Treasury Shares
Non-Controlling Interest
When we purchase our common shares as part of our trading business,
we record the cost of those shares as a reduction in shareholders’
equity. If those shares are resold at a price higher than their cost, the
premium is recorded as an increase in contributed surplus. If those
shares are resold at a price below their cost, the discount is recorded as
a reduction first to contributed surplus and then to retained earnings for
any amounts in excess of total contributed surplus related to treasury
shares.
Included in non-controlling interest in subsidiaries as at October 31,
2014 were capital trust securities including accrued interest totalling
$1,063 million ($1,068 million in 2013) related to non-controlling
interest in subsidiaries and formed part of our Tier 1 regulatory capital,
as further described in Note 18. During 2013, we redeemed the US$250
million, 7.375% preferred shares issued by Harris Preferred Capital
Corporation, a U.S. subsidiary. Non-controlling interest in other
subsidiaries was $22 million at October 31, 2014 resulting from our F&C
acquisition.
Note 21: Offsetting of Financial Assets and Financial Liabilities
sold under repurchase agreements and derivative instruments. Amounts
not offset in the Consolidated Balance Sheet relate to transactions
where a master netting arrangement or similar agreement is in place
with a right of set off only in the event of default, insolvency or
bankruptcy, or where the offset criteria are otherwise not met.
The following table presents the amounts that have been offset in our
Consolidated Balance Sheet, as well as those amounts that are subject
to enforceable master netting arrangements or similar agreements but
do not qualify for netting. Amounts offset in the Consolidated Balance
Sheet include securities purchased under resale agreements, securities
(Canadian $ in millions)
2014
Amounts not offset in the balance sheet
Financial Assets
Securities borrowed or purchased under resale agreements
Derivative instruments
Financial Liabilities
Derivative instruments
Securities lent or sold under repurchase agreements
Gross
amounts
Amounts offset
in the balance
sheet
Net amounts
presented in
the balance sheet
Impact of
master netting
agreements
Financial
instruments
received/
pledged as
collateral
57,119
38,338
3,564
5,683
53,555
32,655
10,004
24,398
41,042
1,676
–
825
2,509
5,756
95,457
9,247
86,210
34,402
42,718
825
8,265
39,340
43,259
5,683
3,564
33,657
39,695
24,398
10,004
3,048
28,868
323
–
5,888
823
82,599
9,247
73,352
34,402
31,916
323
6,711
Cash
collateral
Net amount
(Canadian $ in millions)
2013
Amounts not offset in the balance sheet
Financial Assets
Securities borrowed or purchased under resale agreements
Derivative instruments
Financial Liabilities
Derivative instruments
Securities lent or sold under repurchase agreements
Gross
amounts
Amounts offset
in the balance
sheet
Net amounts
presented in
the balance sheet
Impact of
master netting
agreements
Financial
instruments
received/
pledged as
collateral
41,587
33,745
1,788
3,486
39,799
30,259
12,170
24,459
22,941
1,208
–
823
4,688
3,769
75,332
5,274
70,058
36,629
24,149
823
8,457
35,460
30,672
3,486
1,788
31,974
28,884
24,459
12,170
2,007
15,820
1,301
–
4,207
894
66,132
5,274
60,858
36,629
17,827
1,301
5,101
Cash
collateral
Net amount
Note 22: Capital Management
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 deductions for goodwill,
intangible assets and 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 the components of our capital
position are presented in Notes 13, 16, 17, 18 and 20.
BMO Financial Group 197th Annual Report 2014 163
Notes
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.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Regulatory Capital and Risk-Weighted Assets
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 Common
Equity Tier 1 capital risk-weighted assets.
‰ The Tier 1 Capital Ratio is defined as Tier 1 capital divided by Tier 1
capital risk-weighted assets.
‰ The Total Capital Ratio is defined as Total capital divided by Total
capital risk-weighted assets.
‰ The Assets-to-Capital Multiple is calculated by dividing total assets and
specified off-balance sheet items, net of other specified deductions,
by Total capital calculated on a Basel III transitional basis.
