As filed with the Securities and Exchange Commission on December 19, 1997
Registration Statement No.333-41009
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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C 20549
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FORM F-9 and Amendment No. 1 to FORM S-4
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
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<CAPTION>
<S> <C> <C>
Form F-9 Amendment No. 1 to
National Bank of Canada (Exact Name of Registrant as Specified in its Charter) Form S-4
NB Capital Corporation
Canada (Province or Other Jurisdiction of Incorporation or Organization) Maryland
6021 (Primary Standard Industrial Classification Code Number) 6798
Not Applicable (I.R.S. Employer Identification No. if Applicable) 52-2063921
National Bank Tower 125 West 55th Street
600 de La Gauchetiere Street West New York, New York 10019
Montreal, Quebec, Canada H3B 4L2 (212) 632-8500
(514) 394-6080
(Address, including postal code and telephone number, including area code, of Registrant's principal executive offices)
NB Capital Corporation NB Capital Corporation
Francois Bourassa Francois Bourassa
Vice-President Legal and Secretary Vice-President Legal and Secretary
125 West 55th Street 125 West 55th Street
New York, New York 10019 New York, New York 10019
(212) 632-8693 (212) 632-8693
(Name, Address (Including Zip Code) and Telephone Number (Including Area Code) of Agent for Services in the United States)
Copies to:
Jean Dagenais
Vice-President
and Chief Accounting Officer Michel Roy Robert Evans III
National Bank of Canada Desjardins Ducharme Stein Monast Shearman & Sterling
National Bank Tower 600 de La Gauchetiere Street West 599 Lexington Avenue
600 de La Gauchetiere Street West Suite 2400 New York, New York 10022
Montreal, Quebec H3B 4L2 Montreal, Quebec, Canada H3B 4L8 (212) 848-4000
(514) 394-6233 (514) 878-9411
</TABLE>
Approximate date of commencement of proposed sale to the public: From time to
time after the effective date of this Registration Statement.
<TABLE>
<CAPTION>
Form F-9 Amendment No. 1 to
Province of Quebec Form S-4
<S> <C>
(Principal jurisdiction regulating this Form F-9 offering
(if applicable) If the securities being registered on this Form are
It is proposed that this filing shall become effective being offered in connection with the formation of a holding
(check appropriate box): company and there is compliance with General Instruction G,
A. |_| upon filing with the Commission, pursuant to Rule check the following box. |_|
467(a) (if in connection with an offering being made
contemporaneously in the United States and Canada). If this Form is filed to register additional
securities for an offering pursuant to Rule 462(b) under the
B. |x| at some future date (check the appropriate box Securities Act, check the following box and list the Securities
below) Act registration statement number of the earlier effective
1. |_| pursuant to Rule 467 (a) on ( )at( ) registration statement for the same offering. |_|
(designate a time not sooner than 7 calendar
days after filing). If this Form is a post-effective amendment filed
2. |_| pursuant to Rule 467 (b) on ( )at( ) pursuant to Rule 462(d) under the Securities Act, check the
(designate a time 7 calendar days or sooner following box and list the Securities Act registration
after filing) because the securities regulatory statement number on the earlier effective registration
authority in the review jurisdiction has issued statement for the same offering. |_|
a receipt or notification of clearance on ( )
3. |x| pursuant to Rule 467 (b) as soon as practicable
after notification of the Commission by the
Registrant or the Canadian securities regulatory
authority of the review jurisdiction that a
receipt or notification of clearance has been
issued with respect hereto.
4. |_| after the filing of the next amendment to this
Form (if preliminary material is being filed).
