Bank of Montreal 2010 Annual Report Download - page 65

MD&A
sufficient earnings are retained to support anticipated business growth,
fund strategic investments and provide continued support for depositors.
Dividends declared per common share in 2010 totalled $2.80.
Annual dividends declared in 2010 represented 58.8% of net income
available to common shareholders. We continue to focus on increasing
our earnings, which we expect will result in a dividend payout ratio
within our target range. Over the long term, BMO’s dividends are
generally increased in line with trends in earnings per share growth.
At year end, BMO’s common shares provided a 4.6% annual dividend
yield based on the year-end closing share price. On December 7, 2010,
BMO announced that the Board of Directors declared a quarterly dividend
on common shares of $0.70 per share, unchanged from both the prior
quarter and a year ago.
Under the Shareholder Dividend Reinvestment and Share Purchase
Plan (the Plan), the bank may offer a discount of up to 5% from the
average market price (as defined in the Plan) on common shares newly
issued from treasury. In fiscal 2010, common shareholders who elected
to reinvest dividends in common shares of BMO were issued shares from
treasury at a 2% discount from the average market price. Effective with
the November 26, 2010 dividend payment, the discount is no longer
offered until such time as we elect otherwise.
Eligible Dividends Designation
For the purposes of the Income Tax Act (Canada) and any similar
provincial and territorial legislation, BMO designates all dividends paid
or deemed to be paid on both its common and preferred shares as
“eligible dividends”, unless indicated otherwise.
Outstanding Shares and Securities Convertible
into Common Shares
Number of shares Dividends declared per share
As at November 25, 2010 or dollar amount 2010 2009 2008
Common shares 566,526,090 $ 2.80 $ 2.80 $ 2.80
Class B Preferred shares
Series 5 $ 200,000,000 $ 1.33 $ 1.33 $ 1.33
Series 13 $ 350,000,000 $ 1.13 $ 1.13 $ 1.13
Series 14 $ 250,000,000 $ 1.31 $ 1.31 $ 1.48
Series 15 $ 250,000,000 $ 1.45 $ 1.45 $ 0.94
Series 16 $ 300,000,000 $ 1.30 $ 1.30 $ 0.55
Series 18 $ 150,000,000 $ 1.62 $ 1.55 $ –
Series 21 $ 275,000,000 $ 1.62 $ 1.11 $ –
Series 23 $ 400,000,000 $ 1.60 $ 0.59 $ –
Convertible into common shares:
Class B Preferred shares (1)
Series 6 (2) $ – $ – $ – $ 1.19
Series 10 US$ 300,000,000 US$ 1.49 US$ 1.49 US$ 1.49
Stock options
– vested 7,470,000
– nonvested 7,560,000
(1) Convertible preferred shares may be exchanged for common shares on specific dates on a
pro-rata basis based on 95% of the average trading price of common shares for the 20 days
ending four days prior to the exchange date.
(2) Redeemed on November 25, 2008.
Note 20 on page 145 of the financial statements includes details on share capital.
Caution
This Enterprise-Wide Capital Management section contains forward-looking statements.
Please see the Caution Regarding Forward-Looking Statements.
At the request of the G7 finance ministers and central bank governors,
The Financial Stability Forum (since re-established as the Financial
Stability Board) issued a report in April 2008 on enhancing market
and institutional resilience. Among its recommendations, the report
encouraged enhanced disclosure related to financial instruments that
markets had come to regard as carrying higher risk. We expanded
our discussion of certain financial instruments in 2008 in keeping with
these developments and we have continued to report on them, together
with other financial instruments, to put exposures in context relative to
our portfolio. We have also followed a practice of reporting on significant
changes in our interim MD&A.
Caution
Given the uncertainty in the capital markets environment, our capital
markets instruments could experience valuation gains and losses due
to changes in market value. This section, Select Financial Instruments,
contains forward-looking statements. Please see the Caution Regarding
Forward-Looking Statements on page 29.
Consumer Loans
In Canada, our consumer loan portfolio totalled $85.7 billion at
October 31, 2010 and is comprised of three main asset classes: residen-
tial mortgages (48%), instalment and other personal loans (48%) and
credit card loans (4%).
In the United States, our consumer loan portfolio totalled
US$15.0 billion and is also primarily comprised of three asset classes:
residential first mortgages (34%), home equity products (33%) and
indirect automobile loans (29%).
The following is a discussion of subprime mortgage loans, Alt-A
mortgage loans and home equity products, portfolios that have been
of increased investor interest in the economic environment of the past
few years. It also includes a discussion on repurchased mortgages.
Subprime Mortgage Loans
In the United States, subprime loans are typically considered to be
those made to borrowers with credit bureau scores of 620 or less.
We do not originate subprime mortgages through a subprime mortgage
program in the United States; however, we make loans available in
the United States to individuals with credit scores below 620 as part
of our compliance with lending requirements under the Community
Reinvestment Act. We also occasionally lend to parties with credit
scores below 620 when there are other strong qualification criteria.
As a result, we have US$0.27 billion of first mortgage loans outstanding
with subprime characteristics at the date of authorization. A small
portion of these are uninsured loans with a loan-to-value ratio of
greater than 80% at issuance. At year end, US$15.8 million or 5.94%
(US$18.5 million or 6.29% in 2009) of the US$0.27 billion of loans were
90 days or more in arrears. This compares with a rate of 4.46% for
BMO’s total U.S. first mortgage loan portfolio.
We also had net exposure of US$69 million (US$101 million in
2009) to a business that buys distressed mortgages (including subprime
mortgages) at a discounted price.
Home equity products are secured by the homeowner’s equity
and rank subordinate to any existing first mortgage on the property. In
the United States, we have a US$5.0 billion home equity loan portfolio,
which amounted to 2.9% of BMO’s total loan portfolio at October 31, 2010.
Of the U.S. home equity portfolio, loans of US$0.28 billion were extended
to customers with credit bureau scores below 620 and would be
categorized as subprime loans. Of these, only US$7 million or 2.56%
(US$7 million or 2.1% in 2009) were 90 days or more in arrears.
In Canada, BMO does not have any subprime mortgage programs,
nor do we purchase subprime mortgage loans from third-party lenders.
BMO mortgage lending decisions incorporate a full assessment of the
customer and loan structure. Credit score is only one component of our
credit adjudication process and consequently, we do not categorize
Select Financial Instruments
BMO Financial Group 193rd Annual Report 2010 63