retain the mortgage servicing rights for these loans, which represent our continuing involvement. As at July 31, 2019, the carrying value of the mortgage servicing rights was $45 million ($52 million as at October 31, 2018).

Note 5: Acquisitions

KGS-Alpha Capital Markets (“KGS”)

On September 1, 2018, we completed the acquisition of the business of KGS, a U.S. fixed income broker-dealer specializing in U.S. mortgage and asset-backed securities in the institutional investor market, for cash consideration of US$304 million (CAD$397 million). During the three months ended January 31, 2019, the purchase price decreased to US$303 million (CAD$396 million) due to a post-closing adjustment based upon working capital. The acquisition was accounted for as a business combination, and the acquired business and corresponding goodwill are included in our Capital Markets reporting segment.

As part of this acquisition, we acquired intangible assets of $49 million and goodwill of $54 million. The intangible assets are being amortized over three to fourteen years on an accelerated basis. Goodwill of $32 million related to this acquisition is deductible for tax purposes.

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

(Canadian $ in millions)
	KGS
Securities - trading	5,193
Securities borrowed or purchased under resale agreements	5,669
Goodwill and intangible assets	103
Other assets	583
Total assets	11,548
Securities lent or sold under repurchase agreements	9,563
Securities sold but not yet purchased	1,431
Other liabilities	158
Purchase price	396

  The purchase price allocation for KGS is subject to refinement as we complete the valuation of the assets acquired and liabilities assumed.

48 BMO Financial Group Third Quarter Report 2019

Note 6: Deposits and Subordinated Debt

Deposits

	Payable on demand								Payable				Payable on
(Canadian $ in millions)	Interest bearing				Non-interest bearing				after notice				a fixed date (4)(5)				Total
	July 31, 2019		October 31, 2018		July 31, 2019		October 31, 2018		July 31, 2019		October 31, 2018		July 31, 2019		October 31, 2018		July 31, 2019		October 31, 2018
Deposits by:
Banks (1)		2,606		1,450		1,424		1,400		883		526		24,407		24,531		29,320		27,907
Business and government		25,181		25,266		32,159		33,984		79,734		67,026		189,908		185,901		326,982		312,177
Individuals		3,233		3,476		22,548		21,345		92,862		90,233		78,438		65,790		197,081		180,844
Total (2) (3)		31,020		30,192		56,131		56,729		173,479		157,785		292,753		276,222		553,383		520,928
Booked in:
Canada		25,514		21,735		48,406		47,231		86,459		82,091		179,587		160,069		339,966		311,126
United States		4,398		7,395		7,704		9,477		85,875		74,476		86,000		86,805		183,977		178,153
Other countries		1,108		1,062		21		21		1,145		1,218		27,166		29,348		29,440		31,649
Total		31,020		30,192		56,131		56,729		173,479		157,785		292,753		276,222		553,383		520,928

 (1) Includes regulated and central banks.

 (2) Includes structured notes designated at fair value through profit or loss.

 (3) As at July 31, 2019 and October 31, 2018, total deposits payable on a fixed date included $31,317 million and $29,673 million, respectively, of federal funds purchased and commercial paper issued and other deposit liabilities. Included in deposits as at July 31, 2019 and October 31, 2018 are $274,625 million and $259,747 million, respectively, of deposits denominated in U.S. dollars, and $33,792 million and $37,427 million, respectively, of deposits denominated in other foreign currencies.

 (4) Includes $260,007 million of deposits, each greater than one hundred thousand dollars, of which $165,061 million were booked in Canada, $67,790 million were booked in the United States and $27,156 million were booked in other countries ($246,685 million, $145,574 million, $71,770 million and $29,341 million, respectively, as at October 31, 2018). Of the $165,061 million of deposits booked in Canada, $65,563 million mature in less than three months, $8,403 million mature in three to six months, $18,226 million mature in six to twelve months and $72,869 million mature after twelve months ($145,574 million, $55,190 million, $3,836 million, $12,909 million and $73,639 million, respectively, as at October 31, 2018).

 (5) Includes $12,992 million of senior unsecured debt as at July 31, 2019 subject to the Bank Recapitalization (Bail-In) regime ($37 million as at October 31, 2018). The Bail-In regime provides certain statutory powers to the Canada Deposit Insurance Corporation, including the ability to convert specified eligible shares and liabilities into common shares if the bank becomes non-viable.

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

Subordinated Debt

During the three and nine months ended July 31, 2019, we did not issue or redeem any subordinated debt. On August 1, 2019, we announced our intention to redeem all of our $1 billion 3.12% Series – H Medium Term Notes First Tranche on September 19, 2019.

