REG - Nat Bank of Canada - Financial Statements - Part 2 <Origin Href="QuoteRef">NA.TO</Origin> - Part 1
RNS Number : 1668QNational Bank of Canada27 August 2014National Bank of Canada
27 August 2014
Regulatory Announcement (Part 1)
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INTERIM CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
(unaudited)
Consolidated Balance Sheets
38
Consolidated Statements of Income
39
Consolidated Statements of Comprehensive Income
40
Consolidated Statements of Changes in Equity
41
Consolidated Statements of Cash Flows
42
Notes to the Interim Condensed Consolidated Financial Statements
43
CONSOLIDATED BALANCE SHEETS
(unaudited) (millions of Canadian dollars)
As at July31, 2014
As at October31, 2013(1)
ASSETS
Cash and deposits with financial institutions
5,912
3,596
Securities (Notes 4 and 5)
At fair value through profit or loss
45,632
44,000
Available-for-sale
9,133
9,744
54,765
53,744
Securities purchased under reverse repurchase agreements
and securities borrowed
22,019
21,449
Loans (Note 6)
Residential mortgage
38,663
36,573
Personal and credit card
29,322
27,989
Business and government
27,423
24,400
95,408
88,962
Customers' liability under acceptances
8,584
8,954
Allowances for credit losses
(593)
(578)
103,399
97,338
Other
Derivative financial instruments
6,086
5,904
Due from clients, dealers and brokers
935
1,101
Investments in associates and joint ventures
677
684
Premises and equipment
381
404
Goodwill
1,271
1,064
Intangible assets
1,039
898
Other assets (Note 8)
2,338
2,037
12,727
12,092
198,822
188,219
LIABILITIES AND EQUITY
Deposits (Notes 4 and 9)
Personal
44,657
42,652
Business and government
65,551
57,103
Deposit-taking institutions
4,736
2,356
114,944
102,111
Other
Acceptances
8,584
8,954
Obligations related to securities sold short
16,249
18,909
Obligations related to securities sold under repurchase agreements
and securities loaned
20,344
19,746
Derivative financial instruments
4,370
4,858
Due to clients, dealers and brokers
1,732
2,442
Liabilities related to transferred receivables (Note 4)
16,376
15,323
Other liabilities (Note 10)
4,365
4,497
72,020
74,729
Subordinated debt (Note 11)
1,885
2,426
EQUITY (Notes 13 and 17)
Equity attributable to the Bank's shareholders
Preferred shares
923
677
Common shares
2,237
2,160
Contributed surplus
75
58
Retained earnings
5,660
5,055
Accumulated other comprehensive income
300
214
9,195
8,164
Non-controlling interests (Note 14)
778
789
9,973
8,953
198,822
188,219
The accompanying notes are an integral part of these unaudited interim condensed consolidated financial statements.
(1) Certain amounts have been adjusted to reflect changes in accounting standards. See Note 2.
CONSOLIDATED STATEMENTS OF INCOME
(unaudited) (millions of Canadian dollars)
Quarter ended July31
Nine months ended July31
2014
2013(1)
2014
2013(1)
Interest income
Loans
867
819
2,523
2,417
Securities at fair value through profit or loss
267
265
772
742
Available-for-sale securities
40
52
139
150
Deposits with financial institutions
8
5
20
14
1,182
1,141
3,454
3,323
Interest expense
Deposits
316
258
896
745
Liabilities related to transferred receivables
101
102
295
310
Subordinated debt
19
26
57
77
Other
106
126
303
346
542
512
1,551
1,478
Net interest income
640
629
1,903
1,845
Non-interest income
Underwriting and advisory fees
116
81
284
232
Securities brokerage commissions
83
83
255
255
Mutual fund revenues
65
57
184
163
Trust service revenues
99
81
282
233
Credit fees
104
105
289
299
Card revenues
39
32
99
90
Deposit and payment service charges
59
59
175
174
Trading revenues (losses) (Note 16)
81
(7)
126
148
Gains (losses) on available-for-sale securities, net
21
28
60
70
Insurance revenues, net
27
30
82
91
Foreign exchange revenues, other than trading
20
25
66
68
Share in the net income of associates and joint ventures
20
9
34
21
Other
86
73
261
211
820
656
2,197
2,055
Total revenues
1,460
1,285
4,100
3,900
Provisions for credit losses
49
48
151
133
1,411
1,237
3,949
3,767
Non-interest expenses
Compensation and employee benefits
549
488
1,539
1,415
Occupancy
57
57
168
166
Technology
113
106
326
349
Communications
18
17
51
51
Professional fees
58
58
166
163
Other
84
82
244
235
879
808
2,494
2,379
Income before income taxes
532
429
1,455
1,388
Income taxes
91
27
247
196
Net income
441
402
1,208
1,192
Net income attributable to
Preferred shareholders
11
10
30
32
Common shareholders
412
377
1,127
1,113
Bank shareholders
423
387
1,157
1,145
Non-controlling interests
18
15
51
47
441
402
1,208
1,192
Earnings per share(2)(dollars)(Note 19)
Basic
1.26
1.16
3.44
3.43
Diluted
1.24
1.16
3.41
3.41
Dividends per common share(2)(dollars)
0.48
0.44
1.40
1.26
The accompanying notes are an integral part of these unaudited interim condensed consolidated financial statements.
(1) Certain amounts have been adjusted to reflect changes in accounting standards. See Note 2.
(2) Reflecting the stock dividend paid on February 13, 2014. See Note 13.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(unaudited) (millions of Canadian dollars)
Quarter ended July31
Nine months ended July31
2014
2013(1)
2014
2013(1)
Net income
441
402
1,208
1,192
Other comprehensive income, net of income taxes
Items that may be subsequently reclassified to net income
Net foreign currency translation adjustments
Net unrealized foreign currency translation gains (losses) on investments in foreign operations
(30)
15
46
27
Impact of hedging net foreign currency translation gains (losses)
22
(17)
(38)
(26)
(8)
(2)
8
1
Net change in available-for-sale securities
Net unrealized gains (losses) on available-for-sale securities
26
(40)
93
29
Net (gains) losses on available-for-sale securities reclassified to net income
(20)
(7)
(56)
(32)
6
(47)
37
(3)
Net change in cash flow hedges
Net gains (losses) on derivative financial instruments designated as cash flow hedges
44
(23)
51
(24)
Net (gains) losses on designated derivative financial instruments reclassified to net income
(3)
(7)
(9)
(24)
41
(30)
42
(48)
Item that will not be subsequently reclassified to net income
Actuarial gains and losses on employee benefit plans
(65)
164
(30)
156
Share in the other comprehensive income of associates and joint ventures
Total other comprehensive income, net of income taxes
(26)
85
57
106
Comprehensive income
415
487
1,265
1,298
Comprehensive income attributable to
Bank shareholders
398
474
1,213
1,251
Non-controlling interests
17
13
52
47
415
487
1,265
1,298
income taxes - other comprehensive income
The following table presents the income tax expense or recovery for each component of other comprehensive income.
Quarter ended July31
Nine months ended July31
2014
2013(1)
2014
2013(1)
Net foreign currency translation adjustments
Net unrealized foreign currency translation gains (losses) on investments in foreign operations
(1)
1
2
1
Impact of hedging net foreign currency translation gains (losses)
8
(4)
(10)
(6)
7
(3)
(8)
(5)
Net change in available-for-sale securities
Net unrealized gains (losses) on available-for-sale securities
10
(11)
35
14
Net (gains) losses on available-for-sale securities reclassified to net income
(8)
(5)
(22)
(14)
2
(16)
13
Net change in cash flow hedges
Net gains (losses) on derivative financial instruments designated as cash flow hedges
17
(9)
19
(9)
Net (gains) losses on designated derivative financial instruments reclassified to net income
(1)
(1)
(3)
(9)
16
(10)
16
(18)
Actuarial gains and losses on employee benefit plans
(24)
60
(11)
56
1
31
10
33
The accompanying notes are an integral part of these unaudited interim condensed consolidated financial statements.
(1) Certain amounts have been adjusted to reflect changes in accounting standards. See Note 2.
CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY
(unaudited) (millions of Canadian dollars)
Nine months ended July31
2014
2013(1)
Preferred shares at beginning
677
762
Issuance of Series 28 and 30 preferred shares
350
200
Redemption of Series 15, 24 and 26 preferred shares for cancellation
(104)
(200)
Preferred shares at end
923
762
Common shares at beginning
2,160
2,054
Issuances of common shares
Stock Option Plan
74
79
Other
3
Common shares at end
2,237
2,133
Contributed surplus at beginning
58
58
Stock option expense (Note 17)
11
12
Stock options exercised
(10)
(10)
Other
16
(1)
Contributed surplus at end
75
59
Retained earnings at beginning
5,055
4,091
Net income attributable to the Bank's shareholders
1,157
1,145
Dividends (Note 13)
Preferred shares
(30)
(32)
Common shares
(458)
(410)
Share issuance expenses
(7)
(4)
Actuarial gains and losses on employee benefit plans
(30)
156
Impact of a financial liability resulting from a put option written to a non-controlling interest
(27)
Other
7
Retained earnings at end
5,660
4,953
Accumulated other comprehensive income at beginning
214
255
Net foreign currency translation adjustments
8
1
Net change in unrealized gains (losses) on available-for-sale securities
37
(3)
Net change in gains (losses) on cash flow hedges
41
(48)
Accumulated other comprehensive income at end
300
205
Equity attributable to the Bank's shareholders
9,195
8,112
Non-controlling interests at beginning
789
791
Net income attributable to non-controlling interests
51
47
Other comprehensive income attributable to non-controlling interests
1
Distributions to non-controlling interests
(63)
(65)
Non-controlling interests at end
778
773
Equity
9,973
8,885
accumulated other comprehensive income
As at July31,
2014
As at July31, 2013(1)
Accumulated other comprehensive income
Net foreign currency translation adjustments
2
(11)
Net unrealized gains (losses) on available-for-sale securities
209
161
Net gains (losses) on instruments designated as cash flow hedges
88
53
Share in the other comprehensive income of associates and joint ventures
1
2
300
205
The accompanying notes are an integral part of these unaudited interim condensed consolidated financial statements.
(1) Certain amounts have been adjusted to reflect changes in accounting standards. See Note 2.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited) (millions of Canadian dollars)
Nine months ended July31
2014
2013(1)
Cash flows from operating activities
Net income
1,208
1,192
Adjustments for:
Provisions for credit losses
151
133
Amortization of premises and equipment and intangible assets
121
111
Impairment losses on intangible assets
39
Deferred taxes
30
62
Translation adjustment on foreign currency subordinated debt
1
1
Losses (gains) on sales of available-for-sale securities, net
(66)
(98)
Impairment of available-for-sale securities
6
28
Stock option expense
11
12
Change in operating assets and liabilities:
Securities at fair value through profit or loss
(1,632)
115
Securities purchased under reverse repurchase agreements and securities borrowed
(570)
(5,441)
Loans, net of securitization
(5,458)
(5,274)
Investments in associates and joint ventures
7
(37)
Deposits
11,453
6,916
Obligations related to securities sold short
(2,660)
1,740
Obligations related to securities sold under repurchase agreements
and securities loaned
598
90
Derivative financial instruments, net
(727)
(170)
Due from and to clients, dealers and brokers, net
(207)
932
Interest and dividends receivable and interest payable
(69)
(20)
Current tax assets and liabilities
59
(194)
Other items
(575)
(548)
1,681
(411)
Cash flows from financing activities
Issuance of preferred shares
350
200
Redemption of preferred shares for cancellation
(104)
(200)
Issuance of common shares
67
69
Redemption of subordinated debt
(526)
Share issuance expenses
(7)
(4)
Dividends paid on shares
(471)
(430)
Change in other items
(2)
(164)
(693)
(529)
Cash flows from investing activities
Acquisition of TD Waterhouse Institutional Services (Note 20)
722
Purchases of available-for-sale securities
(4,060)
(4,425)
Sales of available-for-sale securities
4,603
4,320
Net change in premises and equipment
(89)
(123)
Net change in intangible assets
(92)
(86)
1,084
(314)
Impact of currency rate movements on cash and cash equivalents
244
(40)
Increase (decrease) in cash and cash equivalents
2,316
(1,294)
Cash and cash equivalents at beginning
3,596
3,249
Cash and cash equivalents at end(2)
5,912
1,955
Supplementary information about cash flows from operating activities
Interest paid
1,653
1,590
Interest and dividends received
3,487
3,417
Income taxes paid
252
313
The accompanying notes are an integral part of these unaudited interim condensed consolidated financial statements.
