UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
WASHINGTON,
DC 20549
FORM
10-K
| x |
Annual
report pursuant to Section 13 or 15(d) of the Securities Exchange
Act of
1934 for
the fiscal year ended December 31,
2007.
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o
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Transition
report pursuant to Section 13 or 15(d) of the Securities Exchange
Act of
1934
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for
the
transition period from ________ to ________.
Commission
File Number: 1-14103
NB
CAPITAL CORPORATION
(Exact
name of registrant as specified in its charter)
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Maryland
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52-2063921
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(State
or other jurisdiction of
|
(I.R.S.
Employer
|
|
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incorporation
or organization)
|
Identification
No.)
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65
East 55TH Street, 31st Floor
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New
York, New York
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10022
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(Address
of principal executive offices)
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(Zip
code)
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Registrant's
telephone number, including area code: 1-866-517-5455
Securities
registered pursuant to Section 12(b) of the Act:
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Title
of Each Class
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Name
of each exchange on which registered
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Depository
Shares, each representing a one-fortieth
interest in 8.35% Noncumulative Exchangeable Preferred Stock, Series A, par value $.01 per share |
New
York Stock Exchange
|
Securities
registered pursuant to Section 12(g) of the Act:
8.35%
Noncumulative Exchangeable Preferred Stock, Series A, par value $ .01 per
share
Indicate
by check mark if the registrant is a well-known seasoned issuer, as defined
in
Rule 405 of the Securities Act. Yes o No x
Indicate
by check mark if the registrant is not required to file reports pursuant to
Section 13 or Section 15(d) of the Act. Yes o No x
Indicate
by check mark whether the registrant (1) has filed all reports required to
be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the
preceding 12 months (or for such shorter period that registrant was required
to
file such reports) and (2) has been subject to such filing requirements for
the
past 90 days.
Yes
x
No o
Indicate
by check mark if disclosure of delinquent filers pursuant to Item 405 of
Regulation S-K is not contained herein, and will not be contained, to the best
of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to
this
Form 10-K. o
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer or a smaller reporting
company.
Large
Accelerated Filer o Accelerated
Filer
o
Non-Accelerated
Filer x Smaller
Reporting
Company o
Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act). Yes o No
x
As
of
June
30,
2007 and
March
28, 2008, 100 shares of the Registrant’s Common Stock, par value $.01, were
outstanding, and were all owned by National Bank of Canada. There is no market
for the Registrant’s Common Stock.
Documents
Incorporated by reference: None
FORWARD-LOOKING
STATEMENTS
From
time
to time, NB Capital Corporation (the "Company") makes written and oral
forward-looking statements, included in this annual report on Form 10-K for
filing with the U.S. Securities and Exchange Commission, in reports to
shareholders, in press releases and in other communications. All such statements
are made pursuant to the “safe harbor” provisions of the United States Private
Securities Litigation Reform Act of 1995. These forward-looking statements
include, among others, statements with respect to the economy, market changes,
the achievement of strategic objectives, certain risks as well as statements
with respect to our beliefs, plans, expectations, anticipations, estimates
and
intentions. These forward-looking statements are typically identified by the
words “may,” “could,” “should,” “would,” “suspect,” “outlook,” “believe,”
“anticipate,” “estimate,” “expect,” “intend,” “plan,” and words and expressions
of similar import.
By
their
very nature, such forward-looking statements require us to make assumptions
and
involve inherent risks and uncertainties, both general and specific. There
is
significant risk that express or implied projections contained in such
statements will not materialize or will not be accurate. A number of factors
could cause actual future results, conditions, actions or events to differ
materially from the targets, expectations, estimates or intentions expressed
in
the forward-looking statements. Such differences may be caused by factors,
many
of which are beyond the Company’s control, which include, but are not limited
to, market and liquidity risks; the strength of the Canadian and United States
economies; the impact of the movement of the U.S. dollar relative to other
currencies, particularly the Canadian dollar; the effects of changes in monetary
policy, including changes in interest rate policies of the Federal Reserve
System and the Bank of Canada; the impact of changes in the laws and regulations
regulating real estate investment trusts; judicial judgments and legal
proceedings; changes in the accounting policies and methods the Company uses
to
report its financial condition, including uncertainties associated with critical
accounting assumptions and estimates; operational and infrastructure risks;
other factors that may affect future results, including changes in trade
policies, changes in estimates relating to reserves, changes in tax laws;
natural disasters; the possible impact on the business from public health
emergencies, conflicts, other international events and other developments,
including those relating to the war on terrorism; and the Company’s success in
anticipating and managing the foregoing risks.
The
Company cautions that the foregoing list of important factors is not exhaustive.
Investors and others who base themselves on the Company’s forward-looking
statements should carefully consider the above factors as well as the
uncertainties they represent and the risk they entail. The Company therefore
cautions readers not to place undue reliance on these forward-looking
statements. The Company does not undertake to update any forward-looking
statements, whether written or oral, that may be made from time to time by
or on
behalf of the Company.
EXCHANGE
RATE
References
to “$” are to United States dollars; references to “C$” are to Canadian dollars.
As of December 31, 2007, the Canadian dollar exchange rate was C$0.9913 = $1.00
and certain amounts stated herein reflect such exchange rate. The exchange
rate
was obtained from the Bank of Canada.
PART
I
ITEM
1:
BUSINESS
General
On
August
20, 1997, NB Capital Corporation (the "Company") was incorporated under the
laws
of the State of Maryland for the purposes of providing U.S. investors with
the
opportunity to invest in Canadian residential mortgages and other real estate
assets. The Company began operations on September 3, 1997 with the consummation
of an offering of 300,000 shares of its 8.35% Noncumulative Exchangeable
Preferred Stock, Series A (the "Series A Preferred Shares"). The Series A
Preferred Shares trade on the New York Stock Exchange in the form of Depository
Shares, each representing a one-fortieth interest in a Series A Preferred Share
(the "Depository Shares"). National Bank of Canada (the "Bank") owns all of
the
Company's issued and outstanding common stock, par value $.01 per share (the
"Common Stock"). Accordingly, the Company is a wholly owned subsidiary of the
Bank.
The
Company's principal business objective is to acquire, hold, finance and manage
assets consisting of obligations secured by real property ("Mortgage Assets")
as
well as certain other qualifying real estate investment trust ("REIT") assets.
The Mortgage Assets currently consist of 51 "hypothecation" loans issued to
the
Company by NB Finance, Ltd. ("NB Finance"), a Bermuda corporation and a wholly
owned subsidiary of the Bank, that are recourse only to the Canada Mortgage
and
Housing Corporation insured residential first mortgage loans ("Mortgage Loans").
Hypothecation loans are loans secured by the pledge of mortgages as security
therefor. The Mortgage Loans consist of 51 pools of, as at December 31, 2007,
an
aggregate 10,727 residential first mortgages insured by Canada Mortgage and
Housing Corporation, an agency of the Government of Canada ("CMHC"), that are
secured by real property located in Canada. The Company has acquired and expects
to continue to acquire its Mortgage Assets from the Bank and affiliates of
the
Bank. The Company may also from time to time, however, acquire Mortgage Assets
from unrelated third parties.
The
Bank
administers the day-to-day operations of the Company pursuant to an Advisory
Agreement, between the Bank and the Company (the "Advisory Agreement"). The
Bank
also services the Mortgage Loans pursuant to a Servicing Agreement, between
the
Bank and NB Finance (the "Servicing Agreement"). Pursuant to an Assignment
Agreement, NB Finance has assigned to the Company all of its right, title and
interest in the Servicing Agreement. Such contractual arrangements are further
described elsewhere in this annual report on Form 10-K, including without
limitation the sections under the captions of “Advisory Agreement” and
“Servicing Agreement” in Item 1 of this annual report.
In
order
to preserve the Company’s status as a REIT under the Internal Revenue Code of
1986, as amended (the "Code"), substantially all of the assets of the Company
consist of the Mortgage Assets issued by NB Finance and other real estate assets
that are of the type set forth in Section 856(c)(6)(B) of the Code.
For
information regarding the Company's revenues and operating profits, see the
Company's financial statements, beginning on page F-1 of this
report.
Automatic
Exchange
Each
Series A Preferred Share will be exchanged automatically for one newly issued
8.45% Non-cumulative First Preferred Share, Series Z, of the Bank (a "Bank
Preferred Share"): (i) immediately prior to such time, if any, at which the
Bank
fails to declare and pay or set aside for payment when due on any dividend
on
any issue of its cumulative First Preferred Shares or the Bank fails to pay
or
set aside for payment when due any declared dividend on any of its
non-cumulative First Preferred Shares, (ii) in the event that the Bank has
a
Tier 1 risk-based capital ratio of less than 4.0% or a total risk-based capital
ratio of less than 8.0%, (iii) in the event that the Superintendent of Financial
Institutions Canada (the "Superintendent") takes control of the Bank pursuant
to
the Bank Act (Canada), as amended (the "Bank Act"), or proceedings are commenced
for the winding-up of the Bank pursuant to the Winding-up and Restructuring
Act
(Canada), or (iv) in the event that the Superintendent, by order, directs the
Bank to act pursuant to subsection 485(3) of the Bank Act and the Bank elects
to
cause the exchange (each, an "Exchange Event"). Upon an Exchange Event, the
holders of the Series A Preferred Shares shall be unconditionally obligated
to
surrender to the Bank the certificates representing the Series A Preferred
Share
held by such holder, and the Bank shall be unconditionally obligated to issue
to
such holder in exchange for each such Series A Preferred Share a certificate
representing one Bank Preferred Share.
-3-
The
Automatic Exchange shall occur as of 8:00 a.m. Eastern Time on the date for
such
exchange set forth in the requirements of the Superintendent or, if such date
is
not set forth in such requirements as of 8:00 a.m. on the earliest possible
date
such exchange could occur consistent with such requirements (the "Time of
Exchange"), as evidenced by the issuance by the Bank of a press release prior
to
such time. As of the Time of Exchange, all of the Series A Preferred Shares
will
be deemed cancelled without any further action by the Company, all rights of
the
holders of the Series A Preferred Shares as stockholders of the Company will
cease, and such persons will thereupon and thereafter be deemed to be holders
of
Bank Preferred Shares for all purposes. The Company will mail notice of the
occurrence of an Exchange Event to each holder of the Series A Preferred Shares
within 30 days of such event, and the Bank will deliver to each such holder
certificates for the Bank Preferred Shares upon surrender of such holder’s
certificates for the Series A Preferred Shares. The Company’s charter provides
that, immediately after the delivery of such notice, the existence of the
Company shall terminate and the Company will be liquidated and its affairs
wound
up in accordance with the procedures of the Maryland General Corporation Law
relating to forfeiture of the charter of a corporation and expiration of
corporate existence. Until such replacement stock certificates are delivered
(or
in the event such replacement certificates are not delivered), certificates
previously representing the Series A Preferred Shares shall be deemed for all
purposes to represent the Bank Preferred Shares. Once an Exchange Event occurs,
no action will be required to be taken by holders of the Series A Preferred
Shares, by the Bank or by the Company in order to effect an automatic exchange
as of the Time of Exchange.
Holders
of the Series A Preferred Shares, by purchasing the Series A Preferred Shares,
have agreed to be bound by the unconditional obligation to exchange such Series
A Preferred Shares for the Bank Preferred Shares upon the occurrence of an
Exchange Event. The obligation of the holders of the Series A Preferred Shares
to surrender such shares and the obligation of the Bank to issue the Bank
Preferred Shares in exchange for the Series A Preferred Shares may be enforced
by the Bank or such holders, respectively, against the other.
Upon
the
occurrence of an Exchange Event, the Bank Preferred Shares to be issued as
part
of the automatic exchange would constitute a newly issued series of First
Preferred Shares of the Bank and would constitute 100% of the issued and
outstanding Bank Preferred Shares. The Bank Preferred Shares would have the
same
liquidation preference and be subject to redemption on the same terms as the
Series A Preferred Shares (except that there would be no redemption for certain
tax-related events). Any accrued and unpaid dividends on the Series A Preferred
Shares as of the Time of Exchange would be accounted for as accrued and unpaid
dividends on the Bank Preferred Shares. The Bank Preferred Shares would rank
pari passu, in terms of dividend payments and liquidation preference, with,
or
senior to, any outstanding First Preferred Shares of the Bank. The Bank
Preferred Shares would not entitle the holders to vote except in certain
circumstances. Dividends on the Bank Preferred Shares would be non-cumulative
and payable at the rate of 8.45% per annum of the liquidation preference, if,
when and as declared by the Board of Directors of the Bank. The Bank does not
intend to apply for listing of the Bank Preferred Shares on any national
securities exchange. Absent the occurrence of an Exchange Event, however, the
Bank will not issue any Bank Preferred Shares, although the Bank will be able
to
issue First Preferred Shares in series other than that of the Bank Preferred
Shares. There can be no assurance as to the liquidity of the trading markets
for
the Bank Preferred Shares, if issued, or that an active public market for the
Bank Preferred Shares would develop or be maintained.
Holders
of the Series A Preferred Shares cannot exchange the Series A Preferred Shares
for the Bank Preferred Shares voluntarily. In addition, absent the occurrence
of
an automatic exchange, holders of the Series A Preferred Shares will have no
dividend, voting, liquidation preference or other rights with respect to the
Bank or any security of the Bank.
-4-
Advisory
Agreement
The
Company entered into the Advisory Agreement with the Bank, under which the
Bank
is responsible for, among other things, (i) administering the day-to-day
operations and affairs of the Company, (ii) monitoring the credit quality of
Mortgage Assets held by the Company, (iii) advising the Company with respect
to
the reinvestment of income from and payments on, and with respect to the
acquisition, management, financing and disposition of, Mortgage Assets held
by
the Company, (iv) holding documents relating to the Company’s Mortgage Assets as
custodian, and (v) monitoring the Company’s compliance with the requirements
necessary to qualify as a REIT. As long as any Series A Preferred Shares and,
accordingly, any Depository Shares remain outstanding, the Company may not
renew, terminate, or modify the Advisory Agreement without the approval of
a
majority of the Board of Directors of the Company (the "Board of Directors")
as
well as of a majority of the independent directors of the Company, which are
defined under the Advisory Agreement to mean those directors who are not current
officers or employees of the Company or current directors, employees or officers
of the Bank or any affiliate of the Bank (the "Independent Directors"). The
Bank may, with the approval of a majority of the Board of Directors as well
as a
majority of the Independent Directors, subcontract all or a portion of its
obligations under the Advisory Agreement to one or more related or unrelated
third parties. The Bank will not, in connection with the subcontracting of
any
of its obligations under the Advisory Agreement, be discharged or relieved
in
any respect from any of its obligations under the Advisory Agreement. As of
the
date of this Form 10-K, the Bank has not subcontracted any of its obligations
under the Advisory Agreement.
The
Advisory Agreement was entered into on September 3, 1997 for an initial term
of
one year, and has been renewed every year for additional one-year periods.
The
Advisory Agreement was renewed on March 19, 2007 and expired on March 19, 2008.
The last renewal was dated March 17, 2008 for an additional one-year period.
The
Company may terminate the Advisory Agreement at any time upon 60 days’ prior
written notice. As long as any of the Series A Preferred Shares or Depository
Shares remain outstanding, any decision by the Company to renew, terminate
or
modify the Advisory Agreement must be approved by a majority of the Board of
Directors, as well as by a majority of the Independent Directors. The Bank
received an advisory fee equal to $100,000 for fiscal year 2007, and subject
to
renewal of the Advisory Agreement under the same terms, will be entitled to
receive the same amount for fiscal year 2008, payable in equal quarterly
instalments for the advisory and management services provided by it to the
Company. Payment of such fees is subordinated to payments of dividends on the
Series A Preferred Shares and, accordingly, the Depository Shares.
Servicing Agreement
The
Mortgage Loans are serviced by the Bank pursuant to the terms of the Servicing
Agreement. The Bank receives a fee equal to 0.25% per annum on the principal
balances (in $) of the loans serviced.
The
Servicing Agreement, dated as of September 3, 1997, had an initial term of
one
year, and has been renewed every year for additional one-year periods. The
last
renewal was made on May 4, 2007 for a one-year period beginning on June 28,
2007
and ending on June 28, 2008. The Servicing Agreement requires the Bank to
service Mortgage Loans in a manner generally consistent with normal mortgage
servicing practices of prudent mortgage lending institutions that service
mortgage loans of the same type as the Mortgage Loans, with any servicing
guidelines promulgated by the Company and with relevant government agency
guidelines and procedures. The Servicing Agreement requires the Bank to service
Mortgage Loans solely with a view toward the interests of the Company and
without regard to the interests of the Bank or any of its other affiliates
(including NB Finance). The Bank collects and remits principal and interest
payments, administers mortgage escrow accounts, submits and pursues mortgage
insurance claims and supervises foreclosure proceedings on any Mortgage Loans
it
services. The Bank also provides accounting and reporting services with respect
to such Mortgage Loans. The Servicing Agreement requires the Bank to follow
such
collection procedures as are customary in normal mortgage servicing practices
of
prudent mortgage lending institutions that service mortgage loans of the same
type as the Mortgage Loans. The Bank may from time to time subcontract all
or a
portion of its servicing obligations under the Servicing Agreement to a third
party subject to the prior written approval of the Company. The Bank will not,
in connection with subcontracting any of its obligations under the Servicing
Agreement, be discharged or relieved in any respect from its obligation to
the
Company to perform its obligations under the Servicing Agreement. As of the
date
of this Form 10-K, the Bank has not subcontracted any of its obligations under
the Servicing Agreement.
-5-
The
Bank
is required to pay all expenses related to the performance of its duties under
the Servicing Agreement. The Bank is required to make advances of taxes and
required insurance premiums that are not collected from mortgagors with respect
to any Mortgage Loan serviced by it, unless it determines that such advances
are
non recoverable from the mortgagor, insurance proceeds or other sources with
respect to such Mortgage Loan. If such advances are made, the Bank generally
will be reimbursed prior to the Company being reimbursed out of the payments
with respect to such Mortgage Loan. The Bank also is entitled to reimbursement
for expenses incurred by it in connection with the liquidation of defaulted
Mortgage Loans serviced by it and in connection with the restoration of
mortgaged property. The Bank is responsible to the Company for any loss suffered
as a result of the Bank's failure to make and pursue timely claims or as a
result of actions taken or omissions made by the Bank which cause the policies
to be cancelled by the insurer. Subject to approval by the Company, the Bank
may
institute foreclosure proceedings, exercise any power of sale contained in
any
Mortgage Loan or deed of trust, obtain a deed in lieu of foreclosure or
otherwise acquire title to a mortgaged property underlying a Mortgage Loan
by
operation of law or otherwise in accordance with the terms of the Servicing
Agreement. The Bank does not, however, have the authority to enter into
contracts in the name of the Company.
The
Company may terminate the Servicing Agreement upon the occurrence of one or
more
events specified in the Servicing Agreement. Such events relate generally to
the
Bank's proper and timely performance of its duties and obligations under the
Servicing Agreement. In addition, the Company may also terminate the Servicing
Agreement without cause upon 60 days' notice and payment of a termination
fee. The termination fee will be equal to the product of 0.0002% of the
then current aggregate unpaid principal balance of the related Mortgage Loans
and the number of months remaining until the first anniversary of the Servicing
Agreement, provided however, that the successor servicer is not an affiliate
of
the Bank.
As
is
customary in the mortgage loan servicing industry, the Bank is entitled to
retain any late payment charges, penalties and assumption fees collected in
connection with the Mortgage Loans serviced by it. The Bank will receive any
benefit derived from interest earned on collected principal and interest
payments between the date of collection and the date of remittance
(15th
calendar
day) to the Company and, to the extent permitted by law, from interest earned
on
tax and insurance impound funds with respect to Mortgage Loans serviced by
it.
When
any
mortgaged property underlying a Mortgage Loan is conveyed by a mortgagor, the
Bank generally will enforce any "due-on-sale" clause contained in the Mortgage
Loan, to the extent permitted under applicable law and governmental regulations.
A "due-on-sale" clause states that the Mortgage loan must be paid when the
mortgaged property is sold. The terms of a particular Mortgage Loan or
applicable law, however, may provide that the Bank is prohibited from exercising
the "due-on-sale" clause under certain circumstances related to the security
underlying the Mortgage Loan and the buyer's ability to fulfill the obligations
there under. Upon any assumption of a Mortgage Loan by a transferee, a nominal
fee is typically required, which sum will be retained by the Bank as additional
servicing compensation.
Investment
Policy
The
Company’s principal business objective is to acquire, hold, finance and manage
Mortgage Assets as well as certain other qualifying REIT assets. The Company's
current investment policy is to invest around 80% of its portfolio in Mortgage
Assets issued by NB Finance and the remainder in any other assets eligible
to be
held by a REIT. Such other assets include Mortgage Loans, residential mortgage
loans, mortgage-backed securities, commercial mortgage loans, partnership
interests, cash, cash equivalents, government securities and shares or interests
in other REITs. As of December 31, 2007, Mortgage Assets issued by NB Finance
comprised 94.03% of the Company’s portfolio.
The
Company expects to continue to follow the foregoing investment policy approved
by the Board of Directors on December 6, 2000. However, this policy may be
amended or revised from time to time at the discretion of the Board of Directors
(in certain circumstances subject to the approval of a majority of the
Independent Directors) without a vote of the Company's common or preferred
stockholders. All investments will be made primarily for income.
-6-
Description
of the Mortgage Assets
The
Mortgage Assets are comprised of 51 hypothecation loans issued by NB Finance
to
the Company. As of December 31, 2007, the principal amount of the Mortgage
Assets was approximately $450 million. Each of the 51 hypothecation loans
comprising the Mortgage Assets issued by NB Finance is secured by a pool of
Mortgage Loans. As of December 31, 2007, the Mortgage Loans were comprised
of, in the aggregate, 10,727 Mortgage Loans in an aggregate amount of
approximately C$641 million ($647 million). The value of each pool of Mortgage
Loans comprising the Mortgage Assets exceeds the principal amount of the
hypothecation loan that it secures. Accordingly, the Mortgage Assets issued
by
NB Finance are over collateralized by the Mortgage Loans. As of December 31,
2007, the aggregate amount of such over collateralization is $197 million.
The
Company acquired the Mortgage Assets issued by NB Finance pursuant to the terms
of a loan agreement with NB Finance.
Each
Mortgage Asset issued by NB Finance is recourse only to the Mortgage Loans
securing such Mortgage Asset. Each pool of Mortgage Loans is comprised of
entirely CMHC-insured residential first mortgages. Each Mortgage Asset issued
by
NB Finance is further secured by the residential real properties underlying
such
CMHC-insured first mortgages. Such residential real properties are located
primarily in Quebec, Ontario and New Brunswick in Canada. Since the Mortgage
Loans are insured by an agency of the Government of Canada, the Company expects
little or no loss of principal or interest. However, CMHC insurance does not
guarantee timely payment of interest and principal. The Mortgage Assets have
maturities ranging from February 2008 to January 2015. The Mortgage Assets
pay
interest at rates ranging from 5.37% to 10.15%, with a weighted-average rate
of
approximately 6.21% per annum.
Payments
of interest are made monthly out of payments on the Mortgage Loans. Pursuant
to
an agreement between the Company and NB Finance (the "Mortgage Loan Assignment
Agreement"), dated September 3, 1997, the Company receives all scheduled
payments made on the Mortgage Loans, retains a portion of any such payments
equal to the amount due and payable on the Mortgage Assets issued by NB Finance
and remits the balance, if any, to NB Finance. The Company also retains a
portion of any prepayments of principal in respect of the Mortgage Loans equal
to the proportion of such prepayments that the outstanding principal amount
of
the Mortgage Loan bears to the outstanding principal amount of the Mortgage
Assets issued by NB Finance, which amount would be applied to reduce the
outstanding principal amount of the Mortgage Assets issued by NB Finance.
Repayment of the Mortgage Assets issued by NB Finance is secured by an
assignment of the Mortgage Loans to the Company pursuant to the Mortgage Loan
Assignment Agreement, which is governed by the laws of Bermuda.
The
assignment of the Mortgage Loans by NB Finance to the Company is without
recourse. The Company has a security interest in the real property securing
the
Mortgage Loans and, subject to fulfilling certain procedural requirements under
applicable Canadian law, is entitled to enforce payment on the Mortgage Loans
in
its own name if a mortgagor should default thereon. In the event of such a
default, the Company has the same rights as NB Finance to force a sale of the
mortgaged property and satisfy the obligations of NB Finance out of the
proceeds. In the event of a default in respect of a Mortgage Loan, the amount
of
the Mortgage Assets issued by NB Finance will be reduced by an amount equal
to
the portion thereof allocable to the defaulting mortgage.
Following
repayment of the Mortgage Assets issued by NB Finance, the Company will reassign
any outstanding Mortgage Loans (without recourse) and deliver them to, or as
directed by, NB Finance. All payments in respect of the Mortgage Loans are
made
in Canadian dollars. The amounts due on the Mortgage Assets issued by NB Finance
are retained by the Company free and clear of and without withholding or
deduction for or on account of any present or future taxes imposed by or on
behalf of Bermuda or any political subdivision thereof or therein.
Description
of the Mortgage Loans
All
of
the Mortgage Loans were originated in accordance with underwriting policies
customarily employed by the Bank, or with underwriting policies acceptable
to
the Bank. With respect to its underwriting policies, the Bank will not make
any
residential mortgage loans that exceed a loan to value ratio of 80% unless
such
loan is insured. If the residential mortgage loan is CMHC-insured (i) a cash
down payment of between 5% and 24.9% is required, (ii) the monthly payment
for
capital, interest, taxes and heating must not exceed 32% of the gross monthly
revenue of the borrower and (iii) the monthly payment for capital, interest,
taxes, heating and all other monthly payments (including, without limitation,
personal loans, lease payments and credit card debt service) must not exceed
40%
of the net monthly revenue of the borrower. Additionally, for all mortgage
loans, an external credit check must be positive. When a loan is insured, an
additional amount may be added to the principal amount of the mortgage loan
representing the premium related thereto. The premium rates vary in accordance
with the principal amount of the loan. Generally, the greater the loan to value
ratio, the greater the premium rate. As is generally the case in the Canadian
residential mortgage business, such underwriting policies are derived from
CMHC
- approved underwriting criteria.
-7-
As
a CMHC
- approved lender, the Bank has access to the National Housing Act mortgage
insurance program. All of the Mortgage Loans are insured by CMHC pursuant to
that program. The bulk of those loans were insured at origination. Whether
a
loan is insured at origination or through the CMHC portfolio insurance program,
the insurance is valid until the expiration of the loan.
All
of
the Mortgage Loans are balloon mortgages. This means that the Mortgage Loans
do
not provide for the amortization of the principal balance thereof equally over
their term to maturity: thus, a principal payment equal to the original balance
less any principal amount paid will be due on each Mortgage Loan at maturity.
Balloon mortgages are the most prevalent type of mortgage offered by Canadian
mortgage lenders. At the expiration of the term, the mortgage is generally
renewed, based on then current market conditions, for a new term. Although
the
Bank offers terms varying from 3 months to 10 years, terms exceeding 5 years
are
relatively rare. Moreover, although the Bank offers monthly, semi-monthly and
weekly pay mortgages, the majority of the Mortgage Loans are monthly pay
mortgages. In general, loans are amortized over a period not exceeding 25
years.
The
Mortgage Loans provide for limited prepayment rights. For example, typically
up
to 10% of the original principal amount of a Mortgage Loan may be prepaid once
annually without penalty. Moreover, a Mortgage Loan may also be prepaid without
penalty if the mortgaged property is sold and the mortgagor enters into a new
mortgage with the same terms and conditions as the Mortgage Loan. In most other
circumstances, prepayments or renegotiations of either the interest rate or
the
term of a Mortgage Loan will be subjected to prepayment penalties. During the
first five years following the most recent interest adjustment date, such
penalties are tantamount to a yield maintenance clause. After five years, such
penalties will be limited to three months of interest.
The
Company intends and has the ability to hold the Mortgage Loans to maturity
unless there is a prepayment by the customer or a Mortgage Loan is impaired.
Tax
Status
The
Company elected to be taxable as a REIT under Sections 856 through 860 of the
Code. As a REIT, the Company generally will not be liable for United States
federal income tax to the extent that it distributes its income to the holders
of its Common Stock and its preferred stock, including the Series A Preferred
Shares and, accordingly, Depository Shares, and maintains its qualification
as a
REIT.
As
a
REIT, the Company is subject to a number of organizational and operational
requirements, including a requirement that it currently distribute to
stockholders at least 90% of its “REIT taxable income”. REIT taxable income is
essentially taxable income, as determined in accordance with the Code, with
certain adjustments. The most significant of such adjustments are (i) no
deduction is allowed for dividends received, (ii) a deduction is allowed for
dividends paid (other than the portion of any dividend attributable to net
income from foreclosure property) and for taxes imposed for failing to satisfy
certain statutory REIT requirements, and (iii) net income from foreclosure
property and net income derived from prohibited transactions is excluded from
the determination.
Employees
Under
the
Advisory Agreement, the Bank administers the day-to-day operations and affairs
of the Company and bears employment expenses, including salaries, wages, payroll
taxes and costs of employee benefit plans, of its personnel providing such
day-to-day services to the Company. Currently the Company is using the services
of employees of the Bank, all of whom receive compensation solely from the
Bank
pursuant to the Advisory Agreement. The Company does not anticipate that it
will
require any additional employees because the Company retains the Bank to perform
certain functions pursuant to the Advisory Agreement. The Company maintains
corporate records and audited financial statements that are separate from those
of the Bank and of any of the Bank's affiliates.
-8-
Competition
The
Company does not engage in the business of originating Mortgage Assets. While
the Company will purchase additional Mortgage Assets, it anticipates that such
Mortgage Assets will be purchased from the Bank and/or affiliates of the Bank.
Accordingly, the Company does not compete with mortgage conduit programs,
investment banking firms, savings and loan associations, banks, thrift and
loan
associations, finance companies, mortgage bankers or insurance companies in
acquiring its Mortgage Assets.
As
of
October 31, 2007, the Bank held approximately C$15.9 billion of residential
mortgage assets and 79.1% of such mortgages were located in Quebec, the Bank's
principal place of business. The major competitor of the Bank in Quebec is
the
Caisses Populaires Desjardins (a credit union). According to the Bank’s
economics and strategy department, the market share of the Bank for such
mortgages in Quebec is approximately 14.44% compared with a significantly
greater market share for Caisses Populaires Desjardins.
ITEM
1A.
RISK FACTORS
In
order
to maintain its REIT Status, the Company must maintain certain compliance
ratios. If the Company fails to respect the compliance ratios then it would
risk
losing its REIT status as well as having to pay a penalty. As at December 31,
2007 the Company had respected the compliance ratios.
The
Company believes that there are no other significant risk factors.
ITEM
1B.
UNRESOLVED STAFF COMMENTS
None
ITEM
2.
PROPERTIES
The
principal executive offices of the Company were located in the U.S. branch
office of the Bank at 65 East 55th
Street,
New York, New York 10022 on December 31, 2007. Such office use is covered by
the
Advisory Agreement described in Item 1 of this report, and the Company does
not
pay rents separately. The Company neither owns nor leases any
properties.
ITEM
3.
LEGAL PROCEEDINGS
The
Company is not subject to any material litigation. The Company is not currently
involved in nor, to the Company's knowledge, is it currently threatened with
any
material litigation. In the event routine litigation arises in the ordinary
course of business, most of which is expected to be covered by liability
insurance.
ITEM
4.
SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
-9-
PART
II
ITEM
5.
MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED SHAREHOLDER MATTERS AND ISSUER
PURCHASES OF EQUITY SECURITIES
Since
the
incorporation of the Company, the Bank has owned, and the Bank expects to
continue to own, all of the issued and outstanding shares of the Common Stock
of
the Company. The Common Stock is the Company’s only class of common equity
issued and outstanding. Accordingly, there is no established public trading
market for the Company's common equity, there are no securities authorized
for
issuance under equity compensation plans and there were no purchases of equity
securities by the Company nor affiliated purchases.
For
the
year ended December 31, 2006, the Company paid one dividend with respect to
the
Common Stock in an amount of $6,000,000. For the year ended December 31, 2007,
the Company paid one dividend with respect to the Common Stock in an amount
of
$6,000,000.
On
January 19, 1998, the Company sold 110 shares of its Adjustable Rate Cumulative
Senior Preferred Shares, par value $.01 per share (the "Senior Preferred
Shares") in a private placement. The Senior Preferred Shares are not and were
not required to be registered under the Securities Act of 1933, as amended
(the
"Securities Act"). The Senior Preferred Shares were offered to (a) accredited
investors (as defined in Rule 501(a) of Regulation D under the Securities Act)
in reliance on an exemption from registration pursuant to Section 4(2) of the
Securities Act relating to transactions not involving a public offering and
(b)
certain directors and officers of the Company and its affiliates who reside
in
Canada and who were able to make certain representations and warranties pursuant
to Regulation S of the Securities Act. Investors were required to complete
an
Investor Questionnaire to verify their status as: (a) an accredited investor
or
(b) a resident of Canada. The Senior Preferred Shares are not convertible or
exchangeable. The Senior Preferred Shares were offered and sold for $3,000
each
or $330,000 in the aggregate and the proceeds were used to meet the working
capital needs of the Company.
ITEM
6.
SELECTED FINANCIAL DATA
The
following table sets forth our selected financial information. The financial
information as of December 31, 2005, 2006, and 2007 and for each of the three
years in the period ended December 31, 2007 have been derived from, and should
be read together with, our audited financial statements and the accompanying
notes included in Item 8 of this report. The financial information as of
December 31, 2003 and 2004 and for each of the two years in the period ended
December 31, 2004 have been derived from our audited financial statements not
included in this report. The financial information set forth should be read
in
conjunction with, and is qualified in its entirety by reference to, Management’s
Discussion and Analysis of Financial Condition and Results of Operations in
Item
7 and our audited financial statements and related notes in Item 8.
|
Year Ended
December
31, 2007
|
Year Ended
December
31, 2006
|
Year Ended
December
31, 2005
|
Year Ended
December
31, 2004
|
Year Ended
December
31, 2003
|
||||||||||||
|
Statement
of Income Data:
|
||||||||||||||||
|
Operating
Revenues
|
$
|
31,911,117
|
$
|
33,044,255
|
$
|
35,342,570
|
$
|
36,322,291
|
$
|
37,895,366
|
||||||
|
Income
from Operations
|
$
|
30,019,332
|
$
|
31,194,038
|
$
|
33,344,602
|
$
|
34,459,040
|
$
|
36,103,421
|
||||||
|
Income
from Operations / Common Share
|
$
|
300,193
|
$
|
311,940
|
$
|
333,446
|
$
|
344,590
|
$
|
361,034
|
||||||
|
Balance
Sheet Data:
|
||||||||||||||||
|
Total
assets
|
$
|
478,638,397
|
$
|
479,617,056
|
$
|
479,610,581
|
$
|
477,763,501
|
$
|
478,884,177
|
||||||
|
Total
liabilities
|
$
|
490,763
|
$
|
409,054
|
$
|
518,994
|
$
|
444,371
|
$
|
456,663
|
||||||
|
Stockholders’
Equity
|
$
|
478,147,634
|
$
|
479,208,002
|
$
|
479,091,587
|
$
|
477,319,130
|
$
|
478,427,514
|
||||||
|
Cash
Dividends Declared / Common Share
|
$
|
60,000
|
$
|
60,000
|
$
|
65,000
|
$
|
105,000
|
$
|
145,000
|
||||||
-10-
ITEM
7.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATION
General
The
Company’s principal business objective is to acquire, hold, finance and manage
Mortgage Assets as well as other qualifying REIT assets. The Company elected
to
be taxed as a REIT under the Code and, accordingly, is generally not liable
for
United States federal income tax to the extent that it distributes at least
90%
of its taxable income, subject to certain adjustments, to its
stockholders.
Results
of Operations
Income
from operations for the year ended December 31, 2007 decreased by $1,174,706
or
3.77 % over the prior year ended December 31, 2006, which decreased by
$2,150,564 or 6.45 % over the prior year ended December 31, 2005. Operating
revenues for the year ended December 31, 2007, the year ended December 31,
2006
and the year ended December 31, 2005, each of which were comprised entirely
of
interest income, were $31,911,117, $33,044,255 and $35,342,570, respectively.
The decrease in 2007 was mainly due to lower interest rates on newly acquired
Mortgage Assets as well as a lower average outstanding balance of Promissory
notes in 2007 of $415,817,379 compared to $421,443,401 in 2006. Because the
Company has elected to be taxed as a REIT, no income tax was recorded during
the
year except for non-resident income taxes withheld.
Ninety
percent of revenues were derived from the Mortgage Assets issued by NB Finance.
The Mortgage Assets issued by NB Finance are collateralized by the Mortgage
Loans that consist of 51 pools of residential first mortgages insured by CMHC
and that are secured by real property located in Canada. The balance of the
revenues resulted from interest on a bank account and term
deposits.
Expenses
for the year ended December 31, 2007, the year ended December 31, 2006 and
the
year ended December 31, 2005 totalled $1,891,785, $1,850,217 and $1,997,968,
respectively. Servicing and advisory fees for the year ended December 31, 2007,
the year ended December 31, 2006 and the year ended December 31, 2005 totalled
$1,572,053, $1,590,939 and $1,614,444, respectively. Pursuant to the Servicing
Agreement and the Advisory Agreement, the Bank performs all necessary operations
in connection with administering the Mortgage Assets issued by NB Finance and
the Mortgage Loans. Other professional fees include payment to the transfer
agent, external accounting fees and miscellaneous expenses.
During
the year ended December 31, 2007, the Board of Directors authorized dividends
of, in the aggregate, $25,079,700 on Preferred Stock (i.e., Senior Preferred
Shares and the Series A Preferred Shares and, accordingly, the Depository
Shares) and a dividend of $6,000,000 on Common Stock.
Capital
Resources and Liquidity
The
Company’s revenues are derived primarily from interest payments on the Mortgage
Assets. As of December 31, 2007, $450 million of Mortgage Assets issued by
NB
Finance were over-collateralized by C$641 million ($647 million) of Mortgage
Loans. The Company believes that the amounts generated from the payment of
interest and principal on such Mortgage Loans will provide more than sufficient
funds to make full payments with respect to the Mortgage Assets issued by NB
Finance and that such payments will provide the Company with sufficient funds
to
meet its operating expenses and to pay quarterly dividends on the Senior
Preferred Shares and the Series A Preferred Shares and, accordingly, the
Depository Shares. To the extent that the cash flow from its Mortgage Assets
exceeds those amounts, the Company will use the excess to fund the acquisition
of additional Mortgage Assets and make distributions on the Common
Stock.
The
Company does not require any capital resources for its operations and,
therefore, it does not expect to acquire any capital assets in the foreseeable
future.
-11-
As
of
December 31, 2007, the Company had cash resources of $16,887,030, or 3.53%
of
total assets compared to $90,211,545 or 18.81% of total assets as of December
31, 2006. It is expected that the Company will invest in additional Mortgage
Assets when cash resources reach 20% of total assets. The liquidity level is
sufficient for the Company to pay fees and expenses pursuant to the Servicing
Agreement and the Advisory Agreement.
The
Company’s principal short-term and long-term liquidity needs are to pay
quarterly dividends on the Senior Preferred Shares and the Series A Preferred
Shares and, accordingly, the Depository Shares, to pay fees and expenses of
the
Bank pursuant to the Servicing Agreement and the Advisory Agreement, and to
pay
expenses of advisors, if any, of the Company.
Disclosure
of Contractual Obligations
The
Company does not have any indebtedness (current or long-term), material capital
expenditures, balloon payments or other payments due on other long-term
obligations. No negative covenants have been imposed on the
Company.
Off-Balance
Sheet Accounting
The
Company does not have any off-balance sheet obligations.
