Bank of Montreal 2013 Annual Report Download - page 154

Note 21: Capital Management
Our objective is to maintain a strong capital position in a cost-effective
structure that: considers 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, targets 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 a cost-effective capital structure.
Regulatory capital requirements and risk-weighted assets for the
consolidated entity are determined on a Basel III basis.
Adjusted common shareholders’ equity, known as Common Equity
Tier 1 capital under Basel III, is the most permanent form of capital. It is
comprised of common shareholders’ equity less a deduction for
goodwill, excess intangible assets and deductions for certain other items
under Basel III. Tier 1 capital is primarily comprised of regulatory
common equity, preferred shares and innovative hybrid instruments net
of Tier 1 capital deductions. 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 collective
allowance for credit losses, net of certain Tier 2 capital deductions.
Details of components of our capital position are presented in Notes 13,
16, 17, 18 and 20.
Our Common Equity Tier 1 Capital Ratio, Tier 1 Capital Ratio, Total
Capital Ratio and Assets-to-Capital Multiple are the primary regulatory
capital measures.
‰ The Common Equity Tier 1 Capital Ratio is defined as common
shareholders’ equity net of capital adjustments divided by risk-
weighted assets.
‰ 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 calculated on a Basel III transitional basis.
Regulatory Capital and Risk-Weighted Assets
Basel III Basel II
(Canadian $ in millions, except as noted) 2013 2012
Common Equity Tier 1 Capital 21,227 21,635
Tier 1 Capital 24,599 25,896
Tier 2 Capital 4,901 4,773
Total Capital 29,500 30,669
Risk-Weighted Assets 215,094 205,230
Common Equity Tier 1 Capital Ratio 9.9% 10.5%
Tier 1 Capital Ratio 11.4% 12.6%
Total Capital Ratio 13.7% 14.9%
Assets-to-Capital Multiple 15.6 15.2
All 2013 balances above are on a Basel III “all-in” basis. In 2012, we presented Basel II balances.
Basel II amounts and ratios may not be comparable to Basel III amounts and ratios.
We have met OSFI’s stated minimum capital ratio requirements as at
October 31, 2013.
Note 22: Employee Compensation – Stock-Based Compensation
Stock Option Plan We determine the fair value of stock options on their grant date
We maintain a Stock Option Plan for designated officers and employees. and record this amount as compensation expense over the period that
Options are granted at an exercise price equal to the closing price of our the stock options vest, with a corresponding increase to contributed
common shares on the day before the grant date. Options vest in surplus. When these stock options are exercised, we issue shares and
tranches over a four-year period starting from their grant date. Each record the amount of proceeds, together with the amount recorded in
tranche (i.e. the 25% portion that vests each year) is treated as a contributed surplus, in share capital. Stock options granted to employees
separate award with a different vesting period. A portion of the options eligible to retire are expensed at the date of grant.
can only be exercised once certain performance targets are met. All
options expire 10 years from their grant date.
The following table summarizes information about our Stock Option Plan:
(Canadian $, except as noted) 2013 2012 2011
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 15,801,966 79.96 16,989,499 84.28 15,232,139 48.74
Granted 2,003,446 60.11 2,526,345 56.00 1,798,913 57.78
Granted as part of the M&I acquisition – – – – 3,676,632 193.12
Exercised 2,069,588 47.95 1,766,318 40.17 3,040,825 37.34
Forfeited/cancelled 5,558 56.35 54,565 40.77 34,758 48.20
Expired 761,555 150.78 1,892,995 126.62 642,602 52.92
Outstanding at end of year 14,968,711 78.17 15,801,966 79.96 16,989,499 84.28
Exercisable at end of year 7,283,321 98.79 7,900,710 103.87 9,311,241 108.54
Available for grant 5,201,062 6,897,964 8,728,782
Outstanding stock options as a percentage of
outstanding shares 2.32% 2.43% 2.66%
Employee compensation expense related to this plan for the years ended
October 31, 2013, 2012 and 2011 was $14 million, $17 million and
$17 million before tax, respectively ($13 million, $16 million and
$16 million after tax, respectively).
The intrinsic value of a stock option grant is the difference between
the current market price of our common shares and the strike price of
the option. The aggregate intrinsic value of stock options outstanding at
October 31, 2013, 2012 and 2011 was $215 million, $79 million and
$107 million, respectively. The aggregate intrinsic value of stock options
exercisable at October 31, 2013, 2012 and 2011 was $107 million,
$47 million and $66 million, respectively.
BMO Financial Group 196th Annual Report 2013 165
Notes