Third Quarter 2012 Report to Shareholders

BMO Financial Group Reports Strong Quarterly Results, Increasing Net Income by 37% Year Over Year to $970 Million, and Increases Dividend by 3%

Financial Results Highlights(1):

Third Quarter 2012 Compared with Third Quarter 2011:

-- Net income of $970 million, up $262 million or 37%

-- Adjusted net income(2) of $1,013 million, up $157 million or 18%

-- Reported EPS(3) of $1.42, up 30%

-- Adjusted EPS(2)(3) of $1.49, up 11%

-- Reported ROE of 14.5%, compared with 13.3%

-- Adjusted ROE(2) of 15.2%, compared with 16.4%

-- Reported provisions for credit losses of $237 million; adjusted

provisions of $116 million, down $129 million

-- Common Equity Ratio strengthens to 10.31%, using a Basel II approach

-- Announced a $0.72 dividend per common share for the fourth quarter, up

$0.02 or 3%

Year-to-Date 2012 Compared with Year-to-Date 2011:

-- Net income of $3,107 million, up $761 million or 32%

-- Adjusted net income(2) of $2,967 million, up $524 million or 21%

-- Reported EPS(3) of $4.56, up 22%

-- Adjusted EPS(2)(3) of $4.35, up 11%

-- Reported provisions for credit losses of $573 million; adjusted

provisions of $358 million, down $469 million

For the third quarter ended July 31, 2012, BMO Financial Group reported strong net income of $970 million or $1.42 per share. On an adjusted basis, net income was $1,013 million or $1.49 per share.

"BMO has reported strong quarterly financial results," said Bill Downe, President and Chief Executive Officer, BMO Financial Group. "Our business continues to deliver consistent and attractive profitability within a sound risk framework and the growth we are experiencing remains consistent with our strategy.

"We increased the dividend, reflecting our strong capital position and our confidence in our continued ability to generate sustained earnings growth. We also moved the target payout range to 40 to 50 per cent, which gives us more flexibility to grow the bank.

"Our core franchise, P&C Canada, experienced good volume growth across most product lines, including residential mortgages; we are attracting new customers and steadily increasing the amount of business existing customers are choosing to entrust to us. The recent changes to Canada's mortgage market announced by the Minister of Finance were prudent, responsible and timely; they align with BMO's risk practices and ongoing efforts to encourage Canadians to borrow smartly.

"Consistent with the confidence we expressed throughout our U.S. investor day in June, this quarter's earnings reflect strong performance from our U.S. businesses. The U.S. P&C business continues to generate healthy organic growth in commercial loans and is executing against its plans.

"Earnings in our wealth business were up quarter over quarter when adjusted to exclude the unfavourable impact of movements in long-term interest rates on the bank's insurance business.

"BMO Capital Markets delivered good performance with higher revenue and net income than last quarter. These results reflect the benefits of the diversified revenue mix of our capital markets' business.

"Across BMO, our sharp focus on improving efficiency will ensure we are investing in what our customers value most. Mobile PayPass, North American mobile banking and e-statements, BMO alerts that send account updates to customers' mobile devices and online appointment booking are just a few examples of the type of functionality we've rolled out for customers in the past twelve months - this in addition to a complete refresh of retail online banking in Canada that gained high approval ratings from customers and industry analysts alike.

"Overall, each of our businesses is delivering against a high standard of customer experience and is on track to finish the year with strong performance in a highly competitive environment," concluded Mr. Downe.

Concurrent with the release of results, BMO announced a fourth quarter dividend of $0.72 per common share, a two cents per share increase from the preceding quarter and equivalent to an annual dividend of $2.88 per common share.

(1) Effective the first quarter of 2012, BMO's consolidated financial statements and the accompanying Interim Management's Discussion and Analysis (MD&A) are prepared in accordance with International Financial Reporting Standards (IFRS), as described in Note 1 to the unaudited interim consolidated financial statements for the quarter ended April 30, 2012. Amounts in respect of comparative periods for 2011 have been restated to conform to the current presentation. References to GAAP mean IFRS, unless indicated otherwise.

(2) Results and measures in this document are presented on a GAAP basis. They are also presented on an adjusted basis that excludes the impact of certain items. Items excluded from third quarter 2012 results in the determination of adjusted results totalled a charge of $43 million after tax, comprised of a $47 million after-tax net benefit of credit-related items in respect of the acquired Marshall & Ilsley Corporation (M&I) performing loan portfolio; costs of $105 million ($65 million after tax) for the integration of the acquired business; a $33 million ($24 million after tax) charge for amortization of acquisition-related intangible assets on all acquisitions; a loss on run-off structured credit activities of $15 million ($15 million after tax); and a decrease in the collective allowance for credit losses of $15 million ($14 million after tax). Items excluded from the year-to-date adjusted results totalled net income of $140 million after tax and consisted of a $216 million after-tax net benefit of credit-related items in respect of the acquired M&I performing loan portfolio; a $249 million ($155 million after tax) charge for the integration of the acquired business; a $100 million ($72 million after tax) charge for amortization of acquisition-related intangible assets; the benefit of run-off structured credit activities of $197 million ($194 million after tax); restructuring charges of $99 million ($69 million after tax) to align our cost structure with the current and future business environment; and a decrease in the collective allowance for credit losses of $33 million ($26 million after tax). All of the adjusting items are reflected in results of Corporate Services except for the amortization of acquisition-related intangible assets, which is charged across the operating groups. Management assesses performance on both a GAAP basis and adjusted basis and considers both bases to be useful in assessing underlying, ongoing business performance. Presenting results on both bases provides readers with an enhanced understanding of how management views results and may enhance readers' analysis of performance. Adjusted results and measures are non-GAAP and are detailed in the Adjusted Net Income section, and (for all reported periods) in the Non-GAAP Measures section of the MD&A, where such non-GAAP measures and their closest GAAP counterparts are disclosed.

