-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, LZ295M3j0hFbVZmo7Y+cO01v0BUb88neOC28xjjaoXK4WtL9Fzeu3Ehe8t/LGNbP C+FyQQtUJF8KCTd4AiGfRg== 0000909567-03-000440.txt : 20030326 0000909567-03-000440.hdr.sgml : 20030325 20030326130204 ACCESSION NUMBER: 0000909567-03-000440 CONFORMED SUBMISSION TYPE: 40-F PUBLIC DOCUMENT COUNT: 6 CONFORMED PERIOD OF REPORT: 20021031 FILED AS OF DATE: 20030326 FILER: COMPANY DATA: COMPANY CONFORMED NAME: NATIONAL BANK OF CANADA /FI/ CENTRAL INDEX KEY: 0000926171 IRS NUMBER: 000000000 STATE OF INCORPORATION: A8 FILING VALUES: FORM TYPE: 40-F SEC ACT: 1934 Act SEC FILE NUMBER: 333-49153 FILM NUMBER: 03617654 BUSINESS ADDRESS: STREET 1: NATIONAL BANK TOWER STREET 2: 600 DE LA CAUCHETIERE WEST CITY: MONTREAL QUEBEC STATE: A8 ZIP: 00000 MAIL ADDRESS: STREET 1: 600 DE LA CAUCHETIERE WEST STREET 2: MONTRAL QUEBEC CITY: CANADA H3B 4L2 STATE: A8 ZIP: 00000 40-F 1 t09344e40vf.txt FORM 40-F ================================================================================ SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ---------------------- FORM 40-F [ ] Registration statement pursuant to Section 12 of the Securities Exchange Act of 1934 or [ X ] Annual report pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934 For the fiscal year ended: OCTOBER 31, 2002 Commission file number: 333-49153 ---------------------- NATIONAL BANK OF CANADA (Exact name of registrant as specified in its charter)
CANADA 6021 13-2957778 (Province or Other Jurisdiction (Primary Standard (I.R.S. Employer of Incorporation or Organization) Industrial Identification No.) Classification Code)
NATIONAL BANK OF CANADA NATIONAL BANK TOWER 125 WEST 55TH STREET 600 DE LA GAUCHETIERE WEST NEW YORK, NEW YORK 10019 MONTREAL, QUEBEC H3B 4L2 ATTN: SERGE LACROIX (514) 394-6081 (212) 632-8580 (Address and telephone number of (Name, address (including zip code) and registrant's telephone number (including area code) of principal executive offices) agent for service in the United States)
---------------------- Securities registered pursuant to Section 12(b) of the Act: NONE Securities registered pursuant to Section 12(g) of the Act: NONE Securities for which there is a reporting obligation pursuant to Section 15(d) of the Act:
Title of Each Class: Name of Each Exchange On Which Registered: - -------------------- ------------------------------------------ NONE NONE
For annual reports, indicate by check mark the information filed with this form: [x] Annual Information Form [x] Audited Annual Financial Statements Indicate the number of outstanding shares of each of the issuer's classes of capital or common stock as of the close of the period covered by the annual report.
Title of Each Class: Outstanding at October 31, 2002: - ------------------- ------------------------------- COMMON 182,596,351 FIRST PREFERRED, SERIES 12 5,000,000 FIRST PREFERRED, SERIES 13 7,000,000
Indicate by check mark whether the Registrant by filing the information contained in this Form is also thereby furnishing the information to the Commission pursuant to Rule 12g3-2(b) under the Securities Exchange Act of 1934 (the "Exchange Act"). If "Yes" is marked, indicate the filing number assigned to the Registrant in connection with such Rule. [ X ] Yes 82-03764 [ ] No Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days. [ ] Yes [ x ] No ================================================================================ ANNUAL INFORMATION FORM DATED NOVEMBER 29, 2002 2002 ANNUAL REPORT [NATIONAL BANK OF CANADA LOGO] ANNUAL INFORMATION FORM Portions of the Annual Information Form are disclosed in the following documents and are incorporated herein by reference: o the annual report to shareholders for the fiscal year ended October 31, 2002 ("Annual Report"); and o the Management Proxy Circular dated as at January 21, 2003 ("Circular").
PAGE REFERENCE --------------- INCORPORATED BY REFERENCE FROM --------------- ANNUAL TABLE OF CONTENTS REPORT CIRCULAR - ----------------- ------ -------- CORPORATE STRUCTURE o Name and Incorporation P 122 o Subsidiaries of the Bank (Intercorporate Relationships) P 114, 120 o Real Estate N 7, P 91, P 122 o Number of Employees P 113 o Designated Countries T 12, P 63 ------------------------- ---------------- GENERAL DEVELOPMENT OF THE BUSINESS o Five-Year History P 66-69, P 122 o Significant Acquisitions and Dispositions N 26, P 106, N 27, P 107 o Trends P 31, N 18, P 98-99 ------------------------- ---------------- DESCRIPTION OF BUSINESS o Description of Business P 20-30 - Main Products and Services P 20-30 - Competition P 16-19 - Environmental Risk P 122 - Risks Linked to Operations Abroad T 12, P 63 o Results by Segment N 25, P 105-106 o Assets Under Administration/Management T 9, P 62 o Earning Assets Abroad N 20, P 102 o Loans by Borrower Category T 10, P 62 o Personal, Business and Mortgage Loans P 78 o Impaired Loans N 5, P 90, T 13, P 64 o Interest on Impaired Loans T 14, P 65 o Provision for Credit Losses T 4, P 58 ------------------------- ---------------- MAIN CONSOLIDATED FINANCIAL INFORMATION o Quarterly Results P 66-69 o Cash P 124 o Dividend Policy P 124 ------------------------- ---------------- MANAGEMENT'S DISCUSSION AND ANALYSIS OF P 34-53 FINANCIAL CONDITION AND RESULTS ------------------------- ---------------- MARKET FOR TRADING NATIONAL BANK P 124 SECURITIES ------------------------- ---------------- DIRECTORS AND OFFICERS o Board of Directors, Members of the Board and Committees of the Board P 116 Schedule: b, c o Executive Officers P 118 o Shareholdings of Directors and Executive Officers P 123 ------------------------- ---------------- ADDITIONAL INFORMATION P 123 ------------------------- ---------------- FORWARD-LOOKING STATEMENTS P 31, 35
Legend P: Page N: Note T: Table Page 121 NATIONAL BANK OF CANADA 2001-2002 SUPPLEMENTARY INFORMATION ANNUAL INFORMATION FORM CORPORATE STRUCTURE NAME AND INCORPORATION National Bank of Canada (the "Bank") is a chartered bank governed by the Bank Act (Canada). The Bank's roots date back to 1859 with the founding of the Banque Nationale in Quebec City. Its current charter is the result of a series of amalgamations, notably with The Provincial Bank of Canada in 1979, with the Mercantile Bank of Canada in 1985, and with National Bank Leasing Inc., its wholly-owned subsidiary in 1992. Although no change was made to its statutes, in March 2001 the Bank amended section 4.1 of By-Law I of the General By-Law to reduce the minimum and maximum number of directors and, in March 2002, it amended section 4.6 of By-Law I to increase the aggregate remuneration which may be paid to its directors. GENERAL DEVELOPMENT OF THE BUSINESS FIVE-YEAR HISTORY FISCAL 1997-1998 The Bank diversified its revenue streams while remaining true to its primary mission as a commercial bank. One of the year's highlights was the strong performance of National Bank shares. In fact, the total return to common shareholders of the Bank (share appreciation plus dividends) exceeded that of other banks and trust companies, which were harder hit by the downturn on world financial markets. FISCAL 1998-1999 The Bank acquired First Marathon which it integrated with Levesque Beaubien Geoffrion, its securities brokerage subsidiary, to form National Bank Financial, a Canada-wide brokerage and investment bank. FISCAL 1999-2000 Committed to improving the quality of services offered to its various client groups and better positioning itself with respect to the growth in electronic commerce and services, the Bank signed a partnership agreement with a preferred supplier of information technology services. FISCAL 2000-2001 In keeping with its business model of being a super-regional bank offering such value added services as investment banking and wealth management to its individual and business clients, the Bank sold its asset-based lending operations in the United States as well as its merchant payment solutions. FISCAL 2001-2002 The Bank strengthened its position in potentially lucrative markets through major partnership agreements and acquisitions, particularly that of Altamira, a Canadian mutual fund manager and distributor. In addition, the Bank significantly improved the quality of its lending portfolio as evidenced by the level of gross private impaired loans outstanding which amounted to $479 million as at October 31, 2002 compared to $932 million as at October 31, 2001. DESCRIPTION OF BUSINESS ENVIRONMENTAL RISK In order to minimize environmental risk, several years ago the Bank notably implemented a procedure setting out its environmental responsibilities when granting credit and taking possession of assets. To date, the risks involved have not had a material impact on the Bank's operations. REAL ESTATE With respect to real estate holdings, as at October 31, 2002 the Bank owned, for its operations, 114 buildings in Canada, and leased 450 premises, including six abroad. It also held two other buildings through the intermediary of its wholly-owned subsidiary, National Bank Realty Inc. With respect to the premises of its head office located in Montreal, the Bank held a long-term lease of 20 years, ending on February 9, 2020. The Bank's consolidated fixed assets at cost, less accumulated amortization, and excluding furniture, equipment and leasehold improvements, amounted to $65 million as at October 31, 2002. Information concerning the Bank's fixed assets is provided in Note 7 to the consolidated financial statements (page 91). Page 122 DIRECTORS AND OFFICERS EXECUTIVE OFFICERS The members of senior management mentioned on page 118 have held various management, executive or senior executive positions with the Bank during the past five years, with the exception of: G.F. Kym Anthony who, from 1993 to 1998, was employed by TD Securities Inc. as Chair and Chief Executive Officer and, from 1998 to 1999, was employed by First Marathon Securities Ltd. as Chief Operating Officer and Executive Vice-President; Olivier Lecat who, from 1992 to 1997, was employed by Royal Bank as Vice-President -- Treasury and Investment Banking, Internal Audit Services and, from 1997 to 2001, as Vice-President -- Corporate and Investment Banking, Internal Audit Services; Michel Lozeau who, from 1995 to 2001, was employed by Oracle Corporation Canada as Senior Manager -- Consulting, Central Region, Regional Vice-President -- Consulting, Canada and Group Vice-President -- Consulting, Canada, respectively; Luc Papineau who, from 1994 to 1997, was employed by Levesque Beaubien Geoffrion Inc. as Vice-President and Branch Manager and, from 1997 to 1998, was employed by Merrill Lynch Canada Inc. as Vice-President and Branch Manager; Jean-Charles Petitclerc who, from 1994 to 2000, was employed by Bank of Nova Scotia as Senior Vice-President -- Systems Operations and Technical Services; Michel Tremblay who, from 1993 to 1998, was employed by ING Canada as Senior Vice-President -- Investments, and by ING Investment Management as Senior Vice-President and Managing Director; and W. David Wood who, from 1993 to 1999, was employed by Correspondent Network as President. SHAREHOLDINGS OF DIRECTORS AND EXECUTIVE OFFICERS To the best of the Bank's knowledge, the directors and executive officers of the Bank as a group beneficially own less than 1% of the outstanding common shares of the Bank. ADDITIONAL INFORMATION The Bank undertakes to provide to any person, upon request, a copy of the Annual Information Form of the Bank, together with a copy of any document incorporated therein by reference, a copy of the annual consolidated financial statements for the year ended October 31, 2002 with the accompanying auditors' report, a copy of any subsequent quarterly financial statements, a copy of the Circular in respect of its most recent Annual Meeting of Shareholders that involved the election of directors, and a copy of any other document that is incorporated by reference into a preliminary short form prospectus or a short form prospectus whenever the securities of the Bank are part of a distribution. The Circular enclosed with the Notice, dated January 21, 2003, of the Annual Meeting of Shareholders scheduled for March 12, 2003, contains additional information such as the remuneration and indebtedness of directors and executive officers, the principal holders of Bank shares, the stock options awarded and the interests of insiders in material transactions. Copies of these documents may be obtained upon request from the Corporate Secretary's Office of the Bank, 600 de La Gauchetiere West, 4th Floor, Montreal, Quebec, Canada H3B 4L2. DISTRIBUTION NOTICE The Annual Information Form must be accompanied by copies of all the documents incorporated into it by reference when it is provided to security holders or other interested parties. Notice dated November 29, 2002 Page 123 UNDERTAKINGS The Registrant undertakes to make available, in person or by telephone, representatives to respond to inquiries made by the Commission staff, and to furnish promptly, when requested to do so by the Commission staff, information relating to: the securities registered pursuant to Form 40-F; the securities in relation to which the obligation to file an annual report on Form 40-F arises; or to transactions in said securities. CONTROLS AND PROCEDURES Based on their evaluations as of a date within 90 days of the filing date of this report, the Registrant's President and Chief Executive Officer and Senior Vice President, Finance and Technology have concluded that the Registrant's disclosure controls and procedures (as defined in Rule 13a-14(c) under the Exchange Act of 1934, as amended (the "Exchange Act")) are effective to ensure that information required to be disclosed by the Registrant in reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission rules and forms. There were no significant changes in the Registrant's internal controls or in other factors that could significantly affect these controls subsequent to the date of their evaluation including any corrective actions with regard to significant deficiencies and material weaknesses. The Registrant believes that it is not required to file this report pursuant to the provisions of the Securities Exchange Act of 1934, as amended, but is doing so on a voluntary basis. SIGNATURES Pursuant to the requirements of the Exchange Act, the Registrant certifies that it meets all of the requirements for filing on Form 40-F and has duly caused this Annual Report to be signed on its behalf by the undersigned, thereunto duly authorized. NATIONAL BANK OF CANADA /s/ Real Raymond ------------------------------------ Real Raymond President and Chief Executive Officer Date: March 19, 2003 CERTIFICATIONS I, Real Raymond, President and Chief Executive Officer of National Bank of Canada, certify that: 1. I have reviewed this annual report on Form 40-F of National Bank of Canada; 2. Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report; 3. Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report; 4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have: (a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this annual report is being prepared; (b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this annual report (the "Evaluation Date"); and (c) presented in this annual report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (and persons performing the equivalent functions): (a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and (b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 6. The registrant's other certifying officers and I have indicated in this annual report whether there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. /s/ Real Raymond ------------------------------------- Real Raymond President and Chief Executive Officer Date: March 19, 2003 I, Michel Labonte, Senior Vice President, Finance and Technology, of National Bank of Canada, certify that: 1. I have reviewed this annual report on Form 40-F of National Bank of Canada; 2. Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report; 3. Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report; 4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have: (a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this annual report is being prepared; (b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this annual report (the "Evaluation Date"); and (c) presented in this annual report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (and persons performing the equivalent functions): (a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and (b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 6. The registrant's other certifying officers and I have indicated in this annual report whether there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. /s/ Michel Labonte --------------------------------------------- Michel Labonte Senior Vice President, Finance and Technology Date: March 19, 2003 EXHIBIT INDEX The following exhibits have been filed as part of the Annual Report: Exhibit Description ------- ----------- 1 National Bank of Canada's 2002 Annual Report which includes: o Audited consolidated financial statements and the notes thereto, together with the Auditors' report (pages 73 to 111); o Management's Discussion and Analysis for the year ended October 31, 2002 (pages 33 to 72); 2 Management Proxy Circular of National Bank of Canada, dated January 23, 2003 issued in connection with the March 12, 2003 Annual Meeting of Shareholders 3 Consent of PricewaterhouseCoopers LLP and Samson Belair/Deloitte & Touche, General Partnership 4 Comments by Auditors for U.S. Readers on Canada-U.S. Reporting Differences 5 Certificates EX-1 3 t09344exv1.txt 2002 ANNUAL REPORT Exhibit 1 THE PRODUCT OF OUR EXPERTISE 2002 ANNUAL REPORT [NATIONAL BANK OF CANADA] HIGHLIGHTS
Percentage change 2002 2001 2002/2001 -------- -------- ---------- OPERATING RESULTS (1) (millions of dollars) Income before goodwill charges 429 582 (26) Net income 429 5w (24) Adjusted income (2) 555 580 (4) -------- -------- --- RETURN ON COMMON SHAREHOLDERS' EQUITY (1) Before goodwill charges 11.3% 16.0% Adjusted (2) 14.7% 15.9% -------- -------- --- PER COMMON SHARE (1) Income before goodwill charges Basic $ 2.18 $ 2.88 (24) Diluted 2.18 2.86 (24) Net income Basic $ 2.18 $ 2.78 (22) Diluted 2.18 2.76 (21) Adjusted income (2) 2.86 2.87 - Dividends declared 0.93 0.82 13 Book value 19.72 19.04 4 Stock trading range High $ 34.93 $ 31.00 Low 24.70 23.00 Close 29.39 24.25 -------- -------- --- FINANCIAL POSITION (1) (millions of dollars) Total assets 74,611 75,966 (2) Loans and acceptances 43,800 47,985 (9) Deposits 51,690 51,436 1 Subordinated debentures and shareholders' equity 5,493 5,763 (5) Capital ratios -- BIS Tier 1 9.6% 9.6% Total 13.6% 13.1% Interest coverage 7.39 8.74 Asset coverage 3.02 3.55 -------- -------- --- OTHER INFORMATION Number of common shares at end of year (thousands) 182,596 190,331 Number of common shareholders of record 28,549 29,766 Number of employees 17,285 17,070 1 Number of branches in Canada 530 546 (3) Number of banking machines 823 834 (1) -------- -------- ---
(1) The impact of the adjustment to the general allowance for credit risk is explained in Note 28 to the consolidated financial statements on page 108. (2) See Reconciliation of Reported Income to Adjusted Income in Table 1b on page 55. [WEALTH MANAGEMENT] DIRECTIONS: Entrust your assets to a National Bank Financial Planner. Benefit from the unique expertise of a multidisciplinary team specialized in financial and retirement planning. Enjoy all the privileges associated with personalized service. Watch your assets grow. Live life to the full! Page 1 NATIONAL BANK OF CANADA 2001-2002 THE PRODUCT OF OUR EXPERTISE [MONEY-SAVER MORTGAGE] DIRECTIONS: Meet with your National Bank advisor. Obtain an automatic reduction of 0.35% on the 3-month variable rate for a 5-year term*. WARNING: Savings realized with a Money-Saver Mortgage may cause euphoria. * Offer valid for a limited time Page 2 [IMAGES: PERSONAL FLEX LINE] [ SECURITY FLEX LINE] [ SUPERIOR FLEX LINE] DIRECTIONS: Take advantage of a highly versatile, multi-purpose product. With these lines of credit, manage your finances more easily by grouping your payments together, reduce interest charges, benefit from a single rate and flexible payment method, access funds, and finance your projects with the equity in your home. A ready-made solution for ready money. Page 3 NATIONAL BANK OF CANADA 2001-2002 THE PRODUCT OF OUR EXPERTISE [IMAGE: BUSINESS LATITUDE LINE OF CREDIT] DIRECTIONS: Benefit from the flexibility of a line of credit and the simplicity of a credit card. Do all your banking and contact an account manager through Internet Banking Solutions. Make it part of your business and appreciate the results. Page 4 [IMAGE: INTERNET BANKING] DIRECTIONS: Manage your accounts, pay your bills, transfer funds or carry out your international transactions online. Internet Banking Solutions offers a wide range of options to simplify your everyday banking in a secure, confidential environment. Convenience at your fingertips. Page 5 NATIONAL BANK OF CANADA 2001-2002 THE PRODUCT OF OUR EXPERTISE [IMAGE: PROGRESSIVE PAYROLL] DIRECTIONS: Simply transmit the hours worked by your employees. Let Progressive Payroll Solutions handle the rest: payroll calculations, payments to employees, government remittances, records of employment and year-end reports (income tax slips and summaries). Use as needed. Instant relief. Page 6 [IMAGE: MULTIFUND GIC] DIRECTIONS: Invest in a Multifund GIC and relax with confidence. Meet with your advisor or call 1-888-4TelNat for more information. Principal guaranteed or money refunded. 100% value. Page 7 NATIONAL BANK OF CANADA 2001-2002 MESSAGE FROM THE CHAIRMAN OF THE BOARD [PICTURE OF THE CHAIRMAN] Dear Shareholders, Of all the subjects debated in the business community in 2002, good corporate governance certainly headed the list. Investors are worried, and who can blame them? The financial scandals that have rocked certain corporations and major investment banks in the United States have left investors not knowing what to think, and in many cases wondering what the real situation is here in Canada. Do Canadian banks and financial institutions offer enough of a guarantee against embezzlement? Should Canadian companies -- and Canadian banks in particular -- be compelled to submit to new standards or stricter rules with respect to corporate governance? What is National Bank of Canada doing to ensure the quality of its governance? As Chairman of the National Bank's Board of Directors, it is my duty to give some answers to these perfectly legitimate questions. Because they are few in number, and because of their size and central role in keeping the country's economy running smoothly, Canadian banks are subjected to more stringent regulations than companies in other sectors of the economy. After all, the economy's health and performance depend to a great extent on how well financial institutions meet the needs of businesses, public-sector corporations, investors and consumers. The reputation and solid financial condition of the banks are therefore of the utmost importance. For all these reasons and for many others, Canadian banks not only have to submit to the regulatory requirements of stock exchanges and securities commissions, but they must also comply with the Bank Act, follow the guidelines of the Office of the Superintendent of Financial Institutions and respect the Standards of Sound Business and Financial Practices of the Canada Deposit Insurance Corporation. That all makes for a very regulated environment, and yet there is more. At the National Bank, the Board of Directors and its officers closely monitor the latest developments in corporate gov- Page 8 ernance, as well as the thinking and findings of experts, both here and abroad. We do so in order to ensure that we are complying with the regulations applicable to us, and we keep a close eye on changes so that we can study their impact, while all the time looking for ways to improve ourselves based on our judgement and our analysis of the current situation. Creating a corporate governance culture at every level of our organization is just as important as being required to respect the regulations in effect. This has been a priority for quite some time, and we intend to continue moving in this direction, in the best interests of our shareholders, our customers and our employees. As part of this effort, a Conduct Review and Corporate Governance Committee, composed of seven outside directors, was formed in order to stay on top of corporate governance issues and further strengthen the rules of good governance. In addition to ensuring that the specific provisions of the Bank Act and other regulations are applied and respected, the Committee has several other mandates, such as assessing the performance and efficiency of the Board and its committees; setting up and reviewing education programs for directors; monitoring developments in corporate governance; overseeing the mechanisms and procedures established by the Board concerning conflict of interest, use of confidential information and settlement of customers' complaints; and reviewing the code of professional conduct applicable to directors, officers and employees of the Bank. Moreover, the Bank's Audit and Risk Management Committee, which is composed of six outside directors, is responsible for overseeing appropriate risk management policies. It receives reports on compliance with laws and regulations, and reviews all financial information documents. I would remind you that the documents we issue on our quarterly results and the related conference calls are accessible to everyone on our website. Since March 13, 2002, the functions of Chairman of the Board and President and Chief Executive Officer have been separated. In addition, to further ensure their independence, the outside directors meet from time to time without members of management being present. To assist them in their deliberations, they can also retain the services of expert consultants. Finally, the Board brought in certain rules, requiring in particular that directors own a minimum of 2,000 National Bank shares. The success of a business depends in large part on the quality and integrity of its officers, and on the relationship between Board members and members of management. Meetings are therefore organized with senior management to give directors an opportunity to discuss the Bank's principal activities and the major challenges facing it in the short and medium term. But no matter how important and useful rules, procedures, codes of ethics and other standards of conduct may be, I firmly believe that a good board of directors is more than that. A good board also stands out for the way its members work together. What is important is to maintain a balance between interpersonal relations, respect, trust, competence and openness on the one side, and legal and regulatory aspects on the other. The very best boards form a community where the relationship between the various individuals is characterized by esteem, good faith, transparency, the sharing of information and experience, the right to disagree, and constructive criticism. Stricter rules are not necessarily synonymous with better corporate governance. Furthermore, the structures and standards that are suitable for large organizations can be crippling for smaller businesses and dampen the entrepreneurial spirit of their managers and directors. In closing, I would like to thank Robert Parizeau and Bernard Lemaire for their invaluable contribution to the work and deliberations of the Board of Directors. After many years of loyal service, and in accordance with our rules, Mr. Parizeau and Mr. Lemaire will not be seeking re-election. [ANDRE BERARD SIGNATURE] Andre Berard Page 9 NATIONAL BANK OF CANADA 2001-2002 MESSAGE FROM THE PRESIDENT AND CHIEF EXECUTIVE OFFICER [PICTURE OF PRESIDENT] "I am convinced that superior quality service is central to growing our business." Real Raymond Page 10 Dear Shareholders, If I had to sum up 2002 at the National Bank in just a few words, I would be inclined to say that it was a "year of positioning". We strengthened our positions on strong-potential markets for the Bank not only through acquisitions and major partnership agreements, but also by restructuring our lines of business and subsidiaries. As part of the new organization structure that was introduced in February 2002, an Executive Committee was given the mandate of defining the Bank's culture and philosophy, approving and pursuing the strategic initiatives of the National Bank group as a whole, managing the succession process, and ensuring a balance between employee engagement, customer satisfaction and shareholder satisfaction. The acquisition of Altamira, a leading Canadian mutual fund manager and distributor, allowed us to greatly expand our presence outside Quebec as a provider of wealth management services, particularly in Ontario. In addition to doubling the value of our mutual funds under management, this transaction gives us the opportunity to serve nearly 240,000 new customers through a network of 115 more financial advisors working out of six branch offices. Also, a few months before the Altamira acquisition, we purchased Gestion de placements Valorem, a specialized portfolio management firm with $1.4 billion in assets under management. At the partnership level, the most important agreement we signed in 2002 was with Investors Group, Great-West Life and London Life, all members of the Power Financial Corporation group. This 10-year agreement gives us access to the largest network of financial advisors in Canada, with 7,000 professionals serving over 3.2 million customers throughout the country. The National Bank is now positioned as one of Canada's primary manufacturers of financial products since we will be providing customers of the three new partner companies with personal loans (for investments or other purposes), lines of credit, deposit accounts, GICs, credit cards, Internet services and access to banking machines in the National Bank's own network and in The Exchange Network. Similar agreements have already been concluded with Assante, Promutuel and Edward Jones. National Bank Financial, which celebrated its centennial in 2002, continued to expand with the acquisition of Putnam Lovell, a U.S. investment bank. With offices in New York, San Francisco, Los Angeles, Toronto and London, Putnam Lovell NBF gives us a major presence on the international scene in terms of merger and acquisition advisory services, and corporate financing. This acquisition positions us in a specialized niche which we are fully familiar with, and will enable us to accompany our business clients more effectively as they pursue their expansion projects in the United States and elsewhere in the world. As regards our internal organization, the creation of the National Bank Wealth Management line of business is a good example of the type of positioning we are adopting in order to be Quebec's leading financial institution for wealth management services. Our financial planners and one-third of our personal bankers have been reassigned to this front-line service where customers are automatically directed towards a designated advisor whose role includes ensuring that they can draw on the expertise of various other professionals in the Bank. This same basic philosophy is what led us to transfer our corporate banking operations to National Bank Financial. By combining that division with the investment banking activities of NBF, we can now guarantee our clients highly integrated services providing bank credit as well as corporate financing on capital markets. It was this type of restructuring that enabled us to orchestrate large-scale acquisition projects such as the purchase of Franco-Nevada and Normandy by Newmont Mining to form the largest gold producer in the world. All these initiatives were possible because the National Bank is in sound financial health and has the means to match its ambitions. Not only are we the best capitalized of any Canadian bank, but we also have the best ratio in the banking industry in terms of impaired loans versus the resources to cover them (tangible capital plus allowances). We have substantially improved the quality of our lending portfolio, and our proactive management of the balance sheet means that our loans and investments are less risky. During the past 10 years, the Bank's earnings and profitability have grown in line with those of the other Canadian financial institutions. The symbiotic relationship we have developed over time with Quebec's economy and society affords us additional protection vis-a-vis our competitors. However, no fortress can be maintained without devoting the necessary energy to it and ensuring that its foundations are solid. That is why I am convinced that superior quality service is central to growing our business. Our internal surveys show that our customers' level of satisfaction with the National Bank has risen, particularly since we extended business hours by up to 40% at some 60 key branches that serve over 30% of our target clientele. For fiscal 2002, income before goodwill charges was $429 million or $2.18 per share as against $582 million or $2.88 per share in 2001. Data for both 2001 and 2002 include one-time events that should not be considered when analyzing earnings trends. Detailed information on those items is presented in Table 1b on page 55 of this Annual Report. Consequently, adjusted income amounted to $555 million or $2.86 per share versus $580 million or $2.87 per share in 2001. This corresponds to a 4% decline in adjusted income, attributable mainly to an increase in the provision for credit losses during the year. Fortunately, the rise in loan losses was partially offset by the strong performance of Financial Markets, Treasury and Investment Banking, while the results for the other lines of business remained relatively stable compared to 2001. The slight difference in adjusted earnings per share ($2.86 in 2002, $2.87 in 2001) was caused primarily by the repurchase of 9.5 million common shares under the normal course issuer bid, which was completed in October 2002. Total adjusted income, Page 11 NATIONAL BANK OF CANADA 2001-2002 MESSAGE FROM THE PRESIDENT AND CHIEF EXECUTIVE OFFICER on a taxable equivalent basis, was up by $82 million or 3%, to reach $3,253 million. The adjusted return on common shareholders' equity went from 15.9% in 2001 to 14.7% in 2002 as a result of the decrease in income on the one hand and the increase in average common shareholders' equity on the other. Although these results did not meet our expectations, I consider them satisfactory overall given the difficult economic environment that prevailed in 2001 and 2002. Moreover, as the figures show, our financial results were better than those achieved by most of the other major Canadian banks. In fiscal 2002, the Board of Directors declared a dividend of $0.93 per share, for an increase of 13.4% over the previous year. The return on National Bank shares, including dividends, was 25% in 2002. In comparison, the return was -8% on the Canadian stock market (as measured by the S&P/TSX index), and 4% on the Banks and Trusts subindex, for the same period. In short, the National Bank is in very good financial health, enjoys an enviable reputation, is prudently managed and is well positioned to take advantage of business opportunities that will ensure its growth in the years ahead. With a sound balance sheet, a bank enjoys greater access to capital markets and the resources needed to expand its franchise and develop its technological infrastructure. The substantial improvement in the quality of our credit portfolio and our capital ratios in 2002 puts us in a strong position going forward. I would therefore like to offer my sincere thanks to our employees, our shareholders, our customers and our partners, all of whom help us to make the National Bank a dynamic, responsible and respected business. /s/ Real Raymond Real Raymond Page 12 TABLE OF CONTENTS
Message from the Chairman of the Board 8 Message from the President and Chief Executive Officer 10 NATIONAL BANK FINANCIAL NETWORK The Wealth Management Stakes 16 Structure and Operations of the National Bank 20 Economic Environment 31 MANAGEMENT'S DISCUSSION AND ANALYSIS Management's Discussion and analysis of Financial Condition and Results 34 Additional Financial Information 54 Quarterly Results 66 Glossary of Financial Terms 70 CONSOLIDATED FINANCIAL STATEMENTS Management's Report 75 Auditors' Report 76 Consolidated Statement of Income 77 Consolidated Balance Sheet 78 Consolidated Statement of Changes in Shareholders' Equity 79 Consolidated Statement of Cash Flows 80 Notes to the Consolidated Financial Statements 81 Statistical Review 112 Subsidiaries 114 SUPPLEMENTARY INFORMATION Directors 116 Corporate Governance 117 Officers 118 Principal Subsidiaries and Offices Abroad 120 Annual Information Form 121 Information for Shareholders and Investors 124
Page 13 NATIONAL BANK FINANCIAL NETWORK Page 15 NATIONAL BANK OF CANADA 2001-2002 NATIONAL BANK FINANCIAL NETWORK THE WEALTH MANAGEMENT STAKES It may safely be assumed that everyone looks forward to having a comfortable retirement and, in due course, leaving an inheritance to family or friends. Over the years, you have placed your savings in bank deposits, shares, mutual funds, bonds, life insurance policies, real estate, retirement plans, and the like. Together, these all represent your personal wealth. Managing your personal wealth is, in part, the art of determining if these various components are balanced in such a way as to ensure that you receive the best possible returns for the level of risk you are prepared to assume. Wealth management, solidly underpinned by a knowledge of financial planning, is also a matter of defining the best possible tax and legal conditions under which to build your wealth so that one day you can leave a legacy to those who matter the most to you. A growing number of Canadians are focusing more actively on saving and investing in order to ensure a secure future for themselves and their children, with the result that wealth management has become one of the fastest growing markets in the country. In addition to its enviable profitability, this market presents undeniable growth opportunities because of three trends: 1) the general aging of the population, which means that more wealth is being accumulated; 2) heightened awareness of the limitations and uncertain future of government pension plans; and 3) the increasing popularity of professional fund management services, as opposed to holding equities or conventional guaranteed investment certificates that are not actively managed. Given this context, there are many who say that the large Canadian banks enjoy a privileged position as they already manage the lion's share of personal savings. Conveniently forgotten is the fact that the borders have been opened up to foreign financial institutions and the Canadian financial services industry has been deregulated. The result is fierce competition that comes in more guises than ever. Banks, insurance companies, mutual fund managers, securities brokers and financial planners are all vying with each other to meet customers' demand for wealth management services. For an institution like the National Bank, the intense competition of recent years is not the only challenge to overcome. Since the start of the millennium, the wealth management sector -- in Canada as in most developed countries -- has been experiencing a growth crisis triggered by the slowing of the global economy and depressed stock markets. The business of managing wealth suddenly appears to carry more risk and to be not as easy as it was throughout the 1990s. Banking institutions are realizing that profitability is never assured and it can even fall dramatically when disappointing stock market performances translate into lower investor asset values and trading volumes. Despite economic ups and downs and the highly competitive nature of this market, the wealth management sector offers good prospects for the National Bank. We project that a growing share of our revenues and earnings will be generated by this market in the years to come. Thanks to our status as a super-regional bank, our position as the leading bank for SMEs in Quebec, our widely recognized corporate brand, the remarkable performance of our portfolio managers, our extensive line of products and services, and our vast network of professionals specialized in all areas of financial management, we are confident that the National Bank has all the tools it needs to stand out from the crowd and to maintain its position as the largest wealth manager in Quebec. AN INDUSTRY WITHOUT BARRIERS The wealth management market is an open market. It is far from being the stronghold of the big banks. Unlike traditional financial intermediary activities, there are virtually no legal or regulatory barriers to entry. Hundreds of independent fund managers, financial planners and group savings representatives, who are more like self-employed individuals than small businesses, are all competing to garner their share of the market. Added to these are the larger entities like insurance companies, unaffiliated brokerage firms, groups of independent financial planners and mutual fund companies. It is therefore not surprising that no one particular institution dominates the sector. In the United States, for example, no player in the wealth management sector controls more than 2% of the market. The 20 largest financial institutions combined manage only 12% of total assets. In Canada, assets are more heavily concentrated in the hands of the major banks than they are south of the border. Yet, there is no denying that Canadians' savings are migrating toward the multitude of financial advisory firms which, while admittedly smaller, are sometimes well adapted to serving their particular clientele. Canadian banks are therefore competing not only against one another, but they are also going head to head with hundreds of small entrepreneurs who are keen, ambitious and available, whose operating costs are extremely low, and who offer very personalized service. Banks consequently have to exploit their corporate image and their vast expertise in order to dispel preconceived notions that their services are less personalized or less specialized than those offered by independent advisors. The great strength of the Canadian banking industry lies in its capacity to offer a vast array of wealth management products and services. At the National Bank, for instance, customers can count on full-service and discount brokerage services, trust services, access to professionals in all our domestic branches, a family of more than 100 mutual funds, as well as personalized, private and discretionary wealth management services, to name only a few. Page 16 Successfully offering access to such a variety of products, services and professionals under a single banner is more than simply a question of economies of scale and diversification. Financial planning and wealth management call for a comprehensive approach matched by an appropriate, well coordinated offering of services. Very few financial institutions are able to do this as well as the National Bank does in Quebec. That is one barrier we want to make insurmountable for most of our competitors. THE MUTUAL FUNDS REVOLUTION Canadians are investing more and more of their money in mutual funds. This is by far the single most important change in the financial services sector in the past 20 years and amounts to a veritable revolution in terms of savings and investment habits. We have come a long way from the days when Canadians entrusted nearly all of their savings to banks, trust companies and credit unions. By the end of the 1990s, almost half of Canadians' savings were going to mutual fund companies which then used this money to invest in securities through capital markets. Some mutual fund companies have been so successful in establishing their brands that customers of the major banks do not hesitate to insist that they be included in their portfolio. If banks refused to offer those funds, many of their customers would likely take their business elsewhere, perhaps to securities or insurance brokers, to obtain what they want. These days, customers of the major banks are looking for an offering that is more mainstream and which includes competitors' funds. Even though the banks promote their own products first and foremost in their advertising and marketing material, they nevertheless authorize their advisors to sell almost all the funds available on the market whenever they are requested by customers. It was precisely in this context that the National Bank signed an agreement with Fidelity, the most prestigious mutual fund family in the world. Our strategy is to highlight the complementary nature of our two institutions' respective offerings by showing, for example, that the Bank's strengths lie in bond funds and Canadian equity funds while those of our partner tend more towards U.S. and international equity funds. Investors realize that no single team of fund managers can be the best in every category, and a bank can only enhance its credibility by developing partnerships with recognized third-party fund managers. Acquiring families of funds is another way of increasing our presence in the Canadian wealth management market. The National Bank's sound financial condition and excellent capitalization make it well positioned to seek out the best business opportunities. For instance, with our acquisition of the mutual fund management firm Altamira, we immediately doubled our mutual fund assets under management to nearly $10 billion. Even better, this transaction enabled us to make further inroads into the market outside Quebec, much as we did in 1999 when we merged our brokerage firm Levesque Beaubien Geoffrion with Ontario-based brokerage First Marathon to form National Bank Financial and thereby raised the profile of our brokerage subsidiary outside Quebec. Altamira, which offers 47 mutual funds, has 240,000 customers, more than half of whom are in Ontario. Further to this transaction, the National Bank now ranks 14th in the Canadian mutual fund industry. According to the Investment Funds Institute of Canada, the returns achieved by the National Bank on its mutual fund portfolios placed it among the top five financial institutions in 2002. Our outstanding performance, which is attributable to a prudent, disciplined and value-oriented approach combined with a more aggressive, proactive marketing approach, resulted in a net increase in sales even though financial markets were beset by problems in 2002. The indisputable talent, consistent success and rigorous investment philosophy of the fund managers at our subsidiary Natcan Investment Management have long been recognized by the industry and investors alike. Through the contribution of these professionals, we were able to stand out from our competitors in the area of mutual funds, and even surpass our expectations. NEW WEALTH AND INHERITED WEALTH A study conducted by Cap Gemini Ernst & Young in 2001 revealed that there are more than 7.2 million millionaires worldwide, 2.5 million of whom are in North America. Canada, for its part, has 315,000 millionaires and this figure could rise to 915,000 by 2010. According to the magazine Canadian Business, the number of Canadian families with at least $1 million in liquid assets has risen by 13% each year since 1994. In 2000, 177,000 families belonged to this group, representing a total of $800 billion. In other words, almost half of all assets under discretionary management are held by 1.3% of Canadian households. Needless to say, all the financial institutions are rolling out the red carpet to attract them as customers. In Canada, a thriving entrepreneurial spirit is largely responsible for this proliferation of millionaires -- entrepreneurs who have been very successful and accumulated substantial wealth over the years or who have acquired it either by selling their company or merging it with another. The National Bank's strong penetration of Quebec's SME sector has earned it a market share of 40%, giving it an enviable position in this sector. We can offer our commercial customers financial services that not only meet their company's needs, but also their own needs as regards the management of their personal and family assets. Page 17 NATIONAL BANK OF CANADA 2001-2002 NATIONAL BANK FINANCIAL NETWORK THE WEALTH MANAGEMENT STAKES (cont.) NEW WEALTH AND INHERITED WEALTH (cont.) For most of the big Canadian banks, the first criterion in the selection of wealth management customers is the liquidity of their assets. At the National Bank, the focus is more on the potential wealth of its customers. For instance, a 25-year-old entrepreneur with $10,000 to invest would be of interest to each one of our wealth management advisors because that same young man, in 10 years' time, could well belong to the group of customers with $250,000 under management. Our position as the leading bank of SMEs in Quebec has led us to adopt a strategy that gives as much importance to our customers' potential to amass wealth as to their current assets. A comparison with our banking competitors shows that the high net-worth customers of the major banks have gone from the phase of accumulating assets to that of protecting them through professional management. At the National Bank, customers who are at the wealth accumulation phase of their lives outnumber those who have reached the capital preservation phase. That is why we are confident in saying that the growth outlook for our market is as good for the long term as it is in the near term. According to a longstanding tradition, upscale customers at the large European and North American banks are divided into two main categories. There are the newly wealthy on the one hand, usually entrepreneurs, professionals and corporate executives who have accumulated wealth through their entrepreneurship, their stock options or their professional occupation. There are also those who have inherited wealth, that is to say, customers whose main income is derived from family money that is passed down from one generation to the next. What generally distinguishes the first group from those whose wealth is inherited is their higher tolerance for risk, their comparative lack of loyalty to any particular financial institution and their desire to play a more active role in managing their wealth. By and large, they are also more familiar with the new information technologies, and their investment horizon is shorter when it comes to taking a critical look at their portfolio returns. While still useful for targeting this clientele, the differences between the two groups are tending to vanish as the new generation of those who inherited money is more receptive to riskier asset classes, such as equities, than their parents' generation before them. We are also noticing that both groups, regardless of how they came by their wealth, share a common goal: they want to retire at a younger age than their peers. They are therefore more concerned than most people about preserving their capital. Without denying the usefulness of this distinction between new wealth and old wealth, the National Bank's customer segmentation approach is more refined and takes into account a larger number of factors that are simultaneously socio-demographic, socio-economic and cultural. The bank that knows its customers best always has an edge over its competitors, and its chances of being entrusted to manage a growing share of customers' assets are also that much better. THE VALUE OF PROFESSIONAL ADVISORS If the bearish stock markets since March 2000 have had one positive outcome, it is that they made investors realize more than ever the need for sound professional advice in managing their financial assets. In good times and bad, the services of a professional advisor are worth their weight in gold. Making good investment decisions requires a combination of three key ingredients: appropriate financial knowledge, a good understanding of oneself and enough discipline to stick to a plan without being swayed by emotion. Very few investors possess all three ingredients in equal measure at the same time. That is why professional advice is very often essential -- not just because of the training or extensive knowledge that advisors have, but because of their ability to help investors gain a better understanding of themselves. Because of their neutral position, advisors can act as an objective third party in the decisions investors have to make in order to achieve their financial goals. The problem is that even in times of economic prosperity and stock market buoyancy, the returns earned by many investors can be less than impressive. As revealed in a study published in the October 2002 issue of the Quebec business magazine Finance et Investissement, Canadian investors show a strong propensity for buying a mutual fund category when the price of the securities making up the fund is high and then selling when prices are low. With the passage of time, such behaviour becomes increasingly costly to investors. The end result is that although they invest substantial amounts of money, they do not earn anything like the average return, on paper, of each fund category, let alone the return of the benchmark indexes. Page 18 From 1990 to 1999, for example, the total return of the TSE 300 index was 193%, while holders of Canadian equity funds obtained an average return of 97%. The same phenomenon was observed for balanced funds and Canadian bond funds. The benchmark index for balanced funds rose by 190% over 10 years, whereas Canadians holding this type of mutual fund earned a meager 67% return in comparison. For its part, the Canadian bond fund index advanced by 171%, while investors who opted for this fund category had to content themselves with an average return of 50% over 10 years. It would be unfair to blame fund managers for the disappointing performance of those investors' funds. They did their job properly, achieving average returns that came very close to the indexes. The misfortunes of some fund holders can only be explained by the allure of fast, easy gains, a lack of discipline and a tendency to move in and out of funds solely on the basis of what was in vogue at the time and past returns. Mutual fund holders who have a financial advisor are better at keeping their emotions in check and hold on to their funds longer than investors who manage their assets themselves. This translates into a higher return on their portfolio, one that is much more in line with the benchmark indexes. In short, if you have mutual funds managed by the National Bank, if you kept a cool head throughout the 1990s, if you stayed on course with respect to your financial goals and avoided excessive trading, then the chances are that the returns you obtained were close to the market indexes, if not higher. The quality of the relationship between customer and financial advisor is the linchpin of success, not just for a financial institution active in wealth management, but also for a customer whose portfolio performs well because of the sound management of his financial assets. Canadian banks have long been seen as not having the necessary structures for offering constant, personalized wealth management services. The banking culture, it was said, made investors customers of their bank rather than customers of their advisors. And with bank personnel being transferred regularly, it was difficult for customers to establish an ongoing relationship with one advisor. In wealth management, however, long-term success presupposes a lasting relationship based on trust that enables advisors to manage their customers' emotional reactions to financial market performance in addition to managing their financial assets. The main reason why customers transfer their business to another financial institution is because their advisor leaves. A survey conducted by the Taddingstone Consulting Group, which appeared in the summer 2000 issue of Canadian Business, revealed that high net-worth customers at the large Canadian banks felt that financial planners were far too young, had very little experience and tended to move from one employer to another. That is why we at the National Bank place great importance on having an effective personnel retention policy, a superior professional training program, and a corporate culture that puts a premium on teamwork, to the tangible benefit of all its customers. The wealth management needs of a customer can require the involvement of several different types of professionals, such as financial planners, accountants, tax specialists or portfolio managers. At the National Bank, a customer's first point of entry to our network of professionals is increasingly through a single intermediary, be it a financial planner, an account manager or a private banking manager. However, once customers are in contact with a group of professionals who offer complementary services under the same banner, the risk that an investor will leave because of an intermediary's departure becomes much lower. On average, we manage 26% of our customers' assets. Our goal is to increase this share to 33% over the next three years. Our National Bank Wealth Management line of business, with close to 300 financial advisors, is just one example of our determination to be the largest wealth manager in Quebec and one of the 10 largest in Canada as a whole. Page 19 NATIONAL BANK OF CANADA 2001-2002 NATIONAL BANK FINANCIAL NETWORK STRUCTURE AND OPERATIONS OF THE NATIONAL BANK With Real Raymond, its new President and Chief Executive Officer, at the helm, National Bank of Canada had another solid year in fiscal 2002, successfully maintaining an effective balance between shareholder interests, customer satisfaction and employee engagement. Six factors contributed to this performance and will continue to be key to the Bank's success in the years ahead: improved service quality at every level of the organization; regional dominance in Quebec where our market shares exceed those of the major national players; concentration of our operations in value-added sectors; economies of scope afforded by more varied sources of revenue; excellent capitalization; and strategic alliances with world-class companies and major financial distributors in Quebec and the rest of Canada. Being the number one bank in Quebec is extremely important to us, while being the sixth largest bank in Canada is more of a statistic. That is not to say, however, that we are not committed to maintaining our presence outside Quebec. Our niche markets of choice, such as wealth management, commercial banking and capital market brokerage services, require us to have a strong presence through our branches in Atlantic Canada, Ontario and the major Western Canadian cities. Looking at the Bank's operations from a horizontal perspective, our services are available in every region of Canada. We also favour more specialized niches that enable us to serve customers around the world through representative offices and strategic alliances. The Bank's Canadian network consists of 530 branches and 823 banking machines, complemented by some 500 banking machines accessible through The Exchange Network, and a total of 17,285 employees, the vast majority of whom are in Quebec. From a vertical standpoint, the National Bank offers a full line of financial services. We are active in personal banking, commercial banking, international capital markets, securities brokerage, insurance, wealth management, mutual fund and pension plan management, as well as in providing financing for large corporations and government organizations. The quality of the service offered to customers is the only real competitive advantage that an institution can have in today's financial services market. Access to service and the competence of our personnel are the two key elements that allow us to stand out from the competition. That is why we have extended business hours at some 60 of our branches throughout Quebec by nearly 40%. Over 530,000 customers are already benefiting from the extended hours at those branches which are now open 35 hours a week or more. We are currently looking into the possibility of similarly extending hours at certain other branches. Reorganizing job functions and setting up competency development projects was the approach taken by the Bank to ensure that its employees upgraded their knowledge of products and services and focused on their objectives. That was the second part of our plan to enhance customer service. Managers at the Bank have adopted a new way of thinking which holds that everyone at the National Bank has customers and everyone should be concerned with improving service quality. Support units and employees who are not in direct contact with customers, whether at Head Office or elsewhere, are committed to giving every assistance to the front-line units that serve customers on a day-to-day basis. In that regard, support units sign actual service agreements, pledging to deliver quality products and services to the units that deal directly with the Bank's clientele. These agreements give employees access to scorecards and feedback informing them to what extent they have succeeded in achieving the desired level of quality and how they can continue to make improvements. According to a poll conducted by Leger Marketing to determine the 150 most admired companies in Quebec, the National Bank has been gaining in popularity and now ranks first among financial institutions operating in the province. The fifth edition of this annual survey confirmed that the National Bank has made gains in winning the hearts of Quebecers whereas most of the other financial institutions have lost ground. This independent study by Leger Marketing is further proof that our efforts to enhance customer service and improve the Bank's image among the general public have started to yield encouraging results. THE BOARD OF DIRECTORS The Board of Directors supervises the management of the business and affairs of the National Bank, either directly or indirectly through its committees. Its role is to protect the Bank's assets and ensure its effectiveness, profitability, long-term survival and development. To that end, the mandate of the Board is to define the Bank's mission, review its business objectives and approve strategies for achieving them. The Board and its three committees provide direction and support for the Bank's Executive Committee in pursuing the performance objectives established in the strategic plan. Page 20 One of the goals set by the Bank's senior management is to develop a corporate culture that makes the National Bank a model corporate citizen among its Canadian peers. The National Bank enjoys an excellent reputation as a good corporate citizen. We were therefore pleased to place 18th in the list of Canada's best corporate citizens from among the 300 companies included in the S&P/TSX index. The study, which was published in Corporate Knights magazine and covered in The Globe and Mail in June 2002, was conducted by Michael Jantzi Research Associates, a firm that tracks the social and environmental performance of Canadian companies. For the purposes of the study, a good corporate citizen was defined as a corporation that makes money for its shareholders, enhances its national and local communities, leaves as small a footprint as possible on the environment, treats employees well, and keeps customers happy. MANAGEMENT In February 2002, a new organization structure was implemented at the National Bank. An 11-member Executive Committee was given the following mandate: to define the culture and philosophy of the Bank; to approve and pursue the strategic initiatives of the National Bank group as a whole; to manage the succession process; and to ensure a balance between employee engagement, customer satisfaction and shareholder satisfaction. Reflecting the strong emphasis on teamwork, efficiency and succession planning at the Bank's senior management level, the new Executive Committee is composed of the following senior officers: Real Raymond, President and Chief Executive Officer Jean Turmel, President -- Financial Markets, Treasury and Investment Bank G.F. Kym Anthony, President and Chief Executive Officer, National Bank Financial Patricia Curadeau-Grou, Senior Vice-President -- Risk Management Gisele Desrochers, Senior Vice-President -- Human Resources and Operations Jean Houde, Senior Vice-President -- Corporate Affairs Michel Labonte, Senior Vice-President -- Finance and Technology Michel Lozeau, Senior Vice-President -- E-Commerce Tony Meti, Senior Vice-President -- Commercial Banking and International Michel Tremblay, Senior Vice-President -- Personal Banking and Wealth Management Louis Vachon, Senior Vice-President -- Treasury and Financial Markets BUSINESS SEGMENTS Personal Banking and Wealth Management is divided into two major divisions: Personal Banking (branch network, deposits, personal loans, mortgages, insurance, debit and credit cards, etc.) and Wealth Management (full-service brokerage for individuals, discount brokerage, mutual funds, trust services, etc.). Commercial Banking, for its part, is responsible for servicing businesses and the real estate sector in Canada, while Financial Markets, Treasury and Investment Banking is in charge of corporate finance, treasury operations, management of the Bank's assets and liabilities, corporate brokerage services and portfolio management. PERSONAL BANKING AND WEALTH MANAGEMENT Personal Banking and Wealth Management serves over two million individuals, self-employed customers and small businesses in Canada through its branch network, call centres, banking machines and Internet platform. These service delivery methods are complemented by a network of off-site financial advisors and commercial banking centres. Our objective is simple: we want to outperform all our competitors when it comes to helping our customers achieve their financial goals. Significant changes were made in Personal Banking and Wealth Management subsequent to the management restructuring in February 2002. Three objectives were set, all with the view to enhancing the quality of customer service: 1) group together service and sales forces according to their target clientele and distribution method; 2) finalize the separation of manufacturing units from distribution units; and 3) ensure greater cohesion in the way the branch network functions. As a result, the distribution networks of Personal Banking and Wealth Management are now divided into three entities -- the branch network, the specialized sales network and alternative networks. This restructuring enables us to offer our individual, self-employed and very small business customers an array of products and services designed to assist them in managing their savings and financial assets more effectively. Page 21 NATIONAL BANK OF CANADA 2001-2002 NATIONAL BANK FINANCIAL NETWORK STRUCTURE AND OPERATIONS OF THE NATIONAL BANK (cont.) PERSONAL BANKING AND WEALTH MANAGEMENT (cont.) One of the highlights of fiscal 2002 for Personal Banking and Wealth Management was the acquisition of mutual fund manager and distributor Altamira. ALTAMIRA ACQUISITION FURTHER STRENGTHENS OUR PRESENCE IN ONTARIO In August 2002, the National Bank acquired Altamira, a leading manager and distributor of mutual funds in Canada. This acquisition greatly expanded the Bank's presence outside Quebec in the area of wealth management, especially in Ontario. Through its family of funds, Altamira manages approximately $5 billion in assets -- slightly more than $4 billion on behalf of individual investors and just under $1 billion for institutional clients. In other words, the Bank doubled the value of its mutual fund assets under management to nearly $10 billion. From a geographic standpoint, over half of the company's assets under management come from customers in Ontario and 15% from customers in Quebec. Altamira, which manages and distributes 47 mutual funds, employs 300 people, including 115 advisors in six branch offices and three call centres. Its head office is in Toronto. Altamira services approximately 137,000 customers directly and an additional 103,000 through a network of intermediaries. In acquiring Altamira, the National Bank gained a large volume of new customers, expanded its distribution network and created synergies by combining two financial institutions with complementary investment management styles. Through its subsidiary, Natcan Investment Management, the Bank is recognized for its value approach while Altamira's expertise lies in a growth approach. These complementary management styles and the combined resources of the two companies should result in a broader diversification of products and expand the Bank's customer base Canada-wide. A few months prior to the acquisition of Altamira, the Bank's Natcan subsidiary purchased Gestion de placements Valorem inc., a portfolio management firm with $1.4 billion in assets under management. Valorem, founded in Quebec City in 1994, was 55% owned by SSQ Financial Group, a company actively involved in the field of insurance with one million customers and over 1,000 employees. The transaction was greatly facilitated by the fact that Valorem's principal shareholder was keen to take advantage of Natcan's expertise in asset and mutual fund management. As a result, SSQ's life insurance arm has become another of Natcan's major insurance company clients, following the example of Clarica. Another achievement we are particularly proud of is the agreement the Bank concluded with three companies belonging to Power Financial Corporation, namely, Investors Group, Great-West Life and London Life. In addition to its immediate financial advantages, this partnership agreement gives the National Bank access to one of the best financial product distribution networks in Canada and, over the long term, will enhance its reputation and reach outside Quebec. The agreement is similar to those concluded in 2001 with Assante, a leading provider of integrated wealth management services with a network of 1,500 advisors in Canada, and Groupe Promutuel, one of Quebec's largest property and casualty insurers that is strongly represented in the insurance and financial services market throughout Quebec. As a manufacturer of financial