Bank of Montreal (BMO) 6-K 2021 Q3 BMO Financial Group Reports Third Quarter 2021 Results

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, 2021			April 30, 2021			July 31, 2020		July 31, 2021		July 31, 2020
Interest, Dividend and Fee Income
Loans	$	3,916		$	3,849		$	4,204	$	11,794	$	13,856
Securities (Note 2)		929			1,002			1,249		2,921		3,971
Deposits with banks		50			50			49		144		343
		4,895			4,901			5,502		14,859		18,170
Interest Expense
Deposits		745			817			1,292		2,483		5,157
Subordinated debt		44			51			65		153		201
Other liabilities		585			578			610		1,669		2,371
		1,374			1,446			1,967		4,305		7,729
Net Interest Income		3,521			3,455			3,535		10,554		10,441
Non-Interest Revenue
Securities commissions and fees		264			300			260		849		789
Deposit and payment service charges		319			306			299		930		916
Trading revenues		135			47			68		394		(8	)
Lending fees		348			343			309		1,047		956
Card fees		113			122			85		316		264
Investment management and custodial fees		502			476			455		1,460		1,341
Mutual fund revenues		406			396			348		1,176		1,062
Underwriting and advisory fees		411			404			287		1,073		811
Securities gains, other than trading		198			111			31		411		84
Foreign exchange gains, other than trading		41			63			21		128		89
Insurance revenues		1,137			(163	)		1,321		1,718		2,035
Investments in associates and joint ventures		67			60			52		183		112
Other		100			156			118		374		308
		4,041			2,621			3,654		10,059		8,759
Total Revenue		7,562			6,076			7,189		20,613		19,200
Provision for Credit Losses (Note 3)		(70	)		60			1,054		146		2,521
Insurance Claims, Commissions and Changes in Policy Benefit Liabilities		984			(283	)		1,189		1,302		1,708
Non-Interest Expense
Employee compensation (Note 8)		2,102			2,042			1,964		6,263		5,994
Premises and equipment		829			863			785		2,496		2,348
Amortization of intangible assets		157			158			154		471		461
Travel and business development		101			97			57		264		296
Communications		63			72			71		199		233
Professional fees		140			147			135		423		396
Other (Note 12)		292			1,030			278		1,590		901
		3,684			4,409			3,444		11,706		10,629
Income Before Provision for Income Taxes		2,964			1,890			1,502		7,459		4,342
Provision for income taxes (Note 10)		689			587			270		1,864		829
Net Income	$	2,275		$	1,303		$	1,232	$	5,595	$	3,513
Earnings Per Share (Canadian $) (Note 9)
Basic	$	3.42		$	1.91		$	1.81	$	8.36	$	5.18
Diluted		3.41			1.91			1.81		8.35		5.18
Dividends per common share		1.06			1.06			1.06		3.18		3.18

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

46

BMO Financial Group Third Quarter Report 2021

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, 2021			April 30, 2021			July 31, 2020			July 31, 2021			July 31, 2020
Net Income	$	2,275		$	1,303		$	1,232		$	5,595		$	3,513
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 debt securities
Unrealized gains (losses) on fair value through OCI debt securities arising during the period (1)		22			(89	)		141			(10	)		421
Reclassification to earnings of (gains) in the period (2)		(5	)		(19	)		(18	)		(33	)		(74	)
		17			(108	)		123			(43	)		347
Net change in unrealized gains (losses) on cash flow hedges
Gains (losses) on derivatives designated as cash flow hedges arising during the period (3)		218			(479	)		83			(392	)		1,673
Reclassification to earnings of (gains) losses on derivatives designated as cash flow hedges in the period (4)		(116	)		(86	)		(37	)		(279	)		8
		102			(565	)		46			(671	)		1,681
Net gains (losses) on translation of net foreign operations
Unrealized gains (losses) on translation of net foreign operations		521			(1,304	)		(1,180	)		(1,914	)		516
Unrealized gains (losses) on hedges of net foreign operations (5)		(139	)		316			206			398			(145	)
		382			(988	)		(974	)		(1,516	)		371
Items that will not be reclassified to net income
Gains (losses) on remeasurement of pension and other employee future benefit plans (6)		54			436			(189	)		765			(244	)
Gains (losses) on remeasurement of own credit risk on financial liabilities designated at fair value (7)		22			3			(330	)		(220	)		(49	)
Unrealized gains on fair value through OCI equity securities arising during the period (8)		7			-			-			7			-
		83			439			(519	)		552			(293	)
Other Comprehensive Income (Loss), net of taxes		584			(1,222	)		(1,324	)		(1,678	)		2,106
Total Comprehensive Income (Loss)	$	2,859		$	81		$	(92	)	$	3,917		$	5,619

(1) Net of income tax (provision) recovery of $(7) million, $32 million, $(47) million for the three months ended, and $5 million, $(147) million for the nine months ended, respectively.

(2) Net of income tax provision of $2 million, $6 million, $6 million for the three months ended, and $11 million, $23 million for the nine months ended, respectively.

(3) Net of income tax (provision) recovery of $(72) million, $173 million, $(27) million for the three months ended, and $147 million, $(600) million for the nine months ended, respectively.

(4) Net of income tax provision (recovery) of $41 million, $31 million, $13 million for the three months ended, and $100 million, $(3) million for the nine months ended, respectively.

(5) Net of income tax (provision) recovery of $50 million, $(115) million, $(74) million for the three months ended, and $(145) million, $53 million for the nine months ended, respectively.

(6) Net of income tax (provision) recovery of $(26) million, $(158) million, $65 million for the three months ended, and $(283) million, $85 million for the nine months ended, respectively.

(7) Net of income tax (provision) recovery of $(9) million, $(1) million, $120 million for the three months ended, and $79 million, $18 million for the nine months ended, respectively.

(8) Net of income tax (provision) recovery of $(2) million, $nil, $nil for the three months ended, and $(2) million, $nil 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 2021

47

Interim Consolidated Financial Statements

Consolidated Balance Sheet

(Unaudited) (Canadian $ in millions)				As at
	July 31, 2021			April 30, 2021			October 31, 2020
Assets
Cash and Cash Equivalents	$	83,825		$	98,593		$	57,408
Interest Bearing Deposits with Banks		8,793			8,955			9,035
Securities (Note 2)
Trading		102,169			90,566			97,834
Fair value through profit or loss		14,239			13,331			13,568
Fair value through other comprehensive income		64,553			61,172			73,407
Debt securities at amortized cost		48,727			46,744			48,466
Investments in associates and joint ventures		1,088			1,054			985
		230,776			212,867			234,260
Securities Borrowed or Purchased Under Resale Agreements		104,738			98,327			111,878
Loans
Residential mortgages		134,374			130,529			127,024
Consumer instalment and other personal		75,092			71,918			70,148
Credit cards		7,866			7,488			7,889
Business and government		241,108			237,702			245,662
		458,440			447,637			450,723
Allowance for credit losses (Note 3)		(2,824	)		(3,028	)		(3,303	)
		455,616			444,609			447,420
Other Assets
Derivative instruments		36,331			37,998			36,815
Customers’ liability under acceptances		14,263			11,952			13,493
Premises and equipment		4,266			4,298			4,183
Goodwill		5,450			5,375			6,535
Intangible assets		2,298			2,323			2,442
Current tax assets		1,145			1,141			1,260
Deferred tax assets		1,209			1,294			1,473
Other		22,648			22,107			23,059
		87,610			86,488			89,260
Total Assets	$	971,358		$	949,839		$	949,261
Liabilities and Equity
Deposits (Note 4)	$	680,553		$	657,201		$	659,034
Other Liabilities
Derivative instruments		29,167			33,218			30,375
Acceptances		14,263			11,952			13,493
Securities sold but not yet purchased		28,497			32,540			29,376
Securities lent or sold under repurchase agreements		92,990			87,703			88,658
Securitization and structured entities’ liabilities		23,927			25,657			26,889
Current tax liabilities		154			193			126
Deferred tax liabilities		188			163			108
Other		36,950			38,554			36,193
		226,136			229,980			225,218
Subordinated Debt (Note 4)		6,973			7,144			8,416
Equity
Preferred shares and other equity instruments (Note 5)		5,848			5,848			6,598
Common shares (Note 5)		13,609			13,536			13,430
Contributed surplus		310			313			302
Retained earnings		34,089			32,561			30,745
Accumulated other comprehensive income		3,840			3,256			5,518
Total Equity		57,696			55,514			56,593
Total Liabilities and Equity	$	971,358		$	949,839		$	949,261

 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.