If any of the securities being registered on this
Form are to be offered on a delayed or continuous basis
pursuant to the home jurisdiction's shelf prospectus
offering procedures, check the following box. |_|
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CALCULATION OF REGISTRATION FEE
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Title of Each Class Amount Proposed Maximum Proposed Maximum Aggregate Amount of
of Securities to be Registeredto be Registered Offering Price Per Security Offering Price Registration Fee
<S> <C> <C> <C> <C>
8.45% Noncumulative
First Preferred Shares, U.S.$300,000,000 U.S.$1,000 U.S.$300,000,000 N/A (1)
Series Z
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(1) Pursuant to Rule 457(f)(2) under the Securities Act, U.S.$90,910 was paid
on November 25, 1997 by NB Capital Corporation in connection with its
filing of a Registration Statement on Form S-4 related to 300,000 shares
of its 8.35% Noncumulative Exchangeable Preferred Stock, Series A. Each
share of 8.35% Noncumulative Exchangeable Preferred Stock, Series A, is
convertible into one 8.45% Noncumulative First Preferred Share, Series Z,
of National Bank of Canada. Accordingly, pursuant to Rule 457(i) under the
Securities Act, no registration fee is due with respect to the
registration of the 8.45% Noncumulative First Preferred Shares, Series Z
of National Bank of Canada.
* The Registrant hereby amends this Registration Statement on such date or dates
as may be necessary to delay its effective date until the Registration Statement
shall become effective as provided in Rule 467 under the Securities Act of 1933
or on such date as the Commission, acting pursuant to Section 8(a) of the Act,
may determine.
** The Registrant hereby amends this Registration Statement on such date or
dates as may be necessary to delay its effective date until the Registrants
shall file a further amendment which specifically states that this Registration
statement shall thereafter become effective in accordance with Section 8(a) of
the Securities Act of 1933, or until this Registration Statement shall become
effective on such date as the Commission, acting pursuant to said Section 8(a),
may determine.
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* Solely with respect to Form F-9.
** Solely with respect to Amendment No. 1 to Form S-4.
<PAGE>
EXPLANATORY NOTE
On November 25, 1997, NB Capital Corporation filed with the Securities
and Exchange Commission a Registration Statement on Form S-4 (the "Form S-4")
pertaining to the registration of 300,000 shares of its 8.35% Noncumulative
Exchangeable Preferred Stock, Series A (the "New Preferred Shares"). As
indicated in the Form S-4 and herein, the New Preferred Shares will be offered
in exchange (the "Exchange Offer") for up to 300,000 shares of 8.35%
Noncumulative Exchangeable Preferred Stock, Series A, of NB Capital Corporation
currently outstanding (the "Old Preferred Shares" and together with the New
Preferred Shares, the "Preferred Shares"). The New Preferred Shares are
identical in all respects to the Old Preferred Shares, except that the New
Preferred Shares will not bear legends restricting transfer and therefore, after
registration, will be freely transferrable.
As indicated in the Form S-4 and herein, upon the occurrence of an
Exchange Event (as defined in the prospectus relating to the New Preferred
Shares forming part of the Form S-4 and hereof), each Preferred Share will be
automatically exchanged for one newly issued 8.45% Noncumulative First Preferred
Share, Series Z (the "Series Z Preferred Shares") of National Bank of Canada,
the direct parent of NB Capital Corporation. The Series Z Preferred Shares were
registered in Canada pursuant to a short-term prospectus filed by National Bank
of Canada filed with the Quebec Securities Commission on December 4, 1997. On
December 11, 1997, the Quebec Securities Commission approved the registration of
the Series Z Preferred Shares. Pursuant to the multi-jurisdictional disclosure
system, National Bank of Canada is filing this Registration Statement in order
to register the Series Z Preferred Shares in the United States. National Bank of
Canada and NB Capital Corporation intend that the registration of the Series Z
Preferred Shares and the New Preferred Shares become effective concurrently.
Accordingly, National Bank of Canada will delay filing the Notice of
Effectiveness issued by the Quebec Securities Commission with respect to the
Series Z Preferred Shares until such time as the Securities and Exchange
Commission indicates that the registration of the New Preferred Shares will be
declared effective.
The accounting firm of Deloitte and Touche LLP, NB Capital
Corporation's independent auditors, is currently in the process of auditing the
opening balance sheet of NB Capital Corporation. The audited opening balance
sheet will be filed by amendment to this Registration Statement as soon as it is
available.