products, the National Bank has expanded its distribution network more in the past year than ever before. AGREEMENT WITH THREE POWER FINANCIAL CORPORATION COMPANIES It is not every day that a bank signs an agreement giving it access to a Canada-wide network of over 7,000 financial advisors and a customer base of more than 3.2 million individual clients. However, that is exactly what the Bank did on November 6, 2002, when it signed an agreement with Investors Group, Great-West Life and London Life, all three of which are part of the Power Financial Corporation group. Through this 10-year agreement, which is renewable, the Bank will be able to consolidate its position as one of Canada's leading manufacturers of financial products. The Bank products to be distributed by the three Power Financial Corporation companies include loans for investment purposes (RRSPs and non-RRSP investments), lines of credit, deposit accounts with chequing privileges, personal loans, GICs, credit cards, Internet services and access to banking machines in the Bank's own network and The Exchange Network. Page 22 The creation of the National Bank Wealth Management line of business lies at the core of our penetration strategy in the wealth management market. During fiscal 2002, not only did we strengthen our new sales force, but we consolidated our position in this fast-growing strategic market, mainly among client segments that have an entrepreneurial or professional profile. The mission of National Bank Wealth Management is to offer personalized management services that enable its customers to identify and achieve their financial goals by selecting from a vast range of products and services of the highest quality. The Bank's Financial Planners and about 30% of its Personal Bankers have been assigned to this integrated business line. Their objective is to boost the Bank's market shares among wealthy and upscale client segments and to increase the share of customers' portfolios managed by the Bank. National Bank Wealth Management has been successful in applying a new approach whereby each customer is automatically assigned an advisor who oversees and facilitates access to the services of various other experts according to the customer's needs. Teamwork is therefore crucial and the designated advisors are called on to work closely with experts who can supplement their knowledge and the services they provide. Advisors now also accompany their customers to meetings with Bank specialists from such sectors as National Bank Discount Brokerage, National Bank Securities, National Bank Financial or the Private Banking Group of National Bank Trust. In other words, a single advisor guides the customer and opens the door to all the financial solutions offered by the Bank while specialized teams, using the latest banking technology, take charge of transaction and administrative functions so that front-line staff can develop their markets, services and customer relationships. The Bank has made inroads into the wealth management market in other ways as well. For example, current trends indicate that an increasing number of employers are turning away from traditional defined-benefit pension plans in favour of group RRSPs. Many employers have found that setting up traditional pension plans is a costly process and that their employees in fact prefer plans that give them more control over their investments. National Bank Trust responded to this need by adding new types of investments, such as segregated funds from reputable external managers, to its existing product offering of GICs and assisted portfolio management products managed by Natcan. As a result, employers and employees enjoy more control over their investments and can take advantage of an Internet platform that lets participants consult their account and carry out transactions online 24 hours a day, seven days a week. In order to deploy these new offerings, National Bank Trust signed an administrative agreement with Industrial Alliance, an experienced player in the savings and retirement field, which will provide administrative support for group retirement plans. Thanks to the trust subsidiary's initiatives, the Bank has gained a very advantageous position in a market that has long been dominated by life insurance companies. With over $40 billion in assets under administration, National Bank Trust continues to be one of the dominant trust companies in Quebec. The three major product lines offered by its Personal Trust Services sector are private investment management, trust administration and estate settlement. Its Corporate Trust Services sector provides a complete range of services, including group pension plans, share ownership management, securities administration and custodial services, and mutual fund administration. The National Bank is among the leading issuers of MasterCard cards in Canada and ranks among the 100 largest issuers of Visa and MasterCard cards in the world according to a Nielson report released in December 2001. We were the first in the country to offer a debit card, co-branded cards, a secure payment server for Canadian merchants' e-commerce operations, and instant in-store credit. The Bank's Electronic Payment Solutions Department offers no less than 103 types of credit cards and is also responsible for smart cards, banking machines, electronic payments and point-of-sale terminals. Despite the downward spiral on stock markets in 2001 and 2002, National Bank Discount Brokerage (NBDB) maintained its growth in terms of account openings and assets under administration. NBDB currently holds close to 25% of the discount brokerage market in Quebec with slightly more than 100,000 customers, 90% of whom are also National Bank customers. For the fourth time in a year, the Dalbar research firm ranked NBDB first for the overall quality of its telephone and e-mail customer service, ahead of all its Canadian competitors. Customers of NBDB can choose to carry out their transactions by telephone with a representative, through the company's website, by cellphone or through the automated Dial-A-Quote telephone system. The NBDB website (formerly at www.invesnet.com) was completely redesigned and has been integrated into the Bank's site at www.nbc.ca/nbdb. The shared portal means that customers can manage all their finances from a single location. The trading area of the site was also given a brand new look and features many improvements such as a more intuitive structure; easier, faster and more dynamic navigation; revised terminology; menus and buttons; and a whole new design. Page 23 NATIONAL BANK OF CANADA 2001-2002 NATIONAL BANK FINANCIAL NETWORK STRUCTURE AND OPERATIONS OF THE NATIONAL BANK (cont.) PERSONAL BANKING AND WEALTH MANAGEMENT (cont.) The Bank's Internet banking solutions have continued to evolve. For instance, since June 2002, we have been offering person-to-person, or P2P, electronic payments for individuals. Our customers can now transfer funds from their account to the account of another Bank customer in complete security via the Bank's website. This instant online service is greatly appreciated by customers who regularly transfer funds to relatives or friends as it presents significant advantages over cheque-based transactions in terms of speed and simplicity. August 25, 2002 was the launch date of the Bank's new and improved website at www.nbc.ca. The revamped site is both efficient and user-friendly, making it easier for users to navigate the site and carry out searches by product type or other specific criteria. This major revision was designed to ensure that the Bank and its subsidiaries project a unified image to its customers and to the public at large. In particular, the Internet platforms of National Bank Discount Brokerage and National Bank Trust have been integrated into the main Bank site. Customers who visit the site can access a variety of tools, guides and practical advice, including economic analysis reports, daily market summaries, business plan models, financial calculators and investment guides. In addition, all transaction operations have been centralized under the www.nbc.ca address where individuals and businesses can do their banking, apply online for loans and credit cards, as well as purchase deposit products and RRSPs. The retail market is a keenly competitive market where players must constantly strive to stand out through their advertising and marketing activities. The Bank's efforts in this regard were recognized during the year at the 2002 Media Innovation Awards organized by Marketing Magazine and the Canadian Media Directors' Council. The awards highlight excellence in applying innovative and strategic ideas to media use and planning. The originality of the Bank's RRSP campaign impressed the jury, particularly the informative video clips that appeared in banners on external websites (a new technology that enabled Internet users to view information segments on the 2002 RRSP campaign without having to download them). The jury also liked the way the concept was integrated with other media (radio and television). COMMERCIAL BANKING The National Bank enjoys a well-deserved reputation as the leading bank for small and medium-sized enterprises (SMEs) in Quebec. Three Quebec employers out of five do business with the Bank in one way or another. Serving over 12,000 companies, the Commercial Banking line of business offers a complete selection of financial services that SMEs rely on to grow and prosper. In many respects, the strong performance of Commercial Banking is attributable to the symbiotic relationship which the Bank has with the Quebec economy. The province is no longer the commercial bankruptcy capital of Canada. Since the second half of the 1990s, the number of business failures has in fact been lower in Quebec than in Ontario. Quebec's economy has undergone a very impressive modernization process during the past decade. Approximately 32% of the province's exports now originate from technology-intensive industries, versus 14% for Canada overall. Developments such as these can only have a positive impact on a super-regional bank such as ours. At the end of 2002, all commercial clients, including small businesses, real estate financing clients, self-employed individuals and agricultural clients, were grouped together under Commercial Banking. This restructuring, which takes full effect in 2003, will enable us to give all entrepreneurs, regardless of their size or sector of activity, the specialized products and services they need to run their businesses. We will also be able to deploy more consistent, targeted strategies to earn the trust of our commercial clients and successfully refer them to our wealth management and personalized financial planning teams. Our market share in Quebec is higher than that of any other bank. We focus on specialized niches where we can boost our penetration levels and reach new commercial clients. The Bank's teams of professionals have developed specific competencies enabling them to provide financing and support to businesses in sectors such as agriculture, television and motion pictures, energy resources and advanced technologies. We have also developed expertise and specialized services for SMEs that choose the franchise model, a structured business formula that is an advantageous way to start up and grow small businesses. In fact, we are the only bank with franchise and partnership experts on staff. These professionals support franchisors and franchisees alike, offering them a range of standardized services. Given our long involvement in franchising and partnerships, we have acquired in-depth knowledge of the concepts, backgrounds and profiles of the businesses operating under that model. In this fast-growing market, we believe it is important to stay a step ahead of our competitors. Page 24 High-technology and knowledge-based companies in Canada can count on the services of the Commercial Banking Technology Group, which is composed of finance and technology professionals. This team serves companies across the country from its main centre in Montreal and its regional centres in Quebec City, Ottawa and Toronto, giving us an active presence in the primary locations where technology business is concentrated. The loan packages and financial services offered by the Bank to technology companies are perfectly adapted to their needs: venture capital through our partners; federal and provincial government programs; operating and term loans; financing of research and development tax credits with or without guarantees from Investissement Quebec; contract financing by way of progress advances on an operating loan to execute contracts awarded by governments or major corporations; export financing, including the Progress Payment Program (PPP), the Convention generale de garantie (general guarantee agreement) and the Master Accounts Receivable Guarantee (MARG); and public and private initial public offerings via our subsidiary National Bank Financial. The mission of the National Bank's TV and Motion Picture Group, which specializes in financing film projects and television series, is to offer a complete line of customized banking products and services to the Canadian film and television production and distribution industry. In addition to producers and distributors, our clientele includes post-production, special effects and equipment leasing companies, as well as studios. The financial products offered to businesses can sometimes be highly complex. Examples include derivative instruments which the Bank makes available so that companies can efficiently manage the risk associated with interest rate and exchange rate fluctuations, and foreign exchange forward contracts that give companies more flexibility in coordinating foreign currency inflows and outflows. That is why it is important to have high-calibre experts on hand at all times to help companies to better understand these tools and use them effectively. The National Bank's Structured Financing Group is one such example. Its team of experienced professionals specialize in project financing, acquisitions, share buybacks and other complex transactions designed to assist growing companies with financing needs in excess of $2 million. Through this group, SMEs in our market have access to a large network of contacts both at the Bank and on financial markets (venture capital, subordinated debt, specialized consultants, government organizations, lawyers, tax specialists, etc.). Moreover, medium-sized businesses can, among other things, benefit from alternative financing tools such as subordinated debt which makes it possible for them, in some cases, to maximize borrowing capacity in order to minimize or avoid share dilution. With flexible, efficient teams such as these, the Bank can be even more competitive in its target markets. Our teams provide fully adapted financing and import-export solutions to companies looking to do business outside the country. By way of medium-term financing from our partner Northstar, our SME clients can offer their foreign buyers financing of up to $5 million for a maximum of five years. This solution makes it easier for our clients to obtain contracts to sell goods and services on international markets. For businesses that often turn to leasing the equipment they need to carry on their operations, lease financing is a very attractive financing solution. In cooperation with our partner Alter Moneta, a company jointly owned by the National Bank and the Caisse de depot et placement du Quebec and specializing in lease financing, we can offer our clients all the lease financing facilities they require. We continue to be involved in Fodex, a fund which invests in the capital of foreign companies that buy from Canadian companies. Through its NatExport and Sodex divisions, the Bank also continues to provide factoring services for exporters (purchase of local and foreign receivables). This process improves liquidity for our commercial clients and eliminates the risks associated with following up and collecting receivables. A number of our clients do business or have expansion projects in Europe, particularly in France. Similarly, a number of French and other European business people have set up operations in Canada or are interested in doing so. To meet the financial needs of entrepreneurs on both sides of the Atlantic, the National Bank and Credit Agricole of France signed a service agreement which makes us the designated representative responsible for meeting the banking needs of Credit Agricole clients that want to do business here. In return, National Bank clients targeting the European market can look for assistance and services from Credit Agricole, France's largest bank and one of the leading banks in the world with assets of US $446 billion. An international business development manager, whose role is to advise commercial clients on export financing and international trade risk management, is based in most of the Bank's regional centres in Quebec. Similar positions have been created in other provinces, notably Ontario and Alberta. With Internet Banking Solutions Inc., our virtual branch for businesses, clients have ready access to the services of an experienced account manager. From 8 a.m. to 6 p.m., Monday through Friday, they can call on the account manager's expertise and advice, particularly with respect to financing, investments or cash management. TelNat automated telephone banking services, which are available between 6 a.m. and midnight, seven days a week, enable our clients to rapidly carry out transactions related to managing their business, including bill payments, balance inquiries, past transaction lists, and loans and lines of credit. Page 25 NATIONAL BANK OF CANADA 2001-2002 NATIONAL BANK FINANCIAL NETWORK STRUCTURE AND OPERATIONS OF THE NATIONAL BANK (cont.) COMMERCIAL BANKING (cont.) Recognized as the bank for business, the National Bank is particularly attuned to the realities facing women entrepreneurs. In June 2002, we therefore teamed up with the Reseau des Societes d'aide au developpement des collectivites du Quebec (SADC) and the Association feminine d'education et d'action sociale (AFEAS) in a project called AFER (Aide aux femmes entrepreneures en region) in order to encourage entrepreneurship among women in outlying areas of Quebec. The goal of this three year agreement is to facilitate access to capital for women who have a business project they want to develop and who live in rural areas. Although the Bank's usual credit criteria still apply, concrete efforts have been made to minimize the factors that impact negatively on women's access to financing. Through its SME Centres in Quebec, the Bank works closely with the 62 regional offices of the SADC to ensure the success of this project. The agreement to sell the Bank's MasterCard merchant payment solutions to Global Payments was finalized in October 2001 and the transition process is well under way. As Global Payments is one of the world's leading debit and credit card transaction processing companies, our clients benefit from a wide array of point-of-sale solutions for enhanced convenience and simplicity. Global Payments' commitment to designing new payment solutions on an ongoing basis means that our business clients can count on having access to the most innovative technologies at all times. On May 30, 2002, the Bank's ClicCommerce subsidiary officially changed its name to National Bank eCommerce, in line with the Bank's strategy to standardize the image and names of its products and services in order to promote the National Bank name and capitalize on the strong brand awareness associated with it. National Bank eCommerce is much more than a new name, however. It reaffirms the Bank's commitment and initiatives in the area of e-commerce solutions for its individual and business clients. In addition to acquiring a new name, National Bank eCommerce broadened its offering by adding new features. For instance, private B2B marketplaces were created for medium-sized and large companies looking to make purchases directly from their suppliers via an Internet platform integrating purchasing, billing and electronic payment operations. A public B2B marketplace was also set up to assist SMEs in their purchasing of routine supplies. The Bank was able to further enhance its B2B e-commerce offerings for SMEs through an agreement signed with a provider of B2B procurement solutions. In addition, web solutions are available for companies that want to place their promotional brochures on the Internet, raise their visibility or sell their products and services directly to consumers. National Bank eCommerce has its sights set on facilitating companies' projects and needs in the world of e-commerce solutions and it fully intends to contribute to the performance of businesses through innovative, scalable, outsourced solutions in an environment that meets the strictest security standards. The platform supports the various public and private marketplaces in Canada and integrates master agreements signed between a company and its suppliers. This user-friendly, economical and accessible e-solution will give National Bank clients a competitive edge and make them more productive. As the Bank firmly believes that the Internet and e-commerce are areas of high growth potential in the coming decade, it wants to stay at the forefront of technology by offering increasingly high-quality solutions to its business clients. Page 26 FINANCIAL MARKETS, TREASURY AND INVESTMENT BANKING NATIONAL BANK FINANCIAL CELEBRATES ITS CENTENNIAL! In 2002, National Bank Financial celebrated 100 years in operation since the day when Louis de Gaspe Beaubien founded his brokerage firm in Montreal in 1902. For close to 60 years, the company operated under the name Maison Beaubien until it was bought out by the firm headed by Jean-Louis Levesque. Over the years, Levesque Beaubien, as it became known, grew and thrived by establishing numerous strategic alliances with key partners. In 1988, the brokerage firm became a subsidiary of the National Bank, and merged a year later with Geoffrion Leclerc Inc. to become Levesque Beaubien Geoffrion. In 1999, the National Bank acquired First Marathon, a Toronto-based investment dealer which it subsequently integrated with its subsidiary Levesque Beaubien Geoffrion to form National Bank Financial, thereby presenting a unified image to customers while capitalizing on the National Bank name. In fact, National Bank Financial, as we know it today, is the result of various mergers involving many different brokerage firms over the years, including such well-established names as Levesque Beaubien, Geoffrion Leclerc, First Marathon, Putnam Lovell, J.D. Mack, Equitable Securities, Rademaker McDougall and Company, Oswald Drinkwater and Graham, and Credit Interprovincial. National Bank Financial owes its current success to visionaries with the ability to act rapidly and find innovative ways for making the most of the good times and weathering the bad times. From its origins as the Maison Beaubien to the present day, the history of National Bank Financial is first and foremost the history of men and women who knew how to seize opportunities and who pooled their talent and expertise to build a highly efficient organization that stands out for the quality of its customer service. To all those who invest their time and efforts every day to meet the needs of our loyal customers, we say thank you. And our thanks go also to all our customers who have helped to make National Bank Financial the solid, reputable institution it is today. Financial Markets, Treasury and Investment Banking oversees all the brokerage and financing services which the National Bank and National Bank Financial offer corporate and institutional clients, as well as the investment and trading operations carried out by Treasury on financial markets. Celebrating a century of serving individuals and corporations, National Bank Financial is one of the top six securities brokerage firms in Canada, and the undisputed industry leader in Quebec. The company's roots go back to 1902, a time when many of its present-day competitors did not yet exist. It grew and developed through numerous strategic alliances with key partners, and is the culmination of mergers between a number of investment dealers over the years, including such well-established firms as Levesque Beaubien, Geoffrion Leclerc, First Marathon, J.D. Mack, Capital Group, Equitable Securities, Rademaker McDougall and Company, and Oswald Drinkwater and Graham. On June 19, 2002, National Bank Financial took another step in its expansion strategy, with the acquisition of American investment bank Putnam Lovell Group Inc. The Global Financial Institutions Groups of Putnam Lovell and National Bank Financial, as well as all the other activities of Putnam Lovell, were consolidated and now operate under the name Putnam Lovell NBF out of offices in New York, San Francisco, Los Angeles, Toronto and London. For the National Bank, the creation of Putnam Lovell NBF signalled a major breakthrough on the international scene in terms of merger and acquisition advisory services, corporate finance, equity research, sales and trading, derivatives and currency markets. Although concentrated in Canada, and especially in Quebec, the National Bank Financial network extends well beyond the Canadian border, covering all international financial markets through its affiliates. Since the beginning of the 20th century, National Bank Financial has been an active player on international markets, through representatives and market-makers in Geneva, London and, through its U.S. subsidiary, in the United States. For its customers, the firm's association with other partners opens up exciting possibilities on European and Asian markets. Moreover, under an agreement with one of the leading U.S. institutional brokers, National Bank Financial has access to first-hand information on the U.S. economy and American companies. This extensive international network means that National Bank Financial's investment advisors can give their clients timely information and sound advice about both foreign and domestic markets. National Bank Financial is an integrated firm with solid expertise in investment counselling and brokerage services for individual investors, as well as institutional brokerage, corporate finance and clearing, and brokerage services for third parties. The firm has offices in every region of Canada, but what makes it unique among major Canadian firms is the depth of its services in Quebec. It is prominent in every important area of investing in Canada, and active in certain specialized, rapidly growing sectors. It is represented from coast to coast through its 94 branches and 3,147 employees, more than 800 of whom are investment advisors. It is particularly dominant in Quebec, where it enjoys a 30% market share. NBF services close to 275,000 individual investors Canada-wide, on whose behalf it manages more than $35 billion in assets. Committed to building on its tradition of excellence, NBF has made customer service and long-term relationships the cornerstone of its business philosophy. Page 27 NATIONAL BANK OF CANADA 2001-2002 NATIONAL BANK FINANCIAL NETWORK STRUCTURE AND OPERATIONS OF THE NATIONAL BANK (cont.) FINANCIAL MARKETS, TREASURY AND INVESTMENT BANKING (cont.) National Bank Financial is structured around two main divisions. Its Individual Investor Services (which forms part of Personal Banking and Wealth Management) offers a diversified clientele a variety of financial services to help individuals establish an integrated plan for capital growth and protection. The four main groupings of services are customized solutions for individual investors, delivered by teams of investment advisors; the LBG Canada Immigrant Investor program for foreign investors interested in supporting the growth of Canadian companies; Special Services available by referral to the customers of independent representatives and financial planners; and finally, insurance brokerage and estate planning services through the subsidiary NBF Financial Services. NBF's Institutional and Corporate Services deliver customized solutions to a vast clientele of institutional clients and private and public corporations, with the aim of helping them use capital markets to support their growth. These services fall into eight main categories, coordinated by an equal number of teams: equity, fixed income, investment banking, merchant banking, the National Bank Correspondent Network (NBCN), new issues, market events and credit derivatives. Not including the personnel of Putnam Lovell, NBF has more than 70 professionals working out of offices in Montreal, Toronto, Calgary and Vancouver to provide investment banking services, making them one of the largest investment banking teams in Canada. As part of its ongoing commitment to SMEs, the National Bank has taken upon itself to facilitate access to capital markets for medium-sized enterprises. When including the venture capital funds available from EdgeStone Capital, a capital manager in which NBF is a stakeholder, the picture that emerges is of an investment bank able to offer its clients a comprehensive range of services designed to meet their diverse needs. The credit derivative experts at NBF specialize in designing structured products that help clients manage their risk exposure. Credit derivatives are instruments that transfer the credit risk and return related to a given asset to another party, without actually transferring the underlying asset. Although the global credit derivatives market is still relatively small compared to markets for other derivative products, it is nonetheless growing rapidly and NBF is well positioned to reap the benefits. Serving the entire securities industry, the NBCN team is the Canadian leader in third-party clearing and brokerage services. More than 60 associated organizations staffed by some 3,000 financial advisors trade through NBCN each year, making it the leading provider of clearing and brokerage services to Canada's financial community. The breadth of correspondent services offered by NBCN makes it unique in Canada. For instance, it offers accounting services, office support services and research products, all of which assist both entrepreneurs and more established companies in building and operating their investment sectors. National Bank Financial's Merchant Banking Group expands and refines the services offered to investment banking clients. NBF teamed up with EdgeStone Capital Partners, in which it has a 20% interest, in order to meet the growing demand for capital in Canada, while increasing the variety of investment products available to its investor clients. EdgeStone Capital is known in particular for the performance of the family of strategic funds it has developed to provide financing for mid-market companies at every stage of their growth. EdgeStone has formed an alliance with a coveted partner -- the Canada Pension Plan Investment Board -- not only as a major investor in EdgeStone funds, but also as a partner with a 10% stake that may eventually be increased to 17.5%. In March 2002, the National Bank's Corporate Banking division was combined with the merchant banking business of NBF to create a new group reporting to NBF. These two important operating segments were merged in response to client demand for a high degree of integration between bank credit and corporate finance services. The Corporate Finance team at National Bank Financial had something to celebrate in February 2002 when it obtained a prestigious multi-million dollar mandate from Hydro One, the Ontario government corporation that was preparing to make the largest initial public offering in the history of Canadian financial markets. NBF became the electricity transmission and distribution company's special advisor for its privatization and stock market listing project, with the specific mandate of helping Hydro One's officers to evaluate and negotiate all the terms and conditions of the transaction. NBF was chosen over a number of its competitors because of the quality, expertise and experience of its team. Being chosen for a mandate such as this shows just how much progress NBF has made in two years, when the integration of Levesque Beaubien Geoffrion with First Marathon consolidated the company's Canada-wide reputation. Page 28 In the same vein, NBF completed its largest merger transaction to date in 2002 as financial advisor to Franco-Nevada Mining. Following the merger, Franco-Nevada, Normandy and Newmont created the world's biggest gold producer, ahead of AngloGold. This transaction, which was exceptional in many respects, generated the highest fee income that NBF has ever received for its mergers and acquisitions practice. With the depth of NBF's consulting work in recent years and the experience it has acquired, it can expect increasingly important mandates in the years ahead. NBF has scored two home runs with these two mandates, confirming yet again that it is a major-league player in corporate finance and mergers and acquisitions. National Bank Financial has one of the best equity research teams in Canada in its line-up, with some 30 financial analysts and economists -- and as many assistants -- based in Montreal, Toronto, Winnipeg, Calgary and Vancouver. Each year, NBF's research department is ranked among the best in the country. Industry surveys by independent firms consistently name it No. 1 in Canada for the quality of its work. In addition, many of NBF's analysts are considered stars in their field, ranking among the top three in their respective sectors, which are as diverse as auto parts, biotechnology and pharmaceuticals, consumer products, industrial products, distribution, precious metals, printing, broadcasting and publishing, pipelines and energy, telecommunications and cable utilities. In 2002, NBF came in first for quality of financial research in a Brendan Wood survey, tying for the honour with Scotia Capital. The survey of 350 institutional portfolio managers consisted of evaluating the work of 544 analysts at 34 brokerage houses. NBF was ranked first for the quality of its investment ideas, the level of contact with institutional investors and the quality of its research reports. Ten of the industrial sectors covered by NBF are led by the star analysts who placed among the top three for their category. In spring 2002, management of the National Bank decided to group the Bank's economists together with the economists at NBF in a single unit to be headed up by Clement Gignac, Portfolio Strategist and Chief Economist at NBF and economics spokesman for the entire National Bank Financial Group. Combining NBF's economists, widely acknowledged for their expertise with respect to institutional investors, with the Bank's economists, characterized by a banking approach focused on savings and credit, produced a broader vision of the markets in which a diversified financial group like National is active. Both banking and brokerage customers will receive better service and greater expertise, and both groups of economists will have an opportunity to acquire and share new competencies. The National Bank's Treasury is responsible for operations on financial markets, which comprise the Bank's own management operations, as well as hedging operations on behalf of clients. Management operations include liquidity and securities management, asset and liability matching, and hedging for certain financial instruments. Hedging operations enable clients to protect themselves against exchange or interest rate fluctuations, as well as other changes that may occur on financial markets. The Bank's strategic management focuses not only on its product offerings, but also on its balance sheet and operating expenses. The Bank manages its balance sheet according to economic conditions and its own capital requirements. Methods such as securitization and loan syndication help to ensure that the Bank continues to grow and satisfy its clients, while minimizing risk and reducing required capital. In this way, the Bank's growth is managed in the best interests of its customers, its employees and its shareholders. Page 29 NATIONAL BANK OF CANADA 2001-2002 NATIONAL BANK FINANCIAL NETWORK COMMUNITY INVOLVEMENT Investing in socially responsible companies has been a growing trend in the past 10 years. The National Bank, however, did not need ethical investing to become fashionable before earning a reputation for outstanding involvement in the community. For as many years as it has been in existence, the Bank and its personnel have always been a source of support for humanitarian causes. The Bank's corporate donations amounted to almost $4 million in 2002, and were made to several hundred organizations throughout the country. The five main sectors that benefited from this money were community development, health care, amateur sport, culture and youth. In all the regions where we are represented, we are involved with associations and organizations devoted to local community development or serving the most needy among us. Each year, our employees across Canada take part in the United Way/Centraide fund-raising campaign for community- based organizations. Indeed, in 2001-2002, employees, officers and retirees together raised more than $540,000. Combined with the Bank's own donation of $540,000, United Way/Centraide received in excess of $1 million, making the National Bank one of the organization's most generous donors. Fund-raising is also done on a regular basis through the branch network for various community-based organizations such as the Fondation Mira for the training of seeing-eye dogs, to name one example. In the area of health care, the Bank gives financial support to a number of hospital foundations and well-known research organizations, such as the Foundation for Research into Children's Diseases. As part of its program for supporting athletes and amateur sport, the Bank has presented bursaries totalling $350,000 to 260 young athletes who may one day represent Canada at the Olympic Games. With respect to its support for cultural activities, the Bank is equally supportive of the performing arts (theatre, music, opera, song, dance) and the visual arts (painting, photography, sculpture). Each year, it encourages young artists by buying and displaying some 100 of their works, with the result that the Bank's corporate collection now contains more than 5,000 works of art. Finally, in all the Bank's branches across Canada, employees do their utmost to support the young people of their towns and neighbourhoods. Many of them, for instance, are involved in the Junior Achievement's Company and Project Business programs. The aim of these programs, which are geared specifically to high school students, is to foster entrepreneurship among young people through hands-on experience. Through these programs, employees share their experience and knowledge of the business world with the young people who will eventually take their place. Page 30 ECONOMIC ENVIRONMENT ECONOMIC CONDITIONS IN 2002 The Canadian economy weathered the U.S. recession of 2001 without suffering too much damage. Canada fared better than its neighbour to the south essentially because it was less severely affected by the difficulties experienced in the information technology sector as this sector is not as important to its domestic economy. In addition, Canada is a net exporter of energy and therefore, unlike the United States, was able to benefit from oil and gas prices which rose sharply in 2000 and remained high throughout much of 2001 and 2002. Lastly, an accommodating monetary policy led to a depreciation in the Canadian dollar as well as lower interest rates. Right from the start of 2002, Canada's employment numbers set an optimistic note. The labour market's strong showing coupled with low interest rates fuelled consumer confidence. Moreover, after a decade of stagnation in the standard of living, the prospects of lower taxes as a result of improved public finances undoubtedly contributed to the climate of confidence, as evidenced by the expression of pent-up demand for new homes and cars. In Quebec, residential housing starts climbed to almost 40,000 units in 2002, a level not seen in eight years. In the United States, however, the recovery of 2002 turned out to be a sluggish and bumpy process reminiscent of the rally in the early 1990s when employment was very slow to pick up. Over the past year, caution reigned supreme in corporate America as companies looked for ways to clear inventories. Faced with pressure on prices, companies relied on gains in productivity to boost profitability, hence the curb on hiring. Exports were also hurt by the slowdown in the economic growth of overseas economies. Despite these economic woes, U.S. consumers managed to sustain the recovery, thanks to an already very low unemployment rate and the tax cuts introduced at the beginning of the year. Moreover, unlike previous recessions, real wages continued to climb and many households took advantage of low interest rates to renegotiate their mortgages, reduce their monthly payments and even take out new loans. Financial markets, however, behaved unusually. While the general consensus was that a recovery was under way, the stock markets continued to decline for most of 2002. The Canadian dollar, which had started the year on a strong footing, fell victim to the turmoil as distraught investors fled to the safety of U.S. Treasury bonds. It is important to note that a number of specific events contributed to this market uncertainty, most notably, the meltdown in technology stocks, perceived accounting scandals, the geo-political situation in the Middle East and the precarious state of several economies in Latin America. OUTLOOK This market turbulence presents a definite risk for the Canadian economy. However, if the recovery in the United States firms up as expected, Canada's economic growth will once again outpace that of all other industrialized countries, as net exports increase and capital spending is stimulated by the country's relatively high capacity utilization rate as well as the need to remain competitive. This renewed confidence will encourage companies to rebuild their inventories, especially in the United States. Quebec's economy is well positioned to benefit from these developments. Growth in the province will probably exceed the national average in 2002 and will at least match it in 2003. The wild card, of course, is that the Bank of Canada could decide to raise interest rates gradually in 2003. However, because its monetary policy was extremely accommodating in 2002, it would be unfair to describe such an action as hitting the brakes; rather, it would be more accurate to say that the Bank of Canada may ease off the gas. Page 31 NATIONAL BANK OF CANADA 2001-2002 NATIONAL BANK FINANCIAL NETWORK IMPLICATIONS FOR THE BANK The slow pace of the recovery combined with financial market uncertainty prompted companies to pare down both their inventories and investments. This in turn reduced their financing needs, especially as many obtained financing by way of public issues. Despite this environment, the National Bank was able to hold its own as it maintained loan volumes to companies in its core market, thereby increasing its market share. National Bank's residential mortgage loans recorded higher volumes for the year. In the second and third quarters of fiscal 2002, many investors became discouraged and liquidated their holdings in equity mutual funds. National Bank Securities was not hit as hard as the rest of the industry, as customers reinvested most of their redeemed investments in the bond fund offered by this Bank subsidiary. In fact, National Bank Securities was one of the only fund managers to record higher sales than withdrawals throughout most of the year. In 2003, economic conditions should favour robust growth in both savings and credit. The Bank will benefit from this scenario because its commercial loans stand to increase as companies restock their inventories and dust off investment projects that had been temporarily shelved. On the savings front, individual investors may well continue to shun mutual funds that include equities. To counter this aversion to risk, the Bank is offering variable-return guaranteed investment certificates (based on the return of different financial instruments) where the capital is fully guaranteed. We expect a marked improvement in revenues from capital markets in 2003, as both wholesale and retail brokerage activities pick up steam. Page 32 MANAGEMENT'S DISCUSSION AND ANALYSIS Page 33 NATIONAL BANK OF CANADA 2001-2002 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS Management's discussion and analysis provides complementary information to the consolidated financial statements, which were prepared in accordance with Canadian generally accepted accounting principles and the guidance of the Superintendent of Financial Institutions Canada. It also presents additional data with respect to the Bank's performance during the fiscal year ended October 31, 2002, compared with its past achievements and future objectives. This financial review and the information it contains are the responsibility of the management of the Bank. It has been examined and approved by the Audit and Risk Management Committee of the Board of Directors. In analyzing its 2002 results and evaluating the Bank's future prospects, management formulates forward-looking statements that necessarily involve uncertainties. Among the many factors that can affect projections are economic conditions and financial market developments (stock prices, interest rates, exchange rates, etc.) in Canada and abroad, as well as changes in customer demand, regulations and the competitive environment. Management cautions readers not to place undue reliance on statements which, even with the use of the best risk management techniques, deal with a future that is inherently uncertain. A GOOD YEAR National Bank of Canada is the largest banking institution in Quebec and the sixth largest in Canada. In its core market of Quebec, the Bank offers its customers a comprehensive line of banking products and related financial services. It also accompanies its customers into foreign markets, where it is a niche player in its areas of expertise. By responding to its customers' needs and ensuring its financial soundness, the Bank's goal is to deliver as much value as possible to its shareholders. The Bank accomplished a great deal in 2002, including some important strategic acquisitions. Among these was that of Altamira, a manager and distributor of mutual funds. Not only did this acquisition strengthen the Bank's position in a strategic niche but the new subsidiary, 85% of whose business is outside Quebec, will also considerably expand the Bank's distribution network. It is the centrepiece for the development of wealth management activities beyond the Quebec market. Other acquisitions during the year included that of Putnam Lovell Group, a U.S. investment bank, and of Gestion de placements Valorem inc., a Quebec City-based firm specialized in managing Canadian bond and equity portfolios. In the first quarter of the year, the Bank finalized the sale of its U.S. asset-based lending operations with loans valued at CDN $3.1 billion. On January 15, 2002, $2.5 billion passed into the buyer's control, with the remaining $600 million covered by an 18-month servicing agreement. As at October 31, 2002, the balance of this portfolio was $313 million. The sale generated a pre-tax gain of $141 million, net of transaction-related expenses and provisions taken for the loans which will be serviced by the Bank during the 18-month period. The gain amounted to $79 million after income taxes. Taking into account the recovery of the $65 million general allowance for credit losses ($41 million after taxes) that was allocated to the portfolio sold, as well as the results of portfolio-related transactions during the year, the net after-tax contribution of discontinued operations was $111 million in 2002. The impact of these discontinued operations appears under "Discontinued operations" in the financial statements and the tables referred to in this report. Turbulent financial markets and uncertain economic conditions characterized 2002. The effect of this environment could be seen in the prices of technology stocks, which continued their downward trend. In fact, business in general experienced a slower year. It was in this context that the Bank carried out two important transactions: it revalued its investment in COGNICASE and reassessed its portfolio of impaired loans. In the third quarter of fiscal 2000, the Bank sold its information technology subsidiary SIBN to COGNICASE, in exchange for shares of COGNICASE. In the third quarter of 2002, the Bank revalued this investment and decided to record an impairment charge of $112 million after taxes. The value assigned to the investment reflects a conservative assessment of prevailing conditions in the technology sector. This adjustment in no way affects business relations with COGNICASE, which remains a preferred supplier of information technology services to the Bank and its subsidiaries. Strengthening its balance sheet was another of the Bank's major accomplishments in 2002. In the first quarter, after reassessing the realizable value of its impaired loans in light of current economic conditions and its goal of accelerating the disposal of this portfolio, the Bank decided to take an additional $185 million specific provision for credit losses. Further to this prudent move, the total allowance for impaired loans (including the general allowance for credit risk) exceeded gross impaired loans outstanding, with the result that impaired loans are now more than 100% provisioned. Economic conditions also had an impact on the objectives the Bank had set itself as regards growth in earnings per share and ROE. If we examine adjusted income rather than reported income (see Table 1b "Reconciliation of Reported Income to Adjusted Income" on page 55), earnings per share remained fairly stable at $2.86 (versus $2.87 in 2001), and ROE, at 14.7%, was just short of the target range. The efficiency ratio, for its part, moved closer to the objective. Page 34 OBJECTIVES AND RESULTS IN 2002
Objectives Results ---------- ------- GROWTH IN EARNINGS PER SHARE Reported* 4%-6% -3% Adjusted** Stable ROE Reported* 15%-17% 14.3% Adjusted** 14.7% EFFICIENCY RATIO -- ADJUSTED** 61% in 2003 62.4% TIER 1 CAPITAL RATIO 7.75%-8.75% 9.6% =========== ======
* Results excluding the impairment charge on an investment. ** See reconciliation of reported income to adjusted income in Table 1b (page 55). Adjusted income excludes items that, in the opinion of management, should not be taken into account in the analysis of the Bank's performance. Adjusted income is not defined according to Canadian generally accepted accounting principles and is not necessarily comparable to similar data used by another company. Table 1b on page 55 provides a detailed reconciliation of reported income to adjusted income; a summary table is included at the beginning of the section "Overview of Results and the Balance Sheet" on page 36. Considering the fragile state of the economy, the Bank turned in a relatively good performance compared to most of its banking industry competitors. The gap between its share price and that of the other major Canadian banks narrowed, and the Bank's shareholders enjoyed a higher total return than the shareholders of its competitors. Moreover, the Bank exceeded its objectives for financial soundness, as evidenced by its Tier 1 capital ratio of 9.6%, as against an objective of 7.75%-8.75%. The Bank expects economic conditions to improve gradually in fiscal 2003, although the economy will continue to perform below its potential. It will be a year of transition that will bring the Bank closer to the medium-term objectives it is likely to reach in 2004. FUTURE OBJECTIVES
2003 Medium term ---- ----------- GROWTH IN EARNINGS PER SHARE 5%-10% Over 8% ROE 14%-16% 15%-17% TIER 1 CAPITAL RATIO 8.75%-9.50% 8.25%-9.00% DIVIDEND PAYOUT RATIO 30%-40%
The sale of non-strategic operations and the addition of targeted acquisitions has greatly altered the relative size of the Bank's business segments during the past two years. Starting in fiscal 2003, the Bank will therefore present its segmented results in terms of the following three lines of business: Personal and Commercial Banking, Wealth Management, and Financial Markets, Treasury and Investment Banking. Improving the efficiency ratio remains a priority. Based on the new demarcation of its business segments, the Bank will break down the objective for this ratio in order to take into account the specific characteristics of each line of business. Page 35 NATIONAL BANK OF CANADA 2001-2002 MANAGEMENT'S DISCUSSION AND ANALYSIS OVERVIEW OF RESULTS AND THE BALANCE SHEET SOLID RESULTS Table 1a on page 54 presents an overview of results for 2002. As can be seen, net income went from $562.7 to $429.4 million. Income before goodwill charges per share was $2.18 versus $2.88 in 2001. Income adjusted for one-time events in 2002 was $555 million or $2.86 per share, compared to $580 million or $2.87 per share for income similarly adjusted in 2001. The 4.3% decline in adjusted income was chiefly attributable to the increase in the provision for credit losses. Adjusted earnings per share remained fairly stable at $2.86. This item did not decline to the same extent as adjusted income because of the common share repurchase program. RECONCILIATION OF REPORTED INCOME TO ADJUSTED INCOME Year ended October 31 (taxable equivalent basis) (millions of dollars)
2002 2001 ---- ---- REPORTED INCOME BEFORE GOODWILL CHARGES 429 582 Adjustments, after income taxes: Gain on sale of operations - (47) Decline in value of investments 113 - Write-off of tangible assets 6 - Revision of estimated allowance 118 - Discontinued operations (111) 45 ----- ----- ADJUSTED INCOME 555 580 ----- ----- EARNINGS PER SHARE BEFORE GOODWILL CHARGES: Reported $2.18 $2.88 Net of adjustments $2.86 $2.87 RETURN ON COMMON SHAREHOLDERS' EQUITY: Reported 11.3% 16.0% Net of adjustments 14.7% 15.9% ===== =====
The above table presents the main points of comparison between reported income and adjusted income. A more detailed picture is given in Table 1b (page 55). In 2001, the Bank sold its merchant payment solutions, thereby generating a gain of $76 million, or $47 million after taxes. Income for 2001 was adjusted downward for this non-recurring item. In 2002, the first adjustment to net income was for the reduction in the value of investments. As mentioned earlier, the Bank revised the value of its investment in an IT services company and consequently recorded a $112 million impairment charge after taxes. Moreover, in the fourth quarter, the Bank recorded an impairment charge of just over $1 million ($2 million before taxes) relative to initial investments in mutual funds held by the Bank. The second adjustment to 2002 income was for the write-off of deferred expenses and fixed assets related to e-commerce activities. The third adjustment involved a revision of the realizable value of impaired loans and the taking of an additional $185 million provision to cover the new estimated amount. This one-time provision cost the Bank $118 million after taxes. The fourth adjustment also affected income for 2001 in that discontinued operations recorded a $45 million loss in 2001, while the sale of these operations in 2002 generated a one-time gain of $111 million. Because of lower income on the one hand, and growth in average common shareholders' equity on the other, adjusted ROE went from 15.9% in 2001 to 14.7% in 2002. Page 36 INCREASED FINANCIAL SOUNDNESS The improvement in the Bank's financial soundness was evident at year-end 2002, with net impaired loans falling from $591 million to $246 million. Moreover, the Bank had a $405 million general allowance for credit risk as at October 31, 2002 (2001: $500 million). The capital ratios -- particularly the Tier 1 capital ratio -- are indicators of a bank's financial health. The Tier 1 capital ratio represents the risk-weighted proportion of the balance sheet funded by capital provided by shareholders and holders of subordinated debt. The Tier 1 capital ratio remained high at 9.6%, or the same level as in 2001. By way of comparison, the Tier 1 capital ratio was 7.7% five years earlier. SHAREHOLDER VALUE ADDED Year after year, the Bank creates value for its shareholders, as the table below shows. Shareholder value added is calculated by deducting the cost of capital from operating income before goodwill charges. The cost of capital, estimated at 13%, is the minimum compensation required by the Bank's common shareholders in light of returns available elsewhere on capital markets. Further to the adjustments mentioned earlier, shareholder value added in 2002 was $62 million, exceeding what shareholders could have expected from investments having an equal degree of risk. SHAREHOLDER VALUE ADDED Year ended October 31 (millions of dollars)
Adjusted ----------------------------------------------------- 2002 2001 2002 2001 2000 1999 1998 ---- ---- ---- ---- ---- ---- ---- Available income 534 545 408 547 500 401 362 Average common equity used 3,628 3,430 3,628 3,430 3,144 2,599 2,499 Cost of capital (13%) 472 446 472 446 409 338 325 Shareholder value added 62 99 (64) 101 91 63 37 ===== ===== ===== ===== ===== ===== =====
The Bank calculates shareholder value added in each of its lines of business in order to determine the most profitable use of capital for its shareholders. REVENUES AND EXPENSES INCREASE IN NET INTEREST INCOME For fiscal 2002, net interest income on a taxable equivalent basis was $1,473.3 million, up 6.1% over 2001. As shown in Table 2 (page 56), the average volume of assets remained stable while the total interest margin widened from 2.01% to 2.13%. NET INTEREST INCOME, 1998-2002 [GRAPH] The Treasury sector's asset/liability management operations were mainly responsible for the improvement in net interest income. In addition, lower interest rates significantly narrowed the interest margin on transaction deposits. This downward pressure on net interest income was offset by strong growth of $1.2 billion or 5% in the average volume of personal and small business deposits and by wider interest margins because of lower financing costs on credit card advances and other loans to individuals and small businesses. The growth in securitization operations compressed net interest income, but this phenomenon was offset by an increase in securitization revenues recorded under "Other income". Page 37 NATIONAL BANK OF CANADA 2001-2002 MANAGEMENT'S DISCUSSION AND ANALYSIS OTHER INCOME MARKS TIME Other income decreased by $217 million, two-thirds of which was due to the $139 million write-down of investments recorded under "Trading activities and gains on investment account securities" (see Table 3 on page 57). Had it not been for this one-time charge, as well as the non-recurring gain on the sale of merchant payment solutions in 2001 (increasing the "Other" item), other income would have been fairly stable in 2002 at $1,780 million, compared to $1,782 million in 2001. Many of the components of other income showed an increase. The $46 million or 9.3% growth in capital market fees was attributable to the Putnam Lovell acquisition and institutional operations at National Bank Financial. The strong rise in trust services and mutual funds ($15 million or 15.6%) came from Altamira revenues. There was also very solid growth in securitization revenues, which offset the reduction in net interest income and reflected the Bank's determination to diversify its funding sources. If the $76 million gain from the sale of merchant payment solutions is excluded from "Other" in 2001, this item grew by $37 million, a large part of which was attributable to insurance revenues. However, these advances were cancelled out by a drop in trading revenues, a slowdown in brokerage activities with individuals and the absence of fees from the merchant payment solutions activity that was sold. This last factor accounts for part of the $33 million reduction in card service revenues. PRUDENCE IN THE PROVISION FOR CREDIT LOSSES Table 4 (page 58) describes the changes in the provision for credit losses as well as the composition of the allowances. The annual provision is added to the existing allowances, which are either specific or general. The specific allowance for impaired loans covers individually identifiable losses on impaired loans for which the write-down can be estimated from the loan's realizable value. The general allowance for credit risk is composed of two parts, an "allocated" portion and an "unallocated" portion. The allocated general allowance is based on a statistical analysis of the risk of loss in various portfolios. The unallocated general allowance is in addition to other allowances and reflects the opinion of Bank management as to possible losses not adequately captured elsewhere. Note 1 to the financial statements explains these concepts in greater detail. The provision for credit losses before discontinued operations rose from $205 to $490 million, essentially because of the revised estimate for the allowance and the loss on a loan in the telecommunications sector. The Bank's reassessment of its portfolio of impaired loans based on economic conditions and its goal of accelerating the disposal of this portfolio prompted it to take a $185 million specific provision in the first quarter of 2002. Moreover, in the second and fourth quarters, the Bank provisioned an amount of $120 million for credit losses related to the telecommunications company Teleglobe after its parent corporation withdrew financial support. The increase in the provision for loans to individuals and small businesses and for commercial sector loans accounted for most of the $185 million provision mentioned in the previous paragraph, and includes the overall rise in the provision for domestic private risks as well. The increase in the provision for the domestic corporate banking sector was attributable to economic conditions. The $129 million provision for international private risks included the $120 million loss in the telecommunications sector as the impaired loans in question were granted to an American subsidiary of a telecommunications company. In 2002, the general allowance for credit risk was reduced by $95 million, of which $65 million was attributable to discontinued operations following the sale of U.S. asset-based lending operations. The remaining $30 million was determined using the general allowance calculation method which the Bank adopted in 2001. When the provision for international private risks ($126 million) is combined with the provision for domestic private risks ($394 million), and the $30 million reduction in the general allowance is then deducted, it results in a total provision of $490 million charged to 2002 income (before discontinued operations). Further to the increase, the provision as a percentage of net average loans and acceptances outstanding rose substantially from 0.75% to 1.14%. Given write-offs of $673 million and recoveries of $49 million, the allowance for credit losses at year-end totalled $666 million, a year-over-year decrease of $230 million, basically attributable to faster write-offs of gross impaired loans. The item "Transfer of allowance for assets held for disposal" is made up of the $65 million in reversals from the general allowance for discontinued operations, together with specific allowances relating to these operations before the transfer. Page 38 OPERATING EXPENSES UNDER CONTROL Operating expenses rose by $51 million or 2.6% during the year. If the write-off of deferred expenses and fixed assets (included in the item "Occupancy costs, computers and equipment, including amortization") is excluded, the increase would be only $42 million. It can be attributed to the operating expenses of newly acquired subsidiaries Putnam Lovell ($38 million) and Altamira ($10 million). More specifically, salaries and staff benefits were $1,147 million in 2002, up $83 million or 8% over 2001. More than 15% of this increase can be traced to salary expenses at these new subsidiaries, and close to one-quarter relates to variable remuneration at National Bank Financial and in the Treasury sector. The remainder is attributable to salary increases for Bank employees and the higher cost of staff benefits. The substantial decline under "Operating expenses -- other" can be explained, among other things, by the Bank billing back to the purchaser of the merchant payment solutions for its services. The efficiency ratio (operating expenses to total revenues) was pushed up both by the write-off and by the reduction in total revenues following the revaluation of investments. The one-time gain on the sale of merchant payment solutions had the opposite effect in 2001. If these factors are excluded, the efficiency ratio was 62.4% as against 62.7% for the previous year. The Bank will continue to control its operating expenses and improve its efficiency ratio. One of the ways in which it is improving its operating efficiency is through its partnership with IBM Canada to manage the operations of its information technology infrastructure, including banking systems, the Web environment and call centres. This partnership was renewed in 2002, with the signing of a new contract that will represent some $1.1 billion by 2011, and will enable the Bank to stay at the leading edge of electronic technology while keeping its expenses in check. RESULTS BY LINE OF BUSINESS This section describes the 2002 results for each of the Bank's three business segments: Personal Banking and Wealth Management, Commercial Banking, and Financial Markets, Treasury and Investment Banking. Since the breakdown by business segment is used for long-term strategic planning and evaluation, it is important to assess credit losses independently of specific incidents and events related to economic conditions. To do so, a statistical model was developed to calculate expected losses for each segment. Expected losses are the probable amount of losses during a given period based on the overall economic cycle. These expected losses, rather than the actual losses recognized during the year, are presented in the tables for the three major segments; the difference appears under the "Other" item of the segmented results. Expected losses for the year were well below the provisions actually recorded since they are calculated over an economic cycle, and fiscal 2002 was the bottom of the cycle. RESULTS BY BUSINESS SEGMENT PERSONAL BANKING AND WEALTH MANAGEMENT Year ended October 31 (taxable equivalent basis) (millions of dollars)
2002 2001 ---- ---- Net interest income 1,001 977 Other income 933 934 ----- ----- TOTAL REVENUES 1,934 1,911 Operating expenses 1,452 1,420 ----- ----- CONTRIBUTION 482 491 Provision for credit losses 97 98 ----- ----- INCOME BEFORE INCOME TAXES 385 393 Income taxes 139 149 Non-controlling interest - - ----- ----- INCOME BEFORE DISCONTINUED OPERATIONS AND GOODWILL CHARGES 246 244 Discontinued operations - - ----- ----- INCOME BEFORE GOODWILL CHARGES 246 244 Goodwill charges - - ----- ----- NET INCOME 246 244 ===== ===== ROE 23.2% 24.0% SHAREHOLDER VALUE ADDED 101 106
Page 39 NATIONAL BANK OF CANADA 2001-2002 MANAGEMENT'S DISCUSSION AND ANALYSIS PERSONAL BANKING AND WEALTH MANAGEMENT: CONTRASTING RESULTS In spite of the uncertain economic conditions, the Personal Banking and Wealth Management segment maintained its performance. With the slight increase in total revenues (which amounted to $1,934 million) and expenses, the stable provision for credit losses and the reduction in income taxes, net income held steady at $246 million (2001: $244 million). If the fourth quarter adjustments are excluded (write-off of deferred expenses and fixed assets, and write-down of mutual funds), net income would have been $253 million, for an increase of 3.7%. The 10% growth in Personal Banking income (excluding the write-off of certain assets) was partially offset by the weaker performance of the Wealth Management subsegment, chiefly because of a decline in brokerage revenues. Average assets as well as loans and acceptances in Personal Banking and Wealth Management rose by 1.8% and 1.5% respectively, while the net interest margin improved slightly to 3.58% (2001: 3.56%). Deposits advanced strongly, posting 5.8% growth. This line of business maintained an excellent ROE of 23.2%, compared to 24.0% in 2001. Shareholder value added amounted to $101 million, as against $106 million the previous year. PERSONAL BANKING SUBSEGMENT The Personal Banking subsegment maintained its 71% share of the segment's total revenues, and increased its share of net income to 81%. It has a very good year overall, with net income up 7.0% or $13 million, and ROE of 23.5%, or 0.6 points higher than in 2001. Vigorous growth in net interest income accounted for the rise in income. RESULTS BY BUSINESS SEGMENT PERSONAL BANKING Year ended October 31 (taxable equivalent basis) (millions of dollars)
2002 2001 ---- ---- Net interest income 915 888 Other income 466 465 ----- ----- TOTAL REVENUES 1,381 1,353 Operating expenses 975 956 ----- ----- CONTRIBUTION 406 397 Provision for credit losses 94 96 ----- ----- INCOME BEFORE INCOME TAXES 312 301 Income taxes 113 115 Non-controlling interest - - ----- ----- INCOME BEFORE DISCONTINUED OPERATIONS AND GOODWILL CHARGES 199 186 Discontinued operations - - ----- ----- INCOME BEFORE GOODWILL CHARGES 199 186 Goodwill charges - - ----- ----- NET INCOME 199 186 ----- ----- ROE 23.5% 22.9% SHAREHOLDER VALUE ADDED 83 77 ===== =====