(3) All Earnings per Share (EPS) measures in this document refer to diluted EPS unless specified otherwise. EPS is calculated using net income after deductions for net income attributable to non-controlling interest in subsidiaries and preferred share dividends.

Note: All ratios and percentage changes in this report are based on unrounded numbers.

Operating Segment Overview

P&C Canada

Net income was $453 million, up $10 million or 2.4% from a year ago. Reported results reflect provisions for credit losses in BMO's operating groups on an expected loss basis. On a basis that adjusts reported results to reflect provisions on an actual loss basis, P&C Canada's net income was up $20 million or 4.6%. Results reflect higher revenues from increased volume across most products, partially offset by lower net interest margins. The volume growth was achieved while managing expenses prudently and continuing to invest in our business. There was good quarter-over-quarter growth, with loans increasing 2.9% and deposits up 1.6%, as well as improvements in market share for these products.

We are focused on our customers and helping them make money make sense. Our continued investment in our branches, automated banking machines (ABMs) and online and mobile banking platforms are making it easier for more customers to access our products and services. This year we have opened or upgraded 28 locations across the country. Our ABM network continues to grow as we have added more than 300 cash dispensing ABMs so far this year. More and more of our customers are using our online and mobile banking services including 'Tap & Go' and email notice features. In addition, cross-selling of products to both personal and commercial customers continues to grow, while customer loyalty, as measured by net promoter score, continues to improve in both our personal and commercial businesses.

In personal banking our award winning mortgage product continues to help customers become mortgage free faster, pay less interest and protect themselves against rising interest rates. With the success of this product, we have also seen improved customer retention and the foundation for new and expanded long-term relationships. We are confident that we are well positioned for future growth.

In commercial banking, our goal is to become the bank of choice for businesses across Canada by providing the knowledge, advice and guidance that customers value. BMO was the only Canadian bank to receive the prestigious 2012 Model Bank Award from the research group Celent, for our Online Banking for Business Platform. This annual award program identifies model banks and recognizes them for their achievements in the strategic development, effective deployment, and improvements to business and customer experience with banking technology. We continue to rank #2 in Canadian business banking loan market share.

P&C U.S. (all amounts in US$)

Net income of $127 million increased $32 million or 34% from $95 million in the third quarter a year ago. Adjusted net income was $143 million, up $40 million or 37% from a year ago as a result of the acquisition of Marshall & Ilsley Corporation in July 2011. Adjusted net income increased 4.1% from the second quarter.

The core commercial loan portfolio continues to grow, having now increased in three sequential quarters.

BMO Harris Bank recently launched a free mobile application for iPhone and Google Android devices. Our retail customers can now check account balances, transfer funds, locate branches, pay bills, and use remote cheque deposit with this application. We registered more than 41,500 new users in the first month of the offering in July.

On August 1, BMO Harris Bank launched its social media platform on the largest social media sites including Facebook, Twitter and LinkedIn. Social media was identified as a way to deliver on our vision to be the bank that defines a great customer experience. Through social media, we will be able to deliver more great service, more convenience, more helpful guidance and more smart advice.

During the quarter, BMO Harris Bank received the 2012 Corporate Philanthropic Award from the West Suburban Philanthropic Network for our commitment to financial support, leadership and volunteerism in Illinois' western suburbs. BMO Harris is the only financial institution to have ever received the Corporate Philanthropic Award.

Preparation for our systems conversion and rebranding of all remaining legacy M&I and Harris Bank locations under the BMO Harris Bank banner is progressing and we have successfully completed a number of technology projects to enhance system features and functionality. In addition, associated employee readiness and customer outreach programs are underway.

Private Client Group

Net income was $109 million, up $5 million or 5.7% from a year ago. Adjusted net income was $115 million, up $10 million or 8.4% from a year ago. Lower interest rates reduced net income in the insurance business by $45 million in the current quarter and by $36 million a year ago. Adjusted net income in PCG excluding insurance was $97 million, up $11 million or 10% from a year ago. Results benefited from acquisitions and higher spread-based and fee-based revenue, partly offset by lower brokerage revenue.

Assets under management and administration grew by approximately $14 billion from a year ago to $445 billion as we continue to attract new client assets.

On June 11, 2012, we completed our acquisition of CTC Consulting, LLC, a U.S.-based independent investment consulting firm. This acquisition expands and enhances our manager research and advisory capabilities, especially in the area of alternative investments, benefiting our high net worth clients in the United States as well as in Canada and Asia.

On August 1, 2012, we completed our acquisition of a 19.99% interest in COFCO Trust Co., a subsidiary of COFCO Group, one of China's largest state-owned enterprises with operations across a variety of sectors, including agriculture and financial services. COFCO Trust Co. had assets under management of approximately US$5.7 billion at December 31, 2011. The acquisition provides an effective vehicle to expand our offering to high net worth and institutional clients in China through a local partner. In addition, this strategic partnership opens more doors, broadens our capabilities and helps grow our domestic wealth management business in China.

BMO Harris Private Banking was named the Best Private Bank in Canada for the second consecutive year by World Finance. This recognition is a clear demonstration of the quality of our client relationships.

