Bank of Montreal (BMO) 6-K 2019 Q2 BMO Financial Group Reports Second Quarter 2019 Results

  Interim Consolidated Financial Statements

Consolidated Statement of Income

(Unaudited) (Canadian $ in millions, except as noted)	For the three months ended						For the six months ended
	April 30, 2019		January 31, 2019		April 30, 2018		April 30, 2019		April 30, 2018
Interest, Dividend and Fee Income
Loans	$	4,814	$	4,795	$	3,838	$	9,609	$	7,543
Securities (Note 2)		1,405		1,314		962		2,719		1,890
Deposits with banks		183		222		152		405		274
		6,402		6,331		4,952		12,733		9,707
Interest Expense
Deposits		2,110		2,079		1,372		4,189		2,573
Subordinated debt		69		70		57		139		110
Other liabilities		1,088		1,010		857		2,098		1,483
		3,267		3,159		2,286		6,426		4,166
Net Interest Income		3,135		3,172		2,666		6,307		5,541
Non-Interest Revenue (Note 1)
Securities commissions and fees		254		248		249		502		510
Deposit and payment service charges		290		291		277		581		553
Trading revenues		111		93		258		204		346
Lending fees		277		277		236		554		483
Card fees		116		105		112		221		200
Investment management and custodial fees		426		428		437		854		861
Mutual fund revenues		356		347		376		703		742
Underwriting and advisory fees		261		244		214		505		435
Securities gains, other than trading		42		49		38		91		105
Foreign exchange gains, other than trading		51		38		63		89		99
Insurance revenue		710		1,049		460		1,759		967
Investments in associates and joint ventures		52		29		41		81		85
Other		132		147		153		279		291
		3,078		3,345		2,914		6,423		5,677
Total Revenue		6,213		6,517		5,580		12,730		11,218
Provision for Credit Losses (Note 3)		176		137		160		313		301
Insurance Claims, Commissions and Changes in Policy Benefit Liabilities		561		926		332		1,487		693
Non-Interest Expense (Note 1)
Employee compensation		2,010		2,072		2,012		4,082		3,975
Premises and equipment		767		728		672		1,495		1,336
Amortization of intangible assets		138		133		129		271		252
Travel and business development		143		126		130		269		243
Communications		78		74		75		152		142
Professional fees		141		121		143		262		268
Other		318		303		364		621		709
		3,595		3,557		3,525		7,152		6,925
Income Before Provision for Income Taxes		1,881		1,897		1,563		3,778		3,299
Provision for income taxes (Note 12)		384		387		317		771		1,080
Net Income attributable to Bank shareholders	$	1,497	$	1,510	$	1,246	$	3,007	$	2,219
Earnings Per Share (Canadian $) (Note 11)
Basic	$	2.27	$	2.28	$	1.87	$	4.55	$	3.30
Diluted		2.26		2.28		1.86		4.54		3.29
Dividends per common share		1.00		1.00		0.93		2.00		1.86

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

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

36 BMO Financial Group Second Quarter Report 2019

  Interim Consolidated Financial Statements

Consolidated Statement of Comprehensive Income

(Unaudited) (Canadian $ in millions)	For the three months ended									For the six months ended
	April 30, 2019			January 31, 2019			April 30, 2018			April 30, 2019			April 30, 2018
Net Income	$	1,497		$	1,510		$	1,246		$	3,007		$	2,219
Other Comprehensive Income (Loss), net of taxes
Items that may subsequently be reclassified to net income
Net change in unrealized gains (losses) on fair value through OCI securities
Unrealized gains (losses) on fair value through OCI debt securities arising during the period (1)		46			187			(105	)		233			(218	)
Reclassification to earnings of (gains) in the period (2)		(15	)		(14	)		(23	)		(29	)		(36	)
		31			173			(128	)		204			(254	)
Net change in unrealized gains (losses) on cash flow hedges
Gains (losses) on derivatives designated as cash flow hedges arising during the period (3)		433			757			(106	)		1,190			(701	)
Reclassification to earnings of losses on derivatives designated as cash flow hedges in the period (4)		49			37			84			86			115
		482			794			(22	)		1,276			(586	)
Net gains (losses) on translation of net foreign operations
Unrealized gains (losses) on translation of net foreign operations		556			(25	)		1,059			531			(31	)
Unrealized gains (losses) on hedges of net foreign operations (5)		(103	)		13			(181	)		(90	)		(50	)
		453			(12	)		878			441			(81	)
Items that will not be reclassified to net income
Gains (losses) on remeasurement of pension and other employee future benefit plans (6)		(2	)		(148	)		27			(150	)		99
Gains (losses) on remeasurement of own credit risk on financial liabilities designed at fair value (7)		(98	)		79			42			(19	)		(32	)
		(100	)		(69	)		69			(169	)		67
Other Comprehensive Income (Loss), net of taxes		866			886			797			1,752			(854	)
Total Comprehensive Income attributable to Bank shareholders	$	2,363		$	2,396		$	2,043		$	4,759		$	1,365

  (1) Net of income tax (provision) recovery of $(17) million, $(61) million, $30 million for the three months ended, and $(78) million, $54 million for the six months ended, respectively.

  (2) Net of income tax provision of $5 million, $5 million, $8 million for the three months ended, and $10 million, $12 million for the six months ended, respectively.

  (3) Net of income tax (provision) recovery of $(156) million, $(274) million, $39 million for the three months ended, and $(430) million, $240 million for the six months ended, respectively.

  (4) Net of income tax (recovery) of $(18) million, $(13) million, $(30) million for the three months ended, and $(31) million, $(41) million for the six months ended, respectively.

  (5) Net of income tax (provision) recovery of $38 million, $(5) million, $65 million for the three months ended, and $33 million, $18 million for the six months ended, respectively.

  (6) Net of income tax (provision) recovery of $1 million, $54 million, $(10) million for the three months ended, and $55 million, $(60) million for the six months ended, respectively.

  (7) Net of income tax (provision) recovery of $36 million, $(29) million, $(15) million for the three months ended, and $7 million, $11 million for the six months ended, respectively.

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

BMO Financial Group Second Quarter Report 2019 37

  Interim Consolidated Financial Statements

Consolidated Balance Sheet

(Unaudited) (Canadian $ in millions)	As at
	April 30, 2019			January 31, 2019			October 31, 2018
Assets
Cash and Cash Equivalents	$	35,839		$	40,470		$	42,142
Interest Bearing Deposits with Banks		7,518			7,609			8,305
Securities (Note 2)
Trading		100,991			101,486			99,697
Fair value through profit or loss		12,904			12,280			11,611
Fair value through other comprehensive income		68,668			66,696			62,440
Debt securities at amortized cost		7,881			7,272			6,485
Other		782			742			702
		191,226			188,476			180,935
Securities Borrowed or Purchased Under Resale Agreements		110,405			100,699			85,051
Loans
Residential mortgages		120,778			120,039			119,620
Consumer instalment and other personal		64,454			63,241			63,225
Credit cards		8,467			8,187			8,329
Business and government		221,253			207,765			194,456
		414,952			399,232			385,630
Allowance for credit losses (Note 3)		(1,710	)		(1,628	)		(1,639	)
		413,242			397,604			383,991
Other Assets
Derivative instruments		20,627			21,633			26,204
Customers’ liability under acceptances		21,702			21,529			18,585
Premises and equipment		1,983			1,971			1,986
Goodwill		6,500			6,388			6,373
Intangible assets		2,331			2,285			2,272
Current tax assets		1,309			1,469			1,515
Deferred tax assets		1,765			1,813			2,039
Other		16,023			14,651			14,677
		72,240			71,739			73,651
Total Assets	$	830,470		$	806,597		$	774,075
Liabilities and Equity
Deposits (Note 6)	$	548,837		$	532,199		$	520,928
Other Liabilities
Derivative instruments		21,549			23,188			24,411
Acceptances		21,702			21,529			18,585
Securities sold but not yet purchased		32,023			30,407			28,804
Securities lent or sold under repurchase agreements		87,039			87,783			66,684
Securitization and structured entities’ liabilities		25,621			23,969			25,051
Current tax liabilities		42			84			50
Deferred tax liabilities		73			73			74
Other		37,236			33,196			36,985
		225,285			220,229			200,644
Subordinated Debt (Note 6)		6,953			6,820			6,782
Equity
Preferred shares (Note 7)		4,690			4,340			4,340
Common shares (Note 7)		12,939			12,914			12,929
Contributed surplus		307			308			300
Retained earnings		27,405			26,599			25,850
Accumulated other comprehensive income		4,054			3,188			2,302
Total Equity		49,395			47,349			45,721
Total Liabilities and Equity	$	830,470		$	806,597		$	774,075