Net interest income was up $27 million or 3.0%, chiefly on account of the higher average volume of personal deposits and the wider interest margin on credit card advances. In contrast, the effect of lower interest rates on the interest margin for transaction deposits compressed net interest income. Personal savings rose sharply, mainly in such secure instruments as savings accounts and guaranteed investment certificates (GICs), a development that can be attributed to investors' fear of financial market uncertainty. In response to this new demand, the Bank focused more on savings than on credit, transforming its branches into resource centres to which its customers can turn for savings related advice and services, and where they can talk to advisors face-to-face. That is why the Bank extended business hours for advisory services in its branches. Its goal is to become a better retailer of banking services by proactively seeing to all of its customers' needs and directing them to the appropriate resources. This new challenge means that the Bank has to provide better training for its personnel and minimize turnover. On the credit side, borrowers moved away from long-term loans toward short-term loans and personal lines of credit. This phenomenon led the Bank to revise its product offering and helped to improve the net interest margin in this segment. Other income, at $466 million, remained virtually unchanged from a year earlier. The decline in card service revenues following the sale of merchant payment solutions was offset by an increase in insurance revenues and an adjustment in pricing to reflect costs in the banking network. Page 40 Insurance is an important part of the Bank's objective to diversify revenue sources. The general insurance segment reached its objectives and is on target for achieving profitability in 2003. One of our growth strategies is to become a niche player in low-risk products. Operating expenses were kept under control in Personal Banking. Their growth levelled off at 2.0%, with the result that the efficiency ratio was almost unchanged at 70.6%. Nearly half of the increase in operating expenses was attributable to the write-off of deferred expenses and fixed assets related to e-commerce activities. Moreover, the increase in compensation was mitigated by the sale of merchant payment solutions. As a result of borrowers' migration toward lower-risk products (lines of credit rather than consumer loans, for instance) and a slight improvement in customers' risk profile, expected credit losses dropped from $96 to $94 million. One of the important events of the year was the inauguration of the Bank's new website. The Bank also became the first financial institution in Quebec to offer its customers person-to-person transfers via the Internet. In addition, it signed a partnership agreement with the U.S. bank Wells Fargo under which each bank will refer to the other customers wishing to have a Canadian or U.S. currency credit card, as applicable. Not only does this agreement enable the Bank to deliver better service to its customers, but it also allows it to further expand its customer base. WEALTH MANAGEMENT SUBSEGMENT Net income in the Wealth Management subsegment was $47 million, down $11 million, mainly because of the significant slowdown in retail brokerage activities as investors shunned the stock market. ROE was 21.8%, compared to 28.3% a year earlier, and shareholder value added slipped as well. RESULTS BY BUSINESS SEGMENT WEALTH MANAGEMENT Year ended October 31 (taxable equivalent basis) (millions of dollars)
2002 2001 ---- ---- Net interest income 86 89 Other income 467 470 ---- ---- TOTAL REVENUES 553 559 Operating expenses 477 465 ---- ---- CONTRIBUTION 76 94 Provision for credit losses 3 2 ---- ---- INCOME BEFORE INCOME TAXES 73 92 Income taxes 26 34 Non-controlling interest - - ---- ---- INCOME BEFORE DISCONTINUED OPERATIONS AND GOODWILL CHARGES 47 58 Discontinued operations - - ---- ---- INCOME BEFORE GOODWILL CHARGES 47 58 Goodwill charges - - ---- ---- NET INCOME 47 58 ---- ---- ROE 21.8% 28.3% SHAREHOLDER VALUE ADDED 18 29 ==== ====
The reduction in retail brokerage revenues was partially offset by National Bank Securities mutual funds, trust revenues and revenues from Altamira. The Altamira acquisition also accounted for most of the $12 million increase in operating expenses. A number of initiatives supported mutual fund sales. The acquisition of Altamira raised mutual fund outstandings managed or administered by the Bank by $4,280 million. The Bank developed the Multifund guaranteed investment certificate, the return on which is tied to the performance of a basket of nine mutual funds managed by four major financial institutions (including the National Bank). National Bank Securities launched its new True North Fund, a clone of the Fidelity Investments fund of the same name that is notable for its performance over the past five years. Outstanding volumes for mutual funds offered by the Bank almost doubled during the year, going from $4.8 billion to $9.4 billion. Private investment management is a National Bank Trust product distributed by the Bank's wealth management network. It is the main wealth management product offered by the Trust to its high net worth customers, who are more inclined to entrust the management of their portfolio to experts. The value of sales of this product increased 70% during the year. National Bank Trust invested $2 million to upgrade its IT systems for private investment management. During the year, National Bank Trust also signed an agreement with Industrial Alliance Trust Company to administer its group pension plans. Page 41 NATIONAL BANK OF CANADA 2001-2002 MANAGEMENT'S DISCUSSION AND ANALYSIS National Bank Discount Brokerage now offers its customers the option of trading fixed-income securities such as bonds, GICs, Treasury bills and debentures via the Internet. These instruments are very much in demand because they are less risky and less sensitive to market fluctuations. According to a study by the research firm Dalbar, National Bank Discount Brokerage tied for first place with two other brokerage firms for the quality of customer service. COMMERCIAL BANKING: A STABLE SEGMENT Net income posted by Commercial Banking remained stable at $119 million in 2002, with the drop in its revenues offset by the reduction in credit losses. ROE increased to 11.2%, while shareholder value added rose to -$18 million. RESULTS BY BUSINESS SEGMENT COMMERCIAL BANKING Year ended October 31 (taxable equivalent basis) (millions of dollars)
2002 2001 ---- ---- Net interest income 279 288 Other income 146 144 ---- --- TOTAL REVENUES 425 432 Operating expenses 153 152 ---- --- CONTRIBUTION 272 280 Provision for credit losses 83 88 ---- --- INCOME BEFORE INCOME TAXES 189 192 Income taxes 70 73 Non-controlling interest - - ---- --- INCOME BEFORE DISCONTINUED OPERATIONS AND GOODWILL CHARGES 119 119 Discontinued operations - - ---- --- INCOME BEFORE GOODWILL CHARGES 119 119 Goodwill charges - - ---- --- NET INCOME 119 119 ---- --- ROE 11.2% 9.6% SHAREHOLDER VALUE ADDED (18) (34) ==== ===
Total revenues for Commercial Banking were down $7 million because of the 3.1% drop in net interest income. This development was attributable to the $400 million decline in commercial loans outstanding, which was only partially absorbed by a slight improvement in the net interest margin. Outstandings were down because most companies were reluctant to increase their short-term debt given the economic environment. Operating expenses in the Commercial Banking segment were stable, resulting in a slight increase in the efficiency ratio. The provision for credit losses decreased by $5 million, reflecting lower volumes and improved credit quality. Among the Commercial Banking segment's innovations in 2002 was the signing of a service agreement under which members of the Quebec CMA Order can benefit from a financial package designed especially for professional associations and orders. In addition, National Bank eCommerce (formerly ClicCommerce) began offering a full range of e-commerce solutions for business, in cooperation with a number of partners. During the year, the Bank began to bring together all the services it offers under the "Inc." trademark in a single division. By placing very small businesses, small and medium-sized enterprises (SMEs), public-sector organizations and agricultural enterprises under a single structure, these client groups will all have access to the same banking and financial services. This integration process is expected to be finalized in 2003. Page 42 FINANCIAL MARKETS, TREASURY AND INVESTMENT BANKING: STRONG GROWTH In 2002, Financial Markets, Treasury and Investment Banking once again recorded strong growth in income before goodwill charges, which rose from $204 to $250 million, for an increase of 22.5%. The segment's contribution to the Bank's consolidated net income represented 58%. Its ROE was 24.4%, compared to 19.0% in 2001, and shareholder value added rose to $113 million. RESULTS BY BUSINESS SEGMENT FINANCIAL MARKETS, TREASURY AND INVESTMENT BANKING Year ended October 31 (taxable equivalent basis) (millions of dollars)
2002 2001 ---- ---- Net interest income 320 229 Other income 541 506 ---- ---- TOTAL REVENUES 861 735 Operating expenses 431 366 ---- ---- CONTRIBUTION 430 369 Provision for credit losses 31 32 ---- ---- INCOME BEFORE INCOME TAXES 399 337 Income taxes 146 130 Non-controlling interest 3 3 ---- ---- INCOME BEFORE DISCONTINUED OPERATIONS AND GOODWILL CHARGES 250 204 Discontinued operations - - ---- ---- INCOME BEFORE GOODWILL CHARGES 250 204 Goodwill charges - 1 ---- ---- NET INCOME 250 203 ---- ---- ROE 24.4% 19.0% SHAREHOLDER VALUE ADDED 113 61 ==== ====
The segment owes its remarkable performance in 2002 to higher revenues, as total revenues rose by 17.1% to $861 million. This increase was generated mainly by Treasury's gains on asset/liability management, which accounted for the sharp rise in net interest income. The increase in other income came from the institutional activities of National Bank Financial, including revenues from Putnam Lovell. The operating expenses of the new subsidiary Putnam Lovell comprised almost 60% of the $65 million increase in the segment's operating expenses. The segment's credit losses remained stable. National Bank Financial continued to develop its investment banking operations. The integration of the former Corporate Banking segment (except for certain traditional banking services that now come under Commercial Banking) with National Bank Financial was finalized during the year. The advisory services of Putnam Lovell and the Financial Institutions Group at National Bank Financial will be amalgamated under the name Putnam Lovell NBF. Natcan Investment Management had a fairly good year, achieving higher revenues in high-yield and other bonds, as well as hedge funds. Assets under management rose by $3,302 million or 22.7%, partly because of the acquisition of Gestion de placements Valorem inc., a firm specialized in managing Canadian equity portfolios and with assets under management of $1,400 million. OTHER The "Other" heading under Results by Business Segment presents data on securitization operations, gains on the sale of activities, discontinued operations and non-recurring items such as the revaluation of investments. It includes revenues and expenses that cannot be assigned to any one specific segment. Net interest income was negative because it incorporated interest paid to third parties in securitization operations. In contrast, other income posted a gain at the time of the transaction, and management fees thereafter. The decline in other income in 2002 stemmed from the combined effect of two factors: first, the impairment charge for COGNICASE reduced other income by $137 million in 2002, and second, this item included a $76 million non-recurring gain in 2001 from the sale of merchant payment solutions. Page 43 NATIONAL BANK OF CANADA 2001-2002 MANAGEMENT'S DISCUSSION AND ANALYSIS RESULTS BY BUSINESS SEGMENT OTHER Year ended October 31 (taxable equivalent basis) (millions of dollars)
2002 2001 ---- ---- Net interest income (127) (105) Other income 21 274 ---- ---- TOTAL REVENUES (106) 169 Operating expenses 4 51 ---- ---- CONTRIBUTION (110) 118 Provision for credit losses 279 (13) ---- ---- INCOME BEFORE INCOME TAXES (389) 131 Income taxes (119) 46 Non-controlling interest 27 25 ---- ---- INCOME BEFORE DISCONTINUED OPERATIONS AND GOODWILL CHARGES (297) 60 Discontinued operations 111 (45) ---- ---- INCOME BEFORE GOODWILL CHARGES (186) 15 Goodwill charges - 18 ---- ---- NET INCOME (186) (3) ==== ===
The provision for credit losses represents the residual amount needed to reconcile the expected losses presented in the segment tables and the actual provision reported in income. The amount of $279 million that appears for this item in 2002 comprises the $185 million provisioned following the revaluation of the impaired loans portfolio, the $120 million provisioned for a telecommunications company, and a $30 million credit from the adjustment to the general allowance for credit risk. The table also shows a $111 million after-tax gain arising from the sale of U.S. asset-based lending operations. FINANCIAL CONDITION ON A MORE SOLID FOOTING TOTAL ASSETS AS AT OCTOBER 31 (millions of dollars) [BAR CHART] At $74,611 million, total assets were down slightly after posting growth in recent years. The sale of the U.S. asset-based lending portfolio and the reduction in various financial commitments accounted for this consolidation in growth. LIABILITIES AND SHAREHOLDERS' EQUITY Liabilities and shareholders' equity presented in the Consolidated Balance Sheet (see the financial statements, page 78) are the Bank's sources of funding. Deposits, at $51,690 million, represented 69% of funding, up over the previous year. Shareholders' equity as a percentage of liabilities and shareholders' equity was unchanged at 5%. Table 6 (page 59) shows the composition of and changes in deposits on the Bank's Consolidated Balance Sheet. Variations between the information in this table and that on the Consolidated Balance Sheet arise from the fact that large personal deposits are considered purchased funds for these purposes, in the same way as funds obtained on capital markets. Deposits at year-end 2002 had grown by 0.5% from the previous year, generated primarily by the upsurge in commercial deposits, but also by the growth in personal deposits. Personal deposits accounted for 29.9% of total assets as against 28.3% at year-end 2001. Page 44 PERSONAL DEPOSITS, 1998-2002 (millions of dollars) [BAR CHART] Personal deposits, which represented 43.2% of total deposits, were up 3.8%. The Bank seeks to fund as much of its operations as possible with this type of low-cost deposit. As can be seen, the proportion of personal deposits to total deposits rose almost two percentage points, or $2,409 million, over five years. In 2002, the Bank's strategy was supported by greater consumer demand for zero-risk savings vehicles, as opposed to stock market instruments. Commercial deposits experienced spectacular growth of 21.6% in 2002, to stand at $14,183 million. This phenomenon was undoubtedly due to a slowdown in investing because of the economic uncertainty and companies' decision to invest their funds in no-risk instruments. As a result of the increase in commercial and personal deposit volumes as well as the decline in loan volumes outstanding, the Bank was able to reduce its purchased funds outstanding -- the most expensive form of funding -- by more than $3 billion. The proportion of purchased funds fell from 35.5% to 29.4% at year-end 2002, in sharp contrast to the 41.9% they represented at year-end 1999. The geographic distribution of deposits illustrates the steady increase in domestic deposits. International deposits, particularly in the United States, were reduced by the sale of asset-based lending operations. Table 7 (page 60) illustrates the composition of the Bank's capital and how it has changed between 1998 and 2002. Capital is comprised of shareholders' equity (share capital plus retained earnings), subordinated debentures and non-controlling interest (mainly holders of preferred shares issued by NB Capital, a U.S. subsidiary of the Bank). The upper portion of Table 7 indicates that as at October 31, 2002, the Bank's total capital was $5,979 million, two-thirds of which, or $3,901 million, consisted of shareholders' equity. Retained earnings and common shares made up 92% of shareholders' equity, with the remainder composed of preferred shares. Common shareholders' equity (common shares plus retained earnings) totalled $3,601 million. The Bank adopted two specific measures during the year to manage its capital effectively: the repurchase of common shares and the redemption of preferred shares. In the first quarter, the Bank announced a normal course issuer bid targeting a maximum of 9,500,000 of its common shares, or 5% of the total outstanding. Given the Bank's very high capital ratios, the Board of Directors considered the repurchase program to be an appropriate use of the Bank's excess capital as well as an opportunity to increase shareholder value. As at October 31, 2002, the target of 9,500,000 shares had been purchased on the stock market. The repurchase program reduced the carrying value of common shares by $82 million; an additional $224 million, representing the premium on the carrying value of common shares, was charged to retained earnings. The second capital reduction measure was the Bank's decision to redeem all its non-cumulative first preferred shares, Series 10 and 11, for an aggregate consideration of $192 million. As a result, total capital as shown in Table 7 decreased by $271 million. Internally generated capital from net income for the year less dividends was more than offset by the reduction in retained earnings, chiefly as a result of the premium paid for the repurchase of common shares. External financing was negative in 2002 because of the repurchase and redemption of common and preferred shares as well as the redemption of $55 million in debentures. These measures taken by the Bank to enhance its capital management had an impact on regulatory capital. Tier 1 capital (calculated according to the rules of the Bank for International Settlements) contracted 13.3% to stand at $3,726 million, as shown in Table 8 (page 61). The main reason for this was the increase in the balance sheet amount of goodwill attributable to the acquisition of Putnam Lovell and Altamira. Page 45 NATIONAL BANK OF CANADA 2001-2002 MANAGEMENT'S DISCUSSION AND ANALYSIS [LINE CHART] Capital ratios (at the bottom of Table 8) are calculated by taking the capital measurements and dividing them by risk-weighted assets, with the riskiest balance sheet items receiving a higher weighting. The Tier 1 capital ratio held steady at 9.6%, while the Tier 2 capital ratio rose from 13.1% to 13.6%. These ratios have been very high in recent years. In fact, they have been among the highest in the Canadian banking industry, far exceeding the capital adequacy standards of 7% for the Tier 1 capital ratio and 10% for the total capital ratio. The changes in the capital ratios were caused by a combination of two factors that produced opposite effects: the increase in goodwill generated by the Putnam Lovell and Altamira acquisitions pushed Tier 1 capital down; and regulatory risk-weighted assets declined because of the sale of the U.S. asset-based lending portfolio and sluggish credit growth in Canada. ASSETS: CONSOLIDATION OF GROWTH Totalling $74,611 million as at October 31, 2002, the Bank's assets were down $1,355 million or 1.8% compared to a year earlier. The reduction resulted from the sale of the U.S. asset-based lending portfolio. The Bank's assets were chiefly composed of cash resources (9%), securities (27%), and loans and acceptances (59%). The Consolidated Balance Sheet on page 78 shows a decline in loans and customers' liability under acceptances, a decline that was not fully offset by the increase in cash resources and securities. Gross loans outstanding were down in each of the lines of business, except for residential mortgages (+8.4%). The slide was particularly significant in business and government loans, which fell $2,809 million or 12.0%. The sale of the U.S. asset-based lending portfolio, the reduction in the volume of corporate loans and the cautious attitude of borrowers were some of the factors behind this decline. Personal and credit card loans fell by $305 million as a result of the securitization of a $515 million portfolio of consumer loans and a $250 million portfolio of credit card receivables. Because of stagnant credit demand combined with an increase in deposits, the Bank's cash resources rose 17.7% to a record $6,864 million. Trading account securities also grew substantially (19.9%) in response to the development of new financial products and demand from new client segments. ASSETS UNDER ADMINISTRATION AND ASSETS UNDER MANAGEMENT: STRONG GROWTH Asset administration and management are growth areas that are closely tied to the Bank's objective of growing its wealth management activities. At the end of fiscal 2002, assets under administration at the Bank and its subsidiaries reached a value of $117,468 million, and assets under management were $23,269 million, for a total of $140,737 million. The value of assets under administration or management was up 13.1% over 2001, and has almost doubled over the past five years. Page 46 ASSETS UNDER ADMINISTRATION AND ASSETS UNDER MANAGEMENT,1998-2002 (millions of dollars) [BAR CHART] Table 9 (page 62) provides more information on assets under administration and assets under management. In all, 40% of the growth in the value of assets under administration and 61% of the growth in the value of assets under management were generated by mutual funds, one of the growth sectors in 2002. The strong upsurge in mutual fund outstandings was primarily on account of the acquisition of Altamira, which increased mutual funds in the category of assets under administration by 42%. This new subsidiary administers $4,280 million in mutual funds for individuals in addition to the $788 million it administers for institutional clients. Table 9 illustrates the important role assumed by the Bank's subsidiaries in terms of administration and management of assets. National Bank Securities recorded 7.3% growth in the mutual funds it administers. National Bank Financial manages or administers $59,468 million of assets, up 10.9% from the end of fiscal 2001 owing to increased activities at National Bank Correspondent Network. Natcan Investment Management manages pension plans and mutual funds worth $17,823 million, an increase of 22.7%, mainly as a result of its acquisition of the firm Gestion de placements Valorem inc. The subsidiaries National Bank Discount Brokerage and National Bank Trust, which account for $7,523 and $40,917 million respectively of total assets under administration or management, also recorded significant increases. RISK MANAGEMENT RISK MANAGEMENT STRUCTURES Risk is inherent in all corporate activity, and particularly so in a bank's financial intermediation activities. Banks are exposed to four main risk categories: credit risk, market risk, liquidity risk and operational risk (these terms are defined in the Glossary on pages 70 to 72). Managing risk in order to optimize the risk-return trade-off is an essential activity which must be carried out within a structure designed specifically for that purpose. [ORGANIZATIONAL CHART] Heading the risk management structure at the National Bank is the Board of Directors which is responsible for establishing risk management policies. The Board delegates part of its responsibilities in this regard to the Audit and Risk Management Committee which recommends policies and, once adopted, oversees their application. Moreover, all exceptional risk-related decisions are made by this Committee. The Audit and Risk Management Committee is assisted by Internal Audit and three committees, namely, the Credit Committee, the Market Risk Management Committee and the Operational Risk Management Committee, all of which are composed of members of the bank's management. Internal Audit, whose Senior Vice-President reports directly to the Audit and Risk Management Committee, provides an independent and objective assessment of the effectiveness of processes, policies, procedures and control measures implemented by managers. Moreover, Internal Audit recommends solutions for improving the effectiveness of risk management, internal controls and operating activities of the Bank and its subsidiaries. Page 47 NATIONAL BANK OF CANADA 2001-2002 MANAGEMENT'S DISCUSSION AND ANALYSIS CREDIT RISK STANDARDS, PROCEDURES AND CONTROLS To manage credit risk, the Board of Directors adopts each year, on the recommendation of the Audit and Risk Management Committee, a comprehensive policy that defines the principal standards, procedures and control methods for credit granted by the Bank. The policy is applied by the Bank's Credit Committee, which is chaired by the Senior Vice- President, Risk Management. The Credit Committee's decisions are supported by sector analyses performed by the Bank's economists and Risk Management Group. The credit policy established by the Board of Directors and the administrative measures adopted by the various units of the Bank in applying the policy define acceptable risk, portfolio diversification criteria, economic and geographic sector-specific constraints, as well as allocation and authorization line levels. All standards and policies are reviewed by the Audit and Risk Management Committee. The higher the credit amount or the risk, the higher the authorization line level within the Bank's structure. Exceptionally, decisions may even be referred to the Board of Directors. In addition, specific standards apply to individuals or companies related to the Bank. When an application for credit is made to the Bank, it is subject to a procedure that becomes increasingly rigorous depending on the amount requested or the degree of risk of the sector, region or borrower. Once the application is made in due form and after the required documents and information have been provided, it is analyzed using a sophisticated credit scoring system. The decision to approve credit is made either by a credit officer or by the Bank's Credit Committee. Any deviation from the procedure has to be submitted to the Audit and Risk Management Committee. Credits and borrowers are continuously monitored according to the degree of risk they represent. Ongoing analyses attempt to foresee potential problems in an industry, region or with a borrower before these become apparent in the form of past due payments. Any loan on which interest is in arrears for 90 days or more is classified as impaired and a loss provision must be taken for it. Moreover, loans that are not past due but where repayment of principal or interest is not reasonably assured are also deemed impaired. The Bank's policies set out detailed provisioning criteria and, where required, write-off criteria for irrecoverable debts. The credit policies also define recovery practices, the intent of which is to minimize losses by recovering the largest possible portion of the amounts owing. A team of internal auditors ensures that the standards are respected at all times. CONTROLLING RISK IN 2002 The Bank adopted a very prudent approach to credit risk in 2002. In addition to being extremely cautious, which accounts for the current quality of its portfolio, operational criteria were tightened to better reflect the uncertain economic environment. One of the reasons for the Bank's solid lending portfolio is diversification, as shown in Table 10 (page 62). The largest concentration (30%) of loans is in residential mortgages, which are among the least risky forms of credit. These are followed by other types of personal loans, at 14%. Excluding securities purchased under resale agreements and government loans, the balance (46%) consists of loans to small, medium-sized and large companies. These business loans are largely concentrated in manufacturing (12%), a category that, on its own, includes a large number of diversified subsectors. Except for financial institutions (with 8% of loans), no single sector accounted for even 5%. Needless to say, these loans are all subject to the Bank's credit policies, procedures and controls. As at October 31, 2002, business loans to the telecommunications sector accounted for only 0.63% of the loans and acceptances portfolio, and total loans to the electric power and power generation sector, 0.48%. The breakdown of loans by sector remained virtually unchanged during fiscal 2002. Business loans declined $2,630 million (which essentially corresponds to the value of the U.S. portfolio that was sold), going from 48.6% to 45.7% of total loans. Residential mortgages, for their part, rose from 27.3% to 30.4% of the portfolio. At year-end 2002, gross real estate loans were stable at $544 million (down 40% over five years), as Table 11 on page 63 shows. Given the $37 million in accumulated allowances for these loans, net volumes outstanding stood at only $507 million, or largely unchanged from 2001. Net real estate exposure represented 13% of shareholders' equity and 1% of loans and acceptances. As can be seen in Table 11, the weighting of real estate has been reduced substantially in recent years. In addition, the riskiest loans have been removed following the steady paring down of the portfolio. Page 48 For the first time in several years, real estate loans were up in the Bank's core market, reflecting both the recovery in the real estate market and the Bank's commitment to accompany the clients it knows well. This was particularly true for residential real estate. At the same time, efforts to improve the quality of the portfolio in other regions, especially in the United States, continued unabated. Over the years, the Bank has sold off the bulk of its portfolio of loans to "designated countries", i.e., developing countries that failed to respect their obligations in the 1980s. In 2002, as shown in Table 12 (page 63), write-offs reduced gross loan exposure to $79 million. Net of allowances, these country risks now account for only $53 million or 1.4% of shareholders' equity. The overall change in impaired loans shows how effective the Bank has been in cleaning up its portfolio. Table 13 (page 64) shows the sharp decrease in impaired loans. In fact, net impaired loans amounted to $246 million as at October 31, 2002, down 58% from $591 million a year earlier. The upper portion of Table 13 shows that net private impaired loans have declined across all sectors, except for corporate and real estate loans. The change in net impaired corporate loans reflects the difficulties currently experienced by certain economic sectors. The increase in net impaired real estate loans accounted for only a small portion and is attributable to prevailing economic conditions. MARKET RISK STANDARDS, PROCEDURES AND CONTROLS Market risk is an integral part of trading on financial markets, such trading being essential for managing assets and liabilities. Like all financial institutions, the Bank also holds a trading portfolio with which it takes positions on financial markets for its trading, market-making and hedging operations. On the recommendation of its Audit and Risk Management Committee, the Board of Directors of the Bank adopted detailed policies for managing the four components of market risk, namely, interest rate risk, foreign exchange risk, equity risk and commodity risk. The policies adopted by the Board of Directors establish standards, procedures and controls aimed at optimizing the risk-return trade-off and ensuring oversight of financial transactions. The Audit and Risk Management Committee oversees the Market Risk Management Committee which heads the risk management structure for the Financial Markets, Treasury and Investment Banking line of business. The New Products Committee and the Risk Management Committee of National Bank Financial also report to it. The Market Risk Management Committee plays a key role in establishing market risk policies and practices, including risk assessment, maximum limits, simulation and oversight processes, as well as operational compliance with Bank policies. The Risk Management Group is an independent team that is responsible for the day-to-day monitoring of market risk exposures, including ensuring that maximum limits and authorization procedures are respected. The Group also develops risk measurement procedures and models for carrying out simulations. TRADING ACTIVITIES The VaR (Value-at-Risk) simulation model is one of the main tools used to manage market risk in trading activities. The VaR measure is based on a 99% confidence level and is an estimate of the maximum potential trading loss in 99 out of every 100 days or, to put it another way, actual losses will probably exceed VaR on only one day out of 100. VaR is calculated on an ongoing basis for the major categories of financial instruments (including derivatives) and for the Bank's aggregate trading portfolio. Insofar as is possible, it thus ensures that trading decisions do not entail risks that exceed pre-set limits. The computerized VaR calculation model is based on three years of historical data which means that it can only simulate losses in a market situation similar to that observed during the previous three years. To simulate the impact of unlikely events, the Bank also runs stress tests, exploring, for example, a crash such as the stock market crash in 1987. Table 15 (page 65) provides an assessment of market risk in fiscal 2002 versus the previous year. For the three major market risk categories (interest rate, foreign exchange, equity), the table shows yearend VaR, the annual average and the degree of variation during the year. Global VaR presented in the last line takes into account the correlations between the various risks. In 2002, VaR did not once exceed $6 million and averaged $4 million. At no time, therefore, did the Bank's trading portfolio incur major risks, despite the turbulence on financial markets. Page 49 NATIONAL BANK OF CANADA 2001-2002 MANAGEMENT'S DISCUSSION AND ANALYSIS BACKTESTING (CDN$ EQUIVALENT) (dollars) [LINE CHART] The chart complements Table 15 by providing the results of backtesting, which each day compares the VaR projected by our simulations to the theoretical revenues obtained. Backtesting, which the Bank carries out regularly, validates the use of VaR methodology in estimating maximum loss risk, based on the composition of the trading portfolio. INTEREST RATE RISK IN ASSET/LIABILITY MANAGEMENT Managing assets (investments, including loans) and liabilities (debt, including deposits) exposes the Bank to interest rate risk. Interest rate fluctuations give rise to changes in interest income and interest expense. Although these changes move in the same direction, the impact of their relative weighting on net interest income and the economic value of shareholders' equity will be either favourable or unfavourable. The extent of the impact depends on several factors, including asset and liability matching and the interest rate curve. Assets and liabilities are managed in such a way as to optimize the impact of fluctuating interest rates based on projected rate movements. The Bank's Treasury sector is responsible for managing assets and liabilities in accordance with the policies adopted by the Board of Directors and overseen by the Audit and Risk Management Committee. The Market Risk Management Committee works closely with Treasury in this activity. Simulations are carried out regularly to assess the impact of various scenarios on net interest income and the economic value of shareholders' equity and to provide guidance in managing the portfolio of assets and liabilities. INTEREST RATE SENSITIVITY As at October 31, 2002 (millions of dollars)
Scenario 2002 2001 - -------- ---- ---- 100 point increase in interest rates Impact on net interest income (3) (11) Impact on shareholders' equity (78) (92) === ===
The above table presents an interest-rate sensitivity simulation. Using a number of repricing assumptions, a permanent 100 point increase in interest rates as at October 31, 2002 would have reduced net interest income by $3 million and the economic value of shareholders' equity by $78 million. RISK OF OFF-BALANCE SHEET ACTIVITIES Market risk also affects off-balance sheet activities, consisting of derivative and credit instruments. These off-balance sheet financial instruments are usually components of portfolios which also include balance sheet items and which, as such, are subject to the risk limits and control procedures described earlier. In addition, off-balance sheet credit instruments must respect the same credit criteria and procedures as loans recorded on the balance sheet. Additional controls are also applied to derivative instruments. Table 8 (page 61) provides a breakdown of the credit equivalent of the various off-balance sheet items included in the calculation of total risk-weighted assets. They represent a relatively small proportion in comparison to other credit risks recorded on the balance sheet. As at October 31, 2002, off-balance sheet items accounted for 13.2% of risk-weighted total assets, compared to 13.9% in 2001. Page 50 Note 19 of the consolidated financial statements (pages 99 to 101) presents the notional (or nominal) amounts of derivatives used by the Bank, as well as their maturity profile as at October 31, 2002. It should be noted that most of these instruments mature within 12 months. Also worth noting is that these notional amounts are not necessarily representative of the risk level represented by derivative instruments, but rather they reflect the large number of transactions. The data on the risk-weighted equivalent amount confirm the small proportion of derivatives on the balance sheet. In addition to the market risk to which they are subject, derivative instruments also comprise a credit risk which the Bank mitigates in various ways. In dealings with certain counterparties, for instance, exposure is reduced by means of netting or marked-to-market agreements. Note 19 also shows that most of the credit equivalent amount for derivatives is contracted with reliable counterparties, specifically major banks and OECD member countries. DERIVATIVE INSTRUMENTS AND RISK The derivative financial instruments used by the Bank (forwards, futures, swaps and options) are contracts whose value is derived from interest rates, foreign exchange rates, commodity prices, equity prices and credit default swaps. Some derivatives can be offered through recognized exchanges (exchange-traded), but more structured products are negotiated between individual parties (over the counter). Derivatives are the strategic tool of choice in risk management. Accordingly, the Bank uses them for trading activities, asset/liability management and for hedging certain credit risks. The Bank uses its trading portfolio to carry out market-making or trading activities and to position itself on markets. In this context, derivatives are needed to control the risks associated with trading activities. Because of its expertise in these products and its ability to use them efficiently in its risk management process, the Bank also provides its commercial and institutional clients with risk management solutions. Derivatives are also one of the balance-sheet management tools available for interest rate, foreign exchange and credit hedging, as well as asset and liability matching. It is essential that these risks, which are a normal part of banking, be managed in order to protect the interest spread and the value of capital. The risks inherent in derivatives are similar to the general risks for financial instruments, namely, market risk, credit risk, liquidity risk and operational risk. Market risk is defined as the potential for deterioration in the value of a derivative instrument because of fluctuations in the underlying primary instrument (interest rates, foreign exchange rates, commodity prices or equity prices). All derivative risks are accurately measured, re-evaluated on a daily basis and managed in accordance with the policies approved by the Bank's Board of Directors. Credit risk, also known as the credit equivalent amount, is the value of the loss incurred should a counterparty fail to honour its commitments. It is measured by taking into account the current replacement cost of the contract (if it is positive), future credit risk exposure (which is the estimated change in the value of the contract to maturity) and the impact of master netting agreements. Liquidity risk consists of two elements: market liquidity and cash flow. In the first instance, risk exposure stems from a possible delay in settling a position when, for example, the market lacks sufficient depth. This is controlled by taking relatively short-term positions where liquidity may be at issue. Longer-term positions are taken only in liquid and proven markets. In order to ensure adequate control, maximum term limits are established according to the liquidity assessment of the relevant market. Cash flow risk derives from the timing of cash receipts and outflows and is managed as part of the Bank's overall liquidity management process. One example of operational risk is legal risk, which exists when there is a possibility that a counterparty does not have the necessary legal power to close a transaction or the legal documents for such a transaction are deficient. The Bank manages this risk by applying the necessary checks and controls and by working with the national and international organizations that set the standards to be respected. In doing so, the Bank has developed a high degree of internal knowledge with regard to legal confirmations and documentation. In addition to being managed within the limits provided for in the Bank's general risk management policies, derivative risk exposure is also subject to special assessment and control measures. The Risk Management Group, an independent unit within the Bank, is responsible for monitoring financial transactions and administering risk control systems. The duties of this unit include ensuring that transactions are settled and recorded, measuring position risk, checking that the policies adopted by the Board of Directors are applied and controlling the quality of analysis systems. Page 51 NATIONAL BANK OF CANADA 2001-2002 MANAGEMENT'S DISCUSSION AND ANALYSIS LIQUIDITY RISK Liquidity risk, which is integrated into the strategies applied by Treasury, is an intrinsic part of asset/liability management and is also linked to market risk. Since it is important for a bank to have liquid assets available at all times, special emphasis is placed on managing them. The Bank's liquidity management policy is approved by the Board of Directors. In particular, it sets out objectives, measurement methods, minimum requirements, control procedures and strategies for accessing capital funds, as well as the steps to be taken to deal with any unforeseen events. The President, Financial Markets, Treasury and Investment Bank, is responsible for applying the liquidity management policy, a report on which is submitted each year to the Executive Committee. The situation is monitored regularly by means of weekly reports on liquidity ratios and quarterly reports on the Bank's overall liquidity position. The liquidities needed for the Bank's operations are guaranteed by stable, well-diversified funding in the form of core deposits and purchased funds, by a sufficient level of equity, and by the Bank's access to capital markets. Sufficient liquidity is assured at all times by means of other techniques, such as securitization, use of derivatives, and the purchase and sale of securities through resale and repurchase agreements. OPERATIONAL RISK Not only can operational risk have immediate financial consequences, but it can also negatively affect the Bank's reputation, thereby compromising its competitive position and possibly resulting in regulatory censure. While operational risk can never be fully eliminated, it must be managed in a disciplined, transparent manner. Accordingly, the Bank is currently implementing a management framework that includes a governance model as well as procedures for identifying, measuring and monitoring this form of risk. During the year, the Board of Directors approved an operational risk management policy for identifying, measuring, overseeing and controlling this risk, which is also taken into account in decisions about capital allocation. The Bank's business units are responsible for the day-to-day management of their operational risks. In this, they are supported by the Operational Risk Management Group, a central task force created in 2001. The Group's mission is to establish a comprehensive, standard framework to help identify, measure, monitor, control and document operational risk. In 2002, the Bank adopted proactive measures to integrate the qualitative and quantitative components of operational risk. The focus was on developing operational risk self-assessment tools and processes, and setting up a centralized database for losses due to operational risk. No significant loss of this kind occurred during the year. In addition, the Bank keeps a close eye on developments in operational risk practices in the financial industry. The Bank intends to remain competitive by implementing industry best practices and meeting the requirements of the Basel Committee of the Bank for International Settlements. Page 52 INVESTING IN THE NATIONAL BANK The Bank creates value for its shareholders by responding to the needs of its clients. In 2002, its ability in this regard and in ensuring customer satisfaction, translated into increased, profitable business with individuals, stability in the Commercial Banking business line, sustained growth in revenues and earnings at Financial Markets, Treasury and Investment Banking, sound risk management and an appreciably stronger financial position. While ROE dipped slightly, reflecting economic uncertainties and market upheavals, the National Bank was less affected than a number of its competitors. The Bank's aim is to keep ROE at between 14% and 16% in 2003, and to re-establish the range of 15% to 17% for the mid term. The target range for the dividend payout ratio is 30% to 40%. Total return on shares, 1998-2002 [BAR CHART] One of the reasons for the National Bank's success lies in its ability to combine the flexibility of a smaller bank with an extremely diversified product offering. Moreover, it significantly expanded its presence outside Quebec during the year with its acquisition of Altamira and Putnam Lovell. Prudent risk management also accounts in large part for the success enjoyed in recent years. This strategy stood the Bank in good stead in 2002, as it was less affected than several of its competitors by the economic slowdown and the difficulties experienced in various sectors. A financial analyst recently commented that the "National Bank has very limited exposure to the troubled telecom and electric power and power generation sectors," while a recent report issued by a major investment dealer noted that the "National Bank leads the Big 6 in low levels of new net formations (of impaired loans)." The prudent approach taken by the National Bank has resulted in strong capital ratios, making it one of the best capitalized banks in Canada. The National Bank prefers to be slightly overcapitalized in order to benefit from greater flexibility and to ensure its shareholders a stable return. In recent years, the total return (dividends and stock appreciation) for National Bank common shares has outpaced the total return for the other five large Canadian banks. In fiscal 2001, this return was 25% for the National Bank as against -0.4% for the other banks. Over five years, the total return obtained by common shareholders of the National Bank reached 11%, compared to 8% for the TSX Banks and Trusts sub-index. In the third quarter, a financial analyst was quoted as saying: "We continue to expect the (National Bank's) P/E multiple to expand relative to the bank group, reflecting the bank's lower risk profile, strong capital ratios and solid profitability." Management also believes that financial markets will increasingly acknowledge the value of National Bank stock and that investors who have confidence in the stock have every reason to look forward to receiving a stable and attractive return. Page 53 NATIONAL BANK OF CANADA 2001-2002 ADDITIONAL FINANCIAL INFORMATION TABLE 1A. OVERVIEW OF RESULTS Year ended October 31 (taxable equivalent basis) (millions of dollars and as a percentage of average assets)
2002 2001 2000 1999 1998 ---------------- ---------------- ----------------- ----------------- ---------------- $ % $ % $ % $ % $ % Net interest income 1,473.3 2.13 1,389.0 2.01 1,231.8 1.76 1,224.3 1.86 1,212.7 1.96 Other income 1,641.0 2.37 1,857.5 2.68 1,940.3 2.78 1,232.7 1.87 1,108.9 1.79 Provision for credit losses 490.0 0.71 205.1 0.30 183.7 0.26 169.6 0.26 147.3 0.24 Operating expenses 2,040.4 2.95 1,988.8 2.87 2,119.6 3.03 1,615.5 2.46 1,535.5 2.48 Income taxes 236.3 0.34 398.4 0.58 343.2 0.49 250.6 0.38 242.4 0.39 Non-controlling interest 29.5 0.04 27.4 0.04 26.1 0.04 31.8 0.05 31.2 0.05 ------ ---- -------- ---- -------- ---- -------- ---- -------- ---- Income before discontinued operations and goodwill charges 318.1 0.46 626.8 0.90 499.5 0.72 389.5 0.58 365.2 0.59 Discontinued operations 111.4 0.16 (45.5) (0.07) 29.3 0.04 36.0 0.05 24.0 0.04 ------ ---- -------- ---- -------- ---- -------- ---- -------- ---- Income before goodwill charges 429.5 0.62 581.3 0.83 528.8 0.76 425.5 0.63 389.2 0.63 Goodwill charges 0.1 - 18.6 0.03 19.7 0.03 8.5 0.01 73.4 0.12 ------ ---- -------- ---- -------- ---- -------- ---- -------- ---- Net income 429.4 0.62 562.7 0.80 509.1 0.73 417.0 0.62 315.8 0.51 ------ ---- -------- ---- -------- ---- -------- ---- -------- ---- Average assets* 69,292 69,197 69,840 65,784 61,949
* Excluding discontinued operations Page 54 TABLE 1B. RECONCILIATION OF REPORTED INCOME TO ADJUSTED INCOME Year ended October 31 (taxable equivalent basis) (millions of dollars) REPORTED
2002 2001 ---- ---- Net interest income (1) 1,473 1,389 Other income (1) 1,641 1,858 Provision for credit losses 490 205 Operating expenses 2,040 1,989 ---- ---- Income before income taxes, non-controlling interest, discontinued operations and goodwill charges 584 1,053 Income taxes (1) 236 398 Non-controlling interest 30 28 ---- ---- Income before discontinued operations and goodwill charges 318 627 Discontinued operations 111 (45) ---- ---- Income before goodwill charges 429 582 Goodwill charges - 19 ---- ---- NET INCOME 429 563 ---- ---- EARNINGS PER SHARE (BEFORE GOODWILL CHARGES) 2.18 2.88 RETURN ON COMMON SHAREHOLDERS' EQUITY 11.3% 16.0% ==== ==== ADJUSTMENTS Other income Decline in value of investments (2) 139 - Gain on sale of merchant payment solutions - (76) ---- ---- 139 (76) ---- ---- Provision for credit losses Revision of estimated allowance (185) - ---- ---- Operating expenses Write-off of assets (3) (9) - ---- ---- Income taxes 96 (29) ---- ---- Discontinued operations (111) 45 ==== ====
ADJUSTED
2002 2001 ---- ---- Net interest income (1) 1,473 1,389 Other income (1) 1,780 1,782 Provision for credit losses 305 205 Operating expenses 2,031 1,989 ----- ---- Income before income taxes, non-controlling interest, discontinued operations and goodwill charges 917 977 Income taxes (1) 332 369 Non-controlling interest 30 28 ----- ---- Income before discontinued operations and goodwill charges 555 580 Discontinued operations - - ----- ---- Income before goodwill charges 555 580 Goodwill charges - 19 ----- ---- Adjusted net income 555 561 ----- ---- ADJUSTED EARNINGS PER SHARE (BEFORE GOODWILL CHARGES) 2.86 2.87 RETURN ON COMMON SHAREHOLDERS' EQUITY 14.7% 15.9% ===== =====
Adjusted income excludes items which, in the opinion of management, should not be taken into account in the analysis of the Bank's performance. Adjusted income is not defined according to GAAP and is not necessarily comparable to similar data used by another company. Notes: (1) Net interest income was grossed up by $29 million in 2002 ($51 million in 2001). Other income was grossed up by $57 million in 2002 ($69 million in 2001). These increases are intended to bring tax-exempt income earned on certain securities in line with income earned on other financial instruments. An equivalent amount was added to income taxes. (2) Permanent impairment in the value of mutual funds and a corporate investment (3) Write-off of deferred expenses and fixed assets of a subsidiary Page 55 NATIONAL BANK OF CANADA 2001-2002 ADDITIONAL FINANCIAL INFORMATION TABLE 2. CHANGES IN NET INTEREST INCOME Year ended October 31 (taxable equivalent basis) (millions of dollars)
$ Variation 2002 2001 2002-2001 due to: ------------------------ ------------------------ -------------------------- ----------------- Average Average Average Average volume Rate Interest volume Rate Interest volume Rate Interest volume Rate ------- ---- -------- ------- ---- -------- ------- ---- -------- ------- ---- $ % $ $ % $ $ % $ Assets Deposits with financial institutions 7,316 2.38 174.3 5,769 4.93 284.7 1,547 (2.55) (110.4) 36.8 (147.2) Securities 16,342 3.16 516.1 16,230 4.03 654.1 112 (0.87) (138.0) 3.5 (141.5) Residential mortgage loans 12,591 5.72 719.6 11,940 6.66 795.4 651 (0.94) (75.8) 37.2 (113.0) Personal loans 6,913 5.21 360.2 7,338 8.00 586.9 (425) (2.79) (226.7) (22.1) (204.6) Business and other loans 19,782 4.14 819.3 20,512 5.28 1,083.2 (730) (1.14) (263.9) (30.2) (233.7) Impaired loans, net (97) (1.55) 1.5 102 1.86 1.9 (199) (3.41) (0.4) 3.1 (3.5) ------ ----- ------- ------ ---- ------- ----- ----- ----- ----- ----- Earning assets 62,847 4.12 2,591.0 61,891 5.50 3,406.2 956 (1.38) (815.2) 28.3 (843.5) Other assets 6,445 - - 7,306 - - (861) - - - - ------ ----- ------- ------ ---- ------- ----- ----- ----- ----- ----- Total assets 69,292 3.74 2,591.0 69,197 4.92 3,406.2 95 (1.18) (815.2) 28.3 (843.5) ------ ----- ------- ------ ---- ------- ----- ----- ----- ----- ----- Liabilities and shareholders' equity Personal deposits 21,420 2.96 633.6 21,108 3.84 810.8 312 (0.88) (177.2) 9.2 (186.4) Deposit-taking institutions 6,421 2.14 137.3 6,159 4.52 278.3 262 (2.38) (141.0) 5.6 (146.6) Other deposits 21,083 2.34 493.2 19,492 4.36 849.7 1,591 (2.02) (356.5) 37.2 (393.7) ------ ----- ------- ------ ---- ------- ----- ----- ----- ----- ----- 48,924 2.58 1,264.1 46,759 4.15 1,938.8 2,165 (1.57) (674.7) 52.0 (726.7) Subordinated debentures 1,623 6.77 109.8 1,573 6.95 109.3 50 (0.18) 0.5 3.4 (2.9) Liabilities other than deposits 9,257 0.86 79.9 9,733 1.09 106.1 (476) (0.23) (26.2) (4.1) (22.1) Other (1) (28) - (336.1) - - (137.0) (28) - (199.1) - (199.1) ------ ----- ------- ------ ---- ------- ----- ----- ----- ----- ----- Interest-bearing liabilities 59,776 1.87 1,117.7 58,065 3.47 2,017.2 1,711 (1.60) (899.5) 51.3 (950.8) Other liabilities 5,550 - - 7,210 - - (1,660) - - - - Shareholders' equity 3,966 - - 3,922 - - 44 - - - - ------ ----- ------- ------ ---- ------- ----- ----- ----- ----- ----- Total liabilities and shareholders' equity 69,292 1.61 1,117.7 69,197 2.91 2,017.2 95 (1.30) (899.5) 51.3 (950.8) Impact of non-interest bearing assets and liabilities - - - - - - - - - 25.1 (25.1) ------ ----- ------- ------ ---- ------- ----- ----- ----- ----- ----- Net interest income 2.13 1,473.3 2.01 1,389.0 0.12 84.3 2.1 82.2
(1) Other interest income and interest expenses including hedging operations Page 56 TABLE 3. OTHER INCOME Year ended October 31 (taxable equivalent basis) (millions of dollars)
2002 2001 2000 1999 1998 ---- ---- ---- ---- ---- Capital market fees 539 493 566 336 313 Deposit and payment service charges 170 160 155 150 144 Trading activities and gains on investment account securities, net 25 298 318 120 91 Card service revenues 53 86 85 91 92 Lending fees 181 175 171 146 128 Acceptances, letters of credit and guarantee 63 65 60 55 40 Foreign exchange revenues 67 61 52 50 46 Trust services and mutual funds 111 96 87 77 74 Securitization revenues 204 157 99 67 34 Other 228 267 347 141 147\ ----- ----- ----- ----- ----- 1,641 1,858 1,940 1,233 1,109 ----- ----- ----- ----- ----- Domestic 1,595 1,856 1,927 1,206 1,099 International - United States (3) 6 6 7 4 - Other 49 (4) 7 20 6 ----- ----- ----- ----- ----- Other income as a percentage of total revenues on a taxable equivalent basis (1) 54.7% 56.2% 59.4% 50.2% 47.8% ===== ===== ===== ===== =====
(1) In 2002, the $139 million impairment charge on investments was excluded. In 2001, the $76 million gain (taxable equivalent basis) on the sale of merchant payment solutions was excluded. In 2000, the $136 million gain (taxable equivalent basis) on the sale of a subsidiary was excluded. Page 57 NATIONAL BANK OF CANADA 2001-2002 ADDITIONAL FINANCIAL INFORMATION TABLE 4. PROVISION FOR CREDIT LOSSES Year ended October 31 (millions of dollars)
2002 2001 2000 1999 1998 ------ ------ ------ ------ ------ Provisions for credit losses Domestic Individuals and small business 186 72 88 77 58 Commercial 154 102 69 75 44 Corporate 44 26 13 3 2 Real estate 23 12 15 12 10 Other (13) (6) (2) - 1 ------ ------ ------ ------ ------ Domestic - Private risks 394 206 183 167 115 ------ ------ ------ ------ ------ International Real estate - United States (3) (1) (7) - 31 Corporate 129 - - - - Other - - 8 3 1 ------ ------ ------ ------ ------ International - Private risks 126 (1) 1 3 32 ------ ------ ------ ------ ------ General allowance for credit risk (30) - - - - ------ ------ ------ ------ ------ Provision for credit losses charged to income before discontinued operations 490 205 184 170 147 Provision for credit losses charged to discontinued operations (51) 120 16 15 46 ------ ------ ------ ------ ------ Total provision for credit losses charged to income 439 325 200 185 193 ------ ------ ------ ------ ------ Net average loans and acceptances Domestic 37,543 38,308 39,345 38,928 35,550 International - United States 663 677 851 737 940 - Other 188 291 301 213 790 Discontinued operations - 3,925 3,967 3,605 3,924 ------ ------ ------ ------ ------ TOTAL 38,394 43,201 44,464 43,483 41,204 ------ ------ ------ ------ ------ Provision for credit losses as a percentage of net average loans and acceptances Domestic 1.05% 0.54% 0.47% 0.43% 0.32% International - United States 19.00% (0.15)% (0.83)% -% 3.30% - Other -% -% 2.66% 1.41% 0.13% Discontinued operations -% 3.06% 0.40% 0.42% 1.17% TOTAL 1.14% 0.75% 0.45% 0.43% 0.47% ------ ------ ------ ------ ------ Allowances Balance at beginning of year 896 965 989 1,049 839 Transfer from allowance for assets held for disposal (45) - - - - Provision for credit losses charged to income: Before discontinued operations 490 205 184 170 147 Discontinued operations (51) 120 16 15 46 Write-offs (1) (673) (402) (257) (276) (328) Recoveries 49 8 33 31 45 Adjustment to general allowance - - - - 300 ------ ------ ------ ------ ------ Balance at end of year 666 896 965 989 1,049 ------ ------ ------ ------ ------ Composition of allowances: Designated countries Portion related to loans 22 38 35 37 40 Portion related to securities 4 17 17 16 17 Specific 235 341 413 436 492 General allocated 296 306 - - - General unallocated 109 194 500 500 500 ====== ====== ====== ====== ======
(1) Including exchange rate fluctuations Page 58 TABLE 5. OPERATING EXPENSES Year ended October 31 (millions of dollars)
2002 2001 2000 1999 1998 ---- ---- ---- ---- ---- Salaries and staff benefits 1,147 1,064 1,129 858 798 Occupancy costs, computers and equipment, including amortization 430 408 431 381 365 Other Messenger services and communications 77 69 71 63 58 Professional fees 165 167 119 74 63 Advertising and external relations 50 42 45 36 36 Stationery 28 27 26 21 21 Travel expenses 17 16 15 12 11 Security and theft 24 16 13 11 11 Capital and payroll taxes 57 63 64 38 50 Other 45 117 207 121 122 ----- ----- ----- ----- ----- 463 517 560 376 372 ----- ----- ----- ----- ----- Total 2,040 1,989 2,120 1,615 1,535 ----- ----- ----- ----- ----- Domestic 1,999 1,956 2,083 1,573 1,491 ----- ----- ----- ----- ----- International - United States 18 16 20 28 26 - Other 23 17 17 14 18 ----- ----- ----- ----- ----- Operating expenses as a percentage of total revenues on a taxable equivalent basis (1) 62.4% 62.7% 65.8% 65.7% 66.1% ===== ===== ===== ===== =====
(1) In 2002, the $139 million impairment charge on investments was excluded from other income and the write-off of $9 million in fixed assets was excluded from operating expenses. In 2001, the $76 million gain (taxable equivalent basis) on the sale of merchant payment solutions was excluded. In 2000, the $136 million gain (taxable equivalent basis) on the sale of a subsidiary and $120 million in non-recurring charges were excluded. TABLE 6. DEPOSITS As at October 31 (millions of dollars)
2002 2001 2000 1999 1998 -------------- -------------- --------------- -------------- -------------- $ % $ % $ % $ % $ % Personal 22,306 43.2 21,485 41.8 20,497 40.6 20,316 40.6 19,897 41.4 Commercial 14,183 27.4 11,667 22.7 9,726 19.3 8,737 17.5 9,828 20.5 Purchased funds 15,201 29.4 18,284 35.5 20,250 40.1 20,931 41.9 18,301 38.1 ------ ----- ------ ----- ------ ----- ------ ----- ------ ----- Total 51,690 100.0 51,436 100.0 50,473 100.0 49,984 100.0 48,026 100.0 ------ ----- ------ ----- ------ ----- ------ ----- ------ ----- Domestic 40,959 79.2 38,161 74.2 35,383 70.1 36,035 72.1 36,492 76.0 International - United States 2,814 5.5 4,315 8.4 6,935 13.7 5,518 11.0 6,292 13.1 - Other 7,917 15.3 8,960 17.4 8,155 16.2 8,431 16.9 5,242 10.9 ------ ----- ------ ----- ------ ----- ------ ----- ------ ----- Total 51,690 100.0 51,436 100.0 50,473 100.0 49,984 100.0 48,026 100.0 ------ ----- ------ ----- ------ ----- ------ ----- ------ ----- Personal deposits as a percentage of total assets 29.9 28.3 27.0 29.1 28.2 ===== ===== ===== ===== =====
Page 59 NATIONAL BANK OF CANADA 2001-2002 ADDITIONAL FINANCIAL INFRMATION TABLE 7. SOURCE OF CAPITAL As at October 31 (millions of dollars)
2002 2001 2000 1999 1998 ---- ---- ---- ---- ---- Non-controlling interest 486 487 468 443 523 Subordinated debentures 1,592 1,647 1,361 1,035 966 Shareholders' equity Preferred shares 300 492 492 317 317 Common shares 1,639 1,668 1,653 1,641 1,327 Retained earnings 1,962 1,956 1,683 1,343 1,051 ----- ----- ----- ----- ----- 3,901 4,116 3,828 3,301 2,695 ----- ----- ----- ----- ----- TOTAL CAPITAL 5,979 6,250 5,657 4,779 4,184 ----- ----- ----- ----- ----- INTERNALLY GENERATED CAPITAL Net income 429 563 509 417 316 Other amounts affecting retained earnings (228) (99) 1 22 (200) ----- ----- ----- ----- ----- 201 464 510 439 116 Less: dividends (195) (191) (170) (147) (140) ----- ----- ----- ----- ----- 6 273 340 292 (24) ----- ----- ----- ----- ----- EXTERNAL FINANCING Non-controlling interest (1) 19 25 (80) 57 Subordinated debentures (55) 286 326 69 (103) Preferred shares (192) - 175 - (59) Common shares (29) 15 12 314 18 ----- ----- ----- ----- ----- (277) 320 538 303 (87) ----- ----- ----- ----- ----- INCREASE (DECREASE) IN CAPITAL (271) 593 878 595 (111) ===== ===== ===== ===== =====
Page 60 TABLE 8. CAPITAL RATIOS As at October 31 (millions of dollars) (in accordance with BIS guidelines)
2002 2001 2000 1999(2) 1998 ------ ------ ------ ------- ------ TIER 1 CAPITAL Common shareholders' equity 3,601 3,624 3,336 2,984 2,378 Non-cumulative permanent preferred shares 300 492 492 317 317 Innovative instruments 467 477 457 441 463 Non-controlling interest 19 10 11 2 60 Less: goodwill (661) (305) (325) (350) (81) ------ ------ ------ ------ ------ 3,726 4,298 3,971 3,394 3,137 ------ ------ ------ ------ ------ TIER 2 CAPITAL Subordinated debentures 1,524 1,595 1,290 1,271 911 General allowance for credit risk 341 391 343 328 300 ------ ------ ------ ------ ------ 1,865 1,986 1,633 1,599 1,211 ------ ------ ------ ------ ------ Less: investments in affiliated corporations (181) (326) (329) (125) (3) Less: first loss protection (116) (82) (54 ) (3) - ------ ------ ------ ------ ------ TOTAL CAPITAL 5,294 5,876 5,221 4,865 4,345 ====== ====== ====== ====== ====== RISK-WEIGHTED BALANCE SHEET ITEMS Cash resources 1,421 1,187 1,160 675 882 Securities 2,336 2,686 1,921 2,126 583 Mortgage loans 3,971 3,486 2,816 3,707 4,335 Other loans 19,478 23,030 25,328 24,077 23,881 Other assets 5,117 6,572 5,528 4,729 4,429 ------ ------ ------ ------ ------ 32,323 36,961 36,753 35,314 34,110 General allowance for credit risk 341 391 343 328 300 ------ ------ ------ ------ ------ 32,664 37,352 37,096 35,642 34,410 ------ ------ ------ ------ ------ RISK-WEIGHTED OFF-BALANCE SHEET ITEMS (1) Letters of guarantee and documentary credit 751 1,180 1,292 1,878 1,645 Commitments to extend credit 3,872 4,415 4,747 5,137 2,819 Interest rate contracts 161 106 84 65 94 Foreign exchange contracts 221 374 331 244 443 Equity and commodity contracts 161 148 187 72 41 ------ ------ ------ ------ ------ 5,166 6,223 6,641 7,396 5,042 ------ ------ ------ ------ ------ MARKET RISK ITEMS 1,148 1,121 2,098 1,083 1,195 ------ ------ ------ ------ ------ Total risk-weighted assets 38,978 44,696 45,835 44,121 40,647 ====== ====== ====== ====== ====== Assets to capital multiple (3) 14.2 13.1 14.8 16.6 17.0 RATIOS Tier 1 capital 9.6% 9.6% 8.7% 7.7% 7.7% Total capital 13.6% 13.1% 11.4% 11.0% 10.7% ====== ====== ====== ====== ======
(1) For 2002, items are as at October 31. For 2001, letters of guarantee and documentary credit as well as commit- ments to extend credit are as at October 31; all other information is as at September 30. Off-balance sheet items prior to 2001 are as at September 30. (2) Taking into account the issuance of US $250 million in debentures on November 2, 1999. (3) The assets to capital multiple is calculated by dividing total balance sheet assets and direct credit substitutes by total capital as defined by capital adequacy requirements. Page 61 NATIONAL BANK OF CANADA 2001-2002 ADDITIONAL FINANCIAL INFORMATION TABLE 9. ASSETS UNDER ADMINISTRATION AND ASSETS UNDER MANAGEMENT As at October 31 (millions of dollars)
National National National National Altamira Natcan Bank Bank Bank Bank Bank Investment Investment Discount excluding Total Trust Financial Security Services Management Brokerage subsidiaries 2002 2001 -------- --------- -------- ---------- ---------- --------- ------------ ---- ------- ASSETS UNDER ADMINISTRATION Institutional 32,716 3,308 - 788 - - - 36,812 34,838 Personal - 54,883 - - - 5,458 - 60,341 52,360 Mutual funds 6,090 7 5,160 4,280 - - - 15,537 10,193 Mortgage loans sold to third parties - - - - - - 4,778 4,778 6,682 ------ ------ ----- ----- ------ ----- ----- ------- ------- Total assets under administration 38,806 58,198 5,160 5,068 - 5,458 4,778 117,468 104,073 ------ ------ ----- ----- ------ ----- ----- ------- ------- ASSETS UNDER MANAGEMENT Personal 2,111 - - - - - - 2,111 1,974 Managed portfolios - 1,270 - - 9,527 2,065 - 12,862 11,859 Mutual funds - - - - 8,296 - - 8,296 6,507 ------ ------ ----- ----- ------ ----- ----- ------- ------- Total assets under management 2,111 1,270 - - 17,823 2,065 - 23,269 20,340 ------ ------ ----- ----- ------ ----- ----- ------- ------- TOTAL ASSETS UNDER ADMINISTRATION/ MANAGEMENT - 2002 40,917 59,468 5,160 5,068 17,823 7,523 4,778 140,737 124,413 ------ ------ ----- ----- ------ ----- ----- ------- ------- Total assets under administration/ management - 2001 38,908 53,633 4,808 - 14,521 6,970 5,573 124,413 ====== ====== ===== ===== ====== ===== ===== ======= =======
TABLE 10. DISTRIBUTION OF LOANS BY BORROWER CATEGORY As at September 30 (millions of dollars)
2002 2001 2000 1999 1998 ------------- ------------- ------------ -------------- ------------- $ % $ % $ % $ % $ % Personal (1) 5,859 14.2 6,100 13.7 7,415 16.3 7,459 16.2 5,975 12.4 Residential mortgage 12,548 30.4 12,132 27.3 11,503 25.2 13,298 28.9 14,158 29.3 Non-residential mortgage 836 2.0 779 1.7 756 1.7 683 1.5 648 1.3 Agricultural 1,486 3.6 1,286 2.9 1,169 2.6 1,060 2.3 942 1.9 Financial institutions 3,239 7.8 2,771 6.2 2,725 6.0 2,760 6.0 2,268 4.7 Manufacturing 5,050 12.2 5,733 12.9 5,132 11.3 4,980 10.8 5,076 10.5 Construction and real estate 1,707 4.1 1,301 2.9 1,388 3.0 1,606 3.5 2,194 4.5 Transportation and communications 632 1.5 1,041 2.3 1,013 2.2 877 1.9 815 1.7 Mines, quarries and energy 601 1.5 742 1.7 585 1.3 608 1.3 614 1.3 Forestry 252 0.6 293 0.7 289 0.6 238 0.5 269 0.6 Governments 882 2.1 783 1.8 867 1.9 800 1.7 724 1.5 Wholesale trade 807 2.0 1,682 3.8 1,839 4.0 1,613 3.5 1,431 3.0 Retail trade 1,281 3.1 1,423 3.2 1,481 3.2 1,498 3.2 1,729 3.5 Services 1,910 4.6 2,537 5.7 2,320 5.1 2,339 5.1 2,818 5.8 Securities purchased under resale agreements 3,083 7.5 3,863 8.7 5,364 11.8 4,175 9.1 6,812 14.1 Other 1,160 2.8 2,003 4.5 1,745 3.8 2,072 4.5 1,890 3.9 ------ ----- ------ ----- ------ ----- ------ ----- ------ ----- 41,333 100.0 44,469 100.0 45,591 100.0 46,066 100.0 48,363 100.0 ====== ===== ====== ===== ====== ===== ====== ===== ====== =====
(1) Includes consumer loans, credit card loans and other personal loans Page 62 TABLE 11. REAL ESTATE LOANS As at October 31 (millions of dollars)
2002 2001 2000 1999 1998 ----------- -------- --------- -------- --------- $ % $ % $ % $ % $ % GEOGRAPHIC DISTRIBUTION CANADA Ontario 73 13 81 15 101 16 168 24 238 26 Quebec 399 73 350 64 371 58 335 49 376 42 Other 3 1 3 1 16 2 18 3 21 2 --- --- --- --- --- --- --- --- --- --- 475 87 434 80 488 76 521 76 635 70 --- --- --- --- --- --- --- --- --- --- UNITED STATES California 2 - 29 6 58 9 57 8 79 9 New York 6 2 7 1 15 2 19 3 27 3 Illinois - - 7 1 7 1 7 1 28 3 Other 61 11 68 12 78 12 85 12 131 15 --- --- --- --- --- --- --- --- --- --- 69 13 111 20 158 24 168 24 265 30 --- --- --- --- --- --- --- --- --- --- 544 100 545 100 646 100 689 100 900 100 --- --- --- --- --- --- --- --- --- --- BY TYPE OF PROJECT Retail 147 27 148 27 183 28 186 27 256 29 Office 202 37 202 37 235 37 216 31 283 32 Residential 101 18 68 12 93 14 94 14 103 11 Industrial 31 6 31 6 45 7 55 8 82 9 Land 5 1 15 3 25 4 29 4 38 4 Other 58 11 81 15 65 10 109 16 138 15 --- --- --- --- --- --- --- --- --- --- 544 100 545 100 646 100 689 100 900 100 Allowances for credit losses 37 42 53 64 116 --- --- --- --- --- --- --- --- --- --- REAL ESTATE LOANS, NET 507 503 593 625 784 --- --- --- --- --- --- --- --- --- --- As a percentage of shareholders' equity 13 12 15 19 29 As a percentage of total loans and acceptances 1 1 1 1 2 === === === === === === === === === ===
TABLE 12. DESIGNATED COUNTRIES As at October 31 (millions of dollars)
2002 2001 2000 1999 1998 ---- ---- ---- ---- ---- Loans and securities, gross Brazil 39 40 38 37 39 Ivory Coast 14 15 14 14 14 Sudan - 15 13 15 18 Nicaragua - 14 13 13 14 Peru 14 14 13 13 14 Other 12 11 12 12 14 ---- ---- ---- ---- ---- 79 109 103 104 113 Country risk allowance 26 55 52 53 57 ---- ---- ---- ---- ---- Loans and securities, net of allowances 53 54 51 51 56 ---- ---- ---- ---- ---- Allowance as a % of loans and securities 32.9% 50.5% 50.5% 51.0% 50.4% Loans and securities, net, as a % of shareholders' equity 1.4% 1.3% 1.3% 1.5% 2.1% ==== ==== ==== ==== ====
