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, 2006. |
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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 for the transition period from ________ to
________.
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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
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(I.R.S.
Employer
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|||
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incorporation
or organization)
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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: (212) 632-8697
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
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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, or a non-accelerated filer.
| Large Accelerated Filer o | Accelerated Filer o | Non-Accelerated Filer x |
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,
2006 and
March
30, 2007, 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
that
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, changes in North American and/or global economic and financial conditions
(particularly fluctuations in interest rates, currencies and other financial
instruments), liquidity, market trends, regulatory developments and competition
in geographic areas where the Company operates, technological changes, the
possible impact on our businesses of international conflicts and other
developments including those relating to the war on terrorism and the Company’s
anticipation of and success in managing the risks implied by the
foregoing.
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, 2006, the Canadian dollar exchange rate was C$1.1654 =
$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 53 "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 53 pools of, at December 31, 2006,
an
aggregate 10,036 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 report on Form 10-K, including without limitation
the sections under the captions of “Advisory Agreement” and “Servicing
Agreement” in Item 1 of this 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 shall be
enforceable by the Bank and such holders, respectively, against the
other.
Upon
the
occurrence of an Exchange Event, the Bank Preferred Shares to be issued as
part
of an 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
last renewal was dated March 21, 2006 and its expiration date is March 21,
2007.
The next renewal is expected to occur before March 21, 2007. 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 $100,000 for fiscal year 2006, and subject to renewal
of
the Advisory Agreement under the same terms, will be entitled to receive
the
same amount for fiscal year 2007, payable in equal quarterly instalments
for the
advisory and management services provided by it to the Company. Payment of
such
fees is subordinated to payments of dividends on the Series A Preferred Shares
and, accordingly, the Depository Shares.
Servicing Agreement
The
Mortgage Loans are serviced by the Bank pursuant to the terms of the Servicing
Agreement. The Bank receives a fee equal to 0.25% per annum on the principal
balances (in US$) 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 5, 2006 for a one-year period ending on June 28,
2007.
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
thereunder. 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, 2006, Mortgage Assets issued by NB Finance
comprised 79.34% of the Company’s portfolio. An investment in Mortgage Assets
issued by NB Finance was made on February 22, 2007.
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 stockholders. All
investments will be made primarily for income.
-6-
Description
of the Mortgage Assets
The
Mortgage Assets issued by NB Finance are comprised of 53 hypothecation loans
issued by NB Finance to the Company. As of December 31, 2006, the principal
amount of the Mortgage Assets was approximately $381 million. Each of the
53
hypothecation loans comprising the Mortgage Assets issued by NB Finance is
secured by a pool of Mortgage Loans. As of December 31, 2006, the Mortgage
Loans were comprised of, in the aggregate, 10,036 Mortgage Loans in an aggregate
amount of approximately C$597 million ($512 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. The aggregate
amount of such over collateralization is, as of December 31, 2006, $131 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. Since the Mortgage Loans
are
insured, 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 January 2007
to
January 2015. The Mortgage Assets pay interest at rates ranging from 5.00%
to
10.15%, with a weighted-average rate of approximately 7.03% 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 75% 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 has ten employees,
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, 2006, the Bank held more than C$15.2 billion of residential mortgage
assets. Slightly more than 77.5% 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 14.69% 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,
2006 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, 2006. 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, 2005, the Company paid one dividend with respect
to the
Common Stock in an amount of $6,500,000. 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.
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 non-public offering. 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 offering of the Senior Preferred Shares was not
underwritten. 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, 2004, 2005, and 2006 and for each of the three
years in the period ended December 31, 2006 have been derived from, and should
be read together with, our audited consolidated financial statements and
the
accompanying notes included in Item 8 of this report. The consolidated financial
information as of December 31, 2002 and 2003 and for each of the two years
in
the period ended December 31, 2003 have been derived from our audited
consolidated financial statements not included in this report. The consolidated
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, 2006
|
Year
Ended
December
31, 2005
|
Year
Ended
December
31, 2004
|
Year
Ended
December
31, 2003
|
Year
Ended
December
31, 2002
|
||||||||||||
|
Statement
of Income Data:
|
||||||||||||||||
|
Operating
Revenues
|
$
|
33,044,255
|
$
|
35,342,570
|
$
|
36,322,291
|
$
|
37,895,366
|
$
|
37,707,287
|
||||||
|
Income
from Operations
|
$
|
31,194,038
|
$
|
33,344,602
|
$
|
34,459,040
|
$
|
36,103,421
|
$
|
36,054,804
|
||||||
|
Income
from Operations / Common Share
|
$
|
311,940
|
$
|
333,446
|
$
|
344,590
|
$
|
361,034
|
$
|
360,548
|
||||||
|
Balance
Sheet Data:
|
||||||||||||||||
|
Total
assets
|
$
|
479,617,056
|
$
|
479,610,581
|
$
|
477,763,501
|
$
|
478,884,177
|
$
|
482,278,189
|
||||||
|
Total
liabilities
|
$
|
409,054
|
$
|
518,994
|
$
|
444,371
|
$
|
456,663
|
$
|
386,175
|
||||||
|
Stockholders’
Equity
|
$
|
479,208,002
|
$
|
479,091,587
|
$
|
477,319,130
|
$
|
478,427,514
|
$
|
481,892,014
|
||||||
|
Cash
Dividends Declared / Common Share
|
$
|
60,000
|
$
|
65,000
|
$
|
105,000
|
$
|
145,000
|
$
|
105,000
|
||||||
-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, 2006 decreased by $2,150,564
or
6.45 % over the prior year ended December 31, 2005, which decreased by
$1,114,438 or 3.23 % over the prior year ended December 31, 2004. Operating
revenues for the year ended December 31, 2006, the year ended December 31,
2005
and the year ended December 31, 2004, each of which were comprised entirely
of
interest income, were $33,044,255, $35,342,570 and $36,322,291, respectively.
The decrease in 2006 was mainly due to lower interest rates on newly acquired
Mortgage Assets as well as a lower average outstanding balance of Promissory
notes in 2006 of $421,443,401 compared to $430,053,653 in 2005. 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-two
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 53 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 bank deposits and short-term investments
(i.e., commercial paper and U.S. Treasury bills).
Expenses
for the year ended December 31, 2006, the year ended December 31, 2005 and
the
year ended December 31, 2004 totalled $1,850,217, $1,997,968 and $1,863,251,
respectively. Servicing and advisory fees for the year ended December 31,
2006,
the year ended December 31, 2005 and the year ended December 31, 2004 totalled
$1,590,939, $1,614,444 and $1,598,279, 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, 2006, the Board of Directors authorized dividends
of, in the aggregate, $25,077,623 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, 2006, $381 million of Mortgage Assets issued by
NB
Finance were over-collateralized by C$597 million ($512 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.
As
of
December 31, 2006, the Company had cash resources of $90,211,545, or 18.81%
of
total assets compared to $59,900,966 or 12.49% of total assets as of December
31, 2005 and $58,327,311, or 12.21% of total assets as at December 31, 2004.
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 made a purchase of additional Mortgage Assets
on
February 22, 2007.
-11-
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
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 has not yet determined the effect
that
the implementation of this standard will have 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 NB Capital on January 1,
2008.
However, we do not believe that it will have a material impact on the Company’s
financial reporting and disclosure.
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.
-12-
ITEM
8.
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The
financial statements are contained on pages F-1 through F-11 of this Form
10-K.
Selected
Quarterly Financial Data (Unaudited)
|
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
|
|||||
|
Quarter
Ended
March
31,
2005 |
Quarter
Ended
June
30,
2005 |
Quarter
Ended
September
30,
2005 |
Quarter
Ended
December
31,
2005 |
||||||||||
|
Statement
of Income Data:
|
|||||||||||||
|
Operating
Revenues
|
$
|
8,888,526
|
$
|
8,978,728
|
$
|
8,693,089
|
$
|
8,782,227
|
|||||
|
Income
from Operations
|
$
|
8,399,897
|
$
|
8,499,388
|
$
|
8,187,874
|
$
|
8,257,443
|
|||||
|
Income
from Operations / Common Share
|
$
|
83,999
|
$
|
84,994
|
$
|
81,879
|
$
|
82,574
|
|||||
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.
There
were no changes in our internal control over financial reporting (as defined
in
Rule 13a-15(f) under the Securities Exchange Act of 1934) during the fourth
quarter of fiscal 2006 that materially affected, or are reasonably likely
to
materially affect, our internal control over financial reporting.
ITEM
9B.
OTHER INFORMATION
None
-13-
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, 2006:
|
Name
|
Age
|
Position
and Offices Held
|
Director
Since
|
|
Christian
Dubé
|
50
|
Director
and Member of the Audit Committee
|
2001
|
|
Donna
Goral
|
49
|
Director,
Chairman of the Board and President
|
2001
|
|
André
Belzile
|
45
|
Director
and Member of the Audit Committee
|
1999
|
|
Alain
Michel
|
57
|
Director
and Chairman of the Audit Committee
|
1997
|
|
Monique
Baillergeau
|
48
|
Director
and Vice President
|
2003
|
|
Hoda
Abdelmessih
|
52
|
Director
and Vice President
|
2004
|
|
Vincent
Lima
|
49
|
Director
and Vice President
|
2006
|
|
Jean
Dagenais
|
48
|
Chief
Financial Officer
|
N/A
|
James
J.
Hanks, Jr. (Secretary) is an officer of the Company. Vanessa Fontana (Assistant
Secretary), Martin-Pierre Boulianne (Assistant Secretary), Valérie Pelletier
(Assistant Secretary), Peter Greco (Compliance Officer) and Martin Ouellet
(Vice-President) are the only other employees of the company. The following
is a
summary of the experience of the directors and officers of the
Company:
Since
May
2004, Mr. Belzile has been Senior Vice-President Finance and Corporate Affairs
of The Jean Coutu Group (PJC) Inc., a leading retail drugstore chain operating
in Canada and the United States. From 1992 to 2004, he was Vice-President
and
Chief Financial Officer of Cascades Inc.,
a
producer and marketer of packaging products. From 1986 to 1992, he worked
in
financial reporting for Cascades Inc. From 1984 to 1986, he worked as an
external auditor for the accounting firm Coopers & Lybrand.
Since
September 2005, Mr. Michel has been Executive Chairman of the Board of the
Cari-All Group. 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.
-14-
Since
May
2004, Mr. Dubé has been Vice-President and Chief Financial Officer of Cascades
Inc., a leader in the manufacturing of packaging products, tissue paper and
specialty fine papers. From 1998 until 2004, Mr. Dubé occupied the position of
Senior Vice-President and Chief Financial Officer of Domtar Inc. From 1996
until
1998, he was Vice-President Corporate Development and Vice-President Treasurer
of Domtar Inc. He currently serves on the Board of Directors for Heroux-Devtek
Inc.
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 been 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. In 1997, he was
promoted to Vice-President. As such, he is responsible for the preparation
of
the Bank’s consolidated financial statements as well as other financial
information presented to management, shareholders and regulatory authorities.
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 Ethics
The
Company has adopted a Code of Conduct and Ethics (as an exhibit to this Form
10-K) (the “Code of Ethics”) that applies to all of the Company’s directors and
officers as well as employees. No waivers to the Code of Ethics have been
granted by the Company. The Company undertakes to provide a copy of this
Code of
Ethics without charge, upon request. Investors may send a request for a copy
of
the Code of 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.
-15-
Director
Independence
Mr.
Belzile, 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.
Board
Meetings and Committees
The
Board
of Directors met 4 times during 2006. All directors attended 75% or more
meetings of the Board and the Audit Committee of the Board on which such
directors served.
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 consists of the three following members: Mr. Alain
Michel (Chairman of the Audit Committee), Mr. Christian Dubé and Mr. André
Belzile. On May 14, 2003,
and
every year thereafter,
the
Board of Directors determined that all three 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. The Audit Committee has
a
written charter, which is filed as Exhibit 99.1.
-16-
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, 2006.
| Alain Michel (Chairman) | ||
| Christian Dubé | ||
| André Belzile | ||
| |
|
|
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, 2006, 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.
-17-
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
2006 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, 2006 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 Board and President
|
2006
|
|
$2,362
|
|
$661
|
-
|
-
|
-
|
|
$483
|
|
$374
|
|
$3,880
|
||||||||||||||
|
Jean
Dagenais, Chief Financial Officer
|
2006
|
C$1,594
|
C$860
|
C$15
|
C$531
|
-
|
C$800
|
C$133
|
C$3,933
|
|||||||||||||||||||
|
Serge
Lacroix, former Chairman of the Board and President (2)
|
2006
|
|
$375
|
|
$900
|
-
|
-
|
-
|
|
$30
|
|
$25
|
|
$1,330
|
| (1) |
This
table represents the
compensation paid by the Bank to Ms. Goral, Mr. Dagenais and Mr.
Lacroix
for all services
rendered in all capacities to the
Company.
|
| (2) |
Mr.
Lacroix, former Chairman of the Board and President, resigned effective
February 1, 2006.
|
Director
Compensation
|
Name
|
Fees
Earned or Paid in Cash1
($)
|
Stock
Awards
($)
|
Option
Awards
($)
|
Non-Equity
Incentive Plan Compensation
($)
|
Change
in Pension Value and Nonqualified Deferred Compensation
Earnings
|
All
Other Compensation
($)
|
Total
($)
|
|||||||||||||||
|
Alain
Michel
|
18,500
|
-
|
-
|
-
|
-
|
-
|
18,500
|
|||||||||||||||
|
Christian
Dubé
|
17,500
|
-
|
-
|
-
|
-
|
-
|
17,500
|
|||||||||||||||
|
André
Belzile
|
17,500
|
-
|
-
|
-
|
-
|
-
|
17,500
|
|||||||||||||||
(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.
-18-
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, 2006, 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." The Bank also services the
Mortgage Loans pursuant to the Servicing Agreement. See "Business-Servicing
Agreement."
ITEM
14.
PRINCIPAL ACCOUNTING FEES AND SERVICES
Audit
Fees
Deloitte
& Touche LLP’s aggregate fees billed for professional services rendered for
the audit of our annual financial statements for the 2006 fiscal year and
the
review of the quarterly financial statements for the 2006 fiscal year were
$44,000 (compared to $41,000 for 2005). The engagement of Deloitte & Touche
LLP for the 2006 fiscal year and the scope of audit, audit-related and tax
services were pre-approved by our 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 2006
fiscal year were $6,000 (compared to $5,600 for 2005).
Deloitte
& Touche LLP’s aggregate fees billed for work related to Sarbanes Oxley
readiness assessment was $0 (compared to $5,000 for 2005).
Tax
Fees
Deloitte
& Touche LLP’s aggregate fees for all tax related services for the 2006
fiscal year were $40,000 for tax compliance and consulting services (compared
to
$35,000 for 2005).
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.
-19-
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)
|
During
the quarter ended December 31, 2006, the Company did not file any
Current
Reports on Form 8-K.
|
|
(c)
|
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. National Bank Non-Cumulative 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, 2006 and October
31, 2005,
as well as Independent Auditors' Report, are filed as part of this
annual
report on Form 10-K.
|
-20-
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 30th
day of March, 2007.
| 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 30th day
of March, 2007.
| By: /s/ Donna Goral | By: | /s/Alain Michel |
|
Donna Goral |
Alain Michel |
|
| Director | Director | |
| By: /s/ Hoda Abdelmessih | By: | /s/André Belzile |
|
Hoda Abdelmessih |
André Belzile |
|
| Director | Director | |
| By: | /s/Christian Dubé | |
|
Christian Dubé |
||
| Director | ||
| By: | /s/Monique Baillergeau | |
|
Monique Baillergeau |
||
| Director | ||
| By: | /s/Vincent Lima | |
|
Vincent Lima |
||
| Director | ||
-21-
INDEX
TO EXHIBITS
| Exhibit Number |
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 21, 2006 between National Bank of Canada
and NB
Capital Corporation**
|
|
10.2
|
Servicing
Agreement dated June 28, 2006 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
|
Deposit
Agreement among NB Capital Corporation, National Bank of Canada
and The
Bank of Nova Scotia Trust Company of New York, including Form of
Depository Receipt*
|
|
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*
|
-22-
|
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
Note 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
Note 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
Note 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 Note 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
Note 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
Note representing $55,963,732.07 executed by NB Finance, Ltd. in
favor of
NB Capital Corporation*
|
|
10.28
|
Mortgage
Loan Assignment Agreement dated as of January 29, 2002 among NB
Finance,
Ltd., NB Capital Corporation and National Bank of
Canada*
|
|
10.29
|
Promissory
Note representing $71,866,079.87 executed by NB Finance, Ltd. in
favor of
NB Capital Corporation*
|
|
10.30
|
Mortgage
Loan Assignment Agreement dated as of June 20, 2002 among NB Finance,
Ltd., NB Capital Corporation and National Bank of
Canada*
|
|
10.31
|
Promissory
Note representing $64,221,362.98 executed by NB Finance, Ltd. in
favor of
NB Capital Corporation*
|
-23-
|
10.32
|
Mortgage
Loan Assignment Agreement dated as of December 16, 2002 among NB
Finance,
Ltd., NB Capital Corporation and National Bank of
Canada*
|
|
10.33
|
Promissory
Note representing $52,054,168.88 executed by NB Finance, Ltd. in
favor of
NB Capital Corporation*
|
|
10.34
|
Mortgage
Loan Assignment Agreement dated as of May 27, 2003 among NB Finance,
Ltd.,
NB Capital Corporation and National Bank of
Canada*
|
|
10.35
|
Promissory
Note representing $70,420,135.45 executed by NB Finance, Ltd. in
favor of
NB Capital Corporation*
|
|
10.36
|
Mortgage
Loan Assignment Agreement dated as of October 21,2003 among NB
Finance,
Ltd., NB Capital Corporation and National Bank of
Canada*
|
|
10.37
|
Promissory
Note representing $106,552,720.44 executed by NB Finance, Ltd.
in favor of
NB Capital Corporation*
|
|
10.38
|
Mortgage
Loan Assignment Agreement dated as of April 28, 2004 among NB Finance,
Ltd., NB Capital Corporation and National Bank of
Canada*
|
|
10.39
|
Promissory
Note representing $76,053,456.93 executed by NB Finance, Ltd. in
favor of
NB Capital Corporation*
|
|
10.40
|
Mortgage
Loan Assignment Agreement dated as of August 26, 2004 among NB
Finance,
Ltd., NB Capital Corporation and National Bank of
Canada*
|
|
10.41
|
Promissory
Note representing $94,559,444.49 executed by NB Finance, Ltd. in
favor of
NB Capital Corporation*
|
|
10.42
|
Mortgage
Loan Assignment Agreement dated as of February 24, 2005 among NB
Finance,
Ltd., NB Capital Corporation and National Bank of
Canada*
|
|
10.43
|
Promissory
Note 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**
|
|
14
|
NB
Capital Code of Ethics**
|
|
31.1
|
Certification
of Chairman and President pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002**
|
-24-
| 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. |
-25-
|
NB
CAPITAL CORPORATION
Financial
statements as of
December
31, 2006, 2005 and 2004, 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-11
|
|
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, 2006 and 2005 and the related statements of
income, stockholders’ equity and cash flows for each of the three years in the
period ended December 31, 2006. 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. An audit includes consideration
of
internal control over financial reporting as a basis for designing 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 disclosure
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, the financial statements referred to above present fairly, in all
material respects, the financial position of the Company as of December 31,
2006 and 2005 and the results of its operations and its cash flows for each
of
the three years in the period ended December 31, 2006, in conformity with
accounting principles generally accepted in the United States of
America.
/s/
DELOITTE & TOUCHE LLP
Montreal,
Canada
February
21, 2007
F-1
NB
CAPITAL CORPORATION
Balance
sheets
as
of December 31 2006 and 2005
(in
U.S. dollars)
|
2006
|
2005
|
|||||||||
|
$
|
$
|
|||||||||
|
Assets
|
||||||||||
|
Current
Assets
|
||||||||||
|
Cash
and cash equivalents
|
90,211,545
|
59,900,966
|
||||||||
|
Due
from an affiliated company
|
8,800,848
|
9,680,137
|
||||||||
|
Promissory
notes - current portion (Note 3)
|
186,717,983
|
79,840,304
|
||||||||
|
Prepaid
expenses
|
34,429
|
31,800
|
||||||||
|
Accrued
interest on cash equivalents
|
47,553
|
18,691
|
||||||||
|
Total
Current Assets
|
285,812,358
|
149,471,898
|
||||||||
|
Promissory
notes (Note 3)
|
193,804,698
|
330,138,683
|
||||||||
|
Total
assets
|
479,617,056
|
479,610,581
|
||||||||
|
Liabilities
|
||||||||||
|
Current
Liabilities
|
||||||||||
|
Due
to the parent company
|
364,964
|
402,482
|
||||||||
|
Accounts
payable
|
44,090
|
116,512
|
||||||||
|
Total
liabilities
|
409,054
|
518,994
|
||||||||
|
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
|
2,443,986
|
2,327,571
|
||||||||
|
Total
stockholders’ equity
|
479,208,002
|
479,091,587
|
||||||||
|
Total
liabilities and stockholders’ equity
|
479,617,056
|
479,610,581
|
||||||||
See
accompanying notes to financial statements.