(1) Certain amounts have been adjusted to reflect changes in accounting standards. See Note 2.
(2) This item is the equivalent of Consolidated Balance Sheet item Cash and deposits with financial institutions. The Bank is required to maintain balances with central banks and other regulatory authorities. The total of these balances was $206million as at July31, 2014 ($355million as at July31, 2013). In addition, $2million was held in escrow as at July31, 2014($7million as at July31, 2013).
NOTES TO THE INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited) (millions of Canadian dollars)
Note 1
Basis of Presentation
43
Note 12
Hedging Activities
61
Note 2
Accounting Policy Changes
43
Note 13
Share Capital
62
Note 3
Fair Value of Financial Instruments
46
Note 14
Non-Controlling Interests
64
Note 4
Financial Instruments Designated at Fair Value Through Profit or Loss
52
Note 15
Capital Disclosure
64
Note 5
Securities
53
Note 16
Trading Activity Revenues
65
Note 6
Loans
55
Note 17
Share-Based Payments
65
Note 7
Financial Assets Transferred But Not Derecognized
58
Note 18
Employee Benefits
66
Note 8
Other Assets
59
Note 19
Earnings Per Share
67
Note 9
Deposits
59
Note 20
Acquisition
68
Note 10
Other Liabilities
60
Note 21
Structured Entities
68
Note 11
Subordinated Debt
60
Note 22
Segment Disclosures
71
NOTE 1 - Basis of Presentation
On August 26, 2014, the Board of Directors authorized the publication of the Bank's unaudited interim condensed consolidated financial statements (the consolidated financial statements) for the third quarter and nine months ended July31, 2014. The common share information presented in these consolidated financial statements has been retrospectively adjusted to reflect the stock dividend of one common share on each issued and outstanding common share declared on December3, 2013 and paid on February13, 2014. The effect of this stock dividend was the same as a two-for-one split of common shares, as described in Note13.
The Bank's consolidated financial statements have been prepared in accordance with section 308(4)of the Bank Act (Canada), which states that, except as otherwise specified by the Office of the Superintendent of Financial Institutions (Canada) (OSFI), the financial statements are to be prepared in accordance with International Financial Reporting Standards (IFRS), as issued by the International Accounting Standards Board (IASB) and set out in the CPA Canada Handbook. None of the OSFI accounting requirements are exceptions to IFRS.
These consolidated financial statements have been prepared in accordance with IAS 34 -Interim Financial Reporting using the accounting policies described in Note1 to the audited annual consolidated financial statements for the year ended October31, 2013, except for the accounting policy changes described below in Note2. Future accounting policy changes are also presented in Note2. Since these consolidated financial statements do not include all of the annual financial statement disclosures required under IFRS, theyshould be read in conjunction with the audited annual consolidated financial statementsand accompanying notes for the year ended October31, 2013.
The consolidated financial statements are presented in Canadian dollars, which is the Bank's functional and presentation currency.
NOTE 2 - ACCOUNTING POLICY CHANGES
Effective Date - November 1, 2013
As required by the IASB, on November 1, 2013, the Bank adopted the following new or amended accounting standards.
IAS 19 Employee Benefits
In June 2011, the IASB issued an amended version of IAS 19, introducing significant changes to the accounting of employee benefits, primarily for defined benefit pension plans. The main changes to the revised standard are as follows:
- The expected return on plan assets is no longer used in calculating the pension plan expense. The discount rate used to measure the accrued benefit obligation must also be used to measure the return on plan assets.
- Past service costs are recognized when a plan is amended, with no deferral over the vesting period.
- Additional annual disclosure is to be provided regarding the characteristics of defined benefit plans and the risks to which entities are exposed by participating in those plans.
- The revised standard requires that all actuarial gains and losses be immediately recognized in Other comprehensive income. The recognition of actuarial gains and losses can no longer be deferred. This last amendment has no impact on the Bank since it already recognizes actuarial gains and losses in Other comprehensive income.
The requirements of the amended version of IAS 19 have been applied retrospectively. The impacts of adopting the amendments on the Consolidated Balance Sheet as at October31, 2013 are presented below. There is no impact on the Consolidated Balance Sheet as at November 1, 2012.
As at October31, 2013
Consolidated Balance Sheet
Increase in Other assets
15
Decrease in Other liabilities
6
Increase in Retained earnings
21
NOTE 2 - ACCOUNTING POLICY CHANGES (cont.)
Retrospective adoption of the changes had the following impacts on the Consolidated Statement of Income and the Consolidated Statement of Comprehensive Income for the third quarter and nine months ended July31, 2013.
Quarter ended July31, 2013
Nine months ended July31, 2013
Consolidated Statements of Income and Comprehensive Income
Increase in Compensation and employee benefits
(19)
(22)
(1)
Decrease in Income taxes
5
6
Decrease in Net income
(14)
(16)
Increase in Other comprehensive income - Actuarial gains and losses on employee benefit plans
13
38
Increase (decrease) in Comprehensive income
(1)
22
Decrease in earnings per share (dollars)
Basic
(0.04)
(0.05)
Diluted
(0.04)
(0.05)
(1) This amount includes a $35million decrease in past service costs, less a $4.5million reduction recorded under the previous IAS 19, resulting from changes that had been made to provisions in the Bank's pension plans and other post-retirement plans in the first quarter of 2013.
IFRS 10 - Consolidated Financial Statements
IFRS 10 replaces the consolidation guidance in IAS 27 - Consolidated and Separate Financial Statements and in interpretation SIC-12 - Consolidation - Special Purpose Entities, by establishing a single consolidation model based on control for all interests held in all types of entities (investees). According to IFRS 10, control is based on the concepts of decision-making authority regarding the investee's relevant activities, exposure or rights to variable returns from its involvement with the investee, and the ability to use its power to affect the amount of returns. An entity must consolidate the entities it controls and present consolidated financial statements.
The Bank retrospectively adopted IFRS 10, the impact of which is the deconsolidation of NBC Capital Trust (the Trust). Under IFRS 10, the Bank does not control the Trust because the Bank's interest does not expose it to variable returns. The Bank's earnings per share has not been affected. The impacts of the deconsolidation are as follows:
- A $225million increase in Deposits on the Consolidated Balance Sheet as at October31, 2013 and as at November 1, 2012, representing the Trust's deposit note.
- A $229million decrease in Non-controlling interests on the Consolidated Balance Sheet as at October31, 2013 and as at November 1, 2012, representing the trust units issued by the Trust.
- A $4million increase in Other liabilities on the Consolidated Balance Sheet as at October31, 2013 and as at November 1, 2012, representing accrued interest payable on the deposit note.
- Decreases in Net income and equivalent decreases in Non-controlling interests of $3million and $9million on the Consolidated Statement of Income for the third quarter and nine-month period ended July31, 2013, respectively.
IFRS 7 - Financial Instruments: Disclosures
The amendments to IFRS 7 require disclosure about legally enforceable rights of set-off for financial instruments under master netting agreements or similar arrangements. The Bank retrospectively adopted these amendments, which had no impact on its results or financial position since the standard only affects disclosures. The required IFRS 7 disclosure amendments will be presented in the audited annual consolidated financial statements as at October31, 2014.
IFRS 11 - Joint Arrangements
IFRS 11- Joint Arrangements replaces IAS 31- Interests in Joint Venturesand SIC-13- Jointly Controlled Entities - Non-Monetary Contributions by Venturers. Under IFRS 11, a joint arrangement is an arrangement in which two or more parties have joint control. Joint control means the contractually agreed sharing of control of an arrangement, which exists only when decisions about the relevant activities require the unanimous consent of the parties sharing control. Under IFRS 11, a joint arrangement must be classified as either a joint operation or a joint venture, depending on an assessment of the rights and obligations of the parties to the arrangement.
A joint operation is a joint arrangement wherein joint operators have rights to the assets and obligations for the liabilities. A joint operator shall account for the assets, liabilities, revenues and expenses relating to its interest in a joint operation in accordance with the IFRS standards applicable to the particular assets, liabilities, revenues and expenses. A joint venture is a joint arrangement wherein the joint venturers have rights to the net assets of the arrangement. A joint venturer accounts for its interest in a joint venture using the equity method.
The Bank retrospectively adopted IFRS 11 and concluded that the joint arrangements in which it has rights constitute joint ventures. Since these investments had already been accounted for using the equity method under IAS 31, there was no impact on the Bank's consolidated financial statements.
IFRS 12 - Disclosure of Interests in Other Entities
IFRS 12 applies to entities that hold interests in subsidiaries, joint arrangements, associates and non-consolidated structured entities. It requires additional disclosure that enables financial statement users to assess the nature of, and risks associated with, an entity's interests in other entities and the effects of those interests on the entity's financial position, financial performance and cash flows. The Bank retrospectively adopted IFRS 12, and the required disclosures will be presented in the audited annual consolidated financial statements as at October31, 2014. However, certain disclosures related to structured entities are presented in these consolidated financial statements.
IFRS 13 - Fair Value Measurement
IFRS 13 defines fair value, sets out in a single standard a framework for measuring fair value and requires disclosures about fair value measurements. Prospective adoption of this standard did not have a significant impact on the Bank's consolidated financial statements. The required quarterly disclosures are presented in the consolidated financial statements; the additional annual disclosures required will be presented in the audited annual consolidated financial statements as at October31, 2014.
Effective Date - November 1, 2014
IAS 32 - Financial Instruments: Presentation
IAS 32 was amended to clarify the requirements for offsetting financial assets and financial liabilities in order to reduce inconsistencies in current practice. The Bank is currently assessing the impact these amendments will have on the consolidated financial statements.
IFRIC Interpretation 21 - Levies
IFRIC Interpretation 21 (IFRIC 21) provides guidance on when to recognize a liability to pay a levy imposed by a government that is accounted for in accordance with IAS 37 - Provisions, ContingentLiabilities and Contingent Assets. IFRIC 21 is to be applied retrospectively and the Bank is currently assessing the impact of adopting this interpretation.
Effective Date - November 1, 2017
IFRS 15 - Revenue from Contracts with Customers
In May 2014, the IASB issued a new standard, IFRS 15, which replaces the current revenue recognition standards and interpretations. IFRS 15 provides a single comprehensive model to use when accounting for revenue arising from contracts with customers. The new model applies to all contracts with customers except those that are within the scope of other IFRS standards such as leases, insurance contracts and financial instruments. IFRS 15 is to be applied retrospectively, and the Bank is currently assessing the impact of adopting this standard.