Particulars, by country, of private-risk and sovereign-risk loans classified as restructured for previous years are as follows: 1998: Ivory Coast, $13 million. Page 63 NATIONAL BANK OF CANADA 2001-2002 ADDITIONAL FINANCIAL INFORMATION TABLE 13. IMPAIRED LOANS As at October 31 (millions of dollars)
2002 2001 2000 1999 1998 ---- ---- ---- ---- ---- Private impaired loans, net Domestic Individuals and small business (1) 62 214 194 216 244 Commercial 99 210 233 240 216 Corporate 36 15 23 3 - Real estate 44 29 26 33 31 Other - - 1 - - ---- ---- ---- ---- ---- 241 468 477 492 491 ---- ---- ---- ---- ---- International Real estate - United States - 3 12 13 11 - Other 3 3 4 7 7 Discontinued operations - 117 51 30 36 ---- ---- ---- ---- ---- 3 123 67 50 54 ---- ---- ---- ---- ---- Total private impaired loans, net (2) 244 591 544 542 545 ---- ---- ---- ---- ---- Total impaired loans to designated countries Gross 24 38 35 38 42 Allowance 22 38 35 37 40 ---- ---- ---- ---- ---- Total impaired loans to designated countries, net 2 - - 1 2 ---- ---- ---- ---- ---- Total impaired loans, net 246 591 544 543 547 ---- ---- ---- ---- ---- Allocated general allowance (296) (306) - - - Unallocated general allowance (109) (194) (500) (500) (500) ---- ---- ---- ---- ---- General allowance for credit risk (3) (405) (500) (500) (500) (500) ---- ---- ---- ---- ---- (159) 91 44 43 47 ---- ---- ---- ---- ---- Private impaired loans, gross 479 932 957 978 1037 Allowance for credit losses 235 341 413 436 492 ---- ---- ---- ---- ---- Private impaired loans, net 244 591 544 542 545 Provisioning rate 49.1% 36.6% 43.2% 44.6% 47.5% ---- ---- ---- ---- ---- As a percentage of net loans and acceptances Domestic - Private 0.6% 1.2% 1.1% 1.2% 1.2% International - Private 0.1% 1.7% 0.9% 0.7% 0.8% International - Designated countries 0.1% -% -% -% -% Total 0.6% 1.2% 1.1% 1.2% 1.1% As a percentage of common shareholders' equity 6.8% 16.3% 16.3% 18.2% 22.9% ==== ==== ==== ==== ====
(1) Including $22 million in net consumer loans in 2002 (2001: $108 million; 2000: $80 million; 1999: $64 million; 1998: $57 million). (2) The Bank has no loans classified as other past-due loans (90 days and over) except for those already designated as impaired. (3) See Note 28 to the consolidated financial statements on page 108 for the impact of the adjustment made to the general allowance for credit risk. Page 64 TABLE 14. INTEREST ON IMPAIRED LOANS Year ended October 31 (millions of dollars)
2002 2001 2000 1999 1998 ---- ---- ---- ---- ---- Interest on impaired loans Domestic 5 (4) (6) (8) (9) International - - - - - ---- ----- ----- ----- ---- 5 (4) (6) (8) (9) Average impaired loans Domestic (129) 30 30 45 292 International 12 37 15 8 39 ---- ----- ----- ----- ---- (117) 67 45 53 331 ---- ----- ----- ----- ---- Interest as a % of average impaired loans, net Domestic (3.9)% (13.3)% (20.0)% (17.8)% (3.1)% International - % - % - % - % - % Total (4.3)% (6.0)% (13.3)% (15.1)% (2.7)% ==== ===== ===== ===== ====
TABLE 15. TRADING ACTIVITIES - MARKET RISK ASSESSMENT Year ended October 31 (millions of dollars)
Global VaR by risk category 2002 2001 --------------------------------- -------------------------------- Year-end High Average Low Year-end High Average Low -------- ---- ------- --- -------- ---- ------- --- Interest (3) (5) (3) (1) (2) (6) (3) (2) Foreign exchange - (3) (1) - (1) (2) (1) - Equity securities (1) (3) (2) (1) (1) (6) (3) (1) Global VaR (3) (6) (4) (2) (3) (7) (5) (3) == == == == == == == ==
Page 65 NATIONAL BANK OF CANADA 2001-2002 QUARTERLY RESULTS QUARTERLY RESULTS (millions of dollars, except per share amounts)
Income Net interest Other before income income discontinued Income (taxable (taxable Provisions operations before equivalent equivalent for credit Operating and goodwill Discontinued goodwill basis) basis) losses expenses charges operations charges ------------ ----------- ---------- --------- ------------ ------------ -------- 1st Q 308 277 50 376 89 13 102 2nd Q 298 293 48 389 87 11 98 3rd Q 306 277 16 387 105 (5) 100 4th Q 301 262 33 383 84 5 89 ----- ----- --- ----- --- --- --- 1998 1,213 1,109 147 1,535 365 24 389 ----- ----- --- ----- --- --- --- 1st Q 313 285 38 389 96 7 103 2nd Q 298 328 44 412 95 8 103 3rd Q 313 303 44 409 94 11 105 4th Q 300 317 44 405 104 10 114 ----- ----- --- ----- --- --- --- 1999 1,224 1,233 170 1,615 389 36 425 ----- ----- --- ----- --- --- --- 1st Q 300 417 41 476 115 6 121 2nd Q 322 482 46 536 127 10 137 3rd Q 319 573 57 618 126 7 133 4th Q 291 468 40 490 131 6 137 ----- ----- --- ----- --- --- --- 2000 1,232 1,940 184 2,120 499 29 528 ----- ----- --- ----- --- --- --- 1st Q 338 424 43 477 143 (1) 142 2nd Q 352 446 46 503 147 (2) 145 3rd Q 359 453 18 503 174 (26) 148 4th Q 340 535 98 506 163 (16) 147 ----- ----- --- ----- --- --- --- 2001 1,389 1,858 205 1,989 627 (45) 582 ----- ----- --- ----- --- --- --- 1st Q 386 419 245 501 28 118 146 2nd Q 361 466 130 491 122 - 122 3rd Q 358 309 62 508 29 (3) 26 4th Q 368 447 53 540 139 (4) 135 ----- ----- --- ----- --- --- --- 2002 1,473 1,641 490 2,040 318 111 429 ===== ===== === ===== === === ===
Page 66
Earnings per share ------------------------------- Before discont. Dividends operations Before (thousands of dollars) ROE before Goodwill Net & goodwill goodwill --------------------- goodwill charges income charges charges Net Common Preferred charges - -------- ------ ------------ -------- --- ------ --------- ---------- % 3 99 0.48 0.56 0.55 25,658 6,608 15.7 2 96 0.47 0.53 0.52 29,079 6,701 15.0 3 97 0.58 0.55 0.53 29,142 6,720 14.6 65 24 0.45 0.48 0.09 29,213 6,495 13.1 --- ---- ---- ---- ------- ------ ---- 73 316 1.98 2.12 1.69 113,092 26,524 14.6 --- ---- ---- ---- ------- ------ ---- 1 102 0.52 0.56 0.55 29,241 6,044 15.9 1 102 0.52 0.56 0.56 29,255 6,044 16.2 2 103 0.51 0.58 0.57 31,031 6,043 15.4 4 110 0.53 0.58 0.56 33,964 6,044 15.1 --- ---- ---- ---- ------- ------ ---- 8 417 2.08 2.28 2.24 123,491 24,175 15.5 --- ---- ---- ---- ------- ------ ---- 4 117 0.58 0.61 0.59 34,036 6,044 15.3 5 132 0.64 0.69 0.66 35,939 6,044 17.2 5 128 0.62 0.67 0.64 35,973 6,636 15.8 5 132 0.65 0.68 0.65 35,995 8,843 15.8 --- ---- ---- ---- ------- ------ ---- 19 509 2.49 2.65 2.54 141,943 27,567 16.0 --- ---- ---- ---- ------- ------ ---- 4 138 0.71 0.71 0.68 36,024 8,844 16.1 5 140 0.73 0.71 0.69 39,843 8,844 16.6 5 143 0.86 0.73 0.70 39,908 8,844 15.9 5 142 0.81 0.73 0.71 40,029 8,844 15.4 --- ---- ---- ---- ------- ------ ---- 19 563 3.11 2.88 2.78 155,804 35,376 16.0 --- ---- ---- ---- ------- ------ ---- - 146 0.11 0.73 0.73 40,009 6,831 15.0 - 122 0.62 0.62 0.62 45,763 4,831 13.1 - 26 0.13 0.12 0.12 43,213 4,831 2.3 - 135 0.73 0.71 0.71 44,597 4,832 14.5 --- ---- ---- ---- ------- ------ ---- - 429 1.59 2.18 2.18 173,582 21,325 11.3 === ==== ==== ==== ======= ====== ====
Page 67 NATIONAL BANK OF CANADA 2001-2002 QUARTERLY RESULTS QUARTERLY RESULTS (millions of dollars, except per share amounts)
Impaired loans ------------------------------------------------------------ Net private Net total ----------- --------- Designated countries ------------------------------- Gross outstanding Allowances 1st Q 490 57 54 493 2nd Q 489 36 35 490 3rd Q 490 39 37 492 4th Q 545 42 40 547 --- -- -- --- 1998 --- -- -- --- 1st Q 543 40 38 545 2nd Q 548 37 36 549 3rd Q 548 39 38 549 4th Q 542 38 37 543 --- -- -- --- 1999 --- -- -- --- 1st Q 544 35 35 544 2nd Q 544 35 35 544 3rd Q 545 36 36 545 4th Q 544 35 35 544 --- -- -- --- 2000 --- -- -- --- 1st Q 554 36 36 554 2nd Q 578 36 36 578 3rd Q 582 36 36 582 4th Q 591 38 38 591 --- -- -- --- 2001 --- -- -- --- 1st Q 307 9 9 307 2nd Q 311 23 21 313 3rd Q 279 24 22 281 4th Q 244 24 22 246 === == == === 2002
Page 68
Number of common shares (thousands) Per common share - --------------------------- ---------------------------- Average End of Book Number of Number of period value Stock trading range employees (1) branches -------------------- in Canada High Low ----- ----- 170,762 170,986 14.47 24.60 20.35 11,837 642 171,126 171,210 14.79 31.25 22.80 11,815 640 171,401 171,518 15.19 30.85 27.10 12,149 639 171,600 171,616 13.86 26.70 20.10 12,041 646 - ------- ------- ----- ----- ----- ------ --- - ------- ------- ----- ----- ----- ------ --- 171,850 172,024 14.27 26.20 22.60 12,315 646 172,153 172,214 14.70 24.50 19.90 12,164 646 172,294 172,320 15.23 23.15 18.55 12,337 648 186,568 188,729 15.81 19.35 17.15 12,175 649 - ------- ------- ----- ----- ----- ------ --- - ------- ------- ----- ----- ----- ------ --- 188,925 189,049 16.17 18.60 16.40 12,265 638 189,174 189,201 16.66 22.05 17.25 12,325 636 189,311 189,334 17.11 24.25 20.55 11,884 634 189,444 189,474 17.60 25.25 21.05 11,457 586 - ------- ------- ----- ----- ----- ------ --- - ------- ------- ----- ----- ----- ------ --- 189,578 189,607 17.57 29.00 23.00 11,492 571 189,757 189,822 18.08 31.00 26.05 11,675 566 190,062 190,230 18.57 30.60 25.20 12,153 549 190,311 190,331 19.04 30.20 24.25 12,027 546 - ------- ------- ----- ----- ----- ------ --- - ------- ------- ----- ----- ----- ------ --- 190,450 190,500 19.56 30.07 24.70 11,381 543 188,794 185,109 19.53 34.93 29.14 11,308 544 184,134 183,256 19.29 33.73 29.01 11,394 544 183,124 182,596 19.72 32.50 27.00 11,442 530 ======= ===== ===== ===== ====== ===
(1) On a full-time equivalent basis and excluding the subsidiary National Bank Financial & Co. Inc. Page 69 NATIONAL BANK OF CANADA 2001-2002 GLOSSARY OF FINANCIAL TERMS GLOSSARY OF FINANCIAL TERMS ACCEPTANCE Short-term debt security traded on the money market which a bank guarantees on behalf of a borrower, for a stamping fee. ALLOWANCES FOR CREDIT LOSSES Allowances taken to absorb expected credit-related losses (loans, acceptances, letters of guarantee, letters of credit, deposits with other banks and derivatives). Allowances for credit losses include the country risk allowance, specific provision and general allowance for credit risk. They are the sum of the annual provisions less write-offs, net of recoveries. ASSET/LIABILITY MANAGEMENT Management of maturities of assets and liabilities as well as off-balance sheet items in such a way as to minimize interest rate risk and foreign exchange risk through appropriate matching. ASSETS UNDER ADMINISTRATION Assets in respect of which a financial institution provides administrative services such as custodial services, collection of investment income, settlement of purchase and sale transactions and record-keeping. Assets under administration, which are beneficially owned by clients, are not reported on the balance sheet of the institution offering such services. ASSETS UNDER MANAGEMENT Assets managed by a financial institution which are beneficially owned by clients. Management services are more comprehensive than administrative services, and include selecting investments or offering investment advice. Assets under management, which may also be administered by the financial institution, are not reported on its balance sheet. AVERAGE ASSETS Daily average of balance sheet assets. CAPITAL Amount which would be owed to the holders of shares and subordinated debentures if assets had to be liquidated to reimburse depositors and other creditors. Capital consists of bank debentures, shareholders' equity and non- controlling interest. CAPITAL RATIOS Ratios of capital, as defined by regulatory authorities, to risk-weighted assets. The Bank for International Settlements (BIS) distinguishes between two types of capital: Tier 1 capital, or base capital, consists of common shareholders' equity, non-cumulative preferred shares and non-controlling interest in subsidiaries less goodwill; Tier 2 capital, or supplementary capital, consists of other preferred shares and the eligible portion of subordinated debentures and of the general allowance for credit risk. Total regulatory capital, or total capital, is the sum of the various types of capital less investments in affiliates and first loss protection with respect to asset securitization. In accordance with BIS rules, the Superintendent of Financial Institutions Canada defines a third tier of capital intended specifically to cover market risk, a risk which must also be covered by Tier 1 capital. COMMODITY RISK Potential loss due to movements in the price of commodities on which the Bank holds derivatives in its trading portfolio. COMMON SHAREHOLDERS' EQUITY The portion of shareholders' equity that includes only the capital stock paid in by common shareholders (plus retained earnings) and represents the amount that would be owed to common shareholders if assets had to be liquidated to reimburse depositors and other creditors. CREDIT DERIVATIVE Derivative instruments based on financial instruments that transfer the credit risk and return related to a given asset to another party, without actually transferring the underlying asset, and offer protection against credit risk (credit swaps, for example). CREDIT RISK Potential loss resulting from the inability or unwillingness of a counterparty to honour its contractual obligations with respect to a loan or other type of credit. Credit risk can arise because of specific counterparty-related conditions, or represent a consequence of market risk. DERIVATIVE INSTRUMENTS (DERIVATIVES) Financial contracts whose value is "derived" from interest rates, foreign exchange rates or equity prices. Derivatives are used in treasury operations as well as for hedging regular financial instruments. The most common types of derivatives include foreign currency or interest rate futures, swaps and options. EARNINGS PER SHARE Net income available to holders of common shares, namely, net income less dividends on preferred shares, divided by the average number of common shares outstanding during the period in question. Page 70 EQUITY RISK Potential loss arising from movements in the price of shares held by the Bank, or its subsidiaries. FOREIGN CURRENCY FUTURE Contractual obligation to buy or sell, on or before a specified future date, a given quantity of foreign currency at a given exchange rate. FOREIGN CURRENCY AND INTEREST RATE SWAPS Transactions in which counterparties agree to exchange, for a specified period, currencies and/or streams of interest payments (generally by exchanging a fixed rate for a floating one) based on an amount of notional principal. FOREIGN CURRENCY OR INTEREST RATE OPTION The right, but not the obligation, to buy (call option) or sell (put option) at or by a set date a given amount of foreign currency or securities at a set price (strike price). FOREIGN EXCHANGE RISK Potential loss caused by currency rate movements and the subsequent decline in the value of a security or other financial instrument denominated in foreign currencies that is held by the Bank. FORWARD RATE AGREEMENT Contractual obligation to buy or sell, on or before a specified future date, a given quantity of securities at a given interest rate. IMPAIRED LOAN A loan is considered impaired when, in the opinion of management, there is reasonable doubt as to the payment of principal or interest. Any loan where payments are 90 days past due falls into this category, unless there is no doubt as to the collectibility of principal and interest. INTEREST RATE RISK Potential loss caused by changes in interest rates and resulting in mismatched maturities of productive assets and liabilities or, more generally, reducing the value of a financial instrument held by the Bank. INVESTMENT ACCOUNT Securities purchased with the intention of holding them to maturity or until conditions render alternative long-term investments more attractive. The investment account consists primarily of equity securities and debt securities. Equity securities are stated at their acquisition cost unless the Bank has a significant influence over the entity in question. Debt securities are stated at their acquisition cost. LETTERS OF GUARANTEE AND LETTERS OF CREDIT Irrevocable assurances through which a bank undertakes to make payments for a client that cannot meet its financial obligations to third parties. LIQUID ASSETS Assets held as cash or securities easily convertible to cash, such as deposits with other banks and securities. LIQUIDITY RISK Potential difficulty in meeting a demand for cash or funding obligations as they come due. MARKET RISK Potential loss from changes in the value of financial instruments, specifically from changes in interest rates, foreign exchange rates, equity prices and commodity prices. Changes in these prices result in exposure to four main categories of market risk: interest rate risk, foreign exchange risk, equity risk and commodity risk. MATCHING The process of equating asset and liability maturities as well as off-balance sheet items so as to minimize interest rate risk and foreign exchange risk. Matching is also known as "asset/liability management". NET INTEREST INCOME Difference between interest and dividends earned on total assets and interest expenses paid on total liabilities. In other words, net interest income is the difference between what the Bank earns on assets such as loans and securities, and what it pays on liabilities such as deposits. Average net interest margin is equal to the ratio of net interest income to average assets. NOTIONAL PRINCIPAL Contract amount used as a reference point to calculate payments for off-balance sheet instruments such as forward rate agreements and interest rate swaps. It is considered "notional" as the principal amount itself never changes hands. OBLIGATIONS RELATED TO SECURITIES SOLD UNDER REPURCHASE AGREEMENTS Financial obligations related to securities sold under an agreement according to which they will be repurchased on a specified date and at a specified price. Such an agreement is a form of short-term funding. Page 71 NATIONAL BANK OF CANADA 2001-2002 GLOSSARY OF FINANCIAL TERMS OPERATIONAL RISK Potential loss resulting from inadequate or failed processes, technology or human performance, or from external events. OTHER INCOME Includes all revenue except for interest and dividend income. It consists of such items as deposit and payment service charges, lending fees, capital market revenues, card service revenues, investment management and custodial fees, mutual fund revenues and securitization revenues. POINT Unit of measure equal to one percentage (1%). PROVISION FOR CREDIT LOSSES Amount added to the allowance for credit losses to bring it to a level that management considers adequate, taking into account write-offs and recoveries with respect to specific loans. RETURN ON COMMON SHAREHOLDERS' EQUITY (OR ROE) Net income, less dividends on preferred shares, expressed as a percentage of the average value of common shareholders' equity. RISK WEIGHTING Risk-weighting factors are applied to the face value of certain assets in order to present comparable risk levels. This procedure is also used to recognize the risk in off-balance sheet instruments by adjusting the notional value to balance sheet (or credit) equivalents and then applying the appropriate risk-weighting factors. Total risk-weighted assets are used in calculating the various capital ratios according to the rules of the Bank for International Settlements (BIS). SECURITIES PURCHASED UNDER REVERSE REPURCHASE AGREEMENTS Securities purchased by the Bank from a client under an agreement according to which they will be resold to the same client on a specified date and at a specified price. Such an agreement is a form of short-term collateralized lending. SECURITIZATION Transaction in which certain assets, such as mortgages or credit card receivables, are sold to an entity which finances their acquisition by issuing negotiable securities. SHAREHOLDERS' EQUITY The sum of the capital stock paid by shareholders and retained earnings. Shareholders' equity is the amount that would be owed to shareholders if assets had to be liquidated to reimburse depositors and other creditors. SUBORDINATED DEBENTURE Unsecured debt instrument issued by a bank and for which repayment, in the event of liquidation, ranks behind the claims of depositors and certain other creditors. Convertible debentures can be exchanged for shares at the option of the holder, the issuer or both. TAXABLE EQUIVALENT BASIS Calculation method used to gross up certain tax-exempt income (primarily dividends) by the income tax that would have been payable had it been taxable. The gross-up of such income permits a uniform comparison of the yield on the various types of assets, such as those comprising net interest income, regardless of their tax treatment. TRADING ACCOUNT Short-term securities held for trading purposes. This account is recorded on the balance sheet at its fair value. YIELD CURVE Graphic representation of interest rates in effect on a given date for different maturities. Interest rates vary according to the risks factored in by the market. Interest rates are generally lower for short-term maturities than for long-term maturities. The curve may be inverted, i.e., when rates for short-term maturities are higher than for long-term maturities. Page 72 CONSOLIDATED FINANCIAL STATEMENTS Page 73 NATIONAL BANK OF CANADA 2001-2002 CONSOLIDATED FINANCIAL STATEMENTS Page 74 MANAGEMENT'S REPORT The consolidated financial statements of National Bank of Canada (the "Bank") as well as the other financial information presented in the Annual Report were prepared by management, which is responsible for their integrity, including material estimates and judgements incorporated therein. The consolidated financial statements were prepared in accordance with Canadian generally accepted accounting principles, other than the accounting for the general allowance for credit risk which is in accordance with the accounting treatment of the Superintendent of Financial Institutions Canada (the "Superintendent") under the Bank Act, as described in Note 1. Management maintains the necessary accounting and control systems in discharging its responsibility and ensuring that the Bank's assets are safeguarded. These controls include standards for hiring and training personnel, the definition and appraisal of tasks and functions, operating policies and procedures, and budget controls. The Board of Directors (the "Board") is responsible for examining and approving the financial data which appear in the Annual Report. Acting through the Audit and Risk Management Committee (the "Committee"), the Board also oversees the presentation of the consolidated financial statements and the maintenance of accounting and control systems. The Committee, composed of directors who are neither officers nor employees of the Bank, is responsible for the ongoing evaluation of internal control procedures, for examining the consolidated financial statements, and for recommending them to the Board for approval. A team of internal auditors reports to the Committee and makes presentations to it on a regular basis. The control systems are reinforced by the observation of laws and regulations which apply to the Bank's operations. The Superintendent regularly examines the affairs of the Bank to ensure that the provisions of the Bank Act with respect to the safety of the depositors and shareholders of the Bank are being observed and that the Bank is in a sound financial condition. The independent auditors, whose report follows, were appointed by the shareholders on the recommendation of the Board. They were given full and unrestricted access to the Committee to discuss matters related to their audit and the reporting of information. Real Raymond President and Chief Executive Officer Michel Labonte Senior Vice-President Finance and Technology Montreal, November 29, 2002 Page 75 NATIONAL BANK OF CANADA 2001-2002 CONSOLIDATED FINANCIAL STATEMENTS AUDITORS' REPORT To the Shareholders of National Bank of Canada We have audited the Consolidated Balance Sheet of National Bank of Canada (the "Bank") as at October 31, 2002 and the Consolidated Statements of Income, Changes in Shareholders' Equity and Cash Flows for the year then ended. These consolidated financial statements are the responsibility of the Bank's management. Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit in accordance with Canadian generally accepted auditing standards. Those standards require that we plan and perform an audit to obtain reasonable assurance that the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. In our opinion, these consolidated financial statements present fairly, in all material respects, the financial position of the Bank as at October 31, 2002 and the results of its operations and its cash flows for the year then ended in accordance with Canadian generally accepted accounting principles other than the accounting for the general allowance for credit risk which is in accordance with the accounting treatment of the Superintendent of Financial Institutions Canada under the Bank Act, as described in Note 1. The consolidated financial statements as at October 31, 2001 and for the year then ended were audited by Samson Belair/Deloitte & Touche, General Partnership, and by Arthur Andersen & Cie, General Partnership, who expressed an opinion thereon without reservation in their report dated December 3, 2001. Samson Belair/Deloitte & Touche PricewaterhouseCoopers LLP General Partnership Chartered Accountants Chartered Accountants Montreal, November 29, 2002 Page 76 CONSOLIDATED STATEMENT OF INCOME Year ended October 31 (millions of dollars, except per share amounts)
Note 2002 2001 ---- ---- ---- INTEREST INCOME AND DIVIDENDS Loans 1,906 2,493 Securities 511 599 Deposits with financial institutions 174 289 ------- ------- 2,591 3,381 ------- ------- INTEREST EXPENSE Deposits 979 1,851 Subordinated debentures 110 109 Other 58 83 ------- ------- 1,147 2,043 ------- ------- NET INTEREST INCOME 1,444 1,338 ------- ------- OTHER INCOME Capital market fees 539 493 Deposit and payment service charges 170 160 Trading activities and gains (losses) on investment account securities, net 23 (32) 263 Card service revenues 53 86 Lending fees 181 175 Acceptances, letters of credit and guarantee 63 65 Securitization revenues 204 157 Foreign exchange revenues 67 61 Trust services and mutual funds 111 96 Other 228 233 ------- ------- 1,584 1,789 ------- ------- TOTAL REVENUES 3,028 3,127 ------- ------- PROVISION FOR CREDIT LOSSES Related to regular operations 305 205 Related to a revision of the estimated allowance 185 - ------- ------- 490 205 ------- ------- 2,538 2,922 ------- ------- OPERATING EXPENSES Salaries and staff benefits 1,147 1,064 Occupancy and amortization 191 173 Computers and equipment 239 235 Communications 77 69 Professional fees 165 167 Other 221 281 2,040 1,989 ------- ------- INCOME BEFORE INCOME TAXES, NON-CONTROLLING INTEREST, DISCONTINUED OPERATIONS AND GOODWILL CHARGES 498 933 Income taxes 16 150 278 348 655 Non-controlling interest 30 28 ------- ------- INCOME BEFORE DISCONTINUED OPERATIONS AND GOODWILL CHARGES 318 627 Discontinued operations 26 111 (45) ------- ------- INCOME BEFORE GOODWILL CHARGES 429 582 Goodwill charges - 19 ------- ------- NET INCOME 429 563 Dividends on preferred shares 21 35 ------- ------- NET INCOME APPLICABLE TO COMMON SHARES 408 528 ------- ------- Average number of common shares outstanding (thousands) 17 Basic 186,608 189,928 Diluted 187,727 190,815 ------- ------- INCOME BEFORE DISCONTINUED OPERATIONS AND GOODWILL CHARGES PER COMMON SHARE 17 Basic 1.59 3.11 Diluted 1.59 3.10 ------- ------- INCOME BEFORE GOODWILL CHARGES PER COMMON SHARE 17 Basic 2.18 2.88 Diluted 2.18 2.86 ------- ------- NET INCOME PER COMMON SHARE 17 Basic 2.18 2.78 Diluted 2.18 2.76 ------- ------- DIVIDENDS PER COMMON SHARE 0.93 0.82 ======= =======
Page 77 NATIONAL BANK OF CANADA 2001-2002 CONSOLIDATED FINANCIAL STATEMENTS CONSOLIDATED BALANCE SHEET As at October 31 (millions of dollars)
Note 2002 2001 ---- ---- ---- ASSETS CASH RESOURCES Cash and deposits with Bank of Canada 245 419 Deposits with financial institutions 6,619 5,413 ------ ------ 6,864 5,832 ------ ------ SECURITIES 4 Investment account 6,712 6,802 Trading account 13,179 10,992 Loan substitutes 76 78 ------ ------ 19,967 17,872 ------ ------ LOANS 5 and 6 Residential mortgage 12,867 11,875 Personal and credit card 5,561 5,866 Business and government 20,680 23,489 Securities purchased under reverse repurchase agreements 2,366 4,041 Allowance for credit losses (662) (879) ------ ------ 40,812 44,392 ------ ------ OTHER Customers' liability under acceptances 2,988 3,593 Assets held for disposal 26 313 - Premises and equipment 7 255 250 Goodwill 8 661 305 Intangible assets 8 184 12 Other assets 9 2,567 3,710 ------ ------ 6,968 7,870 ------ ------ 74,611 75,966 ====== ====== LIABILITIES AND SHAREHOLDERS' EQUITY DEPOSITS 10 Personal 22,607 21,857 Business and government 22,582 23,362 Deposit-taking institutions 6,501 6,217 ------ ------ 51,690 51,436 ------ ------ OTHER Acceptances 2,988 3,593 Obligations related to securities sold short 5,542 5,379 Obligations related to securities sold under repurchase agreements 4,416 4,407 Other liabilities 11 3,996 4,901 ------ ------ 16,942 18,280 ------ ------ SUBORDINATED DEBENTURES 12 1,592 1,647 ------ ------ NON-CONTROLLING INTEREST 486 487 ------ ------ SHAREHOLDERS' EQUITY Preferred shares 14 300 492 Common shares 14 1,639 1,668 Retained earnings 1,962 1,956 ------ ------ 3,901 4,116 ------ ------ 74,611 75,966 ====== ======
REAL RAYMOND PIERRE BOURGIE President and Chief Executive Officer Director Page 78 CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY Year ended October 31 (millions of dollars)
Note 2002 2001 ---- ---- ---- CAPITAL STOCK AT BEGINNING OF YEAR 2,160 2,145 Issuance of common shares 53 15 Repurchase of common shares for cancellation (82) - Redemption of preferred shares, Series 10 and 11 for cancellation (192) - ----- ----- CAPITAL STOCK AT END OF YEAR 14 1,939 2,160 ----- ----- RETAINED EARNINGS AT BEGINNING OF YEAR 1,956 1,606 Net income 429 563 Dividends Preferred shares (21) (35) Common shares (174) (156) Income taxes related to dividends on preferred shares, Series 10, 11, 12 and 13 (2) (2) Premium paid on common shares repurchased for cancellation 14 (224) - Unrealized foreign exchange gains (losses), net of income taxes (2) 8 Loss on redemption of subordinated debenture, net of income taxes 12 - (28) ----- ----- RETAINED EARNINGS AT END OF YEAR 1,962 1,956 ----- ----- SHAREHOLDERS' EQUITY 3,901 4,116 ===== =====
Page 79 NATIONAL BANK OF CANADA 2001-2002 CONSOLIDATED FINANCIAL STATEMENTS CONSOLIDATED STATEMENT OF CASH FLOWS Year ended October 31 (millions of dollars)
2002 2001 ---- ---- CASH FLOWS FROM OPERATING ACTIVITIES Net income 429 563 Adjustments for: Provision for credit losses excluding discontinued operations 490 205 Provision for credit losses attributed to discontinued operations (51) 120 Amortization of premises and equipment 58 48 Goodwill charges excluding discontinued operations - 19 Goodwill charges attributed to discontinued operations - 2 Future income taxes (24) 50 Adjustment upon foreign currency translation of subordinated (10) 23 debentures Impairment charge 139 - Net gains on sale of investment account securities (41) (70) Change in interest payable (153) (137) Change in interest receivable (25) 76 Change in income taxes payable 164 (140) Change in unrealized losses and amounts payable on derivative contracts 124 98 Change in trading account securities (2,187) (544) Change in other items (377) (1,267) ------ ---- (1,464) (954) ------ ---- CASH FLOWS FROM FINANCING ACTIVITIES Change in deposits 254 963 Issuance of subordinated debentures - 300 Redemption and maturity of subordinated debentures (45) (82) Issuance of common shares 53 15 Common shares repurchased for cancellation (306) - Preferred shares redeemed for cancellation (192) - Dividends paid (195) (187) Change in obligations related to securities sold short 163 476 Change in obligations related to securities sold under repurchase agreements 9 (1,910) Change in other items (4) 6 ------ ---- (263) (419) ------ ---- CASH FLOWS FROM INVESTING ACTIVITIES Change in loans (1,129) (379) Change in securitization of assets (258) 1,045 Proceeds from sale of asset-based loans 2,540 - Purchases of investment account securities (21,335) (20,384) Sale of investment account securities 21,329 19,961 Change in securities purchased under reverse repurchase agreements 1,675 1,356 Change in premises and equipment (63) (49) ------ ---- 2,759 1,550 ------ ---- INCREASE IN CASH AND CASH EQUIVALENTS 1,032 177 Cash and cash equivalents at beginning of year 5,832 5,655 Cash and cash equivalents at end of year 6,864 5,832 CASH AND CASH EQUIVALENTS Cash and deposits with Bank of Canada 245 419 Deposits with financial institutions 6,619 5,413 ------ ---- Total 6,864 5,832 ------ ---- Interest and dividends paid 1,519 2,564 Income taxes paid 101 280
Page 80 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS Year ended October 31 (millions of dollars) 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES The consolidated financial statements of National Bank of Canada (the "Bank") were prepared in accordance with section 308(4) of the Bank Act, which states that Canadian generally accepted accounting principles (GAAP) are to be applied unless otherwise specified by the Superintendent of Financial Institutions Canada (the "Superintendent"). These principles differ in some regards from United States GAAP, as explained in Note 29. The preparation of consolidated financial statements in conformity with Canadian GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the balance sheet date and the reported amounts of revenues and expenses during the period covered by the consolidated financial statements. Actual results could differ from those estimates. The significant accounting policies used in preparing these consolidated financial statements, including the accounting treatment prescribed by the Superintendent, are summarized below. The Superintendent has specified an accounting treatment for the general allowance for credit risk which does not conform to Canadian GAAP; a comparison of this treatment is presented in Note 28. The accounting policies for all other financial statement items conform, in all material respects, to Canadian GAAP. CONSOLIDATION The consolidated financial statements of the Bank include the assets, liabilities and operating results of the Bank and all its subsidiaries after the elimination of intercompany transactions and balances. The purchase method is used to account for the acquisition of subsidiaries. The excess of the price paid for the acquisition of subsidiaries over the fair value of the net assets acquired is referred to as goodwill. On November 1, 2001, the Bank adopted the new standard of the Canadian Institute of Chartered Accountants (CICA) entitled "Goodwill and Other Intangible Assets". In conformity with the standard, the Bank ceased to amortize goodwill as of this date and began the transitional impairment test to detect a possible depreciation in goodwill. The transitional impairment test was completed in the second quarter of the year and the Bank concluded that goodwill as at November 1, 2001 had not been impaired. Under the new standard, goodwill is tested periodically for impairment to ensure that the fair value remains greater than or equal to the carrying value. The excess of the carrying value over the fair value is to be charged to income for the period during which the impairment is determined. Prior to November 1, 2001, goodwill was amortized using the straight-line method over a period corresponding to its estimated useful life of 20 years. Aside from eliminating goodwill amortization charges, which amounted to $21 million for the year ended October 31, 2001, including $2 million attributable to discontinued operations, the adoption of this new standard had no impact on the Consolidated Statement of Income. Investments in companies over which the Bank has significant influence are accounted for by the equity method and are included in securities in the Consolidated Balance Sheet. The Bank's share of income (losses) from these companies is included in interest income and dividends in the Consolidated Statement of Income. TRANSLATION OF FOREIGN CURRENCIES Items in foreign currencies included in the Consolidated Balance Sheet are translated into Canadian dollars at the exchange rates prevailing at year-end. Revenues and expenses are translated at the average exchange rates prevailing during the year. Spot and forward foreign exchange positions are kept in balance insofar as practicable. Any gain or loss on these positions is recognized in the Consolidated Statement of Income, with the exception of positions related to net foreign currency investments in establishments and subsidiaries abroad. Translation gains and losses on net foreign currency investments in establishments and subsidiaries abroad are recorded under retained earnings, less the after-tax gains and losses applicable to instruments used for hedging purposes. These gains or losses are not charged to income until they are realized. CASH AND CASH EQUIVALENTS Cash consists of cash on hand, bank notes and coin. Cash equivalents consist of deposits with the Bank of Canada, deposits with financial institutions, and cheques and other items in transit. SECURITIES Securities are divided into three major categories: investment account securities, trading account securities and loan substitutes. Investment account securities are purchased with the intention of holding them to maturity or until market conditions render alternative investments more attractive. Equity securities are stated at their acquisition cost if the Bank does not have a significant influence, while debt securities are stated at their unamortized acquisition cost. Premiums and discounts on debt securities are amortized using the yield method over the period to maturity or disposal of the security. Gains or losses realized on the disposal of securities and the amortization of premiums and discounts are recorded in income. Any loss in the value of investment account securities that is other than a temporary impairment is recorded in income. Page 81 NATIONAL BANK OF CANADA 2001-2002 CONSOLIDATED FINANCIAL STATEMENTS NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS Year ended October 31 (millions of dollars) 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONT.) Trading account securities are purchased for resale in the short term. They are presented at their fair value based on publicly disclosed market prices. In the event market prices are not available, the fair value is estimated on the basis of the market prices of similar securities. Realized and unrealized gains or losses on these securities are recorded in income. Loan substitutes are customer financings which have been structured as after-tax securities rather than conventional loans in order to provide the issuers with a borrowing rate advantage. These securities are recorded on the same basis as a loan. LOANS A loan, other than a credit card loan, is considered impaired when, in the opinion of management, there is reasonable doubt as to the ultimate collectibility of a portion of principal or interest or where payment of interest is contractually past due 90 days, unless there is no doubt as to the collectibility of principal and interest. A loan may revert to performing status only when principal and interest payments have become fully current. Credit card loans are written off if payments are more than 180 days in arrears. When a loan is deemed impaired, interest ceases to be recorded, and the carrying value of the loan is adjusted to its estimated realizable amount by writing off all or part of the loan and/or by taking an allowance for credit losses. Foreclosed assets held for sale in settlement of an impaired loan are recorded at the time of foreclosure at the lower of the recorded balance of the foreclosed loan or the estimated net proceeds from the sale of the assets. Any difference between the carrying value of the loan and the estimated realizable amount of the assets is recorded in the provision for credit losses. The loan is then adjusted to take into account the revenues received or the costs incurred after foreclosure. The provision for credit losses recorded in income for the year consists of the net change in the allowance for credit losses and write-offs of the carrying values resulting from foreclosed assets, less recoveries. Loan origination fees, including loan commitment, restructuring and renegotiation fees, are considered an integral part of the yield earned on the loan and are deferred and amortized to interest income over the term of the loan. Commitment fees are treated on the same basis if there is reasonable expectation that the commitment will result in a loan; the fees are then amortized to interest income over the term of the loan. Otherwise, the fees are included in other income over the term of the commitment. Loan syndication fees are recognized in other income, unless the yield on any loan retained by the Bank is less than that of other comparable lenders involved in the financing. In such cases, an appropriate portion of the fee is deferred and amortized to interest income over the term of the loan. Loans also include securities purchased under reverse repurchase agreements which the Bank has purchased and simultaneously committed to resell to the initial buyer at a specified price on a specified date. Since ownership of the securities does not change, the transaction is treated as a loan by the Bank. The securities are recorded at cost and the related interest income is recorded on an accrual basis. ALLOWANCES FOR CREDIT LOSSES The allowances for credit losses reflect management's best estimate of losses in its loan portfolio as at the balance sheet date. The allowances relate primarily to loans, but also to the credit risk associated with deposits with other banks, derivative products, loan substitute securities and other credit instruments such as acceptances, letters of guarantee and letters of credit. The allowances for credit losses, which consist of the specific allowance for impaired loans, the allowance for designated countries and the general allowance for credit risk, are increased by the provision for credit losses which is charged to income and reduced by the amount of write-offs, net of recoveries. The specific allowance for impaired loans is established for all such loans for which the impairment could be estimated individually, reducing them to their estimated realizable amounts. The estimated realizable amounts are measured by discounting expected future cash flows. For groups of impaired loans consisting of large numbers of homogeneous balances of relatively small amounts, the realizable amounts are valuated by discounting expected future cash flows for each group of loans by applying formulas that take into account past loss experience, economic conditions and other relevant circumstances. No specific allowance is established for credit card loans, as balances are written off if no payments are received within 180 days. The allowance for credit losses in relation to loans to countries designated by the Superintendent is constantly re-evaluated on the basis of exposure in the various countries and economic conditions. Page 82 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS Year ended October 31 (millions of dollars) 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONT.) The allocated general allowance for credit risk represents the best estimate of probable losses within the portion of the loan portfolio that has not yet been specifically identified as impaired. This amount is established through the application of expected loss factors to outstanding and undrawn facilities. The allocated general allowance for corporate and government loans is based on the application of expected default and loss factors, determined by statistical loss migration analysis according to loan type. For more homogeneous portfolios, such as residential mortgages, SME loans, personal loans and credit card loans, the determination of the allocated general allowance is done on a product portfolio basis. The losses are determined by the application of loss ratios determined through the statistical analysis of loss migration over an economic cycle. The unallocated general allowance for credit risk is based on management's assessment of probable losses in the portfolio that have not been captured in the determination of the specific allowance for credit losses, the allowance for designated countries or the allocated general allowance. This assessment takes into account general economic and business conditions, recent loan loss experience, and trends in credit quality and concentrations. This allowance also reflects model and estimation risks. This allowance does not represent future losses or serve as a substitute for the allocated general allowance. ASSET SECURITIZATION The Bank periodically enters into securitization transactions involving residential and commercial mortgage loans, consumer loans, personal loans and credit card receivables by selling them to special purpose entities or trusts (securitization vehicles) that issue securities to investors. These transactions are recorded as sales when the Bank is deemed to have surrendered control over the assets sold. Prior to July 1, 2001, securitization transactions were recorded in accordance with the Emerging Issues Committee's Abstract No. 9 entitled "Transfer of Receivables" (EIC No. 9) of the CICA Handbook. For securitization transactions carried out on or after July 1, 2001, the Bank has applied the CICA Accounting Guideline No. 12, entitled "Transfer of Receivables". Prior to July 1, 2001, gains on securitization transactions were amortized to income over time, while losses were recognized as incurred. For securitization transactions that provide for the payment of the proceeds of the sale when the sum of interest and fees collected from borrowers exceeded the yield paid to investors, these proceeds were considered income when the amount could legally be paid by the trust. Subsequent to July 1, 2001, gains and losses are recognized in income on the date of the transaction. Transactions entered into prior to July 1, 2001, or completed after that date pursuant to commitments to sell prior to July 1, 2001, have not been restated and the deferred gains and other income will continue to be recorded under the original terms of the agreements. As part of the securitization transactions, the Bank may retain interests in the securitized loans in the form of one or more subordinated tranches, servicing rights and in some cases, a cash reserve account. Gains or losses on the sale of loans depend in part on the allocation of the previous carrying amount of the loans between the assets sold and the retained interests. This allocation is based on their relative fair value at the date of transfer. Fair value is based on market prices, when available. However, as quotes are usually not available for retained interests, fair value is determined using the present value of future expected cash flows estimated in relation to assumptions on credit losses, prepayment rates, forward yield curves, and discount rates commensurate with the risks involved. The Bank generally transfers the loans on a fully serviced basis. When they are securitized, a servicing liability amount is carried forward and amortized to income over the term of the transferred loans. Retained interests are recorded at cost and included under investment account securities. Any decline in the value of retained interests that is other than temporary is recorded in income. GUARANTEED MORTGAGE LOANS The Bank finances a portion of its residential mortgage loan portfolio through the mortgage-backed securities program provided for in the National Housing Act. Under this program, the Bank pools eligible mortgage loans and sells ownership rights in these pools to investors. Investors are paid a pre-set coupon rate and the principal from the underlying mortgages. The Canada Mortgage and Housing Corporation (CMHC) unconditionally guarantees the payments to the investors. The Bank continues to service the mortgage loans thus securitized. The Bank is committed to the CMHC to make sufficient funds regularly available to the central payor and transfer agent to pay the amounts due to investors, whether or not the mortgagors have made their payments. Moreover, the Bank must place all funds due to investors at maturity of the securities at the disposal of the central payor and transfer agent. Should the Bank default, the CMHC can assign the servicing of the securitized loans to another servicer. Page 83 NATIONAL BANK OF CANADA 2001-2002 CONSOLIDATED FINANCIAL STATEMENTS NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS Year ended October 31 (millions of dollars) 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (cont.) Issuance costs for mortgage-backed securities include the direct costs incurred in assembling and selling the securities and the discount at sale. These costs are charged in their entirety to the Consolidated Statement of Income at the time of sale by way of a deduction from the proceeds of the sale of securities. The normal servicing fees which the Bank collects for servicing the securitized mortgage loans are set at 25 basis points. They are credited to other income when collected. The Bank also collects a net interest spread over the life of the mortgage-backed securities. This spread is the interest collected from mortgagors less the sum of the interest paid to investors and the normal servicing fees. The estimated present value of the net interest spread is added to the proceeds from the sale of securities as a receivable and is included in establishing the gains or losses at the date of sale. This receivable is drawn down as mortgage payments are received and the resulting yield is charged to interest income. ACCEPTANCES AND CUSTOMERS' LIABILITY UNDER ACCEPTANCES The potential liability of the Bank under acceptances is recorded as a liability in the Consolidated Balance Sheet. The Bank's potential recourse towards customers is recorded as an equivalent offsetting asset. PREMISES AND EQUIPMENT Premises and equipment are recognized at cost less accumulated amortization and are amortized over their estimated useful lives according to the following methods and rates:
Methods Rates ------- ----- Buildings (a) or (b) 2% to 14% Equipment and furniture (a) or (b) 20% to 50% Leasehold improvements (a) (c)
(a) straight-line (b) diminishing-balance (c) over the lease term plus the first renewal option INTANGIBLE ASSETS The intangible assets of the Bank arising from the acquisition of subsidiaries or groups of assets are mainly formed of management contracts with an indefinite life and as such are not amortized. These assets are tested for impairment annually, or more frequently if events or changes in circumstances indicate that the asset might be impaired. The impairment test consists in comparing the fair value of the asset with its carrying value. The excess of the carrying value over the fair value of the asset is charged to income in the period in which the impairment is determined. Intangible assets with a finite useful life are amortized over appropriate periods. These assets are written down when the long-term expectation is that their carrying values will not be recovered. Any excess of the carrying value over the net recoverable value is charged to income. OBLIGATIONS RELATED TO SECURITIES SOLD SHORT These liabilities represent the Bank's obligation to deliver securities it sold but did not own at the time of sale. Gains and losses on the sale and the changes in fair value are recorded under income for the year. OBLIGATIONS RELATED TO SECURITIES SOLD UNDER REPURCHASE AGREEMENTS These liabilities represent securities which the Bank has sold and simultaneously committed to repurchase from the initial buyer at a specified price on a specified date. Since ownership of the securities does not change, the transaction is treated as a loan to the Bank. The securities are recorded at cost and the interest expense is recorded on an accrual basis. INCOME TAXES The Bank provides for income taxes under the tax liability method. The Bank determines future income tax assets and future income tax liabilities based on the differences between the carrying values and tax values of assets and liabilities, according to income tax laws and income tax rates enacted or substantially enacted on the date the variances are reversed. Future income tax assets represent tax benefits related to deductions the Bank may claim to reduce its taxable income in future years. No provision for future income taxes is taken for the portion of retained earnings of foreign subsidiaries which is permanently reinvested. DERIVATIVE FINANCIAL INSTRUMENTS The Bank offers various types of derivatives to accommodate the needs of its clients in managing their risk exposure and their investment and trading activities. It also uses derivatives in its own risk exposure and trading activities. Page 84 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS Year ended October 31 (millions of dollars) 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONT.) The main derivative instruments used by the Bank are over-the-counter foreign exchange forward contracts, futures, forward rate agreements, swaps and options. Derivatives used to accommodate the needs of clients and to enable the Bank to generate income from its trading activities are recognized at their fair value and the resulting gains or losses are recorded in income. When derivative instruments are used to hedge assets and liabilities, notably against interest rate and exchange rate risk, and they qualify as an effective hedge, the resulting gains or losses are deferred and amortized to income on the same basis as the hedged asset or liability. INSURANCE REVENUES AND EXPENSES Premiums less claims and changes in actuarial liabilities are reflected in other income. Investment income is included in income from securities in the Consolidated Statement of Income. Administrative costs are recorded in operating expenses in the Consolidated Statement of Income. ASSETS UNDER ADMINISTRATION AND ASSETS UNDER MANAGEMENT The Bank administers and manages assets owned by clients but which are not reflected on the balance sheet. Asset management fees are earned for providing investment management and mutual fund services. Asset administration fees are earned for providing trust, estate administration and custodial services. Fees are recognized and reported in other income as the services are provided. EMPLOYEE FUTURE BENEFITS The Bank records its obligations under employee benefit plans as well as related costs, less the assets of the plans. The cost of pensions and other post-retirement benefits earned by employees is established by calculating the sum of the following: the current period benefit cost (actuarial method); the notional interest on the actuarial debt of the plans and the return on the plans; the amortization, over the estimated average remaining working lives of employees, of actuarial gains and losses, and the amounts resulting from the changes made to the assumptions and the plans. The cumulative surplus of funding contributions over the amounts recorded as expenses is recognized in "Other assets" while the cumulative cost of other post-retirement benefits is recognized in "Other liabilities". The plan investments are valued at their fair value for the purpose of calculating the projected rate of return. Past service costs arising from amendments to the plans are amortized on a straight-line basis over the average remaining service period of active employees on the date of the amendments. The portion of actuarial net gain or actuarial net loss which exceeds 10% of either the accrued benefit obligation or the fair value of the plan assets, whichever is higher, is amortized over the average remaining service period of active employees. The average remaining service period for pension benefit plans is 13 years for the employee pension plan and 10 years for the designated employee plans. When the restructuring of an employee benefit plan results simultaneously in a curtailment and settlement of the obligations resulting from such plan, the curtailment is recorded first. STOCK-BASED COMPENSATION PLANS The Bank's stock-based compensation plans consist primarily of the Stock Appreciation Rights (SAR) Plan, the Stock Option Plan and the Employee Share Ownership Plan, which are described in Note 15. The compensation expense with respect to the SAR Plan is based on the expected exercise rate, the vesting period, the excess of the market price over the exercise price on the grant date of the award and taking hedges into account. Contributions made by the Bank under the Employee Share Ownership Plan are charged to income as paid. No compensation expense is recognized for these plans when shares or stock options are issued to employees. Any consideration paid by employees on exercise of stock options or purchase of shares is credited to common share paid-up capital. The exercise price of each option awarded is equal to the closing price of the common shares of the Bank on The Toronto Stock Exchange on the business day preceding the grant date of the award. COMPARATIVE FIGURES Certain comparative figures have been restated to conform with the presentation adopted in fiscal 2002. 2. RECENT STANDARDS PENDING ADOPTION STOCK-BASED COMPENSATION In 2001, the CICA issued a new standard on stock-based compensation and other stock-based payments. This new standard brings Canadian GAAP more closely in line with U.S. GAAP and is applicable to fiscal years beginning on or after January 1, 2002. The Bank will adopt the new standard effective November 1, 2002. It establishes standards for the recognition, measurement and disclosure of stock-based compensation and other stock-based payments made in exchange for goods and services. It requires that stock appreciation rights and similar awards to be settled in cash are to be recorded at fair value by valuing, on an ongoing basis, the Page 85 NATIONAL BANK OF CANADA 2001-2002 CONSOLIDATED FINANCIAL STATEMENTS NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS Year ended October 31 (millions of dollars) 2. RECENT STANDARDS PENDING ADOPTION (CONT.) excess of the stock price over the exercise price of the option. The change in the fair value of these awards must be recognized in the Consolidated Statement of Income. The standard encourages, but does not require, the recognition in income of a compensation cost for stock options using a fair value-based method. The fair value of the stock options must be determined at the grant date and the cost recognized in income over the vesting period. The Bank has chosen to record the stock options awarded as of November 1, 2002 at fair value. The standard contains special transitional provisions for recording stock appreciation rights outstanding at the date of adoption of the recommendations. The cumulative amount resulting from the adoption of this standard should be charged to the balance of retained earnings as at November 1, 2002, without restatement of prior years. The Bank has assessed the impact of the application of the standard and concluded that it would have no impact on the balance of retained earnings as at November 1, 2002. The impact of the adoption of this new standard on the 2003 financial statements has not yet been determined. HEDGING RELATIONSHIPS In 2001, the CICA issued Accounting Guideline 13, "Hedging Relationships". This Guideline identifies the circumstances in which hedge accounting is appropriate and discusses the identification, designation, documentation and effectiveness of hedging relationships and the discontinuance of hedge accounting, but does not cover hedge accounting techniques. The provisions of the new Guideline apply to fiscal years beginning on or after July 1, 2003. The Bank intends to adopt this Guideline effective November 1, 2003. The impact of the adoption of this Guideline on the 2004 financial statements has not yet been determined. 3. SECURITIZATION TRANSACTIONS CMHC-GUARANTEED MORTGAGE LOANS During the year, the Bank securitized $1 billion of CMHC-guaranteed mortgage loans through the creation of mortgage-backed securities, and initially sold virtually all of these securities. Mortgage-backed securities created and unsold are recorded in the Consolidated Balance Sheet under "Securities -- Investment account". The Bank received net cash proceeds of $1 billion and retained the rights to the excess spread of $39 million generated on the mortgage loans. A pre-tax gain of approximately $26 million, net of transaction fees, was recognized in the Consolidated Statement of Income under "Securitization revenues". MORTGAGE LOANS -- OTHER In 2000, the Bank sold approximately $1 billion of mortgage loans for five units or more to a trust. These loans continue to be accounted for in accordance with EIC No. 9. CREDIT CARD RECEIVABLES Under the terms of a 1998 agreement, the Bank sells credit card receivables on a revolving basis to a trust. In October 2001, the Bank sold an additional ownership interest in its credit card receivables portfolio to this trust. The Bank received cash proceeds of $50 million and retained the rights to the excess spread generated on the receivables, net of any credit losses. The Bank charged a management liability of approximately $0.3 million to the Consolidated Balance Sheet under "Other liabilities". A pre-tax gain of approximately $1 million, net of transaction fees, was recognized in the Consolidated Statement of Income under "Securitization revenues". During the year, the Bank sold an additional $250 million in credit card receivables to this trust. The Bank received cash proceeds of $249 million, net of an initial reserve of $1 million and transaction fees, and retained the rights to the excess spread of $7 million generated on the loans, net of any credit losses. The Bank also charged a servicing liability of approximately $1 million and recognized a pre-tax gain of approximately $6 million, net of transaction fees. CONSUMER LOANS In January 2001, the Bank sold $700 million of its consumer loans to a trust which continue to be accounted for in accordance with EIC No. 9. In October 2001, the Bank sold an additional amount of $281 million in consumer loans to this trust. The Bank received cash proceeds of $267 million, net of an initial reserve of $14 million, and retained the rights to the excess spread generated on the loans, net of any credit losses. The Bank also assumed a servicing liability of approximately $3 million which is recorded in the Consolidated Balance Sheet under "Other liabilities". A pre-tax gain of approximately $4 million, net of transaction fees, was recognized in the Consolidated Statement of Income under "Securitization revenues". PERSONAL LOANS During the year, the Bank sold $515 million of fixed-rate personal loans to a trust. It received cash proceeds of $480 million, net of an initial reserve of $31 million and transaction fees, and retained the rights to the excess spread generated on the loans, net of any credit losses. The Bank also assumed a servicing liability of approximately $5 million which is recorded in the Consolidated Balance Sheet under "Other liabilities". A pre-tax gain of approximately $2 million, net of transaction fees, was recognized in the Consolidated Statement of Income under "Securitization revenues". Page 86 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS Year ended October 31 (millions of dollars) 3. SECURITIZATION TRANSACTIONS (CONT.) The key assumptions used to value the sold and retained interests as at the securitization date for transactions carried out during 2002 and 2001 were as follows: KEY ASSUMPTIONS
CMHC- guaranteed mortgage Credit card Consumer Personal loans receivables loans loans ------------- ------------ ----------- ------------ 2002 2001 2002 2001 2002 2001 2002 2001 ---- ---- ---- ---- ---- ---- ---- ---- Weighted average term (months) 31.8 35.7 - - - 17.2 14.6 - Payment rate - - 30.1% 29.4% - - - - Prepayment rate 18.0% 15.0% - - - 13.0% 24.0 - Excess spread, net of credit losses 1.5% 1.5% 11.6% 10.6% - 0.7% 3.6% - Expected credit losses - - 3.3% 3.2% - 1.2% 1.2% - Discount rate 4.9% 5.1% 21.0% 21.0% - 21.0% 21.0% -
The table below presents certain amounts recorded in the consolidated financial statements with respect to securitization operations:
Securitization Investment account Other revenues securities liabilities --------------- ------------------------ ----------- Cash Gain on disposal Retained deposits Servicing of assets interests at a trust liabilities ---------------- ---------- ----------- ----------- 2002 2001 2002 2001 2002 2001 2002 2001 ---- ---- ---- ---- ---- ---- ---- ---- Mortgage loans - - CMHC-guaranteed 26 17 90 101 - - - - - - Other - - - - 32 41 - - Credit card receivables 16 1 13 1 6 5 2 - Consumer loans - 4 4 11 18 33 1 3 Personal loans 4 - 18 - 24 - 5 - --- --- --- --- --- --- --- --- Total 46 22 125 113 80 79 8 3
The table below presents total securitized assets and certain credit data on the securitized assets:
2002 2001 ---------------------------------- --------------------------------- Securitized Impaired Net credit Securitized Impaired Net credit assets loans losses assets loans losses ----------- -------- ---------- ----------- -------- ---------- Mortgage loans - - CMHC-guaranteed 4,027 - - 4,523 - - - - Other 625 - - 805 - - Credit card receivables 1,200 10 28 950 13 26 Consumer loans 348 5 6 695 8 2 Personal loans 515 1 1 - - - ----- --- --- ----- --- --- Total 6,715 16 35 6,973 21 28
The table below summarizes certain cash flows received from securitization vehicles:
CMHC- guaranteed mortgage Credit card Consumer Personal loans receivables loans loans ------------ ----------- ----------- ------------ 2002 2001 2002 2001 2002 2001 2002 2001 ---- ---- ---- ---- ---- ---- ---- ---- Proceeds from new securitizations 1,115 1,030 250 50 - 981 515 - Proceeds collected and reinvested in revolving securitizations - - 3,109 3,067 - - 136 - Cash flows from retained interests in securitizations 60 57 14 - 12 - 7 -
Page 87 NATIONAL BANK OF CANADA 2001-2002 CONSOLIDATED FINANCIAL STATEMENTS NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS Year ended October 31 (millions of dollars) 3. SECURITIZATION TRANSACTIONS (CONT.) As at October 31, the sensitivity of the current fair value of these retained interests to immediate 10% and 20% adverse changes in key assumptions were as follows: SENSITIVITY OF KEY ASSUMPTIONS TO ADVERSE CHANGES
Credit CMHC-guaranteed card Personal mortgage loans receivables loans --------------------- ----------- -------- Assumptions 2002 2001 2002 2002 - ----------- ---- ---- ---- ---- PREPAYMENT RATE 18.0% 15.0% 30.1% 24.0% Impact on fair value of 10% adverse change $(1.5) $(1.0) $(1.0) $(0.2) Impact on fair value of 20% adverse change $(2.9) $(2.0) $(1.8) $(0.5) EXCESS SPREAD, NET OF CREDIT LOSSES 1.5% 1.5% 11.6% 3.6% Impact on fair value of 10% adverse change $(6.1) $(5.3) $(1.4) $(1.8) Impact on fair value of 20% adverse change $(12.1) $(10.6) $(2.8) $(3.6) DISCOUNT RATE 5.4% 5.6% 21.0% 21.0% Impact on fair value of 10% adverse change $(0.3) $(0.3) $(0.1) $(0.8) Impact on fair value of 20% adverse change $(0.7) $(0.6) $(0.1) $(1.6) SERVICING 0.3% 0.3% 2.0% 1.0% Impact on fair value of 10% adverse change $(1.0) $(0.9) $(0.2) $(0.5) Impact on fair value of 20% adverse change $(2.0) $(1.8) $(0.5) $(1.0)
The changes in key assumptions had no material impact on the value of retained interests in the case of credit card receivables in 2001 and consumer loans in 2001 and 2002. These sensitivities are hypothetical and should be used with caution. Changes in fair value attributable to changes in assumptions generally cannot be extrapolated because the relationship between the change in the assumption and the change in fair value may not be linear. Changes affecting one factor may result in changes to another, which might magnify or counteract the sensitivities attributable to changes in assumptions. Page 88 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS Year ended October 31 (millions of dollars) 4. SECURITIES Securities held are as follows:
No Under 1 to 5 to Over specific 2002 2001 1 year 5 years 10 years 10 years maturity Total Total ------ ------- -------- -------- -------- ----- ----- INVESTMENT ACCOUNT Securities issued or guaranteed by Canada Unamortized cost 1,060 1,855 219 30 - 3,164 2,897 Fair value 1,076 1,918 226 30 - 3,250 3,022 Provinces Unamortized cost 79 65 465 30 - 639 367 Fair value 82 68 468 31 - 649 377 Municipalities or school boards Unamortized cost - - 2 - - 2 16 Fair value - - 2 - - 2 16 Debt securities (1) Unamortized cost 821 243 62 63 205 1,394 2,145 Fair value 819 240 59 47 205 1,370 2,135 Equity securities Cost - - - - 1,513 1,513 1,377 Fair value - - - - 1,431 1,431 1,225 ----- ----- ----- --- ----- ------ ------ UNAMORTIZED COST 1,960 2,163 748 123 1,718 6,712 6,802 ----- ----- ----- --- ----- ------ ------ FAIR VALUE 1,977 2,226 755 108 1,636 6,702 6,775 TRADING ACCOUNT Securities issued or guaranteed by Canada 4,485 1,792 427 115 - 6,819 5,432 Provinces 367 1,069 734 437 - 2,607 2,560 Municipalities or school boards 113 180 27 17 - 337 385 Debt securities (1) 1,023 563 191 214 - 1,991 1,567 Equity securities - - - - 1,425 1,425 1,048 ----- ----- ----- --- ----- ------ ------ 5,988 3,604 1,379 783 1,425 13,179 10,992 ----- ----- ----- --- ----- ------ ------ LOAN SUBSTITUTES (2) - - - - 76 76 78 ----- ----- ----- --- ----- ------ ------ TOTAL CARRYING VALUE OF SECURITIES 7,948 5,767 2,127 906 3,219 19,967 17,872 ----- ----- ----- --- ----- ------ ------ TOTAL FAIR VALUE OF SECURITIES 7,965 5,830 2,134 891 3,137 19,957 17,845 ===== ===== ===== === ===== ====== ======
Where no organized market exists for which prices are publicly disclosed, the fair value is estimated using the market prices of similar securities. (1) Debt securities include loans restructured as bonds under the Brady Plan, net of the country risk allowance. Such bonds are guaranteed by the United States government and have longer maturities and more favourable conditions for the borrowing country. (2) The fair value of loan substitute securities is similar to the carrying value.