Note 7: Equity

Preferred and Common Shares Outstanding and Other Equity Instruments (1)

(Canadian $ in millions, except as noted)	July 31, 2019				October 31, 2018
	Number of shares		Amount		Number of shares		Amount		Convertible into…
Preferred Shares - Classified as Equity
Class B – Series 25		9,425,607		236		9,425,607		236		Class B - Series 26	(2)
Class B – Series 26		2,174,393		54		2,174,393		54		Class B - Series 25	(2)
Class B – Series 27		20,000,000		500		20,000,000		500		Class B - Series 28	(2)(3)
Class B – Series 29		16,000,000		400		16,000,000		400		Class B - Series 30	(2)(3)
Class B – Series 31		12,000,000		300		12,000,000		300		Class B - Series 32	(2)(3)
Class B – Series 33		8,000,000		200		8,000,000		200		Class B - Series 34	(2)(3)
Class B – Series 35		6,000,000		150		6,000,000		150		Not convertible	(3)
Class B – Series 36		600,000		600		600,000		600		Class B - Series 37	(2)(3)
Class B – Series 38		24,000,000		600		24,000,000		600		Class B - Series 39	(2)(3)
Class B – Series 40		20,000,000		500		20,000,000		500		Class B - Series 41	(2)(3)
Class B – Series 42		16,000,000		400		16,000,000		400		Class B - Series 43	(2)(3)
Class B – Series 44		16,000,000		400		16,000,000		400		Class B - Series 45	(2)(3)
Class B – Series 46		14,000,000		350		-		-		Class B - Series 47	(2)(3)
Preferred Shares - Classified as Equity				4,690				4,340
Other Equity Instruments				658				-		Variable number of common shares	(4)
Common Shares (5) (6)		639,035,737		12,958		639,329,625		12,929
Share Capital and Other Equity Instruments				18,306				17,269

 (1) For additional information refer to Notes 16 and 20 of our annual consolidated financial statements for the year ended October 31, 2018 on pages 182 and 192 of our 2018 Annual Report.

 (2) If converted, the holders have the option to convert back to the original preferred shares on subsequent redemption dates.

 (3) The shares issued include a non-viability contingent capital provision, which is necessary for the shares to qualify as regulatory capital under Basel III. As such, the shares are convertible into a variable number of our common shares if OSFI announces that the bank is, or is about to become, non-viable or if a federal or provincial government in Canada publicly announces that the bank has accepted or agreed to accept a capital injection, or equivalent support, to avoid non-viability. In such an event, each preferred share is convertible into common shares pursuant to an automatic conversion formula and a conversion price based on the greater of: (i) a floor price of $5.00 and (ii) the current market price of our common shares based on the volume weighted average trading price of our common shares on the TSX. The number of common shares issued is determined by dividing the share value of the preferred share issuance (including declared and unpaid dividends on such preferred share issuance) by the conversion price and then times the multiplier.

 (4) The Other Equity Instruments (notes) issued include a non-viability contingent capital provision, which is necessary for the notes to qualify as regulatory capital under Basel III. As such, the notes are convertible into a variable number of our common shares if OSFI announces that the bank is, or is about to become, non-viable or if a federal or provincial government in Canada publicly announces that the bank has accepted or agreed to accept a capital injection, or equivalent support, to avoid non-viability. In such an event, the notes are convertible into common shares of the bank determined by dividing (a) the product of the Multiplier of 1.25, and the Note Value, by (b) the Conversion Price which is the greater of the Floor price of $5 and the current market price.

 (5) The stock options issued under the Stock Option Plan are convertible into 6,318,299 common shares as at July 31, 2019 (6,095,201 common shares as at October 31, 2018).

 (6) During the three and nine months ended July 31, 2019, we did not issue any common shares under the Shareholder Dividend Reinvestment and Share Purchase Plan. During the three and nine months ended July 31, 2019, we issued 274,868 and 706,112 common shares, respectively, under the Stock Option Plan.

BMO Financial Group Third Quarter Report 2019 49

Preferred Shares

During the three and nine months ended July 31, 2019, we did not redeem any preferred shares.

On June 27, 2019, we announced that we did not intend to exercise our right to redeem the currently outstanding Non-Cumulative 5-Year Rate Reset Class B Preferred Shares Series 29 (Preferred Shares Series 29) on August 25, 2019. As a result, subject to certain conditions, the holders of Preferred Shares Series 29 had the right, at their option, by August 12, 2019, to convert any or all of their Preferred Shares Series 29 on a one-for-one basis into Non-Cumulative Floating Rate Class B Preferred Shares Series 30 (Preferred Shares Series 30). During the conversion period, which ran from July 26, 2019 to August 12, 2019, 223,098 Preferred Shares Series 29 were tendered for conversion into Preferred Shares Series 30, which is less than the minimum 1,000,000 required to give effect to the conversion, as described in the Preferred Shares Series 29 prospectus supplement dated May 30, 2014. As a result, no Preferred Shares Series 30 were issued and holders of Preferred Shares Series 29 retained their shares. The dividend rate for the Preferred Shares Series 29 for the five year period commencing on August 25, 2019, and ending on August 24, 2024, is 3.624%.

On April 17, 2019, we issued 14 million Non-Cumulative 5-Year Rate Reset Class B Preferred Shares Series 46 (Non-Viability Contingent Capital (NVCC)), at a price of $25 per share, for gross proceeds of $350 million. For the initial five year period to the earliest redemption date of May 25, 2024, the shares pay quarterly cash dividends, if declared, at a rate of 5.1% per annum. The dividend rate will reset on the earliest redemption date and every fifth year thereafter at a rate equal to the 5-year Government of Canada bond yield plus a premium of 3.51%. Holders have the option to convert their shares into an equal number of Non-Cumulative Floating Rate Class B Preferred Shares Series 47 (Preferred Shares Series 47), subject to certain conditions, on the earliest redemption date and every fifth year thereafter. Holders of the Preferred Shares Series 47 will be entitled to receive non-cumulative preferential floating rate quarterly dividends, as and when declared, equal to the 3-month Government of Canada Treasury Bill yield plus 3.51%.