F-2
NB
CAPITAL CORPORATION
Statements
of income
years
ended December 31, 2006, 2005 and 2004
(in
U.S. dollars)
|
2006
|
|
2005
|
|
2004
|
|
|||||
|
|
|
$
|
|
$
|
|
$
|
||||
|
Revenue
|
||||||||||
|
Interest
income
|
||||||||||
|
Short-term
investments
|
2,494,790
|
1,346,146
|
441,053
|
|||||||
|
Promissory
notes
|
30,546,845
|
33,995,506
|
35,879,238
|
|||||||
|
Bank
interest
|
2,620
|
918
|
2,000
|
|||||||
|
33,044,255
|
35,342,570
|
36,322,291
|
||||||||
|
Expenses
|
||||||||||
|
Legal
|
49,107
|
127,883
|
62,265
|
|||||||
|
Other
professional fees
|
210,171
|
255,641
|
202,707
|
|||||||
|
Servicing
fees
|
1,490,939
|
1,514,444
|
1,498,279
|
|||||||
|
Advisory
fees
|
100,000
|
100,000
|
100,000
|
|||||||
|
1,850,217
|
1,997,968
|
1,863,251
|
||||||||
|
Net
income
|
31,194,038
|
33,344,602
|
34,459,040
|
|||||||
|
Preferred
stock dividends
|
25,077,623
|
25,072,145
|
25,067,424
|
|||||||
|
Income
available to common stockholders
|
6,116,415
|
8,272,457
|
9,391,616
|
|||||||
|
Weighted
average number of common
|
||||||||||
|
shares
outstanding
|
100
|
100
|
100
|
|||||||
|
Earnings
per common share - basic and diluted
|
61,164
|
82,725
|
93,916
|
|||||||
See
accompanying notes to financial statements.
F-3
NB
CAPITAL CORPORATION
Statements
of stockholders’ equity
years
ended December 31, 2006, 2005 and 2004
(in
U.S. dollars)
|
Series
A
|
|
Senior
|
|
|
|
Additional
|
|
|
|
|
|
||||||||
|
|
|
Preferred
|
|
Preferred
|
|
Common
|
|
Paid-in
|
|
Retained
|
|
|
|
||||||
|
|
|
Stock
|
|
Stock
|
|
Stock
|
|
Capital
|
|
Earnings
|
|
Total
|
|
||||||
|
|
|
$
|
|
$
|
|
$
|
|
$
|
|
$
|
|
$
|
|||||||
|
Stockholders’
equity as of
|
|||||||||||||||||||
|
December
31, 2003
|
3,000
|
1
|
1
|
476,761,014
|
1,663,498
|
478,427,514
|
|||||||||||||
|
Net
income
|
-
|
-
|
-
|
-
|
34,459,040
|
34,459,040
|
|||||||||||||
|
Dividends
on senior preferred stock and
|
|||||||||||||||||||
|
Series
A preferred stock
|
-
|
-
|
-
|
-
|
(25,067,424
|
)
|
(25,067,424
|
)
|
|||||||||||
|
Dividend
on common stock
|
-
|
-
|
-
|
-
|
(10,500,000
|
)
|
(10,500,000
|
)
|
|||||||||||
|
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
|
)
|
|||||||||||
|
Dividend
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
|
)
|
|||||||||||
|
Dividend
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
|
|||||||||||||
See
accompanying notes to financial statements.
F-4
NB
CAPITAL CORPORATION
Statements
of cash flows
years
ended December 31, 2006, 2005 and 2004
(in
U.S. dollars)
|
2006
|
|
2005
|
|
2004
|
|
|||||
|
|
|
$
|
|
$
|
|
$
|
||||
|
Operating
activities
|
||||||||||
|
Net
income
|
31,194,038
|
33,344,602
|
34,459,040
|
|||||||
|
Adjustment
to reconcile net income to
|
||||||||||
|
net
cash provided by operating activities
|
||||||||||
|
Due
from an affiliated company
|
879,289
|
(205,777
|
)
|
1,637,556
|
||||||
|
Prepaid
expenses
|
(2,629
|
)
|
(1,280
|
)
|
(2,520
|
)
|
||||
|
Accrued
interest on cash equivalents
|
(28,862
|
)
|
6,808
|
(20,265
|
)
|
|||||
|
Due
to the parent company
|
(37,518
|
)
|
(11,602
|
)
|
(870
|
)
|
||||
|
Accounts
payable
|
(72,422
|
)
|
86,225
|
(11,422
|
)
|
|||||
|
Net
cash provided by operating activities
|
31,931,896
|
33,218,976
|
36,061,519
|
|||||||
|
Investing
activities
|
||||||||||
|
Investment
in promissory notes
|
(174,603,983
|
)
|
(170,774,678
|
)
|
(170,612,901
|
)
|
||||
|
Repayments
of promissory notes
|
204,060,289
|
170,701,502
|
209,040,546
|
|||||||
|
Net
cash provided by (used in)
|
||||||||||
|
investing
activities
|
29,456,306
|
(73,176
|
)
|
38,427,645
|
||||||
|
Financing
activities
|
||||||||||
|
Dividends
|
(31,077,623
|
)
|
(31,572,145
|
)
|
(35,567,424
|
)
|
||||
|
Net
cash used in financing activities
|
(31,077,623
|
)
|
(31,572,145
|
)
|
(35,567,424
|
)
|
||||
|
Cash
and cash equivalents, beginning of year
|
59,900,966
|
58,327,311
|
19,405,571
|
|||||||
|
Cash
and cash equivalents,
|
||||||||||
|
end
of year
|
90,211,545
|
59,900,966
|
58,327,311
|
|||||||
See
accompanying notes to financial statements.
F-5
NB
CAPITAL CORPORATION
Notes
to the financial statements
years
ended December 31, 2006, 2005 and 2004
(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.
Per
share data
Basic
and
diluted earnings per share with respect to the Company for the years ended
December 31, 2006, 2005 and 2004 are computed based upon the weighted
average number of common shares outstanding during the year.
F-6
NB
CAPITAL CORPORATION
Notes
to the financial statements
years
ended December 31, 2006, 2005 and 2004
(in
U.S. dollars)
| 2. |
Significant
accounting policies
(continued)
|
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 revenues and expenses
during the reporting year. Actual results could differ from those
estimates.
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.
| 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 January 2007 to January 2015,
at rates ranging from 5.00% to 10.15%, with a weighted-average rate of
approximately 7.03% per annum.
The
fair
value of the Promissory notes as at December 31, 2006 is $388,258,533
($422,649,877 in 2005). Fair value is estimated using the present value of
expected future cash flows and may not be indicative of the net realizable
value.
|
2006
|
|
2005
|
|
||||
|
|
|
$
|
|
$
|
|||
|
Promissory
notes, beginning of year
|
409,978,987
|
409,905,811
|
|||||
|
Acquisitions
|
174,603,983
|
170,774,678
|
|||||
|
Principal
repayments
|
(204,060,289
|
)
|
(170,701,502
|
)
|
|||
|
Promissory
notes, end of year
|
380,522,681
|
409,978,987
|
|||||
F-7
NB
CAPITAL CORPORATION
Notes
to the financial statements
years
ended December 31, 2006, 2005 and 2004
(in
U.S. dollars)
| 3. |
Promissory
notes (continued)
|
The
scheduled principal repayments as of December 31, 2006 are as
follows:
|
$
|
||||
|
2007
|
186,717,983
|
|||
|
2008
|
40,644,501
|
|||
|
2009
|
28,327,189
|
|||
|
2010
|
29,213,021
|
|||
|
2011
|
48,674,232
|
|||
|
2012
|
27,898,277
|
|||
|
2013
|
6,723,690
|
|||
|
2014
|
3,759,146
|
|||
|
2015
|
8,564,642
|
|||
| 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 $30,546,845 ($33,995,506 in 2005 and $35,879,238 in
2004) (see Note 3).
The
amounts due from an affiliated company as of December 31, 2006 and 2005
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 2005 and $100,000
in
2004), payable in equal quarterly installments, National Bank of Canada will
furnish advice and recommendations with respect to all aspects of the business
and affairs of the Company.
F-8
NB
CAPITAL CORPORATION
Notes
to the financial statements
years
ended December 31, 2006, 2005 and 2004
(in
U.S. dollars)
| 5. |
Transactions
with the parent company
(continued)
|
Servicing
agreement
National
Bank of Canada will service and administer the promissory notes and the
collateralized mortgage loans and will perform all necessary operations in
connection with such servicing and administration.
The
fee
will equal one-twelfth (1/12) of 0.25% per annum of the aggregate outstanding
balance (in US$) 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 $487,166,472 ($537,567,066
in
2005 and 542,179,064 in 2004). During the year, fees of $1,490,939 ($1,514,444
in 2005 and $1,498,279 in 2004) were charged to the Company.
Custodian
agreement
National
Bank of Canada will hold all documents relating to the collateralized mortgage
loans. During the years ended December 31, 2006, 2005 and 2004, no fee was
charged to the Company.
Interest
on bank account and short-term investments
The
Company received $2,620 ($918 in 2005 and $2,000 in 2004) in interest on a
bank
account held with National Bank of Canada.
The
Company received $2,494,790 ($1,346,146 in 2005 and $441,053 in 2004) in
interest on term deposits held with National Bank of Canada.
F-9
NB
CAPITAL CORPORATION
Notes
to the financial statements
years
ended December 31, 2006, 2005 and 2004
(in
U.S. dollars)
| 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, 2006 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, 2006 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
thereof.
|
F-10
NB
CAPITAL CORPORATION
Notes
to the financial statements
years
ended December 31, 2006, 2005 and 2004
(in
U.S. dollars)
| 7. |
Recent
pronouncements
|
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 has not yet determined the effect that
the implementation of this standard will have 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, we do not believe that it will have a
material impact on the Company’s financial reporting and
disclosure.
F-11
ITEM
15(c) to the Annual Report of NB Capital Corporation on Form 10-K for
the Year
Ended December 31, 2006
Consolidated
Financial Statements of National Bank of Canada (Expressed in Canadian
dollars).
National
Bank of Canada
Consolidated
Financial Statements
A bank
like no other
| 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.
|
Réal
Raymond
|
Pierre
Fitzgibbon
|
|
|
President
and
|
Senior
Vice-President
|
|
|
Chief
Executive Officer
|
Finance,
Technology and Corporate
Affairs
|
Montreal,
Canada, November 30, 2006
|
Samson
Bélair/Deloitte & Touche s.e.n.c.r.l.
1
Place Ville Marie
Suite
3000
Montreal
QC H3B 4T9
Canada
Tel :
514-393-5317
Fax
: 514-390-4111
www.deloitte.ca
|
Independent
Auditors’ report
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, 2006 and 2005 and the Consolidated Statements of Income,
Changes in Shareholders’ Equity and Cash Flows for the years then ended. These
consolidated financial statements are the responsibility of the Bank’s
management. Our responsibility is to express an opinion on these consolidated
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. Those 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 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 Bank’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, these consolidated financial statements present fairly, in all
material
respects, the financial position of the Bank as at October 31, 2006 and
2005 and
the results of its operations and its cash flows for each of the years
in the
two year period ended October 31, 2006 in accordance with Canadian generally
accepted accounting principles.
Montreal,
Canada
November
30, 2006
Consolidated
Statement of Income
|
Year
ended October 31
|
||||||||||
|
(millions
of dollars)
|
Note
|
2006
|
2005
|
|||||||
|
Interest
income
|
||||||||||
|
Loans
|
2,648
|
2,122
|
||||||||
|
Securities
|
960
|
739
|
||||||||
|
Deposits
with financial institutions
|
314
|
193
|
||||||||
|
3,922
|
3,054
|
|||||||||
|
Interest
expense
|
||||||||||
|
Deposits
|
1,877
|
1,109
|
||||||||
|
Subordinated
debentures
|
90
|
100
|
||||||||
|
Other
|
663
|
404
|
||||||||
|
2,630
|
1,613
|
|||||||||
|
Net
interest income
|
1,292
|
1,441
|
||||||||
|
Other
income
|
||||||||||
|
Financial
market fees
|
629
|
682
|
||||||||
|
Deposit
and payment service charges
|
208
|
201
|
||||||||
|
Trading
revenues
|
317
|
192
|
||||||||
|
Gains
on investment account securities, net
|
180
|
91
|
||||||||
|
Card
service revenues
|
61
|
63
|
||||||||
|
Lending
fees
|
251
|
246
|
||||||||
|
Acceptances,
letters of credit and guarantee
|
68
|
61
|
||||||||
|
Securitization
revenues
|
6
|
175
|
194
|
|||||||
|
Foreign
exchange revenues
|
98
|
76
|
||||||||
|
Trust
services and mutual funds
|
324
|
281
|
||||||||
|
Other
|
242
|
175
|
||||||||
|
2,553
|
2,262
|
|||||||||
|
Total
revenues
|
3,845
|
3,703
|
||||||||
|
Provision
for credit losses
|
5
|
77
|
33
|
|||||||
|
Operating
expenses
|
||||||||||
|
Salaries
and staff benefits
|
1,479
|
1,451
|
||||||||
|
Occupancy
|
164
|
160
|
||||||||
|
Technology
|
387
|
380
|
||||||||
|
Communications
|
74
|
81
|
||||||||
|
Professional
fees
|
145
|
136
|
||||||||
|
Other
|
339
|
291
|
||||||||
|
2,588
|
2,499
|
|||||||||
|
Income
before income taxes and non-controlling interest
|
1,180
|
1,171
|
||||||||
|
Income
taxes
|
18
|
277
|
291
|
|||||||
|
903
|
880
|
|||||||||
|
Non-controlling
interest
|
32
|
25
|
||||||||
|
Net
income
|
871
|
855
|
||||||||
|
Dividends
on preferred shares
|
16
|
21
|
26
|
|||||||
|
Net
income available to common shareholders
|
850
|
829
|
||||||||
|
Average
number of common shares outstanding
(thousands)
|
19
|
|||||||||
|
Basic
|
162,851
|
166,382
|
||||||||
|
Diluted
|
165,549
|
168,964
|
||||||||
|
Earnings
per common share
(dollars)
|
19
|
|||||||||
|
Basic
|
5.22
|
4.98
|
||||||||
|
Diluted
|
5.13
|
4.90
|
||||||||
|
Dividends
per common share
(dollars)
|
16
|
1.96
|
1.72
|
|||||||
Consolidated
Balance Sheet
|
As
at October 31
|
||||||||||
|
(millions
of dollars)
|
Note
|
2006
|
2005
|
|||||||
|
ASSETS
|
||||||||||
|
Cash
|
268
|
227
|
||||||||
|
Deposits
with financial institutions
|
10,611
|
10,087
|
||||||||
|
Securities
|
||||||||||
|
Investment
account
|
3
|
6,814
|
6,869
|
|||||||
|
Trading
account
|
3
|
31,864
|
26,183
|
|||||||
|
38,678
|
33,052
|
|||||||||
|
Securities
purchased under reverse repurchase agreements
|
7,592
|
7,023
|
||||||||
|
Loans
|
4,
5 and 6
|
|||||||||
|
Residential
mortgage
|
15,230
|
15,677
|
||||||||
|
Personal
and credit card
|
11,280
|
9,796
|
||||||||
|
Business
and government
|
20,679
|
19,047
|
||||||||
|
47,189
|
44,520
|
|||||||||
|
Allowance
for credit losses
|
(426
|
)
|
(451
|
)
|
||||||
|
46,763
|
44,069
|
|||||||||
|
Other
|
||||||||||
|
Customers’
liability under acceptances
|
3,725
|
3,242
|
||||||||
|
Fair
value of trading derivative financial instruments
|
21
|
2,269
|
2,390
|
|||||||
|
Premises
and equipment
|
8
|
383
|
355
|
|||||||
|
Goodwill
|
9
|
683
|
662
|
|||||||
|
Intangible
assets
|
9
|
177
|
178
|
|||||||
|
Other
assets
|
10
|
5,736
|
6,685
|
|||||||
|
12,973
|
13,512
|
|||||||||
|
116,885
|
107,970
|
|||||||||
|
LIABILITIES
AND SHAREHOLDERS’ EQUITY
|
||||||||||
|
Deposits
|
11
|
|||||||||
|
Personal
|
29,164
|
26,385
|
||||||||
|
Business
and government
|
33,998
|
29,878
|
||||||||
|
Deposit-taking
institutions
|
8,602
|
5,956
|
||||||||
|
Deposit
from NBC Capital Trust
|
225
|
-
|
||||||||
|
71,989
|
62,219
|
|||||||||
|
Other
|
||||||||||
|
Acceptances
|
3,725
|
3,242
|
||||||||
|
Obligations
related to securities sold short
|
15,621
|
15,504
|
||||||||
|
Securities
sold under repurchase agreements
|
9,517
|
12,915
|
||||||||
|
Fair
value of trading derivative financial instruments
|
21
|
1,646
|
1,846
|
|||||||
|
Other
liabilities
|
12
|
7,574
|
6,058
|
|||||||
|
38,083
|
39,565
|
|||||||||
|
Subordinated
debentures
|
13
|
1,449
|
1,102
|
|||||||
|
Non-controlling
interest
|
14
|
576
|
487
|
|||||||
|
Shareholders’
equity
|
||||||||||
|
Preferred
shares
|
16
|
400
|
400
|
|||||||
|
Common
shares
|
16
|
1,566
|
1,565
|
|||||||
|
Contributed
surplus
|
21
|
13
|
||||||||
|
Unrealized
foreign currency translation adjustments
|
(92
|
)
|
(26
|
)
|
||||||
|
Retained
earnings
|
2,893
|
2,645
|
||||||||
|
4,788
|
4,597
|
|||||||||
|
116,885
|
107,970
|
|||||||||
|
Réal
Raymond
|
Pierre
Bourgie
|
||||
|
President
and Chief Executive Officer
|
Director
|
||||
Consolidated
Statement of Changes in Shareholders’ Equity
|
Year
ended October 31
|
||||||||||
|
(millions
of dollars)
|
Note
|
2006
|
2005
|
|||||||
|
Preferred
shares at beginning
|
400
|
375
|
||||||||
|
Issuance
of preferred shares, Series 16
|
-
|
200
|
||||||||
|
Redemption
of preferred shares, Series 13, for cancellation
|
-
|
(175
|
)
|
|||||||
|
Preferred
shares at end
|
16
|
400
|
400
|
|||||||
|
Common
shares at beginning
|
1,565
|
1,545
|
||||||||
|
Issuance
of common shares
|
||||||||||
|
Dividend
Reinvestment and Share Purchase Plan
|
15
|
12
|
||||||||
|
Stock
Option Plan
|
35
|
46
|
||||||||
|
Repurchase
of common shares for cancellation
|
(48
|
)
|
(39
|
)
|
||||||
|
Impact
of shares acquired or sold for trading purposes
|
(1
|
)
|
1
|
|||||||
|
Common
shares at end
|
16
|
1,566
|
1,565
|
|||||||
|
Contributed
surplus at beginning
|
13
|
7
|
||||||||
|
Stock
option expense
|
17
|
12
|
6
|
|||||||
|
Stock
options exercised
|
(4
|
)
|
-
|
|||||||
|
Contributed
surplus at end
|
21
|
13
|
||||||||
|
Unrealized
foreign currency translation adjustments at
beginning
|
(26
|
)
|
(10
|
)
|
||||||
|
Losses
on foreign exchange operations with a functional currency
|
||||||||||
|
other
than the Canadian dollar, net of income taxes
|
(66
|
)
|
(16
|
)
|
||||||
|
Unrealized
foreign currency translation adjustments at end
|
(92
|
)
|
(26
|
)
|
||||||
|
Retained
earnings at beginning
|
2,645
|
2,287
|
||||||||
|
Net
income
|
871
|
855
|
||||||||
|
Impact
of initial adoption of AcG-15
|
-
|
1
|
||||||||
|
Dividends
|
||||||||||
|
Preferred
shares
|
16
|
(21
|
)
|
(26
|
)
|
|||||
|
Common
shares
|
16
|
(320
|
)
|
(286
|
)
|
|||||
|
Premium
paid on common shares repurchased for cancellation
|
16
|
(261
|
)
|
(185
|
)
|
|||||
|
Other
adjustments, net of income taxes
|
(21
|
)
|
(1
|
)
|
||||||
|
Retained
earnings at end
|
2,893
|
2,645
|
||||||||
|
Shareholders’
equity
|
4,788
|
4,597
|
||||||||
Consolidated
Statement of Cash Flows
|
Year
ended October 31
|
|||||||
|
(millions
of dollars)
|
2006
|
2005
|
|||||
|
Cash
flows from operating activities
|
|||||||
|
Net
income
|
871
|
855
|
|||||
|
Adjustments
for:
|
|||||||
|
Provision
for credit losses
|
77
|
33
|
|||||
|
Amortization
of premises and equipment
|
69
|
63
|
|||||
|
Future
income taxes
|
21
|
(31
|
)
|
||||
|
Translation
adjustment on foreign currency subordinated debentures
|
(3
|
)
|
(11
|
)
|
|||
|
Gains
on sale of investment account securities, net
|
(180
|
)
|
(91
|
)
|
|||
|
Gains
on asset securitizations and other transfers of receivables,
net
|
(98
|
)
|
(124
|
)
|
|||
|
Stock
option expense
|
12
|
6
|
|||||
|
Change
in interest payable
|
185
|
(73
|
)
|
||||
|
Change
in interest and dividends receivable
|
(45
|
)
|
11
|
||||
|
Change
in income taxes payable
|
33
|
6
|
|||||
|
Change
in net fair value amounts on trading derivative financial
instruments
|
(79
|
)
|
(195
|
)
|
|||
|
Change
in trading account securities
|
(5,681
|
)
|
(5,622
|
)
|
|||
|
Change
in other items
|
2,415
|
(2,144
|
)
|
||||
|
(2,403
|
)
|
(7,317
|
)
|
||||
|
Cash
flows from financing activities
|
|||||||
|
Change
in deposits
|
9,545
|
8,492
|
|||||
|
Issuance
of deposit to NBC Capital Trust
|
225
|
-
|
|||||
|
Issuance
of subordinated debentures
|
500
|
350
|
|||||
|
Repurchase
of subordinated debentures
|
(150
|
)
|
(350
|
)
|
|||
|
Issuance
of common shares
|
50
|
58
|
|||||
|
Issuance
of preferred shares
|
-
|
200
|
|||||
|
Repurchase
of common shares for cancellation
|
(309
|
)
|
(224
|
)
|
|||
|
Repurchase
of preferred shares for cancellation
|
-
|
(175
|
)
|
||||
|
Dividends
paid on common shares
|
(311
|
)
|
(278
|
)
|
|||
|
Dividends
paid on preferred shares
|
(21
|
)
|
(27
|
)
|
|||
|
Change
in obligations related to securities sold short
|
117
|
5,300
|
|||||
|
Change
in securities sold under repurchase agreements
|
(3,398
|
)
|
4,733
|
||||
|
Change
in other items
|
(78
|
)
|
(19
|
)
|
|||
|
6,170
|
18,060
|
||||||
|
Cash
flows from investing activities
|
|||||||
|
Change
in deposits with financial institutions pledged as
collateral
|
4,028
|
(3,594
|
)
|
||||
|
Change
in loans (excluding securitization)
|
(5,092
|
)
|
(6,559
|
)
|
|||
|
Proceeds
from securitization of new assets and other transfers of
receivables
|
2,321
|
3,069
|
|||||
|
Maturity
of securitized assets
|
-
|
(706
|
)
|
||||
|
Purchases
of investment account securities
|
(24,630
|
)
|
(14,052
|
)
|
|||
|
Sales
of investment account securities
|
24,865
|
14,768
|
|||||
|
Change
in securities purchased under reverse repurchase
agreements
|
(569
|
)
|
(2,527
|
)
|
|||
|
Consolidation
of assets on initial adoption of AcG-15
|
-
|
(132
|
)
|
||||
|
Net
acquisitions of premises and equipment
|
(97
|
)
|
(67
|
)
|
|||
|
826
|
(9,800
|
)
|
|||||
|
Increase
in cash and cash equivalents
|
4,593
|
943
|
|||||
|
Cash
and cash equivalents at beginning
|
6,276
|
5,333
|
|||||
|
Cash
and cash equivalents at end
|
10,869
|
6,276
|
|||||
|
Cash
and cash equivalents
|
|||||||
|
Cash
|
268
|
227
|
|||||
|
Deposits
with financial institutions
|
10,611
|
10,087
|
|||||
|
Less:
amount pledged as collateral
|
(10
|
)
|
(4,038
|
)
|
|||
|
10,869
|
6,276
|
||||||
|
Supplementary
information
|
|||||||
|
Interest
paid
|
2,445
|
1,686
|
|||||
|
Income
taxes paid during the year
|
217
|
243
|
|||||
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 the Canadian generally accepted accounting principles
(“GAAP”)
are to be applied unless otherwise specified by the Superintendent of Financial
Institutions Canada (the “Superintendent”). These principles differ in some
regards from United States GAAP, as explained in Note 27.
