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, 2020		April 30, 2020			July 31, 2019		July 31, 2020			July 31, 2019
Interest, Dividend and Fee Income
Loans	$	4,204	$	4,689		$	5,120	$	13,856		$	14,752
Securities (Note 2)		1,249		1,363			1,407		3,971			4,126
Deposits with banks		49		101			187		343			592
		5,502		6,153			6,714		18,170			19,470
Interest Expense
Deposits		1,292		1,738			2,224		5,157			6,413
Subordinated debt		65		66			69		201			208
Other liabilities (Note 1)		610		831			1,204		2,371			3,325
		1,967		2,635			3,497		7,729			9,946
Net Interest Income		3,535		3,518			3,217		10,441			9,524
Non-Interest Revenue
Securities commissions and fees		260		277			259		789			761
Deposit and payment service charges		299		313			309		916			890
Trading revenues (losses)		68		(217	)		115		(8	)		319
Lending fees		309		322			314		956			879
Card fees		85		80			109		264			330
Investment management and custodial fees		455		430			444		1,341			1,298
Mutual fund revenues		348		348			357		1,062			1,060
Underwriting and advisory fees		287		239			260		811			754
Securities gains (losses), other than trading		31		(11	)		90		84			181
Foreign exchange gains, other than trading		21		21			48		89			137
Insurance revenues (losses)		1,321		(166	)		989		2,035			2,748
Investments in associates and joint ventures		52		34			31		112			112
Other		118		76			124		308			403
		3,654		1,746			3,449		8,759			9,872
Total Revenue		7,189		5,264			6,666		19,200			19,396
Provision for Credit Losses (Note 3)		1,054		1,118			306		2,521			619
Insurance Claims, Commissions and Changes in Policy Benefit Liabilities		1,189		(197	)		887		1,708			2,374
Non-Interest Expense
Employee compensation		1,964		1,902			1,960		5,994			6,042
Premises and equipment (Note 1)		785		806			734		2,348			2,229
Amortization of intangible assets		154		156			135		461			406
Travel and business development		57		118			142		296			411
Communications		71		83			72		233			224
Professional fees		135		128			141		396			403
Other		278		323			307		901			928
		3,444		3,516			3,491		10,629			10,643
Income Before Provision for Income Taxes		1,502		827			1,982		4,342			5,760
Provision for income taxes (Note 11)		270		138			425		829			1,196
Net Income attributable to Equity Holders of the Bank	$	1,232	$	689		$	1,557	$	3,513		$	4,564
Earnings Per Share (Canadian $) (Note 10)
Basic	$	1.81	$	1.00		$	2.34	$	5.18		$	6.90
Diluted		1.81		1.00			2.34		5.18			6.88
Dividends per common share		1.06		1.06			1.03		3.18			3.03

  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.

46 BMO Financial Group Third Quarter Report 2020

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, 2020			April 30, 2020			July 31, 2019			July 31, 2020			July 31, 2019
Net Income	$	1,232		$	689		$	1,557		$	3,513		$	4,564
Other Comprehensive Income (Loss), net of taxes
Items that may subsequently be reclassified to net income
Net change in unrealized gains on fair value through OCI debt securities
Unrealized gains on fair value through OCI debt securities arising during the period (1)		141			170			112			421			345
Reclassification to earnings of (gains) in the period (2)		(18	)		(36	)		(14	)		(74	)		(43	)
		123			134			98			347			302
Net change in unrealized gains on cash flow hedges
Gains on derivatives designated as cash flow hedges arising during the period (3)		83			1,380			290			1,673			1,480
Reclassification to earnings of (gains) losses on derivatives designated as cash flow hedges in the period (4)		(37	)		21			36			8			122
		46			1,401			326			1,681			1,602
Net gains (losses) on translation of net foreign operations
Unrealized gains (losses) on translation of net foreign operations		(1,180	)		1,487			(577	)		516			(46	)
Unrealized gains (losses) on hedges of net foreign operations (5)		206			(304	)		94			(145	)		4
		(974	)		1,183			(483	)		371			(42	)
Items that will not be reclassified to net income
Gains (losses) on remeasurement of pension and other employee future benefit plans (6)		(189	)		73			(233	)		(244	)		(383	)
Gains (losses) on remeasurement of own credit risk on financial liabilities designated at fair value (7)		(330	)		351			31			(49	)		12
		(519	)		424			(202	)		(293	)		(371	)
Other Comprehensive Income (Loss), net of taxes		(1,324	)		3,142			(261	)		2,106			1,491
Total Comprehensive Income (Loss) attributable to Equity Holders of the Bank	$	(92	)	$	3,831		$	1,296		$	5,619		$	6,055

 (1) Net of income tax (provision) of $(47) million, $(62) million, $(39) million for the three months ended, and $(147) million, $(117) million for the nine months ended, respectively.

 (2) Net of income tax provision of $6 million, $10 million, $5 million for the three months ended, and $23 million, $15 million for the nine months ended, respectively.

 (3) Net of income tax (provision) of $(27) million, $(497) million, $(106) million for the three months ended, and $(600) million, $(536) million for the nine months ended, respectively.

 (4) Net of income tax provision (recovery) of $13 million, $(7) million, $(13) million for the three months ended, and $(3) million, $(44) million for the nine months ended, respectively.

 (5) Net of income tax (provision) recovery of $(74) million, $110 million, $(35) million for the three months ended, and $53 million, $(2) million for the nine months ended, respectively.

 (6) Net of income tax (provision) recovery of $65 million, $(26) million, $83 million for the three months ended, and $85 million, $138 million for the nine months ended, respectively.

 (7) Net of income tax (provision) recovery of $120 million, $(127) million, $(11) million for the three months ended, and $18 million, $(4) million for the nine months ended, respectively.

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

BMO Financial Group Third Quarter Report 2020 47

Interim Consolidated Financial Statements

Consolidated Balance Sheet

(Unaudited) (Canadian $ in millions)				As at
	July 31, 2020			April 30, 2020			October 31, 2019
Assets
Cash and Cash Equivalents	$	76,590		$	71,593		$	48,803
Interest Bearing Deposits with Banks		8,364			7,687			7,987
Securities (Note 2)
Trading		89,207			83,362			85,903
Fair value through profit or loss		14,053			13,572			13,704
Fair value through other comprehensive income		78,493			74,476			64,515
Debt securities at amortized cost		45,229			41,592			24,472
Investments in associates and joint ventures		923			906			844
		227,905			213,908			189,438
Securities Borrowed or Purchased Under Resale Agreements		118,713			119,058			104,004
Loans
Residential mortgages		125,481			125,534			123,740
Consumer instalment and other personal		69,168			69,818			67,736
Credit cards		7,947			7,672			8,859
Business and government		245,983			268,695			227,609
		448,579			471,719			427,944
Allowance for credit losses (Note 3)		(3,251	)		(2,776	)		(1,850	)
		445,328			468,943			426,094
Other Assets
Derivative instruments		38,796			41,150			22,144
Customers’ liability under acceptances		18,032			22,473			23,593
Premises and equipment (Note 1)		3,881			3,973			2,055
Goodwill		6,566			6,785			6,340
Intangible assets		2,470			2,526			2,424
Current tax assets		1,717			1,898			1,165
Deferred tax assets		1,456			1,391			1,568
Other		23,690			25,682			16,580
		96,608			105,878			75,869
Total Assets	$	973,508		$	987,067		$	852,195
Liabilities and Equity
Deposits (Note 5)	$	660,600		$	653,710		$	568,143
Other Liabilities
Derivative instruments		39,859			45,909			23,598
Acceptances		18,032			22,473			23,593
Securities sold but not yet purchased		30,579			30,212			26,253
Securities lent or sold under repurchase agreements		99,854			105,943			86,656
Securitization and structured entities’ liabilities		27,461			27,888			27,159
Current tax liabilities		56			88			55
Deferred tax liabilities		82			65			60
Other (Note 1)		33,885			38,201			38,607
		249,808			270,779			225,981
Subordinated Debt (Note 5)		8,513			7,344			6,995
Equity
Preferred shares and other equity instruments (Note 6)		5,348			5,348			5,348
Common shares (Note 6)		13,200			13,000			12,971
Contributed surplus		302			301			303
Retained earnings (Note 1)		29,902			29,426			28,725
Accumulated other comprehensive income		5,835			7,159			3,729
Total Equity		54,587			55,234			51,076
Total Liabilities and Equity	$	973,508		$	987,067		$	852,195

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

48 BMO Financial Group Third Quarter Report 2020

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, 2020			July 31, 2019			July 31, 2020			July 31, 2019
Preferred Shares and Other Equity Instruments (Note 6)
Balance at beginning of period	$	5,348		$	4,690		$	5,348		$	4,340
Issued during the period		-			658			-			1,008
Balance at End of Period		5,348			5,348			5,348			5,348
Common Shares (Note 6)
Balance at beginning of period		13,000			12,939			12,971			12,929
Issued under the Shareholder Dividend Reinvestment and Share Purchase Plan		214			-			214			-
Issued under the Stock Option Plan		1			19			30			49
Repurchased for cancellation or for treasury shares		(15	)		-			(15	)		(20	)
Balance at End of Period		13,200			12,958			13,200			12,958
Contributed Surplus
Balance at beginning of period		301			307			303			300
Stock option expense, net of options exercised		1			(3	)		(1	)		1
Other		-			(1	)		-			2
Balance at End of Period		302			303			302			303
Retained Earnings
Balance at beginning of period		29,426			27,405			28,725			25,850
Impact from adopting IFRS 16 (Note 1)		-			na			(59	)		na
Net income attributable to equity holders of the bank		1,232			1,557			3,513			4,564
Dividends on preferred shares and distributions payable on other equity instruments		(73	)		(59	)		(195	)		(159	)
Dividends on common shares		(682	)		(658	)		(2,038	)		(1,936	)
Share issue expense		-			(4	)		-			(8	)
Common shares repurchased for cancellation (Note 6)		-			-			-			(70	)
Net discount on sale of treasury shares		(1	)		-			(44	)		-
Balance at End of Period		29,902			28,241			29,902			28,241
Accumulated Other Comprehensive Income (Loss) on Fair Value through OCI Securities, net of taxes
Balance at beginning of period		250			(111	)		26			(315	)
Unrealized gains on fair value through OCI debt securities arising during the period		141			112			421			345
Reclassification to earnings of (gains) on fair value through OCI debt securities during the period		(18	)		(14	)		(74	)		(43	)
Balance at End of Period		373			(13	)		373			(13	)
Accumulated Other Comprehensive Income on Cash Flow Hedges, net of taxes
Balance at beginning of period		2,148			202			513			(1,074	)
Gains on derivatives designated as cash flow hedges arising during the period		83			290			1,673			1,480
Reclassification to earnings of (gains) losses on derivatives designated as cash flow hedges in the period		(37	)		36			8			122
Balance at End of Period		2,194			528			2,194			528
Accumulated Other Comprehensive Income on Translation of Net Foreign Operations, net of taxes
Balance at beginning of period		5,048			4,168			3,703			3,727
Unrealized gains (losses) on translation of net foreign operations		(1,180	)		(577	)		516			(46	)
Unrealized gains (losses) on hedges of net foreign operations		206			94			(145	)		4
Balance at End of Period		4,074			3,685			4,074			3,685
Accumulated Other Comprehensive (Loss) on Pension and Other Employee Future Benefit Plans, net of taxes
Balance at beginning of period		(438	)		19			(383	)		169
(Losses) on remeasurement of pension and other employee future benefit plans		(189	)		(233	)		(244	)		(383	)
Balance at End of Period		(627	)		(214	)		(627	)		(214	)
Accumulated Other Comprehensive (Loss) on Own Credit Risk on Financial Liabilities Designated at Fair Value, net of taxes
Balance at beginning of period		151			(224	)		(130	)		(205	)
Gains (losses) on remeasurement of own credit risk on financial liabilities designated at fair value		(330	)		31			(49	)		12
Balance at End of Period		(179	)		(193	)		(179	)		(193	)
Total Accumulated Other Comprehensive Income		5,835			3,793			5,835			3,793
Total Equity	$	54,587		$	50,643		$	54,587		$	50,643

  na – not applicable due to IFRS 16 adoption.