BMO's Exchange Traded Fund (ETF) business marked its three-year anniversary by surpassing $6 billion in assets under management. In the first six months of 2012, the total assets of BMO ETFs grew by 62 per cent.

BMO Capital Markets

Net income for the current quarter was $232 million, down from a strong $270 million in the prior year, but up $7 million or 2.9% from the previous quarter. The increase in net income from the previous quarter was driven by higher trading revenue and corporate banking revenue.

During the quarter we earned a number of awards, recognizing our commitment to customer experience. BMO Capital Markets was named Best Investment Bank in Canada for 2012 by World Finance. We also won Trade Finance magazine's "Best Trade Bank" in Canada award for the third year in a row. BMO Capital Markets was selected as share leader for Overall Canadian Fixed-Income Market Share and Quality Leader for Canadian Fixed-Income Research Quality by Greenwich Associates for 2012, a designation that reflects client recognition for providing unmatched coverage and quality of service for Canadian Fixed Income markets. BMO Capital Markets was also recognized for its Prime Brokerage business, earning the top spot in Canada for its capital introduction capabilities in a survey conducted by Global Custodian magazine.

BMO Capital Markets participated in 125 new issues in the quarter including 51 corporate debt deals, 29 government debt deals, 32 common equity transactions and 13 issues of preferred shares, raising $46 billion dollars.

Corporate Services

Net income for the quarter was $47 million, an increase of $246 million from a year ago. On an adjusted basis, net income was $65 million, an improvement of $127 million from a year ago. Adjusting items are detailed in the Adjusted Net Income section and in the Non-GAAP Measures section. Adjusted provisions for credit losses were lower by $164 million due in part to a $118 million ($73 million after-tax) recovery of provisions for credit losses on the M&I purchased credit impaired loan portfolio. The remaining decrease was attributable to lower provisions charged to Corporate Services under BMO's expected loss provisioning methodology, which is explained in the Corporate Services section at the end of this MD&A.

Acquisition of Marshall & Ilsley Corporation (M&I)

On July 5, 2011, BMO completed the acquisition of M&I. In this document, M&I is generally referred to as the 'acquired business' and other acquisitions are specifically identified. Activities of the acquired business are primarily reflected in the P&C U.S., Private Client Group and Corporate Services segments, with a small amount included in BMO Capital Markets.

The acquired business contributed $117 million to reported net income and $165 million to adjusted net income for the quarter. It contributed $557 million to reported net income and $561 million to adjusted net income for the year to date.

Adjusted Net Income

Management has designated certain amounts as adjusting items and has adjusted GAAP results so that we can discuss and present financial results without the effects of adjusting items to facilitate understanding of business performance and related trends. Management assesses performance on a GAAP basis and on an adjusted basis and considers both to be useful in the assessment of underlying business performance. Presenting results on both bases provides readers with a better understanding of how management assesses results. Adjusted results and measures are non-GAAP and, together with items excluded in determining adjusted results, are disclosed in more detail in the Non-GAAP Measures section, along with comments on the uses and limitations of such measures. Items excluded from third quarter 2012 results in the determination of adjusted results totalled a charge of $43 million or $0.07 per share and were comprised of:

-- the $47 million after-tax net benefit for credit-related items in

respect of the acquired M&I performing loan portfolio, including $212

million for the recognition in net interest income of a portion of the

credit mark on the portfolio (including $93 million for the release of

the credit mark related to early repayment of loans), net of a $136

million provision for credit losses (comprised of an increase in the

collective allowance of $23 million and specific provisions of $113

million) and related income taxes of $29 million. These credit-related

items in respect of the acquired M&I performing loan portfolio can

significantly impact both net interest income and the provision for

credit losses in different periods over the life of the acquired M&I

performing loan portfolio;

-- costs of $105 million ($65 million after tax) for integration of the

acquired business including amounts related to system conversions,

restructuring and other employee-related charges, consulting fees and

marketing costs in connection with customer communications and

rebranding activities;

-- a $15 million ($15 million after-tax) loss on run-off structured credit

activities (our credit protection vehicle and structured investment

vehicle). These vehicles are consolidated on our balance sheet under

IFRS and results primarily reflect valuation changes associated with

these activities that have been included in trading revenue;

-- a decrease in the collective allowance for credit losses of $15 million

($14 million after tax) on loans other than the M&I acquired loan

portfolio; and

-- the amortization of acquisition-related intangible assets of $33 million

($24 million after tax).

Adjusted net income was $1,013 million for the third quarter of 2012, up $157 million or 18% from a year ago. Adjusted earnings per share were $1.49, up 11% from $1.34 a year ago. All of the above adjusting items were recorded in Corporate Services except the amortization of acquisition-related intangible assets, which is charged to the operating groups. The impact of adjusting items for comparative periods is summarized in the Non-GAAP Measures section.

Caution

The foregoing sections contain forward-looking statements. Please see the Caution Regarding Forward-Looking Statements.

The foregoing sections contain adjusted results and measures, which are non-GAAP. Please see the Non-GAAP Measures section.

Bank of Montreal's Chief Executive Officer and Chief Financial Officer have signed certifications relating to the appropriateness of the financial disclosures in our interim MD&A and unaudited interim consolidated financial statements for the period ended July 31, 2012, and relating to the design of our disclosure controls and procedures and internal control over financial reporting. Bank of Montreal's management, under the supervision of the CEO and CFO, has evaluated the effectiveness, as at July 31, 2012, of Bank of Montreal's disclosure controls and procedures (as defined in the rules of the Securities and Exchange Commission and the Canadian Securities Administrators) and has concluded that such disclosure controls and procedures are effective.

