Bank of Montreal 2008 Annual Report Download - page 140

Notes
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
136 | BMO Financial Group 191st Annual Report 2008
We participated in a normal course issuer bid during the period
from September 6, 2007 to September 7, 2008 under which we were
able to repurchase up to 25,000,000 common shares, approximately 5%
of our common shares then outstanding.
During the year ended October 31, 2008, we did not repurchase
any common shares. During the year ended October 31, 2007, we
repurchased 7,621,600 shares at an average cost of $68.80 per share,
totalling $524 million. During the year ended October 31, 2006, we
repurchased 5,919,400 shares at an average cost of $63.58 per share,
totalling $376 million.
Issuances Exchangeable into Common Shares
One of our subsidiaries, Bank of Montreal Securities Canada Limited
(“BMSCL”), has issued various classes of non-voting shares that can
be exchanged at the option of the holder for our common shares,
based on a formula. If all of these BMSCL shares had been converted
into our common shares, up to 263,397, 270,657 and 327,863 of our
common shares would have been needed to complete the exchange
as at October 31, 2008, 2007 and 2006, respectively.
Share Redemption and Dividend Restrictions
OSFI must approve any plan to redeem any of our preferred share
issues for cash.
We are prohibited from declaring dividends on our preferred
or common shares when we would be, as a result of paying such
a dividend, in contravention of the capital adequacy, liquidity or any
other regulatory directives issued under the Bank Act. In addition,
common share dividends cannot be paid unless all dividends declared
and payable on our preferred shares have been paid or sufficient
funds have been set aside to do so.
In addition, we have agreed that if BMO Capital Trust (the “Trust”),
one of our subsidiaries, fails to pay any required distribution on its
capital trust securities, we will not declare dividends of any kind on
any of our preferred or common shares for a period of time following
the Trust’s failure to pay the required distribution (as defined in the
capital trust securities’ prospectuses) unless the Trust first pays such
distribution to the holders of its capital trust securities (see Note 19).
Shareholder Dividend Reinvestment and Share Purchase Plan
We offer a dividend reinvestment and share purchase plan for our
shareholders. Participation in the plan is optional. Under the terms of
the plan, cash dividends on common shares are reinvested to purchase
additional common shares. Shareholders also have the opportunity
to make optional cash payments to acquire additional common shares.
We may issue these common shares at an average of the closing prices
of our common shares on the Toronto Stock Exchange based on the
five trading days prior to the last business day of the month or we may
purchase them on the open market at market prices. During the year
ended October 31, 2008, we issued a total of 2,413,244 common shares
(1,626,374 in 2007) under the plan.
Potential Share Issuances
As at October 31, 2008, we had reserved 3,228,679 common shares
for potential issuance in respect of our Shareholder Dividend Reinvest-
ment and Share Purchase Plan and 4,983,517 common shares in respect
of the exchange of certain shares of BMSCL. We also have reserved
20,051,854 common shares for the potential exercise of stock options,
as further described in Note 23.
Treasury Shares
When we purchase our common shares as part of our trading business,
we record the cost of those shares as a reduction in shareholders’
equity. If those shares are resold at a value higher than their cost,
the premium is recorded as an increase in contributed surplus. If those
shares are resold at a value below their cost, the discount is recorded
as a reduction first to contributed surplus and then to retained earnings
for any amounts in excess of total contributed surplus related to
treasury shares.
Our capital management framework is designed to maintain
a level of capital that: meets our target regulatory capital ratios;
meets our internal assessment of required economic capital;
is consistent with our targeted credit ratings; underpins our operating
groups’ business strategies; and builds long-term shareholder value.
Our approach includes establishing limits, goals and performance
measures for the management of balance sheet positions, risk levels
and minimum capital amounts, as well as issuing and redeeming capital
instruments to obtain the most cost-effective capital structure possible.
Effective November 1, 2007, a new regulatory capital management
framework was implemented in Canada. The new framework, Basel II,
replaced Basel I, the framework utilized for the past 20 years. Basel II
is an improvement over Basel I in that it establishes regulatory capital
requirements that are more sensitive to a bank’s risk profile.
Tier 1 capital represents more permanent forms of capital, and
primarily includes common shareholders’ equity, preferred shares and
innovative hybrid instruments, less a deduction for goodwill and excess
intangible assets and other deductions required under Basel II. Total
capital includes Tier 1 and Tier 2 capital, net of certain deductions.
Tier 2 capital is primarily comprised of subordinated debentures and the
eligible portion of the general allowance for credit losses. Deductions
from Tier 2 capital are primarily comprised of our investments in non-
consolidated entities and substantial investments. Capital instruments
aredetailedinNotes16,18,19and21.
The Tier 1 Capital Ratio, Total Capital Ratio and Assets-to-Capital
Multiple are the primary capital measures monitored by our regulator.
•The Tier 1 Capital Ratio is defined as Tier 1 capital divided by
risk-weighted assets.
•The Total Capital Ratio is defined as total capital divided by
risk-weighted assets.
•The Assets-to-Capital Multiple is calculated by dividing total assets,
including specified off-balance sheet items net of other specified
deductions, by total capital.
Basel II Regulatory Capital and Risk-Weighted Assets
(Canadian $ in millions, except as noted) 2008
Tier 1 Capital $ 18,729
Tier 2 Capital $ 4,592
Total Capital $ 23,321
Total Risk-Weighted Assets $ 191,608
Tier 1 Capital Ratio 9.77%
Total Capital Ratio 12.17%
Assets-to-Capital Multiple 16.42
Both our Tier 1 and Total Capital Ratios remain above OSFI’s stated mini-
mum capital ratios of 7% and 10%, respectively, for a well-capitalized
financial institution. Our Assets-to-Capital Multiple was 16.42 as at
October 31, 2008. The multiple remains below the maximum permitted
by OSFI.
As a result of the implementation of Basel II in fiscal 2008,
amounts reported for risk-weighted assets, capital and capital ratios
are not comparable on a year-over-year basis.
Note 22: Capital Management