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

BMO Financial Group Third Quarter Report 2020 49

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, 2020			July 31, 2019			July 31, 2020			July 31, 2019
Cash Flows from Operating Activities
Net Income	$	1,232		$	1,557		$	3,513		$	4,564
Adjustments to determine net cash flows provided by (used in) operating activities
Provision on securities, other than trading		1			1			2			2
Net (gain) on securities, other than trading		(32	)		(91	)		(86	)		(183	)
Net (increase) decrease in trading securities		(7,319	)		5,290			(1,624	)		4,814
Provision for credit losses (Note 3)		1,054			306			2,521			619
Change in derivative instruments – (increase) decrease in derivative asset		5,863			(196	)		(14,158	)		5,348
– increase (decrease) in derivative liability		(6,918	)		350			15,342			(2,595	)
Amortization of premises and equipment		198			110			598			326
Amortization of other assets		48			56			152			163
Amortization of intangible assets		154			135			461			406
Net (increase) decrease in deferred income tax asset		(90	)		84			132			386
Net increase (decrease) in deferred income tax liability		16			5			(1	)		2
Net (increase) decrease in current income tax asset		90			11			(492	)		257
Net (decrease) in current income tax liability		(19	)		(6	)		(9	)		(17	)
Change in accrued interest – (increase) decrease in interest receivable		242			80			319			(117	)
– increase (decrease) in interest payable		14			131			(198	)		303
Changes in other items and accruals, net		(334	)		(1,934	)		(6,870	)		(2,232	)
Net increase in deposits		19,630			9,149			88,368			33,047
Net (increase) decrease in loans		14,938			(7,568	)		(19,327	)		(34,470	)
Net increase (decrease) in securities sold but not yet purchased		724			(4,445	)		4,081			(1,430	)
Net increase (decrease) in securities lent or sold under repurchase agreements		(3,645	)		3,772			11,616			23,561
Net (increase) decrease in securities borrowed or purchased under resale agreements		(1,979	)		2,528			(13,514	)		(22,086	)
Net increase (decrease) in securitization and structured entities’ liabilities		(101	)		18			191			483
Net Cash Provided by Operating Activities		23,767			9,343			71,017			11,151
Cash Flows from Financing Activities
Net increase (decrease) in liabilities of subsidiaries		(5,326	)		81			(8,113	)		(1,267	)
Proceeds from issuance of covered bonds		-			2,290			4,425			4,168
Redemption/buyback of covered bonds		(1,371	)		(1,511	)		(6,868	)		(3,765	)
Proceeds from issuance of subordinated debt (Note 5)		1,250			-			1,250			-
Proceeds from issuance of preferred shares and other equity instruments (Note 6)		-			658			-			1,008
Share issue expense		-			(4	)		-			(8	)
Net proceeds from issuance (repurchase) of common shares or treasury shares (Note 6)		(15	)		17			(48	)		43
Common shares repurchased for cancellation (Note 6)		-			-			-			(90	)
Cash dividends and distributions paid		(516	)		(687	)		(1,974	)		(2,035	)
Repayment of lease liabilities (1)		(82	)		-			(250	)		-
Net Cash Provided by (Used in) Financing Activities		(6,060	)		844			(11,578	)		(1,946	)
Cash Flows from Investing Activities
Net (increase) decrease in interest bearing deposits with banks		(950	)		508			(280	)		1,420
Purchases of securities, other than trading		(20,449	)		(16,754	)		(73,897	)		(43,019	)
Maturities of securities, other than trading		5,050			2,749			12,539			10,538
Proceeds from sales of securities, other than trading		5,223			7,710			30,556			20,033
Premises and equipment – net (purchases)		(74	)		(117	)		(273	)		(303	)
Purchased and developed software – net (purchases)		(125	)		(153	)		(490	)		(457	)
Acquisitions		-			-			(186	)		-
Net Cash (Used in) Investing Activities		(11,325	)		(6,057	)		(32,031	)		(11,788	)
Effect of Exchange Rate Changes on Cash and Cash Equivalents		(1,385	)		(1,031	)		379			(621	)
Net increase (decrease) in Cash and Cash Equivalents		4,997			3,099			27,787			(3,204	)
Cash and Cash Equivalents at Beginning of Period		71,593			35,839			48,803			42,142
Cash and Cash Equivalents at End of Period	$	76,590		$	38,938		$	76,590		$	38,938
Supplemental Disclosure of Cash Flow Information
Net cash provided by operating activities includes:
Interest paid in the period	$	1,974		$	3,382		$	7,905		$	9,648
Income taxes paid in the period	$	140		$	432		$	1,732		$	1,145
Interest received in the period	$	5,241		$	6,339		$	16,988		$	17,979
Dividends received in the period	$	466		$	431		$	1,289		$	1,274

 (1) Prior to adoption of IFRS 16, repayments of finance lease liabilities were included in “Net Cash Provided by Operating Activities“.

  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.

50 BMO Financial Group Third Quarter Report 2020

Notes to Consolidated Financial Statements

July 31, 2020 (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 at 129 rue Saint Jacques, Montreal, Quebec. Our executive offices are at 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, 2019, with the exception of the adoption of IFRS 16 Leases, IFRS Interpretations Committee Interpretation 23 Uncertainty Over Income Tax Treatments (“IFRIC 23”) and Amendments to IAS 39 Financial Instruments: Recognition and Measurement (“IAS 39”) and IFRS 7 Financial Instruments: Disclosures (“IFRS 7”), as a result of interest rate benchmark reform 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, 2019 as set out on pages 142 to 207 of our 2019 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 25, 2020.

Changes in Accounting Policy

Leases

Effective November 1, 2019, we adopted IFRS 16 Leases (“IFRS 16”), which provides guidance whereby lessees are required to recognize a liability for the present value of future lease payments and record a corresponding asset on the balance sheet for most leases. There are minimal changes to the accounting from the lessor’s perspective.

The main impact for the bank is recording real estate leases on the balance sheet. Previously most of our real estate leases were classified as operating leases, whereby we recorded the lease expense over the lease term with no asset or liability recorded on the balance sheet other than related leasehold improvements. On adoption, we elected to exclude intangibles from the scope of lease accounting.

We recalculated the right-of-use asset as if we had always applied IFRS 16 for a selection of leases and for the remaining leases, we set the right-of-use asset equal to the lease liability. We will continue to account for low dollar value leases as executory contracts with lease expense recorded over the lease term and no corresponding right-of-use asset or lease liability. In addition, we combined lease and non-lease components (for example maintenance and utilities that have fixed payments) in the calculation of right-of-use assets and lease liabilities when applicable.

On transition, we recognized the cumulative effect of adoption in opening retained earnings as at November 1, 2019 with no changes to prior periods. The impact to the Consolidated Balance Sheet as at November 1, 2019 was an increase in premises and equipment of $1,965 million, an increase in other liabilities of $2,024 million, and a decrease in retained earnings of $80 million ($59 million after tax).

The following table sets out a reconciliation of our operating lease commitments, as disclosed under IAS 17 Leases as at October 31, 2019, which were used to derive the lease liabilities as at November 1, 2019.

(Canadian $ in millions)	November 1, 2019
Operating lease commitment at October 31, 2019 as disclosed in our consolidated financial statements		3,800
Discounted using the incremental borrowing rate at November 1, 2019		(310	)
Finance lease liabilities recognized as at October 31, 2019		41
Recognition exemption for low-value asset leases		(13	)
Extension and termination options reasonably certain to be exercised		37
Executory costs not included in the lease liability		(166	)
Leases signed but not yet started		(1,222	)
Lease liabilities recognized at November 1, 2019		2,167

When measuring lease liabilities, we discounted lease payments using our incremental borrowing rate at November 1, 2019. The weighted-average rate applied was 2.52%.

When we enter into new arrangements as a lessee, a right-of-use asset is recognized equal to the lease liability, which is calculated based on the future lease payments discounted at our incremental borrowing rate over the lease term. The lease term is based on the non-cancellable period and includes any options to extend or terminate which we are reasonably certain to exercise.

The right-of-use asset is depreciated on a straight-line basis, based on the shorter of useful life of the underlying asset or the lease term, and is adjusted for impairment losses, if any.

The lease liability accretes interest which is recognized in interest expense, other liabilities, based on the effective interest method over the lease term. The lease liability is remeasured when decisions are made to exercise options under the lease arrangement or when the likelihood of exercising an option within the lease changes.

Amounts relating to leases of low value are expensed when incurred in non-interest expense, premises and equipment.

BMO Financial Group Third Quarter Report 2020 51

Uncertainty Over Income Tax Treatment

Effective November 1, 2019, we adopted IFRIC 23. The Interpretation clarifies the recognition and measurement requirements in IAS 12 Income Taxes when there is uncertainty over income tax treatments. The Interpretation had no impact on our financial results on adoption.

Interbank Offered Rate (“IBOR”) Reform

Effective November 1, 2019, we early adopted the IASB’s Phase 1 amendments to IAS 39 and IFRS 7, which provide hedge accounting relief from the uncertainty arising from IBOR reform during the period prior to replacement of IBORs. These amendments modify certain hedge accounting requirements, allowing us to assume the interest rate benchmark on which the cash flows of the hedged item and the hedging instrument are based are not altered as a result of IBOR reform, allowing hedge accounting to continue. They also provide an exception from the requirement to discontinue hedge accounting if a hedging relationship does not meet the effectiveness requirements as a result of IBOR reform.

Mandatory application of the amendments ends at the earlier of when the uncertainty regarding the timing and amount of interest rate benchmark-based cash flows is no longer present and discontinuation of the hedging relationship.