Bank of Montreal's internal control over financial reporting includes policies and procedures that: pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the transactions and dispositions of the assets of BMO; provide reasonable assurance that transactions are recorded as necessary to permit preparation of the consolidated financial statements in accordance with Canadian generally accepted accounting principles and the requirements of the Securities and Exchange Commission in the United States, as applicable; ensure receipts and expenditures of BMO are being made only in accordance with authorizations of management and directors of Bank of Montreal; and provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of BMO assets that could have a material effect on the consolidated financial statements.

Because of its inherent limitations, internal control over financial reporting can provide only reasonable assurance and may not prevent or detect misstatements. Further, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

There were no changes in our internal control over financial reporting during the quarter ended July 31, 2012, that materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

As in prior quarters, Bank of Montreal's Audit and Conduct Review Committee reviewed this document, including the unaudited interim consolidated financial statements, and Bank of Montreal's Board of Directors approved the document prior to its release.

A comprehensive discussion of our businesses, strategies and objectives can be found in Management's Discussion and Analysis in BMO's 2011 Annual Report, which can be accessed on our website at www.bmo.com/investorrelations. Readers are also encouraged to visit the site to view other quarterly financial information.

Caution Regarding Forward-Looking Statements

Bank of Montreal's public communications often include written or oral forward-looking statements. Statements of this type are included in this document, and may be included in other filings with Canadian securities regulators or the U.S. Securities and Exchange Commission, or in other communications. All such statements are made pursuant to the "safe harbor" provisions of, and are intended to be forward-looking statements under, the United States Private Securities Litigation Reform Act of 1995 and any applicable Canadian securities legislation. Forward-looking statements may involve, but are not limited to, comments with respect to our objectives and priorities for 2012 and beyond, our strategies or future actions, our targets, expectations for our financial condition or share price, and the results of or outlook for our operations or for the Canadian and U.S. economies.

By their nature, forward-looking statements require us to make assumptions and are subject to inherent risks and uncertainties. There is significant risk that predictions, forecasts, conclusions or projections will not prove to be accurate, that our assumptions may not be correct and that actual results may differ materially from such predictions, forecasts, conclusions or projections. We caution readers of this document not to place undue reliance on our forward-looking statements as a number of factors could cause actual future results, conditions, actions or events to differ materially from the targets, expectations, estimates or intentions expressed in the forward-looking statements.

The future outcomes that relate to forward-looking statements may be influenced by many factors, including but not limited to: general economic and market conditions in the countries in which we operate; weak, volatile or illiquid capital and/or credit markets; interest rate and currency value fluctuations; changes in monetary, fiscal or economic policy; the degree of competition in the geographic and business areas in which we operate; changes in laws or in supervisory expectations or requirements, including capital, interest rate and liquidity requirements and guidance; judicial or regulatory proceedings; the accuracy and completeness of the information we obtain with respect to our customers and counterparties; our ability to execute our strategic plans and to complete and integrate acquisitions; critical accounting estimates and the effect of changes to accounting standards, rules and interpretations on these estimates; operational and infrastructure risks; changes to our credit ratings; general political conditions; global capital markets activities; the possible effects on our business of war or terrorist activities; disease or illness that affects local, national or international economies; natural disasters and disruptions to public infrastructure, such as transportation, communications, power or water supply; technological changes; and our ability to anticipate and effectively manage risks associated with all of the foregoing factors.

We caution that the foregoing list is not exhaustive of all possible factors. Other factors could adversely affect our results. For more information, please see the discussion on pages 30 and 31 of BMO's 2011 annual MD&A, which outlines in detail certain key factors that may affect Bank of Montreal's future results. When relying on forward-looking statements to make decisions with respect to Bank of Montreal, investors and others should carefully consider these factors, as well as other uncertainties and potential events, and the inherent uncertainty of forward-looking statements. Bank of Montreal does not undertake to update any forward-looking statements, whether written or oral, that may be made from time to time by the organization or on its behalf, except as required by law. The forward-looking information contained in this document is presented for the purpose of assisting our shareholders in understanding our financial position as at and for the periods ended on the dates presented, as well as our strategic priorities and objectives, and may not be appropriate for other purposes.

In calculating the pro-forma impact of Basel III on our regulatory capital, risk-weighted assets (including Counterparty Credit Risk and Market Risk) and regulatory capital ratios, we have assumed that our interpretation of the proposed rules and proposals announced by the Basel Committee on Banking Supervision (BCBS) as of this date, and our models used to assess those requirements, are consistent with the final requirements that will be promulgated by the Office of the Superintendent of Financial Institutions Canada (OSFI). We have also assumed that the proposed changes affecting capital deductions, risk-weighted assets, the regulatory capital treatment for non-common share capital instruments (i.e. grandfathered capital instruments) and the minimum regulatory capital ratios are adopted by OSFI as proposed by BCBS, unless OSFI has expressly advised otherwise. We have also assumed that existing capital instruments that are non-Basel III compliant but are Basel II compliant can be fully included in the July 31, 2012, pro-forma calculations. The full impact of the Basel III proposals has been quantified based on our financial and risk positions at quarter end or as close to quarter end as was practical. In setting out the expectation that we will be able to refinance certain capital instruments in the future, as and when necessary to meet regulatory capital requirements, we have assumed that factors beyond our control, including the state of the economic and capital markets environment, will not impair our ability to do so.

