REG - Nat Bank of Canada - Financial Statements - Part 2 <Origin Href="QuoteRef">NA.TO</Origin> - Part 5
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NOTE 8 - OTHER ASSETS
As at July 31, 2014 As at October 31, 2013 (1)
Receivables, prepaid expenses and other items 657 612
Interest and dividends receivable 393 425
Purchased receivables 801 466
Accrued benefit asset 141 131
Deferred tax assets 269 289
Current tax assets 50 88
Reinsurance assets 27 26
2,338 2,037
(1) Certain amounts have been adjusted to reflect changes in accounting standards. See Note 2.
NOTE 9 - DEPOSITS
As at July 31, 2014 As at October 31, 2013 (1)
On demand or after notice Fixed date Total Total
Personal 24,473 20,184 44,657 42,652
Business and government 31,985 33,566 65,551 57,103
Deposit-taking institutions 762 3,974 4,736 2,356
57,220 57,724 114,944 102,111
(1) Certain amounts have been adjusted to reflect changes in accounting standards. See Note 2.
TheDeposits - Business and government item includes the deposit from NBC Capital Trust and the covered bonds, as described
below.
Deposit from NBC Capital Trust
On June 15, 2006, NBC Capital Trust (the Trust), an open-end trust established under the laws of the Province of Ontario,
issued 225,000 transferable non-voting trust units called Trust Capital Securities - Series 1 or NBC CapS - Series 1. The
gross proceeds of $225 million from the offering were used by the Trust to acquire a deposit note from the Bank.
The Bank does not control the Trust and therefore does not consolidate it. See Note 21 for additional information.
Consequently, the NBC CapS - Series 1 issued by the Trust are not included on the Bank's Consolidated Balance Sheet, but
the deposit note is presented in Deposits - Business and government.
The main terms and characteristics of the $225 million deposit note are as follows.
Issuance date Fixed annualinterest rate Interestpayment dates Semi-annualpayment (1) Maturity Date ofconversionat the optionof the Trust (2)
June 15, 2006 5.329 %(3) June 30,December 31 $26.645 June 30, 2056 Anytime
(1) Per $1,000 principal amount.
(2) Each $1,000 principal amount of the deposit note is convertible at the option of the Trust into 40 Series 17
First Preferred Shares of the Bank. The Trust will exercise this conversion right in circumstances in which holders of NBC
CapS - Series 1 exercise their exchange right.
(3) The rate of 5.329% will be in effect up to and including June 30, 2016. After that date, the note will bear
interest at a fixed annual rate equal to the 180-day bankers' acceptance rate in effect plus 1.50%.
Redemption at the Option of the Bank
Since June 30, 2011, and on any subsequent distribution date, the Bank may, at its option, redeem the deposit note, in
whole or in part, upon the occurrence of predetermined events of a regulatory or fiscal nature. Any redemption may be
carried out without the consent of the Trust, subject to prior written notice and OSFI approval. If the Bank redeems the
deposit note in whole or in part, the Trust will be required to redeem a corresponding amount of NBC CapS - Series 1.
NOTE 9 - DEPOSITS (cont.)
Purchase for Cancellation
Since June 30, 2011, the Bank may, with OSFI approval, purchase the deposit note in whole or in part on the open market by
tender or private contract at any price. Any part of the deposit note purchased by the Bank will be cancelled and will not
be reissued.
Instances of Default
Failure by the Bank to make payments or to satisfy its other obligations under the deposit note will not entitle the Trust
to accelerate payment of the deposit note.
Covered Bonds
NBC Covered Bond Guarantor (Legislative) Limited Partnership
During the quarter ended July 31, 2014, the Bank did not issue any covered bonds under the new legislative covered bond
program. During the nine months ended July 31, 2014, the Bank issued covered bonds under this program for an amount of 2.0
billion euros. The Bank created a structured entity, NBC Covered Bond Guarantor (Legislative) Limited Partnership, to
guarantee the payment of principal and interest due to bondholders.See Note 21 for additional information. The covered
bonds, totalling $2.9 billion as at July 31, 2014, are presented in the Deposits - Business and government item on the
Bank's Consolidated Balance Sheet.