The
preparation of consolidated financial statements in conformity with Canadian
GAAP requires Management to make estimates and assumptions that affect
assets
and liabilities, income and other related information. The most significant
assets and liabilities subject to estimates and assumptions by Management
are
the allowance for credit losses, fair value financial instruments, the
valuation
of investment account securities, asset securitization, goodwill and intangible
assets, pension plans and other employee future benefits, income taxes,
the
provision for contingencies and variable interest entities (“VIEs”). If actual
results differ from these estimates, the impact is recognized in future
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 Accounting Guideline No. 15 “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 receives the majority
of the
expected residual returns or absorbs the majority of the entity’s expected
losses, 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” in the Consolidated Statement of Income
under “Other.”
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.
Translation
of foreign currencies
Monetary
assets and liabilities of the Bank and its integrated branches and subsidiaries
denominated in foreign currencies as well as all assets and liabilities
of its
self-sustaining branches and subsidiaries denominated in foreign currencies
are
translated into Canadian dollars at the year-end exchange rate. Non-monetary
assets and liabilities of the Bank and its integrated branches and subsidiaries
denominated in foreign currencies are translated into Canadian dollars
at
historical rates. Revenues and expenses denominated in foreign currencies
are
translated using average exchange rates.
Translation
gains and losses arising from the translation of the financial statements
of
self-sustaining branches and subsidiaries, including the related impact
of
hedging and income taxes, are recorded in “Unrealized foreign currency
translation adjustments” in the Consolidated Balance Sheet. Translation gains
and losses arising from operations in integrated branches and subsidiaries
are
included in the Consolidated Statement of Income.
Cash
and deposits with financial institutions
Cash
and
deposits with financial institutions consist of cash and cash equivalents.
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.
Securities
Securities
are held, depending on Management’s intentions, in the investment or trading
account. The Bank records securities transactions on a trade date
basis.
Investment
account securities are purchased with the intention of holding them to
maturity
or until market conditions favour other types of investment. Equity securities
are stated at acquisition cost if the Bank does not exercise a significant
influence over the investee. Debt securities are stated at unamortized
acquisition cost, and any premiums or discounts are amortized using the
effective yield method over the period to maturity or disposal of the security.
Dividend and interest income as well as the amortization of premiums and
discounts are recorded in “Interest income.” Gains or losses realized on the
disposal of securities, determined using the average cost method, are recorded
in “Other income.”
Investment
account securities are valued periodically to determine whether there is
an
objective indication of an other-than-temporary impairment in value. When
making
this valuation, the Bank takes into account the duration and the materiality
of
the impairment in relation to the carrying value, the financial condition
and
near-term prospects of the issuer as well as the Bank’s ability and intent to
hold the investment until it recovers its carrying value. If there is an
objective indication of an other-than-temporary impairment, the carrying
value
of the investment account securities will be adjusted to reflect its net
realizable value, and the amount of the loss will be recorded under “Other
income” in the Consolidated Statement of Income.
Trading
account securities, generally purchased for resale in the short term, are
presented at fair value based on publicly disclosed market prices. In the
event
market prices are not available, the fair value is estimated on the basis
of the
market prices of similar securities or using other methods. Dividend and
interest income are recorded in “Interest income.” Realized and unrealized gains
or losses on these securities are recorded in “Other 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 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
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. A 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.
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 presented 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 to “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 recognized in the
Consolidated Statement of Income as “Other income” under “Other.”
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 fair value is recorded under “Provision for credit losses.” Subsequent
to the date of foreclosure, these assets are recorded as premises and equipment
and are subjet to the same 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. If there is
a
reasonable expectation that a commitment will result in a loan, commitment
fees
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 to “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 in the Consolidated Statement of Income
under
“Lending fees” when earned.
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
other
banks, derivative 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 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 determined 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
allocated general allowance 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
determined through statistical analysis of loss migration over an economic
cycle. The unallocated general allowance 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 and commercial mortgage loans, consumer loans,
personal
loans and credit card receivables by selling them to qualifying special
purpose
entities or 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. Gains and losses on securitization transactions are recognized
in income on the transaction date.
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 carried in the
Consolidated Statement of Income under “Securitization revenues.” 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,
fair value is determined 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.
Retained
interests are recorded at cost and included in investment account securities.
Any impairment in the value of retained interests that is other than temporary
is recorded in the Consolidated Statement of Income under “Securitization
revenues.”
The
Bank
generally transfers receivables on a fully serviced basis. At the time
of
transfer, a servicing liability is recognized and amortized to income over
the
term of the transferred assets. This servicing liability is presented in
the
Consolidated Balance Sheet under “Other liabilities.”
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. 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
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. 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 income for the period during which the impairment has been
determined.
Intangible
assets
The
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 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 income for the period during which the impairment
is
determined. Intangible assets with finite useful lives are amortized over
their
useful lives. 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 income.
Obligations
related to securities sold short
These
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 as liabilities at fair value; obligations related to securities
that are used as hedges are accounted for at unamortized cost. Realized
and
unrealized gains and losses on trading activities are recorded in “Trading
revenues” in the Consolidated Statement of Income.
Gains
and
losses on securities sold short used for hedging purposes are included
in the
Consolidated Statement of Income concurrently with the gains and losses
on the
hedged items.
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, according
to 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
Certain
types of derivatives are used to meet the risk management, investment and
trading needs of the Bank and its clients.
The
main
derivative 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.
Trading
derivatives
Derivatives
used to accommodate the needs of clients and enable the Bank to generate
income
from its trading activities are recognized on a fair value basis. Derivatives
with a positive fair value are presented as assets, and derivatives with
a
negative fair value as liabilities, in the Consolidated Balance Sheet.
Realized
and unrealized gains and losses on trading activities are recorded in “Other
income” in the Consolidated Statement of Income.
Non-trading
derivatives
The
Bank
also uses derivative instruments in its own risk management and investment
activities.
Derivative
instruments used to manage the Bank’s own risks, in particular interest and
exchange rate risks, are recorded using hedge accounting, when appropriate.
Non-trading derivatives that do not qualify for hedge accounting are carried
at
fair value in assets or liabilities. Realized and unrealized gains and
losses on
these non-trading derivatives are recorded in “Other income” in the Consolidated
Statement of Income.
Hedge
accounting
Documentation
The
Bank
prepares formal documentation for all hedging relationships which identifies
the
hedging derivative and the specific asset or liability or cash flow being
hedged. It also documents the risk management objective and strategy used
for
all hedging activities. The Bank also systematically determines, at inception
of
the hedge and over the term of the hedging relationship, whether changes
in the
fair value or cash flows of the hedged item can be effectively offset by
changes
in the fair value or cash flows of the hedging derivative.
Recognition
When
the
derivative is designated and deemed effective as a fair value or cash flow
hedge, the related gains and losses are recorded in “Other income” in the
Consolidated Statement of Income at the same time as the gains and losses
on the
assets or liabilities hedged.
Discontinuance
of hedge accounting
Realized
and unrealized gains and losses on terminated derivatives or derivatives
that
have ceased to be effective before they expire are 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 is recognized. Should the derivative once again
qualify
for hedge accounting, any fair value already presented in the Consolidated
Balance Sheet will be amortized to “Other income” over the remaining term of the
hedged item. If a designated hedged item is sold, terminated or expires
before
the related derivative expires, any realized or unrealized gain or loss
on the
derivative is recognized in “Other income” in the Consolidated Statement of
Income.
Equity-linked
deposit contracts
The
Bank
recognizes the fair value of certain deposit obligations that vary according
to
the performance of certain securities or equity indexes and entitle investors,
after a predetermined period, to receive a given percentage of their capital
or
a variable amount, whichever is greater, based on the performance of an
equity
index or shares. Future fluctuations in fair value are reflected in the
Consolidated Statement of Income as they arise.
Insurance
revenues and expenses
Premiums
less claims and changes in actuarial liabilities are reflected in “Other
income.” Income from securities held by the insurance subsidiaries is included
in “Interest income” in the Consolidated Statement of Income. Amortization of
deferred gains and losses on the disposal of securities is included in
“Other
income.” Administrative costs are recorded in “Operating expenses” 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 on 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” 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 post-retirement benefits
are those who retire at certain retirement ages. Employees eligible for
post-employment benefits are those on long-term disability or maternity
leave.
The
Bank
records its benefit obligation under employee pension plans and the related
costs, net of plan assets.
Actuarial
valuations are made periodically to determine the present value of plan
obligations. The actuarial valuation of accrued pension and post-retirement
benefit obligations 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 9 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.
These
plans are described in detail in Note 17 to the consolidated financial
statements.
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 compensation expense and contributed surplus.
When the
options are exercised, the contributed surplus is credited to common share
paid-up capital. The proceeds received from the employees when these options
are
exercised are also credited to common share paid-up capital.
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.” 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 by increasing or decreasing the compensation
expense 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 is generally recognized
in
income on a straight-line basis over the vesting period, and a corresponding
amount is included in “Other liabilities.” The compensation expense for the
other plans is recognized in income in the period in which the corresponding
services are received. The change in the obligation attributable to variations
in the stock price and dividends paid on common shares for these plans
is
recognized by increasing or decreasing the compensation expense 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 instruments to hedge the risks associated with some of
these
plans. The compensation expense for these plans is recognized, net of related
hedges, in the Consolidated Statement of Income.
The
Bank’s contributions to the Employee Share Ownership Plan are expensed as
incurred.
Recent
accounting standards adopted
No
new
accounting standard was adopted in fiscal 2006.
Comparative
figures
Certain
comparative figures have been reclassified to conform with the presentation
adopted in fiscal 2006.
2 Accounting
Standards Pending Adoption
In
January 2005, the CICA issued three new accounting standards: Section 1530,
Comprehensive
Income;
Section
3855, Financial
Instruments - Recognition and Measurement;
and
Section 3865, Hedges.
The
significant accounting policies relating to financial instruments that
the Bank
will apply effective November 1, 2006 are summarized below.
Measurement
The
new
accounting standards for financial instruments require that all financial
assets
and liabilities be classified according to their characteristics, management’s
intention, or the choice of category in certain circumstances. All financial
assets must be classified as either held for trading, held to maturity,
available for sale or as loans and receivables. Financial liabilities must
be
classified as held for trading or not held for trading.
When
they
are initially recognized, all financial assets and liabilities will be
recorded
at fair value on the Consolidated Balance Sheet. In subsequent periods,
financial instruments will be valued at fair value, except for items that
are
classified in the following categories, which will be measured at amortized
cost: loans and receivables, securities held to maturity and financial
liabilities not held for trading purposes. Securities classified as held
to
maturity and as available for sale will be measured periodically to determine
whether an objective indication of impairment exists. If such evidence
exists,
the carrying amount of the securities will be adjusted to its fair value,
and
the amount of the loss will be recorded under “Other income” in the Consolidated
Statement of Income. Finally, obligations related to securities sold short
as
well as all derivatives, including embedded derivatives that have to be
accounted for separately, will be recorded at fair value on the Consolidated
Balance Sheet.
In
the
case of financial assets or liabilities classified as held for trading,
all
transaction costs directly attributable to the acquisition or issuance
of these
financial instruments will be recorded in the Consolidated Statement of
Income
when initially recognized. In the case of financial assets or liabilities
that
are not classified as held for trading, the transaction costs will be added
to
the value of the financial instrument and will be amortized, if applicable,
using the effective interest rate method.
The
standard also allows any financial instrument to be irrevocably designated
as
held for trading when it is first recognized (“fair value option”); as a result,
it will be measured at fair value with the gains and losses being recognized
in
the Consolidated Statement of Income during the period in which they arise.
The
Superintendent issued guidelines limiting the circumstances under which
this
option may be used. The Bank plans on using this option, among others,
if, in
accordance with a documented risk management strategy, doing so allows
the Bank
to eliminate or significantly reduce a measurement or recognition inconsistency,
and if the fair values are reliable.
Recognition
of Financial Assets and Liabilities
Securities
Securities
will be classified as securities held for trading, held to maturity, or
available for sale. The Bank will continue to recognize securities transactions
on the trade date.
Held
for trading
Trading
account securities will continue to be recognized at their fair value,
and the
realized and unrealized gains and losses will be recorded in the Consolidated
Statement of Income.
Held
to maturity
Securities
held to maturity are financial assets for which the Bank would have the
positive
intention and ability to hold to maturity. The Bank does not plan on classifying
securities in this category.
Available
for sale
Securities
that will not be classified as held for trading or held to maturity will
be
classified as available for sale. These securities will be recognized at
fair
value, except for investments in equity instruments that do not have a
quoted
market price in an active market, which will be recognized at cost.
Unrealized
gains and losses related to securities available for sale will be recognized,
net of income taxes, and as long as they are not hedged by derivative products
under a fair-value hedging relationship, in “Accumulated other comprehensive
income.” Upon the disposal or recognized impairment of these securities, these
gains or losses will be reclassified in the Consolidated Statement of
Income.
Deposits
with financial institutions, securities purchased under reverse repurchase
agreements or securities sold under repurchase agreements, loans, deposits
and
subordinated debentures
These
financial instruments will continue to be recorded at amortized cost using
the
effective interest rate method.
Embedded
derivatives
An
embedded derivative is a component of a financial instrument or another
contract, the characteristics of which are similar to a derivative. Taken
together, the financial instrument or contract is considered to be a hybrid
instrument that has a host contract and an embedded derivative.
The
new
accounting standard requires an embedded derivative to be accounted for
separately if, and only if, the following three conditions are met: the
characteristics and the economic risks of the embedded derivative are not
closely related to those of the host contract, the embedded derivative
is a
separate instrument that satisfies the definition of a derivative, and
the
hybrid contract is not recorded at fair value.
The
Bank
selected November 1, 2002 as its transition date for embedded
derivatives.
Establishing
fair value
Fair
value is the amount at which a financial instrument - which is quoted on
an
active market with an exchange, dealer, broker, industry group, or pricing
service - could be exchanged between willing, unrelated parties on an open
market. When a financial instrument is initially recognized, its fair value
is
generally the value of the consideration paid or received. In cases where
the
fair value is not quoted on an active market, fair value can be established
by
comparing the instrument to observable market transactions involving an
identical instrument, without modification or repackaging, or is based
on a
valuation technique whose variables include observable market data.
Subsequent
to the initial recognition, the fair value of a financial asset quoted
on an
active market is generally the bid price and, for a financial liability
quoted
on an active market, the fair value is generally the ask price. If a financial
instrument’s market is not active, fair value is established using valuation
techniques that rely on observable market data. These valuation techniques
include, among others, the use of available observable information on similar
transactions, discounted cash flow analysis, option pricing models, and
other
valuation methods commonly used by market participants.
Securities
The
fair
value of securities is based on quoted market prices. In the absence of
an
organized market, fair value is established using the quoted market prices
of
similar securities.
Derivative
financial instruments
The
fair
value of derivative financial instruments is determined without taking
into
consideration master netting agreements. When available, quoted market
prices
are used to determine the fair value of derivative financial instruments.
Otherwise, fair value is determined using pricing models that consider
current
market prices and the contractual prices of underlying instruments, the
time
value of money, yield curves, volatility and credit risk factors.
Hedges
The
Bank
uses derivative financial instruments as part of its risk management activities.
When hedge accounting is appropriate, the hedging relationship is designated
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
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 gains or losses attributable to the hedged risk, which are
carried
to “Other income” in the Consolidated Statement of Income. The change in the
fair value of the hedging item will be carried to “Other income” in the
Consolidated Statement of Income.
Hedge
accounting is discontinued prospectively when the hedging relationship
no longer
qualifies as an effective hedge or if the hedging item is terminated or
sold.
The hedged item is no longer adjusted to reflect changes in fair value.
Amounts
previously recorded as cumulative fair value adjustments to the carrying
amount
of the hedged item are amortized using the effective interest rate method
and
presented 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
fair
value adjustments to the carrying amount of the hedged item are immediately
carried to “Other income” 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 the changes in fair value of the hedging item is recognized
in “Accumulated other comprehensive income,” whereas the ineffective portion is
recognized in “Other income” in the Consolidated Statement of
Income.
The
amounts recognized in “Accumulated other comprehensive income” with respect to
cash flow hedges are reclassified in the Consolidated Statement of Income
in the
period or periods during which the hedged item affects net income.
When
the
derivative 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 affects net income.
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 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,” whereas the ineffective portion is
recorded in “Other income” in the Consolidated Statement of Income.
Comprehensive
income
A
statement entitled “Consolidated Statement of Comprehensive Income” will be
added to the Bank’s consolidated financial statements. Comprehensive income
consists of net income plus “Other comprehensive income.” In addition to
unrealized gains or losses on available-for-sale financial assets, “Other
comprehensive income” will include the unrealized exchange gains or losses
arising from self-sustaining foreign operations (net of hedge transactions)
and
the effective portion of the changes in the fair value of the cash flow
hedging
instruments. “Accumulated other comprehensive income” will be presented
separately in shareholders’ equity.
Transition
The
recognition, derecognition and measurement methods used as well as the
hedge
accounting policies used to prepare the consolidated financial statements
of
periods prior to the effective date of the new standards were unchanged
and,
therefore, those financial statements will not be restated.
As
at
November 1, 2006, the Bank will recognize all of its financial assets and
liabilities in the Consolidated Balance Sheet according to their classification.
Any adjustment made to a previous carrying amount will be recognized as
an
adjustment to the balance of retained earnings at that date or as the opening
balance of a separate item in “Accumulated other comprehensive income,” net of
income taxes.
The
following items will specifically be recognized as an adjustment to the
opening
balance of retained earnings, net of income taxes:
| · |
Deferred
gains on previous disposals of securities from life insurance
activities;
|
| · |
Deferred
amounts and the difference between the carrying amount and
the fair value
of derivatives or non-derivatives that no longer meet the
hedging
criteria;
|
| · |
The
difference between the carrying amount and the fair value
of financial
assets and liabilities designated as held for trading under
the fair value
option;
|
| · |
The
impacts of embedded derivatives;
|
| · |
The
ineffective portion of the gain or loss on the hedging item
for cash flow
and fair value hedging
relationships;
|
| · |
The
impact of the use of the effective interest rate method to amortize
transaction costs.
|
The
following items will be recognized as an adjustment to the opening balance
of
“Accumulated other comprehensive income,” net of income taxes:
| · |
The
difference between the carrying amount and the fair value
of securities
classified as available for
sale;
|
| · |
Reclassification
of the unrealized foreign currency translation adjustment in
the financial
statements of self-sustaining foreign operations, net of hedge
transactions;
|
| · |
The
portion of the gain or loss on the hedging item that is considered
to be
an effective cash flow hedge.
|
These
transition adjustments, which will be recognized as at November 1, 2006
in
opening retained earnings and in the opening balance of “Accumulated other
comprehensive income,” should not have a material impact on the Bank's
Consolidated Balance Sheet.
3
Securities
Securities
held are as follows:
|
Within
1 year
|
1
to
5
years
|
5
to
10
years
|
Over
10
years
|
No
maturity
|
2006
Total
|
2005
Total
|
||||||||||||||||
|
Investment
account (unamortized cost)
|
||||||||||||||||||||||
|
Securities
issued or guaranteed by
|
||||||||||||||||||||||
|
Canada
|
666
|
1,568
|
58
|
16
|
112
|
2,420
|
2,282
|
|||||||||||||||
|
Provinces
|
259
|
490
|
241
|
30
|
-
|
1,020
|
386
|
|||||||||||||||
|
Municipalities
or school boards
|
-
|
-
|
-
|
-
|
-
|
-
|
34
|
|||||||||||||||
|
U.S.
