MANAGEMENT’S DISCUSSION AND ANALYSIS OF OPERATIONS AND FINANC IAL CONDITION 2002 Objectives and Achievements  Sustain strong retail and small business lending growth, with the target of increasing loans outstanding by more than US$1 billion per year for the next several years. Continue to expand U.S. wealth management business through both acquisition and organic growth and by leveraging HarrisGLYPH<213> long-standing reputation in major U.S. markets. Accelerate the development of top-tier, multi-product, lead-client relationships and continue our double-digit growth in investment banking revenues at Harris Nesbitt. Continue strong organic growth and selective acquisitions toward our objective of building the dominant full-service bank in Chicagoland. Financial Results 2001 Compared with 2000 b Opened new full-service wealth management offices in Bellevue, Washington and Minneapolis, Minnesota. These offices offer clients  full-service investing, direct investing, private banking and investment management services. b Chicagoland BankingGLYPH<213>s retail and small business loans increased US$1.7 bil- lion or 26%. The acquisition of Joliet accounted for US$500 million or seven percentage points of this increase. b Chicagoland Banking attained 6% organic deposit growth and grew 13% overall, including our 2001 Joliet acquisition. b Deposits and loan growth combined with strong cost controls resulted in accelerating revenue and earnings momentum. b Ended the year with an improved market profile and significant business achievements despite the difficult environment for financing-related and advisory products. b Transaction volumes for lead financings, advisory services and cash  management increased, with a good mix of new clients and expanded business with existing clients. b Loan utilization rates were affected by general weakness in the economy. On a U.S. dollar/U.S. GAAP basis, net income was $201 million, decline of $67 million or 25% from 2000. Excluding gains on and earnings of divested businesses and the $80 million after- tax provision increase, net income increased $15 million or 6% from 2000. The increase was attributable to strong business growth and a favourable interest rate environment, partially off- set by the higher loan loss provision associated with the impact of the slowing economy and by expenses related to business growth and expansion. Non-interest expenses increased 9% to $817 million. Exclud- ing the impact of the Joliet acquisition, expenses increased 5%, reflective of cost containment efforts. Expense growth related to the integration of Joliet, system conversions, expansion initiatives and robust volume growth in Chicagoland Banking.  Revenue increased $77 million from the prior year. Excluding the gain on sale of the merchant card business in 2001, revenue rose $137 million or 11%. The acquisition of Joliet accounted  for three percentage points of the improvement. Continued growth in consumer, mortgage and small business loans, higher net interest margins and a $30 million increase in gains on sales of investment securities also contributed to the improvement. Net interest margins improved by 39 basis points to 3.38% due to the declining interest rate environment in 2001 and a higher mix of retail loans and deposits in 2002. On a U.S. dollar/U.S. GAAP basis, Harris Bank’s net income  was $278 million, up $77 million from a year ago. In the fourth quarter of 2001, Harris increased its provision for credit losses  by $125 million ($80 million after tax) because of continued  economic uncertainty. Earlier in 2001, Harris recognized a  $60 million ($36 million after tax) gain on the sale of the Harris Bank merchant card business to a unit of BMO Financial Group in connection with the establishment of the Moneris TM5 Solutions joint venture. The gain was not included in BMO’s consolidated results because it was between related companies. Excluding the gain on sale and the aforementioned increase in the provision for credit losses, net income increased $33 million or 14%.  The increase was driven by continued strong retail and small business growth, higher gains on sales of investment securities and the Joliet acquisition, partially offset by higher provisions  for credit losses. The acquisition of Joliet in the third quarter of 2001 increased revenue, expenses and net income, and affects comparisons between years. Harris Bank  (U.S. GAAP/US$ millions, except as noted) R eported (As at or for the year ended October 31) 2002 2001 2000 Net interest income (teb) 836 760 694 Non-interest revenue 505 504 489 T otal revenues 1,341 1,264 1,183 Provision for credit losses 99 208 27 Non-interest expense 817 747 736 I ncome before provision for income taxes  and goodwill amortization 425 309 420 I ncome taxes (teb) 146 105 149 Amortization of goodwill,  net of applicable income tax 1 3 3 Ne t income 278 201 268 Net income by group: P&C  120 73 64 PCG 26 23 22 IBG 158 87 148 Corp (26) 18 34 Net economic profit 101 28 124 Cash return on equity (U.S. basis) (%) 17.5 12.9 21.1 Average net interest margin (U.S. basis) (%) 3.38 2.99 2.83 Cash non-interest expense-to-revenue ratio (%) 58.7 57.2 60.3 Average common equity 1,944 1,798 1,509 A verage assets 27,802 28,677 27,705 Total risk-weighted assets 22,909 22,732 23,287 Full-time equivalent staff 5,826 5,756 6,260 BMO FINANCIAL GROUP ANNUAL REPORT 2002 50