The Bank has limited access to the assets owned by this structured entity according to the terms of the agreements that
apply to this transaction. The assets owned by this entity totalled $4.5 billion as at July 31, 2014, of which $4.4 billion
is presented in the Residential mortgage item on the Bank's Consolidated Balance Sheet. The assets pledged as collateral
for this program amounted to $4.4 billion as at July 31, 2014.
NBC Covered Bond Guarantor Limited Partnership
Covered bonds issued under the structured covered bond program, established in 2011, totalled $2.2 billion as at July 31,
2014 ($3.1 billion as at October 31, 2013) and are presented in the Deposits - Business and government item on the Bank's
Consolidated Balance Sheet. On January 30, 2014, an amount of US$1.0 billion matured.
The Bank has limited access to the assets owned by NBC Covered Bond Guarantor Limited Partnership, the structured entity
created to guarantee the payments of principal and interest due to the bondholders. See Note 21 for additional information.
The assets owned by this entity totalled $2.7 billion as at July 31, 2014 ($3.9 billion as at October 31, 2013), of which
$2.5 billion ($3.5 billion as at October 31, 2013) is presented in the Residential mortgage item on the Bank's Consolidated
Balance Sheet. The assets pledged as collateral for this program amounted to $2.5 billion as at July 31, 2014 ($3.5 billion
as at October 31, 2013).
NOTE 10 - OTHER LIABILITIES
As at July 31, 2014 As at October 31, 2013(1)
Accounts payable and accrued expenses 1,157 1,236
Subsidiaries' debts to third parties 1,430 1,457
Interest and dividends payable 700 785
Accrued benefit liability 227 202
Deferred tax liabilities 118 119
Current tax liabilities 91 70
Insurance liabilities 72 73
Other items(2) 570 555
4,365 4,497
(1) Certain amounts have been adjusted to reflect changes in accounting standards. See Note 2.
(2) As at July 31, 2014, the Other items item included a $17 million provision ($26 million as at October 31, 2013)
for severance pay related to the optimization of certain organizational structures.
NOTE 11 - SUBORDINATED DEBT
On November 15, 2013, the Bank redeemed, at nominal value for cancellation, $500 million in notes maturing in November
2018. In addition, on December 13, 2013, the Bank redeemed for cancellation debentures with a nominal value of US$25
million maturing in February 2087 and recognized an $8 million gain in Non-interest income in the Consolidated Statement of
Income.
NOTE 12 - Hedging Activities
Derivative and Non-Derivative Financial Instruments Designated as Hedging Instruments
As at July 31, 2014 As at October 31, 2013
Fair value hedge Cash flow hedge Net investment hedge Fair value hedge Cash flow hedge Net investment hedge
Assets
Derivative financial instruments 405 266 8 390 82 2
Liabilities
Derivative financial instruments 155 146 1 188 33 −
Carrying value of non-derivative financial instruments − − 1,306 − − 1,192
Notional amounts of designated derivative financial instruments 19,722 18,889 658 20,830 3,956 190
Results of the Hedges of Net Investments in Foreign Operations
For the quarters and nine-month periods ended July 31, 2014 and 2013, a negligible amount representing the ineffective
portion was recognized in Non-interest income in the Consolidated Statement of Income.
Results of the Fair Value Hedges
Quarter ended July 31 Nine months ended July 31
2014 2013 2014 2013
Gains (losses) on hedging instruments 30 (185) 75 (171)
Gains (losses) on hedged items attributable to the hedged risk (28) 182 (74) 171
Ineffectiveness of fair value hedging relationships − 1 − 1
Results of the Cash Flow Hedges
Quarter ended July 31 Nine months ended July 31
2014 2013 2014 2013
Unrealized gains (losses) included in Other comprehensive income
as the effective portion of the hedging instrument 61 (32) 70 (33)
Losses (gains) reclassified to Net interest income
in the Consolidated Statement of Income (4) (8) (12) (33)
Ineffectiveness of cash flow hedging relationships − (1) − (2)
The following table shows the periods during which the Bank expects the hedged cash flows to occur and have an impact on
net income.