2002 2001 --------------------------------------- ----------------------------------------- Gross Gross Gross Gross Carrying unrealized unrealized Fair Carrying unrealized unrealized Fair value gains losses value value gains losses value -------- ---------- ---------- ----- -------- ---------- ---------- ----- INVESTMENT ACCOUNT Securities issued or guaranteed by Canada 3,164 87 (1) 3,250 2,897 127 (2) 3,022 Provinces 639 14 (4) 649 367 10 - 377 Municipalities or school boards 2 - - 2 16 - - 16 Debt securities 1,394 3 (27) 1,370 2,145 27 (37) 2,135 Equity securities 1,513 38 (120) 1,431 1,377 30 (182) 1,225 ----- --- ---- ----- ----- --- ---- ----- TOTAL INVESTMENT ACCOUNT 6,712 142 (152) 6,702 6,802 194 (221) 6,775 ===== === ==== ===== ===== === ==== =====
Page 89 NATIONAL BANK OF CANADA 2001-2002 CONSOLIDATED FINANCIAL STATEMENTS NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS Year ended October 31 (millions of dollars) 5. LOANS AND IMPAIRED LOANS
Impaired loans ------------------------------- Country Gross Specific risk General amount Gross allowance allowance Net allowance ------ ----- --------- --------- --- --------- October 31, 2002 Residential mortgage 12,867 23 3 - 20 - 20 Personal and credit card 5,561 33 12 - 21 - 21 Business and government 20,680 447 220 22 205 - 205 Securities purchased under reverse repurchase agreements 2,366 - - - - - - ------ --- --- -- --- --- ---- 41,474 503 235 22 246 - 246 General allowance (1) - - - - - 405 (405) ------ --- --- -- --- --- ---- 41,474 503 235 22 246 405 (159) October 31, 2001 Residential mortgage 11,875 46 6 - 40 - 40 Personal and credit card 5,866 129 21 - 108 - 108 Business and government 23,489 795 314 38 443 - 443 Securities purchased under reverse repurchase agreements 4,041 - - - - - - ------ --- --- -- --- --- ---- 45,271 970 341 38 591 - 591 General allowance (1) - - - - - 500 (500) ------ --- --- -- --- --- ---- 45,271 970 341 38 591 500 91
(1) The general allowance for credit risk was taken for the Bank's loans in their entirety. Foreclosed assets held for sale in settlement of impaired loans which are included in total impaired loans together with the related allowance for credit losses amounted to $12 million and $4 million respectively as at October 31, 2002 compared to $13 million and $3 million as at October 31, 2001. 6. ALLOWANCE FOR CREDIT LOSSES The changes made to allowances during the year are as follows:
Country risk Allocate Unallocated allowance Specific general general (loans and 2002 2001 allowance allowance allowance securities) Total Total --------- --------- ----------- ---------- ----- ----- Allowance at beginning of year 341 306 194 55 896 965 Transfer of allowance for assets held for disposal (45) - - - (45) - Amounts related to discontinued operations 14 (65) - - (51) 120 Provision for credit losses Related to regular operations 335 55 (85) - 305 205 Related to a revision of the estimated allowance 185 - - - 185 - Write-offs (644) - - (29) (673) (402) Recoveries 49 - - - 49 8 ---- --- --- -- ---- ---- Allowance at end of year 235 296 109 26 666 896 ---- --- --- -- ---- --- Portion related to loans 235 296 109 22 662 879 Portion related to securities - - - 4 4 17
Page 90 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS Year ended October 31 (millions of dollars) 7. PREMISES AND EQUIPMENT
2002 2001 -------- -------- Carrying Carrying Accumulated value, value, Cost amortization net net ---- ------------ -------- -------- Land 10 - 10 10 Buildings 98 43 55 58 Equipment and furniture 459 370 89 92 --- --- --- --- 567 413 154 160 Leasehold improvements 101 90 255 250 Amortization for the year recorded in the Consolidated Statement of Income 58 48
8. INTANGIBLE ASSETS AND GOODWILL
Intangible assets Goodwill ---------- -------- Balance as at October 31, 2001 12 305 Sale of asset-based lending operations in the United States - (22) Acquisitions Putnam Lovell Group Inc. - 68 Altamira Investment Services Inc. 171 308 Amortization (2) - Other 3 2 --- --- Balance as at October 31, 2002 184 661 === ===
9. OTHER ASSETS
2002 2001 ----- ----- Interest and dividends receivable 441 416 Income taxes receivable - 113 Future income tax assets (Note 16) 319 304 Prepaid expenses and receivables 653 1,319 Accrued benefit assets (Note 13) 95 92 Brokers' client accounts 306 1,055 Other 753 411 ----- ----- 2,567 3,710 ===== =====
10. DEPOSITS
Payable Payable Payable after on a fixed 2002 2001 on demand notice date TOTAL Total --------- ------- ---------- ----- ----- Personal 1,886 6,325 14,396 22,607 21,857 Business and government 6,112 5,918 10,552 22,582 23,362 Deposit-taking institutions 123 25 6,353 6,501 6,217 ----- ------ ------ ------ ------ 8,121 12,268 31,301 51,690 51,436 ===== ====== ====== ====== ======
Page 91 NATIONAL BANK OF CANADA 2001-2002 CONSOLIDATED FINANCIAL STATEMENTS NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS Year ended October 31 (millions of dollars) 11. OTHER LIABILITIES
2002 2001 ----- ----- Interest and dividends payable 442 595 Income taxes payable 81 30 Future income tax liabilities (Note 16) 194 203 Liabilities of a subsidiary 360 439 Accrued benefit liability (Note 13) 112 107 Trade and other payables 1,954 2,091 Brokers' client accounts 319 1,008 Other 534 428 ----- ----- 3,996 4,901
12. SUBORDINATED DEBENTURES Debentures are subordinated in right of payment to the claims of depositors and certain other creditors. During fiscal 2001, the Bank redeemed the subordinated debenture convertible into common shares for the sum of $65 million. The $28 million loss, net of $17 million in income taxes, was charged to retained earnings.
Denominated in Interest foreign Maturity date rate Characteristics currency 2002 2001 - ------------- -------- --------------- -------------------- ----- ----- December 2003 7.50% Not redeemable by the Bank prior to maturity 45 45 August 2004 8.13% Not redeemable by the Bank prior to maturity unless the debentures become subject to foreign taxes US 26 40 42 November 2009 7.75% Not redeemable by the Bank prior to maturity unless the debentures become subject to foreign taxes US 250 389 397 June 2010 6.90% (1) Not redeemable prior to June 7, 2005 350 350 October 2011 7.50% (2) Redeemable since October 17, 2001 150 150 October 2012 6.25% (3) Not redeemable prior to October 31, 2007 300 300 April 2014 5.70% (4) Not redeemable prior to April 16, 2004 250 250 February 2087 variable (5) Redeemable at the Bank's option since February 28, 1993 (2001: US 71) US 44 68 113 ----- ----- Total 1,592 1,647 ===== =====
(1) Bearing interest at a rate of 6.90% until June 7, 2005, and thereafter at an annual rate equal to the 90-day acceptance rate plus 1%. (2) Bearing interest at a rate of 7.50% until October 17, 2006, and thereafter at an annual rate equal to the 90-day acceptance rate plus 1%. (3) Bearing interest at a rate of 6.25% until October 31, 2007, and thereafter at an annual rate equal to the 90-day acceptance rate plus 1%. (4) Bearing interest at a rate of 5.70% until April 16, 2009, and thereafter at an annual rate equal to the 90-day acceptance rate plus 1%. (5) Bearing interest at an annual rate of 1/8% above LIBOR. The debenture maturities are as follows:
2003 - 2004 85 2005 - 2006 - 2007 - 2008 to 2012 1,189 2013 and thereafter 318
Page 92 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS Year ended October 31 (millions of dollars) 13. EMPLOYEE FUTURE BENEFITS The Bank's employee pension plans provide for the payment of benefits based on the length of service and final average earnings of the employees covered by the plans. The Bank also offers a variety of complementary insurance plans to eligible present and retired employees and their dependants. As at October 31, the information related to all defined benefit plans was as follows:
Pension benefit plans Other benefit plans ---------------------- ------------------- 2002 2001 2002 2001 ---- ---- ---- ---- PLAN ASSETS Fair value at beginning of year 1,021 1,115 - - Actual return on plan assets (39) (68) - - Bank contributions 21 7 - - Employees' contributions 13 12 - - Benefits paid (51) (45) - - ----- ----- ---- ---- Fair value at end of year 965 1,021 - - ----- ----- ---- ---- ACCRUED BENEFIT OBLIGATION Balance at beginning of year 1,118 1,023 107 101 Current service cost 40 36 6 9 Interest cost 78 75 7 7 Benefits paid (51) (45) (8) (10) Curtailment gain - (6) - - Amendments to plans 10 - - - Actuarial loss (gain) (23) 35 (3) - ----- ----- ---- ---- Balance at end of year 1,172 1,118 109 107 ----- ----- ---- ---- Funded status -- plan deficit (207) (97) (109) (107) Unamortized net actuarial loss (gain) 302 189 (3) - ----- ----- ---- ---- Net accrued benefit assets (liabilities) 95 92 (112) (107) ===== ===== ==== ====
The above amounts which relate to the accrued benefit obligation and the fair value of plan assets at year-end include the following amounts which relate to plans with an accrued benefit obligation that exceeds assets:
Pension benefit plans Other benefit plans ---------------------- ------------------- 2002 2001 2002 2001 ---- ---- ---- ---- Fair value of plan assets 965 1,021 - - Accrued benefit obligation 1,172 1,118 109 107 ----- ----- ---- ---- Funded status -- plan deficit (207) (97) (109) (107) ===== ===== ==== ====
The material actuarial assumptions retained by the Bank to valuate its accrued benefit obligation and benefit charge are as follows:
Pension benefit plans Other benefit plans ---------------------- ------------------- 2002 2001 2002 2001 ---- ---- ---- ---- Discount rate 7.00 7.00 7.00 7.00 Expected long-term rate of return on plan assets 7.75 8.00 - - Rate of compensation increase 4.25 4.25 3.25 3.25
For valuation purposes, the hypothetical annual growth rate of health care costs covered per participant was set at 7.7% for 2002 (2001: 8.3%). According to the assumption retained, this rate is expected to gradually decrease to 5.2% in 2008 and remain at that level thereafter. The effect of a 0.25% increase or decrease in the expected long-term rate of return for pension plan assets on the Bank's pension expense would be a $3 million decrease or increase, respectively. Page 93 NATIONAL BANK OF CANADA 2001-2002 CONSOLIDATED FINANCIAL STATEMENTS NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS Year ended October 31 (millions of dollars) 13. EMPLOYEE FUTURE BENEFITS (CONT.) For the years ended October 31, the Bank's net benefit plan expense was as follows:
Pension benefit plans Other benefit plans ----------------------- ------------------- 2002 2001 2002 2001 ---- ---- ---- ---- Current service cost during the year, net of employees' contributions 27 24 6 9 Interest cost 78 75 7 7 Expected return on plan assets (87) (87) - - Curtailment gain - (6) - - --- --- -- -- 18 6 13 16
14. CAPITAL STOCK AUTHORIZED FIRST PREFERRED SHARES: An unlimited number of shares, without par value, issuable for a maximum aggregate consideration of $1 billion. SECOND PREFERRED SHARES: 15 million shares, without par value, issuable for a maximum aggregate consideration of $300 million. COMMON SHARES: An unlimited number of shares, without par value, issuable for a maximum aggregate consideration of $3 billion.
OUTSTANDING SHARES AND DIVIDENDS DECLARED 2002 ------------------------------------------- Shares outstanding Dividends declared ---------------------- ------------------ No. of $ $ Per shares share ------ ---- --- ----- First preferred shares Series 11 - - 2 0.5000 Series 12 5,000,000 125 8 1.6250 Series 13 7,000,000 175 11 1.6000 ----------- ----- --- ------ Total preferred shares and dividends 12,000,000 300 21 ----------- ----- --- ------ Common shares Common shares at beginning of year 190,331,368 1,668 Issued pursuant to the Dividend Reinvestment and Share Purchase Plan and the Stock Option Plan 495,420 12 Issued pursuant to acquisitions 1,269,563 41 Repurchase of common shares (9,500,000) (82) ----------- ----- --- ------ Total common shares and dividends 182,596,351 1,639 174 0.9300 ----------- ----- --- ------ Total dividends declared 195 =========== ===== === ======
OUTSTANDING SHARES AND DIVIDENDS DECLARED 2001 ------------------------------------------ Shares outstanding Dividends declared -------------------- ------------------ No. of $ $ Per shares share ------ ----- --- ----- First preferred shares Series 10 3,680,000 92 8 2.1875 Series 11 4,000,000 100 8 2.0000 Series 12 5,000,000 125 8 1.6250 Series 13 7,000,000 175 11 1.6000 ----------- ----- --- ------ Total preferred shares and dividends 19,680,000 492 35 ----------- ----- --- ------ Common shares Common shares at beginning of year 189,474,149 1,653 Issued pursuant to the Dividend Reinvestment and Share Purchase Plan and the Stock Option Plan 857,219 15 Total common shares and dividends 190,331,368 1,668 156 0.8200 ----------- ----- --- ------ Total dividends declared 191
Page 94 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS Year ended October 31 (millions of dollars) 14. CAPITAL STOCK (CONT.) CHARACTERISTICS OF FIRST PREFERRED SHARES (AMOUNTS IN DOLLARS) SERIES 12 Redeemable at the Bank's option since May 15, 2001 at $25 per share in cash, plus a premium if redeemed before May 15, 2003, and accrued and unpaid dividends in accordance with the privileges and conditions related to such preferred shares, subject to the prior approval of the Superintendent; non-cumulative preferential dividends, payable quarterly in an amount of $0.40625 per share. Convertible at the Bank's option since May 15, 2001 into a number of common shares determined by dividing the redemption price per share of the shares to be converted by $3.00 or 95% of the weighted average price of common shares, whichever is higher, subject to the approval of the stock exchange on which the Bank's shares are listed. Convertible at the holder's option on or after May 15, 2004 into common shares in accordance with the privileges and conditions related to such preferred shares, or into another series of preferred shares if the Bank's Board of Directors should decide, by resolution at least 30 days prior to May 15, 2004, to authorize a further series of first preferred shares, subject to the prior approval of the Superintendent. The Bank may, upon notice of no less than two business days prior to the conversion date, redeem the preferred shares to be converted. SERIES 13 Redeemable at the Bank's option, subject to the prior approval of the Superintendent and upon notice of not more than 60 and not less than 30 days, i) on August 15, 2005 and on the last day of each period of five years plus one day thereafter (conversion date), in whole at any time or in part from time to time, at a price equal to $25 per share in cash plus all declared and unpaid dividends at the date fixed for redemption and, ii) after August 15, 2005, other than on a conversion date, in whole but not in part, at a price equal to $25.50 per share, plus all declared and unpaid dividends at the date fixed for redemption; non-cumulative preferential dividends, at a quarterly rate of $0.40 per share for the first five years and variable thereafter. Convertible at the holder's option on August 15, 2005 or a subsequent conversion date, into fully paid preferred shares, Series 14. REDEMPTION OF PREFERRED SHARES (AMOUNTS IN DOLLARS) On February 15, 2002, the Bank redeemed all 4,000,000 preferred shares, Series 11 outstanding at a price of $25 per share for an aggregate consideration of $100,000,000. On November 16, 2001, the Bank redeemed all 3,680,000 preferred shares, Series 10 outstanding at a price of $25 per share for an aggregate consideration of $92,000,000. REPURCHASE OF COMMON SHARES Effective March 5, 2002, the Bank made a normal course issuer bid for the repurchase of up to 9,500,000 common shares over a 12-month period ending no later than March 4, 2003. Purchases were made on the open market at market prices through the facilities of The Toronto Stock Exchange. Premiums paid above the average book value of the common shares were charged to retained earnings. As at October 31, 2002, the Bank had repurchased 9,500,000 common shares at a cost of $306 million, which reduced common equity capital by $82 million and retained earnings by $224 million. RESERVED COMMON SHARES As at October 31, 2002, 4,512,919 common shares (2001: 4,817,022) were reserved under the Dividend Reinvestment and Share Purchase Plan and 4,322,743 common shares (2001: 4,514,060) were reserved under the Stock Option Plan. In respect of the acquisition of Putnam Lovell Group, 476,119 common shares were reserved, with issuance contingent upon certain profitability targets being met in 2004. RESTRICTION ON THE PAYMENT OF DIVIDENDS Under the Bank Act, the Bank is prohibited from declaring dividends on its common or preferred shares if there are reasonable grounds for believing that the Bank is, or the payment would cause the Bank to be, in contravention of the regulations of the Bank Act or the guidelines of the Superintendent with respect to capital adequacy and liquidity. In addition, the ability to pay common share dividends is restricted by the terms of the outstanding preferred shares whereby the Bank may not pay dividends on its common shares without the approval of the holders of the outstanding preferred shares, unless all preferred share dividends have been declared and paid or set aside for payment. SHAREHOLDER RIGHTS PLAN In 2001, the Bank adopted a Shareholder Rights Plan (the "Rights Plan"). Under this plan, the Bank can issue subscription rights to all its shareholders should a takeover or share exchange bid be made for more than 20% of the outstanding common shares of the Bank except in the event of a permitted bid. Each right, with the exception of those held by the acquirer, would entitle its holder to purchase from the Bank one common share on The Toronto Stock Exchange (at 50% of the market price) on the stock acquisition date, subject to certain anti-dilution adjustments. The Rights Plan will remain in effect until March 7, 2004. Page 95 NATIONAL BANK OF CANADA 2001-2002 CONSOLIDATED FINANCIAL STATEMENTS NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS Year ended October 31 (millions of dollars) 15. STOCK-BASED COMPENSATION THE BANK HAS THREE STOCK-BASED COMPENSATION PLANS: STOCK APPRECIATION RIGHTS PLAN The Bank offers a Stock Appreciation Rights Plan ("SAR Plan") to senior management and other key employees of the Bank and its subsidiaries ("designated employees"). Under the SAR Plan, when designated employees exercise their SARs, they receive a cash amount equal to the difference between the market price of a common share on the exercise date of the SAR and the exercise price of the SAR. The exercise price of each SAR awarded is equal to the market price of the stock at closing on the day before the date of the award. The SARs vest evenly over a four-year period and expire 10 years from the award date or, in certain circumstances set out in the SAR Plan, expire within specified time limits. The expense recognized in respect of the SAR Plan was $4 million in 2002 and in 2001.
2002 2001 ------------------------------ ----------------------------- Number Weighted average Number Weighted average SAR PLAN of SARs exercise price of SARs exercise price - ----------- --------- ------------------ ---------- ---------------- Outstanding at beginning of year 2,322,025 $17.22 4,780,925 $20.45 Granted 26,500 $28.01 79,300 $24.90 Exercised (413,900) $16.79 (535,100) $19.75 Cancelled (65,400) $18.36 (2,003,100) $24.56 --------- ------ ---------- ------ Outstanding at end of year 1,869,225 $17.42 2,322,025 $17.22 Exercisable at end of year 1,051,832 $16.87 892,850 $16.05
SARS OUTSTANDING
SARs Exercisable Exercise price outstanding SARs Expiry date - -------------- ----------- ----------- -------------- $13.50 249,525 249,525 December 2006 $24.50 22,150 22,150 December 2007 $25.00 32,275 24,206 December 2008 $17.35 1,483,425 741,713 December 2009 $24.90 56,950 14,238 December 2010 $28.01 24,900 - December 2011 --------- --------- Total 1,869,225 1,051,832
STOCK OPTION PLAN The Bank offers a Stock Option Plan to senior management and other key employees of the Bank and its subsidiaries ("designated employees"). Under the Bank's Stock Option Plan, options are periodically granted to designated employees. These options provide employees with the right to subscribe for common shares of the Bank at an exercise price equal to the market price of shares on the day before the date of the award. The options vest evenly over a four-year period and expire 10 years from the award date or, in certain circumstances set out in the Stock Option Plan, expire within specified time limits. The maximum number of common shares that could be issued under the Stock Option Plan was 18,930,437 as at October 31, 2002. The maximum number of common shares reserved for a participant may not exceed 5% of the total number of Bank shares issued and outstanding. Each participant in the SAR Plan who is a resident of Canada can exchange each SAR held for a stock option governed by the Stock Option Plan at an exercise price representing the market value of a common share at closing on the day before its exchange.
2002 2001 ------------------------------ ----------------------------- Number Weighted average Number Weighted average STOCK OPTION PLAN of options exercise price of options exercise price - ------------------ ---------- ------------------ ---------- ---------------- Outstanding at beginning of year 4,517,975 $22.16 1,501,615 $11.92 Granted 1,882,840 $28.01 3,612,875 $25.06 Exercised (608,818) $18.82 (563,190) $13.34 Cancelled (99,175) $25.88 (33,325) $25.05 --------- ------ --------- ------ Outstanding at end of year 5,692,822 $24.38 4,517,975 $22.16 Exercisable at end of year 2,466,587 $21.35 2,146,857 $19.03
Page 96 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS Year ended October 31 (millions of dollars) 15. STOCK-BASED COMPENSATION (CONT.)
OPTIONS OUTSTANDING Stock options Exercisable Exercise price outstanding stock options Expiry date - -------------- ------------- ------------- ------------- $11.00 416,925 416,925 December 2005 $13.50 296,650 296,650 December 2006 $25.20 742,475 742,475 December 2007 $25.20 829,557 622,168 December 2008 $24.90 1,553,475 388,369 December 2010 $28.01 1,853,740 -- December 2011 --------- --------- Total 5,692,822 2,466,587 ========= =========
EMPLOYEE SHARE OWNERSHIP PLAN Under the Bank's Employee Share Ownership Plan, employees who meet the eligibility criteria can contribute up to 8% of their annual gross salary by way of payroll deductions. The Bank matches 25% of the employee contribution amount, to a maximum of $1,500 per annum. All Bank contributions vest in the employee after one year of continuous participation in the Plan, and all subsequent contributions vest immediately. The Bank's contribution, amounting to $3.3 million in 2002 ($2.8 million in 2001), was charged to income as paid. 16. INCOME TAXES The Bank's income taxes for the fiscal year ended October 31 in the consolidated financial statements were as follows:
2002 2001 ---- ---- CONSOLIDATED STATEMENT OF INCOME Income taxes 150 278 ---- ---- CONSOLIDATED STATEMENT OF RETAINED EARNINGS Income taxes related to: Redemption of debenture -- (17) Restatement related to accrued benefit liabilities - Other benefit plans -- (34) Dividends on preferred shares, Series 10, 11, 12 and 13 2 2 Unrealized foreign exchange losses (gains) 7 (12) ---- ---- 9 (61) ---- ---- 159 217 ---- ---- Income taxes were as follows: Current income taxes 179 150 Future income tax expense (benefit) related to the origination and reversal of temporary differences (20) 67 ---- ---- Income taxes 159 217 ---- ----
The temporary differences and carry forwards resulting in future income tax assets and liabilities were as follows:
2002 2001 ---- ---- Future income tax assets Allowance for credit losses and other expenses 284 269 Accrued benefit liabilities - Other benefit plans 35 35 ---- ---- 319 304 ---- ---- Future income tax liabilities Capital assets 14 15 Securitization 24 15 Investment in a company - 27 Accrued benefit assets - Pension benefit plans 26 28 Other 130 118 ---- ---- 194 203 ---- ---- Future income tax assets, net 125 101 ---- ----
Page 97 NATIONAL BANK OF CANADA 2001-2002 CONSOLIDATED FINANCIAL STATEMENTS NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS Year ended October 31 (millions of dollars) 16. INCOME TAXES (CONT.) Reconciliation of the Bank's income tax rate for the fiscal years ended on October 31 was as follows:
2002 2001 --------------- ---------------- $ % $ % Income before income taxes, non-controlling interest, discontinued operations and goodwill charges 498 100.0 933 100.0 ----- ----- ----- ------ Income taxes at Canadian statutory income tax rate 183 36.7 355 38.1 ----- ----- ----- ------ Increase (reduction) in income tax rate due to: Tax-exempt income from securities, mainly dividends from Canadian corporations (17) (3.4) (39) (4.2) Rates applicable to subsidiaries abroad (37) (7.4) (23) (2.4) Federal large corporations tax and surtax 7 1.4 7 0.8 Gain realized on the sale of operations and impairment charge on an investment 24 4.8 (17) (1.9) Other items (10) (2.0) (5) (0.6) ----- ----- ----- ------ (33) (6.6) (77) (8.3) ----- ----- ----- ------ Income taxes and effective income tax rate 150 30.1 278 29.8
17. INCOME PER SHARE Diluted income before goodwill charges per common share and diluted net income per common share were calculated based on income before goodwill charges and net income, net of dividends on non-convertible preferred shares divided by the average number of common shares outstanding. BASIC AND DILUTED INCOME PER COMMON SHARE
2002 2001 -------- -------- INCOME BEFORE DISCONTINUED OPERATIONS Income before discontinued operations and goodwill charges $ 318 $ 627 Goodwill charges -- 19 Dividends on preferred shares 21 35 -------- -------- Income before discontinued operations available to common shareholders - basic and diluted $ 297 $ 573 AVERAGE NUMBER OF COMMON SHARES OUTSTANDING (thousands) Average basic number of common shares outstanding 186,608 189,928 Adjustment to number of common shares: Stock options potentially exercisable 1,119 887 -------- -------- Average diluted number of common shares outstanding 187,727 190,815 -------- --------
18. COMMITMENTS AND CONTINGENT LIABILITIES COMMITMENTS As at October 31, 2002, minimum commitments under leases, contracts for out-sourced information technology services, and other leasing agreements were as follows:
Service Equipment Premises contracts and furniture Total -------- --------- ------------- ----- 2003 97 212 2 311 2004 88 161 2 251 2005 84 152 1 237 2006 77 151 - 228 2007 70 148 - 218 2008 and thereafter 448 506 - 954 ----- ----- ----- ----- 864 1,330 5 2,199
Page 98 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS Year ended October 31 (millions of dollars) 18. COMMITMENTS AND CONTINGENT LIABILITIES (CONT.) PLEDGED ASSETS Securities with a carrying value of $10,593 million (2001: $11,131 million) have been pledged as collateral for various types of funding transactions including obligations related to securities sold under repurchase agreements and obligations related to securities sold short. Included in the above amount are assets with a carrying value of $121 million (2001: $171 million) deposited as collateral in order to participate in clearing and payment systems and depositories. CREDIT INSTRUMENTS In the normal course of business, the Bank enters into various off-balance sheet commitments. The credit instruments used to meet the financing needs of its clients represent the maximum amount of additional credit that the Bank could be obligated to extend if the commitments were fully utilized.
As at October 31 2002 2001 - ---------------- ------ ------ Letters of guarantee (1) 947 1,335 Documentary letters of credit (2) 183 249 Credit card loans (3) 3,964 3,768 Commitments to extend credit (3) Original term of one year or less 2,787 4,668 Original term of more than one year 9,504 10,296
- ---------- (1) Letters of guarantee are firm commitments by the Bank to make payments on behalf of a client that is unable to meet its contractual obligations to a third party. They represent the same credit risk as loans. (2) Documentary letters of credit are documents issued by the Bank which are used in international trade to enable a third party to draw drafts on the Bank up to an amount established under specific terms and conditions, and are collateralized by the delivery of the goods they represent. (3) Credit card loans and commitments to extend credit represent the unused portions of credit authorizations granted in the form of loans, acceptances, letters of guarantee and documentary letters of credit. The Bank is required at all times to make the unused portion of the authorization available, subject to certain conditions. LITIGATION The Bank and its subsidiaries are engaged in various legal proceedings arising in the normal course of business. Most of these proceedings are related to lending activities, and are in reaction to measures taken by the Bank and its subsidiaries to collect delinquent loans. In management's opinion, the aggregate amount of potential liability related thereto will not have a material impact on the Bank's financial position. 19. DERIVATIVE FINANCIAL INSTRUMENTS Derivative financial instruments are financial contracts whose value is derived from an underlying interest rate, exchange rate, or equity, commodity or credit instrument or index. The Bank uses derivatives to accommodate the needs of its clients as well as for its own risk management and trading activities. The main derivative financial instruments used are defined as follows: Foreign exchange forward contracts are tailor-made agreements transacted between counterparties in the over-the-counter ("OTC") market to buy or sell foreign currencies for delivery on a future date at a specified rate. Futures are contractual obligations to buy or deliver a specific amount of currency, commodities or financial instruments on a future date at a specified price. Futures are standardized contracts traded on organized exchanges and are subject to daily cash margining. Forward rate agreements are contracts fixing an interest rate to be paid or received, calculated on a notional amount with a specified maturity commencing at a specified future date. Swaps are transactions in which two parties agree to exchange cash flows having specific characteristics (in terms of fixed or floating rates, currency, commodity price, index or other) based on a specified notional amount for a specified period of time. Page 99 NATIONAL BANK OF CANADA 2001-2002 CONSOLIDATED FINANCIAL STATEMENTS NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS Year ended October 31 (millions of dollars) 19. DERIVATIVE FINANCIAL INSTRUMENTS (CONT.) Options are agreements between two parties in which the writer of the option grants the buyer the right, but not the obligation, to buy or to sell, at or by a predetermined date, a specific amount of currency, commodities or financial instruments at a price agreed to when the option is arranged. The writer receives a premium for selling this instrument. Notional amounts, upon which payments are based, are not indicative of the credit risk associated with derivative financial instruments.
Remaining term to maturity 2002 2001 -------------------------------------- --------- --------- Contracts held Contracts held for trading Within 3 to 12 1 to 5 Over Total for trading Total purposes 3 months months years 5 years contracts purposes contracts -------------- -------- ------- ------- ------- -------- -------------- --------- FOREIGN EXCHANGE CONTRACTS OTC CONTRACTS Forwards 7,340 3,403 2,357 1,580 -- 7,340 9,692 9,692 Swaps 37,370 22,533 15,053 3,130 457 41,173 34,059 39,554 Options purchased 7,470 5,683 1,307 480 -- 7,470 10,255 10,255 Options written 6,798 4,547 1,773 478 -- 6,798 8,329 8,329 ------- ------- ------ ------ ----- ------- ------- ------- Total 58,978 36,166 20,490 5,668 457 62,781 62,335 67,830 ------- ------- ------ ------ ----- ------- ------- ------- EXCHANGE-TRADED CONTRACTS Futures Long positions 28 28 -- -- -- 28 601 601 Short positions 110 41 54 15 -- 110 88 88 Options purchased 137 119 18 -- -- 137 16 16 Options written 298 141 157 -- -- 298 42 42 ------- ------- ------ ------ ----- ------- ------- ------- Total 573 329 229 15 -- 573 747 747 ------- ------- ------ ------ ----- ------- ------- ------- INTEREST RATE CONTRACTS OTC CONTRACTS Forward rate agreements 8,561 7,316 1,245 -- -- 8,561 8,510 8,510 Swaps 41,121 16,496 18,804 28,082 4,437 67,819 52,557 77,398 Options purchased 11,514 4,742 6,352 420 8 11,522 6,273 6,369 Options written 16,135 4,312 11,182 641 -- 16,135 19,285 19,285 ------- ------- ------ ------ ----- ------- ------- ------- Total 77,331 32,866 37,583 29,143 4,445 104,037 86,625 111,562 ------- ------- ------ ------ ----- ------- ------- ------- EXCHANGE-TRADED CONTRACTS Futures Long positions 4,332 824 4,669 468 -- 5,961 8,574 8,851 Short positions 7,607 6,231 1,915 28 -- 8,174 4,419 7,924 Options purchased 11,220 14,951 6,827 617 -- 22,395 25,511 32,025 Options written 21,283 29,456 14,109 -- -- 43,565 35,583 44,806 ------- ------- ------ ------ ----- ------- ------- ------- Total 44,442 51,462 27,520 1,113 -- 80,095 74,087 93,606 ------- ------- ------ ------ ----- ------- ------- ------- EQUITY AND COMMODITY CONTRACTS OTC CONTRACTS Futures 185 5 -- 36 144 185 503 503 Swaps 2,145 208 1,418 566 17 2,209 1,109 1,140 Options purchased 576 46 263 277 -- 586 483 499 Options written 391 1 237 150 3 391 531 535 ------- ------- ------ ------ ----- ------- ------- ------- Total 3,297 260 1,918 1,029 164 3,371 2,626 2,677 ------- ------- ------ ------ ----- ------- ------- ------- EXCHANGE-TRADED CONTRACTS Futures Long positions 101 100 1 -- -- 101 1,678 1,678 Short positions 872 862 10 -- -- 872 1,663 1,663 Options purchased 406 393 9 4 -- 406 153 153 Options written 296 294 -- 2 -- 296 58 58 ------- ------- ------ ------ ----- ------- ------- ------- Total 1,675 1,649 20 6 -- 1,675 3,552 3,552 ------- ------- ------ ------ ----- ------- ------- ------- TOTAL 2002 186,296 122,732 87,760 36,974 5,066 252,532 -- -- ======= ======= ====== ====== ===== ======= ======= ======= Total 2001 229,972 139,885 93,256 42,270 4,563 279,974 229,972 279,974 ======= ======= ====== ====== ===== ======= ======= =======
Page 100 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS Year ended October 31 (millions of dollars) 19. DERIVATIVE FINANCIAL INSTRUMENTS (cont.) Credit risk on derivative financial instruments is the risk of a financial loss occurring as a result of a counterparty defaulting on its obligations to the Bank. The current replacement cost, which is the positive fair value of all outstanding derivative financial instruments, represents the Bank's maximum derivative credit exposure. The credit equivalent amount is calculated taking into account the current replacement cost of all outstanding contracts in a gain position, potential future exposure and the impact of master netting agreements. The risk-weighted amount is the credit equivalent amount multiplied by the counterparty risk factors prescribed by the Superintendent. The Bank negotiates master netting agreements with counterparties with which it has significant credit risk exposure resulting from derivative transactions. Such agreements provide for the simultaneous close-out and settling of all transactions with a counterparty in the event of default. Some of these agreements also provide for the exchange of collateral between parties in the event that the fair value of outstanding transactions between the parties exceeds an agreed threshold. As at October 31, credit risk exposure on the derivatives portfolio was as follows:
2002 2001 ---------------------------------------------- ----------------------------------------------- Credit Risk- Credit Risk- Notional Replacement equivalent weighted Notional Replacement equivalent weighted amount cost amount amount amount cost amount amount -------- ----------- ---------- -------- --------- ----------- ---------- -------- Foreign exchange contracts 63,354 314 815 221 68,577 471 1,098 379 Interest rate contracts 184,132 579 720 161 205,168 470 582 129 Equity and commodity contracts 5,046 345 602 161 6,229 119 375 141 ------- ----- ----- --- ------- ----- ----- --- Total 252,532 1,238 2,137 543 279,974 1,060 2,055 649 ======= ===== ===== === ======= ===== ===== ===
The fair value of derivatives is determined before the impact of master netting agreements. When available, market prices are used to determine the fair value of derivatives. Otherwise, fair value is determined using pricing models that incorporate current market prices and the contractual prices of the underlying instruments, the time value of money, yield curves and volatility factors. If necessary, fair value is adjusted to take market, model and credit risks into account, as well as the related costs. As at October 31, the fair value of derivative financial instruments was as follows:
2002 2001 ------------------------------------------- ------------------------------------------- Contracts held Contracts held Contracts held Contracts held for trading for non-trading for trading for non-trading purposes purposes purposes purposes -------------------- -------------------- -------------------- -------------------- Gross Gross Gross Gross Gross Gross Gross Gross assets liabilities assets liabilities assets liabilities assets liabilities ------ ----------- ------ ----------- ------ ----------- ------ ----------- Foreign exchange contracts 649 746 89 15 668 824 189 18 Interest rate contracts 433 408 729 192 577 529 736 218 Equity and commodity contracts 434 397 3 -- 161 136 7 6 ----- ----- --- --- ----- ----- --- --- Total 1,516 1,551 821 207 1,406 1,489 932 242 ===== ===== === === ===== ===== === ===
As at October 31, the distribution of risk exposure by counterparty was as follows:
2002 2001 ------------------------ ------------------------ Credit Credit Replacement equivalent Replacement equivalent cost amount cost amount ----------- ---------- ----------- ---------- OECD governments 6 232 -- 172 OECD banks 1,947 1,369 1,659 974 Other 339 536 585 909 ----- ----- ----- ----- Total 2,292 2,137 2,244 2,055 ===== ===== ===== =====
Page 101 NATIONAL BANK OF CANADA 2001-2002 CONSOLIDATED FINANCIAL STATEMENTS NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS Year ended October 31 (millions of dollars) 20. GEOGRAPHIC DISTRIBUTION OF EARNING ASSETS BY ULTIMATE RISK
2002 2001 ----------------- ----------------- $ % $ % ------ ------ ------ ------ North America Canada 57,171 86.5 55,420 82.1 United States 3,746 5.7 6,573 9.7 ------ ----- ------ ----- 60,917 92.2 61,993 91.8 ------ ----- ------ ----- Europe United Kingdom 1,228 1.9 861 1.3 France 352 0.5 691 1.0 Germany 1,024 1.5 513 0.8 Other 1,705 2.5 1,915 2.8 ------ ----- ------ ----- 4,309 6.4 3,980 5.9 ------ ----- ------ ----- Latin America and Caribbean 390 0.7 698 1.0 ------ ----- ------ ----- Asia and Pacific 436 0.6 807 1.2 ------ ----- ------ ----- Middle East and Africa 24 0.1 41 0.1 ------ ----- ------ ----- Earning assets as at September 30 66,076 100.0 67,519 100.0 Other assets as at September 30 6,777 8,128 Net change in assets in October 1,758 319 ------ ----- ------ ----- Total assets as at October 31 74,611 75,966 ====== ===== ====== =====
Earning assets are those which bear interest. Consequently, they do not include cash, deposits with the Bank of Canada, cheques and other items in transit (net value), customers' liability under acceptances, premises and equipment, and other assets. The Bank's earning assets as at September 30 were distributed according to the location of ultimate risk, namely, the geographic location of the borrower or, if applicable, the guarantor. Earning assets are calculated net of any allowance for credit losses, and are presented separately for each country where the Bank's exposure exceeds an amount equal to 0.75% of total earning assets. There is no material concentration of credit risk in any given operating sector. 21. INTEREST RATE SENSITIVITY POSITION Analyzing interest rate sensitivity gaps is one of the methods used by the Bank to manage interest rate risk. The following breakdown of assets and liabilities by maturity illustrates the sensitivity of the Bank's balance sheet to interest rate fluctuations as at October 31, 2002. Page 102 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS Year ended October 31 (millions of dollars) 21. INTEREST RATE SENSITIVITY POSITION (CONT.)
Non- Floating Within 3 to 12 1 to 5 Over 5 interest rate 3 months months years years sensitive Total -------- -------- ------- ------- ------- --------- ------- ASSETS Cash resources 1,419 2,661 2,519 -- -- 265 6,864 Effective yield 2.4% 2.0% -- -- Securities 113 2,949 4,886 5,768 3,108 3,143 19,967 Effective yield 3.9% 4.4% 3.9% 5.2% Loans 16,385 10,373 5,525 8,184 345 -- 40,812 Effective yield 4.5% 6.2% 6.9% 7.7% Other assets 313 -- -- -- -- 6,655 6,968 ------ ------- ------ ------ ------ ------ ------ 18,230 15,983 12,930 13,952 3,453 10,063 74,611 ------ ------- ------ ------ ------ ------ ------ LIABILITIES AND SHAREHOLDERS' EQUITY Deposits 11,659 18,595 7,494 13,580 362 -- 51,690 Effective yield 2.5% 3.6% 5.1% 5.2% Other debt (1) 30 4,463 310 1,738 1,625 1,792 9,958 Effective yield 2.4% 3.0% 3.4% 5.2% Subordinated debentures -- -- 68 885 639 -- 1,592 Effective yield -- 2.0% 6.5% 6.9% Acceptances and other liabilities -- -- -- -- -- 7,470 7,470 Shareholders' equity -- -- -- 300 -- 3,601 3,901 ------ ------- ------ ------ ------ ------ ------ 11,689 23,058 7,872 16,503 2,626 12,863 74,611 ------ ------- ------ ------ ------ ------ ------ On-balance sheet gap 6,541 (7,075) 5,058 (2,551) 827 (2,800) -- Derivative financial instruments -- (9,659) (785) 10,068 356 20 -- ------ ------- ------ ------ ------ ------ ------ Total 6,541 (16,734) 4,273 7,517 1,183 (2,780) -- ------ ------- ------ ------ ------ ------ ------ POSITION IN CANADIAN DOLLARS On-balance sheet total 5,964 (2,065) 1,977 (2,871) 975 (4,042) (62) Derivative financial instruments -- (8,259) (980) 8,427 (88) 292 (608) ------ ------- ------ ------ ------ ------ ------ Total 5,964 (10,324) 997 5,556 887 (3,750) (670) ------ ------- ------ ------ ------ ------ ------ POSITION IN FOREIGN CURRENCY On-balance sheet total 577 (5,010) 3,081 320 (148) 1,242 62 Derivative financial instruments -- (1,400) 195 1,641 444 (272) 608 ------ ------- ------ ------ ------ ------ ------ Total 577 (6,410) 3,276 1,961 296 970 670 ------ ------- ------ ------ ------ ------ ------ TOTAL 2002 6,541 (16,734) 4,273 7,517 1,183 (2,780) -- ------ ------- ------ ------ ------ ------ ------ TOTAL 2001 8,409 (20,577) 9,854 5,124 994 (2,952) 852 ====== ======= ====== ====== ====== ====== ======
- ---------- (1) Represents obligations related to securities sold short and securities sold under repurchase agreements. Effective yield represents the weighted average effective yield based on the earlier of contractual repricing or the maturity date. Page 103 NATIONAL BANK OF CANADA 2001-2002 CONSOLIDATED FINANCIAL STATEMENTS NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS Year ended October 31 (millions of dollars) 22. FAIR VALUE OF FINANCIAL INSTRUMENTS The following table presents the fair value of balance sheet financial instruments based on the valuation methods and assumptions set out below. Fair value represents the amount at which a financial instrument could be exchanged in an arm's length transaction between willing parties under no compulsion to act and is best evidenced by a quoted market price. If no quoted market prices are available, the fair values presented are estimates derived using present value or other valuation techniques and may not be indicative of the net realizable value. The fair values disclosed exclude the values of assets and liabilities that are not considered financial instruments such as land, buildings, equipment and furniture and other. Due to the judgement used in applying a wide range of acceptable valuation techniques and estimations in calculating fair value amounts, fair values are not necessarily comparable among financial institutions. The calculation of estimated fair values is based on market conditions at a specific point in time and may not be reflective of future fair values.
2002 2001 ------------------- ------------------- Carrying Fair Carrying Fair value value value value -------- ------- -------- ------- ASSETS Cash resources 6,864 6,864 5,832 5,832 Securities 19,967 19,957 17,872 17,845 Loans 40,812 41,166 44,392 45,001 Other assets 6,968 6,968 7,870 7,870 ------ ------ ------ ------ Total 74,611 74,955 75,966 76,548 ====== ====== ====== ====== LIABILITIES Deposits 51,690 52,175 51,436 52,132 Other liabilities 16,942 16,942 18,280 18,280 Subordinated debentures 1,592 1,697 1,647 1,727 ------ ------ ------ ------ Total 70,224 70,814 71,363 72,139 ====== ====== ====== ======
VALUATION METHODS AND ASSUMPTIONS CASH RESOURCES, OTHER ASSETS AND OTHER LIABILITIES Due to their short-term maturity, the fair value of these financial instruments is assumed to be equal to their carrying value. SECURITIES The fair value of securities is presented in Note 4 to the consolidated financial statements. It is based on quoted market prices. If quoted market prices are not available, fair value is estimated using the quoted market prices of similar securities. LOANS The fair value of floating-rate loans is assumed to be equal to their carrying value. The fair value of other loans is estimated using a discounted cash flow calculation that uses market interest rates currently charged for similar new loans as at the balance sheet date applied to expected maturity amounts (adjusted for any prepayments). DEPOSITS The fair value of fixed-rate deposits is determined by discounting the contractual cash flows, using market interest rates currently offered for deposits with the same remaining terms to maturity. The fair value of deposits with no stated maturity is assumed to be equal to their carrying value. SUBORDINATED DEBENTURES The fair value of subordinated debentures is determined by discounting the contractual cash flows, using market interest rates currently offered for similar financial instruments with the same remaining terms to maturity. Page 104 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS Year ended October 31 (millions of dollars) 23. IMPAIRMENT CHARGE Given the significant decline in the market value of the common shares of COGNICASE INC., the Bank carried out a valuation of the carrying value of its investment in COGNICASE INC. Based on the best estimate of the value of the investment in COGNICASE INC., an impairment charge of $137 million was recorded during 2002 in the Consolidated Statement of Income under "Other income". 24. RELATED PARTY TRANSACTIONS The Bank grants loans to its directors and officers under various conditions. Total outstanding loans of this type amounted to:
2002 2001 ---- ---- Mortgage loans 6 5 Other loans 144 107
Loans to directors are granted under market conditions for similar risks. Residential mortgage loans to officers are granted at the market rate divided by 3 for the first $50,000 and the lesser of the market rate divided by 3 or the market rate less 5% for the remainder. Other loans granted to officers are chiefly personal lines of credit bearing interest at the Bank's prime rate divided by 2 for the first $10,000 to $20,000, and the lesser of prime minus 3% or prime divided by 2 for the remainder, up to an aggregate maximum of 50% of the officer's salary. 25. SEGMENT DISCLOSURES The Bank carries out its activities in three reportable segments described hereinafter, the other operating segments being grouped together for presentation purposes. Each reportable segment is distinguished by the services offered, the type of client and the marketing strategies. The following summary briefly describes the operations included in each of the Bank's reportable segments. PERSONAL BANKING AND WEALTH MANAGEMENT This segment comprises the branch network, intermediary services, full-service retail brokerage, discount brokerage, mutual funds, trust services, credit cards and insurance. COMMERCIAL BANKING This segment includes commercial banking services in Canada as well as real estate. FINANCIAL MARKETS, TREASURY AND INVESTMENT BANKING This segment consists of corporate financing and lending, treasury operations which include asset and liability management, corporate brokerage and portfolio management. OTHER This heading comprises securitization operations, gains on the sale of operations, the impairment charge for an investment, certain non-recurring items, discontinued operations and the unallocated portion of centralized service units. The accounting policies of the reportable segments are the same as those described in the note on accounting policies, with the exception of net interest income, other income and income taxes which are presented on a taxable equivalent basis. Taxable equivalent basis is a calculation method that consists in grossing up the tax-exempt income earned on certain securities by the amount of income tax that otherwise would have been payable. Head office expenses are recorded under segment results. The provision for credit losses for the segments is determined based on expected losses, which are established through statistical analysis. The difference between actual losses and expected losses is recorded under the "Other" heading. The Bank assesses performance based on income before goodwill charges. Intersegment revenues are recorded at the exchange amount. Segment assets are average assets directly used in segment operations. Page 105 NATIONAL BANK OF CANADA 2001-2002 CONSOLIDATED FINANCIAL STATEMENTS NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS Year ended October 31 (millions of dollars) 25. SEGMENT DISCLOSURES (CONT.) RESULTS BY BUSINESS SEGMENT
Financial Markets, Personal Banking Treasury and and Wealth Commercial Investment Management Banking Banking Other Total ---------------- ---------------- ------------------ ----------------- ---------------- 2002 2001 2002 2001 2002 2001 2002 2001 2002 2001 ------ ------ ------ ------ ------ ------ ------ ------ ------ ------ Net interest income(1) 1,001 977 279 288 320 229 (127) (105) 1,473 1,389 Other income(1) 933 934 146 144 541 506 21 274 1,641 1,858 ------ ------ ------ ------ ------ ------ ------ ------ ------ ------ Total revenues 1,934 1,911 425 432 861 735 (106) 169 3,114 3,247 Operating expenses 1,452 1,420 153 152 431 366 4 51 2,040 1,989 ------ ------ ------ ------ ------ ------ ------ ------ ------ ------ Contribution 482 491 272 280 430 369 (110) 118 1,074 1,258 Provision for credit losses 97 98 83 88 31 32 279 (13) 490 205 ------ ------ ------ ------ ------ ------ ------ ------ ------ ------ Income before income taxes, non-controlling interest, discontinued operations and goodwill charges 385 393 189 192 399 337 (389) 131 584 1,053 Income taxes(1) 139 149 70 73 146 130 (119) 46 236 398 Non-controlling interest -- -- -- -- 3 3 27 25 30 28 ------ ------ ------ ------ ------ ------ ------ ------ ------ ------ Income before discontinued operations and goodwill charges 246 244 119 119 250 204 (297) 60 318 627 Discontinued operations -- -- -- -- -- -- 111 (45) 111 (45) ------ ------ ------ ------ ------ ------ ------ ------ ------ ------ Income before goodwill charges 246 244 119 119 250 204 (186) 15 429 582 ====== ====== ====== ====== ====== ====== ====== ====== ====== ====== Average assets 27,945 27,451 11,135 11,550 37,094 36,448 (6,882) (6,252) 69,292 69,197
- ---------- (1) Net interest income was grossed up by $29 million (2001: $51 million) and other income by $57 million (2001: $69 million) in order to present them on a taxable equivalent basis. An equal amount was added to income taxes. RESULTS BY GEOGRAPHIC SEGMENT Total revenues are attributed to countries where the client conducts its business. More than 94% of revenues are concentrated in Canada. 26. DISCONTINUED OPERATIONS LENDING OPERATIONS IN THE UNITED STATES On January 15, 2002, the Bank finalized the sale of its asset-based lending operations in the United States to PNC Financial Services Group. This transaction generated a gain of $79 million, net of restructuring costs, and net of income taxes of $62 million. Moreover, $41 million of the general allowance for credit risk, less income taxes of $24 million, was reversed under "Discontinued operations". Taking into account the results of these operations, the total contribution from discontinued operations was $111 million, less income taxes of $82 million. Page 106 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS Year ended October 31 (millions of dollars) 26. DISCONTINUED OPERATIONS (CONT.) The results for discontinued operations were as follows:
2002 2001 ---- ---- Interest income 52 299 Interest expense 24 197 ---- ---- Net interest income 28 102 Other income 167 27 ---- ---- Total revenues 195 129 Operating expenses 53 79 ---- ---- Contribution 142 50 Provision for credit losses (51) 120 ---- ---- Income (loss) before income taxes and goodwill charges 193 (70) Income tax expense (benefit) 82 (27) ---- ---- Income before goodwill charges 111 (43) Goodwill charges -- 2 ---- ---- Net income (loss) 111 (45)
A total of $2.5 billion of asset-based loans were sold on January 15. The remainder of the loans included in the agreement, representing $313 million as at October 31, 2002, is shown on the balance sheet under the heading "Assets held for disposal". They constitute the asset-based loans covered by an 18-month servicing agreement with PNC Financial Services Group. 27. ACQUISITIONS A) Putnam Lovell Group Inc. On June 19, 2002, the Bank finalized its acquisition of U.S.-based investment bank Putnam Lovell Group Inc. (Putnam Lovell), which in future will operate under the name Putnam Lovell NBF. Putnam Lovell is a premier investment boutique with a global practice in mergers and acquisitions, structured finance, equity research, equity sales and trading and private equity, all focused on the financial services industry. The aggregate consideration paid at closing amounted to $27 million and consisted of 807,294 common shares of the Bank valued at $26 million plus a cash payment of $1 million. The value of the common shares issued was established on the basis of the average closing price of Bank shares in the days preceding June 18, 2002, the date on which the number of shares was determined. Furthermore, as part of the acquisition, the Bank issued 191,598 common shares valued at $6 million as compensation to a third party. The $68 million excess of the purchase price over the fair value of the net liabilities assumed was allocated entirely to goodwill. An additional amount in the form of 476,119 common shares of the Bank valued at $15 million will be paid in 2004, contingent upon certain profitability targets being met and if applicable, will be added to goodwill. The results of Putnam Lovell have been recorded in the Consolidated Statement of Income as of its acquisition date, namely, June 19, 2002. B) Altamira Investment Services Inc. On August 12, 2002, the Bank concluded the acquisition of Altamira Investment Services Inc. (Altamira), a manager and distributor of mutual funds. The purchase price of $263 million consisted of $254 million in cash and 270,671 common shares of the Bank valued at $9 million. Page 107 NATIONAL BANK OF CANADA 2001-2002 CONSOLIDATED FINANCIAL STATEMENTS NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS Year ended October 31 (millions of dollars) 27. ACQUISITIONS (CONT.) The tangible assets acquired amounted to $48 million while the liabilities assumed amounted to $264 million and consisted primarily of Altamira debt. The excess of the purchase price over the estimated fair value of the net liabilities assumed was $479 million. Of this amount, $171 million of the excess of the purchase price was allocated to Altamira management contracts and the Altamira trademark as intangible assets, and the remaining $308 million was allocated to goodwill. The intangible assets acquired have an indefinite useful life and will not be amortized. The results of Altamira have been recorded in the Consolidated Statement of Income as of its acquisition date, namely, August 12, 2002. 28. COMPARISON WITH GENERALLY ACCEPTED ACCOUNTING PRINCIPLES IN CANADA GENERAL ALLOWANCE FOR CREDIT RISK In 1998, in accordance with the guidance provided by the Superintendent, the Bank increased its general allowance for credit risk by $300 million and applied this one-time adjustment to retained earnings. This adjustment was not in compliance with Canadian GAAP. In 2001, after evaluating the adequacy of the general allowance for credit risk in accordance with Canadian GAAP, the general allowance was raised to $403 million. During 2002, following the sale of its asset-based lending operations in the United States, the Bank reversed an amount of $65 million under "Discontinued operations" ($41 million net of income taxes), representing the portion of the general allowance related to its asset-based lending portfolio in the United States. Following an evaluation of the adequacy of the general allowance for credit risk as at January 31, 2002, the Bank established the allowance at $435 million. Since January 31, 2002, the general allowance for credit risk has complied with Canadian GAAP and the accounting treatment prescribed by the Superintendent. Had the Bank followed Canadian GAAP during the year, net income would have decreased by $57 million (2001: $126 million), the provision for credit losses would have increased by $97 million (2001: $203 million, including $44 million attributed to discontinued operations), income taxes would have decreased by $40 million (2001: $77 million, including $17 million attributed to discontinued operations), and basic and diluted net income per common share would have decreased by $0.31 and $0.30 respectively (2001: $0.66 basic and diluted). There was no impact as at October 31, 2002 on the Consolidated Balance Sheet (2001: $97 million increase in loans, $40 million decrease in other assets and $57 million increase in retained earnings), on the Consolidated Statement of Changes in Shareholders' Equity (2001: $57 million increase) nor on the book value of common shares (2001: $0.30 increase). Furthermore, had the Bank followed Canadian GAAP during the year, return on common shareholders' equity before goodwill charges would have decreased by 1.61% (2001: 4.26%). 29. COMPARISON WITH GENERALLY ACCEPTED ACCOUNTING PRINCIPLES IN THE UNITED STATES The consolidated financial statements of the Bank are prepared in accordance with Canadian GAAP, other than the accounting for the general allowance for credit risk which is in accordance with the accounting treatment of the Superintendent described in Note 28. For the Bank, Canadian GAAP is, in all material respects, in accordance with U.S. GAAP, except for the following:
NET INCOME 2002 2001 - ---------- ------ ------ REPORTED NET INCOME 429 563 Charge for other-than-temporary impairment 134 (134) General allowance for credit losses (97) (203) Sale of premises (2) (2) Amortization of goodwill -- (1) Loan securitization (7) (5) Derivatives and hedging activities 38 61 Redemption of a debenture -- (45) Income tax effect on above items 5 99 ----- ----- NET INCOME PER U.S. GAAP 500 333 ----- ----- NET INCOME PER COMMON SHARE, BASIC - U.S. GAAP $2.57 $1.57 NET INCOME PER COMMON SHARE, DILUTED - U.S. GAAP $2.55 $1.56
Page 108 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS Year ended October 31 (millions of dollars) 29. COMPARISON WITH GENERALLY ACCEPTED ACCOUNTING PRINCIPLES IN THE UNITED STATES (CONT.)
CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME 2002 2001 - ---------------------------------------------- ---- ---- NET INCOME PER U.S. GAAP 500 333 Other comprehensive income Change in unrealized gains and losses on securities available for sale, net of income taxes of ($44) (2001: $19) (69) 31 Change in gains and losses on derivatives designated as cash flow hedges, net of income taxes of ($2) (2001: $82) 31 134 Minimum pension liability adjustment, net of income taxes of ($3) (5) -- Change in unrealized foreign exchange gains and losses, net of income taxes of $7 (2001: ($12)) (2) 8 ---- ---- COMPREHENSIVE INCOME 455 506 ==== ====
CONSOLIDATED CONDENSED BALANCE SHEET 2002 2001 - ------------------------------------ ---------------------------------- ---------------------------------- As Increase As Increase reported (decrease) U.S. GAAP reported (decrease) U.S. GAAP -------- ---------- --------- -------- ---------- --------- ASSETS Cash resources 6,864 -- 6,864 5,832 -- 5,832 Investment account securities 6,712 (25) 6,687 6,802 (36) 6,766 Trading account securities 13,179 -- 13,179 10,992 -- 10,992 Loan substitutes 76 -- 76 78 -- 78 Loans 40,812 2,173 42,985 44,392 2,547 46,939 Premises and equipment 255 84 339 250 90 340 Goodwill 661 22 683 305 22 327 Other assets 6,052 741 6,793 7,315 790 8,105 ------ ------ ------ ------ ------ ------ Total assets 74,611 2,995 77,606 75,966 3,413 79,379 ====== ====== ====== ====== ====== ====== LIABILITIES Deposits 51,690 2,246 53,936 51,436 2,525 53,961 Other liabilities 16,942 520 17,462 18,280 687 18,967 Subordinated debentures 1,592 -- 1,592 1,647 -- 1,647 Non-controlling interest 486 -- 486 487 -- 487 ------ ------ ------ ------ ------ ------ Total liabilities 70,710 2,766 73,476 71,850 3,212 75,062 ------ ------ ------ ------ ------ ------ SHAREHOLDERS' EQUITY Preferred shares 300 -- 300 492 -- 492 Common shares 1,639 24 1,663 1,668 24 1,692 Retained earnings 1,962 34 1,996 1,956 (39) 1,917 Accumulated other comprehensive income -- 171 171 -- 216 216 ------ ------ ------ ------ ------ ------ Total shareholders' equity 3,901 229 4,130 4,116 201 4,317 ------ ------ ------ ------ ------ ------ TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY 74,611 2,995 77,606 75,966 3,413 79,379 ====== ====== ====== ====== ====== ======
Page 109 NATIONAL BANK OF CANADA 2001-2002 CONSOLIDATED FINANCIAL STATEMENTS NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS Year ended October 31 (millions of dollars) 29. COMPARISON WITH GENERALLY ACCEPTED ACCOUNTING PRINCIPLES IN THE UNITED STATES (cont.) IMPAIRMENT CHARGE According to Canadian GAAP, unless compelling evidence is provided to indicate otherwise, a decrease in the value of an investment is considered an other-than-temporary impairment when the carrying value exceeds the market value for a prolonged period. The factors indicative of an impairment that is other than temporary under Canadian GAAP differ from those in the United States insofar as concerns the period during which the carrying value may exceed the market value before it must be concluded that the decrease in value is an other-than-temporary impairment. In comparison to Canadian GAAP, the period in the United States is significantly shorter. Lastly, according to U.S. GAAP, when there has been a loss in value of an investment that is other than a temporary decline, the investment should be written down to fair value, based on market prices. INVESTMENT ACCOUNT SECURITIES According to U.S. GAAP, investment account securities are separated into two categories: securities available for sale (reported in the Consolidated Balance Sheet at fair value) and securities held to maturity (reported in the Consolidated Balance Sheet at their unamortized cost). Unrealized gains and losses on securities available for sale are presented separately in "Accumulated other comprehensive income" under shareholders' equity, while the change in unrealized gains and losses, net of income taxes, is recorded in the Consolidated Statement of Comprehensive Income. Under U.S. GAAP, the Bank records virtually all of the investment account securities in the available for sale category. GENERAL ALLOWANCE FOR CREDIT RISK In 1998, in accordance with the guidance provided by the Superintendent, the Bank increased its general allowance for credit risk by $300 million and applied this one-time adjustment to retained earnings. This adjustment did not comply with Canadian or U.S. GAAP. In 2001, the Bank increased the portion of its general allowance for credit risk in accordance with U.S. GAAP by $203 million. During the first quarter of 2002, following the sale of its asset-based lending operations in the United States, the Bank reversed an amount of $65 million under "Discontinued operations", representing the portion of the general allowance related to its asset-based lending portfolio in the United States. Following an evaluation of the adequacy of the general allowance for credit risk as at January 31, 2002, the Bank established the allowance at $435 million. Since January 31, 2002, the general allowance for credit risk has complied with Canadian and U.S. GAAP. Had the Bank followed U.S. GAAP during the year, net income would have decreased by $57 million (2001: $126 million), the provision for credit losses would have increased by $97 million (2001: $203 million, including $44 million attributed to discontinued operations) and income taxes would have decreased by $40 million (2001: $77 million, including $17 million attributed to discontinued operations). The adjustment had no impact as at October 31, 2002 on the Consolidated Balance Sheet (2001: a $97 million increase in loans, a decrease of $40 million in other assets and a $57 million increase in retained earnings). SALE OF PREMISES Under Canadian GAAP, the leases related to the head office building were accounted for as a sales-type lease followed by an operating lease as a lessee. Under U.S. GAAP (SFAS No. 98, entitled "Accounting for Leases"), in order to be accounted for as a sales-type lease, title must be transferred by the end of the lease term; otherwise, the leases must be accounted for as operating leases. AMORTIZATION OF GOODWILL In 1999, the value of the shares issued by the Bank in order to acquire First Marathon Inc. was based on the market price of the shares over a reasonable period of time before and after the acquisition date, according to Canadian GAAP prior to July 1, 2002. According to U.S. GAAP, the value of shares would have been based on the market price of the shares over a reasonable period of time before and after the date the terms of the acquisition were agreed to and announced. Had the Bank followed U.S. GAAP, goodwill and the amount of common shares would have increased. Page 110 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS Year ended October 31 (millions of dollars) 29. COMPARISON WITH GENERALLY ACCEPTED ACCOUNTING PRINCIPLES IN THE UNITED STATES (cont.) LOAN SECURITIZATION A new Canadian GAAP standard became effective for loan securitization transactions carried out as of July 1, 2001, substantially harmonizing the Canadian accounting treatment with that required under U.S. GAAP. However, certain differences remain with respect to transactions entered into before July 1, 2001 and the conditions under which special purpose entities ("SPEs") require consolidation. Under Canadian GAAP, SPEs are consolidated only when the Bank is deemed to control these SPEs and retains virtually all residual risks and rewards of the SPEs. U.S. GAAP requires that SPEs be consolidated unless they receive a substantial investment from an independent third party or their activities are sufficiently limited. Certain SPEs with which the Bank has entered into loan securitization transactions would require consolidation under U.S. GAAP. DERIVATIVE FINANCIAL INSTRUMENTS AND HEDGING ACTIVITIES Under Canadian GAAP, derivatives used in sales or trading activities are recorded on the Consolidated Balance Sheet at fair value while other derivatives are recorded at cost. Under the U.S. standard (SFAS No. 133, entitled "Accounting for Derivative Instruments and Hedging Activities" as amended by SFAS No. 138), the Bank is required to measure all derivatives at fair value and to recognize them on the Consolidated Balance Sheet as an asset or liability. The U.S. standard contains specific guidance regarding the documentation and designation of derivatives so that they can be recorded as hedging instruments, the limits of hedging strategies and the measurement of hedge ineffectiveness. Derivatives that cannot be recorded as hedging instruments are recorded at fair value, and changes in fair value are recorded in income. Changes in the fair value of derivatives designated as fair value hedges are recorded in income and are generally offset by changes in the fair value of the hedged items. With respect to derivatives used for cash flow hedge transactions, changes in fair value are recorded as a separate item in the Consolidated Statement of Comprehensive Income until the hedged items are recognized in income. The ineffective portion of hedging relationships is recognized in income on a quarterly basis. REDEMPTION OF A DEBENTURE In 2001, the Bank redeemed the $20 million subordinated debenture convertible into common shares for a cash consideration of $65 million. In accordance with Canadian GAAP, the difference between the amount paid and the carrying value was charged, net of income taxes, to retained earnings. Under U.S. GAAP (SFAS No. 4, entitled "Reporting Gains and Losses from Extinguishment of Debt"), the loss from redeeming the debentures must be charged to income. MINIMUM PENSION LIABILITY Under U.S. GAAP (SFAS No. 87, entitled "Employers' Accounting for Pensions"), if the accrued benefit obligation, without salary projections, exceeds the fair value of the pension plan, a liability (minimum pension liability) equivalent to the difference must be recorded in the Consolidated Balance Sheet. Recognition of an additional liability is required in the event that the accumulated benefit obligation, without salary projections, exceeds the fair value of the pension plan, and net accrued benefit assets are recognized in the Consolidated Balance Sheet. If an additional minimum liability is recognized, an equal amount shall be recognized as an intangible asset, provided that the asset recognized does not exceed the amount of unrecognized prior service cost. If an additional liability required to be recognized exceeds unrecognized prior service cost, the excess shall be reported under other comprehensive income, net of income taxes. Page 111 NATIONAL BANK OF CANADA 2001-2002 CONSOLIDATED FINANCIAL STATEMENTS STATISTICAL REVIEW As at October 31
2002 2001 2000 1999 1998 1997(8) 1996(7) 1995 1994 1993 ------- ------- ------- ------- ------- ------- ------- ------- ------- ------- BALANCE SHEET DATA (millions of dollars) Cash resources $ 6,864 $ 5,832 $ 5,655 $ 3,561 $ 4,852 $ 4,476 $ 3,528 $ 5,174 $ 3,765 $ 3,204 Securities 19,967 17,872 16,835 16,932 15,439(6) 10,010 8,414 7,285 6,071 5,985 Loans 40,812 44,392 46,739 43,891 45,507(6) 47,259 37,935 33,795 32,226 30,692 Customers' liability under acceptances 2,988 3,593 3,640 2,962 2,658 2,273 1,725 1,293 1,255 1,081 Premises and equipment and other assets 3,980 4,277 2,958 2,455 2,207 2,217 1,532 1,366 1,457 1,772 ------- ------- ------- ------- ------- ------- ------- ------- ------- ------- Total assets $74,611 $75,966 $75,827 $69,801 $70,663 $66,235 $53,134 $48,913 $44,774 $42,734 ------- ------- ------- ------- ------- ------- ------- ------- ------- ------- Deposits $51,690 $51,436 $50,473 $49,984 $48,026 $43,270 $40,125 $40,424 $36,850 $35,113 Other liabilities 17,428 18,767 20,165 15,481 18,976 19,136 9,494 4,895 4,253 4,476 Long-term debt floating- capital notes -- -- -- -- -- -- -- 106 113 137 Subordinated debentures 1,592 1,647 1,361 1,035 966 1,069 1,016 1,177 1,241 1,037 Capital stock Preferred 300 492 492 317 317 376 376 376 532 426 Common 1,639 1,668 1,653 1,641 1,327 1,309 1,268 1,234 1,207 1,083 Retained earnings 1,962 1,956 1,683 1,343 1,051 1,075 855 701 578 462 ------- ------- ------- ------- ------- ------- ------- ------- ------- ------- Total liabilities and shareholders' equity $74,611 $75,966 $75,827 $69,801 $70,663 $66,235 $53,134 $48,913 $44,774 $42,734 ------- ------- ------- ------- ------- ------- ------- ------- ------- ------- Average assets $69,292 $69,197 $73,807 $69,387 $65,873 $55,685 $49,239 $47,582 $43,160 $39,657 Average capital funds(1) 5,249 5,020 4,660 3,512 3,886 3,744 3,511 3,620 3,230 2,871 ------- ------- ------- ------- ------- ------- ------- ------- ------- ------- INCOME STATEMENT DATA (millions of dollars) Net interest income $ 1,444 $ 1,338 $ 1,190 $ 1,187 $ 1,209 $ 1,235 $ 1,136 $ 1,170 $ 1,081 $ 996 Other income 1,584 1,789 1,878 1,232 1,108 1,030 970 712 719 635 ------- ------- ------- ------- ------- ------- ------- ------- ------- ------- TOTAL REVENUES $ 3,028 $ 3,127 $ 3,068 $ 2,419 $ 2,317 $ 2,265 $ 2,106 $ 1,882 $ 1,800 $ 1,631 ------- ------- ------- ------- ------- ------- ------- ------- ------- ------- Provision for credit losses 490 205 184 170 147 280 235 255 275 325 Operating expenses 2,040 1,989 2,120 1,615 1,535 1,451 1,402 1,219 1,158 1,036 Income taxes 150 278 239 213 239 209 130 146 131 81 Non-controlling interest 30 28 26 32 31 16 10 7 9 8 ------- ------- ------- ------- ------- ------- ------- ------- ------- ------- INCOME BEFORE DISCONTINUED OPERATIONS AND GOODWILL CHARGES 318 627 499 389 365 309 329 255 227 181 ------- ------- ------- ------- ------- ------- ------- ------- ------- ------- Discontinued operations 111 (45) 29 36 24 42 -- -- -- -- Goodwill charges -- 19 19 8 73 9 11 10 10 6 ------- ------- ------- ------- ------- ------- ------- ------- ------- ------- NET INCOME $ 429 $ 563 $ 509 $ 417 $ 316 $ 342 $ 318 $ 245 $ 217 $ 175 ======= ======= ======= ======= ======= ======= ======= ======= ======= =======
Page 112 STATISTICAL REVIEW As at October 31
2002 2001 2000 1999 1998 1997(8) 1996(7) 1995 1994 1993 ------- ------- ------- ------- ------- ------- ------- ------- ------- ------- STOCK DATA Number of common shares (thousands) 182,596 190,331 189,474 188,729 171,616 170,461 167,151 163,963 160,976 148,474 Shareholders of record 28,549 29,766 30,795 32,048 32,902 34,433 36,549 39,053 41,974 46,121 Income before goodwill charges per share, basic $ 2.18 $ 2.88 $ 2.65 $ 2.28 $ 2.12 $ 1.92 $ 1.82 $ 1.32 $ 1.18 $ 1.05 Net income per share, basic $ 2.18 $ 2.78 $ 2.54 $ 2.24 $ 1.69 $ 1.86 $ 1.76 $ 1.26 $ 1.12 $ 1.01 Dividend per share $ 0.93 $ 0.82 $ 0.75 $ 0.70 $ 0.66 $ 0.575 $ 0.49 $ 0.40 $ 0.40 $ 0.40 Stock trading range High $ 34.93 $ 31.00 $ 25.25 $ 26.20 $ 31.25 $ 20.30 $ 13.90 $ 11.88 $ 11.63 $ 10.75 Low $ 24.70 $ 23.00 $ 16.40 $ 17.15 $ 20.10 $ 13.20 $ 10.38 $ 8.63 $ 8.25 $ 7.25 Close $ 29.39 $ 24.25 $ 24.95 $ 17.90 $ 23.05 $ 20.15 $ 13.00 $ 11.00 $ 9.38 $ 10.50 Book value $ 19.72 $ 19.04 $ 17.60 $ 15.81 $ 13.86 $ 13.99 $ 12.70 $ 11.88 $ 11.09 $ 10.41 Dividends on preferred shares Series 5 -- -- -- -- 3.9531 3.3670 4.8235 5.9462 4.4495 4.6618 Series 7 -- -- -- -- 1.0306 0.8777 1.2576 1.5503 1.1601 1.2154 Series 8 -- -- -- -- 0.9883 0.8417 1.2059 1.4865 1.1125 1.1655 Series 10 -- 2.1875 2.1875 2.1875 2.1875 2.1875 2.1875 2.1875 2.1875 2.1875 Series 11 0.5000 2.0000 2.0000 2.0000 2.0000 2.0000 2.0000 2.0000 2.0000 2.0000 Series 12 1.6250 1.6250 1.6250 1.6250 1.6250 1.6250 1.6250 1.6250 1.0562 -- Series 13 1.6000 1.6000 0.5447 -- -- -- -- -- -- -- ------- ------- ------- ------- ------- ------- ------- ------- ------- ------- FINANCIAL RATIOS Return on common shareholders' equity before goodwill charges 11.3% 16.0% 16.0% 15.5% 14.6% 14.5% 15.1% 11.5% 11.1% 10.3% Return on average assets 0.62% 0.80% 0.73% 0.62% 0.51% 0.62% 0.64% 0.51% 0.50% 0.44% Return on average capital funds 9.5% 12.5% 12.4% 13.2% 9.3% 10.5% 10.6% 8.3% 7.9% 7.3%(3) Capital ratios - BIS Tier 1 9.6% 9.6% 8.7% 7.7% 7.7% 8.1% 6.9% 6.8% 6.9% 6.2%(3) Total 13.6% 13.1% 11.4% 11.0%(5) 10.7% 11.3% 10.2%(2) 10.4% 11.1% 9.6%(3) ------- ------- ------- ------- ------- ------- ------- ------- ------- ------- OTHER INFORMATION Impaired loans (millions of dollars) $ 246 $ 591 $ 544 $ 543 $ 547 $ 497 $ 506 $ 611 $ 744 $ 935 Number of Bank employees(4) In Canada 11,287 11,676 11,050 11,744 11,641 11,245 11,022 10,249 10,423 11,822 Outside Canada 155 351 407 431 400 406 380 371 323 327 National Bank Financial & Co. Inc. 3,147 2,294 2,419 2,489 1,895 1,676 1,425 1,578 1,481 1,398 Branches in Canada 530 546 586 649 646 641 632 629 641 650 Banking machines 823 834 802 761 744 738 712 624 551 496 ------- ------- ------- ------- ------- ------- ------- ------- ------- -------
- ---------- (1) Average capital funds include common shareholders' equity, redeemable preferred shares and subordinated debentures. (2) Taking into account the issuance of $150 million in subordinated debentures on November 1, 1996 (3) Taking into account the redemption of $100 million in subordinated debentures through the issuance of common shares as at November 1, 1993 (4) The number of employees is provided on a full-time equivalent basis. This basis was changed in 1996. (5) Taking into account the issuance of US $250 million in subordinated debentures on November 2, 1999 (6) The securities figures were restated to include mortgage-backed securities held by the Bank. Figures prior to fiscal 1998 have not been restated. (7) Figures prior to 1996 have not been restated to reflect the fact that gains and losses on securities previously recorded under "Interest income" were reclassified as "Other income" as they could not be obtained through reasonable effort. (8) Figures prior to 1997 have not been restated to reflect the impact of activities that were discontinued in 2001. Page 113 NATIONAL BANK OF CANADA 2001-2002 CONSOLIDATED FINANCIAL STATEMENTS SUBSIDIARIES
PERCENTAGE OF VOTING AND INVESTMENT PRINCIPAL PARTICIPATING AT COST NAME OFFICE ADDRESS SHARES (millions of dollars) - ---- ----------------------- ------------- -------------------- National Bank Group Inc. Montreal, Canada 100% 517 National Bank Financial & Co. Inc. Montreal, Canada 100% 258 Natcan Insurance Company Limited Christ Church, Barbados 100% 1 Natcan Trust Company Montreal, Canada 100% 55 National Bank Trust Inc. Montreal, Canada 100% 155 National Bank Life Insurance Company Montreal, Canada 100% 10 Services Financiers Banque Nationale Inc. Montreal, Canada 100% -- National Bank Financial Services (Investments) Inc. Montreal, Canada 100% -- National Bank Securities Inc. Montreal, Canada 100% -- Natcan Investment Management Inc. Montreal, Canada 75% 9 National Bank Discount Brokerage Inc. Montreal, Canada 100% 11 Innocap Investment Management Inc. Montreal, Canada 100% 1 National Bank Financial Planning Inc. Montreal, Canada 100% -- National Bank Realty Inc. Montreal, Canada 100% 6 Monexcor Inc. Montreal, Canada 100% -- FMI Acquisition Holding Inc. Montreal, Canada 100% 25 FMI Acquisition Inc. Montreal, Canada 100% 97 NBC Financial (U.K.) Ltd. London, United Kingdom 100% 48 Assurances generales Banque Nationale (Gestion) Inc. Montreal, Canada 90% 17 Altamira Investment Services Inc. Toronto, Canada 100% 263 Alter Moneta Corporation Longueuil, Canada 59% 28 Natcan Holdings International Limited Nassau, Bahamas 100% 35 National Bank of Canada (International) Limited Nassau, Bahamas 100% -- Natcan Finance (Asia) Limited Hong Kong, China 100% 8 NB Capital Corporation New York, United States 100% 286 NB Finance Ltd. Hamilton, Bermuda 100% 206 National Canada Finance LLC New York, United States 100% 867 National Canada Export Corporation New York, United States 100% -- NatBC Holding Corporation Florida, United States 100% 21 Natbank, National Association Florida, United States 100% -- NBC Global Risk Management Houston, United States 100% --
Page 114 SUPPLEMENTARY INFORMATION Page 115 NATIONAL BANK OF CANADA 2001-2002 SUPPLEMENTARY INFORMATION DIRECTORS ANDRE BERARD JEAN GAULIN Chairman of the Board Corporate Director National Bank of Canada San Antonio, Texas, United States Ile-des-Soeurs, Verdun, Quebec PAUL GOBEIL LAWRENCE S. BLOOMBERG Vice-Chairman of the Board Advisor Metro Inc. National Bank Financial Inc. Ile-des-Soeurs, Verdun, Quebec Toronto, Ontario SUZANNE LECLAIR PIERRE BOURGIE President, President and Chief Executive Officer and Chief Executive Officer Chairwoman of the Board Societe Financiere Bourgie Inc. Transit Truck Bodies Inc. Outremont, Quebec Ile-des-Soeurs, Verdun, Quebec GERARD COULOMBE BERNARD LEMAIRE Chairman of the Board and Chairman of the Board Senior Partner Cascades Inc. Desjardins Ducharme Stein Monast Kingsey Falls, Quebec Sainte-Marthe, Quebec ROBERT PARIZEAU FRANCOIS J. COUTU Chairman of the Board President and AON Parizeau Inc. Chief Executive Officer Montreal, Quebec The Jean Coutu Group (PJC) Inc. Outremont, Quebec E.A. (DEE) PARKINSON-MARCOUX Consultant BERNARD CYR Southern Pacific Petroleum President Canmore, Alberta Cyr Holding Inc. Moncton, New Brunswick REAL RAYMOND President and SHIRLEY A. DAWE Chief Executive Officer President National Bank of Canada Shirley Dawe Associates Inc. Ile-des-Soeurs, Verdun, Quebec Toronto, Ontario ROSEANN RUNTE NICOLE DIAMOND-GELINAS President Vice-President and Old Dominion University General Manager Norfolk, Virginia, United States Aspasie Inc. Saint-Barnabe Nord, Quebec JEAN TURMEL President - Financial Markets, JEAN DOUVILLE Treasury and Investment Bank Chairman of the Board National Bank of Canada UAP Inc. Outremont, Quebec Ile-des-Soeurs, Verdun, Quebec DENNIS WOOD MARCEL DUTIL Chairman of the Board, Chairman of the Board, President and President and Chief Executive Officer Chief Executive Officer Dennis Wood Holdings Inc. The Canam Manac Group Inc. Magog, Quebec Outremont, Quebec
Page 116 CORPORATE GOVERNANCE The Bank believes that it is both essential and in the general interest of its shareholders, customers and employees to adopt sound corporate governance standards and practices. Directors oversee the management of the Bank with integrity and in the best interests of the Bank, with the objective of improving long-term shareholder value. The Management Proxy Circular of the Bank for the 2003 Annual Meeting of Shareholders describes the practices of the Bank with regard to corporate governance, which incorporate the guidelines of The Toronto Stock Exchange and contain a description of the committees of the Board, their mandates and their activities. FUNCTIONS OF THE BOARD OF DIRECTORS The Board adopted a mandate describing the responsibilities that it assumes either directly or through its various committees. These functions include strategic planning, reviewing major risks for the Bank, succession planning, evaluating the performance of senior management as well as assessing the integrity of internal control systems and the presentation of financial information. COMPOSITION OF THE BOARD As at October 31, 2002, the Board was composed of 20 directors. Through its Conduct Review and Corporate Governance Committee, the Board reviews from time to time the impact of its size and composition on its activities in order to maintain a balance between the competencies and experience of directors that is conducive to supporting the Bank's strategic orientations and needs in the future. INDEPENDENCE OF THE BOARD AND ITS COMMITTEES The Board of the Bank designated the Conduct Review and Corporate Governance Committee to ensure the effectiveness and independence of the Board. As at October 31, 2002, five directors were "related" to the Bank in accordance with the definition of "unrelated director" in the guidelines of The Toronto Stock Exchange(1). On that date, seven of the 20 directors were "affiliated with the Bank" as defined in the Bank Act (2). In both cases, the Bank complies with the provisions of the Bank Act and the guidelines of The Toronto Stock Exchange. Moreover, all the committees of the Board are composed of outside directors. Only one related director sits on a committee of the Board, namely, the Human Resources Committee. To increase the independence of the Board in relation to management, outside directors meet from time to time during in camera sessions chaired by the Chair of the Conduct Review and Corporate Governance Committee. INFORMATION The effective functioning of the Board and its committees depends on the quality of the information that directors receive and the quality of solutions recommended. The officers and directors of the Bank work together and share relevant information enabling them to make informed decisions that are in the best interests of the Bank, its shareholders, customers and partners. After each committee meeting, the chair of the committee in question reports to the Board on the activities of the committee. COMMUNICATION The Board establishes mechanisms to ensure effective communication between the Bank, its shareholders, customers, financial analysts, the media and the public. The Board favours transparency in the communication of information to all shareholders, customers and the public at large. The Bank's quarterly reports and the related conference calls are broadcast in real time on the Bank's website (www.nbc.ca). Customer complaints that cannot be resolved through the administrative procedures in effect at the Bank are handled by the Bank's Ombudsman. (1) An "unrelated director" is a director who is independent of management and is free from any interest and any business or other relationship which could, or could reasonably be perceived to, materially interfere with the director's ability to act with a view to the best interests of the corporation, other than interests and relationships arising from shareholding. (2) A director "affiliated with the Bank" is a director who is an officer or employee of the Bank or of a corporation controlled by the Bank or a person who, directly or through companies with whom such person is affiliated, maintains significant relationships with the Bank covering a range of business or shareholding situations, as well as the spouse of such person. Page 117 NATIONAL BANK OF CANADA 2001-2002 SUPPLEMENTARY INFORMATION OFFICERS EXECUTIVE COMMITTEE OFFICERS OF SUBSIDIARIES REAL RAYMOND YVES G. BRETON President and Chief Executive Officer President, National Bank Discount Brokerage Inc. JEAN TURMEL President - Financial Markets, PIERRE DESBIENS Treasury and Investment Bank President and Chief Executive Officer National Bank Life Insurance, and G.F. KYM ANTHONY President and Chief Executive Officer President and Chief Executive Officer National Bank Trust Inc. National Bank Financial Inc. CHARLES GUAY PATRICIA CURADEAU-GROU President and Chief Operating Officer Senior Vice-President National Bank Securities Inc. Risk Management CHRISTOPHER J. HODGSON GISELE DESROCHERS President and Chief Executive Officer Senior Vice-President Altamira Investment Services Inc. Human Resources and Operations MARC KNUEPP JEAN HOUDE Chief Financial Officer Senior Vice-President Altamira Investment Services Inc. Corporate Affairs LUC PAIEMENT MICHEL LABONTE President - Individual Investor Services Senior Vice-President National Bank Financial Inc. Finance and Technology SAM REDA MICHEL LOZEAU President and Chief Operating Officer Senior Vice-President Natcan Investment Management Inc. E-Commerce W. DAVID WOOD TONY METI Executive Vice-President and Senior Vice-President Chief Administrative Officer Commercial Banking and National Bank Financial Inc. International MICHEL TREMBLAY VICE-PRESIDENTS Senior Vice-President Personal Banking and DANA ADES Wealth Management Special Loans LOUIS VACHON SANTO ALBORINO Senior Vice-President Human Resources Operations Treasury and Financial Markets JEAN-LUC ALIMONDO Europe/Middle East/Africa SENIOR VICE-PRESIDENTS DANIEL ARPIN OLIVIER LECAT National Accounts, Quebec Internal Audit FRANCINE AUBERTIN REJEAN LEVESQUE Project Office Northern and Eastern Quebec RICHARD BARRIAULT LUC PAPINEAU Taxation Wealth Management Advisory Services PIERRE BLAIS DENIS PELLERIN Government Affairs Operational and Market Risk Management JEAN BLOUIN Credit and Investment Solutions JEAN-CHARLES PETITCLERC Information Technology ANDRE BOILEAU Lower St. Lawrence OMBUDSMAN MICHEL BROUILLETTE PIERRE DESROCHES Quebec Urban Community/Saguenay VINCENT BUTKIEWICZ Financial Markets and Derivatives
Page 118 JEAN-PAUL CARON MICHELLE LEDUC Corporate Affairs Retail Credit LINDA CATY BENOIT LORANGER Corporate Secretary Alternative Networks GILLES CHOQUET FRANCE MAFFEI Monteregie and Central Quebec Human Resources Interventions RENE COLLETTE J. ARCHIE MARSHALL Personal and Commercial Banking, Atlantic Central, Southern and Western Ontario SUZANNE COTE ANDRE MONDOR Legal Affairs Sales and Service Strategies JEAN DAGENAIS RENAUD NADEAU Chief Accountant Wealth Management and Specialized Networks FRANCE DAVID Treasury Operations JACQUES NAUD Laval/North Shore YVAN DESROSIERS Saguenay/Lac St-Jean MARTIN OUELLET Treasurer LEVIS DOUCET Montreal PAUL-ANDRE PARADIS Montreal PIERRE DUBREUIL Specialized Products JACQUES PICHE International, Cuba, ICO MICHEL FAUBERT Operations Optimization PAOLO PIZZUTO West Island LUC FREDETTE Credit, Canada GERARD PROULX Laval/Northern and Western Quebec MICHEL GENDRON Montreal/Bank Tower ROLAND PROVOST Drummond/Bois-Francs/Mauricie CLEMENT GIGNAC Chief Economist NICOLE RONDOU Compliance JACQUES GRANDMAISON Ontario and Western Canada SYLVIE ROY Customer Relationship Centres RUBINA HAVLIN Electronic Payment Solutions LILI J. SHAIN National Accounts, Ontario RICHARD HEBERT South Shore VINCENT SOFIA Asia JACYNTHE HOTTE Operational Risk JOHN W. SWENDSEN Western Canada and Energy LYNN JEANNIOT Marketing and Public Affairs MARC TAILLON Quebec City and Eastern Quebec RAYMOND H. KEROACK Laval/North Shore/Abitibi-Temiscamingue PIERRE THERRIEN Private Banking, Quebec PIERRETTE LACROIX Market Risk PETER D. THOMPSON Outaouais/Northern and Eastern Ontario JEAN-PIERRE LAMBERT Monteregie/Eastern Townships JIMMY VILLENEUVE Organizational Performance, Premises and JACQUES LATENDRESSE Material Resources Nassau KATHLEEN ZICAT Network Support
Page 119 NATIONAL BANK OF CANADA 2001-2002 SUPPLEMENTARY INFORMATION PRINCIPAL SUBSIDIARIES AND OFFICES ABROAD SUBSIDIARIES CANADA National Bank Group Inc. Assurances generales National Bank Discount 600 de La Gauchetiere West Banque Nationale (Gestion) Inc. Brokerage Inc. 4th Floor 1100 University, 11th Floor 1100 University, 7th Floor Montreal, Quebec H3B 4L2 Montreal, Quebec H3B 2G7 Montreal, Quebec H3B 2G7 INVESTMENT DEALER TRUST SERVICES National Bank Financial Services National Bank Financial Inc. National Bank Trust Inc. (Investments) Inc. 1155 Metcalfe, 5th Floor 1100 University, 12th Floor 1100 University, 12th Floor Montreal, Quebec H3B 4S9 Montreal, Quebec H3B 2G7 Montreal, Quebec H3B 2G7 PORTFOLIO MANAGEMENT Natcan Trust Company FINANCIAL PLANNING Natcan Investment 600 de La Gauchetiere West National Bank Financial Management Inc. 4th Floor Planning Inc. 1100 University, 4th Floor Montreal, Quebec H3B 4L2 1100 University Montreal, Quebec H3B 2G7 Montreal, Quebec H3B 2G7 DISCOUNT BROKERAGE EXPORT FINANCING AND GROUP SAVINGS REAL ESTATE NatExport, a division of National Bank Securities Inc. National Bank Realty Inc. National Bank of Canada 1100 University, 8th Floor 600 de La Gauchetiere West 600 de La Gauchetiere West Montreal, Quebec H3B 2G7 Montreal, Quebec H3B 4L2 5th Floor Montreal, Quebec H3B 4L2 Altamira Investment Services Inc. The Exchange Tower INSURANCE 130 King Street West, Suite 900 National Bank Life Toronto, Ontario M5X 1K9 Insurance Company 1100 University, 12th Floor Montreal, Quebec H3B 2G7
UNITED STATES BAHAMAS UNITED KINGDOM Natbank, National Association National Bank of Canada NBC Financial (U.K.) Ltd. 4031 Oakwood Boulevard (International) Limited 71 Fenchurch Street Oakwood Plaza Goodman's Bay, Corporate Center London, United Kingdom Hollywood, FL 33020 West Bay Street, P.O. Box N3015 EC3M 4HD Nassau, Bahamas Natbank, National Association 990 North Federal Highway OFFICES ABROAD Pompano Beach, FL 33064 BARBADOS National Canada Finance LLC Natcan Insurance EUROPE 125 West 55th Street Company Limited New York, NY 10019 The Business Center REGIONAL AND Upton Road REPRESENTATIVE OFFICE NB Capital Corporation Christ Church, Barbados 123, avenue des Champs-Elysees 125 West 55th Street 75008 Paris, France New York, NY 10019 CHINA BRANCH NBC Global Risk Management 71 Fenchurch Street, 11th Floor 700 Louisiana Street NBC Trade Finance London, United Kingdom Suite 3905 7/F EC3M 4HD Houston, Texas 77002 Citic Tower 1 Tim Mei Avenue Central, Hong Kong
Page 120 ANNUAL INFORMATION FORM Portions of the Annual Information Form are disclosed in the following documents and are incorporated herein by reference: o the annual report to shareholders for the fiscal year ended October 31, 2002 ("Annual Report"); and o the Management Proxy Circular dated as at January 21, 2003 ("Circular").