48

BMO Financial Group Third Quarter Report 2021

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, 2021			July 31, 2020			July 31, 2021			July 31, 2020
Preferred Shares and Other Equity Instruments (Note 5)
Balance at beginning of period	$	5,848		$	5,348		$	6,598		$	5,348
Redeemed during the period		-			-			(750	)		-
Balance at End of Period		5,848			5,348			5,848			5,348
Common Shares (Note 5)
Balance at beginning of period		13,536			13,000			13,430			12,971
Issued under the Shareholder Dividend Reinvestment and Share Purchase Plan		-			214			-			214
Issued under the Stock Option Plan		40			1			99			30
Treasury shares or repurchase of common shares for cancellation		33			(15	)		80			(15	)
Balance at End of Period		13,609			13,200			13,609			13,200
Contributed Surplus
Balance at beginning of period		313			301			302			303
Stock option expense, net of options exercised		-			1			7			(1	)
Net premium (discount) on sale of treasury shares		(3	)		-			-			-
Other		-			-			1			-
Balance at End of Period		310			302			310			302
Retained Earnings
Balance at beginning of period		32,561			29,426			30,745			28,725
Impact from adopting IFRS 16		-			-			-			(59	)
Net income		2,275			1,232			5,595			3,513
Dividends on preferred shares and distributions payable on other equity instruments		(61	)		(73	)		(185	)		(195	)
Dividends on common shares		(686	)		(682	)		(2,058	)		(2,038	)
Equity issue expense and premium paid on redemption of preferred shares		-			-			(6	)		-
Net discount on sale of treasury shares		-			(1	)		(2	)		(44	)
Balance at End of Period		34,089			29,902			34,089			29,902
Accumulated Other Comprehensive Income on Fair Value through OCI Securities, net of taxes
Balance at beginning of period		295			250			355			26
Unrealized gains (losses) on fair value through OCI debt securities arising during the period		22			141			(10	)		421
Unrealized gains on fair value through OCI equity securities arising during the period		7			-			7			-
Reclassification to earnings of (gains) during the period		(5	)		(18	)		(33	)		(74	)
Balance at End of Period		319			373			319			373
Accumulated Other Comprehensive Income on Cash Flow Hedges, net of taxes
Balance at beginning of period		1,206			2,148			1,979			513
Gains (losses) on derivatives designated as cash flow hedges arising during the period		218			83			(392	)		1,673
Reclassification to earnings of (gains) losses on derivatives designated as cash flow hedges in the period		(116	)		(37	)		(279	)		8
Balance at End of Period		1,308			2,194			1,308			2,194
Accumulated Other Comprehensive Income on Translation of Net Foreign Operations, net of taxes
Balance at beginning of period		2,082			5,048			3,980			3,703
Unrealized gains (losses) on translation of net foreign operations		521			(1,180	)		(1,914	)		516
Unrealized gains (losses) on hedges of net foreign operations		(139	)		206			398			(145	)
Balance at End of Period		2,464			4,074			2,464			4,074
Accumulated Other Comprehensive Income (Loss) on Pension and Other Employee Future Benefit Plans, net of taxes
Balance at beginning of period		73			(438	)		(638	)		(383	)
Gains (losses) on remeasurement of pension and other employee future benefit plans		54			(189	)		765			(244	)
Balance at End of Period		127			(627	)		127			(627	)
Accumulated Other Comprehensive (Loss) on Own Credit Risk on Financial Liabilities Designated at Fair Value, net of taxes
Balance at beginning of period		(400	)		151			(158	)		(130	)
Gains (losses) on remeasurement of own credit risk on financial liabilities designated at fair value		22			(330	)		(220	)		(49	)
Balance at End of Period		(378	)		(179	)		(378	)		(179	)
Total Accumulated Other Comprehensive Income		3,840			5,835			3,840			5,835
Total Equity	$	57,696		$	54,587		$	57,696		$	54,587

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

BMO Financial Group Third Quarter Report 2021

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, 2021			July 31, 2020			July 31, 2021			July 31, 2020
Cash Flows from Operating Activities
Net Income	$	2,275		$	1,232		$	5,595		$	3,513
Adjustments to determine net cash flows provided by (used in) operating activities
Provision on securities, other than trading		-			1			(1	)		2
Net (gain) on securities, other than trading		(198	)		(32	)		(410	)		(86	)
Net (increase) in trading securities		(10,335	)		(7,319	)		(7,415	)		(1,624	)
Provision (recovery) for credit losses (Note 3)		(70	)		1,054			146			2,521
Change in derivative instruments – (increase) decrease in derivative asset		2,648			5,863			1,779			(14,158	)
– increase (decrease) in derivative liability		(5,367	)		(6,918	)		(1,683	)		15,342
Amortization of premises and equipment		195			198			588			598
Amortization of other assets		32			48			110			152
Amortization of intangible assets		157			154			471			461
Write-down of goodwill		8			-			755			-
Net (increase) decrease in deferred income tax asset		91			(90	)		212			132
Net increase (decrease) in deferred income tax liability		24			16			80			(1	)
Net (increase) decrease in current income tax asset		53			90			(56	)		(492	)
Net increase (decrease) in current income tax liability		(43	)		(19	)		70			(9	)
Change in accrued interest – decrease in interest receivable		67			242			267			319
– increase (decrease) in interest payable		(32	)		14			(434	)		(198	)
Changes in other items and accruals, net		(2,233	)		891			(549	)		(5,623	)
Net increase in deposits		17,752			19,630			45,947			85,368
Net (increase) decrease in loans		(8,222	)		13,713			(19,737	)		(20,574	)
Net increase (decrease) in securities sold but not yet purchased		(4,243	)		724			(159	)		4,081
Net increase (decrease) in securities lent or sold under repurchase agreements		4,232			(3,645	)		7,661			11,616
Net (increase) decrease in securities borrowed or purchased under resale agreements		(5,480	)		(1,979	)		2,972			(13,514	)
Net increase (decrease) in securitization and structured entities’ liabilities		(1,822	)		(101	)		(2,591	)		191
Net Cash Provided by (Used in) Operating Activities		(10,511	)		23,767			33,618			68,017
Cash Flows from Financing Activities
Net (decrease) in liabilities of subsidiaries		-			(5,326	)		-			(8,113	)
Proceeds from issuance of covered bonds		1,837			-			1,837			4,425
Redemption/buyback of covered bonds		(1,860	)		(1,371	)		(4,074	)		(3,868	)
Proceeds from issuance of subordinated debt (Note 4)		1,000			1,250			1,000			1,250
Repayment of subordinated debt (Note 4)		(1,250	)		-			(2,250	)		-
Redemption of preferred shares (Note 5)		-			-			(756	)		-
Net proceeds from issuance of common shares and sale of treasury shares (Note 5)		71			(15	)		172			(48	)
Cash dividends and distributions paid		(755	)		(516	)		(2,234	)		(1,974	)
Repayment of lease liabilities		(82	)		(82	)		(244	)		(250	)
Net Cash (Used in) Financing Activities		(1,039	)		(6,060	)		(6,549	)		(8,578	)
Cash Flows from Investing Activities
Net (increase) decrease in interest bearing deposits with banks		300			(950	)		(265	)		(280	)
Purchases of securities, other than trading		(14,397	)		(20,449	)		(38,783	)		(73,897	)
Maturities of securities, other than trading		7,266			5,050			21,530			12,539
Proceeds from sales of securities, other than trading		2,998			5,223			19,417			30,556
Premises and equipment – net (purchases)		(124	)		(74	)		(327	)		(273	)
Purchased and developed software – net (purchases)		(118	)		(125	)		(358	)		(490	)
Acquisitions		-			-			-			(186	)
Proceeds from divestitures (Note 12)		63			-			63			-
Net Cash Provided by (Used in) Investing Activities		(4,012	)		(11,325	)		1,277			(32,031	)
Effect of Exchange Rate Changes on Cash and Cash Equivalents		794			(1,385	)		(1,929	)		379
Net increase (decrease) in Cash and Cash Equivalents		(14,768	)		4,997			26,417			27,787
Cash and Cash Equivalents at Beginning of Period		98,593			71,593			57,408			48,803
Cash and Cash Equivalents at End of Period	$	83,825		$	76,590		$	83,825		$	76,590
Supplemental Disclosure of Cash Flow Information
Net cash provided by operating activities includes:
Interest paid in the period	$	1,373		$	1,974		$	4,679		$	7,905
Income taxes paid in the period	$	650		$	140		$	1,476		$	1,732
Interest received in the period	$	4,562		$	5,241		$	13,936		$	16,988
Dividends received in the period	$	415		$	466		$	1,255		$	1,289

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 2021

Notes to Consolidated Financial Statements

July 31, 2021 (Unaudited)

Note 1: Basis of Presentation

Bank of Montreal (the bank or BMO) 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, 2020, with the exception of changes in accounting policy described 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, 2020. 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 24, 2021.

Changes in Accounting Policy

Interbank Offered Rate (IBOR) Reform

Effective November 1, 2020, we early adopted the IASB’s IBOR Phase 2 amendments to IFRS 9

Financial Instruments

(IFRS 9), IAS 39

Financial Instruments: Recognition and Measurement

(IAS 39), IFRS 7

Financial Instruments: Disclosures

(IFRS 7), IFRS 4

Insurance Contracts

as well as IFRS 16

Leases

. These amendments address issues that arise from implementation of IBOR reform, where IBORs will be replaced with alternative benchmark rates.

For financial instruments at amortized cost, the amendments introduce a practical expedient such that if a change in the contractual cash flows is as a direct consequence of IBOR reform and occurs on an economically equivalent basis, the change will be accounted for by updating the effective interest rate with no immediate gain or loss recognized. The amendments also provide additional temporary relief from applying specific IAS 39 hedge accounting requirements to hedging relationships affected by IBOR reform. For example, there is an exception from the requirement to discontinue hedge accounting as a result of changes to hedge documentation required solely by IBOR reform.

As a result of the transition from IBORs to alternative reference rates (ARRs), certain benchmark rates may be subject to discontinuance, changes in methodology, increased volatility or decreased liquidity. The bank, both as a holder and an issuer of IBOR-based instruments, is exposed to increased financial, operational, legal and regulatory, and reputational risks as the rates transition. These risks arise principally from updating systems and processes to capture new ARRs, amending contracts or existing fallback clauses for new ARRs, managing the client transition to ARRs and the resulting impact on economic risk management, as well as updating hedge designations as the new ARRs emerge. In order to manage those risks, we have established an enterprise IBOR Transition Office (ITO) to coordinate and oversee the transition from IBORs to ARRs, with a focus on managing and mitigating internal risks as well as managing our client relationships. The ITO, sponsored and supported by senior management, is responsible for running the enterprise-wide program, covering all of BMO’s lines of business and corporate function areas. The ITO has a global mandate to ensure that we properly prepare for the discontinuation or unavailability of LIBOR and other IBORs. As part of its mandate, the ITO continues to address the bank’s industry and regulatory engagement, client and financial contract changes, internal and external communications, technology and operations modifications, introduction of new products, migration of existing clients, program strategy, and governance and evaluate financial reporting impacts, including for hedge accounting. In addition, the ITO continues to monitor the development and usage of ARRs across the industry, including the Alternative Reference Rate Committee’s formal recommendation of the CME Group’s forward-looking Secured Overnight Financing Rate (SOFR) Term Rates. As the market continues to develop we have begun to add

ARR-based

products to our suite of offerings.

We adhered to the International Swaps and Derivatives Association Fallbacks Protocol (ISDA Protocol), which took effect on January 25, 2021. The ISDA Protocol provides specific fallbacks depending on whether the relevant IBOR (for example, USD LIBOR or GBP LIBOR) has been permanently discontinued or is temporarily unavailable. It provides an efficient amendment mechanism for mutually adhering counterparties to incorporate these fallback provisions into legacy derivative contracts. Also, we continue to incorporate contractual fallback provisions in new IBOR based cash products in order to ensure there is an alternative benchmark rate at the time of the relevant IBOR cessation.