<PAGE>
SUBJECT TO COMPLETION, DATED DECEMBER __, 1997
- ----------------------------------------------
PRELIMINARY PROSPECTUS
- ----------------------
NB Capital Corporation
Offer to Exchange
8.35% Noncumulative Exchangeable Preferred Stock, Series A
for up to 300,000 shares of
8.35% Noncumulative Exchangeable Preferred Stock, Series A
NB Capital Corporation (the "Company") hereby offers, upon the terms and subject
to the conditions set forth in this Prospectus (the "Prospectus") and in the
accompanying Letter of Transmittal (which together constitute the "Exchange
Offer"), to exchange up to 300,000 shares of its 8.35% Noncumulative
Exchangeable Preferred Stock, Series A, par value US$.01 per share (the "New
Preferred Shares") for up to all of the outstanding shares of its 8.35%
Noncumulative Exchangeable Preferred Stock, Series A, par value US$.01 per share
(the "Old Preferred Shares") at the rate of one New Preferred Share for each Old
Preferred Share. As of the date of this Prospectus, the aggregate number of the
Old Preferred Shares outstanding is 300,000. The form and terms of the New
Preferred Shares are identical in all material respects to the form and terms of
the Old Preferred Shares, except that the New Preferred Shares have been
registered under the Securities Act of 1933, as amended (the "Securities Act"),
and, therefore, will not bear legends restricting their transfer.
The Old Preferred Shares were issued on September 3, 1997 (the "Issue Date") in
a transaction not registered under the Securities Act in reliance upon an
exemption from the registration requirements thereof. In general, the Old
Preferred Shares may not be offered or sold unless registered under the
Securities Act or unless offered or sold pursuant to an exemption from, or in a
transaction not subject to, the Securities Act. The New Preferred
<PAGE>
Shares are being offered hereby to satisfy certain obligations of the Company
contained in the Registration Rights Agreement (as defined). Based on
interpretations by the staff of the Securities and Exchange Commission (the
"Commission") set forth in no-action letters issued to third parties, the
Company believes that the New Preferred Shares issued pursuant to the Exchange
Offer in exchange for Old Preferred Shares may be offered for resale, resold or
otherwise transferred by any holder thereof (other than any holder that is a
broker-dealer or an "affiliate" of the Company within the meaning of Rule 405
under the Securities Act) without further compliance with the registration and
prospectus delivery requirements of the Securities Act, provided that such New
Preferred Shares are acquired in the ordinary course of such holder's business,
such holder has no arrangement or understanding with any person to participate
in the distribution of such New Preferred Shares and neither such holder nor any
such other person is engaging in or intends to engage in a distribution of New
Preferred Shares. However, the Company has not sought, and does not intend to
seek, its own no-action letter, and there can be no assurance that the
Commission or its staff would make a similar determination with respect to the
Exchange Offer. Notwithstanding the foregoing, each broker-dealer that receives
New Preferred Shares for its own account pursuant to the Exchange Offer must
acknowledge that it will deliver a prospectus in connection with any resale of
such New Preferred Shares. The Letter of Transmittal states that by so
acknowledging and by delivering a prospectus, a broker-dealer will not be deemed
to admit that it is an "underwriter" within the meaning of the Securities Act.
This Prospectus, as it may be amended or supplemented from time to time, may be
used by a broker-dealer in connection with any resale of New Preferred Shares
received in exchange for Old Preferred Shares where such Old Preferred Shares
were acquired by such broker-dealer as a result of market-making activities or
other trading activities (other than Old Preferred Shares acquired directly from
the Company). The Company has agreed that, for a period of six months after the
date of this Prospectus, it will make this Prospectus available to any
broker-dealer for use in connection with any such resale.