PAGE REFERENCE - ----------------------------------------------------------------------------------------------- INCORPORATED BY REFERENCE FROM --------------- ANNUAL TABLE OF CONTENTS REPORT CIRCULAR - ----------------- ------------------------ --------------- CORPORATE STRUCTURE o Name and Incorporation P 122 o Subsidiaries of the Bank (Intercorporate Relationships) P 114, 120 o Real Estate N 7, P 91, P 122 o Number of Employees P 113 o Designated Countries T 12, P 63 ------------------------ --------------- GENERAL DEVELOPMENT OF THE BUSINESS o Five-Year History P 66-69, P 122 o Significant Acquisitions and Disposition N 26, P 106, N 27, P 107 o Trends P 31, N 18, P 98-99 ------------------------ --------------- DESCRIPTION OF BUSINESS o Description of Business P 20-30 - Main Products and Services P 20-30 - Competition P 16-19 - Environmental Risk P 122 - Risks Linked to Operations Abroad T 12, P 63 o Results by Segment N 25, P 105-106 o Assets Under Administration/Management T 9, P 62 o Earning Assets Abroad N 20, P 102 o Loans by Borrower Category T 10, P 62 o Personal, Business and Mortgage Loans P 78 o Impaired Loans N 5, P 90, T 13, P 64 o Interest on Impaired Loans T 14, P 65 o Provision for Credit Losses T 4, P 58 ------------------------ --------------- MAIN CONSOLIDATED FINANCIAL INFORMATION o Quarterly Results P 66-69 o Cash Dividends P 124 o Dividend Policy P 124 ------------------------ --------------- MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS P 34-53 ------------------------ --------------- MARKET FOR TRADING NATIONAL BANK P 124 SECURITIES ------------------------ --------------- DIRECTORS AND OFFICERS o Board of Directors, Members of the Board and Committees of the Board P 116 Schedule: b, c o Executive Officers P 118 o Shareholdings of Directors and Executive Officers P 123 ------------------------ --------------- ADDITIONAL INFORMATION P 123 ------------------------ --------------- FORWARD-LOOKING STATEMENTS P 31, 35 ------------------------ ---------------
- ---------- Legend P: Page N: Note T: Table Page 121 NATIONAL BANK OF CANADA 2001-2002 SUPPLEMENTARY INFORMATION ANNUAL INFORMATION FORM CORPORATE STRUCTURE NAME AND INCORPORATION National Bank of Canada (the "Bank") is a chartered bank governed by the Bank Act (Canada). The Bank's roots date back to 1859 with the founding of the Banque Nationale in Quebec City. Its current charter is the result of a series of amalgamations, notably with The Provincial Bank of Canada in 1979, with the Mercantile Bank of Canada in 1985, and with National Bank Leasing Inc., its wholly-owned subsidiary in 1992. Although no change was made to its statutes, in March 2001 the Bank amended section 4.1 of By-Law I of the General By-Law to reduce the minimum and maximum number of directors and, in March 2002, it amended section 4.6 of By-Law I to increase the aggregate remuneration which may be paid to its directors. GENERAL DEVELOPMENT OF THE BUSINESS FIVE-YEAR HISTORY FISCAL 1997-1998 The Bank diversified its revenue streams while remaining true to its primary mission as a commercial bank. One of the year's highlights was the strong performance of National Bank shares. In fact, the total return to common shareholders of the Bank (share appreciation plus dividends) exceeded that of other banks and trust companies, which were harder hit by the downturn on world financial markets. FISCAL 1998-1999 The Bank acquired First Marathon which it integrated with Levesque Beaubien Geoffrion, its securities brokerage subsidiary, to form National Bank Financial, a Canada-wide brokerage and investment bank. FISCAL 1999-2000 Committed to improving the quality of services offered to its various client groups and better positioning itself with respect to the growth in electronic commerce and services, the Bank signed a partnership agreement with a preferred supplier of information technology services. FISCAL 2000-2001 In keeping with its business model of being a super-regional bank offering such value added services as investment banking and wealth management to its individual and business clients, the Bank sold its asset-based lending operations in the United States as well as its merchant payment solutions. FISCAL 2001-2002 The Bank strengthened its position in potentially lucrative markets through major partnership agreements and acquisitions, particularly that of Altamira, a Canadian mutual fund manager and distributor. In addition, the Bank significantly improved the quality of its lending portfolio as evidenced by the level of gross private impaired loans outstanding which amounted to $479 million as at October 31, 2002 compared to $932 million as at October 31, 2001. DESCRIPTION OF BUSINESS ENVIRONMENTAL RISK In order to minimize environmental risk, several years ago the Bank notably implemented a procedure setting out its environmental responsibilities when granting credit and taking possession of assets. To date, the risks involved have not had a material impact on the bank's operations. REAL ESTATE With respect to real estate holdings, as at October 31, 2002 the Bank owned, for its operations, 114 buildings in Canada, and leased 450 premises, including six abroad. It also held two other buildings through the intermediary of its wholly-owned subsidiary, National Bank Realty Inc. With respect to the premises of its head office located in Montreal, the Bank held a long-term lease of 20 years, ending on February 9, 2020. The Bank's consolidated fixed assets at cost, less accumulated amortization, and excluding furniture, equipment and leasehold improvements, amounted to $65 million as at October 31, 2002. Information concerning the Bank's fixed assets is provided in Note 7 to the consolidated financial statements (page 91). Page 122 DIRECTORS AND OFFICERS EXECUTIVE OFFICERS The members of senior management mentioned on page 118 have held various management, executive or senior executive positions with the Bank during the past five years, with the exception of: G.F. Kym Anthony who, from 1993 to 1998, was employed by TD Securities Inc. as Chair and Chief Executive Officer and, from 1998 to 1999, was employed by First Marathon Securities Ltd. as Chief Operating Officer and Executive Vice-President; Olivier Lecat who, from 1992 to 1997, was employed by Royal Bank as Vice-President - Treasury and Investment Banking, Internal Audit Services and, from 1997 to 2001, as Vice-President - Corporate and Investment Banking, Internal Audit Services; Michel Lozeau who, from 1995 to 2001, was employed by Oracle Corporation Canada as Senior Manager - Consulting, Central Region, Regional Vice-President - Consulting, Canada and Group Vice-President - Consulting, Canada, respectively; Luc Papineau who, from 1994 to 1997, was employed by Levesque Beaubien Geoffrion Inc. as Vice-President and Branch Manager and, from 1997 to 1998, was employed by Merrill Lynch Canada Inc. as Vice-President and Branch Manager; Jean-Charles Petitclerc who, from 1994 to 2000, was employed by Bank of Nova Scotia as Senior Vice-President - Systems Operations and Technical Services; Michel Tremblay who, from 1993 to 1998, was employed by ING Canada as Senior Vice-President - Investments, and by ING Investment Management as Senior Vice-President and Managing Director; and W. David Wood who, from 1993 to 1999, was employed by Correspondent Network as President. SHAREHOLDINGS OF DIRECTORS AND EXECUTIVE OFFICERS To the best of the Bank's knowledge, the directors and executive officers of the Bank as a group beneficially own less than 1% of the outstanding common shares of the Bank. ADDITIONAL INFORMATION The Bank undertakes to provide to any person, upon request, a copy of the Annual Information Form of the Bank, together with a copy of any document incorporated therein by reference, a copy of the annual consolidated financial statements for the year ended October 31, 2002 with the accompanying auditors' report, a copy of any subsequent quarterly financial statements, a copy of the Circular in respect of its most recent Annual Meeting of Shareholders that involved the election of directors, and a copy of any other document that is incorporated by reference into a preliminary short form prospectus or a short form prospectus whenever the securities of the Bank are part of a distribution. The Circular enclosed with the Notice, dated January 21, 2003, of the Annual Meeting of Shareholders scheduled for March 12, 2003, contains additional information such as the remuneration and indebtedness of directors and executive officers, the principal holders of Bank shares, the stock options awarded and the interests of insiders in material transactions. Copies of these documents may be obtained upon request from the Corporate Secretary's Office of the Bank, 600 de La Gauchetiere West, 4th Floor, Montreal, Quebec, Canada H3B 4L2. DISTRIBUTION NOTICE The Annual Information Form must be accompanied by copies of all the documents incorporated into it by reference when it is provided to security holders or other interested parties. Notice dated November 29, 2002 Page 123 NATIONAL BANK OF CANADA 2001-2002 SUPPLEMENTARY INFORMATION INFORMATION FOR SHAREHOLDERS AND INVESTORS STOCK EXCHANGE LISTINGS The common shares of the Bank as well as the First Preferred Shares, Series 12 and 13 are listed on The Toronto Stock Exchange. The ticker symbols and newspaper abbreviations for the Bank's shares are as follows: Ticker Symbols Newspaper Abbreviations -------------- ----------------------- Common Shares NA Nat Bk or Natl Bk First Preferred Shares Series 12 NA. PR.I Nat Bk s12 or Natl Bk s12 Series 13 NA. PR.J Nat Bk s13 or Natl Bk s13 TRANSFER AGENT AND REGISTRAR NATIONAL BANK OF CANADA - HEAD OFFICE National Bank Trust Inc. National Bank Tower 1100 University 600 de La Gauchetiere West 9th Floor Montreal, Quebec H3B 4L2 Montreal, Quebec H3B 2G7 Telephone: (514) 394-5000 Telephone: (514) 871-7171 Telex: 0525181 1-800-341-1419 (Nabacan Montreal) www.nbc.ca National Bank Trust Inc. acts as Transfer Agent and Registrar in Montreal, Toronto, Winnipeg, Calgary and Vancouver. DIVIDEND REINVESTMENT AND SHARE PURCHASE PLAN Under the Dividend Reinvestment and Share Purchase Plan, holders of common shares or preferred shares of the Bank may invest in common shares of the Bank without paying a commission or administration fee. Participants in the Plan may acquire shares by reinvesting cash dividends paid on shares held by them or by making optional cash payments of a minimum of $500 per cash payment, up to $5,000 per quarter. For additional information, contact the Registrar, National Bank Trust Inc., at (514) 871-7171 or 1-800-341-1419. DIRECT DEPOSIT SERVICE Shareholders of the Bank may elect to have their dividends deposited directly into the bank account of their choice by advising National Bank Trust Inc. NUMBER OF SHAREHOLDERS As at October 31, 2002, there were 28,549 registered holders of common shares listed with the Registrar. PAYMENT OF DIVIDENDS Declared dividend payments for common shares are made on the 1st of February, May, August and November. For First Preferred Shares, Series 12 and 13, the dividend payment date is the 15th day of the above months. The dividend record dates for common shares are December 26, 2002, and March 27, June 26 and September 25, 2003. For First Preferred Shares, Series 12 and 13, they are January 10, April 11, July 11 and October 10, 2003. PUBLIC ACCOUNTABILITY STATEMENT National Bank of Canada will publish its 2002 social responsibility statement in March 2003. The document will be available on its website at www.nbc.ca. INFORMATION For any additional information, shareholders are requested to contact the Transfer Agent and Registrar, National Bank Trust Inc. Shareholders who receive more than one copy of a document, particularly of quarterly or annual reports, are requested to notify the Registrar. ANNUAL MEETING The Annual Meeting of Holders of Common Shares of the Bank will be held on Wednesday, March 12, 2003, at 9:30 a.m. EST, at the Palais des Congres de Montreal , 201 Viger West, Montreal, Quebec. Page 124 CAUTION REGARDING FORWARD-LOOKING STATEMENTS As part of its analyses and reports, National Bank of Canada from time to time makes forward-looking statements concerning the economy, market changes, the achievement of strategic objectives, certain risks and other related matters. By their very nature, such forward-looking statements involve inherent risks and uncertainties. It is therefore possible that express or implied projections contained in such statements will not materialize or will differ materially from actual future results. Such differences may be caused by factors which include, but are not limited to, changes in Canadian and/or global economic conditions (particularly fluctuations in interest rates, currencies and other financial instruments), market trends, technological changes and regulatory developments. Investors and others who base themselves on the Bank's sions should carefully consider the above factors as well as the uncertainties they represent and the risk they entail. The Bank therefore cautions readers not to place undue reliance on these forward-looking statements. This Annual Report is published by the Public Relations Department, National Bank of Canada. POUR OBTENIR UN EXEMPLAIRE DE LA VERSION FRANCAISE DU RAPPORT ANNUEL, VEUILLEZ VOUS ADRESSER A: Service des relations publiques Banque Nationale du Canada 600, rue de La Gauchetiere Ouest, 8 etage Montreal (Quebec) H3B 4L2 LEGAL DEPOSIT 4th quarter 2002 Bibliotheque nationale du Quebec PRINTED IN CANADA ISBN 2-921835-25-8 DESIGN lg2d PRODUCTION la souris masquee PHOTOGRAPHER Luc Robitaille PRINTING Transcontinental Litho Acme HEAD OFFICE National Bank Tower 600 de La Gauchetiere West Montreal, Quebec H3B 4L2 www.nbc.ca [NATIONAL BANK OF CANADA-LOGO] EX-2 4 t09344exv2.txt MANAGEMENT PROXY CIRCULAR - JAN 23, 2003 EXHIBIT 2 NOTICE OF ANNUAL MEETING OF SHAREHOLDERS MARCH 12, 2003 MANAGEMENT PROXY CIRCULAR SHAREHOLDER INFORMATION [NATIONAL BANK OF CANADA-LOGO] [NATIONAL BANK OF CANADA-LOGO] January 23, 2003 Dear Shareholder, We are pleased to invite you to attend the Annual Meeting of Shareholders of National Bank of Canada which will be held on Wednesday, March 12, 2003 at 9:30 a.m. at the Palais des Congres de Montreal, 201 Viger West, Room 710, Montreal, Quebec. At this Meeting, you will have an opportunity to take due note of certain information about the Bank and you will be called upon to vote on the business set out in the Notice of Annual Meeting. We also invite you to consult the attached Management Proxy Circular which contains important information, in particular, about the exercise of your voting rights. Sincerely, /s/ Andre Berard /s/ Real Raymond - ----------------------------- ----------------------------- Andre Berard Real Raymond Chairman of the Board President and Chief Executive Officer [NATIONAL BANK OF CANADA-LOGO] NOTICE OF ANNUAL MEETING OF SHAREHOLDERS DATE: WEDNESDAY, MARCH 12, 2003 TIME: 9:30 A.M. (EASTERN TIME) PLACE: PALAIS DES CONGRES DE MONTREAL ROOM 710 201 VIGER WEST MONTREAL, QUEBEC BUSINESS OF THE MEETING: 1. To receive the consolidated financial statements for the financial year ended October 31, 2002 and the auditors' report thereon; 2. To elect directors; 3. To appoint auditors; 4. To consider the shareholder proposals set out in Schedule A of the Management Proxy Circular (the "Circular"); and 5. To transact such other business as may properly be brought before the Meeting. Holders of common shares of the Bank of record at 5:00 p.m. (Eastern time) on January 21, 2003 are entitled to receive the Notice of Annual Meeting of Shareholders. On that date, 183,463,975 common shares of the Bank were issued and outstanding. Each holder of common shares is entitled to cast one vote per share held, unless restricted in the Bank Act. By Order of the Board of Directors, LINDA CATY Vice-President and Corporate Secretary Montreal, January 23, 2003 HOLDERS OF COMMON SHARES OF THE BANK WHO ARE UNABLE TO ATTEND THE MEETING ARE REQUESTED TO COMPLETE, DATE AND SIGN THE ENCLOSED FORM OF PROXY. PROXIES MAY BE RETURNED BY MAIL IN THE POSTAGE-PAID ENVELOPE PROVIDED TO NATIONAL BANK TRUST INC., SHARE OWNERSHIP MANAGEMENT, P.O. BOX 888, STATION B, MONTREAL, QUEBEC H3B 9Z9 OR SENT BY FAX TO (514) 871-3673. IN ORDER TO BE VALID, THE FORM OF PROXY MUST REACH NATIONAL BANK TRUST INC. NO LATER THAN 5:00 P.M. (EASTERN TIME) ON MARCH 10, 2003. SHAREHOLDERS WITH QUESTIONS REGARDING THE CIRCULAR, THE FORM OF PROXY OR THE EXERCISE OF VOTING RIGHTS MAY CALL 1-866-278-8464 FOR SERVICE IN ENGLISH OR 1-866-553-1241 FOR SERVICE IN FRENCH. [NATIONAL BANK OF CANADA-LOGO] TABLE OF CONTENTS 1 SECTION I - VOTING INFORMATION 2 SECTION II - BUSINESS OF THE MEETING 2 Financial Statements and Auditors' Report 2 Election of Directors 7 Appointment of Auditors 8 Shareholder Proposals 8 SECTION III - INFORMATION ON COMPENSATION 8 Remuneration Paid to Directors 9 Compensation Paid to Officers 9 Report of the Human Resources Committee on the Compensation of Officers of the Bank 12 Performance of the Bank in 2002 13 Performance Graph for Common Shares of the Bank 14 Total Compensation of Named Executive Officers of the Bank 15 Compensation of the Officers of National Bank Financial 16 Retirement Benefits for Named Executive Officers of the Bank 17 Termination of Employment Policy 17 Indebtedness of Directors and Executive Officers 20 SECTION IV - OTHER INFORMATION 20 Liability Insurance for Directors and Officers 20 Repurchase of Shares 20 Corporate Governance 20 Minutes 21 SCHEDULE A - SHAREHOLDER PROPOSALS 25 SCHEDULE B - RECORD OF ATTENDANCE BY DIRECTORS AND SUMMARY OF THE NUMBER OF BOARD AND COMMITTEE MEETINGS 26 SCHEDULE C - COMMITTEES OF THE BOARD 28 SCHEDULE D - CORPORATE GOVERNANCE [NATIONAL BANK OF CANADA-LOGO] MANAGEMENT PROXY CIRCULAR as at January 21, 2003 (except as otherwise indicated) SECTION I - VOTING INFORMATION SOLICITATION OF PROXIES THIS MANAGEMENT PROXY CIRCULAR (THE "CIRCULAR") IS FURNISHED IN CONNECTION WITH THE SOLICITATION BY THE MANAGEMENT OF NATIONAL BANK OF CANADA (THE "BANK") OF PROXIES TO BE USED AT THE ANNUAL MEETING OF HOLDERS OF COMMON SHARES OF THE BANK (THE "MEETING"), FOR THE PURPOSES INDICATED IN THE NOTICE OF MEETING, TO BE HELD ON WEDNESDAY, MARCH 12, 2003, AT 9:30 A.M. (EASTERN TIME), AT THE PALAIS DES CONGRES DE MONTREAL, ROOM 710, 201 VIGER WEST, MONTREAL, QUEBEC, AND AT ANY CONTINUATION THEREOF AFTER AN ADJOURNMENT. The solicitation of proxies will be done by mail, electronically, by telephone or in person. Employees, officers, directors or agents of the Bank will solicit the proxies. The Bank may also use the services of an outside agency, Georgeson Shareholder Communications Canada, to solicit proxies on its behalf. The Bank estimates that the costs which might be incurred for such solicitation would be approximately $32,000. The costs incurred in this regard will be borne by the Bank. VOTING COMMON SHARES Holders of common shares of the Bank of record at 5:00 p.m. (Eastern time) on January 21, 2003 or their duly authorized attorneys are entitled to receive the Notice of Annual Meeting and to vote at the Meeting. Persons who acquire such shares after that date must request, no later than 10 days before the Meeting, that their name be included on the list of shareholders to be entitled to vote. To do so, they must contact the transfer agent by writing to National Bank Trust Inc., Share Ownership Management, P.O. Box 888, Station B, Montreal, Quebec H3B 9Z9, or by calling one of the following numbers: 1-800-341-1419 or (514) 871-7171. On January 21, 2003, the date the registers of the Bank were closed, 183,463,975 common shares of the Bank were issued and outstanding. Each holder of common shares is entitled to cast one vote per share held. However, the Bank Act (the "Act") contains provisions which specifically prevent the exercise of voting rights attaching to the common shares of the Bank held by a government, whether Canadian, provincial or foreign, as well as any agency thereof. To the best of the knowledge of the directors and officers of the Bank, no individual or corporation beneficially owns, directly or indirectly, controls or directs common shares carrying more than 10% of the voting rights attached to the common shares of the Bank. Holders of common shares of the Bank may vote in person at the Meeting or may complete, sign and return the enclosed form of proxy. This form of proxy authorizes a proxyholder to represent and to vote on behalf of the holder of common shares at the Meeting. NON-REGISTERED SHAREHOLDERS The names of shareholders whose shares are held in the name of a broker or another intermediary do not appear on the list of shareholders of the Bank. To vote, the shareholders must therefore ask the broker or other intermediary to send them material relating to the Meeting, complete the request for voting instructions sent by the broker or other intermediary and, if they wish to vote in person, insert their name as the proxyholder. APPOINTMENT OF PROXYHOLDERS THE PROXYHOLDERS DESIGNATED IN THE ENCLOSED FORM OF PROXY ARE DIRECTORS OF THE BANK. IF A SHAREHOLDER WISHES TO APPOINT AS A PROXYHOLDER A PERSON OTHER THAN ONE OF THOSE DESIGNATED IN THE FORM OF PROXY, THE SHAREHOLDER MAY DO SO BY STRIKING OUT THE NAMES APPEARING THEREON AND INSERTING THE NAME OF SUCH PERSON IN THE BLANK SPACE PROVIDED. IF THE SHAREHOLDER IS A LEGAL ENTITY, AN ESTATE OR A TRUST, THE FORM OF PROXY MUST BE SIGNED BY A DULY AUTHORIZED OFFICER OR ATTORNEY. A PROXYHOLDER IS NOT REQUIRED TO BE A SHAREHOLDER OF THE BANK. IN ORDER TO BE VALID, THE FORM OF PROXY MUST BE RETURNED BY MAIL, IN THE POSTAGE-PAID ENVELOPE PROVIDED, TO NATIONAL BANK TRUST INC., SHARE OWNERSHIP MANAGEMENT, P.O. BOX 888, STATION B, MONTREAL, QUEBEC H3B 9Z9, OR BY FAX TO (514) 871-3673, NO LATER THAN 5:00 P.M. (EASTERN TIME) ON MARCH 10, 2003. NATIONAL BANK OF CANADA SECTION I - VOTING INFORMATION (CONT.) VOTING BY PROXIES Common shares represented by a proxy are to be voted by the proxyholder designated in the enclosed form of proxy in accordance with the directions of the shareholder. IF NO INSTRUCTIONS ARE GIVEN, THE VOTING RIGHTS ATTACHED TO THE COMMON SHARES WILL BE EXERCISED BY THE PROXYHOLDER WHO IS A DIRECTOR OF THE BANK BY VOTING AS FOLLOWS: o FOR THE ELECTION OF ALL NOMINEES PROPOSED AS DIRECTOR BY THE MANAGEMENT OF THE BANK; o FOR THE APPOINTMENT OF AUDITORS; o AGAINST THE FOUR SHAREHOLDER PROPOSALS SET OUT IN SCHEDULE A OF THE CIRCULAR. IF NO INSTRUCTIONS ARE GIVEN, ANY OTHER PROXYHOLDER WILL HAVE DISCRETIONARY AUTHORITY WHEN EXERCISING THE VOTING RIGHTS ATTACHED TO THE COMMON SHARES CONCERNING THESE MATTERS. The proxy confers, to the proxyholder designated therein, discretionary authority with respect to any proposed changes to the matters set out therein and any other business which may properly come before the Meeting. Any proxy previously given is thereby revoked. As at the date hereof, management of the Bank knows of no amendments or other matters which may properly come before the Meeting. REVOCATION OF PROXIES Shareholders may revoke a proxy by delivering a written notice to that effect signed by them or by their duly authorized attorneys to: o the Head Office of the Bank, c/o Corporate Secretary's Office, National Bank of Canada, 600 de La Gauchetiere West, 4th Floor, Montreal, Quebec H3B 4L2, no later than the last business day preceding the day of the Meeting or any continuation thereof after an adjournment; or o the secretary of the Meeting on the day of the Meeting or any continuation thereof after an adjournment. CONFIDENTIALITY OF VOTES In order to protect the confidential nature of voting by proxy, the votes exercised by proxy are received and compiled for the Meeting by National Bank Trust Inc., the transfer agent and registrar of the Bank. National Bank Trust Inc. submits a copy of the form of proxy to the Bank only when a shareholder clearly wishes to express a personal opinion to management or when it is required for legal reasons. SECTION II - BUSINESS OF THE MEETING FINANCIAL STATEMENTS AND AUDITORS'REPORT The consolidated financial statements of the Bank for the financial year ended October 31, 2002 and the auditors' report on these financial statements are included in the Annual Report of the Bank, which has been mailed to shareholders with this Circular. ELECTION OF DIRECTORS Management of the Bank recommends voting FOR the election of all the nominees to the Board listed on the following pages. Page 2 NOMINEES FOR ELECTION AS DIRECTORS [PICTURE] DIRECTOR SINCE: July 1985 COMMON SHAREHOLDINGS:(1) 116,751 ANDRE BERARD ILE-DES-SOEURS, VERDUN, QUEBEC Chairman of the Board of National Bank of Canada since 1990. Over the past 40 years, Mr. Berard has held various positions in a number of key Bank sectors, including that of President and Chief Executive Officer from July 1989 to March 2002. Recognized for his leadership qualities, he is also very involved in many fundraising campaigns, primarily in the health care sector. Mr. Berard has an in-depth understanding of all the sectors of activity. With his vast business experience, he has a clear vision of the economic, social and political environment of the domestic and international markets in which the Bank operates. [PICTURE] DIRECTOR SINCE: March 1998 COMMON SHAREHOLDINGS: 105,252 PIERRE BOURGIE (ARM) (G) OUTREMONT, QUEBEC President and Chief Executive Officer of Societe Financiere Bourgie Inc., a diversified investment company, and President of Partenaires de Montreal, a merchant bank specialized in business financing. Mr. Bourgie is actively involved in a number of economic, community and cultural organizations, such as the Musee d'art contemporain de Montreal, of which he is Chairman of the Board. As a business leader and a director of several companies, Mr. Bourgie brings to the Board his business management skills as well as a keen understanding of corporate governance and international business management. [PICTURE] DIRECTOR SINCE: August 1999 COMMON SHAREHOLDINGS: 873,068 LAWRENCE S. BLOOMBERG TORONTO, ONTARIO Advisor to National Bank Financial Inc., where he served as Co-Chairman of the Board and Co-Chief Executive Officer from October 1999 to October 2000. Prior to that, Mr. Bloomberg was Chairman of the Board, President and Chief Executive Officer of First Marathon Inc., a company he founded in 1979 and which was integrated with National Bank Financial Inc. in 1999. Mr. Bloomberg has extensive expertise in the financial sector, both nationally and internationally. He contributed to the growth of several financial companies before starting his own business and becoming one of the Bank's experts in financial matters. As a result of his involvement in several business organizations, he brings valuable insight and a unique perspective to the Board concerning developments in the financial sector in Canada as well as abroad. [PICTURE] DIRECTOR SINCE: February 1994 COMMON SHAREHOLDINGS: 3,468 DEFERRED STOCK UNITS: 5,817 GERARD COULOMBE (HR) SAINTE-MARTHE, QUEBEC Senior Partner of Desjardins Ducharme Stein Monast, General Partnership, where he practises business law and was appointed Chairman of the Board in 2000. Mr. Coulombe is also Chairman Emeritus of Lex Mundi Ltd., a global association of more than 150 independent law firms. He was formerly with Department of Finance Canada where he was responsible for negotiating international tax treaties. Mr. Coulombe sits on the boards of FMI Acquisition Inc., National Bank Life Insurance Company and National Bank Group Inc. Mr. Coulombe has vast expertise in business management and corporate law, especially as regards financial institutions and crown corporations, as well as the creation of financial and industrial consortiums. He is also an authority on corporate governance matters. - ---------- (1) o Common shareholdings: Include common shares beneficially owned, controlled or directed. o Deferred stock units: For more information regarding deferred stock units ("DSUs"), please refer to the "Forms of Remuneration of Directors of the Bank" section in the Circular. o (ARM): Member of the Audit and Risk Management Committee. o (G): Member of the Conduct Review and Corporate Governance Committee. o (HR): Member of the Human Resources Committee. Page 3 NATIONAL BANK OF CANADA SECTION II - BUSINESS OF THE MEETING (CONT.) NOMINEES FOR ELECTION AS DIRECTORS DIRECTOR SINCE: January 1993 COMMON SHAREHOLDINGS: 6,234 FRANCOIS J. COUTU (HR) OUTREMONT, QUEBEC Since September 2002, President and Chief Executive Officer of The Jean Coutu Group (PJC) Inc., a franchisor of a chain of pharmacies, which distributes pharmaceutical and other products. From 1987 to 1990, Mr. Coutu held the positions of Vice-President -- Operations and Marketing and Executive Vice-President -- Pharmacies and Public Affairs in the Group. In 1990, he was appointed President and Chief Operating Officer of the Group. A pharmacist by profession, Mr. Coutu owns pharmacies in the Jean Coutu chain. He sits on the board of directors of several organizations in Canada and the United States. Mr. Coutu is a member of the Board of Directors of National Bank Life Insurance Company. With his experience managing a family business that has become an international group and leader in its field, Mr. Coutu contributes his in-depth knowledge of key issues relating to retail trade and consumer relations. DIRECTOR SINCE: July 1988 COMMON SHAREHOLDINGS: 3,000 DEFERRED STOCK UNITS: 1,869 SHIRLEY A. DAWE (G) (HR) TORONTO, ONTARIO President of Shirley Dawe Associates Inc., a Toronto-based consulting company specializing in retail and consumer brand management and marketing, since 1986. From 1969 to 1985, Ms. Dawe held progressively senior executive positions with the Hudson's Bay Company. Her extensive management and consumer marketing experience brought Ms. Dawe to the boards of public and private sector companies in Canada and the United States. Her expertise in the retail sector led to her appointment to industry-specific public task forces as well as to academic and not-for-profit boards. She co-authored a definitive study of international e-retailing for a Canadian university. Ms. Dawe brings to the Board a deep understanding of consumer trends and winning business strategies in the North American retail industry. DIRECTOR SINCE: August 2001 COMMON SHAREHOLDINGS: 4,307 BERNARD CYR (ARM) MONCTON, NEW BRUNSWICK President of Cyr Holdings Inc., a holding company in the hotel, commercial real estate, restaurant and entertainment sectors, since 1986, and President of Dooly's Inc., a franchisor in the entertainment industry, since 1993. Mr. Cyr serves on the boards of several companies and currently chairs the development committee for the Universite de Moncton, his alma mater. He was a member of the Bank's business development committee in Atlantic Canada from 1996 to 2001. In addition to his entrepreneurial vision, Mr. Cyr brings to the Board varied experience in the management of small and medium-sized enterprises as well as excellent knowledge of regional markets. DIRECTOR SINCE: March 1998 COMMON SHAREHOLDINGS: 19,412 NICOLE DIAMOND-GELINAS (ARM) SAINT-BARNABE-NORD, QUEBEC Vice-President and General Manager of Aspasie Inc., a manufacturer of colour charts, since 1976, and President of Plastifill Inc., a company specialized in plastic extrusion and injection. Ms. Diamond-Gelinas also heads a company specializing in the sale, leasing and servicing of motor vehicles. Actively involved in her region's business community, she is a member of the Chambre de commerce de Trois-Rivieres and was a member of the Mauricie business development committee of the Bank from 1992 to 1998. Ms. Diamond-Gelinas is a member of the Board of Directors of National Bank Life Insurance Company. Ms. Diamond-Gelinas has first-hand experience of the realities and challenges facing small and medium-sized manufacturers as well as a solid grasp of the economic and social dynamics of regional markets. Page 4 [PICTURE] DIRECTOR SINCE: November 1991 COMMON SHAREHOLDINGS: 4,564 DEFERRED STOCK UNITS: 5,574 JEAN DOUVILLE (ARM) (G) ILE-DES-SOEURS, VERDUN, QUEBEC Chairman of the Board of UAP Inc., a firm specialized in distributing and reconditioning replacement parts and accessories for cars, trucks and industrial machinery. Mr. Douville was called to the Quebec Bar in 1968 and began working for UAP Inc. in 1971. He subsequently became President of the company in 1981, was appointed Chief Executive Officer in 1982 and then Chairman of the Board in 1994. He also sits on the board of directors of various Canadian and U.S. companies. Mr. Douville is a member of the Board of Directors of National Bank Life Insurance Company. Mr. Douville brings to the Board in-depth knowledge of a key industrial sector in North America as well as experience managing a large corporation. [PICTURE] DIRECTOR SINCE: October 2001 COMMON SHAREHOLDINGS: 23,000 DEFERRED STOCK UNITS: 1,253 JEAN GAULIN (HR) SAN ANTONIO, TEXAS, UNITED STATES Corporate Director, Mr. Gaulin was Chairman of Ultramar Diamond Shamrock Corporation from January 1, 2000 to January 1, 2002. He was also President and Chief Executive Officer of the Corporation from January 1, 1999 to January 1, 2002. In 1996, following the merger of Ultramar Corporation and Diamond Shamrock Inc., he was named Vice-Chairman, President and Chief Operating Officer of Ultramar Diamond Shamrock. Prior to the merger, he was Chairman and Chief Executive Officer of Ultramar Corporation. He serves on the board of directors of various companies and is involved with charitable organizations. Mr. Gaulin brings to the Board expertise in the oil industry and solid experience in managing a large North American corporation. [PICTURE] DIRECTOR SINCE: January 1982 COMMON SHAREHOLDINGS: 88,418 DEFERRED STOCK UNITS: 3,121 MARCEL DUTIL (HR) OUTREMONT, QUEBEC Chairman of the Board, President and Chief Executive Officer of The Canam Manac Group Inc. Mr. Dutil is the founder of this industrial company which mainly designs and manufactures frames, joists, steel decks, semi-trailers and forestry equipment. He also sits on the board of directors of several Canadian and foreign firms. In building his business from the ground up, Mr. Dutil has acquired solid experience in the areas of management and market development, especially international markets. [PICTURE] DIRECTOR SINCE: February 1994 COMMON SHAREHOLDINGS: 10,000 DEFERRED STOCK UNITS: 9,259 PAUL GOBEIL (ARM) (G) ILE-DES-SOEURS, VERDUN, QUEBEC Vice-Chairman of the Board of Metro Inc., Chairman of the Board of Export Development Canada, and Co-Chairman of the Board of EADS Canada Inc. Mr. Gobeil has been a Member of the Ordre des comptables agrees du Quebec since 1965 and a Fellow since 1986. From 1974 to 1985, he held a number of executive positions at Provigo Inc. Elected as the MNA for Verdun in 1985, he was, until 1989, Minister Responsible for Administration, President of the Treasury Board and then Minister of International Affairs in the Quebec government. Mr. Gobeil is also involved in a number of cultural, charitable, educational and professional organizations. He is currently Chairman of the Board of the Universite de Sherbrooke. Mr. Gobeil is a member of the Board of Directors of National Bank Financial & Co. Inc. Mr. Gobeil is an invaluable asset to the Board in terms of corporate governance, financial and accounting management, and corporate strategy. Page 5 NATIONAL BANK OF CANADA SECTION II - BUSINESS OF THE MEETING (CONT.) NOMINEES FOR ELECTION AS DIRECTORS [PICTURE] DIRECTOR SINCE: July 1989 COMMON SHAREHOLDINGS: 10,831 SUZANNE LECLAIR (G) ILE-DES-SOEURS, VERDUN, QUEBEC President, Chief Executive Officer and Chairwoman of the Board of Directors of Transit Truck Bodies Inc., a firm specialized in the construction of truck bodies. Ms. Leclair has won a number of awards for her entrepreneurial skills. She is also actively involved in a number of committees for economic, cultural and charitable organizations. Ms. Leclair is a member of the Board of Directors of National Bank Trust Inc. Ms. Leclair is the founder of an SME that has grown into a large corporation which has received numerous business awards for its quality of management. She brings to the Board her vision as an entrepreneur in the manufacturing sector. [PICTURE] DIRECTOR SINCE: November 1999 COMMON SHAREHOLDINGS: 28,413 DEFERRED STOCK UNITS FOR OFFICERS:(1) 14,540 REAL RAYMOND ILE-DES-SOEURS, VERDUN, QUEBEC President and Chief Executive Officer of National Bank of Canada since March 2002. Mr. Raymond has held a number of positions since joining the Bank in 1970, including that of Senior Vice-President -- Treasury and Financial Markets from 1992 to 1997. In 1997, he went to Levesque Beaubien Geoffrion Inc., now National Bank Financial Inc., where he served as Senior Executive Vice-President -- Corporate Financing while maintaining his responsibilities as Senior Vice-President at the Bank. In November 1999, he was appointed President -- Personal and Commercial Bank and in July 2001, President and Chief Operating Officer of the Bank. Mr. Raymond is a member of the Board of Directors of National Bank Life Insurance Company, National Bank Group Inc. and National Bank Trust Inc. He is involved in many professional and community organizations. For instance, he is a member of the Board of Directors of the Fondation de l'Universite du Quebec a Montreal and Vice-Chair of the Conference Board of Canada. Mr. Raymond has an MBA from the Universite du Quebec Montreal. Mr. Raymond brings to the Board his varied expertise in the field of banking as well as an in-depth understanding of business operations and strategies in several sectors of activity. [PICTURE] DIRECTOR SINCE: March 2000 COMMON SHAREHOLDINGS: 2,000 DEFERRED STOCK UNITS: 3,697 E.A. (DEE) PARKINSON-MARCOUX (HR) CANMORE, ALBERTA Since November 2001, Consultant with Southern Pacific Petroleum, an oil-producing company. An engineer by training, Ms. Parkinson-Marcoux previous positions include President and Chief Executive Officer of Ensyn Energy from 1999 to 2001, President of Gulf Heavy Oil from 1997 to 1998, President of CS Resources from 1996 to 1997 and Executive Vice-President of Suncor Oil Sands Group from 1991 to 1996. She is also a director of companies in the energy, natural resources and engineering sectors. Ms. Parkinson-Marcoux brings to the Board her solid expertise in the energy, oil and natural resource sectors as well as knowledge of Western Canadian markets. [PICTURE] DIRECTOR SINCE: April 2001 COMMON SHAREHOLDINGS: 2,000 DEFERRED STOCK UNITS: 1,846 ROSEANN RUNTE (G) NORFOLK, VIRGINIA, UNITED STATES President of Old Dominion University in Norfolk, Virginia since July 2001. Ms. Runte also served as President of Victoria University in Toronto from 1994 to 2001. She has a Ph.D. in French from the University of Kansas. She is the author of many books and articles, especially on education and economic and cultural development. Ms. Runte is Assessor Member of the Council of the Royal College of Physicians and Surgeons of Canada; she is a member of the executive committee of the Club of Rome and was recently appointed to the board of the Virginia Advanced Ship Building Information Carrier Design Center. In the past, she sat on various boards of directors in the literary, cultural and economic development sectors, and served as the President of the Canadian Commission for UNESCO from 1992 to 1996. She also served on the board of Expo 2000 in Germany. Ms. Runte draws on her management experience in the Canadian university milieu and her involvement with boards in Canada as well as abroad to bring to the Board her vision of the issues facing markets in a globalized business environment. (1) For more information, please refer to the "Total Compensation of Named Executive Officers of the Bank" section in the Circular. Page 6 [Picture] DIRECTOR SINCE: September 1998 COMMON SHAREHOLDINGS: 18,377 DEFERRED STOCK UNITS FOR OFFICERS: 116,678 JEAN TURMEL OUTREMONT, QUEBEC President -- Financial Markets, Treasury and Investment Bank of National Bank of Canada. After working at various securities companies, Mr. Turmel joined the Bank in 1981 as Vice-President -- Treasury and Foreign Exchange. Since that time, he has held many senior management positions within the Bank. During the past few years, he has been involved in various organizations in the finance and securities sectors. Mr. Turmel is a member of the Board of Directors of National Bank Financial & Co. Inc., National Bank Financial Inc., National Bank Financial Ltd., Natcan Investment Management Inc., National Bank Group Inc. and FMI Acquisition Inc. Mr. Turmel has exceptional expertise in the Bank's key sectors of activity, especially securities, brokerage and treasury. Having held many different positions at the Bank over the years, he has a thorough grasp of the Bank's decision-making processes and strategies in specialized fields. [Picture] DIRECTOR SINCE: March 2001 COMMON SHAREHOLDINGS: 8,094 DENNIS WOOD (G) MAGOG, QUEBEC Chairman, President and Chief Executive Officer of Dennis Wood Holdings Inc. Mr. Wood is a co-founder of C-MAC Industries Inc. For the past 30 years, through his holding company, Mr. Wood has owned and managed numerous businesses including, most notably, C-MAC Industries Inc. and Berkeley Wallcoverings Inc. (both Canadian public companies). Since the merger between C-MAC Industries Inc. and Solectron in December 2001, Mr. Wood has served as a board member and committee member for Solectron. This is in addition to the directorships he holds in various Canadian companies, including National Bank Trust Inc. Mr. Wood continues to be very active in cultural and not-for-profit organizations in Montreal and the Eastern Townships. Mr. Wood brings to the Board solid expertise in the high-tech sector and extensive experience in developing international markets. Each director elected at the Meeting will hold office until the close of the subsequent annual meeting of the Bank. The number of meetings held by the Board and its committees as well as the attendance of directors at these meetings are presented in the form of tables in Schedule B of the Circular. Bernard Lemaire and Robert Parizeau will not be standing for re-election as they have reached the retirement age specified by the Board. APPOINTMENT OF AUDITORS Management of the Bank recommends voting FOR the appointment of the accounting firms Samson Belair/Deloitte & Touche, General Partnership, and PricewaterhouseCoopers LLP as auditors of the Bank for the financial year beginning November 1, 2002 and ending October 31, 2003. In the past five financial years, Samson Belair/Deloitte & Touche, General Partnership, acted as auditor of the Bank in 1997, 1998, 2000, 2001 and 2002, and PricewaterhouseCoopers LLP acted as auditor of the Bank in 1997, 1999, 2000 and 2002. In order to be adopted, the proposal regarding the appointment of auditors must be approved by a majority of votes cast by the holders of common shares present or represented by proxy and entitled to vote at the Meeting. REMUNERATION OF AUDITORS During the financial year ended October 31, 2002, the fees paid by the Bank to Samson Belair/Deloitte & Touche, General Partnership, and PricewaterhouseCoopers LLP for the audit services rendered to the Bank and its subsidiaries amounted to $2,141,300 and $1,438,307, respectively. The fees paid to these same accounting firms for services relating to taxation amounted to $2,653,900 and $88,615, respectively, while those relating to other services, such as information technology, amounted to $438,065 and $383,554, respectively. Page 7 NATIONAL BANK OF CANADA SECTION II - BUSINESS OF THE MEETING (CONT.) SHAREHOLDER PROPOSALS Four proposals made by a shareholder were received by the Bank within the time limits prescribed in the Act. A translation of the complete text of the proposals is provided in Schedule A of the Circular. Management of the Bank recommends voting AGAINST proposal No. 1 for the reasons set out after the proposal. Management of the Bank recommends voting AGAINST proposal No. 2 for the reasons set out after the proposal. Management of the Bank recommends voting AGAINST proposal No. 3 for the reasons set out after the proposal. Management of the Bank recommends voting AGAINST proposal No. 4 for the reasons set out after the proposal. In order to be adopted, these proposals must be approved by a majority of the votes cast by the holders of common shares present or represented by proxy and entitled to vote at the Meeting. Any proposal which a shareholder would like to have included at the annual meeting of shareholders to be held in 2004 must be received no later than 5:00 p.m. (Eastern time) on December 11, 2003. SECTION III - INFORMATION ON COMPENSATION REMUNERATION PAID TO DIRECTORS The following table sets out the annual retainer and meeting fees which the directors were entitled to receive for sitting on the boards of directors and committees of the Bank and its subsidiaries designated hereinbelow for the financial year ended October 31, 2002.
Annual Retainer Additional Annual Retainer ($) Meeting ($) ---------------------------------------------------------------------------------- Fees - ---------------------------- Committee Members Committee Chairs ($) The Bank and --------------------------------------- ---------------------------------------- ------- Designated Commit- Subsidiaries (BD) (E) (G) (HR) (A) (ARM) (E) (G) (HR) (A) (ARM) (BD) tees ------ ----- ----- ----- ----- ----- ----- ------ ------ ----- ------ ----- ------- National Bank of Canada 17,000(1) N/A 3,500 3,500 N/A 3,500 N/A 10,000 10,000 N/A 10,000 1,200 1,200 FMI Acquisition Inc. 500 N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A National Bank Life Insurance Company 6,000 1,800 N/A N/A 1,800 N/A 3,000 N/A N/A 3,000 N/A 1,000 1,000 National Bank Financial & Co. Inc. 10,000 1,000(2) N/A(3) 1,000(3) 1,000 N/A 4,000(2) N/A(3) 4,000(3) 4,000 N/A 1,000 1,000 National Bank Trust Inc. 6,000 1,000 N/A N/A 1,000 N/A 1,000 N/A N/A 1,000 N/A 500 500
(BD): Board of Directors (E): Ethics Committee (A): Audit Committee (G): Conduct Review and Corporate Governance Committee (ARM): Audit and Risk Management Committee (HR): Human Resources Committee
- ---------- (1) The Chairman of the Board of the Bank receives an additional annual compensation of $300,000. (2) At National Bank Financial & Co. Inc., this committee is known as the Compliance Committee. (3) At National Bank Financial & Co. Inc., this committee is known as the Human Resources and Corporate Governance Committee. OTHER REMUNERATION PAID TO A DIRECTOR Mr. Berard ceased to be Chief Executive Officer on March 13, 2002. For more information regarding the remuneration paid to him during the last financial year, please refer to the "Compensation of the President and Chief Executive Officer" section in the Circular. During the past financial year, only one director received from one of the Bank's subsidiaries remuneration other than that received in his capacity as director. In accordance with a service contract signed in February 2001 with National Bank Financial Inc. and renewed in October 2002, Lawrence S. Bloomberg serves as Advisor to National Bank Financial and, as such, receives an annual retainer, commissions, an allowance for business development and reimbursement for various administrative expenses incurred when carrying out his functions. For the financial year ended October 31, 2002, Mr. Bloomberg received a total amount of $3,860,939 for services rendered under the terms of this contract. Page 8 The directors of the Bank who are also full-time officers of the Bank or one of its subsidiaries do not receive any remuneration in their capacity as directors of the Bank or any of its subsidiaries. However, the Bank and its subsidiaries reimburse these directors for the expenses they incur to attend meetings. FORMS OF REMUNERATION OF DIRECTORS OF THE BANK All eligible directors may receive their remuneration for serving on the boards of directors and, if applicable, any committees of the Bank or its subsidiaries, in the form of common shares of the Bank, deferred stock units ("DSUs"), cash or a combination thereof. A DSU is a right which has a value equal to the market value of a common share of the Bank on the date it is credited and is credited every quarter to an account in the director's name. It is paid out, in the form he or she chooses, as cash, common shares or a combination thereof, at the market value of a common share of the Bank on the date the director leaves the Board. Additional DSUs are credited to that account when dividends are paid on common shares of the Bank. They are calculated based on the amount of the dividend paid. The directors, with the exception of those who are also officers of the Bank, do not participate in any stock option plan. COMPENSATION PAID TO OFFICERS REPORT OF THE HUMAN RESOURCES COMMITTEE ON THE COMPENSATION OF OFFICERS OF THE BANK Compensation is one of the ways favoured by the Bank to attract, motivate and retain competent officers (as defined hereinbelow) who focus on improving the performance of the Bank and enhancing shareholder value. To that end, the Board mandates the Human Resources Committee (the "Committee") to review general compensation policies and to make recommendations with regard to compensation for the officers of the Bank. These recommendations are supported by the opinion of external compensation specialists. In addition to its mandated functions, the Committee this year modified the components of the compensation of the President and Chief Executive Officer. It also modified the program of loans to officers and defined the Share Ownership Guidelines for all the officers of the Bank. Lastly, it reviewed the Stock Option Plan. COMPOSITION OF THE HUMAN RESOURCES COMMITTEE The Committee is comprised of seven directors who are neither officers nor former officers of the Bank. The Committee is chaired by Robert Parizeau, with the other members being Gerard Coulombe, Francois J. Coutu, Shirley A. Dawe, Marcel Dutil, Jean Gaulin and E.A. (Dee) Parkinson-Marcoux. ROLE OF THE HUMAN RESOURCES COMMITTEE The Committee submits its recommendations to the Board which makes the final decisions with regard to changes to the compensation policy and programs and the total compensation for the Chairman, the Presidents, the Senior Vice-Presidents and the Vice-Presidents (the "Officers"). The Committee strives to set compensation at a level comparable to that offered by the Bank's comparison market, which comprises a group of Canadian financial institutions and selected Canadian companies, while taking into account Bank-specific factors. The recommendations of the Committee are based on the following fundamental principles of the compensation policy: o The annual bonus program supports the Bank's strategic objectives and offers fully competitive total cash compensation, which may exceed market practices if justified by financial results and business development; o The long-term variable compensation program aligns Officers' interests with the long-term interests of the Bank's shareholders and those of the Bank's various other partners; o The proportion of variable compensation in relation to base salary increases in line with the level of responsibility; o Employee benefits and the pension plan are comparable, on the whole, to those offered by the comparison market. Page 9 NATIONAL BANK OF CANADA SECTION III - INFORMATION ON COMPENSATION (CONT.) COMPONENTS OF THE COMPENSATION OF OFFICERS OF THE BANK The compensation of Officers consists of a cash component (namely, base salary and an annual bonus), long-term variable compensation and a benefits package. The target value of each of the components varies in line with the level of responsibility. Of this compensation, base salary may represent 24% to 58%, the annual bonus, 18% to 24% and long-term variable compensation, 24% to 52%. Base Salary The Committee reviews the base salary of each Officer annually taking into account his or her level of responsibility, experience and individual performance. To ensure that the base salaries of Officers are competitive, the Committee uses the median salaries of the Bank's comparison market, adjusted when necessary, to take into consideration characteristics of the Bank. Annual Bonus Program The Bank offers an annual bonus program to all its employees. Under the terms of this program, the total bonus envelope to be shared is calculated based, on the one hand, on how well the Bank's overall financial results and those of its business segments are met versus the objectives set at the beginning of the year and, on the other hand, on the Bank's financial performance compared to that of the five major Canadian banks. The program also considers whether other objectives relating to management quality and customer satisfaction have been achieved. The annual bonus varies depending on the percentage of results achieved and position held. The more influence an employee has on the Bank's ability to reach its objectives, the greater the amount of the compensation. The actual bonus paid to each Officer, including the President and Chief Executive Officer, is thus based on the Bank's results and is established by taking into account the Officer's individual contribution to his or her financial, client service and management results, measured using criteria applicable to both management practices and employee engagement. It is also established taking into account the Officer's individual performance. Certain Officers of Financial Markets, Treasury and Investment Banking participate in an annual bonus program based on the profitability of their respective groups. One third of the bonus amount is deferred. The deferred portion for Jean Turmel is converted into deferred stock units for Officers ("DSUs for Officers") with a value equal to the closing market price of the common shares of the Bank the day preceding the award of the annual bonus. Additional DSUs for Officers are credited to his account and are calculated based on the dividends paid. DSUs for Officers may only be cashed when the Officer retires or leaves the Bank. In order to maintain total compensation at a competitive level and to acknowledge Real Raymond's specific contribution to implementing the Bank's strategy, the Committee decided to include a "medium-term" variable compensation component in the President's total compensation, which was paid out to him this year in DSUs for Officers. Long-Term Variable Compensation Program Stock Option Plan The purpose of the Stock Option Plan is to encourage Officers and other designated persons of the Bank or its subsidiaries to contribute to the growth of shareholders' investments by giving them the opportunity to benefit from the appreciation in the value of the common shares of the Bank. Each year, when awarding additional options, the Committee reviews the number and the expiry dates of options previously awarded. After setting the terms and conditions, the Committee awards options, on an annual basis, to Officers and other designated persons of the Bank and its subsidiaries. Options may be exercised in whole or in part before the termination date determined by the Committee at the time they are awarded, without exceeding the legal limit of 10 years. They expire on the termination date or, in the event of certain circumstances provided for in the Stock Option Plan, expire in a specific timeframe. No options may be exercised in the first year after they are awarded. The Stock Option Plan was revised by the Board on October 24, 2002. At that time, the Bank decided to eliminate the feature of exercising options without purchasing shares. The Bank received approval from the regulatory authorities and participants were informed accordingly. The Bank undertook to assume the brokerage fees related to the exercising of stock options awarded prior to that date by Plan participants who chose to receive a cash amount representing the gain on the shares related to the options awarded, had the Stock Option Plan not been modified. In order to further align the interests of Officers who sit on the Bank's Executive Committee with those of shareholders, the Board added a new condition to the option awards, which will be imposed as of the 2002-2003 financial year. Thus, each Officer on the Bank's Executive Committee will be required to retain the shares received further to exercising an option, after tax considerations, for a minimum of one year. Page 10 As at October 31, 2002, 5,692,822 options were outstanding with strike prices ranging between $11.00 and $28.01 and maturities between December 2005 and December 2011. During the past financial year, 1,882,840 options were awarded and 608,818 options were exercised at strike prices ranging from $11.00 to $25.20. As at October 31, 2002, 2,466,587 options could be exercised at prices ranging between $11.00 and $25.20. The maximum number of common shares that may be issued under the Stock Option Plan is 18,930,437. The maximum number of common shares reserved for a participant may not exceed 5% of the total number of common shares issued and outstanding. Stock Appreciation Rights Plan The Stock Appreciation Rights Plan (the "SAR Plan") has the same objectives as the Stock Option Plan. The Committee awards stock appreciation rights ("SARs") to Officers and other designated persons of the Bank and its subsidiaries. For their part, participants entitled to SARs may receive, on the exercise date of the SAR, a cash amount equal to the difference between the market price of a common share on the exercise date of the SAR and the exercise price of the SAR. No SARs were awarded to Canadian residents during the financial year ended October 31, 2002. The SAR Plan was revised by the Board on December 14, 2000. Employee Share Ownership Plan Under the Employee Share Ownership Plan in effect at the Bank, employees who respect the eligibility criteria may contribute up to 8% of their gross salary per year by way of payroll deductions. The Bank's contribution consists in paying an amount equal to 25% of the employee's contribution up to $1,500 per year. After one year of continuous participation, the Bank's contributions are vested in the employee. Moreover, all subsequent contributions are vested as soon as they are made. Share Ownership Guidelines The Board established guidelines for all Officers which require minimum holdings of Bank common shares, including DSUs for Officers and vested stock options, proportionate to each Officer's compensation and position. The value of the minimum stock holdings is a multiple of the previous three years' average base salary and annual bonus received by a given Officer. The guidelines are as follows: i) 2.5 for the President and Chief Executive Officer ii) 1.0 for the other Executive Committee members iii) 0.5 for the senior vice-presidents and vice-presidents The Officers will be given a reasonable period of time to meet these requirements. COMPENSATION OF THE PRESIDENT AND CHIEF EXECUTIVE OFFICER The Committee assesses the overall performance of the President and Chief Executive Officer on the basis of his contribution to: o the financial results obtained by the Bank compared, on the one hand, to the objectives set at the beginning of the financial year and, on the other, to the results obtained by the five major banks; o the development of competitive advantages enabling the Bank to consolidate its strategic positioning within the financial industry; o the continued development of customer service quality; o the risk profile and credit quality of the Bank; and o the relationships with shareholders, customers, employees, governments and communities. As President and Chief Executive Officer, Mr. Raymond's annual base salary was set at $750,000 and is situated at the beginning of the median of the Bank's reference market, adjusted to take into account the specific characteristics of the Bank. Under the annual bonus program, Mr. Raymond received a total bonus of $800,000 as President and Chief Operating Officer and, since March 13, 2002, as President and Chief Executive Officer. The bonus was awarded to underscore the excellent work carried out by Mr. Raymond during his first year of heading the Bank. Thus, in addition to the satisfactory results achieved during a difficult year in the financial industry, the Committee took into account the exceptional growth in the price of the Bank's stock, which enabled shareholders to obtain one of the best returns in the banking industry. Page 11 NATIONAL BANK OF CANADA SECTION III - INFORMATION ON COMPENSATION (CONT.) Moreover, the Committee took into account customers' increased satisfaction with the Bank, the result, among other things, of the extended business hours at a number of branches and the improved competence of front-line personnel. As well, the Bank's efficiency ratio is right on target with the three-year plan. In addition, the Committee decided to include a medium-term bonus in Mr. Raymond's compensation in the form of DSUs for Officers representing $450,000 or 14,540 DSUs for Officers at a price of $30.95 per share. This bonus is intended to recognize Mr. Raymond's contribution in carrying out the Bank's strategic plan. For the 2001-2002 financial year, Mr. Raymond actively pursued the strategy of re-centering the Bank's activities in its priority markets, including expanding its wealth management operations, one of the key areas of future growth for the Bank. The acquisitions of Altamira and U.S. investment bank Putnam Lovell, as well as a partnership agreement with three Power Financial Corporation companies, substantially increased the Bank's market share, especially outside Quebec. The Committee also took into account the significant improvement in the quality of the credit portfolio, despite a difficult market. In fact, gross impaired loans were reduced by almost half, positioning the Bank as a leader in the banking industry in terms of the ratio of gross impaired loans to tangible capital and allowances. Lastly, the Bank maintained a very high capitalization ratio, ranking second among the Canadian banks in terms of Tier 1 capital. The Committee also awarded Mr. Raymond 149,940 stock options. Andre Berard, formerly Chairman of the Board and Chief Executive Officer, retired in March 2002 as Chief Executive Officer but remains Chairman of the Board. His annual base salary during the past financial year was $680,000. He also received an annual bonus of $600,000 for the five months he served as Chairman of the Board and Chief Executive Officer. In addition, he was awarded 218,600 stock options. Furthermore, in recognition of his having contributed to the Bank's development and consolidated its financial market position, the Committee awarded Mr. Berard a lump sum of $850,508 and an amount of $314,925 as a retirement allowance. THIS REPORT IS SUBMITTED BY THE HUMAN RESOURCES COMMITTEE IN ACCORDANCE WITH CANADIAN SECURITIES LEGISLATION. THE MEMBERS ARE: ROBERT PARIZEAU, CHAIR GERARD COULOMBE FRANCOIS J. COUTU SHIRLEY A. DAWE MARCEL DUTIL JEAN GAULIN E.A. (DEE) PARKINSON-MARCOUX PERFORMANCE OF THE BANK IN 2002 The 2002 financial year was affected by difficult economic conditions, marked by reduced demand for commercial credit and upheavals on financial markets, which slowed retail brokerage activities. The Bank performed well despite this context. More specifically, the total return on the Bank's shares (dividends and stock appreciation) was 25% in 2002 compared to a negative return of 0.4% for the five major Canadian banks. Over five years, the total return obtained by common shareholders of the National Bank reached 11%, compared to 8% for the S&P/TSX Banks and Trusts subindex. In addition, the measures adopted in the first quarter helped to reduce gross impaired loans by nearly 50%. As at October 31, 2002, gross private impaired loans of $479 million represented 14.1% of tangible capital and allowances compared to 22.5% a year earlier. At year-end 2002, the same ratio for the five major Canadian banks averaged 22.8%. As at October 31, 2002, the Bank had the second best Tier 1 capital ratio of the six largest Canadian banks, at 9.6%. The Tier 1 capital ratio of the other five banks averaged 9.0%. Income before goodwill charges was $429 million or $2.18 per share for fiscal 2002 as against $563 million or $2.88 per share in 2001. However, certain charges and income for one-time events must be deducted from the 2002 and 2001 results in order to evaluate the Bank's underlying performance. These one-time items included, for fiscal 2002, discontinued operations with respect to asset-based lending in the United States, a revision of the estimated allowance for credit losses, an impairment charge relating to a decline in the value of investments and the writeoff of fixed assets. For fiscal 2001, one-time items included discontinued operations and the gain on the sale of merchant payment solutions. Table 1b on page 55 of the 2001-2002 Annual Report provides details of these items. Page 12 Adjusted income in 2002 was $555 million or $2.86 per share compared to $580 million or $2.87 per share in 2001. Income was down 4% while earnings per share remained relatively stable due to the repurchase of 9.5 million common shares under the Bank's normal course issuer bid. By comparison, the average income of the five major Canadian banks declined 28% from 2001 to 2002. Adjusted income for 2002 for Personal Banking and Wealth Management totalled $253 million, up 4% over 2001. The growth in adjusted income for Personal Banking was offset by the weaker performance of brokerage activities as a result of lower transaction volumes. Income for Commercial Banking totalled $119 million in 2002, unchanged from 2001. The decline in revenues, attributable to reduced loan volumes as a result of weak credit demand, was offset by a reduction in expected loan losses. Financial Markets, Treasury and Investment Banking recorded income of $250 million in 2002 for a 23% year-over-year increase. This performance was primarily attributable to asset and liability matching operations as well as National Bank Financial's institutional operations. Overall, the Bank's results compare favourably to those of the other major Canadian banks. In addition, the Bank began fiscal 2003 on a solid footing, mainly because of the quality of its credit portfolio and its high capital ratios. PERFORMANCE GRAPH FOR COMMON SHARES OF THE BANK The following performance graph shows the cumulative total return of a $100 investment in common shares of the Bank made on October 31, 1997 compared to the cumulative total return of the S&P/TSX Banks and Trusts subindex and the S&P/TSX Composite Index for the five most recently completed financial years, assuming dividends are fully reinvested at the market price on each dividend payment date. FIVE-YEAR CUMULATIVE TOTAL RETURN ON A $100 INVESTMENT [LINE-CHART]
Oct. 1997 ($) Oct. 1998 ($) Oct. 1999 ($) Oct. 2000 ($) Oct. 2001 ($) Oct. 2002 ($) ------------- ------------- ------------- ------------- ------------- ------------- National Bank of Canada 100.00 118.25 94.79 136.94 137.19 171.29 S&P/TSX Banks and Trusts 100.00 96.05 101.69 142.62 140.88 146.83 S&P/TSX Composite Index 100.00 92.22 109.51 147.19 106.77 98.57
Page 13 NATIONAL BANK OF CANADA SECTION III - INFORMATION ON COMPENSATION (CONT.) TOTAL COMPENSATION OF NAMED EXECUTIVE OFFICERS OF THE BANK SUMMARY OF TOTAL COMPENSATION OF NAMED EXECUTIVE OFFICERS The following table, presented in accordance with Canadian securities legislation, shows the total compensation paid by the Bank and its subsidiaries to each of the Named Executive Officers, during each of the three most recently completed financial years. The persons named in this table are collectively the "Named Executive Officers".
Annual Compensation Long-Term Compensation ---------------------------------------- ----------------------------- Awards Payouts ----------------- --------- Securities Awarded(3) Under Long-Term Other Annual ----------------- Bonus All Other Salary Bonus(1) Compensation(2) SARs Options Program Compensation Name and Principal Position Year ($) ($) ($) (#) (#) ($) ($) - --------------------------- ---- ------- --------- --------------- ------- ------- --------- ------------ ANDRE BERARD(4) 2002 286,900(4) 600,000 833 nil 218,600 N/A 1,165,433(5) Chairman of the Board 2001 680,000 1,083,920 2,928 nil 265,000 N/A N/A 2000 680,000 940,000 5,104 265,000 nil N/A N/A REAL RAYMOND(6) 2002 692,137(6) 800,000 4,339 nil 149,940 450,000(7) N/A President and 2001 461,800 800,000 653 nil 88,300 N/A N/A Chief Executive Officer 2000 385,000 500,000 74 122,000 nil N/A N/A JEAN TURMEL 2002 500,000 3,567,333 4,037 nil 124,900 1,783,667(8) N/A President - Financial 2001 500,000 3,243,333 24,470 nil 88,300 1,621,667 N/A Markets, Treasury and 2000 385,000 802,000 5,458 122,000 nil N/A N/A Investment Bank LOUIS VACHON 2002 250,000 2,009,582 169 nil 28,300 N/A N/A Senior Vice-President 2001 250,000 2,103,200 35 nil 30,000 N/A N/A Treasury and Financial 2000 234,000 1,021,040 104 29,000 nil N/A N/A Markets G.F. KYM ANTHONY 2002 370,000 2,750,273 83,008 nil 42,800 N/A N/A President and 2001 374,600 1,950,452 100,916 N/A N/A N/A N/A Chief Executive Officer 2000 400,000 2,902,400 nil N/A N/A N/A N/A National Bank Financial Inc. GERMAIN CARRIERE 2002 277,500 1,575,000 16,175 nil 21,400 N/A N/A President and 2001 280,962 885,800 34,716 N/A N/A 64,818(9) N/A Chief Operating Officer 2000 150,000 2,250,000 1,541 nil N/A 260,920(9) N/A Individual Investor Services National Bank Financial Inc.
- ---------- (1) Excluding all portions of bonuses paid in the form of DSUs for Officers. For more information, please refer to the "Annual Bonus Program" section in the Circular. (2) The amounts in this column only represent benefits relating to loans granted at preferred interest rates to Named Executive Officers. The Named Executive Officers have the use of a leased car and may, at their option, participate in the Employee Share Ownership Plan of the Bank; the aggregate value of these benefits for the financial year ended October 31, 2002 does not exceed the lesser of: $50,000 or 10% of the annual salary and bonuses paid to Named Executive Officers. In addition, for G.F. Kym Anthony, this amount includes $67,200 received as deferred compensation for prior years (2000/2001) and $15,808 paid under the EdgeStone Affiliate Fund co-investment program. For Germain Carriere, this amount includes $15,175 and $33,716 for 2002 and 2001, respectively, paid under the EdgeStone Affiliate Fund co-investment program. (3) These securities were awarded under the Stock Appreciation Rights Plan and the Stock Option Plan of the Bank. For further information, refer to the "Stock Option Plan" and the "Stock Appreciation Rights Plan" sections in the Circular. (4) Andre Berard ceased to be Chief Executive Officer on March 13, 2002. His salary was established at $286,900, representing an annual salary of $680,000. (5) This amount includes a lump sum payment of $850,508 to highlight Mr. Berard's overall contribution to the bank's development and financial market consolidation, as well as $314,925 paid as a retirement allowance. (6) Real Raymond was appointed President and Chief Executive Officer by the Board on March 13, 2002. His annual salary in this capacity was set at $750,000. (7) Real Raymond received a medium-term bonus in the form of DSUs for Officers representing 14,540 units based on a price of $30 .95 per share. For further information, refer to the "Annual Bonus Program" section in the Circular. (8) With regard to the bonus for 2002, Jean Turmel received 33% of his bonus in the form of DSUs for Officers in two installments representing 34,762 units based on a price of $31.96 per share and 21,734 units based on a price of $30.95 per share, respectively. For further information, refer to the "Annual Bonus Program" section in the Circular. (9) Under the long-term variable compensation program of National Bank Financial, as described hereafter, Germain Carriere received 2,406 deferred stock units based on a price of $26.94 per share in 2001 and 11,000 deferred stock units based on a price of $23.72 per share in 2000. SUMMARY OF LONG-TERM VARIABLE COMPENSATION OF NAMED EXECUTIVE OFFICERS The table below specifies the number of options awarded to Named Executive Officers under the Stock Option Plan during the financial year ended October 31, 2002. These options were exercisable by their holders as follows: 25% as of December 2002; with a further 25% exercisable as of December 2003, another 25% exercisable as of December 2004, and the remainder as of December 2005. These options expire on December 31, 2011. During the 30-day period prior to the awarding of the options, the closing price of the common shares of the Bank on The Toronto Stock Exchange fluctuated between $26.30 and $28.59. Page 14 OPTIONS AWARDED DURING THE FINANCIAL YEAR ENDED OCTOBER 31, 2002
% of Total Options & SARs Market Value of a Number of Awarded to Exercise Common Share on Options Employees During Price of an the Day Preceding Expiry Name Awarded the Financial Year Option ($) the Award ($) Date - ---- --------- ------------------ ----------- ----------------- -------- ANDRE BERARD 218,600 11.4 28.01 28.01 31/12/11 REAL RAYMOND 149,940 7.9 28.01 28.01 31/12/11 JEAN TURMEL 124,900 6.5 28.01 28.01 31/12/11 LOUIS VACHON 28,300 1.5 28.01 28.01 31/12/11 G.F. KYM ANTHONY 42,800 2.2 28.01 28.01 31/12/11 GERMAIN CARRIERE 21,400 1.1 28.01 28.01 31/12/11
The following table lists, for each of the Named Executive Officers, the number of securities affected by options/SARs exercised during the financial year ended October 31, 2002, the total value realized, and the number and value of unexercised in-the-money options/SARs outstanding as at October 31, 2002. The value of unexercised options at financial year-end is equal to the difference between the exercise price of the options and the closing price of common shares of the Bank on The Toronto Stock Exchange on the last business day of the financial year, namely, $29.39 per common share. The value of unexercised SARs at financial year-end is equal to the difference between the exercise price of the SARs and the closing price of common shares of the Bank on The Toronto Stock Exchange on the last business day of the financial year, namely, $29.39 per common share. OPTIONS/SARs EXERCISED BY THE NAMED EXECUTIVE OFFICERS DURING THE FINANCIAL YEAR ENDED OCTOBER 31, 2002 AND NUMBER AND VALUE OF UNEXERCISED IN-THE-MONEY OPTIONS/SARs AT FINANCIAL YEAR-END
Number of Value of Unexercised Securities Unexercised Options/SARs at In-the-Money Options/SARs Affected by Aggregate Financial Year-End(1) at Financial Year-End Exercised Value ------------------------------------ ------------------------------------ Name Options/SARs Realized ($) Exercisable (#) Unexercisable (#) Exercisable ($) Unexercisable ($) - ----- ------------ ------------ --------------- ----------------- --------------- ----------------- ANDRE BERARD 72,500 1,332,550 631,350 584,350 6,195,127 2,933,911 REAL RAYMOND 0 0 167,075 277,165 1,979,217 1,238,707 JEAN TURMEL 30,000 657,000 277,825 267,375 2,742,459 1,268,050 LOUIS VACHON 0 0 34,000 69,300 258,535 331,419 G.F. KYM ANTHONY 0 0 0 42,800 0 59,064 GERMAIN CARRIERE 0 0 0 21,400 0 29,532
- ---------- (1) The amounts indicated are based on a price of $29.39 per common share, namely, the closing price on the last business day of the financial year ended October 31, 2002. COMPENSATION OF THE OFFICERS OF NATIONAL BANK FINANCIAL The officers of National Bank Financial receive a base salary, an annual bonus and long-term variable compensation. The compensation of the Named Executive Officers is approved by the Human Resources Committee of the Board of Directors of National Bank Financial & Co. Inc., which is comprised of a majority of outside directors. These directors are: Robert Parizeau, Chair, Pierre Ducros, Paul Gobeil and Jean Turmel. Base Salary To establish the base salary of its officers, National Bank Financial refers to the salaries of its comparison market, while taking into consideration the criteria specific to National Bank Financial. Annual Bonus Program To attract and retain high-calibre employees in the highly competitive securities sector, National Bank Financial offers an annual bonus program which is an important part of the compensation of officers at National Bank Financial. Under this program, bonuses are awarded every six months based on the profitability of securities operations in the sectors under the responsibility of each officer. Long-Term Variable Compensation Program G.F. Kym Anthony and Germain Carriere no longer participate in the long-term variable compensation program of National Bank Financial. However, information on their past participation is provided in the "Summary of Total Compensation of Named Executive Officers" table in the Circular. The long-term variable compensation program enables certain officers and employees of National Bank Financial to share in the company's pre-tax profits. It provides for either bonuses to be granted or deferred stock units to be created. Page 15 NATIONAL BANK OF CANADA SECTION III - INFORMATION ON COMPENSATION (CONT.) Eligible participants can acquire these bonuses over a three-year period as follows: 50% payable at the end of the reference year, 25% payable at the end of the second year and 25% payable at the end of the third year. Since participants are eligible for deferred stock units, they receive phantom stock units of the Bank at a value equal to the market value, based on the average closing price of a regular board lot on The Toronto Stock Exchange for the five trading days immediately prior to the date of the award. The value of the units varies according to the price of Bank shares. In order to encourage participants to remain with National Bank Financial, the deferred stock units vest over a four-year period beginning the year after they are awarded. They may only be converted to cash at the time of retirement, death or upon termination of employment. As indicated in the "Summary of Total Compensation of Named Executive Officers" table, G.F. Kym Anthony and Germain Carriere participate in the Bank's Stock Option Plan. RETIREMENT BENEFITS FOR NAMED EXECUTIVE OFFICERS OF THE BANK PENSION PLAN With the exception of G.F. Kym Anthony and Germain Carriere, the Named Executive Officers of the Bank participate in a defined benefit pension plan. This plan is fully funded according to the most recent actuarial valuation. For each year of service credited, the plan grants a pension equal to 2% of average eligible earnings, defined as the average earnings for the 60 highest-paid consecutive months. Compensation consequently varies according to level. For Officers at the level of President, it is based on the salary and the annual bonus. For the Senior Vice-President level, the calculation is based on salary and 25% of the annual bonus (up to a maximum of 20% of salary). This pension is then reduced by the pension acquired under the Canada or Quebec pension plans ("CPP/QPP") while the Named Executive Officer participated in the Bank pension plan, except for the years of participation prior to January 1, 1990 which are reduced by 50%. However, this benefit cannot exceed the maximum pension prescribed under the Income Tax Act (Canada), currently $1,722 per year of service credited. The normal retirement age is 60. However, the plan allows for early retirement, with the employer's consent, as of 55 years of age. Benefits then payable are reduced by the lesser of 4% for each year of early retirement prior to age 60 or 2% for each year by which the sum of the participant's age and years of service falls short of 90. POST-RETIREMENT ALLOWANCE PROGRAM With the exception of G.F. Kym Anthony and Germain Carriere, who do not participate in any pension plan, the Named Executive Officers of the Bank are also entitled to receive a post-retirement allowance for life. This program, in which the Named Executive Officers participate, grants an allowance equal to the difference between the pension which would be payable if there were no provision for a maximum pension (maximum 35 years) and the pension actually paid under the pension plan for the years recognized under the Post-Retirement Allowance Program. In order to calculate this supplemental pension, the annual bonus recognized is limited to 100% of the salary for the President and Chief Executive Officer and to $571,000 for the President - Financial Markets, Treasury and Investment Bank, while for the Senior Vice-President, average eligible earnings are limited to $250,000. The payment conditions of the allowance are identical to those of the pension plan. Further to a decision taken by the Board at its meeting held on June 20, 2002, the Post-Retirement Allowance Program has been funded since January 1, 2003, in the form of a retirement agreement. ESTIMATED ANNUAL BENEFITS PAYABLE AT RETIREMENT The following tables show the estimated annual benefits payable under the Bank's pension plan and the Post-Retirement Allowance Program to the Named Executive Officers of the Bank at the level of President and Senior Vice-President. Page 16 PENSIONS PAYABLE AS OF AGE 60 PRESIDENT
AVERAGE YEARS OF PARTICIPATION(2)(3) ELIGIBLE ---------------------------------------------------------------- EARNINGS(1) 15 20 25 30 35 - ----------- ------- ------- ------- ------- --------- ($) ($) ($) ($) ($) ($) 1,050,000 311,958 416,412 520,866 625,319 730,324 1,200,000 356,958 476,412 595,866 715,319 835,324 1,350,000 401,958 536,412 670,866 805,319 940,324 1,500,000 446,958 596,412 745,866 895,319 1,045,324
SENIOR VICE-PRESIDENT
AVERAGE YEARS OF PARTICIPATION(2)(3) ELIGIBLE ---------------------------------------------------------------- EARNINGS(1) 15 20 25 30 35 - ----------- ------- ------- ------- ------- --------- ($) ($) ($) ($) ($) ($) 200,000 58,766 67,377 75,988 84,599 93,540 225,000 66,682 75,293 83,904 92,516 101,457 250,000 74,599 83,210 91,821 100,432 109,374 300,000 74,599 83,210 91,821 100,432 109,374
- ---------- (1) The sum of the amounts in the "Salary" and "Bonus" columns of the "Summary of Total Compensation of Named Executive Officers" table in the Circular is used to calculate the average eligible earnings. (2) Years of service credited on the normal retirement date for the purposes of the pension plan have been estimated as follows: o Real Raymond: 35 years o Jean Turmel: 24 years o Louis Vachon: 24 years However, the maximum number of years recognized for the purposes of the Post-Retirement Allowance Program is 35. (3) The pension is payable for life. Upon the participant's death, 60% of the pension is payable to the spouse. If there is no spouse, part of the pension is payable to the dependent children. TERMINATION OF EMPLOYMENT POLICY On November 30, 2000, the Board adopted a policy whereby certain Executive Officers, as defined under the heading "Indebtedness of Directors and Executive Officers", would receive a separation allowance in the event their employment is terminated by the Bank following a change in control. A change in control notably means any change in the ownership of Bank shares following the acquisition of shares, a merger or a business combination, resulting in one shareholder beneficially owning in excess of 20% of the voting shares of the Bank. Under the terms of this policy, the President and Chief Executive Officer as well as the President - Financial Markets, Treasury and Investment Bank would each be entitled to a separation allowance equal to their base salary and average annual bonus for the previous three years (or the target annual bonus for eligible Executive Officers who have been in their positions for less than three years) for a period of 36 months, up to the normal retirement age. Certain other Executive Officers of the Bank are also covered by this policy and could receive a separation allowance equal to their base salary and average annual bonus for the previous three years (or the target annual bonus for eligible Executive Officers who have been in their positions for less than three years) for a period of 18 to 24 months, up to the normal retirement age. In all cases, the separation allowance would also include an amount equal to the estimated value of the stock options and SARs that would have been granted to them had their employment not been terminated. Moreover, all stock options and SARs already granted would immediately be vested and the Executive Officers would have up to 12 months in which to exercise the options or SARs. National Bank Financial Inc. has entered into separate agreements with G.F. Kym Anthony and Germain Carriere which set out the terms and conditions of their respective compensation in the event that their employment is terminated either by National Bank Financial Inc. or following a change in control. The terms and conditions of these agreements are in line with the policy described above and would entitle each of them to a separation allowance equal to his base salary and his average annual bonus for the previous two years for a period of 24 months, up to the normal retirement age. INDEBTEDNESS OF DIRECTORS AND EXECUTIVE OFFICERS In the normal course of its operations, the Bank grants loans to its directors, officers and employees. As at January 1, 2003, total loans outstanding (other than routine indebtedness as defined by Canadian securities legislation) granted notably to directors and Executive Officers of the Bank, as defined below, amounted to approximately $249,046,674. This total includes mortgage loans for an aggregate amount of approximately $226,273,249, personal loans for an aggregate amount of approximately $21,880,036 and investment loans for the purchase of securities of the Bank or its subsidiaries for an aggregate amount of approximately $893,389. None of these loans was granted to a director. For the purposes of this section, the term "Executive Officers" includes: the President and Chief Executive Officer, the President - Financial Markets, Treasury and Investment Bank, the Senior Vice-Presidents, and other officers of the Bank or one of its subsidiaries who perform a policy-making function in respect of the Bank. Page 17 NATIONAL BANK OF CANADA SECTION III - INFORMATION ON COMPENSATION (CONT.) The tables below show loans granted to Executive Officers of the Bank, in accordance with Canadian securities legislation. TABLE OF INDEBTEDNESS OF EXECUTIVE OFFICERS UNDER SECURITIES PURCHASE PLANS
Largest Amount Outstanding Involvement of the Bank During the Financial Year Balance as at Name and Principal Occupation or a Subsidiary Ended October 31, 2002 ($) January 1, 2003 ($) - ----------------------------- ----------------------- -------------------------- ------------------- MICHEL TREMBLAY(1) Senior Vice-President - Personal Loans granted by Banking and Wealth Management National Bank of Canada 163,017 134,866
- ---------- (1) Loan granted for the purchase of 69,289 Class A voting common shares of Natcan Investment Management Inc. pursuant to this subsidiary's long-term bonus program and secured by a mortgage. The principal of the loan bears interest at the Bank's prime rate less 2% and, subject to the usual prepayment clauses, at least 4% of the principal is repayable on March 31 of each year. These shares are subject to certain transfer restrictions and are redeemable at any time. TABLE OF INDEBTEDNESS OF EXECUTIVE OFFICERS OTHER THAN UNDER SECURITIES PURCHASE PLANS
Largest Amount Outstanding Involvement of the Bank During the Financial Year Balance as at Name and Principal Occupation or a Subsidiary Ended October 31, 2002 ($) January 1, 2003 ($) - ----------------------------- ----------------------- -------------------------- ------------------- G.F. KYM ANTHONY President and Chief Executive Officer Loans granted by National Bank Financial Inc. National Bank of Canada 1,130,490(1) 1,578,463 RICHARD BARRIAULT Vice-President - Taxation Loans granted by National Bank of Canada National Bank of Canada 18,234(1) 9,961 JEAN-PAUL CARON Vice-President - Corporate Affairs Loans granted by National Bank of Canada National Bank of Canada 64,006(2) 60,764 GERMAIN CARRIERE President and Chief Operating Officer Individual Investor Services Loans granted by 676,681(1) 883,342 National Bank Financial Inc. National Bank of Canada 58,004(2) 17,145 MICHEL LABONTE Senior Vice-President Finance and Technology Loans granted by 27,351(1) 19,236 National Bank of Canada National Bank of Canada 27,000(2) 15,063 MARIO LECALDARE(3) Vice-Chairman of the Board Restructuring Group Loans granted by 263,892(1) 300,089 National Bank Financial Inc. National Bank of Canada 400,000(2) 382,564 REJEAN LEVESQUE Senior Vice-President Northern and Eastern Quebec Loans granted by National Bank of Canada National Bank of Canada 12,156(1) 6,640
Page 18 NATIONAL BANK OF CANADA TABLE OF INDEBTEDNESS OF EXECUTIVE OFFICERS OTHER THAN UNDER SECURITIES PURCHASE PLANS (CONT.)