Critical
Accounting Policies
In
December 2001, the Securities and Exchange Commission requested that all
registrants discuss their most "critical accounting policies" in management's
discussion and analysis of financial condition and results of operations. The
SEC indicated that a "critical accounting policy" is one which is both important
to the portrayal of the Company's financial condition and results and requires
management's most difficult, subjective or complex judgments, often as a result
of the need to make estimates about the effect of matters that are inherently
uncertain. We believe, based on our current business, that there are no critical
accounting policies in connection with the preparation of the financial
statements of the Company.
Recently
Issued Accounting Pronouncements
In
June
2006, the FASB issued FASB Interpretation No. 48, Accounting
for Uncertainty in Income Taxes –
an
interpretation of FASB Statement No. 109
("FIN
48"), which clarifies the accounting for uncertainty in tax positions. This
Interpretation requires that the Company recognize in its financial statements,
the impact of a tax position, if that position is more likely than not of being
sustained on audit, based on the technical merits of the position. The
provisions of FIN 48 are effective as of the beginning of the 2007 fiscal year,
with the cumulative effect, if any, of the change in accounting principle
recorded as an adjustment to opening retained earnings. The Company adopted
FIN
48 on January 1, 2007, and such adoption did not have any impact on the
Company’s consolidated financial position and results of operations, because the
Company qualified as a REIT, distributed the necessary amount of taxable income
and therefore, incurred no income tax expense.
In
February 2007, the FASB issued SFAS No. 159, "The Fair Value Option for
Financial Assets and Financial Liabilities" ("SFAS 159"), which allows
measurement of specified financial instruments, warranty and insurance contracts
at fair value on a contract by contract basis, with changes in fair value
recognized in earnings in each period. SFAS 159 is effective at the beginning
of
the fiscal year that begins after November 15, 2007, and will be effective
for
the Company in fiscal 2008. The Company does not believe that the implementation
of this standard will have a material impact on its financial position or
results of operations.
On
September 15, 2006, FASB issued FASB Statement No.157, "Fair Value Measurements"
("FAS 157"), which establishes a framework for measuring fair value in GAAP,
and
is applicable to other accounting pronouncements where fair value is considered
to be the relevant measurement attribute. FAS 157 also expands disclosures
about
fair value measurements and will be effective for the Company on
January 1, 2008. However, the Company does not believe that this
standard will have a material impact on its financial reporting and
disclosure.
-12-
ITEM
7A.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Any
market risk to which the Company would be exposed would result from fluctuations
in: (a) interest rates and (b) currency exchange rates affecting the interest
payments received by the Company in respect of the Mortgage Assets issued by
NB
Finance. Since the Mortgage Assets are significantly over collateralized by
the
Mortgage Loans, interest rate fluctuations should not present significant market
risk. The Company expects that the interest and principal generated by the
Mortgage Loans should enable full payment by NB Finance of all of its
obligations as they come due. Since the Mortgage Loans are guaranteed by a
fixed
ratio of exchange predetermined on the date of purchase and applicable until
the
maturity of the Mortgage Loans pursuant to the Mortgage Loan Assignment
Agreement, fluctuations in currency exchange rates should not present
significant market risk.
ITEM
8.
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The
financial statements are contained on pages F-1 through F-10 of this Form
10-K.
Selected
Quarterly Financial Data (Unaudited)
|
Quarter
Ended
March
31,
2007
|
Quarter
Ended
June
30,
2007
|
Quarter
Ended
September
30,
2007
|
Quarter
Ended
December
31,
2007
|
||||||||||
|
Statement
of Income Data:
|
|||||||||||||
|
Operating
Revenues
|
$
|
7,915,138
|
$
|
8,373,052
|
$
|
7,752,169
|
$
|
7,870,758
|
|||||
|
Income
from Operations
|
$
|
7,490,193
|
$
|
7,894,397
|
$
|
7,275,316
|
$
|
7,359,426
|
|||||
|
Income
from Operations / Common Share
|
$
|
74,902
|
$
|
78,944
|
$
|
72,753
|
$
|
73,594
|
|||||
|
Quarter
Ended
March
31,
2006
|
Quarter
Ended
June
30,
2006
|
Quarter
Ended
September
30,
2006
|
Quarter
Ended
December
31,
2006
|
||||||||||
|
Statement
of Income Data:
|
|||||||||||||
|
Operating
Revenues
|
$
|
8,582,146
|
$
|
8,418,561
|
$
|
8,053,293
|
$
|
7,990,255
|
|||||
|
Income
from Operations
|
$
|
8,112,007
|
$
|
7,938,669
|
$
|
7,590,538
|
$
|
7,552,824
|
|||||
|
Income
from Operations / Common Share
|
$
|
81,120
|
$
|
79,387
|
$
|
75,905
|
$
|
75,528
|
|||||
ITEM
9.
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE
None
ITEM
9A.
CONTROLS AND PROCEDURES
Based
on
their evaluation as of the end of the period covered by this report, the
Company’s President and Chief Financial Officer have concluded that the
Company’s disclosure controls and procedures (as defined in Rule 13a-15(e) under
the Securities Exchange Act of 1934, as amended (the “Exchange Act”)), are
effective to ensure that information required to be disclosed by the Company
in
reports that it files or submits under the Exchange Act is recorded, processed,
summarized and reported within the time periods specified in the Securities
and
Exchange Commission’s rules and forms.
-13-
The
management of the Company is responsible for establishing and maintaining
adequate internal control over financial reporting. Internal control over
financial reporting is a process to provide reasonable assurance regarding
the
reliability of the Company’s financial reporting for external purposes in
accordance with accounting principles generally accepted in the United States
of
America. Internal control over financial reporting includes maintaining records
that in reasonable detail accurately and fairly reflect the Company’s
transactions and dispositions of the assets of the Company; providing reasonable
assurance that transactions are recorded as necessary for preparation of the
Company’s financial statements in accordance with generally accepted accounting
principles; providing reasonable assurance that receipts and expenditures are
made in accordance with authorizations
of management and the directors of the Company; and providing reasonable
assurance that unauthorized acquisition, use or disposition of company assets
that could have a material effect on the Company’s financial statements would be
prevented or detected on a timely basis. Because of its inherent limitations,
internal control over financial reporting is not intended to provide absolute
assurance that a misstatement of the Company’s financial statements would be
prevented or detected.
Management
conducted an evaluation of the effectiveness of the Company’s internal control
over financial reporting based on the framework and criteria established in
Internal Control — Integrated Framework, issued by the Committee of Sponsoring
Organizations of the Treadway Commission. This evaluation included review of
the
documentation of controls, evaluation of the design effectiveness of controls,
testing of the operating effectiveness of controls and a conclusion on this
evaluation. Based on this evaluation, management concluded that the Company’s
internal control over financial reporting was effective as of December 31,
2007.
During
the fiscal year ended December 31, 2007, there were no changes in the Company’s
internal control over financial reporting that have materially affected or
are
reasonably likely to materially affect the Company’s internal control over
financial reporting (as defined in Rules 13(a)-15(f) and 15d-14(f) under the
Securities Exchange Act of 1934).
This
annual report does not include an attestation report of the Company’s registered
public accounting firm regarding internal control over financial reporting.
Management’s report was not subject to attestation by the Company’s registered
public accounting firm pursuant to rules of the Securities and Exchange
Commission that permit the Company to provide only management’s report in this
annual report.
ITEM
9B.
OTHER INFORMATION
None
-14-
PART
III
ITEM
10.
DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
Directors
and Executive Officers
The
following table sets forth our directors and executive officers as of
December 31, 2007:
|
Name
|
Age
|
Position
and Offices Held
|
Director Since
|
|||
|
Christian
Dubé
|
51
|
Director
and Member of the Audit Committee
|
2001
|
|||
|
Donna
Goral
|
50
|
Director,
Chairman of the Board and President
|
2001
|
|||
|
Alain
Michel
|
58
|
Director
and Chairman of the Audit Committee
|
1997
|
|||
|
Monique
Baillergeau
|
49
|
Director
and Vice President
|
2003
|
|||
|
Hoda
Abdelmessih
|
53
|
Director
and Vice President
|
2004
|
|||
|
Vincent
Lima
|
50
|
Director
and Vice President
|
2006
|
|||
|
Jean
Dagenais
|
49
|
Chief
Financial Officer
|
N/A
|
James
J.
Hanks, Jr. (Secretary), Vanessa Fontana (Assistant Secretary), Martin-Pierre
Boulianne (Assistant Secretary), Peter Greco (Compliance Officer) and Martin
Ouellet (Vice-President) are the only other officers of the Company. André
Belzile was Director and Member of the Audit Committee since 1999. He resigned
on August 22, 2007. The following is a summary of the experience of the
directors and officers of the Company:
Since
September 2005, Mr. Michel has been Chairman of the Board of the Cari-All Group.
Cari-All Group is a North American leader in shopping carts manufacturing.
From
2001 until 2005, Mr. Michel was a business consultant for the Caisse
de dépôt et placement du Québec, a
financial institution that manages public and private pension and insurance
funds. From 1994 until 2001, he was Senior Vice-President and Chief Financial
Officer of Le Groupe Vidéotron Ltée. From 1992 until 1994, he was Vice-President
of Finance and Treasurer of Le Groupe Vidéotron Ltée. Mr.
Michel was director of Cable Satisfaction International Inc., which, in July
2003, applied for protection under the Companies' Creditors Arrangement Act
(Canada). The plan of arrangement and reorganisation proposed by Cable
Satisfaction International Inc. was unanimously approved at the meeting of
the
company's creditors held on March 16, 2004 and was sanctioned by the Quebec
Superior Court on March 19, 2004. He
currently serves on the Board of Directors for Rona Inc., IPL Inc. and
DiagnoCure Inc.
Since
May
2004, Mr. Dubé has been Vice-President and Chief Financial Officer of Cascades
Inc., a leader in the manufacturing of packaging products and tissue paper.
From
1998 until 2004, Mr. Dubé occupied the position of Senior Vice-President and
Chief Financial Officer of Domtar Inc. He currently serves on the Board of
Directors for Heroux-Devtek Inc., Maetta and Reno de Medici.
-15-
As
of
March 21, 2006, Ms. Goral was elected President and Chairman of the Board of
Directors of NB Capital Corporation. She is also a director of NB Finance,
Ltd. and holds the position of Vice-President - Taxation, USA Operations for
the
Bank since 1992. Ms. Goral’s prior tax experience includes positions with KPMG
Peat Marwick and Ernst & Whinney. She is a Certified Public Accountant (CPA)
and a member of the American Institute of Certified Public Accountants and
the
New York State Society of CPAs.
Ms.
Abdelmessih joined the Bank in 1993 as the Treasury Manager. In 1996, Ms.
Abdelmessih assumed the responsibility of Treasury Control and in 1999 was
promoted to Assistant Vice President of Treasury. In 2001, the Bank decided
to
repatriate all treasury back office functions to Montreal and Ms. Abdelmessih
was appointed as the Project Manager for New York to decommission the back
office. With the sale of the loan portfolio to PNC, Ms. Abdelmessih's
mandate changed, she became a key person in ensuring the conversion of the
loan
system that would support all cross border loans administered in New
York.
Ms.
Baillergeau was appointed Director of NB Capital and NB Finance, Ltd. in May
2003. She has been with the Bank New York branch since February 1986. In 1998,
she was assigned to manage the Operations of the London branch. In May 2003,
she
accepted the position of Vice President in charge of Operations and
Administration in New York.
Mr.
Lima
was appointed Director of NB Capital in March 2006. Mr. Lima joined the
Bank in December 1987, and over the years has held several positions such as
Assistant Controller, Assistant Vice President/Credit Analyst - Commercial
Financing Group, and Vice President - Cross Border Financing Group. He started
his career in 1978 with a major international bank in the Money Transfer/Cash
Management Dept., and over the years has held various positions in both
operations and accounting with various international banks.
Mr.
Dagenais joined the Bank in 1990 as Manager and Chief Accountant and was
promoted to Vice-President in 1997. Since June 2007, he was appointed Senior
Vice-President and Chief Financial Officer. As such, he is responsible for
investors’ relation, budget and regulatory capital planning, financial
reporting, taxation and accounting. He began is career in 1980 as external
auditor with a major international accounting firm. From 1985 to 1990, he held
various positions in accounting and financial reporting with large corporations.
He studied at the University of Sherbrooke, where he obtained a Bachelor in
Administration. He was admitted to the Order of Certified Management Accountants
in 1982 and to the Order of Chartered Accountants in 1983.
Code
of
Business Conduct and Ethics
The
Company has adopted a Code of Business Conduct and Ethics (as an exhibit to
this
Form 10-K) (the “Code of Business Conduct and Ethics”) that applies to all of
the Company’s directors and officers as well as employees. No waivers to the
Code of Business Conduct and Ethics have been granted by the Company. The
Company undertakes to provide a copy of this Code of Business Conduct and Ethics
without charge, upon request. Investors may send a request for a copy of the
Code of Business Conduct and Ethics in writing to the Company’s principal
executive office by certified mail with a self-addressed envelope attached
to
such request.
In
2006,
the Company named Mr. Peter Greco the Compliance Officer of the Company in
connection with the Company’s effort to keep open lines of dialogue between
management and employees.
Director
Independence
Mr.
Michel and Mr. Dubé are Independent Directors
which
are defined under the Advisory Agreement to mean those directors who are not
current officers or employees of the Company or current directors, officers
or
employees of the Bank or any affiliate of the Bank. They comply as well to
the
independence definition provided by the corporate governance rules of the New
York Stock Exchange. Mr. André Belzile was also an Independent Director and has
resigned on August 22, 2007.
Board
Meetings and Committees
The
Board
of Directors met 4 times during 2007. All directors attended 75% or more
meetings of the Board and the Audit Committee of the Board on which such
directors served.
-16-
In
accordance to the Advisory Agreement, the Bank bears all expenses of the
personnel employed by the Bank who provide the day-to-day services to the
Company. Therefore, the Company does not have a compensation committee. All
of
the shares of the Company’s common stock are owned by the Bank. The Company does
not have a nominating committee. The Company has an Audit Committee, comprised
of independent directors.
Director
Compensation
The
Company pays the Independent Directors fees for their services. The Independent
Directors receive annual compensation of $10,000 plus a fee of $750 for
attendance (in person or by telephone) at each meeting of the Board of
Directors. The Company also pays the directors who comprise the Audit Committee
a fee for their additional services. The Audit Committee is comprised of the
Independent Directors. Each Independent Director receives annual compensation
of
$1,500 per year plus a fee of $750 for attendance (in person or by telephone)
at
each meeting of the Audit Committee. Additionally, Mr. Michel receives annual
compensation of $1,000 for acting as Chairman of the Audit Committee.
The
Company does not pay any compensation to its directors who are not Independent
Directors or
to its
executive officers or officers. They receive their compensation and benefits
solely from the Bank pursuant to the Advisory Agreement.
Audit
Committee
The
Audit
Committee of the Company consisted of three members until August 22, 2007,
date
on which Mr. André Belzile resigned and since that date, the Audit Committee of
the Company consists of the two following members: Mr. Alain Michel (Chairman
of
the Audit Committee) and Mr. Christian Dubé. On May 14, 2003,
and
every year thereafter,
the
Board of Directors determined that all of the members of the Audit Committee
are
Audit Committee Financial Experts and are independent of the Company and of
the
Bank. They
comply as well to the independence definition provided by the corporate
governance rules of the New York Stock Exchange. No member of the Audit
Committee is relying on an exemption from Rule 10A-3 of the Exchange Act. The
Audit Committee has a written charter, which is filed as Exhibit 99.1.
The
Company submitted a certification regarding certain corporate governance matters
to the New York Stock Exchange pursuant to the rules applicable to domestic
U.S.
issuers. The certification was unqualified.
Report
of the audit committee
The
audit
committee has reviewed and discussed the audited financial statements of the
Company with the Company’s management. The audit committee has discussed with
the independent auditors the matters required to be discussed by the statement
on Auditing Standards No. 61, as amended. The audit committee has received
the
written disclosures and the letter from the independent accountants required
by
Independence Standards Board Standard No. 1 (Independence Standards Board
Standard No. 1, Independence Discussions with Audit Committees), and has
discussed with the independent accountant the independent accountant’s
independence. Based on the review and discussions, the audit committee
recommended to the board of directors of the Company that the audited financial
statements be included in the Company's annual report on Form
10-K
for the
fiscal year ended December 31, 2007.
|
Date:
March 17, 2008
|
|
|
Alain
Michel (Chairman)
|
|
|
Christian
Dubé
|
-17-
Section
16(a) Beneficial Ownership Reporting Compliance
Section
16(a) of the Securities Exchange Act of 1934, as amended, requires the Company's
officers and directors and certain other persons to file timely certain reports
regarding ownership of, and transactions in, the Company's securities with
the
Securities and Exchange Commission. Copies of the required filings must also
be
furnished to the Company.
Based
solely on its review of such forms received by it, or written representations
from certain reporting persons, the Company believes that during the year ended
December 31, 2007, all reports for the Company’s executive officers and
directors that were required to be filed under Section 16 of the Securities
Exchange Act of 1934 were timely filed.
-18-
ITEM
11.
EXECUTIVE COMPENSATION
The
services of executive officers of the Company are provided pursuant to the
Advisory Agreement between the Bank and the Company (see "Item 1: Business
-
Advisory Agreement"). The advisory fee paid by the Company to the Bank in
2007 was $100,000. Accordingly, no executive officer of the Company was paid
more than $100,000 of compensation for the fiscal year ended December 31, 2007
that would be attributable to services performed for the Company.
Summary
Compensation Table (1)
|
Name
|
Year
|
Salary
|
Bonus
|
Stock
Awards
|
Option
Awards
|
Non-Equity
Incentive
Plan
Compen-
sation
|
Change in
Pension
Value and
Non-
Qualified
Deferred
Compen-
sation
Earnings
|
All Other
Compen-
sation
|
Total
|
|||||||||||||||||||
|
Donna
Goral, Chairman of the
|
2007
|
|
$1,226
|
|
$232
|
-
|
-
|
-
|
|
$108
|
|
$34
|
|
$1,600
|
||||||||||||||
|
Board
and President
|
2006
|
|
$2,362
|
|
$661
|
-
|
-
|
-
|
|
$483
|
|
$65
|
(2)
|
|
$3,571
|
|||||||||||||
|
Jean
Dagenais, Chief
|
2007
|
C$1,334
|
C$229
|
C$11
|
C$2,430
|
-
|
C$1,806
|
C$
82
|
C$5,892
|
|||||||||||||||||||
|
Financial
Officer
|
2006
|
C$1,594
|
C$860
|
C$15
|
C$
531
|
-
|
C$
800
|
C$133
|
C$3,933
|
|||||||||||||||||||
| (1) |
This
table represents the
compensation paid by the Bank to Ms. Goral and Mr. Dagenais for all
services rendered in all capacities to the
Company.
|
| (2) |
In
the Form 10-K Report for the fiscal year ended December 31, 2006,
the
amount under “All Other Compensation” was $374. This amount was added by
inadvertence.
|
Director
Compensation
|
Name
|
Fees
Earned or
Paid in
Cash(1)
($)
|
Stock
Awards
($)
|
Option
Awards
($)
|
Non-Equity
Incentive Plan
Compensation
($)
|
Change in
Pension Value
and
Nonqualified
Deferred
Compensation
Earnings
|
All Other
Compensation
($)
|
Total
($)
|
|||||||||||||||
|
Alain
Michel
|
16,750
|
-
|
-
|
-
|
-
|
-
|
16,750
|
|||||||||||||||
|
Christian
Dubé
|
17,500
|
-
|
-
|
-
|
-
|
-
|
17,500
|
|||||||||||||||
|
André
Belzile
|
13,125
|
-
|
-
|
-
|
-
|
-
|
13,125
|
|||||||||||||||
(1)
Please see “Item 10 – Director Compensation” for additional information on
director compensation. As for the other directors, Ms. Baillergeau, Ms.
Abdelmessih, Ms. Goral and Mr. Lima, they do not receive additional compensation
for services provided as a director.
In
accordance to the Advisory Agreement, the Bank bears all expenses of the
personnel employed by the Bank who provide the day-to-day services to the
Company. Therefore, the Company does not have a compensation
committee.
-19-
ITEM
12.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER MATTERS
The
Common Stock is the only voting security of the Company issued and outstanding.
As of December 31, 2007, 100 shares of Common Stock were issued and outstanding
and 100% were beneficially owned directly by the Bank. The Bank’s address is
National Bank Tower, 600 de La Gauchetière West, Montreal, Quebec, H3B 4L2,
Canada. No officer or director beneficially owns more than five percent of
any
class of the Company's securities.
The
Company does not maintain any equity compensation plans for its executive
officers.
ITEM
13.
CERTAIN RELATIONSHIPS, RELATED TRANSACTIONS AND DIRECTOR
INDEPENDENCE
The
Bank
administers the day-to-day operations of the Company pursuant to the Advisory
Agreement. See "Business-Advisory Agreement" under Item 1 of Part 1. The Bank
also services the Mortgage Loans pursuant to the Servicing Agreement. See
"Business-Servicing Agreement" under Item 1 of Part 1. As for Director
Independence, see "Director Independence" under Item 10 of Part
III.
ITEM
14.
PRINCIPAL ACCOUNTING FEES AND SERVICES
Audit
Fees
Deloitte
& Touche LLP’s aggregate fees billed for professional services rendered for
the audit of the Company’s annual financial statements for the 2007 fiscal year
and the review of the quarterly financial statements for the 2007 fiscal year
were $46,000 (compared to $44,000 for 2006). The engagement of Deloitte &
Touche LLP for the 2007 fiscal year and the scope of audit, audit-related and
tax services were pre-approved by the Company’s Audit Committee.
Audit-Related
Fees
Deloitte
& Touche LLP’s aggregate fees billed for audit-related professional services
(special report on procedures performed on the mortgage loans) for the 2007
fiscal year were $6,200 (compared to $6,000 for 2006).
Tax
Fees
Deloitte
& Touche LLP’s aggregate fees for all tax related services for the 2007
fiscal year were $42,000 for tax compliance and consulting services (compared
to
$40,000 for 2006).
The
Company’s Audit Committee pre-approves the services – both permitted audit
services and permitted non-audit services – of the external auditor before
the external auditor is engaged by the Company to render such permitted audit
services or permitted non-audit services. The Audit Committee evidences its
pre-approval by resolution of the Audit Committee.
-20-
PART
IV
ITEM
15.
EXHIBITS, FINANCIAL STATEMENT SCHEDULES
| (a) |
The
following documents are filed as part of this
report:
|
|
(1)
|
The
report of independent registered chartered accountants and financial
statements appearing in Item 8.
|
|
(2)
|
The
Company is not filing separately financial statement schedules because
of
the absence of conditions under which they are required or because
the
required information is included in the financial statements or the
notes
thereto.
|
|
(3)
|
The
exhibits required by this item are listed in the Exhibit Index which
appears elsewhere in this Form 10-K and is incorporated herein by
reference. The Company is not a party to any management contracts
or
compensation plans or arrangements required to be filed as exhibits
to
this Form 10-K.
|
|
(b)
|
None
|
|
(c)
|
Each
Series A share
is exchangeable, upon the occurrence of certain events, for one newly
issued 8.45% Noncumulative First Preferred Share, Series Z, of National
Bank of Canada. National Bank of Canada is the parent company of
NB Capital Corporation and the holder of 100% of the common shares of
NB Capital Corporation. In light of this exchangeable feature, the
audited
consolidated financial statements for the National Bank of Canada
for the
years ended October 31, 2007 and October 31, 2006, as well as Independent
Auditors' Report, are filed as part of this annual report on Form
10-K.
|
-21-
SIGNATURES
Pursuant
to the requirements of Section 13 or 15(d) of the Securities Exchange Act of
1934, the Registrant has duly caused this report to be signed on its behalf
by
the undersigned, thereunto duly authorized, on the 28th
day of
March, 2008.
|
NB
CAPITAL CORPORATION
|
|||
|
By:
|
/s/
Donna Goral
|
||
|
Donna
Goral
|
|||
|
Chairman
of the Board and President
|
|||
|
(Principal
Executive Officer)
|
|||
|
By:
|
/s/
Jean Dagenais
|
||
|
Jean
Dagenais
|
|||
|
Chief
Financial Officer
|
|||
|
(Principal
Financial Officer)
|
|||
Pursuant
to the requirements of the Securities Exchange Act of 1934, this report has
been
signed below by the following persons on behalf of the Registrant and in the
capacities indicated on the 28th
day of
March, 2008.
|
By:
|
/s/
Donna Goral
|
By:
|
/s/
Alain Michel
|
||
|
Donna
Goral
|
Alain
Michel
|
||||
|
Director
|
Director
|
||||
|
By:
|
/s/
Hoda Abdelmessih
|
By:
|
/s/
Christian Dubé
|
||
|
Hoda
Abdelmessih
|
Christian
Dubé
|
||||
|
Director
|
Director
|
||||
|
By:
|
/s/
Monique Baillergeau
|
||||
|
Monique
Baillergeau
|
|||||
|
Director
|
|||||
|
By:
|
/s/
Vincent Lima
|
||||
|
Vincent
Lima
|
|||||
|
Director
|
|||||
-22-
INDEX
TO EXHIBITS
|
Description
|
||
|
3.1
|
Articles
of Incorporation and Articles of Amendment and Restatement and Articles
Supplementary of NB Capital Corporation*
|
|
|
3.2
|
Bylaws
of NB Capital Corporation*
|
|
|
4.1
|
Registration
Rights Agreement dated as of September 3, 1997 by and among NB Capital
Corporation, National Bank of Canada and Merrill Lynch, Pierce, Fenner
& Smith Incorporated*
|
|
|
10.1
|
Advisory
Agreement dated March 19, 2007 between National Bank of Canada and
NB
Capital Corporation**
|
|
|
10.2
|
Servicing
Agreement dated June 28, 2007 between National Bank of Canada and
NB
Finance, Ltd.**
|
|
|
10.3
|
Loan
Agreement dated as of September 3, 1997 between NB Finance, Ltd.
and NB
Capital Corporation*
|
|
|
10.4
|
Custodial
Agreement dated as of September 3, 1997 between National Bank of
Canada
and NB Capital Corporation*
|
|
|
10.5
|
Deed
of Sale of Mortgage Loans dated September 3, 1997 between National
Bank of
Canada and NB Finance, Ltd.*
|
|
|
10.6
|
Mortgage
Loan Assignment Agreement dated September 3, 1997 among National
Bank of
Canada, NB Capital Corporation and NB Finance, Ltd.*
|
|
|
10.7
|
Promissory
Notes representing the 16 hypothecation loans executed by NB Finance,
Ltd.
in favor of NB Capital Corporation*
|
|
|
10.8
|
Amendment
to Deposit Agreement made as of January 1, 2008 among NB Capital
Corporation, National Bank of Canada, Computershare Inc. and Computershare
Trust Company, N.A. ***
|
|
|
10.9
|
First
Supplemental Servicing Agreement dated December 4, 1998 between National
Bank of Canada and NB Capital Corporation*
|
|
|
10.10
|
Loan
Agreement dated as of December 4, 1998 between NB Finance, Ltd. and
NB
Capital Corporation*
|
|
|
10.11
|
Custodial
Agreement dated as of December 4, 1998 between NB Capital Corporation
and
National Bank of Canada*
|
|
|
10.12
|
Amended
and Restated Servicing Agreement dated June 28, 2001 between National
Bank
of Canada and NB Capital Corporation.*
|
|
|
10.13
|
Deed
of Sale of Mortgage Loans dated December 4, 1998 between National
Bank of
Canada and NB Finance, Ltd.*
|
|
|
10.14(i)
|
Mortgage
Loan Assignment Agreement dated as of December 4, 1998 among NB Finance,
Ltd., NB Capital Corporation and National Bank of
Canada*
|
-23-
|
10.14(ii)
|
Mortgage
Loan Assignment Agreement dated as of December 4, 1998 among NB Finance,
Ltd., NB Capital Corporation and National Bank of
Canada*
|
|
|
10.15(i)
|
Promissory
Note representing $25,836,597.23 executed by NB Finance, Ltd. in
favor of
NB Capital Corporation*
|
|
|
10.15(ii)
|
Promissory
Note representing $29,880,126.51 executed by NB Finance, Ltd. in
favor of
NB Capital Corporation*
|
|
|
10.16
|
Mortgage
Loan Assignment Agreement dated as of September 7, 1999 among NB
Finance,
Ltd., NB Capital Corporation and National Bank of
Canada*
|
|
|
10.17
|
Promissory
Notes representing $85,989,203.22 executed by NB Finance, Ltd. in
favor of
NB Capital Corporation*.
|
|
|
10.18
|
Mortgage
Loan Assignment Agreement dated as of April 14, 2000 among NB Finance,
Ltd., NB Capital Corporation and National Bank of
Canada*
|
|
|
10.19
|
Promissory
Notes representing $98,836,341.23 executed by NB Finance, Ltd. in
favor of
NB Capital Corporation*
|
|
|
10.20
|
Mortgage
Loan Assignment Agreement dated as of September 28, 2000 among NB
Finance,
Ltd., NB Capital Corporation and National Bank of
Canada*
|
|
|
10.21
|
Promissory
Notes representing $67,323,437.74 executed by NB Finance, Ltd. in
favor of
NB Capital Corporation*
|
|
|
10.22
|
Mortgage
Loan Assignment Agreement dated as of January 30, 2001 among NB Finance,
Ltd., NB Capital Corporation and National Bank of
Canada*
|
|
|
10.23
|
Promissory
Notes representing $107,179,964.89 executed by NB Finance, Ltd. in
favor
of NB Capital Corporation*
|
|
|
10.24
|
Mortgage
Loan Assignment Agreement dated as of June 12, 2001 among NB Finance,
Ltd., NB Capital Corporation and National Bank of
Canada*
|
|
|
10.25
|
Promissory
Notes representing $121,357,226.22 executed by NB Finance, Ltd. in
favor
of NB Capital Corporation*
|
|
|
10.26
|
Mortgage
Loan Assignment Agreement dated as of September 24, 2001 among NB
Finance,
Ltd., NB Capital Corporation and National Bank of
Canada*
|
|
|
10.27
|
Promissory
Notes representing $55,963,732.07 executed by NB Finance, Ltd. in
favor of
NB Capital Corporation*
|
|
|
10.28
|
Mortgage
Loan Assignment Agreements dated as of January 25, 2002 among NB
Finance,
Ltd., NB Capital Corporation and National Bank of
Canada*
|
|
|
10.29
|
Promissory
Notes representing $71,866,079.87 executed by NB Finance, Ltd. in
favor of
NB Capital Corporation*
|
|
|
10.30
|
Mortgage
Loan Assignment Agreements dated as of June 20, 2002 among NB Finance,
Ltd., NB Capital Corporation and National Bank of
Canada*
|
|
|
10.31
|
Promissory
Notes representing $64,221,362.98 executed by NB Finance, Ltd. in
favor of
NB Capital Corporation*
|
-24-
|
10.32
|
Mortgage
Loan Assignment Agreements dated as of December 16, 2002 among NB
Finance,
Ltd., NB Capital Corporation and National Bank of
Canada*
|
|
|
10.33
|
Promissory
Notes representing $52,054,168.88 executed by NB Finance, Ltd. in
favor of
NB Capital Corporation*
|
|
|
10.34
|
Mortgage
Loan Assignment Agreements dated as of May 27, 2003 among NB Finance,
Ltd., NB Capital Corporation and National Bank of
Canada*
|
|
|
10.35
|
Promissory
Notes representing $70,420,135.45 executed by NB Finance, Ltd. in
favor of
NB Capital Corporation*
|
|
|
10.36
|
Mortgage
Loan Assignment Agreements dated as of October 21, 2003 among NB
Finance,
Ltd., NB Capital Corporation and National Bank of
Canada*
|
|
|
10.37
|
Promissory
Notes representing $106,552,720.44 executed by NB Finance, Ltd. in
favor
of NB Capital Corporation*
|
|
|
10.38
|
Mortgage
Loan Assignment Agreements dated as of April 28, 2004 among NB Finance,
Ltd., NB Capital Corporation and National Bank of
Canada*
|
|
|
10.39
|
Promissory
Notes representing $76,053,456.93 executed by NB Finance, Ltd. in
favor of
NB Capital Corporation*
|
|
|
10.40
|
Mortgage
Loan Assignment Agreements dated as of August 26, 2004 among NB Finance,
Ltd., NB Capital Corporation and National Bank of
Canada*
|
|
|
10.41
|
Promissory
Notes representing $94,559,444.49 executed by NB Finance, Ltd. in
favor of
NB Capital Corporation*
|
|
|
10.42
|
Mortgage
Loan Assignment Agreements dated as of February 24, 2005 among NB
Finance,
Ltd., NB Capital Corporation and National Bank of
Canada*
|
|
|
10.43
|
Promissory
Notes representing $73,037,930.00 executed by NB Finance, Ltd. in
favor of
NB Capital Corporation*
|
|
|
10.44
|
Mortgage
Loan Assignment Agreement dated as of August 29, 2005 among NB Finance,
Ltd., NB Capital Corporation and National Bank of
Canada*
|
|
|
10.45
|
Promissory
Note representing $97,736,747.47 executed by NB Finance, Ltd. in
favor of
NB Capital Corporation*
|
|
|
10.46
|
Mortgage
Loan Assignment Agreements dated as of February 22, 2006 among NB
Finance,
Ltd., NB Capital Corporation and National Bank of
Canada*
|
|
|
10.47
|
Promissory
Notes representing a total of $82,898,199.20 executed by NB Finance,
Ltd.
in favor of NB Capital Corporation*
|
|
|
10.48
|
Mortgage
Loan Assignment Agreements dated as of August 17, 2006 among NB Finance,
Ltd., NB Capital Corporation and National Bank of
Canada*
|
|
|
10.49
|
Promissory
Notes representing a total of $91,705,784.05 executed by NB Finance,
Ltd.
in favor of NB Capital Corporation*
|
|
|
10.50
|
Mortgage
Loan Assignment Agreements dated as of February 22, 2007 among NB
Finance,
Ltd., NB Capital Corporation and National Bank of
Canada**
|
-25-
|
10.51
|
Promissory
Notes representing a total of $118,362,791.25 executed by NB Finance,
Ltd.
in favor of NB Capital Corporation**
|
|
|
10.52
|
Mortgage
Loan Assignment Agreement dated as of April 25, 2007 among NB Finance,
Ltd., NB Capital Corporation and National Bank of
Canada**
|
|
|
10.53
|
Promissory
Note representing a total of $72,935,607.29 executed by NB Finance,
Ltd.
in favor of NB Capital Corporation**
|
|
|
10.54
|
Mortgage
Loan Assignment Agreements dated as of August 27, 2007 among NB Finance,
Ltd., NB Capital Corporation and National Bank of
Canada**
|
|
|
10.55
|
Promissory
Notes representing a total of $156,493,641.44 executed by NB Finance,
Ltd.
in favor of NB Capital Corporation**
|
|
|
10.56
|
Mortgage
Loan Assignment Agreements dated as of September 26, 2007 among NB
Finance, Ltd., NB Capital Corporation and National Bank of
Canada**
|
|
|
10.57
|
Promissory
Notes representing a total of $33,517,318.32 executed by NB Finance,
Ltd.
in favor of NB Capital Corporation**
|
|
|
10.58
|
Mortgage
Loan Assignment Agreements dated as of December 18, 2007 among NB
Finance,
Ltd., NB Capital Corporation and National Bank of
Canada**
|
|
|
10.59
|
Promissory
Notes representing a total of $82,090,326.44 executed by NB Finance,
Ltd.
in favor of NB Capital Corporation**
|
|
|
14
|
NB
Capital Code of Business Conduct and Ethics**
|
|
|
31.1
|
Certification
of Chairman and President pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002**
|
|
|
31.2
|
Certification
of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002**
|
|
|
32.1
|
Written
Statement of Chairman and President Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002 (18 U.S.C. Section 1350)**
|
|
|
32.2
|
Written
Statement of Chief Financial Officer Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002 (18 U.S.C. Section 1350)**
|
|
|
99.1
|
Audit
Committee Charter**
|
|
*
|
As
previously filed on the Registration Statement on Form S-11 of the
Company
(Registration Statement No.
333-47157).
|
| ** |
As
filed herewith.
|
| *** |
As
previously filed in the Registrant’s 8-K on January 4,
2008.
|
-26-
Financial
statements of
NB
CAPITAL CORPORATION
December
31, 2007, 2006 and 2005, and
Report
of Independent Registered Chartered Accountants
NB
CAPITAL CORPORATION
Table
of contents
| Report of Independent Registered Chartered Accountants |
F-1
|
|
| Balance sheets |
F-2
|
|
| Statements of income |
F-3
|
|
| Statements of stockholders’ equity |
F-4
|
|
| Statements of cash flows |
F-5
|
|
| Notes to the financial statements |
F-6
-
F-10
|
|
Deloitte
& Touche LLP
1
Place Ville Marie
Suite
3000
Montreal
QC H3B 4T9
Canada
Tel:
514-393-7118
Fax:
514-390-4112
www.deloitte.ca
|
Report
of Independent Registered Chartered Accountants
To
the
Board of Directors and Stockholders of
NB
Capital Corporation
We
have
audited the accompanying balance sheets of NB Capital Corporation (the
“Company”) as of December 31, 2007 and 2006, and the related statements of
income, stockholders’ equity, and cash flows for each of the three years in the
period ended December 31, 2007. These financial statements are the
responsibility of the Company’s management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We
conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we
plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. The Company is not required to
have, nor were we engaged to perform, an audit of its internal control over
financial reporting. Our audits included consideration of internal control
over
financial reporting as a basis for designing audit procedures that are
appropriate in the circumstances, but not for the purpose of expressing an
opinion on the effectiveness of the Company’s internal control over financial
reporting. Accordingly, we express no such opinion. An audit also includes
examining, on a test basis, evidence supporting the amounts and disclosures
in
the financial statements, assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In
our
opinion, such financial statements present fairly, in all material respects,
the
financial position of the Company as of December 31, 2007 and 2006, and the
results of its operations and its cash flows for each of the three years in
the
period ended December 31, 2007, in conformity with accounting principles
generally accepted in the United States of America.
Montreal,
Canada
March
7,
2008
F-1
|
NB
CAPITAL CORPORATION
Balance
sheets
as
of December 31 2007 and 2006
(in
U.S. dollars)
|
|||||||
|
2007
|
2006
|
||||||
|
$
|
$
|
||||||
|
Assets
|
|||||||
|
Current
assets
|
|||||||
|
Cash
and cash equivalents
|
16,887,030
|
90,211,545
|
|||||
|
Due
from an affiliated company
|
11,629,979
|
8,800,848
|
|||||
|
Promissory
notes - current portion (Note 3)
|
297,724,722
|
186,717,983
|
|||||
|
Prepaid
expenses
|
35,665
|
34,429
|
|||||
|
Accrued
interest on cash equivalents
|
5,273
|
47,553
|
|||||
|
Total
current assets
|
326,282,669
|
285,812,358
|
|||||
|
Promissory
notes (Note 3)
|
152,355,728
|
193,804,698
|
|||||
|
Total
assets
|
478,638,397
|
479,617,056
|
|||||
|
Liabilities
|
|||||||
|
Current
liabilities
|
|||||||
|
Due
to the parent company
|
419,072
|
364,964
|
|||||
|
Accounts
payable
|
71,691
|
44,090
|
|||||
|
Total
liabilities
|
490,763
|
409,054
|
|||||
|
Stockholders’
equity
|
|||||||
|
Preferred
stock, $0.01 par value per share;
|
|||||||
|
10,000,000
shares authorized,
|
|||||||
|
300,000
Series A shares issued and paid
|
3,000
|
3,000
|
|||||
|
110
Senior preferred shares issued and paid
|
1
|
1
|
|||||
|
Common
stock, $0.01 par value per share;
|
|||||||
|
1,000
shares authorized,
|
|||||||
|
100
shares issued and paid
|
1
|
1
|
|||||
|
Additional
paid-in capital
|
476,761,014
|
476,761,014
|
|||||
|
Retained
earnings
|
1,383,618
|
2,443,986
|
|||||
|
Total
stockholders’ equity
|
478,147,634
|
479,208,002
|
|||||
|
Total
liabilities and stockholders’ equity
|
478,638,397
|
479,617,056
|
|||||
See
accompanying notes to financial statements.