Under IBOR reform, certain benchmark rates may be subject to discontinuance, changes in methodology, increased volatility or decreased liquidity during the transition from IBORs to alternative rates. Banks will cease rate submissions for the calculation of the London Interbank Offered Rates after December 31, 2021.

In order to manage the transition from IBORs to alternative rates, our enterprise-wide IBOR Transition Office is evaluating potential changes to market infrastructures on our risk framework, models, systems and processes, and reviewing legal documents to ensure the bank is prepared prior to the cessation of IBORs. We will apply judgment with respect to the need for new or revised hedging relationships; however, given market uncertainty, the assessment of the impact on the bank’s hedging relationships and its mitigation plans are in the early stages. The notional amount of the derivatives likely subject to IBOR reform designated as hedging instruments that mature after December 31, 2021 was $85,727 million of USD LIBOR and $1,560 million of other potentially impacted IBORs as at November 1, 2019.

Future changes in IFRS

Insurance Contracts

In June 2020, the IASB issued amendments to IFRS 17 Insurance Contracts (“IFRS 17”), which included a deferral of the effective date, resulting in a new adoption date for the bank of November 1, 2023 instead of November 1, 2022. The amendments also simplify some requirements, such as excluding certain credit cards from the scope of IFRS 17 and providing a policy choice to exclude certain loan contracts from IFRS 17, allowing us to continue accounting for them as we do today. We continue to assess the impact of the standard on our future financial results.

Use of Estimates and Judgments

The preparation of the consolidated financial statements requires management to use estimates and assumptions that affect the carrying amounts of certain assets and liabilities, certain amounts reported in net income and other related disclosures. The most significant assets and liabilities for which we must make estimates and judgments include the allowance for credit losses; financial instruments measured at fair value; pension and other employee future benefits; impairment of securities; income taxes and deferred tax assets; goodwill and intangible assets; insurance-related liabilities; provisions; and transfer of financial assets and consolidation of structured entities. If actual results were to differ from the estimates, the impact would be recorded in future periods.

The full extent of the impact that COVID-19, including government and/or regulatory responses to the outbreak, will have on the Canadian and US economies and the bank’s business remains uncertain and difficult to predict at this time. By their very nature, the judgments and estimates we make for the purposes of preparing our financial statements relate to matters that are inherently uncertain. However, we have detailed policies and internal controls that are intended to ensure these judgments and estimates are well controlled, independently reviewed, and our policies are consistently applied from period to period. We believe that our estimates of the value of our assets and liabilities are appropriate as at July 31, 2020.

Allowance for Credit Losses

As detailed further in Note 1 of our annual consolidated financial statements for the year ended October 31, 2019 on page 144 of the Annual Report, the allowance for credit losses (“ACL”) consists of allowances on impaired loans, which represent estimated losses related to impaired loans in the portfolio provided for but not yet written off, and allowances on performing loans, which is our best estimate of impairment in the existing portfolio for loans that have not yet been individually identified as impaired.

The expected credit loss model requires the recognition of credit losses generally based on 12 months of expected losses for performing loans and the recognition of lifetime losses on performing loans that have experienced a significant increase in credit risk since origination.

The determination of a significant increase in credit risk takes into account many different factors and varies by product and risk segment. The main factors considered in making this determination are relative changes in probability of default since origination, and certain other criteria, such as 30-day past due and watchlist status. We may apply experienced credit judgment to reflect factors not captured in the ECL models, based on the results produced by the ECL models as we deem necessary. In cases where borrowers have opted to participate in payment deferral programs we offered as a result of the COVID-19 pandemic, deferred payments are not considered to be past due and do not on their own indicate a significant increase in credit risk.

The judgments we apply in determining the ACL include changes in circumstances that may cause future assessments of credit risk to be materially different from current assessments, which could require an increase or decrease in the allowance for credit losses.

Additional information regarding the allowance for credit losses is included in Note 3.

52 BMO Financial Group Third Quarter Report 2020

Financial Instruments Measured at Fair Value

Our fair value measurement techniques have not changed from those outlined in Note 17 of our annual consolidated financial statements for the year ended October 31, 2019 on pages 180 to 181 of the Annual Report. Additional information on fair value of financial instruments is included in Note 7.

Income Taxes and Deferred Tax Assets

Deferred tax assets are recognized only when it is probable that sufficient taxable profit will be available in future periods against which deductible temporary differences or unused taxes losses and tax credits may be realized. On the evidence available, including management projections of income, we believe that it is probable there will be sufficient taxable income generated by our business operations to recognize these deferred tax assets.

Additional information on income taxes is included in Note 11.

Goodwill and Intangible Assets

As a result of the current economic conditions due to the COVID-19 pandemic and the impact on our business performance, we reassessed the recoverable value of goodwill for certain cash-generating units (“CGUs”) by updating key assumptions, including the estimated cost of capital, discount rates as well as the actual and future business performance of the CGUs. Indefinite-life intangible assets were also reviewed for impairment. We concluded that the fair value less costs to sell continue to exceed the carrying value of these CGUs and indefinite-life intangible assets and therefore no impairment write-downs were recorded in the three and nine-months ended July 31, 2020.

Provisions

A provision, including for restructuring, is recognized if, as a result of a past event, the bank has a present legal or constructive obligation that can be estimated reliably, and it is probable that an outflow of economic benefits will be required to settle the obligation. Provisions are recorded at the best estimate of the amounts required to settle the obligation as at the balance sheet date, taking into account the risks and uncertainties associated with the obligation. Management and external experts are involved in estimating any provision, as necessary. The actual costs of settling some obligations may be substantially higher or lower than the amounts of the provisions.

Additional information on legal proceedings is included in Note 13.

Transfer of Assets and Consolidation of Structured Entities

We enter into transactions in which we transfer assets to a structured entity or third party to obtain alternate sources of funding. 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. Where we continue to be exposed to substantially all of the repayment, interest rate and/or credit risk associated with the securitized loans, they do not qualify for derecognition. We continue to recognize the loans and the related cash proceeds as secured financing in our Consolidated Balance Sheet.

Further details of our assessment of certain government offered programs launched in response to the impact of COVID-19 against the derecognition criteria is discussed in Note 3.

BMO Financial Group Third Quarter Report 2020 53

Note 2: Securities

Classification of Securities

The bank’s fair value through profit or loss (“FVTPL”) securities of $14,053 million ($13,704 million as at October 31, 2019) are comprised of $2,361 million mandatorily measured at fair value and $11,692 million investment securities held by insurance subsidiaries designated at fair value ($2,899 million and $10,805 million, respectively, as at October 31, 2019).

Our fair value through other comprehensive income (“FVOCI”) securities totalling $78,493 million ($64,515 million as at October 31, 2019), are net of an allowance for credit losses of $4 million ($2 million as at October 31, 2019).

Amortized cost securities totalling $45,229 million ($24,472 million as at October 31, 2019), are net of an allowance for credit losses of $1 million ($1 million as at October 31, 2019).

Unrealized Gains and Losses on FVOCI Securities

The following table summarizes the unrealized gains and losses:

(Canadian $ in millions)	July 31, 2020								October 31, 2019
	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		27,329		253		–		27,582		11,876		72		4		11,944
Canadian provincial and municipal governments		4,585		140		–		4,725		5,907		106		1		6,012
U.S. federal government		17,646		1,039		6		18,679		15,363		617		5		15,975
U.S. states, municipalities and agencies		5,196		169		2		5,363		4,091		74		4		4,161
Other governments		6,949		205		4		7,150		7,179		158		2		7,335
National Housing Act (“NHA”) mortgage-backed securities (“MBS”)		1,614		51		2		1,663		1,953		18		1		1,970
U.S. agency MBS and collateralized mortgage obligations (“CMO”)		9,543		336		4		9,875		11,966		106		42		12,030
Corporate debt		3,241		129		1		3,369		4,899		110		2		5,007
Corporate equity		85		2		–		87		79		2		-		81
Total		76,188		2,324		19		78,493		63,313		1,263		61		64,515

  Unrealized gains (losses) may be offset by related (losses) gains on hedge contracts.

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, 2020		July 31, 2019		July 31, 2020		July 31, 2019
FVOCI - Debt		185		403		823		1,202
Amortized cost		144		75		455		163
Total		329		478		1,278		1,365

54 BMO Financial Group Third Quarter Report 2020

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, FVOCI or FVTPL as at July 31, 2020 and October 31, 2019. Stage 1 represents those performing loans carried with up to 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, 2020								October 31, 2019
	Stage 1		Stage 2		Stage 3		Total		Stage 1		Stage 2		Stage 3		Total
Loans: Residential mortgages
Exceptionally low		1		-		-		1		-		-		-		-
Very low		79,472		278		-		79,750		79,011		242		-		79,253
Low		22,654		2,765		-		25,419		20,853		2,821		-		23,674
Medium		11,594		6,560		-		18,154		13,651		4,578		-		18,229
High		91		362		-		453		124		397		-		521
Not rated		1,082		192		-		1,274		1,531		118		-		1,649
Impaired		-		-		430		430		-		-		414		414
Allowance for credit losses		65		58		17		140		15		32		17		64
Carrying amount		114,829		10,099		413		125,341		115,155		8,124		397		123,676
Loans: Consumer instalment and other personal
Exceptionally low		1,584		33		-		1,617		21,023		25		-		21,048
Very low		25,827		43		-		25,870		16,491		194		-		16,685
Low		20,281		873		-		21,154		9,894		346		-		10,240
Medium		9,921		4,856		-		14,777		10,510		4,264		-		14,774
High		367		1,493		-		1,860		397		1,423		-		1,820
Not rated		3,349		108		-		3,457		2,594		107		-		2,701
Impaired		-		-		433		433		-		-		468		468
Allowance for credit losses		115		420		127		662		82		318		136		536
Carrying amount		61,214		6,986		306		68,506		60,827		6,041		332		67,200
Loans: Credit cards
Exceptionally low		2,155		-		-		2,155		2,418		-		-		2,418
Very low		1,076		16		-		1,092		1,214		16		-		1,230
Low		904		164		-		1,068		970		158		-		1,128
Medium		1,700		965		-		2,665		2,020		876		-		2,896
High		49		388		-		437		140		440		-		580
Not rated		530		-		-		530		606		1		-		607
Impaired		-		-		-		-		-		-		-		-
Allowance for credit losses		60		270		-		330		43		193		-		236
Carrying amount		6,354		1,263		-		7,617		7,325		1,298		-		8,623
Loans: Business and government (1)
Acceptable
Investment grade		124,728		6,757		-		131,485		134,587		1,028		-		135,615
Sub-investment grade		93,201		27,697		-		120,898		96,731		11,553		-		108,284
Watchlist		-		8,082		-		8,082		-		5,556		-		5,556
Impaired		-		-		3,550		3,550		-		-		1,747		1,747
Allowance for credit losses		573		971		575		2,119		263		441		310		1,014
Carrying amount		217,356		41,565		2,975		261,896		231,055		17,696		1,437		250,188
Commitments and financial guarantee contracts
Acceptable
Investment grade		132,838		1,491		-		134,329		134,920		884		-		135,804
Sub-investment grade		42,765		17,614		-		60,379		45,178		6,435		-		51,613
Watchlist		-		3,419		-		3,419		-		2,133		-		2,133
Impaired		-		-		1,164		1,164		-		-		324		324
Allowance for credit losses		212		232		12		456		119		103		22		244
Carrying amount (2)		175,391		22,292		1,152		198,835		179,979		9,349		302		189,630

 (1) Includes customers’ liability under acceptances.