Basel III
2014
Basel III
2013
22,421
26,602
31,927
21,227
24,599
29,500
222,092
222,428
222,931
10.1%
12.0%
14.3%
16.1
215,094
215,094
215,094
9.9%
11.4%
13.7%
15.6
(Canadian $ in millions, except as noted)
Common Equity Tier 1 Capital
Tier 1 Capital
Total Capital
Common Equity Tier 1 Capital Risk-Weighted
Assets
Tier 1 Capital Risk-Weighted Assets
Total Capital Risk-Weighted Assets
Common Equity Tier 1 Capital Ratio
Tier 1 Capital Ratio
Total Capital Ratio
Assets-to-Capital Multiple
All 2014 and 2013 balances above are on a Basel III “all-in” basis.
We have met OSFI’s stated minimum capital ratio requirements as at
October 31, 2014.
Note 23: Employee Compensation – Stock-Based Compensation
Stock Option Plan
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. Amounts related to stock options
granted to employees eligible to retire are expensed at the date of
grant.
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 before the grant date. Stock options granted
on or after December 2013 vest in equal tranches of 50% on the third
and fourth anniversaries of their grant date. Options granted prior to
December 2013 vest in tranches over a four-year period starting from
their grant date. Each tranche (i.e. the portion that vests each year) is
treated as a separate award with a different vesting period. A portion of
the options 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)
2014
2013
2012
Number of
stock options
Weightedaverage
exercise price
Number of
stock options
Weightedaverage
exercise price
Number of
stock options
Weightedaverage
exercise price
Outstanding at beginning of year
Granted
Exercised
Forfeited/cancelled
Expired
14,968,711
1,618,223
2,133,107
88,965
1,027,097
78.17
68.60
53.66
79.77
139.34
15,801,966
2,003,446
2,069,588
5,558
761,555
79.96
60.11
47.95
56.35
150.78
16,989,499
2,526,345
1,766,318
54,565
1,892,995
84.28
56.00
40.17
40.77
126.62
Outstanding at end of year
Exercisable at end of year
Available for grant
Outstanding stock options as a percentage of
outstanding shares
13,337,765
6,607,237
4,222,722
76.21
90.85
14,968,711
7,283,321
5,201,062
78.17
98.79
15,801,966
7,900,710
6,879,964
79.96
103.87
2.32%
2.06%
2.43%
the option. The aggregate intrinsic value of stock options outstanding at
October 31, 2014, 2013 and 2012 was $279 million, $215 million and
$79 million, respectively. The aggregate intrinsic value of stock options
exercisable at October 31, 2014, 2013 and 2012 was $145 million,
$107 million and $47 million, respectively.
Employee compensation expense related to this plan for the years
ended October 31, 2014, 2013 and 2012 was $11 million, $14 million
and $17 million before tax, respectively ($11 million, $13 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
Options outstanding and exercisable at October 31, 2014 and 2013 by range of exercise price were as follows:
(Canadian $, except as noted)
Notes
Range of exercise
prices
2013
2014
Options outstanding
Number
of stock
options
Weightedaverage Weightedaverage
remaining
exercise
contractual
price
life (years)
$30.01 to $40.00
718,299
$40.01 to $50.00
208,437
$50.01 to $60.00 5,087,750
$60.01 to $70.00 5,956,232
$70.01 and over (1) 1,367,047
(1) Issued as part of the acquisition of M&I.
164 BMO Financial Group 197th Annual Report 2014
4.1
4.6
5.7
6.0
2.6
34.13
42.36
56.05
63.89
232.14
Options outstanding
Options exercisable
Number
of stock
options
718,299
208,437
3,000,262
1,313,192
1,367,047
Weightedaverage
remaining
contractual
life (years)
4.1
4.6
6.0
4.1
2.6
Weightedaverage
exercise
price
34.13
42.36
55.73
62.71
232.14
Number
of stock
options
1,044,175
262,959
6,934,041
4,886,738
1,840,798
Weightedaverage
remaining
contractual
life (years)
5.1
5.6
6.0
5.6
3.1
Options exercisable
Weightedaverage
exercise
price
Number
of stock
options
34.12
42.44
55.78
62.28
234.78
1,044,175
262,959
2,845,945
1,289,444
1,840,798
Weightedaverage Weightedaverage
remaining
exercise
contractual
price
life (years)
5.1
5.6
6.1
3.2
3.1
34.12
42.44
55.57
63.94
234.78