BMO Financial Group Third Quarter Report 2021

51

The table below presents quantitative information for financial instruments that referenced certain IBORs as at November 1, 2020, the date of adoption for Phase 2 relief, and were either due to mature after December 31, 2021 or demand facilities that will be subject to remediation to amend the benchmark interest rate. Our GBP LIBOR and other LIBOR exposures have not materially changed since November 1, 2020.

(Canadian $ in millions)					November 1, 2020
	USD LIBOR		GBP LIBOR		Other (1)
Non-derivative assets (2)		100,521		868		1,225
Non-derivative liabilities (2)		7,435		692		-
Derivative notional amounts (3)(4)		1,570,534		20,972		6,702
Authorized and committed loan commitments (5)(6)		68,449		194		23,633

(1) Includes CHF LIBOR, EONIA and JPY LIBOR.

(2) All amounts are presented based on contractual amounts outstanding with the exception of securities, in non-derivative assets, which are disclosed based on carrying value.

(3) Notionals represent the amount to which a rate or price is applied in order to calculate the amount of cash that must be exchanged under the contract. Notional amounts do not represent assets or liabilities and therefore are not recorded in our Consolidated Balance Sheet.

(4) Includes certain cross-currency swap positions where both the pay and receive leg currently reference an IBOR. For those derivatives, the table above includes the notional for both the pay and receive legs in the relevant columns aligning with the IBOR exposure.

(5) Excludes personal lines of credit and credit cards that are unconditionally cancellable at our discretion. A large majority of these commitments expire without being drawn upon. As a result, the total contractual amounts may not be representative of the funding likely to be required for these commitments.

(6) Other includes loan commitments where our customers have the option to draw from their facility in multiple currencies. Amounts drawn will be subject to prevailing interbank offered rates for the foreign currency, including those that are in scope of IBOR reform.

Financial instruments that reference rates in multi-rate jurisdictions, including the Canadian Dollar Offered Rate (CDOR), the EURO Interbank Offered Rate and Australian Bank Bill Swap Rate, are excluded from the table above. In the case of CDOR, financial instruments indexed to

6-month

and

12-month

CDOR tenors were discontinued on May 17, 2021, while other tenors of CDOR will continue as a benchmark rate. As at November 1, 2020, we did not hold any material positions in either of these CDOR tenors.

On March 5, 2021, the Financial Conduct Authority (FCA) confirmed that LIBOR settings will cease to be provided by any administrator immediately after December 31, 2021 for all sterling, euro, Swiss franc and Japanese yen settings as well as the

1-week

and

2-month

USD LIBOR settings. The remaining USD LIBOR settings will cease to be provided immediately after June 30, 2023. The announcement followed the completion of the ICE Benchmark Administration consultation regarding the process and timing for the orderly wind-down of LIBOR contracts. US prudential regulators have issued supervisory guidance that the extension of these certain USD LIBOR settings to June 30, 2023 applies only to legacy contracts; new issuances of LIBOR-based instruments must cease by December 31, 2021. The ITO has adjusted all impacted project plans to align with these extended timelines.

As a result of extending the cessation date of certain USD LIBOR settings, more contracts will expire prior to cessation and therefore the number and value of contracts that will be subject to remediation efforts has reduced. The following table presents the value of financial instruments impacted by the FCA extension as at April 30, 2023 as presented in our second quarter financial statements, that is, ones that reference USD LIBOR (with the exception of the 1 week and

2-month

settings) and either mature after June 30, 2023 or are demand facilities with no maturity date.

(Canadian $ in millions)	April 30, 2021
	USD LIBOR
Non-derivative assets (1)		75,455
Non-derivative liabilities (1)		2,933
Derivative notional amounts (2)		1,112,747
Authorized and committed loan commitments (3)(4)		45,794

(1) All amounts are presented based on contractual amounts outstanding with the exception of securities, in non-derivative assets, which are disclosed based on carrying value.

(2) Notionals represent the amount to which a rate or price is applied in order to calculate the amount of cash that must be exchanged under the contract. Notional amounts do not represent assets or liabilities and therefore are not recorded in our Consolidated Balance Sheet.

(3) Excludes personal lines of credit and credit cards that are unconditionally cancellable at our discretion. A large majority of these commitments expire without being drawn upon. As a result, the total contractual amounts may not be representative of the funding likely to be required for these commitments.

(4) Excludes $8,746 million of loan commitments where the customer’s option to draw in another currency impacted by IBOR reform is limited to USD. Any amounts drawn under the option will be subject to USD LIBOR, which will be impacted by the June 30, 2023 cessation date.

Changes in our exposures during the third quarter ended July 31, 2021, did not result in significant changes to the risks arising from transition since we previously disclosed our IBOR exposures. In the normal course of business, our exposures may continue to fluctuate with no significant impact expected to our IBOR conversion plans.

Conceptual Framework

Effective November 1, 2020, we adopted the revised Conceptual Framework (Framework), which sets out the fundamental concepts for financial reporting to ensure consistency in standard-setting decisions and that similar transactions are treated in a similar way, so as to provide useful information to users of financial statements. The revised Framework had no impact on our accounting policies.

Use of Estimates and Judgments

The preparation of the interim 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 including legal proceedings and restructuring charges; leases; 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.

52

BMO Financial Group Third Quarter Report 2021

The extent to which the

COVID-19

pandemic impacts BMO’s business, results of operations, reputation, financial performance and condition, including the potential for credit, counterparty and mark-to-market losses, its credit ratings and regulatory capital and liquidity ratios, as well as impacts to its customers and competitors will depend on future developments. Such developments are highly uncertain and cannot be predicted, including the scope, severity and duration of the pandemic and actions taken by third parties, governments, and governmental and regulatory authorities, which could vary by country and region. 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 that these judgments and estimates are well controlled and independently reviewed, and that 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, 2021.

Allowance for Credit Losses

As detailed further in Note 1 of our annual consolidated financial statements for the year ended October 31, 2020, 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 bank’s methodology for determining significant increase in credit risk is based on the change in probability of default between origination, and reporting date, assessed using probability weighted scenarios as well as certain other criteria, such as

30-day

past due and watchlist status. The assessment of a significant increase in credit risk requires experienced credit judgment.

The judgments we apply in determining the ACL reflect the impact of uncertainties in the economic environment on credit conditions 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.

Note 2: Securities

Classification of Securities

The bank’s fair value through profit or loss (FVTPL) securities of $14,239 million ($13,568 million as at October 31, 2020) are comprised of $2,788 million mandatorily measured at fair value and $11,451 million investment securities held by insurance subsidiaries designated at fair value ($2,420 million and $11,148 million, respectively, as at October 31, 2020).

Our fair value through other comprehensive income (FVOCI) securities totalling $64,553 million ($73,407 million as at October 31, 2020), are net of an allowance for credit losses of $3 million ($4 million as at October 31, 2020).

Amortized cost securities totalling $48,727 million ($48,466 million as at October 31, 2020), are net of an allowance for credit losses of $1 million ($1 million as at October 31, 2020).

Unrealized Gains and Losses on FVOCI Securities

The following table summarizes the unrealized gains and losses:

(Canadian $ in millions)	July 31, 2021								October 31, 2020
	Cost/ Amortized cost		Gross unrealized gains		Gross unrealized losses		Fair value		Cost/ Amortized cost		Gross unrealized gains		Gross unrealized losses		Fair value
Issued or guaranteed by:
Canadian federal government		14,503		124		17		14,610		22,240		211		1		22,450
Canadian provincial and municipal governments		2,630		45		1		2,674		4,628		119		-		4,747
U.S. federal government		20,183		590		77		20,696		16,881		844		31		17,694
U.S. states, municipalities and agencies		4,296		117		1		4,412		5,132		147		3		5,276
Other governments		6,520		88		11		6,597		7,222		168		9		7,381
National Housing Act (NHA) mortgage-backed securities (MBS)		1,287		13		1		1,299		1,583		46		-		1,629
U.S. agency MBS and collateralized mortgage obligations (CMO)		11,323		242		11		11,554		10,600		307		4		10,903
Corporate debt		2,561		43		6		2,598		3,153		91		10		3,234
Corporate equity		101		12		-		113		90		3		-		93
Total		63,404		1,274		125		64,553		71,529		1,936		58		73,407

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, 2021		July 31, 2020		July 31, 2021		July 31, 2020
FVOCI - Debt		114		185		366		823
Amortized cost		101		144		309		455
Total		215		329		675		1,278