 (2) Represents the total contractual amounts of undrawn credit facilities and other off-balance sheet exposures, excluding personal lines of credit and credit cards that are unconditionally cancellable at our discretion.

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 $3,707 million at July 31, 2020 ($2,094 million at October 31, 2019) of which $3,251 million ($1,850 million at October 31, 2019) was recorded in loans and $456 million ($244 million at October 31, 2019) was recorded in other liabilities in our Consolidated Balance Sheet.

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

BMO Financial Group Third Quarter Report 2020 55

The following table shows the continuity in the loss allowance by product type. Transfers represent the amount of expected credit loss (“ECL”) that moved between stages during the period, for example, moving from a 12-month (Stage 1) to lifetime (Stage 2) ECL measurement basis. Net remeasurements represent the ECL impact due to stage transfers, changes in economic forecasts and credit quality.

(Canadian $ in millions)
For the three months ended	July 31, 2020												July 31, 2019
	Stage 1			Stage 2			Stage 3			Total			Stage 1			Stage 2			Stage 3			Total
Loans: Residential mortgages
Balance as at beginning of period		29			37			27			93			16			37			44			97
Transfer to Stage 1		8			(7	)		(1	)		-			7			(6	)		(1	)		-
Transfer to Stage 2		(1	)		4			(3	)		-			(1	)		2			(1	)		-
Transfer to Stage 3		-			(1	)		1			-			-			(3	)		3			-
Net remeasurement of loss allowance		27			30			10			67			(9	)		6			-			(3	)
Loan originations		4			-			-			4			2			-			-			2
Derecognitions and maturities		-			(2	)		-			(2	)		(1	)		(1	)		-			(2	)
Model changes		(1	)		(3	)		-			(4	)		-			-			-			-
Total Provision for Credit Losses (“PCL”) (1)		37			21			7			65			(2	)		(2	)		1			(3	)
Write-offs (2)		-			-			(3	)		(3	)		-			-			(6	)		(6	)
Recoveries of previous write-offs		-			-			2			2			-			-			7			7
Foreign exchange and other		(1	)		-			(6	)		(7	)		-			-			(8	)		(8	)
Balance as at end of period		65			58			27			150			14			35			38			87
Loans: Consumer instalment and other personal
Balance as at beginning of period		116			407			125			648			86			324			128			538
Transfer to Stage 1		59			(57	)		(2	)		-			44			(42	)		(2	)		-
Transfer to Stage 2		(10	)		21			(11	)		-			(4	)		18			(14	)		-
Transfer to Stage 3		(1	)		(27	)		28			-			(1	)		(32	)		33			-
Net remeasurement of loss allowance		(50	)		103			56			109			(40	)		66			52			78
Loan originations		9			-			-			9			12			-			-			12
Derecognitions and maturities		(4	)		(9	)		-			(13	)		(4	)		(13	)		-			(17	)
Model changes		11			8			-			19			-			-			-			-
Total PCL (1)		14			39			71			124			7			(3	)		69			73
Write-offs (2)		-			-			(81	)		(81	)		-			-			(80	)		(80	)
Recoveries of previous write-offs		-			-			22			22			-			-			25			25
Foreign exchange and other		(3	)		(3	)		(10	)		(16	)		(1	)		(1	)		(7	)		(9	)
Balance as at end of period		127			443			127			697			92			320			135			547
Loans: Credit cards
Balance as at beginning of period		115			319			-			434			77			231			-			308
Transfer to Stage 1		50			(50	)		-			-			28			(28	)		-			-
Transfer to Stage 2		(9	)		9			-			-			(5	)		5			-			-
Transfer to Stage 3		-			(48	)		48			-			(1	)		(46	)		47			-
Net remeasurement of loss allowance		(44	)		105			20			81			(24	)		79			24			79
Loan originations		5			-			-			5			5			-			-			5
Derecognitions and maturities		(1	)		(7	)		-			(8	)		(1	)		(6	)		-			(7	)
Model changes		(1	)		(10	)		-			(11	)		-			-			-			-
Total PCL (1)		-			(1	)		68			67			2			4			71			77
Write-offs (2)		-			-			(80	)		(80	)		-			-			(91	)		(91	)
Recoveries of previous write-offs		-			-			19			19			-			-			20			20
Foreign exchange and other		(3	)		(1	)		(7	)		(11	)		-			1			-			1
Balance as at end of period		112			317			-			429			79			236			-			315
Loans: Business and government
Balance as at beginning of period		580			795			586			1,961			336			423			260			1,019
Transfer to Stage 1		45			(45	)		-			-			31			(30	)		(1	)		-
Transfer to Stage 2		(65	)		66			(1	)		-			(16	)		17			(1	)		-
Transfer to Stage 3		(4	)		(163	)		167			-			(1	)		(14	)		15			-
Net remeasurement of loss allowance		145			510			134			789			(23	)		91			89			157
Loan originations		53			-			-			53			53			-			-			53
Derecognitions and maturities		(21	)		(36	)		-			(57	)		(28	)		(22	)		-			(50	)
Model changes		(7	)		(4	)		-			(11	)		-			-			-			-
Total PCL (1)		146			328			300			774			16			42			102			160
Write-offs (2)		-			-			(300	)		(300	)		-			-			(52	)		(52	)
Recoveries of previous write-offs		-			-			37			37			-			-			2			2
Foreign exchange and other		(5	)		10			(46	)		(41	)		(1	)		(4	)		(15	)		(20	)
Balance as at end of period		721			1,133			577			2,431			351			461			297			1,109
Total as at end of period		1,025			1,951			731			3,707			536			1,052			470			2,058
Comprised of: Loans		813			1,719			719			3,251			409			946			447			1,802
Other credit instruments (3)		212			232			12			456			127			106			23			256

(1) Excludes PCL on other assets of $24 million for the three months ended July 31, 2020 ($(1) million for the three months ended July 31, 2019).

(2) Generally, we continue to seek recovery on amounts that were written off during the year, unless the loan is sold, we no longer have the right to collect or we have exhausted all reasonable efforts to collect.

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

56 BMO Financial Group Third Quarter Report 2020

The following table shows the continuity in the loss allowance by each product type:

(Canadian $ in millions)
For the nine months ended	July 31, 2020												July 31, 2019
	Stage 1			Stage 2			Stage 3			Total			Stage 1			Stage 2			Stage 3			Total
Loans: Residential mortgages
Balance as at beginning of period		15			33			38			86			20			38			44			102
Transfer to Stage 1		19			(17	)		(2	)		-			21			(19	)		(2	)		-
Transfer to Stage 2		(2	)		7			(5	)		-			(2	)		5			(3	)		-
Transfer to Stage 3		-			(4	)		4			-			-			(7	)		7			-
Net remeasurement of loss allowance		29			47			17			93			(29	)		21			7			(1	)
Loan originations		8			-			-			8			5			-			-			5
Derecognitions and maturities		(1	)		(4	)		-			(5	)		(1	)		(3	)		-			(4	)
Model changes		(3	)		(5	)		-			(8	)		-			-			-			-
Total PCL (1)		50			24			14			88			(6	)		(3	)		9			-
Write-offs (2)		-			-			(9	)		(9	)		-			-			(13	)		(13	)
Recoveries of previous write-offs		-			-			6			6			-			-			12			12
Foreign exchange and other		-			1			(22	)		(21	)		-			-			(14	)		(14	)
Balance as at end of period		65			58			27			150			14			35			38			87
Loans: Consumer instalment and other personal
Balance as at beginning of period		89			333			136			558			90			326			144			560
Transfer to Stage 1		138			(131	)		(7	)		-			131			(122	)		(9	)		-
Transfer to Stage 2		(20	)		66			(46	)		-			(13	)		62			(49	)		-
Transfer to Stage 3		(3	)		(79	)		82			-			(4	)		(84	)		88			-
Net remeasurement of loss allowance		(112	)		247			162			297			(134	)		168			112			146
Loan originations		32			-			-			32			35			-			-			35
Derecognitions and maturities		(12	)		(27	)		-			(39	)		(12	)		(30	)		-			(42	)
Model changes		16			33			-			49			-			-			-			-
Total PCL (1)		39			109			191			339			3			(6	)		142			139
Write-offs (2)		-			-			(248	)		(248	)		-			-			(233	)		(233	)
Recoveries of previous write-offs		-			-			64			64			-			-			97			97
Foreign exchange and other		(1	)		1			(16	)		(16	)		(1	)		-			(15	)		(16	)
Balance as at end of period		127			443			127			697			92			320			135			547
Loans: Credit cards
Balance as at beginning of period		80			225			-			305			74			219			-			293
Transfer to Stage 1		107			(107	)		-			-			78			(78	)		-			-
Transfer to Stage 2		(25	)		25			-			-			(16	)		16			-			-
Transfer to Stage 3		(1	)		(129	)		130			-			(1	)		(125	)		126			-
Net remeasurement of loss allowance		(57	)		332			68			343			(68	)		221			58			211
Loan originations		13			-			-			13			15			-			-			15
Derecognitions and maturities		(3	)		(19	)		-			(22	)		(3	)		(18	)		-			(21	)
Model changes		(1	)		(10	)		-			(11	)		-			-			-			-
Total PCL (1)		33			92			198			323			5			16			184			205
Write-offs (2)		-			-			(257	)		(257	)		-			-			(250	)		(250	)
Recoveries of previous write-offs		-			-			66			66			-			-			66			66
Foreign exchange and other		(1	)		-			(7	)		(8	)		-			1			-			1
Balance as at end of period		112			317			-			429			79			236			-			315
Loans: Business and government
Balance as at beginning of period		338			496			311			1,145			298			408			209			915
Transfer to Stage 1		109			(102	)		(7	)		-			139			(135	)		(4	)		-
Transfer to Stage 2		(118	)		121			(3	)		-			(41	)		53			(12	)		-
Transfer to Stage 3		(6	)		(226	)		232			-			(1	)		(41	)		42			-
Net remeasurement of loss allowance		321			883			558			1,762			(141	)		230			159			248
Loan originations		153			-			-			153			163			-			-			163
Derecognitions and maturities		(63	)		(86	)		-			(149	)		(75	)		(57	)		-			(132	)
Model changes		(30	)		8			-			(22	)		-			-			-			-
Total PCL (1)		366			598			780			1,744			44			50			185			279
Write-offs (2)		-			-			(516	)		(516	)		-			-			(123	)		(123	)
Recoveries of previous write-offs		-			-			60			60			-			-			61			61
Foreign exchange and other		17			39			(58	)		(2	)		9			3			(35	)		(23	)
Balance as at end of period		721			1,133			577			2,431			351			461			297			1,109
Total as at end of period		1,025			1,951			731			3,707			536			1,052			470			2,058
Comprised of: Loans		813			1,719			719			3,251			409			946			447			1,802
Other credit instruments (3)		212			232			12			456			127			106			23			256

(1) Excludes PCL on other assets of $27 million for the nine months ended July 31, 2020 ($(4) million for the nine months ended July 31, 2019).