F-2
|
NB
CAPITAL CORPORATION
Statements
of income
years
ended December 31, 2007, 2006 and 2005
(in
U.S. dollars)
|
||||||||||
|
2007
|
2006
|
2005
|
||||||||
|
$
|
$
|
$
|
||||||||
|
Revenue
|
||||||||||
|
Interest
income
|
||||||||||
|
Short-term
investments
|
3,296,010
|
2,494,790
|
1,346,146
|
|||||||
|
Promissory
notes
|
28,611,321
|
30,546,845
|
33,995,506
|
|||||||
|
Bank
interest
|
3,786
|
2,620
|
918
|
|||||||
|
31,911,117
|
33,044,255
|
35,342,570
|
||||||||
|
Expenses
|
||||||||||
|
Legal
|
79,215
|
49,107
|
127,883
|
|||||||
|
Other
professional fees
|
240,517
|
210,171
|
255,641
|
|||||||
|
Servicing
fees
|
1,472,053
|
1,490,939
|
1,514,444
|
|||||||
|
Advisory
fees
|
100,000
|
100,000
|
100,000
|
|||||||
|
1,891,785
|
1,850,217
|
1,997,968
|
||||||||
|
Net
income
|
30,019,332
|
31,194,038
|
33,344,602
|
|||||||
|
Preferred
stock dividends
|
25,079,700
|
25,077,623
|
25,072,145
|
|||||||
|
Income
available to common stockholders
|
4,939,632
|
6,116,415
|
8,272,457
|
|||||||
|
Weighted
average number of common
|
||||||||||
|
shares
outstanding
|
100
|
100
|
100
|
|||||||
|
Earnings
per common share - basic and diluted
|
49,396
|
61,164
|
82,725
|
|||||||
See accompanying notes to financial statements.
F-3
|
NB
CAPITAL CORPORATION
Statements
of stockholders’ equity
years
ended December 31, 2007, 2006 and 2005
(in
U.S. dollars)
|
|||||||||||||||||||
|
Series
A
Preferred Stock |
Senior
Preferred Stock |
Common
Stock |
Additional
Paid-in Capital |
Retained
Earnings |
Total
|
||||||||||||||
|
$
|
$
|
$
|
$
|
$
|
$
|
||||||||||||||
|
Stockholders’
equity as of
|
|||||||||||||||||||
|
December
31, 2004
|
3,000
|
1
|
1
|
476,761,014
|
555,114
|
477,319,130
|
|||||||||||||
|
Net
income
|
-
|
-
|
-
|
-
|
33,344,602
|
33,344,602
|
|||||||||||||
|
Dividends
on senior preferred stock and
|
|||||||||||||||||||
|
Series
A preferred stock
|
-
|
-
|
-
|
-
|
(25,072,145
|
)
|
(25,072,145
|
)
|
|||||||||||
|
Dividends
on common stock
|
-
|
-
|
-
|
-
|
(6,500,000
|
)
|
(6,500,000
|
)
|
|||||||||||
|
Stockholders’
equity as of
|
|||||||||||||||||||
|
December
31, 2005
|
3,000
|
1
|
1
|
476,761,014
|
2,327,571
|
479,091,587
|
|||||||||||||
|
Net
income
|
-
|
-
|
-
|
-
|
31,194,038
|
31,194,038
|
|||||||||||||
|
Dividends
on senior preferred stock and
|
|||||||||||||||||||
|
Series
A preferred stock
|
-
|
-
|
-
|
-
|
(25,077,623
|
)
|
(25,077,623
|
)
|
|||||||||||
|
Dividends
on common stock
|
-
|
-
|
-
|
-
|
(6,000,000
|
)
|
(6,000,000
|
)
|
|||||||||||
|
Stockholders’
equity as of
|
|||||||||||||||||||
|
December
31, 2006
|
3,000
|
1
|
1
|
476,761,014
|
2,443,986
|
479,208,002
|
|||||||||||||
|
Net
income
|
-
|
-
|
-
|
-
|
30,019,332
|
30,019,332
|
|||||||||||||
|
Dividends
on senior preferred stock and
|
|||||||||||||||||||
|
Series
A preferred stock
|
-
|
-
|
-
|
-
|
(25,079,700
|
)
|
(25,079,700
|
)
|
|||||||||||
|
Dividends
on common stock
|
-
|
-
|
-
|
-
|
(6,000,000
|
)
|
(6,000,000
|
)
|
|||||||||||
|
Stockholders’
equity as of
|
|||||||||||||||||||
|
December
31, 2007
|
3,000
|
1
|
1
|
476,761,014
|
1,383,618
|
478,147,634
|
|||||||||||||
See
accompanying notes to financial statements.
F-4
|
NB
CAPITAL CORPORATION
Statements
of cash flows
years
ended December 31, 2007, 2006 and 2005
(in
U.S. dollars)
|
||||||||||
|
2007
|
2006
|
2005
|
||||||||
|
$
|
$
|
$
|
||||||||
|
Operating
activities
|
||||||||||
|
Net
income
|
30,019,332
|
31,194,038
|
33,344,602
|
|||||||
|
Adjustments
for:
|
||||||||||
|
Due
from an affiliated company
|
(2,829,131
|
)
|
879,289
|
(205,777
|
)
|
|||||
|
Prepaid
expenses
|
(1,236
|
)
|
(2,629
|
)
|
(1,280
|
)
|
||||
|
Accrued
interest on cash equivalents
|
42,280
|
(28,862
|
)
|
6,808
|
||||||
|
Due
to the parent company
|
54,108
|
(37,518
|
)
|
(11,602
|
)
|
|||||
|
Accounts
payable
|
27,601
|
(72,422
|
)
|
86,225
|
||||||
|
27,312,954
|
31,931,896
|
33,218,976
|
||||||||
|
Investing
activities
|
||||||||||
|
Investment
in promissory notes (Note 3)
|
(463,399,685
|
)
|
(174,603,983
|
)
|
(170,774,678
|
)
|
||||
|
Repayments
of promissory notes (Note 3)
|
393,841,916
|
204,060,289
|
170,701,502
|
|||||||
|
(69,557,769
|
)
|
29,456,306
|
(73,176
|
)
|
||||||
|
Financing
activities
|
||||||||||
|
Dividends
|
(31,079,700
|
)
|
(31,077,623
|
)
|
(31,572,145
|
)
|
||||
|
(31,079,700
|
)
|
(31,077,623
|
)
|
(31,572,145
|
)
|
|||||
|
(Decrease)
increase in cash and cash equivalents
|
(73,324,515
|
)
|
30,310,579
|
1,573,655
|
||||||
|
Cash
and cash equivalents, beginning of year
|
90,211,545
|
59,900,966
|
58,327,311
|
|||||||
|
Cash
and cash equivalents,
|
||||||||||
|
end
of year
|
16,887,030
|
90,211,545
|
59,900,966
|
|||||||
See
accompanying notes to financial statements.
F-5
|
NB
CAPITAL CORPORATION
Notes
to financial statements
years
ended December 31, 2007, 2006 and 2005
(in
U.S. dollars)
|
| 1. |
Incorporation
and nature of
operations
|
NB
Capital Corporation (the “Company”) was incorporated in the state of Maryland on
August 20, 1997. The Company’s principal business is to acquire, hold, finance
and manage mortgage assets. The Company issued, through an Offering Circular,
dated August 22, 1997, $300 million of preferred stock and,
simultaneously, National Bank of Canada, the parent company, made a capital
contribution in the amount of $183 million. The Company used the aggregate
net proceeds of $477 million to acquire promissory notes of
NB Finance, Ltd., a wholly-owned subsidiary of National Bank of
Canada.
| 2. |
Significant
accounting policies
|
Financial
statements
The
financial statements are prepared in accordance with accounting principles
generally accepted in the United States of America and are expressed in U.S.
dollars.
Cash
and cash
equivalents
Cash
equivalents include short-term, highly liquid investments that are readily
convertible to known amounts of cash and have a maturity of three months or
less
at the acquisition date.
Promissory
notes
In
accordance with Statement of Financial Accounting Standards (“SFAS”)
No. 115, “Accounting for Certain Investments in Debt and Equity
Securities,” and based on the Company’s intentions regarding these instruments,
the Company has classified the promissory notes as held to maturity and has
accounted for them at amortized cost.
Income
taxes
The
Company has elected to be taxable as a Real Estate Investment Trust (“REIT”)
under the Internal Revenue
Code
of 1986,
as amended, and, accordingly, is generally not liable for United States federal
income tax to the extent that it distributes at least 90% of its taxable income
to its stockholders, maintains its qualification as a REIT and complies with
certain other requirements. There is no unrecognized tax benefits.
Per
share data
Basic
and
diluted earnings per share with respect to the Company for the years ended
December 31, 2007, 2006 and 2005 are computed based upon the weighted
average number of common shares outstanding during the year.
F-6
|
NB
CAPITAL CORPORATION
Notes
to financial statements
years
ended December 31, 2007, 2006 and 2005
(in
U.S. dollars)
|
| 2. |
Significant
accounting policies
(continued)
|
Interest
on promissory notes and short-term investments.
Interest
income on promissory notes and short-term investments is accrued using the
simple interest method based on the amount of principle outstanding. The accrual
of interest is discontinued when management believes that the collection of
interest is doubtful.
Use
of estimates
The
preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date
of
the financial statements and the reported amounts of revenue and expenses during
the reporting year. Actual results could differ from those
estimates.
Recent
accounting standards adopted
In
June
2006, the FASB issued FASB Interpretation No. 48, Accounting
for Uncertainty in Income Taxes — an interpretation of FASB Statement
No. 109 (“FIN 48”),
which clarifies the accounting for uncertainty in tax positions. This
Interpretation requires that the Company recognize in its financial statements,
the impact of a tax position, if that position is more likely than not of being
sustained on audit, based on the technical merits of the position. The
provisions of FIN 48 are effective as of the beginning of the 2007
fiscal year, with the cumulative effect, if any, of the change in accounting
principle recorded as an adjustment to opening retained earnings. The Company
adopted FIN 48 on January 1, 2007, and such adoption did not have any impact
on
the Company’s consolidated financial position and results of operations, because
the Company qualified as a REIT, distributed the necessary amount of taxable
income and therefore, incurred no income tax expense.
| 3. |
Promissory
notes
|
The
Company entered into loan agreements evidenced by promissory notes with NB
Finance, Ltd., an affiliated company. The promissory notes are collateralized
only by mortgage loans, which are secured by residential first mortgages and
insured by the Canada Mortgage and Housing Corporation.
The
promissory notes have maturities ranging from February 2008 to January
2015, at rates ranging from 5.37% to 10.15%, with a weighted-average rate of
approximately 6.21% per annum.
The
fair
value of the promissory notes as at December 31, 2007 is $456,383,813
($388,258,533 in 2006). Fair value is estimated using the present value of
expected future cash flows and may not be indicative of the net realizable
value.
|
2007
|
2006
|
||||||
|
$
|
$
|
||||||
|
Promissory
notes, beginning of year
|
380,522,681
|
409,978,987
|
|||||
|
Acquisitions
|
463,399,685
|
174,603,983
|
|||||
|
Principal
repayments
|
(393,841,916
|
)
|
(204,060,289
|
)
|
|||
|
Promissory
notes, end of year
|
450,080,450
|
380,522,681
|
|||||
F-7
|
NB
CAPITAL CORPORATION
Notes
to financial statements
years
ended December 31, 2007, 2006 and 2005
(in
U.S. dollars)
|
|
3.
|
Promissory
notes (continued)
|
The
scheduled principal repayments as of December 31, 2007 are as
follows:
|
$
|
||
|
2008
|
297,724,722
|
|
|
2009
|
58,366,139
|
|
|
2010
|
21,904,363
|
|
|
2011
|
35,723,299
|
|
|
2012
|
19,264,504
|
|
|
2013
|
5,753,381
|
|
|
2014
|
2,803,256
|
|
|
2015
|
8,540,786
|
| 4. |
Transactions
with an affiliated
company
|
During
the year, the Company earned interest from NB Finance, Ltd. on the promissory
notes, in the amount of $28,611,321 ($30,546,845 in 2006 and $33,995,506 in
2005) (see Note 3).
The
amounts due from an affiliated company as of December 31, 2007 and 2006
represent interest and principal repayments due on the promissory notes from
NB
Finance, Ltd.
| 5. |
Transactions
with the parent
company
|
The
Company entered into agreements with National Bank of Canada in relation to
the
administration of the Company’s operations. The agreements are as
follows:
Advisory
agreement
In
exchange for a fee equal to $100,000 per year ($100,000 in 2006 and $100,000
in
2005), payable in equal quarterly installments, National Bank of Canada will
furnish advice and recommendations with respect to all aspects of the business
and affairs of the Company.
Servicing
agreement
National
Bank of Canada will service and administer the promissory notes and the
collateralized mortgage loans and will perform all necessary operations in
connection to such servicing and administration.
The
fee
will equal one-twelfth (1/12) of 0.25% per annum of the aggregate outstanding
balance (in US$) of the collateralized mortgage loans as of the last day of
each
calendar month. The average outstanding balance of the collateralized mortgage
loans securing the promissory notes amounted to $519,771,724 ($487,166,472
in
2006 and $537,567,066 in 2005). During the year, fees of $1,472,053 ($1,490,939
in 2006 and $1,514,444 in 2005) were charged to the Company.
F-8
|
NB
CAPITAL CORPORATION
Notes
to financial statements
years
ended December 31, 2007, 2006 and 2005
(in
U.S. dollars)
|
|
5.
|
Transactions
with the parent company
(continued)
|
Custodian
agreement
National
Bank of Canada will hold all documents relating to the collateralized mortgage
loans. During the years ended December 31, 2007, 2006 and 2005, no fee was
charged to the Company.
Interest
on bank account and short-term investments
The
Company received $3,786 ($2,620 in 2006 and $918 in 2005) in interest on a
bank
account held with National Bank of Canada.
The
Company received $3,296,010 ($2,494,790 in 2006 and $1,346,146 in 2005) in
interest on term deposits held with National Bank of Canada.
| 6. |
Stockholders’
equity
|
Common
stock
The
Company is authorized to issue up to 1,000 shares of $0.01 par value common
stock. The common shares issued as at December 31, 2007 are as
follows:
| · |
100
shares are authorized, issued and
paid.
|
Preferred
stock
The
Company is authorized to issue up to 10,000,000 shares of $0.01 par value
preferred stock. The preferred shares issued as at December 31, 2007 are as
follows:
| · |
300,000
shares authorized and issued as 8.35% Non-Cumulative Exchangeable
Preferred Stock, Series A, non-voting, ranked senior to the common
stock and junior to the Adjustable Rate Cumulative Senior Preferred
Shares, with a liquidation value of $1,000 per share, redeemable
at the
Company’s option on or after September 3, 2007, except upon the
occurrence of certain changes in tax laws in the United States
of America
and in Canada, on or after September 3,
2002.
|
Each
Series A share is exchangeable, upon the occurrence of certain events, for
one
newly issued 8.45% Non-Cumulative First Preferred Share, Series Z, of National
Bank of Canada.
These
Series A shares are traded in the form of Depositary Shares, each representing
a
one-fortieth
interest therein.
| · |
1,000
shares authorized and 110 shares issued as Adjustable Rate Cumulative
Senior Preferred Shares, non-voting, ranked senior to the common
stock and
to the 8.35% Non-Cumulative
Exchangeable Preferred Stock, with a liquidation value of $3,000
per
share, redeemable at the Company’s option at any time and retractable at
the holders’ option on December 30, 2007 and every ten-year
anniversary thereafter.
|
F-9
|
NB
CAPITAL CORPORATION
Notes
to financial statements
years
ended December 31, 2007, 2006 and 2005
(in
U.S. dollars)
|
|
7.
|
Recent
accounting
standards pending
adoption
|
In
February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for
Financial Assets and Financial Liabilities” (“SFAS 159”), which allows
measurement of specified financial instruments, warranty and insurance contracts
at fair value on a contract by contract basis, with changes in fair value
recognized in earnings in each period. SFAS 159 is effective at the beginning
of
the fiscal year that begins after November 15, 2007, and will be effective
for
the Company in fiscal 2008. The Company does not believe that the implementation
of this standard will have a material impact on its financial position or
results of operations.
On
September 15, 2006, the FASB issued FASB Statement No.157, “Fair Value
Measurements” (“FAS 157”), which establishes a framework for measuring fair
value in GAAP, and is applicable to other accounting pronouncements where fair
value is considered to be the relevant measurement attribute. FAS 157 also
expands disclosures about fair value measurements and will be effective for
the
Company on January 1, 2008. However, the Company does not believe that this
standard will have a material impact on its financial reporting and
disclosure.
F-10
ITEM
15(c) to the Annual Report of NB Capital Corporation on Form 10-K for the Year
Ended December 31, 2007
Extract
of the Consolidated Financial Statements of National Bank of Canada (Expressed
in Canadian dollars).
National
Bank of Canada
Consolidated
Financial Statements
|
Management’s
Report
|
85
|
|
Auditors’
Report
|
86
|
|
Consolidated
Balance Sheet
|
87
|
|
Consolidated
Statement of Income
|
88
|
|
Consolidated
Statement of Comprehensive Income
|
89
|
|
Consolidated
Statement of Changes in Shareholders’ Equity
|
90
|
|
Consolidated
Statement of Cash Flows
|
91
|
|
Notes
to the Consolidated Financial Statements
|
92
|
84
Management’s
Report
The
consolidated financial statements of National Bank of Canada (the “Bank”) and
the other financial information presented in the Annual Report were prepared
by
Management, which is responsible for their integrity, including the material
estimates and judgments incorporated therein. The consolidated financial
statements were prepared in accordance with Canadian generally accepted
accounting principles.
In
discharging its responsibilities and ensuring that the Bank’s assets are
safeguarded, Management maintains the necessary accounting and control systems.
These controls include standards for hiring and training personnel, the defining
and evaluation of tasks and functions, operating policies and procedures and
budget controls.
The
Board
of Directors (the “Board”) is responsible for reviewing and approving the
financial information contained in the Annual Report. Acting through the Audit
and Risk Management Committee (the “Committee”), the Board also oversees the
presentation of the consolidated financial statements and ensures that
accounting and control systems are maintained.
The
Committee, composed of directors who are neither officers nor employees of
the
Bank, is responsible for evaluating internal control procedures on an ongoing
basis and reviewing the consolidated financial statements and recommending
them
to the Board for approval. The Committee oversees a team of internal auditors,
which reports to it on a regular basis.
The
control systems are further supported by the Bank’s observance of the laws and
regulations that apply to its operations. The Superintendent of Financial
Institutions regularly examines the affairs of the Bank to ensure that the
provisions of the Bank Act (Canada) with respect to the protection of the Bank’s
depositors are being duly observed and that the Bank is in a sound financial
condition.
The
independent auditors, Samson Bélair/Deloitte & Touche s.e.n.c.r.l., whose
report follows, were appointed by the shareholders on the recommendation of
the
Board. They were granted full and unrestricted access to the Committee to
discuss their audit and financial reporting matters.
/s/
Louis Vachon
Louis
Vachon
President
and Chief Executive Officer
/s/
Jean Dagenais
Jean
Dagenais
Senior
Vice-President and Chief Financial Officer
Montreal,
Canada, November 28, 2007
National
Bank of Canada | 2007 Annual Report
85
Report
of Independent Registered Chartered Accountants
To
the
Board of Directors of National Bank of Canada
We
have
audited the Consolidated Balance Sheets of National Bank of Canada (the “Bank”)
as at October 31, 2007 and 2006 and the Consolidated Statements of Income,
Comprehensive Income, Changes in Shareholders’ Equity and Cash Flows for the
years then ended. These financial statements are the responsibility of the
Bank’s management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We
conducted our audits in accordance with Canadian generally accepted auditing
standards and auditing standards generally accepted in the United States
of
America. These standards require that we plan and perform an audit to obtain
reasonable assurance whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our
opinion.
In
our
opinion, these consolidated financial statements present fairly, in all material
respects, the financial position of the Bank as at October 31, 2007 and 2006
and
the results of its operations and its cash flows for the years then ended
in
accordance with Canadian generally accepted accounting principles.
The
Bank
is not required to have, nor were we engaged to perform, an audit of its
internal control over financial reporting. Our audits included consideration
of
internal control over financial reporting as a basis for designing audit
procedures that are appropriate in the circumstances, but not for the purpose
of
expressing an opinion on the Bank’s internal control over financial reporting.
Accordingly, we express no such opinion.
Independent
Registered Chartered Accountants
Montreal,
Canada
November
28, 2007
Comments
by Independent Registered Chartered Accountants on Canada-United States of
America Reporting Difference
In
the
United States, reporting standards for auditors require the addition of an
explanatory paragraph (following the opinion paragraph) when there are changes
in accounting principles that have a material effect on the comparability
of the
Bank’s financial statements, such as the change described in Notes 1, 2, 3, 4,
13 and 31 to the financial statements. Our report to the Board of Directors,
dated November 28, 2007, is expressed in accordance with Canadian reporting
standards which do not require a reference to such changes in accounting
principles in the auditors’ report when the change is properly accounted for and
adequately disclosed in the financial statements.
Independent
Registered Chartered Accountants
Montreal,
Canada
November
28, 2007
National
Bank of Canada | 2007 Annual Report
86
Consolidated
Balance Sheet
As
at
October 31
|
(millions of dollars)
|
Note
|
2007
|
2006
|
|||||||
|
ASSETS
|
||||||||||
|
Cash
|
283
|
268
|
||||||||
|
Deposits
with financial institutions
|
3,045
|
10,611
|
||||||||
|
Securities
|
||||||||||
|
Available
for sale (2006: Investment account)
|
3
|
8,442
|
6,814
|
|||||||
|
Held
for trading
|
4
|
30,828
|
31,864
|
|||||||
|
39,270
|
38,678
|
|||||||||
|
Securities
purchased under reverse repurchase agreements
|
5,966
|
7,592
|
||||||||
|
Loans
|
5, 6 and 7
|
|||||||||
|
Residential
mortgage
|
15,895
|
15,385
|
||||||||
|
Personal
and credit card
|
13,116
|
11,319
|
||||||||
|
Business
and government
|
19,377
|
20,667
|
||||||||
|
48,388
|
47,371
|
|||||||||
|
Allowance
for credit losses
|
(428
|
)
|
(426
|
)
|
||||||
|
47,960
|
46,945
|
|||||||||
|
Other
|
||||||||||
|
Customers’
liability under acceptances
|
4,085
|
3,725
|
||||||||
|
Fair
value of derivative financial instruments
|
23
|
4,883
|
2,269
|
|||||||
|
Premises
and equipment
|
9
|
426
|
385
|
|||||||
|
Goodwill
|
10
|
703
|
683
|
|||||||
|
Other
intangible assets
|
10
|
169
|
177
|
|||||||
|
Other
assets
|
11
|
6,295
|
5,468
|
|||||||
|
16,561
|
12,707
|
|||||||||
|
113,085
|
116,801
|
|||||||||
|
LIABILITIES
AND SHAREHOLDERS’ EQUITY
|
||||||||||
|
Deposits
|
12
|
|||||||||
|
Personal
|
30,215
|
29,092
|
||||||||
|
Business
and government
|
33,797
|
33,998
|
||||||||
|
Deposit-taking
institutions
|
6,561
|
8,602
|
||||||||
|
Deposit
from NBC Capital Trust
|
225
|
225
|
||||||||
|
70,798
|
71,917
|
|||||||||
|
Other
|
||||||||||
|
Acceptances
|
4,085
|
3,725
|
||||||||
|
Obligations
related to securities sold short
|
16,223
|
15,621
|
||||||||
|
Securities
sold under repurchase agreements
|
2,070
|
9,517
|
||||||||
|
Fair
value of derivative financial instruments
|
23
|
3,620
|
1,646
|
|||||||
|
Other
liabilities
|
14
|
9,087
|
7,562
|
|||||||
|
35,085
|
38,071
|
|||||||||
|
Subordinated
debentures
|
15
|
1,605
|
1,449
|
|||||||
|
Non-controlling
interest
|
16
|
960
|
576
|
|||||||
|
Shareholders’
equity
|
||||||||||
|
Preferred
shares
|
18
|
400
|
400
|
|||||||
|
Common
shares
|
18
|
1,575
|
1,566
|
|||||||
|
Contributed
surplus
|
19
|
32
|
21
|
|||||||
|
Retained
earnings
|
2,793
|
2,893
|
||||||||
|
Accumulated
other comprehensive income (loss)
|
1 and 2
|
(163
|
)
|
(92
|
)
|
|||||
|
4,637
|
4,788
|
|||||||||
|
113,085
|
116,801
|
|||||||||
Louis
Vachon
President
and Chief Executive Officer
Paul
Gobeil
Director
National
Bank of Canada | 2007 Annual Report
87
Consolidated
Statement of Income
Year
ended October 31
|
(millions of dollars)
|
Note
|
2007
|
2006
|
|||||||
|
Interest
income
|
||||||||||
|
Loans
|
3,031
|
2,648
|
||||||||
|
Securities
|
–
|
960
|
||||||||
|
Securities
available for sale
|
296
|
–
|
||||||||
|
Securities
held for trading
|
1,060
|
–
|
||||||||
|
Deposits
with financial institutions
|
423
|
314
|
||||||||
|
4,810
|
3,922
|
|||||||||
|
Interest
expense
|
||||||||||
|
Deposits
|
2,633
|
1,877
|
||||||||
|
Subordinated
debentures
|
100
|
90
|
||||||||
|
Other
|
950
|
663
|
||||||||
|
3,683
|
2,630
|
|||||||||
|
Net
interest income
|
1,127
|
1,292
|
||||||||
|
Other
income
|
||||||||||
|
Underwriting
and advisory fees
|
381
|
373
|
||||||||
|
Securities
brokerage commissions
|
267
|
256
|
||||||||
|
Deposit
and payment service charges
|
213
|
208
|
||||||||
|
Trading
revenues
|
510
|
317
|
||||||||
|
Gains
(losses) on available for sale securities (2006: Investment account),
net
|
3
|
(409
|
)
|
180
|
||||||
|
Card
service revenues
|
34
|
34
|
||||||||
|
Lending
fees
|
127
|
138
|
||||||||
|
Insurance
revenues
|
115
|
113
|
||||||||
|
Acceptances,
letters of credit and guarantee
|
68
|
68
|
||||||||
|
Securitization
revenues
|
7
|
179
|
175
|
|||||||
|
Foreign
exchange revenues
|
103
|
98
|
||||||||
|
Trust
services and mutual funds
|
357
|
309
|
||||||||
|
Other
|
351
|
242
|
||||||||
|
2,296
|
2,511
|
|||||||||
|
Total
revenues
|
3,423
|
3,803
|
||||||||
|
Provision
for credit losses
|
6
|
103
|
77
|
|||||||
|
Operating
expenses
|
||||||||||
|
Salaries
and staff benefits
|
1,498
|
1,479
|
||||||||
|
Occupancy
|
169
|
164
|
||||||||
|
Technology
|
407
|
387
|
||||||||
|
Communications
|
73
|
74
|
||||||||
|
Professional
fees
|
194
|
141
|
||||||||
|
Other
|
291
|
301
|
||||||||
|
2,632
|
2,546
|
|||||||||
|
Income
before income taxes and non-controlling interest
|
688
|
1,180
|
||||||||
|
Income
taxes
|
20
|
79
|
277
|
|||||||
|
609
|
903
|
|||||||||
|
Non-controlling
interest
|
68
|
32
|
||||||||
|
Net
income
|
541
|
871
|
||||||||
|
Dividends
on preferred shares
|
18
|
21
|
21
|
|||||||
|
Net
income available to common shareholders
|
520
|
850
|
||||||||
|
Average
number of common shares outstanding (thousands)
|
21
|
|||||||||
|
Basic
|
159,811
|
162,851
|
||||||||
|
Diluted
|
161,190
|
165,549
|
||||||||
|
Earnings
per common share (dollars)
|
21
|
|||||||||
|
Basic
|
3.25
|
5.22
|
||||||||
|
Diluted
|
3.22
|
5.13
|
||||||||
|
Dividends
per common share (dollars)
|
18
|
2.28
|
1.96
|
|||||||
National
Bank of Canada | 2007 Annual Report
88
Consolidated
Statement of Comprehensive Income
Year
ended October 31
|
(millions of dollars)
|
Note
|
2007
|
2006
|
|||||||
|
Net
income
|
541
|
871
|
||||||||
|
Other
comprehensive income (loss), net of income taxes
|
20
|
|||||||||
|
Net
unrealized gains (losses) on translating financial statements of
self-sustaining foreign operations
|
(299
|
)
|
(99
|
)
|
||||||
|
Impact
of hedging net foreign currency gains or losses
|
211
|
33
|
||||||||
|
Net
change in unrealized foreign currency gains and losses, net of
hedging
activities
|
(88
|
)
|
(66
|
)
|
||||||
|
Net
unrealized gains (losses) on available for sale financial
assets
|
51
|
–
|
||||||||
|
Reclassification
to net income of (gains) losses on available for sale financial
assets
|
(11
|
)
|
–
|
|||||||
|
Net
change in unrealized gains and losses on available for sale financial
assets
|
40
|
–
|
||||||||
|
Net
gains (losses) on derivative financial instruments designated as
cash flow
hedges
|
(54
|
)
|
–
|
|||||||
|
Reclassification
to net income of (gains) losses on derivative financial instruments
designated as cash flow hedges
|
10
|
–
|
||||||||
|
Net
change in gains and losses on derivative financial instruments
designated
as cash flow hedges
|
(44
|
)
|
–
|
|||||||
|
Total
other comprehensive income (loss), net of income taxes
|
(92
|
)
|
(66
|
)
|
||||||
|
Comprehensive
income
|
449
|
805
|
||||||||
National
Bank of Canada | 2007 Annual Report
89
Consolidated
Statement of Changes in Shareholders’ Equity
Year
ended October 31
|
(millions of dollars)
|
Note
|
2007
|
2006
|
|||||||
|
Preferred
shares
|
18
|
400
|
400
|
|||||||
|
Common
shares at beginning
|
1,566
|
1,565
|
||||||||
|
Issuance
of common shares
|
||||||||||
|
Dividend
Reinvestment and Share Purchase Plan
|
18
|
15
|
||||||||
|
Stock
Option Plan
|
34
|
35
|
||||||||
|
Other
|
6
|
–
|
||||||||
|
Repurchase
of common shares for cancellation
|
(49
|
)
|
(48
|
)
|
||||||
|
Impact
of shares acquired or sold for trading purposes
|
–
|
(1
|
)
|
|||||||
|
Common
shares at end
|
18
|
1,575
|
1,566
|
|||||||
|
Contributed
surplus at beginning
|
21
|
13
|
||||||||
|
Stock
option expense
|
16
|
12
|
||||||||
|
Stock
options exercised
|
(4
|
)
|
(4
|
)
|
||||||
|
Other
|
(1
|
)
|
–
|
|||||||
|
Contributed
surplus at end
|
19
|
32
|
21
|
|||||||
|
Retained
earnings at beginning
|
2,893
|
2,645
|
||||||||
|
Net
income
|
541
|
871
|
||||||||
|
Impact
of initial adoption of financial instruments standards
|
2
|
2
|
–
|
|||||||
|
Dividends
|
||||||||||
|
Preferred
shares
|
18
|
(21
|
)
|
(21
|
)
|
|||||
|
Common
shares
|
18
|
(364
|
)
|
(320
|
)
|
|||||
|
Premium
paid on common shares repurchased for cancellation
|
(266
|
)
|
(261
|
)
|
||||||
|
Share
issuance and other expenses, net of income taxes
|
8
|
(21
|
)
|
|||||||
|
Retained
earnings at end
|
2,793
|
2,893
|
||||||||
|
Accumulated
other comprehensive income (loss) at beginning, net of income
taxes
|
1
|
(92
|
)
|
(26
|
)
|
|||||
|
Impact
of initial adoption of financial instruments standards
|
2
|
21
|
–
|
|||||||
|
Net
change in unrealized foreign currency gains (losses), net of hedging
activities
|
(88
|
)
|
(66
|
)
|
||||||
|
Net
change in unrealized gains (losses) on available for sale financial
assets
|
40
|
–
|
||||||||
|
Net
change in gains (losses) on derivative financial instruments designated
as
cash flow hedges
|
(44
|
)
|
–
|
|||||||
|
Accumulated
other comprehensive income (loss) at end, net of income taxes
|
(163
|
)
|
(92
|
)
|
||||||
|
Shareholders’
equity
|
4,637
|
4,788
|
||||||||
|
As at October 31
|
2007
|
2006
|
|||||
|
Accumulated
other comprehensive income (loss), net of income taxes
|
|||||||
|
Unrealized
foreign currency gains (losses), net of hedging activities
|
(180
|
)
|
(92
|
)
|
|||
|
Unrealized
gains (losses) on available for sale financial assets
|
68
|
–
|
|||||
|
Gains
(losses) on derivative financial instruments designated as cash
flow
hedges
|
(51
|
)
|
–
|
||||
|
(163
|
)
|
(92
|
)
|
||||
National
Bank of Canada | 2007 Annual Report
90
Consolidated
Statement of Cash Flows
Year
ended October 31
|
(millions of dollars)
|
2007
|
2006
|
|||||
|
Cash
flows from operating activities
|
|||||||
|
Net
income
|
541
|
871
|
|||||
|
Adjustments
for:
|
|||||||
|
Provision
for credit losses
|
103
|
77
|
|||||
|
Amortization
of premises and equipment
|
78
|
69
|
|||||
|
Future
income taxes
|
49
|
21
|
|||||
|
Translation
adjustment on foreign currency subordinated debentures
|
(8
|
)
|
(3
|
)
|
|||
|
Gains
on sale of available for sale securities (2006: Investment account),
net
|
(124
|
)
|
(180
|
)
|
|||
|
Impairment
charge
|
533
|
–
|
|||||
|
Gains
on asset securitizations and other transfers of receivables, net
|
(113
|
)
|
(98
|
)
|
|||
|
Stock
option expense
|
16
|
12
|
|||||
|
Change
in interest payable
|
245
|
185
|
|||||
|
Change
in interest and dividends receivable
|
(52
|
)
|
(45
|
)
|
|||
|
Change
in income taxes payable
|
(151
|
)
|
33
|
||||
|
Change
in fair value of derivative financial instruments, net
|
(576
|
)
|
(79
|
)
|
|||
|
Change
in held for trading securities
|
1,036
|
(5,681
|
)
|
||||
|
Change
in other items
|
1,049
|
2,671
|
|||||
|
2,626
|
(2,147
|
)
|
|||||
|
Cash
flows from financing activities
|
|||||||
|
Change
in deposits
|
(1,119
|
)
|
9,473
|
||||
|
Issuance
of deposit to NBC Capital Trust
|
–
|
225
|
|||||
|
Issuance
of subordinated debentures
|
500
|
500
|
|||||
|
Repurchase
of subordinated debentures
|
(300
|
)
|
(150
|
)
|
|||
|
Issuance
of common shares
|
58
|
50
|
|||||
|
Repurchase
of common shares for cancellation
|
(315
|
)
|
(309
|
)
|
|||
|
Dividends
paid on common shares
|
(351
|
)
|
(311
|
)
|
|||
|
Dividends
paid on preferred shares
|
(21
|
)
|
(21
|
)
|
|||
|
Change
in obligations related to securities sold short
|
602
|
117
|
|||||
|
Change
in securities sold under repurchase agreements
|
(7,447
|
)
|
(3,398
|
)
|
|||
|
Change
in other items
|
(80
|
)
|
(78
|
)
|
|||
|
(8,473
|
)
|
6,098
|
|||||
|
Cash
flows from investing activities
|
|||||||
|
Change
in deposits with financial institutions pledged as
collateral
|
(322
|
)
|
4,028
|
||||
|
Change
in loans (excluding securitization)
|
(3,887
|
)
|
(5,274
|
)
|
|||
|
Proceeds
from securitization of new assets and other transfers of
receivables
|
2,870
|
2,321
|
|||||
|
Maturity
and redemption of securitized assets
|
(101
|
)
|
–
|
||||
|
Purchases
of available for sale securities (2006: Investment account)
|
(18,025
|
)
|
(24,630
|
)
|
|||
|
Sales
of available for sale securities (2006: Investment
account)
|
15,932
|
24,865
|
|||||
|
Change
in securities purchased under reverse repurchase
agreements
|
1,626
|
(569
|
)
|
||||
|
Net
acquisitions of premises and equipment
|
(119
|
)
|
(99
|
)
|
|||
|
(2,026
|
)
|
642
|
|||||
|
Increase
(decrease) in cash and cash equivalents
|
(7,873
|
)
|
4,593
|
||||
|
Cash
and cash equivalents at beginning
|
10,869
|
6,276
|
|||||
|
Cash
and cash equivalents at end
|
2,996
|
10,869
|
|||||
|
Cash
and cash equivalents
|
|||||||
|
Cash
|
283
|
268
|
|||||
|
Deposits
with financial institutions
|
3,045
|
10,611
|
|||||
|
Less:
Amount pledged as collateral
|
(332
|
)
|
(10
|
)
|
|||
|
2,996
|
10,869
|
||||||
|
Supplementary
information
|
|||||||
|
Interest
paid
|
3,438
|
2,445
|
|||||
|
Income
taxes paid during the year
|
367
|
217
|
|||||
National
Bank of Canada | 2007 Annual Report
91
Notes
to
the Consolidated Financial Statements
As
at
October 31 (millions of dollars)
1
|
Summary of Significant Accounting Policies
The
consolidated financial statements of National Bank of Canada (the “Bank”) were
prepared in accordance with section 308(4) of the Bank Act (Canada), which
states that except for as otherwise specified by the Superintendent of Financial
Institutions (the “Superintendent”), the financial statements are to be prepared
in accordance with Canadian generally accepted accounting principles (“GAAP”),
which differ in certain respects from United States GAAP, as explained in Note
31.
The
preparation of consolidated financial statements in conformity with Canadian
GAAP requires Management to make estimates and assumptions that affect the
carrying value of assets and liabilities on the balance sheet date, income
and
other related information. The most significant items for which Management
has
prepared estimates and assumptions are the allowance for credit losses, the
fair
value of financial instruments, the other-than-temporary impairment of available
for sale financial assets, asset securitization, goodwill and other intangible
assets, pension plans and other employee future benefits, income taxes, the
provision for contingencies and variable interest entities (“VIEs”).
Accordingly, actual results could differ from these estimates, in which case
the
impact would be recognized in the consolidated financial statements in future
fiscal periods.
Unless
otherwise indicated, all amounts are expressed in Canadian dollars.
Basis
of
consolidation
The
consolidated financial statements include the assets, liabilities and operating
results of all subsidiaries and VIEs where the Bank is the primary beneficiary,
as defined in Canadian Institute of Chartered Accountants (CICA) Handbook
Accounting Guideline No. 15 entitled Consolidation of Variable Interest Entities
(AcG-15), after elimination of intercompany transactions and balances. AcG-15
provides guidance for applying the principles in Section 1590, Subsidiaries,
of
the CICA Handbook to certain entities defined as VIEs. VIEs are entities in
which equity investors do not have a controlling financial interest or where
the
equity investment at risk is not sufficient to permit the entity to finance
its
activities without additional subordinated financial support provided by other
parties. AcG-15 requires the consolidation of a VIE by its primary beneficiary,
defined as the party that absorbs the majority of the entity’s expected losses,
receives the majority of the entity’s expected residual returns, or
both.