BMO Financial Group Third Quarter Report 2021

53

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, 2021 and October 31, 2020. 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, 2021								October 31, 2020
	Stage 1		Stage 2		Stage 3		Total		Stage 1		Stage 2		Stage 3		Total
Loans: Residential mortgages
Exceptionally low		2		-		-		2		1		-		-		1
Very low		91,813		417		-		92,230		79,295		429		-		79,724
Low		22,578		2,605		-		25,183		24,490		2,481		-		26,971
Medium		11,544		3,475		-		15,019		11,560		6,461		-		18,021
High		112		303		-		415		172		446		-		618
Not rated		1,088		53		-		1,141		1,132		148		-		1,280
Impaired		-		-		384		384		-		-		409		409
Allowance for credit losses		51		37		13		101		51		75		16		142
Carrying amount		127,086		6,816		371		134,273		116,599		9,890		393		126,882
Loans: Consumer instalment and other personal
Exceptionally low		1,468		28		-		1,496		1,550		31		-		1,581
Very low		29,735		28		-		29,763		26,645		37		-		26,682
Low		23,142		505		-		23,647		20,935		585		-		21,520
Medium		10,953		3,769		-		14,722		10,324		4,334		-		14,658
High		465		1,288		-		1,753		429		1,470		-		1,899
Not rated		3,363		49		-		3,412		3,372		96		-		3,468
Impaired		-		-		299		299		-		-		340		340
Allowance for credit losses		127		362		98		587		134		429		105		668
Carrying amount		68,999		5,305		201		74,505		63,121		6,124		235		69,480
Loans: Credit cards (1)
Exceptionally low		2,468		-		-		2,468		2,252		-		-		2,252
Very low		412		1		-		413		1,106		15		-		1,121
Low		1,636		136		-		1,772		899		148		-		1,047
Medium		1,649		725		-		2,374		1,611		899		-		2,510
High		60		297		-		357		58		377		-		435
Not rated		482		-		-		482		524		-		-		524
Impaired		-		-		-		-		-		-		-		-
Allowance for credit losses		60		233		-		293		61		272		-		333
Carrying amount		6,647		926		-		7,573		6,389		1,167		-		7,556
Loans: Business and government (2)
Acceptable
Investment grade		146,024		1,515		-		147,539		129,100		3,242		-		132,342
Sub-investment grade		82,986		16,173		-		99,159		85,197		30,106		-		115,303
Watchlist		-		6,926		-		6,926		-		8,621		-		8,621
Impaired		-		-		1,747		1,747		-		-		2,889		2,889
Allowance for credit losses		584		832		427		1,843		510		1,044		606		2,160
Carrying amount		228,426		23,782		1,320		253,528		213,787		40,925		2,283		256,995
Commitments and financial guarantee contracts
Acceptable
Investment grade		148,061		1,024		-		149,085		138,141		1,628		-		139,769
Sub-investment grade		44,769		10,139		-		54,908		41,650		20,421		-		62,071
Watchlist		-		2,979		-		2,979		-		4,861		-		4,861
Impaired		-		-		792		792		-		-		1,261		1,261
Allowance for credit losses		209		191		24		424		211		288		12		511
Carrying amount (3)(4)		192,621		13,951		768		207,340		179,580		26,622		1,249		207,451

 (1) Credit card loans are immediately written off when principal or interest payments are 180 days past due, and as a result are not reported as impaired in Stage 3.

 (2) Includes customers’ liability under acceptances.

 (3) 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.

 (4) Certain commercial borrower commitments are conditional and may include recourse with other parties.

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

Allowance for Credit Losses

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 $3,248 million at July 31, 2021 ($3,814 million as at October 31, 2020) of which $2,824 million ($3,303 million as at October 31, 2020) was recorded in loans and $424 million ($511 million as at October 31, 2020) 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.

54

BMO Financial Group Third Quarter Report 2021

The following tables show the continuity in the loss allowance by product type for the three and nine months ended July 31, 2021 and July 31, 2020. 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 transfers between stages, and changes in economic forecasts and credit quality. Model changes includes new calculation models or methodologies.

(Canadian $ in millions)
For the three months ended	July 31, 2021												July 31, 2020
	Stage 1			Stage 2			Stage 3			Total			Stage 1			Stage 2			Stage 3			Total
Loans: Residential mortgages
Balance as at beginning of period		60			53			22			135			29			37			27			93
Transfer to Stage 1		14			(13	)		(1	)		-			8			(7	)		(1	)		-
Transfer to Stage 2		(1	)		3			(2	)		-			(1	)		4			(3	)		-
Transfer to Stage 3		-			(2	)		2			-			-			(1	)		1			-
Net remeasurement of loss allowance		(35	)		-			3			(32	)		27			30			10			67
Loan originations		15			-			-			15			4			-			-			4
Derecognitions and maturities		(2	)		(3	)		-			(5	)		-			(2	)		-			(2	)
Model changes		-			-			-			-			(1	)		(3	)		-			(4	)
Total Provision for Credit Losses (PCL) (1)		(9	)		(15	)		2			(22	)		37			21			7			65
Write-offs (2)		-			-			(3	)		(3	)		-			-			(3	)		(3	)
Recoveries of previous write-offs		-			-			4			4			-			-			2			2
Foreign exchange and other		-			-			(3	)		(3	)		(1	)		-			(6	)		(7	)
Balance as at end of period		51			38			22			111			65			58			27			150
Loans: Consumer instalment and other personal
Balance as at beginning of period		141			401			101			643			116			407			125			648
Transfer to Stage 1		58			(56	)		(2	)		-			59			(57	)		(2	)		-
Transfer to Stage 2		(5	)		16			(11	)		-			(10	)		21			(11	)		-
Transfer to Stage 3		(3	)		(24	)		27			-			(1	)		(27	)		28			-
Net remeasurement of loss allowance		(64	)		60			18			14			(50	)		103			56			109
Loan originations		23			-			-			23			9			-			-			9
Derecognitions and maturities		(8	)		(13	)		-			(21	)		(4	)		(9	)		-			(13	)
Model changes		-			-			-			-			11			8			-			19
Total PCL (1)		1			(17	)		32			16			14			39			71			124
Write-offs (2)		-			-			(55	)		(55	)		-			-			(81	)		(81	)
Recoveries of previous write-offs		-			-			24			24			-			-			22			22
Foreign exchange and other		-			2			(4	)		(2	)		(3	)		(3	)		(10	)		(16	)
Balance as at end of period		142			386			98			626			127			443			127			697
Loans: Credit cards
Balance as at beginning of period		106			284			-			390			115			319			-			434
Transfer to Stage 1		42			(42	)		-			-			50			(50	)		-			-
Transfer to Stage 2		(6	)		6			-			-			(9	)		9			-			-
Transfer to Stage 3		-			(47	)		47			-			-			(48	)		48			-
Net remeasurement of loss allowance		(39	)		84			2			47			(44	)		105			20			81
Loan originations		11			-			-			11			5			-			-			5
Derecognitions and maturities		(3	)		(7	)		-			(10	)		(1	)		(7	)		-			(8	)
Model changes		-			-			-			-			(1	)		(10	)		-			(11	)
Total PCL (1)		5			(6	)		49			48			-			(1	)		68			67
Write-offs (2)		-			-			(70	)		(70	)		-			-			(80	)		(80	)
Recoveries of previous write-offs		-			-			26			26			-			-			19			19
Foreign exchange and other		(1	)		(1	)		(5	)		(7	)		(3	)		(1	)		(7	)		(11	)
Balance as at end of period		110			277			-			387			112			317			-			429
Loans: Business and government
Balance as at beginning of period		689			1,075			541			2,305			580			795			586			1,961
Transfer to Stage 1		114			(113	)		(1	)		-			45			(45	)		-			-
Transfer to Stage 2		(23	)		63			(40	)		-			(65	)		66			(1	)		-
Transfer to Stage 3		-			(17	)		17			-			(4	)		(163	)		167			-
Net remeasurement of loss allowance		(112	)		13			12			(87	)		145			510			134			789
Loan originations		87			-			-			87			53			-			-			53
Derecognitions and maturities		(36	)		(72	)		-			(108	)		(21	)		(36	)		-			(57	)
Model changes		-			-			-			-			(7	)		(4	)		-			(11	)
Total PCL (1)		30			(126	)		(12	)		(108	)		146			328			300			774
Write-offs (2)		-			-			(101	)		(101	)		-			-			(300	)		(300	)
Recoveries of previous write-offs		-			-			13			13			-			-			37			37
Foreign exchange and other		9			5			1			15			(5	)		10			(46	)		(41	)
Balance as at end of period		728			954			442			2,124			721			1,133			577			2,431
Total as at end of period		1,031			1,655			562			3,248			1,025			1,951			731			3,707
Comprised of: Loans		822			1,464			538			2,824			813			1,719			719			3,251
Other credit instruments (3)		209			191			24			424			212			232			12			456

 (1) Excludes PCL on other assets of $(4) million for the three months ended July 31, 2021 ($24 million for the three months ended July 31, 2020).

 (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) Other credit instruments, including off-balance sheet items, are recorded in other liabilities in our Consolidated Balance Sheet.

BMO Financial Group Third Quarter Report 2021

55

(Canadian $ in millions)
For the nine months ended	July 31, 2021												July 31, 2020
	Stage 1			Stage 2			Stage 3			Total			Stage 1			Stage 2			Stage 3			Total
Loans: Residential mortgages
Balance as at beginning of period		51			75			26			152			15			33			38			86
Transfer to Stage 1		48			(39	)		(9	)		-			19			(17	)		(2	)		-
Transfer to Stage 2		(3	)		20			(17	)		-			(2	)		7			(5	)		-
Transfer to Stage 3		-			(11	)		11			-			-			(4	)		4			-
Net remeasurement of loss allowance		(68	)		5			29			(34	)		29			47			17			93
Loan originations		28			-			-			28			8			-			-			8
Derecognitions and maturities		(5	)		(10	)		-			(15	)		(1	)		(4	)		-			(5	)
Model changes		-			-			-			-			(3	)		(5	)		-			(8	)
Total PCL (1)		-			(35	)		14			(21	)		50			24			14			88
Write-offs (2)		-			-			(9	)		(9	)		-			-			(9	)		(9	)
Recoveries of previous write-offs		-			-			8			8			-			-			6			6
Foreign exchange and other		-			(2	)		(17	)		(19	)		-			1			(22	)		(21	)
Balance as at end of period		51			38			22			111			65			58			27			150
Loans: Consumer instalment and other personal
Balance as at beginning of period		148			454			105			707			89			333			136			558
Transfer to Stage 1		175			(168	)		(7	)		-			138			(131	)		(7	)		-
Transfer to Stage 2		(21	)		50			(29	)		-			(20	)		66			(46	)		-
Transfer to Stage 3		(6	)		(76	)		82			-			(3	)		(79	)		82			-
Net remeasurement of loss allowance		(197	)		169			77			49			(112	)		247			162			297
Loan originations		66			-			-			66			32			-			-			32
Derecognitions and maturities		(21	)		(37	)		-			(58	)		(12	)		(27	)		-			(39	)
Model changes		-			-			-			-			16			33			-			49
Total PCL (1)		(4	)		(62	)		123			57			39			109			191			339
Write-offs (2)		-			-			(184	)		(184	)		-			-			(248	)		(248	)
Recoveries of previous write-offs		-			-			70			70			-			-			64			64
Foreign exchange and other		(2	)		(6	)		(16	)		(24	)		(1	)		1			(16	)		(16	)
Balance as at end of period		142			386			98			626			127			443			127			697
Loans: Credit cards
Balance as at beginning of period		110			321			-			431			80			225			-			305
Transfer to Stage 1		141			(141	)		-			-			107			(107	)		-			-
Transfer to Stage 2		(21	)		21			-			-			(25	)		25			-			-
Transfer to Stage 3		(1	)		(134	)		135			-			(1	)		(129	)		130			-
Net remeasurement of loss allowance		(139	)		234			22			117			(57	)		332			68			343
Loan originations		28			-			-			28			13			-			-			13
Derecognitions and maturities		(6	)		(22	)		-			(28	)		(3	)		(19	)		-			(22	)
Model changes		-			-			-			-			(1	)		(10	)		-			(11	)
Total PCL (1)		2			(42	)		157			117			33			92			198			323
Write-offs (2)		-			-			(212	)		(212	)		-			-			(257	)		(257	)
Recoveries of previous write-offs		-			-			73			73			-			-			66			66
Foreign exchange and other		(2	)		(2	)		(18	)		(22	)		(1	)		-			(7	)		(8	)
Balance as at end of period		110			277			-			387			112			317			-			429
Loans: Business and government
Balance as at beginning of period		658			1,258			608			2,524			338			496			311			1,145
Transfer to Stage 1		385			(380	)		(5	)		-			109			(102	)		(7	)		-
Transfer to Stage 2		(86	)		138			(52	)		-			(118	)		121			(3	)		-
Transfer to Stage 3		(2	)		(83	)		85			-			(6	)		(226	)		232			-
Net remeasurement of loss allowance		(327	)		268			119			60			321			883			558			1,762
Loan originations		232			-			-			232			153			-			-			153
Derecognitions and maturities		(102	)		(165	)		-			(267	)		(63	)		(86	)		-			(149	)
Model changes		(5	)		(19	)		-			(24	)		(30	)		8			-			(22	)
Total PCL (1)		95			(241	)		147			1			366			598			780			1,744
Write-offs (2)		-			-			(285	)		(285	)		-			-			(516	)		(516	)
Recoveries of previous write-offs		-			-			40			40			-			-			60			60
Foreign exchange and other		(25	)		(63	)		(68	)		(156	)		17			39			(58	)		(2	)
Balance as at end of period		728			954			442			2,124			721			1,133			577			2,431
Total as at end of period		1,031			1,655			562			3,248			1,025			1,951			731			3,707
Comprised of: Loans		822			1,464			538			2,824			813			1,719			719			3,251
Other credit instruments (3)		209			191			24			424			212			232			12			456