(2) Generally, we continue to seek recovery on amounts that were written off during the year, unless the loan is sold, we no longer have the right to collect or we have exhausted all reasonable efforts to collect.

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

BMO Financial Group Third Quarter Report 2020 57

Loans and allowance for credit losses by geographic region as at July 31, 2020 and October 31, 2019 are as follows:

(Canadian $ in millions)	July 31, 2020								October 31, 2019
	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		270,348		345		1,335		268,668		258,842		207		740		257,895
United States		166,278		374		1,164		164,740		158,454		256		630		157,568
Other countries		11,953		-		33		11,920		10,648		-		17		10,631
Total		448,579		719		2,532		445,328		427,944		463		1,387		426,094

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

(2) Excludes allowance for credit losses on impaired loans of $12 million for other credit instruments, which is included in other liabilities ($22 million as at October 31, 2019).

(3) Excludes allowance for credit losses on performing loans of $444 million for other credit instruments, which is included in other liabilities ($222 million as at October 31, 2019).

Impaired (Stage 3) loans, including the related allowances, as at July 31, 2020 and October 31, 2019 are as follows:

(Canadian $ in millions)					July 31, 2020						October 31, 2019
	Gross impaired amount (3)		Allowance for credit losses on impaired loans (4)		Net impaired amount (3)		Gross impaired amount (3)		Allowance for credit losses on impaired loans (4)		Net impaired amount (3)
Residential mortgages		430		17		413		414		17		397
Consumer instalment and other personal		433		127		306		468		136		332
Business and government (1)		3,550		575		2,975		1,747		310		1,437
Total		4,413		719		3,694		2,629		463		2,166
By geographic region (2):
Canada		1,469		345		1,124		914		207		707
United States		2,885		374		2,511		1,715		256		1,459
Other countries		59		-		59		-		-		-
Total		4,413		719		3,694		2,629		463		2,166

(1) Includes customers’ liability under acceptances.

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

(3) Gross impaired loans and net impaired loans exclude purchased credit impaired loans.

(4) Excludes allowance for credit losses on impaired loans of $12 million for other credit instruments, which is included in other liabilities ($22 million as at October 31, 2019).

Loans Past Due Not Impaired

Loans that are past due but not classified as impaired are loans where our customers have failed to make payments when contractually due but for which we expect the full amount of principal and interest payments to be collected, or loans which are held at fair value. The following table presents loans that are past due but not classified as impaired as at July 31, 2020 and October 31, 2019. In cases where borrowers have opted to participate in payment deferral programs we offered as a result of the COVID-19 pandemic, deferred payments are not considered past due and do not on their own indicate a significant increase in credit risk. As a result, they have not been included in the table below.

(Canadian $ in millions)					July 31, 2020								October 31, 2019
	1 to 29 days		30 to 89 days		90 days or more		Total		1 to 29 days		30 to 89 days		90 days or more		Total
Residential mortgages		598		335		28		961		806		465		16		1,287
Credit card, consumer instalment and other personal		1,261		328		81		1,670		1,590		426		87		2,103
Business and government		387		293		32		712		351		207		59		617
Total		2,246		956		141		3,343		2,747		1,098		162		4,007

  Fully secured loans with amounts past due between 90 and 180 days that we have not classified as impaired totalled $43 million and $54 million as at July 31, 2020 and October 31, 2019, respectively.

ECL Sensitivity and Key Economic Variables

The expected credit loss model requires the recognition of credit losses generally based on 12 months of expected losses for performing loans and the recognition of lifetime losses on performing loans that have experienced a significant increase in credit risk since origination.

The allowance for performing loans is sensitive to changes in both economic forecasts and the probability-weight assigned to each forecast scenario. We incorporate multiple economic forecasts and those used are representative of our view of future economic conditions and considering external data, developed internally by our Economics group. Many of the variables used in our forecasts have a high degree of interdependency, and as such there is no single factor to which loan impairment allowances as a whole are sensitive. We apply experienced credit judgment to reflect factors not captured in the ECL models as we deem necessary. In Q3 2020, we have applied experienced credit judgment to reflect the impact of the extraordinary and highly uncertain environment on credit conditions and the economy.

As at July 31, 2020, our base case economic forecast depicts a contracting Canadian economy, with real GDP falling in 2020 as a result of a sharp decline in the first half of the year, as a result of the COVID-19 pandemic. This is in contrast to our base case economic forecast as at October 31, 2019 which depicted moderate economic growth in both Canada and the U.S. over the projection period. In addition, the outlook for the economy and labour markets is moderately weaker compared to the second quarter of 2020. If we assume a 100% base case economic forecast and include the impact of loan migration by restaging, with other assumptions held constant, including the application of experienced credit judgment, the allowance on performing loans would be approximately $2,725 million as at July 31, 2020 ($1,325 million as at October 31, 2019), compared to the reported allowance for performing loans of $2,976 million ($1,609 million as at October 31, 2019).

As at July 31, 2020, our adverse case economic forecast also depicts a contracting Canadian economy, with real GDP declining in 2020, with an increase in 2021. In our adverse case scenario, the dislocations caused by the pandemic are more significant and persist for a longer period of time compared with our base case scenario. This is in contrast to the adverse scenario forecast as at October 31, 2019 which depicted a typical recession, with the economy contracting in the first year followed by a steady recovery through the end of the projection period. If we assume a 100% adverse economic forecast and include the impact of loan migration by restaging, with other assumptions held constant, including the application of

58 BMO Financial Group Third Quarter Report 2020

experienced credit judgment, the allowance on performing loans would be approximately $3,550 million as at July 31, 2020 ($2,800 million as at October 31, 2019), compared to the reported allowance for performing loans of $2,976 million ($1,609 million as at October 31, 2019).

The following table shows the key economic variables we use to estimate our allowance on performing loans during the forecast period. This table is typically provided on an annual basis. However, given the significant level of change in the forward-looking information since the end of 2019, the disclosures have been provided as an update to the bank’s Annual Report for the year ended October 31, 2019. The values shown represent the national average values for calendar 2020 and calendar 2021. The base case scenario reflects our view of the most probable outcome. While the values disclosed below are national variables, we use regional variables in our underlying models where considered appropriate and consider factors impacting particular industries.

	Benign scenario								Base scenario								Adverse scenario (1)
	2020				2021				2020				2021				2020				2021
All figures are average annual values	July 31, 2020		October 31, 2019		July 31, 2020		October 31, 2019		July 31, 2020		October 31, 2019		July 31, 2020		October 31, 2019		July 31, 2020		October 31, 2019		July 31, 2020		October 31, 2019
Real gross domestic product (2)
Canada		(4.6)%		2.9%		8.9%		2.5%		(6.0)%		1.7%		6.0%		1.6%		(7.6)%		(2.3)%		3.7%		0.5%
United States		(4.1)%		2.4%		7.8%		2.4%		(5.5)%		1.8%		5.0%		1.9%		(7.1)%		(2.0)%		2.5%		0.6%
Corporate BBB 10-year spread
Canada		2.1%		2.0%		1.9%		2.1%		2.4%		2.3%		2.3%		2.3%		2.8%		4.5%		3.1%		4.1%
United States		2.2%		1.8%		1.9%		2.0%		2.5%		2.3%		2.4%		2.4%		3.0%		4.1%		3.2%		3.6%
Unemployment rates
Canada		8.5%		5.1%		6.5%		5.0%		9.5%		5.7%		8.0%		5.9%		10.9%		8.5%		10.0%		9.0%
United States		7.5%		3.3%		5.4%		3.2%		8.9%		3.7%		7.0%		3.8%		10.3%		6.1%		8.9%		6.8%
Housing Price Index (“HPI”) (2)
Canada (3)		5.3%		3.7%		5.4%		3.7%		3.5%		2.0%		0.0%		2.5%		0.8%		(12.3)%		(7.5)%		(4.7)%
United States (4)		2.4%		4.4%		4.6%		4.2%		1.0%		3.0%		1.6%		2.7%		(0.4)%		(5.7)%		(1.9)%		(2.2)%

 (1) In Q4 2019, the adverse scenario was reflective of a typical recession that extends for four quarters. However, beginning Q2 2020, the adverse scenario used is reflective of a more adverse outcome compared with our base case forecast.

 (2) Real gross domestic product and housing price index are year-over-year growth rates.

 (3) In Canada, we use the HPI Benchmark Composite.

 (4) In the United States, we use the National Case-Shiller House Price Index.

The ECL approach requires the recognition of credit losses generally based on 12 months of expected losses for performing loans (Stage 1) and the recognition of lifetime expected losses for performing loans that have experienced a significant increase in credit risk since origination (Stage 2). Under our current probability-weighted scenarios and based on the current risk profile of our loan exposures, if all our performing loans were in Stage 1, our allowance for performing loans would be approximately $2,300 million ($1,050 million as at October 31, 2019), compared with the reported allowance for performing loans of $2,976 million ($1,609 million as at October 31, 2019).

Transfer of Assets

In the normal course, we sell Canadian mortgage loans to third-party Canadian securitization programs. Beginning in the second quarter, we participated in the Insured Mortgage Purchase Program (“IMPP”), launched by the Government of Canada as part of their response to COVID-19.

Under the IMPP, we assessed whether substantially all of the risks and rewards of the loans have been transferred, in order to determine if the mortgages qualify for derecognition. Since we continue to be exposed to substantially all of the risks and rewards of ownership associated with these securitized mortgages, they do not qualify for derecognition. We continue to recognize the loans and recognize the related cash proceeds as secured financing in our Consolidated Balance Sheet.

The government also launched the Canada Emergency Business Account (“CEBA”) Program in the second quarter, where we issue loans that are funded by the government. We determined these loans qualify for derecognition as the risks and rewards were transferred to the government, therefore we do not recognize these loans on our Consolidated Balance Sheet.

Note 4: Risk Management

We have an enterprise-wide approach to the identification, measurement, monitoring and control of risks faced across our organization. The key risks related to our financial instruments are classified as credit and counterparty, market, and liquidity and funding risk. Our risk management policies and processes have not changed significantly from those outlined in the Enterprise-Wide Risk Management sections on pages 68 to 106 of the bank’s Annual Report for the year ended October 31, 2019. However, the COVID-19 pandemic has resulted in an increase in certain risks outlined in the Risk Management section of our interim Management’s Discussion and Analysis. We have provided an update on each of the key risks below.