Investments
in companies over which the Bank exercises significant influence are accounted
for using the equity method and are included in Other assets in the Consolidated
Balance Sheet. The Bank’s share of income (loss) from these companies is
included in Other income under Other in the Consolidated Statement of
Income.
The
proportionate consolidation method is used to account for investments in which
the Bank exercises joint control, whereby only the Bank’s prorata share of
assets, liabilities, revenues and expenses is consolidated.
Accounting
framework for financial instruments in effect since November 1,
2006
On
November 1, 2006, the Bank adopted the standards set out in the new sections
of
the CICA Handbook relating to financial instruments: Section 1530, Comprehensive
Income; Section 3855, Financial Instruments – Recognition and Measurement; and
Section 3865, Hedges. The comparative figures for the fiscal year ended October
31, 2006 presented in this Annual Report have not been restated, in accordance
with specified transitional provisions, except for unrealized gains and losses
on translating financial statements of self-sustaining foreign operations,
net
of hedging activities.
The
critical accounting policies described below apply to the fiscal years ended
October 31, 2007 and 2006. When a different accounting treatment applies to
the
fiscal year ended October 31, 2006, the accounting policy applicable to that
year is indicated.
Classification
and measurement of financial instruments
The
new
accounting framework for financial instruments requires that all financial
assets and liabilities be classified based on their characteristics,
Management’s intention, or the choice of category in certain circumstances. On
and after November 1, 2006, when they are initially recognized, all financial
assets are classified as held for trading, held to maturity, available for
sale
or loans and receivables, while financial liabilities are classified as held
for
trading or not held for trading. To date, the Bank has not classified any
financial asset as held to maturity.
When
they
are initially recognized, all financial assets and liabilities, including
derivative financial instruments, are recorded at fair value in the Consolidated
Balance Sheet. In subsequent periods, they are measured at fair value, except
for items that are classified in the following categories, which are measured
at
amortized cost: loans and receivables and financial liabilities not held for
trading purposes.
The
standard also allows any financial asset or liability to be irrevocably
designated as held for trading when it is first recognized (“fair value
option”). Financial instruments accounted for under the fair value option are
measured at fair value and any change in fair value is recorded in Other income
in the Consolidated Statement of Income.
National
Bank of Canada | 2007 Annual Report
92
The
Superintendent has issued guidelines limiting the circumstances under which
this
option may be used. The Bank may use this option in the following
cases:
|
·
|
If,
consistent with a documented risk management strategy, using this
option
allows the Bank to eliminate or significantly reduce the measurement
or
recognition inconsistency of measuring financial assets or liabilities
together on a different basis, and if the fair values are reliable;
or
|
|
·
|
If
a group of financial assets and financial liabilities to which an
instrument belongs is managed and its performance is evaluated on
a fair
value basis, in accordance with the Bank’s documented risk management or
investment strategy, and information is provided on that basis to
senior
management, and if the fair values are reliable;
or
|
|
·
|
For
hybrid financial instruments with one or more embedded derivatives
which
would significantly modify the cash flows of the financial instruments
and
which would otherwise be bifurcated and accounted for
separately.
|
Establishing
fair value
The
fair
value of a financial instrument is the amount at which a financial instrument
could be exchanged, in an arm’s length transaction, between knowledgeable,
willing parties who are under no compulsion to act.
The
existence of published price quotations in an active market is the best evidence
of fair value and, when they exist, the Bank uses them to measure the financial
instruments. A financial instrument is regarded as quoted in an active market
when quoted prices are readily and regularly available from an exchange, dealer,
broker, industry group or pricing service and those prices reflect actual and
regularly occurring market transactions on an arm’s length basis. The fair value
of a financial asset traded in an active market generally reflects the bid
price
and, that of a financial liability traded in an active market, the asking price.
If a financial instrument’s market is not active, its fair value is established
using valuation techniques that make maximum use of observable market inputs.
These valuation techniques include using available information concerning recent
market transactions, discounted cash flow analysis, valuation models, and other
valuation methods commonly used by market participants where it has been
demonstrated that the technique provides reliable estimates.
In
cases
where the fair value is established using valuation models, the Bank makes
assumptions about the amount, the timing of estimated future cash flows and
the
discount rates used. These assumptions are based primarily on factors observable
in external markets, such as interest rate yield curves, volatility factors
and
credit risk.
Accumulated
other comprehensive income
Since
November 1, 2006, a separate line item, Accumulated other comprehensive income,
has been presented in the Consolidated Balance Sheet under Shareholders’ equity,
net of income taxes. Accumulated other comprehensive income comprises unrealized
gains and losses on available for sale financial assets, unrealized gains and
losses on translating self-sustaining foreign operations, net of hedging
activities, and the effective portion of changes in the fair value of cash
flow
hedging items.
In
addition, in accordance with requirements, unrealized gains and losses on
translating financial statements of self-sustaining foreign operations, net
of
hedging activities, which were previously presented as a separate item under
Shareholders’ equity, have been reclassified to Accumulated other comprehensive
income for prior periods.
Translation
of foreign currencies
Monetary
assets and liabilities of the Bank and its integrated branches and subsidiaries
denominated in foreign currencies are translated into Canadian dollars at the
rate in effect on the balance sheet date, whereas non-monetary assets and
liabilities are translated into Canadian dollars at historical rates. Revenues
and expenses denominated in foreign currencies are translated at the average
exchange rates for the period. Translation gains and losses arising from
operations in integrated branches and subsidiaries are recorded in Other income
in the Consolidated Statement of Income, except for unrealized gains and losses
on their available for sale financial assets, which are recorded in Other
comprehensive income.
All
assets and liabilities of self-sustaining foreign branches and subsidiaries
denominated in foreign currencies are translated into Canadian dollars at the
rate in effect on the balance sheet date, whereas revenues and expenses of
such
foreign operations are translated into Canadian dollars at average exchange
rates for the period. Gains and losses on translating the financial statements
of self-sustaining branches and subsidiaries, along with related hedge and
tax
effects, are presented in Accumulated other comprehensive income in the
Consolidated Balance Sheet. An appropriate portion of these accumulated
translation gains and losses is recognized in Other income in the Consolidated
Statement of Income when there is a reduction in the net
investment.
Cash
and
deposits with financial institutions
Cash
and
deposits with financial institutions consist of cash and cash equivalents as
well as amounts pledged. Cash comprises cash on hand, bank notes and coin.
Cash
equivalents consist of deposits with the Bank of Canada, deposits with financial
institutions – including net receivables related to cheques and other items in
the clearing process – as well as the net amount of cheques and other items in
transit.
National
Bank of Canada | 2007 Annual Report
93
Available
for sale financial assets
Since
November 1, 2006, securities not classified as held for trading have been
classified as securities available for sale. Prior to this date, substantially
all of these securities were held, depending on Management’s intentions, in the
investment account. Certain negotiable certificates of deposit presented in
Deposits with financial institutions in the Consolidated Balance Sheet were
also
classified as available for sale financial assets.
The
Bank
has opted to account for transactions on available for sale securities on the
trade date and to capitalize any related transaction costs.
Since
November 1, 2006, available for sale financial assets have been recognized
at
fair value, except for investments in equity instruments that do not have a
quoted price in an active market and which are recognized at cost.
Unrealized
gains and losses related to available for sale financial assets are recognized,
net of income taxes, provided they are not hedged by derivative financial
instruments in a fair value hedging relationship, in Accumulated other
comprehensive income. In the event of disposal, the realized gains or losses,
determined on an average cost basis, are reclassified to Other income in the
Consolidated Statement of Income on the trade date.
The
amortization of premiums and discounts under the effective interest method
as
well as dividend and interest income are recorded in Interest income in the
Consolidated Statement of Income.
Available
for sale financial assets are measured periodically to determine whether there
is objective evidence of impairment. When making this valuation, the Bank takes
into account the duration and the materiality of the impairment in relation
to
its cost or amortized cost, the financial condition and prospects of the issuer
as well as the Bank’s ability and intent to hold the investment until it
recovers its fair value. For available for sale financial assets, if there
is
objective evidence of impairment and that the decline in fair value below its
cost or amortized cost is other than temporary, the accumulated loss previously
recorded in Other comprehensive income is reclassified to Other income in the
Consolidated Statement of Income.
As
specified above, for the fiscal year ended October 31, 2006, substantially
all
securities available for sale were held in the investment account. Equity
securities were stated at acquisition cost if the Bank did not exercise a
significant influence over the investee, while debt securities were stated
at
unamortized acquisition cost. Gains or losses realized on disposal as well
as
losses in the event of impairment on these securities were presented in the
Consolidated Statement of Income. Negotiable certificates of deposit were
presented at cost after amortization in the Consolidated Balance
Sheet.
Held
for
trading securities
Held
for
trading securities are generally purchased for sale in the near term. The Bank
has opted to account for held for trading securities transactions on the
settlement date in the Consolidated Balance Sheet. Changes in fair value between
the trade date and the settlement date are included in Other income in the
Consolidated Statement of Income. For the fiscal year ended October 31, 2006,
these securities transactions were recognized on the trade date.
When
they
are initially recognized and in subsequent periods, held for trading securities
are recorded at fair value and any transaction fees are included directly in
the
Consolidated Statement of Income. Realized and unrealized gains and losses
on
such securities are recorded as Other income in the Consolidated Statement
of
Income. Dividend and interest income are recorded in Interest
income.
Securities
purchased under reverse repurchase agreements and sold under repurchase
agreements
The
Bank
purchases securities under reverse repurchase agreements and sells securities
under repurchase agreements. Reverse repurchase agreements and repurchase
agreements are treated as guaranteed loans and borrowings and are recorded
at
cost after amortization using the effective interest method in the Consolidated
Balance Sheet. Interest income from reverse repurchase agreements and interest
expense under repurchase agreements are recorded on an accrual basis in the
Consolidated Statement of Income.
Loans
Loans,
including transaction fees directly attributable to the granting of the loans,
are recognized in the Consolidated Balance Sheet at cost after amortization
calculated using the effective interest method (straight-line method for the
fiscal year ended October 31, 2006).
A
loan,
other than a credit card loan, is considered impaired when, in the opinion
of
Management, there is reasonable doubt as to the ultimate collectibility of
a
portion of principal or interest or where payment of interest is contractually
90 days past due, unless there is no doubt as to the collectibility of the
principal or interest. The loan may revert to performing status only when
principal and interest payments have become fully current. Credit card loans
are
written off when payments are more than 180 days in arrears.
National
Bank of Canada | 2007 Annual Report
94
When
a
loan is deemed impaired, interest ceases to be recorded and the carrying value
of the loan is reduced to its estimated realizable amount by writing off all
or
part of the loan or by taking an allowance for credit losses.
Foreclosed
assets held for sale in settlement of an impaired loan are accounted for at
fair
value less selling costs at the date of foreclosure. Any difference between
the
carrying value of the loan before foreclosure and the initially estimated
realizable amount of the assets is recorded under Provision for credit losses.
For any subsequent change in their fair value, gains and losses are recognized
under Other income in the Consolidated Statement of Income. Gains must not
exceed losses of value recognized after the foreclosure date. Revenue generated
by foreclosed assets as well as operating expenses are recorded in Other income
under Other in the Consolidated Statement of Income.
Foreclosed
assets held for use in settlement of an impaired loan are measured at fair
value
at the date of foreclosure. Any difference in the carrying value of the loan
exceeding this fair value is recorded under Provision for credit losses in
the
Consolidated Statement of Income. Subsequent to the date of foreclosure, these
assets are recorded as premises and equipment and are subject to the related
accounting rules.
Loan
origination fees, including commitment, restructuring and renegotiation fees,
are considered an integral part of the yield earned on the loan and are deferred
and amortized to Interest income over the term of the loan. Direct costs for
originating a loan are netted against origination fees. If there is a reasonable
expectation that a commitment will result in a loan, commitment fees receive
the
same accounting treatment: they are amortized to Interest income over the term
of the loan. Otherwise, they are included in Other income over the term of
the
commitment. Loan syndication fees are recorded in Other income, unless the
yield
on any loan retained by the Bank is less than that of other comparable lenders
involved in the financing. In such cases, an appropriate portion of the fees
is
deferred and amortized to Interest income over the term of the loan. Certain
mortgage loan prepayment fees are recognized as Lending fees in the Consolidated
Statement of Income when earned. Commissions, if any, are amortized under the
effective interest method (2006: straight-line method).
Allowance
for credit losses
The
allowance for credit losses reflects Management’s best estimate of losses in its
loan portfolio as at the balance sheet date. This allowance relates primarily
to
loans, but may also cover the credit risk associated with deposits with
financial institutions, derivative financial instruments, loan substitute
securities and other credit instruments such as acceptances, letters of
guarantee and letters of credit. The allowance for credit losses, which consists
of specific allowances for impaired loans and the general allowance for credit
risk, is increased by the provision for credit losses, which is charged to
the
Consolidated Statement of Income, and decreased by the amount of write-offs,
net
of recoveries.
The
specific allowances for impaired loans are established for all such loans that
can be identified and for which impairment can be estimated individually,
reducing them to their estimated realizable amounts. The estimated realizable
amounts are measured by discounting expected future cash flows. For groups
of
impaired loans consisting of large numbers of homogeneous balances of relatively
small amounts, the realizable amounts are calculated by discounting expected
future cash flows for each group of loans using formulas that take into account
past loss experience, economic conditions and other relevant circumstances.
No
specific allowance is established for credit card loans, as balances are written
off if payment has not been received within 180 days.
The
general allowance allocated for credit risk represents Management’s best
estimate of probable losses within the portion of the portfolio that has not
yet
been specifically identified as impaired. This amount is determined by applying
expected loss factors to outstanding and undrawn facilities. The allocated
general allowance for corporate and government loans is based on the application
of expected default and loss factors, determined by statistical loss migration
analysis, delineated by loan type. For more homogeneous portfolios, such as
residential mortgage loans, small and medium-sized enterprise loans, personal
loans and credit card loans, the allocated general allowance is determined
on a
product portfolio basis. Losses are determined by the application of loss ratios
established through statistical analysis of loss migration over an economic
cycle. The general allowance not allocated for credit risk is based on
Management’s assessment of probable losses in the portfolio that have not been
captured in the determination of the specific allowances for impaired loans
and
the allocated general allowance. This assessment takes into account general
economic and business conditions, recent loan loss experience, and trends in
credit quality and concentrations. This allowance also reflects model and
estimation risks. The unallocated general allowance does not represent future
losses or serve as a substitute for the allocated general
allowance.
Asset
securitization
The
Bank
securitizes residential mortgage loans, personal loans and credit card
receivables by selling them to trusts that issue securities to investors. These
transactions are recorded as sales when the Bank is deemed to have surrendered
control over the assets sold and to have received consideration other than
beneficial interests in these assets. Control is deemed to be surrendered if,
and only if, all of the following conditions are met:
|
·
|
The
transferred assets have been isolated from those of the Bank, even
in
bankruptcy or other receivership;
|
National
Bank of Canada | 2007 Annual Report
95
|
·
|
The
purchaser has the right to pledge or exchange the assets it received
or,
if the purchaser is a qualifying special-purpose entity (“QSPE”) as
defined in CICA Accounting Guideline No. 12, Transfers of Receivables,
each investor in the QSPE has the right to sell or pledge its beneficial
interests in the QSPE; and
|
|
·
|
The
Bank does not maintain effective control over the transferred
assets.
|
If
these
conditions are not all met, the sale is deemed to be a secured borrowing, the
assets remain on the Bank’s Consolidated Balance Sheet and the proceeds are
presented as a liability.
As
part
of securitization transactions, the Bank may retain certain interests in the
securitized receivables in the form of subordinated certificates, rights to
future excess interest and, in some cases, a cash reserve account. Gains and
losses on securitizations, net of transaction fees, are included in
Securitization revenues in the Consolidated Statement of Income. Gains and
losses recognized on the sale of receivables are dependent in part on the
allocation of the previous carrying amount of the receivables to the assets
sold
and the retained interests. This allocation is based on their relative fair
value at the date of transfer. Fair value is based on market prices, when
available. However, as quotes are usually not available for retained interests,
their initial and future fair values are determined primarily using the present
value of expected future cash flows based on assumptions regarding credit
losses, prepayment rates, forward yield curves and discount rates commensurate
with the risks involved.
Since
November 1, 2006, retained interests have been recorded at fair value and
included in available for sale securities. Changes in fair value are recognized
in Other comprehensive income. If there is objective evidence of an
other-than-temporary impairment in fair value, the accumulated loss reflected
in
Other comprehensive income is reclassified to Securitization revenues in the
Consolidated Statement of Income. For the fiscal year ended October 31, 2006,
the retained interests were recorded at cost and included in Investment account
securities. Any other-than-temporary impairment in retained interests was
recognized in Securitization revenues in the Consolidated Statement of
Income.
The
Bank
generally transfers receivables on a fully serviced basis. At the time of
transfer, a servicing liability is recognized in the Consolidated Balance Sheet
and amortized to the Consolidated Statement of Income over the term of the
transferred assets. This servicing liability is presented in Other liabilities
in the Consolidated Balance Sheet.
Acceptances
and customers’ liability under acceptances
The
potential liability of the Bank under acceptances is recorded as a liability
in
the Consolidated Balance Sheet. The Bank’s potential recourse against customers
is recorded as an equivalent offsetting asset. These financial instruments
are
recorded at cost in the Consolidated Balance Sheet. Fees are recorded in Other
income in the Consolidated Statement of Income.
Premises
and equipment
Buildings,
equipment and furniture and leasehold improvements are recognized at cost less
accumulated amortization and are amortized over their estimated useful lives
according to the following methods and rates. Land is recorded at cost.
|
Methods
|
Rates
|
||||||
|
Buildings
|
(a)
or (b
|
)
|
2%
to 14
|
%
|
|||
|
Equipment
and furniture
|
(a)
or (b
|
)
|
20%
to 50
|
%
|
|||
|
Leasehold
improvements
|
(a
|
)
|
(c
|
)
|
|||
(a)
Straight-line
(b)
Diminishing balance
(c)
Over
the lease term plus the first renewal option
Goodwill
and other intangible assets
The
purchase method is used to account for the acquisition of subsidiaries. Goodwill
represents the excess of the price paid for the acquisition of subsidiaries
over
the fair value of the net assets acquired. This goodwill is tested for
impairment annually, or more frequently if changes in circumstances indicate
that the asset might be impaired, to ensure that the fair value remains greater
than or equal to the carrying value. Any excess of the carrying value over
the
fair value is charged to the Consolidated Statement of Income for the period
during which the impairment has been determined.
The
other
intangible assets of the Bank result from the acquisition of subsidiaries
or
groups of assets. They are mainly composed of management contracts and are
recorded at fair value at the time of acquisition. Since most of these assets
have indefinite lives, they are not amortized, but are tested for impairment
annually, or more frequently if changes in circumstances indicate that they
might be impaired. The impairment test consists in comparing the fair value
of
the asset with its carrying value. Any excess of the carrying value over
the
fair value is charged to the Consolidated Statement of Income for the period
during which the impairment is determined. Certain other intangible assets
with
finite useful lives are amortized over their useful lives, which generally
do
not exceed eight years. These assets are written down when the long-term
expectation is that their carrying values will not be recovered. Any excess
of
the carrying value over the recoverable value is charged to the Consolidated
Statement of Income.
National
Bank of Canada | 2007 Annual Report
96
Obligations
related to securities sold short
These
financial liabilities represent the Bank’s obligation to deliver securities it
sold but did not own at the time of sale. Obligations related to securities
sold
short are recorded at fair value and presented as liabilities in the
Consolidated Balance Sheet. Realized and unrealized gains and losses are
recognized in Other income in the Consolidated Statement of Income.
Income
taxes
The
Bank
provides for income taxes under the asset and liability method. It determines
future income tax assets and liabilities based on the differences between
the
carrying values and the tax bases of assets and liabilities, in accordance
with
income tax laws and income tax rates enacted or substantively enacted on
the
date the differences will reverse. Future income tax assets represent tax
benefits related to deductions the Bank may claim to reduce its taxable income
in future years. No future income tax expense is recorded for the portion
of
Retained earnings of foreign subsidiaries that is permanently
reinvested.
Derivative
financial instruments
In
the
normal course of business, the Bank uses derivative financial instruments
for
trading and asset/liability management purposes.
Since
November 1, 2006, all derivative financial instruments, including embedded
derivatives that must be bifurcated, have been recorded at fair value in
the
Consolidated Balance Sheet. Derivative financial instruments with a positive
fair value are included in assets and derivative financial instruments with
a
negative fair value are included in liabilities in the Consolidated Balance
Sheet.
The
main
derivative financial instruments used by the Bank are exchange-traded contracts
such as futures and options as well as over-the-counter products such as
forwards, options and swaps.
Embedded
derivative financial instruments
An
embedded derivative financial instrument is a component of a financial
instrument or another contract, the characteristics of which are similar
to
those of a derivative. Taken together, the financial instrument or contract
is
considered to be a hybrid instrument comprising a host contract and an embedded
derivative.
Since
November 1, 2006, the accounting framework has required that embedded
derivatives be bifurcated and accounted for separately if, and only if, the
following three conditions are met: the economic characteristics and risks
of
the embedded derivative are not closely related to those of the host contract,
the embedded derivative is a separate instrument that meets the definition
of a
derivative, and the hybrid contract is not recorded at fair value. Prior
to the
adoption of the new standards, embedded derivative financial instruments
were
not accounted for separately from the host contract, except for derivatives
embedded in equity-linked deposit contracts covered by Accounting Guideline
No.
17, Equity-Linked Deposit Contracts.
Embedded
derivative financial instruments that must be accounted for separately from
the
host contract are recognized at fair value. Realized and unrealized gains
and
losses are recorded in Other income in the Consolidated Statement of
Income.
The
Bank
selected November 1, 2002 as its transition date for the recognition of embedded
derivatives.
Trading
derivative financial instruments
Derivative
financial instruments used by the Bank to accommodate the needs of clients
and
enable it to generate income from its trading activities are recognized at
fair
value. Realized and unrealized gains and losses on trading activities are
recorded in Other income in the Consolidated Statement of Income.
Hedging
derivative financial instruments
The
Bank
uses derivative financial instruments to manage its exposure to interest
rate
risk, foreign exchange risk and credit risk, as well as other market risks.
Section 3865 of the CICA Handbook, which took effect on November 1, 2006,
specifies when and how hedge accounting may be applied. All derivative financial
instruments used as hedges are recognized at fair value in the Consolidated
Balance Sheet. Before November 1, 2006, derivative financial instruments
that
met the criteria for hedge accounting were recorded on an accrual
basis.
Hedge
accounting
Policy
The
purpose of hedging transactions is to modify the Bank’s exposure to one or more
risks by creating an offset between changes in the fair value of, or the
cash
flows attributable to, the hedged item and the hedging item. Hedge accounting
ensures that counterbalancing gains, losses, revenues and expenses are
recognized in net income in the same period or periods.
National
Bank of Canada | 2007 Annual Report
97
Documentation
At
the
inception of the hedging relationship, the Bank designates and formally
documents all hedging relationships, detailing the risk management objective
and
strategy for establishing the relationship. The documentation identifies
the
specific asset, liability or cash flows being hedged, the related hedging
item,
the nature of the specific risk exposure or exposures being hedged, the intended
term of the hedging relationship, the method for assessing the effectiveness
of
the hedging relationship and the accounting method. Both at the inception
of the
hedging relationship and throughout its term, the Bank ensures that the hedging
relationship will be effective and consistent with its originally documented
risk management objective and strategy. Since November 1, 2006, when hedge
accounting has been appropriate, the hedging relationship has been designated
as
a fair value hedge, a cash flow hedge or a foreign exchange hedge of a net
investment in a self-sustaining foreign operation.
Fair
value hedge
In
a fair
value hedge, the Bank mainly uses interest rate swaps to hedge changes in
the
fair value of a hedged item. The carrying value of the hedged item is adjusted
based on the effective portion of the gains or losses attributable to the
hedged
risk, which are recognized in the Consolidated Statement of Income, as is
the
change in the fair value of the hedging item. The resulting ineffective portion
is included in Other income in the Consolidated Statement of
Income.
Hedge
accounting is discontinued prospectively if the hedging relationship no longer
qualifies as an effective hedge or if the hedging item is settled. The hedged
item is no longer adjusted to reflect changes in fair value. Amounts previously
recorded as cumulative adjustments to the effective portion of gains and
losses
attributable to the hedged risk are amortized using the effective interest
method and recognized in the Consolidated Statement of Income over the remaining
useful life of the hedged item. Hedge accounting is also discontinued if
the
hedged item is sold or terminated before maturity. In such a situation, the
cumulative adjustments to the effective portion of gains and losses attributable
to the hedged risk are immediately recorded in the Consolidated Statement
of
Income.
Cash
flow hedge
In
a cash
flow hedge, the Bank mainly uses interest rate swaps to hedge exposure of
the
future cash flows related to a floating rate financial asset or liability.
The
effective portion of changes in fair value of the hedging item is recorded
in
Accumulated other comprehensive income and the ineffective portion in Other
income in the Consolidated Statement of Income.
The
amounts recorded in Accumulated other comprehensive income with respect to
cash
flow hedges are reclassified to the Consolidated Statement of Income in the
period or periods during which the hedged item is recognized.
When
the
derivative financial instrument no longer satisfies the conditions of effective
hedging, hedge accounting ceases to be prospectively applied. The amounts
previously recorded in Accumulated other comprehensive income will be
reclassified to the Consolidated Statement of Income in the period or periods
during which the hedged item is recognized.
Hedge
of a net investment in a self-sustaining foreign operation
Financial
instruments denominated in foreign currencies are used to hedge the foreign
exchange risk related to investments made in self-sustaining foreign operations
whose activities are denominated in a currency other than the Canadian dollar.
The effective portion of the gains and losses on the hedging item is recorded
in
Accumulated other comprehensive income and the ineffective portion in Other
income in the Consolidated Statement of Income.
Discontinuance
of hedging relationships for the fiscal year ended October 31,
2006
For
the
fiscal year ended October 31, 2006, in instances when hedge accounting was
discontinued, realized and unrealized gains and losses on terminated derivative
financial instruments or derivative financial instruments that ceased to
be
effective before they expired were presented with assets or liabilities in
the
Consolidated Balance Sheet and recognized in Other income in the Consolidated
Statement of Income in the period during which the underlying hedged item
was
recognized. If the derivative financial instrument once again qualified for
hedge accounting, any fair value already presented in the Consolidated Balance
Sheet was amortized to Other income over the remaining term of the hedged
item.
If a designated hedged item was sold, was terminated or expired before the
related derivative financial intrument expired, any realized or unrealized
gain
or loss on the derivative financial instrument was recognized in Other income
in
the Consolidated Statement of Income.
Offsetting
of financial assets and liabilities
Financial
assets and liabilities are offset and the net amount is presented in the
Consolidated Balance Sheet when the Bank has a legally enforceable right
to set
off the recognized amounts and intends to settle on a net basis or to realize
the asset and settle the liability simultaneously.
National
Bank of Canada | 2007 Annual Report
98
Guarantees
CICA
Accounting Guideline No. 14 entitled Disclosure of Guarantees (AcG-14) defines
a
guarantee as a contract (including an indemnity) that contingently requires
the
guarantor to make payments (either in cash, financial instruments, other
assets
or shares of the guarantor, or provision of services) to the beneficiary
due to
(a) changes in an interest rate, security or commodity price, foreign exchange
rate, index or other variable, including the occurrence or non-occurrence
of a
specified event, that is related to an asset, a liability or an equity security
of the beneficiary of the guarantee, (b) failure of a third party to perform
under a contractual agreement, or (c) failure of a third party to pay its
indebtedness when due.
Since
November 1, 2006, liabilities have been recorded for the fair value of the
obligation assumed at the inception of guarantees that satisfy the definition
in
AcG-14. No subsequent remeasurement at fair value is required, unless the
financial guarantee is considered a derivative financial
instrument.
Insurance
revenues and expenses
Premiums
less claims and changes in actuarial liabilities are reflected in Other income
in the Consolidated Statement of Income. For the fiscal year ended October
31,
2006, gains and losses realized on the disposal of securities were recognized
in
the Consolidated Balance Sheet and amortized at a rate of 15% per year. The
amortization was included in Other income in the Consolidated Statement of
Income.
Assets
under administration and assets under management
The
Bank
administers and manages assets that are owned by clients but which are not
reflected in the Consolidated Balance Sheet. Asset management fees are earned
for providing investment and mutual fund management services. Asset
administration fees are earned for providing trust, estate administration
and
custodial services. Fees are recognized in Other income in the Consolidated
Statement of Income as the services are provided.
Employee
future benefits
The
Bank
offers defined benefit pension plans that cover substantially all salaried
employees. These defined benefit plans are funded pension plans. The Bank
also
offers its employees certain post-retirement and post-employment benefits,
compensated leave and termination benefits (non-pension employee benefits),
which are generally not funded. These benefits include healthcare, life
insurance and dental benefits. Employees eligible for postretirement benefits
are those who retire at certain retirement ages. Employees eligible for
post-employment benefits are those on long-term disability or maternity
leave.
Actuarial
valuations are made periodically to determine the present value of plan
obligations. The actuarial valuation of accrued pension obligations and the
post-retirement benefit obligation is based on the projected benefit method
prorated on services using the most likely assumptions according to Management
as regards future salary levels, cost escalation, retirement age and other
actuarial factors. The accrued benefit obligation is valued using market
rates
as at the measurement date. With regard to the expected long-term returns
on
plan assets used to calculate pension expense, most of the fixed-income
securities in the plans are measured using fair value, while equity securities
and other assets are measured using a market-related value. This value takes
into account the changes in the fair value of assets over a three-year
period.
The
cost
of pension and other post-retirement benefits earned by employees is established
by calculating the sum of the following: the current period accrued benefit
cost; the notional interest on the actuarial liability of the plans and the
expected long-term return on plan assets; the amortization over the average
remaining service lives of employees of actuarial gains and losses; and the
amounts resulting from changes made to the assumptions and the plans. The
cumulative excess of pension plan contributions over the amounts recorded
as
expenses is recognized in Other assets in the Consolidated Balance Sheet,
while
the cumulative cost of post-retirement benefits, net of disbursements, is
recognized in Other liabilities.
Past
service costs arising from amendments to the plans are amortized on a
straight-line basis over the average remaining service period of active
employees on the date of the amendments. The portion of the net actuarial
gain
or loss which exceeds 10% of either the accrued benefit obligation or the
fair
value of plan assets, whichever is higher, is amortized over the average
remaining service period of active employees. This average remaining service
period varies from 8 to 12 years depending on the plan. When the restructuring
of an employee benefit plan gives rise to both a curtailment and a settlement
of
obligations, the curtailment is accounted for prior to the
settlement.
Stock-based
compensation plans
The
Bank
has several stock-based compensation plans: the Stock Option Plan, the Stock
Appreciation Rights (SAR) Plan, the Deferred Stock Unit (DSU) Plan, the
Restricted Stock Unit (RSU) Plan, the Deferred Compensation Plan of National
Bank Financial and the Employee Share Ownership Plan.
The
Bank
has used the fair value based method to account for stock options awarded
under
its stock option plan since November 1, 2002. The fair value of the stock
options is estimated on the award date using the Black-Scholes model. This
cost
is recognized on a straight-line basis over the vesting period, i.e., four
years, as an increase in Salaries and staff benefits and Contributed surplus.
When the options are exercised, the Contributed surplus is credited to
Shareholders’ equity – Common shares in the Consolidated Balance Sheet. The
proceeds received from the employees when these options are exercised are
also
credited to Shareholders’ equity – Common shares in the Consolidated Balance
Sheet.
National
Bank of Canada | 2007 Annual Report
99
SARs
are
recorded at intrinsic value by measuring, on an ongoing basis and until the
SARs
are exercised, the excess of the price of the Bank’s common stock over the
exercise price of the option. The obligation, which results from the variation
in the stock’s market price, is recognized in income on a straight-line basis
over the vesting period, i.e., four years, and the corresponding amount is
included in Other liabilities in the Consolidated Balance Sheet. When the
vesting period expires and until the SARs are exercised, the change in the
obligation attributable to variations in the stock price is recognized in
Salaries and staff benefits in the Consolidated Statement of Income for the
period in which the variations occur. When a SAR is exercised, the Bank makes
a
cash payment equal to the increase in the stock price since the date of the
award.
The
obligation that results from the award of a DSU and RSU is generally recognized
in income on a straight-line basis over the vesting period, and a corresponding
amount is included in Other liabilities in the Consolidated Balance Sheet.
The
change in the obligation attributable to variations in the stock price and
dividends paid on common shares for these plans is recognized in Salaries
and
staff benefits in the Consolidated Statement of Income for the period in
which
the variations occur. On the redemption date, the Bank makes a cash payment
equal to the value of the common shares on that date.
The
Bank
uses derivative financial instruments to hedge the risks associated with
some of
these plans. The compensation expense for these plans, net of related hedges,
is
recognized in the Consolidated Statement of Income.
The
Bank’s contributions to the Employee Share Ownership Plan are expensed as
incurred.
Comparative
figures
Certain
comparative figures have been reclassified to conform to the presentation
adopted in fiscal 2007.
National
Bank of Canada | 2007 Annual Report
100
2
|
Changes in Accounting Policies
2a.
Recent Accounting Standards Adopted
Financial
instruments
On
November 1, 2006, the Bank adopted the standards set out in the new sections
of
the CICA Handbook relating to financial instruments: Section 1530, Comprehensive
Income; Section 3855, Financial Instruments – Recognition and Measurement; and
Section 3865, Hedges. The corresponding figures for the year ended October
31,
2006 have not been restated, in accordance with the relevant transitional
provisions, except for unrealized gains or losses on translating financial
statements of self-sustaining foreign operations, net of hedging activities.
These accounting standards are described in detail in Note 1.
As
at
November 1, 2006, the Bank recognized all of its financial assets and
liabilities in the Consolidated Balance Sheet according to their classification.
Any adjustment made to a previous carrying amount was recognized as an
adjustment to the balance of Retained earnings at that date or as an adjustment
to the balance of Accumulated other comprehensive income, net of income
taxes.
The
items
recognized as an adjustment to the opening balance of Retained earnings,
net of
income taxes, totalled $2 million.
The
items
recognized as an adjustment to Accumulated other comprehensive income, net
of
income taxes, are:
|
·
|
reclassification
of the net unrealized loss on translating financial statements
of
self-sustaining foreign operations, net of hedge transactions,
in the
amount of $92 million, which was previously presented as a separate
item in Shareholders’ equity;
|
|
·
|
net
unrealized gain on available for sale securities in the amount
of
$28 million; and
|
|
·
|
net
loss on derivative financial instruments designated as cash flow
hedges in
the amount of $7 million.
|
During
the year ended October 31, 2007, the Bank opted to record, effective November
1,
2006, transactions on held for trading securities on the settlement
date.
The
Consolidated Statement of Comprehensive Income was added to the Bank’s
consolidated financial statements. Comprehensive income consists of Net income
plus Other comprehensive income. In addition to unrealized gains and losses
on
available for sale financial assets, Other comprehensive income comprises
the
unrealized gains or losses on translating financial statements of
self-sustaining foreign operations, net of hedge transactions, and the effective
portion of changes in the fair value of cash flow hedging instruments.
Accumulated other comprehensive income is presented separately in Shareholders’
equity in the Consolidated Balance Sheet.
Stock-based
compensation
On
November 1, 2006, the Bank adopted the accounting treatment set out in Abstract
No. 162 entitled Stock-Based Compensation for Employees Eligible to Retire
Before the Vesting Date (EIC-162) issued by the Emerging Issues Committee
of the
CICA. EIC-162 specifies that the compensation cost attributable to stock-based
awards granted to employees who are eligible to retire at the grant date
should
be recognized immediately and that the compensation cost attributable to
stock-based awards granted to employees who will become eligible to retire
during the vesting period should be recognized over the period from the grant
date to the date of retirement eligibility. Previously, the Bank amortized
this
cost over the vesting period. The Bank has not restated its prior-period
consolidated financial statements to take this change into account because
the
impact is not material.
2b.
Recent Accounting Standards Pending Adoption
Capital
disclosures and financial instruments – disclosures and
presentation
In
December 2006, the CICA published three new accounting standards: Section
1535
Capital Disclosures; Section 3862 Financial Instruments – Disclosures; and
Section 3863 Financial Instruments – Presentation. These new standards will
apply to the Bank effective November 1, 2007.
Section
1535 establishes disclosure requirements concerning:
|
·
|
an
entity’s objectives, policies and processes for managing
capital;
|
|
·
|
quantitative
data about what the entity regards as
capital;
|
|
·
|
whether
the entity has complied with any capital requirements;
and
|
| · |
the
consequences of non-compliance with such capital
requirements.
|
National
Bank of Canada | 2007 Annual Report
101
Sections
3862 and 3863 consist of a comprehensive series of disclosure requirements
and
presentation rules applicable to financial instruments. They revise and enhance
the disclosure requirements set out in Section 3861 Financial Instruments
–
Disclosure and Presentation and carry forward unchanged the presentation
requirements of Section 3861.
Section
3862 establishes disclosure requirements that enable users of financial
statements to evaluate:
|
·
|
the
significance of financial instruments for an entity’s financial position
and performance; and
|
|
·
|
the
nature and extent of risks arising from financial instruments to
which the
entity is exposed and how the entity manages those
risks.
|
Accounting
changes
In
July
2006, the CICA published a new version of Section 1506, Accounting Changes.
The
new standard will apply to the Bank effective November 1, 2007.
The
standard specifies that an entity must change an accounting policy only if
the
change is required by GAAP or in order for the financial statements to provide
more relevant information. An entity must account for a change in accounting
policy resulting from the application of GAAP in accordance with the specific
transitional provisions of the standard, if any. If the standard does not
provide for specific transitional provisions applicable to that change or
if the
entity decides to change an accounting policy voluntarily, the change must
be
applied retrospectively and prior periods adjusted, unless it is impossible
to
determine the period-specific effects or the cumulative effect of the
change.
The
standard requires the disclosure of information about changes in accounting
estimates during the current period and, unless it is impossible to estimate,
for future periods. According to the standard, the entity must disclose that
an
error has occurred and the period in which it occurred. In this case, the
financial statements are restated.
Furthermore,
the standard requires that when a new standard has been issued but is not
yet
effective, this fact be disclosed along with the expected impact of initial
application on the financial statements.
National
Bank of Canada | 2007 Annual Report
102
3
|
Available for Sale Financial Assets
Financial
assets classified as available for sale comprise securities and certain
negotiable certificates of deposit as follows:
|
Term
to maturity
|
|||||||||||||||||||
|
Within
1
year
|
1
to
5
years
|
5
to
10
years
|
Over
10
years
|
No
maturity
|
2007
Total
|
||||||||||||||
|
Securities
issued and guaranteed by
|
|||||||||||||||||||
|
Canada
|
1,058
|
2,900
|
70
|
28
|
–
|
4,056
|
|||||||||||||
|
Provinces
|
500
|
96
|
122
|
26
|
–
|
744
|
|||||||||||||
|
Municipalities
and school boards
|
–
|
–
|
1
|
–
|
–
|
1
|
|||||||||||||
|
U.S.
