TD Bank 2005 Annual Report Download - page 92

TD BANK FINANCIAL GROUP ANNUAL REPORT 2005 Financial Results
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The Bank operates various stock-based compensation plans. As
of November 1, 2002, the Bank adopted the accounting standard
on stock-based compensation and has elected to adopt on a
prospective basis the fair value method of accounting for all stock
option awards. Under this method the Bank recognizes a com-
pensation expense based on the fair value of the options on the
date of grant which is determined by using an option pricing
model. The fair value of the options is recognized over the vest-
ing period of the options granted as compensation expense and
contributed surplus. The contributed surplus balance is reduced
as the options are exercised and the amount initially recorded for
the options in contributed surplus is credited to capital stock. No
compensation expense is recorded for 23.9 million stock options
awarded and outstanding prior to November 1, 2002. As of
October 31, 2005,11.6 million stock options remained unexercised.
STOCK OPTION PLAN
The Bank maintains a stock option program for certain key
employees and non-employee directors. The Bank does not grant
stock options to members of the Board of Directors. Under the
employee plan, options on common shares are periodically grant-
ed to eligible employees of the Bank for terms of 7 years (effective
December 11, 2003) and vesting over a four-year period. These
options provide holders with the right to purchase common shares
of the Bank at a fixed price equal to the closing market price of
the shares on the day prior to the date the options were issued.
Under this plan, 14.3 million common shares have been reserved
for future issuance (2004 – 16.4 million, 2003 – 18.5 million).
The outstanding options expire on various dates to March 2013.
Asummary of the Bank’s stock option activity and related
information for the years ended October 31 is as follows:
Stock Option Activity
Weighted Weighted Weighted
average average average
exercise exercise exercise
(millions of shares) 2005 price 2004 price 2003 price
Number outstanding, beginning of year 22.1 $ 35.21 24.4 $32.28 23.9 $30.35
Granted 2.2 49.41 2.4 40.95 4.0 33.42
Exercised (4.3) 28.95 (4.4) 22.12 (2.9) 16.25
Forfeited/cancelled (.1) 38.46 (.3) 37.79 (.6) 40.00
Number outstanding, end of year 19.9 $38.08 22.1 $35.21 24.4 $32.28
Exercisable, end of year 13.2 $ 36.30 14.1 $33.44 14.8 $28.87
Range of Exercise Prices
Options outstanding Options exercisable
Weighted
Number outstanding average remaining Weighted average Number exercisable Weighted average
(millions of shares) contractual life (years) exercise price (millions of shares) exercise price
$10.13 – $11.81 .1 1.00 $11.81 .1 $ 11.81
$17.45 – $25.43 1.5 2.77 23.63 1.5 23.63
$29.80 – $40.43 7.4 5.50 34.33 5.5 34.61
$40.92 – $44.30 8.7 5.45 41.23 6.1 41.34
$49.40 – $55.90 2.2 6.00 49.41 – –
STOCK-BASED COMPENSATION
NOTE 14
TD Banknorth Stock Option Activity
Weighted average
(millions of shares) 2005 exercise price
Number outstanding, beginning of year 6.3 $28.36
Granted 2.2 36.31
Exercised (.4) 29.11
Forfeited/cancelled (.1) 35.95
Number outstanding, end of year 8.0 $30.38
Exercisable, end of year 5.0 $28.14
The following table summarizes information relating to stock
options outstanding and exercisable at October 31, 2005.
The fair value of options granted was estimated at the date of
grant using the Black-Scholes valuation model with the following
assumptions: (i) risk-free interest rate of 3.7% (2004 – 4.10%,
2003 – 4.29%), (ii) expected option life of 5.3 years (2004 – 5
years, 2003 – 5.5 years), (iii) expected volatility of 25.7% (2004 –
27.6%, 2003 – 27.7%), and (iv) expected dividend yield of
2.84% (2004 – 2.93%, 2003 – 3.37%). During the year,2.2 mil-
lion (2004 – 2.4 million, 2003 – 4.1 million) of options were
granted with a weighted average fair value of $10.64 per option
(2004 – $9.37 per option, 2003 – $7.60 per option).
TD Banknorth also maintains various stock option plans for key
employees and non-employee directors. Under the TD Banknorth
plans, options areperiodically granted to eligible employees of
TD Banknorth. The options provide holders with the right to
purchase common shares of TD Banknorth Inc. at a fixed price. During fiscal 2005, the Bank recognized compensation expense
in the Consolidated Statement of Income of $20 million (2004 –
$11 million, 2003 – $9 million) for the stock option awards granted.
on the Bank’s ability to pay dividends and interest distributions on
common and preferred shares which assesses the ongoing mainte-
nance by the Bank of satisfactory regulatory capital and liquidity.
The Bank does not anticipate that these conditions will restrict it
from paying dividends in the normal course of business.
The Bank is also restricted from paying dividends in the event
that either TD Capital Trust or TD Capital Trust II fails to pay semi-
annual distributions in full to holders of TD Capital Trust Securities.
In addition, the ability to pay dividends on its common shares with-
out the approval of the holders of the outstanding preferred shares
is restricted unless all interest distributions and dividends on the
preferred shares have been declared and paid or set apart for pay-
ment. Currently, these limitations do not restrict the payment of
interest on preferred shares or dividends on common shares.
Activity for all stock option plans during the seven months ended
September 30, 2005 is summarized below: