ENTERPRISE - WIDE CAPITA MANAGEMENT Highlights b Our Tier 1 Capital Ratio of 8.80% was up from 8.15% last year and remained above our minimum target of 8%. b Our risk-weighted assets decreased by $4.7 billion during the year, a result of disciplined balance sheet management. b For 2003, our target is to maintain a Tier 1 Capital Ratio of at least 8.0%, with ongoing controlled growth in risk-weighted assets and redeployment of capital to retail and wealth management businesses. Strategy and Approach 2001 Compared with 2000 Tier 1 Capital Our Capital Management Framework is designed to maintain an optimum level of capital in a cost-effective structure that: meets our target regulatory ratios; supports our internal assessments of economic capital; results in appropriate credit ratings; funds our selected operating group business strategies; and builds long-term shareholder value.  Our approach includes the establishment of limits, goals  and performance measures for management of balance sheet, risk and minimum capital levels, as well as the issuance and redemption of capital instruments to achieve the most cost- effective capital structure possible. These are approved on an annual basis by the Board of Directors as part of our capital management policy and capital plan. At the consolidated  enterprise level, our capital supports our risk appetite, subject to regulatory and legal requirements. At the line of business  level, capital is allocated based on the assessment and measure- ment of Capital at Risk, which is included in line of business performance measures. This ensures that we maintain a  well-capitalized position to protect our stakeholders from the risks inherent in our various businesses, while still deploying balance sheet resources in high-return or strategic growth activities to meet or exceed established enterprise targets.  Dividends are generally increased in line with long-term trends in earnings per share growth, while sufficient profits are retained to support anticipated business growth, fund strategic investments and provide continued support for depositors. BMO’s policy is to maintain a dividend payout ratio of 30% to 40%, over time. Performance Review Tables 20 and 21 on page 63 outline the components of capital and the measures we use for monitoring BMO’s capital require- ments, which are in accordance with guidelines issued by OSFI. Tier 1 capital, representing more permanent forms of capital, increased during the year, as net income and the issuance of Series 10 Preferred Shares more than offset increased goodwill arising on acquisitions and common and preferred share divi- dend payments. Risk-weighted assets decreased during the year, as strong mortgage and personal loan growth in Personal and Commercial Client Group was more than offset by decreases in Investment Banking Group in the challenging business environ- ment. Our strategy of redeploying capital to retail and wealth management businesses aligns with reductions in Investment Banking Group’s non-relationship loan portfolio.  The quarterly dividend on common shares of $0.30 declared in 2002, up from $0.28 in 2001, resulted in a payout ratio of 44%, slightly higher than our long-term goal. BMO’s credit rating, as measured by a composite of Moody’s and Standard & Poor’s (S&P) senior debt ratings, remained The  Tier 1 Capital Ratio is our primary measure of capital adequacy. It is defined as Tier 1 capital divided by risk-weighted assets. unchanged at AA–. On December 19, 2001, S&P removed BMO’s ratings from “CreditWatch” and affirmed its ratings, but  maintained its negative outlook. On July 18, 2002, Moody’s affirmed BMO’s credit rating but changed its outlook to negative from stable. This change in outlook is not expected to have a  significant impact on liquidity and funding costs. In 2001, our Tier 1 Capital Ratio decreased to 8.15% from 8.83% in 2000, due primarily to the completion of a $2 billion share repurchase program and modest risk-weighted asset growth.  ($ millions) 2002 2001 Beginning of year 11,066 11,864 Net income 1,417 1,471 Dividends (668) (648) Goodwill and excess intangible assets (749) (351) Issuance of common shares 84 556 Repurchase of common shares — (2,031) Other issues and redemptions 460 169 Translation and other (81) 36 End of year 11,529 11,066 Risk-Weighted Assets ($ millions) 2002 2001 Beginning of year 135,768 134,360 Increases (decreases) Personal and Commercial Client Group 5,504 3,397 Private Client Group 764 (435) Investment Banking Group (12,612) (6,771) Corporate Support 1,654 5,217 End of year 131,078 135,768 Enterprise-Wide Capital Management  Tier 1 Capital Ratio (%) Total Capital Ratio (%) Assets-to-Capital multiple (times) 7. 26 10.38 7.72 10.77 8.83 11.97 8.15 12.12 8.80 12.23 16.0x 16.3x 14.8x 14.2x 15.8x 1998 2002 2001 2000 1999 BMO FINANCIAL GROUP ANNUAL REPORT 2002 35