Treasury and other U.S. agencies
|
9
|
–
|
–
|
70
|
–
|
79
|
|||||||||||||
|
Other
debt securities
|
1,578
|
382
|
127
|
1
|
182
|
2,270
|
|||||||||||||
|
Equity
securities
|
56
|
132
|
7
|
15
|
1,082
|
1,292
|
|||||||||||||
|
Total
available for sale securities
|
3,201
|
3,510
|
327
|
140
|
1,264
|
8,442
|
|||||||||||||
|
Other
available for sale financial assets
|
836
|
–
|
–
|
–
|
–
|
836
|
|||||||||||||
|
Total
available for sale financial assets
|
4,037
|
3,510
|
327
|
140
|
1,264
|
9,278
|
|||||||||||||
Gross
unrealized gains (losses) on available for sale financial assets are presented
in the table below.
| 2007 | |||||||||||||
|
Cost
or
unamortized
cost
|
Gross
unrealized
gains
|
Gross
unrealized
losses
|
Carrying
value
|
||||||||||
|
Securities
issued or guaranteed by
|
|||||||||||||
|
Canada
|
4,071
|
2
|
(17
|
)
|
4,056
|
||||||||
|
Provinces
|
743
|
2
|
(1
|
)
|
744
|
||||||||
|
Municipalities
and school boards
|
1
|
–
|
–
|
1
|
|||||||||
|
U.S.
Treasury and other U.S. agencies
|
79
|
–
|
–
|
79
|
|||||||||
|
Other
debt securities
|
2,272
|
4
|
(6
|
)
|
2,270
|
||||||||
|
Equity
securities
|
1,174
|
168
|
(50
|
)
|
1,292
|
||||||||
|
Total
available for sale securities
|
8,340
|
176
|
(74
|
)
|
8,442
|
||||||||
|
Other
available for sale financial assets
|
836
|
–
|
–
|
836
|
|||||||||
|
Total
available for sale financial assets
|
9,176
|
176
|
(74
|
)
|
9,278
|
||||||||
Financial
assets classified as available for sale are measured periodically to determine
whether there is objective evidence of an other-than-temporary impairment
in
value. Gross unrealized losses on equity securities are mainly caused by
market
price fluctuations or foreign exchange movements. The Bank has the ability
and
intent to hold these securities for a period of time sufficient to allow
for any
recovery of their fair value. As at October 31, 2007, the Bank concluded
that
the gross unrealized losses were temporary.
Asset-backed
commercial paper
On
August
20, 2007, the Bank announced a number of measures to relieve its clients
from
the uncertainties related to the liquidity problem in the asset-backed
commercial paper (ABCP) market. During the fourth quarter of 2007, the Bank
purchased $2,138 million of ABCP, issued by 26 trusts, including $1,084 million
from mutual funds and $559 million from pooled funds administered by the
Bank,
as well as the ABCP held by its individual retail clients and certain other
clients. This amount is in addition to the $156 million of ABCP already held
by
the Bank. As at October 31, 2007, once adjusted, the carrying value of this
ABCP
owned by the Bank was $1,719 million. The carrying value of this ABCP classified
in Available for sale securities was $1,606 million and an amount of $113
million was classified in Held for trading securities.
During
the fourth quarter of 2007, the Bank adjusted the carrying value of the ABCP
it
owned due to impairment in the value of some of the underlying assets, the
significant reduction in liquidity of the commercial paper and the uncertain
nature of the terms and conditions of the restructuring proposals of the
ABCP
conduits. A charge of $575 million was recognized in the Consolidated Statement
of Income, specifically $42 million under Trading revenues (Financial Markets
segment) and $533 million under Gains (losses) on available for sale securities
(under the Other heading of segment results). This charge represents
Management’s best estimate of impairment within a reasonable range of possible
write-downs.
National
Bank of Canada | 2007 Annual Report
103
The
deterioration in global credit markets, prolonged illiquidity, reduced price
transparency in underlying assets, increased market volatility and a
significantly weaker U.S. housing market all contributed to the turmoil in
the
Canadian ABCP market. Determining the fair value of the ABCP is complex and
involves an extensive process that includes the use of quantitative modeling
and
relevant assumptions. Whenever available, observable market inputs for
comparable underlying securities, from independent pricing sources, were
used to
assess the fair value of each class of assets in the trusts.
The
Bank’s valuation was based on its assessment of then-prevailing conditions,
which may change in subsequent periods. Possible changes that could have
a
material effect on the future value of the ABCP include (1) changes in the
value
of the underlying assets, (2) developments related to the liquidity of the
ABCP
market, (3) the outcome of the restructuring of the conduits and (4) a change
in
economic conditions in North America.
Available
for sale securities presented at cost
The
Bank
holds equity securities such as mutual fund units and other securities that
are
classified as available for sale but must be presented at cost because they
are
not traded in an active market. These available for sale securities presented
at
cost in the Consolidated Balance Sheet totalled $403 million. Some of these
securities had a fair value that could be estimated. The difference between
the
estimated fair value and the cost of these securities totalled $45 million.
Some
available for sale securities presented at cost were sold during the year.
When
they were sold, their carrying value was $5 million and the Bank recognized
a
$54 million gain on their sale.
Investment
account securities as at October 31, 2006
Until
October 31, 2006, securities held in the investment account were presented
at
cost or amortized cost in the Consolidated Balance Sheet. As at October 31,
2006, gross unrealized gains (losses) on these securities were as follows:
| 2006 | |||||||||||||
|
Carrying
value
|
Gross
unrealized
gains
|
Gross
unrealized
losses
|
Fair
value
|
||||||||||
|
Securities
issued or guaranteed by
|
|||||||||||||
|
Canada
|
2,420
|
12
|
(9
|
)
|
2,423
|
||||||||
|
Provinces
|
1,020
|
5
|
–
|
1,025
|
|||||||||
|
U.S.
Treasury and other U.S. agencies
|
962
|
–
|
(9
|
)
|
953
|
||||||||
|
Other
debt securities
|
1,109
|
4
|
(5
|
)
|
1,108
|
||||||||
|
Equity
securities
|
1,303
|
185
|
(57
|
)
|
1,431
|
||||||||
|
Total
investment account
|
6,814
|
206
|
(80
|
)
|
6,940
|
||||||||
National
Bank of Canada | 2007 Annual Report
104
4
| Held
for Trading Securities
Held
for
trading securities are as follows:
|
2007
|
2006
|
|||||||||||||||||||||
|
Term
to maturity
|
||||||||||||||||||||||
|
Within
1
year
|
1
to
5 years
|
5
to
10 years
|
Over 10
years
|
No maturity
|
Total
|
Total
|
||||||||||||||||
|
Securities
issued or guaranteed by
|
||||||||||||||||||||||
|
Canada
|
1,619
|
2,256
|
1,056
|
665
|
–
|
5,596
|
9,412
|
|||||||||||||||
|
Provinces
|
709
|
2,439
|
1,780
|
622
|
–
|
5,550
|
5,746
|
|||||||||||||||
|
Municipalities
and school boards
|
59
|
152
|
204
|
37
|
–
|
452
|
436
|
|||||||||||||||
|
Other
debt securities
|
3,882
|
1,043
|
1,369
|
200
|
–
|
6,494
|
8,130
|
|||||||||||||||
|
Equity
securities
|
5
|
–
|
1
|
3
|
12,727
|
12,736
|
8,140
|
|||||||||||||||
|
Total
held for trading securities
|
6,274
|
5,890
|
4,410
|
1,527
|
12,727
|
30,828
|
31,864
|
|||||||||||||||
National
Bank of Canada | 2007 Annual Report
105
5
| Loans
and Impaired Loans
| Loans |
2007
|
2006
|
|||||||||||||||||
|
Term
to maturity(1)
|
|||||||||||||||||||
|
Within
1
year
|
1
to
2
years
|
2
to
5
years
|
Over
5
years
|
Total
gross
amount
|
Total gross
amount
|
||||||||||||||
|
Residential
mortgage
|
7,549
|
2,430
|
4,819
|
1,097
|
15,895
|
15,385
|
|||||||||||||
|
Personal
and credit card
|
11,870
|
638
|
539
|
69
|
13,116
|
11,319
|
|||||||||||||
|
Business
and government
|
13,593
|
770
|
1,657
|
3,357
|
19,377
|
20,667
|
|||||||||||||
|
33,012
|
3,838
|
7,015
|
4,523
|
48,388
|
47,371
|
||||||||||||||
(1)
Based
on the earlier of the contractual repricing date or maturity
|
Impaired
Loans
|
2007 | 2006 | |||||||||||||||||
|
Impaired
loans
|
Impaired
loans
|
||||||||||||||||||
|
Gross
|
Specific
allowances
|
Net
balance
|
Gross
|
Specific
allowances
|
Net
balance
|
||||||||||||||
|
Residential
mortgage
|
20
|
1
|
19
|
13
|
2
|
11
|
|||||||||||||
|
Personal
|
36
|
12
|
24
|
36
|
16
|
20
|
|||||||||||||
|
Business
and government
|
193
|
107
|
86
|
185
|
100
|
85
|
|||||||||||||
|
249
|
120
|
129
|
234
|
118
|
116
|
||||||||||||||
|
General
allowance(2)
|
(308
|
)
|
(308
|
)
|
|||||||||||||||
|
Impaired
loans, net of specific and general allowances
|
(179
|
)
|
(192
|
)
|
|||||||||||||||
(2)
The
general allowance for credit risk was created taking into account the Bank’s
credit in its entirety.
National
Bank of Canada | 2007 Annual Report
106
6
|
Allowance for Credit Losses
The
changes made to allowances during the fiscal years were as follows:
| 2007 | 2006 | ||||||||||||||||||
|
Specific
allowances
|
General
allowances
|
Total
|
Specific
allowances
|
General
allowances
|
Total
|
||||||||||||||
|
Allowances
at beginning
|
118
|
308
|
426
|
143
|
308
|
451
|
|||||||||||||
|
Provision
for credit losses
|
103
|
–
|
103
|
77
|
–
|
77
|
|||||||||||||
|
Write-offs
|
(154
|
)
|
–
|
(154
|
)
|
(166
|
)
|
–
|
(166
|
)
|
|||||||||
|
Recoveries
|
53
|
–
|
53
|
64
|
–
|
64
|
|||||||||||||
|
Allowances
at end
|
120
|
308
|
428
|
118
|
308
|
426
|
|||||||||||||
National
Bank of Canada | 2007 Annual Report
107
7
|
Transfers of Receivables
Asset
securitization
New
securitization activities
Insured
mortgage loans
The
Bank
securitizes insured residential mortgage loans by creating mortgage-backed
securities. The pre-tax gain or loss from securitization transactions, net
of
transaction fees, is recognized in the Consolidated Statement of Income under
Securitization revenues.
|
2007
|
2006
|
||||||
|
Net
cash proceeds
|
2,770
|
2,180
|
|||||
|
Retained
interests
|
72
|
63
|
|||||
|
Retained
servicing liability
|
(15
|
)
|
(13
|
)
|
|||
|
2,827
|
2,230
|
||||||
|
Receivables
securitized and sold
|
2,803
|
(1)
|
2,200
|
||||
|
Gain
before income taxes, net of transaction fees
|
24
|
30
|
|||||
|
Mortgage-backed
securities created and retained included in Securities
available for sale (2006: Investment account)
|
74
|
674
|
|||||
(1)
Includes $38 million in receivables securitized in previous fiscal
years
Repurchase
and maturity
Mortgage
loans – other
During
fiscal 2000, the Bank sold uninsured mortgage loans on properties with five
or
more housing units to a trust. The Bank terminated this program in July 2007
by
repurchasing the $86 million in outstanding loans, which represented less
than
10% of the initial portfolio.
Personal
loans
The
Bank
used to sell fixed-rate personal loans on a revolving basis to a trust. The
two
remaining series of notes, totalling $309 million, matured in July 2007.
No new
series were issued and the structure was closed in 2007.
Key
assumptions
The
key
assumptions used to measure the fair value of retained interests as at the
securitization date for transactions carried out during 2007 and 2006 were
as
follows:
|
Insured
mortgage
loans
|
Credit
card
receivables
|
Personal
loans
|
|||||||||||||||||||||||
| 2007 | 2006 |
2007
|
2006
|
2007
|
2006
|
||||||||||||||||||||
|
Variable
|
Fixed
|
Variable
|
Fixed
|
||||||||||||||||||||||
|
Weighted
average term (months)
|
25.8
|
31.6
|
30.5
|
30.1
|
–
|
–
|
–
|
14.3
|
|||||||||||||||||
|
Payment
rate (per month)
|
–
|
–
|
–
|
–
|
24.9
|
%
|
31.9
|
%
|
–
|
–
|
|||||||||||||||
|
Prepayment
rate
|
20.0
|
%
|
18.2
|
%
|
20.0
|
%
|
20.0
|
%
|
–
|
–
|
30.0
|
%
|
30.0
|
%
|
|||||||||||
|
Excess
spread, net of credit losses
|
1.1
|
%
|
1.1
|
%
|
1.9
|
%
|
1.1
|
%
|
10.7
|
%
|
9.9
|
%
|
1.3
|
%
|
1.3
|
%
|
|||||||||
|
Expected
credit losses
|
–
|
–
|
–
|
–
|
3.7
|
%
|
3.8
|
%
|
1.7
|
%
|
1.7
|
%
|
|||||||||||||
|
Discount
rate
|
4.6
|
%
|
4.3
|
%
|
4.2
|
%
|
4.1
|
%
|
17.0
|
%
|
17.0
|
%
|
17.0
|
%
|
17.0
|
%
|
|||||||||
The
static pool credit loss ratio for securitized credit card receivables as
at
October 31, 2007 was 1.18% (1.14% in 2006). It is calculated by dividing
actual
and projected credit losses by the original balance of the receivables
securitized. Static pool credit losses are not applicable to insured mortgage
loans.
National
Bank of Canada | 2007 Annual Report
108
Summary
of securitized assets
| 2007 | 2006 | ||||||||||||||||||
|
Securitized
assets
|
Past
due (1)
|
Net
credit
losses
|
Securitized
assets
|
Past
due(1)
|
Net
credit losses
|
||||||||||||||
|
Mortgage
loans
|
|||||||||||||||||||
|
–
insured(2)
|
6,624
|
–
|
–
|
5,639
|
–
|
–
|
|||||||||||||
|
–
other(3)
|
–
|
–
|
–
|
122
|
–
|
–
|
|||||||||||||
|
Credit
card receivables
|
1,200
|
8
|
44
|
1,200
|
7
|
45
|
|||||||||||||
|
Personal
loans
|
–
|
–
|
1
|
125
|
(4)
|
1
|
3
|
||||||||||||
|
Total
|
7,824
|
8
|
45
|
7,086
|
8
|
48
|
|||||||||||||
(1)
Receivables and loans that are more than 90 days past due but are not considered
impaired
(2)
Includes $662 million of mortgage-backed securities created and unsold in
2007
(2006: $836 million). These securities are presented under Securities available
for sale (2006: Investment account) in the Consolidated Balance
Sheet.
(3)
During fiscal 2000, the Bank sold uninsured mortgage loans on properties
with
five or more housing units to a trust. The Bank terminated this program in
July
2007.
(4)
The
trust that held personal loans also held $60 million of mortgage-backed
securities created by the Bank in 2006.
Impact
of
securitization activities on certain items in the Consolidated Statement
of
Income
Securitization
revenues
|
Gains
on
sale of assets
|
Servicing
revenues
|
Other
|
Total
|
||||||||||||||||||||||
|
2007
|
2006
|
2007
|
2006
|
2007
|
2006
|
2007
|
2006
|
||||||||||||||||||
|
Mortgage
loans
|
|||||||||||||||||||||||||
|
–
insured
|
24
|
30
|
15
|
13
|
–
|
–
|
39
|
43
|
|||||||||||||||||
|
–
other
|
–
|
–
|
–
|
–
|
1
|
2
|
1
|
2
|
|||||||||||||||||
|
Credit
card receivables(1)
|
89
|
67
|
20
|
17
|
30
|
41
|
139
|
125
|
|||||||||||||||||
|
Personal
loans(1)
|
–
|
–
|
–
|
1
|
–
|
4
|
–
|
5
|
|||||||||||||||||
|
Total
|
113
|
97
|
35
|
31
|
31
|
47
|
179
|
175
|
|||||||||||||||||
(1)
Revolving securitization transactions
Impact
of
securitization activities on certain items in the Consolidated Balance Sheet
|
Available
for sale securities (1)
|
Other
liabilities
|
||||||||||||||||||
|
Retained
interests
|
Cash
deposits
at
a trust(2)
|
Servicing
liability
|
|||||||||||||||||
|
2007
|
2006
|
2007
|
2006
|
2007
|
2006
|
||||||||||||||
|
Mortgage
loans
|
|||||||||||||||||||
|
–
insured
|
139
|
127
|
–
|
–
|
27
|
22
|
|||||||||||||
|
–
other
|
–
|
–
|
–
|
20
|
–
|
–
|
|||||||||||||
|
Credit
card receivables
|
40
|
29
|
2
|
2
|
8
|
6
|
|||||||||||||
|
Personal
loans
|
–
|
1
|
–
|
12
|
–
|
1
|
|||||||||||||
|
Total
|
179
|
157
|
2
|
34
|
35
|
29
|
|||||||||||||
(1)
2006:
Investment account
(2)
Cash
deposits can only be used when revenues collected on loans are insufficient
to
pay interest owing to investors.
National
Bank of Canada | 2007 Annual Report
109
Cash
flows from securitization activities
|
Insured
mortgage
loans
|
Other
mortgage
loans
|
Credit
card
receivables
|
Personal
loans
|
||||||||||||||||||||||||||||
| 2007 | 2006 |
2007
|
2006
|
2007
|
2006
|
2007
|
2006
|
||||||||||||||||||||||||
|
Variable
rate
|
Fixed
rate
|
Variable
rate
|
Fixed
rate
|
||||||||||||||||||||||||||||
|
Proceeds
from new securitizations
|
423
|
2,347
|
192
|
1,988
|
–
|
–
|
–
|
–
|
–
|
–
|
|||||||||||||||||||||
|
Proceeds
collected and reinvested in revolving
securitizations
|
–
|
–
|
–
|
–
|
–
|
–
|
3,608
|
3,508
|
45
|
167
|
|||||||||||||||||||||
|
Cash
flows from retained interests in
securitizations
|
4
|
79
|
–
|
71
|
–
|
–
|
129
|
126
|
–
|
6
|
|||||||||||||||||||||
|
Loan
redemptions
|
–
|
–
|
–
|
–
|
(86
|
)
|
–
|
–
|
–
|
(15
|
)
|
–
|
|||||||||||||||||||
Sensitivity
of key assumptions to adverse changes
As
at
October 31, the sensitivity of the current fair value of retained interests
to
immediate 10% and 20% adverse changes in key assumptions was as follows:
|
Insured
mortgage
loans
|
Credit
card
receivables |
Personal
loans |
||||||||||||||||||||
| 2007 | 2006 |
2007
|
2006
|
2006
|
||||||||||||||||||
|
Variable
rate
|
Fixed
rate
|
Variable
rate
|
Fixed
rate |
|||||||||||||||||||
|
Prepayment
rate
|
20.0
|
%
|
19.3
|
%
|
20.0
|
%
|
20.0
|
%
|
25.1
|
%
|
31.9
|
%
|
30.0
|
%
|
||||||||
|
Impact
on fair value of 10% adverse change
|
$
|
(0.4
|
)
|
$
|
(3.6
|
)
|
$
|
(0.3
|
)
|
$
|
(3.7
|
)
|
$
|
(2.9
|
)
|
$
|
(2.5
|
)
|
–
|
|||
|
Impact
on fair value of 20% adverse change
|
$
|
(0.8
|
)
|
$
|
(7.1
|
)
|
$
|
(0.6
|
)
|
$
|
(7.3
|
)
|
$
|
(5.3
|
)
|
$
|
(4.6
|
)
|
–
|
|||
|
Excess
spread, net of credit losses
|
1.2
|
%
|
1.3
|
%
|
1.9
|
%
|
1.4
|
%
|
10.7
|
%
|
9.9
|
%
|
1.3
|
%
|
||||||||
|
Impact
on fair value of 10% adverse change
|
$
|
(1.3
|
)
|
$
|
(12.3
|
)
|
$
|
(0.8
|
)
|
$
|
(11.9
|
)
|
$
|
(4.1
|
)
|
$
|
(2.8
|
)
|
$
|
(0.1
|
)
|
|
|
Impact
on fair value of 20% adverse change
|
$
|
(2.6
|
)
|
$
|
(24.5
|
)
|
$
|
(1.6
|
)
|
$
|
(23.8
|
)
|
$
|
(8.1
|
)
|
$
|
(5.7
|
)
|
$
|
(0.2
|
)
|
|
|
Expected
credit losses
|
–
|
–
|
–
|
–
|
3.7
|
%
|
3.8
|
%
|
1.7
|
%
|
||||||||||||
|
Impact
on fair value of 10% adverse change
|
–
|
–
|
–
|
–
|
$
|
(1.4
|
)
|
$
|
(1.1
|
)
|
$
|
(0.1
|
)
|
|||||||||
|
Impact
on fair value of 20% adverse change
|
–
|
–
|
–
|
–
|
$
|
(2.8
|
)
|
$
|
(2.2
|
)
|
$
|
(0.2
|
)
|
|||||||||
|
Discount
rate
|
4.5
|
%
|
4.0
|
%
|
4.2
|
%
|
3.9
|
%
|
17.0
|
%
|
17.0
|
%
|
17.0
|
%
|
||||||||
|
Impact
on fair value of 10% adverse change
|
$
|
(0.1
|
)
|
$
|
(0.6
|
)
|
$
|
(0.1
|
)
|
$
|
(0.6
|
)
|
$
|
(0.2
|
)
|
$
|
(0.1
|
)
|
–
|
|||
|
Impact
on fair value of 20% adverse change
|
$
|
(0.1
|
)
|
$
|
(1.2
|
)
|
$
|
(0.1
|
)
|
$
|
(1.1
|
)
|
$
|
(0.4
|
)
|
$
|
(0.2
|
)
|
–
|
|||
These
sensitivities are hypothetical and should be used with caution. Changes in
fair
value attributable to changes in assumptions generally cannot be extrapolated
because the relationship between the change in assumption and the change
in fair
value may not be linear. Changes affecting one factor may result in changes
to
another, which might magnify or counteract the sensitivities attributable
to
changes in assumptions.
Other
transfers
The
Bank
sells insured and uninsured mortgage loans to a mutual fund administered
by the
Bank. The pre-tax gain or loss is recorded in Other income in the Consolidated
Statement of Income. The total outstanding amount of insured and uninsured
mortgage loans sold to this mutual fund was $437 million as at October 31,
2007
(2006: $518 million). The table below summarizes the other transfers carried
out
by the Bank:
|
2007
|
2006
|
||||||
|
Net
cash proceeds
|
100
|
141
|
|||||
|
Insured
and uninsured mortgage loans sold
|
100
|
140
|
|||||
|
Gain
before income taxes
|
–
|
1
|
|||||
National
Bank of Canada | 2007 Annual Report
110
8
|
Variable Interest Entities
The
VIEs
where the Bank holds a significant variable interest but is not the primary
beneficiary as defined in AcG-15 are described below. The Bank’s maximum
exposure to loss resulting from these variable interests consists primarily
of
investments in these entities, the fair value of the derivative contracts
entered into with them and the backstop liquidity facility granted to one of
them.
Securitization
entity for the Bank’s assets
The
Bank
carries out transactions in which certain assets are sold to an entity that
finances their purchase by issuing term bonds. This entity is a qualifying
special-purpose entity under CICA Accounting Guideline No. 12, Transfers of
Receivables, and is therefore exempt from the consolidation requirements under
AcG-15. Asset securitization transactions for the fiscal year ended October
31,
2007 and 2006 are described in Note 7 to the consolidated financial statements.
Multi-seller
conduit
The
Bank
administers a multi-seller conduit that purchases financial assets from clients
and finances those purchases by issuing asset-backed commercial paper. Clients
use this multi-seller conduit to diversify their funding sources and reduce
funding costs, while continuing to manage the respective financial assets and
providing some amount of first-loss protection. The Bank acts as a financial
agent and trustee and provides administrative and transaction structuring
services to this conduit. During the fiscal year ended October 31, 2007, the
Bank purchased commercial paper issued by the conduit. The Bank does not provide
any credit protection, but it does provide a backstop liquidity facility under
the commercial paper program. This backstop liquidity facility is presented
and
described in Note 22 to the consolidated financial statements. The Bank holds
a
variable interest in this conduit through its participation in the commercial
paper program, the backstop liquidity facility provided and its rights to
collect fees as financial agent and administrator. However, the Bank is not
required to consolidate this conduit under AcG-15 because it does not have
to
absorb the majority of the conduit’s expected losses, receive the majority of
its expected residual returns, or both. In order to meet the needs of investors,
the Bank has concluded derivative contracts with this conduit, the fair value
of
which is presented on the Bank’s Consolidated Balance Sheet. The total assets of
the conduit were $892 million as at October 31, 2007 ($683 million as at October
31, 2006).
Structured
finance entities
The
Bank
also acts as a financial agent and administrator for three trusts. These trusts
issue and sell fixed and adjustable rate debt securities backed by
mortgage-backed securities, asset-backed securities, structured financial
securities, synthetic corporate exposures and other securities. During fiscal
2007, the Bank purchased debt securities issued by these trusts. The Bank holds
variable interests in these trusts through its participation in the debt
securities and its rights to collect fees as financial agent and administrator.
However, the Bank is not the primary beneficiary of these trusts and is
therefore not required to consolidate them under AcG-15. The Bank concluded
derivative contracts with some of these trusts, the fair value of which is
presented on the Bank’s Consolidated Balance Sheet. The total assets of these
entities were $4.2 billion as at October 31, 2007 ($4.2 billion as at October
31, 2006).
Investment
funds
As
part
of its investment banking operations, the Bank invests in several limited
liability partnerships and incorporated entities. These investment companies
in
turn invest in operating companies with a view to reselling these investments
at
a profit over the medium or long term. The Bank does not intervene in the
operations of these entities; its only role is that of investor. The Bank is
not
required to consolidate these entities under AcG-15 as it does not absorb the
majority of their expected losses, receive the majority of their expected
residual returns, or both. As at October 31, 2007, the recorded value of the
Bank’s total investment was $170 million ($90 million as at October 31, 2006).
The total assets of all these entities amounted to $1.7 billion ($1.2 billion
as
at October 31, 2006). Moreover, the Bank has commitments to invest in these
entities. These commitments are disclosed in Note 22 to the consolidated
financial statements.
National
Bank of Canada | 2007 Annual Report
111
9
|
Premises and Equipment
|
2007
|
2006
|
||||||||||||||||||
|
Cost
|
Accumulated
amortization
|
Net
carrying
value
|
Cost
|
Accumulated
amortization
|
Net
carrying
value
|
||||||||||||||
|
Land
|
17
|
–
|
17
|
17
|
–
|
17
|
|||||||||||||
|
Buildings
|
183
|
95
|
88
|
189
|
94
|
95
|
|||||||||||||
|
Equipment
and furniture
|
733
|
517
|
216
|
638
|
473
|
165
|
|||||||||||||
|
Leasehold
improvements
|
394
|
289
|
105
|
372
|
264
|
108
|
|||||||||||||
|
1,327
|
901
|
426
|
1,216
|
831
|
385
|
||||||||||||||
|
Amortization
for the year
|
78
|
69
|
|||||||||||||||||
National
Bank of Canada | 2007 Annual Report
112
10
|
Goodwill and Other Intangible Assets
The
Bank
performs an annual impairment test of goodwill and other intangible assets
with
indefinite lives. No impairment loss was recorded for 2006.
The change in the carrying value of goodwill is as follows:
The change in the carrying value of goodwill is as follows:
|
Personal and
Commercial
|
Wealth
Management
|
Financial
Markets
|
Total
|
||||||||||
|
Balance
as at October 31, 2005
|
49
|
421
|
192
|
662
|
|||||||||
|
Acquisition
of Credigy Ltd.
|
–
|
–
|
21
|
21
|
|||||||||
|
Balance
as at October 31, 2006
|
49
|
421
|
213
|
683
|
|||||||||
|
Increase
in the interest in Credigy Ltd. (Note 29)
|
–
|
–
|
2
|
2
|
|||||||||
|
Increase
in the interest in Asset Management
|
|||||||||||||
|
Finance
Corporation (Note 29)
|
–
|
–
|
19
|
19
|
|||||||||
|
Other
|
–
|
–
|
(1
|
)
|
(1
|
)
|
|||||||
|
Balance
as at October 31, 2007
|
49
|
421
|
233
|
703
|
|||||||||
Other
intangible assets comprise the following:
|
2007
|
2006
|
|||||||||||||||
|
Cost
|
Impairment
charge(2)
|
Accumulated
amortization
|
Net
carrying
value
|
Net
carrying
value
|
||||||||||||
|
Trademarks(1)
|
11
|
–
|
–
|
11
|
11
|
|||||||||||
|
Management
contracts(1)
|
160
|
6
|
–
|
154
|
160
|
|||||||||||
|
Other
|
16
|
–
|
12
|
4
|
6
|
|||||||||||
|
Total
|
187
|
6
|
12
|
169
|
177
|
|||||||||||
(1)
Not
subject to amortization
(2)
Following the results of the impairment test, a charge was recorded for
impairment of an intangible asset.
National
Bank of Canada | 2007 Annual Report
113
11
|
Other Assets
|
2007
|
2006
|
||||||
|
Interest
and dividends receivable
|
419
|
367
|
|||||
|
Prepaid
expenses and deferred amounts
|
268
|
109
|
|||||
|
Future
income tax assets (Note 20)
|
91
|
138
|
|||||
|
Due
from clients, dealers and brokers
|
4,775
|
3,948
|
|||||
|
Investments
in companies subject to significant influence
|
180
|
151
|
|||||
|
Accrued
benefit asset (Note 17)
|
340
|
344
|
|||||
|
Other
|
222
|
411
|
|||||
|
6,295
|
5,468
|
||||||
National
Bank of Canada | 2007 Annual Report
114
12
|
Deposits
|
Payable on
demand
|
Payable after
notice
|
Payable on a
fixed date
|
2007
Total |
2006
Total |
||||||||||||
|
Personal
|
2,834
|
12,298
|
15,083
|
30,215
|
29,092
|
|||||||||||
|
Business
and government
|
6,294
|
6,756
|
20,747
|
33,797
|
33,998
|
|||||||||||
|
Deposit-taking
institutions
|
238
|
19
|
6,304
|
6,561
|
8,602
|
|||||||||||
|
Deposit
from NBC Capital Trust
|
–
|
–
|
225
|
225
|
225
|
|||||||||||
|
9,366
|
19,073
|
42,359
|
70,798
|
71,917
|
||||||||||||
|
2007
|
2006
|
||||||||||||||||||
|
Term
to maturity
|
|||||||||||||||||||
|
Within
1
year
|
1
to 2 years
|
2
to 5 years
|
Over
5
years
|
Total
|
Total
|
||||||||||||||
|
Payable
on demand and payable after notice
|
|||||||||||||||||||
|
Personal
|
10,162
|
3,485
|
1,485
|
–
|
15,132
|
14,468
|
|||||||||||||
|
Other
|
10,831
|
314
|
558
|
1,604
|
13,307
|
17,309
|
|||||||||||||
|
Total
|
20,993
|
3,799
|
2,043
|
1,604
|
28,439
|
31,777
|
|||||||||||||
|
Payable
on a fixed date
|
|||||||||||||||||||
|
Personal
|
8,248
|
3,244
|
3,566
|
25
|
15,083
|
14,624
|
|||||||||||||
|
Other
|
23,244
|
506
|
1,663
|
1,863
|
27,276
|
25,516
|
|||||||||||||
|
Total
|
31,492
|
3,750
|
5,229
|
1,888
|
42,359
|
40,140
|
|||||||||||||
|
Total
|
52,485
|
7,549
|
7,272
|
3,492
|
70,798
|
71,917
|
|||||||||||||
Deposit
from NBC Capital Trust
On
June
15, 2006, NBC Capital Trust (the “Trust”), an open-end trust established under
the laws of the Province of Ontario, issued 225,000 transferable non-voting
trust units called Trust Capital Securities-Series 1, or NBC CapS-Series 1.
The
gross proceeds from the offering of $225 million were used by the Trust to
acquire a deposit note from the Bank.
The
deposit note bears interest at a fixed annual rate of 5.329% payable
semi-annually in arrears up to June 30, 2016 and thereafter at a fixed annual
rate equal to the acceptance rate plus 1.50%. The deposit note, which will
mature on June 30, 2056, may be redeemed, on or after June 30, 2011, at the
option of the Bank, without the consent of the Trust, subject to prior written
notice and prior approval of the Superintendent or upon the occurrence of
predetermined regulatory or tax events. If the Bank redeems the deposit note,
in
whole or in part, the Trust will be required to redeem a corresponding amount
of
NBC CapS-Series 1.
Each
$1,000 of principal amount of the deposit note is convertible at any time into
40 First Preferred Shares, Series 17 of the Bank at the option of the Trust.
The
Trust will exercise this conversion right in circumstances in which holders
of
NBC CapS-Series 1 exercise their exchange rights.
Failure
by the Bank to make payments or to satisfy its other obligations under the
deposit note will not entitle the Trust to accelerate payment of the deposit
note.
The
Trust
is a variable interest entity as defined in AcG-15. Although the Bank owns
the
equity and voting control of the Trust, the Bank does not consolidate the Trust
because the Bank is not the primary beneficiary; therefore, NBC CapS-Series
1
issued by the Trust are not reported on the Bank’s Consolidated Balance Sheet,
but the deposit note is reported under Deposits.
The
non-cumulative cash distribution per NBC CapS-Series 1 will be $26.645
(representing an annual yield of 5.329% of the $1,000 initial issue price);
it
will be paid by the Trust semi-annually from December 31, 2006 to and including
June 30, 2016, and thereafter, will be determined by multiplying $1,000 by
half
of the sum of the applicable acceptance rate plus 1.50%. No cash distributions
will be payable by the Trust on NBC CapS-Series 1 if the Bank fails to declare
regular dividends on its preferred shares or, if no preferred shares are then
outstanding, on its outstanding common shares. In this case, the net
distributable funds of the Trust will be paid to the Bank as holder of the
Special Trust Securities, representing the residual interest in the Trust.
Should the Trust fail to pay the semi-annual distributions in full on the NBC
CapS-Series 1, the Bank will not declare dividends on any of its preferred
shares and common shares for a specified period of time. The NBC CapS-Series
1
is not redeemable at the option of the holder.
National
Bank of Canada | 2007 Annual Report
115
On
or
after June 30, 2011, the Trust may, at its option, redeem the NBC CapS-Series
1,
in whole or in part, without the consent of the holders, subject to prior
written notice and prior approval of the Superintendent or upon the occurrence
of predetermined regulatory or tax events.
Holders
of NBC CapS-Series 1 may surrender at any time, subject to prior notice, each
NBC CapS-Series 1 for 40 First Preferred Shares, Series 17 of the Bank. The
Bank’s First Preferred Shares, Series 17 pay semi-annual non-cumulative cash
dividends as and when declared by the Board of Directors and will be redeemable
at the option of the Bank, with the prior approval of the Superintendent, on
or
after June 30, 2011, but not at the option of the holders. This exchange right
will be effected through the conversion by the Trust of the corresponding amount
of the deposit note of the Bank. The NBC CapS-Series 1 exchanged for the Bank’s
First Preferred Shares, Series 17 will be cancelled by the Trust.
Each
NBC
CapS-Series 1 will be exchanged automatically, without the consent of the
holders, for 40 First Preferred Shares, Series 18 of the Bank, upon the
occurrence of any one of the following events: (i) proceedings are commenced
for
the winding-up of the Bank; (ii) the Superintendent takes control of the Bank;
(iii) the Bank posts a Tier 1 capital ratio of less than 5% or a total capital
ratio of less than 8%; or (iv) the Superintendent has directed the Bank to
increase its capital or to provide additional liquidity and the Bank elects
such
automatic exchange or the Bank fails to comply with such direction to the
satisfaction of the Superintendent. The Bank’s First Preferred Shares, Series 18
pay semi-annual non-cumulative cash dividends and will be redeemable at the
option of the Bank, with the prior approval of the Superintendent, on or after
June 30, 2011, but not at the option of the holders. On an automatic exchange,
the Bank will hold all outstanding trust capital securities of the Trust, the
main asset of which is the deposit note.
For
regulatory capital purposes, $225 million of NBC CapS-Series 1 qualifies as
Tier
1 capital.
National
Bank of Canada | 2007 Annual Report
116
13
| Held
for Trading Financial Liabilities
During
the fiscal year ended October 31, 2007, the Bank designated certain deposits
with one or more embedded derivatives as held for trading. These deposits are
included under liabilities in Deposits in the Consolidated Balance Sheet.
The
fair
value of these deposits totalled $297 million as at October 31, 2007. The change
in fair value in the amount of $5 million for the period from November 1, 2006
to October 31, 2007 was recorded as a gain in Trading revenues in the
Consolidated Statement of Income. This change in fair value is entirely caused
by factors other than changes in an essentially risk-free interest rate.
The
amount at maturity, which the Bank will be contractually required to pay to
the
holders of these deposits, may vary and will be different from the fair value
as
at October 31, 2007.
National
Bank of Canada | 2007 Annual Report
117
14
|
Other Liabilities
|
2007
|
2006
|
||||||
|
Interest
and dividends payable
|
1,076
|
819
|
|||||
|
Income
taxes payable
|
27
|
178
|
|||||
|
Future
income tax liabilities (Note 20)
|
85
|
59
|
|||||
|
Trade
and other payables
|
1,165
|
1,185
|
|||||
|
Due
to clients, dealers and brokers
|
4,341
|
3,223
|
|||||
|
Accrued
benefit liability (Note 17)
|
126
|
115
|
|||||
|
Insurance-related
obligations
|
68
|
69
|
|||||
|
Subsidiaries’
debts to third parties
|
959
|
886
|
|||||
|
Accounts
payable and deferred income
|
280
|
305
|
|||||
|
Other
|
960
|
723
|
|||||
|
9,087
|
7,562
|
||||||
National
Bank of Canada | 2007 Annual Report
118
15
|
Subordinated Debentures
Subordinated
debentures represent direct unsecured obligations, in the form of notes and
debentures, to the Bank’s debt holders. The rights of the holders of the Bank’s
notes and debentures are subordinate to the claims of depositors and certain
other creditors. Approval from the Superintendent is required before the
Bank
can redeem its subordinated debentures in whole or in part.
During
the fiscal year ended October 31, 2007, the Bank issued a total of $500 million
of subordinated debentures maturing in 2016 under its Canadian Medium Term
Note
Program. Interest at the annual rate of 4.456% is payable semi-annually on
May 2
and November 2 of each year until November 2, 2011. The Bank also redeemed
a
subordinated debenture in the amount of $300 million, maturing on October
31,
2012.