Treasury and other U.S. agencies
|
952
|
5
|
5
|
-
|
-
|
962
|
1,007
|
|||||||||||||||
|
Other
debt securities
|
107
|
428
|
273
|
110
|
191
|
1,109
|
1,848
|
|||||||||||||||
|
Equity
securities (cost)
|
33
|
169
|
9
|
17
|
1,075
|
1,303
|
1,312
|
|||||||||||||||
|
Total
carrying value
|
2,017
|
2,660
|
586
|
173
|
1,378
|
6,814
|
6,869
|
|||||||||||||||
|
Trading
account
|
||||||||||||||||||||||
|
Securities
issued or guaranteed by
|
||||||||||||||||||||||
|
Canada
|
4,493
|
3,667
|
683
|
569
|
-
|
9,412
|
8,020
|
|||||||||||||||
|
Provinces
|
757
|
2,056
|
1,166
|
1,767
|
-
|
5,746
|
4,966
|
|||||||||||||||
|
Municipalities
or school boards
|
62
|
167
|
148
|
59
|
-
|
436
|
470
|
|||||||||||||||
|
Other
debt securities
|
4,106
|
1,936
|
1,450
|
638
|
-
|
8,130
|
6,041
|
|||||||||||||||
|
Equity
securities
|
2
|
3
|
1
|
23
|
8,111
|
8,140
|
6,686
|
|||||||||||||||
|
9,420
|
7,829
|
3,448
|
3,056
|
8,111
|
31,864
|
26,183
|
||||||||||||||||
|
Total
carrying value of securities
|
38,678
|
33,052
|
||||||||||||||||||||
Gross
unrealized gains (losses) are as follows:
|
2006
|
2005
|
||||||||||||||||||||||||
|
Carrying
Value
|
Gross
unrealized
gains
|
Gross
unrealized
losses
|
Fair value |
Carrying Value |
Gross unrealized
gains |
Gross
unrealized
loss
|
Fair value |
||||||||||||||||||
|
Investment
account
|
|||||||||||||||||||||||||
|
Securities
issued or guaranteed by
|
|||||||||||||||||||||||||
|
Canada
|
2,420
|
12
|
(9
|
)
|
2,423
|
2,282
|
26
|
(4
|
)
|
2,304
|
|||||||||||||||
|
Provinces
|
1,020
|
5
|
-
|
1,025
|
386
|
8
|
(3
|
)
|
391
|
||||||||||||||||
|
Municipalities
or school boards
|
-
|
-
|
-
|
-
|
34
|
-
|
-
|
34
|
|||||||||||||||||
|
U.S.
Treasury and other U.S.
agencies
|
962
|
-
|
(9
|
)
|
953
|
1,007
|
-
|
(14
|
)
|
993
|
|||||||||||||||
|
Other
debt securities
|
1,109
|
4
|
(5
|
)
|
1,108
|
1,848
|
6
|
(11
|
)
|
1,843
|
|||||||||||||||
|
Equity
securities
|
1,303
|
185
|
(57
|
)
|
1,431
|
1,312
|
109
|
(43
|
)
|
1,378
|
|||||||||||||||
|
Total
investment account
|
6,814
|
206
|
(80
|
)
|
6,940
|
6,869
|
149
|
(75
|
)
|
6,943
|
|||||||||||||||
4 Loans
and Impaired Loans
| Loans | |||||||||||||||||||
|
2006
|
2005
|
||||||||||||||||||
|
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
|
7,851
|
2,450
|
4,568
|
361
|
15,230
|
15,677
|
|||||||||||||
|
Personal
and credit card
|
10,194
|
552
|
466
|
68
|
11,280
|
9,796
|
|||||||||||||
|
Business
and government
|
13,924
|
694
|
1,518
|
4,543
|
20,679
|
19,047
|
|||||||||||||
|
31,969
|
3,696
|
6,552
|
4,972
|
47,189
|
44,520
|
||||||||||||||
|
(1)
Based on the earlier of the contractual repricing date or
maturity.
|
|
Impaired
Loans
|
|||||||||||||||||||
|
2006
|
2005
|
||||||||||||||||||
|
Impaired
loans
|
Impaired
loans
|
||||||||||||||||||
|
Gross
|
Specific
allowances
|
Net
balance
|
Gross
|
Specific
allowances
|
Net
balance
|
||||||||||||||
|
Residential
mortgage
|
13
|
2
|
11
|
10
|
2
|
8
|
|||||||||||||
|
Personal
and credit card
|
36
|
16
|
20
|
35
|
18
|
17
|
|||||||||||||
|
Business
and government
|
185
|
100
|
85
|
215
|
123
|
92
|
|||||||||||||
|
234
|
118
|
116
|
260
|
143
|
117
|
||||||||||||||
|
General
allowance(2)
|
(308
|
)
|
(308
|
)
|
|||||||||||||||
|
Impaired
loans, net of specific and general allowances
|
(192
|
)
|
(191
|
)
|
|||||||||||||||
|
(2)
The general allowance for credit risk was created taking into
account the
Bank’s credit in its
entirety.
|
5 Allowance
for Credit Losses
The
changes made to allowances during fiscal 2006 and 2005 are as
follows:
|
Specific
allowances
|
General
allowances
|
2006
Total
|
Specific
allowances
|
General
allowance
|
2005
Total
|
||||||||||||||
|
Allowances
at beginning
|
143
|
308
|
451
|
228
|
350
|
578
|
|||||||||||||
|
Provision
for credit losses
|
77
|
-
|
77
|
75
|
(42
|
)
|
33
|
||||||||||||
|
Write-offs
|
(166
|
)
|
-
|
(166
|
)
|
(215
|
)
|
-
|
(215
|
)
|
|||||||||
|
Recoveries
|
64
|
-
|
64
|
55
|
-
|
55
|
|||||||||||||
|
Allowances
at end
|
118
|
308
|
426
|
143
|
308
|
451
|
|||||||||||||
6 Transfers
of Receivables
Asset
securitization
New
securitization activities
CMHC-insured
mortgage loans and credit card receivables
The
Bank
securitizes residential mortgage loans by creating mortgage-backed securities.
Under a 1998 agreement, the Bank also sold credit card receivables on a
revolving basis to a trust. The pre-tax gain or loss from securitization
transactions, net of transaction fees, is recognized in the Consolidated
Statement of Income under “Securitization revenues.” The table below summarizes
new securitization activities for 2006 and 2005.
|
2006(1)
Mortgage
loans
|
2005
Mortgage
loans
|
2005
Credit
card
receivables
|
||||||||
|
Net
cash proceeds
|
2,180
|
1,845
|
795
|
|||||||
|
Retained
interests
|
63
|
79
|
21
|
|||||||
|
Retained
servicing liability
|
(13
|
)
|
(11
|
)
|
(4
|
)
|
||||
|
2,230
|
1,913
|
812
|
||||||||
|
Receivables
securitized and sold
|
2,200
|
1,854
|
800
|
|||||||
|
Gain
before income taxes, net of transaction fees
|
30
|
59
|
12
|
|||||||
|
Mortgage-backed
securities created and retained included
|
||||||||||
|
in
“Securities - Investment Account”
|
674
|
276
|
-
|
|||||||
(1)
There was no new credit card receivables securitization in
2006.
Personal
loans
Since
fiscal 2002, the Bank has sold fixed-rate personal loans on a revolving
basis to
a trust. A series of notes totalling $206 million issued by this trust
in 2002
matured during fiscal 2005. The two remaining series of notes outstanding
totalled $309 million as at October 31, 2006 ($309 million as at October
31,
2005) and will mature in July 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 2006 and 2005 were
as
follows:
|
Insured
mortgage loans
|
Credit
card receivables
|
Personal
loans
|
|||||||||||||||||
|
2006
|
2005
|
2006
|
2005
|
2006
|
2005
|
||||||||||||||
|
Weighted
average term (months)
|
30.2
|
27.5
|
-
|
-
|
14.3
|
13.1
|
|||||||||||||
|
Payment
rate
|
-
|
-
|
31.9
|
%
|
31.6
|
%
|
-
|
-
|
|||||||||||
|
Prepayment
rate
|
20.0
|
%
|
20.0
|
%
|
-
|
-
|
30.0
|
%
|
30.0
|
%
|
|||||||||
|
Excess
spread, net of credit losses
|
1.2
|
%
|
1.8
|
%
|
9.9
|
%
|
10.4
|
%
|
1.3
|
%
|
1.3
|
%
|
|||||||
|
Expected
credit losses
|
-
|
-
|
3.8
|
%
|
3.5
|
%
|
1.7
|
%
|
1.7
|
%
|
|||||||||
|
Discount
rate
|
4.1
|
%
|
3.3
|
%
|
17.0
|
%
|
17.0%(1
|
)
|
17.0
|
%
|
17.0%(1
|
)
|
|||||||
(1)
Since August 1, 2005 (previously 21%)
Summary
of securitized assets
|
2006
|
2005
|
||||||||||||||||||
|
Securitized
assets
|
Impaired
loans
|
Net
credit
losses
|
Securitized
assets
|
Impaired
loans
|
Net
credit
losses
|
||||||||||||||
|
Mortgage
loans
|
|||||||||||||||||||
|
-
insured
|
5,639
|
(1)
|
-
|
-
|
4,395
|
(1)
|
-
|
-
|
|||||||||||
|
-
other(2)
|
122
|
-
|
-
|
186
|
-
|
-
|
|||||||||||||
|
Credit
card receivables
|
1,200
|
7
|
45
|
1,200
|
7
|
41
|
|||||||||||||
|
Personal
loans
|
125
|
(3)
|
1
|
3
|
222
|
(3)
|
1
|
6
|
|||||||||||
|
Total
|
7,086
|
8
|
48
|
6,003
|
8
|
47
|
|||||||||||||
| (1) |
Includes
$836 million of mortgage-backed securities created and unsold
in 2006
(2005: $316 million). These securities are presented in the Consolidated
Balance Sheet under “Securities - Investment
account.”
|
| (2) |
During
fiscal 2000, the Bank sold uninsured mortgage loans on properties
with
five or more housing units
to a trust.
|
| (3) |
The
trust holding personal loans also holds $60 million of mortgage-backed
securities created by the Bank in 2006 (2005: $87 million).
|
Impact
of securitization activities on certain items in the Consolidated Statement
of
Income
Securitization
revenues
|
Gains
(losses) on
sale of assets
|
Servicing
revenues |
Other
|
Total
|
||||||||||||||||||||||
|
2006
|
2005
|
2006
|
2005
|
2006
|
2005
|
2006
|
2005
|
||||||||||||||||||
|
Mortgage
loans
|
|||||||||||||||||||||||||
|
-
insured
|
30
|
59
|
13
|
10
|
-
|
-
|
43
|
69
|
|||||||||||||||||
|
-
other
|
-
|
-
|
-
|
-
|
2
|
8
|
2
|
8
|
|||||||||||||||||
|
Credit
card receivables
|
67
|
68
|
17
|
13
|
41
|
29
|
125
|
110
|
|||||||||||||||||
|
Personal
loans
|
-
|
(1
|
)
|
1
|
4
|
4
|
4
|
5
|
7
|
||||||||||||||||
|
Total
|
97
|
126
|
31
|
27
|
47
|
41
|
175
|
194
|
|||||||||||||||||
Impact
of securitization activities on certain items in the Consolidated Balance
Sheet
|
Investment
account securities
|
Other
liabilities
|
||||||||||||||||||
|
Retained
interests
|
Cash
deposits at
a
trust
|
Servicing
liability
|
|||||||||||||||||
|
2006
|
2005
|
2006
|
2005
|
2006
|
2005
|
||||||||||||||
|
Mortgage
loans
|
|||||||||||||||||||
|
-
insured
|
127
|
125
|
-
|
-
|
22
|
19
|
|||||||||||||
|
-
other
|
-
|
-
|
20
|
20
|
-
|
-
|
|||||||||||||
|
Credit
card receivables
|
29
|
31
|
2
|
2
|
6
|
6
|
|||||||||||||
|
Personal
loans
|
1
|
2
|
12
|
16
|
1
|
2
|
|||||||||||||
|
Total
|
157
|
158
|
34
|
38
|
29
|
27
|
|||||||||||||
Cash
flows from securitization activities
|
Insured
mortgage
loans
|
Credit
card receivables
|
Personal
loans
|
|||||||||||||||||
|
2006
|
2005
|
2006
|
2005
|
2006
|
2005
|
||||||||||||||
|
Proceeds
from new securitizations
|
2,180
|
1,845
|
-
|
795
|
-
|
-
|
|||||||||||||
|
Proceeds
collected and reinvested in
revolving securitizations |
-
|
-
|
3
,508
|
3,092
|
38
|
268
|
|||||||||||||
|
Cash
flows from retained interests in
securitizations |
71
|
60
|
126
|
81
|
6
|
16
|
|||||||||||||
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:
|
Assumptions
|
Insured
mortgage
loans
|
Credit
card receivables
|
Personal
loans
|
||||||||||||||||
|
2006
|
2005
|
2006
|
2005
|
2006
|
2005
|
||||||||||||||
|
Prepayment
rate
|
20.0
|
% |
20.0
|
% |
31.9
|
% |
31.6
|
% |
30.0
|
% |
30.0
|
% | |||||||
|
Impact
on fair value of 10% adverse change
|
$
|
(4.0
|
)
|
$
|
(4.0
|
)
|
$
|
(2.5
|
)
|
$
|
(2.6
|
)
|
-
|
$
|
(0.1
|
)
|
|||
|
Impact
on fair value of 20% adverse change
|
$
|
(7.9
|
)
|
$
|
(7.9
|
)
|
$
|
(4.6
|
)
|
$
|
(4.8
|
)
|
-
|
$
|
(0.1
|
)
|
|||
|
Excess
spread, net of credit losses
|
1.5
|
%
|
1.6
|
%
|
9.9
|
%
|
10.4
|
%
|
1.3
|
%
|
1.3
|
%
|
|||||||
|
Impact
on fair value of 10% adverse change
|
$
|
(12.7
|
)
|
$
|
(12.5
|
)
|
$
|
(2.8
|
)
|
$
|
(3.0
|
)
|
$
|
(0.1
|
)
|
$
|
(0.2
|
)
|
|
|
Impact
on fair value of 20% adverse change
|
$
|
(25.4
|
)
|
$
|
(25.1
|
)
|
$
|
(5.7
|
)
|
$
|
(6.0
|
)
|
$
|
(0.2
|
)
|
$
|
(0.5
|
)
|
|
|
Expected
credit losses
|
-
|
-
|
3.8
|
%
|
3.5
|
%
|
1.7
|
%
|
1.7
|
%
|
|||||||||
|
Impact
on fair value of 10% adverse change
|
-
|
-
|
$
|
(1.1
|
)
|
$
|
(1.0
|
)
|
$
|
(0.1
|
)
|
$
|
(0.3
|
)
|
|||||
|
Impact
on fair value of 20% adverse change
|
-
|
-
|
$
|
(2.2
|
)
|
$
|
(2.0
|
)
|
$
|
(0.2
|
)
|
$
|
(0.6
|
)
|
|||||
|
Discount
rate
|
3.9
|
%
|
3.8
|
%
|
17.0
|
%
|
17.0%(1
|
)
|
17.0
|
%
|
17.0%(1
|
)
|
|||||||
|
Impact
on fair value of 10% adverse change
|
$
|
(0.6
|
)
|
$
|
(0.6
|
)
|
$
|
(0.1
|
)
|
$
|
(0.1
|
)
|
-
|
-
|
|||||
|
Impact
on fair value of 20% adverse change
|
$
|
(1.2
|
)
|
$
|
(1.1
|
)
|
$
|
(0.2
|
)
|
$
|
(0.3
|
)
|
-
|
-
|
|||||
(1)
Since August 1, 2005 (previously 21%)
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 the Consolidated Statement
of
Income under “Other income.” The table below summarizes the other transfers
carried out by the Bank:
|
2006
|
2005
|
||||||
|
Net
cash proceeds
|
141
|
429
|
|||||
|
Insured
and uninsured mortgage loans sold
|
140
|
431
|
|||||
|
Gain
(loss) before income taxes
|
1
|
(2
|
)
|
||||
7 Variable
Interest Entities
The
VIEs
in which the Bank holds a significant variable interest but for which it
is not
the primary beneficiary under AcG-15 are described below. The maximum risk
of
loss arising from these variable interests is primarily investments in
these
entities and the backstop liquidity facilities granted to them in the event
of a
market disruption and the fair value of the derivative contracts concluded
with
these entities.
Securitization
entities
The
Bank
carries out transactions in which certain assets such as mortgage loans,
credit
card receivables and personal loans are sold to entities that finance their
acquisition through the issuance of term bonds or commercial paper. These
entities are qualifying special purpose entities under CICA Accounting
Guideline
No. 12 “Transfers of Receivables” (AcG-12) and are therefore exempt from the
consolidation requirements under AcG-15. Asset securitization operations
are
described in Note 6 to the consolidated financial statements. The Bank
provides
backstop liquidity facilities under a commercial paper conduit program.
The
details of these facilities are presented in Note 20 to the consolidated
financial statements. Moreover, the Bank has concluded a derivative contract
with one of these special purpose entities. The fair value of this derivative
is
presented on the Bank’s Consolidated Balance Sheet.
Multi-seller
special purpose entities (SPEs)
The
Bank
administers a multi-seller SPE that purchases financial assets from clients
and
finances these purchases through the issuance of commercial paper. Clients
use
this multi-seller SPE to diversify their sources of financing and reduce
financing costs while continuing to manage the financial assets and providing
some first loss protection. The Bank does not have any ownership interest
in
this SPE and, under AcG-15, is not required to consolidate it. The Bank
acts as
a financial agent and trustee and provides administrative and transaction
structuring services to this SPE. The Bank does not provide any credit
protection; it does, however, provide backstop liquidity facilities under
the
commercial paper program. These backstop liquidity facilities are presented
and
described in Note 20 to the consolidated financial statements. The rights
to
collect fees for all services rendered to this SPE are variable interests.
In
order to meet the needs of investors, the Bank has concluded derivative
contracts with this SPE, the fair value of which is presented on the Bank’s
Consolidated Balance Sheet. The total assets of the SPE were $683 million
as at
October 31, 2006 ($1.2 billion as at October 31, 2005).
The
Bank
also acts as a financial agent and administrator for three other trusts.
These
trusts issue and sell, to purchasers, fixed/adjustable rate debt securities
backed by mortgage-backed securities, asset-backed securities, structured
financial securities, synthetic corporate exposures and other securities.
The
Bank does not have any ownership position in these trusts and is not required
to
consolidate them under AcG-15. The rights to collect fees as financial
agent and
administrator are variable interests. 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 trusts were $4.2
billion
as at October 31, 2006 ($3.9 billion as at October 31, 2005).
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 the expected losses and/or receive the majority of the expected
residual returns of these entities. As at October 31, 2006, the recorded
value
of the Bank’s total investment was $90 million ($144 million as at October 31,
2005). The total assets of all these entities amounted to $6.4 billion
($2.6
billion as at October 31, 2005). Moreover, the Bank has commitments to
invest in
these entities. These commitments are disclosed in Note 20 to the consolidated
financial statements.
8 Premises
and Equipment
|
2006
|
2005
|
||||||||||||
|
Cost
|
Accumulated
amortization
|
Net
carrying
value
|
Net
carrying
value
|
||||||||||
|
Land
|
17
|
-
|
17
|
18
|
|||||||||
|
Buildings
|
189
|
94
|
95
|
99
|
|||||||||
|
Equipment
and furniture
|
636
|
473
|
163
|
132
|
|||||||||
|
Leasehold
improvements
|
372
|
264
|
108
|
106
|
|||||||||
|
1,214
|
831
|
383
|
355
|
||||||||||
|
Amortization
for the year
|
69
|
63
|
|||||||||||
9 Goodwill
and Intangible Assets
The
Bank
performs an annual impairment test of goodwill and intangible assets with
indefinite lives. No impairment loss was recorded in 2006 or 2005.
The
change in the carrying value of goodwill is as follows:
|
Personal
and Commercial
|
Wealth
Management
|
Financial
Markets
|
Total
|
||||||||||
|
Balance
as at October 31, 2004
|
49
|
421
|
192
|
662
|
|||||||||
|
Acquisitions
|
-
|
-
|
-
|
-
|
|||||||||
|
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
|
|||||||||
Intangible
assets include the following:
|
2006
|
2005
|
||||||||||||
|
Cost
|
Accumulated
amortization
|
Net
carrying value
|
Net
carrying value
|
||||||||||
|
Trademarks(1)
|
11
|
-
|
11
|
11
|
|||||||||
|
Management
contracts(1)
|
160
|
-
|
160
|
160
|
|||||||||
|
Other
|
16
|
10
|
6
|
7
|
|||||||||
|
Total
|
187
|
10
|
177
|
178
|
|||||||||
(1)
Not subject to amortization
10 Other
Assets
|
2006
|
2005
|
||||||
|
Interest
and dividends receivable
|
367
|
322
|
|||||
|
Prepaid
expenses and deferred amounts
|
375
|
386
|
|||||
|
Future
income tax assets (Note 18)
|
138
|
137
|
|||||
|
Brokers’
client accounts
|
3,948
|
5,010
|
|||||
|
Investments
in companies subject to significant influence
|
151
|
116
|
|||||
|
Accrued
benefit asset (Note 15)
|
339
|
353
|
|||||
|
Other
|
418
|
361
|
|||||
|
5,736
|
6,685
|
||||||
11 Deposits
|
|
|
|
|
|
|
|
|
2006
|
|
2005
|
||||||
|
Payable
on demand
|
Payable
after
notice
|
Payable
on
a
fixed date
|
Total
|
Total
|
||||||||||||
|
Personal
|
2,419
|
12,049
|
14,696
|
29,164
|
26,385
|
|||||||||||
|
Business
and government
|
9,700
|
6,047
|
18,251
|
33,998
|
29,878
|
|||||||||||
|
Deposit-taking
institutions
|
1,531
|
31
|
7,040
|
8,602
|
5,956
|
|||||||||||
|
Deposit
from NBC Capital Trust
|
-
|
-
|
225
|
225
|
-
|
|||||||||||
|
13,650
|
18,127
|
40,212
|
71,989
|
62,219
|
||||||||||||
|
Term
to maturity
|
2006
|
2005
|
|||||||||||||||||
|
Within
1
year
|
1
to 2 years
|
2
to 5 years
|
Over
5
years
|
Total
|
Total
|
||||||||||||||
|
Payable
on demand and payable after notice
|
|||||||||||||||||||
|
Personal
|
9,411
|
2,913
|
2,144
|
-
|
14,468
|
11,858
|
|||||||||||||
|
Other
|
10,141
|
324
|
584
|
6,260
|
17,309
|
16,335
|
|||||||||||||
|
Total
|
19,552
|
3,237
|
2,728
|
6,260
|
31,777
|
28,193
|
|||||||||||||
|
Payable
on a fixed date
|
|||||||||||||||||||
|
Personal
|
7,799
|
3,223
|
3,613
|
61
|
14,696
|
14,527
|
|||||||||||||
|
Other
|
22,462
|
444
|
1,363
|
1,247
|
25,516
|
19,499
|
|||||||||||||
|
Total
|
30,261
|
3,667
|
4,976
|
1,308
|
40,212
|
34,026
|
|||||||||||||
|
Total
|
49,813
|
6,904
|
7,704
|
7,568
|
71,989
|
62,219
|
|||||||||||||
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 bankers’ acceptance rate plus 1.50%. The deposit note, which
will mature on June 30, 2056, may be redeemed, on and 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 certain regulatory or tax events as defined. 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 will 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 under 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)
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 bankers’ 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
are not redeemable at the option of the holder.