(1) Excludes PCL on other assets of $(8) million for the nine months ended July 31, 2021 ($27 million for the nine months ended July 31, 2020).

(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) Other credit instruments, including off-balance sheet items, are recorded in other liabilities in our Consolidated Balance Sheet.

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BMO Financial Group Third Quarter Report 2021

Loans and allowance for credit losses by geographic region as at July 31, 2021 and October 31, 2020 are as follows:

(Canadian $ in millions)	July 31, 2021				October 31, 2020
	Gross amount	Allowance for credit losses on impaired loans (2)	Allowance for credit losses on performing loans (3)	Net a mount	Gross amount	Allowance for credit losses on impaired loans (2)	Allowance for credit losses on performing loans (3)	Net a mount
By geographic region (1):
Canada	293,558	352	1,269	291,937	276,975	303	1,323	275,349
United States	156,332	186	996	155,150	161,725	410	1,225	160,090
Other countries	8,550	-	21	8,529	12,023	14	28	11,981
Total	458,440	538	2,286	455,616	450,723	727	2,576	447,420

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

(2) Excludes allowance for credit losses on impaired loans of $24 million for other credit instruments, which is included in other liabilities ($12 million as at October 31, 2020).

(3) Excludes allowance for credit losses on performing loans of $400 million for other credit instruments, which is included in other liabilities ($499 million as at October 31, 2020).

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

Impaired (Stage 3) loans, including the related allowances, as at July 31, 2021 and October 31, 2020 are as follows:

(Canadian $ in millions)					July 31, 2021						October 31, 2020
	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		384		13		371		409		16		393
Consumer instalment and other personal		299		98		201		340		105		235
Business and government (1)		1,747		427		1,320		2,889		606		2,283
Total		2,430		538		1,892		3,638		727		2,911
By geographic region (2):
Canada		1,207		352		855		1,343		303		1,040
United States		1,223		186		1,037		2,211		410		1,801
Other countries		-		-		-		84		14		70
Total		2,430		538		1,892		3,638		727		2,911

(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 $24 million for other credit instruments, which is included in other liabilities ($12 million as at October 31, 2020).

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, 2021 and October 31, 2020. Loans less than 30 days past due are excluded as they are not generally representative of the borrower’s ability to meet their payment obligations.

(Canadian $ in millions)	July 31, 2021						October 31, 2020
	30 to 89 days		90 days or more		Total		30 to 89 days		90 days or more		Total
Residential mortgages		341		16		357		543		43		586
Credit card, consumer instalment and other personal		317		64		381		345		65		410
Business and government		219		32		251		330		22		352
Total		877		112		989		1,218		130		1,348

 Fully secured loans with amounts past due between 90 and 180 days that we have not classified as impaired totalled $42 million and $53 million as at July 31, 2021 and October 31, 2020, 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. Forecasts are developed internally by our Economics group, considering external data and our view of future economic conditions. We apply experienced credit judgment to reflect factors not captured in the ECL models, as we deem necessary. We have applied experienced credit judgment to reflect the impact of the extraordinary and highly uncertain environment on credit conditions and the economy as a result of the

COVID-19

pandemic.

As at July 31, 2021, our base case scenario depicts a stronger economic forecast in both Canada and the U.S. In Canada, annual real GDP growth averages 7.3% over the next 12 months and 3.9% over the following 12 months. The U.S. economy follows a similar trajectory, but with a higher level of growth compared to Canada, given a larger policy stimulus and an initially faster vaccine rollout. Our base case economic forecast as at October 31, 2020 depicted moderate economic growth in both Canada and the U.S. over the near-term projection period. If we assumed a 100% base case economic forecast and included 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 $1,850 million as at July 31, 2021 ($2,375 million as at October 31, 2020), compared to the reported allowance for performing loans of $2,686 million ($3,075 million as at October 31, 2020).

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57

As at July 31, 2021, the adverse case economic scenario depicts de minimis annual average real GDP growth in both Canada and the U.S. over the next 12 months, with both contracting at a rate of 1.1% in the following 12 months as shown in the table below. The adverse case scenario assumes a sustained and large increase in

COVID-19

infections, accompanied by renewed restrictions on a broad range of activities leading to a decline in consumer and business confidence. The adverse case as at October 31, 2020 depicted a less severe economic contraction in Canada and the United States compared with the adverse case as at July 31, 2021 as real GDP in Canada and the U.S. contracted about 3% over several quarters instead of 5%. However, due to the different time periods, the yearly growth rates of real GDP were weaker as at October 31, 2020 compared to July 31, 2021. If we assumed a 100% adverse economic forecast and included 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 $4,225 million as at July 31, 2021 ($4,875 million as at October 31, 2020), compared to the reported allowance for performing loans of $2,686 million ($3,075 million as at October 31, 2020).

When we measure changes in economic performance in our forecasts, we use real GDP as the basis, which acts as the key driver for movements in many of the other economic and market variables used, including VIX equity volatility index, corporate BBB credit spreads, unemployment rates, housing price indices and consumer credit. Many of the variables have a high degree of interdependency and as such, there is no one single factor to which loan impairment allowances as a whole are sensitive. The following table shows certain key economic variables used to estimate the allowance on performing loans during the forecast period. This table is typically provided on an annual basis; however, given the continued level of uncertainty in the forward-looking information due to the impact of

COVID-19,

the disclosures have been provided as an update to the information in Note 4 of our annual consolidated financial statements for the year ended October 31, 2020. The values shown represent the national annual average levels or growth rates for the next 12 months and subsequent 12 months following each reporting period for all scenarios. While the values disclosed below are national variables, we use regional variables in our underlying models where appropriate.

	As at July 31, 2021						As at October 31, 2020
All figures are average annual values	Benign scenario		Base scenario		Adverse scenario		Benign scenario		Base scenario		Adverse scenario
	First 12 months	Second 12 months	First 12 months	Second 12 months	First 12 months	Second 12 months	First 12 months	Second 12 months	First 12 months	Second 12 months	First 12 months	Second 12 months
Real GDP growth rates (1)
Canada	9.6%	5.5%	7.3%	3.9%	0.7%	(1.1)%	3.7%	6.4%	1.8%	4.2%	(4.4)%	(1.1)%
United States	10.9%	4.6%	8.7%	3.3%	0.1%	(1.1)%	1.6%	6.0%	(0.4)%	4.0%	(5.1)%	(1.2)%
Corporate BBB 10-year spread
Canada	1.5%	1.9%	1.9%	2.2%	3.6%	4.4%	1.8%	1.9%	2.2%	2.2%	3.6%	4.5%
United States	1.0%	1.2%	1.3%	1.6%	4.2%	4.5%	1.7%	1.7%	2.0%	2.0%	3.9%	4.1%
Unemployment rates
Canada	5.9%	4.8%	7.1%	5.8%	11.2%	13.1%	7.4%	6.1%	8.9%	7.5%	12.7%	13.9%
United States	4.3%	3.2%	4.9%	3.7%	9.1%	11.6%	6.4%	4.8%	8.0%	6.0%	11.5%	12.8%
Housing Price Index (1)
Canada (2)	24.0%	10.9%	20.9%	6.0%	(8.6)%	(18.0)%	10.3%	7.7%	7.2%	2.8%	(1.2)%	(8.7)%
United States (3)	13.8%	7.0%	11.5%	4.5%	(7.4)%	(15.5)%	4.6%	4.5%	2.4%	2.1%	(2.4)%	(6.2)%

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

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

(3) 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 $1,925 million ($2,300 million as at October 31, 2020), compared with the reported allowance for performing loans of $2,686 million ($3,075 million as at October 31, 2020).

