MANAGEMENT’S DISCUSSION AND ANALYSIS OF OPERATIONS AND FINANC IAL CONDITION Personal and Commercial Client Group  ($ millions, except as noted) Financial Results  2001 Compared with 2000 Note: Graphs reflect Canada only. 38 BMO FINANCIAL GROUP ANNUAL REPORT 2002 Net income decreased $119 million to $794 million in 2001. Excluding non-recurring after-tax gains on sales of branches  in 2001 and gains on the sales of Partners First and branches in fiscal 2000, net income decreased $37 million to $785 million. Excluding non-recurring items, revenue increased $145 million or 4%, driven by volume growth and higher gains on securiti- zations, partially offset by lower gains on sales of securities. Volumes improved in the second half of the year as the expanded sales force was assimilated, but the favourable impact was offset by spread compression in the declining interest rate environment. Expenses were $196 million higher due to strategic initiative spending and investment in front-line staffing. A more favourable tax rate and the discontinuance of goodwill amortization also contributed to higher earnings. Non-interest expenses rose $70 million or 3%. In Canada,  they were virtually unchanged due to particularly successful expense management. Expenses rose in the United States due  to system conversion and integration costs for Joliet, robust business volume growth, expansion initiatives and currency translation. The group’s expense-to-revenue ratio improved by 269 basis points, as both Canada and the United States enjoyed productivity gains. Revenue increased $310 million or 7%, driven by significant volume growth in both Canadian and U.S. operations. Strong volume growth in Canada continued the trend from the latter half of 2001, as the expanded front-line sales staff was assimi- lated over that period. Volume growth was also spurred by the low interest rate environment and high demand for residential mortgages and personal loans. Personal deposits also rose, driven by depositors’ ready acceptance of our premium rate savings product, as well as economic uncertainty and weak equity  markets. The favourable effects of the volume growth were  partially offset by lower net interest margins, which reflected continuation of the trend from the summer of 2001 of spread compression in the low interest rate environment, and the effect of the highly competitive lending conditions. In the United States, revenue rose 26%, driven by strong loan and deposit growth and by the acquisition of Joliet at the end of the third quarter of 2001. Average net interest margins in the United States were virtually unchanged. Chicagoland Banking repre- sented slightly less than 20% of Personal and Commercial Client Group’s operations in 2002. Personal and Commercial Client Group net income rose 22% to $968 million. Branch sales generated non-recurring revenue of $12 million ($9 million after tax) in 2001. The commentary that follows excludes those non-recurring items. R eported (As at or for the year ended October 31) 2002 2001 2000 Net interest income (teb) 3,309 3,054 2,928 Non-interest revenue 1,299 1,256 1,377 Total revenues (teb) 4,608 4,310 4,305 Provision for credit losses 281 267 235 Non-interest expense 2,763 2,693 2,497 I ncome before provision for income taxes,  non-controlling interest in subsidiaries and goodwill amortization 1,564 1,350 1,573 I ncome taxes (teb) 594 533 643 Non-controlling interest  2 — (1) Amortization of goodwill, net of  applicable income taxes — 23 18 Ne t income 968 794 913 Net economic profit 566 476 582 Cash return on equity (%) 25.5 25.8 30.8 Average net interest margin (%) 3.13 3.18 3.19 Non-interest expense-to-revenue ratio (%) 60.0 62.5 58.0 Average common equity 3,785 3,100 2,929 A verage assets 105,806 96,145 91,913 Total risk-weighted assets 67,322 61,818 58,421 Average current loans  95,906 87,407 84,053 A verage deposits 54,160 45,521 42,451 Assets under administration 14,452 15,504 13,423 Assets under management 371 486  — Full-time equivalent staff 18,043 17,446 18,057 Excluding non-recurring items Total revenues (teb) 4,608 4,298 4,153 Ne t income 968 785 822 Cash return on equity (%) 25.5 25.5 27.7 Non-interest expense-to-revenue ratio (%) 60.0 62.7 60.1 Customer Loyalty — GLYPH<CR> Secure Customer Index  (%) 22.0 24.4 26.9 27.6 23.4 26.0 28.0 29.0 Personal Small Business 2002 2001 2000 1999 Employee Professionalism GLYPH<CR> Index  (%) 35.0 35.9 41.1 43.6 30.0 35.1 36.6 39.7 Personal Small Business 2002 2001 2000 1999 Small Business Market Share GLYPH<CR> ($0—$5 million loans) (%)GLYPH<CR> JunGLYPH<CR> 2002 DecGLYPH<CR> 2001 DecGLYPH<CR> 2000 DecGLYPH<CR> 1999 19.48 19.04 18.72 18.73 Personal Market Share  (%) SepGLYPH<CR> 2002 OctGLYPH<CR> 2001 OctGLYPH<CR> 2000 OctGLYPH<CR> 1999 13.69 13.29 13.46 14.42