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 certain regulatory or tax events as defined.
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 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 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.
As
at October 31, 2006, for regulatory capital
purposes, $225 million of NBC CapS-Series 1 qualifies as Tier 1
capital.
12 Other
Liabilities
|
2006
|
2005
|
||||||
|
Interest
and dividends payable
|
819
|
627
|
|||||
|
Income
taxes payable
|
178
|
135
|
|||||
|
Future
income tax liabilities (Note 18)
|
59
|
40
|
|||||
|
Trade
and other payables
|
1,185
|
814
|
|||||
|
Brokers’
client accounts
|
3,223
|
2,610
|
|||||
|
Accrued
benefit liability (Note 15)
|
115
|
105
|
|||||
|
Insurance-related
obligations
|
64
|
82
|
|||||
|
Subsidiaries’
debts to third parties
|
886
|
768
|
|||||
|
Accounts
payable and deferred income
|
317
|
301
|
|||||
|
Other
|
728
|
576
|
|||||
|
7,574
|
6,058
|
||||||
13 Subordinated
Debentures
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, 2006, the Bank issued a total of $500
million
of subordinated debentures under its Canadian Medium Term Note Program
that
mature in 2020. 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 October 17, 2011.
During
the fiscal year ended October 31, 2005, the Bank issued a total of $350
million
of subordinated debentures under its Canadian Medium Term Note Program.
The
issue, Series 3 Medium Term Notes, matures in December 2019. Interest on
this
issue is payable semi-annually at a fixed rate of 4.926% until December
22,
2014, and thereafter, quarterly to maturity at a floating rate equal to
the rate
on three-month bankers’ acceptances plus 1.00%. The Bank redeemed a subordinated
debenture in the amount of $350 million, maturing June 7, 2010, at a rate
of
6.90%. In October 2005, the Bank also converted a US $250 million debenture,
maturing in November 2009, into deposit notes.
| Maturity date |
Interest
rate
|
Characteristics
|
Denominated
in
foreign
currency
|
2006
|
2005
|
||||||||||
|
October
2011
|
7.50%
|
(1)
|
Redeemable
since ctober 17, 2001
|
-
|
150
|
||||||||||
|
October
2012
|
6.25%
|
(2)
|
Not
redeemable before October 31, 2007
|
300
|
300
|
||||||||||
|
April
2014
|
5.70%
|
(3)
|
Redeemable
since April 16, 2004
|
250
|
250
|
||||||||||
|
December
2019
|
4.926%
|
(4)
|
Not
redeemable before December 22, 2014
|
350
|
350
|
||||||||||
|
November
2020
|
4.70%
|
(5)
|
Redeemable
since November 2, 2005
|
500
|
-
|
||||||||||
|
February
2087
|
Floating
|
(6)
|
Redeemable
at the Bank’s option since February
28, 1993
|
US
44
|
49
|
52
|
|||||||||
|
Total
|
1,449
|
1,102
|
|
(1)
|
Bearing
interest at a rate of 7.50% until October 17, 2006, and thereafter
at an
annual rate equal to the 90-day bankers’ acceptance rate plus
1%
|
|
(2)
|
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%
|
|
(3)
|
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%
|
|
(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
|
The
subordinated debenture maturities are as follows:
|
2007
|
-
|
|||
|
2008
|
-
|
|||
|
2009
|
-
|
|||
|
2010
|
-
|
|||
|
2011
|
-
|
|||
|
2012
to 2016
|
550
|
|||
|
2017
and thereafter
|
899
|
|||
|
1,449
|
On
November 2, 2006, the Bank issued $500 million of subordinated debentures
that
mature in 2016. Interest at the annual rate of 4.456% is payable semi-annually
on May 2 and November 2 of each year.
14 Non-Controlling
Interest
|
Denominated
in foreign
currency |
2006
|
2005
|
||||||||
|
300,000
preferred shares, Series A, exchangeable,
|
||||||||||
|
non-cumulative
dividends, issued by NB Capital Corporation(1)
|
US
300
|
337
|
355
|
|||||||
|
Mutual
funds consolidated in accordance with AcG-15
|
110
|
124
|
||||||||
|
Other
entities consolidated in accordance with AcG-15
|
117
|
-
|
||||||||
|
Other
|
12
|
8
|
||||||||
|
Total
|
576
|
487
|
||||||||
|
(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 are
redeemable at the issuer’s option as of 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).
|
15 Employee
Future Benefits
The
Bank
offers defined benefit pension plans that cover substantially all salaried
employees. These defined benefit plans are funded pension plans.
A
retirement plan is also offered to National Bank Financial employees. The
plan
provides for the payment of benefits based on length of service and final
average earnings of the employees covered by the plan. National Bank Financial
measures the accrued benefit obligation and the fair value of plan assets
for
accounting purposes on October 31 of each year. The fair value of plan
assets as
at October 31, 2006 was $41 million (2005: $36 million), the accrued benefit
obligation was $48 million (2005: $41 million) and the accrued benefit
asset was
$5 million (2005: $6 million). This information is not included in the
following
tables.
The
effective dates of the most recent actuarial valuations and those of compulsory
future valuations to ensure the funded status of the funded plans
are:
|
Date
of most recent actuarial
valuation
|
Date
of compulsory actuarial
valuation
|
|||
|
Employee
pension plan
|
December
31, 2004
|
December
31, 2007
|
||
|
Pension
plan for designated employees
|
December
31, 2004
|
December
31, 2007
|
||
|
Post-Retirement
Allowance Program
|
December
31, 2005
|
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 describe the Bank’s commitments and costs for these employee
future benefits. The measurement date used is October 31 of each year.
Accrued
benefit asset (liability)
|
Pension
benefit plans
|
Other
benefit plans
|
||||||||||||
|
2006
|
2005
|
2006
|
2005
|
||||||||||
|
Accrued
benefit obligation
|
|||||||||||||
|
Balance
at beginning
|
1,731
|
1,480
|
136
|
116
|
|||||||||
|
Current
service cost
|
45
|
37
|
5
|
4
|
|||||||||
|
Interest
cost
|
97
|
95
|
8
|
8
|
|||||||||
|
Employee
contributions
|
17
|
16
|
-
|
-
|
|||||||||
|
Benefits
paid
|
(67
|
)
|
(64
|
)
|
(5
|
)
|
(5
|
)
|
|||||
|
Plan
amendments
|
2
|
24
|
-
|
-
|
|||||||||
|
Actuarial
losses
|
69
|
143
|
15
|
13
|
|||||||||
|
Balance
at end
|
1,894
|
1,731
|
159
|
136
|
|||||||||
|
Plan
assets
|
|||||||||||||
|
Fair
value at beginning
|
1,638
|
1,478
|
-
|
-
|
|||||||||
|
Actual
return on plan assets
|
175
|
162
|
-
|
-
|
|||||||||
|
Bank
contributions
|
45
|
46
|
-
|
-
|
|||||||||
|
Employee
contributions
|
17
|
16
|
-
|
-
|
|||||||||
|
Benefits
paid
|
(67
|
)
|
(64
|
)
|
-
|
-
|
|||||||
|
Fair
value at end
|
1,808
|
1,638
|
-
|
-
|
|||||||||
|
Funded
status - plan deficit
|
(86
|
)
|
(93
|
)
|
(159
|
)
|
(136
|
)
|
|||||
|
Unamortized
net actuarial losses
|
393
|
412
|
44
|
31
|
|||||||||
|
Unamortized
past service costs
|
32
|
34
|
-
|
-
|
|||||||||
|
Accrued
benefit asset (liability) at end
|
339
|
353
|
(115
|
)
|
(105
|
)
|
|||||||
The
accrued benefit asset (liability) is presented as follows in the Consolidated
Balance Sheet:
|
Pension
benefit plans
|
Other
benefit plans
|
||||||||||||
|
2006
|
2005
|
2006
|
2005
|
||||||||||
|
Accrued
benefit asset included in “Other assets”
|
339
|
353
|
-
|
-
|
|||||||||
|
Accrued
benefit liability included in “Other liabilities”
|
-
|
-
|
(115
|
)
|
(105
|
)
|
|||||||
|
Net
amount recorded as at October 31
|
339
|
353
|
(115
|
)
|
(105
|
)
|
|||||||
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:
|
2006
|
2005
|
||||||
|
Fair
value of plan assets
|
1,707
|
1,541
|
|||||
|
Accrued
benefit obligation
|
1,821
|
1,664
|
|||||
|
Funded
status - plan deficit
|
(114
|
)
|
(123
|
)
|
|||
As
at
October 31, plan assets consist of:
|
2006
|
2005
|
||||||
|
%
|
%
|
||||||
|
Asset
category
|
|||||||
|
Money
market
|
5
|
7
|
|||||
|
Bonds
|
31
|
27
|
|||||
|
Equities
|
56
|
54
|
|||||
|
Other
|
8
|
12
|
|||||
|
100
|
100
|
||||||
Plan
assets include investment securities issued by the Bank. As at October
31, 2006,
these investments totalled $129 million (2005: $128 million).
In
fiscal
2006, the Bank and its subsidiaries received close to $4 million (2005:
$5
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
|
||||||||||||
|
2006
|
2005
|
2006
|
2005
|
||||||||||
|
Current
service cost
|
45
|
37
|
5
|
4
|
|||||||||
|
Interest
cost
|
97
|
95
|
8
|
8
|
|||||||||
|
Actual
return on plan assets
|
(175
|
)
|
(162
|
)
|
-
|
-
|
|||||||
|
Actuarial
losses on obligation
|
69
|
143
|
15
|
13
|
|||||||||
|
Plan
amendments
|
2
|
24
|
-
|
-
|
|||||||||
|
Curtailment
and settlement loss
|
-
|
-
|
-
|
-
|
|||||||||
|
Expense
before adjustments to recognize the
long-term nature of employee future benefits |
38
|
137
|
28
|
25
|
|||||||||
|
Difference
between expected return and actual return
on plan assets for year |
66
|
59
|
-
|
-
|
|||||||||
|
Difference
between actuarial gains recognized for year and actual
actuarial gains on accrued benefit obligation for year |
(47
|
)
|
(125
|
)
|
(13
|
)
|
(12
|
)
|
|||||
|
Difference
between amortization of past service costs for
year and actual plan amendments for year |
2
|
(20
|
)
|
-
|
-
|
||||||||
|
Defined
benefit expense
|
59
|
51
|
15
|
13
|
|||||||||
The
significant assumptions used by the Bank are as follows (weighted average):
|
Pension
benefit plans
|
Other
benefit plans
|
||||||||||||
|
2006
%
|
2005
%
|
2006
%
|
2005
%
|
||||||||||
|
Accrued
benefit obligation as of October 31
|
|||||||||||||
|
Discount
rate
|
5.25
|
5.50
|
5.50
|
5.75
|
|||||||||
|
Rate
of compensation increase
|
3.50
|
3.50
|
3.50
|
3.50
|
|||||||||
|
Defined
benefit expense for years ended October 31
|
|||||||||||||
|
Discount
rate
|
5.50
|
6.25
|
5.75
|
6.50
|
|||||||||
|
Expected
long-term rate of return on plan assets
|
7.00
|
7.25
|
-
|
-
|
|||||||||
|
Rate
of compensation increase
|
3.50
|
4.00
|
3.50
|
4.00
|
|||||||||
For
measurement purposes, a 7.5% annual rate of increase (2005: 6.9%) in the
per
capita cost of covered healthcare benefits was assumed for 2006. The rate
was
assumed to decrease gradually to reach 5.5% in 2010 and remain at that
level
thereafter.
Sensitivity
of key assumptions in 2006
|
Pension
benefit plans
|
Change
in obligation
|
Change
in expense
|
|||||
|
Impact
of a 0.25% change in the assumption regarding the discount
rate
|
69
|
8
|
|||||
|
Impact
of a 0.25% change in the assumption regarding the
expected long-term rate of return on plan assets |
-
|
4
|
|||||
|
Impact
of a 0.25% change in the assumption regarding the rate
of
compensation increase |
15
|
4
|
|||||
|
Other
benefit plans
|
Change
in obligation
|
Change
in expense
|
|||||
|
Impact
of a 0.25% change in the assumption regarding the discount
rate
|
6
|
1
|
|||||
|
Impact
of a 0.25% change in the assumption regarding the rate
of
compensation increase |
-
|
-
|
|||||
|
Impact
of a 1.00% increase in the expected healthcare cost trend
rate
|
22
|
3
|
|||||
|
Impact
of a 1.00% decrease in the expected healthcare cost trend
rate
|
(17
|
)
|
(3
|
)
|
|||
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:
|
2006
|
2005
|
||||||
|
Bank
pension benefit plan contributions
|
45
|
46
|
|||||
|
Benefits
paid under other benefit plans
|
5
|
5
|
|||||
16 Capital
Stock
Authorized
First
preferred shares
An
unlimited number of shares, without par value, issuable for a maximum aggregate
consideration of $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.
|
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
|
||||||||||||
|
2005
|
|||||||||||||
|
Shares
outstanding and dividends declared
|
Shares
|
Dividends
|
|||||||||||
|
Number
of shares
|
$
|
|
$
|
Per
share
|
|||||||||
|
First
Preferred Shares
|
|||||||||||||
|
Series
13
|
-
|
-
|
8
|
1.2000
|
|||||||||
|
Series
15
|
8,000,000
|
200
|
12
|
1.4625
|
|||||||||
|
Series
16
|
8,000,000
|
200
|
6
|
0.8089
|
|||||||||
|
Preferred
shares and dividends
|
16,000,000
|
400
|
26
|
||||||||||
|
Common
shares at beginning
|
167,430,253
|
1,545
|
|||||||||||
|
Issued
pursuant to:
|
|||||||||||||
|
Dividend
Reinvestment and Share Purchase Plan
|
239,374
|
12
|
|||||||||||
|
Stock
Option Plan
|
1,773,463
|
46
|
|||||||||||
|
Repurchase
of common shares
|
(4,178,900
|
)
|
(39
|
)
|
|||||||||
|
Impact
of shares purchased or sold for trading
|
70,712
|
1
|
|||||||||||
|
Common
shares at end and dividends
|
165,334,902
|
1,565
|
286
|
1.7200
|
|||||||||
|
Total
dividends
|
312
|
||||||||||||
Characteristics
of first preferred shares (amounts
in dollars)
Series
13
Redeemable
in cash at the Bank’s option, subject to the prior approval of the
Superintendent and upon notice of not more than 60 and not less than 30
days,
(i) on August 15, 2005 and on the last day of each period of five years
plus one
day thereafter (conversion date), in whole at any time or in part from
time to
time, at a price equal to $25.00 per share plus all declared and unpaid
dividends at the date fixed for redemption and, (ii) after August 15, 2005,
other than on a conversion date, in whole but not in part, at a price equal
to
$25.50 per share, plus all declared and unpaid dividends at the date fixed
for
redemption; non-cumulative preferential dividends at a quarterly rate of
$0.40
per share for the first five years and at a variable rate
thereafter.
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.
Issuance
and redemption of preferred shares
On
March
15, 2005, the Bank issued 8,000,000 first preferred shares with non-cumulative
preferential dividends at a quarterly rate of $0.303125 per share, Series
16,
for a consideration of $194 million, net of fees of $6 million.
On
August
15, 2005, the Bank redeemed for cancellation all 7,000,000 first preferred
shares with non-cumulative dividends, Series 13, at a price equal to $25.00
per
share, plus $0.40 per share, representing all declared and unpaid dividends
until the date of redemption.
Repurchase
of common shares
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 ending no later than 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, 2006, the Bank
had
completed the repurchase of 5,055,520 common shares (2005: 4,178,900) at
a cost
of $309 million (2005: $224 million), which reduced common share capital
by $48
million (2005: $39 million) and retained earnings by $261 million (2005:
$185
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,
2006, 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
NB
Capital Corporation preferred share 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, 2006, 3,475,682 common shares were reserved under the Dividend
Reinvestment and Share Purchase Plan and 13,321,347 common shares were
reserved
under the Stock Option Plan.
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.
17 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
13,321,347 as at October 31, 2006 (14,395,655 as at October 31, 2005).
The
maximum number of common shares reserved for a participant may not exceed
5% of
the total number of Bank shares issued and outstanding.
|
2006
|
2005
|
||||||||||||
|
Number
of
options
|
Weighted
average
exercise
price
|
Number
of
options
|
Weighted
average
exercise
price
|
||||||||||
|
Stock
Option Plan
|
|||||||||||||
|
Outstanding
at beginning
|
5,613,970
|
$
|
35.76
|
6,180,960
|
$
|
30.20
|
|||||||
|
Awarded
|
943,200
|
$
|
61.44
|
1,468,260
|
$
|
48.20
|
|||||||
|
Exercised
|
(1,074,308
|
)
|
$
|
29.56
|
(1,760,263
|
)
|
$
|
25.69
|
|||||
|
Cancelled
|
(90,950
|
)
|
$
|
41.18
|
(274,987
|
)
|
$
|
41.59
|
|||||
|
Outstanding
at end
|
5,391,912
|
$
|
41.40
|
5,613,970
|
$
|
35.76
|
|||||||
|
Exercisable
at end
|
2,494,166
|
$
|
32.77
|
2,192,403
|
$
|
28.90
|
|||||||
|
Exercise
price
|
Outstanding
|
Options exercisable |
Expiry
date
|
|||||||
|
$13.50
|
6,150
|
6,150
|
December
2006
|
|||||||
|
$25.20
|
118,800
|
118,800
|
December
2007
|
|||||||
|
$25.20
|
166,250
|
166,250
|
December
2008
|
|||||||
|
$24.90
|
271,805
|
271,805
|
December
2010
|
|||||||
|
$28.01
|
539,910
|
539,910
|
December
2011
|
|||||||
|
$30.95
|
989,663
|
645,494
|
December
2012
|
|||||||
|
$41.00
|
1,100,674
|
466,030
|
December
2013
|
|||||||
|
$48.20
|
1,267,185
|
279,727
|
December
2014
|
|||||||
|
$61.44
|
931,475
|
-
|
December
2015
|
|||||||
|
Total
|
5,391,912
|
2,494,166
|
||||||||
During
the fiscal year ended October 31, 2006, the Bank awarded 943,200 stock
options
(2005: 1,468,260) with a fair value of $12.81 (2005: $9.70).
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:
|
2006
|
2005
|
||||||
|
Risk-free
interest rate
|
4.18
|
%
|
4.05
|
%
|
|||
|
Expected
life of options
|
6
years
|
6
years
|
|||||
|
Expected
volatility
|
24
|
%
|
27
|
%
|
|||
|
Expected
dividend yield
|
5
|
%
|
5
|
%
|
|||
The
compensation expense recorded for these options for the year ended October
31,
2006 was $12 million (2005: $6 million).
Stock
Appreciation Rights (SAR) Plan
The
Bank
offers a 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, 2006 with
respect
to the Plan amounted to $3 million (2005: $12 million).
|
|
2006
|
2005
|
|||||||||||
|
Number
of
SARs
|
Weighted
average
exercise
price
|
Number
of
SARs
|
Weighted
average
exercise
price
|
||||||||||
|
SAR
Plan
|
|||||||||||||
|
Outstanding
at beginning
|
378,310
|
$
|
19.84
|
715,680
|
$
|
18.59
|
|||||||
|
Awarded
|
5,400
|
$
|
61.44
|
9,800
|
$
|
48.20
|
|||||||
|
Exercised
|
(68,935
|
)
|
$
|
19.56
|
(340,320
|
)
|
$
|
17.99
|
|||||
|
Cancelled
|
(7,975
|
)
|
$
|
30.79
|
(6,850
|
)
|
$
|
21.73
|
|||||
|
Outstanding
at end
|
306,800
|
$
|
20.35
|
378,310
|
$
|
19.84
|
|||||||
|
Exercisable
at end
|
282,419
|
$
|
18.16
|
340,348
|
$
|
17.80
|
|||||||
|
SARs outstanding |
SARs
exercisable
|
Expiry
date
|
||||||||
|
$13.50
|
7,850
|
7,850
|
December
2006
|
|||||||
|
$24.50
|
600
|
600
|
December
2007
|
|||||||
|
$17.35
|
257,100
|
257,100
|
December
2009
|
|||||||
|
$24.90
|
850
|
850
|
December
2010
|
|||||||
|
$28.01
|
7,000
|
7,000
|
December
2011
|
|||||||
|
$30.95
|
9,500
|
4,969
|
December
2012
|
|||||||
|
$41.00
|
9,900
|
2,800
|
December
2013
|
|||||||
|
$48.20
|
8,600
|
1,250
|
December
2014
|
|||||||
|
$61.44
|
5,400
|
-
|
December
2015
|
|||||||
|
Total
|
306,800
|
282,419
|
||||||||
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 when the director’s term ends. A total of 219,047 DSUs were
outstanding as at October 31, 2006 (2005: 300,791). Compensation expense
recognized for the year ended October 31, 2006 with respect to the Plans
was $3
million (2005: $6 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, 2006, a total of 163,538
RSUs were outstanding (2005: 67,181). Compensation expense recognized for
the
year ended October 31, 2006 with respect to the Plan was $4 million (2005:
$3
million).