As at July 31, 2014
1 year or less Over 1 year to 2 years Over 2 years to 5 years Over 5 years
Expected cash flows from hedged assets 65 68 240 86
Expected cash flows from hedged liabilities 89 74 163 43
Net exposure (24) (6) 77 43
NOTE 13 - SHARE CAPITAL
Stock Dividend
On December 3, 2013, the Board declared a stock dividend of one common share on each issued and outstanding common share,
paid on February 13, 2014 to common shareholders of record on February 6, 2014. The effect was the same as a two-for-one
split of common shares. All common share information has been adjusted retrospectively to reflect the stock dividend.
Issuance of Preferred Shares
On February 7, 2014, the Bank issued 14,000,000 Non-Cumulative 5-Year Rate-Reset Series 30 First Preferred Shares at a
per-share price of $25.00 for gross proceeds of $350 million. These shares are redeemable in cash at the Bank's option,
subject to the provisions of the Bank Act (Canada) and to OSFI approval, on May 15, 2019 and on May 15 every five years
thereafter, in whole or in part, at a price equal to $25.00 per share, plus all dividends declared and unpaid thereon on
the date fixed for redemption; the shares are convertible at the option of the holder into floating-rate (equal to the
three-month Government of Canada Treasury Bills yield plus 2.40%) non-cumulative Series 31 First Preferred Shares, subject
to certain conditions, on May 15, 2019 and on May 15 every five years thereafter. The Series 30 preferred shares carry a
non-cumulative quarterly dividend of $0.2563 for the initial period ending May 15, 2019. Thereafter, these shares carry a
non-cumulative quarterly fixed dividend in an amount per share determined by multiplying the interest rate, equal to the
sum of the 5-year Government of Canada bond-yield on the calculation date of the applicable fixed rate plus 2.40%, by
$25.00.
Upon the occurrence of a trigger event as defined by OSFI, each outstanding Series 30 and 31 preferred share will be
automatically and immediately converted, on a full and permanent basis, without the consent of the holder, into a number of
common shares of the Bank determined pursuant to an automatic conversion formula. This conversion will be calculated by
dividing the value of the preferred shares, i.e., $25.00 per share, plus all declared and unpaid dividends as at the date
of the trigger event, by the value of the common shares. The value of the common shares will be the greater of a $5.00
floor price or the current market price of the common shares. Current market price means the volume weighted average
trading price of common shares for the ten consecutive trading days ending on the trading day preceding the date of the
trigger event. If the common shares are not listed on an exchange when this price is being established, the price will be
the fair value reasonably determined by the Bank's Board of Directors. Given that the Series 30 preferred shares satisfy
the non-viability contingent capital requirements, they qualify for the purposes of calculating regulatory capital under
Basel III.
Change in Classification of Series 30 First Preferred Shares
During the quarter ended July 31, 2014, the Bank reclassified these preferred shares on the Consolidated Balance Sheet. As
at July 31, 2014, these preferred shares are presented in equity. Specifically, the Preferred share liabilities item of
$341 million was reclassified to equity, representing a $350 million increase in Preferred shares and a $9 million decrease
in Retained earnings.
Redemption of Preferred Shares
On February 15, 2014, the Bank redeemed the outstanding 2,425,880 Non-Cumulative Series 24 First Preferred Shares and the
outstanding 1,724,835 Non-Cumulative Series 26 First Preferred Shares at a per-share price of $25.00 plus the periodic
declared and unpaid dividend. The Bank paid the redemption price and the dividend on February 17, 2014, the first business
day after the redemption date.
Repurchase of Common Shares(1)
On June 20, 2013, the Bank began a normal course issuer bid to repurchase for cancellation up to 6,496,228 common shares
over the 12-month period ended June 19, 2014. During the nine months ended July 31, 2014, the Bank did not repurchase any
shares.
Common Shares Held in Escrow(1)
As part of the acquisition of Wellington West Holdings Inc., the Bank had issued common shares held in escrow. As at July
31, 2014, the balance of the common shares held in escrow was 977,110 (2,664,268 as at October 31, 2013). The Bank expects
that the conditions will be met and that the remaining shares held in escrow will be released by the end of fiscal 2016.
