MANAGEMENT’S DISCUSSION AND ANALYSIS OF OPERATIONS AND FINANC IAL CONDITION Change in Net Interest Income, Average Assets and Average Net Interest  Margin Net interest inc ome (teb) Average assets  Net interest margin ($ millions) Change ($ millions) (in basis points) For the year ended October 31 2002 2001 $ %  2002 2001 % change 2002 2001 Change P&C Canada 2,526 2,431 95 4 87,093 81,289 7 290 299 (9) P&C Harris 783 623 160 26 18,713 14,856 26 418 419 (1) Personal and Commercial Client Group (P&C) 3,309 3,054 255 8 105,806 96,145 10 313 318 (5) Private Client Group (PCG) 565 540 25 5 5,509 5,340 3 1,026 1,012 14 Investment Banking Group (IBG) 1,466 1,497 (31) (2) 140,760 145,092 (3) 104 103 1 Corporate Support, including Technology and Solutions (Corp) (405) (450) 45 10 (4,085) (3,329) nm nm nm nm Total 4,935 4,641 294 6 247,990 243,248 2 199 191 8 nm — not meaningful Net interest income for the year was $4,935 million, an increase of $294 million or 6% from 2001. The increase was driven by volume growth in personal and commercial banking.  Net interest margins averaged 1.99% and were up 8 basis points from a year earlier. The increase was attributable to changes in asset mix, as relatively higher-yielding retail banking assets rose strongly, while relatively lower-yielding wholesale banking assets were reduced.  Average assets rose $4.8 billion but increased $9.7 billion in Personal and Commercial Client Group, reflecting solid growth in Canada, particularly in residential mortgages. Canadian retail and commercial deposits also experienced solid growth. U.S. retail and business banking grew very strongly, partly due to the acquisition of Joliet in July 2001. Margins declined in Canada, reflecting a low interest rate environment and a highly competitive lending market. Net interest income growth in Private Client Group was largely attributable to businesses acquired in the United States. The group’s net interest margins on assets are relatively high because its personal term deposits balances exceed its loans balances. Investment Banking Group average assets fell $4.3 billion due to the weak corporate lending environment and strategic reduc- tions in non-relationship loans. The interest margin was largely unchanged. The effects of higher spreads in capital markets businesses were only partially offset by lower spreads in cash management businesses and lower loans balances. Non-interest revenue, which comprises all revenues other than net interest income, declined $298 million to $3,924 million from $4,222 million in 2001. Non-recurring items in 2001 totalled $155 million. This included $321 million of gains on sales of our investment in Bancomer and $12 million of gains on sales of branches, partially offset by $178 million of write-downs on  our investments in CBOs. There were no non-recurring items  in 2002. Excluding non-recurring items in 2001, non-interest revenue for 2002 declined $143 million or 4% from 2001. The additive effect of acquired businesses increased non-interest revenue by $152 million. The remainder of the non-interest  revenue section is presented excluding non-recurring items.  Securities commissions and fees rose $71 million. These fees largely consist of full-service and self-directed retail broker- age commissions within Private Client Group and institutional equity trading commissions within Investment Banking Group. Institutional revenues rose, but most of the increase related to direct investing acquisitions, as client-trading volumes declined. Deposit and payment service charges, which represent income earned on both retail and commercial deposit accounts, rose $62 million while card fees increased $56 million. Both increases were due to robust volume growth and service initiatives.  Lending fees decreased $46 million due to lower corporate lending activities in Investment Banking Group as demand weakened. Investment management and custodial fees decreased $22 million, partly due to lower equity market values.  Net interest income is comprised of earnings on assets, such as loans and securities, including interest and dividend income and BMOGLYPH<213>s share  of income from investments accounted for using the equity method of accounting, less interest expense paid on liabilities, such as deposits.  Net interest margin is the ratio of net interest income to average assets. Net Interest Income 20 BMO FINANCIAL GROUP ANNUAL REPORT 2002 Assets under AdministrationGLYPH<CR> ($ billions) Revenue by Country  (%) (excluding non-recurring items) Non-Interest Revenue GLYPH<CR> as a % of Total Revenue GLYPH<CR> (excluding non-recurring items) 2002 2001 3 3 63 33 67 30 Canada United States Other countries 43 44 2002 2001 2000 1999 1998 49 47 44 2001 2002 1998 1999 2000 168 169* *Excluding Global Custody assetsGLYPH<CR> of $177 billion. 220 230 246 1999 2000 2001 2002 1998 64 81 90 96 60 Assets under ManagementGLYPH<CR> ($ billions) Non-Interest Revenue