Effective Date - November 1, 2018
IFRS 9 - FinancialInstruments
In July 2014, the IASB issued a complete and final version of IFRS 9, which replaces the current standard on financial instruments. IFRS 9 sets out requirements for the classification and measurement of financial assets and financial liabilities, for the impairment of financial assets, and for general hedge accounting. Macro hedge accounting has been decoupled from IFRS 9 and will be considered and issued as a separate standard. IFRS 9 provides a single model for financial asset classification and measurement that is based on contractual cash flow characteristics and on the business model for holding financial assets. With respect to measuring financial liabilities designated at fair value through profit or loss, the standard prescribes that fair value changes attributable to an entity's own credit risk be accounted for in Other comprehensive income unless they offset amounts recognized in Net income. The IASB and OSFI are permitting early adoption of these new requirements for recognizing changes in an entity's own credit risk.
IFRS 9 also introduces a new impairment model for financial assets not measured at fair value through profit or loss that requires recognition of expected credit losses rather than incurred losses as applied under the current standard. As for the new hedge accounting model, it provides better alignment of hedge accounting with risk management activities. However, the current hedge accounting requirements may continue to be applied until the IASB finalizes its macro hedge accounting project. In general, IFRS 9 is to be applied retrospectively, and the Bank is currently assessing the impact of adopting this standard.
NOTE 3 - Fair Value of Financial Instruments
Fair Value and Carrying Value of Financial Instruments by Category
Financial assets and financial liabilities are recognized on the Consolidated Balance Sheet at fair value or at amortized cost in accordance with the categories set out in the accounting framework for financial instruments. The Bank did not classify any financial assets as held to maturity.
As at July31, 2014
Carrying value and fair value
Carrying value
Fair value
Total
carrying
value
Total
fair
value
Financial instruments classified
as at fair value through profit or loss
Financial instruments
designated
at fair value
through profit
or loss
Available-
for-sale
Loans
and
receivables
and financial
liabilities at
amortized cost
Loans
and
receivables
and financial
liabilities at
amortized cost
FINANCIAL ASSETS
Cash and deposits with financial
institutions
5,912
5,912
5,912
5,912
Securities
42,943
2,689
9,133
54,765
54,765
Securities purchased under reverse
repurchase agreements and
securities borrowed
415
21,604
21,604
22,019
22,019
Loans and acceptances
2,498
83
100,818
101,575
103,399
104,156
Other
Derivative financial instruments
6,086
6,086
6,086
Due from clients, dealers and brokers
935
935
935
935
Other assets
1,194
1,194
1,194
1,194
FINANCIAL LIABILITIES
Deposits
2,301
112,643
(1)
113,238
114,944
115,539
Other
Acceptances
8,584
8,584
8,584
8,584
Obligations related to securities sold short
16,249
16,249
16,249
Obligations related to securities sold under
repurchase agreements and
securities loaned
20,344
20,344
20,344
20,344
Derivative financial instruments
4,370
4,370
4,370
Due to clients, dealers and brokers
1,732
1,732
1,732
1,732
Liabilities related to transferred receivables
6,175
10,201
10,314
16,376
16,489
Other liabilities
88
2,289
2,289
2,377
2,377
Subordinated debt
1,885
1,913
1,885
1,913
(1) Including embedded derivative financial instruments.
As at October31, 2013(1)
Carrying value and fair value
Carrying value
Fair value
Total
carrying
value
Total
fair
value
Financial instruments classified
as at fair value through profit or loss
Financial instruments
designated
at fair value
through profit
or loss
Available-
for-sale
Loans
and
receivables
and financial
liabilities at
amortized cost
Loans
and
receivables
and financial
liabilities at
amortized cost
FINANCIAL ASSETS
Cash and deposits with financial
institutions
3,596
3,596
3,596
3,596
Securities
40,778
3,222
9,744
53,744
53,744
Securities purchased under reverse
repurchase agreements and
securities borrowed
21,449
21,449
21,449
21,449
Loans and acceptances
1,526
62
95,750
96,323
97,338
97,911
Other
Derivative financial instruments
5,904
5,904
5,904
Due from clients, dealers and brokers
1,101
1,101
1,101
1,101
Other assets
891
891
891
891
FINANCIAL LIABILITIES
Deposits
1,846
100,265
(2)
100,639
102,111
102,485
Other
Acceptances
8,954
8,954
8,954
8,954
Obligations related to securities sold short
18,909
18,909
18,909
Obligations related to securities sold under
repurchase agreements and
securities loaned
19,746
19,746
19,746
19,746
Derivative financial instruments
4,858
4,858
4,858
Due to clients, dealers and brokers
2,442
2,442
2,442
2,442
Liabilities related to transferred receivables
6,819
8,504
8,593
15,323
15,412
Other liabilities
109
2,345
2,345
2,454
2,454
Subordinated debt
2,426
2,450
2,426
2,450
(1) Certain amounts have been adjusted to reflect changes in accounting standards. See Note 2.
(2) Including embedded derivative financial instruments.
Establishing Fair Value
Fair value is established in accordance with a rigorous control framework. The fair value of existing and new products is determined and validated by functions independent of the risk-taking team. Fair value matters are reviewed by valuation committees made up of experts from various support functions.
For financial instruments classified in Level3 of the fair value hierarchy, the Bank has documented the policies and controls in place to ensure that fair value is measured appropriately, reliably and consistently. Valuation methods and assumptions are reviewed on a regular basis.
NOTE 3 - Fair Value of Financial Instruments (cont.)
Hierarchy of Fair Value Measurements
Financial instruments recorded at fair value on the Consolidated Balance Sheet are classified using a fair value hierarchy that reflects the significance of the inputs used in making the measurements. For additional information, see Note 3 to the audited annual consolidated financial statements for the year ended October31, 2013. During the nine-month periods ended July31, 2014 and 2013, there were no significant transfers of financial instruments between Levels1and 2.
As at July31, 2014
Level 1
Level 2
Level 3
Total financial
assets/liabilities
at fair value
Financial assets
Securities
At fair value through profit or loss
Securities issued or guaranteed by
Canada
4,322
5,058
9,380
Provinces
8,234
8,234
Municipalities and school boards
487
487
U.S. Treasury, other U.S. agencies and other foreign governments
1,864
1,864
Other debt securities
3,748
1,212
4,960
Equity securities
19,258
1,416
33
20,707
25,444
18,943
1,245
45,632
Available-for-sale
Securities issued or guaranteed by
Canada
133
4,555
4,688
Provinces
3,142
3,142
Municipalities and school boards
303
303
U.S. Treasury, other U.S. agencies and other foreign governments
128
128
Other debt securities
303
87
390
Equity securities
210
123
149
482
471
8,426
236
9,133
Securities purchased under reverse repurchase agreements and
securities borrowed
415
415
Loans and acceptances
2,581
2,581
Other
Derivative financial instruments
61
5,976
49
6,086
25,976
36,341
1,530
63,847
Financial liabilities
Deposits
2,548
2
2,550
Other
Obligations related to securities sold short
10,705
5,544
16,249
Derivative financial instruments
60
4,241
69
4,370
Liabilities related to transferred receivables
6,175
6,175
Other liabilities
88
88
10,765
18,596
71
29,432
As at October31, 2013
Level 1
Level 2
Level 3
Total financial
assets/liabilities
at fair value
Financial assets
Securities
At fair value through profit or loss
Securities issued or guaranteed by
Canada
5,476
5,080
10,556
Provinces
10,654
10,654
Municipalities and school boards
367
367
U.S. Treasury, other U.S. agencies and other foreign governments
689
689
Other debt securities
2,784
1,305
4,089
Equity securities
15,929
1,670
46
17,645
22,094
20,555
1,351
44,000
Available-for-sale
Securities issued or guaranteed by
Canada
143
5,517
5,660
Provinces
2,617
2,617
Municipalities and school boards
302
302
U.S. Treasury, other U.S. agencies and other foreign governments
390
390
Other debt securities
253
77
330
Equity securities
209
65
171
445
742
8,754
248
9,744
Loans and acceptances
1,588
1,588
Other
Derivative financial instruments
239
5,609
56
5,904
23,075
36,506
1,655
61,236
Financial liabilities
Deposits
1,978
73
2,051
Other
Obligations related to securities sold short
11,415
7,494
18,909
Derivative financial instruments
330
4,454
74
4,858
Liabilities related to transferred receivables
6,819
6,819
Other liabilities
109
109
11,745
20,854
147
32,746
NOTE 3 - Fair Value of Financial Instruments (cont.)
Financial Instruments Classified in Level 3
The Bank classifies financial instruments in Level 3 when the valuation technique is based on at least one significant input that is not observable in the markets or when there is a lack of liquidity in certain markets. The valuation technique may also be based, in part, on observable market inputs. The following table shows the significant unobservable inputs used for the fair value measurements of financial instruments classified in Level 3 of the hierarchy.
As at July31, 2014
Fair
value
Primary valuation techniques
Significant unobservable inputs
Range of input values
Financial assets
Securities
Restructured notes of the master asset vehicle
Liquidity premium(2)(3)
1.50% to 6.70%
(MAV) conduits and other restructured notes
1,272
Internal model(1)
Credit spread(2)(3)
22 Bps to 603 Bps(4)
Equity securities and other debt securities
209
Various(5)
Various(5)
Various(5)
Other
Long-term volatility(6)(7)
13% to 33%
Derivative financial instruments
49
Option pricing model
Long-term correlation(6)(7)
(24)% to 80%
1,530
Financial liabilities
Deposits
Long-term volatility(6)(7)
13% to 24%
Structured deposit notes
2
Option pricing model
Long-term correlation(6)(7)
(4)% to 77%
Other
Long-term volatility(6)(7)
13% to 33%
Derivative financial instruments
69
Option pricing model
Long-term correlation(6)(7)
(24)% to 77%
71
(1) For a description of the valuation techniques, see Note 6 to the audited annual consolidated financial statements for the year ended October31, 2013 and Note 5 to these unaudited interim condensed consolidated financial statements.
(2) There is no predictable correlation between the liquidity premium and the credit spread.
(3) An increase (decrease) in this unobservable input generally results in a decrease (increase) in fair value.
(4) Bps or basis point is a unit of measure equal to 0.01%.
(5) In the absence of an active market, the fair value of these securities is estimated based on an analysis of the investee's financial position and results, risk profile, economic outlook and other factors. Given the nature of the analysis in respect of each investment, it is not practical to quote a range of values for significant unobservable inputs.
(6) An increase (decrease) in long-term volatility is generally associated with an increase (decrease) in long-term correlation.
(7) An increase (decrease) in this unobservable input generally results in an increase (decrease) in fair value.
The Bank performs sensitivity analyses for fair value measurements of financial instruments classified in Level 3, substituting the unobservable inputs with one or more reasonably plausible alternative assumptions. For the sensitivity analysis of investments in restructured notes of the MAV conduits, see Note 5. For private equity securities classified in Available-for-sale securities, the Bank varies significant unobservable market inputs, such as net asset value or projected future cash flows, and establishes a reasonable fair value range that could result in a $17million increase or decrease in the fair value recorded as at July31, 2014 (a $17million increase or decrease as at October31, 2013). For other financial instruments classified in Level 3, sensitivity analyses result in a negligible change in fair value.
Change in the Fair Value of Financial Instruments Classified in Level 3
The Bank may hedge the fair value of financial instruments classified in the various levels through inverse hedge positions. Gains and losses for financial instruments classified in Level 3 presented in the following tables do not reflect the inverse gains and losses on financial instruments used for economic hedging purposes that may have been classified in Level 1 or 2 by the Bank. In addition, the Bank may hedge the fair value of financial instruments classified in Level 3 using other financial instruments classified in Level 3. The effect of these hedges is not included in the net amount presented in the following tables. The gains and losses presented hereafter may therefore comprise changes in fair value based on observable and unobservable inputs.