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BMO Financial Group Third Quarter Report 2021

Note 4: 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, 2021		October 31, 2020		July 31, 2021		October 31, 2020		July 31, 2021		October 31, 2020		July 31, 2021		October 31, 2020		July 31, 2021		October 31, 2020
Deposits by:
Banks (1)		5,830		3,594		1,998		2,460		769		1,231		20,630		31,540		29,227		38,825
Business and government		50,810		44,111		50,659		44,258		144,468		124,813		188,817		187,497		434,754		400,679
Individuals		4,934		4,661		35,927		30,369		117,314		111,905		58,397		72,595		216,572		219,530
Total (2) (3)		61,574		52,366		88,584		77,087		262,551		237,949		267,844		291,632		680,553		659,034
Booked in:
Canada		52,667		41,855		79,560		67,873		126,999		112,543		163,465		185,655		422,691		407,926
United States		8,594		8,818		8,959		9,170		134,231		124,129		75,851		78,175		227,635		220,292
Other countries		313		1,693		65		44		1,321		1,277		28,528		27,802		30,227		30,816
Total		61,574		52,366		88,584		77,087		262,551		237,949		267,844		291,632		680,553		659,034

 (1) Includes regulated and central banks.

 (2) Includes structured notes and metals deposits designated at FVTPL (Note 6).

 (3) Included in deposits as at July 31, 2021 and October 31, 2020 are $340,368 million and $322,951 million, respectively, of deposits denominated in U.S. dollars, and $28,815 million and $32,254 million, respectively, of deposits denominated in other foreign currencies.

 (4) Includes $31,727 million of senior unsecured debt as at July 31, 2021 subject to the Bank Recapitalization (Bail-In) regime ($25,651 million as at October 31, 2020). 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.

 (5) Deposits totalling $21,108 million as at July 31, 2021 ($27,353 million as at October 31, 2020) can be early redeemed (either fully or partially) by customers without penalty. As we do not expect a significant amount to be redeemed before maturity, we have classified them as payable on a fixed date.

The following table presents deposits payable on a fixed date and greater than one hundred thousand dollars:

(Canadian $ in millions)	Canada	United States	Other	Total
As at July 31, 2021	140,159	71,589	28,526	240,274
As at October 31, 2020	158,475	72,186	27,799	258,460

The following table presents the maturity schedule for deposits payable on a fixed date and greater than one hundred thousand dollars, which are booked in Canada:

(Canadian $ in millions)	Less than 3 months		3 to 6 months	6 to 12 months	Over 12 months	Total
As at July 31, 2021		22,423	13,274	23,840	80,622	140,159
As at October 31, 2020		18,081	29,679	28,109	82,606	158,475

Subordinated Debt

On July 22, 2021, we issued $1,000 million of 1.928% non-viability contingent capital (NVCC) subordinated notes under our Canadian Medium-Term Note Program. The Series K Medium-Term Notes are due July 22, 2031. The notes reset to a floating rate on July 22, 2026.

On June 1, 2021, we redeemed all of our $1,250 million 3.32% Series I Medium-Term Notes First Tranche (NVCC), at a redemption price of 100 percent of the principal amount plus unpaid accrued interest to, but excluding, the redemption date.

On December 8, 2020, we redeemed all of our outstanding $1,000 million, Series H Medium-Term Notes Second Tranche (NVCC), at a redemption price of 100 percent of the principal amount plus unpaid accrued interest to, but excluding, the redemption date.

BMO Financial Group Third Quarter Report 2021

59

Note 5: Equity

Preferred and Common Shares Outstanding and Other Equity Instruments

(1)

(Canadian $ in millions, except as noted)	July 31, 2021				October 31, 2020
	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		Not convertible	(8)
Class B – Series 36		-		-		600,000		600		Class B - Series 37	(8)
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				3,940				4,690
Other Equity Instruments 4.8% Additional Tier 1 Capital Notes (AT1 Notes)				658				658		Common shares	(3)
4.3% Limited Recourse Capital Notes, Series 1 (LRCNs)				1,250				1,250		Common shares	(3)(4)
Other Equity Instruments				1,908				1,908
Preferred Shares and Other Equity Instruments				5,848				6,598
Common Shares (5) (6) (7)		648,094,938		13,609		645,889,396		13,430

 (1) For additional information refer to Notes 16 and 20 of our annual consolidated financial statements for the year ended October 31, 2020.

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

 (3) The instruments issued include a NVCC provision, which is necessary for the preferred shares, AT1 Notes and by virtue of the recourse to Preferred Shares Series 48, the LRCNs (see (4) below) to qualify as regulatory capital under Basel III. As such, they 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, including Preferred Shares Series 48, and AT1 Note 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 value of the preferred share or other equity instrument, including declared and unpaid dividends, by the conversion price and then applying the multiplier.

 (4) Non-deferrable interest is payable semi-annually on the LRCNs at the bank’s discretion. Non-payment of interest will result in a recourse event, with the noteholders’ sole remedy being the holders’ proportionate share of trust assets comprised of our NVCC Preferred Shares Series 48, which are eliminated on consolidation. In such an event, the delivery of the trust assets will represent the full and complete extinguishment of our obligations under the LRCNs. In circumstances under which NVCC, including the Preferred Shares Series 48, would be converted into common shares of the bank, the LRCNs would be redeemed and the noteholders’ sole remedy would be their proportionate share of trust assets, then comprised of common shares of the bank received by the trust on conversion of the Preferred Share Series 48.

 (5) The stock options issued under the Stock Option Plan are convertible into 6,077,912 common shares as at July 31, 2021 (6,446,110 common shares as at October 31, 2020).

 (6) During the three and nine months ended July 31, 2021, we did not issue common shares under the Shareholder Dividend Reinvestment and Share Purchase Plan and we issued 503,580 and 1,330,160 common shares, respectively, under the Stock Option Plan.

 (7) Common shares are net of 222,652 treasury shares as at July 31, 2021 (652,730 treasury shares as at October 31, 2020).

 (8) Series 35 and Series 36 were redeemed and final dividends were paid on November 25, 2020.

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BMO Financial Group Third Quarter Report 2021

Other Equity Instruments

The bank’s US$500 million (CAD $658 million) 4.8% Additional Tier 1 Capital Notes (AT1 Notes) and $1,250 million 4.3% Limited Recourse Capital Notes Series 1 (LRCNs) are classified as equity and form part of our additional

Tier 1 non-viability contingent capital.

 Both the AT1 Notes and LRCNs are compound financial instruments that have both equity and liability features. On the date of issuance, we assigned an insignificant value to the liability components of both instruments and, as a result, the full amount of proceeds has been classified as equity. Semi-annual distributions on the AT1 Notes and LRCNs are recognized as a reduction in equity when payable. The AT1 Notes and LRCNs are subordinate to the claims of the depositors and certain other creditors in right of payment.

Preferred Shares

On July 16, 2021, we announced our intention to redeem all of our 9,425,607 outstanding Non-Cumulative 5 Year Rate Reset Class B Preferred Shares, Series 25 for an aggregate total of approximately $236 million and all of our 2,174,393 outstanding Non-Cumulative Floating Rate Class B Preferred Shares, Series 26 for an aggregate total of approximately $54 million on August 25, 2021.

On November 25, 2020, we redeemed all of our 6 million issued and outstanding

Non-Cumulative

Perpetual Class B Preferred Shares, Series 35 (NVCC) for an aggregate total of $156 million and all of our 600,000 issued and outstanding

Non-Cumulative

5-Year

Rate Reset Class B Preferred Shares, Series 36 (NVCC) for an aggregate total of $600 million.

Normal Course Issuer Bid

Our previous normal course issuer bid (NCIB) expired on June 2, 2020. Our plan, subject to approval of OSFI and the Toronto Stock Exchange, was to establish a new NCIB over a

12-month

period, commencing on or about June 3, 2020. The renewal process was put on hold 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, and we did not renew our NCIB. We expect to proceed with the new NCIB following an announcement from OSFI that the restriction is no longer in effect.

Shareholder Dividend Reinvestment and Share Purchase Plan

Until further notice, common shares under the Shareholder Dividend Reinvestment and Share Purchase Plan are purchased on the open market without a discount.

BMO Financial Group Third Quarter Report 2021

61

Note 6: 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, 2020 for further discussion on the determination of fair value.

(Canadian $ in millions)		July 31, 2021	October 31, 2020
	Carrying value	Fair value	Carrying value	Fair value
Securities (1)
Amortized cost	48,727	49,105	48,466	49,009
Loans (1)
Residential mortgages	134,273	134,914	126,882	128,815
Consumer instalment and other personal	74,505	74,945	69,480	70,192
Credit cards	7,573	7,573	7,556	7,556
Business and government (2)	232,459	233,753	238,239	239,929
	448,810	451,185	442,157	446,492
Deposits (3)	658,175	659,636	640,961	643,156
Securitization and structured entities’ liabilities (4)	23,298	23,709	26,889	27,506
Subordinated debt	6,973	7,275	8,416	8,727

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 is net of allowances for credit losses.

(2) Excludes $6,738 million of loans classified as FVTPL and $140 million of loans classified as FVOCI as at July 31, 2021, respectively ($5,306 million and $51 million, respectively, as at October 31, 2020).

(3) Excludes $22,085 million of structured note liabilities ($18,073 million as at October 31, 2020) and $293 million of metals deposits ($nil as at October 31, 2020) designated at FVTPL.

(4) Excludes $629 million of securitization and structured entities’ liabilities classified at FVTPL ($nil as at October 31, 2020).

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

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 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.