Credit and Counterparty Risk

Credit and counterparty risk is the potential for loss due to the failure of a borrower, endorser, guarantor or counterparty to repay a loan or honour another predetermined financial obligation. Credit risk arises predominantly with respect to loans, over-the-counter and centrally cleared derivatives and other credit instruments. This is the most significant measurable risk that we face. Updated information on credit risk related to loans is included in Note 3.

BMO Financial Group Third Quarter Report 2020 59

Market Risk

Market risk is the potential for adverse changes in the value of our assets and liabilities resulting from changes in market variables such as interest rates, foreign exchange rates, equity prices, dividend policies and commodity prices and their implied volatilities, and credit spreads, and includes the risk of credit migration and default in our trading book. We incur market risk in our trading and underwriting activities and in the management of structural market risk in our banking and insurance activities. Updated market risk measures are included on page 36 of our interim Management’s Discussion and Analysis.

Liquidity and Funding Risk

Liquidity and funding risk is the potential for loss if we are unable to meet our financial commitments in a timely manner at reasonable prices as they become 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 a safe and sound enterprise, depositor confidence and earnings stability. Updated contractual maturities of assets, liabilities and off-balance sheet commitments, a tool used to manage liquidity and funding risk, are included on pages 43 and 44 of our interim Management’s Discussion and Analysis.

Note 5: 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, 2020		October 31, 2019		July 31, 2020		October 31, 2019		July 31, 2020		October 31, 2019		July 31, 2020		October 31, 2019		July 31, 2020		October 31, 2019
Deposits by:
Banks (1) (6)		3,245		1,996		1,773		1,530		1,240		1,017		35,641		19,273		41,899		23,816
Business and government		45,320		29,083		41,901		33,853		115,048		85,022		195,436		195,199		397,705		343,157
Individuals		4,213		3,361		28,729		23,084		107,521		94,304		80,533		80,421		220,996		201,170
Total (2) (3)		52,778		34,440		72,403		58,467		223,809		180,343		311,610		294,893		660,600		568,143
Booked in:
Canada		39,943		27,338		62,427		49,911		107,555		90,630		201,878		181,835		411,803		349,714
United States		11,254		6,043		9,935		8,531		114,926		88,604		77,713		86,368		213,828		189,546
Other countries		1,581		1,059		41		25		1,328		1,109		32,019		26,690		34,969		28,883
Total		52,778		34,440		72,403		58,467		223,809		180,343		311,610		294,893		660,600		568,143

 (1) Includes regulated and central banks.

 (2) Includes structured notes designated at fair value through profit or loss (Note 7).

 (3) As at July 31, 2020 and October 31, 2019, total deposits payable on a fixed date included $40,757 million and $25,438 million, respectively, of federal funds purchased and commercial paper issued and other deposit liabilities. Included in deposits as at July 31, 2020 and October 31, 2019 are $318,088 million and $279,860 million, respectively, of deposits denominated in U.S. dollars, and $38,861 million and $36,680 million, respectively, of deposits denominated in other foreign currencies.

 (4) Includes $276,218 million of deposits, each greater than one hundred thousand dollars, of which $173,167 million were booked in Canada, $71,037 million were booked in the United States and $32,014 million were booked in other countries ($258,862 million, $152,499 million, $79,682 million and $26,681 million, respectively, as at October 31, 2019). Of the $173,167 million of deposits booked in Canada, $27,729 million mature in less than three months, $11,351 million mature in three to six months, $41,220 million mature in six to twelve months and $92,867 million mature after twelve months ($152,499 million, $26,234 million, $8,400 million, $31,155 million and $86,710 million, respectively, as at October 31, 2019). Certain comparative figures have been reclassified to conform with the current period’s presentation.

 (5) Includes $24,990 million of senior unsecured debt as at July 31, 2020 subject to the Bank Recapitalization (Bail-In) regime ($16,248 million as at October 31, 2019). 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.

 (6) Includes $12,741 million of deposits with the Bank of Canada, where we have used our own bearer deposit notes as collateral under its term repo facility ($nil as at October 31, 2019).

Subordinated Debt

On June 17, 2020, we issued $1,250 million of 2.077% unsecured subordinated notes under our Canadian Medium-Term Note Program. The issue, Series J Medium-Term Notes Second Tranche, is due June 17, 2030. The notes reset to a floating rate on June 17, 2025.

During the three and nine months ended July 31, 2020, we did not redeem any subordinated debt.

60 BMO Financial Group Third Quarter Report 2020

Note 6: Equity

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

(Canadian $ in millions, except as noted)	July 31, 2020				October 31, 2019
	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		14,000,000		350		Class B -Series 47	(2)(3)
Preferred Shares - Classified as Equity				4,690				4,690
Other Equity Instruments (4)				658				658
Common Shares (5) (6) (7)		642,804,880		13,200		639,232,276		12,971
Share Capital and Other Equity Instruments				18,548				18,319

 (1) For additional information refer to Notes 16 and 20 of our annual consolidated financial statements for the year ended October 31, 2019 on pages 177 and 188 of our 2019 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 6,635,228 common shares as at July 31, 2020 (6,108,307 common shares as at October 31, 2019).

 (6) During the three and nine months ended July 31, 2020, we issued 3,355,394 common shares under the Shareholder Dividend Reinvestment and Share Purchase Plan and 8,614 and 423,737 common shares under the Stock Option Plan.

 (7) Common shares are net of 206,527 treasury shares as at July 31, 2020.

Other Equity Instruments

The bank’s US$500 million (CAD $658 million) 4.800% Additional Tier 1 Capital Notes (“notes”) 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 as a reduction in retained earnings when payable in May and December. 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.

Preferred Shares

On June 29, 2020, we announced that we did not intend to exercise our right to redeem the current outstanding Non-Cumulative 5-Year Rate Reset Class B Preferred Shares Series 33 (“Preferred Shares Series 33”) on August 25, 2020. As a result, subject to certain conditions, the holders of Preferred Shares Series 33 had the right, at their option, by August 10, 2020, to convert any or all of their Preferred Shares Series 33 on a one-for-one basis into Non-Cumulative Floating Rate Class B Preferred Shares Series 34 (“Preferred Shares Series 34”). During the conversion period, July 27, 2020 to August 10, 2020, 118,563 Preferred Shares Series 33 were tendered for conversion into Preferred Shares Series 34, which is less than the minimum 1,000,000 required to give effect to the conversion, as described in the Preferred Shares Series 33 prospectus supplement dated May 29, 2015. As a result, no Preferred Shares Series 34 were issued and holders of Preferred Shares Series 33 retained their shares. The dividend rate for the Preferred Shares Series 33 for the five year period commencing on August 25, 2020, and ending on August 24, 2025, is 3.054%.

During the three and nine months ended July 31, 2020, we did not issue or redeem any preferred shares.

Common Shares

On February 25, 2020, we announced our intention, subject to the approval of OSFI and the Toronto Stock Exchange, to establish a new normal course issuer bid (“NCIB”) that will permit us to purchase for cancellation up to 12 million common shares over a 12-month period, commencing on or about June 3, 2020. As previously noted, in light of OSFI’s announcement on March 13, 2020 that all share buybacks by federally regulated financial institutions should be halted for the time being, we have put the process on hold. We will proceed with the new NCIB based on OSFI’s future guidance. Our previous NCIB expired on June 2, 2020.

BMO Financial Group Third Quarter Report 2020 61

Shareholder Dividend Reinvestment and Share Purchase Plan

On August 25, 2020, we announced that commencing with common share dividend declared for the fourth quarter of fiscal 2020, and subsequently until further notice, common shares under the Shareholder Dividend Reinvestment and Share Purchase Plan (the “Plan”) will be purchased on the open market without a discount.

During the three and nine months ended July 31, 2020, we issued 3,355,394 common shares under the Plan.

Note 7: 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, 2019 on pages 179 to 186 for further discussion on the determination of fair value.

(Canadian $ in millions)			July 31, 2020				October 31, 2019
	Carrying value		Fair value		Carrying value		Fair value
Securities
Amortized cost		45,229		45,875		24,472		24,622
Loans (1)
Residential mortgages		125,341		127,108		123,676		124,093
Consumer instalment and other personal		68,506		69,181		67,200		67,516
Credit cards		7,617		7,617		8,623		8,623
Business and government (2)		240,352		242,295		224,442		225,145
		441,816		446,201		423,941		425,377
Deposits (3)		643,133		645,402		552,314		553,444
Securitization and structured entities’ liabilities		27,461		28,159		27,159		27,342
Subordinated debt		8,513		8,790		6,995		7,223

  This table excludes financial instruments with a carrying value approximating fair value, such as 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 $3,562 million of loans classified as FVTPL and $50 million of loans classified as FVOCI as at July 31, 2020, respectively ($2,156 million and $22 million as at October 31, 2019).

 (3) Excludes $17,467 million of structured note liabilities designated at FVTPL and accounted for at fair value ($15,829 million as at October 31, 2019).

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 debt and equity securities using quoted prices in active markets (Level 1) when these are available. When quoted prices in active markets are not available, we determine the fair value of financial instruments using models such as discounted cash flows with observable market data for inputs such as yield and prepayment rates or broker quotes and other third-party vendor quotes (Level 2). Fair value may also be determined using models where significant market inputs are not observable due to inactive markets or minimal market activity (Level 3). We maximize the use of observable market inputs to the extent possible. We have considered the current market conditions due to COVID-19 and their impact on the determination of fair value, applying judgment in the selection of inputs where applicable.

Our Level 2 trading and FVOCI securities are primarily valued 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.