On March 29, 2019, we announced that we did not intend to exercise our right to redeem the currently outstanding Non-Cumulative 5-Year Rate Reset Class B Preferred Shares Series 27 (Preferred Shares Series 27) on May 25, 2019. As a result, subject to certain conditions, the holders of Preferred Shares Series 27 had the right, at their option, by May 10, 2019, to convert any or all of their Preferred Shares Series 27 on a one-for-one basis into Non-Cumulative Floating Rate Class B Preferred Shares Series 28 (Preferred Shares Series 28). During the conversion period, which ran from April 25, 2019 to May 10, 2019, 412,564 Preferred Shares Series 27 were tendered for conversion into Preferred Shares Series 28, which is less than the minimum 1,000,000 required to give effect to the conversion, as described in the Preferred Shares Series 27 prospectus supplement dated April 16, 2014. As a result, no Preferred Shares Series 28 were issued and holders of Preferred Shares Series 27 retained their shares. The dividend rate for the Preferred Shares Series 27 for the five year period commencing on May 25, 2019, and ending on May 24, 2024, is 3.852%.

Other Equity Instruments

On July 30, 2019, we issued US$500 million 4.800% Additional Tier 1 Capital Notes (NVCC) (“notes”) which are classified as equity and form part of our additional Tier 1 non-viability contingent capital. The notes are compound financial instruments that have both equity and liability features. On the date of issuance, we assigned an insignificant value to the liability component of the notes and, as a result, the full amount of proceeds has been classified as equity. Semi-annual distributions on the notes will be recorded when payable. The rights of the holders of our notes are subordinate to the claims of the depositors and certain other creditors but rank above our common and preferred shares.

(Canadian $ in millions, except as noted)

Face value

Interest rate (%)

Redeemable at our option

Convertible to

July 31, 2019

October 31, 2018

4.800% Additional Tier 1 Capital Notes

US$

500

4.800 (1)

August 2024 (2)

Variable number of common shares (3)

658

-

Total

658

-

(1) Non-cumulative interest is payable semi-annually in arrears, at the bank’s discretion.

(2) The notes are redeemable, at a redemption price equal to 100% of the principal amount, plus any accrued and unpaid interest, in whole or in part at our option on or after the first interest reset date in 2024 or following certain regulatory or tax events. The bank may, at any time, purchase the notes at any price in the open market.

(3) The notes issued include a non-viability contingent capital provision, which is necessary for the notes to qualify as regulatory capital under Basel III. As such, the notes are convertible into a variable number of our common shares if OSFI announces that the bank is, or is about to become, non-viable or if a federal or provincial government in Canada publicly announces that the bank has accepted or agreed to accept a capital injection, or equivalent support, to avoid non-viability. In such an event, the notes are convertible into common shares of the bank determined by dividing (a) the product of the Multiplier of 1.25, and the Note Value, by (b) the Conversion Price which is the greater of the Floor price of $5 and the current market price.

Common Shares

On June 3, 2019, we renewed our normal course issuer bid (“NCIB”) effective for one year. Under this bid, we may purchase up to 15 million common shares for cancellation. The NCIB is a regular part of BMO’s capital management strategy. The timing and amount of purchases under the NCIB are subject to regulatory approvals and to management discretion, based on factors such as market conditions and capital levels.

During the three months ended July 31, 2019, we did not purchase for cancellation any common shares under the NCIB. During the nine months ended July 31, 2019, 1 million common shares were purchased for cancellation.

Capital Trust Securities

On December 31, 2018, BMO Capital Trust II redeemed all of its issued and outstanding BMO Tier 1 Notes - Series A at a redemption amount equal to $1,000 for an aggregate redemption of $450 million, plus accrued and unpaid interest to but excluding the redemption date.

50 BMO Financial Group Third Quarter Report 2019

Note 8: Fair Value of Financial Instruments

Fair Value of Financial Instruments Not Carried at Fair Value on the Balance Sheet

Set out in the following table are the amounts that would be reported if all financial assets and liabilities not currently carried at fair value were reported at their fair values. Refer to Note 17 to our annual consolidated financial statements for the year ended October 31, 2018 on pages 184 to 190 for further discussion on the determination of fair value.

(Canadian $ in millions)	July 31, 2019		October 31, 2018
	Carrying value	Fair value	Carrying value	Fair value
Securities
Amortized cost	15,024	15,102	6,485	6,288
Loans (1)
Residential mortgages	121,989	122,548	119,544	118,609
Consumer instalment and other personal	65,465	65,806	62,687	62,618
Credit cards	8,504	8,504	8,099	8,099
Business and government (2)	219,681	220,625	192,225	191,989
	415,639	417,483	382,555	381,315
Deposits (3)	537,378	538,311	506,742	506,581
Securitization and structured entities’ liabilities	25,544	25,753	25,051	24,838
Subordinated debt	6,876	7,174	6,782	6,834

  This table excludes financial instruments with a carrying value approximating fair value, including cash and cash equivalents, interest bearing deposits with banks, securities borrowed or purchased under resale agreements,

  customers’ liability under acceptances, other assets, acceptances, securities lent or sold under repurchase agreements and other liabilities.

 (1) Carrying value of loans is net of allowance.

 (2) Excludes $2,230 million of loans classified as FVTPL as at July 31, 2019 ($1,450 million as at October 31, 2018).

 (3) Excludes $16,005 million of structured note liabilities designated at fair value through profit or loss and accounted for at fair value ($14,186 million as at October 31, 2018).