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

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

38 BMO Financial Group Second Quarter Report 2019

  Interim Consolidated Financial Statements

Consolidated Statement of Changes in Equity

(Unaudited) (Canadian $ in millions)	For the three months ended						For the six months ended
	April 30, 2019			April 30, 2018			April 30, 2019			April 30, 2018
Preferred Shares (Note 7)
Balance at beginning of period	$	4,340		$	4,240		$	4,340		$	4,240
Issued during the period		350			-			350			-
Balance at End of Period		4,690			4,240			4,690			4,240
Common Shares (Note 7)
Balance at beginning of period		12,914			13,020			12,929			13,032
Issued under the Stock Option Plan		25			7			30			55
Repurchased for cancellation		-			(101	)		(20	)		(161	)
Balance at End of Period		12,939			12,926			12,939			12,926
Contributed Surplus
Balance at beginning of period		308			306			300			307
Stock option expense, net of options exercised		-			(3	)		4			(9	)
Other		(1	)		1			3			6
Balance at End of Period		307			304			307			304
Retained Earnings
Balance at beginning of period		26,599			23,893			25,850			23,700
Impact from adopting IFRS 9		-			-			-			99
Net income attributable to Bank shareholders		1,497			1,246			3,007			2,219
Dividends – Preferred shares		(48	)		(46	)		(100	)		(91	)
– Common shares		(639	)		(596	)		(1,278	)		(1,196	)
Share issue expense		(4	)		-			(4	)		-
Common shares repurchased for cancellation (Note 7)		-			(387	)		(70	)		(621	)
Balance at End of Period		27,405			24,110			27,405			24,110
Accumulated Other Comprehensive (Loss) on Fair Value through OCI Securities, net of taxes
Balance at beginning of period		(142	)		(125	)		(315	)		56
Impact from adopting IFRS 9		-			-			-			(55	)
Unrealized gains (losses) on fair value through OCI debt securities arising during the period		46			(105	)		233			(218	)
Reclassification to earnings of (gains) in the period		(15	)		(23	)		(29	)		(36	)
Balance at End of Period		(111	)		(253	)		(111	)		(253	)
Accumulated Other Comprehensive Income (Loss) on Cash Flow Hedges, net of taxes
Balance at beginning of period		(280	)		(746	)		(1,074	)		(182	)
Gains (losses) on derivatives designated as cash flow hedges arising during the period		433			(106	)		1,190			(701	)
Reclassification to earnings of losses on derivatives designated as cash flow hedges in the period		49			84			86			115
Balance at End of Period		202			(768	)		202			(768	)
Accumulated Other Comprehensive Income on Translation of Net Foreign Operations, net of taxes
Balance at beginning of period		3,715			2,506			3,727			3,465
Unrealized gains (losses) on translation of net foreign operations		556			1,059			531			(31	)
Unrealized (losses) on hedges of net foreign operations		(103	)		(181	)		(90	)		(50	)
Balance at End of Period		4,168			3,384			4,168			3,384
Accumulated Other Comprehensive Income on Pension and Other Employee Future Benefit Plans, net of taxes
Balance at beginning of period		21			(20	)		169			(92	)
Gains (losses) on remeasurement of pension and other employee future benefit plans		(2	)		27			(150	)		99
Balance at End of Period		19			7			19			7
Accumulated Other Comprehensive (Loss) on Own Credit Risk on Financial Liabilities Designated at Fair Value, net of taxes
Balance at beginning of period		(126	)		(255	)		(205	)		(181	)
Gains (losses) on remeasurement of own credit risk on financial liabilities designated at fair value		(98	)		42			(19	)		(32	)
Balance at End of Period		(224	)		(213	)		(224	)		(213	)
Total Accumulated Other Comprehensive Income		4,054			2,157			4,054			2,157
Total Shareholders’ Equity	$	49,395		$	43,737		$	49,395		$	43,737

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

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

BMO Financial Group Second Quarter Report 2019 39

  Interim Consolidated Financial Statements

Consolidated Statement of Cash Flows

(Unaudited) (Canadian $ in millions)	For the three months ended						For the six months ended
	April 30, 2019			April 30, 2018			April 30, 2019			April 30, 2018
Cash Flows from Operating Activities
Net Income	$	1,497		$	1,246		$	3,007		$	2,219
Adjustments to determine net cash flows provided by (used in) operating activities
Provision on securities, other than trading		1			1			1			2
Net (gain) on securities, other than trading		(43	)		(39	)		(92	)		(107	)
Net (increase) decrease in trading securities		1,532			6,505			(476	)		1,796
Provision for credit losses (Note 3)		176			160			313			301
Change in derivative instruments – decrease in derivative asset		190			7,688			6,326			4,591
– (decrease) in derivative liability		(1,308	)		(8,901	)		(3,727	)		(4,833	)
Amortization of premises and equipment		111			98			216			195
Amortization of other assets		54			58			107			117
Amortization of intangible assets		138			129			271			252
Net decrease in deferred income tax asset		68			77			302			683
Net (decrease) in deferred income tax liability		(1	)		(23	)		(3	)		(50	)
Net (increase) decrease in current income tax asset		206			53			246			(711	)
Net (decrease) in current income tax liability		(47	)		(10	)		(11	)		(86	)
Change in accrued interest – (increase) in interest receivable		(91	)		(137	)		(197	)		(151	)
– increase in interest payable		121			168			172			135
Changes in other items and accruals, net		1,473			2,997			(298	)		(19	)
Net increase in deposits		11,490			2,344			23,898			9,458
Net (increase) in loans		(12,526	)		(6,835	)		(26,902	)		(11,185	)
Net increase (decrease) in securities sold but not yet purchased		1,391			(1,300	)		3,015			308
Net increase (decrease) in securities lent or sold under repurchase agreements		(2,073	)		4,360			19,789			23,653
Net (increase) in securities borrowed or purchased under resale agreements		(8,462	)		(9,396	)		(24,614	)		(19,724	)
Net increase (decrease) in securitization and structured entities’ liabilities		1,535			(131	)		465			492
Net Cash Provided by (Used in) Operating Activities		(4,568	)		(888	)		1,808			7,336
Cash Flows from Financing Activities
Net increase (decrease) in liabilities of subsidiaries		1,344			15			(1,348	)		827
Proceeds from issuance of covered bonds		-			2,706			1,878			2,706
Redemption of covered bonds		-			-			(2,254	)		(567	)
Proceeds from issuance of subordinated debt (Note 6)		-			-			-			1,566
Repayment of subordinated debt (Note 6)		-			(900	)		-			(900	)
Proceeds from issuance of preferred shares (Note 7)		350			-			350			-
Share issue expense		(4	)		-			(4	)		-
Proceeds from issuance of common shares (Note 7)		22			7			26			55
Common shares repurchased for cancellation (Note 7)		-			(488	)		(90	)		(782	)
Cash dividends paid		(691	)		(645	)		(1,348	)		(1,276	)
Net Cash Provided by (Used in) Financing Activities		1,021			695			(2,790	)		1,629
Cash Flows from Investing Activities
Net (increase) decrease in interest bearing deposits with banks		236			(615	)		912			(1,105	)
Purchases of securities, other than trading		(10,795	)		(13,442	)		(26,265	)		(21,837	)
Maturities of securities, other than trading		3,554			2,239			7,789			5,549
Proceeds from sales of securities, other than trading		5,763			5,831			12,323			11,897
Premises and equipment – net (purchases)		(95	)		(54	)		(186	)		(119	)
Purchased and developed software – net (purchases)		(159	)		(135	)		(304	)		(267	)
Net Cash (Used in) Investing Activities		(1,496	)		(6,176	)		(5,731	)		(5,882	)
Effect of Exchange Rate Changes on Cash and Cash Equivalents		412			1,132			410			240
Net increase (decrease) in Cash and Cash Equivalents		(4,631	)		(5,237	)		(6,303	)		3,323
Cash and Cash Equivalents at Beginning of Period		40,470			41,159			42,142			32,599
Cash and Cash Equivalents at End of Period	$	35,839		$	35,922		$	35,839		$	35,922
Supplemental Disclosure of Cash Flow Information
Net cash provided by operating activities includes:
Interest paid in the period	$	3,133		$	1,885		$	6,243		$	3,752
Income taxes paid in the period	$	309		$	208		$	713		$	1,077
Interest received in the period	$	5,819		$	4,340		$	11,617		$	8,674
Dividends received in the period	$	440		$	426		$	843		$	846

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

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

BMO Financial Group Second Quarter Report 2019 40

Notes to Consolidated Financial Statements

April 30, 2019 (Unaudited)

Note 1: Basis of Presentation

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

These condensed interim consolidated financial statements have been prepared in accordance with International Accounting Standard 34,Interim Financial Reportingas issued by the International Accounting Standards Board (“IASB”) using the same accounting policies as disclosed in our annual consolidated financial statements for the year ended October 31, 2018, with the exception of the adoption of IFRS 15Revenue from Contracts with Customers discussed below. These condensed interim consolidated financial statements should be read in conjunction with the notes to our annual consolidated financial statements for the year ended October 31, 2018 as set out on pages 148 to 209 of our 2018 Annual Report. We also comply with interpretations of International Financial Reporting Standards (“IFRS”) by our regulator, the Office of the Superintendent of Financial Institutions of Canada (“OSFI”). These interim consolidated financial statements were authorized for issue by the Board of Directors on May 29, 2019.