Assumptions about the level of asset sales, expected asset sale prices, net funding cost, credit quality, risk of default and losses on default of the underlying assets of the structured investment vehicle were material factors we considered when establishing our expectations regarding the structured investment vehicle discussed in this interim MD&A, including the adequacy of first-loss protection. Key assumptions included that assets will continue to be sold with a view to reducing the size of the structured investment vehicle, under various asset price scenarios, and that the level of default and losses will be consistent with the credit quality of the underlying assets and our current expectations regarding continuing difficult market conditions.

Assumptions about the level of default and losses on default were material factors we considered when establishing our expectations regarding the future performance of the transactions into which our credit protection vehicle has entered. Among the key assumptions were that the level of default and losses on default will be consistent with historical experience. Material factors that were taken into account when establishing our expectations regarding the future risk of credit losses in our credit protection vehicle and risk of loss to BMO included industry diversification in the portfolio, initial credit quality by portfolio, the first-loss protection incorporated into the structure and the hedges that BMO has entered.

In determining the impact of reductions to interchange fees in the U.S. Regulatory Developments section, we have assumed that business volumes remain consistent with our expectations and that certain management actions are implemented that will modestly reduce the impact of the rules on our revenues.

Assumptions about the performance of the Canadian and U.S. economies, as well as overall market conditions and their combined effect on our business, are material factors we consider when determining our strategic priorities, objectives and expectations for our business. In determining our expectations for economic growth, both broadly and in the financial services sector, we primarily consider historical economic data provided by the Canadian and U.S. governments and their agencies. See the Economic Outlook and Review section of this interim MD&A.

Regulatory Filings

Our continuous disclosure materials, including our interim filings, annual MD&A and audited consolidated financial statements, Annual Information Form and Notice of Annual Meeting of Shareholders and Proxy Circular are available on our website at www.bmo.com/investorrelations, on the Canadian Securities Administrators' website at www.sedar.com and on the EDGAR section of the SEC's website at www.sec.gov.

Economic Outlook and Review

The Canadian economy is growing modestly, supported by low interest rates and a vibrant resource sector but restrained by the strong Canadian dollar and weak global demand. The economy is expected to achieve real growth of 2% this year, maintaining the unemployment rate near 7%. Households will likely continue to spend cautiously in the face of elevated debt and more restrictive credit rules. Similarly, housing market activity should moderate in response to recent changes in mortgage rules and high valuations in some markets. Fiscal policies should remain restrictive as a result of budget deficits. While exporters, consumers and governments all face challenging conditions, Canadian businesses should maintain their strong rate of investment, particularly in the resource-rich provinces of Alberta, Saskatchewan, and Newfoundland & Labrador. In addition, lower office and industrial vacancy rates will continue to support commercial construction. The Canadian dollar is expected to trade near parity with the U.S. dollar in 2013, supported by strong inflows of foreign capital. Inflation should stay low, despite expected increases in food prices, allowing the Bank of Canada to maintain its overnight rate target at 1% well into next year.

The U.S. economy continues to grow modestly, as concerns about the European debt situation and domestic fiscal issues have discouraged companies from spending and hiring. Expected real GDP growth of approximately 2% will likely result in the unemployment rate staying above 8% through 2013. Despite lower gasoline prices and improved finances, many households are struggling with weak job prospects and still-high (though declining) foreclosures. Restrictive fiscal policies will likely continue to restrain economic expansion, especially in 2013 when special tax breaks expire and scheduled spending reductions begin. However, the housing market should improve further in response to attractive affordability and growing demand due to the rising number of young prospective buyers. In the face of high unemployment and low inflation, the Federal Reserve is expected to maintain its near-zero interest rate policy for at least a couple of more years and to implement additional measures to reduce longer-term borrowing costs.

The U.S. Midwest economy is growing in line with the national trend, supported by rising automotive production and increased oil output in North Dakota but restrained by restrictive fiscal policies and weak global demand. The Midwest economy is expected to grow about 2% this year, held back by sharply lower agricultural production due to the severe drought. Growth will likely improve slightly next year, as stimulative fiscal and monetary policies in China and other emerging-market economies should support a pickup in global exports.

This Economic Outlook and Review section contains forward-looking statements. Please see the Caution Regarding Forward-Looking Statements.

Foreign Exchange

The Canadian dollar equivalents of BMO's U.S.-dollar-denominated net income, revenues, expenses, provisions for credit losses and income taxes were increased relative to the third quarter of 2011 and for the year to date relative to the comparable period in 2011 by the strengthening of the U.S. dollar. They were also raised relative to the second quarter of 2012, by a modest strengthening of the U.S. dollar. The average Canadian/U.S. dollar exchange rate for the quarter, expressed in terms of the Canadian dollar cost of a U.S. dollar, increased by 5.7% from a year ago and increased by 2.7% from the average of the second quarter. The average rate for the year to date increased by 3.1%. The following table indicates the relevant average Canadian/U.S. dollar exchange rates and the impact of changes in the rates.

Adjusted results in this section are non-GAAP amounts or non-GAAP measures.

Please see the Non-GAAP Measures section.

The effect of currency fluctuations on our investments in foreign operations is discussed in the Income Taxes section.

Other Value Measures

BMO's average annual total shareholder return for the five-year period ended July 31, 2012, was 2.5%.

