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BMO continues to focus on its expense management program, which is intended to reduce expense growth. The program’s guidelines are intended to protect customer-related expenses that are essential to increased sales, to protect strategic initiatives designed to promote future growth and to reduce other discretion- ary costs. BMO also continued to invest in strategic initiatives, which included the expansion of our North American distribu- tion network and U.S. wealth management capabilities, as well as the costs of implementing Pathway Connect, the new personal and commercial banking technology platform. 

Effective for fiscal 2002, GAAP no longer requires amortization of goodwill, but instead requires that goodwill be subject to a periodicimpairmentreviewtoensureitsfairvalueisequaltoor greater than its book value. The change in accounting increased net income by $56 million in fiscal 2002 relative to 2001. 

In 2003, BMO will begin recognizing compensation expense for new stock options granted after October 31, 2002. Stock option expense is expected to be in the range of $10 million to $20 million in fiscal 2003. If BMO had recorded compensation expense related to all outstanding stock options this year, reported net income would have been $47 million lower. 

In 2003, pension expense is expected to increase by approxi- mately $70 million. This is due to lower than expected returns on pension assets in 2002 and a reduction in our expected long- term rate of return on pension assets to 7.0% from 7.5%, offset in part by a planned contribution to our pension plan. 

## 2001 Compared with 2000 

The 2001 expense-to-revenue ratio of 64.0% was 329 basis points higher than in 2000. Excluding non-recurring items, the expense-to-revenue ratio was 65.1%, compared with 62.8% in 2000. Expense growth from normal operations was 7%, while 

## Balance Sheet 

Total assets increased $13.5 billion or 6% from last year to $252.9 billion at October 31, 2002. The increase was primarily due to a $6.0 billion increase in securities and a $4.8 billion in- crease in net loans and acceptances. 

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revenue growth was 3%. The adoption of a new accounting standard for pensions and other future employee benefits in 2001 increased costs by approximately $69 million. Acquired businesses and the expenses of increased front-line staffing added to costs, while performance-based compensation costs declined modestly. Premises and equipment costs rose due to business growth and project costs. Other expenses in 2001 included $155 million of items processing costs that would have been allocated across expense categories using prior year allocation methods. 

## Provision for Income Taxes 

The provision for income taxes reflected in the consolidated statement of income is based upon transactions recorded in income regardless of when such transactions are subject to income taxes, with the exception of the repatriation of retained earnings from foreign subsidiaries. Non-recurring items and income taxes thereon are outlined on page 18. 

On a taxable equivalent basis, the effective tax rate was 26.4% in 2002, compared with 29.1% in 2001. Excluding non-recurring items, the effective rate for the year was 26.7%, an improvement from 31.6% in 2001. The year-over-year improvements related to a reduction of 2 percentage points in statutory tax rates and incremental tax benefits. The tax benefits are generally reflected in Corporate Support in the year they arise. The components of variances between the effective and Canadian statutory tax rates are outlined in Note 18 on page 84 of the financial statements. 

The sustainable income tax rate for 2003 is estimated to be 31%. We anticipate that the actual tax rate will approximate 28% to 29% due to realization of tax benefits in 2003 that are not expected to be sustainable. 

## Securities 

Trading securities rose $6.2 billion to $22.4 billion due to higher holdings of equities and corporate and Government of Canada bonds. The fixed income increase is a result of asset mix changes that reflect opportunities and trading strategies at the time. Higher levels of equities are attributable to new prod- uct offerings. 

Investment securities at $21.3 billion were down slightly from 2001. The fair value of BMO’s investment portfolio exceeded book value by $321 million at October 31, 2002, compared with an excess of $244 million in 2001. 

Note 3 on page 72 of the financial statements provides further details on securities. 

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