(1) Reflecting the stock dividend, as described above.
As at July 31, 2014 As at October 31, 2013
Number of shares Shares $ Number of shares Shares $
First Preferred Shares
Series 16 8,000,000 200 8,000,000 200
Series 20 6,900,000 173 6,900,000 173
Series 24 − − 2,425,880 61
Series 26 − − 1,724,835 43
Series 28 8,000,000 200 8,000,000 200
Series 30 14,000,000 350 − −
36,900,000 923 27,050,715 677
Common shares at beginning of the fiscal year(1) 325,982,736 2,160 322,616,546 2,054
Issued pursuant to:
Stock Option Plan(1) 2,164,204 74 3,529,528 107
Impact of shares purchased or sold for trading(1) 357,182 3 (137,688) (1)
Other(1) (35,292) − (25,650) −
Common shares at end of the period(1) 328,468,830 2,237 325,982,736 2,160
Nine months ended July 31
2014 2013
Dividends $ Dividendsper share Dividends $ Dividendsper share
First Preferred Shares
Series 15 − − 2 0.2444
Series 16 7 0.9094 7 0.9094
Series 20 8 1.1250 8 1.1250
Series 21 − − 3 1.0078
Series 24 1 0.4125 3 1.2375
Series 26 1 0.4125 2 1.2375
Series 28 6 0.7125 7 0.7353
Series 30 7 0.5287 − −
30 32
Common shares(1) 458 1.4000 410 1.2600
488 442
(1) Reflecting the stock dividend, as described on the previous page.
NOTE 14 - Non-Controlling Interests
As at July 31, 2014 As at October 31, 2013(1)
Trust units issued by NBC Asset Trust (NBC CapS II)
Series 1(2) 402 409
Series 2(3) 352 359
Other 24 21
778 789
(1) Certain amounts have been adjusted to reflect changes in accounting standards. See Note 2.
(2) Includes $2 million in accrued interest ($9 million as at October 31, 2013).
(3) Includes $2 million in accrued interest ($9 million as at October 31, 2013).
NOTE 15 - CAPITAL DISCLOSURE
OSFI has been requiring Canadian banks to meet the 2019 minimum "all-in" requirements since the first quarter of 2013 for
Common Equity Tier 1 (CET1) and since the first quarter of 2014 for Tier 1 capital and total capital. Furthermore, to
ensure an implementation similar to that of other countries, OSFI has decided to phase in the credit valuation adjustment
(CVA) charge over a five-year period beginning in 2014. In the first year, only 57%, 65% and 77% of total CVA will be
applied to the calculation of the CET1, Tier 1 and total capital ratios, respectively, and these percentages will gradually
increase each year until they reach 100% by 2019. The Bank has applied the prescribed percentages to the total CVA charge
in the calculation of capital ratios as at July 31, 2014.
The Bank must now maintain a CET1 capital ratio, Tier 1 capital ratio and total capital ratio of at least 7.0%, 8.5% and
10.5%, respectively, all of which include the 2.5% capital conservation buffer. In March 2013, OSFI designated Canada's six
largest banks, a group that includes National Bank, as Domestic Systemically Important Banks (D-SIBs). For these banks, a
1% surcharge will apply to their capital ratios as of January 1, 2016. Consequently, as of that date, the Bank and all
other major Canadian banks will have to maintain a CET1 capital ratio of at least 8.0%, a Tier 1 capital ratio of at least
9.5% and a total capital ratio of at least 11.5%, all determined using the "all-in" methodology.
In addition to regulatory capital ratios, OSFI also requires Canadian banks to meet a financial leverage test. Leverage or
the assets-to-capital multiple (ACM) is calculated by dividing the Bank's total assets, including certain off-balance-sheet
items, by its total regulatory capital in accordance with the transitional requirements for Basel III. In January 2014,
after the Basel Committee on Banking Supervision updated the Basel III rules for the leverage ratio, OSFI announced that
the new Basel III leverage ratio would replace the ACM as of January 1, 2015. The new leverage ratio is calculated by
dividing Tier 1 capital by total on- and off-balance-sheet assets. Items deducted from Tier 1 capital will also be excluded
from the calculation of the leverage ratio.