Net economic profit (NEP) was $278 million, compared with $366 million in the second quarter and $151 million in the third quarter of 2011. Adjusted NEP was $297 million, compared with $296 million in the second quarter and $287 million in the third quarter of 2011. Changes in adjusted NEP relative to a year ago are reflective of higher earnings, including the impact of two additional months of results of the acquired business in the current year, and increased capital. Changes relative to the second quarter were attributable to increased capital, offset in part by improved earnings. NEP of $278 million represents the net income that is attributable to shareholders ($951 million), less preferred share dividends ($32 million), plus the after-tax amortization of intangible assets ($24 million), net of a charge for capital ($665 million), and is considered an effective measure of added economic value. Adjusted NEP is calculated in the same manner using adjusted net income rather than reported net income and excluding the addition of the amortization of intangible assets. NEP and adjusted NEP are non-GAAP measures. Please see the Non-GAAP Measures section for a discussion on the use and limitations of non-GAAP measures.

Net Income

Q3 2012 vs Q3 2011

Net income was $970 million for the third quarter of 2012, up $262 million or 37% from a year ago. Earnings per share were $1.42, up 30% from $1.09 a year ago.

Adjusted net income was $1,013 million for the third quarter of 2012, up $157 million or 18% from a year ago. Adjusted earnings per share were $1.49, up 11% from $1.34 a year ago. Adjusted results and items excluded in determining adjusted results are disclosed in more detail in the preceding Adjusted Net Income section and in the Non-GAAP Measures section, together with comments on the uses and limitations of such measures.

Adjusted net income growth reflects the benefits from acquisitions and organic growth. There was significant growth in P&C U.S., due largely to inclusion of results of the acquired business for three months compared to one month a year ago. PCG results improved despite lower insurance results, and P&C Canada net income was higher due to volume growth across most products, partially offset by lower net interest margin. BMO Capital Markets results were lower than the strong results of a year ago. Adjusted net income increased in Corporate Services due in large part to lower adjusted provisions for credit losses.

Provisions for credit losses increased modestly, but adjusted provisions were down $81 million after-tax due to a recovery of provisions for credit losses on M&I purchased credit impaired loans and lower specific provisions on the legacy portfolio. The effective tax rate was lower, as explained in the Income Taxes section.

Q3 2012 vs Q2 2012

Net income decreased $58 million or 5.8% from the second quarter and earnings per share decreased $0.09 or 6.0%. Adjusted net income increased $31 million or 3.1% and adjusted earnings per share increased $0.05 or 3.5%.

On an adjusted basis, there were increases in P&C U.S, P&C Canada, BMO Capital Markets and Corporate Services and a reduction in Private Client Group.

Adjusted revenues were lower than in the second quarter, and adjusted expenses also decreased, reflective of effective expense management. Adjusted provisions for credit losses decreased and the adjusted effective tax rate was also lower in the current quarter.

Q3 YTD 2012 vs Q3 YTD 2011

Net income increased $761 million or 32% to $3,107 million. Earnings per share were $4.56, up $0.82 or 22% from a year ago.

Adjusted net income increased $524 million or 21% to $2,967 million and adjusted earnings per share were $4.35, up $0.44 or 11% from a year ago. Eight additional months of results of the acquired business added $527 million to year-to-date adjusted net income compared to the same period a year ago.

This section contains adjusted results and measures which are non-GAAP. Please see the Non-GAAP Measures section.

Revenue

Total revenue increased $558 million or 17% from the third quarter a year ago. Adjusted revenue increased $297 million or 8.8%. The inclusion of results of the acquired business for three months compared to one month in the prior year increased adjusted revenue by $320 million. The stronger U.S. dollar increased adjusted revenue growth by $41 million or 1.3%, on a basis that excludes the impact of the acquired business. Excluding these two items, adjusted revenue decreased by $64 million or 2.0%, primarily due to lower BMO Capital Markets revenues, as market conditions were more favourable a year ago, lower insurance revenue and decreased revenues in Corporate Services.

Revenue decreased $81 million or 2.1% from the second quarter. Adjusted revenue decreased $50 million or 1.4%. The stronger U.S. dollar increased adjusted revenue growth by $33 million or 0.9%. Excluding the impact of the stronger U.S. dollar, adjusted revenue decreased by $83 million or 2.2%, primarily due to lower insurance revenue. P&C Canada revenues increased due to two extra days and good volume growth across all products, offset in part by lower margins. Adjusted revenues in Corporate Services were down due to a number of small items.

Revenue for the year to date increased $1,833 million or 18% and adjusted revenue increased $1,075 million or 11%. The inclusion of results of the acquired business for eight additional months in the current year to date increased adjusted revenue by $1,254 million. The stronger U.S. dollar increased adjusted revenue growth by $68 million or 0.7%, on a basis that excludes the impact of the acquired business. Excluding these two items, adjusted revenue decreased by $248 million or 2.5%, primarily due to less favourable market conditions for BMO Capital Markets.

Changes in net interest income and non-interest revenue are reviewed in the sections that follow.

This section contains adjusted results and measures which are non-GAAP. Please see the Non-GAAP Measures section.

Net Interest Income

Net interest income in the quarter increased $422 million or 23% from a year ago to $2,225 million. Adjusted net interest income increased $194 million or 11% to $2,012 million. The increase in adjusted net interest income was primarily in P&C U.S., due to the inclusion of results of the acquired business for two additional months in the current quarter relative to the same period a year ago. There was strong growth in Private Client Group due in part to the impact of the acquired business. There was a modest reduction in P&C Canada. BMO Capital Markets net interest income was consistent with results of a year ago, while Corporate Services adjusted net interest income was lower.