Financial Instruments Designated at Fair Value

Most of our structured note liabilities included in deposits have been designated at fair value through profit or loss which aligns the accounting result with the way the portfolio is managed. The fair value and notional amount due at contractual maturity of these structured notes as at July 31, 2019 were $16,005 million and $15,933 million, respectively ($14,186 million and $15,088 million, respectively, as at October 31, 2018). The change in fair value of these structured notes was recorded as a decrease of $168 million and $1,010 million in non-interest revenue, trading revenue and an increase of $49 million and $35 million recorded in other comprehensive income related to changes in our credit spread, respectively, for the three and nine months ended July 31, 2019 (a decrease of $128 million and an increase of $340 million recorded in non-interest revenue, trading revenue, and an increase of $36 million and a decrease $6 million recorded in other comprehensive income related to changes in our own credit spread, respectively, for the three and nine months ended July 31, 2018). The impact of changes in our credit spread is measured based on movements in our credit spread quarter over quarter. The impact of economic hedges used to manage the exposure is recorded in non-interest revenue, trading revenue.

The cumulative change in fair value related to changes in our own credit spread that has been recognized since the notes were designated at fair value to July 31, 2019 was an unrealized loss of $296 million, of this an unrealized loss of $220 million was recorded in other comprehensive income, with an unrealized loss of $76 million recorded through the Consolidated Statement of Income prior to the adoption of IFRS 9 own credit provision in 2015.

We designate certain securities held by our insurance subsidiaries that support our insurance liabilities at fair value through profit or loss since the actuarial calculation of insurance liabilities is based on the fair value of the investments supporting them. This designation aligns the accounting result with the way the portfolio is managed on a fair value basis. The change in fair value of the assets is recorded in non-interest revenue, insurance revenue and the change in fair value of the liabilities is recorded in insurance claims, commissions and changes in policy benefit liabilities. The fair value of these investments as at July 31, 2019 of $10,718 million ($8,783 million as at October 31, 2018) is recorded in securities in our Consolidated Balance Sheet. The impact of recording these investments at fair value through profit or loss was an increase of $383 million and $976 million in non-interest revenue, insurance revenue, respectively, for the three and nine months ended July 31, 2019 (an increase of $49 million and a decrease of $85 million, respectively, for the three and nine months ended July 31, 2018).

We designate the obligation related to certain investment contracts in our insurance business at fair value through profit or loss, which eliminates a measurement inconsistency that would otherwise arise from measuring the investment contract liabilities and offsetting changes in the fair value of the investments supporting them on a different basis. The fair value of these investment contract liabilities as at July 31, 2019 of $1,011 million ($800 million as at October 31, 2018) is recorded in other liabilities in our Consolidated Balance Sheet. The change in fair value of these investment contract liabilities resulted in an increase of $41 million and an increase of $102 million in insurance claims, commissions, and changes in policy benefit liabilities, respectively, for the three and nine months ended July 31, 2019 (a decrease of $2 million and $15 million, respectively, for the three and nine months ended July 31, 2018). For the three and nine months ended July 31, 2019, a decrease of $7 million and $19 million, respectively, was recorded in other comprehensive income related to changes in our own credit spread (an increase of $3 million and $1 million, respectively, for the three and nine months ended July 31, 2018). Changes in the fair value of investments backing these investment contract liabilities are recorded in non-interest revenue, insurance revenue. The impact of changes in our credit spread is measured based on movements in our credit spread quarter over quarter.

BMO Financial Group Third Quarter Report 2019 51

Fair Value Hierarchy

We use a fair value hierarchy to categorize financial instruments according to the inputs we use in valuation techniques to measure fair value.

Valuation Techniques and Significant Inputs

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

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

52 BMO Financial Group Third Quarter Report 2019

The extent of our use of actively quoted market prices (Level 1), internal models using observable market information as inputs (Level 2) and internal models without observable market information as inputs (Level 3) in the valuation of securities, loans, fair value liabilities, derivative assets and derivative liabilities was as follows:

(Canadian $ in millions)							July 31, 2019
	Valued using quoted market prices		Valued using models (with observable inputs)		Valued using models (without observable inputs)		Total
Trading Securities
Issued or guaranteed by:
Canadian federal government		7,593		2,041		-		9,634
Canadian provincial and municipal governments		3,320		4,655		-		7,975
U.S. federal government		8,253		1,324		-		9,577
U.S. states, municipalities and agencies		18		439		-		457
Other governments		1,187		579		-		1,766
NHA MBS, U.S. agency MBS and CMO		31		9,494		246		9,771
Corporate debt		2,450		6,372		26		8,848
Loans		-		193		-		193
Corporate equity		46,684		1		-		46,685
		69,536		25,098		272		94,906
FVTPL Securities
Issued or guaranteed by:
Canadian federal government		526		150		-		676
Canadian provincial and municipal governments		159		1,097		-		1,256
U.S. federal government		6		67		-		73
Other governments		-		49		-		49
NHA MBS, U.S. agency MBS and CMO		-		5		-		5
Corporate debt		80		7,892		-		7,972
Corporate equity		1,543		68		1,906		3,517
		2,314		9,328		1,906		13,548
FVOCI Securities
Issued or guaranteed by:
Canadian federal government		9,707		1,337		-		11,044
Canadian provincial and municipal governments		4,376		2,771		-		7,147
U.S. federal government		15,564		1,952		-		17,516
U.S. states, municipalities and agencies		-		4,164		1		4,165
Other governments		2,837		4,228		-		7,065
NHA MBS, U.S. agency MBS and CMO		-		14,943		-		14,943
Corporate debt		2,260		3,215		-		5,475
Corporate equity		-		-		79		79
		34,744		32,610		80		67,434
Business and government Loans		-		66		2,164		2,230
Fair Value Liabilities
Securities sold but not yet purchased		18,237		8,966		172		27,375
Structured note liabilities and other note liabilities		-		16,005		-		16,005
Investment contract liabilities		-		1,011		-		1,011
		18,237		25,982		172		44,391
Derivative Assets
Interest rate contracts		13		9,594		-		9,607
Foreign exchange contracts		6		10,334		-		10,340
Commodity contracts		146		984		-		1,130
Equity contracts		214		857		-		1,071
Credit default swaps		-		52		-		52
		379		21,821		-		22,200
Derivative Liabilities
Interest rate contracts		8		7,161		-		7,169
Foreign exchange contracts		8		12,061		-		12,069
Commodity contracts		141		1,518		-		1,659
Equity contracts		129		2,482		-		2,611
Credit default swaps		-		104		1		105
		286		23,326		1		23,613