Changes in Accounting Policy

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

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

(Canadian $ in millions)	For the three months ended			For the six months ended
	April 30, 2018			April 30, 2018
Increase (decrease) in
Non-Interest Revenue
Securities commissions and fees		(2	)		(3	)
Deposit and payment service charges		(2	)		(5	)
Card fees		(37	)		(77	)
Investment management and custodial fees		2			3
Underwriting and advisory fees		1			3
Other		1			2
		(37	)		(77	)
Non-Interest Expense
Employee compensation		1			1
Travel and business development		(43	)		(87	)
Professional fees		2			4
Other		3			4
		(37	)		(78	)
Provision for income taxes		-			1
Net Income		-			-

Future Changes in IFRS

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

We have substantially completed our lease assessment and are upgrading our lease administration system. In addition, we are developing future processes and internal controls to enable the application of IFRS 16 in 2019.

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

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

BMO Financial Group Second Quarter Report 2019 41

Note 2: Securities

Classification of Securities

The bank’s fair value through profit or loss (“FVTPL”) securities of $12,904 million ($11,611 million as at October 31, 2018) are comprised of $2,897 million mandatorily measured at fair value and $10,007 million designated at fair value ($2,828 million and $8,783 million, respectively, as at October 31, 2018).

Our fair value through other comprehensive income (“FVOCI”) securities totalling $68,668 million ($62,440 million as at October 31, 2018), are net of allowance for credit losses of $3 million ($2 million as at October 31, 2018).

Amortized cost securities totalling $7,881 million ($6,485 million as at October 31, 2018), are net of allowance for credit losses of $1 million ($1 million as at October 31, 2018).

Unrealized Gains and Losses on FVOCI Securities

The following table summarizes the unrealized gains and losses:

(Canadian $ in millions)								April 30, 2019								October 31, 2018
	Cost/			Gross		Gross				Cost/		Gross		Gross
	Amortized cost		��	unrealized gains		unrealized losses		Fair value		Amortized cost		unrealized gains		unrealized losses		Fair value
Issued or guaranteed by:
Canadian federal government		12,882			56		10		12,928		12,884		1		80		12,805
Canadian provincial and municipal governments		7,517			91		2		7,606		6,896		8		42		6,862
U.S. federal government		17,337			229		97		17,469		17,403		4		584		16,823
U.S. states, municipalities and agencies		4,038			41		10		4,069		3,694		16		55		3,655
Other governments		6,307			78		3		6,382		4,818		2		30		4,790
National Housing Act (NHA) mortgage-backed securities (MBS)		2,365			21		1		2,385		2,382		6		18		2,370
U.S. agency MBS and collateralized mortgage obligations (CMO)		12,994			29		212		12,811		11,811		2		496		11,317
Corporate debt		4,898			55		4		4,949		3,783		6		33		3,756
Corporate equity		69			-		-		69		62		-		-		62
Total		68,407			600		339		68,668		63,733		45		1,338		62,440

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

Interest Income on Debt Securities

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

(Canadian $ in millions)	For the three months ended				For the six months ended
	April 30, 2019		April 30, 2018		April 30, 2019		April 30, 2018
FVOCI - Debt		407		246		799		472
Amortized cost		48		43		88		92
Total		455		289		887		564

42 BMO Financial Group Second Quarter Report 2019

Note 3: Loans and Allowance for Credit Losses

Credit Risk Exposure

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

(Canadian $ in millions)							April 30, 2019
	Stage 1		Stage 2		Stage 3		Total
Loans: Residential mortgages
Exceptionally low		-		-		-		-
Very low		75,639		140		-		75,779
Low		19,579		2,634		-		22,213
Medium		12,090		4,802		-		16,892
High		143		545		-		688
Not rated		4,550		230		-		4,780
Impaired		-		-		426		426
Allowance for credit losses		16		35		19		70
Carrying amount		111,985		8,316		407		120,708
Loans: Consumer instalment and other personal
Exceptionally low		20,711		21		-		20,732
Very low		15,043		146		-		15,189
Low		9,851		319		-		10,170
Medium		9,757		4,024		-		13,781
High		396		1,426		-		1,822
Not rated		2,116		135		-		2,251
Impaired		-		-		509		509
Allowance for credit losses		79		310		127		516
Carrying amount		57,795		5,761		382		63,938
Loans: Credit cards
Exceptionally low		2,386		1		-		2,387
Very low		1,129		16		-		1,145
Low		883		176		-		1,059
Medium		1,829		871		-		2,700
High		137		448		-		585
Not rated		590		1		-		591
Impaired		-		-		-		-
Allowance for credit losses		40		200		-		240
Carrying amount		6,914		1,313		-		8,227
Loans: Business and government (1)
Acceptable
Investment grade		128,949		843		-		129,792
Sub-investment grade		98,430		8,479		-		106,909
Watchlist		-		4,854		-		4,854
Impaired		-		-		1,400		1,400
Allowance for credit losses		255		370		259		884
Carrying amount		227,124		13,806		1,141		242,071
Commitments and financial guarantee contracts
Acceptable
Investment grade		128,763		345		-		129,108
Sub-investment grade		45,189		4,318		-		49,507
Watchlist		-		2,283		-		2,283
Impaired		-		-		319		319
Allowance for credit losses		125		100		27		252
Carrying amount		173,827		6,846		292		180,965

 (1) Includes customers’ liability under acceptances.

BMO Financial Group Second Quarter Report 2019 43

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

 (1) Includes customers’ liability under acceptances.

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

44 BMO Financial Group Second Quarter Report 2019

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 $1,962 million at April 30, 2019 ($1,870 million at October 31, 2018) of which $1,710 million ($1,639 million at October 31, 2018) was recorded in loans and $252 million ($231 million at October 31, 2018) was recorded in other liabilities in our Consolidated Balance Sheet.

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

The following table shows the continuity in the loss allowance by each product type for the three months ended April 30, 2019:

(Canadian $ in millions)
For the three months ended	Stage 1			Stage 2			Stage 3			Total
Loans: Residential mortgages
Balance as at January 31, 2019		21			39			45			105
Transfer to Stage 1		7			(6	)		(1	)		-
Transfer to Stage 2		(1	)		1			-			-
Transfer to Stage 3		-			(2	)		2			-
Net remeasurement of loss allowance		(12	)		6			2			(4	)
Loan originations		1			-			-			1
Derecognitions and maturities		-			(1	)		-			(1	)
Total Provision for Credit Losses (“PCL”) (1)		(5	)		(2	)		3			(4	)
Write-offs		-			-			(3	)		(3	)
Recoveries of previous write-offs		-			-			2			2
Foreign exchange and other		-			-			(3	)		(3	)
Balance as at April 30, 2019		16			37			44			97
Loans: Consumer instalment and other personal
Balance as at January 31, 2019		90			326			135			551
Transfer to Stage 1		42			(39	)		(3	)		-
Transfer to Stage 2		(5	)		20			(15	)		-
Transfer to Stage 3		(1	)		(26	)		27			-
Net remeasurement of loss allowance		(47	)		49			37			39
Loan originations		10			-			-			10
Derecognitions and maturities		(4	)		(7	)		-			(11	)
Total PCL (1)		(5	)		(3	)		46			38
Write-offs		-			-			(69	)		(69	)
Recoveries of previous write-offs		-			-			18			18
Foreign exchange and other		1			1			(2	)		-
Balance as at April 30, 2019		86			324			128			538
Loans: Credit cards
Balance as at January 31, 2019		75			215			-			290
Transfer to Stage 1		24			(24	)		-			-
Transfer to Stage 2		(6	)		6			-			-
Transfer to Stage 3		-			(39	)		39			-
Net remeasurement of loss allowance		(20	)		79			21			80
Loan originations		5			-			-			5
Derecognitions and maturities		(1	)		(5	)		-			(6	)
Total PCL (1)		2			17			60			79
Write-offs		-			-			(83	)		(83	)
Recoveries of previous write-offs		-			-			23			23
Foreign exchange and other		-			(1	)		-			(1	)
Balance as at April 30, 2019		77			231			-			308
Loans: Business and government
Balance as at January 31, 2019		335			389			217			941
Transfer to Stage 1		39			(37	)		(2	)		-
Transfer to Stage 2		(8	)		13			(5	)		-
Transfer to Stage 3		-			(14	)		14			-
Net remeasurement of loss allowance		(62	)		80			34			52
Loan originations		50			-			-			50
Derecognitions and maturities		(24	)		(15	)		-			(39	)
Total PCL (1)		(5	)		27			41			63
Write-offs		-			-			(40	)		(40	)
Recoveries of previous write-offs		-			-			50			50
Foreign exchange and other		6			7			(8	)		5
Balance as at April 30, 2019		336			423			260			1,019
Total as at April 30, 2019		515			1,015			432			1,962
Comprised of:     Loans		390			915			405			1,710
Other credit instruments (2)		125			100			27			252