Largest Amount Outstanding Involvement of the Bank During the Financial Year Balance as at Name and Principal Occupation or a Subsidiary Ended October 31, 2002 ($) January 1, 2003 ($) - ----------------------------- ----------------------- -------------------------- ------------------- MARTIN OUELLET Vice-President and Treasurer Loans granted by National Bank of Canada National Bank of Canada 18,234(1) 9,961 ENRICO PALLOTTA(3) Managing Director Loans granted by 27,251(1) 41,205 National Bank Financial Inc. National Bank of Canada 497,536(2) 416,804 LUC PAPINEAU Senior Vice-President Wealth Management Advisory Services Loans granted by National Bank of Canada National Bank of Canada 300,000(2) 293,397 NICOLE RONDOU Vice-President - Compliance Loans granted by National Bank of Canada National Bank of Canada 6,078(1) 3,320 LOUIS VACHON Senior Vice-President Treasury and Financial Markets Loans granted by National Bank of Canada National Bank of Canada 82,052(1) 57,707 W. DAVID WOOD Executive Vice-President and Chief Administrative Officer Loans granted by National Bank Financial Inc. National Bank of Canada 843,033(1) 1,095,309
- ---------- (1) This amount represents one or more personal leveraged loans (the "Leveraged Loans") granted to a director or Executive Officer in order to finance the participant's equity commitments under the EdgeStone Affiliate Fund co-investment program. All Leveraged Loans bear interest at the federal prescribed rate published monthly and are secured by a pledge of the participant's interest in the limited partnerships comprising the EdgeStone Affiliate Fund co-investment program. This program provides Officers and eligible employees of the Bank and of entities affiliated with the Bank the opportunity to co-invest with EdgeStone Capital Equity Fund II, L.P., EdgeStone Capital Mezzanine Fund II, L.P. and EdgeStone Capital Venture Fund, L.P. (collectively, the "Main Funds") and with the Bank or a company in which the Bank holds an indirect interest. Officers and eligible employees are offered credit facilities by the Bank or its affiliates in particular through limited recourse Leveraged Loans. Leveraged Loans may bear interest and will mature on the earliest of: (i) the 10th anniversary date of the applicable Main Fund, (ii) the termination of the applicable Affiliate Fund limited partnership, (iii) the sale or disposition of the applicable Affiliate Fund limited partnership interest held by a participant or (iv) the date the principal amount under the Loan otherwise becomes due and payable. The lender will have personal recourse against the participant equal to 50% of the participant's total commitment (equity and leveraged portion). Recourse for the balance of the Leveraged Loan is limited to the participant's Affiliate Fund partnership interest and the distributions thereon. (2) This amount represents a loan or the sum of loans granted to an Executive Officer of the Bank, which must be disclosed in accordance with the relevant securities legislation. The loan or loans may have been granted in the form of either of the following: - A personal loan in excess of $25,000 granted for consumer purchases, construction and home improvements and sundry investments, granted according to the standards applicable to clients, except for the interest rate, which ranges between half of the Bank's prime rate and the prime rate, or as a loan granted under a relocation agreement; - A loan secured by a mortgage on the borrower's main residence, which exceeds the Executive Officer's annual salary; it is granted according to the standards applicable to clients, except for the interest rate, which is at one-third of the Bank's client rate on the first $50,000 and at the Bank's prime rate less 5% on the amount in excess thereof but such rate cannot be lower than the rate applied to the first $50,000; - A loan secured by a mortgage on the borrower's secondary residence. This loan is granted on market terms and conditions. (3) On March 4, 2002, the Bank's Corporate Banking operations were transferred to National Bank Financial Inc. Further to an agreement between the Bank and the Officer, the benefits related to reduced-rate loans are maintained until March 31, 2003. Page 19 NATIONAL BANK OF CANADA SECTION IV - OTHER INFORMATION LIABILITY INSURANCE FOR DIRECTORS AND OFFICERS The Bank is covered by a blended risk insurance program, which includes public liability insurance for directors and Officers of the Bank and its subsidiaries. This policy provides coverage of $100,000,000 with a deductible of $10,000,000 per claim. This insurance protects directors and Officers of the Bank from acts, errors or omissions committed in the course of their duties as directors or Officers. Illegal acts and those committed for personal gain are excluded from this coverage. The Bank's insurer estimates that the portion of the annual premium attributable to the public liability insurance for directors and Officers is approximately $585,000. REPURCHASE OF SHARES The Bank currently has a normal course issuer bid (the "Issuer Bid") in place under which it intends to repurchase for cancellation, from time to time and during a given period (hereafter referred to), a given number of common shares through The Toronto Stock Exchange. The Issuer Bid as filed allows for the purchase of up to 9,100,000 common shares representing approximately 5% of the outstanding common shares. In the opinion of the Board, the purchase of common shares pursuant to the Issuer Bid constitutes an appropriate use of the Bank's surplus funds. The Issuer Bid, which commenced on January 20, 2003, will run for a period ending on the earlier of i) the date on which the Bank repurchases the maximum number of common shares, i.e., 9,100,000, or ii) the date on which the Bank otherwise decides not to repurchase further shares, or iii) on January 19, 2004. The price the Bank pays for any common share which it repurchases shall be the prevailing market price of a common share on The Toronto Stock Exchange on the purchase date. To the knowledge of the Bank, its directors and Officers, after reasonable verification, as at the date hereof, the Bank repurchased 9,500,000 common shares as part of its previous normal course issuer bid, representing approximately 5% of the common shares outstanding at the time the issuer bid was made on March 5, 2002. CORPORATE GOVERNANCE The Statement of Corporate Governance Practices of the Bank Incorporating the Guidelines of The Toronto Stock Exchange is presented in Schedule D of the Circular. The Statement of Corporate Governance Practices of the Bank was reviewed by the Conduct Review and Corporate Governance Committee and approved by the Board. In addition, Schedule C of the Circular contains a description of the various Board committees, including their mandates and activities. MINUTES A copy of the minutes of the Annual Meeting of Common Shareholders of the Bank held on March 13, 2002 has been mailed to shareholders with the Circular. ADDITIONAL INFORMATION The Bank will provide to any person, upon request, a copy of the Annual Report, a copy of the Annual Information Form together with a copy of any document incorporated therein by reference, a copy of the annual consolidated financial statements for the financial year ended October 31, 2002 together with the accompanying auditor's report, a copy of any subsequent quarterly financial statements and a copy of the Management Proxy Circular of the Bank in respect of its most recent annual meeting that involved the election of directors. To obtain copies of these documents, send your request to the Corporate Secretary's Office of the Bank, 600 de La Gauchetiere West, 4th Floor, Montreal, Quebec, Canada H3B 4L2. APPROVAL OF THE BOARD OF DIRECTORS The Board has approved the contents of this Management Proxy Circular and the mailing thereof to the shareholders. Linda Caty Vice-President and Corporate Secretary Montreal, January 23, 2003 Page 20 SCHEDULE A SHAREHOLDER PROPOSALS Proposals Nos. 1 to 4 inclusively have been submitted to the management of the Bank by the Association for the Protection of Quebec Savers and Investors, a shareholder located at 425 de Maisonneuve West, Suite 1002, Montreal, Quebec H3A 3G5. PROPOSAL NO. 1 PROPOSAL AND STATEMENT OF THE SHAREHOLDER: "It is proposed that the company abolish stock option plans as a form of compensation to executive officers and directors. Beginning in the mid-1990s, the compensation strategies of North American companies have tended towards the growing use of stock options as part of the compensation of their executive officers and directors. This practice has generally given rise to excessive, illegitimate and indefensible levels of compensation, in light of the performance of the vast majority of companies and the stock returns offered to shareholders. These abuses have contributed significantly to the dramatic loss of confidence in the quality of the governance of publicly-traded companies and the integrity of financial markets by investors and the public. Executive officer compensation has become completely divorced from the long-term objectives set for management and has been transformed into an incentive to manage companies based on the immediate stock price. The massive use of stock options in the compensation system is the main reason for these distortions and, in several cases, the source of numerous frauds where officers, with the complicity of their auditors, violated rules of conduct and the law to traffic information on the real financial condition of their companies. As a growing number of observers and specialists have noted, assigning to options the objective of aligning the interests of officers with those of shareholders has manifestly failed. In fact, they encouraged the devastation of shareholder assets by the executive officers of their companies. On September 26, 2002, the Canadian Council of Chief Executives (CCCE, Governance, Values and Competitiveness; A Commitment to Leadership, September 2002, page 16) also came to the same conclusion, stating that it "understood the frustration felt by investors when senior executives are rewarded handsomely for past performance that proves to be short-lived." This form of compensation must be eliminated and alternative solutions found, such as awarding shares with the requirement that they be held for a minimum period of time, in order to align officers' interests with those of shareholders. The National Bank is therefore requested not to extend its stock option plans for executive officers and directors once the obligations undertaken in the past have been honoured." POSITION OF THE BANK: Since Officers have an impact on the Bank's long-term growth, the Bank seeks to attract and interest high-calibre managers. It is essential that the Bank recruit, retain and motivate talented and competent managers in order to achieve its return and performance objectives. To do otherwise would, ultimately, have a negative impact for our shareholders. Stock option plans, for which only Officers and certain key Bank employees are eligible, are a profit-sharing tool aimed at encouraging them to stimulate the growth of shareholder investments by aligning part of their compensation to the Bank's performance. Thus, the interests of Officers are directly aligned with those of the shareholders of the Bank, for the benefit of the shareholders. The directors of the Bank, with the exception of those who are also Officers of the Bank, do not participate in any stock option plan. The Human Resources Committee was mandated by the Board of Directors to review and approve the Bank's compensation practices and policies, including more specifically the stock option plans. The awarding of options and the assessment of Officers' performance is carried out under the control of this Committee, which is composed exclusively of outside directors. In recent months, the Committee directed outside consultants to conduct a comparative study of stock option plans. The results revealed that the plans currently in place at the Bank reflect general practices in its comparison market. However, in order to further align executive compensation with shareholder return, the Board adopted share ownership guidelines for all Bank Officers. Under these new guidelines, Officers are required to hold a minimum number of common shares, the value of which is proportional to the compensation they receive and the position they hold. Moreover, a provision obliges Officers who are members of the Executive Committee to keep for a one-year period, after tax considerations, shares acquired through the exercise of options. Moreover, as of November 1, 2002, the beginning of the financial year, the Bank has opted to expense the cost of stock options based on the fair market value of the options as determined by an options valuation model and as recommended under the accounting standards published by the Canadian Institute of Chartered Accountants. The shareholder proposal would eliminate a major compensation tool and an effective method for fostering the Bank's growth and profitability. The shareholder proposal is therefore not in the best interest of all shareholders. For all these reasons, management recommends voting AGAINST this proposal. Page 21 NATIONAL BANK OF CANADA SCHEDULE A (CONT.) PROPOSAL NO. 2 PROPOSAL AND STATEMENT OF THE SHAREHOLDER: "It is proposed that the Chairman of the Board, as well as the chairs of Board committees present a verbal report and answer shareholders' questions at the annual meeting of the company. A company's business operations and internal affairs must be discussed at annual shareholder meetings. The quality of governance is an internal issue which should be at the core of discussions at the annual meeting of shareholders. Poor corporate governance has caused investors to lose billions of dollars in recent years as a result of bankruptcy and fraud, which have had direct consequences not only for the shareholders of those companies, but for the entire financial community. Corporate governance is not just an ideal, a theoretical concept or a question of ethics. It is also a matter of return for shareholders. The Board of Directors is a fundamental component of the governance system of public companies and plays a key role in decisions in this regard. It is the centre of a chain of delegation which extends from the shareholders to the executive officers. The Board's main responsibilities are to oversee the management of the company on behalf of the shareholders, who have entrusted this mandate to it, to make certain decisions (for example the hiring and compensation of executive officers) and, in general, to identify conflicts of interest between executive officers and shareholders and resolve them to the benefit of the shareholders. In carrying out its mandate and discharging its responsibilities, the Board of Directors entrusts some of these major issues to committees. By virtue of this delegation of responsibility and the governance mandate, the management of the company must report to the Board. By virtue of this same chain of delegation of responsibility, the Board of Directors must report to the shareholders on the way it carried out its duties in their name. The objective of this proposal is, first, to strengthen the ties between the Board, its committees and the shareholders and, second, to enable shareholders to judge the quality of governance in the company. Its adoption would allow for shareholders to obtain additional information on certain matters with respect to how the Board carries out its mandate and enhance transparency in their favour." POSITION OF THE BANK: At all meetings of shareholders of the Bank, the President and Chief Executive Officer reviews the previous year in detail and presents the Bank's objectives and strategies for the future. During the question period reserved for shareholders, the Chairman of the Board and the President and Chief Executive Officer answer questions directly. However, they frequently ask the chairs of Board committees or Officers to provide information to the shareholders directly. Officers and committee chairs will continue to answer questions from the shareholders and give them the information requested. The Bank does not intend to change this practice. Shareholders may also consult this Circular for information on the role, responsibilities and activities of each of the Board committees. For all these reasons, management recommends voting AGAINST this proposal. Page 22 PROPOSAL NO. 3 PROPOSAL AND STATEMENT OF THE SHAREHOLDER: "It is proposed that the company not grant the directors and executive officers any personal loan other than in the normal course of business and at the regular rate of interest. These reduced-rate loans are granted for personal use (consumer purchases, investments and other) and they are not always repaid. Companies have no reason to grant such sinecures to executive officers and directors who are already very highly paid. The practice of using personal loans to speculate on shares of their own company combined with awards of large quantities of stock options has encouraged abuse by officers and contributed to the recent financial scandals, the sharp drop in stock prices as well as the erosion of investor confidence. A number of companies have already announced that they intend to abolish these programs, which in no way benefit the interests of shareholders." POSITION OF THE BANK: First, it should be noted that the directors do not benefit from reduced-rate loans. Reduced-rate loans, which are tools to retain employees, form part of the benefits offered to all permanent Bank employees and, by the same token, of its overall compensation policy. The Bank regularly reviews the benefit programs that it offers to its employees. A new program was recently introduced. The credit conditions offered to all employees, including Officers, were standardized. All Bank employees will now be subject to the same conditions and will benefit from the same rates with respect to the loans granted, regardless of their position. Management considers that it is not desirable to eliminate personal loans to Officers. However, the management of the Bank is closely monitoring changes in industry practices and regulations, and will obviously ensure that the latter are respected. For all these reasons, management recommends voting AGAINST this proposal. Page 23 NATIONAL BANK OF CANADA SCHEDULE A (CONT.) PROPOSAL NO. 4 PROPOSAL AND STATEMENT OF THE SHAREHOLDER: "It is proposed that the Board of Directors create an ethics committee that is responsible for ensuring that the company takes all the necessary means to foster a corporate culture based on the highest ethical standards. The events of the past few years have drawn attention to the moral decadence of a sizeable fringe in the business world. Society and shareholders demand that their companies adhere to ethical principles and demonstrate a high degree of social conscience. It is not enough for a company to have adopted a code of business conduct if such a code is not underpinned by mechanisms that encourage compliance by all the personnel, and by control measures and sanctions for those who fail to comply with it. Moreover, this code must be reviewed regularly to reflect the new realities of society and the business world. Shareholders are sounding the alarm, letting their company know that it must practice zero tolerance when it comes to the issue of integrity and they want this message to be clearly heard. To do this, they are asking that the Board of Directors create a board committee that specifically addresses ethical matters. This committee would be responsible for ensuring that management adopts measures to strengthen an ethics-based corporate culture. It would be responsible for ensuring that a strict code of conduct would be circulated at all levels of the company, reviewed regularly and that efficient mechanisms would control its application. Ethics and integrity are not simply theoretical concepts, they are criteria on which clients, suppliers, creditors and investors increasingly base their business decisions. Consequently, this proposal relates both to the company's conduct and shareholder return." POSITION OF THE BANK: The Board of Directors and the management of the Bank pay close attention to all matters related to integrity and ethics. The Conduct Review and Corporate Governance Committee already assumes the responsibilities of an ethics committee. The Board has delegated responsibility for recommending orientations, policies and practices in this area to this Committee. The Committee reviews and approves the Code of Professional Conduct applicable to the directors, Officers and employees of the Bank and its subsidiaries, and is responsible for ensuring that it is respected. The Board has also delegated to the Committee specific responsibility for ensuring that legislation and regulations governing related party transactions are respected as well as oversight of potential situations of conflict of interest and the use of confidential information. Shareholders may also consult this Circular in order to obtain more information about the role, responsibilities and activities of this Committee. For all these reasons, management recommends voting AGAINST this proposal. Page 24 SCHEDULE B RECORD OF ATTENDANCE BY DIRECTORS for the financial year ended October 31, 2002
Attendance at Board and Attendance at Board and Committee Meetings Committee Meetings ----------------------- ----------------------- Director Board Committees Director Board Committees - -------- ----- ---------- -------- ----- ---------- ANDRE BERARD 15/15 - JEAN GAULIN(4)(HR) 13/15 3/4 LAWRENCE S. BLOOMBERG 15/15 - PAUL GOBEIL (ARM)(G) 15/15 15/17 PIERRE BOURGIE (ARM) (G) 14/15 17/17 SUZANNE LECLAIR(1)(3)(G) 14/15 7/7 GERARD COULOMBE (HR) 15/15 7/7 BERNARD LEMAIRE 14/15 - FRANCOIS J. COUTU (1)(HR) 11/15 9/10 ROBERT PARIZEAU(2)(5)(ARM)(HR) 15/15 17/17 BERNARD CYR(2)(ARM) 15/15 9/9 E.A. (DEE) PARKINSON-MARCOUX (HR) 13/15 6/7 SHIRLEY A. DAWE (G)(HR) 14/15 11/12 REAL RAYMOND 15/15 - NICOLE DIAMOND-GELINAS (ARM) 14/15 12/12 ROSEANN RUNTE(3)(G) 14/15 3/4 JEAN DOUVILLE(3)(ARM)(G) 13/15 16/16 JEAN TURMEL 14/15 - MARCEL DUTIL (HR) 14/15 6/7 DENNIS WOOD (G) 13/15 4/5
SUMMARY OF THE NUMBER OF BOARD AND COMMITTEE MEETINGS held during the financial year ended October 31, 2002 Board of Directors 15 Conduct Review and Corporate Governance Committee (G) 5 Audit and Risk Management Committee (ARM) 12 Human Resources Committee (HR) 7
CHANGES AS AT MARCH 13, 2002 (1) Ms. Leclair and Mr. Coutu ceased to be members of the Audit and Risk Management Committee. (2) Mr. Cyr and Mr. Parizeau were appointed members of the Audit and Risk Management Committee. (3) Ms. Leclair, Ms. Runte and Mr. Douville were appointed members of the Conduct Review and Corporate Governance Committee. (4) Mr. Gaulin was appointed a member of the Human Resources Committee. (5) Mr. Parizeau ceased to be a member of the Conduct Review and Corporate Governance Committee. Page 25 NATIONAL BANK OF CANADA SCHEDULE C COMMITTEES OF THE BOARD The main duty of the Board of Directors ("the Board") is to oversee the management of the Bank either directly or through its committees. The responsibility of the Board is to protect the assets of the Bank, and to ensure its viability, profitability, long-term survival and development. The Board delegates some of its responsibilities to committees in order to increase its effectiveness. The Board adopted a structure comprised of three standing committees, namely, the Audit and Risk Management Committee, the Human Resources Committee, and the Conduct Review and Corporate Governance Committee, and approved the mandates thereof. The committees, through their respective chairs, are required to report to the Board on their deliberations. A summary of the number of Board and committee meetings held during the financial year ended October 31, 2002 is presented in Schedule B of the Management Proxy Circular (the "Circular"). AUDIT AND RISK MANAGEMENT COMMITTEE The Board has entrusted certain of its powers to the Audit and Risk Management Committee in order to assist it in overseeing the management of the Bank. In this regard, the Committee reviews the financial statements, financial reporting processes, internal controls, audit processes and management information systems in order to determine their integrity and effectiveness. In addition, it oversees, on behalf of the Board, independent functions such as internal and external audits, and the corporate compliance function. It also conducts a detailed review of risk management and the control methods used therefor. The Committee is comprised of six outside and unrelated directors. All the members of the Committee are financially literate and at least one member has accounting or financial expertise. MEMBERS Pierre Bourgie, Chair Bernard Cyr Nicole Diamond-Gelinas Jean Douville Paul Gobeil Robert Parizeau MANDATE AND ACTIVITIES Specifically, the Committee has the following responsibilities: Audit component o Require management to implement and maintain appropriate internal control procedures and annually review the effectiveness of these procedures; o review internal and external auditors' reports on a quarterly or annual basis and ensure that the necessary measures are taken to follow up the suggestions resulting from such reports; o review and approve the annual internal audit plan; o review the nature and scope of the work of the external auditors for the Bank; o ensure cooperation between the internal Audit sector of the Bank and the external auditors; o review and discuss the report prepared by the external auditors detailing all factors that might have an impact on their independence and objectivity; recommend measures to be taken by the Board to ensure the independence of the external auditors; and o recommend to the Board the appointment or dismissal of the internal auditor and make recommendations regarding the appointment and remuneration of the external auditors. Financial Analysis component o review the quarterly and annual consolidated financial statements of the Bank and recommend approval thereof to the Board, and review the financial statements of certain subsidiaries; o review such investments and transactions that could adversely affect the financial well-being of the Bank as the external auditors or management may bring to its attention; o review management's report on any dispute, notice of assessment or any other claim of a similar nature which could have a material impact on the financial condition of the Bank and ensure that such material claims are properly disclosed in the financial statements; and o meet with representatives of the Office of the Superintendent of Financial Institutions Canada ("OSFI"). Risk Management component o review and recommend to the Board the adoption of policies for managing material risk, notably policies related to credit risk, market risk, structural risk, fiduciary risk and operational risk, and review these policies annually; o review changes in impaired loans, ensure that they are monitored and approve the provisions for credit losses of the Bank, according to the rules established in the Credit Risk Management Policy of the Bank; and o review and recommend to the Board, subject to the provisions set out in section 497 of the Bank Act (the "Act"), any transaction between the Bank and a related party. HUMAN RESOURCES COMMITTEE The Board of Directors has entrusted certain powers to the Human Resources Committee in order to assist it in overseeing the management of the Bank. In this regard, the Committee reviews and approves the Bank's practices and policies with respect to human resources. The Committee is comprised of seven outside directors of the Bank. Only one director is related within the meaning of The Toronto Stock Exchange guidelines. MEMBERS Robert Parizeau, Chair Gerard Coulombe Francois J. Coutu Shirley A. Dawe Marcel Dutil Jean Gaulin E.A. (Dee) Parkinson-Marcoux Page 26 MANDATE AND ACTIVITIES Specifically, the Committee has the following responsibilities: o review and approve the description of the functions of the President and Chief Executive Officer and the annual objectives he must achieve; o review and recommend annually to the Board the adoption of the salary policies and approach with respect to total compensation applicable to the Named Executive Officers, other Officers and employees of the Bank; o annually evaluate the performance of these Officers and review their total compensation based on the objectives assigned to them and the results achieved; o approve the amendments made from time to time to the terms and conditions of the Stock Option Plan, the Stock Appreciation Rights Plan and the Deferred Stock Units Plan for Officers; o study the various components of compensation for Officers and make recommendations to the Board when appropriate; o review and recommend to the Board that it approve an annual report on the compensation paid to Officers; o periodically review the management succession plan of the Bank, the succession planning process for the Bank's senior management as well as the profile of Officers possessing the necessary competencies to hold senior management positions at the Bank; o review and recommend to the Board amendments to the Employee Pension Plan and the Pension Plan for Designated Employees; o revise and approve the mandate of the Retirement Committee and appoint the internal and external members; and o approve the financial statements of the pension plans and the Pool Fund of the Participating Pension Plans of the Bank. CONDUCT REVIEW AND CORPORATE GOVERNANCE COMMITTEE The Board has entrusted certain powers to the Conduct Review and Corporate Governance Committee in order to assist it in overseeing the management of the Bank. In this regard, the Committee assumes the responsibilities assigned to a conduct review committee under the Act. It also oversees the implementation of corporate governance rules, procedures and policies at the Bank as well as compliance therewith. The Committee is comprised of seven outside and unrelated directors of the Bank. MEMBERS Jean Douville, Chair Pierre Bourgie Shirley A. Dawe Paul Gobeil Suzanne Leclair Roseann Runte Dennis Wood MANDATE AND ACTIVITIES Specifically, the Committee has the following responsibilities: Corporate Governance component o make recommendations to the Board concerning the adoption of the Bank's orientations, policies, and practices with respect to corporate governance and ensure compliance; o prepare and review the criteria for selecting directors as well as the procedure for selecting and appointing new directors, and make recommendations thereon to the Board; periodically review the structure, mandate and composition of the Board's committees; o assess the performance and effectiveness of the Board and its committees and periodically submit reports on the results obtained to the Board; o periodically review the impact of the Board's size and composition on its activities; o organize and review education and orientation programs for directors of the Bank; o make recommendations concerning the remuneration and allowances for directors; o monitor recent developments concerning corporate governance, particularly the modernization of CDIC Standards of Sound Business and Financial Practices, and review its corporate governance practices in light of recent developments; o approve the annual report of the Bank with respect to corporate governance, taking into account regulatory requirements; and o review and recommend to the Board that it approve the Circular, excluding the portion relating to compensation. Conduct Review component o review Bank procedures which ensure that transactions with related parties of the Bank comply with the Act and review Bank practices in order to identify any transactions with related parties that could have an adverse effect on the Bank's stability or solvency; establish assessment criteria for determining whether the value of transactions with related parties of the Bank are nominal or immaterial to the Bank; o oversee the mechanisms and procedures established by the Board governing conflicts of interest, use of confidential information, disclosure of information to customers in accordance with the Act, and the settlement of customer complaints; and o review the Code of Professional Conduct that applies to directors, Officers and employees of the Bank and its subsidiaries. Page 27 NATIONAL BANK OF CANADA SCHEDULE D CORPORATE GOVERNANCE Statement of Corporate Governance Practices of the Bank Incorporating the Guidelines of The Toronto Stock Exchange
TORONTO STOCK EXCHANGE GUIDELINES CORPORATE GOVERNANCE PRACTICES OF THE BANK - ------------------------------------------- ------------------------------------------ 1. THE BOARD OF DIRECTORS SHOULD EXPLICITLY o The Board oversees the management of the Bank either directly or ASSUME RESPONSIBILITY FOR THE STEWARDSHIP through its committees. The responsibility of the Board is to OF THE BANK AND SPECIFICALLY FOR: protect the Bank's assets and to ensure its viability, profitability, long-term survival and development. a) THE ADOPTION OF A STRATEGIC PLANNING o The Board reviews and approves the Bank's business objectives, the strategic PROCESS; plan, taking into account the opportunities and risks for the Bank, as well as business plans focusing on major activities. Periodically, a Board meeting is devoted to strategic planning. At subsequent meetings, the directors receive updated information on the status of the strategy deployment. b) THE IDENTIFICATION OF THE PRINCIPAL o The Board, through its Audit and Risk Management Committee, regularly RISKS ASSOCIATED WITH THE BUSINESS assesses the principal risks of the Bank and ensures that the principal OF THE BANK AND ENSURING THE IMPLE- risk management policies are adopted, particularly those relating to credit MENTATION OF APPROPRIATE SYSTEMS TO risk, structural risk, fiduciary risk, operational risk and market risk MANAGE THESE RISKS; (including liquidity, financing and capital management). In addition, the Board receives the assurance that these policies are implemented and regularly reviewed. c) SUCCESSION PLANNING, INCLUDING o The Human Resources Committee annually reviews the profile of Officers who APPOINTING, TRAINING AND MONITORING possess the required competencies to hold senior management positions at SENIOR MANAGEMENT; the Bank, as well as the Bank's succession plan, and determines development needs as applicable. d) A COMMUNICATIONS POLICY; o The Board emphasizes transparency in the communication of information to all shareholders, clients and the general public. o The Board approves a disclosure policy, which sets up mechanisms to ensure full, accurate and timely communication between the Bank, its shareholders, its clients, financial analysts, the media and the public. The Audit and Risk Management Committee reviews documents presenting financial information, the Annual Information Form and media releases related to the publication of the Bank's quarterly and annual consolidated financial statements, before these are authorized by the Board. The Bank's quarterly reports and related conference calls are made available in real time on the Bank's website (www.nbc.ca) o The Bank responds to requests from shareholders, investors and financial analysts through its Investor Relations Department, the Corporate Secretary's Office or National Bank Trust Inc., the Bank's transfer agent and registrar. o The Ombudsman of the Bank handles customer complaints that could not be settled through the administrative channels set up within the Bank. As a last resort, a client who is not satisfied with the way his or her complaint was handled can contact the Ombudsman for Banking Services and Investments. e) THE INTEGRITY OF INTERNAL CONTROL AND o The Board, through its Audit and Risk Management Committee and in MANAGEMENT INFORMATION SYSTEMS. consultation with the internal auditor and management of the Bank, examines the effectiveness of the Bank's policies and internal control mechanisms. o Each year, the Bank's Internal Audit sector submits a report on the quality of the Bank's internal control system to this Committee.
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TORONTO STOCK EXCHANGE GUIDELINES CORPORATE GOVERNANCE PRACTICES OF THE BANK - ------------------------------------------- ------------------------------------------ 2. A MAJORITY OF THE DIRECTORS SHOULD BE o As at October 31, 2002, five directors were related to the Bank "UNRELATED". according to the definition of "unrelated director" (1) provided by The Toronto Stock Exchange. The Conduct Review and Corporate Governance Committee, to the best of its knowledge, is of the opinion that the other directors are unrelated to the Bank. o The Bank respects the provisions of the Bank Act (the "Act") concerning the authorized number of directors "affiliated with the bank". As at October 31, 2002, seven of the 20 directors were "affiliated with the bank" (2) as defined by the Act. 3. THE APPLICATION OF THE DEFINITION OF o The Board, through the Conduct Review and Corporate Governance Committee, "UNRELATED DIRECTOR" TO THE CIRCUMSTANCES is responsible for overseeing the application of the definition of OF EACH DIRECTOR SHOULD BE THE "unrelated director" under the guidelines of The Toronto Stock Exchange. RESPONSIBILITY OF THE BOARD, AS WELL AS THE This Committee analyzed all the business and related party relationships DISCLOSURE ON AN ANNUAL BASIS OF THE of the directors with the Bank or its subsidiaries, as applicable. It was ANALYSIS OF THE APPLICATION OF THE PRINCI- determined that the majority of directors are unrelated to the Bank. PLES SUPPORTING THIS CONCLUSION AND Of the five directors deemed to be related as defined by The Toronto Stock WHETHER THE BOARD HAS A MAJORITY OF Exchange, four are Officers or former Officers of the Bank or of one of its UNRELATED DIRECTORS. subsidiaries and one director has a business relationship with the Bank. 4. THE BOARD SHOULD APPOINT A COMMITTEE o The Board has assigned to the Conduct Review and Corporate Governance OF DIRECTORS COMPOSED EXCLUSIVELY OF OUT- Committee the duty of administering the selection process in effect for new SIDE, I.E. NON-MANAGEMENT DIRECTORS, A directors and to submit its recommendations to the Board. The Committee MAJORITY OF WHOM ARE UNRELATED, AND is composed exclusively of outside directors who are unrelated to the Bank. ASSIGN TO SUCH COMMITTEE THE RESPONSI- BILITY FOR PROPOSING NEW NOMINEES TO THE o The Committee recruits and proposes nominees for director, who have a broad BOARD AND FOR ASSESSING DIRECTORS ON AN complementary range of abilities and competencies, as well as pertinent ONGOING BASIS. expertise that enables them to make an active, informed and profitable contribution to managing the Bank, conducting its business and guiding its development. In its assessment of nominees, the Committee also takes into consideration their availability as well as their knowledge of regional and national issues, and ensures that they enjoy a reputation for integrity and honesty. o The Conduct Review and Corporate Governance Committee periodically reviews selection criteria for directors to ensure that they take into account regulatory requirements, expectations as well as the Board's current and future needs with respect to the abilities, competencies and experience of directors. These criteria guide the Committee in making its recommendations to the Board. o This Committee is also mandated to re-assess each year the eligibility and availability of directors who are nominated for re-election.
- ---------- (1) An "unrelated director" is a "director who is independent of management and is free from any interest and any business or other relationship which could, or could reasonably be perceived to, materially interfere with the director's ability to act with a view to the best interests of the corporation, other than interests and relationships arising from shareholding." (2) A director "affiliated with the bank" is a director who is an officer or an employee of the bank or of a corporation controlled by the bank or a person who, directly or through companies with whom such person is affiliated, maintains significant relationships with the bank covering a range of business or shareholding situations, as defined more fully in banking regulations, as well as the spouse of such person. Page 29 NATIONAL BANK OF CANADA SCHEDULE D (CONT.)
TORONTO STOCK EXCHANGE GUIDELINES CORPORATE GOVERNANCE PRACTICES OF THE BANK - ------------------------------------------- ------------------------------------------ 5. THE BOARD SHOULD IMPLEMENT A PROCESS o The Conduct Review and Corporate Governance Committee is delegated by the TO BE MONITORED BY THE APPROPRIATE COM- Board to implement a process allowing the Committee to assess, from time to MITTEE, FOR ASSESSING THE EFFECTIVENESS OF time, the effectiveness of the Board and its committees. Accordingly, THE BOARD AND THE COMMITTEES OF THE directors are required to complete a self-assessment questionnaire BOARD, AS WELL AS THE CONTRIBUTION OF concerning the overall performance of the Board and its committees, the INDIVIDUAL DIRECTORS. availability of information needed for decision-making and the capacity, in terms of knowledge, of the members of the Board and the committees to process this information for each strategic activity of the Board and the committees. The questionnaire also covers the directors' assessment of the general operation of the Board and its committees; for example, the frequency of meetings, the participation rate of the members and their attendance at such meetings. o In order to ensure an impartial process, the duly completed questionnaires are forwarded to an independent firm of experts to compile the results. On receipt of the results, the Chair of the Conduct Review and Corporate Governance Committee apprises the Committee members of the results of the self-assessment. The complete study of the results is transmitted to the Committee members and to the chairs of the other committees. The Chair of the Conduct Review and Corporate Governance Committee reports on the results of the self-assessment to the Board and presents the recommendations of this Committee. o The results of this self-assessment were presented and discussed during the past financial year. 6. PROVIDE AN ORIENTATION AND EDUCATION o During the year, the Conduct Review and Corporate Governance Committee PROGRAM FOR NEW RECRUITS TO THE BOARD. introduced a new orientation program for new directors of the Bank designed to give them an overview of the Bank and its operations. Meetings are arranged with Senior Management personnel such that new directors can discuss with them the main activities and major challenges facing the Bank. o The Conduct Review and Corporate Governance Committee also reviewed its education program for directors and made some changes in order to meet the directors' needs and expectations more effectively in a continually changing economic and regulatory environment. o The Directors' Handbook, which describes the responsibilities and obligations of directors, the organizational structure and the mandates of the Board and its committees, is distributed to all the directors and regularly updated. o Special presentations are made to the directors at regular meetings on technical, strategic and corporate governance issues, among other topics. The directors may at any time communicate with the Bank's Officers to obtain additional information. 7. THE BOARD SHOULD EXAMINE ITS SIZE WITH o The Board, through the Conduct Review and Corporate Governance Committee, A VIEW TO DETERMINING THE IMPACT OF THE periodically examines the impact of its size and composition on its activities NUMBER OF DIRECTORS UPON EFFECTIVENESS, in order to maintain a balance between the directors' competencies and AND UNDERTAKE, WHERE APPROPRIATE, A experience that will support the Bank's strategic orientations and PROGRAM TO REDUCE THE NUMBER OF DIREC- requirements in the future. TORS TO A NUMBER WHICH FACILITATES MORE EFFECTIVE DECISION-MAKING. o The retirement age of directors is being gradually lowered from 70 to 65 according to a procedure proposed by the Conduct Review and Corporate Governance Committee and approved by the Board. o Further to the recommendations of its Conduct Review and Corporate Governance Committee, the Board is of the opinion that its size enables it to make decisions effectively given the diversified experience and expertise contributed by its members.
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TORONTO STOCK EXCHANGE GUIDELINES CORPORATE GOVERNANCE PRACTICES OF THE BANK - ------------------------------------------- ------------------------------------------ 8. THE BOARD SHOULD REVIEW THE ADEQUACY o The Conduct Review and Corporate Governance Committee periodically AND FORM OF THE COMPENSATION OF DIREC- reviews the remuneration of directors and makes recommendations TORS IN LIGHT OF THE RISKS AND RESPONSIBILI- thereon to the Board. The Committee therefore takes into consideration TIES INVOLVED IN BEING AN EFFECTIVE DIREC- the types of remuneration and the amounts paid to directors of Canadian TOR. financial institutions and comparable publicly-traded Canadian companies. o The Board established ownership requirements, according to which directors must hold a minimum of 2,000 shares. o The Bank offers directors the possibility of receiving their remuneration for carrying out their functions on the Board and, if applicable, on the committees of the Bank or of its subsidiaries, in the form of common shares, deferred stock units, cash or any combination thereof. 9. THE COMMITTEES OF THE BOARD OF DIREC- o The Audit and Risk Management Committee, the Human Resources Committee TORS SHOULD GENERALLY BE COMPOSED OF and the Conduct Review and Corporate Governance Committee are composed OUTSIDE DIRECTORS, A MAJORITY OF WHOM exclusively of directors who are not members of management. No director ARE UNRELATED DIRECTORS. on the Audit and Risk Management Committee or the Conduct Review and Corporate Governance Committee is a related director of the Bank. Only one director on the Human Resources Committee is related to the Bank. 10. THE BOARD OF DIRECTORS SHOULD ASSUME o The Conduct Review and Corporate Governance Committee is responsible for RESPONSIBILITY FOR DEVELOPING THE preparing and monitoring the Bank's approach to corporate governance and it APPROACH TO GOVERNANCE ISSUES, OR ASSIGN makes recommendations thereon to the Board. It monitors corporate governance SUCH RESPONSIBILITY TO A COMMITTEE matters that apply to the Bank. This Committee reviews and approves the manner OF THE BOARD. THE COMMITTEE WOULD, in which the Bank responds to the guidelines of The Toronto Stock Exchange. This AMONG OTHER THINGS, BE RESPONSIBLE FOR year, the Committee met five times. RESPONDING TO THE TSE GUIDELINES. 11. a) THE BOARD OF DIRECTORS, TOGETHER o The mandates of the Board and of its committees are regularly reviewed in order WITH THE CEO, SHOULD DEVELOP POSITION to more clearly specify their respective responsibilities. DESCRIPTIONS FOR THE BOARD AND FOR THE CEO, INVOLVING THE DEFINITION OF THE o The Board delegated certain specific powers to management. The LIMITS TO MANAGEMENT'S RESPONSIBILITIES; responsibilities that are not expressly assigned to management remain vested in the Board. o A description of the functions of the President and Chief Executive Officer was drawn up to define his responsibilities. o The Act limits the powers that may be delegated by the Board to management; more specifically, the declaration of dividends and the approval of annual financial statements are matters that come within the exclusive purview of the Board. 11. b) THE BOARD SHOULD APPROVE OR o The Human Resources Committee approves the objectives of the President and DEVELOP THE GENERAL OBJECTIVES OF THE Chief Executive Officer annually and reviews his performance based on BANK WHICH THE CEO IS RESPONSIBLE FOR pre-determined objectives. MEETING. 12. a) THE BOARD SHOULD HAVE IN PLACE o The Board designated the Conduct Review and Corporate Governance Committee APPROPRIATE STRUCTURES AND PROCEDURES to ensure the effectiveness and independence of the Board. TO ENSURE THAT THE BOARD CAN FUNCTION INDEPENDENTLY OF MANAGEMENT. AN o As of March 13, 2002, the functions of Chairman of the Board and APPROPRIATE STRUCTURE WOULD BE TO: (i) of President and Chief Executive Officer of the Bank were separated. APPOINT A CHAIR OF THE BOARD WHO IS NOT A The Chairman of the Board is responsible for ensuring that the Board MEMBER OF MANAGEMENT WITH RESPONSIBILITY discharges its responsibilities effectively and independently. The TO ENSURE THAT THE BOARD DISCHARGES ITS Conduct Review and Corporate Governance Committee proposed a description RESPONSIBILITIES OR (ii) ADOPT ALTERNATE of the functions of the Chairman of the Board, which was approved by MEANS SUCH AS ASSIGNING THIS RESPONSIBILITY the Board. TO A COMMITTEE OF THE BOARD OR TO A DIRECTOR, SOMETIMES REFERRED TO AS THE "LEAD DIRECTOR";
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TORONTO STOCK EXCHANGE GUIDELINES CORPORATE GOVERNANCE PRACTICES OF THE BANK - ------------------------------------------- ------------------------------------------ 12. b) APPROPRIATE PROCEDURES MAY o In order to increase the Board's independence from management, the outside INVOLVE THE BOARD MEETING ON A REGULAR directors periodically hold in camera meetings under the leadership of the Chair BASIS WITHOUT MANAGEMENT PRESENT OR of the Conduct Review and Corporate Governance Committee. During the past MAY INVOLVE EXPRESSLY ASSIGNING THE financial year, outside directors met in camera three times. RESPONSIBILITY FOR ADMINISTERING THE BOARD'S RELATIONSHIP TO MANAGEMENT TO A COMMITTEE OF THE BOARD. 13. a) THE AUDIT COMMITTEE SHOULD BE o The Audit and Risk Management Committee is composed exclusively of outside COMPOSED ONLY OF OUTSIDE DIRECTORS; unrelated directors of the Bank. o The members of the Audit and Risk Management Committee are all financially literate and at least one member has accounting or financial expertise. 13. b) THE ROLE AND RESPONSIBILITIES OF THE o The Audit and Risk Management Committee is responsible for assuring the AUDIT COMMITTEE SHOULD BE SPECIFICALLY Board that the risks to which the Bank is exposed are identified and that DEFINED SO AS TO PROVIDE APPROPRIATE they are properly and effectively managed and controlled. The Audit and Risk GUIDANCE TO AUDIT COMMITTEE MEMBERS Management Committee analyzes, reviews and monitors issues related to the AS TO THEIR DUTIES. THE AUDIT COMMITTEE management of material financial and non-financial risk to which the Bank DUTIES SHOULD INCLUDE OVERSIGHT RESPONSI- is exposed. BILITY FOR MANAGEMENT REPORTING ON INTERNAL CONTROL. WHILE IT IS MANAGEMENT'S o The Board approved the mandate of the Audit and Risk Management Committee. RESPONSIBILITY TO DESIGN AND IMPLEMENT The audit component of the Committee's mandate provides that the Committee review AN EFFECTIVE SYSTEM OF INTERNAL CONTROLS, quarterly and annual consolidated financial statements, make IT IS THE RESPONSIBILITY OF THE AUDIT recommendations to the Board regarding the appointment of external auditors COMMITTEE TO ENSURE THAT MANAGEMENT HAS and their remuneration and assess, in conjunction with the auditors DONE SO; and management, the adequacy of internal controls and the integrity of the procedures established by the Bank to identify and manage risk. The Committee also examines the adequacy of established processes in order to comply with the laws and regulations applicable to the Bank. For more information on the mandate and activities of the Audit and Risk Management Committee, refer to Schedule C in this Circular. o The Board of Directors reviewed and approved the mandate of the Audit and Risk Management Committee, which sets out the functions and responsibilities attributed to the Committee members. o The mandate of the Audit and Risk Management Committee provides that this Committee examine and discuss a report prepared by the external auditors detailing all the elements likely to affect their independence. 13. c) THE AUDIT COMMITTEE SHOULD HAVE o The Audit and Risk Management Committee regularly meets with internal and DIRECT COMMUNICATION CHANNELS WITH THE external auditors without members of management being present in order to INTERNAL AND EXTERNAL AUDITORS TO DISCUSS discuss specific issues with them. AND REVIEW SPECIFIC ISSUES AS APPROPRIATE. 14. THE BOARD OF DIRECTORS SHOULD IMPLE- o The Board, one of its committees or a director may engage the services of MENT A SYSTEM THAT ENABLES AN INDIVIDUAL outside consultants, at the Bank's expense, by authority of the Conduct Review DIRECTOR TO ENGAGE AN OUTSIDE ADVISOR AT and Corporate Governance Committee, or in the event of an emergency, by authority THE EXPENSE OF THE BANK IN APPROPRIATE of the chair of this Committee. CIRCUMSTANCES. THE ENGAGEMENT OF THE OUTSIDE ADVISOR SHOULD BE SUBJECT TO THE APPROVAL OF AN APPROPRIATE COMMITTEE OF THE BOARD.
Page 32 GENERAL INFORMATION For a change of address, information on dividends or share certificate transfers, or other shareholder administrative matters, shareholders are requested to contact National Bank Trust Inc. directly. Investors, brokers and securities analysts requiring financial information are asked to contact: BY TELEPHONE 1-800-341-1419 (toll-free) (514) 871-7171 Monday to Friday 8:30 a.m. to 5:00 p.m. (Eastern time) BY FAX (514) 871-3673 BY E-MAIL clientele@tbn.bnc.ca BY MAIL National Bank Trust Inc. Share Ownership Management P.O. Box 888, Station B Montreal, Quebec H3B 9Z9 ELAINE CARR Director Investor Relations (514) 394-0296 elaine.carr@bnc.ca NATIONAL BANK OF CANADA WEBSITE www.nbc.ca HEAD OFFICE National Bank Tower 600 de La Gauchetiere West, 4th Floor Montreal, Quebec H3B 4L2 Legal deposit 1st Quarter 2003 Bibliotheque nationale du Quebec ISBN 2-921835-27-4 EX-3 5 t09344exv3.txt CONSENT [SAMSON BELAIR DELOITTE & TOUCHE LOGO] [PRICEWATERHOUSECOOPERS LOGO] Exhibit 3 AUDITORS' CONSENT We consent to the inclusion in the Annual Report on Form 40-F of our report dated November 29, 2002, with respect to the consolidated financial statements of National Bank of Canada (the "Bank") as at and for the year ended October 31, 2002 included in Exhibit 1 and of our comments for U.S. Readers on Canada - -- U.S. Reporting Difference, dated November 29, 2002 included in Exhibit 4. Our signatures to this letter relate to the year ended October 31, 2002 for which we were auditors of the Bank. [SAMSON BELAIR/DELOITTE & TOUCHE SIGNATURE] [PRICEWATERHOUSECOOPERS SIGNATURE] Samson Belair/Deloitte & Touche PricewaterhouseCoopers LLP General Partnership Chartered Accountants Chartered Accountants November 29, 2002 SAMSON BELAIR/DELOITTE & TOUCHE, S.E.N.C. PRICEWATERHOUSECOOPERS S.R.L. COMPTABLES AGREES COMPTABLES AGREES 1, Place Ville-Marie 1250, boul. Rene-Levesque Ouest Bureau 3000 Bureau 2800 Montreal (Quebec) H3B 4T9 Montreal (Quebec) H3B 2G4 Telephone: (514) 393-7115 Telephone: (514) 205-5000 Telecopieur: (514) 390-4100 Telecopieur: (514) 876-1502 EX-4 6 t09344exv4.txt COMMENTS BY AUDITORS [SAMSON BELAIR DELOITTE & TOUCHE LOGO] [PRICEWATERHOUSECOOPERS LOGO] Exhibit 4 COMMENTS BY AUDITORS FOR U.S. READERS ON CANADA-U.S. REPORTING DIFFERENCE In the United States of America, reporting standards for auditors require the addition of an explanatory paragraph (following the opinion paragraph) when there is a change in accounting principles that has a material effect on the comparability of the company's financial statements, such as the change described in Note 1 to the consolidated financial statements as at and for the year ended October 31, 2002, relating to the adoption by the Bank of the CICA Handbook section 3062 -- Goodwill and other intangible assets. Our report to the shareholders dated November 29, 2002 is expressed in accordance with Canadian reporting standards, which do not require a reference to such a change in accounting principles in the auditors' report when the change is properly accounted for and adequately disclosed in the financial statements.
[SAMSON BELAIR/DELOITTE & TOUCHE SIGNATURE] [PRICEWATERHOUSECOOPERS LLP SIGNATURE] - ------------------------------------------- -------------------------------------- Samson Belair/Deloitte & Touche PricewaterhouseCoopers LLP General Partnership Chartered Accountants Chartered Accountants
November 29, 2002 SAMSON BELAIR/DELOITTE & TOUCHE, S.E.N.C. PRICEWATERHOUSECOOPERS s.c.l. COMPTABLES AGREES COMPTABLES AGREES 1, Place Ville-Marie 1250, boul. Rene-Levesque Ouest Bureau 3000 Bureau 2800 Montreal (Quebec) H3B 4T9 Montreal (Quebec) H3B 2G4 Telephone : (514) 393-7115 Telephone : (514) 205-5000 Telecopieur : (514) 390-4100 Telecopieur : (514) 876-1502 EX-5 7 t09344exv5.txt CERTIFICATES EXHIBIT 5 CERTIFICATIONS In connection with the annual report of National Bank of Canada (the "Company"), for the period ended October 31, 2002 as filed with the Securities and Exchange Commission on Form 40-F on the date hereof (the "Report"), I, Real Raymond, President and Chief Executive Officer of the Company, certify that: (1) the Report fully complies with the requirements of section 13(a) or 15(d) of the Securities and Exchange Act of 1934; and (2) the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. /s/ Real Raymond --------------------------------------------- Real Raymond President and Chief Executive Officer Dated: March 18, 2003 This certification shall not be deemed filed by the registrant for the purposes of Section 18 of the Securities Exchange Act of 1934, as amended. In connection with the annual report of National Bank of Canada (the "Company"), for the period ended October 31, 2002 as filed with the Securities and Exchange Commission on Form 40-F on the date hereof (the "Report"), I, Michel Labonte, Senior Vice President, Finance and Technology of the Company, certify that: (1) the Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and (2) the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. /s/ Michel Labonte --------------------------------------------- Michel Labonte Senior Vice President, Finance and Technology Dated: March 19, 2003 This certification shall not be deemed filed by the registrant for the purposes of Section 18 of the Securities Exchange Act of 1934, as amended. -----END PRIVACY-ENHANCED MESSAGE-----