Nine months ended July31, 2014
Securities
at fair value
through profit
or loss
Available-
for-sale
securities
Loans
Derivative
financial
instruments
(1)
Deposits
Fair value as at October31, 2013
1,351
248
(18)
(73)
Total realized and unrealized gains (losses) included in
Net income(2)
102
6
11
(4)
Total realized and unrealized gains (losses) included in
Other comprehensive income
9
Purchases
9
18
Sales
(206)
(39)
Issuances
1
Settlements and other
(11)
(7)
Transfers into Level 3(3)
1
(9)
(8)
Transfers out of Level 3(3)
-
(4)
82
Fair value as at July31, 2014
1,245
236
(20)
(2)
Change in unrealized gains and losses included in net income
with respect to financial assets and liabilities
held as at July31, 2014(4)
101
11
(4)
Nine months ended July31, 2013
Securities
at fair value
through profit
or loss
Available-
for-sale
securities
Loans
Derivative
financial
instruments
(1)
Deposits
Fair value as at October31, 2012
1,326
270
(3)
(36)
(73)
Total realized and unrealized gains (losses) included in
Net income(5)
175
6
(2)
Total realized and unrealized gains (losses) included in
Other comprehensive income
10
Purchases
32
4
Sales
(39)
(38)
Issuances
(7)
(30)
Settlements and other
(111)
(13)
3
1
(1)
Transfers into Level 3(3)
(1)
(3)
Transfers out of Level 3(3)
5
59
Fair value as at July31, 2013
1,383
239
(38)
(50)
Change in unrealized gains and losses included in net income
with respect to financial assets and liabilities
held as at July31, 2013(6)
174
(2)
(1) The derivative financial instruments include assets and liabilities presented on a net basis.
(2) Total net gains included in Non-interest income was $115million.
(3) During the nine-month periods ended July31, 2014 and 2013, certain financial instruments were transferred into and out of Level 3 due to changes in the availability of observable market inputs resulting from changing market conditions.
(4) Total unrealized gains included in Non-interest income was $108million.
(5) Total net gains included in Non-interest income was $179million.
(6) Total unrealized gains included in Non-interest income was $172million.
NOTE 4 - FINANCIAL INSTRUMENTS DESIGNATED AT FAIR VALUE THROUGH PROFIT OR LOSS
The Bank chose to designate certain financial instruments at fair value through profit or loss according to criteria presented in Note 1 to the audited annual consolidated financial statements for the year ended October31, 2013. In accordance with its risk management strategy, which allows the Bank to eliminate or significantly reduce measurement or recognition disparity resulting from measuring financial assets and liabilities on different bases, the Bank designated certain debt securities, certain securities purchased under reverse repurchase agreements, and certain liabilities related to transferred receivables at fair value through profit or loss. The fair value of liabilities related to transferred receivables does not include credit risk, as the holders of these liabilities are not exposed to the Bank's credit risk.
The Bank also designated certain hybrid financial instruments with one or more embedded derivatives, such as restructured notes of the MAV conduits, certain deposits, and certain loans at fair value through profit or loss. There is no exposure to credit risk on the loans to the extent that they are fully collateralized.
Information about the financial assets and financial liabilities designated at fair value through profit or loss is provided in the following tables.
Carrying value as at
July31, 2014
Change in the
total fair value
(including the
change in the
fair value
attributable to
credit risk) for
the quarter ended
July31, 2014
Change in the
total fair value
(including the change in the fair
value attributable
to credit risk)
for the nine
months ended
July31, 2014
Change in
fair value
since the initial
recognition of the instrument
Financial assets designated at fair value through profit or loss
Securities
2,689
56
94
422
Securities purchased under reverse repurchase agreements
415
Loans
83
(7)
(8)
2
3,187
49
86
424
Financial liabilities designated at fair value through profit or loss
Deposits(1)
2,301
(32)
(79)
(195)
Liabilities related to transferred receivables
6,175
(2)
10
(187)
8,476
(34)
(69)
(382)
Carrying value as at
July31, 2013
Change in the
total fair value
(including the
change in the
fair value
attributable to
credit risk) for
the quarter ended
July31, 2013
Change in the
total fair value
(including the change in the fair value attributable
to credit risk)
for the nine
months ended
July31, 2013
Change in
fair value since the initial recognition of the instrument
Financial assets designated at fair value through profit or loss
Securities
3,527
(76)
95
304
Loans
54
(5)
(2)
3,581
(81)
93
304
Financial liabilities designated at fair value through profit or loss
Deposits(1)
1,596
(2)
(39)
(84)
Liabilities related to transferred receivables
6,974
97
102
(174)
8,570
95
63
(258)
(1) For the quarter ended July31, 2014, the change in the fair value of deposits designated at fair value through profit or loss attributable to credit risk was a $3million gain ($1million loss for the quarter ended July31, 2013). For the nine months ended July31, 2014, this change was a $4million loss (an insignificant amount of loss for the nine months ended July31, 2013).
NOTE 5 - SECURITIES
Available-for-Sale Securities
As at July31, 2014
Amortized
cost
Gross
unrealized
gains
Gross
unrealized
losses
Carrying
value
Securities issued or guaranteed by
Canada
4,646
43
(1)
4,688
Provinces
2,970
174
(2)
3,142
Municipalities and school boards
288
15
303
U.S. Treasury, other U.S. agencies and other foreign governments
128
128
Other debt securities
342
49
(1)
390
Equity securities
403
85
(6)
482
8,777
366
(10)
9,133
As at October31, 2013
Amortized
cost
Gross
unrealized
gains
Gross
unrealized
losses
Carrying
value
Securities issued or guaranteed by
Canada
5,646
30
(16)
5,660
Provinces
2,480
159
(22)
2,617
Municipalities and school boards
286
17
(1)
302
U.S. Treasury, other U.S. agencies and other foreign governments
387
3
390
Other debt securities
292
40
(2)
330
Equity securities
391
58
(4)
445
9,482
307
(45)
9,744
Impairment Losses Recognized
At the end of each financial reporting period, the Bank determines whether there is objective evidence of impairment for each available-for-sale security. During the quarter ended July31, 2014, $2million in impairment losses ($11million for the quarter ended July31, 2013) was recognized in Gains (losses) on available-for-sale securities, net in the Consolidated Statement of Income. For the nine months ended July31, 2014, $6million in impairment losses ($28million for the nine months ended July31, 2013) was recognized. In addition, during the nine months ended July31, 2014 and 2013, no amount was reversed in the Consolidated Statement of Income to recognize subsequent increases in the fair value of previously impaired debt securities.
Unrealized Gross Losses
As at July31, 2014 and as at October31, 2013, the Bank concluded that the unrealized losses on available-for-sale securities were mainly due to market price fluctuations and to changes in foreign exchange rates and that there is no objective evidence of impairment requiring an impairment loss to be recognized in the Consolidated Statement of Income.
Master Asset Vehicles
As at July 31, 2014, the face value of the restructured notes of the MAV conduits and of the other restructured notes held by the Bank was $1,527million ($1,727million as at October31, 2013), of which $1,294million was designated as Securities at fair value through profit or loss under the fair value option, and an amount of $233million was classified in Available-for-sale securities ($1,506million designated as Securities at fair value through profit or loss and $221million classified in Available-for-sale securities as at October31, 2013). The change in the face value of the restructured notes of the MAV conduits during the first nine months of fiscal 2014 was mainly due to capital repayments and disposals. During the nine months ended July 31, 2014, the Bank participated in two optional redemption unwind processes for restructured notes of the MAVII conduits and disposed of certain notes, classified in Securities at fair value through profit or loss, for a face value of $199million. In exchange, the Bank received $179million in cash and liquidation trust units with a fair value of $9million as at July31, 2014 and classified these units in Available-for-sale securities.
The Bank has committed to contribute $835million ($886million as at October31, 2013) to a margin funding facility related to the MAV conduits in order to finance potential collateral calls. As at July 31, 2014 and as at October31, 2013, no amount had been advanced by the Bank.
NOTE 5 - SECURITIES (cont.)
Establishing Fair Value
The carrying value of the restructured notes of the MAV conduits and of the other restructured notes held by the Bank in an investment portfolio as at July 31, 2014, designated as Securities at fair value through profit or loss, was $1,203million, and $78million was classified in Available-for-sale securities ($1,293million designated as Securities at fair value through profit or loss and $68million classified in Available-for-sale securities as at October31, 2013). The notes held in an investment portfolio with one or more embedded derivatives were designated as Securities at fair value through profit and loss under the fair value option, and the other notes were classified in Available-for-sale securities.
In establishing the fair value of the restructured notes of the MAV conduits and ineligible assets, the Bank applied the same methodologies used as at October31, 2013. For additional information, see Note 6 to the audited annual consolidated financial statements for the year ended October31, 2013. In addition, the Bank adjusted its assumption on the liquidity of the MAVI notes to reflect market conditions; for the restructured notes of the MAVI and MAVII conduits for Class C, it also adjusted its weighting for broker quotes. During the quarter ended July31, 2014, revenues totalling $47million (a negligible amount for the quarter ended July 31, 2013) were recognized in Trading revenues (losses) in the Consolidated Statement of Income to reflect a rise in the fair value of the restructured notes. For the nine months ended July 31, 2014, the rise in the fair value of the restructured notes amounted to $92million ($151million for the nine-month period ended July 31, 2013). The carrying value of the restructured notes, designated as Securities at fair value through profit or loss, was within estimated fair value ranges as at July 31, 2014. The credit ratings of the restructured notes of the MAV conduits have not changed from October31, 2013.
The Bank's valuation was based on its assessment of the conditions prevailing as at July 31, 2014, which may change in the future. The most significant assumptions used to determine the fair value of the restructured notes are observable discount rates, the credit ratings of the notes and the broker quotes on the MAVII Class A-1, A-2, B and C notes. Furthermore, there may be valuation uncertainty resulting from the choice of valuation model used. The sensitivities of these assumptions on fair value as at July 31, 2014 were as follows:
- A 10-basis-point change in the discount rate would result in a $6million decrease or increase in the fair value.
- A decrease in the credit rating by one letter grade would result in a decrease in the fair value between a range of $4million to $7million.
- An increase in the credit rating by one letter grade would result in an increase in the fair value between a range of $2million to $3million.
- A 100-basis-point change in the liquidity premium spread would result in a $12million decrease or increase in the fair value.
- A 10% change in the weighting used to determine the discount rate would result in a $2million decrease or increase in the fair value.
- A 10% change in the weighting attributed to the discount rate and the broker quotes on the MAVII Class A-1, A-2, B and C notes would result in a $7million decrease or increase in the fair value.
- A 1% change in the broker quotes on the MAVII Class A-1, A-2, B and C notes would result in a $4million decrease or increase in the fair value.
Determining the fair value of restructured notes of the MAV conduits is complex and involves an extensive process that includes the use of quantitative modelling and relevant assumptions. Possible changes that could have a significant impact on the future value include (1)changes in the value of the underlying assets, (2)changes regarding the liquidity of the restructured notes of the MAV conduits which are not currently traded on an active market, (3)the impacts of a marked and prolonged economic slowdown in North America and certain European countries, and (4)changes in legislation.