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

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

BMO Financial Group Second Quarter Report 2019 45

The following table shows the continuity in the loss allowance by each product type for the six months ended April 30, 2019:

(Canadian $ in millions)
For the six months ended	Stage 1			Stage 2			Stage 3			Total
Loans: Residential mortgages
Balance as at October 31, 2018		20			38			44			102
Transfer to Stage 1		14			(13	)		(1	)		-
Transfer to Stage 2		(1	)		3			(2	)		-
Transfer to Stage 3		-			(4	)		4			-
Net remeasurement of loss allowance		(20	)		15			7			2
Loan originations		3			-			-			3
Derecognitions and maturities		-			(2	)		-			(2	)
Total PCL (1)		(4	)		(1	)		8			3
Write-offs		-			-			(7	)		(7	)
Recoveries of previous write-offs		-			-			5			5
Foreign exchange and other		-			-			(6	)		(6	)
Balance as at April 30, 2019		16			37			44			97
Loans: Consumer instalment and other personal
Balance as at October 31, 2018		90			326			144			560
Transfer to Stage 1		87			(80	)		(7	)		-
Transfer to Stage 2		(9	)		44			(35	)		-
Transfer to Stage 3		(3	)		(52	)		55			-
Net remeasurement of loss allowance		(94	)		102			60			68
Loan originations		23			-			-			23
Derecognitions and maturities		(8	)		(17	)		-			(25	)
Total PCL (1)		(4	)		(3	)		73			66
Write-offs		-			-			(153	)		(153	)
Recoveries of previous write-offs		-			-			72			72
Foreign exchange and other		-			1			(8	)		(7	)
Balance as at April 30, 2019		86			324			128			538
Loans: Credit cards
Balance as at October 31, 2018		74			219			-			293
Transfer to Stage 1		50			(50	)		-			-
Transfer to Stage 2		(11	)		11			-			-
Transfer to Stage 3		-			(79	)		79			-
Net remeasurement of loss allowance		(44	)		142			34			132
Loan originations		10			-			-			10
Derecognitions and maturities		(2	)		(12	)		-			(14	)
Total PCL (1)		3			12			113			128
Write-offs		-			-			(159	)		(159	)
Recoveries of previous write-offs		-			-			46			46
Foreign exchange and other		-			-			-			-
Balance as at April 30, 2019		77			231			-			308
Loans: Business and government
Balance as at October 31, 2018		298			408			209			915
Transfer to Stage 1		108			(105	)		(3	)		-
Transfer to Stage 2		(25	)		36			(11	)		-
Transfer to Stage 3		-			(27	)		27			-
Net remeasurement of loss allowance		(118	)		139			70			91
Loan originations		110			-			-			110
Derecognitions and maturities		(47	)		(35	)		-			(82	)
Total PCL (1)		28			8			83			119
Write-offs		-			-			(71	)		(71	)
Recoveries of previous write-offs		-			-			59			59
Foreign exchange and other		10			7			(20	)		(3	)
Balance as at April 30, 2019		336			423			260			1,019
Total as at April 30, 2019		515			1,015			432			1,962
Comprised of:     Loans		390			915			405			1,710
Other credit instruments (2)		125			100			27			252

(1) Excludes provision for credit losses on other assets of $(3) million.

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

46 BMO Financial Group Second Quarter Report 2019

The following table shows the continuity in the loss allowance by each product type for the three months ended April 30, 2018:

(Canadian $ in millions)
For the three months ended	Stage 1			Stage 2			Stage 3			Total
Loans: Residential mortgages
Balance as at January 31, 2018		26			27			47			100
Transfer to Stage 1		9			(8	)		(1	)		-
Transfer to Stage 2		-			2			(2	)		-
Transfer to Stage 3		-			(3	)		3			-
Net remeasurement of loss allowance		(18	)		14			1			(3	)
Loan originations		1			-			-			1
Derecognitions and maturities		-			(1	)		-			(1	)
Total PCL (1)		(8	)		4			1			(3	)
Write-offs		-			-			(3	)		(3	)
Recoveries of previous write-offs		-			-			2			2
Foreign exchange and other		1			-			(1	)		-
Balance as at April 30, 2018		19			31			46			96
Loans: Consumer instalment and other personal
Balance as at January 31, 2018		79			317			129			525
Transfer to Stage 1		59			(55	)		(4	)		-
Transfer to Stage 2		(8	)		30			(22	)		-
Transfer to Stage 3		(1	)		(51	)		52			-
Net remeasurement of loss allowance		(49	)		95			51			97
Loan originations		9			-			-			9
Derecognitions and maturities		(4	)		(12	)		-			(16	)
Total PCL (1)		6			7			77			90
Write-offs		-			-			(78	)		(78	)
Recoveries of previous write-offs		-			-			22			22
Foreign exchange and other		1			4			(3	)		2
Balance as at April 30, 2018		86			328			147			561
Loans: Credit cards
Balance as at January 31, 2018		76			255			-			331
Transfer to Stage 1		56			(56	)		-			-
Transfer to Stage 2		(13	)		13			-			-
Transfer to Stage 3		(1	)		(52	)		53			-
Net remeasurement of loss allowance		(49	)		100			1			52
Loan originations		6			-			-			6
Derecognitions and maturities		-			(14	)		-			(14	)
Total PCL (1)		(1	)		(9	)		54			44
Write-offs		-			-			(81	)		(81	)
Recoveries of previous write-offs		-			-			27			27
Foreign exchange and other		2			-			-			2
Balance as at April 30, 2018		77			246			-			323
Loans: Business and government
Balance as at January 31, 2018		282			371			239			892
Transfer to Stage 1		18			(18	)		-			-
Transfer to Stage 2		(3	)		4			(1	)		-
Transfer to Stage 3		-			(9	)		9			-
Net remeasurement of loss allowance		(33	)		30			32			29
Loan originations		33			-			-			33
Derecognitions and maturities		(15	)		(22	)		-			(37	)
Total PCL (1)		-			(15	)		40			25
Write-offs		-			-			(80	)		(80	)
Recoveries of previous write-offs		-			-			23			23
Foreign exchange and other		9			12			11			32
Balance as at April 30, 2018		291			368			233			892
Total as at April 30, 2018		473			973			426			1,872
Comprised of:     Loans		383			866			398			1,647
Other credit instruments (2)		90			107			28			225

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

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

BMO Financial Group Second Quarter Report 2019 47

The following table shows the continuity in the loss allowance by each product type for the six months ended April 30, 2018:

(Canadian $ in millions)
For the six months ended	Stage 1			Stage 2			Stage 3			Total
Loans: Residential mortgages
Balance as at November 1, 2017		16			34			49			99
Transfer to Stage 1		18			(17	)		(1	)		-
Transfer to Stage 2		(1	)		4			(3	)		-
Transfer to Stage 3		-			(6	)		6			-
Net remeasurement of loss allowance		(19	)		20			5			6
Loan originations		6			-			-			6
Derecognitions and maturities		(1	)		(3	)		-			(4	)
Total PCL (1)		3			(2	)		7			8
Write-offs		-			-			(10	)		(10	)
Recoveries of previous write-offs		-			-			4			4
Foreign exchange and other		-			(1	)		(4	)		(5	)
Balance as at April 30, 2018		19			31			46			96
Loans: Consumer instalment and other personal
Balance as at November 1, 2017		76			357			137			570
Transfer to Stage 1		127			(119	)		(8	)		-
Transfer to Stage 2		(14	)		62			(48	)		-
Transfer to Stage 3		(2	)		(103	)		105			-
Net remeasurement of loss allowance		(111	)		154			74			117
Loan originations		18			-			-			18
Derecognitions and maturities		(9	)		(23	)		-			(32	)
Total PCL (1)		9			(29	)		123			103
Write-offs		-			-			(144	)		(144	)
Recoveries of previous write-offs		-			-			39			39
Foreign exchange and other		1			-			(8	)		(7	)
Balance as at April 30, 2018		86			328			147			561
Loans: Credit cards
Balance as at November 1, 2017		83			254			-			337
Transfer to Stage 1		116			(116	)		-			-
Transfer to Stage 2		(26	)		26			-			-
Transfer to Stage 3		(1	)		(101	)		102			-
Net remeasurement of loss allowance		(105	)		207			11			113
Loan originations		11			-			-			11
Derecognitions and maturities		(1	)		(24	)		-			(25	)
Total PCL (1)		(6	)		(8	)		113			99
Write-offs		-			-			(163	)		(163	)
Recoveries of previous write-offs		-			-			50			50
Foreign exchange and other		-			-			-			-
Balance as at April 30, 2018		77			246			-			323
Loans: Business and government
Balance as at November 1, 2017		268			410			234			912
Transfer to Stage 1		51			(50	)		(1	)		-
Transfer to Stage 2		(13	)		23			(10	)		-
Transfer to Stage 3		-			(28	)		28			-
Net remeasurement of loss allowance		(45	)		54			86			95
Loan originations		66			-			-			66
Derecognitions and maturities		(34	)		(40	)		-			(74	)
Total PCL (1)		25			(41	)		103			87
Write-offs		-			-			(130	)		(130	)
Recoveries of previous write-offs		-			-			31			31
Foreign exchange and other		(2	)		(1	)		(5	)		(8	)
Balance as at April 30, 2018		291			368			233			892
Total as at April 30, 2018		473			973			426			1,872
Comprised of:     Loans		383			866			398			1,647
Other credit instruments (2)		90			107			28			225

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

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

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

(Canadian $ in millions)	April 30, 2019				October 31, 2018
	Gross amount	Allowance for credit losses on impaired loans (2)	Allowance for credit losses on performing loans (3)	Net Amount	Gross amount	Allowance for credit losses on impaired loans (2)	Allowance for credit losses on performing loans (3)	Net Amount
By geographic region (1):
Canada	254,015	186	715	253,114	244,837	189	689	243,959
United States	150,385	219	581	149,585	131,247	181	574	130,492
Other countries	10,552	-	9	10,543	9,546	-	6	9,540
Total	414,952	405	1,305	413,242	385,630	370	1,269	383,991

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

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

(3) Excludes allowance for credit losses on performing loans of $225 million for other credit instruments, which is included in other liabilities ($204 million as at October 31, 2018).

48 BMO Financial Group Second Quarter Report 2019

Renegotiated Loans

The carrying value of our renegotiated loans was $1,183 million as at April 30, 2019 ($1,129 million as at October 31, 2018), with $557 million classified as performing as at April 30, 2019 ($541 million as at October 31, 2018). Renegotiated loans of $3 million and $8 million, respectively, were written off in the three and six months ended April 30, 2019 ($26 million and $33 million, respectively, for the three and six months ended April 30, 2018).

Note 4: Transfer of Assets

Loan Securitization

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

During the three and six months ended April 30, 2019, we sold $1,024 million and $2,864 million, respectively, of loans to these programs ($3,419 million and $4,418 million, respectively, for the three and six months ended April 30, 2018).

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

(Canadian $ in millions)			April 30, 2019				October 31, 2018
	Carrying amount of assets (1)		Carrying amount of associated liabilities		Carrying amount of assets (1)		Carrying amount of associated liabilities
Residential mortgages		6,072				5,569
Other related assets (2)		11,096				11,640
Total (3)		17,168		16,694		17,209		16,925

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

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

(3) The fair values of assets and associated liabilities are $17,126 million and $16,869 million, respectively, as at April 30, 2019 ($17,105 million and $16,763 million, respectively, as at October 31, 2018).

During the three and six months ended April 30, 2019, we sold and derecognized $72 million and $181 million, respectively, of mortgage loans purchased or originated in the U.S. ($201 million and $430 million, respectively, for the three and six months ended April 30, 2018). We retain the mortgage servicing rights for these loans, which represent our continuing involvement. As at April 30, 2019, the carrying value of the mortgage servicing rights was $49 million ($52 million as at October 31, 2018).

Note 5: Acquisitions

KGS-Alpha Capital Markets (“KGS”)

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

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

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

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

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

BMO Financial Group Second Quarter Report 2019 49

Note 6: Deposits and Subordinated Debt

Deposits

	Payable on demand								Payable				Payable on
(Canadian $ in millions)	Interest bearing				Non-interest bearing				after notice				a fixed date (4) (5)				Total
	April 30, 2019		October 31, 2018		April 30, 2019		October 31, 2018		April 30, 2019		October 31, 2018		April 30, 2019		October 31, 2018		April 30, 2019		October 31, 2018
Deposits by:
Banks (1)		1,459		1,450		1,567		1,400		1,035		526		26,238		24,531		30,299		27,907
Business and government		25,026		25,266		33,357		33,984		74,092		67,026		192,288		185,901		324,763		312,177
Individuals		3,451		3,476		22,237		21,345		93,118		90,233		74,969		65,790		193,775		180,844
Total (2) (3)		29,936		30,192		57,161		56,729		168,245		157,785		293,495		276,222		548,837		520,928
Booked in:
Canada		23,941		21,735		47,957		47,231		86,146		82,091		177,142		160,069		335,186		311,126
United States		5,001		7,395		9,187		9,477		80,767		74,476		81,021		86,805		175,976		178,153
Other countries		994		1,062		17		21		1,332		1,218		35,332		29,348		37,675		31,649
Total		29,936		30,192		57,161		56,729		168,245		157,785		293,495		276,222		548,837		520,928

 (1) Includes regulated and central banks.

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

 (3) As at April 30, 2019 and October 31, 2018, total deposits payable on a fixed date included $31,767 million and $29,673 million, respectively, of federal funds purchased and commercial paper issued and other deposit liabilities. Included in deposits as at April 30, 2019 and October 31, 2018 are $268,320 million and $259,747 million, respectively, of deposits denominated in U.S. dollars, and $39,956 million and $37,427 million, respectively, of deposits denominated in other foreign currencies.

 (4) Includes $261,028 million of deposits, each greater than one hundred thousand dollars, of which $162,543 million were booked in Canada, $63,161 million were booked in the United States and $35,324 million were booked in other countries ($246,685 million, $145,574 million, $71,770 million and $29,341 million, respectively, as at October 31, 2018). Of the $162,543 million of deposits booked in Canada, $71,007 million mature in less than three months, $3,162 million mature in three to six months, $15,103 million mature in six to twelve months and $73,271 million mature after twelve months ($145,574 million, $55,190 million, $3,836 million, $12,909 million and $73,639 million, respectively, as at October 31, 2018).

 (5) Includes $9,164 million of senior unsecured debt as at April 30, 2019 subject to the Bank Recapitalization (Bail-In) regime ($37 million as at October 31, 2018). The Bail-In regime provides certain statutory powers to the Canada Deposit Insurance Corporation, including the ability to convert specified eligible shares and liabilities into common shares if the bank becomes non-viable.

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

Subordinated Debt

During the three and six months ended April 30, 2019, we did not issue or redeem any subordinated debt.

Note 7: Equity

Preferred and Common Shares Outstanding (1)

(Canadian $ in millions, except as noted)	April 30, 2019				October 31, 2018
	Number of shares		Amount		Number of shares		Amount		Convertible into...
Preferred Shares - Classified as Equity
Class B – Series 25		9,425,607		236		9,425,607		236		Class B - Series 26	(2)
Class B – Series 26		2,174,393		54		2,174,393		54		Class B - Series 25	(2)
Class B – Series 27		20,000,000		500		20,000,000		500		Class B - Series 28	(2)(3)
Class B – Series 29		16,000,000		400		16,000,000		400		Class B - Series 30	(2)(3)
Class B – Series 31		12,000,000		300		12,000,000		300		Class B - Series 32	(2)(3)
Class B – Series 33		8,000,000		200		8,000,000		200		Class B - Series 34	(2)(3)
Class B – Series 35		6,000,000		150		6,000,000		150		Not convertible	(3)
Class B – Series 36		600,000		600		600,000		600		Class B - Series 37	(2)(3)
Class B – Series 38		24,000,000		600		24,000,000		600		Class B - Series 39	(2)(3)
Class B – Series 40		20,000,000		500		20,000,000		500		Class B - Series 41	(2)(3)
Class B – Series 42		16,000,000		400		16,000,000		400		Class B - Series 43	(2)(3)
Class B – Series 44		16,000,000		400		16,000,000		400		Class B - Series 45	(2)(3)
Class B – Series 46		14,000,000		350		-		-		Class B - Series 47	(2)(3)
				4,690				4,340
Common Shares (4) (5)		638,760,869		12,939		639,329,625		12,929
Share Capital				17,629				17,269

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

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

 (3) The shares issued include anon-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 avoidnon-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 stock options issued under the Stock Option Plan are convertible into 6,593,167 common shares as at April 30, 2019 (6,095,201 common shares as at October 31, 2018).