Our Level 2 trading and FVOCI securities are primarily valued using discounted cash flow models with observable spreads or broker quotes and other 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 2021

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 and FVOCI, other assets, fair value liabilities, derivative assets and derivative liabilities is presented in the following tables:

(Canadian $ in millions)	July 31, 2021												October 31, 2020
	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		5,031		1,264		-		6,295		6,529		4,371		-		10,900
Canadian provincial and municipal governments		3,368		2,863		-		6,231		1,868		6,467		-		8,335
U.S. federal government		5,581		2,581		-		8,162		5,702		2,716		-		8,418
U.S. states, municipalities and agencies		30		264		-		294		16		487		-		503
Other governments		1,152		404		-		1,556		1,021		1,495		-		2,516
NHA MBS, U.S. agency MBS and CMO		-		13,282		794		14,076		7		11,487		803		12,297
Corporate debt		2,711		6,747		2		9,460		3,767		7,274		-		11,041
Trading loans		-		194		-		194		-		67		-		67
Corporate equity		55,901		-		-		55,901		43,757		-		-		43,757
		73,774		27,599		796		102,169		62,667		34,364		803		97,834
FVTPL Securities
Issued or guaranteed by:
Canadian federal government		781		221		-		1,002		452		149		-		601
Canadian provincial and municipal governments		469		885		-		1,354		180		1,249		-		1,429
U.S. federal government		1		48		-		49		-		44		-		44
Other governments		-		93		-		93		-		94		-		94
NHA MBS, U.S. agency MBS and CMO		-		11		-		11		-		3		-		3
Corporate debt		141		7,611		-		7,752		70		7,827		-		7,897
Corporate equity		1,690		12		2,276		3,978		1,587		10		1,903		3,500
		3,082		8,881		2,276		14,239		2,289		9,376		1,903		13,568
FVOCI Securities
Issued or guaranteed by:
Canadian federal government		13,627		983		-		14,610		20,765		1,685		-		22,450
Canadian provincial and municipal governments		1,655		1,019		-		2,674		2,604		2,143		-		4,747
U.S. federal government		17,166		3,529		-		20,695		14,852		2,842		-		17,694
U.S. states, municipalities and agencies		93		4,318		1		4,412		8		5,267		1		5,276
Other governments		3,126		3,471		-		6,597		3,643		3,738		-		7,381
NHA MBS, U.S. agency MBS and CMO		-		12,853		-		12,853		-		12,532		-		12,532
Corporate debt		654		1,945		-		2,599		792		2,442		-		3,234
Corporate equity		-		-		113		113		-		-		93		93
		36,321		28,118		114		64,553		42,664		30,649		94		73,407
Business and government loans		-		4,573		2,305		6,878		-		3,412		1,945		5,357
Other Assets (1)		3,274		85		-		3,359		5,328		117		-		5,445
Fair Value Liabilities
Securities sold but not yet purchased		21,383		7,114		-		28,497		19,740		9,636		-		29,376
Structured note liabilities (2)		-		22,085		-		22,085		-		18,073		-		18,073
Other liabilities (3)		-		2,087		13		2,100		-		1,285		-		1,285
		21,383		31,286		13		52,682		19,740		28,994		-		48,734
Derivative Assets
Interest rate contracts		12		10,213		-		10,225		13		14,916		-		14,929
Foreign exchange contracts		3		15,667		-		15,670		1		10,825		-		10,826
Commodity contracts		352		5,582		-		5,934		123		2,465		-		2,588
Equity contracts		965		3,534		-		4,499		750		7,711		-		8,461
Credit default swaps		-		3		-		3		-		11		-		11
		1,332		34,999		-		36,331		887		35,928		-		36,815
Derivative Liabilities
Interest rate contracts		6		7,761		-		7,767		22		10,871		-		10,893
Foreign exchange contracts		11		11,998		-		12,009		3		10,609		-		10,612
Commodity contracts		638		1,042		-		1,680		350		1,983		-		2,333
Equity contracts		565		7,140		-		7,705		456		6,067		-		6,523
Credit default swaps		-		2		4		6		-		10		4		14
		1,220		27,943		4		29,167		831		29,540		4		30,375

(1) Other assets include precious metals and certain receivables measured at fair value included in other assets, other, in our Consolidated Balance Sheet.

(2) These structured note liabilities included in deposits have been designated at FVTPL.

(3) Other liabilities include investment contract liabilities in our insurance business, certain payables and metals deposits that have been designated at FVTPL, as well as certain securitization and structured entities’ liabilities measured at FVTPL.

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

BMO Financial Group Third Quarter Report 2021

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 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 assumptions 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, 2021 (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

2,276

Net Asset Value

Net Asset Value

na

na

EV/EBITDA

Multiple

6

16

Loans (3)

Business and government loans

2,305

Discounted cash flows

Discount margin

50bps

144bps

NHA MBS and U.S. agency MBS and CMO

NHA MBS and U.S. agency MBS and CMO

794

Discounted cash flows

Prepayment rate

4%

38%

Market Comparable

Comparability Adjustment (4)

(4.64)

4.53

(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 $457 million of Federal Reserve Bank and U.S. Federal Home Loan Bank shares that we carry at cost as at July 31, 2021 ($487 million as at October 31, 2020), which approximates fair value, and are held 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 $4 million as at July 31, 2021 ($3 million as at October 31, 2020).

(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, 2021 and July 31, 2020.

(Canadian $ in millions)
For the three months ended			July 31, 2021				July 31, 2020
	Level 1 to Level 2		Level 2 to Level 1		Level 1 to Level 2		Level 2 to Level 1
Trading Securities		639		1,473		994		2,682
FVTPL Securities		153		403		19		241
FVOCI Securities		1,016		1,917		1,768		4,294
Securities sold but not yet purchased		197		648		681		2,067

(Canadian $ in millions)
For the nine months ended			July 31, 2021				July 31, 2020
	Level 1 to Level 2		Level 2 to Level 1		Level 1 to Level 2		Level 2 to Level 1
Trading Securities		4,067		11,009		5,761		3,952
FVTPL Securities		361		804		518		302
FVOCI Securities		6,856		10,890		9,032		7,012
Securities sold but not yet purchased		1,198		5,905		4,432		2,982

64

BMO Financial Group Third Quarter Report 2021

Changes in Level 3 Fair Value Measurements

The tables below present a reconciliation of all changes in Level 3 financial instruments for the three and nine months ended July 31, 2021 and 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
For the three months ended July 31, 2021  (Canadian $ in millions)	Balance April 30, 2021		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, 2021		Change in unrealized gains (losses) recorded in income for instruments still held (3)
Trading Securities
NHA MBS and U.S. agency MBS and CMO		702		(78	)		11		441		(255	)		-			35		(62	)		794		5
Corporate debt		3		-			-		-		(1	)		-			-		-			2		-
Total trading securities		705		(78	)		11		441		(256	)		-			35		(62	)		796		5
FVTPL Securities
Corporate equity		2,048		158			20		175		(106	)		-			-		(19	)		2,276		149
Total FVTPL securities		2,048		158			20		175		(106	)		-			-		(19	)		2,276		149
FVOCI Securities
Issued or guaranteed by:
U.S. states, municipalities and agencies		1		-			-		-		-			-			-		-			1		na
Corporate equity		100		-			9		4		-			-			-		-			113		na
Total FVOCI securities		101		-			9		4		-			-			-		-			114		na
Business and government loans		2,841		-			45		113		-			(694	)		-		-			2,305		-
Other Liabilities		-		-			-		-		-			-			13		-			13		-
Derivative Liabilities
Credit default swaps		4		-			-		-		-			-			-		-			4		-
Total derivative liabilities		4		-			-		-		-			-			-		-			4		-

			Change in fair value
For the nine months ended July 31, 2021  (Canadian $ in millions)	Balance October 31, 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, 2021		Change in unrealized gains (losses) recorded in income for instruments still held (3)
Trading Securities
NHA MBS and U.S. agency MBS and CMO		803		(172	)		(50	)		1,206		(938	)		-			106		(161	)		794		24
Corporate debt		-		-			-			3		(1	)		-			-		-			2		-
Total trading securities		803		(172	)		(50	)		1,209		(939	)		-			106		(161	)		796		24
FVTPL Securities
Corporate equity		1,903		217			(81	)		453		(193	)		(4	)		-		(19	)		2,276		262
Total FVTPL		1,903		217			(81	)		453		(193	)		(4	)		-		(19	)		2,276		262
FVOCI Securities
Issued or guaranteed by:
U.S. states, municipalities and agencies		1		-			-			-		-			-			-		-			1		na
Corporate equity		93		-			9			11		-			-			-		-			113		na
Total FVOCI securities		94		-			9			11		-			-			-		-			114		na
Business and government loans		1,945		-			(150	)		1,812		-			(1,302	)		-		-			2,305		-
Other Liabilities		-		-			-			-		-			-			13		-			13		-
Derivative Liabilities
Credit default swaps		4		-			-			-		-			-			-		-			4		-
Total derivative liabilities		4		-			-			-		-			-			-		-			4		-

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

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

(3) Changes in unrealized gains (losses) on Trading and FVTPL securities still held on July 31, 2021 are included in earnings for the period.

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

na – not applicable

BMO Financial Group Third Quarter Report 2021

65

			Change in fair value
For the three months ended July 31, 2020  (Canadian $ in millions)	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		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		-
Other Liabilities		-		-			-			-		-			-			-		-			-		-
Derivative Liabilities
Credit default swaps		4		-			-			-		-			-			-		(1	)		3		-
Total derivative liabilities		4		-			-			-		-			-			-		(1	)		3		-

			Change in fair value
For the nine months ended July 31, 2020  (Canadian $ in millions)	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		-
Other Liabilities		-		-			-			-		-			-			-		-			-		-
Derivative Liabilities
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 received 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 (losses) gains on economic hedge contracts.

na – not applicable

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BMO Financial Group Third Quarter Report 2021

Note 7: 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, 2021, 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 (DSB) applicable to

D-SIBs.

As announced by OSFI in June 2021, the DSB will be set at 2.5% effective October 31, 2021. Our capital position as at July 31, 2021 is further detailed in the Capital Management section of our interim Management’s Discussion and Analysis.

Regulatory Capital Measures, Risk-Weighted Assets and Leverage Exposures

(Canadian $ in millions, except as noted)	July 31, 2021		October 31, 2020
Common Equity Tier 1 (CET1) Capital		43,349		40,077
Tier 1 Capital		48,826		45,840
Total Capital		56,203		54,661
Risk-Weighted Assets		322,529		336,607
Leverage Exposures		969,824		953,640
CET 1 Capital Ratio		13.4%		11.9%
Tier 1 Capital Ratio		15.1%		13.6%
Total Capital Ratio		17.4%		16.2%
Leverage Ratio		5.0%		4.8%

Note 8: Employee Compensation

Stock Options

We did not grant any stock options during the three months ended July 31, 2021 and 2020. During the nine months ended July 31, 2021, we granted a total of 984,943 stock options (976,087 stock options during the nine months ended July 31, 2020). The weighted-average fair value of options granted during the nine months ended July 31, 2021 was $10.75 per option ($9.46 per option for the nine months ended July 31, 2020).