During
the fiscal year ended October 31, 2006, the Bank issued a total of $500 million
of subordinated debentures maturing in 2020 under its Canadian Medium Term
Note
Program. Interest at the annual rate of 4.70% is payable semi-annually on
May 2
and November 2 of each year. The Bank also redeemed a subordinated debenture
in
the amount of $150 million, maturing on October 17, 2011.
|
Maturity date
|
Interest rate
|
Characteristics
|
Denominated
in foreign
currency
|
2007
|
2006
|
||||||||||||||
|
October
|
2012
|
6.25
|
%(1)
|
Redeemable
since October 31, 2007
|
–
|
300
|
|||||||||||||
|
April
|
2014
|
5.70
|
%(2)
|
Redeemable
since April 16, 2004
|
250
|
250
|
|||||||||||||
|
November
|
2016
|
4.456
|
%(3)
|
Not
redeemable before November 2, 2011
|
500
|
–
|
|||||||||||||
|
December
|
2019
|
4.926
|
%(4)
|
Not redeemable before December 22, 2014
|
350
|
350
|
|||||||||||||
|
November
|
2020
|
4.70
|
%(5)
|
Not
redeemable before November 2, 2015
|
500
|
500
|
|||||||||||||
|
February
|
2087
|
Floating
|
(6)
|
Redeemable
at the Bank’s option since February 28, 1993
|
US
44
|
41
|
49
|
||||||||||||
|
1,641
|
1,449
|
||||||||||||||||||
|
Fair
value adjustment(7)
|
(30
|
)
|
–
|
||||||||||||||||
|
Unamortized
issue costs(8)
|
(6
|
)
|
–
|
||||||||||||||||
|
Total
|
1,605
|
1,449
|
|||||||||||||||||
| (1) |
Bearing
interest at a rate of 6.25% until October 31, 2007, and thereafter
at an
annual rate equal to the 90-day bankers’ acceptance rate plus 1%
|
| (2) |
Bearing
interest at a rate of 5.70% until April 16, 2009, and thereafter
at an
annual rate equal to the 90-day bankers’ acceptance rate plus 1%
|
| (3) |
Bearing
interest at a rate of 4.456% until November 2, 2011, and thereafter
at an
annual rate equal to the 90-day bankers’ acceptance rate plus 1%
|
| (4) |
Bearing
interest at a rate of 4.926% until December 22, 2014, and thereafter
at an
annual rate equal to the 90-day bankers’ acceptance rate plus
1%
|
| (5) |
Bearing
interest at a rate of 4.70% until November 2, 2015, and thereafter
at an
annual rate equal to the 90-day bankers’ acceptance rate plus 1%
|
| (6) |
Bearing
interest at an annual rate of 1/8% above LIBOR
|
| (7) |
The
fair value adjustment reflects the change in the carrying value of
the
subordinated debentures covered by a fair value hedge.
|
| (8) |
The
unamortized costs related to the issuance of the subordinated debentures
represent the initial cost, net of accumulated amortization calculated
using the effective interest method.
|
The
subordinated debenture maturities are as follows:
|
2008
to 2012
|
–
|
|||
|
2013
to 2017
|
750
|
|||
|
2018
and thereafter
|
891
|
National
Bank of Canada | 2007 Annual Report
119
16
|
Non-Controlling Interest
|
Denominated in
foreign currency
|
2007
|
2006
|
||||||||
|
300,000
preferred shares, Series A, exchangeable, non-cumulative
dividends, issued by NB Capital Corporation(1)
|
US
300
|
284
|
337
|
|||||||
|
Mutual
funds consolidated in accordance with AcG-15
|
26
|
110
|
||||||||
|
Other
entities consolidated in accordance with AcG-15
|
630
|
117
|
||||||||
|
Other
|
20
|
12
|
||||||||
|
Total
|
960
|
576
|
||||||||
(1)
Annual dividend of 8.35% payable quarterly on March 30, June 30, September
30
and December 30. These preferred shares do not have voting rights. They have
been redeemable at the issuer’s option since September 3, 2007. The preferred
shares, whose liquidation price is US $1,000 per share, are traded on the New
York Stock Exchange in the form of depositary shares representing 1/40 of each
share. Each preferred share will automatically be exchanged for a new First
Preferred Share, Series Z of the Bank if one of the following events occurs:
(i)
the Bank defaults on the dividend payment for its first preferred shares; (ii)
the Bank’s Tier 1 capital ratio is less than 4% or its total capital ratio is
less than 8%; or (iii) at the request of the Superintendent, in accordance
with
subsection 485(3) of the Bank Act (Canada).
National
Bank of Canada | 2007 Annual Report
120
17
|
Employee Future Benefits
The
Bank
offers defined benefit pension plans that cover substantially all salaried
employees. These defined benefit plans are funded pension plans. The effective
dates of the most recent actuarial valuations and the next required actuarial
valuations for funding purposes are:
|
Date of most recent
actuarial valuation
|
Date of required actuarial
valuation
|
||||||
|
Employee
pension plan
|
December 31, 2006
|
December 31, 2009
|
|||||
|
Pension
plan for designated employees
|
December 31, 2006
|
December 31, 2007
|
|||||
|
Post-Retirement
Allowance Program
|
December 31, 2006
|
December 31, 2008
|
|||||
The
Bank’s employee pension plans provide for the payment of benefits based on
length of service and final average earnings of the employees covered by the
plans. The Bank also offers various complementary, contributory insurance plans
to eligible current and retired employees, their spouses and their dependants.
However, these benefit plans are not funded.
The
following tables present the Bank’s commitments and costs for these employee
future benefits. The measurement date used is October 31 of each year.
|
Pension
benefit plans
|
Other
benefit plans
|
||||||||||||
|
2007
|
2006
|
2007
|
2006
|
||||||||||
|
Accrued
benefit obligation
|
|||||||||||||
|
Balance
at beginning
|
1,942
|
1,772
|
159
|
136
|
|||||||||
|
Current
service cost
|
54
|
48
|
6
|
5
|
|||||||||
|
Interest
cost
|
105
|
99
|
9
|
8
|
|||||||||
|
Employee
contributions
|
20
|
19
|
–
|
–
|
|||||||||
|
Benefits
paid
|
(76
|
)
|
(69
|
)
|
(6
|
)
|
(5
|
)
|
|||||
|
Plan
amendments
|
21
|
2
|
–
|
–
|
|||||||||
|
Actuarial
losses (gains)
|
(173
|
)
|
71
|
(11
|
)
|
15
|
|||||||
|
Balance
at end
|
1,893
|
1,942
|
157
|
159
|
|||||||||
|
Plan
assets
|
|||||||||||||
|
Fair
value at beginning
|
1,849
|
1,674
|
–
|
–
|
|||||||||
|
Actual
return on plan assets
|
130
|
177
|
–
|
–
|
|||||||||
|
Bank
contributions
|
60
|
48
|
–
|
–
|
|||||||||
|
Employee
contributions
|
20
|
19
|
–
|
–
|
|||||||||
|
Benefits
paid
|
(76
|
)
|
(69
|
)
|
–
|
–
|
|||||||
|
Fair
value at end
|
1,983
|
1,849
|
–
|
–
|
|||||||||
|
Funded
status – plan deficit
|
90
|
(93
|
)
|
(157
|
)
|
(159
|
)
|
||||||
|
Unamortized
net actuarial losses
|
193
|
393
|
31
|
44
|
|||||||||
|
Unamortized
past service costs
|
57
|
44
|
–
|
–
|
|||||||||
|
Accrued
benefit asset (liability) at end
|
340
|
344
|
(126
|
)
|
(115
|
)
|
|||||||
The
accrued benefit asset (liability) is presented as follows in the Consolidated
Balance Sheet:
|
Pension
benefit plans
|
Other
benefit plans
|
||||||||||||
|
2007
|
2006
|
2007
|
2006
|
||||||||||
|
Accrued
benefit asset included in Other assets
|
340
|
344
|
–
|
–
|
|||||||||
|
Accrued
benefit liability included in Other liabilities
|
–
|
–
|
(126
|
)
|
(115
|
)
|
|||||||
|
Net
amount recorded as at October 31
|
340
|
344
|
(126
|
)
|
(115
|
)
|
|||||||
National
Bank of Canada | 2007 Annual Report
121
Included
in the above accrued benefit obligation and fair value of plan assets at
year-end are the following amounts in respect of benefit plans with accrued
benefit obligations in excess of plan assets:
|
2007
|
2006
|
||||||
|
Fair
value of plan assets
|
61
|
1,707
|
|||||
|
Accrued
benefit obligation
|
62
|
1,821
|
|||||
|
Funded
status – plan deficit
|
(1
|
)
|
(114
|
)
|
|||
As
at
October 31, plan assets consisted of:
|
Asset
category
|
2007
%
|
2006
%
|
|||||
|
Money
market
|
6
|
5
|
|||||
|
Bonds
|
31
|
31
|
|||||
|
Equities
|
55
|
56
|
|||||
|
Other
|
8
|
8
|
|||||
|
100
|
100
|
||||||
Plan
assets include investment securities issued by the Bank. As at October 31,
2007,
these investments totalled $155 million (2006: $129 million).
In
fiscal
2007, the Bank and its subsidiaries received close to $5 million (2006: $4
million) in management fees for related management, administration and custodial
services.
Elements
of defined benefit expense for the years ended October 31:
|
Pension
benefit plans
|
Other
benefit plans
|
||||||||||||
|
2007
|
2006
|
2007
|
2006
|
||||||||||
|
Current
service cost
|
54
|
48
|
6
|
5
|
|||||||||
|
Interest
cost
|
105
|
99
|
9
|
8
|
|||||||||
|
Actual
return on plan assets
|
(130
|
)
|
(173
|
)
|
–
|
–
|
|||||||
|
Actuarial
losses (gains) on obligation
|
(173
|
)
|
71
|
(11
|
)
|
15
|
|||||||
|
Plan
amendments
|
21
|
2
|
–
|
–
|
|||||||||
|
Expense
before adjustments to recognize the long-term nature of employee
future
benefits
|
(123
|
)
|
39
|
4
|
28
|
||||||||
|
Difference
between expected return and actual return on plan assets for
year
|
8
|
66
|
–
|
–
|
|||||||||
|
Difference
between actuarial losses recognized for year and actual actuarial
losses
on accrued benefit obligation for year
|
192
|
(47
|
)
|
13
|
(13
|
)
|
|||||||
|
Difference
between amortization of past service costs for year and actual plan
amendments for year
|
(13
|
)
|
2
|
–
|
–
|
||||||||
|
Defined
benefit expense
|
64
|
60
|
|||||||||||
|
Other
employee future benefit expense
|
17
|
15
|
|||||||||||
National
Bank of Canada | 2007 Annual Report
122
The
significant assumptions used by the Bank are as follows (weighted average):
|
Pension
benefit plans
|
Other
benefit plans
|
||||||||||||
|
2007
%
|
2006
%
|
2007
%
|
2006
%
|
||||||||||
|
Accrued
benefit obligation as of October 31
|
|||||||||||||
|
Discount
rate
|
5.75
|
5.25
|
6.00
|
5.50
|
|||||||||
|
Rate
of compensation increase
|
3.50
|
3.50
|
3.50
|
3.50
|
|||||||||
|
Defined
benefit expense for years ended October 31
|
|||||||||||||
|
Discount
rate
|
5.25
|
5.50
|
–
|
–
|
|||||||||
|
Expected
long-term rate of return on plan assets
|
7.00
|
7.00
|
–
|
–
|
|||||||||
|
Rate
of compensation increase
|
3.50
|
3.50
|
–
|
–
|
|||||||||
|
Other
employee future benefit expense for years ended
October 31
|
|||||||||||||
|
Discount
rate
|
–
|
–
|
5.50
|
5.75
|
|||||||||
|
Rate
of compensation increase
|
–
|
–
|
3.50
|
3.50
|
|||||||||
The
Bank
also offers its employees certain post-retirement and post-employment benefits,
compensated leave and termination benefits (non-pension employee benefits),
which are generally not funded. These benefits include health insurance, life
insurance and dental insurance.
For
measurement purposes, a 6.8% annual rate of increase (2006: 7.5%) in the per
capita cost of covered healthcare benefits was assumed for 2007. The rate was
assumed to decrease gradually to reach 5.5% in 2010 and remain at that level
thereafter.
Sensitivity
of key assumptions in 2007
|
Other benefit plans
|
Change in
obligation
|
Change in
expense
|
|||||
|
Impact
of a 0.25% change in the assumption regarding the discount
rate
|
5.9
|
0.7
|
|||||
|
Impact
of a 0.25% change in the assumption regarding the rate of compensation
increase
|
0.2
|
–
|
|||||
|
Impact
of a 1.00% increase in the expected healthcare cost trend
rate
|
20.3
|
3.8
|
|||||
|
Impact
of a 1.00% decrease in the expected healthcare cost trend
rate
|
(17.9
|
)
|
(3.0
|
)
|
|||
The
sensitivity analysis presented in the above table must be used with caution
given that the changes are hypothetical and the changes in each significant
assumption may not be linear.
Cash
payments for employee future benefits for the years ended October 31 are as
follows:
|
2007
|
2006
|
||||||
|
Bank
pension benefit plan contributions
|
51
|
45
|
|||||
|
Benefits
paid to beneficiaries under other benefit plans
|
6
|
5
|
|||||
National
Bank of Canada | 2007 Annual Report
123
18
|
Capital Stock
Authorized
First
preferred shares
An
unlimited number of shares, without par value, issuable for a maximum aggregate
consideration of $5 billion (2006: $1 billion).
Second
preferred shares
15
million shares, without par value, issuable for a maximum aggregate
consideration of $300 million.
Common
shares
An
unlimited number of shares, without par value, issuable for a maximum aggregate
consideration of $3 billion.
|
2007
|
|||||||||||||
|
Shares
outstanding and dividends declared
|
Shares
|
Dividends
|
|||||||||||
|
Number
of
shares
|
$ |
$
|
Per
share
|
||||||||||
|
First
Preferred Shares
|
|||||||||||||
|
Series
15
|
8,000,000
|
200
|
12
|
1.4625
|
|||||||||
|
Series
16
|
8,000,000
|
200
|
9
|
1.2125
|
|||||||||
|
Preferred
shares and dividends
|
16,000,000
|
400
|
21
|
||||||||||
|
Common
shares at beginning
|
161,512,351
|
1,566
|
|||||||||||
|
Issued
pursuant to:
|
|||||||||||||
|
Dividend
Reinvestment and Share Purchase Plan
|
292,234
|
18
|
|||||||||||
|
Stock
Option Plan
|
931,318
|
34
|
|||||||||||
|
Other
|
100,000
|
6
|
|||||||||||
|
Repurchase
of common shares
|
(5,006,600
|
)
|
(49
|
)
|
|||||||||
|
Impact
of shares purchased or sold for trading
|
(23,000
|
)
|
–
|
||||||||||
|
Common
shares at end and dividends
|
157,806,303
|
1,575
|
364
|
2.2800
|
|||||||||
|
Total
dividends
|
385
|
||||||||||||
|
2006
|
|||||||||||||
|
Shares
outstanding and dividends declared
|
Shares
|
Dividends
|
|||||||||||
|
Number
of
shares
|
$ |
$
|
Per
share
|
||||||||||
|
First
Preferred Shares
|
|||||||||||||
|
Series
15
|
8,000,000
|
200
|
12
|
1.4625
|
|||||||||
|
Series
16
|
8,000,000
|
200
|
9
|
1.2125
|
|||||||||
|
Preferred
shares and dividends
|
16,000,000
|
400
|
21
|
||||||||||
|
Common
shares at beginning
|
165,334,902
|
1,565
|
|||||||||||
|
Issued
pursuant to:
|
|||||||||||||
|
Dividend
Reinvestment and Share Purchase Plan
|
249,298
|
15
|
|||||||||||
|
Stock
Option Plan
|
1,074,308
|
35
|
|||||||||||
|
Repurchase
of common shares
|
(5,055,520
|
)
|
(48
|
)
|
|||||||||
|
Impact
of shares purchased or sold for trading
|
(90,637
|
)
|
(1
|
)
|
|||||||||
|
Common
shares at end and dividends
|
161,512,351
|
1,566
|
320
|
1.9600
|
|||||||||
|
Total
dividends
|
341
|
||||||||||||
National
Bank of Canada | 2007 Annual Report
124
Characteristics
of first preferred shares (amounts in dollars)
Series
15
Redeemable
in cash at the Bank’s option, subject to the prior approval of the
Superintendent, on or after May 15, 2008, in whole or in part, at a price equal
to $26.00 per share if redeemed before May 15, 2009, at a price equal to $25.75
per share if redeemed during the 12-month period preceding May 15, 2010, at
a
price equal to $25.50 per share if redeemed during the 12-month period preceding
May 15, 2011, at a price equal to $25.25 per share if redeemed during the
12-month period preceding May 15, 2012, and at a price equal to $25.00 per
share
if redeemed on or after May 15, 2012, plus, in all cases, all declared and
unpaid dividends at the date fixed for redemption.
Series
16
Redeemable
in cash at the Bank’s option, subject to the prior approval of the
Superintendent, on or after May 15, 2010, in whole or in part, at a price equal
to $26.00 per share if redeemed before May 15, 2011, at a price equal to $25.75
per share if redeemed during the 12-month period preceding May 15, 2012, at
a
price equal to $25.50 per share if redeemed during the 12-month period preceding
May 15, 2013, at a price equal to $25.25 per share if redeemed during the
12-month period preceding May 15, 2014, and at a price equal to $25.00 per
share
if redeemed on or after May 15, 2014, plus, in all cases, all declared and
unpaid dividends at the date fixed for redemption.
Repurchase
of common shares
On
February 1, 2007, the Bank filed a normal course issuer bid for the repurchase
and cancellation of up to 8,102,000 common shares over a 12-month period ending
no later than January 31, 2008. On January 23, 2006, the Bank filed a normal
course issuer bid for the repurchase and cancellation of up to 8,278,000 common
shares over a 12-month period ending no later than January 22, 2007. On January
13, 2005, the Bank filed a normal course issuer bid for the repurchase and
cancellation of up to 8,400,000 common shares over a 12-month period that ended
January 12, 2006. Repurchases were made on the open market at market prices
through the facilities of the Toronto Stock Exchange. Premiums paid above the
average book value of the common shares were charged to Retained earnings.
As at
October 31, 2007, the Bank had completed the repurchase of 5,006,600 common
shares (2006: 5,055,520) at a cost of $315 million (2006: $309 million), which
reduced Common share capital by $49 million (2006: $48 million) and Retained
earnings by $266 million (2006: $261 million).
Preferred
shares – authorized
The
preferred shares described below have been created and reserved for future
issuance by the Bank under two issuances of convertible innovative capital
instruments, which may be exchanged under certain conditions. As at October
31,
2007, no shares of these series had been issued or traded.
Series
17
Each
NBC
CapS-Series 1 will be exchangeable at any time, upon prior notice, for 40 First
Preferred Shares, Series 17 of the Bank. The Bank’s First Preferred Shares,
Series 17 pay semi-annual non-cumulative cash dividends and are redeemable
at
the Bank’s option, subject to the prior approval of the Superintendent, on or
after June 30, 2011, but not at the option of the holders.
Series
18
Each
NBC
CapS-Series 1 will be exchanged automatically, without the consent of the
holders, for 40 First Preferred Shares, Series 18 of the Bank, upon the
occurrence of any one of the following events: (i) proceedings are commenced
for
the winding-up of the Bank; (ii) the Superintendent takes control of the Bank;
(iii) the Bank has a Tier 1 capital ratio of less than 5% or a total capital
ratio of less than 8%; or (iv) the Superintendent has directed the Bank to
increase its capital or to provide additional liquidity and the Bank elects
such
automatic exchange or the Bank fails to comply with such direction to the
satisfaction of the Superintendent. The Bank’s First Preferred Shares, Series 18
pay semi-annual non-cumulative cash dividends and are redeemable at the option
of the Bank, subject to the prior approval of the Superintendent, on or after
June 30, 2011, but not at the option of the holders.
Series
Z
One
preferred share of NB Capital Corporation, a subsidiary of the Bank, will be
exchanged automatically for one Preferred Share, Series Z upon the occurrence
of
any one of the following events: (i) the Bank defaults on the dividend payments
on its first preferred shares; (ii) the Bank’s Tier 1 capital ratio is less than
4% or its total capital ratio is less than 8%; or (iii) the Superintendent
has
directed the Bank to increase its capital, pursuant to subsection 485(3) of
the
Bank Act (Canada).
Reserved
common shares
As
at
October 31, 2007, 3,183,448 common shares were reserved under the Dividend
Reinvestment and Share Purchase Plan and 15,561,130 common shares were reserved
under the Stock Option Plan.
National
Bank of Canada | 2007 Annual Report
125
Restriction
on the payment of dividends
The
Bank
is prohibited from declaring dividends on its common or preferred shares if
there are reasonable grounds for believing that the Bank would, by so doing,
be
in contravention of the regulations of the Bank Act (Canada) or the guidelines
of the Superintendent with respect to capital adequacy and liquidity. In
addition, the ability to pay common share dividends is restricted by the terms
of the outstanding preferred shares pursuant to which the Bank may not pay
dividends on its common shares without the approval of the holders of the
outstanding preferred shares, unless all preferred share dividends have been
declared and paid or set aside for payment. If NBC Capital Trust failed to
pay
any required distribution on the trust capital securities in full, the Bank
could not declare dividends on any of its preferred or common shares. Refer
to
Note 12.
Dividend
Reinvestment and Share Purchase Plan
Under
the
Dividend Reinvestment and Share Purchase Plan, holders of common shares of
the
Bank invest in common shares without paying a commission or administration
fee.
Participants in the Plan may acquire shares by reinvesting cash dividends paid
on shares they hold or by making optional cash payments.
National
Bank of Canada | 2007 Annual Report
126
19
|
Stock-Based Compensation
The
information below on compensation expense excludes the impact of hedging.
Stock
Option Plan
The
Bank
offers a Stock Option Plan to officers and other designated persons of the
Bank
and its subsidiaries. Under the Plan, options are awarded annually and provide
participants with the right to purchase common shares at an exercise price
equal
to the closing price of the common shares of the Bank on the Toronto Stock
Exchange on the day preceding the award. The options vest evenly over a
four-year period and expire 10 years from the award date or, in certain
circumstances set out in the Plan, within specified time limits. The maximum
number of common shares that may be issued under the Stock Option Plan is
15,561,130 as at October 31, 2007 (13,321,347 as at October 31, 2006). The
maximum number of common shares reserved for a participant may not exceed 5%
of
the total number of Bank shares issued and outstanding.
|
2007
|
2006
|
||||||||||||
|
Number
of options |
Weighted
average exercise price |
Number
of options |
Weighted
average exercise price |
||||||||||
|
Stock
Option Plan
|
|||||||||||||
|
Outstanding
at beginning
|
5,391,912
|
|
$41.40
|
5,613,970
|
|
$35.76
|
|||||||
|
Awarded
|
1,493,504
|
|
$65.90
|
943,200
|
|
$61.44
|
|||||||
|
Exercised
|
(931,318
|
)
|
|
$32.28
|
(1,074,308
|
)
|
|
$29.56
|
|||||
|
Cancelled
|
(183,751
|
)
|
|
$57.21
|
(90,950
|
)
|
|
$41.18
|
|||||
|
Outstanding
at end
|
5,770,347
|
|
$48.71
|
5,391,912
|
|
$41.40
|
|||||||
|
Exercisable
at end
|
2,787,177
|
|
$37.86
|
2,494,166
|
|
$32.77
|
|||||||
|
Exercise
price
|
Outstanding
|
Options
exercisable
|
Expiry
date
|
|||||||
|
$25.20
|
34,500
|
34,500
|
December
2007
|
|||||||
|
$25.20
|
80,550
|
80,550
|
December
2008
|
|||||||
|
$24.90
|
158,150
|
158,150
|
December
2010
|
|||||||
|
$28.01
|
394,990
|
394,990
|
December
2011
|
|||||||
|
$30.95
|
739,807
|
732,307
|
December
2012
|
|||||||
|
$41.00
|
929,837
|
645,675
|
December
2013
|
|||||||
|
$48.20
|
1,140,935
|
532,505
|
December
2014
|
|||||||
|
$61.44
|
866,350
|
208,500
|
December
2015
|
|||||||
|
$65.90
|
1,425,228
|
–
|
December
2016
|
|||||||
|
Total
|
5,770,347
|
2,787,177
|
||||||||
During
the fiscal year ended October 31, 2007, the Bank awarded 1,493,504 stock
options
(2006: 943,200) with a fair value of $11.32 per option (2006:
$12.81).
The
fair
value of options awarded was estimated on the award date using the Black-Scholes
model. The following assumptions were used for accounting purposes:
|
2007
|
2006
|
||||||
|
Risk-free
interest rate
|
4.05
|
%
|
4.18
|
%
|
|||
|
Expected
life of options
|
5
years
|
6
years
|
|||||
|
Expected
volatility
|
22.5
|
%
|
24.0
|
%
|
|||
|
Expected
dividend yield
|
3.3
|
%
|
3.2
|
%
|
|||
The
compensation expense recorded for these options for the year ended October
31,
2007 was $16 million (2006: $12 million).
National
Bank of Canada | 2007 Annual Report
127
Stock
Appreciation Rights (SAR) Plan
The
Bank
offers an SAR plan to officers and other designated persons of the Bank and
its
subsidiaries. Under the Plan, when participants exercise this right, they
receive a cash amount equal to the difference between the closing price of
the
common shares of the Bank on the Toronto Stock Exchange on the day preceding
the
exercise date and the closing price on the day preceding the award date. SARs
vest evenly over a four-year period and expire 10 years after the award date
or,
in certain circumstances set out in the Plan, within specified time limits.
Compensation expense recognized for the year ended October 31, 2007 with respect
to the Plan amounted to $2 million (2006: $3 million).
|
2007
|
2006
|
||||||||||||
|
Number
of SARs |
Weighted
average exercise price |
Number
of SARs |
Weighted
average exercise price
|
||||||||||
|
SAR
Plan
|
|||||||||||||
|
Outstanding
at beginning
|
306,800
|
|
$20.35
|
378,310
|
|
$19.84
|
|||||||
|
Awarded
|
48,396
|
|
$65.90
|
5,400
|
|
$61.44
|
|||||||
|
Exercised
|
(49,400
|
)
|
|
$22.26
|
(68,935
|
)
|
|
$19.56
|
|||||
|
Cancelled
|
(6,396
|
)
|
|
$65.90
|
(7,975
|
)
|
|
$30.79
|
|||||
|
Outstanding
at end
|
299,400
|
|
$26.43
|
306,800
|
|
$20.35
|
|||||||
|
Exercisable
at end
|
254,646
|
|
$20.21
|
282,419
|
|
$18.16
|
|||||||
|
Exercise
price
|
SARs
outstanding |
SARs
exercisable |
Expiry
date
|
|||||||
|
$17.35
|
231,500
|
231,500
|
December
2009
|
|||||||
|
$24.90
|
850
|
850
|
December
2010
|
|||||||
|
$28.01
|
2,650
|
2,650
|
December
2011
|
|||||||
|
$30.95
|
4,125
|
4,125
|
December
2012
|
|||||||
|
$41.00
|
6,525
|
3,425
|
December
2013
|
|||||||
|
$48.20
|
6,350
|
1,450
|
December
2014
|
|||||||
|
$61.44
|
5,400
|
1,350
|
December
2015
|
|||||||
|
$65.90
|
42,000
|
9,296
|
December
2016
|
|||||||
|
Total
|
299,400
|
254,646
|
||||||||
Deferred
Stock Unit Plans
The
DSU
Plans are for officers and other designated persons of the Bank and its
subsidiaries as well as directors. The Plans make it possible to tie a portion
of the value of the compensation of participants to the future value of the
Bank’s common shares. A DSU is a right that has a value equal to the closing
price of a common share of the Bank on the Toronto Stock Exchange on the day
preceding the award. DSUs generally vest evenly over four years. Additional
DSUs
are credited to the account of participants equal in amount to the dividends
paid on common shares of the Bank and vest evenly over the same period as the
reference DSUs. DSUs may only be cashed when the participant retires or leaves
the Bank, or for a director, when his term ends. A total of 148,324 DSUs were
outstanding as at October 31, 2007 (2006: 219,047). Compensation expense
recognized for the year ended October 31, 2007 with respect to the Plans was
$1
million (2006: $3 million).
Restricted
Stock Unit Plan
The
RSU
Plan is for certain officers and other designated persons of the Bank and its
subsidiaries. The objective of the Plan is to ensure that the compensation
of
certain officers is competitive and to foster retention. An RSU is a right
that
has a value equal to the closing price of a common share of the Bank on the
Toronto Stock Exchange on the day preceding the award. RSUs generally vest
evenly over three years, although some RSUs vest on the last day of the 35th
month following the date of the award, the date on which all RSUs expire.
Additional RSUs are credited to the account of participants equal in amount
to
the dividends declared on the common shares of the Bank and vest evenly over
the
same period as the reference RSUs. As at October 31, 2007, a total of 364,653
RSUs were outstanding (2006: 163,538). Compensation expense recognized for
the
year ended October 31, 2007 with respect to the Plan was $4 million (2006:
$8
million).
National
Bank of Canada | 2007 Annual Report
128
Deferred
Compensation Plan of National Bank Financial
This
Plan
is exclusively for key employees of Individual Investor Services of National
Bank Financial (NBF). The purpose of the Plan is to foster the retention of
key
employees and promote the growth in income and the continuous improvement in
profitability at Individual Investor Services. Under the Plan, participants
can
defer a portion of their annual compensation and NBF may pay a contribution
to
key employees when certain financial objectives are met. Amounts awarded by
NBF
and the compensation deferred by participants are invested in, among others,
Bank stock units. These stock units represent a right, the value of which
corresponds to the closing price of the common shares of the Bank on the Toronto
Stock Exchange on the award date. Additional units are paid to the participant’s
account equal in amount to the dividends declared on the common shares of the
Bank. Stock units representing the amounts awarded by NBF vest evenly over
four
years. When a participant retires, or in certain cases when the participant’s
employment is terminated, the participant receives a cash amount representing
the value of the vested stock units. As at October 31, 2007, 917,544 units
were
outstanding (2006: 934,249). No compensation expense was recognized for the
year
ended October 31, 2007 with respect to the Plan (2006: $9 million). However,
an
adjustment of $8 million reduced the compensation expense for the year ended
October 31, 2007.
Employee
Share Ownership Plan
Under
the
Bank’s Employee Share Ownership Plan, employees who meet the eligibility
criteria can contribute up to 8% of their annual gross salary by way of payroll
deductions. The Bank matches 25% of the employee contribution amount, to a
maximum of $1,500 per annum. Bank contributions vest to the employee after
one
year of continuous participation in the Plan. Subsequent contributions vest
immediately. The Bank’s contributions, amounting to $6 million in 2007 (2006: $6
million), were charged to Salaries and staff benefits when paid. As at October
31, 2007, a total of 2,499,936 common shares were held for this Plan (2006:
2,370,775).
Plan
shares are purchased on the open market and are considered to be outstanding
for
earnings per share calculations. Dividends paid on the Bank’s common shares held
for the Employee Share Ownership Plan are used to purchase other common shares
on the open market.
National
Bank of Canada | 2007 Annual Report
129
20
|
Income Taxes
The
Bank’s income taxes presented in the consolidated financial statements for the
fiscal years ended October 31 are as follows:
|
2007
|
2006
|
||||||
|
Consolidated
Statement of Income
|
|||||||
|
Income
taxes
|
79
|
277
|
|||||
|
Consolidated
Statement of Changes in Shareholders’ Equity
|
|||||||
|
Income
taxes related to:
|
|||||||
|
Impact
of initial adoption of financial instruments standards
|
13
|
–
|
|||||
|
Dividends
on First Preferred Shares, Series 15 and 16
|
(8
|
)
|
7
|
||||
|
Redemption
of subordinated debentures –
2001
|
–
|
10
|
|||||
|
Accumulated
other comprehensive income
|
64
|
31
|
|||||
|
69
|
48
|
||||||
|
Total
income taxes
|
148
|
325
|
|||||
|
Consolidated
Statement of Comprehensive Income
|
|||||||
|
Income
tax expense (recovery) for each component of Other comprehensive
income
|
|||||||
|
Net
unrealized gains (losses) on translating financial statements of
self-sustaining operations
|
(22
|
)
|
11
|
||||
|
Impact
of hedging net foreign currency translation gains (losses)
|
91
|
20
|
|||||
|
Net
unrealized gains (losses) on available for sale financial
assets
|
23
|
–
|
|||||
|
Reclassification
to net income of (gains) losses on available for sale financial
assets
|
(7
|
)
|
–
|
||||
|
Net
gains (losses) on derivative financial instruments designated as
cash flow
hedges
|
(26
|
)
|
–
|
||||
|
Reclassification
to net income of (gains) losses on derivative financial instruments
designated as
cash flow hedges
|
5
|
–
|
|||||
|
64
|
31
|
||||||
Income
taxes were as follows:
|
2007
|
2006
|
||||||
|
Current
income taxes
|
92
|
304
|
|||||
|
Future
income taxes relating to the inception and reversal of temporary
differences
|
56
|
21
|
|||||
|
Income
taxes
|
148
|
325
|
|||||
During
fiscal 2001, the Bank redeemed a subordinated debenture convertible into common
shares for a total consideration of $65 million. As a result of this redemption,
a loss of $28 million, net of income taxes of $17 million, was charged to
Retained earnings. In 2006, $10 million in income taxes was recognized in
Retained earnings in order to record the portion not eligible for tax purposes.
The
temporary differences and carryforwards resulting in future income tax assets
and liabilities are as follows:
|
2007
|
2006
|
||||||
|
Future
income tax assets
|
|||||||
|
Allowance
for credit losses and other liabilities
|
247
|
307
|
|||||
|
Accrued
benefit liability –
Other benefit plans
|
38
|
36
|
|||||
|
Accumulated
other comprehensive income
|
7
|
-
|
|||||
|
292
|
343
|
||||||
|
Future
income tax liabilities
|
|||||||
|
Premises
and equipment
|
(35
|
)
|
(25
|
)
|
|||
|
Securitization
|
(45
|
)
|
(41
|
)
|
|||
|
Accrued
benefit asset – Pension benefit plans
|
(102
|
)
|
(107
|
)
|
|||
|
Other
|
(104
|
)
|
(91
|
)
|
|||
|
(286
|
)
|
(264
|
)
|
||||
|
Net
balance of future income tax assets
|
6
|
79
|
|||||
|
Future
income tax assets
|
91
|
138
|
|||||
|
Future
income tax liabilities
|
(85
|
)
|
(59
|
)
|
|||
|
6
|
79
|
||||||
National
Bank of Canada | 2007 Annual Report
130
Reconciliation of the Bank’s income tax rate for the years ended October 31 is as follows:
|
2007
|
2006
|
||||||||||||
|
$
|
%
|
$
|
%
|
||||||||||
|
Income
before income taxes and non-controlling interest
|
688
|
100.0
|
1,180
|
100.0
|
|||||||||
|
Income
taxes at Canadian statutory income tax rate
|
230
|
33.5
|
395
|
33.5
|
|||||||||
|
Reduction
in income tax rate due to:
|
|||||||||||||
|
Tax-exempt
income from securities, mainly
dividends from Canadian corporations
|
(86
|
)
|
(12.5
|
)
|
(79
|
)
|
(6.7
|
)
|
|||||
|
Capital
gains
|
(6
|
)
|
(0.9
|
)
|
(1
|
)
|
(0.1
|
)
|
|||||
|
Rates
applicable to subsidiaries and other entities abroad
|
(73
|
)
|
(10.6
|
)
|
(50
|
)
|
(4.2
|
)
|
|||||
|
Other
items
|
14
|
2.0
|
12
|
1.0
|
|||||||||
|
(151
|
)
|
(22.0
|
)
|
(118
|
)
|
(10.0
|
)
|
||||||
|
Income
taxes reported in the Consolidated Statement of Income and effective
income tax rate
|
79
|
11.5
|
277
|
23.5
|
|||||||||
National
Bank of Canada | 2007 Annual Report
131
21
|
Earnings per Share
Diluted
net earnings per common share were calculated based on net income less dividends
on preferred shares divided by the average number of common shares outstanding
taking into account the dilution effect of stock options using the treasury
stock method.
The
adjustment to the average number of Common Shares does not take into account
stock options whose exercise price is higher than the average price of the
share
for the year.
|
2007
|
2006
|
||||||
|
Earnings
per share – basic
|
|||||||
|
Net
income
|
541
|
871
|
|||||
|
Dividends
on preferred shares
|
(21
|
)
|
(21
|
)
|
|||
|
Net
income available to common shareholders
|
520
|
850
|
|||||
|
Average
basic number of common shares outstanding (thousands)
|
159,811
|
162,851
|
|||||
|
Earnings
per share – basic
|
$
|
3.25
|
$
|
5.22
|
|||
|
Earnings
per share – diluted
|
|||||||
|
Net
income available to common shareholders
|
520
|
850
|
|||||
|
Average
basic number of common shares outstanding (thousands)
|
159,811
|
162,851
|
|||||
|
Adjustment
to average number of common shares (thousands)
|
|||||||
|
Stock
options
|
1,379
|
2,698
|
|||||
|
Average
diluted number of common shares outstanding (thousands)
|
161,190
|
165,549
|
|||||
|
Earnings
per share – diluted
|
$
|
3.22
|
$
|
5.13
|
|||
National
Bank of Canada | 2007 Annual Report
132
22
|
Guarantees, Commitments and Contingent Liabilities
Guarantees
The
guarantees are obligations that meet the definition of guarantee under AcG-14.
The
maximum potential amount of future payments represents the maximum risk of
loss
if there were a total default by the guaranteed parties, without consideration
of possible recoveries under recourse provisions, insurance policies or from
collateral held or pledged. The maximum potential amount of future payments
for
significant guarantees issued by the Bank and in effect as at October 31 is
presented in the following table:
|
2007
|
2006
|
||||||
|
Letters
of guarantee
|
1,354
|
1,306
|
|||||
|
Backstop
liquidity facilities
|
105
|
1,410
|
|||||
|
Derivative
financial instruments
|
730
|
1,063
|
|||||
|
Securities
lending
|
754
|
847
|
|||||
|
Other
indemnification agreements
|
123
|
146
|
|||||
|
Other
guarantee
|
32
|
25
|
|||||
Letters
of guarantee
In
the
normal course of business, the Bank issues letters of guarantee. These letters
of guarantee represent irrevocable commitments that the Bank will make payments
in the event that a client cannot meet its financial obligations to third
parties. The Bank’s policy for requiring collateral security with respect to
letters of guarantee is similar to that for loans. Generally, the term of these
letters of guarantee is less than two years. The general allowance for credit
losses covers all credit risks including those relating to letters of guarantee.
Backstop
liquidity facilities
The
Bank
administers a multi-seller conduit that purchases various financial assets
from
clients and funds these purchases by issuing asset-backed commercial paper.
The
Bank provides a backstop liquidity facility to this multi-seller conduit. As
at
October 31, 2007, the amount of the backstop liquidity facility totalled $693
million, representing the total amount of commercial paper outstanding. At
that
date, the Bank held $588 million of this commercial paper and, consequently,
the
maximum potential amount of future payments as at October 31, 2007 was $105
million.
Prior
to
October 2007, this backstop liquidity facility could only be drawn if, after
a
general market disruption, the program were unable to access the commercial
paper market. In October 2007, the Bank amended some of the terms and conditions
of this backstop liquidity facility. As a result of these amendments, it can
be
drawn even if there is no general market disruption. This facility has a term
of
less than one year and can be periodically renewed. The terms and conditions
of
this backstop liquidity facility do not require the Bank to advance money to
the
conduit if it is insolvent or involved in bankruptcy proceedings or to fund
non-performing assets beyond the amount of the available credit enhancement.
The
backstop liquidity facility provided by the Bank has not been drawn to date.
Derivative
financial instruments
In
the
normal course of business, the Bank enters into written put options to meet
the
needs of its clients and for its own risk management and trading activities.
Put
options are contractual agreements where the Bank conveys to the purchaser
the
right, but not the obligation, to sell to the Bank by or before a predetermined
date, a specific amount of currency, commodities or financial instruments,
at a
price agreed to when the option is sold. Written put options that qualify as
a
guarantee under AcG-14 include primarily over-the-counter currency options
with
companies other than financial institutions and over-the-counter stock options
when it is probable that the counterparty holds the underlying securities.
Most
of the terms of these options vary according to the contracts, but do not
generally exceed two years. As at October 31, 2007, the Bank recorded a
liability of $36 million in the Consolidated Balance Sheet with respect to
these
written put options (2006: $35 million), representing their fair value.
Securities
lending
Under
securities lending agreements the Bank has entered into with certain clients
who
have entrusted it with the safekeeping of their securities, the Bank lends
their
securities to third parties and indemnifies its clients in the event of loss.
In
order to protect itself against any contingent loss, the Bank obtains, as
security from the borrower, a cash amount or extremely liquid marketable
securities with a fair value greater than that of the securities loaned. No
amount has been accrued in the Consolidated Balance Sheet with respect to
potential indemnities resulting from these securities lending agreements.