As at July 31, 2014, the Bank was in compliance with all of OSFI's regulatory capital requirements.
Regulatory Capital and Capital Ratios Under Basel III(1)
As at July 31, 2014 As at October 31, 2013
Common Equity Tier 1 Capital (CET1) 5,876 5,350
Tier 1 Capital 7,774 7,002
Total Regulatory Capital 9,650 9,186
CET1 Risk-Weighted Assets 64,703 61,251
Tier 1 Capital Risk-Weighted Assets 64,972
Total Regulatory Capital Risk-Weighted Assets 65,375
Capital ratios
Common Equity Tier 1 (CET1) 9.1 % 8.7 %
Tier 1 12.0 % 11.4 %
Total 14.8 % 15.0 %
Assets-to-capital multiple 18.8 18.4
(1) Figures are presented on an "all-in" basis, except for the assets-to-capital multiple, which is presented in
accordance with the transitional requirements for Basel III, and the October 31, 2013 figures have not been adjusted to
reflect changes in accounting standards.
NOTE 16 - TRADING ACTIVITY REVENUES
Trading activity revenues consist of the net interest income from trading activities and the trading revenues recognized in
Non-interest income in the Consolidated Statement of Income.
Net interest income comprises interest and dividends related to financial assets and liabilities associated with trading
activities, net of interest expenses and interest income related to the financing of these financial assets and
liabilities.
Non-interest income consists of the realized and unrealized gains and losses on securities that are measured at fair value
through profit or loss, income from held-for-trading derivative financial instruments, and the change in fair value of
financial instruments designated at fair value through profit or loss.
Quarter ended July 31 Nine months ended July 31
2014 2013 2014 2013
Net interest income 101 131 317 353
Non-interest income 81 (7) 126 148
182 124 443 501
NOTE 17 - Share-Based Payments(1)
Stock Option Plan
During the quarters ended July 31, 2014 and 2013, the Bank did not award any stock options. During the nine months ended
July 31, 2014, the Bank awarded 2,863,376 stock options (3,225,392 stock options during the nine months ended July 31,
2013) with an average fair value of $5.39 per option ($4.90 in 2013). As at July 31, 2014, there were 15,539,964 stock
options outstanding (15,954,314 stock options as at July 31, 2013).
The average fair value of the options awarded was estimated on the award date using the Black-Scholes model and the
following assumptions.
Nine months ended July 31
2014 2013
Risk-free interest rate 2.47% 1.78%
Expected life of options 7 years 7 years
Expected volatility 20.46% 22.85%
Expected dividend yield 4.4% 4.3%
Compensation expense is presented in the following table.
Quarter ended July 31 Nine months ended July 31
2014 2013 2014 2013
Compensation expense recorded for stock options 4 4 11 12
(1) Reflecting the stock dividend paid on February 13, 2014. See Note 13.
NOTE 18 - Employee Benefits
The Bank offers defined benefit pension plans and certain post-retirement and post-employment benefits. The expenses
associated with these plans and the actuarial gains and losses recognized in Other comprehensive income are presented in
the following tables.
Expense Components of the Pension Plans and Other Plans
Quarter ended July 31 Nine months ended July 31
Pension plans Other plans Pension plans Other plans
2014 2013(1) 2014 2013(1) 2014 2013(1) 2014 2013(1)
Current service cost 19 18 2 2 56 52 6 4
Past service cost − − − − − (26) − (8)
Interest on the accrued benefit liability (asset), net (1) 4 2 − (3) 6 6 3
Administrative expenses 1 − − − 2 2 − −
Pension plan expense 19 22 55 34
Other plan expense (recovery) 4 2 12 (1)
(1) Certain amounts have been adjusted to reflect changes in accounting standards. See Note 2.