The Exchange Offer is not conditioned upon any minimum aggregate number
of Old Preferred Shares being tendered for exchange. The Company will accept for
exchange any and all validly tendered Old Preferred Share not withdrawn prior to
5:00 p.m. New York City time on 1998, unless the Company, in its
sole discretion, extends the period of time during which the Exchange Offer is
open (the "Expiration Date"). The Company does not currently intend to extend
the Expiration Date. The date of acceptance and exchange of the Old Preferred
Shares will be the business day following the Expiration Date. Tenders of
Old Preferred Shares may be withdrawn at any time prior to the Expiration Date.
The Company will not receive any proceeds from the Exchange Offer. The Company
will pay certain expenses incident to the Exchange Offer.
Dividends on the New Preferred Shares are payable at the rate of 8.35%
per annum of the liquidation preference (an amount equal to US$83.50 per annum
per share), if, when and as authorized and declared by the Board of Directors of
the Company. Dividends are
ii
<PAGE>
not cumulative and, if declared, are payable quarterly in arrears on the 30th
day of March, June, September and December in each year, commencing December 30,
1997. If no dividend is declared on the New Preferred Shares for a quarterly
dividend period, holders of the New Preferred Shares will have no right to
receive a dividend for that period, and the Company will have no obligation to
pay a dividend for that period, whether or not dividends are declared and paid
for any future period. Dividends in each dividend period shall accrue from the
first day of such period, whether or not declared or paid in the prior period.
Each of the New Preferred Shares will be exchanged automatically for one newly
issued 8.45% Noncumulative First Preferred Share, Series Z (a "Bank Preferred
Share"), of National Bank of Canada (the "Bank"), on the occurrence of an
Exchange Event (as defined).
See "Risk Factors" commencing on page 21 for a discussion of certain
factors that should be considered by potential holders of New Preferred Shares,
including the following:
o A significant decline in interest rates or in the value of the Canadian
dollar could have an adverse effect on the Company;
o Dividends on the New Preferred Shares are not cumulative;
o The Company's assets principally consist of, and in the future are
expected to, principally consist of limited recourse obligations and
all of the real property securing those obligations are, and in the
future are expected to be, located outside the United States;
o The New Preferred Shares will be exchanged automatically for
the Bank Preferred Shares in the event that the Bank
experiences certain financial difficulties and in certain
other circumstances;
o Banking authorities could impose restrictions on the operations of the
Company, including the Company's ability to pay dividends;
o The Company may not qualify as a REIT (as defined) for United
States federal income tax purposes and may, therefore, be
subject to United States federal income tax at normal
corporate tax rates; and
o Because of the relationship between the Company and the Bank, conflicts
of interest may arise between the Company and the Bank.
The New Preferred Shares are not redeemable prior to September 3, 2007
(except upon the occurrence of a Tax Event, as described herein, on or after
September 3, 2002). On and after September 3, 2007, the New Preferred Shares may
be redeemed for cash at the option of the Company, in whole or in part, at the
redemption prices set forth herein, plus the quarterly accrued and unpaid
dividend, if any, thereon. The Company may not redeem the New Preferred Shares
without prior approval from The Office of the Superintendent of Financial
Institutions Canada (the "Superintendent"). The New Preferred Shares are not
subject to any sinking fund or mandatory redemption and are not convertible into
any other securities of the Company.