53 BMO Financial Group Third Quarter Report 2019

(Canadian $ in millions)							October 31, 2018
	Valued using quoted market prices		Valued using models (with observable inputs)		Valued using models (without observable inputs)		Total
Trading Securities
Issued or guaranteed by:
Canadian federal government		9,107		1,213		-		10,320
Canadian provincial and municipal governments		4,013		4,689		-		8,702
U.S. federal government		9,465		52		-		9,517
U.S. states, municipalities and agencies		78		1,138		-		1,216
Other governments		1,210		201		-		1,411
NHA MBS, U.S. agency MBS and CMO		60		8,869		255		9,184
Corporate debt		2,973		6,218		7		9,198
Loans		-		199		-		199
Corporate equity		49,946		4		-		49,950
		76,852		22,583		262		99,697
FVTPL Securities
Issued or guaranteed by:
Canadian federal government		328		103		-		431
Canadian provincial and municipal governments		219		727		-		946
U.S. federal government		69		-		-		69
Other governments		-		-		-		-
NHA MBS, U.S. agency MBS and CMO		-		7		-		7
Corporate debt		178		6,643		-		6,821
Corporate equity		1,378		134		1,825		3,337
		2,172		7,614		1,825		11,611
FVOCI Securities
Issued or guaranteed by:
Canadian federal government		11,978		827		-		12,805
Canadian provincial and municipal governments		3,315		3,547		-		6,862
U.S. federal government		16,823		-		-		16,823
U.S. states, municipalities and agencies		14		3,640		1		3,655
Other governments		3,143		1,647		-		4,790
NHA MBS, U.S. agency MBS and CMO		-		13,687		-		13,687
Corporate debt		1,959		1,797		-		3,756
Corporate equity		-		-		62		62
		37,232		25,145		63		62,440
Business and government Loans		-		-		1,450		1,450
Fair Value Liabilities
Securities sold but not yet purchased		26,336		2,468		-		28,804
Structured note liabilities and other note liabilities		-		14,186		-		14,186
Investment contract liabilities		-		800		-		800
		26,336		17,454		-		43,790
Derivative Assets
Interest rate contracts		18		8,959		-		8,977
Foreign exchange contracts		16		12,983		-		12,999
Commodity contracts		166		1,894		-		2,060
Equity contracts		286		1,872		-		2,158
Credit default swaps		-		10		-		10
		486		25,718		-		26,204
Derivative Liabilities
Interest rate contracts		14		8,620		-		8,634
Foreign exchange contracts		2		11,852		-		11,854
Commodity contracts		295		1,161		-		1,456
Equity contracts		246		2,183		1		2,430
Credit default swaps		-		36		1		37
		557		23,852		2		24,411

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

Significant Transfers

Our policy is to record transfers of assets and liabilities between fair value hierarchy levels at their fair values as at the end of each reporting period, consistent with the date of the determination of fair value. Transfers between the various fair value hierarchy levels reflect changes in the availability of quoted market prices or observable market inputs that result from changes in market conditions. The following is a discussion of the significant transfers between Level 1, Level 2 and Level 3 balances for the three and nine months ended July 31, 2019. In the nine months ended July 31, 2019, we refined our judgement of whether quoted prices for fixed income securities were obtained from markets that are active or not in the determination of whether a security should be Level 1 or Level 2, with the result that certain securities are shown as a transfer to Level 2.

During the three and nine months ended July 31, 2019, $1,734 million and $5,392 million, respectively, of trading securities, $218 million and $682 million, respectively, of FVTPL securities, $1,834 million and $9,723 million, respectively, of FVOCI securities, and $6,362 million and $9,905 million, respectively, of securities sold but not yet purchased were transferred from Level 1 to Level 2 due to our refined approach and reduced observability of the inputs used to value these securities. During the three and nine months ended July 31, 2019, $901 million and $4,260 million, respectively, of trading securities, $38 million and $390 million, respectively, of FVTPL securities, $2,335 million and $3,910 million, respectively, of FVOCI securities, and $98 million and $2,501 million, respectively, of securities sold but not yet purchased were transferred from Level 2 to Level 1 due to increased availability of quoted prices in active markets.