NOTE 6 - LOANS
Credit Quality of Loans
As at July31, 2014
Residential mortgage
Personal and credit card
Business and government
(1)
Total
Neither past due(2) nor impaired
38,332
29,000
27,000
94,332
Past due(2) but not impaired
278
246
141
665
Impaired
53
76
282
411
Gross loans
38,663
29,322
27,423
95,408
Less: Allowances on impaired loans
Individual allowances
7
13
183
203
Collective allowances
22
2
24
Allowances on impaired loans
7
35
185
227
38,656
29,287
27,238
95,181
Less: Collective allowance on non-impaired loans(3)
366
Loans, net of allowances
94,815
As at October31, 2013
Residential mortgage
Personal and credit card
Business and government
(1)
Total
Neither past due(2) nor impaired
36,213
27,674
24,022
87,909
Past due(2) but not impaired
314
245
99
658
Impaired
46
70
279
395
Gross loans
36,573
27,989
24,400
88,962
Less: Allowances on impaired loans
Individual allowances
7
13
170
190
Collective allowances
20
2
22
Allowances on impaired loans
7
33
172
212
36,566
27,956
24,228
88,750
Less: Collective allowance on non-impaired loans(3)
366
Loans, net of allowances
88,384
(1) Business credit portfolios are closely monitored and a monthly watchlist of problem commitments is produced. The watchlist is analyzed by the loan portfolio managers concerned, who then submit a report to Credit Risk Management.
(2) A loan is past due when the counterparty has not made a payment the day of the contractual expiry date.
(3) The collective allowance on non-impaired loans for credit risk was created taking into account the Bank's overall credit portfolio.
NOTE 6 - LOANS (cont.)
Loans Past Due But Not Impaired
As at July31, 2014
As at October31, 2013
Residential
mortgage
Personal and
credit card
Business and
government(1)
Residential
mortgage
Personal and
credit card
Business and
government(1)
Past due but not impaired
1 month late
132
83
61
168
89
24
2 months late
51
35
17
52
50
14
3 months late and more(2)
95
128
63
94
106
61
278
246
141
314
245
99
(1) As at July31, 2014, the fair value of financial collateral held against loans that were past due but not impaired was $29million ($7million as at October31, 2013).
(2) Comprises fully secured loans for which, in the opinion of management, there is reasonable assurance that principal and interest will ultimately be collected. Credit card receivables are included in this category because they are written off only when payment is 180 days in arrears.
Impaired Loans
As at July31, 2014
Gross
Individual
allowances
Collective allowances
Net
Loans
Residential mortgage
53
7
46
Personal and credit card
76
13
22
41
Business and government
282
183
2
97
411
203
24
184
As at October31, 2013
Gross
Individual
allowances
Collective allowances
Net
Loans
Residential mortgage
46
7
39
Personal and credit card
70
13
20
37
Business and government
279
170
2
107
395
190
22
183
Allowances for Credit Losses
Nine months ended July31, 2014
Residential
mortgage
Personal
and credit card
Business
and government
Total
Total
Individual allowances
Collective
allowances
Individual allowances
Collective
allowances
Individual allowances
Collective
allowances
Individual allowances
Collective
allowances
Allowances on impaired loans
Balance at beginning
7
13
20
170
2
190
22
212
Provisions for credit losses
5
86
30
28
2
119
32
151
Write-offs
(6)
(26)
(30)
(20)
(2)
(52)
(32)
(84)
Write-offs on credit cards
(62)
(62)
(62)
Recoveries
1
2
2
5
8
2
10
Balance at end
7
13
22
183
2
203
24
227
Collective allowance on
non-impaired loans(1)
366
Total allowances
593
Nine months ended July31, 2013
Residential
mortgage
Personal
and credit card
Business
and government
Total
Total
Individual allowances
Collective
allowances
Individual allowances
Collective
allowances
Individual allowances
Collective
allowances
Individual allowances
Collective allowances
Allowances on impaired loans
Balance at beginning
7
7
18
173
3
187
21
208
Provisions for credit losses
4
84
24
19
2
107
26
133
Write-offs
(4)
(20)
(27)
(30)
(3)
(54)
(30)
(84)
Write-offs on credit cards
(60)
(60)
(60)
Recoveries
5
2
1
2
6
8
Balance at end
7
11
20
164
3
182
23
205
Collective allowance on
non-impaired loans(1)
Balance at beginning
369
Write-offs
(3)
Balance at end
366
Total allowances
571
(1) The collective allowance on non-impaired loans was established taking into account the Bank's overall credit portfolio, except for a $3million amount as at October31, 2012 for loans and credit facilities secured by restructured notes of the MAV conduits.
NOTE 7 - FINANCIAL ASSETS TRANSFERRED BUT NOT DERECOGNIZED
In the normal course of its business, the Bank enters into transactions in which it transfers financial assets such as securities or loans directly to third parties, in particular structured entities. In some of those transactions, the Bank retains substantially all of the risks and rewards related to those financial assets. The risks include credit risk, interest rate risk, foreign exchange risk, prepayment risk and other price risks, whereas the rewards include income streams associated with the financial assets. As such, those financial assets are not derecognized and the transactions are treated as collateralized or secured borrowings. The nature of those transactions is described below.
The following table provides additional information about the nature of the transferred financial assets that do not qualify for derecognition and the associated liabilities.
As at July31, 2014
As at October31, 2013
Carrying value of financial assets transferred but not derecognized
Securities(1)
35,188
33,677
Residential mortgages
15,127
14,280
50,315
47,957
Carrying value of associated liabilities(2)
30,640
28,543
Fair value of financial assets transferred but not derecognized
Securities(1)
35,188
33,677
Residential mortgages
15,408
14,464
50,596
48,141
Fair value of associated liabilities
30,754
28,632
(1) The amount related to the securities loaned represents the maximum amount of the Bank's securities that can be lent. For obligations related to securities sold under repurchase agreements, the amount includes the Bank's own financial assets as well as those of third parties.
(2) Associated liabilities include obligations related to securities sold under repurchase agreements before the offsetting impact of $2,442million as at July31, 2014 ($1,029million as at October31, 2013) and liabilities related to transferred receivables. Liabilities related to securities loaned are not included, as the Bank can lend its own financial assets and those of third parties. The carrying value and fair value of liabilities related to securities loaned were $8,522million as at July31, 2014 ($7,555million as at October31, 2013).
The following table specifies the nature of the transactions related to financial assets transferred but not derecognized.
As at July31, 2014
As at October31, 2013
Carrying value of financial assets transferred but not derecognized
Securities backed by insured residential mortgage loans and other securities sold to CHT
15,819
14,903
Securities sold under repurchase agreements
14,324
13,297
Securities loaned
20,155
19,674
Residential mortgages transferred to a mutual fund
17
83
50,315
47,957
NOTE 8 - OTHER ASSETS
As at July31, 2014
As at October31, 2013 (1)
Receivables, prepaid expenses and other items
657
612
Interest and dividends receivable
393
425
Purchased receivables
801
466
Accrued benefit asset
141
131
Deferred tax assets
269
289
Current tax assets
50
88
Reinsurance assets
27
26
2,338
2,037
(1) Certain amounts have been adjusted to reflect changes in accounting standards. See Note 2.
NOTE 9 - DEPOSITS
As at July31, 2014
As at October31, 2013 (1)
On demand
or after notice
Fixed date
Total
Total
Personal
24,473
20,184
44,657
42,652
Business and government
31,985
33,566
65,551
57,103
Deposit-taking institutions
762
3,974
4,736
2,356
57,220
57,724
114,944
102,111
(1) Certain amounts have been adjusted to reflect changes in accounting standards. See Note 2.
TheDeposits - Business and government item includes the deposit from NBC Capital Trust and the covered bonds, as described below.
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 of $225million from the offering were used by the Trust to acquire a deposit notefrom the Bank.
The Bank does not control the Trust and therefore does not consolidate it. See Note 21 for additional information. Consequently, the NBC CapS - Series 1 issued by the Trust are not included on the Bank's Consolidated Balance Sheet, but the deposit noteis presented in Deposits - Business and government.
The main terms and characteristics of the $225million deposit noteare as follows.
Issuance date
Fixed annual
interest rate
Interest
payment dates
Semi-annual
payment
(1)
Maturity
Date of
conversion
at the option
of the Trust
(2)
June 15, 2006
5.329
%(3)
June 30,
December 31
$26.645
June 30, 2056
Anytime
(1) Per $1,000 principal amount.
(2) Each $1,000 principal amount of the deposit noteis convertible at the option of the Trust into 40 Series 17 First Preferred Shares of the Bank. The Trust will exercise this conversion right in circumstances in which holders of NBC CapS - Series 1 exercise their exchange right.
(3) The rate of 5.329% will be in effect up to and including June 30, 2016. After that date, the notewill bear interest at a fixed annual rate equal to the 180-day bankers' acceptance rate in effect plus 1.50%.
Redemption at the Option of the Bank
Since June 30, 2011, and on any subsequent distribution date, the Bank may, at its option, redeem the deposit note, in whole or in part, upon the occurrence of predetermined events of a regulatory or fiscal nature. Any redemption may be carried out without the consent of the Trust, subject to prior written notice and OSFI approval. If the Bank redeems the deposit notein whole or in part, the Trust will be required to redeem a corresponding amount of NBC CapS - Series 1.
NOTE 9 - DEPOSITS (cont.)
Purchase for Cancellation
Since June 30, 2011, the Bank may, with OSFI approval, purchase the deposit notein whole or in part on the open market by tender or private contract at any price. Any part of the deposit notepurchased by the Bank will be cancelled and will not be reissued.
Instances of Default
Failure by the Bank to make payments or to satisfy its other obligations under the deposit notewill not entitle the Trust to accelerate payment of the deposit note.
Covered Bonds
NBC Covered Bond Guarantor (Legislative) Limited Partnership
During the quarter ended July31, 2014, the Bank did not issue any covered bonds under the new legislative covered bond program. During the nine months ended July31, 2014, the Bank issued covered bonds under this program for an amount of 2.0billion euros. The Bank created a structured entity, NBC Covered Bond Guarantor (Legislative) Limited Partnership, to guarantee the payment of principal and interest due to bondholders.See Note 21 for additional information. The covered bonds, totalling $2.9billion as at July31, 2014, are presented in the Deposits - Business and government item on the Bank's Consolidated Balance Sheet.
The Bank has limited access to the assets owned by this structured entity according to the terms of the agreements that apply to this transaction. The assets owned by this entity totalled $4.5billion as at July31, 2014, of which $4.4billion is presented in the Residential mortgage item on the Bank's Consolidated Balance Sheet. The assets pledged as collateral for this program amounted to $4.4billion as at July31, 2014.
NBC Covered Bond Guarantor Limited Partnership
Covered bonds issued under the structured covered bond program, established in 2011, totalled $2.2billion as at July31, 2014 ($3.1billion as at October31,2013) and are presented in the Deposits - Business and government item on the Bank's Consolidated Balance Sheet. On January30,2014, an amount of US$1.0billion matured.
The Bank has limited access to the assets owned by NBC Covered Bond Guarantor Limited Partnership, the structured entity created to guarantee the payments of principal and interest due to the bondholders. See Note 21 for additional information. The assets owned by this entity totalled $2.7billion as at July31,2014 ($3.9billion as at October31,2013), of which $2.5billion ($3.5billion as at October31,2013) is presented in the Residential mortgage item on the Bank's Consolidated Balance Sheet. The assets pledged as collateral for this program amounted to $2.5billion as at July31, 2014 ($3.5billion as at October31, 2013).
NOTE 10 - OTHER LIABILITIES
As at July31, 2014
As at October31, 2013(1)
Accounts payable and accrued expenses
1,157
1,236
Subsidiaries' debts to third parties
1,430
1,457
Interest and dividends payable
700
785
Accrued benefit liability
227
202
Deferred tax liabilities
118
119
Current tax liabilities
91
70
Insurance liabilities
72
73
Other items(2)
570
555
4,365
4,497
(1) Certain amounts have been adjusted to reflect changes in accounting standards. See Note 2.
(2) As at July31, 2014, the Other items item included a $17million provision ($26million as at October31, 2013) for severance pay related to the optimization of certain organizational structures.