62 BMO Financial Group Third Quarter Report 2020

The extent of our use of actively quoted market prices (Level 1), internal models using observable market information as inputs (Level 2) and models without observable market information as inputs (Level 3) in the valuation of securities, business and government loans classified as FVTPL, fair value liabilities, derivative assets and derivative liabilities is presented in the following tables:

(Canadian $ in millions)							July 31, 2020		October 31, 2019
	Valued using quoted market prices		Valued using models (with observable inputs)		Valued using models (without observable inputs)		Total		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		4,746		3,898		-		8,644		6,959		1,371		-		8,330
Canadian provincial and municipal governments		2,056		6,967		-		9,023		3,871		3,656		-		7,527
U.S. federal government		8,000		1,210		-		9,210		8,001		762		-		8,763
U.S. states, municipalities and agencies		38		370		-		408		48		626		-		674
Other governments		1,406		1,485		-		2,891		888		697		-		1,585
NHA MBS, U.S. agency MBS and CMO		5		9,113		584		9,702		14		10,494		538		11,046
Corporate debt		3,694		6,765		-		10,459		2,620		5,091		7		7,718
Trading loans		-		45		-		45		-		103		-		103
Corporate equity		38,825		-		-		38,825		40,155		2		-		40,157
		58,770		29,853		584		89,207		62,556		22,802		545		85,903
FVTPL Securities
Issued or guaranteed by:
Canadian federal government		627		108		-		735		410		107		-		517
Canadian provincial and municipal governments		239		1,231		-		1,470		364		915		-		1,279
U.S. federal government		9		35		-		44		-		48		-		48
Other governments		-		95		-		95		-		49		-		49
NHA MBS, U.S. agency MBS and CMO		-		3		-		3		-		5		-		5
Corporate debt		97		8,140		-		8,237		146		8,071		-		8,217
Corporate equity		1,654		8		1,807		3,469		1,536		69		1,984		3,589
		2,626		9,620		1,807		14,053		2,456		9,264		1,984		13,704
FVOCI Securities
Issued or guaranteed by:
Canadian federal government		21,492		6,090		-		27,582		11,168		776		-		11,944
Canadian provincial and municipal governments		1,944		2,781		-		4,725		3,798		2,214		-		6,012
U.S. federal government		17,046		1,633		-		18,679		15,068		907		-		15,975
U.S. states, municipalities and agencies		6		5,356		1		5,363		1		4,159		1		4,161
Other governments		2,748		4,402		-		7,150		4,396		2,939		-		7,335
NHA MBS, U.S. agency MBS and CMO		-		11,538		-		11,538		-		14,000		-		14,000
Corporate debt		590		2,779		-		3,369		2,205		2,802		-		5,007
Corporate equity		-		-		87		87		-		-		81		81
		43,826		34,579		88		78,493		36,636		27,797		82		64,515
Business and government loans		-		1,409		2,203		3,612		-		442		1,736		2,178
Fair Value Liabilities
Securities sold but not yet purchased		25,323		5,256		-		30,579		22,393		3,860		-		26,253
Structured note liabilities and other note liabilities (1)		-		17,467		-		17,467		-		15,829		-		15,829
Annuity liabilities (2)		-		1,232		-		1,232		-		1,043		-		1,043
		25,323		23,955		-		49,278		22,393		20,732		-		43,125
Derivative Assets
Interest rate contracts		24		17,333		-		17,357		14		10,443		-		10,457
Foreign exchange contracts		9		15,804		-		15,813		7		9,262		-		9,269
Commodity contracts		457		1,555		-		2,012		329		817		-		1,146
Equity contracts		743		2,860		-		3,603		226		997		-		1,223
Credit default swaps		-		11		-		11		-		49		-		49
		1,233		37,563		-		38,796		576		21,568		-		22,144
Derivative Liabilities
Interest rate contracts		31		12,836		-		12,867		11		7,943		-		7,954
Foreign exchange contracts		12		18,723		-		18,735		20		10,843		-		10,863
Commodity contracts		603		2,247		-		2,850		218		1,462		-		1,680
Equity contracts		478		4,907		-		5,385		103		2,896		-		2,999
Credit default swaps		-		19		3		22		-		101		1		102
		1,124		38,732		3		39,859		352		23,245		1		23,598

(1) These structured note liabilities and other note liabilities included in deposits have been designated at FVTPL.

(2) These investment contract liabilities in our insurance business have been designated at FVTPL.

BMO Financial Group Third Quarter Report 2020 63

Quantitative Information about Level 3 Fair Value Measurements

The table below presents the fair values of our significant Level 3 financial instruments that are measured at a fair value on a recurring basis, the valuation techniques used to determine their fair values and the value ranges of significant unobservable inputs used in the valuations. We have not applied any other reasonably possible alternative assumption to the significant Level 3 categories of private equity investments, as the net asset values are provided by the investment or fund managers.

Range of input values (1)

As at July 31, 2020 (Canadian $ in millions, except as noted)

Reporting line in fair value hierarchy table

Fair value of assets

Valuation techniques

Significant unobservable inputs

Low

High

Private equity (2)

Corporate equity

1,807

Net Asset Value

Net Asset Value

na

na

EV/EBITDA

Multiple

5x

16x

Loans (3)

Business and government loans

2,203

Discounted cash flows

Discount margin

56bps

224bps

NHA MBS and U.S. agency MBS and CMO

NHA MBS and U.S. agency MBS and CMO

584

Discounted cash flows

Prepayment rate

7%

86%

Market Comparable

Comparability Adjustment (4)

(5.26)

5.54

(1) The low and high input values represent the highest and lowest actual level of inputs used to value a group of financial instruments in a particular product category. These input ranges do not reflect the level of input uncertainty, but are affected by the specific underlying instruments within each product category. The input ranges will therefore vary from period to period based on the characteristics of the underlying instruments held at each balance sheet date.

(2) Included in private equity is $490 million of Federal Reserve Bank and U.S. Federal Home Loan Bank shares that we carry at cost, which approximates fair value, and hold to meet regulatory requirements.

(3) The impact of assuming a 10 basis point increase or decrease in discount margin for business and government loans is $2 million.

(4) Range of input values represents price per security adjustment.

  na – not applicable

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. Transfers from Level 1 to Level 2 were due to reduced observability of the inputs used to value the securities. Transfers from Level 2 to Level 1 were due to increased availability of quoted prices in active markets.

The following table presents significant transfers between Level 1 and Level 2 for the three and nine months ended July 31, 2020 and July 31, 2019.

(Canadian $ in millions)
For the three months ended	July 31, 2020			July 31, 2019
	Level 1 to Level 2	Level 2 to Level 1	Level 1 to Level 2	Level 2 to Level 1
Trading Securities	994	2,682	1,734	901
FVTPL Securities	19	241	218	38
FVOCI Securities	1,768	4,294	1,834	2,335
Securities sold but not yet purchased	681	2,067	6,362	98

(Canadian $ in millions)
For the nine months ended	July 31, 2020			July 31, 2019
	Level 1 to Level 2	Level 2 to Level 1	Level 1 to Level 2	Level 2 to Level 1
Trading Securities	5,761	3,952	5,392	4,260
FVTPL Securities	518	302	682	390
FVOCI Securities	9,032	7,012	9,723	3,910
Securities sold but not yet purchased	4,432	2,982	9,905	2,501

64 BMO Financial Group Third Quarter Report 2020

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, 2020, including realized and unrealized gains (losses) included in earnings and other comprehensive income as well as transfers into and out of Level 3. Transfers from Level 2 into Level 3 were due to an increase in unobservable market inputs used in pricing the securities. Transfers out of Level 3 into Level 2 were due to an increase in observable market inputs used in pricing the securities.

			Change in fair value
(Canadian $ in millions)   For the three months ended July 31, 2020	Balance April 30, 2020		Included in earnings			Included in other comprehensive income (1)			Issuances/ Purchases		Sales (2)			Maturities/ Settlement			Transfers into Level 3		Transfers out of Level 3			Fair Value as at July 31, 2020		Change in unrealized gains (losses) recorded in income for instruments still held (3)
Trading Securities
NHA MBS and U.S. agency MBS and CMO		487		(115	)		(18	)		362		(151	)		-			41		(22	)		584		(74	)
Corporate debt		48		10			(2	)		-		(56	)		-			-		-			-		-
Total trading securities		535		(105	)		(20	)		362		(207	)		-			41		(22	)		584		(74	)
FVTPL Securities
Corporate equity		2,062		(23	)		(57	)		58		(233	)		-			-		-			1,807		2
Total FVTPL securities		2,062		(23	)		(57	)		58		(233	)		-			-		-			1,807		2
FVOCI Securities
Issued or guaranteed by:
U.S. states, municipalities and agencies		1		-			-			-		-			-			-		-			1		na
Corporate equity		83		-			-			4		-			-			-		-			87		na
Total FVOCI securities		84		-			-			4		-			-			-		-			88		na
Business and government loans		2,028		-			95			765		-			(685	)		-		-			2,203		-
Fair Value Liabilities
Securities sold but not yet purchased		-		-			-			-		-			-			-		-			-		-
Total fair value liabilities		-		-			-			-		-			-			-		-			-		-
Derivative Liabilities
Equity contracts		-		-			-			-		-			-			-		-			-		-
Credit default swaps		4		-			-			-		-			-			-		(1	)		3		-
Total derivative liabilities		4		-			-			-		-			-			-		(1	)		3		-

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

(2) Includes proceeds recovered on securities sold but not yet purchased.

(3) Changes in unrealized gains (losses) on Trading and FVTPL securities still held on July 31, 2020 are included in earnings for the period.

Unrealized gains (losses) recognized on Level 3 financial instruments may be offset by related (losses) gains on hedge contracts.

  na – Not applicable

			Change in fair value
(Canadian $ in millions)   For the nine months ended July 31, 2020	Balance October 31, 2019		Included in earnings			Included in other comprehensive income (1)			Issuances/ Purchases		Sales (2)			Maturities/ Settlement			Transfers into Level 3		Transfers out of Level 3			Fair Value as at July 31, 2020		Change in unrealized gains (losses) recorded in income for instruments still held (3)
Trading Securities
NHA MBS and U.S. agency MBS and CMO		538		(245	)		12			811		(540	)		-			202		(194	)		584		(158	)
Corporate debt		7		10			(2	)		50		(68	)		-			3		-			-		(1	)
Total trading securities		545		(235	)		10			861		(608	)		-			205		(194	)		584		(159	)
FVTPL Securities
Corporate equity		1,984		(27	)		23			244		(418	)		-			1		-			1,807		7
Total FVTPL		1,984		(27	)		23			244		(418	)		-			1		-			1,807		7
FVOCI Securities
Issued or guaranteed by:
U.S. states, municipalities and agencies		1		-			-			-		-			-			-		-			1		na
Corporate equity		81		-			-			6		-			-			-		-			87		na
Total FVOCI securities		82		-			-			6		-			-			-		-			88		na
Business and government loans		1,736		(3	)		183			1,705		-			(1,418	)		-		-			2,203		–
Fair Value Liabilities
Securities sold but not yet purchased		-		-			-			-		-			-			-		-			-		–
Total fair value liabilities		-		-			-			-		-			-			-		-			-		–
Derivative Liabilities
Equity contracts		-		-			-			-		-			-			-		-			-		–
Credit default swaps		1		-			-			-		-			-			3		(1	)		3		–
Total derivative liabilities		1		-			-			-		-			-			3		(1	)		3		–

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

(2) Includes proceeds recovered on securities sold but not yet purchased.

(3) Changes in unrealized gains (losses) on Trading and FVTPL securities still held on July 31, 2020 are included in earnings for the period.

Unrealized gains (losses) recognized on Level 3 financial instruments may be offset by related (losses) gains on hedge contracts.

  na – Not applicable

BMO Financial Group Third Quarter Report 2020 65

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 (2)			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 (3)
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		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 trading securities held by foreign subsidiaries is included in other comprehensive income, net foreign operations.

(2) Includes proceeds recovered on securities sold but not yet purchased.