National
Bank of Canada | 2007 Annual Report
133
Other
indemnification agreements
In
the
normal course of business, including securitization activities and
discontinuance of operations and activities, the Bank enters into numerous
contractual agreements. Under these agreements, the Bank undertakes to
compensate the counterparty for costs incurred as a result of litigation,
changes in laws and regulations (including tax legislation), claims with respect
to past performance, incorrect representations or the non-performance of certain
restrictive covenants. Moreover, as a member of a securities transfer network
and pursuant to the membership agreement and the regulations governing the
operation of the network, the Bank granted a movable hypothec to the network
that can be used in the event another member fails to meet its contractual
obligations. The nature of certain of these commitments prevents the Bank from
estimating the maximum potential liability it may be required to pay. The
duration of these agreements is stipulated in each contract. The maximum
potential future payments that the Bank is able to estimate is presented in
the
previous table and their duration does not exceed two years. No amount has
been
accrued in the Consolidated Balance Sheet with respect to these agreements.
Other
guarantee
Pursuant
to a mutual guarantee agreement required by a regulatory authority, a subsidiary
of the Bank has agreed to guarantee all commitments, debts and liabilities
of a
company subject to significant influence to the maximum of its regulatory
capital. This guarantee expires on the date the investment in the company
subject to significant influence is sold, or sooner if deemed appropriate by
the
regulatory authority. To date, this guarantee remains undrawn and no amount
has
been accrued in the Consolidated Balance Sheet with respect to this agreement.
Commitments
As
at
October 31, 2007, minimum commitments under leases, contracts for outsourced
information technology services and other leasing agreements are as follows:
|
Premises
|
Service
contracts |
Equipment and
furniture |
Total
|
||||||||||
|
2008
|
121
|
208
|
9
|
338
|
|||||||||
|
2009
|
114
|
184
|
7
|
305
|
|||||||||
|
2010
|
106
|
169
|
4
|
279
|
|||||||||
|
2011
|
98
|
165
|
1
|
264
|
|||||||||
|
2012
|
90
|
62
|
1
|
153
|
|||||||||
|
2013
and thereafter
|
477
|
16
|
11
|
504
|
|||||||||
|
1,006
|
804
|
33
|
1,843
|
||||||||||
Pledged
assets
In
the
normal course of business, the Bank pledges securities and other assets as
collateral for various liabilities it contracts. A breakdown of assets pledged
as collateral is provided below.
|
As
at October 31
|
2007
|
2006
|
|||||
|
Assets
pledged to:
|
|||||||
|
Bank
of Canada
|
–
|
25
|
|||||
|
Direct
clearing organizations
|
5,548
|
2,577
|
|||||
|
Assets
pledged in relation to:
|
|||||||
|
Derivative
financial transactions
|
628
|
276
|
|||||
|
Borrowing,
securities lending and securities sold under repurchase
agreements
|
15,187
|
11,117
|
|||||
|
Other
|
71
|
180
|
|||||
|
Total
|
21,434
|
14,175
|
|||||
National
Bank of Canada | 2007 Annual Report
134
Credit
instruments
In
the
normal course of business, the Bank enters into various off-balance sheet
commitments. The credit instruments used to meet the financing needs of its
clients represent the maximum amount of additional credit the Bank could be
obligated to extend if the commitments were fully drawn.
|
As
at October 31
|
2007
|
2006
|
|||||
|
Letters
of guarantee(1)
|
1,354
|
1,306
|
|||||
|
Documentary
letters of credit(2)
|
81
|
102
|
|||||
|
Credit
card loans(3)
|
5,691
|
5,446
|
|||||
|
Commitments
to extend credit(3)
|
|||||||
|
Original
term of one year or less
|
4,694
|
4,680
|
|||||
|
Original
term over one year
|
11,973
|
12,157
|
|||||
| (1) |
See
Letters of guarantee, page 133.
|
| (2) |
Documentary
letters of credit are documents issued by the Bank and used in
international trade to enable a third party to draw drafts on the
Bank up
to an amount established under specific terms and conditions; these
instruments are collateralized by the delivery of goods to which
they are
related.
|
| (3) |
Credit
card loans and credit commitments represent the undrawn portions
of credit
authorizations granted in the form of loans, acceptances, letters
of
guarantee and documentary letters of credit. The Bank is required
at all
times to make the undrawn portion of the authorization available,
subject
to certain conditions.
|
Other
commitments
The
Bank
acts as an investor in investment banking activities where it enters into
agreements to finance external private equity funds and investments in equity
and debt securities at market value at the time the agreements are signed.
In
connection with these activities, the Bank has commitments to invest up to
$163
million as at October 31, 2007 (2006: $196 million).
Litigation
In
the
normal course of business, the Bank is a party in legal proceedings, many of
which are related to lending activities and arise when the Bank takes measures
to collect delinquent loans. The Bank is also sometimes named as a defendant
or
joined in class action suits filed by consumers contesting, among other things,
certain transaction fees and unilateral increases in their credit card limits
or
who wish to avail themselves of certain provisions of consumer protection
legislation. The Bank’s investment dealer subsidiary, National Bank Financial,
is also a party in various legal proceedings in the normal course of business.
Most of these proceedings concern Individual Investor Services and generally
relate to the suitability of investments made by investors relying on the advice
of their respective advisors. In the opinion of Management, based on available
information and past experience, the related aggregate potential liability
will
not have a material unfavourable impact on the Bank’s financial position.
As
a
result of the events that occured in the non-bank asset-backed commercial paper
(ABCP) market in August 2007, the Bank and its subsidiaries received requests
for information and complaints from some of their clients relating to the role
of the Bank and its subsidiaries in ABCP related transactions. To date, no
litigation relating to ABCP has been commenced involving the Bank or its
subsidiaries. However, if legal proceedings were to be initiated on the basis
of
the arguments advanced by ABCP holders to date, Management is of the opinion
that the Bank and its subsidiaries would have strong defences available. Pending
the resolution of the credit and liquidity issues and uncertainties affecting
ABCP, it is not possible to determine the outcome of these client requests
and
complaints.
National
Bank of Canada | 2007 Annual Report
135
23
|
Derivative Financial Instruments
Derivative
financial instruments are financial contracts whose value is derived from an
underlying interest rate, exchange rate, or equity, commodity or credit
instrument or index. In the normal course of business, the Bank uses derivative
financial instruments for trading and asset/liability management purposes.
The
main
types of derivative financial instruments used are as follows:
Forwards
and futures
Forwards
and futures are contractual obligations to buy or deliver a specific amount
of
currency, interest rates, commodities or financial instruments on a specific
future date at a specified price. Forwards are tailor-made agreements transacted
in the over-the-counter market. Futures are traded on organized exchanges and
are subject to cash margining calculated daily by clearing houses.
Swaps
Swaps
are
specific transactions in which two parties agree to exchange cash flows. The
Bank uses the following types of swap contracts:
|
·
|
cross
currency swaps are transactions in which counterparties exchange
fixed
rate interest payments and principal payments in different currencies;
|
|
·
|
interest
rate swaps are transactions in which counterparties exchange fixed
and
floating rate interest payments, based on the notional principal
value in
the same currency;
|
|
·
|
commodity
swaps are transactions in which counterparties exchange fixed and
floating
rate payments, based on the notional principal value of a single
product;
|
|
·
|
equity
swaps are transactions in which counterparties agree to exchange
the
return on one equity or group of equities for a payment based on
a
benchmark interest rate; and
|
|
·
|
credit
default swaps are transactions in which one of the counterparties
agrees
to pay interest expenses to the other counterparty so that it can
make a
payment if a credit event occurs.
|
Options
Options
are agreements between two parties in which the writer of the option conveys
to
the buyer the right, but not the obligation, to buy or sell, at or by a
predetermined date, at any time prior to a predetermined expiry date, a specific
amount of currency, commodities or financial instruments at a price agreed
to
when the option is arranged. The writer receives a premium for selling this
instrument.
Notional
amounts
Notional
amounts, which are off-balance sheet items, represent the set underlying
principal of a derivative financial instrument and serve as a point of reference
in applying an exchange rate, interest rate, stock market price or other
variable in order to determine the amount of cash flows to be exchanged.
Notional amounts are presented in the following table.
National
Bank of Canada | 2007 Annual Report
136
|
2007
|
2006
|
||||||||||||||||||||||||
|
Term
to maturity
|
Within
3 months |
3
to
12
months |
1
to
5
years |
Over
5 years |
Total
contracts |
Contracts
held for trading purposes |
Contracts
designated as hedges |
Total
contracts |
|||||||||||||||||
|
INTEREST
RATE CONTRACTS
|
|||||||||||||||||||||||||
|
OTC
contracts
|
|||||||||||||||||||||||||
|
Guaranteed
interest rate contracts
|
–
|
6,741
|
168
|
–
|
6,909
|
6,909
|
–
|
9,732
|
|||||||||||||||||
|
Swaps
|
14,814
|
24,148
|
67,484
|
20,346
|
126,792
|
113,304
|
13,488
|
118,597
|
|||||||||||||||||
|
Options
purchased
|
900
|
1,700
|
1,719
|
25
|
4,344
|
4,344
|
–
|
11,981
|
|||||||||||||||||
|
Options
written
|
3,465
|
5,299
|
1,036
|
231
|
10,031
|
10,031
|
–
|
13,616
|
|||||||||||||||||
|
Total
|
19,179
|
37,888
|
70,407
|
20,602
|
148,076
|
134,588
|
13,488
|
153,926
|
|||||||||||||||||
|
Exchange-traded
contracts
|
|||||||||||||||||||||||||
|
Futures
|
|||||||||||||||||||||||||
|
Long
positions
|
11,472
|
14,433
|
3,659
|
23
|
29,587
|
29,587
|
–
|
14,375
|
|||||||||||||||||
|
Short
positions
|
504
|
3,282
|
2,709
|
23
|
6,518
|
6,518
|
–
|
16,202
|
|||||||||||||||||
|
Options
purchased
|
20,760
|
8,321
|
–
|
–
|
29,081
|
29,081
|
–
|
104,273
|
|||||||||||||||||
|
Options
written
|
16,123
|
7,956
|
–
|
–
|
24,079
|
24,079
|
–
|
97,742
|
|||||||||||||||||
|
Total
|
48,859
|
33,992
|
6,368
|
46
|
89,265
|
89,265
|
–
|
232,592
|
|||||||||||||||||
|
FOREIGN
EXCHANGE CONTRACTS
|
|||||||||||||||||||||||||
|
OTC
contracts
|
|||||||||||||||||||||||||
|
Forwards
|
4,811
|
1,225
|
288
|
71
|
6,395
|
6,395
|
–
|
7,304
|
|||||||||||||||||
|
Swaps
|
18,318
|
5,182
|
6,675
|
2,367
|
32,542
|
29,464
|
3,078
|
43,164
|
|||||||||||||||||
|
Options
purchased
|
3,855
|
3,190
|
291
|
9
|
7,345
|
7,345
|
–
|
9,094
|
|||||||||||||||||
|
Options
written
|
3,634
|
3,193
|
226
|
10
|
7,063
|
7,063
|
–
|
11,651
|
|||||||||||||||||
|
Total
|
30,618
|
12,790
|
7,480
|
2,457
|
53,345
|
50,267
|
3,078
|
71,213
|
|||||||||||||||||
|
Exchange-traded
contracts
|
|||||||||||||||||||||||||
|
Futures
|
|||||||||||||||||||||||||
|
Long
positions
|
572
|
–
|
–
|
–
|
572
|
572
|
–
|
308
|
|||||||||||||||||
|
Short
positions
|
21
|
–
|
–
|
–
|
21
|
21
|
–
|
132
|
|||||||||||||||||
|
Options
purchased
|
–
|
–
|
–
|
–
|
–
|
–
|
–
|
–
|
|||||||||||||||||
|
Options
written
|
–
|
–
|
–
|
–
|
–
|
–
|
–
|
–
|
|||||||||||||||||
|
Total
|
593
|
–
|
–
|
–
|
593
|
593
|
–
|
440
|
|||||||||||||||||
|
EQUITY,
COMMODITY AND CREDIT DERIVATIVE CONTRACTS
|
|||||||||||||||||||||||||
|
OTC
contracts
|
|||||||||||||||||||||||||
|
Forwards
|
15
|
34
|
57
|
61
|
167
|
148
|
19
|
435
|
|||||||||||||||||
|
Swaps
|
5,586
|
5,796
|
7,922
|
4,602
|
23,906
|
23,906
|
–
|
13,152
|
|||||||||||||||||
|
Options
purchased
|
458
|
1,355
|
4,437
|
1,418
|
7,668
|
7,668
|
–
|
9,021
|
|||||||||||||||||
|
Options
written
|
366
|
1,496
|
4,049
|
1,495
|
7,406
|
7,406
|
–
|
1,729
|
|||||||||||||||||
|
Total
|
6,425
|
8,681
|
16,465
|
7,576
|
39,147
|
39,128
|
19
|
24,337
|
|||||||||||||||||
|
Exchange-traded
contracts
|
|||||||||||||||||||||||||
|
Futures
|
|||||||||||||||||||||||||
|
Long
positions
|
6,476
|
2,873
|
2,398
|
2
|
11,749
|
11,749
|
–
|
6,931
|
|||||||||||||||||
|
Short
positions
|
3,887
|
2,045
|
93
|
–
|
6,025
|
6,025
|
–
|
3,635
|
|||||||||||||||||
|
Options
purchased
|
874
|
852
|
325
|
–
|
2,051
|
2,051
|
–
|
1,046
|
|||||||||||||||||
|
Options
written
|
913
|
388
|
296
|
–
|
1,597
|
1,597
|
–
|
849
|
|||||||||||||||||
|
Total
|
12,150
|
6,158
|
3,112
|
2
|
21,422
|
21,422
|
–
|
12,461
|
|||||||||||||||||
|
Total
2007
|
117,824
|
99,509
|
103,832
|
30,683
|
351,848
|
335,263
|
16,585
|
||||||||||||||||||
|
Total
2006
|
256,138
|
131,871
|
80,706
|
26,254
|
494,969
|
462,591
|
32,378
|
(1) |
494,969
|
||||||||||||||||
(1)
Contracts held for non-trading purposes in 2006
Credit
risk
Credit
risk on derivative financial instruments is the risk of financial loss that
the
Bank assumes if a counterparty fails to honour its contractual obligations.
The
Bank
limits the credit risk of over-the-counter contracts by dealing with
creditworthy counterparties and implementing contracts that provide for the
exchange of collateral between parties where the fair value of the outstanding
transactions exceeds an agreed threshold. The Bank also negotiates master
netting agreements that provide for the simultaneous close-out and settling
of
all transactions with a given counterparty in the event of default.
In
the
case of exchange-traded contracts, exposure to credit risk is limited because
these transactions are standardized contracts executed on established exchanges,
each of which is associated with a well-capitalized clearing house that assumes
the obligations of both counterparties and guarantees their performance
obligations. All exchange-traded contracts are subject to initial margins and
daily settlement.
The
current replacement cost, which is the positive fair value of all outstanding
derivative financial instruments, represents the Bank’s maximum credit risk
related to derivative financial instruments as at the balance sheet date.
The
credit equivalent amount is calculated by taking into account the current
replacement cost of all outstanding contracts in a gain position, potential
future exposure and the impact of master netting agreements. The risk-weighted
amount represents the credit equivalent amount multiplied by the counterparty
risk factors prescribed by the Superintendent.
National
Bank of Canada | 2007 Annual Report
137
As
at
October 31, credit risk exposure on the derivative financial instruments
portfolio is as follows:
|
2007
|
2006
|
||||||||||||||||||||||||||||||
|
Current
replacement cost
|
Current
replacement cost
|
||||||||||||||||||||||||||||||
|
Held for
trading(1) |
Designated
as hedges |
Total
|
Credit
equivalent |
Risk-
weighted amount |
Held for
trading(1) |
Non-
trading |
Total
|
Credit
equivalent |
Risk-
weighted amount |
||||||||||||||||||||||
|
Interest
rate contracts
|
581
|
65
|
646
|
1,308
|
236
|
481
|
135
|
616
|
1,202
|
245
|
|||||||||||||||||||||
|
Foreign
exchange contracts
|
1,947
|
116
|
2,063
|
3,055
|
695
|
666
|
29
|
695
|
1,834
|
432
|
|||||||||||||||||||||
|
Equity,
commodity and credit derivative
contracts
|
1,989
|
–
|
1,989
|
4,975
|
1,494
|
1,008
|
–
|
1,008
|
2,828
|
721
|
|||||||||||||||||||||
|
4,517
|
181
|
4,698
|
9,338
|
2,425
|
2,155
|
164
|
2,319
|
5,864
|
1,398
|
||||||||||||||||||||||
|
Impact
of master netting agreements
|
(1,838
|
)
|
(79
|
)
|
(1,917
|
)
|
(3,277
|
)
|
(679
|
)
|
(1,030
|
)
|
(84
|
)
|
(1,114
|
)
|
(2,409
|
)
|
(543
|
)
|
|||||||||||
|
2,679
|
102
|
2,781
|
6,061
|
1,746
|
1,125
|
80
|
1205
|
3,455
|
855
|
||||||||||||||||||||||
(1)
Exchange-traded contracts subject to daily margining requirements set by the
clearing houses and forward contracts with maturities of less than 14 days
are
excluded from the equity calculations, in accordance with the guidelines of
the
Superintendant in Canada. The total positive fair value of these excluded
contracts amounted to $185 million as at October 31, 2007 (2006: $114 million).
As
at
October 31, credit risk exposure on the derivative financial instruments
portfolio is as follows:
|
2007
|
2006
|
||||||||||||
|
Replacement
cost |
Credit
equivalent |
Replacement
cost |
Credit equivalent
|
||||||||||
|
OECD
governments(1)
|
132
|
183
|
79
|
322
|
|||||||||
|
OECD
banks(1)
|
2,551
|
2,819
|
1,603
|
2,370
|
|||||||||
|
Other
|
2,015
|
3,059
|
637
|
763
|
|||||||||
|
Total
|
4,698
|
6,061
|
2,319
|
3,455
|
|||||||||
(1)
Organisation for Economic Co-operation and Development
National
Bank of Canada | 2007 Annual Report
138
Fair
value
The
fair
value of derivative financial instruments is based on quoted market prices,
where available. Otherwise, fair value is determined using valuation models
that
incorporate assumptions based primarily on data observed in external markets,
such as current market prices and the contractual prices of the underlying
instruments, the time value of money, yield curves, volatility factors, and
market, credit, liquidity and model risks, as well as the related administrative
costs.
As
at
October 31, fair values are as follows:
|
2007
|
2006
|
||||||||||||||||||
|
(millions
of dollars)
|
Positive
|
Negative
|
Net
|
Positive
|
Negative
|
Net
|
|||||||||||||
|
CONTRACTS
HELD FOR TRADING PURPOSES
|
|||||||||||||||||||
|
Interest
rate contracts
|
|||||||||||||||||||
|
Forwards
|
6
|
4
|
2
|
4
|
1
|
3
|
|||||||||||||
|
Swaps
|
573
|
493
|
80
|
468
|
415
|
53
|
|||||||||||||
|
Options
|
12
|
1
|
11
|
16
|
16
|
–
|
|||||||||||||
|
Total
|
591
|
498
|
93
|
488
|
432
|
56
|
|||||||||||||
|
Foreign
exchange contracts
|
|||||||||||||||||||
|
Forwards
|
126
|
129
|
(3
|
)
|
38
|
60
|
(22
|
)
|
|||||||||||
|
Swaps
|
1,715
|
1,161
|
554
|
605
|
360
|
245
|
|||||||||||||
|
Options
|
154
|
214
|
(60
|
)
|
71
|
67
|
4
|
||||||||||||
|
Total
|
1,995
|
1,504
|
491
|
714
|
487
|
227
|
|||||||||||||
|
Equity,
commodity and credit derivative contracts
|
|||||||||||||||||||
|
Forwards
|
85
|
108
|
(23
|
)
|
38
|
92
|
(54
|
)
|
|||||||||||
|
Swaps
|
1,222
|
665
|
557
|
616
|
293
|
323
|
|||||||||||||
|
Options
|
809
|
544
|
265
|
413
|
342
|
71
|
|||||||||||||
|
Total
|
2,116
|
1,317
|
799
|
1,067
|
727
|
340
|
|||||||||||||
|
Total
contracts held for trading purposes
|
4,702
|
3,319
|
1,383
|
2,269
|
1,646
|
623
|
|||||||||||||
|
CONTRACTS
DESIGNATED AS HEDGES(1)
|
|||||||||||||||||||
|
Interest
rate contracts
|
|||||||||||||||||||
|
Forwards
|
–
|
–
|
–
|
–
|
–
|
–
|
|||||||||||||
|
Swaps
|
65
|
108
|
(43
|
)
|
135
|
47
|
88
|
||||||||||||
|
Options
|
–
|
–
|
–
|
–
|
–
|
–
|
|||||||||||||
|
Total
|
65
|
108
|
(43
|
)
|
135
|
47
|
88
|
||||||||||||
|
Foreign
exchange contracts
|
|||||||||||||||||||
|
Forwards
|
–
|
–
|
–
|
–
|
–
|
–
|
|||||||||||||
|
Swaps
|
116
|
163
|
(47
|
)
|
29
|
43
|
(14
|
)
|
|||||||||||
|
Options
|
–
|
–
|
–
|
–
|
–
|
–
|
|||||||||||||
|
Total
|
116
|
163
|
(47
|
)
|
29
|
43
|
(14
|
)
|
|||||||||||
|
Equity,
commodity and credit derivative contracts
|
|||||||||||||||||||
|
Forwards
|
–
|
30
|
(30
|
)
|
–
|
4
|
(4
|
)
|
|||||||||||
|
Swaps
|
–
|
–
|
–
|
–
|
–
|
–
|
|||||||||||||
|
Options
|
–
|
–
|
–
|
–
|
1
|
(1
|
)
|
||||||||||||
|
Total
|
–
|
30
|
(30
|
)
|
–
|
5
|
(5
|
)
|
|||||||||||
|
Total
– Contracts designated as hedges
|
181
|
301
|
(120
|
)
|
|||||||||||||||
|
–
Contracts held for non-trading purposes
|
164
|
95
|
69
|
||||||||||||||||
|
Designated
as fair value hedges
|
179
|
216
|
(37
|
)
|
|||||||||||||||
|
Designated
as cash flow hedges
|
2
|
85
|
(83
|
)
|
|||||||||||||||
|
Total
fair value
|
4,883
|
3,620
|
1,263
|
2,433
|
1,741
|
692
|
|||||||||||||
|
Impact
of master netting agreements
|
(1,917
|
)
|
(1,917
|
)
|
–
|
(1,127
|
)
|
(1,127
|
)
|
–
|
|||||||||
|
2,966
|
1,703
|
1,263
|
1,306
|
614
|
692
|
||||||||||||||
(1)
Contracts held for non-trading purposes in 2006
National
Bank of Canada | 2007 Annual Report
139
24
|
Hedge Accounting
Risk
management
In
the
context of its day-to-day operations, the Bank exposes itself to certain
categories of risk, especially interest rate, foreign exchange and credit risk
as well as other market risks in order to generate revenues and thereby create
shareholder value.
Section
3865 of the CICA Handbook, which took effect on November 1, 2006, establishes
standards for when and how hedge accounting may be applied. The Bank uses
derivative financial instruments as part of its risk management activities.
When
hedge accounting is appropriate, the hedging relationship is designated as
a
fair value hedge, a cash flow hedge or a foreign currency risk hedge related
to
a net investment in a self-sustaining foreign operation.
Fair
value hedge
Fair
value hedge transactions mainly use interest rate swaps to hedge changes in
the
fair value of an asset or liability arising from changes in market interest
rates. In a fair value hedge, the change in fair value of the derivative
financial instruments used as hedging items will offset the change in fair
value
of the hedged item. The Bank uses this strategy primarily for its securities,
deposit and subordinated debenture portfolios.
For
the
fiscal year ended October 31, 2007, the amount representing the ineffective
portion recognized as Other income in the Consolidated Statement of Income
was
not material. All the components of the change in fair value of the derivative
financial instruments used were taken into account in assessing the
effectiveness of the fair value hedge.
Cash
flow
hedge
Cash
flow
hedge transactions mainly use interest rate swaps to hedge exposure of the
future cash flows related to a floating rate financial asset or liability.
In a
cash flow hedge, the derivative financial instruments used as a hedging item
will mitigate the variability in future cash flows relating to the hedged item.
The Bank uses this strategy primarily for its loan portfolios.
For
the
fiscal year ended October 31, 2007, an unrealized loss of $80 million was
recorded in Other comprehensive income for the effective portion of changes
in
the fair value of derivative financial instruments designated as cash flow
hedges. The amounts recognized are reclassified to Net interest income in the
periods during which the variability in cash flows of the hedged item affects
net interest income. Accordingly, a net loss of $15 million was reclassified
to
net income during the fiscal year ended October 31, 2007. An estimated net
loss
of $24 million included in Accumulated other comprehensive income as at October
31, 2007 is expected to be reclassified to net income during the next 12 months.
The maximum period over which the Bank hedges its exposure to the variability
in
future cash flows is four years.
For
the
fiscal year ended October 31, 2007, an unrealized loss representing the
ineffective portion was recognized as Other income in the Consolidated Statement
of Income in the amount of $2 million. All the components of the change in
fair
value of the derivative financial instruments used were taken into account
in
assessing the effectiveness of the cash flow hedge.
Hedge
of
a net investment in a self-sustaining foreign operation
The
Bank
uses financial instruments denominated in foreign currencies to hedge the
foreign exchange risk related to investments in self-sustaining foreign
operations whose activities are denominated in a currency other than the
Canadian dollar. In a hedge of a net investment in a self-sustaining foreign
operation, the monetary items used will offset the foreign exchange gains and
losses on the investments.
For
the
fiscal year ended October 31, 2007, unrealized foreign exchange losses of $321
million were recorded in Other comprehensive income related to the Bank’s net
investment in self-sustaining foreign operations and were offset by gains of
$302 million related to financial instruments designated as foreign currency
risk hedges. These non-derivative financial instruments represent foreign
currency denominated liabilities and totalled $1.8 billion as at October 31,
2007.
National
Bank of Canada | 2007 Annual Report
140
25
|
Interest Rate Sensitivity Position
The
Bank
offers a range of financial products whose cash flows are sensitive to interest
rate fluctuations. Interest rate risk arises from on- and off-balance sheet
cash
flow mismatches. The degree of exposure is based on the size and direction
of
interest rate movements and on the maturity of the mismatched positions.
Analyzing interest rate sensitivity gaps is one of the techniques used by the
Bank to manage interest rate risk.
The
following table illustrates the sensitivity of the Bank’s Consolidated Balance
Sheet to interest rate fluctuations as at October 31.
|
2007
|
2006
|
||||||||||||||||||||||||
|
Floating
rate
|
Within
3 months
|
3 to 12
months
|
1 to 5
years
|
Over
5 years
|
Non-
interest
sensitive
|
Total
|
Total
|
||||||||||||||||||
|
Assets
|
|||||||||||||||||||||||||
|
Cash
|
–
|
–
|
–
|
–
|
–
|
283
|
283
|
268
|
|||||||||||||||||
|
Deposits
with financial institutions
|
119
|
1,699
|
316
|
2
|
–
|
909
|
3,045
|
10,611
|
|||||||||||||||||
|
Effective
yield
|
4.1
|
%
|
5.4
|
%
|
5.3
|
%
|
–
|
%
|
|||||||||||||||||
|
Securities
|
1
|
6,440
|
3,890
|
8,359
|
5,384
|
15,196
|
39,270
|
38,678
|
|||||||||||||||||
|
Effective
yield
|
3.1
|
%
|
3.9
|
%
|
4.4
|
%
|
4.2
|
%
|
|||||||||||||||||
|
Loans
|
439
|
33,231
|
5,309
|
10,853
|
1,330
|
2,764
|
53,926
|
54,537
|
|||||||||||||||||
|
Effective
yield
|
4.8
|
%
|
5.7
|
%
|
5.8
|
%
|
5.8
|
%
|
|||||||||||||||||
|
Other
assets
|
3,206
|
2
|
–
|
–
|
–
|
13,353
|
16,561
|
12,707
|
|||||||||||||||||
|
3,765
|
41,372
|
9,515
|
19,214
|
6,714
|
32,505
|
113,085
|
116,801
|
||||||||||||||||||
|
Liabilities
and shareholders’ equity
|
|||||||||||||||||||||||||
|
Deposits
|
4,073
|
36,619
|
11,793
|
14,821
|
933
|
2,559
|
70,798
|
71,917
|
|||||||||||||||||
|
Effective
yield
|
3.9
|
%
|
3.7
|
%
|
3.0
|
%
|
4.9
|
%
|
|||||||||||||||||
|
Other
debt(1)
|
–
|
3,215
|
1,667
|
4,131
|
5,973
|
3,307
|
18,293
|
25,138
|
|||||||||||||||||
|
Effective
yield
|
4.0
|
%
|
5.0
|
%
|
4.3
|
%
|
5.0
|
%
|
|||||||||||||||||
|
Subordinated
debentures
|
–
|
–
|
41
|
750
|
850
|
(36
|
)
|
1,605
|
1,449
|
||||||||||||||||
|
Effective
yield
|
–
|
%
|
5.6
|
%
|
4.9
|
%
|
4.8
|
%
|
|||||||||||||||||
|
Acceptances
and other liabilities
|
4,338
|
14
|
27
|
85
|
86
|
13,202
|
17,752
|
13,509
|
|||||||||||||||||
|
Shareholders’
equity
|
–
|
–
|
200
|
200
|
–
|
4,237
|
4,637
|
4,788
|
|||||||||||||||||
|
8,411
|
39,848
|
13,728
|
19,987
|
7,842
|
23,269
|
113,085
|
116,801
|
||||||||||||||||||
|
On-balance
sheet gap
|
(4,646
|
)
|
1,524
|
(4,213
|
)
|
(773
|
)
|
(1,128
|
)
|
9,236
|
–
|
–
|
|||||||||||||
|
Derivative
financial instruments
|
–
|
(25,266
|
)
|
15,380
|
8,150
|
1,736
|
–
|
–
|
–
|
||||||||||||||||
|
Total
|
(4,646
|
)
|
(23,742
|
)
|
11,167
|
7,377
|
608
|
9,236
|
–
|
–
|
|||||||||||||||
|
Position
in Canadian dollars
|
|||||||||||||||||||||||||
|
On-balance
sheet total
|
(6,477
|
)
|
9,975
|
(2,539
|
)
|
(923
|
)
|
(1,529
|
)
|
5,392
|
3,899
|
(1,047
|
)
|
||||||||||||
|
Derivative
financial instruments
|
–
|
(24,273
|
)
|
13,964
|
7,902
|
2,247
|
–
|
(160
|
)
|
3,664
|
|||||||||||||||
|
Total
|
(6,477
|
)
|
(14,298
|
)
|
11,425
|
6,979
|
718
|
5,392
|
3,739
|
2,617
|
|||||||||||||||
|
Position
in foreign currency
|
|||||||||||||||||||||||||
|
On-balance
sheet total
|
1,831
|
(8,451
|
)
|
(1,674
|
)
|
150
|
401
|
3,844
|
(3,899
|
)
|
1,047
|
||||||||||||||
|
Derivative
financial instruments
|
–
|
(993
|
)
|
1,416
|
248
|
(511
|
)
|
–
|
160
|
(3,664
|
)
|
||||||||||||||
|
Total
|
1,831
|
(9,444
|
)
|
(258
|
)
|
398
|
(110
|
)
|
3,844
|
(3,739
|
)
|
(2,617
|
)
|
||||||||||||
|
Total
2007
|
(4,646
|
)
|
(23,742
|
)
|
11,167
|
7,377
|
608
|
9,236
|
–
|
||||||||||||||||
|
Total
2006
|
(3,352
|
)
|
(21,733
|
)
|
9,455
|
14,975
|
3
|
652
|
–
|
||||||||||||||||
(1)
Obligations related to securities sold short and securities sold under
repurchase agreements
The
effective yield represents the weighted average effective yield based on the
earlier of contractual repricing and maturity dates.
National
Bank of Canada | 2007 Annual Report
141
26
| Fair
Value of Financial Instruments
The
following table presents the carrying values and the estimated fair values
of
financial assets and liabilities, except for financial instruments whose fair
value is estimated to approximate their carrying value and financial instruments
measured at fair value on the Consolidated Balance Sheet.
In
addition, the details of the fair values of available for sale securities that
do not have an active market and the fair values of derivative financial
instruments are presented in Notes 3 and 23 to the consolidated financial
statements, respectively.
The
fair
values disclosed exclude the values of assets and liabilities that are not
considered financial instruments, such as premises and equipment. Due to the
judgment used in applying a wide range of acceptable valuation techniques and
estimates in calculating fair value amounts, fair values are not necessarily
comparable among financial institutions. The calculation of estimated fair
values is based on market conditions at a specific point in time and may not
be
reflective of future fair values.
|
2007
|
2006
|
||||||||||||||||||
|
Carrying
value
|
Fair
value
|
Difference
|
Carrying
value
|
Fair value
|
Difference
|
||||||||||||||
|
Financial
assets
|
|||||||||||||||||||
|
Investment
account securities
|
–
|
–
|
–
|
6,814
|
6,940
|
126
|
|||||||||||||
|
Loans
|
47,960
|
47,861
|
(99
|
)
|
46,945
|
47,038
|
93
|
||||||||||||
|
Financial
liabilities
|
|||||||||||||||||||
|
Deposits
|
70,798
|
70,647
|
151
|
71,917
|
71,933
|
(16
|
)
|
||||||||||||
|
Subordinated
debentures
|
1,605
|
1,546
|
59
|
1,449
|
1,467
|
(18
|
)
|
||||||||||||
Valuation
methods and assumptions
Investment
account securities
The
fair
value of investment account securities for the fiscal year ended October 31,
2006 is presented in Note 3 to the consolidated financial statements.
It
is
based on market prices. In the absence of an active market, it is estimated
using the prices of similar securities.
Loans
The
fair
value of floating-rate loans is assumed to approximate their carrying value.
The
fair value of other loans is estimated based on a discounted cash flow
calculation that uses market interest rates currently charged for similar new
loans as at the balance sheet date applied to expected maturity amounts
(adjusted for any prepayments).
Deposits
The
fair
value of fixed-rate deposits is determined by discounting the contractual cash
flows using market interest rates currently offered for deposits with the same
term to maturity. The fair value of deposits with no stated maturity is assumed
to approximate their carrying value.
Subordinated
debentures
The
fair
value of subordinated debentures is determined by discounting the contractual
cash flows using market interest rates currently offered for similar financial
instruments with the same remaining term to maturity.
National
Bank of Canada | 2007 Annual Report
142
27
|
Related Party Transactions
The
Bank
grants loans to its directors and officers under various conditions. Loans
to
eligible officers are granted under the same conditions as those applicable
to
loans granted to any other employee of the Bank. The principal conditions are
as
follows: the employee must meet the same credit requirements as a client;
mortgage loans are granted at the posted rate less 2%; personal loans and credit
card advances bear interest at the client rate divided by 2; and personal lines
of credit bear interest at the Canadian prime rate less 3%, but never lower
than
Canadian prime divided by 2. The amounts granted by the Bank to its directors
and officers are not material.
For
personal loans, credit card advances and personal lines of credit, employees
may
not borrow more than 50% of their annual salary at the reduced rate. The
Canadian prime rate is applied to the remainder.
Moreover,
in accordance with the Bank Act (Canada), the aggregate of loans granted to
an
officer of the Bank, excluding a mortgage loan granted on the officer’s
principal residence, cannot exceed two times the officer’s base salary.
In
the
normal course of business, the Bank provides various banking services and
concludes contractual agreements and other transactions with companies over
which it has significant influence under conditions similar to those offered
to
non-related third parties.
Furthermore,
the Bank offers the Deferred Stock Unit Plan to directors who are not Bank
employees. Please refer to Note 19 to the consolidated financial statements
for
more details.
National
Bank of Canada | 2007 Annual Report
143
28
|
Segment Disclosures
The
Bank
carries out its activities in three reportable segments, defined below. The
other operating activities are grouped for presentation purposes. Each
reportable segment is distinguished by services offered, type of clientele
and
marketing strategy. The operations of each of the Bank’s reportable segments are
summarized below.
Personal
and Commercial
The
Personal and Commercial segment comprises the branch network, intermediary
services, credit cards, insurance, business banking services and real estate.
Wealth
Management
The
Wealth Management segment comprises full-service retail brokerage, direct
brokerage, mutual funds, trust services and portfolio management.
Financial
Markets
The
Financial Markets segment encompasses corporate financing and lending, treasury
operations, including asset and liability management for the Bank, and corporate
brokerage.
Other
This
heading comprises securitization transactions, certain non-recurring elements,
and the unallocated portion of centralized services.
The
accounting policies are the same as those presented in the note on accounting
policies (Note 1), with the exception of the net interest income, other income
and income taxes of the operating segments, which are presented on a taxable
equivalent basis. Taxable equivalent basis is a calculation method that consists
in grossing up certain tax-exempt income by the amount of income tax that would
have been otherwise payable. The impact of these adjustments is reversed under
the heading Other. Head Office expenses are allocated to each operating segment
presented in the segmented results. The Bank assesses performance based on
net
income. Intersegment revenues are recognized at the exchange amount. Segment
assets correspond to average assets directly used in segment operations.
Results
by business segment
|
Personal and
Commercial
|
Wealth
Management
|
Financial
Markets
|
Other
|
Total
|
|||||||||||||||||||||||||||
|
2007
|
2006
|
2007
|
2006
|
2007
|
2006
|
2007
|
2006
|
2007
|
2006
|
||||||||||||||||||||||
|
Net
interest income(1)
|
1,365
|
1,330
|
130
|
128
|
(11
|
)
|
172
|
(357
|
)
|
(338
|
)
|
1,127
|
1,292
|
||||||||||||||||||
|
Other
income(1)
|
784
|
762
|
744
|
691
|
1,254
|
915
|
(486
|
)
|
143
|
2,296
|
2,511
|
||||||||||||||||||||
|
Total
revenues
|
2,149
|
2,092
|
874
|
819
|
1
,243
|
1,087
|
(843
|
)
|
(195
|
)
|
3,423
|
3,803
|
|||||||||||||||||||
|
Operating
expenses
|
1,298
|
1,295
|
638
|
601
|
685
|
617
|
11
|
33
|
2,632
|
2,546
|
|||||||||||||||||||||
|
Contribution
|
851
|
797
|
236
|
218
|
558
|
470
|
(854
|
)
|
(228
|
)
|
791
|
1,257
|
|||||||||||||||||||
|
Provision
for credit losses
|
151
|
121
|
-
|
-
|
-
|
4
|
(48
|
)
|
(48
|
)
|
103
|
77
|
|||||||||||||||||||
|
Income
(loss) before income taxes (recovery) and non-controlling interest
|
700
|
676
|
236
|
218
|
558
|
466
|
(806
|
)
|
(180
|
)
|
688
|
1,180
|
|||||||||||||||||||
|
Income
taxes (recovery)(1)
|
234
|
229
|
78
|
70
|
159
|
150
|
(392
|
)
|
(172
|
)
|
79
|
277
|
|||||||||||||||||||
|
Non-controlling
interest
|
-
|
-
|
5
|
6
|
45
|
9
|
18
|
17
|
68
|
32
|
|||||||||||||||||||||
|
Net
income (loss)
|
466
|
447
|
153
|
142
|
354
|
307
|
(432
|
)
|
(25
|
)
|
541
|
871
|
|||||||||||||||||||
|
Average
assets
|
48,792
|
46,245
|
677
|
689
|
88,855
|
69,255
|
(12,286
|
)
|
(9,914
|
)
|
126,038
|
106,275
|
|||||||||||||||||||
(1)
Net
interest income was grossed up by $127 million (2006: $122 million) and other
income by $78 million (2006: $58 million) to bring the tax-exempt income earned
on certain securities into line with the income earned on other financial
instruments. An equivalent amount was added to income taxes. The effect of
these
adjustments is reversed under the heading Other.