iii
<PAGE>
Each of the New Preferred Shares will be exchanged automatically (the
"Automatic Exchange") for one Bank Preferred Share (i) immediately prior to such
time, if any, at which the Bank fails to declare and pay or set aside for
payment when due any dividend on any issue of its cumulative First Preferred
Shares or the Bank fails to pay or set aside for payment when due any declared
dividend on any of its non-cumulative First Preferred Shares, (ii) in the event
that the Bank has a Tier 1 risk-based capital ratio of less than 4.0% or a total
risk-based capital ratio of less than 8.0%, (iii) in the event that the
Superintendent takes control of the Bank pursuant to the Bank Act (Canada), as
amended (the "Bank Act"), or proceedings are commenced for the winding-up of the
Bank pursuant to the Winding-up and Restructuring Act (Canada), or (iv) in the
event that the Superintendent, by order, directs the Bank to act pursuant to
subsection 485(3) of the Bank Act and the Bank elects to cause the exchange
(each, an "Exchange Event"). See "Risk Factors--Certain Risks Associated with
the Bank." CONSEQUENTLY, THE NEW PREFERRED SHARES COULD BE REPLACED, WITHOUT ANY
ACTION BY THE HOLDER THEREOF, BY BANK PREFERRED SHARES AT A TIME WHEN THE BANK'S
FINANCIAL CONDITION IS DETERIORATING OR WHEN THE SUPERINTENDENT HAS TAKEN
CONTROL OF THE BANK OR PROCEEDINGS FOR THE WINDING-UP OF THE BANK HAVE BEEN
COMMENCED. POTENTIAL HOLDERS OF NEW PREFERRED SHARES SHOULD, THEREFORE,
CAREFULLY CONSIDER THE DESCRIPTION OF THE BANK SET FORTH ELSEWHERE IN THIS
PROSPECTUS. The Bank believes, however, that based on various factors, including
the Bank's financial condition, the potential effect of non-payment of dividends
on the Bank's business and the Bank's understanding of the Superintendent's
policies and procedures, the likelihood of an Exchange Event occurring is
extremely remote. In the event of the Automatic Exchange, the Bank Preferred
Shares would constitute a new series of First Preferred Shares of the Bank,
would have the same liquidation preference and would be subject to redemption on
the same terms as the New Preferred Shares (except that there would be no
redemption upon the occurrence of a Tax Event) and would rank pari passu, in
terms of dividend payments and liquidation preference, with, or senior to, any
other outstanding preferred shares of the Bank. The Bank Preferred Shares would
not entitle the holders to vote except in certain circumstances. Dividends on
the Bank Preferred Shares would be non-cumulative and payable at the rate of
8.45% per annum of the liquidation preference, if, when and as declared by the
Board of Directors of the Bank. Holders of the New Preferred Shares cannot
exchange the New Preferred Shares for the Bank Preferred Shares voluntarily and,
absent the occurrence of the Automatic Exchange, holders of the New Preferred
Shares will have no dividend, voting, liquidation preference or other rights
with respect to the Bank or any security of the Bank. See "Description of New
Preferred Shares--Automatic Exchange."
The Company was formed for the purpose of providing investors with the
opportunity to invest in Canadian residential mortgages and other real estate
assets. The Company's principal business objective is to acquire, hold, finance
and manage assets consisting of obligations secured by real property, as well as
certain other qualifying REIT assets
iv
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("Mortgage Assets"). Currently, the Mortgage Assets of the Company consist of
obligations issued by NB Finance, Ltd., a corporation formed under the laws of
Bermuda that is a wholly owned subsidiary of the Bank ("NB Finance"), that are
recourse only to the Initial Mortgage Loans (as defined) and that are secured by
real property that is located in Canada (the "Initial Mortgage Assets"). The
"Initial Mortgage Loans" consist of Canada Mortgage and Housing Corporation
("CMHC") insured residential first mortgages ("Mortgage Loans") acquired from
the Bank. The principal amount of the Initial Mortgage Assets is equal to
approximately 80% of the principal amount of the Initial Mortgage Loans. All of
the shares of the Company's common stock, par value US$.01 per share (the
"Common Stock"), are owned by the Bank. See "Business and Strategy--Description
of the Initial Mortgage Assets" and "Business and Strategy--Description of the
Initial Mortgage Loans."
The Company expects to qualify as a real estate investment trust
("REIT") for United States federal income tax purposes, commencing with its
taxable year ending December 31, 1997. Under the Company's charter (the
"Charter"), no individual is permitted to beneficially own more than 5% of any
series of preferred stock of the Company, including the New Preferred Shares.