54 BMO Financial Group Third Quarter Report 2019

During the three and nine months ended July 31, 2019, $53 million and $98 million, respectively, of trading securities were transferred from Level 2 to Level 3 due to changes in the market observability of inputs used in pricing these securities, $6 million and $41 million, respectively, were transferred from Level 3 to Level 2 due to the availability of observable price inputs used to value these securities.

Changes in Level 3 Fair Value Measurements

The table below presents a reconciliation of all changes in Level 3 financial instruments during the three and nine months ended July 31, 2019, including realized and unrealized gains (losses) included in earnings and other comprehensive income.

			Change in fair value
(Canadian $ in millions)   For the three months ended July 31, 2019	Balance April 30, 2019		Included in earnings			Included in other comprehensive income (1)			Issuances/ Purchases		Sales			Maturities/ Settlement			Transfers into Level 3		Transfers out of Level 3			Fair Value as at July 31, 2019		Change in unrealized gains (losses) recorded in income for instruments still held
Trading Securities
NHA MBS and U.S. agency MBS and CMO		215		(15	)		(3	)		97		(96	)		-			53		(5	)		246		(6	)
Corporate debt		7		-			-			26		(6	)		-			-		(1	)		26		-
Total trading securities		222		(15	)		(3	)		123		(102	)		-			53		(6	)		272		(6	)
FVTPL Securities
Corporate equity		1,907		10			(21	)		77		(66	)		(1	)		-		-			1,906		16
Total FVTPL securities		1,907		10			(21	)		77		(66	)		(1	)		-		-			1,906		16
FVOCI Securities
Issued or guaranteed by:
U.S. states, municipalities and agencies		1		-			-			-		-			-			-		-			1		na
Corporate equity		69		-			-			10		-			-			-		-			79		na
Total FVOCI securities		70		-			-			10		-			-			-		-			80		na
Business and government Loans		2,172		-			(31	)		155		-			(132	)		-		-			2,164		-
Fair Value Liabilities
Securities sold but not yet purchased		-		-			-			-		172			-			-		-			172		-
Total fair value liabilities		-		-			-			-		172			-			-		-			172		-
Derivative Liabilities
Equity contracts		-		-			-			-		-			-			-		-			-		-
Credit default swaps		-		-			-			-		-			-			1		-			1		-
Total derivative liabilities		-		-			-			-		-			-			1		-			1		-

(1) Foreign exchange translation on financial instruments held by foreign subsidiaries is included in other comprehensive income, net foreign operations

  na – Not applicable

			Change in fair value
(Canadian $ in millions)   For the nine months ended July 31, 2019	Balance October 31, 2018		Included in earnings			Included in other comprehensive income (1)		Issuances/ Purchases			Sales			Maturities/ Settlement			Transfers into Level 3		Transfers out of Level 3			Fair Value as at July 31, 2019		Change in unrealized gains (losses) recorded in income for instruments still held
Trading Securities
NHA MBS and U.S. agency MBS and CMO		255		(22	)		1		280			(326	)		-			98		(40	)		246		(13	)
Corporate debt		7		-			-		32			(12	)		-			-		(1	)		26		-
Total trading securities		262		(22	)		1		312			(338	)		-			98		(41	)		272		(13	)
FVTPL Securities
Corporate equity		1,825		20			2		324			(264	)		(1	)		-		-			1,906		36
Total FVTPL		1,825		20			2		324			(264	)		(1	)		-		-			1,906		36
FVOCI Securities
Issued or guaranteed by:
U.S. states, municipalities and agencies		1		-			-		-			-			-			-		-			1		na
Corporate equity		62		-			-		17			-			-			-		-			79		na
Total FVOCI securities		63		-			-		17			-			-			-		-			80		na
Business and government Loans		1,450		7			13		1,369			-			(675	)		-		-			2,164		-
Fair Value Liabilities
Securities sold but not yet purchased		-		-			-		(7	)		179			-			-		-			172		-
Total fair value liabilities		-		-			-		(7	)		179			-			-		-			172		-
Derivative Liabilities
Equity contracts		1		-			-		-			-			-			-		(1	)		-		-
Credit default swaps		1		-			-		-			-			-			1		(1	)		1		-
Total derivative liabilities		2		-			-		-			-			-			1		(2	)		1		-

(1) Foreign exchange translation on financial instruments held by foreign subsidiaries is included in other comprehensive income, net foreign operations

  na – Not applicable

BMO Financial Group Third Quarter Report 2019 55

Note 9: Capital Management

Our objective is to maintain a strong capital position in a cost-effective structure that: is appropriate given our target regulatory capital ratios and internal assessment of required economic capital; is consistent with our target credit ratings; underpins our operating groups’ business strategies; and supports depositor, investor and regulator confidence, while building long-term shareholder value.

As at July 31, 2019, we met OSFI’s target capital ratio requirements, which include a 2.5% Capital Conservation Buffer, a 1.0% Common Equity Surcharge for Domestic Systemically Important Banks (D-SIBs), a Countercyclical Buffer and a 1.75% Domestic Stability Buffer (DSB) applicable to D-SIBs. In June 2019, OSFI set the DSB at 2.0% effective October 31, 2019. Our capital position as at July 31, 2019 is detailed in the Capital Management section of Management’s Discussion and Analysis of the Third Quarter 2019 Report to Shareholders.

Note 10: Employee Compensation

Stock Options

We did not grant any stock options during the three months ended July 31, 2019 and 2018. During the nine months ended July 31, 2019, we granted a total of 931,047 stock options (705,398 stock options during the nine months ended July 31, 2018). The weighted-average fair value of options granted during the nine months ended July 31, 2019 was $10.23 per option ($11.30 per option for the nine months ended July 31, 2018).

To determine the fair value of the stock option tranches (i.e. the portion that vests each year) on the grant date, the following ranges of values were used for each option pricing assumption:

For stock options granted during the nine months ended	July 31, 2019		July 31, 2018
Expected dividend yield		5.7%		4.1%
Expected share price volatility		20.0% - 20.1%		17.0% - 17.3%
Risk-free rate of return		2.5%		2.1%
Expected period until exercise (in years)		6.5 - 7.0		6.5 - 7.0
Exercise price ($)		89.90		100.63

  Changes to the input assumptions can result in different fair value estimates.

Pension and Other Employee Future Benefit Expenses

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

(Canadian $ in millions)
	Pension benefit plans						Other employee future benefit plans
For the three months ended	July 31, 2019			July 31, 2018			July 31, 2019		July 31, 2018
Current service cost		48			52			2		7
Net interest (income) expense on net defined benefit (asset) liability		(5	)		(2	)		10		11
Administrative expenses		1			1			-		-
Benefits expense		44			51			12		18
Canada and Quebec pension plan expense		23			21			-		-
Defined contribution expense		37			34			-		-
Total pension and other employee future benefit expenses recognized in the Consolidated Statement of Income		104			106			12		18
(Canadian $ in millions)
	Pension benefit plans						Other employee future benefit plans
For the nine months ended	July 31, 2019			July 31, 2018			July 31, 2019		July 31, 2018
Current service cost		144			157			7		22
Net interest (income) expense on net defined benefit (asset) liability		(14	)		(6	)		29		34
Past service income		(5	)		-			-		-
Administrative expenses		3			3			-		-
Benefits expense		128			154			36		56
Canada and Quebec pension plan expense		70			65			-		-
Defined contribution expense		127			124			-		-
Total pension and other employee future benefit expenses recognized in the Consolidated Statement of Income		325			343			36		56

56 BMO Financial Group Third Quarter Report 2019

Note 11: Earnings Per Share

Basic earnings per share is calculated by dividing net income attributable to equity holders of the bank, after deducting dividends on preferred shares and distributions on other equity instruments, by the daily average number of fully paid common shares outstanding throughout the period.

Diluted earnings per share is calculated in the same manner, with further adjustments made to reflect the dilutive impact of instruments convertible into our common shares.

The following tables present our basic and diluted earnings per share:

Basic Earnings Per Common Share

(Canadian $ in millions, except as noted)	For the three months ended						For the nine months ended
	July 31, 2019			July 31, 2018			July 31, 2019			July 31, 2018
Net income attributable to equity holders of the bank		1,557			1,537			4,564			3,756
Dividends on preferred shares and distributions on other equity instruments		(59	)		(50	)		(159	)		(141)
Net income available to common shareholders		1,498			1,487			4,405			3,615
Weighted-average number of common shares outstanding (in thousands)		638,900			640,400			638,803			643,937
Basic earnings per common share (Canadian $)		2.34			2.32			6.90			5.61
Diluted Earnings Per Common Share
Net income available to common shareholders adjusted for impact of dilutive instruments		1,498			1,487			4,405			3,615
Weighted-average number of common shares outstanding (in thousands)		638,900			640,400			638,803			643,937
Effect of dilutive instruments
Stock options potentially exercisable (1)		5,734			5,925			5,697			5,560
Common shares potentially repurchased		(4,184	)		(3,970	)		(4,137	)		(3,549)
Weighted-average number of diluted common shares outstanding (in thousands)		640,450			642,355			640,363			645,948
Diluted earnings per common share (Canadian $)		2.34			2.31			6.88			5.60

(1) In computing diluted earnings per share we excluded average stock options outstanding of 687,059 and 908,194 with a weighted-average exercise price of $104.14 and $102.98, respectively, for the three and nine months ended July 31, 2019 (1,007,064 and 1,612,662 with a weighted-average exercise price of $132.86 and $120.44, respectively, for the three and nine months ended July 31, 2018) as the average share price for the period did not exceed the exercise price.

Note 12: Income Taxes

During the quarter, Canada Revenue Agency (CRA) reassessed us for additional taxes and interest in an amount of approximately $250 million in respect of certain 2014 Canadian corporate dividends. In prior fiscal years, we were reassessed by the CRA for additional income taxes and interest of approximately $361 million for certain 2011-2013 Canadian corporate dividends. In its reassessments, the CRA denied dividend deductions on the basis that the dividends were received as part of a “dividend rental arrangement”. The tax rules raised by the CRA in the reassessments were prospectively addressed in the 2015 and 2018 Canadian Federal Budgets. In the future, we expect to be reassessed for significant income tax for similar activities in 2015 and subsequent years. We remain of the view that our tax filing positions were appropriate and intend to challenge any reassessment.

Note 13: Operating Segmentation

Operating Groups

We conduct our business through three operating groups, each of which has a distinct mandate. Our operating groups are Personal and Commercial Banking (“P&C”) (comprised of Canadian Personal and Commercial Banking (“Canadian P&C”) and U.S. Personal and Commercial Banking (“U.S. P&C”)), Wealth Management and BMO Capital Markets (“BMO CM”), along with a Corporate Services unit.

