MANAGEMENT’S DISCUSSION AND ANALYSIS OF OPERATIONS AND FINANC IAL CONDITION The provision for credit losses was $820 million. The provision totalled $880 million in 2001, excluding a $100 million general provision that was categorized as non-recurring for reporting purposes. BMO’s target for 2003 is to maintain provisions for credit losses at the same level as 2002. The provision for credit losses is discussed on page 29 in the credit risk section.  due to volume growth in the Personal and Commercial Client Group and acquired businesses in Private Client Group while Investment Banking Group benefited from the declining interest rate environment, higher levels of dividend income on merchant banking securities and improved spreads.  Non-interest revenue, excluding non-recurring items, declined 1% from fiscal 2000. The expense-to-revenue ratio was 68.1% in 2002, up 4.1 percent- age points from a year ago. Excluding non-recurring items, the ratio was 67.4%, compared with 65.1% in 2001. BMO’s overall expense ratio in any year is affected by the relative strength of the revenues of each of the operating groups. The expense-to- revenue ratio of each group is typically quite different because  of the different nature of their businesses. Personal and Com- mercial Client Group is BMO’s largest group and its efficiency ratio improved by 252 basis points. Excluding non-recurring gains on branch sales in 2001, the ratio improved by 269 basis points to 60.0%.  The efficiency ratios of the other operating groups were less favourable than a year ago. In fee-based businesses, particularly businesses driven by equity markets, the efficiency ratio is more volatile. Excluding non-recurring items, Private Client Group’s expense-to-revenue ratio rose due to higher amortization of intangible assets related to acquisitions. If acquired businesses were excluded, the expense-to-revenue ratio of Private Client Group would have improved modestly from a year ago. In spite of a $91 million reduction in year-over-year expenses, the Invest- ment Banking Group expense-to-revenue ratio rose because of declining revenues in the difficult market environment.  Expenses were up 6% year-over-year, or 5% excluding non- recurring items. Expenses included $250 million related to  the additive effect of acquired businesses and $50 million of severance costs in the fourth quarter. These costs relate to reducing staffing by approximately 500 positions, about 55% of which relate to activities in Corporate Support, including Technology and Solutions.  Excluding non-recurring items, severance costs and acquired businesses, expenses were flat year-over-year. Expenses for 2002 were influenced by a $68 million increase in pension costs and theeffectsofastrongerU.S.dollar.Theseincreaseswerepartially offset by lower performance-based compensation costs and the effects of continued cost containment measures. Performance- based compensation costs were down appreciably in Investment Banking Group but were largely offset by higher costs in Personal and Commercial Client Group. The accompanying table indicates increased expenses in most categories, reflecting the factors discussed above.  Non-Interest Expense  (excluding non-recurring items) ($ millions) Expense-to-Revenue Ratio Provision for Credit Losses The  expense-to-revenue ratio is our primary measure of productivity.  It is calculated as non-interest expense divided by total revenues. The ratio is calculated on a taxable equivalent basis. It is often referred to as  the efficiency ratio or productivity ratio. 22 BMO FINANCIAL GROUP ANNUAL REPORT 2002 Contribution to Non-Interest Expense Growth ( excluding non-recurring items) (%)  For the year ended October 31 2002 2001 2000 1999 1998 Employee compensation 3,397 3,212 3,065 2,820 2,574 Premises and equipment 1,259 1,153 1,071 1,123 972 C ommunications 171 194 259 268 266 Other expenses 1,054 1,069 883 915 949 Amortization of intangible assets 87 43 23 21 24 To tal 5,968 5,671 5,301 5,147 4,785 For the year ended October 31 2002 2001 2000 Performance-based compensation (0.3) (0.2) 4.4 Currency translation effect 0.6 1.1 (0.5) Acquired businesses 4.4 1.2 0.6 P ension expense 1.2 0.8 (0.7) Disposed businesses (0.1) (0.8) (0.9) BMO Nesbitt Burns additional month — — (1.4) Other expenses (0.6) 4.9 1.5 Total non-interest expense growth 5.2  7.0 3.0 Expense-to-Revenue GLYPH<CR> Ratio by Group  (%)  GLYPH<CR> (excluding non-recurring items) 2002 2001 2000 IBG P&C PCG Total BMO 77.1 84.7 86.7 62.8 65.1 67.4 60.1 62.7 60.0 56.1 50.8 52.5 Expenses  ($ millions)  GLYPH<CR> and Annual Growth   GLYPH<CR> (excluding non-recurring items) 4,785 7 8 5,147 3 5,301 7 5,671 5,968 5 2002 2001 2000 1999 1998 Growth (%) Non-Interest Expense GLYPH<CR> by Group 2001 GLYPH<CR> (excluding non-recurring items) P&C 48% PCG 22% IBG 27% Corp 3% Non-Interest Expense GLYPH<CR> by Group 2002 GLYPH<CR> (excluding non-recurring items) P&C 46% PCG 25% IBG 24% Corp 5%