Bank of Montreal's U.S. banking division, Harris Bankcorp Inc. in Chicago, weathered the credit storm and posted a 12% increase in fiscal third-quarter net income from a year earlier, to $28 million, the Toronto company said Tuesday.

Bank of Montreal said its U.S. personal and commercial banking business benefited from an 18-basis-point rise in its net interest margin during the quarter, to 3.11%, as well as new income from the March acquisitions of Merchants and Manufacturers Bancorp. Inc. and Ozaukee Bank, both in the Milwaukee area. The U.S. unit's revenue rose 16% from a year earlier, to $550 million, in the period, which ended July 31.

In Bank of Montreal's earnings release, William Downe, its president and chief executive, called the U.S. results "good" but said deterioration in the U.S. housing market weighed heavily on his company's overall results and created an uncertain outlook.

Bank of Montreal, the first big Canadian bank to report earnings, said its profit fell 21%, to $494 million, or 95 cents a share, dragged down by higher provisions for credit losses. It was the fifth consecutive quarter of declining earnings for Bank of Montreal, Canada's fourth-largest banking company.

Analysts polled by Thomson Reuters estimated Bank of Montreal would report a profit of $1.15 a share before one-time items.

The $358 billion-asset company, which until late last year had a long history of low credit losses, took a $128 million charge on soured investments tied to bad mortgages, and its provision for credit losses rose fivefold from a year earlier, to $462 million, because of losses on corporate accounts linked to the faltering U.S. housing market.

"Credit woes have befallen" Bank of Montreal for nearly a year, and "we believe it no longer wears the crown of low-provision bank," John Aiken, a Dundee Securities Corp. analyst, wrote in a research note to clients Tuesday.

The company's return on equity dropped to 13.5% in the quarter, from 18% a year earlier.

Brad Smith, an analyst at Blackmont Capital Inc. in Toronto, said in an interview Tuesday that Bank of Montreal's credit troubles are likely to burden it the rest of this year. "They have some bright spots," Mr. Smith said, "but it's a rough time."

In its earnings release, Bank of Montreal provided this view of near-term economic conditions: "The Canadian economy is expected to grow just 1% in 2008, the slowest pace since 1992. … The U.S. economy is expected to slow further in the second half of 2008 after expanding modestly in the first half. House prices will continue to decline until demand strengthens and the large overhang of unsold homes is reduced."

The Commerce Department said Tuesday that July sales of new homes rose 2.4% from the previous month, to a seasonally adjusted annual rate of 515,000, but fell 35% from a year earlier.

Also Tuesday, Bank of Nova Scotia, Canada's third-largest bank, reported a third straight decline in quarterly profit, missing analysts' estimates, because of higher provisions for bad loans. The Toronto company also said it would not meet its profit target for the year. Net income in the fiscal third quarter fell 1.9%, to $967.2 million, or 98 cents a share.

Canada's two largest banking companies, Royal Bank of Canada and Toronto-Dominion Bank, report earnings Thursday.

Shares of Bank of Montreal fell 0.2% Tuesday, to $41.85.

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