TD Bank 2006 Annual Report Download - page 93

TD BANK FINANCIAL GROUP ANNUAL REPORT 2006 Financial Results 89
The Bank operates various stock-based compensation plans.
The Bank uses the fair value method of accounting for all stock
option awards. Under this method, the Bank recognizes compen-
sation expense based on the fair value of the options, which is
determined by using an option pricing model. The fair value of
the options is recognized over the vesting 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, because the Bank
prospectively adopted the current accounting standard on stock-
based compensation. 8.9 million of these stock options remain
unexercised, as at October 31, 2006.
STOCK OPTION PLAN
The Bank maintains a stock option program for certain key
employees and non-employee directors. Non-employee directors
have not been granted stock options since December, 2001.
Options on common shares are periodically granted to eligible
employees of the Bank under the plan for terms of seven years
(effective December 11, 2003) and vest 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, 12.5 million common shares have been
reserved for future issuance (2005 – 14.3 million; 2004 – 16.4 mil-
lion). The outstanding options expire on various dates to August
2013. A summary 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) 2006 price 2005 price 2004 price
Number outstanding, beginning of year 19.9 $ 38.08 22.1 $35.21 24.4 $32.28
Granted 1.9 59.95 2.2 49.41 2.4 40.95
Exercised (3.4) 33.78 (4.3) 28.95 (4.4) 22.12
Forfeited/cancelled (.1) 43.38 (.1) 38.46 (.3) 37.79
Number outstanding, end of year 18.3 $ 41.18 19.9 $38.08 22.1 $35.21
Exercisable, end of year 12.9 $ 37.85 13.2 $36.30 14.1 $33.44
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
$17.45 – $25.43 .8 1.7 $23.16 .8 $ 23.16
$29.80 – $40.43 5.7 4.68 34.15 4.9 34.28
$40.92 – $44.30 7.8 4.43 41.23 6.7 41.27
$49.40 – $55.90 2.1 5.00 49.40 .5 49.40
$57.75 – $60.02 1.9 6.03 59.95 – –
STOCK-BASED COMPENSATION
NOTE 14
The following table summarizes information relating to stock
options outstanding and exercisable at October 31, 2006.
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 3.91% (2005 – 3.7%;
2004 – 4.10%); (ii) expected option life of 5.1 years (2005 – 5.3
years; 2004 –5 years); (iii) expected volatility of 21.9% (2005 –
25.7%; 2004 – 27.6%); and (iv) expected dividend yield of
2.88% (2005 – 2.84%; 2004 – 2.93%). During the year, 1.9 mil-
lion (2005 –2.2 million; 2004 – 2.4 million) options were granted
with aweighted average fair value of $11.26 per option (2005 –
$10.64 per option; 2004 – $9.37 per option).
During the year, the Bank recognized compensation expense in
the Consolidated Statement of Income of $26 million (2005 –
$20 million; 2004 – $11 million) for the stock option awards
granted.
OTHER STOCK-BASED COMPENSATION PLANS
The Bank operates restricted share unit plans which are offered
to certain employees of the Bank. Under these plans, participants
aregranted restricted share units equivalent to the Bank’s com-
mon shares that generally vest over three to four years. A liability
is accrued by the Bank related to the restricted share units award-
ed and an incentive compensation expense is recognized in the
Consolidated Statement of Income over the vesting period. At
the maturity date, the participant receives cash representing the
value of the restricted share units. The number of Bank restricted
share units under these plans at October 31, 2006 is 9 million
(2005 –11 million; 2004 – 7.9 million).
The Bank also offers deferred share unit plans to eligible exec-
utives and non-employee directors. Under these plans, a portion
of the participant’s annual incentive award may be deferred as
share units equivalent to the Bank’s common stock. The deferred
shareunits are not redeemable by the participant until retire-
ment, permanent disability or termination of employment or
directorship and must be redeemed for cash by the end of the
next calendar year.Dividend equivalents accrue to the partici-
pants in the form of additional units.
As at October 31, 2006, 2.5 million deferred share units were
outstanding (2005 – 2.1 million).
Compensation expense for these plans is recorded in the year
the incentive award is earned by the plan participant. Changes in
the value of restricted share units and deferred share units are
recorded, net of the effects of related hedges, in the
Consolidated Statement of Income. For the year ended October
31, 2006, the Bank recognized compensation expense, net of the
effects of hedges, for these plans of $129 million (2005 – $113
million; 2004 – $93 million).
EMPLOYEE SAVINGS PLAN
The Bank also operates ashare purchase plan available to
employees. Under the Bank’s Employee Savings Plan (ESP),
employees may contribute up to 6% of their annual base
earnings to a maximum of $4,500 per calendar year toward the
purchase of the Bank’s common shares. The Bank matches 50%
of the employee contribution amount. The Bank’s contributions
vest once the employee has completed two years of continuous