(3) Changes in unrealized gains (losses) on Trading and FVTPL securities still held on July 31, 2019 are included in earnings for the period.

Unrealized gains (losses) recognized on Level 3 financial instruments may be offset by related (losses) gains on hedge contracts.

  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 (2)			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 (3)
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 trading securities held by foreign subsidiaries is included in other comprehensive income, net foreign operations.

(2) Includes proceeds recovered on securities sold but not yet purchased.

(3) Changes in unrealized gains (losses) on Trading and FVTPL securities still held on July 31, 2019 are included in earnings for the period.

Unrealized gains (losses) recognized on Level 3 financial instruments may be offset by related (losses) gains on hedge contracts.

  na – Not applicable

66 BMO Financial Group Third Quarter Report 2020

Note 8: 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; underpins our operating groups’ business strategies; supports depositor, investor and regulator confidence, while building long-term shareholder value; and is consistent with our target credit ratings.

As at July 31, 2020, 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 1.0% Domestic Stability Buffer applicable to D-SIBs. Our capital position as at July 31, 2020 is detailed in the Capital Management section on pages 15 through 18 of our interim Management’s Discussion and Analysis.

Note 9: Employee Compensation

Stock Options

We did not grant any stock options during the three months ended July 31, 2020 and 2019. During the nine months ended July 31, 2020, we granted a total of 976,087 stock options (931,047 stock options during the nine months ended July 31, 2019). The weighted-average fair value of options granted during the nine months ended July 31, 2020 was $9.46 per option ($10.23 per option for the nine months ended July 31, 2019).

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, 2020		July 31, 2019
Expected dividend yield		4.3%		5.7%
Expected share price volatility		15.4%		20.0% - 20.1%
Risk-free rate of return		1.9% - 2.0%		2.5%
Expected period until exercise (in years)		6.5 - 7.0		6.5 - 7.0
Exercise price ($)		101.47		89.90

  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, 2020		July 31, 2019			July 31, 2020		July 31, 2019
Current service cost		62		48			2		2
Net interest (income) expense on net defined benefit (asset) liability		1		(5	)		8		10
Administrative expenses		1		1			-		-
Benefits expense		64		44			10		12
Canada and Quebec pension plan expense		22		23			-		-
Defined contribution expense		37		37			-		-
Total pension and other employee future benefit expenses recognized in the Consolidated Statement of Income		123		104			10		12
(Canadian $ in millions)
	Pension benefit plans					Other employee future benefit plans
For the nine months ended	July 31, 2020		July 31, 2019			July 31, 2020		July 31, 2019
Current service cost		187		144			8		7
Net interest (income) expense on net defined benefit (asset) liability		1		(14	)		24		29
Past service income		-		(5	)		-		-
Administrative expenses		3		3			-		-
Benefits expense		191		128			32		36
Canada and Quebec pension plan expense		75		70			-		-
Defined contribution expense		135		127			-		-
Total pension and other employee future benefit expenses recognized in the Consolidated Statement of Income		401		325			32		36

BMO Financial Group Third Quarter Report 2020 67

Note 10: 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 payable 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, 2020			July 31, 2019			July 31, 2020			July 31, 2019
Net income attributable to equity holders of the bank		1,232			1,557			3,513			4,564
Dividends on preferred shares and distributions payable on other equity instruments		(73	)		(59	)		(195	)		(159)
Net income available to common shareholders		1,159			1,498			3,318			4,405
Weighted-average number of common shares outstanding (in thousands)		641,300			638,900			640,129			638,803
Basic earnings per share (Canadian $)		1.81			2.34			5.18			6.90
Diluted Earnings Per Common Share
Net income available to common shareholders adjusted for impact of dilutive instruments		1,159			1,498			3,318			4,405
Weighted-average number of common shares outstanding (in thousands)		641,300			638,900			640,129			638,803
Effect of dilutive instruments
Stock options potentially exercisable (1)		2,400			5,734			3,473			5,697
Common shares potentially repurchased		(2,046	)		(4,184	)		(2,721	)		(4,137)
Weighted-average number of diluted common shares outstanding (in thousands)		641,654			640,450			640,881			640,363
Diluted earnings per share (Canadian $)		1.81			2.34			5.18			6.88

(1) In computing diluted earnings per share we excluded average stock options outstanding of 4,238,334 and 3,124,912 with a weighted-average exercise price of $94.30 and $99.72, respectively, for the three and nine months ended July 31, 2020 (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) as the average share price for the period did not exceed the exercise price.

Note 11: Income Taxes

The Canada Revenue Agency (“CRA”) has reassessed us for additional income tax and interest in an amount of approximately $941 million, to date, in respect of certain 2011-2015 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 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 subsequent years. We remain of the view that our tax filing positions were appropriate and intend to challenge all reassessments.

Note 12: 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”)), BMO Wealth Management and BMO Capital Markets (“BMO CM”), along with a Corporate Services unit.

For additional information refer to Note 25 of our annual consolidated financial statements for the year ended October 31, 2019 on pages 199 to 202 of the Annual Report.

68 BMO Financial Group Third Quarter Report 2020

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

(Canadian $ in millions)
For the three months ended July 31, 2020	Canadian P&C		U.S. P&C		BMO Wealth Management			BMO CM		Corporate Services (1)			Total
Net interest income (2)		1,509		1,107		229			952		(262	)		3,535
Non-interest revenue		453		292		2,255			576		78			3,654
Total Revenue		1,962		1,399		2,484			1,528		(184	)		7,189
Provision for credit losses on impaired loans		257		109		1			79		-			446
Provision for credit losses on performing loans		313		223		7			58		7			608
Total Provision for credit losses		570		332		8			137		7			1,054
Insurance claims, commissions and changes in policy benefit liabilities		-		-		1,189			-		-			1,189
Depreciation and amortization		117		131		93			59		-			400
Other non-interest expense		843		621		744			766		70			3,044
Income (loss) before taxes		432		315		450			566		(261	)		1,502
Provision for (recovery of) income taxes		112		52		109			140		(143	)		270
Reported net income (loss)		320		263		341			426		(118	)		1,232
Average Assets		252,028		140,615		46,308			379,131		159,682			977,764
For the three months ended July 31, 2019	Canadian P&C		U.S. P&C		BMO Wealth Management			BMO CM		Corporate Services (1)			Total
Net interest income (2)		1,500		1,066		237			537		(123	)		3,217
Non-interest revenue		543		298		1,876			670		62			3,449
Total Revenue		2,043		1,364		2,113			1,207		(61	)		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
Provision for (recovery of) credit losses		204		98		(2	)		10		(4	)		306
Insurance claims, commissions and changes in policy benefit liabilities		-		-		887			-		-			887
Depreciation and amortization		87		111		68			35		-			301
Other non-interest expense		874		693		817			764		42			3,190
Income (loss) before taxes		878		462		343			398		(99	)		1,982
Provision for (recovery of) income taxes		228		94		93			84		(74	)		425
Reported net income (loss)		650		368		250			314		(25	)		1,557
Average Assets		239,948		129,098		41,891			343,292		82,734			836,963
(Canadian $ in millions)
For the nine months ended July 31, 2020	Canadian P&C		U.S. P&C		BMO Wealth Management			BMO CM		Corporate Services (1)			Total
Net interest income		4,561		3,287		672			2,503		(582	)		10,441
Non-interest revenue		1,443		912		4,727			1,445		232			8,759
Total Revenue		6,004		4,199		5,399			3,948		(350	)		19,200
Provision for credit losses on impaired loans		607		365		4			205		2			1,183
Provision for credit losses on performing loans		612		315		13			390		8			1,338
Total Provision for credit losses		1,219		680		17			595		10			2,521
Insurance claims, commissions and changes in policy benefit liabilities		-		-		1,708			-		-			1,708
Depreciation and amortization		373		417		250			171		-			1,211
Non-interest expense		2,549		1,913		2,387			2,264		305			9,418
Income (loss) before taxes		1,863		1,189		1,037			918		(665	)		4,342
Provision for (recovery of) income taxes		482		236		261			210		(360	)		829
Reported net income (loss)		1,381		953		776			708		(305	)		3,513
Average Assets		251,325		139,196		45,234			370,363		129,399			935,517
For the nine months ended July 31, 2019	Canadian P&C		U.S. P&C		BMO Wealth Management			BMO CM		Corporate Services (1)			Total
Net interest income		4,342		3,160		699			1,695		(372	)		9,524
Non-interest revenue		1,564		858		5,396			1,885		169			9,872
Total Revenue		5,906		4,018		6,095			3,580		(203	)		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
Provision for (recovery of) credit losses		462		127		-			40		(10	)		619
Insurance claims, commissions and changes in policy benefit liabilities		-		-		2,374			-		-			2,374
Depreciation and amortization		250		338		200			107		-			895
Non-interest expense		2,610		2,008		2,463			2,380		287			9,748
Income (loss) before taxes		2,584		1,545		1,058			1,053		(480	)		5,760
Provision for (recovery of) income taxes		670		327		265			233		(299	)		1,196
Reported net income (loss)		1,914		1,218		793			820		(181	)		4,564
Average Assets		235,562		124,590		40,345			342,829		82,778			826,104

 (1) Corporate Services includes Technology and Operations.

 (2) Operating groups report on a taxable equivalent basis (“teb”). 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.

BMO Financial Group Third Quarter Report 2020 69

Note 13: Legal Proceedings

The bank and its subsidiaries are party to legal proceedings, including regulatory investigations, in the ordinary course of business. Last quarter, an Ontario court made a liability finding and awarded an accounting of profits in a class action involving BMO Nesbitt Burns Inc., BMO InvestorLine Inc. and BMO Trust Company regarding disclosures of foreign exchange conversion spreads when converting foreign exchange in registered accounts. The monetary award will be determined at a court hearing in Q1 2021 based on profits earned during the class period, less reasonable expenses, plus pre-judgment interest. The lawsuit claimed monetary awards up to $419 million (at May 2019). We have appealed the decision. The Plaintiffs have also appealed. An appropriate provision is in place.

While there is inherent difficulty in predicting the ultimate outcome of this or other proceedings, management does not expect the outcome of any of these proceedings, individually or in the aggregate, to have a material adverse effect on the consolidated financial position or the results of operations of the bank.

Note 14: Acquisition

On April 6, 2020, we completed the acquisition of Clearpool Group Inc. (“Clearpool”), a New York-based provider of electronic trading solutions, operating in the United States and Canada, for cash consideration of US$139 million (CAD$196 million) plus contingent consideration of approximately US$8 million (CAD$11 million) based on meeting certain revenue targets over four years. 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 $85 million and goodwill of $138 million. The intangible assets are being amortized over three to twelve years. Goodwill related to this acquisition is not 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)
	Clearpool
Goodwill and intangible assets		223
Other assets		44
Total assets		267
Liabilities		60
Purchase price		207

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

70 BMO Financial Group Third Quarter Report 2020