Actuarial Gains and Losses Recognized in Other Comprehensive Income (1)
Quarter ended July 31 Nine months ended July 31
Pension plans Other plans Pension plans Other plans
2014 2013(2) 2014 2013(2) 2014 2013(2) 2014 2013(2)
Cumulative actuarial gains (losses) at beginning -
Retained earnings (112) (310) (30) (35) (166) (308) (24) (25)
Actuarial gains (losses) for the period -
Other comprehensive income(3) (78) 207 (11) 17 (24) 205 (17) 7
Cumulative actuarial gains (losses) at end -
Retained earnings (190) (103) (41) (18) (190) (103) (41) (18)
(1) The amounts are presented on a pre-tax basis.
(2) The amounts have been adjusted to reflect changes in accounting standards. See Note 2.
(3) Changes related to the discount rate and the return on plan assets are reviewed and updated on a quarterly basis.
All other assumptions are updated annually.
NOTE 19 - Earnings Per Share(1)
Diluted earnings per share is calculated by dividing net income attributable to common shareholders by the weighted average
number of common shares outstanding, factoring in the dilutive effect of stock options using the treasury stock method.
Quarter ended July 31 Nine months ended July 31
2014 2013(2) 2014 2013(2)
Basic earnings per share
Net income attributable to the Bank's shareholders 423 387 1,157 1,145
Dividends on preferred shares 11 10 30 32
Net income attributable to common shareholders 412 377 1,127 1,113
Weighted average basic number of common shares outstanding (thousands) 327,687 324,772 327,170 324,162
Basic earnings per share (dollars) 1.26 1.16 3.44 3.43
Diluted earnings per share
Net income attributable to common shareholders 412 377 1,127 1,113
Weighted average basic number of common shares outstanding (thousands) 327,687 324,772 327,170 324,162
Adjustment to average number of common shares (thousands)
Stock options(3) 3,694 2,404 3,512 2,537
Weighted average diluted number of common shares outstanding (thousands) 331,381 327,176 330,682 326,699
Diluted earnings per share (dollars) 1.24 1.16 3.41 3.41
(1) The weighted average basic number of common shares outstanding, the weighted average diluted number of common
shares outstanding, basic earnings per share and diluted earnings per share have been adjusted retrospectively to reflect
the stock dividend paid on February 13, 2014. See Note 13.
(2) Certain amounts have been adjusted to reflect changes in accounting standards. See Note 2.
(3) For the quarter and nine-month period ended July 31, 2014, with the exercise price of the options being less than
the average price of the Bank's common shares, no option was excluded from the diluted earnings per share calculation. The
diluted earnings per share calculation does not include an average number of 3,188,416 options outstanding with a weighted
average exercise price of $38.36 for the quarter ended July 31, 2013, and 2,651,442 options outstanding with a weighted
average exercise price of $38.36 for the nine months ended July 31, 2013 as the exercise price of these options was higher
than the average price of the Bank's common shares.
NOTE 20 - Acquisition
TD Waterhouse Institutional Services
On November 12, 2013, through a subsidiary, the Bank completed the acquisition of Toronto-Dominion Bank's institutional
services known as TD Waterhouse Institutional Services. This acquisition marks another step in the Bank's expansion of its
wealth management platform across Canada. The final purchase price is $260 million.The net assets acquired include client
list intangible assets totalling approximately $58 million. The purchase price exceeded the fair value of the net assets
acquired by $206 million. This excess amount was recorded on the Consolidated Balance Sheet as goodwill and mainly
represents synergies and the benefits expected from combining the acquired operations with those of the Bank. The tax
deductible portion of the goodwill is $155 million. The acquired receivables, consisting mainly of loans to clients for the
purchase of securities, had an acquisition-date fair value of $448 million. This amount also represents the gross
contractual amounts receivable, which the Bank expects to fully recover.
An amount of $1 million in acquisition-related costs was included in Non-interest expenses in the Consolidated Statement of
Income for the nine months ended July 31, 2014. These consolidated financial statements include the results of the acquired
business as of November 12, 2013. During the quarter ended July 31, 2014, the acquired business contributed approximately
$12 million to the Bank's total revenues and $4 million to its net income (excluding integration costs). For the nine
months ended July 31, 2014, the contributions to total revenues and net income amounted to $39 million and $16 million,
respectively. If the Bankhad completed the acquisition on November 1, 2013, total revenues would have been approximately
$4,102 million and net income approximately $1,209 million for the nine months ended July 31, 2014.