BMO's overall net interest margin increased by 12 basis points year over year to 1.88%. Adjusted net interest margin decreased by 8 basis points to 1.70% with decreases in each of the operating groups. The decrease in BMO Capital Markets was attributable to reduced market spreads. Decreased margin in P&C Canada was primarily driven by deposit spread compression in the low rate environment lower personal lending margins resulting from customer behaviours in our cards business and competitive pressures and loan growth exceeding deposit growth, particularly mortgages. In P&C U.S., the decrease was due to deposit spread compression, partially offset by the favourable effect of deposit growth exceeding loan growth and the positive impact from the acquired business. In Private Client Group, the decrease was mainly due to lower deposit spreads, offset in part by higher loan and deposit balances in private banking and the impact of the acquired business. Corporate Services adjusted net interest income decreased year over year and contributed to BMO's overall margin reduction.

Average earning assets in the third quarter increased $64.9 billion or 16% relative to a year ago, with a $10.3 billion increase as a result of the stronger U.S. dollar. There were higher assets in P&C U.S. due to the acquired business and good organic commercial loan growth. There were increased assets in BMO Capital Markets due to increased holdings of securities purchased under resale agreements (reverse repos) as a result of client demand and higher deposits at the Federal Reserve. There was growth in P&C Canada, driven by volume growth across most products, and Private Client Group benefited from personal loan growth in private banking and higher insurance assets.

Relative to the second quarter, net interest income increased $105 million or 4.9%. Adjusted net interest income increased $43 million or 2.1%, in part due to two more days in the current quarter. There was growth across all operating groups, partially offset by a decrease in Corporate Services.

BMO's overall net interest margin decreased 1 basis point from the second quarter. Adjusted net interest margin decreased 6 basis points. There was a modest decline in BMO Capital Markets. P&C Canada's margin decrease was primarily due to lower personal lending margins resulting from customer behaviours in our cards business and competitive pressures, deposit spread compression in the low rate environment and loan growth exceeding deposit growth, particularly mortgages. The margin decrease in Private Client Group was driven by lower deposit balances. Adjusted net interest margin increased modestly in P&C U.S. while Corporate Services adjusted net interest income decreased, which had an unfavourable impact on overall spread.

Average earning assets increased $16.0 billion or 3.5% from the second quarter, with a $4.9 billion increase as a result of the stronger U.S. dollar. There was growth in BMO Capital Markets due to higher reverse repos and securities balances. There was solid growth in P&C Canada and in Private Client Group and a more modest increase in P&C U.S.

Year to date, net interest income increased $1,451 million or 28%. Adjusted net interest income increased $821 million or 16% to $6,073 million, primarily due to the inclusion of results of the acquired business for eight additional months in P&C U.S. and Private Client Group, compared to a year ago. Private Client Group also benefited from higher earnings from a strategic investment and good organic growth. There was a decrease in BMO Capital Markets due to reduced margins, while P&C Canada net interest income was consistent with the same period a year ago. Corporate Services adjusted net interest income was lower, due in part to interest received on the settlement of certain tax matters in the prior year.

BMO's overall net interest margin increased by 15 basis points to 1.94% for the year to date. On an adjusted basis, net interest margin decreased by 3 basis points. There were reductions across most operating groups and reduced net interest income in Corporate Services. There was an increase in Private Client Group, due in large part to the impact of the acquired business and higher earnings from a strategic investment.

Average earning assets for the year to date increased $68.1 billion or 17%, and by $62.6 billion adjusted to exclude the impact of the stronger U.S. dollar. There were higher assets in P&C U.S. and in Private Client Group, due to the inclusion of results of the acquired business and organic growth. There was also strong growth in BMO Capital Markets and more modest growth in P&C Canada and Corporate Services.

Adjusted results in this section are non-GAAP amounts or non-GAAP measures. Please see the Non-GAAP Measures section.

Relative to the second quarter, non-interest revenue decreased $186 million or 10%. Adjusted non-interest revenue decreased $93 million or 5.3%. Lower interest rates reduced insurance revenue by $61 million in the current quarter. There were reductions in securities commissions and fees, and in gains on securities, foreign exchange other than trading and equity underwriting fees.

Year to date, non-interest revenue increased $382 million or 7.8% to $5,291 million. Adjusted non-interest revenue increased $254 million or 5.3% to $5,074 million. Increases from the inclusion of results of the acquired business for eight additional months relative to a year ago were partially offset by declines in underwriting and advisory fees, securities commissions and fees, securities gains and insurance revenues.

Non-interest revenue is detailed in the attached summary unaudited interim consolidated financial statements.

Adjusted results in this section are non-GAAP amounts or non-GAAP measures. Please see the Non-GAAP Measures section.

Non-Interest Expense

Non-interest expense increased $263 million or 12% from the third quarter a year ago to $2,484 million. Adjusted non-interest expense increased $273 million or 13% to $2,342 million. The inclusion of results of the acquired business for two additional months compared to a year ago increased adjusted expense by $248 million. The stronger U.S. dollar increased adjusted expense growth by $26 million or 1.3%, on a basis that excludes the impact of the acquired business. Excluding these two items, expenses decreased by $1 million or 0.1% as the benefit from disciplined expense management was largely offset by investment in strategic initiatives.

Relative to the second quarter, non-interest expense decreased $15 million or 0.6%. Adjusted non-interest expense decreased $15 million or 0.6%. The stronger U.S. dollar increased adjusted expense growth by $20 million or 0.9%. Excluding the impact of the stronger U.S. dollar, expenses decreased by $35 million or 1.5%, due to lower employee-related costs and cost containment, despite an increase from two more days in the quarter. Our increased focus on productivity has contributed to quarter-over-quarter adjusted operating leverage of 1.2% on a basis that excludes the impact of long-term interest rates on our insurance business.

