BMO Financial Group said Tuesday its second-quarter profits fell by 44% as provisions for bad loans jumped.

The bank reported that it earned $358 million, or 61¢ a share during the quarter ended April 30, down from year-earlier profits of $642 million, or $1.25 per share.

BMO said some of the decline was due to $80 million worth of capital market environment charges and $80 million in severance costs.

Provisions for credit losses rose to $372 million, up $221 million from a year ago. The increase stemmed primarily from loans in the company’s U.S. personal and commercial business, BMO said.

Provisions could continue to increase as the economic turmoil continues, BMO chief executive Bill Downe said in a conference call on Tuesday. “Provisions in Canada remain relatively low, but may well increase as we move through the recession,” he said.

But he added that loan delinquencies at BMO remain lower its peer group average, thanks to more conservative consumer lending practices.

The bank said profits in its Canadian personal and commercial group jumped 9% to $350 million from a year ago.

The bank’s capital markets division reported a 33% increase in net earnings $249 million, up $62 million from a year ago. The results were boosted by strong performance in debt products, foreign exchange products and financial products, improved spreads in corporate lending in Canada and the U.S. and cost containment initiatives, according to Downe.

Quarterly profit plunged at the bank’s private client group. Net income was $62 million, compared to $107 million a year earlier. Results were impacted by difficult equity markets and a low interest rate environment, BMO said.

The $80 million in severance costs included in the bank’s results were associated with a move to simplify its management structure across its businesses by reducing layers and broadening mandates. The restructuring is intended to reduce ongoing costs and improve BMO’s productivity and profitability as part of a broader cost containment strategy.

“We’re committed to managing expenses across our businesses,” Downe said. “We’ve cut discretionary spending and we’re ensuring that our investment spend is focused on customer-related initiatives.”

This focus on customer service has helped the bank to continue building revenue despite the challenging economic environment, according to Downe. He said the bank would continue to focus on delivering strong customer service.

“We recognize that it’s our focus on customers that’s driven our improved market traction, and we’re confident that this will continue.”

The bank’s Tier 1 capital ratio increased to 10.7% from 9.77% recorded six months ago.

While conditions remain challenging in the credit and capital markets, the bank’s strong capital ratio positions the company well to take advantage of opportunities for growth that arise from the current environment, Downe said.

“Our strong capital and liquidity positions permit us to make opportunistic acquisitions, such as the acquisition of the Canadian life insurance business we completed in the quarter,” he said.

Given the extreme challenges facing many firms in the U.S. banking system, he expects particularly attractive opportunities to arise for BMO Harris Private Banking to expand and gain market share.

The bank also said it will maintain its quarterly dividend at 70¢ share.

IE