The following table summarizes the acquisition-date fair values of all assets acquired and liabilities assumed.
Cash and cash equivalents 982
Loans 71
Due from clients, dealers and brokers 448
Goodwill 206
Intangible assets 58
Total assets 1,765
Deposits 1,380
Due to clients, dealers and brokers 111
Other liabilities 14
Total liabilities 1,505
Purchase price 260
Cash Flows Related to the Acquisition
Cash to be transferred by the seller 982
Purchase price 260
Net cash amount transferred by the seller 722
NOTE 21 - Structured Entities
Structured entities are entities that have been designed so that voting or similar rights are not the dominant factor in
deciding who controls the entity, such as when any voting rights relate only to administrative tasks and the relevant
activities are directed by means of contractual arrangements. Structured entities include special purpose entities, which
are entities created to accomplish a narrow and well-defined objective. Structured entities are assessed for consolidation
in accordance with the accounting treatment described in Note 2. The Bank's maximum exposure to loss resulting from
economic interests consists primarily of the investments in these entities, the fair value of the derivative contracts
entered into with them, and the backstop liquidity and credit enhancement facilities granted to certain structured
entities.
Non-Consolidated Structured Entities
Multi-Seller Conduits
The Bank administers multi-seller conduits that purchase financial assets from clients and finance those purchases by
issuing commercial paper backed by the assets acquired. Clients use these multi-seller conduits to diversify their funding
sources and reduce borrowing costs, while continuing to manage the assets and providing some amount of first-loss
protection. Notes issued by the conduits and held by third parties provide additional credit loss protection. The Bank acts
as a financial agent and provides these conduits with administrative and transaction structuring services as well as
backstop liquidity and credit enhancement facilities under the commercial paper program. The Bank has concluded derivative
contracts with these conduits, the fair value of which is presented on the Bank's Consolidated Balance Sheet. Although the
Bank has the ability to direct the relevant activities of these conduits, it cannot use its power to affect the amount of
the returns it obtains, as it acts as an agent. Consequently, the Bank does not control these conduits and does not
consolidate them.
Master Asset Vehicles (MAV)
The Bank holds economic interests in MAVs in the form of restructured notes and the margin funding facility provided. The
Bank does not have the ability to direct the relevant activities of the MAVs. Consequently, it does not control these MAVs
and does not consolidate them.
Private Capital Funds and Investments
As part of its investment banking operations, the Bank invests in several limited liability partnerships and other
incorporated entities. These investment companies in turn invest in operating companies with a view to reselling these
investments at a profit over the medium or long term. The Bank does not intervene in the operations of these entities; its
only role is that of an investor. Consequently, it does not control these companies and does not consolidate them.
NBC Capital Trust
The Bank created NBC Capital Trust (the Trust) for its funding and capital management needs. The securities issued by this
trust constitute innovative capital instruments and are eligible as additional Tier 1 capital, but because these
instruments do not satisfy the non-viability contingent capital requirements, they are to be phased out at a rate of 10%
per year between 2013 and 2022. The gross proceeds from the securities issued by this trust were used to acquire a deposit
note from the Bank (see Note 9). The Bank also holds all of the trust's equity and has committed to lend it the liquidity
required in the normal course of business. Although the Bank has the ability to direct the relevant activities of the
Trust, it is not exposed to or have the rights to variable returns since the Trust's primary asset is a deposit note issued
by the Bank. Consequently, the Bank does not control the Trust and does not consolidate it.
Consolidated Structured Entities
Securitization Entity for the Bank's Credit Card Receivables
The Bank established Canadian Credit Card Trust (CCCT) to securitize its credit card receivables and has used this entity
for capital management and funding purposes. The Bank acts as an administrative agent and servicer and as such is
responsible for the daily administration and management of CCCT's credit card receivables. In addition, the Bank holds
certificates issued by CCCT, which gives it rights to CCCT's residual cash flows. The Bank therefore has the ability to
direct the relevant activities of CCCT and can use its power to affect the amount of returns it obtains. Consequently, the
Bank controls CCCT and consolidates it.