 (5) During the three and six months ended April 30, 2019, we did not issue any common shares under the Shareholder Dividend Reinvestment and Share Purchase Plan; we issued 357,233 and 431,244 common shares, respectively, under the Stock Option Plan.

50 BMO Financial Group Second Quarter Report 2019

Preferred Shares

On April 17, 2019, we issued 14 millionNon-Cumulative5-Year Rate Reset Class B Preferred Shares Series 46(Non-Viability Contingent Capital (NVCC)), at a price of $25 per share, for gross proceeds of $350 million. For the initial five year period to the earliest redemption date of May 25, 2024, the shares pay quarterly cash dividends, if declared, at a rate of 5.1% per annum. The dividend rate will reset on the earliest redemption date and every fifth year thereafter at a rate equal to the5-year Government of Canada bond yield plus a premium of 3.51%. Holders have the option to convert their shares into an equal number ofNon-Cumulative Floating Rate Class B Preferred Shares Series 47 (Preferred Shares Series 47), subject to certain conditions, on the earliest redemption date and every fifth year thereafter. Holders of the Preferred Shares Series 47 will be entitled to receivenon-cumulative preferential floating rate quarterly dividends, as and when declared, equal to the3-month Government of Canada Treasury Bill yield plus 3.51%.

During the three and six months ended April 30, 2019, we did not redeem any preferred shares.

On March 29, 2019, we announced that we did not intend to exercise our right to redeem the currently outstandingNon-Cumulative5-Year Rate Reset Class B Preferred Shares Series 27 (Preferred Shares Series 27) on May 25, 2019. As a result, subject to certain conditions, the holders of Preferred Shares Series 27 had the right, at their option, by May 10, 2019, to convert any or all of their Preferred Shares Series 27 on aone-for-one basis intoNon-Cumulative Floating Rate Class B Preferred Shares Series 28 (Preferred Shares Series 28). During the conversion period, which ran from April 25, 2019 to May 10, 2019, 412,564 Preferred Shares Series 27 were tendered for conversion into Preferred Shares Series 28, which is less than the minimum 1,000,000 required to give effect to the conversion, as described in the Preferred Shares Series 27 prospectus supplement dated April 16, 2014. As a result, no Preferred Shares Series 28 will be issued and holders of Preferred Shares Series 27 will retain their shares. The dividend rate for the Preferred Shares Series 27 for the five year period commencing on May 25, 2019, and ending on May 24, 2024, will be 3.852%.

Common Shares

During the three months ended April 30, 2019, we did not purchase for cancellation any common shares under the normal course issuer bid (“NCIB”) which expires on May 31, 2019. During the six months ended April 30, 2019, 1 million common shares were purchased for cancellation under this program.

As previously announced, subject to receiving Toronto Stock Exchange approval, we will establish a new NCIB that will permit us to purchase for cancellation up to 15 million common shares over a12-month period commencing on or about June 3, 2019. The NCIB is a regular part of BMO’s capital management strategy. The timing and amount of purchases under the NCIB are subject to regulatory approvals and to management discretion, based on factors such as market conditions and capital levels. We will consult with OSFI before making purchases under the NCIB.

Capital Trust Securities

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

Note 8: Fair Value of Financial Instruments

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

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

(Canadian $ in millions)	April 30, 2019				October 31, 2018
	Carrying value		Fair value		Carrying value		Fair value
Securities
Amortized cost		7,881		7,855		6,485		6,288
Loans (1)
Residential mortgages		120,708		120,590		119,544		118,609
Consumer instalment and other personal		63,938		64,109		62,687		62,618
Credit cards		8,227		8,227		8,099		8,099
Business and government (2)		217,578		218,195		192,225		191,989
		410,451		411,121		382,555		381,315
Deposits (3)		532,695		533,352		506,742		506,581
Securitization and structured entities’ liabilities		25,621		25,757		25,051		24,838
Subordinated debt		6,953		7,168		6,782		6,834

This table excludes financial instruments with a carrying value approximating fair value, including cash and cash equivalents, interest bearing deposits with banks, securities borrowed or purchased under resale agreements, customers’ liability under acceptances, other assets, acceptances, securities lent or sold under repurchase agreements and other liabilities.

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

  (2) Excludes $2,816 million of loans classified as FVTPL as at April 30, 2019 ($1,450 million as at October 31, 2018).

  (3) Excludes $16,142 million of structured note liabilities designated at fair value through profit or loss and accounted for at fair value ($14,186 million as at October 31, 2018).

BMO Financial Group Second Quarter Report 2019 51

Financial Instruments Designated at Fair Value

Most of our structured note liabilities included in deposits have been designated at fair value through profit or loss which aligns the accounting result with the way the portfolio is managed. The fair value and notional amount due at contractual maturity of these structured notes as at April 30, 2019 were $16,142 million and $15,701 million, respectively ($14,186 million and $14,548 million, respectively, as at October 31, 2018). The change in fair value of these structured notes was recorded as a decrease of $365 million and a decrease of $765 million innon-interest revenue, trading revenue and a decrease of $121 million and a decrease of $14 million recorded in other comprehensive income related to changes in our credit spread, respectively, for the three and six months ended April 30, 2019 (an increase of $197 million and a decrease of $72 million recorded innon-interest revenue, trading revenue, and an increase of $49 million and a decrease of $41 million recorded in other comprehensive income related to changes in our own credit spread, respectively, for the three and six months ended April 30, 2018). The impact of economic hedges used to manage the exposure is also recorded innon-interest revenue, trading revenue. The impact of changes in our credit spread is measured based on movements in our credit spread quarter over quarter.

The cumulative change in fair value related to changes in our own credit spread that has been recognized since the notes were designated at fair value to April 30, 2019 was an unrealized loss of $345 million, of this an unrealized loss of $269 million was recorded in other comprehensive income, with an unrealized loss of $76 million recorded through the Consolidated Statement of Income prior to the adoption of IFRS 9 own credit provision in 2015.

We designate certain securities held by our insurance subsidiaries that support our insurance liabilities at fair value through profit or loss since the actuarial calculation of insurance liabilities is based on the fair value of the investments supporting them. This designation aligns the accounting result with the way the portfolio is managed on a fair value basis. The change in fair value of the assets is recorded innon-interest revenue, insurance revenue and the change in fair value of the liabilities is recorded in insurance claims, commissions and changes in policy benefit liabilities. The fair value of these investments as at April 30, 2019 of $10,007 million ($8,783 million as at October 31, 2018) is recorded in securities in our Consolidated Balance Sheet. The impact of recording these investments at fair value through profit or loss was an increase of $337 million and $593 million innon-interest revenue, insurance revenue, respectively, for the three and six months ended April 30, 2019 (a decrease of $124 million and $134 million, respectively, for the three and six months ended April 30, 2018).

We designate the obligation related to certain investment contracts in our insurance business at fair value through profit or loss, which eliminates a measurement inconsistency that would otherwise arise from measuring the investment contract liabilities and offsetting changes in the fair value of the investments supporting them on a different basis. The fair value of these investment contract liabilities as at April 30, 2019 of $952 million ($800 million as at October 31, 2018) is recorded in other liabilities in our Consolidated Balance Sheet. The change in fair value of these investment contract liabilities resulted in an increase of $24 million and an increase of $61 million in insurance claims, commissions, and changes in policy benefit liabilities, respectively, for the three and six months ended April 30, 2019 (an increase of $1 million and a decrease of $13 million, respectively, for the three and six months ended April 30, 2018). For the three and six months ended April 30, 2019, a decrease of $13 million and a decrease of $12 million, respectively, was recorded in other comprehensive income related to changes in our own credit spread (an increase of $8 million and a decrease of $2 million, respectively, for the three and six months ended April 30, 2018). Changes in the fair value of investments backing these investment contract liabilities are recorded innon-interest revenue, insurance revenue. The impact of changes in our credit spread is measured based on movements in our credit spread quarter over quarter.