NOTE 11 - SUBORDINATED DEBT
On November 15, 2013, the Bank redeemed, at nominal value for cancellation, $500million in notes maturing in November 2018. In addition, on December13,2013, the Bank redeemed for cancellation debentures with a nominal value of US$25million maturing in February 2087 and recognized an $8million gain in Non-interest income in the Consolidated Statement of Income.
NOTE 12 - Hedging Activities
Derivative and Non-Derivative Financial Instruments Designated as Hedging Instruments
As at July31, 2014
As at October31, 2013
Fair value
hedge
Cash flow
hedge
Net investment
hedge
Fair value
hedge
Cash flow
hedge
Net investment
hedge
Assets
Derivative financial instruments
405
266
8
390
82
2
Liabilities
Derivative financial instruments
155
146
1
188
33
Carrying value of non-derivative financial instruments
1,306
1,192
Notional amounts of designated derivative financial instruments
19,722
18,889
658
20,830
3,956
190
Results of the Hedges of Net Investments in Foreign Operations
For the quarters and nine-month periods ended July31, 2014 and 2013, a negligible amount representing the ineffective portion was recognized in Non-interest income in the Consolidated Statement of Income.
Results of the Fair Value Hedges
Quarter ended July31
Nine months ended July31
2014
2013
2014
2013
Gains (losses) on hedging instruments
30
(185)
75
(171)
Gains (losses) on hedged items attributable to the hedged risk
(28)
182
(74)
171
Ineffectiveness of fair value hedging relationships
1
1
Results of the Cash Flow Hedges
Quarter ended July31
Nine months ended July31
2014
2013
2014
2013
Unrealized gains (losses) included in Other comprehensive income
as the effective portion of the hedging instrument
61
(32)
70
(33)
Losses (gains) reclassified to Net interest income
in the Consolidated Statement of Income
(4)
(8)
(12)
(33)
Ineffectiveness of cash flow hedging relationships
(1)
(2)
The following table shows the periods during which the Bank expects the hedged cash flows to occur and have an impact on net income.
As at July31, 2014
1 year or less
Over 1 year to 2 years
Over 2 years to 5 years
Over 5 years
Expected cash flows from hedged assets
65
68
240
86
Expected cash flows from hedged liabilities
89
74
163
43
Net exposure
(24)
(6)
77
43
NOTE 13 - SHARE CAPITAL
Stock Dividend
On December 3, 2013, the Board declared a stock dividend of one common share on each issued and outstanding common share, paid on February 13, 2014 to common shareholders of record on February 6, 2014. The effect was the same as a two-for-one split of common shares. All common share information has been adjusted retrospectively to reflect the stock dividend.
Issuance of Preferred Shares
On February 7, 2014, the Bank issued 14,000,000 Non-Cumulative 5-Year Rate-Reset Series 30 First Preferred Shares at a per-share price of $25.00 for gross proceeds of $350million. These shares are redeemable in cash at the Bank's option, subject to the provisions of the Bank Act (Canada) and to OSFI approval, on May 15, 2019 and on May 15 every five years thereafter, in whole or in part, at a price equal to $25.00 per share, plus all dividends declared and unpaid thereon on the date fixed for redemption; the shares are convertible at the option of the holder into floating-rate (equal to the three-month Government of Canada Treasury Bills yield plus 2.40%) non-cumulative Series 31 First Preferred Shares, subject to certain conditions, on May 15, 2019 and on May 15 every five years thereafter. The Series 30 preferred shares carry a non-cumulative quarterly dividend of $0.2563 for the initial period ending May 15, 2019. Thereafter, these shares carry a non-cumulative quarterly fixed dividend in an amount per share determined by multiplying the interest rate, equal to the sum of the 5-year Government of Canada bond-yield on the calculation date of the applicable fixed rate plus 2.40%, by $25.00.
Upon the occurrence of a trigger event as defined by OSFI, each outstanding Series 30 and 31 preferred share will be automatically and immediately converted, on a full and permanent basis, without the consent of the holder, into a number of common shares of the Bank determined pursuant to an automatic conversion formula. This conversion will be calculated by dividing the value of the preferred shares, i.e., $25.00 per share, plus all declared and unpaid dividends as at the date of the trigger event, by the value of the common shares. The value of the common shares will be the greater of a $5.00 floor price or the current market price of the common shares. Current market price means the volume weighted average trading price of common shares for the ten consecutive trading days ending on the trading day preceding the date of the trigger event. If the common shares are not listed on an exchange when this price is being established, the price will be the fair value reasonably determined by the Bank's Board of Directors. Given that the Series 30 preferred shares satisfy the non-viability contingent capital requirements, they qualify for the purposes of calculating regulatory capital under Basel III.
Change in Classification of Series 30 First Preferred Shares
During the quarter ended July31,2014, the Bank reclassified these preferred shares on the Consolidated Balance Sheet. As at July31, 2014, these preferred shares are presented in equity. Specifically, the Preferred share liabilities item of $341million was reclassified to equity, representing a $350million increase in Preferred shares and a $9million decrease in Retained earnings.
Redemption of Preferred Shares
On February 15, 2014, the Bank redeemed the outstanding 2,425,880 Non-Cumulative Series 24 First Preferred Shares and the outstanding 1,724,835 Non-Cumulative Series 26 First Preferred Shares at a per-share price of $25.00 plus the periodic declared and unpaid dividend. The Bank paid the redemption price and the dividend on February 17, 2014, the first business day after the redemption date.
Repurchase of Common Shares(1)
On June 20, 2013, the Bank began a normal course issuer bid to repurchase for cancellation up to 6,496,228 common shares over the 12-month period ended June 19, 2014. During the nine months ended July31, 2014, the Bank did not repurchase any shares.
Common Shares Held in Escrow(1)
As part of the acquisition of Wellington West Holdings Inc., the Bank had issued common shares held in escrow. As at July 31, 2014, the balance of the common shares held in escrow was 977,110 (2,664,268 as at October31, 2013). The Bank expects that the conditions will be met and that the remaining shares held in escrow will be released by the end of fiscal 2016.
(1)Reflecting the stock dividend, as described above.
As at July31, 2014
As at October31, 2013
Number
of shares
Shares
$
Number
of shares
Shares
$
First Preferred Shares
Series 16
8,000,000
200
8,000,000
200
Series 20
6,900,000
173
6,900,000
173
Series 24
2,425,880
61
Series 26
1,724,835
43
Series 28
8,000,000
200
8,000,000
200
Series 30
14,000,000
350
36,900,000
923
27,050,715
677
Common shares at beginning of the fiscal year(1)
325,982,736
2,160
322,616,546
2,054
Issued pursuant to:
Stock Option Plan(1)
2,164,204
74
3,529,528
107
Impact of shares purchased or sold for trading(1)
357,182
3
(137,688)
(1)
Other(1)
(35,292)
(25,650)
Common shares at end of the period(1)
328,468,830
2,237
325,982,736
2,160
Nine months ended July 31
2014
2013
Dividends
$
Dividends
per share
Dividends
$
Dividends
per share
First Preferred Shares
Series 15
2
0.2444
Series 16
7
0.9094
7
0.9094
Series 20
8
1.1250
8
1.1250
Series 21
3
1.0078
Series 24
1
0.4125
3
1.2375
Series 26
1
0.4125
2
1.2375
Series 28
6
0.7125
7
0.7353
Series 30
7
0.5287
30
32
Common shares(1)
458
1.4000
410
1.2600
488
442
(1) Reflecting the stock dividend, as described on the previous page.
NOTE 14 - Non-Controlling Interests
As at July31, 2014
As at October31, 2013(1)
Trust units issued by NBC Asset Trust (NBC CapS II)
Series 1(2)
402
409
Series 2(3)
352
359
Other
24
21
778
789
(1) Certain amounts have been adjusted to reflect changes in accounting standards. See Note 2.
(2) Includes $2million in accrued interest ($9million as at October31, 2013).
(3) Includes $2million in accrued interest ($9million as at October31, 2013).
NOTE 15 - CAPITAL DISCLOSURE
OSFI has been requiring Canadian banks to meet the 2019 minimum "all-in" requirements since the first quarter of 2013 for Common Equity Tier 1 (CET1) and since the first quarter of 2014 for Tier 1 capital and total capital. Furthermore, to ensure an implementation similar to that of other countries, OSFI has decided to phase in the credit valuation adjustment (CVA) charge over a five-year period beginning in 2014. In the first year, only 57%, 65% and 77% of total CVA will be applied to the calculation of the CET1, Tier 1 and total capital ratios, respectively, and these percentages will gradually increase each year until they reach 100% by 2019. The Bank has applied the prescribed percentages to the total CVA charge in the calculation of capital ratios as at July31, 2014.
The Bank must now maintain a CET1 capital ratio, Tier 1 capital ratio and total capital ratio of at least 7.0%, 8.5% and 10.5%, respectively, all of which include the 2.5% capital conservation buffer. In March 2013, OSFI designated Canada's six largest banks, a group that includes National Bank, as Domestic Systemically Important Banks (D-SIBs). For these banks, a 1% surcharge will apply to their capital ratios as of January 1, 2016. Consequently, as of that date, the Bank and all other major Canadian banks will have to maintain a CET1 capital ratio of at least 8.0%, a Tier 1 capital ratio of at least 9.5% and a total capital ratio of at least 11.5%, all determined using the "all-in" methodology.
In addition to regulatory capital ratios, OSFI also requires Canadian banks to meet a financial leverage test. Leverage or the assets-to-capital multiple (ACM) is calculated by dividing the Bank's total assets, including certain off-balance-sheet items, by its total regulatory capital in accordance with the transitional requirements for Basel III.In January 2014, after the Basel Committee on Banking Supervision updated the BaselIII rules for the leverage ratio, OSFI announced that the new BaselIII leverage ratio would replace the ACM as of January 1, 2015. The new leverage ratio is calculated by dividing Tier1 capital by total on- and off-balance-sheet assets. Items deducted from Tier1 capital will also be excluded from the calculation of the leverage ratio.
As at July31, 2014, the Bank was in compliance with all of OSFI's regulatory capital requirements.
Regulatory Capital and Capital Ratios Under Basel III(1)
As at July31, 2014
As at October31, 2013
Common Equity Tier 1 Capital (CET1)
5,876
5,350
Tier 1 Capital
7,774
7,002
Total Regulatory Capital
9,650
9,186
CET1 Risk-Weighted Assets
64,703
61,251
Tier 1 Capital Risk-Weighted Assets
64,972
Total Regulatory Capital Risk-Weighted Assets
65,375
Capital ratios
Common Equity Tier 1 (CET1)
9.1
%
8.7
%
Tier 1
12.0
%
11.4
%
Total
14.8
%
15.0
%
Assets-to-capital multiple
18.8
18.4
(1) Figures are presented on an "all-in" basis, except for the assets-to-capital multiple, which is presented in accordance with the transitional requirements for Basel III, and the October31, 2013 figures have not been adjusted to reflect changes in accounting standards.
NOTE 16 - TRADING ACTIVITY REVENUES
Trading activity revenues consist of the net interest income from trading activities and the trading revenues recognized in Non-interest income in the Consolidated Statement of Income.
Net interest income comprises interest and dividends related to financial assets and liabilities associated with trading activities, net of interest expenses and interest income related to the financing of these financial assets and liabilities.
Non-interest income consists of the realized and unrealized gains and losses on securities that are measured at fair value through profit or loss, income from held-for-trading derivative financial instruments, and the change in fair value of financial instruments designated at fair value through profit or loss.
