BMO Financial Group Reports Fourth Quarter and Fiscal 2018 Results (7)

(Canadian $ in millions) Canadian P&C U.S. P&C Total P&C Wealth BMO Capital Corporate Total Bank Management Markets Services (2) --- Q4-2018 Provision for (recovery of) credit losses on impaired loans 118 61 179 2 (3) (1) 177 Provision for (recovery of) credit losses on performing loans (15) 18 3 1 (4) (2) (2) --- Total provision for (recovery of) credit losses 103 79 182 3 (7) (3) 175 Q3-2018 Provision for (recovery of) credit losses on impaired loans 120 54 174 2 3 (2) 177 Provision for (recovery of) credit losses on performing loans 17 (14) 3 2 4 9 --- Total provision for (recovery of) credit losses 137 40 177 4 7 (2) 186 Q4-2017 Total specific and collective provision for (recovery of) credit losses 130 64 194 4 4 202 --- Fiscal 2018 Provision for (recovery of) credit losses on impaired loans 466 258 724 6 (17) (13) 700 Provision for (recovery of) credit losses on performing loans 3 (38) (35) (1) (2) (38) --- Total provision for (recovery of) credit losses 469 220 689 6 (18) (15) 662 Fiscal 2017 Total specific and collective provision for (recovery of) credit losses (2) 483 289 772 8 44 (78) 746 ---

(1) Effective the first quarter of 2018, the bank prospectively adopted IFRS 9, Financial Instruments (IFRS 9). Under IFRS 9, we refer to the provision for credit losses on impaired loans and the provision for credit losses on performing loans. Prior periods have not been restated. The provision for credit losses in periods prior to the first quarter of 2018 is comprised of specific provisions for operating groups and includes both specific and collective provisions for Corporate Services. Refer to the Changes in Accounting Policies section on page 121 of BMO's 2018 Annual MD&A for further details. (2) Adjustments to the collective allowance for credit losses are recorded in Corporate Services provision for credit losses in 2017 and prior years. Certain comparative figures have been reclassified to conform with the current period's presentation.

Provision for Credit Losses Performance Ratios

Q4-2018 Q3-2018 Q4-2017 Fiscal 2018 Fiscal 2017 Total PCL- to- average net loans and acceptances (annualized) (%) 0.18 0.19 0.22 0.17 0.20 PCL on impaired loans- to- average net loans and acceptances (annualized) (%) 0.18 0.18 0.22 0.18 0.22 ---

Impaired LoansTotal gross impaired loans (GIL) of $1,936 million at the end of the current quarter, down from $2,220 million in the prior year, with the largest decrease in impaired loans in service industries, and the oil and gas sector. GIL decreased $140 million from $2,076 million in the third quarter of 2018.

Factors contributing to the change in GIL are outlined in the following table. Loans classified as impaired during the quarter totalled $443 million, down from $522 million in the third quarter of 2018 and $527 million in the prior year.

Changes in Gross Impaired Loans (GIL) and Acceptances ((1))

(Canadian $ in millions, except as noted) Q4-2018 Q3-2018 Q4-2017 Fiscal 2018 Fiscal 2017 --- GIL, beginning of period 2,076 2,152 2,154 2,220 2,383 Classified as impaired during the period 443 522 527 2,078 2,193 Transferred to not impaired during the period (188) (151) (135) (708) (607) Net repayments (214) (322) (184) (1,051) (1,017) Amounts written-off (194) (140) (146) (618) (618) Recoveries of loans and advances previously written-off Disposals of loans (5) (45) (11) (46) Foreign exchange and other movements 18 15 49 26 (68) --- GIL, end of period 1,936 2,076 2,220 1,936 2,220 --- GIL to gross loans and acceptances (%) 0.48 0.53 0.59 0.48 0.59 ===

(1) GIL excludes purchased credit impaired loans. Certain comparative figures have been reclassified to conform with the current period's presentation.

Insurance Claims, Commissions and Changes in Policy Benefit LiabilitiesInsurance claims, commissions and changes in policy benefit liabilities (CCPB) were $390 million in the fourth quarter of 2018, a decrease of $183 million from $573 million in the fourth quarter of 2017 due to the impact of increases in long-term interest rates decreasing the fair value of policy benefit liabilities in the current quarter, compared with decreases in long-term interest rates increasing the fair value of policy benefit liabilities in the prior year, less elevated reinsurance claims in the current year and the impact of weaker equity markets in the current year, partially offset by higher annuity sales. CCPB increased $121 million from $269 million in the third quarter of 2018, due to the impact of higher annuity sales and elevated reinsurance claims in the current quarter, partially offset by higher increases in long-term interest rates decreasing the fair value of policy benefit liabilities in the current quarter, compared with the prior quarter and the impact of weaker equity markets in the current quarter. The changes related to the fair value of policy benefit liabilities and annuity sales were largely offset in revenue.

Non--Interest ExpenseReported non-interest expense of $3,224 million decreased $151 million or 4% from the prior year. Adjusted non-interest expense of $3,452 million increased $194 million or 6%, or 5% excluding the impact of the stronger U.S. dollar, largely reflecting higher employee-related expenses, including an acquisition, higher technology costs and a gain on sale of an office building in the prior year. Adjusted non-interest expense excludes a benefit of $277 million pre-tax in the current quarter from the remeasurement of an employee benefit liability as a result of an amendment to our other employee future benefits plan for certain employees that was announced in the fourth quarter of 2018, a restructuring charge of $59 million in the prior year and acquisition integration costs and the amortization of acquisition-related intangible assets in both periods.

Reported non-interest expense decreased $162 million or 5% from the third quarter of 2018, reflecting the benefit in the current quarter. Adjusted non-interest expense increased $102 million or 3%, with increases in most expense categories.

Reported operating leverage on a net revenue basis was positive 13.4% year-over-year. Adjusted operating leverage on a net revenue basis was positive 2.9% year-over-year.

The reported efficiency ratio was 54.4% compared with 59.7% in the prior year and was 58.3% on a net revenue basis, compared with 66.4% in the prior year. The adjusted efficiency ratio was 58.3% compared with 57.6% in the prior year and was 62.4% on a net revenue basis, compared with 64.1% in the prior year.

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

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

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