Fair Value Hierarchy

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

Valuation Techniques and Significant Inputs

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

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

52 BMO Financial Group Second Quarter Report 2019

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

(Canadian $ in millions)							April 30, 2019
	Valued using quoted market prices		Valued using models (with observable inputs)		Valued using models (without observable inputs)		Total
Trading Securities
Issued or guaranteed by:
Canadian federal government		8,176		1,665		-		9,841
Canadian provincial and municipal governments		3,998		4,815		-		8,813
U.S. federal government		11,516		823		-		12,339
U.S. states, municipalities and agencies		47		626		-		673
Other governments		1,231		648		-		1,879
NHA MBS, U.S. agency MBS and CMO		35		9,384		215		9,634
Corporate debt		2,022		5,601		7		7,630
Loans		-		263		-		263
Corporate equity		49,918		1		-		49,919
		76,943		23,826		222		100,991
FVTPL Securities
Issued or guaranteed by:
Canadian federal government		434		91		-		525
Canadian provincial and municipal governments		285		797		-		1,082
U.S. federal government		1		70		-		71
Other governments		-		31		-		31
NHA MBS, U.S. agency MBS and CMO		-		6		-		6
Corporate debt		79		7,616		-		7,695
Corporate equity		1,522		65		1,907		3,494
		2,321		8,676		1,907		12,904
FVOCI Securities
Issued or guaranteed by:
Canadian federal government		10,692		2,236		-		12,928
Canadian provincial and municipal governments		4,744		2,862		-		7,606
U.S. federal government		15,302		2,167		-		17,469
U.S. states, municipalities and agencies		-		4,068		1		4,069
Other governments		2,544		3,838		-		6,382
NHA MBS, U.S. agency MBS and CMO		-		15,196		-		15,196
Corporate debt		1,126		3,823		-		4,949
Corporate equity		-		-		69		69
		34,408		34,190		70		68,668
Business and government Loans		-		644		2,172		2,816
Fair Value Liabilities
Securities sold but not yet purchased		27,930		4,093		-		32,023
Structured note liabilities and other note liabilities		-		16,142		-		16,142
Investment contract liabilities		-		952		-		952
		27,930		21,187		-		49,117
Derivative Assets
Interest rate contracts		7		8,725		-		8,732
Foreign exchange contracts		5		9,506		-		9,511
Commodity contracts		113		1,261		-		1,374
Equity contracts		178		781		-		959
Credit default swaps		-		51		-		51
		303		20,324		-		20,627
Derivative Liabilities
Interest rate contracts		13		6,728		-		6,741
Foreign exchange contracts		3		10,568		-		10,571
Commodity contracts		182		1,030		-		1,212
Equity contracts		98		2,826		-		2,924
Credit default swaps		-		101		-		101
		296		21,253		-		21,549

BMO Financial Group Second Quarter Report 2019 53

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

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

Significant Transfers

Our policy is to record transfers of assets and liabilities between fair value hierarchy levels at their fair values as at the end of each reporting period, consistent with the date of the determination of fair value. Transfers between the various fair value hierarchy levels reflect changes in the availability of quoted market prices or observable market inputs that result from changes in market conditions. The following is a discussion of the significant transfers between Level 1, Level 2 and Level 3 balances for the three and six months ended April 30, 2019. As at April 30, 2019, we refined our judgement of whether quoted prices for fixed income securities were obtained from markets that are active or not in the determination of whether a security should be Level 1 or Level 2, with the result that certain securities are shown as a transfer to Level 2 in the quarter.

During the three and six months ended April 30, 2019, $1,954 million and $3,658 million, respectively, of trading securities, $141 million and $464 million, respectively, of FVTPL securities, and $7,282 million and $7,889 million, respectively, of FVOCI securities were transferred from Level 1 to Level 2 due to our refined approach and reduced observability of the inputs used to value these securities. During the three and six months ended April 30, 2019, $2,700 million and $3,359 million, respectively, of trading securities, $248 million and $352 million, respectively, of FVTPL securities and $464 million and $1,575 million, respectively, of FVOCI securities were transferred from Level 2 to Level 1 due to increased availability of quoted prices in active markets.

54 BMO Financial Group Second Quarter Report 2019

During the three and six months ended April 30, 2019, $26 million and $45 million, respectively, of trading securities were transferred from Level 2 to Level 3 due to changes in the market observability of inputs used in pricing these securities, $18 million and $35 million, respectively, were transferred from Level 3 to Level 2 due to the availability of observable price inputs used to value these securities.

Changes in Level 3 Fair Value Measurements

The table below presents a reconciliation of all changes in Level 3 financial instruments during the three and six months ended April 30, 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 April 30, 2019	Balance January 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 April 30, 2019		Change in   unrealized gains   (losses) recorded   in income   for instruments   still held
Trading Securities
NHA MBS and U.S. agency MBS and CMO		231		(2	)		5		87			(114	)		-			26		(18	)		215		(6	)
Corporate debt		6		-			-		6			(5	)		-			-		-			7		-
Total trading securities		237		(2	)		5		93			(119	)		-			26		(18	)		222		(6	)
FVTPL Securities
Corporate equity		1,786		(4	)		27		124			(26	)		-			-		-			1,907		4
Total FVTPL securities		1,786		(4	)		27		124			(26	)		-			-		-			1,907		4
FVOCI Securities
Issued or guaranteed by:
U.S. states, municipalities and agencies		1		-			-		-			-			-			-		-			1		na
Corporate equity		64		-			-		5			-			-			-		-			69		na
Total FVOCI securities		65		-			-		5			-			-			-		-			70		na
Business and government Loans		2,429		-			48		97			-			(402	)		-		-			2,172		-
Fair Value Liabilities
Securities sold but not yet purchased		7		-			-		(7	)		-			-			-		-			-		-
Total fair value liabilities		7		-			-		(7	)		-			-			-		-			-		-
Derivative Liabilities
Equity contracts		-		-			-		-			-			-			-		-			-		-
Credit default swaps		1		-			-		-			-			-			-		(1	)		-		-
Total derivative liabilities		1		-			-		-			-			-			-		(1	)		-		-

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

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

  na – Not applicable

			Change in fair value
(Canadian $ in millions)   For the six months ended April 30, 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 April 30, 2019		Change in   unrealized gains   (losses) recorded   in income   for instruments   still held
Trading Securities
NHA MBS and U.S. agency MBS and CMO		255		(7	)		4		183			(230	)		-			45		(35	)		215		(7	)
Corporate debt		7		-			-		6			(6	)		-			-		-			7		-
Total trading securities		262		(7	)		4		189			(236	)		-			45		(35	)		222		(7	)
FVTPL Securities
Corporate equity		1,825		10			23		247			(198	)		-			-		-			1,907		20
Total FVTPL		1,825		10			23		247			(198	)		-			-		-			1,907		20
FVOCI Securities
Issued or guaranteed by:
U.S. states, municipalities and agencies		1		-			-		-			-			-			-		-			1		na
Corporate equity		62		-			-		7			-			-			-		-			69		na
Total FVOCI securities		63		-			-		7			-			-			-		-			70		na
Business and government Loans		1,450		7			44		1,214			-			(543	)		-		-			2,172		-
Fair Value Liabilities
Securities sold but not yet purchased		-		-			-		(7	)		7			-			-		-			-		-
Total fair value liabilities		-		-			-		(7	)		7			-			-		-			-		-
Derivative Liabilities
Equity contracts		1		-			-		-			-			-			-		(1	)		-		-
Credit default swaps		1		-			-		-			-			-			-		(1	)		-		-
Total derivative liabilities		2		-			-		-			-			-			-		(2	)		-		-

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

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

  na – Not applicable

BMO Financial Group Second Quarter Report 2019 55

Note 9: Capital Management

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

As at April 30, 2019, we met OSFI’s target capital ratio requirements, which include a 2.5% Capital Conservation Buffer, a 1.0% Common Equity Surcharge for Domestic Systemically Important Banks(D-SIBs), a Countercyclical Buffer and a 1.75% Domestic Stability Buffer (DSB) applicable toD-SIBs. Our capital position as at April 30, 2019 is detailed in the Capital Management section of Management’s Discussion and Analysis of the Second Quarter 2019 Report to Shareholders.

Note 10: Employee Compensation

Stock Options

We did not grant any stock options during the three months ended April 30, 2019 and 2018. During the six months ended April 30, 2019, we granted a total of 931,047 stock options (705,398 stock options during the six months ended April 30, 2018). The weighted-average fair value of options granted during the six months ended April 30, 2019 was $10.23 per option ($11.30 per option for the six months ended April 30, 2018).