Quarter ended July31
Nine months ended July31
2014
2013
2014
2013
Net interest income
101
131
317
353
Non-interest income
81
(7)
126
148
182
124
443
501
NOTE 17 - Share-Based Payments(1)
Stock Option Plan
During the quarters ended July31, 2014 and 2013, the Bank did not award any stock options. During the nine months ended July31, 2014, the Bank awarded 2,863,376 stock options (3,225,392 stock options during the nine months ended July31, 2013) with an average fair value of $5.39 per option ($4.90 in 2013). As at July31, 2014, there were 15,539,964 stock options outstanding (15,954,314 stock options as at July31, 2013).
The average fair value of the options awarded was estimated on the award date using the Black-Scholes model and the following assumptions.
Nine months ended July31
2014
2013
Risk-free interest rate
2.47%
1.78%
Expected life of options
7 years
7 years
Expected volatility
20.46%
22.85%
Expected dividend yield
4.4%
4.3%
Compensation expense is presented in the following table.
Quarter ended July31
Nine months ended July31
2014
2013
2014
2013
Compensation expense recorded for stock options
4
4
11
12
(1) Reflecting the stock dividend paid on February 13, 2014. See Note 13.
NOTE 18 - Employee Benefits
The Bank offers defined benefit pension plans and certain post-retirement and post-employment benefits. The expenses associated with these plans and the actuarial gains and losses recognized in Other comprehensive income are presented in the following tables.
Expense Components of the Pension Plans and Other Plans
Quarter ended July31
Nine months ended July31
Pension plans
Other plans
Pension plans
Other plans
2014
2013(1)
2014
2013(1)
2014
2013(1)
2014
2013(1)
Current service cost
19
18
2
2
56
52
6
4
Past service cost
(26)
(8)
Interest on the accrued benefit liability (asset), net
(1)
4
2
(3)
6
6
3
Administrative expenses
1
2
2
Pension plan expense
19
22
55
34
Other plan expense (recovery)
4
2
12
(1)
(1) Certain amounts have been adjusted to reflect changes in accounting standards. See Note 2.
Actuarial Gains and Losses Recognized in Other Comprehensive Income(1)
Quarter ended July31
Nine months ended July31
Pension plans
Other plans
Pension plans
Other plans
2014
2013(2)
2014
2013(2)
2014
2013(2)
2014
2013(2)
Cumulative actuarial gains (losses) at beginning -
Retained earnings
(112)
(310)
(30)
(35)
(166)
(308)
(24)
(25)
Actuarial gains (losses) for the period -
Other comprehensive income(3)
(78)
207
(11)
17
(24)
205
(17)
7
Cumulative actuarial gains (losses) at end -
Retained earnings
(190)
(103)
(41)
(18)
(190)
(103)
(41)
(18)
(1) The amounts are presented on a pre-tax basis.
(2) The amounts have been adjusted to reflect changes in accounting standards. See Note 2.
(3) Changes related to the discount rate and the return on plan assets are reviewed and updated on a quarterly basis. All other assumptions are updated annually.
NOTE 19 - Earnings Per Share(1)
Diluted earnings per share is calculated by dividing net income attributable to common shareholders by the weighted average number of common shares outstanding, factoring in the dilutive effect of stock options using the treasury stock method.
Quarter ended July31
Nine months ended July31
2014
2013(2)
2014
2013(2)
Basic earnings per share
Net income attributable to the Bank's shareholders
423
387
1,157
1,145
Dividends on preferred shares
11
10
30
32
Net income attributable to common shareholders
412
377
1,127
1,113
Weighted average basic number of common shares outstanding (thousands)
327,687
324,772
327,170
324,162
Basic earnings per share (dollars)
1.26
1.16
3.44
3.43
Diluted earnings per share
Net income attributable to common shareholders
412
377
1,127
1,113
Weighted average basic number of common shares outstanding (thousands)
327,687
324,772
327,170
324,162
Adjustment to average number of common shares (thousands)
Stock options(3)
3,694
2,404
3,512
2,537
Weighted average diluted number of common shares outstanding (thousands)
331,381
327,176
330,682
326,699
Diluted earnings per share (dollars)
1.24
1.16
3.41
3.41
(1) The weighted average basic number of common shares outstanding, the weighted average diluted number of common shares outstanding, basic earnings per share and diluted earnings per share have been adjusted retrospectively to reflect the stock dividend paid on February 13, 2014. See Note 13.
(2) Certain amounts have been adjusted to reflect changes in accounting standards. See Note 2.
(3) For the quarter and nine-month period ended July31, 2014, with the exercise price of the options being less than the average price of the Bank's common shares, no option was excluded from the diluted earnings per share calculation. The diluted earnings per share calculation does not include an average number of 3,188,416 options outstanding with a weighted average exercise price of $38.36 for the quarter ended July31, 2013, and 2,651,442 options outstanding with a weighted average exercise price of $38.36 for the nine months ended July31, 2013 as the exercise price of these options was higher than the average price of the Bank's common shares.
NOTE 20 - Acquisition
TD Waterhouse Institutional Services
On November 12, 2013, through a subsidiary, the Bank completed the acquisition of Toronto-Dominion Bank's institutional services known as TD Waterhouse Institutional Services. This acquisition marks another step in the Bank's expansion of its wealth management platform across Canada. The final purchase price is $260million.The net assets acquired include client list intangible assets totalling approximately $58million. The purchase price exceeded the fair value of the net assets acquired by $206million. This excess amount was recorded on the Consolidated Balance Sheet as goodwill and mainly represents synergies and the benefits expected from combining the acquired operations with those of the Bank. The tax deductible portion of the goodwill is $155million. The acquired receivables, consisting mainly of loans to clients for the purchase of securities, had an acquisition-date fair value of $448million. This amount also represents the gross contractual amounts receivable, which the Bank expects to fully recover.
An amount of $1million in acquisition-related costs was included in Non-interest expenses in the Consolidated Statement of Income for the nine months ended July31, 2014. These consolidated financial statements include the results of the acquired business as of November12, 2013. During the quarter ended July31, 2014, the acquired business contributed approximately $12million to the Bank's total revenues and $4million to its net income (excluding integration costs). For the nine months ended July31, 2014, the contributions to total revenues and net income amounted to $39million and $16million, respectively. If the Bankhad completed the acquisition on November 1, 2013, total revenues would have been approximately $4,102million and net income approximately $1,209million for the nine months ended July31, 2014.
The following table summarizes the acquisition-date fair values of all assets acquired and liabilities assumed.
Cash and cash equivalents
982
Loans
71
Due from clients, dealers and brokers
448
Goodwill
206
Intangible assets
58
Total assets
1,765
Deposits
1,380
Due to clients, dealers and brokers
111
Other liabilities
14
Total liabilities
1,505
Purchase price
260
Cash Flows Related to the Acquisition
Cash to be transferred by the seller
982
Purchase price
260
Net cash amount transferred by the seller
722
NOTE 21 - Structured Entities
Structured entities are entities that have been designed so that voting or similar rights are not the dominant factor in deciding who controls the entity, such as when any voting rights relate only to administrative tasks and the relevant activities are directed by means of contractual arrangements. Structured entities include special purpose entities, which are entities created to accomplish a narrow and well-defined objective. Structured entities are assessed for consolidation in accordance with the accounting treatment described in Note2. The Bank's maximum exposure to loss resulting from economic interests consists primarily of the investments in these entities, the fair value of the derivative contracts entered into with them, and the backstop liquidity and credit enhancement facilities granted to certain structured entities.
Non-Consolidated Structured Entities
Multi-Seller Conduits
The Bank administers multi-seller conduits that purchase financial assets from clients and finance those purchases by issuing commercial paper backed by the assets acquired. Clients use these multi-seller conduits to diversify their funding sources and reduce borrowing costs, while continuing to manage the assets and providing some amount of first-loss protection. Notes issued by the conduits and held by third parties provide additional credit loss protection. The Bank acts as a financial agent and provides these conduits with administrative and transaction structuring services as well as backstop liquidity and credit enhancement facilities under the commercial paper program. The Bank has concluded derivative contracts with these conduits, the fair value of which is presented on the Bank's Consolidated Balance Sheet. Although the Bank has the ability to direct the relevant activities of these conduits, it cannot use its power to affect the amount of the returns it obtains, as it acts as an agent. Consequently, the Bank does not control these conduits and does not consolidate them.
Master Asset Vehicles (MAV)
The Bank holds economic interests in MAVs in the form of restructured notes and the margin funding facility provided. The Bank does not have the ability to direct the relevant activities of the MAVs. Consequently, it does not control these MAVs and does not consolidate them.
Private Capital Funds and Investments
As part of its investment banking operations, the Bank invests in several limited liability partnerships and other 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 an investor. Consequently, it does not control these companies and does not consolidate them.
NBC Capital Trust
The Bank created NBC Capital Trust (the Trust) for its funding and capital management needs. The securities issued by this trust constitute innovative capital instruments and are eligible as additional Tier 1 capital, but because these instruments do not satisfy the non-viability contingent capital requirements, they are to be phased out at a rate of 10% per year between 2013 and 2022. The gross proceeds from the securities issued by this trust were used to acquire a deposit notefrom the Bank (see Note 9). The Bank also holds all of the trust's equity and has committed to lend it the liquidity required in the normal course of business. Although the Bank has the ability to direct the relevant activities of the Trust, it is not exposed to or have the rights to variable returns since the Trust's primary asset is a deposit noteissued by the Bank. Consequently, the Bank does not control the Trust and does not consolidate it.
Consolidated Structured Entities
Securitization Entity for the Bank's Credit Card Receivables
The Bank established Canadian Credit Card Trust (CCCT) to securitize its credit card receivables and has used this entity for capital management and funding purposes. The Bank acts as an administrative agent and servicer and as such is responsible for the daily administration and management of CCCT's credit card receivables. In addition, the Bank holds certificates issued by CCCT, which gives it rights to CCCT's residual cash flows. The Bank therefore has the ability to direct the relevant activities of CCCT and can use its power to affect the amount of returns it obtains. Consequently, the Bank controls CCCT and consolidates it.
National Bank Hedge Fund Managed Accounts (Innocap Platform)
Innocap Investment Management Inc. (Innocap), a company under joint control, offers hedge fund account programs for fund sponsors seeking a platform that gives them a high degree of transparency and leading-edge tools to manage liquidity and control assets and risk. The Bank can hold economic interests in certain hedge funds of the platform and consolidates those of which it has the ability to direct the relevant activities and in which it can use its power to affect the amount of returns it obtains.
Covered Bond Guarantor
NBC Covered Bond Guarantor (Legislative) Limited Partnership
Since December2013, the Bank has been participating in the new covered bond legislative program, under which covered bonds are issued. It therefore created NBC Covered Bond Guarantor (Legislative) Limited Partnership (the Guarantor) to guarantee payment of the principal and interest owed to the bondholders. The Bank sold uninsured residential mortgages to the Guarantor and granted it loans to facilitate the acquisition of these assets. Through a subsidiary, the Bank acts as manager of the partnership and therefore influences the returns of the partnership, which are directly related to the return on the mortgage loan portfolio and the interest on the loans from the Bank. Consequently, the Bank consolidates the partnership because it has the ability to direct its relevant activities and because it can use its power to affect the amount of the returns it obtains.
NBC Covered Bond Guarantor Limited Partnership
Since January2011, the Bank has been participating in the structured covered bond program under which covered bonds are issued. It therefore created NBCCovered Bond Guarantor Limited Partnership (the Guarantor) to guarantee payment of the principal and interest owed to the bondholders. The Bank sold insured residential mortgages to the Guarantor and granted it a demand loan to facilitate the acquisition of these assets. Through a subsidiary, the Bank acts as manager of the partnership and therefore influences the returns of the partnership, which are directly related to the return on the mortgage loan portfolio and interest on the loan from the Bank. Consequently, the Bank consolidates the partnership because it has the ability to direct its relevant activities and because it can use its power to affect the amount of the returns it obtains.
