Bank of Montreal today reported a 21% drop in quarterly profit, as provisions for credit losses surged and it took charges for the declining value of certain credit-related securities.

BMO said net income was $521 million, or 98¢ a share, in the third quarter ended July 31, down from $660 million, or $1.28 a share, in the same 2007 period.

On a cash basis, BMO said it earned $1 a share, down from $1.30 a year earlier.

The bank took charges of $134 million, or 19¢ a share, for derivative contract values and impairments on preferred shares and asset-backed commercial paper. These charges were partly offset by a recovery of prior-period income taxes, the bank said.

Provisions for credit losses totalled $484 million including a $50 million increase in the general allowance. “Specific provisions of $434 million were unusually elevated relative to the prior quarter due to the inclusion of $247 million for two corporate accounts related to the U.S. housing market that were identified as impaired in the first half of the current year. The size of the provisions for these two exposures reflects the weakness in the U.S. residential real estate market and the specific nature of the underlying loans,” the bank said in a release.

“The impact of the deterioration in the U.S. housing market has affected our results and while uncertainty exists, we are confident in the earnings capacity of the core franchise,” stated Bill Downe, president and CEO.

Return on equity, a key measure of profitability, fell to 13.5% in the quarter, from 18% a year earlier.

Among the bank’s business units, profit rose 34% in BMO’s capital markets unit to $259 million, despite the latest period’s writedowns and a slowdown in some investment banking businesses.

In its domestic personal and commercial banking operations, net income fell 3% to $343 million. The bank said that when adjusted for a tax recovery one year ago, its domestic banking profit was roughly flat in the latest quarter.

Domestic banking expenses rose 7%, BMO said, citing greater spending to expand and renovate its branches and to increase its mortgage and financial planning staff.