For additional information refer to Note 25 of the consolidated financial statements for the year ended October 31, 2018 on pages 203 to 205 of the Annual Report.

BMO Financial Group Third Quarter Report 2019 57

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

(Canadian $ in millions)
For the three months ended July 31, 2019	Canadian P&C		U.S. P&C			Wealth Management			BMO CM			Corporate Services (1)			Total
Net interest income		1,498		1,067			237			538			(123	)		3,217
Non-interest revenue		550		298			1,876			662			63			3,449
Total Revenue		2,048		1,365			2,113			1,200			(60	)		6,666
Provision for credit losses on impaired loans		174		61			-			7			1			243
Provision for (recovery of) credit losses on performing loans		30		37			(2	)		3			(5	)		63
Total provision for (recovery of) credit losses		204		98			(2	)		10			(4	)		306
Insurance claims, commissions and changes in policy benefit liabilities		-		-			887			-			-			887
Amortization		85		114			68			34			-			301
Non-interest expense		885		690			817			760			38			3,190
Income (loss) before taxes		874		463			343			396			(94	)		1,982
Provision for (recovery of) income taxes		226		95			94			83			(73	)		425
Net Income		648		368			249			313			(21	)		1,557
Average Assets		240,205		129,143			41,891			343,009			82,715			836,963
For the three months ended July 31, 2018	Canadian P&C		U.S. P&C			Wealth Management			BMO CM			Corporate Services (1)			Total
Net interest income		1,402		994			212			410			(136	)		2,882
Non-interest revenue		532		280			1,328			695			77			2,912
Total Revenue		1,934		1,274			1,540			1,105			(59	)		5,794
Provision for (recovery of) credit losses on impaired loans		120		54			2			3			(2	)		177
Provision for (recovery of) credit losses on performing loans		17		(14	)		2			4			-			9
Provision for (recovery of) credit losses		137		40			4			7			(2	)		186
Insurance claims, commissions and changes in policy benefit liabilities		-		-			269			-			-			269
Amortization		82		111			55			32			-			280
Non-interest expense		850		661			821			669			78			3,079
Income (loss) before taxes		865		462			391			397			(135	)		1,980
Provision for (recovery of) income taxes		224		98			100			96			(75	)		443
Net Income		641		364			291			301			(60	)		1,537
Average Assets		225,562		112,935			36,595			312,369			76,929			764,390
(Canadian $ in millions)
For the nine months ended July 31, 2019	Canadian P&C		U.S. P&C			Wealth Management			BMO CM			Corporate Services (1)			Total
Net interest income		4,338		3,161			699			1,698			(372	)		9,524
Non-interest revenue		1,585		858			5,396			1,863			170			9,872
Total Revenue		5,923		4,019			6,095			3,561			(202	)		19,396
Provision for (recovery of) credit losses on impaired loans		410		94			1			20			(5	)		520
Provision for (recovery of) credit losses on performing loans		52		33			(1	)		20			(5	)		99
Total provision for (recovery of) credit losses		462		127			-			40			(10	)		619
Insurance claims, commissions and changes in policy benefit liabilities		-		-			2,374			-			-			2,374
Amortization		248		343			199			105			-			895
Non-interest expense		2,635		2,004			2,463			2,368			278			9,748
Income (loss) before taxes		2,578		1,545			1,059			1,048			(470	)		5,760
Provision for (recovery of) income taxes		668		327			266			231			(296	)		1,196
Net Income		1,910		1,218			793			817			(174	)		4,564
Average Assets		235,815		124,636			40,345			342,549			82,759			826,104
For the nine months ended July 31, 2018	Canadian P&C		U.S. P&C			Wealth Management			BMO CM			Corporate Services (1)			Total
Net interest income		4,120		2,833			616			1,291			(437	)		8,423
Non-interest revenue		1,547		817			4,114			1,940			171			8,589
Total Revenue		5,667		3,650			4,730			3,231			(266	)		17,012
Provision for (recovery of) credit losses on impaired loans		348		197			4			(14	)		(12	)		523
Provision for (recovery of) credit losses on performing loans		18		(56	)		(1	)		3			-			(36	)
Provision for (recovery of) credit losses		366		141			3			(11	)		(12	)		487
Insurance claims, commissions and changes in policy benefit liabilities		-		-			962			-			-			962
Amortization		242		338			172			92			-			844
Non-interest expense		2,537		1,854			2,461			2,002			586			9,440
Income (loss) before taxes		2,522		1,317			1,132			1,148			(840	)		5,279
Provision for income taxes		647		295			279			290			12			1,523
Net Income		1,875		1,022			853			858			(852	)		3,756
Average Assets		223,467		108,591			35,375			303,526			74,222			745,181

 (1) Corporate Services includes Technology and Operations.

  We analyze revenue on a taxable equivalent basis (“teb”) at the operating group level. Revenue and the provision for income taxes are increased on tax-exempt securities to an equivalent before-tax basis to facilitate comparisons

  of income between taxable and tax-exempt sources. The offset to the groups’ teb adjustments is reflected in Corporate Services revenue and provision for income taxes.

  Certain comparative figures have been reclassified to conform with the current period’s presentation and for changes in accounting policy (Note 1).

58 BMO Financial Group Third Quarter Report 2019