Bank of Montreal 2010 Annual Report Download - page 149

Notes
BMO Financial Group 193rd Annual Report 2010 147
Our objective is to maintain a strong capital position in a cost-effective
structure that: meets our target regulatory capital ratios and internal
assessment of required economic capital; is consistent with our targeted
credit ratings; underpins our operating groups’ business strategies;
and builds depositor confidence and 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.
Regulatory capital requirements and risk-weighted assets for the
consolidated entity are determined on a Basel II basis.
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 investment in insurance
subsidiaries and other substantial investments along with other Basel II
deductions. Details of components of our capital position are presented in
Notes 16, 17, 18 and 20.
Note 21: Capital Management
The following table summarizes information about our Stock Option Plan:
(Canadian $, except as noted) 2010 2009 2008
Weighted- Weighted- Weighted-
Number of average Number of average Number of average
stock options exercise price stock options exercise price stock options exercise price
Outstanding at beginning of year 18,578,613 45.23 20,055,702 43.68 20,656,713 41.55
Granted 1,737,204 53.45 2,220,027 34.12 1,442,833 59.14
Exercised 5,002,174 37.21 2,917,490 28.95 1,778,586 31.65
Forfeited/cancelled 23,957 56.46 290,849 39.21 2,700 50.23
Expired 57,547 56.00 488,777 31.99 262,558 42.63
Outstanding at end of year 15,232,139 48.74 18,578,613 45.23 20,055,702 43.68
Exercisable at end of year 7,533,698 45.14 11,575,233 41.47 14,332,077 37.69
Available for grant 9,850,335 11,506,035 2,985,056
Outstanding stock options as a
percentage of outstanding shares 2.69% 3.37% 3.96%
Note 22: Employee Compensation – Stock-Based Compensation
Stock Option Plan
We maintain a Stock Option Plan for designated officers and employees.
Options are granted at an exercise price equal to the closing price of
our common shares on the day prior to the grant date. Options vest 25%
per year over a four-year period starting from their grant date. A portion
of the options can only be exercised once certain performance targets
are met. All options expire 10 years from their grant date.
Employee compensation expense related to this plan for the years
ended October 31, 2010, 2009 and 2008 was $17 million, $8 million
and $12 million before tax, respectively ($16 million, $7 million and
$11 million after tax, respectively).
The intrinsic value of a stock option is the difference between the
current market price of our common shares and the strike price of the
We determine the fair value of stock options on their grant date
and record this amount as compensation expense over the period that
the stock options vest, with a corresponding increase to contributed
surplus. When these stock options are exercised, we issue shares and
record the amount of proceeds, together with the amount recorded in
contributed surplus, in share capital. Stock options granted to employees
eligible to retire are expensed at the date of grant.
option. The aggregate intrinsic value of stock options outstanding
at October 31, 2010, 2009 and 2008 was $189 million, $158 million and
$104 million, respectively. The aggregate intrinsic value of stock options
exercisable at October 31, 2010, 2009 and 2008 was $119 million,
$120 million and $101 million, respectively.
Our Tier 1 Capital Ratio, Tangible Common Equity Ratio, Total Capital
Ratio and Assets-to-Capital Multiple are the primary capital measures.
•
The Tier 1 Capital Ratio is defined as Tier 1 capital divided
by risk-weighted assets.
• The Tangible Common Equity Ratio is defined as common
shareholders’ equity less goodwill and intangibles, 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) 2010 2009
Tier 1 Capital 21,678 20,462
Tier 2 Capital 3,959 4,397
Total Capital 25,637 24,859
Total Risk-Weighted Assets 161,165 167,201
Tier 1 Capital Ratio 13.45% 12.24%
Tangible Common Equity Ratio 10.47% 9.21%
Total Capital Ratio 15.91% 14.87%
Assets-to-Capital Multiple 14.46 14.09
Both our Tier 1 and Total Capital Ratios remain above OSFI’s stated
minimum capital ratios of 7% and 10%, respectively, for a well-
capitalized financial institution. Our Assets-to-Capital Multiple remains
below the maximum permitted by OSFI.