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. The stock units awarded 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, 2006, 934,249 units
were
outstanding (814,599 as at October 31, 2005). Compensation expense recognized
for the year ended October 31, 2006 with respect to the Plan was $9 million
(2005: $9 million).
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 $5 million in 2006 (2005: $4
million), were charged to “Salaries and staff benefits” when paid. As at October
31, 2006, a total of 2,043,120 common shares were held for this Plan (2005:
1,996,866).
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.
18 Income
Taxes
The
Bank’s income taxes in the consolidated financial statements for the fiscal
years ended October 31 are as follows:
|
2006
|
2005
|
||||||
|
Consolidated
Statement of Income
|
|||||||
|
Income
taxes
|
277
|
291
|
|||||
|
Consolidated
Statement of Changes in Shareholders’ Equity
|
|||||||
|
Income
taxes related to:
|
|||||||
|
Share
issuance and other expenses
|
-
|
(2
|
)
|
||||
|
Dividends
on First Preferred Shares, Series 13, 15 and 16
|
7
|
-
|
|||||
|
Unrealized
foreign currency translation adjustments
|
31
|
13
|
|||||
|
Redemption
of subordinated debentures - 2001
|
10
|
-
|
|||||
|
48
|
11
|
||||||
|
325
|
302
|
||||||
Income
taxes were as follows:
|
2006
|
2005
|
||||||
|
Current
income taxes
|
304
|
333
|
|||||
|
Future
income taxes relating to the inception and reversal of temporary
differences
|
21
|
(31
|
)
|
||||
|
Income
taxes
|
325
|
302
|
|||||
During
fiscal 2001, the Bank redeemed a subordinated debenture convertible into
common
shares for total consideration of $65 million. As a result of this transaction,
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:
|
2006
|
2005
|
||||||
|
Future
income tax assets
|
|||||||
|
Allowance
for credit losses and other liabilities
|
307
|
313
|
|||||
|
Accrued
benefit liability - Other benefit plans
|
36
|
34
|
|||||
|
343
|
347
|
||||||
|
Future
income tax liabilities
|
|||||||
|
Premises
and equipment
|
(25
|
)
|
(20
|
)
|
|||
|
Securitization
|
(41
|
)
|
(42
|
)
|
|||
|
Accrued
benefit asset - Pension benefit plans
|
(107
|
)
|
(111
|
)
|
|||
|
Other
|
(91
|
)
|
(77
|
)
|
|||
|
(264
|
)
|
(250
|
)
|
||||
|
Net
balance of future income tax assets
|
79
|
97
|
|||||
|
Future
income tax assets
|
138
|
137
|
|||||
|
Future
income tax liabilities
|
(59
|
)
|
(40
|
)
|
|||
|
79
|
97
|
||||||
Reconciliation
of the Bank’s income tax rate for the years ended October 31 is as
follows:
|
2006
|
2005
|
||||||||||||
|
$
|
%
|
$
|
%
|
||||||||||
|
Income
before income taxes and non-controlling interest
|
1,180
|
100.0
|
1,171
|
100.0
|
|||||||||
|
Income
taxes at Canadian statutory income tax rate
|
395
|
33.5
|
392
|
33.5
|
|||||||||
|
Reduction
in income tax rate due to:
|
|||||||||||||
|
Tax-exempt
income from securities,
|
|||||||||||||
|
mainly
dividends from Canadian corporations
|
(79
|
)
|
(6.7
|
)
|
(58
|
)
|
(4.9
|
)
|
|||||
|
Capital
gains
|
(1
|
)
|
(0.1
|
)
|
-
|
-
|
|||||||
|
Rates
applicable to subsidiaries abroad
|
(50
|
)
|
(4.2
|
)
|
(41
|
)
|
(3.5
|
)
|
|||||
|
Other
items
|
12
|
1.0
|
(2
|
)
|
(0.2
|
)
|
|||||||
|
(118
|
)
|
(10.0
|
)
|
(101
|
)
|
(8.6
|
)
|
||||||
|
Income
taxes and effective income tax rate
|
277
|
23.5
|
291
|
24.9
|
|||||||||
19 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 does not take into account stock options whose exercise price
is
higher than the average price of the share for the year.
|
2006
|
2005
|
||||||
|
Earnings
per share - basic
|
|||||||
|
Net
income
|
871
|
855
|
|||||
|
Dividends
on preferred shares
|
(21
|
)
|
(26
|
)
|
|||
|
Net
income available to common shareholders
|
850
|
829
|
|||||
|
Average
basic number of common shares outstanding (thousands)
|
162,851
|
166,382
|
|||||
|
Earnings
per share - basic
|
$
|
5.22
|
$
|
4.98
|
|||
|
Earnings
per share - diluted
|
|||||||
|
Net
income available to common shareholders
|
850
|
829
|
|||||
|
Average
basic number of common shares outstanding (thousands)
|
162,851
|
166,382
|
|||||
|
Adjustment
to number of common shares (thousands)
|
|||||||
|
Stock
options
|
2,698
|
2,582
|
|||||
|
Average
diluted number of common shares outstanding (thousands)
|
165,549
|
168,964
|
|||||
|
Earnings
per share - diluted
|
$
|
5.13
|
$
|
4.90
|
|||
20 Guarantees, Commitments and Contingent Liabilities
Guarantees
CICA
Accounting Guideline No. 14 “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.
The
maximum potential 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 future payments for
significant guarantees issued by the Bank and in effect as at October 31
are
presented in the following table:
|
2006
|
2005
|
||||||
|
Letters
of guarantee
|
1,306
|
1,313
|
|||||
|
Backstop
liquidity facilities
|
1,410
|
1,519
|
|||||
|
Derivatives
|
1,063
|
1,850
|
|||||
|
Securities
lending
|
847
|
1,023
|
|||||
|
Other
indemnification agreements
|
146
|
226
|
|||||
|
Other
guarantee
|
25
|
23
|
|||||
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
provides backstop liquidity facilities under asset-backed commercial paper
conduit programs administered by it further to securitization operations.
The
Bank also administers a multi-seller conduit that buys various financial
assets
from clients and finances these purchases by issuing asset-backed commercial
paper. The Bank provides backstop liquidity facilities to some multi-seller
conduits, including the one administered by the Bank.
The
backstop liquidity facilities may only be drawn upon if, after market
disruption, the conduit was unable to access the commercial paper market.
These
guarantees have a duration of less than one year and are renewable periodically.
The terms of the backstop liquidity facilities do not require the Bank
to
advance money to the conduit in the event of a bankruptcy or to fund
non-performing or defaulted assets. None of the backstop liquidity facilities
provided by the Bank have been drawn upon to date and no amount has been
accrued
in the Consolidated Balance Sheet with respect to these backstop liquidity
facilities.
Derivatives
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, commodity or financial instrument,
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, 2006, the Bank recorded a
liability of $35 million in the Consolidated Balance Sheet with respect
to these
written put options (2005: $26 million), representing the fair value of
these
options.
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 highly 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.
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 three 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 the
agreement.
Commitments
As
at
October 31, 2006, minimum commitments under leases, contracts for outsourced
information technology services and other leasing agreements are as
follows:
|
Premises
|
Service
contracts
|
Equipment
and
furniture
|
Total
|
||||||||||
|
2007
|
119
|
235
|
9
|
363
|
|||||||||
|
2008
|
113
|
219
|
6
|
338
|
|||||||||
|
2009
|
103
|
190
|
3
|
296
|
|||||||||
|
2010
|
95
|
168
|
2
|
265
|
|||||||||
|
2011
|
79
|
163
|
1
|
243
|
|||||||||
|
2012
and thereafter
|
420
|
74
|
1
|
495
|
|||||||||
|
929
|
1,049
|
22
|
2,000
|
||||||||||
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
|
2006
|
2005
|
|||||
|
Assets
pledged to:
|
|||||||
|
-
Bank of Canada
|
25
|
25
|
|||||
|
-
Direct clearing organizations
|
2,577
|
2,480
|
|||||
|
Assets
pledged in relation to:
|
|||||||
|
-
Derivative transactions
|
276
|
538
|
|||||
|
-
Borrowing, securities lending and securities sold under repurchase
agreements
|
11,117
|
13,264
|
|||||
|
-
Other
|
180
|
221
|
|||||
|
Total
|
14,175
|
16,528
|
|||||
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
|
2006
|
2005
|
|||||
|
Letters
of guarantee(1)
|
1,306
|
1,313
|
|||||
|
Documentary
letters of credit(2)
|
102
|
110
|
|||||
|
Credit
card loans(3)
|
5,446
|
5,331
|
|||||
|
Commitments
to extend credit(3)
|
|||||||
|
Original
term one year or less
|
4,680
|
6,589
|
|||||
|
Original
term over one year
|
12,157
|
11,074
|
|||||
(1) See
“Letters of guarantee,” page 104.
(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 by entering 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 had commitments to invest up to $196 million
as
at October 31, 2006 (2005: $235 million).
Litigation
In
the
normal course of business, the Bank is a party to 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 implied in class
action
suits filed by consumers contesting, among other things, certain banking
transaction fees. The subsidiary National Bank Financial is also a party
in
various legal proceedings in the normal course of business. Most of these
proceedings concern services to individual investors and may relate to
the
suitability of investments. In the opinion of Management, based on available
information and past experience, the related aggregate potential liability
will
not have a material impact on the Bank’s financial position.
21 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. The Bank uses these instruments to accommodate the
needs of
its clients and for its own risk management and trading activities.
The
main
types of derivative financial instruments used are as follows:
Foreign
exchange forward contracts and futures
Foreign
exchange forward contracts and futures are contractual obligations to buy
or
deliver a specific amount of currency, interest, commodities or financial
instruments on a specific future date at a specified price. Foreign exchange
forward contracts are tailor-made agreements transacted on the over-the-counter
market. Futures are traded on organized exchanges and are subject to daily
cash
margining.
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.
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 instrument and serve as a reference for currency
and
interest rates and stock market prices to determine the amount of cash
flows to
be exchanged. Notional amounts are presented in the table below.
|
Remaining
term to maturity
|
2006
|
2005
|
|||||||||||||||||||||||
|
Within
3 months
|
3
to 12 months
|
1
to 5 years
|
Over
5 years
|
Total
contracts
|
Contracts
for trading purposes
|
Contracts
for non- trading purposes
|
Total
contracts
|
||||||||||||||||||
|
Interest
rate contracts
|
|||||||||||||||||||||||||
|
OTC
contracts
|
|||||||||||||||||||||||||
|
Guaranteed
interest rate contracts
|
149
|
8,713
|
870
|
-
|
9,732
|
9,732
|
-
|
9,082
|
|||||||||||||||||
|
Swaps
|
17,889
|
31,497
|
51,981
|
17,230
|
118,597
|
94,015
|
24,582
|
123,134
|
|||||||||||||||||
|
Options
purchased
|
7,360
|
1,296
|
2,161
|
1,164
|
11,981
|
11,981
|
-
|
30,724
|
|||||||||||||||||
|
Options
written
|
7,660
|
1,500
|
3,141
|
1,315
|
13,616
|
13,616
|
-
|
38,244
|
|||||||||||||||||
|
Total
|
33,058
|
43,006
|
58,153
|
19,709
|
153,926
|
129,344
|
24,582
|
201,184
|
|||||||||||||||||
|
Exchange-traded
contracts
|
|||||||||||||||||||||||||
|
Futures
|
|||||||||||||||||||||||||
|
Long
positions
|
2,683
|
9,737
|
1,955
|
-
|
14,375
|
14,375
|
-
|
5,193
|
|||||||||||||||||
|
Short
positions
|
3,939
|
11,718
|
545
|
-
|
16,202
|
16,202
|
-
|
9,670
|
|||||||||||||||||
|
Options
purchased
|
81,138
|
23,135
|
-
|
-
|
104,273
|
102,701
|
1,572
|
55,285
|
|||||||||||||||||
|
Options
written
|
79,545
|
18,197
|
-
|
-
|
97,742
|
95,608
|
2,134
|
29,638
|
|||||||||||||||||
|
Total
|
167,305
|
62,787
|
2,500
|
-
|
232,592
|
228,886
|
3,706
|
99,786
|
|||||||||||||||||
|
Foreign
exchange contracts
|
|||||||||||||||||||||||||
|
OTC
contracts
|
|||||||||||||||||||||||||
|
Forwards
|
5,553
|
1,410
|
337
|
4
|
7,304
|
7,304
|
-
|
6,787
|
|||||||||||||||||
|
Swaps
|
22,520
|
9,007
|
9,857
|
1,780
|
43,164
|
39,110
|
4,054
|
51,144
|
|||||||||||||||||
|
Options
purchased
|
5,716
|
2,979
|
399
|
-
|
9,094
|
9,094
|
-
|
7,433
|
|||||||||||||||||
|
Options
written
|
7,837
|
3,458
|
356
|
-
|
11,651
|
11,651
|
-
|
6,842
|
|||||||||||||||||
|
Total
|
41,626
|
16,854
|
10,949
|
1,784
|
71,213
|
67,159
|
4,054
|
72,206
|
|||||||||||||||||
|
Exchange-traded
contracts
|
|||||||||||||||||||||||||
|
Futures
|
|||||||||||||||||||||||||
|
Long
positions
|
308
|
-
|
-
|
-
|
308
|
308
|
-
|
27
|
|||||||||||||||||
|
Short
positions
|
132
|
-
|
-
|
-
|
132
|
132
|
-
|
90
|
|||||||||||||||||
|
Options
purchased
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
30
|
|||||||||||||||||
|
Options
written
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
20
|
|||||||||||||||||
|
Total
|
440
|
-
|
-
|
-
|
440
|
440
|
-
|
167
|
|||||||||||||||||
|
Equity,
commodity and
|
|||||||||||||||||||||||||
|
credit
derivative contracts
|
|||||||||||||||||||||||||
|
OTC
contracts
|
|||||||||||||||||||||||||
|
Forwards
|
25
|
14
|
351
|
45
|
435
|
413
|
22
|
453
|
|||||||||||||||||
|
Swaps
|
2,490
|
4,530
|
3,196
|
2,936
|
13,152
|
13,152
|
-
|
10,649
|
|||||||||||||||||
|
Options
purchased
|
439
|
2,452
|
4,410
|
1,720
|
9,021
|
9,016
|
5
|
8,395
|
|||||||||||||||||
|
Options
written
|
308
|
724
|
641
|
56
|
1,729
|
1,720
|
9
|
1,900
|
|||||||||||||||||
|
Total
|
3,262
|
7,720
|
8,598
|
4,757
|
24,337
|
24,301
|
36
|
21,397
|
|||||||||||||||||
|
Exchange-traded
contracts
|
|||||||||||||||||||||||||
|
Futures
|
|||||||||||||||||||||||||
|
Long
positions
|
5,763
|
1,010
|
154
|
4
|
6,931
|
6,931
|
-
|
441
|
|||||||||||||||||
|
Short
positions
|
3,369
|
261
|
5
|
-
|
3,635
|
3,635
|
-
|
1
426
|
|||||||||||||||||
|
Options
purchased
|
790
|
132
|
124
|
-
|
1,046
|
1
046
|
-
|
4,475
|
|||||||||||||||||
|
Options
written
|
525
|
101
|
223
|
-
|
849
|
849
|
-
|
2,819
|
|||||||||||||||||
|
Total
|
10,447
|
1,504
|
506
|
4
|
12,461
|
12,461
|
-
|
9,161
|
|||||||||||||||||
|
Total
2006
|
256,138
|
131,871
|
80,706
|
26,254
|
494,969
|
462,591
|
32,378
|
||||||||||||||||||
|
Total
2005
|
200,381
|
111,717
|
74,209
|
17,594
|
403,901
|
373,503
|
30,398
|
403,901
|
|||||||||||||||||
Credit
risk
Credit
risk on derivative financial instruments is the risk of a financial loss
occurring as a result of a counterparty failing to honour its contractual
obligations to the Bank. 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. 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 is the credit equivalent amount multiplied by the counterparty risk
factors prescribed by the Superintendent. The Bank negotiates master netting
agreements with counterparties with which it has significant credit risk
exposure resulting from derivative transactions. Such agreements provide
for the
simultaneous close-out and settling of all transactions with a counterparty
in
the event of default. Some of these agreements also provide for the exchange
of
collateral between parties where the fair value of the outstanding transactions
between the parties exceeds an agreed threshold.
As
at
October 31, credit risk exposure on the derivatives portfolio is as
follows:
|
2006
|
2005
|
||||||||||||||||||||||||||||||
|
Current
replacement cost
|
Current
replacement cost
|
||||||||||||||||||||||||||||||
|
|
Trading(1)
|
Non- trading |
Total
|
Credit
equiv- alent
|
Risk-
weighted
amount
|
Trading(1)
|
Non-
trading
|
Total
|
Credit
equiv-
alent
|
Risk-
weighted
amount
|
|||||||||||||||||||||
|
Interest
rate contracts
|
481
|
135
|
616
|
1,202
|
245
|
439
|
218
|
657
|
1,134
|
223
|
|||||||||||||||||||||
|
Foreign
exchange contracts
|
666
|
29
|
695
|
1,834
|
432
|
800
|
38
|
838
|
1,744
|
433
|
|||||||||||||||||||||
|
Equity,
commodity and credit
|
|||||||||||||||||||||||||||||||
|
derivative
contracts
|
1,008
|
-
|
1,008
|
2,828
|
721
|
1,021
|
7
|
1,028
|
2,628
|
664
|
|||||||||||||||||||||
|
|
2,155
|
164
|
2,319
|
5,864
|
1,398
|
2,260
|
263
|
2,523
|
5,506
|
1,320
|
|||||||||||||||||||||
|
Impact
of master netting
|
|||||||||||||||||||||||||||||||
|
agreements
|
(1,030
|
)
|
(84
|
)
|
(1,114
|
)
|
(2,409
|
)
|
(543
|
)
|
(1,080
|
)
|
(124
|
)
|
(1,204
|
)
|
(2,566
|
)
|
(572
|
)
|
|||||||||||
|
|
1,125
|
80
|
1,205
|
3,455
|
855
|
1,180
|
139
|
1,319
|
2,940
|
748
|
|||||||||||||||||||||
|
(1)
|
Excluding,
in accordance with the guidelines of the Office of the Superintendent
of
Financial Institutions Canada, exchange-traded instruments and
forward
contracts with an original maturity of 14 days. The total positive
fair
value of these excluded contracts amounted to $114 million as
at October
31, 2006 ($130 million as at October 31, 2005).
|
Fair
value
The
fair
value of derivatives is determined before factoring in the impact of master
netting agreements. When available, market prices are used to determine
the fair
value of derivatives. Otherwise, fair value is determined using pricing
models
that incorporate current market prices and the contractual prices of the
underlying instruments, the time value of money, yield curves and volatility
factors. If necessary, fair value is adjusted to take into account market,
model
and credit risks, as well as the related costs.