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

For stock options granted during the six months ended	April 30, 2019		April 30, 2018
Expected dividend yield		5.7%		4.1%
Expected share price volatility		20.0% - 20.1%		17.0% - 17.3%
Risk-free rate of return		2.5%		2.1%
Expected period until exercise (in years)		6.5 - 7.0		6.5 - 7.0
Exercise price ($)		89.90		100.63

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

Pension and Other Employee Future Benefit Expenses

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

(Canadian $ in millions)
	Pension benefit plans						Other employee future benefit plans
For the three months ended	April 30, 2019			April 30, 2018			April 30, 2019		April 30, 2018
Current service cost		48			53			3		8
Net interest (income) expense on net defined benefit (asset) liability		(4	)		(2	)		9		11
Administrative expenses		1			1			-		-
Benefits expense		45			52			12		19
Canada and Quebec pension plan expense		26			24			-		-
Defined contribution expense		36			31			-		-
Total pension and other employee future benefit expenses recognized in the Consolidated Statement of Income		107			107			12		19
(Canadian $ in millions)
	Pension benefit plans						Other employee future benefit plans
For the six months ended	April 30, 2019			April 30, 2018			April 30, 2019		April 30, 2018
Current service cost		96			105			5		15
Net interest (income) expense on net defined benefit (asset) liability		(9	)		(4	)		19		23
Past service income		(5	)		-			-		-
Administrative expenses		2			2			-		-
Benefits expense		84			103			24		38
Canada and Quebec pension plan expense		47			44			-		-
Defined contribution expense		90			90			-		-
Total pension and other employee future benefit expenses recognized in the Consolidated Statement of Income		221			237			24		38

56 BMO Financial Group Second Quarter Report 2019

Note 11: Earnings Per Share

Basic earnings per share is calculated by dividing net income attributable to our shareholders, after deducting total preferred shares dividends, 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 Share

(Canadian $ in millions, except as noted)	For the three months ended						For the six months ended
	April 30, 2019			April 30, 2018			April 30, 2019			April 30, 2018
Net income attributable to bank shareholders		1,497			1,246			3,007			2,219
Dividends on preferred shares		(48	)		(46	)		(100	)		(91	)
Net income available to common shareholders		1,449			1,200			2,907			2,128
Weighted-average number of common shares outstanding (in thousands)		638,574			643,734			638,753			645,735
Basic earnings per share (Canadian $)		2.27			1.87			4.55			3.30
Diluted Earnings Per Share
Net income available to common shareholders adjusted for impact of dilutive instruments		1,449			1,200			2,907			2,128
Weighted-average number of common shares outstanding (in thousands)		638,574			643,734			638,753			645,735
Effect of dilutive instruments
Stock options potentially exercisable (1)		6,037			5,497			5,356			5,711
Common shares potentially repurchased		(4,351	)		(3,604	)		(3,787	)		(3,671	)
Weighted-average number of diluted common shares outstanding (in thousands)		640,260			645,627			640,322			647,775
Diluted earnings per share (Canadian $)		2.26			1.86			4.54			3.29

(1) In computing diluted earnings per share we excluded average stock options outstanding of 687,059 and 1,343,031 with a weighted-average exercise price of $104.14 and $101.82, respectively, for the three and six months ended April 30, 2019 (1,683,632 and 1,584,274 with a weighted-average exercise price of $119.63 and $120.68, respectively, for the three and six months ended April 30, 2018) as the average share price for the period did not exceed the exercise price.

Note 12: Income Taxes

During the quarter ended April 30, 2019, Canada Revenue Agency (CRA) proposed to reassess us for additional taxes and interest in an amount of approximately $250 million in respect of certain 2014 Canadian corporate dividends. In prior fiscal years, we were reassessed by the CRA for additional income taxes and interest of approximately $361 million for certain 2011-2013 Canadian corporate dividends. In its reassessments, the CRA denied dividend deductions on the basis that the dividends were received as part of a “dividend rental arrangement.” The tax rules raised by the CRA in the reassessments were prospectively addressed in the 2015 and 2018 Canadian Federal Budgets. In the future, we expect to be reassessed for significant income tax for similar activities in 2015 and subsequent years. We remain of the view that our tax filing positions were appropriate and intend to challenge any reassessment.

Note 13: Operating Segmentation

Operating Groups

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

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

BMO Financial Group Second Quarter Report 2019 57

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

(Canadian $ in millions)
For the three months ended April 30, 2019	Canadian P&C			U.S. P&C			Wealth Management			BMO CM			Corporate Services (1)			Total
Net interest income		1,407			1,035			230			599			(136	)		3,135
Non-interest revenue		514			281			1,612			630			41			3,078
Total Revenue		1,921			1,316			1,842			1,229			(95	)		6,213
Provision for (recovery of) credit losses on impaired loans		122			18			(1	)		12			(1	)		150
Provision for credit losses on performing loans		16			5			1			3			1			26
Total Provision for credit losses		138			23			-			15			-			176
Insurance claims, commissions and changes in policy benefit liabilities		-			-			561			-			-			561
Amortization		84			117			64			38			-			303
Non-interest expense		868			658			818			849			99			3,292
Income (loss) before taxes		831			518			399			327			(194	)		1,881
Provision for (recovery of) income taxes		216			112			94			78			(116	)		384
Net Income		615			406			305			249			(78	)		1,497
Average Assets		235,680			124,725			40,402			344,427			75,742			820,976
For the three months ended April 30, 2018	Canadian P&C			U.S. P&C			Wealth Management			BMO CM			Corporate Services (1)			Total
Net interest income		1,338			936			204			319			(131	)		2,666
Non-interest revenue		492			269			1,380			723			50			2,914
Total Revenue		1,830			1,205			1,584			1,042			(81	)		5,580
Provision for (recovery of) credit losses on impaired loans		131			66			1			(16	)		(10	)		172
Provision for (recovery of) credit losses on performing loans		(3	)		(12	)		(1	)		3			1			(12	)
Provision for (recovery of) credit losses		128			54			-			(13	)		(9	)		160
Insurance claims, commissions and changes in policy benefit liabilities		-			-			332			-			-			332
Amortization		79			115			60			31			-			285
Non-interest expense		830			596			802			640			372			3,240
Income (loss) before taxes		793			440			390			384			(444	)		1,563
Provision for (recovery of) income taxes		205			92			94			98			(172	)		317
Net Income		588			348			296			286			(272	)		1,246
Average Assets		223,182			108,624			35,246			302,772			73,814			743,638
(Canadian $ in millions)
For the six months ended April 30, 2019	Canadian P&C			U.S. P&C			Wealth Management			BMO CM			Corporate Services (1)			Total
Net interest income		2,840			2,094			462			1,160			(249	)		6,307
Non-interest revenue		1,035			560			3,520			1,201			107			6,423
Total Revenue		3,875			2,654			3,982			2,361			(142	)		12,730
Provision for (recovery of) credit losses on impaired loans		236			33			1			13			(6	)		277
Provision for (recovery of) credit losses on performing loans		22			(4	)		1			17			-			36
Total provision for (recovery of) credit losses		258			29			2			30			(6	)		313
Insurance claims, commissions and changes in policy benefit liabilities		-			-			1,487			-			-			1,487
Amortization		163			229			131			71			-			594
Non-interest expense		1,750			1,314			1,646			1,608			240			6,558
Income (loss) before taxes		1,704			1,082			716			652			(376	)		3,778
Provision for (recovery of) income taxes		442			232			172			148			(223	)		771
Net Income		1,262			850			544			504			(153	)		3,007
Average Assets		233,583			122,346			39,559			342,316			82,781			820,585
For the six months ended April 30, 2018	Canadian P&C			U.S. P&C			Wealth Management			BMO CM			Corporate Services (1)			Total
Net interest income		2,718			1,839			404			881			(301	)		5,541
Non-interest revenue		1,015			537			2,786			1,245			94			5,677
Total Revenue		3,733			2,376			3,190			2,126			(207	)		11,218
Provision for (recovery of) credit losses on impaired loans		228			143			2			(17	)		(10	)		346
Provision for (recovery of) credit losses on performing loans		1			(42	)		(3	)		(1	)		-			(45	)
Provision for (recovery of) credit losses		229			101			(1	)		(18	)		(10	)		301
Insurance claims, commissions and changes in policy benefit liabilities		-			-			693			-			-			693
Amortization		160			227			117			60			-			564
Non-interest expense		1,687			1,193			1,640			1,333			508			6,361
Income (loss) before taxes		1,657			855			741			751			(705	)		3,299
Provision for income taxes		423			197			179			194			87			1,080
Net Income		1,234			658			562			557			(792	)		2,219
Average Assets		222,402			106,383			34,755			299,031			72,846			735,417

(1) Corporate Services includes Technology and Operations.

We analyze revenue on a taxable equivalent basis (“teb”) at the operating group level. Revenue and the provision for income taxes are increased ontax-exempt securities to an equivalentbefore-tax basis to facilitate comparisons of income between taxable andtax-exempt sources. The offset to the groups’ teb adjustments is reflected in Corporate Services revenue and provision for income taxes.

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

58 BMO Financial Group Second Quarter Report 2019