Non-interest expense for the year to date increased $1,228 million or 19% to $7,537 million. Adjusted non-interest expense increased $965 million or 16% to $7,077 million. The inclusion of results of the acquired business for eight additional months in the current year to date increased adjusted expense by $867 million. The stronger U.S. dollar increased adjusted expense growth by $44 million or 0.7%, on a basis that excludes the impact of the acquired business. Excluding these two items, expenses increased by $54 million or 0.9%, primarily due to continued investment in our businesses, including technology development initiatives, as well as increased support costs.

Non-interest expense is detailed in the attached summary unaudited interim consolidated financial statements.

Adjusted results in this section are non-GAAP amounts or non-GAAP measures. Please see the Non-GAAP Measures section.

Risk Management

Starting in the first quarter of 2012, provisions for credit losses for the current and prior periods are reported on an IFRS basis, and as such include provisions resulting from the recognition of our securitized loans and certain special purpose entities on our balance sheet. IFRS also requires that we recognize interest income on impaired loans with a corresponding increase in provision for credit losses.

The provision for credit losses totalled $237 million in the third quarter of 2012. The adjusted provision for credit losses was $116 million, after adjusting for a $113 million specific provision for the M&I purchased performing loan portfolio. Adjusting items also include a $23 million increase in the collective allowance for the M&I purchased performing loan portfolio and a $15 million reduction in the collective allowance on other loans.

The adjusted provision for credit losses of $116 million represents an annualized 21 basis points of average net loans and acceptances, compared with $151 million or an annualized 28 basis points in the second quarter of 2012 and $245 million or an annualized 48 basis points in the third quarter of 2011. Included in the adjusted specific provision for credit losses is a recovery of $118 million related to the M&I purchased credit impaired loans this quarter, compared with a $117 million recovery in the second quarter of 2012.

On a geographic basis, specific provisions in Canada and all other countries (excluding the United States) were $138 million in the third quarter of 2012, $177 million in the second quarter of 2012 and $151 million in the third quarter of 2011. Specific provisions in the United States were $91 million in the third quarter of 2012, $18 million in the second quarter of 2012 and $94 million in the third quarter of 2011. On an adjusted basis, specific provisions in the United States for the comparable periods were a $22 million recovery, a $26 million recovery and a charge of $94 million, respectively.

BMO employs a methodology for segmented reporting purposes whereby credit losses are charged to the client operating groups quarterly, based on their share of expected credit losses. The difference between quarterly charges based on expected losses and required quarterly provisions based on actual losses is charged (or credited) to Corporate Services. The table that follows outlines credit losses by client operating group based on actual credit losses.

Impaired loan formations in BMO's legacy portfolio (which excludes the M&I purchased performing loan portfolio) totalled $405 million in the current quarter, down from $455 million in the second quarter of 2012 and $429 million a year ago. Impaired loan formations related to the M&I purchased performing loan portfolio were $386 million in the current quarter, down from $444 million in the second quarter. At acquisition, we recognized the likelihood of impairment in the purchased performing loan portfolio and losses on these loans that have now been identified as impaired were adequately provided for in the credit mark established at the time of acquisition.

Total gross impaired loans, excluding the purchased credit impaired loans, were $2,867 million at the end of the current quarter, up from $2,837 million in the second quarter of 2012 and $2,290 million a year ago. At the end of the quarter, there were $926 million of gross impaired loans related to the acquired portfolios, of which $133 million is subject to a loss-sharing agreement that expires in 2015 for commercial loans and 2020 for retail loans.

An active housing market in Canada with low interest rates and high consumer debt levels could imply potential risk if there were an economic downturn or increase in interest rates. BMO's Canadian residential mortgage portfolio represents 6.5% of the total Canadian residential mortgage market of $1,142 billion (Bank of Canada, June 2012). Approximately 65% of the portfolio is insured, with an average loan-to-value ratio of 64% (adjusted for current housing values). The remaining 35% of the portfolio is uninsured, with an average loan-to-value ratio of 56%. BMO's Home Equity Line of Credit portfolio is uninsured, but 95% of the exposures represent a priority claim and there are no exposures that had a loan-to-value ratio greater than 80% at time of origination. We remain satisfied with our prudent and consistent lending standards throughout the credit cycle and will continue to monitor the portfolio closely.

BMO's liquidity and funding, market and insurance risk management practices and key measures are outlined on pages 88 to 91 of BMO's 2011 annual MD&A.

There were no significant changes to our level of liquidity and funding risk over the quarter. We remain satisfied that our liquidity and funding management framework provides us with a sound liquidity position.

Trading and Underwriting Market Value Exposure (MVE) decreased over the period, mainly due to reduced fixed income activity. Exposure in the bank's available-for-sale portfolios was relatively unchanged over the period.

There were no significant changes in our structural market risk management practices during the quarter. Structural MVE is driven by rising interest rates and primarily reflects a lower market value for fixed-rate loans. Structural Earnings Volatility (EV) is driven by falling interest rates and primarily reflects the risk of prime-based loans repricing at lower rates. MVE and economic value exposures under rising interest rates decreased from the prior quarter largely due to higher U.S. mortgage prepayments as a result of lower interest rates. MVE also decreased due to lower modelled interest rate volatility. EV and earnings exposure under the 100 basis point falling interest rate scenario were largely unchanged from the prior quarter. Earnings exposure under the 200 basis point falling interest rate scenario increased largely due to the increased impact of interest rate floors, which limit the extent that interest expense can decline when interest rates fall.

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