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, 2021		July 31, 2020
Expected dividend yield		4.9%		4.3%
Expected share price volatility		20.6% - 20.7%		15.4%
Risk-free rate of return		1.0%		1.9% - 2.0%
Expected period until exercise (in years)		6.5 - 7.0		6.5 - 7.0
Exercise price ($)		97.14		101.47

  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, 2021		July 31, 2020		July 31, 2021		July 31, 2020
Current service cost		67		62		2		2
Net interest expense on net defined benefit (asset) liability		2		1		8		8
Administrative expenses		1		1		-		-
Benefits expense		70		64		10		10
Canada and Quebec pension plan expense		24		22		-		-
Defined contribution expense		33		37		-		-
Total pension and other employee future benefit expenses recognized in the Consolidated Statement of Income		127		123		10		10
(Canadian $ in millions)
	Pension benefit plans				Other employee future benefit plans
For the nine months ended	July 31, 2021		July 31, 2020		July 31, 2021		July 31, 2020
Current service cost		201		187		6		8
Net interest expense on net defined benefit (asset) liability		6		1		23		24
Administrative expenses		3		3		-		-
Benefits expense		210		191		29		32
Canada and Quebec pension plan expense		76		75		-		-
Defined contribution expense		126		135		-		-
Total pension and other employee future benefit expenses recognized in the Consolidated Statement of Income		412		401		29		32

BMO Financial Group Third Quarter Report 2021

67

Note 9: Earnings Per Share

Basic earnings per share is calculated by dividing net income, after deducting dividends payable 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, 2021			July 31, 2020			July 31, 2021			July 31, 2020
Net income		2,275			1,232			5,595			3,513
Dividends on preferred shares and distributions payable on other equity instruments		(61	)		(73	)		(185	)		(195)
Net income available to common shareholders		2,214			1,159			5,410			3,318
Weighted-average number of common shares outstanding (in thousands)		647,178			641,300			646,808			640,129
Basic earnings per common share (Canadian $)		3.42			1.81			8.36			5.18
Diluted Earnings Per Common Share
Net income available to common shareholders adjusted for impact of dilutive instruments		2,214			1,159			5,410			3,318
Weighted-average number of common shares outstanding (in thousands)		647,178			641,300			646,808			640,129
Effect of dilutive instruments
Stock options potentially exercisable (1)		6,213			2,400			6,585			3,473
Common shares potentially repurchased		(4,394	)		(2,046	)		(5,229	)		(2,721)
Weighted-average number of diluted common shares outstanding (in thousands)		648,997			641,654			648,164			640,881
Diluted earnings per common share (Canadian $)		3.41			1.81			8.35			5.18

(1) In computing diluted earnings per share, we did not exclude any stock options outstanding for the three and  nine months ended July 31, 2021 as the average share price for the period exceeded the exercise price. For the three and nine months ended July 31, 2020, 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, as the average share price for the period did not exceed the exercise price.

Note 10: Income Taxes

Canadian Taxing Authorities have reassessed us for additional income tax and interest in an amount of approximately $1,210 million, to date, in respect of certain 2011-2016 Canadian corporate dividends. Those reassessments denied certain dividend deductions on the basis that the dividends were received as part of a “dividend rental arrangement”. The tax rules raised by the Canadian Taxing Authorities 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. We remain of the view that our tax filing positions were appropriate and intend to challenge all reassessments. However, if such challenges are unsuccessful, the additional expense would negatively impact our net income.

Note 11: 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 (BMO WM) 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, 2020.

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BMO Financial Group Third Quarter Report 2021

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

(Canadian $ in millions)
For the three months ended July 31, 2021		Canadian P&C			U.S. P&C			BMO WM			BMO CM			Corporate Services (1)			Total
Net interest income (2)			1,660			1,048			247			696			(130	)		3,521
Non-interest revenue			581			304			2,179			888			89			4,041
Total Revenue			2,241			1,352			2,426			1,584			(41	)		7,562
Provision for (recovery of) credit losses on impaired loans			101			(9	)		-			(19	)		(2	)		71
Recovery of credit losses on performing loans			(7	)		(53	)		(2	)		(75	)		(4	)		(141	)
Total provision for (recovery of) credit losses			94			(62	)		(2	)		(94	)		(6	)		(70	)
Insurance claims, commissions and changes in policy benefit liabilities			-			-			984			-			-			984
Depreciation and amortization			131			119			66			68			-			384
Other non-interest expense			915			570			847			850			118			3,300
Income (loss) before taxes			1,101			725			531			760			(153	)		2,964
Provision for (recovery of) income taxes			286			172			130			202			(101	)		689
Reported net income (loss)			815			553			401			558			(52	)		2,275
Average Assets			265,639			125,840			48,053			367,900			162,811			970,243
For the three months ended July 31, 2020		Canadian P&C			U.S. P&C			BMO WM			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			126			137			73			64			-			400
Other non-interest expense			835			615			764			761			69			3,044
Income (loss) before taxes			431			315			450			566			(260	)		1,502
Provision for (recovery of) income taxes			112			52			109			140			(143	)		270
Reported net income (loss)			319			263			341			426			(117	)		1,232
Average Assets			252,028			140,615			46,308			379,131			159,682			977,764
(Canadian $ in millions)
For the nine months ended July 31, 2021		Canadian P&C			U.S. P&C			BMO WM			BMO CM			Corporate Services (1)			Total
Net interest income (2)	��		4,849			3,194			723			2,242			(454	)		10,554
Non-interest revenue			1,633			935			4,795			2,454			242			10,059
Total Revenue			6,482			4,129			5,518			4,696			(212	)		20,613
Provision for (recovery of) credit losses on impaired loans			404			17			3			20			(3	)		441
Recovery of credit losses on performing loans			(22	)		(133	)		(10	)		(126	)		(4	)		(295	)
Total provision for (recovery of) credit losses			382			(116	)		(7	)		(106	)		(7	)		146
Insurance claims, commissions and changes in policy benefit liabilities			-			-			1,302			-			-			1,302
Depreciation and amortization			390			365			213			201			-			1,169
Non-interest expense			2,582			1,689			2,547			2,432			1,287			10,537
Income (loss) before taxes			3,128			2,191			1,463			2,169			(1,492	)		7,459
Provision for (recovery of) income taxes			812			514			358			565			(385	)		1,864
Reported net income (loss)			2,316			1,677			1,105			1,604			(1,107	)		5,595
Average Assets			259,813			128,722			47,761			371,046			166,462			973,804
For the nine months ended July 31, 2020		Canadian P&C			U.S. P&C			BMO WM			BMO CM			Corporate Services (1)			Total
Net interest income (2)			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
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			385			427			220			179			-			1,211
Non-interest expense			2,539			1,903			2,417			2,256			303			9,418
Income (loss) before taxes			1,861			1,189			1,037			918			(663	)		4,342
Provision for (recovery of) income taxes			481			236			261			210			(359	)		829
Reported net income (loss)			1,380			953			776			708			(304	)		3,513
Average Assets			251,325			139,196			45,234			370,363			129,399			935,517

(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 2021

69

Note 12: Divestitures

On April 30, 2021, we completed the sale of our Private Banking business in Hong Kong and Singapore, part of our BMO WM operating segment, to J. Safra Sarasin Group. The business sold is not considered material to the bank.

On April 12, 2021, we entered into an agreement with Ameriprise Financial Inc. (Ameriprise) to sell BMO’s EMEA asset management business, part of our BMO WM operating segment, for £615 million (CAD$1,066 million) in an

all-cash

transaction. Separately, in the U.S. the transaction includes the opportunity for certain BMO asset management clients to move to Ameriprise, subject to client consent. This transaction is expected to close in the fourth quarter of calendar 2021, subject to regulatory approvals and customary closing conditions. As this transaction met the accounting requirements of assets

held-for-sale,

whereby the assets and liabilities are measured at lower of fair value, less costs to sell, and carrying value at each reporting period end until disposal, we recognized a write-down of goodwill related to these businesses of $747 

million in the second quarter of 2021. In the current quarter, we recognized an additional write-down of goodwill of

$8

million based on updated assumptions. The write-down is included in

non-interest

expense, other, in our Consolidated Statement of Income and was reported in the Corporate Services segment. This ultimate impact is subject to closing adjustments, including fair values and foreign exchange rates prevailing at the date of closing.

On July 27, 2021, we entered into an agreement to sell Taplin, Canida & Habacht, LLC, part of our U.S. asset management business to Loop Capital. The transaction is expected to close in the first quarter of fiscal 2022, subject to customary closing conditions. The business sold is not considered material to the bank.

Note 13: Legal Proceedings

BMO and its subsidiaries are named as defendants or are otherwise involved in a substantial number of legal proceedings. BMO Harris Bank N.A. (BMO Harris), as successor to M&I Marshall and Ilsley Bank (M&I), has been named as the defendant in a lawsuit filed in the U.S. Bankruptcy Court for the District of Minnesota (Bankruptcy Court) in connection with a Ponzi scheme carried out by Thomas J. Petters and certain affiliated individuals and entities (collectively, Petters) between 1994 and 2008. The lawsuit, brought by a Trustee in bankruptcy proceedings for certain Petters entities, alleges that, between 1999 and 2008, M&I (and a predecessor bank) facilitated the Ponzi scheme operated by Petters. BMO denies these allegations and continues to defend itself vigorously. The Trustee seeks

US$

1.9

billion in compensatory damages, plus prejudgment interest, punitive damages, and attorneys’ fees. The Bankruptcy Court: (i) denied BMO Harris’s motion for summary judgment; (ii) granted the Trustee’s motion for sanctions based on the alleged spoliation of evidence; and (iii) transferred the case to the U.S. District Court for the District of Minnesota (District Court) for trial. BMO Harris filed an objection to the spoliation sanctions, which is still pending before the District Court. BMO Harris anticipates that the trial in this case may take place in the first half of 2022. While it is inherently difficult to predict the ultimate outcome of this or other proceedings, BMO 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 operation of the bank

.

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BMO Financial Group Third Quarter Report 2021