As
at
October 31, fair values are as follows:
|
|
2006
|
2005
|
|||||||||||||||||
|
(millions
of dollars)
|
Positive
|
Negative
|
Net
|
Positive
|
Negative
|
Net
|
|||||||||||||
|
Contracts
held for trading purposes
|
|
|
|
|
|
|
|||||||||||||
|
Interest
rate contracts
|
|
|
|
|
|
|
|||||||||||||
|
Forwards
|
4
|
1
|
3
|
7
|
8
|
(1
|
)
|
||||||||||||
|
Swaps
|
468
|
415
|
53
|
391
|
355
|
36
|
|||||||||||||
|
Options
|
16
|
16
|
-
|
52
|
46
|
6
|
|||||||||||||
|
Total
|
488
|
432
|
56
|
450
|
409
|
41
|
|||||||||||||
|
Foreign
exchange contracts
|
|||||||||||||||||||
|
Forwards
|
38
|
60
|
(22
|
)
|
29
|
83
|
(54
|
)
|
|||||||||||
|
Swaps
|
605
|
360
|
245
|
681
|
445
|
236
|
|||||||||||||
|
Options
|
71
|
67
|
4
|
109
|
118
|
(9
|
)
|
||||||||||||
|
Total
|
714
|
487
|
227
|
819
|
646
|
173
|
|||||||||||||
|
Equity,
commodity and credit
|
|||||||||||||||||||
|
derivative
contracts
|
|||||||||||||||||||
|
Forwards
|
38
|
92
|
(54
|
)
|
64
|
119
|
(55
|
)
|
|||||||||||
|
Swaps
|
616
|
293
|
323
|
783
|
492
|
291
|
|||||||||||||
|
Options
|
413
|
342
|
71
|
274
|
180
|
94
|
|||||||||||||
|
Total
|
1,067
|
727
|
340
|
1,121
|
791
|
330
|
|||||||||||||
|
Total
contracts held for trading purposes
|
2,269
|
1,646
|
623
|
2,390
|
1,846
|
544
|
|||||||||||||
|
Contracts
held for non-trading purposes
|
|||||||||||||||||||
|
Interest
rate contracts
|
|||||||||||||||||||
|
Forwards
|
-
|
-
|
-
|
-
|
-
|
-
|
|||||||||||||
|
Swaps
|
135
|
47
|
88
|
218
|
94
|
124
|
|||||||||||||
|
Options
|
-
|
-
|
-
|
-
|
-
|
-
|
|||||||||||||
|
Total
|
135
|
47
|
88
|
218
|
94
|
124
|
|||||||||||||
|
Foreign
exchange contracts
|
|||||||||||||||||||
|
Forwards
|
-
|
-
|
-
|
-
|
-
|
-
|
|||||||||||||
|
Swaps
|
29
|
43
|
(14
|
)
|
38
|
52
|
(14
|
)
|
|||||||||||
|
Options
|
-
|
-
|
-
|
-
|
-
|
-
|
|||||||||||||
|
Total
|
29
|
43
|
(14
|
)
|
38
|
52
|
(14
|
)
|
|||||||||||
|
Equity,
commodity and credit
|
|||||||||||||||||||
|
derivative
contracts
|
|||||||||||||||||||
|
Forwards
|
-
|
4
|
(4
|
)
|
-
|
-
|
-
|
||||||||||||
|
Swaps
|
-
|
-
|
-
|
-
|
-
|
-
|
|||||||||||||
|
Options
|
-
|
1
|
(1
|
)
|
7
|
4
|
3
|
||||||||||||
|
Total
|
-
|
5
|
(5
|
)
|
7
|
4
|
3
|
||||||||||||
|
Total
contracts held for non-trading purposes
|
164
|
95
|
69
|
263
|
150
|
113
|
|||||||||||||
|
Total
fair value
|
2,433
|
1,741
|
692
|
2,653
|
1,996
|
657
|
|||||||||||||
|
Impact
of master netting agreements
|
(1,127
|
)
|
(1,127
|
)
|
-
|
(1,217
|
)
|
(1,217
|
)
|
-
|
|||||||||
|
|
1,306
|
614
|
692
|
1,436
|
779
|
657
|
|||||||||||||
As
at
October 31, credit risk exposure on the derivatives portfolio is as
follows:
|
|
2006
|
2005
|
|||||||||||
|
|
Replacement
cost |
Credit equivalent
|
Replacement
cost |
Credit equivalent |
|||||||||
|
OECD
governments(1)
|
79
|
322
|
23
|
446
|
|||||||||
|
OECD
banks(1)
|
1,603
|
2,370
|
1,675
|
1,654
|
|||||||||
|
Other
|
637
|
763
|
825
|
840
|
|||||||||
|
Total
|
2,319
|
3,455
|
2,523
|
2,940
|
|||||||||
(1) Organisation
for Economic Co-operation and Development
22
Interest Rate Sensitivity Position
The
Bank
offers a range of financial products for which the 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
table
below illustrates the sensitivity of the Bank’s Consolidated Balance Sheet to
interest rate fluctuations as at October 31.
|
|
Floating
rate
|
Within
3 months
|
3
to
12 months
|
1
to
5
years
|
Over
5
years
|
Non-interest
sensitive
|
2006
Total
|
2005
Total
|
|||||||||||||||||
|
Assets
|
|
|
|
|
|
|
|
|
|||||||||||||||||
|
Cash
|
-
|
-
|
-
|
-
|
-
|
268
|
268
|
227
|
|||||||||||||||||
|
Deposits
with financial institutions
|
139
|
7,350
|
622
|
-
|
-
|
2,500
|
10,611
|
10,087
|
|||||||||||||||||
|
Effective
yield
|
4.0
|
%
|
5.0
|
%
|
-
|
%
|
-
|
%
|
|||||||||||||||||
|
Securities
|
1
|
5,949
|
7,263
|
8,432
|
6,748
|
10,285
|
38,678
|
33,052
|
|||||||||||||||||
|
Effective
yield
|
4.5
|
%
|
4.2
|
%
|
4.0
|
%
|
4.3
|
%
|
|||||||||||||||||
|
Loans
|
491
|
34,505
|
4,243
|
10,570
|
573
|
3,973
|
54,355
|
51,092
|
|||||||||||||||||
|
Effective
yield
|
|
4.2
|
%
|
5.5
|
%
|
5.4
|
%
|
6.0
|
%
|
|
|
|
|||||||||||||
|
Other
assets
|
2,203
|
1
|
-
|
-
|
-
|
10,769
|
12,973
|
13,512
|
|||||||||||||||||
|
|
2,834
|
47,805
|
12,128
|
19,002
|
7,321
|
27,795
|
116,885
|
107,970
|
|||||||||||||||||
|
Liabilities
and shareholders’ equity
|
|||||||||||||||||||||||||
|
Deposits
|
4,558
|
32,609
|
12,646
|
14,608
|
1,308
|
6,260
|
71,989
|
62,219
|
|||||||||||||||||
|
Effective
yield
|
4.1
|
%
|
4.0
|
%
|
4.0
|
%
|
5.0
|
%
|
|||||||||||||||||
|
Other
debt(1)
|
-
|
10,011
|
916
|
4,025
|
5,346
|
4,840
|
25,138
|
28,419
|
|||||||||||||||||
|
Effective
yield
|
3.6
|
%
|
4.3
|
%
|
4.1
|
%
|
4.2
|
%
|
|||||||||||||||||
|
Subordinated
debentures
|
-
|
-
|
349
|
250
|
850
|
-
|
1,449
|
1,102
|
|||||||||||||||||
|
Effective
yield
|
|
-
|
%
|
6.2
|
%
|
5.7
|
%
|
4.8
|
%
|
|
|
|
|||||||||||||
|
Acceptances
and other liabilities
|
1,628
|
16
|
23
|
106
|
93
|
11,655
|
13,521
|
11,633
|
|||||||||||||||||
|
Shareholders’
equity
|
-
|
-
|
-
|
400
|
-
|
4,388
|
4,788
|
4,597
|
|||||||||||||||||
|
|
6,186
|
42,636
|
13,934
|
19,389
|
7,597
|
27,143
|
116,885
|
107,970
|
|||||||||||||||||
|
On-balance
sheet gap
|
(3,352
|
)
|
5,169
|
(1,806
|
)
|
(387
|
)
|
(276
|
)
|
652
|
-
|
-
|
|||||||||||||
|
Derivative
financial instruments
|
-
|
(26,902
|
)
|
11,261
|
15,362
|
279
|
-
|
-
|
-
|
||||||||||||||||
|
Total
|
(3,352
|
)
|
(21,733
|
)
|
9,455
|
14,975
|
3
|
652
|
-
|
-
|
|||||||||||||||
|
Position
in Canadian dollars
|
|||||||||||||||||||||||||
|
On-balance
sheet total
|
(1,170
|
)
|
8,947
|
(1,454
|
)
|
(1,065
|
)
|
(1,214
|
)
|
(5,091
|
)
|
(1,047
|
)
|
(1,607
|
)
|
||||||||||
|
Derivative
financial instruments
|
-
|
(16,168
|
)
|
9,247
|
8,784
|
1,801
|
-
|
3,664
|
(1,585
|
)
|
|||||||||||||||
|
Total
|
(1,170
|
)
|
(7,221
|
)
|
7,793
|
7,719
|
587
|
(5,091
|
)
|
2,617
|
(3,192
|
)
|
|||||||||||||
|
Position
in foreign currency
|
|||||||||||||||||||||||||
|
On-balance
sheet total
|
(2,182
|
)
|
(3,778
|
)
|
(352
|
)
|
678
|
938
|
5,743
|
1,047
|
1,607
|
||||||||||||||
|
Derivative
financial instruments
|
-
|
(10,734
|
)
|
2,014
|
6,578
|
(1,522
|
)
|
-
|
(3,664
|
)
|
1,585
|
||||||||||||||
|
Total
|
(2,182
|
)
|
(14,512
|
)
|
1,662
|
7,256
|
(584
|
)
|
5,743
|
(2,617
|
)
|
3,192
|
|||||||||||||
| Total 2006 | (3,352 | ) | (21,733 | ) | 9,455 | 14,975 | 3 | 652 | - | - | |||||||||||||||
|
Total
2005
|
(5,072
|
)
|
(17,695
|
)
|
13,693
|
3,719
|
1,379
|
3,976
|
|
-
|
|||||||||||||||
(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.
23 Fair
Value of Financial Instruments
The
following table presents the fair value of balance sheet financial instruments,
except for instruments whose fair value is estimated to approximate their
carrying value. This fair value is determined using the valuation methods
and
assumptions described below. The fair values of derivative financial instruments
are not included in the table and are presented separately in Note
21.
Fair
value represents the amount for which a financial instrument could be exchanged
in an arm’s length transaction between willing parties under no compulsion to
act and is best evidenced by a quoted market price. If no quoted market
prices
are available, the fair values presented are estimates derived using present
value or other valuation techniques and may not be indicative of the net
realizable value.
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
estimations 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.
|
|
2006
|
2005
|
|||||||||||||||||
|
|
|
|
Favourable
|
|
|
Favourable
|
|||||||||||||
|
|
|
|
(unfavour-
|
|
|
(unfavour-
|
|||||||||||||
|
|
Carrying
|
|
able)
|
Carrying
|
|
able)
|
|||||||||||||
|
|
value
|
Fair
value
|
variance
|
value
|
Fair
value
|
variance
|
|||||||||||||
|
Assets
|
|
|
|
|
|
|
|||||||||||||
|
Securities
|
38,678
|
38,804
|
126
|
33,052
|
33,126
|
74
|
|||||||||||||
|
Loans
|
46,763
|
46,856
|
93
|
44,069
|
44,156
|
87
|
|||||||||||||
|
|
|||||||||||||||||||
|
Liabilities
|
|||||||||||||||||||
|
Deposits
|
71,989
|
72,005
|
(16
|
)
|
62,219
|
62,293
|
(74
|
)
|
|||||||||||
|
Subordinated
debentures
|
1,449
|
1,467
|
(18
|
)
|
1,102
|
1,131
|
(29
|
)
|
|||||||||||
Valuation
methods and assumptions
Securities
The
fair
value of securities is presented in Note 3 to the consolidated financial
statements. It is based on quoted market prices. If quoted market prices
are not
available, fair value is estimated using the quoted market 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
remaining terms 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.
24 Related
Party Transactions
The
Bank
grants loans to its directors and officers under various conditions. As
of
August 31, the balance of loans granted is:
|
2006
|
2005
|
||||||
|
2
|
2
|
||||||
|
Other
loans
|
70
|
61
|
|||||
Since
January 1, 2003, loans to eligible officers have been 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 market
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.
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.
Loans
granted to officers before January 1, 2003 were administered according
to
conditions previously in effect, for a transitional period that ended on
December 31, 2005. These conditions were as follows: loans to directors
were
granted under market conditions for similar risks; residential mortgage
loans to
officers were granted at the market rate divided by 3 for the first $50,000
and
at the lower of the market rate divided by 3 and the market rate less 5%
for the
remainder; and other loans granted to officers, mainly personal lines of
credit,
bore interest at the prime rate divided by 2 for the first $10,000 to $20,000
and at the lower of prime less 3% and prime divided by 2 for the remainder,
to
an aggregate maximum of 50% of the officer’s annual 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 with 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. See Note 17 - Stock-Based Compensation for more details.
25 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 client
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 “Other” heading. Head office expenses are allocated to each operating
segment and disclosed 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
|
|||||||||||||||||||||||||||
|
2006
|
|
2005
|
|
2006
|
|
2005
|
|
2006
|
|
2005
|
|
2006
|
|
2005
|
|
2006
|
|
2005
|
|||||||||||||
| Net interest income(1) |
1,367
|
1,299
|
121
|
101
|
141
|
309
|
(337
|
)
|
(268
|
)
|
1,292
|
1,441
|
|||||||||||||||||||
| Other income(1) |
806
|
749
|
737
|
702
|
917
|
671
|
93
|
140
|
2,553
|
2,262
|
|||||||||||||||||||||
|
Total
revenues
|
2,173
|
2,048
|
858
|
803
|
1,058
|
980
|
(244
|
)
|
(128
|
)
|
3,845
|
3,703
|
|||||||||||||||||||
|
Operating
expenses
|
1,329
|
1,265
|
635
|
621
|
610
|
595
|
14
|
18
|
2,588
|
2,499
|
|||||||||||||||||||||
|
Contribution
|
844
|
783
|
223
|
182
|
448
|
385
|
(258
|
)
|
(146
|
)
|
1,257
|
1,204
|
|||||||||||||||||||
|
Provision
for credit losses
|
121
|
117
|
-
|
-
|
4
|
8
|
(48
|
)
|
(92
|
)
|
77
|
33
|
|||||||||||||||||||
|
Income
before income taxes
|
|||||||||||||||||||||||||||||||
|
and
non-controlling interest
|
723
|
666
|
223
|
182
|
444
|
377
|
(210
|
)
|
(54
|
)
|
1,180
|
1,171
|
|||||||||||||||||||
| Income taxes(1) |
244
|
223
|
74
|
68
|
152
|
132
|
(193
|
)
|
(132
|
)
|
277
|
291
|
|||||||||||||||||||
|
Non-controlling
interest
|
-
|
-
|
6
|
3
|
9
|
1
|
17
|
21
|
32
|
25
|
|||||||||||||||||||||
|
479
|
443
|
143
|
111
|
283
|
244
|
(34
|
)
|
57
|
871
|
855
|
|||||||||||||||||||||
|
Average
assets
|
47,379
|
43,956
|
830
|
882
|
67,839
|
51,809
|
(9,775
|
)
|
(5,745
|
)
|
106,273
|
90,902
|
|||||||||||||||||||
| (1) |
Net
interest income was grossed up by $122 million (2005: $90 million)
and
other income by $77 million (2005: $60 million) to bring the
tax-exempt
income earned on certain securities in 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.”
|
Results
by geographic segment
|
Canada
|
United
States
|
Other
|
Total
|
||||||||||||||||||||||
|
2006
|
2005
|
2006
|
2005
|
2006
|
2005
|
2006
|
2005
|
||||||||||||||||||
|
Net
interest income
|
1,229
|
1,491
|
22
|
5
|
41
|
(55
|
)
|
1,292
|
1,441
|
||||||||||||||||
|
Other
income
|
2,319
|
2,045
|
97
|
57
|
137
|
160
|
2,553
|
2,262
|
|||||||||||||||||
|
Total
revenues
|
3,548
|
3,536
|
119
|
62
|
178
|
105
|
3,845
|
3,703
|
|||||||||||||||||
|
Operating
expenses
|
2,410
|
2,325
|
92
|
105
|
86
|
69
|
2,588
|
2,499
|
|||||||||||||||||
|
Contribution
|
1,138
|
1,211
|
27
|
(43
|
)
|
92
|
36
|
1,257
|
1,204
|
||||||||||||||||
|
Provision
for credit losses
|
77
|
33
|
-
|
-
|
-
|
-
|
77
|
33
|
|||||||||||||||||
|
Income
before income
|
|||||||||||||||||||||||||
|
taxes
and non-controlling interest
|
1,061
|
1,178
|
27
|
(43
|
)
|
92
|
36
|
1,180
|
1,171
|
||||||||||||||||
|
Income
taxes
|
269
|
294
|
4
|
(5
|
)
|
4
|
2
|
277
|
291
|
||||||||||||||||
|
Non-controlling
interest
|
1
|
(6
|
)
|
28
|
31
|
3
|
-
|
32
|
25
|
||||||||||||||||
|
791
|
890
|
(5
|
)
|
(69
|
)
|
85
|
34
|
871
|
855
|
||||||||||||||||
|
Average
assets
|
92,000
|
80,224
|
3,655
|
3,779
|
10,618
|
6,899
|
106,273
|
90,902
|
|||||||||||||||||
26 Acquisition
Credigy
Ltd.
On
July
26, 2006, a subsidiary of the Bank acquired a 68% interest in Credigy Ltd.,
a
privately held purchaser of and service-provider for distressed receivables
of,
mainly, U.S. consumers, for a total cash consideration of $57 million,
including
direct acquisition costs.
The
assets acquired totalled $109 million while the liabilities assumed, including
non-controlling interest, were $73 million. The excess of the purchase
price
over the fair value of net assets of $21 million was recognized in the
Consolidated Balance Sheet as goodwill. This amount could be adjusted after
the
Bank has completed its valuation of assets acquired and liabilities
assumed.
Additional
cash consideration of up to $19 million could be paid over the next three
years
provided certain profitability targets are achieved and, if applicable,
would be
recognized as goodwill.
Credigy’s
results have been recognized in the Consolidated Statement of Income as
of the
July 26, 2006 acquisition date.
27
Reconciliation of Canadian and United States GAAP
The
consolidated financial statements of the Bank were prepared in accordance
with
Canadian GAAP. The principal differences on net income and on the Consolidated
Balance Sheet resulting from the application of U.S. GAAP are presented
below.
Under U.S. GAAP, a Consolidated Statement of Comprehensive Income is
also
required.
|
2006
|
|
2005
|
|||||
|
Net
income per Canadian GAAP
|
871
|
855
|
|||||
|
Charge
for other-than-temporary impairment
|
(5
|
)
|
(4
|
)
|
|||
|
Investment
account securities
|
(11
|
)
|
72
|
||||
|
Derivatives
and hedging
|
3
|
(9
|
)
|
||||
|
Limited
partnerships
|
11
|
-
|
|||||
|
Income
tax effect on above items
|
-
|
(19
|
)
|
||||
|
Net
income per U.S. GAAP
|
869
|
895
|
|||||
|
Net
earnings per common share - U.S. GAAP
|
|||||||
|
Basic
|
$
|
5.21
|
$
|
5.22
|
|||
|
Diluted
|
$
|
5.12
|
$
|
5.15
|
|||
|
Consolidated
Statement of Comprehensive Income
|
|||||||
|
2006
|
|
2005
|
|||||
|
Net
income per U.S. GAAP
|
869
|
895
|
|||||
|
Other
comprehensive income
|
|||||||
|
Change
in unrealized gains and losses on securities available for
sale, net of
income taxes (income tax savings) of $20 (2005: $(30))
|
36
|
(59
|
)
|
||||
|
Change
in gains and losses on derivatives designated as cash flow
hedges, net of
income tax savings of $(18) (2005: $(19))
|
(40
|
)
|
(43
|
)
|
|||
|
Minimum
pension liability adjustment, net of income tax savings of
$(4)
|
(7
|
)
|
-
|
||||
|
(66
|
)
|
(16
|
)
|
||||
|
Comprehensive
income
|
792
|
777
|
|||||
Consolidated
Condensed Balance Sheet
|
|
|
|
2006
|
|
|
2005
|
|||||||||||||
|
|
Canadian
|
|
U.S.
|
Canadian
|
|
U.S.
|
|||||||||||||
|
|
GAAP
|
Variation
|
GAAP
|
GAAP
|
Variation
|
GAAP
|
|||||||||||||
|
Assets
|
|
|
|
|
|
|
|||||||||||||
|
Cash
and deposits with financial institutions
|
10,879
|
(3
|
)
|
10,876
|
10,314
|
(29
|
)
|
10,285
|
|||||||||||
|
Securities
|
|||||||||||||||||||
|
Investment
account/available for sale
|
6,814
|
103
|
6,917
|
6,869
|
74
|
6,943
|
|||||||||||||
|
Trading
account
|
31,864
|
(2,387
|
)
|
29,477
|
26,183
|
634
|
26,817
|
||||||||||||
|
Securities
purchased under
|
|||||||||||||||||||
|
reverse
repurchase agreements
|
7,592
|
-
|
7,592
|
7,023
|
-
|
7,023
|
|||||||||||||
|
Loans
|
46,763
|
-
|
46,763
|
44,069
|
-
|
44,069
|
|||||||||||||
|
Premises
and equipment
|
383
|
-
|
383
|
355
|
-
|
355
|
|||||||||||||
|
Goodwill
|
683
|
22
|
705
|
662
|
22
|
684
|
|||||||||||||
|
Other
assets
|
11,907
|
3,632
|
15,539
|
12,495
|
1,419
|
13,914
|
|||||||||||||
|
Total
assets
|
116,885
|
1,367
|
118,252
|
107,970
|
2,120
|
110,090
|
|||||||||||||
|
|
|||||||||||||||||||
|
Liabilities
|
|||||||||||||||||||
|
Deposits
|
71,989
|
(2
|
)
|
71,987
|
62,219
|
10
|
62,229
|
||||||||||||
|
Other
liabilities
|
38,083
|
1,238
|
39,321
|
39,565
|
1,934
|
41,499
|
|||||||||||||
|
Subordinated
debentures
|
1,449
|
18
|
1,467
|
1,102
|
55
|
1,157
|
|||||||||||||
|
Non-controlling
interest
|
576
|
-
|
576
|
487
|
-
|
487
|
|||||||||||||
|
Total
liabilities
|
112,097
|
1,254
|
113,351
|
103,373
|
1,999
|
105,372
|
|||||||||||||
|
|
|||||||||||||||||||
|
Shareholders’
equity
|
|||||||||||||||||||
|
Preferred
shares
|
400
|
(7
|
)
|
393
|
400
|
-
|
400
|
||||||||||||
|
Common
shares
|
1,566
|
24
|
1,590
|
1,565
|
24
|
1,589
|
|||||||||||||
|
Contributed
surplus
|
21
|
-
|
21
|
13
|
-
|
13
|
|||||||||||||
|
Unrealized
foreign currency translation adjustments
|
(92
|
)
|
92
|
-
|
(26
|
)
|
26
|
-
|
|||||||||||
|
Retained
earnings
|
2,893
|
42
|
2,935
|
2,645
|
33
|
2,678
|
|||||||||||||
|
Accumulated
other comprehensive income
|
-
|
(38
|
)
|
(38
|
)
|
-
|
38
|
38
|
|||||||||||
|
Total
shareholders’ equity
|
4,788
|
113
|
4,901
|
4,597
|
121
|
4,718
|
|||||||||||||
|
Total
liabilities and shareholders’ equity
|
116,885
|
1,367
|
118,252
|
107,970
|
2,120
|
110,090
|
|||||||||||||
Impairment
charge
Under
Canadian GAAP, unless compelling evidence is provided to indicate otherwise,
a
decrease in the value of an investment is considered an other-than-temporary
impairment when the carrying value exceeds the market value for a prolonged
period. The factors indicative of an impairment that is other than temporary
under Canadian GAAP differ from those under U.S. GAAP as regards the period
during which the carrying value may exceed the market value before it must
be
concluded that the decrease in value is an other-than-temporary impairment.