National
Bank of Canada | 2007 Annual Report
144
Results
by geographic segment
| Canada |
United States
|
Other | Total | ||||||||||||||||||||||
|
2007
|
2006
|
2007
|
2006
|
2007
|
2006
|
2007
|
2006
|
||||||||||||||||||
|
Net
interest income
|
1,110
|
1,229
|
(91
|
)
|
22
|
108
|
41
|
1,127
|
1,292
|
||||||||||||||||
|
Other
income
|
1,950
|
2,277
|
131
|
97
|
215
|
137
|
2,296
|
2,511
|
|||||||||||||||||
|
Total
revenues
|
3,060
|
3,506
|
40
|
119
|
323
|
178
|
3,423
|
3,803
|
|||||||||||||||||
|
Operating
expenses
|
2,413
|
2,368
|
127
|
92
|
92
|
86
|
2,632
|
2,546
|
|||||||||||||||||
|
Contribution
|
647
|
1,138
|
(87
|
)
|
27
|
231
|
92
|
791
|
1,257
|
||||||||||||||||
|
Provision
for credit losses
|
103
|
77
|
–
|
–
|
–
|
–
|
103
|
77
|
|||||||||||||||||
|
Income
(loss) before income taxes and non-controlling interest
|
544
|
1,061
|
(87
|
)
|
27
|
231
|
92
|
688
|
1,180
|
||||||||||||||||
|
Income
taxes
|
65
|
269
|
9
|
4
|
5
|
4
|
79
|
277
|
|||||||||||||||||
|
Non-controlling
interest
|
(1
|
)
|
1
|
26
|
28
|
43
|
3
|
68
|
32
|
||||||||||||||||
|
Net
income (loss)
|
480
|
791
|
(122
|
)
|
(5
|
)
|
183
|
85
|
541
|
871
|
|||||||||||||||
|
Average
assets
|
106,331
|
92,002
|
5,928
|
3,655
|
13,779
|
10,618
|
126,038
|
106,275
|
|||||||||||||||||
National
Bank of Canada | 2007 Annual Report
145
29
|
Acquisitions
On
July
26, 2006, a subsidiary of the Bank acquired a 68% interest in Credigy Ltd.
(Credigy), a privately held purchaser of and service-provider for distressed
receivables of consumers mainly located in the United States and Brazil, for
a
total cash consideration of $57 million including direct acquisition costs.
The
assets acquired totalled $109 million and the liabilities assumed, including
non-controlling interest, amounted to $73 million. The excess of the purchase
price over the fair value of net assets of $21 million was recorded on the
Consolidated Balance Sheet as goodwill. The results of Credigy have been
recognized in the Consolidated Statement of Income since the July 26, 2006
acquisition date. Under the related agreements, additional cash amounts
totalling approximately $19 million could be paid over the three fiscal years
following the acquisition provided certain profitability objectives were met.
Credigy met the financial objectives set out in the contracts for the first
year
and an additional cash amount of $7 million was paid to the sellers in August
2007. This amount was added to goodwill.
On
June
28, 2007, a subsidiary of National Bank Financial acquired an additional 12%
interest in Credigy for a cash consideration of US $9 million (CDN $10 million),
thereby increasing National Bank Financial’s interest in Credigy to 80% as of
that date.
On
August
1, 2007, a subsidiary of the Bank acquired an additional 43% interest in a
joint
venture, Asset Management Finance Corporation (AMF), for a total consideration
of US $60 million (CDN $64 million), bringing the total interest in AMF to
be
accounted for in the Bank’s consolidated financial statements to 86%. This
company invests cash in the form of a revenue share interest, which provides
a
specific gross rate of return on investment for a specified number of years.
National
Bank of Canada | 2007 Annual Report
146
30
|
Subsequent event
On
November 29, 2007, the Bank announced the signing of an agreement with Crédit
Agricole (Suisse) SA under which Crédit Agricole (Suisse) SA will acquire
National Bank of Canada (International) Ltd., the Bank’s subsidiary in Nassau,
Bahamas. The transaction is expected to be finalized in January 2008, subject
to
the usual regulatory approvals.
National
Bank of Canada | 2007 Annual Report
147
31
|
Reconciliation of Canadian and United States GAAP
The
consolidated financial statements of the Bank were prepared in accordance with
Canadian GAAP. The principal differences that would result from the application
of U.S. GAAP to net income, comprehensive income and the Consolidated Balance
Sheet are summarized below.
Consolidated
Statement of Income
|
2007
|
2006
|
||||||
|
Net
income per Canadian GAAP
|
541
|
871
|
|||||
|
Adjustments:
|
|||||||
|
Charge
for other-than-temporary impairment
|
5
|
(5
|
)
|
||||
|
Available
for sale securities (2006: Investment account)
|
(48
|
)
|
(11
|
)
|
|||
|
Fair
value option
|
(8
|
)
|
–
|
||||
|
Derivative
financial instruments and hedging
|
(21
|
)
|
3
|
||||
|
Limited
partnerships
|
–
|
11
|
|||||
|
Income
tax effect on the above items
|
24
|
–
|
|||||
|
(48
|
)
|
(2
|
)
|
||||
|
Net
income per U.S. GAAP
|
493
|
869
|
|||||
|
Net
earnings per common share – U.S. GAAP
|
|||||||
|
Basic
|
$
|
2.95
|
$
|
5.21
|
|||
|
Diluted
|
$
|
2.93
|
$
|
5.12
|
|||
Consolidated
Statement of Comprehensive Income
|
2007
|
2006(1)
|
||||||
|
Comprehensive
income per Canadian GAAP
|
449
|
805
|
|||||
|
Adjustment
to net income above
|
(48
|
)
|
(2
|
)
|
|||
|
Adjustments
to other comprehensive income:
|
|||||||
|
Net
unrealized gains (losses) on available for sale financial assets,
net of
income taxes (recovery) of $(20 million) (2006: $20
million)
|
(38
|
)
|
36
|
||||
|
Net
gains (losses) on derivative financial instruments designated as
cash flow
hedges, net of income taxes (recovery) of $7 million (2006: $(18
million))
|
15
|
(40
|
)
|
||||
|
Minimum
pension liability adjustment, net of income taxes (recovery) of $4
million
(2006: $(4 million))
|
7
|
(7
|
)
|
||||
|
(16
|
)
|
(11
|
)
|
||||
|
Comprehensive
income per U.S. GAAP
|
385
|
792
|
|||||
(1)
A new
Consolidated Statement of Comprehensive Income was introduced under Canadian
GAAP when Section 1530 was adopted on November 1, 2006.
National
Bank of Canada | 2007 Annual Report
148
Consolidated
Condensed Balance Sheet
| 2007 | 2006 | ||||||||||||||||||
|
Canadian
GAAP
|
Variation
|
U.S.
GAAP
|
Canadian
GAAP
|
Variation
|
U.S.
GAAP |
||||||||||||||
|
Assets
|
|||||||||||||||||||
|
Cash
and deposits with financial institutions
|
3,328
|
40
|
3,368
|
10,879
|
(3
|
)
|
10,876
|
||||||||||||
|
Securities
|
|||||||||||||||||||
|
Available
for sale (2006: Investment account)
|
8,442
|
(15
|
)
|
8,427
|
6,814
|
103
|
6,917
|
||||||||||||
|
Held
for trading
|
30,828
|
1,052
|
31,880
|
31,864
|
(2,387
|
)
|
29,477
|
||||||||||||
|
Securities
purchased under reverse repurchase agreements
|
5,966
|
–
|
5,966
|
7,592
|
–
|
7,592
|
|||||||||||||
|
Loans
|
47,960
|
–
|
47,960
|
46,945
|
–
|
46,945
|
|||||||||||||
|
Premises
and equipment
|
426
|
–
|
426
|
385
|
–
|
385
|
|||||||||||||
|
Goodwill
|
703
|
22
|
725
|
683
|
22
|
705
|
|||||||||||||
|
Other
assets
|
15,432
|
6,309
|
21,741
|
11,639
|
3,632
|
15,271
|
|||||||||||||
|
Total
assets
|
113,085
|
7,408
|
120,493
|
116,801
|
1,367
|
118,168
|
|||||||||||||
|
Liabilities
|
|||||||||||||||||||
|
Deposits
|
70,798
|
–
|
70,798
|
71,917
|
(2
|
)
|
71,915
|
||||||||||||
|
Other
liabilities
|
35,085
|
7,572
|
42,657
|
38,071
|
1,238
|
39,309
|
|||||||||||||
|
Subordinated
debentures
|
1,605
|
–
|
1,605
|
1,449
|
18
|
1,467
|
|||||||||||||
|
Non-controlling
interest
|
960
|
–
|
960
|
576
|
–
|
576
|
|||||||||||||
|
Total
liabilities
|
108,448
|
7,572
|
116,020
|
112,013
|
1,254
|
113,267
|
|||||||||||||
|
Shareholders’
equity
|
|||||||||||||||||||
|
Preferred
shares
|
400
|
(7
|
)
|
393
|
400
|
(7
|
)
|
393
|
|||||||||||
|
Common
shares
|
1,575
|
24
|
1,599
|
1,566
|
24
|
1,590
|
|||||||||||||
|
Contributed
surplus
|
32
|
–
|
32
|
21
|
–
|
21
|
|||||||||||||
|
Retained
earnings
|
2,793
|
(8
|
)
|
2,785
|
2,893
|
42
|
2,935
|
||||||||||||
|
Accumulated
other comprehensive income
|
(163
|
)
|
(173
|
)
|
(336
|
)
|
(92
|
)
|
54
|
(38
|
)
|
||||||||
|
Total
shareholders’ equity
|
4,637
|
(164
|
)
|
4,473
|
4,788
|
113
|
4,901
|
||||||||||||
|
Total
liabilities and shareholders’ equity
|
113,085
|
7,408
|
120,493
|
116,801
|
1,367
|
118,168
|
|||||||||||||
Financial
instruments
With
the
adoption by the Bank of the standards set out in CICA Handbook Section 1530,
Comprehensive Income, Section 3855, Financial Instruments – Recognition and
Measurement, and Section 3865, Hedges, the methods of accounting for securities,
derivative financial instruments, hedging activities and guarantees applied
by
the Bank were substantially harmonized with U.S. GAAP.
Available
for sale securities
For
the
year ended October 31, 2006, in accordance with Canadian GAAP, securities held
for non-trading purposes were recorded in the investment account. Under U.S.
GAAP, investment account securities are separated into two categories:
securities available for sale (recognized in the Consolidated Balance Sheet
at
fair value) and securities held to maturity (carried in the Consolidated Balance
Sheet at amortized cost). For purposes of U.S. GAAP, the Bank classified
substantially all investment account securities as available for sale
securities. The change in unrealized gains and losses, net of income taxes,
is
recorded in the Consolidated Statement of Comprehensive Income.
For
the
year ended October 31, 2006, in accordance with Canadian GAAP, unrealized
foreign currency gains and losses for monetary investment account securities
were presented in the Consolidated Statement of Income. Under U.S. GAAP, this
translation adjustment must be presented in the Consolidated Statement of
Comprehensive Income, net of income taxes, and is an integral part of the
variation in fair value of the available for sale securities described above.
For
the
year ended October 31, 2006, in accordance with Canadian GAAP, securities sold
short that were used in hedging relationships were recorded at amortized cost.
Gains and losses realized on these securities were included in the Consolidated
Statement of Income concurrently with the gains and losses on the hedged items.
Under U.S. GAAP, all obligations related to securities sold short must be
recorded at fair value as liabilities and any changes in fair value must be
accounted for in the Consolidated Statement of Income.
Available
for sale securities that do not have a quoted price in an active market are
presented at cost.
Impairment
charge
For
the
year ended October 31, 2006, under Canadian GAAP, unless compelling evidence
was
provided to indicate otherwise, a decrease in the value of an investment was
considered an other-than-temporary impairment when the carrying value exceeded
the market value for a prolonged period. The factors indicating an
other-than-temporary impairment under Canadian GAAP differed from those under
U.S. GAAP in terms of the period during which the carrying value could exceed
the market value before it was necessary to conclude that the decline in value
was an other-than-temporary impairment. This period is significantly shorter
under U.S. GAAP. In 2007, Canadian GAAP and U.S. GAAP both specified that a
significant and prolonged decline in the fair value of an investment below
its
cost is objective evidence of impairment, and Canadian and U.S. GAAP were
consequently harmonized.
National
Bank of Canada | 2007 Annual Report
149
Held
for trading securities
Under
Canadian GAAP, effective November 1, 2006, held for trading securities
transactions are recorded on the settlement date in the Consolidated Balance
Sheet. Under U.S. GAAP, these transactions are recorded on the trade date in
the
Consolidated Balance Sheet.
Derivative
financial instruments and hedging activities
For
the
year ended October 31, 2006, under Canadian GAAP, derivative financial
instruments held for trading and instruments not eligible for hedge accounting
were recorded at fair value on the Consolidated Balance Sheet. Under U.S. GAAP,
all derivative financial instruments were recognized at fair value on the
Consolidated Balance Sheet.
The
accounting treatment for derivative financial instruments held for hedging
purposes under U.S. GAAP was different from the accounting treatment for such
instruments under Canadian GAAP. Under the U.S. standard, changes in the fair
value of derivative financial instruments designated as fair value hedges were
recorded in the Consolidated Statement of Income and were generally offset
by
changes in the fair value of the hedged items attributable to the hedged risk.
In the case of derivative financial instruments designated as cash flow hedges,
the effective portion of the changes in fair value was recorded in Other
comprehensive income in the Consolidated Statement of Comprehensive Income
and
was reclassified to the Consolidated Statement of Income in the period or
periods during which the hedged items were recognized in the Consolidated
Statement of Income. The ineffective portion of the changes in fair value of
a
hedging item was recognized at all times in the Consolidated Statement of
Income.
With
the
adoption of the new standards for financial instruments on November 1, 2006,
Canadian GAAP was largely harmonized with U.S. GAAP, although some differences
still exist. In particular, for many cash flow hedging strategies, the risk
designated by the Bank under U.S. GAAP is overall risk, which includes, among
other things, interest rate risk and credit risk, while only interest rate
risk
is designated under Canadian GAAP. Other differences may also result from the
fact that certain designations under Canadian GAAP are not always eligible
for
hedge accounting during certain periods of the fiscal year under U.S. GAAP.
Fair
value option
Under
Canadian GAAP, the fair value option as described in Note 1 to the consolidated
financial statements allows any financial instrument to be irrevocably
designated as held for trading when it is initially recognized, provided certain
limits defined by the Superintendent are respected. Under U.S.
GAAP, the application of the fair value option is less widespread and can only
be used to recognize certain hybrid financial instruments.
Limited
partnerships
Under
Canadian GAAP, some of the Bank’s investments in limited partnerships are
accounted for at cost. Canadian GAAP requires the use of the equity method
when
the Bank exerts significant influence over the investee. Under U.S. GAAP, the
equity method is used to account for investments in limited partnerships when
the equity interest is at least 3% of the total ownership interest.
Employee
future benefits
Under
U.S. GAAP (SFAS No. 87, Employers’ Accounting for Pensions), if the accrued
benefit obligation, without salary projections, exceeds the fair value of the
assets of a pension plan, a liability (minimum pension liability) equivalent
to
the difference must be recorded in the Consolidated Balance Sheet. Recognition
of an additional liability is required where the accrued benefit obligation,
without salary projections, exceeds the fair value of the pension plan assets
and a net accrued benefit asset is recognized on the Consolidated Balance Sheet.
If it is necessary to recognize an additional liability, an amount in Other
intangible assets will be recorded up to the amount of unamortized prior service
cost. The excess will, if applicable, be recorded net of income taxes in Other
comprehensive income.
On
October 31, 2007, with the adoption of SFAS No. 158, Employer’s Accounting for
Defined Benefit Pension and Other Postretirement Plans – an amendment of FASB
Statements No. 87, 88, 106 and 132(R), the overfunded or underfunded status
of
defined benefit pension and other postretirement benefit plans must be
recognized in the Consolidated Balance Sheet. Accordingly, unrecognized existing
net actuarial losses and unrecognized prior service costs are recognized in
Other Comprehensive Income and a liability or asset reduction for the same
amounts is recorded in the Consolidated Balance Sheet. This accounting treatment
is applied to each plan. The pension and other employee future benefit expense
calculation remains unchanged. The adoption of SFAS No. 158 was accounted for
as
an adjustment to the closing balance of Accumulated other comprehensive income
as at October 31, 2007. No 2006 or prior period figures were restated.
National
Bank of Canada | 2007 Annual Report
150
Securities
lending
Under
U.S. GAAP (SFAS No. 140, Accounting for Transfers and Servicing of Financial
Assets and Extinguishments of Liabilities), non-cash collateral received for
securities lending transactions is recorded as assets in the Consolidated
Balance Sheet, with a corresponding obligation if the contracts allow the entity
to sell them or give them again as collateral. Under Canadian GAAP, non-cash
collateral received for these transactions is not recorded in the Consolidated
Balance Sheet.
Joint
venture
Under
U.S. GAAP, investments in joint ventures are accounted for using the equity
method. Under Canadian GAAP, these investments are recorded using proportionate
consolidation. If U.S. GAAP had been applied, available for sale securities,
other assets and other liabilities would have decreased and the investment
in
the joint venture would have increased, but there would have been no impact
on
net income.
Accounting
for client trades – brokerage activities
Under
U.S. GAAP, securities trades for which the Bank acts as agent are recorded
on
the settlement date in the Consolidated Balance Sheet.
Under
Canadian GAAP, for the year ended October 31, 2006, securities trades for which
the Bank acted as agent for its brokerage clients were recorded on a trade
date
basis in the Consolidated Balance Sheet. For the year ended October 31, 2007,
these trades were recorded on the settlement date in the Consolidated Balance
Sheet.
Reinsurance
Under
U.S. GAAP, reinsurance recoverables for life insurance business related to
the
risks ceded to other insurance or reinsurance companies are recorded as an
asset
on the Consolidated Balance Sheet. Under Canadian GAAP, these amounts are
recorded as an offset to the actuarial reserves.
Share
issuance costs
Under
U.S. GAAP, share issuance costs are recorded as a reduction of the issuance
proceeds. Under Canadian GAAP, these costs are charged to Retained earnings.
Quantifying
misstatements in financial statements
In
September 2006, the Securities and Exchange Commission (SEC) published Staff
Accounting Bulletin (SAB) 108, Considering the Effects of Prior Year
Misstatements when Quantifying Misstatements in Current Year Financial
Statements. SAB 108 requires that misstatements be quantified using two methods:
the income statement (“rollover”) method and the balance sheet (“iron curtain”)
method. Applying SAB 108 had no impact on the Bank’s consolidated financial
statements.
U.S.
accounting standards pending adoption
Uncertainty
in income taxes
In
June
2006, the FASB published FASB Interpretation No. 48 (FIN 48), Accounting for
Uncertainty in Income Taxes, which sets out criteria for the recognition and
measurement of income tax positions. FIN 48 clarifies the accounting for
uncertainty in income taxes recognized in the financial statements. The Bank
is
currently assessing the impact of adoption of this new standard on its
consolidated financial statements and intends to adopt FIN 48 effective November
1, 2007.
Framework
for measuring fair value
In
September 2006, the FASB published SFAS No. 157, Fair Value Measurements, which
applies to fiscal years beginning on or after November 15, 2007. SFAS No. 157
establishes a framework for measuring fair value in accordance with GAAP and
expands disclosures about fair value measurements in the financial statements.
The Bank is currently assessing the impact of adoption of this new standard
on
its consolidated financial statements.
Fair
value option for financial assets and liabilities
In
February 2007, the FASB published SFAS No. 159, The Fair Value Option for
Financial Assets and Financial Liabilities, including an adjustment to SFAS
No.
115, which applies to fiscal years beginning on or after November 15, 2007.
SFAS
No. 159 gives companies the option of measuring several financial instruments
and some other items at fair value. The Bank is currently assessing the impact
of adoption of this new standard on its financial statements.
National
Bank of Canada | 2007 Annual Report
151
Statistical
Review
|
As
at October 31
|
2007
|
2006
|
2005
|
2004
|
2003
|
2002
|
2001
|
2000
|
1999
|
1998
|
|||||||||||||||||||||
|
Consolidated
balance sheet data
|
|||||||||||||||||||||||||||||||
|
(millions
of dollars)
|
|||||||||||||||||||||||||||||||
|
Cash
and deposits with financial institutions
|
$
|
3,328
|
$
|
10,879
|
$
|
10,314
|
$
|
5,777
|
$
|
7,047
|
$
|
6,864
|
$
|
5,832
|
$
|
5,655
|
$
|
3,561
|
$
|
4,852
|
|||||||||||
|
Securities
|
39,270
|
38,678
|
33,052
|
28,007
|
26,179
|
20,118
|
17,872
|
16,835
|
16,932
|
15,439
|
|||||||||||||||||||||
|
Securities
purchased under reverse repurchase agreements
|
5,966
|
7,592
|
7,023
|
4,496
|
3,955
|
2,366
|
4,041
|
5,397
|
3,480
|
4,947
|
|||||||||||||||||||||
|
Loans
|
47,960
|
46,945
|
44,069
|
41,498
|
38,381
|
38,446
|
40,351
|
41,342
|
40,411
|
40,560
|
|||||||||||||||||||||
|
Customers’
liability under acceptances
|
4,085
|
3,725
|
3,242
|
3,076
|
3,334
|
2,988
|
3,593
|
3,640
|
2,962
|
2,658
|
|||||||||||||||||||||
|
Premises
and equipment and other assets
|
12,476
|
8,982
|
10,270
|
5,643
|
5,730
|
5,249
|
4,277
|
2,958
|
2,455
|
2,207
|
|||||||||||||||||||||
|
Total
assets
|
$
|
113,085
|
$
|
116,801
|
$
|
107,970
|
$
|
88,497
|
$
|
84,626
|
$
|
76,031
|
$
|
75,966
|
$
|
75,827
|
$
|
69,801
|
$
|
70,663
|
|||||||||||
|
Deposits
|
$
|
70,798
|
$
|
71,917
|
$
|
62,219
|
$
|
53,432
|
$
|
51,463
|
$
|
51,690
|
$
|
51,436
|
$
|
50,473
|
$
|
49,984
|
$
|
48,026
|
|||||||||||
|
Other
liabilities
|
36,045
|
38,617
|
40,052
|
29,453
|
27,550
|
18,848
|
18,767
|
20,165
|
15,481
|
18,976
|
|||||||||||||||||||||
|
Subordinated
debentures
|
1,605
|
1,449
|
1,102
|
1,408
|
1,516
|
1,592
|
1,647
|
1,361
|
1,035
|
966
|
|||||||||||||||||||||
|
Capital
stock
|
|||||||||||||||||||||||||||||||
|
Preferred
|
400
|
400
|
400
|
375
|
375
|
300
|
492
|
492
|
317
|
317
|
|||||||||||||||||||||
|
Common
|
1,575
|
1,566
|
1,565
|
1,545
|
1,583
|
1,639
|
1,668
|
1,653
|
1,641
|
1,327
|
|||||||||||||||||||||
|
Contributed
surplus
|
32
|
21
|
13
|
7
|
2
|
–
|
–
|
–
|
–
|
–
|
|||||||||||||||||||||
|
Retained
earnings
|
2,793
|
2,893
|
2,645
|
2,287
|
2,131
|
1,945
|
1,937
|
1,672
|
1,336
|
1,067
|
|||||||||||||||||||||
|
Accumulated
other comprehensive income
|
(163
|
)
|
(92
|
)
|
(26
|
)
|
(10
|
)
|
6
|
17
|
19
|
11
|
7
|
(16
|
)
|
||||||||||||||||
|
Total
liabilities and shareholders’ equity
|
$
|
113,085
|
$
|
116,801
|
$
|
107,970
|
$
|
88,497
|
$
|
84,626
|
$
|
76,031
|
$
|
75,966
|
$
|
75,827
|
$
|
69,801
|
$
|
70,663
|
|||||||||||
|
Average
assets
|
$
|
126,038
|
$
|
106,275
|
$
|
90,902
|
$
|
78,672
|
$
|
71,810
|
$
|
69,292
|
$
|
69,197
|
$
|
69,840
|
$
|
65,784
|
$
|
65,873
|
|||||||||||
|
Average
capital funds(1)
|
5,840
|
5,568
|
5,268
|
5,238
|
5,216
|
5,249
|
5,020
|
4,660
|
3,512
|
3,886
|
|||||||||||||||||||||
|
Consolidated
income statement data
|
|||||||||||||||||||||||||||||||
|
(millions
of dollars)
|
|||||||||||||||||||||||||||||||
|
Net
interest income
|
$
|
1,127
|
$
|
1,292
|
$
|
1,441
|
$
|
1,363
|
$
|
1,311
|
$
|
1,444
|
$
|
1,338
|
$
|
1,190
|
$
|
1,187
|
$
|
1,209
|
|||||||||||
|
Other
income
|
2,296
|
2,511
|
2,235
|
2,162
|
2,033
|
1,584
|
1,789
|
1,878
|
1,232
|
1,108
|
|||||||||||||||||||||
|
Total
revenues
|
$
|
3,423
|
$
|
3,803
|
$
|
3,676
|
$
|
3,525
|
$
|
3,344
|
$
|
3,028
|
$
|
3,127
|
$
|
3,068
|
$
|
2,419
|
$
|
2,317
|
|||||||||||
|
Provision
for credit losses
|
103
|
77
|
33
|
86
|
177
|
490
|
205
|
184
|
170
|
147
|
|||||||||||||||||||||
|
Operating
expenses
|
2,632
|
2,546
|
2,472
|
2,368
|
2,239
|
2,040
|
1,989
|
2,120
|
1,615
|
1,535
|
|||||||||||||||||||||
|
Income
taxes
|
79
|
277
|
291
|
318
|
277
|
150
|
278
|
239
|
213
|
239
|
|||||||||||||||||||||
|
Non-controlling
interest
|
68
|
32
|
25
|
28
|
27
|
30
|
28
|
26
|
32
|
31
|
|||||||||||||||||||||
|
Income
before discontinued operations and goodwill charges
|
$
|
541
|
$
|
871
|
$
|
855
|
$
|
725
|
$
|
624
|
$
|
318
|
$
|
627
|
$
|
499
|
$
|
389
|
$
|
365
|
|||||||||||
|
Discontinued
operations
|
–
|
–
|
–
|
–
|
–
|
111
|
(45
|
)
|
29
|
36
|
24
|
||||||||||||||||||||
|
Goodwill
charges
|
–
|
–
|
–
|
–
|
–
|
–
|
19
|
19
|
8
|
73
|
|||||||||||||||||||||
|
Net
income
|
$
|
541
|
$
|
871
|
$
|
855
|
$
|
725
|
$
|
624
|
$
|
429
|
$
|
563
|
$
|
509
|
$
|
417
|
$
|
316
|
|||||||||||
|
Number
of common shares
|
|||||||||||||||||||||||||||||||
|
(thousands)
|
157,806
|
161,512
|
165,335
|
167,430
|
174,620
|
182,596
|
190,331
|
189,474
|
188,729
|
171,616
|
|||||||||||||||||||||
|
Number
of common shareholders of record
|
24,780
|
25,531
|
26,235
|
26,961
|
27,865
|
28,549
|
29,766
|
30,795
|
32,048
|
32,902
|
|||||||||||||||||||||
|
Basic
earnings per share before goodwill charges
|
$
|
3.25
|
$
|
5.22
|
$
|
4.98
|
$
|
4.10
|
$
|
3.37
|
$
|
2.18
|
$
|
2.88
|
$
|
2.65
|
$
|
2.28
|
$
|
2.12
|
|||||||||||
|
Diluted
earnings per share
|
$
|
3.22
|
$
|
5.13
|
$
|
4.90
|
$
|
4.05
|
$
|
3.34
|
$
|
2.18
|
$
|
2.78
|
$
|
2.54
|
$
|
2.24
|
$
|
1.69
|
|||||||||||
|
Dividend
per share
|
$
|
2.28
|
$
|
1.96
|
$
|
1.72
|
$
|
1.42
|
$
|
1.08
|
$
|
0.93
|
$
|
0.82
|
$
|
0.75
|
$
|
0.70
|
$
|
0.66
|
|||||||||||
|
Stock
trading range
|
|||||||||||||||||||||||||||||||
|
High
|
$
|
66.59
|
$
|
65.60
|
$
|
61.47
|
$
|
48.78
|
$
|
41.19
|
$
|
34.93
|
$
|
31.00
|
$
|
25.25
|
$
|
26.20
|
$
|
31.25
|
|||||||||||
|
Low
|
$
|
50.50
|
$
|
56.14
|
$
|
46.39
|
$
|
40.17
|
$
|
29.95
|
$
|
24.70
|
$
|
23.00
|
$
|
16.40
|
$
|
17.15
|
$
|
20.10
|
|||||||||||
|
Close
|
$
|
54.65
|
$
|
61.25
|
$
|
59.14
|
$
|
48.78
|
$
|
40.91
|
$
|
29.39
|
$
|
24.25
|
$
|
24.95
|
$
|
17.90
|
$
|
23.05
|
|||||||||||
|
Book
value
|
$
|
26.85
|
$
|
27.17
|
$
|
25.39
|
$
|
22.87
|
$
|
21.32
|
$
|
19.72
|
$
|
19.04
|
$
|
17.60
|
$
|
15.81
|
$
|
13.86
|
|||||||||||
|
Dividends
on preferred shares
|
|||||||||||||||||||||||||||||||
|
Series
5
|
–
|
–
|
–
|
–
|
–
|
–
|
–
|
–
|
–
|
3.9531
|
|||||||||||||||||||||
|
Series
7
|
–
|
–
|
–
|
–
|
–
|
–
|
–
|
–
|
–
|
1.0306
|
|||||||||||||||||||||
|
Series
8
|
–
|
–
|
–
|
–
|
–
|
–
|
–
|
–
|
–
|
0.9883
|
|||||||||||||||||||||
|
Series
10
|
–
|
–
|
–
|
–
|
–
|
–
|
2.1875
|
2.1875
|
2.1875
|
2.1875
|
|||||||||||||||||||||
|
Series
11
|
–
|
–
|
–
|
–
|
–
|
0.5000
|
2.0000
|
2.0000
|
2.0000
|
2.0000
|
|||||||||||||||||||||
|
Series
12
|
–
|
–
|
–
|
–
|
0.8125
|
1.6250
|
1.6250
|
1.6250
|
1.6250
|
1.6250
|
|||||||||||||||||||||
|
Series
13
|
–
|
–
|
1.2000
|
1.6000
|
1.6000
|
1.6000
|
1.6000
|
0.5447
|
–
|
–
|
|||||||||||||||||||||
|
Series
15
|
1.4625
|
1.4625
|
1.4625
|
1.4625
|
1.1480
|
–
|
–
|
–
|
–
|
–
|
|||||||||||||||||||||
|
Series
16
|
1.2125
|
1.2125
|
0.8089
|
–
|
–
|
–
|
–
|
–
|
–
|
–
|
|||||||||||||||||||||
|
Financial
ratios
|
|||||||||||||||||||||||||||||||
|
Return
on common shareholders’ equity before goodwill charges
|
11.5
|
%
|
20.1
|
%
|
20.7
|
%
|
18.8
|
%
|
16.5
|
%
|
11.3
|
%
|
16.0
|
%
|
16.0
|
%
|
15.5
|
%
|
14.6
|
%
|
|||||||||||
|
Return
on average assets
|
0.43
|
%
|
0.82
|
%
|
0.94
|
%
|
0.92
|
%
|
0.87
|
%
|
0.62
|
%
|
0.80
|
%
|
0.73
|
%
|
0.62
|
%
|
0.51
|
%
|
|||||||||||
|
Return
on average capital funds
|
9.3
|
%
|
15.6
|
%
|
16.2
|
%
|
13.8
|
%
|
11.9
|
%
|
9.5
|
%
|
12.5
|
%
|
12.4
|
%
|
13.2
|
%
|
9.3
|
%
|
|||||||||||
|
Capital
ratios – BIS
|
|||||||||||||||||||||||||||||||
|
Tier
1
|
9.0
|
%
|
9.9
|
%
|
9.6
|
%
|
9.6
|
%
|
9.6
|
%
|
9.6
|
%
|
9.6
|
%
|
8.7
|
%
|
7.7
|
%
|
7.7
|
%
|
|||||||||||
|
Total
|
12.4
|
%
|
14.0
|
%(4)
|
12.8
|
%(3)
|
13.0
|
%
|
13.4
|
%
|
13.6
|
%
|
13.1
|
%
|
11.4
|
%
|
11.0
|
%(2)
|
10.7
|
%
|
|||||||||||
|
Other
information
|
|||||||||||||||||||||||||||||||
|
Impaired
loans
|
|||||||||||||||||||||||||||||||
|
(millions
of dollars)
|
$
|
129
|
$
|
116
|
$
|
117
|
$
|
160
|
$
|
251
|
$
|
246
|
$
|
591
|
$
|
544
|
$
|
543
|
$
|
547
|
|||||||||||
|
Number
of Bank employees(5)
|
|||||||||||||||||||||||||||||||
|
In
Canada
|
11,124
|
11,073
|
11,342
|
11,074
|
11,328
|
11,287
|
11,676
|
11,050
|
11,744
|
11,641
|
|||||||||||||||||||||
|
Outside
Canada
|
124
|
131
|
138
|
128
|
132
|
155
|
351
|
407
|
431
|
400
|
|||||||||||||||||||||
|
National
Bank Financial
|
3,236
|
3,177
|
2,892
|
2,920
|
2,868
|
3,147
|
2,294
|
2,419
|
2,489
|
1,895
|
|||||||||||||||||||||
|
Branches
in Canada
|
447
|
451
|
457
|
462
|
477
|
507
|
525
|
586
|
649
|
646
|
|||||||||||||||||||||
|
Banking
machines
|
835
|
801
|
788
|
770
|
817
|
826
|
834
|
802
|
761
|
744
|
|||||||||||||||||||||
(1)
Average capital funds include common shareholders’ equity, redeemable preferred
shares and subordinated debentures.
(2)
Taking into account the issuance of US $250 million of subordinated debentures
on November 2, 1999
(3)
Taking into account the issuance of $500 million of subordinated debentures
on
November 2, 2005
(4)
Taking into account the issuance of $500 million of subordinated debentures
on
November 2, 2006
(5)
In
full-time equivalent
National
Bank of Canada | 2007 Annual Report
152
Principal
Subsidiaries
|
Name
|
Principal office
address (1)
|
Voting and participating
shares
|
Investment at book value
(millions of dollars) (2)
|
|||||||
|
National
Bank Acquisition Holding Inc.
|
Montreal,
Canada
|
100
|
%
|
1,996
|
||||||
|
National
Bank Life Insurance Company
|
Montreal,
Canada
|
100
|
%
|
78
|
||||||
|
National
Bank Insurance Firm Inc.
|
Montreal,
Canada
|
100
|
%
|
9
|
||||||
|
1261095
Ontario Limited
|
Toronto,
Canada
|
100
|
%
|
122
|
||||||
|
National
Bank Securities Inc.
|
Montreal,
Canada
|
100
|
%
|
24
|
||||||
|
Natcan
Investment Management Inc.
|
Montreal,
Canada
|
71
|
%
|
16
|
||||||
|
National
Bank Group Inc.
|
Montreal,
Canada
|
100
|
%
|
540
|
||||||
|
National
Bank Financial & Co. Inc.
|
Montreal,
Canada
|
100
|
%
|
925
|
||||||
|
Natcan
Insurance Company Limited
|
Bridgetown,
Barbados
|
100
|
%
|
81
|
||||||
|
Natcan
Trust Company
|
Montreal,
Canada
|
100
|
%
|
404
|
||||||
|
National
Bank Trust Inc.
|
Montreal,
Canada
|
100
|
%
|
161
|
||||||
|
FMI
Acquisition Inc.
|
Montreal,
Canada
|
100
|
%
|
185
|
||||||
|
CABN
Investments Inc.
|
Montreal,
Canada
|
100
|
%
|
1
|
||||||
|
Natcan
Acquisition Holdings Inc.
|
Montreal,
Canada
|
100
|
%
|
273
|
||||||
|
National
Bank Direct Brokerage Inc.
|
Montreal,
Canada
|
100
|
%
|
52
|
||||||
|
Altamira
Investment Services Inc.
|
Toronto,
Canada
|
100
|
%
|
208
|
||||||
|
Innocap
Investment Management Inc.
|
Montreal,
Canada
|
75
|
%
|
2
|
||||||
|
3562719
Canada Inc.
|
Montreal,
Canada
|
100
|
%
|
3
|
||||||
|
National
Bank Realty Inc.
|
Montreal,
Canada
|
100
|
%
|
28
|
||||||
|
Assurances
générales Banque Nationale (Gestion) Inc.
|
Montreal,
Canada
|
90
|
%
|
17
|
||||||
|
National
Bank General Insurance Inc.
|
Montreal,
Canada
|
90
|
%
|
–
|
||||||
|
4166540
Canada Inc.(3)
|
Calgary,
Canada
|
100
|
%
|
19
|
||||||
|
NBC
Invest Trust
|
Montreal,
Canada
|
100
|
%
|
–
|
||||||
|
4166558
Canada Inc.(3)
|
Calgary,
Canada
|
100
|
%
|
1,744
|
||||||
|
4166566
Canada Inc.
|
Calgary,
Canada
|
100
|
%
|
1
|
||||||
|
4389760
Canada Inc.
|
Montreal,
Canada
|
100
|
%
|
1
|
||||||
|
NB
Global Trading, LLC
|
Delaware,
United States
|
100
|
%
|
1
|
||||||
|
Natcan
Holdings International Limited
|
Nassau,
Bahamas
|
100
|
%
|
548
|
||||||
|
National
Bank of Canada (International) Limited(4)
|
Nassau,
Bahamas
|
100
|
%
|
20
|
||||||
|
National
Bank of Canada (Global) Limited
|
St.
Michael, Barbados
|
100
|
%
|
881
|
||||||
|
NB
Capital Corporation
|
New York, United States
|
100
|
%
|
174
|
||||||
|
NB
Finance, Ltd.
|
Hamilton,
Bermuda
|
100
|
%
|
457
|
||||||
|
NatBC
Holding Corporation
|
Florida,
United States
|
100
|
%
|
15
|
||||||
|
Natbank,
National Association
|
Florida,
United States
|
100
|
%
|
–
|
||||||
|
NBC
Trade Finance Limited
|
Hong
Kong, China
|
100
|
%
|
–
|
||||||
|
NBC
Global Investment Inc.
|
Vancouver,
Canada
|
100
|
%
|
315
|
||||||
Principal
Associated Company
|
Name
|
Principal
office address (1)
|
Voting and
participating shares
|
Investment at book value
(millions of dollars) (2)
|
|||||||
|
Maple
Financial Group Inc.
|
Toronto, Canada |
25.5
|
%
|
162
|
||||||
(1)
All
the subsidiaries are incorporated under the laws of the province, state or
country in which their principal office is located, except for NB Capital
Corporation, which is incorporated under the laws of the State of Maryland,
USA,
and NatBC Holding Corporation and NB Global Trading, LLC, which are incorporated
under the laws of the State of Delaware, USA.
(2)
The
investment at cost is the book value stated on an equity basis as at October
31,
2007.
(3)
These
two subsidiaries were merged on November 1, 2007. The resulting subsidiary
is
4341589 Canada Inc.
(4)
On
November 29, 2007, the Bank announced the signing of an agreement to sell this
company to Crédit Agricole (Suisse) SA. This transaction is expected to be
finalized in January 2008.
National
Bank of Canada | 2007 Annual Report
153