National Bank Hedge Fund Managed Accounts (Innocap Platform)
Innocap Investment Management Inc. (Innocap), a company under joint control, offers hedge fund account programs for fund
sponsors seeking a platform that gives them a high degree of transparency and leading-edge tools to manage liquidity and
control assets and risk. The Bank can hold economic interests in certain hedge funds of the platform and consolidates those
of which it has the ability to direct the relevant activities and in which it can use its power to affect the amount of
returns it obtains.
Covered Bond Guarantor
NBC Covered Bond Guarantor (Legislative) Limited Partnership
Since December 2013, the Bank has been participating in the new covered bond legislative program, under which covered bonds
are issued. It therefore created NBC Covered Bond Guarantor (Legislative) Limited Partnership (the Guarantor) to guarantee
payment of the principal and interest owed to the bondholders. The Bank sold uninsured residential mortgages to the
Guarantor and granted it loans to facilitate the acquisition of these assets. Through a subsidiary, the Bank acts as
manager of the partnership and therefore influences the returns of the partnership, which are directly related to the
return on the mortgage loan portfolio and the interest on the loans from the Bank. Consequently, the Bank consolidates the
partnership because it has the ability to direct its relevant activities and because it can use its power to affect the
amount of the returns it obtains.
NBC Covered Bond Guarantor Limited Partnership
Since January 2011, the Bank has been participating in the structured covered bond program under which covered bonds are
issued. It therefore created NBC Covered Bond Guarantor Limited Partnership (the Guarantor) to guarantee payment of the
principal and interest owed to the bondholders. The Bank sold insured residential mortgages to the Guarantor and granted it
a demand loan to facilitate the acquisition of these assets. Through a subsidiary, the Bank acts as manager of the
partnership and therefore influences the returns of the partnership, which are directly related to the return on the
mortgage loan portfolio and interest on the loan from the Bank. Consequently, the Bank consolidates the partnership because
it has the ability to direct its relevant activities and because it can use its power to affect the amount of the returns
it obtains.
Investment Funds
The Bank enters into derivative contracts with third parties to provide them with the desired exposure to certain
investment funds. The Bank economically hedges the risks related to these derivatives by investing in those investment
funds. The Bank consolidates those of which it has the ability to direct its relevant activities and in which it can use
its power to affect the amount of returns it obtains.
NOTE 21 - Structured Entities (cont.)
NBC Asset Trust
The Bank created NBC Asset Trust for its funding and capital management needs. The securities issued by this trust
constitute innovative capital instruments and are eligible as additional Tier 1 capital, but because these instruments do
not satisfy the non-viability contingent capital requirements, they are to be phased out at a rate of 10% per year between
2013 and 2022. The issuance proceeds were used to acquire, from the Bank, residential mortgage loans. Not only does the
Bank remain the administrator of these loans, it also administers the day-to-day operations of the trust. The Bank also
holds the special voting securities of the trust. After the distribution has been paid to the holders of the trust capital
securities, the Bank, as the sole holder of the special trust securities, is entitled to receive the balance of net
residual funds. Therefore, the Bank has the ability to direct the relevant activities of NBC Asset Trust and can use its
power to affect the amount of returns it obtains. Consequently, the Bank controls this trust and consolidates it.
The following table presents the Bank's exposure to consolidated and non-consolidated structured entities.
As at July 31, 2014 As at October 31, 2013(1)
Investmentsand other assets Total assets Investmentsand other assets Total assets
Non-consolidated structured entities
Multi-seller asset-backed commercial paper conduits
administered by the Bank(2) 7 2,048 6 2,110
National Bank hedge fund managed accounts (Innocap platform)(3) 2 15 32 290
Restructured notes of the MAV conduits and other restructured notes(4) 1,281 − 1,361 −
Private capital funds and investments(5) 1,108 8,361 1,304 7,183
NBC Capital Trust(6) − 240 − 246
2,398 10,664 2,703 9,829
Consolidated structured entities
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