Investment Funds
The Bank enters into derivative contracts with third parties to provide them with the desired exposure to certain investment funds. The Bank economically hedges the risks related to these derivatives by investing in those investment funds. The Bank consolidates those of which it has the ability to direct its relevant activities and in which it can use its power to affect the amount of returns it obtains.
NOTE 21 - Structured Entities (cont.)
NBC Asset Trust
The Bank created NBC Asset Trust for its funding and capital management needs. The securities issued by this trust constitute innovative capital instruments and are eligible as additional Tier 1 capital, but because these instruments do not satisfy the non-viability contingent capital requirements, they are to be phased out at a rate of 10% per year between 2013 and 2022. The issuance proceeds were used to acquire, from the Bank, residential mortgage loans. Not only does the Bank remain the administrator of these loans, it also administers the day-to-day operations of the trust. The Bank also holds the special voting securities of the trust. After the distribution has been paid to the holders of the trust capital securities, the Bank, as the sole holder of the special trust securities, is entitled to receive the balance of net residual funds. Therefore, the Bank has the ability to direct the relevant activities of NBC Asset Trust and can use its power to affect the amount of returns it obtains. Consequently, the Bank controls this trust and consolidates it.
The following table presents the Bank's exposure to consolidated and non-consolidated structured entities.
As at July31, 2014
As at October31, 2013(1)
Investments
and other assets
Total
assets
Investments
and other assets
Total
assets
Non-consolidated structured entities
Multi-seller asset-backed commercial paper conduits
administered by the Bank(2)
7
2,048
6
2,110
National Bank hedge fund managed accounts (Innocap platform)(3)
2
15
32
290
Restructured notes of the MAV conduits and other restructured notes(4)
1,281
1,361
Private capital funds and investments(5)
1,108
8,361
1,304
7,183
NBC Capital Trust(6)
240
246
2,398
10,664
2,703
9,829
Consolidated structured entities
Securitization entity for the Bank's credit card receivables(7)(8)
341
1,633
328
1,621
National Bank hedge fund managed accounts (Innocap platform)(3)(8)
465
553
508
617
Investment funds(8)(9)
303
303
411
411
Covered bonds(10)
6,911
7,173
3,506
3,939
Building(11)
77
70
78
71
Private investments(12)
2
NBC Asset Trust(13)
938
1,695
938
1,710
9,035
11,427
5,769
8,371
11,433
22,091
8,472
18,200
(1) Certain amounts have been adjusted to reflect changes in accounting standards. See Note 2.
(2) The main underlying assets, located in Canada, are residential mortgages, automobile loans, automobile inventory financings, and other receivables. As at July31, 2014, the notional committed amount of the global-style liquidity facilities totalled $2,038million ($2,104million as at October31, 2013), representing the total amount of commercial paper outstanding. The Bank also provides series-wide credit enhancement facilities for a notional committed amount of $30million ($30million as at October31, 2013). The maximum exposure to loss cannot exceed the amount of commercial paper outstanding. As at July31, 2014, the Bank held $7million in commercial paper ($6million as at October31, 2013) and, consequently, the maximum potential amount of future payments as at July31, 2014 was limited to $2,031million ($2,098million as at October31, 2013), which represents the amount of undrawn liquidity and credit enhancement facilities.
(3) The underlying assets are various financial instruments (trading portfolio). The total assets of the Innocap platform are presented on a net asset basis.
(4) See the Master Asset Vehicles section in Note 5. The total amount outstanding of restructured notes of the MAV conduits totalled $24billion as at July31, 2014 ($25billion as at October31,2013). The undrawn margin funding facilities amounted to $835million as at July31, 2014 ($886million as at October31, 2013).
(5) The underlying assets are mainly private investments. The amount of total assets of the structured entities corresponds to the amount for the most recent available period.
(6) The underlying asset is a deposit notefrom the Bank. See Note 9.
(7) The underlying assets are credit card receivables.
(8) The Bank's exposure is presented net of third-party holdings.
(9) The underlying assets are various financial instruments and are presented on a net asset basis. Certain investment funds are in a trading portfolio.
(10) For the covered bonds issued under the new covered bond legislative program, the underlying assets are uninsured residential mortgage loans totalling $4,495million as at July31, 2014. The average maturity of these underlying assets is two years. For covered bonds issued under the structured covered bond program, the underlying assets are insured residential mortgage loans totalling $2,678million as at July31, 2014($3,939million as at October31,2013). The average maturity of these underlying assets is two years. See Note 9.
(11) The underlying asset is a building located in Canada.
(12) The underlying assets are private investments.
(13) The underlying assets are insured and uninsured residential mortgage loans of the Bank. As at July31, 2014, insured loans amounted to $237million ($277million as at October31, 2013). The average maturity of the underlying assets is two years.
NOTE 22 - Segment Disclosures
Quarter ended July31
Personal and Commercial
Wealth Management
Financial Markets
Other
Total
2014
2013(1)
2014
2013(1)
2014
2013(1)
2014
2013(1)
2014
2013(1)
Net interest income(2)
433
407
79
68
209
225
(81)
(71)
640
629
Non-interest income
263
258
254
221
236
156
67
21
820
656
Total revenues
696
665
333
289
445
381
(14)
(50)
1,460
1,285
Non-interest expenses
388
374
246
221
188
170
57
43
879
808
Contribution
308
291
87
68
257
211
(71)
(93)
581
477
Provisions for credit losses
48
46
1
1
1
49
48
Income before income taxes (recovery)
260
245
86
67
257
211
(71)
(94)
532
429
Income taxes (recovery)(2)
70
66
22
18
70
56
(71)
(113)
91
27
Net income
190
179
64
49
187
155
19
441
402
Non-controlling interests
5
1
13
14
18
15
Net income attributable to the Bank's
shareholders
190
179
64
49
182
154
(13)
5
423
387
Average assets
82,129
77,251
10,349
9,061
87,673
89,986
26,348
20,042
206,499
196,340
Nine months ended July31
Personal and Commercial
Wealth Management
Financial Markets
Other
Total
2014
2013(1)
2014
2013(1)
2014
2013(1)
2014
2013(1)
2014
2013(1)
Net interest income(3)
1,263
1,205
235
202
613
628
(208)
(190)
1,903
1,845
Non-interest income
740
729
752
652
534
419
171
255
2,197
2,055
Total revenues
2,003
1,934
987
854
1,147
1,047
(37)
65
4,100
3,900
Non-interest expenses
1,142
1,115
714
653
518
500
120
111
2,494
2,379
Contribution
861
819
273
201
629
547
(157)
(46)
1,606
1,521
Provisions for credit losses
149
142
2
2
(12)
1
151
133
Income before income taxes (recovery)
712
677
271
199
629
559
(157)
(47)
1,455
1,388
Income taxes (recovery)(3)
192
182
71
53
170
150
(186)
(189)
247
196
Net income
520
495
200
146
459
409
29
142
1,208
1,192
Non-controlling interests
10
6
41
41
51
47
Net income attributable to the Bank's
shareholders
520
495
200
146
449
403
(12)
101
1,157
1,145
Average assets
80,793
76,022
10,486
9,051
85,472
86,516
28,386
20,743
205,137
192,332
(1) Certain amounts have been adjusted to reflect changes in accounting standards. See Note 2.
(2) Net interest income and income taxes (recovery) of the business segments 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. For the business segments as a whole, Net interest income was grossed up by $57million ($62million in 2013). An equivalent amount was added to Income taxes (recovery). The impact of these adjustments is reversed under the Other heading.
(3) For the nine months ended July31, 2014, Net interest income was grossed up by $162million ($166million in 2013). An equivalent amount was added to Income taxes (recovery). The impact of these adjustments is reversed under the Other heading.
Personal and Commercial
The Personal and Commercial segment encompasses the banking, financing, and investing services offered to individuals and businesses as well as insurance operations.
Wealth Management
The Wealth Management segment comprises investment solutions, trust services, banking services, lending services and other wealth management solutions offered through internal and third-party distribution networks.
Financial Markets
The Financial Markets segment encompasses banking services, investment banking services and financial solutions for institutional clients. The segment is also active in proprietary trading and investment activities.
Other
This heading encompasses treasury activities, including the Bank's liquidity management and funding operations, certain non-recurring items and the unallocated portion of corporate services.
INFORMATION FOR SHAREHOLDERS AND INVESTORS
Investor Relations
Financial analysts and investors who want to obtain financial information on the Bank may contact the Investor Relations Department.
600 De La Gauchetire Street West, 7th Floor
Montreal, Quebec H3B 4L2
Toll-free: 1-866-517-5455
Fax: 514-394-6196
Email: investorrelations@nbc.ca
Website: nbc.ca/investorrelations
Public Affairs
600 De La Gauchetire Street West, 10th Floor
Montreal, Quebec H3B 4L2
Telephone: 514-394-8644
Fax: 514-394-6258
Quarterly Report Publication Dates for Fiscal 2014
(subject to approval by the Board of Directors of the Bank)
First quarter
February 24
Second quarter
May 27
Third quarter
August 27
Fourth quarter
December 5
Disclosure ofThird Quarter 2014 Results
Conference Call
- A conference call for analysts and institutional investors will be held on Wednesday, August 27, 2014 at 1:00 p.m. EDT.
- Access by telephone in listen-only mode: 1-866-862-3930 or
416-695-7806.The access code is 3390539#.
- A recording of the conference call can be heard until September6, 2014 by dialing 1-800-408-3053 or 905-694-9451. The access code is 5955220#.
Webcast
- The conference call will be webcast live at nbc.ca/investorrelations.
- A recording of the webcast will also be available on National Bank's website after the call.
Financial Documents
- The Report to Shareholders (which includes the quarterly consolidated financial statements) is available at all times on National Bank's website at nbc.ca/investorrelations.
- The Report to Shareholders, the Supplementary Financial Information, the Supplementary Regulatory Capital Disclosure, and a slide presentation will be available on the Investor Relations page of National Bank's website shortly before the start of the conference call.
Transfer Agent and Registrar
For information about stock transfers, address changes, dividends, lost certificates, tax forms, and estate transfers, shareholders are asked to contact the transfer agent, Computershare Trust Company of Canada, at the address or telephone number below.
Computershare Trust Company of Canada
Share Ownership Management
1500 University Street, 7th Floor
Montreal, Quebec H3A 3S8
Telephone: 1-888-838-1407
Fax: 1-888-453-0330
Email: service@computershare.com
Website: computershare.com
Direct Deposit Service for Dividends
Shareholders may elect to have their dividend payments deposited directly via electronic funds transfer to their bank account at any financial institution that is a member of the Canadian Payments Association. To do so, they must send a written request to the transfer agent, Computershare Trust Company of Canada.
Dividend Reinvestment and Share Purchase Plan
The Bank has a Dividend Reinvestment and Share Purchase Plan for Canadian holders of its common and preferred shares under which they can acquire common shares of the Bank without paying commissions or administration fees. Canadian participants acquire common shares through the reinvestment of cash dividends paid on the shares they hold or through optional cash payments of at least $500 per payment, up to a maximum of $5,000 per quarter.
For more information, shareholders may contact National Bank's registrar and transfer agent, Computershare Trust Company of Canada, at 18888381407. To participate in the plan, National Bank's beneficial or non-registered common shareholders must contact their financial institution or broker.
Dividends
The dividends declared by the Bank constitute eligible dividends pursuant to the Income Tax Act (Canada).
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