This
period is significantly shorter under U.S. GAAP. Lastly, under U.S. GAAP,
when
there has been a loss in value of an investment that is other than a temporary
decline, the investment should be written down to fair value, based on
market
prices.
Investment
account securities
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 unamortized cost). Unrealized gains and losses on securities available
for sale, net of income taxes, are presented separately in “Accumulated other
comprehensive income” under “Shareholders’ equity,” while the change in
unrealized gains and losses, net of income taxes, is recorded in the
Consolidated Statement of Comprehensive Income. Under U.S. GAAP, the Bank
records substantially all investment account securities as available for
sale.
Under
Canadian GAAP, unrealized foreign currency translation gains and losses
for
monetary investment account securities are 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 investment
account securities available for sale described above.
Furthermore,
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. Under Canadian GAAP,
securities sold short that are used in hedging relationships are recorded
at
unamortized cost. Gains and losses realized on these securities are included
in
the Consolidated Statement of Income concurrently with the gains and losses
on
the hedged items.
Derivative
financial instruments
Under
Canadian and U.S. GAAP, derivatives used in sales or trading activities
as well
as instruments that do not qualify for hedge accounting are recorded on
the
Consolidated Balance Sheet at fair value.
Under
the
U.S. standard, all derivatives are recognized at fair value on the Consolidated
Balance Sheet as an asset or liability. The Canadian and U.S. accounting
treatments for derivatives held for sale or trading are therefore the same.
However,
the Canadian and U.S. accounting treatments for derivatives held for hedging
purposes differ. In accordance with the U.S. standard, changes in the fair
value
of derivatives designated as fair value hedges are recorded in income and
are
generally offset by changes in the fair value of the hedged items attributable
to the hedged risk. With respect to derivatives designated as cash flow
hedges,
the effective portion of the changes in fair value is recorded as a separate
component of comprehensive income in the Consolidated Statement of Comprehensive
Income and is reclassified in the Consolidated Statement of Income in the
period
or periods during which the hedged items are recognized in the Consolidated
Statement of Income. The ineffective portion of the changes in fair value
of a
hedging item is always recognized in the Consolidated Statement of
Income.
Minimum
pension liability
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 in the Consolidated Balance
Sheet.
If an additional liability is required to be recognized, an amount up to
the
amount of unamortized prior service cost is recognized as an intangible
asset,
and the excess is recorded, net of income taxes, under “Other comprehensive
income.”
Securities
lending
Under
U.S. GAAP (FASB Interpretation 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 whereas under Canadian GAAP, these investments are recorded using
proportionate consolidation. If U.S. GAAP had been applied, other liabilities,
other assets, investment account securities and cash would have decreased
and
the investment in the joint venture would have increased; there would have
been
no impact on net income.
Accounting
for client trades - brokerage activities
Under
Canadian GAAP, securities trades for which the Bank acts as agent for its
brokerage clients are recorded on a trade date basis in the Consolidated
Balance
Sheet. Under U.S. GAAP, these trades must be 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.
Limited
partnerships
Under
Canadian GAAP, certain 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.
|
As
at October 31
|
2006
|
|
2005
|
|
2004
|
|
2003
|
|
2002
|
|
2001
|
|
2000
|
|
1999
|
|
1998
|
|
1997
|
||||||||||||
|
Consolidated
balance sheet data
|
|||||||||||||||||||||||||||||||
|
(millions
of dollars)
|
|||||||||||||||||||||||||||||||
|
Cash
and deposits with financial institutions
|
$
|
10,879
|
$
|
10,314
|
$
|
5,777
|
$
|
7,047
|
$
|
6,864
|
$
|
5,832
|
$
|
5,655
|
$
|
3,561
|
$
|
4,852
|
$
|
4,476
|
|||||||||||
|
Securities
|
38,678
|
33,052
|
28,007
|
26,179
|
20,118
|
17,872
|
16,835
|
16,932
|
15,439
|
(5)
|
10,010
|
||||||||||||||||||||
|
Securities
purchased under reverse repurchase agreements
|
7,592
|
7,023
|
4,496
|
3,955
|
2,366
|
4,041
|
5,397
|
3,480
|
4,947
|
9,155
|
|||||||||||||||||||||
|
Loans
|
46,763
|
44,069
|
41,498
|
38,381
|
38,446
|
40,351
|
41,342
|
40,411
|
40,560
|
(5)
|
38,104
|
||||||||||||||||||||
|
Customers’
liability under acceptances
|
3,725
|
3,242
|
3,076
|
3,334
|
2,988
|
3,593
|
3,640
|
2,962
|
2,658
|
2,273
|
|||||||||||||||||||||
|
Premises
and equipment
|
|||||||||||||||||||||||||||||||
|
and
other assets
|
9,248
|
10,270
|
5,643
|
5,730
|
5,249
|
4,277
|
2,958
|
2,455
|
2,207
|
2,217
|
|||||||||||||||||||||
|
Total
assets
|
$
|
116,885
|
$
|
107,970
|
$
|
88,497
|
$
|
84,626
|
$
|
76,031
|
$
|
75,966
|
$
|
75,827
|
$
|
69,801
|
$
|
70,663
|
$
|
66,235
|
|||||||||||
|
Deposits
|
$
|
71,989
|
$
|
62,219
|
$
|
53,432
|
$
|
51,463
|
$
|
51,690
|
$
|
51,436
|
$
|
50,473
|
$
|
49,984
|
$
|
48,026
|
$
|
43,270
|
|||||||||||
|
Other
liabilities
|
38,659
|
40,052
|
29,453
|
27,550
|
18,848
|
18,767
|
20,165
|
15,481
|
18,976
|
19,136
|
|||||||||||||||||||||
|
Subordinated
debentures
|
1,449
|
1,102
|
1,408
|
1,516
|
1,592
|
1,647
|
1,361
|
1,035
|
966
|
1,069
|
|||||||||||||||||||||
|
Capital
stock
|
|||||||||||||||||||||||||||||||
|
Preferred
|
400
|
400
|
375
|
375
|
300
|
492
|
492
|
317
|
317
|
376
|
|||||||||||||||||||||
|
Common
|
1,566
|
1,565
|
1,545
|
1,583
|
1,639
|
1,668
|
1,653
|
1,641
|
1,327
|
1,309
|
|||||||||||||||||||||
|
Contributed
surplus
|
21
|
13
|
7
|
2
|
-
|
-
|
-
|
-
|
-
|
-
|
|||||||||||||||||||||
|
Unrealized
foreign currency translation adjustments
|
(92
|
)
|
(26
|
)
|
(10
|
)
|
6
|
17
|
19
|
11
|
7
|
|
(16 | ) | (2 | ) | |||||||||||||||
|
Retained
earnings
|
2,893
|
2,645
|
2,287
|
2,131
|
1,945
|
1,937
|
1,672
|
1,336
|
1,067
|
1,077
|
|||||||||||||||||||||
|
Total
liabilities and shareholders’ equity
|
$
|
116,885
|
$
|
107,970
|
$
|
88,497
|
$
|
84,626
|
$
|
76,031
|
$
|
75,966
|
$
|
75,827
|
$
|
69,801
|
$
|
70,663
|
$
|
66,235
|
|||||||||||
|
Average
assets
|
$
|
106,273
|
$
|
90,902
|
$
|
78,672
|
$
|
71,810
|
$
|
69,292
|
$
|
69,197
|
$
|
69,840
|
$
|
65,784
|
$
|
65,873
|
$
|
55,685
|
|||||||||||
|
Average
capital funds(1)
|
5,568
|
5,268
|
5,238
|
5,216
|
5,249
|
5,020
|
4,660
|
3,512
|
3,886
|
3,744
|
|||||||||||||||||||||
|
Consolidated
income statement data
|
|||||||||||||||||||||||||||||||
|
(millions
of dollars)
|
|||||||||||||||||||||||||||||||
|
Net
interest income
|
$
|
1,292
|
$
|
1,441
|
$
|
1,363
|
$
|
1,311
|
$
|
1,444
|
$
|
1,338
|
$
|
1,190
|
$
|
1,187
|
$
|
1,209
|
$
|
1,235
|
|||||||||||
|
Other
income
|
2,553
|
2,262
|
2,182
|
2,051
|
1,584
|
1,789
|
1,878
|
1,232
|
1,108
|
1,030
|
|||||||||||||||||||||
|
Total
revenues
|
$
|
3,845
|
$
|
3,703
|
$
|
3,545
|
$
|
3,362
|
$
|
3,028
|
$
|
3,127
|
$
|
3,068
|
$
|
2,419
|
$
|
2,317
|
$
|
2,265
|
|||||||||||
|
Provision
for credit losses
|
77
|
33
|
86
|
177
|
490
|
205
|
184
|
170
|
147
|
280
|
|||||||||||||||||||||
|
Operating
expenses
|
2,588
|
2,499
|
2,388
|
2,257
|
2,040
|
1,989
|
2,120
|
1,615
|
1,535
|
1,451
|
|||||||||||||||||||||
|
Income
taxes
|
277
|
291
|
318
|
277
|
150
|
278
|
239
|
213
|
239
|
209
|
|||||||||||||||||||||
|
Non-controlling
interest
|
32
|
25
|
28
|
27
|
30
|
28
|
26
|
32
|
31
|
16
|
|||||||||||||||||||||
|
Income
before discontinued operations and
goodwill charges
|
$
|
871
|
$
|
855
|
$
|
725
|
$
|
624
|
$
|
318
|
$
|
627
|
$
|
499
|
$
|
389
|
$
|
365
|
$
|
309
|
|||||||||||
|
Discontinued
operations
|
-
|
-
|
-
|
-
|
111
|
(45
|
)
|
29
|
36
|
24
|
42
|
||||||||||||||||||||
|
Goodwill
charges
|
-
|
-
|
-
|
-
|
-
|
19
|
19
|
8
|
73
|
9
|
|||||||||||||||||||||
|
Net
income
|
$
|
871
|
$
|
855
|
$
|
725
|
$
|
624
|
$
|
429
|
$
|
563
|
$
|
509
|
$
|
417
|
$
|
316
|
$
|
342
|
|||||||||||
|
As
at October 31
|
2006
|
|
2005
|
|
2004
|
|
2003
|
|
2002
|
|
2001
|
|
2000
|
|
1999
|
|
1998
|
|
1997
|
||||||||||||
|
Number
of common shares
|
|||||||||||||||||||||||||||||||
|
(thousands)
|
161,512
|
165,335
|
167,430
|
174,620
|
182,596
|
190,331
|
189,474
|
188,729
|
171,616
|
170,461
|
|||||||||||||||||||||
|
Number
of common shareholders of record
|
25,531
|
26,235
|
26,961
|
27,865
|
28,549
|
29,766
|
30,795
|
32,048
|
32,902
|
34,433
|
|||||||||||||||||||||
|
Basic
earnings per share before goodwill charges
|
$
|
5.22
|
$
|
4.98
|
$
|
4.10
|
$
|
3.37
|
$
|
2.18
|
$
|
2.88
|
$
|
2.65
|
$
|
2.28
|
$
|
2.12
|
$
|
1.92
|
|||||||||||
|
Diluted
earnings per share
|
$
|
5.13
|
$
|
4.90
|
$
|
4.05
|
$
|
3.34
|
$
|
2.18
|
$
|
2.78
|
$
|
2.54
|
$
|
2.24
|
$
|
1.69
|
$
|
1.86
|
|||||||||||
|
Dividend
per share
|
$
|
1.96
|
$
|
1.72
|
$
|
1.42
|
$
|
1.08
|
$
|
0.93
|
$
|
0.82
|
$
|
0.75
|
$
|
0.70
|
$
|
0.66
|
$
|
0.575
|
|||||||||||
|
Stock
trading range
|
|||||||||||||||||||||||||||||||
|
High
|
$
|
65.60
|
$
|
61.47
|
$
|
48.78
|
$
|
41.19
|
$
|
34.93
|
$
|
31.00
|
$
|
25.25
|
$
|
26.20
|
$
|
31.25
|
$
|
20.30
|
|||||||||||
|
Low
|
$
|
56.14
|
$
|
46.39
|
$
|
40.17
|
$
|
29.95
|
$
|
24.70
|
$
|
23.00
|
$
|
16.40
|
$
|
17.15
|
$
|
20.10
|
$
|
13.20
|
|||||||||||
|
Close
|
$
|
61.25
|
$
|
59.14
|
$
|
48.78
|
$
|
40.91
|
$
|
29.39
|
$
|
24.25
|
$
|
24.95
|
$
|
17.90
|
$
|
23.05
|
$
|
20.15
|
|||||||||||
|
Book
value
|
$
|
27.17
|
$
|
25.39
|
$
|
22.87
|
$
|
21.32
|
$
|
19.72
|
$
|
19.04
|
$
|
17.60
|
$
|
15.81
|
$
|
13.86
|
$
|
13.99
|
|||||||||||
|
Dividends
on preferred shares
|
|||||||||||||||||||||||||||||||
|
Series
5
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
3.9531
|
3.3670
|
|||||||||||||||||||||
|
Series
7
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
1.0306
|
0.8777
|
|||||||||||||||||||||
|
Series
8
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
0.9883
|
0.8417
|
|||||||||||||||||||||
|
Series
10
|
-
|
-
|
-
|
-
|
-
|
2.1875
|
2.1875
|
2.1875
|
2.1875
|
2.1875
|
|||||||||||||||||||||
|
Series
11
|
-
|
-
|
-
|
-
|
0.5000
|
2.0000
|
2.0000
|
2.0000
|
2.0000
|
2.0000
|
|||||||||||||||||||||
|
Series
12
|
-
|
-
|
-
|
0.8125
|
1.6250
|
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
|
1.1480
|
-
|
-
|
-
|
-
|
-
|
-
|
|||||||||||||||||||||
|
Series
16
|
1.2125
|
0.8089
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
|||||||||||||||||||||
|
Financial
ratios
|
|||||||||||||||||||||||||||||||
|
Return
on common shareholders’ equity before good will charges
|
20.1
|
%
|
20.7
|
%
|
18.8
|
%
|
16.5
|
%
|
11.3
|
%
|
16.0
|
%
|
16.0
|
%
|
15.5
|
%
|
14.6
|
%
|
14.5
|
%
|
|||||||||||
|
Return
on average assets
|
0.82
|
%
|
0.94
|
%
|
0.92
|
%
|
0.87
|
%
|
0.62
|
%
|
0.80
|
%
|
0.73
|
%
|
0.62
|
%
|
0.51
|
%
|
0.62
|
%
|
|||||||||||
|
Return
on average capital funds
|
15.6
|
%
|
16.2
|
%
|
13.8
|
%
|
11.9
|
%
|
9.5
|
%
|
12.5
|
%
|
12.4
|
%
|
13.2
|
%
|
9.3
|
%
|
10.5
|
%
|
|||||||||||
|
Capital
ratios - BIS
|
|||||||||||||||||||||||||||||||
|
Tier
1
|
9.9
|
%
|
9.6
|
%
|
9.6
|
%
|
9.6
|
%
|
9.6
|
%
|
9.6
|
%
|
8.7
|
%
|
7.7
|
%
|
7.7
|
%
|
8.1
|
%
|
|||||||||||
|
Total
|
14.0
|
%(4)
|
12.8
|
%(3)
|
13.0
|
%
|
13.4
|
%
|
13.6
|
%
|
13.1
|
%
|
11.4
|
%
|
11.0
|
%(2)
|
10.7
|
%
|
11.3
|
%
|
|||||||||||
|
Other
information
|
|||||||||||||||||||||||||||||||
|
Impaired
loans
|
|||||||||||||||||||||||||||||||
|
(millions
of dollars)
|
$
|
116
|
$
|
117
|
$
|
160
|
$
|
251
|
$
|
246
|
$
|
591
|
$
|
544
|
$
|
543
|
$
|
547
|
$
|
497
|
|||||||||||
|
Number
of Bank employees
|
|||||||||||||||||||||||||||||||
|
In
Canada
|
11,073
|
11,342
|
11,074
|
11,328
|
11,287
|
11,676
|
11,050
|
11,744
|
11,641
|
11,245
|
|||||||||||||||||||||
|
Outside
Canada
|
131
|
138
|
128
|
132
|
155
|
351
|
407
|
431
|
400
|
406
|
|||||||||||||||||||||
|
National
Bank Financial
|
3,177
|
2,892
|
2,920
|
2,868
|
3,147
|
2,294
|
2,419
|
2,489
|
1,895
|
1,676
|
|||||||||||||||||||||
|
Branches
in Canada
|
451
|
457
|
462
|
477
|
507
|
525
|
586
|
649
|
646
|
641
|
|||||||||||||||||||||
|
Banking
machines
|
801
|
788
|
770
|
817
|
826
|
834
|
802
|
761
|
744
|
738
|
|||||||||||||||||||||
| (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)
|
These
figures have been restated to include mortgage-backed securities
held by
the Bank. Figures prior to fiscal 1998 have not been
restated.
|
Principal
Subsidiaries
|
|
Voting
and
|
Investment
|
|||||
|
|
Principal
|
participating
|
value
at cost(2)
|
||||
|
Name
|
office
address(1)
|
shares
|
(millions
of dollars)
|
||||
|
National
Bank Acquisition Holding Inc.
|
Montreal,
Canada
|
100%
|
1,669
|
||||
|
National
Bank Life Insurance Company
|
Montreal,
Canada
|
|
100%
|
58
|
|||
|
National
Bank Insurance Firm Inc.
|
Montreal,
Canada
|
100%
|
7
|
||||
|
NBC
Financial (UK) Ltd.(3)
|
London,
United Kingdom
|
100%
|
88
|
||||
|
1261095
Ontario Limited
|
Toronto,
Canada
|
100%
|
79
|
||||
|
National
Bank Securities Inc.
|
Montreal,
Canada
|
100%
|
25
|
||||
|
Natcan
Investment Management Inc.
|
Montreal,
Canada
|
71%
|
14
|
||||
|
National
Bank Group Inc.
|
Montreal,
Canada
|
100%
|
543
|
||||
|
National
Bank Financial & Co. Inc.
|
Montreal,
Canada
|
100%
|
803
|
||||
|
Natcan
Insurance Company Limited
|
Bridgetown,
Barbados
|
100%
|
49
|
||||
|
Natcan
Trust Company
|
Montreal,
Canada
|
100%
|
367
|
||||
|
FMI
Acquisition Inc.
|
Montreal,
Canada
|
100%
|
184
|
||||
|
National
Bank Trust Inc.
|
Montreal,
Canada
|
100%
|
240
|
||||
|
CABN
Investments Inc.
|
Montreal,
Canada
|
100%
|
1
|
||||
|
Natcan
Acquisition Holdings Inc.
|
Montreal,
Canada
|
100%
|
278
|
||||
|
National
Bank Direct Brokerage Inc.
|
Montreal,
Canada
|
100%
|
65
|
||||
|
Altamira
Investment Services Inc.
|
Toronto,
Canada
|
100%
|
208
|
||||
|
Innocap
Investment Management Inc.
|
Montreal,
Canada
|
100%
|
22
|
||||
|
3562719
Canada Inc.
|
Montreal,
Canada
|
100%
|
3
|
||||
|
National
Bank Realty Inc.
|
Montreal,
Canada
|
100%
|
27
|
||||
|
Assurances
générales Banque Nationale (Gestion) Inc.
|
Montreal,
Canada
|
90%
|
15
|
||||
|
National
Bank General Insurance Inc.
|
Montreal,
Canada
|
100%
|
-
|
||||
|
4166540
Canada Inc.
|
Calgary,
Canada
|
100%
|
-
|
||||
|
NBC
Invest Trust
|
Montreal,
Canada
|
100%
|
1,731
|
||||
|
4166558
Canada Inc.
|
Calgary,
Canada
|
100%
|
10
|
||||
|
4166566
Canada Inc.
|
Calgary,
Canada
|
100%
|
-
|
||||
|
Natcan
Holdings International Limited
|
Nassau,
Bahamas
|
100%
|
452
|
||||
|
National
Bank of Canada (International) Limited
|
Nassau,
Bahamas
|
100%
|
212
|
||||
|
National
Bank of Canada (Global) Limited
|
St.
Michael, Barbados
|
100%
|
538
|
||||
|
NB
Capital Corporation
|
New
York, United States
|
100%
|
178
|
||||
|
NB
Finance, Ltd.
|
Hamilton,
Bermuda
|
100%
|
544
|
||||
|
NatBC
Holding Corporation
|
Florida,
United States
|
100%
|
18
|
||||
|
Natbank,
National Association
|
Florida,
United States
|
100%
|
- | ||||
|
NBC
Trade Finance Limited
|
Hong
Kong, China
|
100%
|
-
|
||||
|
NBC
Global Investment Inc.
|
Vancouver,
Canada
|
100%
|
305
|
Principal
Associated Companies
|
|
Voting
and
|
Investment
at
|
|||||
|
|
Principal
|
participating
|
book
value(2)
|
||||
|
Name
|
office
address(1)
|
shares
|
(millions
of dollars)
|
||||
|
Alter
Moneta Trust
|
Montreal,
Canada
|
34.9%
|
40
|
||||
|
Maple
Financial Group Inc.
|
Toronto,
Canada
|
24.8%
|
110
|
| (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, which is 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, 2006.
|
| (3) |
The
subsidiary NBC Financial (UK) Ltd. has ceased operations.
|