---------------------------
THE SECURITIES DESCRIBED HEREIN HAVE NOT BEEN APPROVED OR DISAPPROVED
BY THE SECURITIES AND EXCHANGE COMMISSION NOR HAS THE COMMISSION PASSED UPON THE
ACCURACY OR DETERMINED THE ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO
THE CONTRARY IS A CRIMINAL OFFENSE.
---------------------------
The date of this Prospectus is December __,1997.
v
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AVAILABLE INFORMATION
The Company is not currently subject to the periodic reporting and
other informational requirements of the Securities Exchange Act of 1934, as
amended (the "Exchange Act"). As a result of the Exchange Offer, the Company
will be required to file reports and other information with the Commission
pursuant to the informational requirements of the Exchange Act.
This Prospectus constitutes a part of a registration statement on Form
S-4 (the "Registration Statement") filed by the Company with the Commission
under the Securities Act. As permitted by the rules and regulations of the
Commission, this Prospectus does not contain all of the information contained in
the Registration Statement and the exhibits and schedules thereto, and reference
is hereby made to the Registration Statement and the exhibits and schedules
thereto for further information with respect to the Company and the New
Preferred Shares. Statements contained herein concerning the provisions of any
documents filed as an exhibit to the Registration Statement or otherwise filed
with the Commission are not necessarily complete, and in each instance reference
is made to the copy of such document so filed. Each such statement is qualified
in its entirety by such reference.
The Registration Statement may be inspected and copied at the public
reference facilities maintained by the Commission at Room 1024, 450 Fifth
Street, N.W., Washington, D.C. 20549, or at its regional offices located at 500
West Madison Street, Suite 1400, Chicago, Illinois 60661 and Seven World Trade
Center, 13th Floor, New York, New York 10048. Copies of such material can be
obtained from the public reference section of the Commission at 450 Fifth
Street, N.W., Washington, D.C. 20549, at prescribed rates and may also be
accessed electronically by means of the Commission's website at
(http://www.sec.gov).
vi
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TABLE OF CONTENTS
Page
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PROSPECTUS SUMMARY........................................................... 1
The Company............................................................ 1
The Bank............................................................... 4
Business and Strategy.................................................. 4
Tax Status of the Company.............................................. 7
Risk Factors........................................................... 7
The Exchange Offer..................................................... 10
The New Preferred Shares............................................... 14
Selected Financial Data................................................ 20
RISK FACTORS................................................................. 21
Consequences of Failure to Exchange Old Preferred Shares............... 21
Interest Rate Risk..................................................... 21
Currency Exchange Rate Risk............................................ 22
Dividends Not Cumulative............................................... 22
Real Estate Market Conditions.......................................... 22
Limited Recourse Nature of Certain Mortgage Assets; Limitations on
CMHC Insurance.................................................... 23
All of the Real Property Securing the Initial Mortgage Assets Is
Located Outside of the United States.............................. 23
Canadian Legal Considerations.......................................... 24
Certain Risks Associated with the Bank................................. 24
Dividend and Other Regulatory Restrictions on Operations of the
Company........................................................... 25
Tax Risks.............................................................. 26
Relationship with the Bank and Its Affiliates; Conflicts of Interest... 28
Dependence upon the Advisor and the Servicer........................... 29
Risk of Future Revisions in Policies and Strategies by Board of
Directors......................................................... 29
No Third Party Valuation of the Mortgage Assets; No Arm's-Length
Negotiations with Affiliates...................................... 29
THE COMPANY.................................................................. 30
USE OF PROCEEDS.............................................................. 31
CAPITALIZATION............................................................... 31
THE EXCHANGE OFFER........................................................... 32
General................................................................ 32
Purpose of the Exchange Offer.......................................... 32
Terms of the Exchange.................................................. 33
Expiration Date; Extension; Termination; Amendment..................... 34
Procedures for Tendering Old Preferred Shares.......................... 34
Terms and Conditions of the Letter of Transmittal...................... 37
Withdrawal Rights...................................................... 38
vii
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Page
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Acceptance of Old Preferred Shares for Exchange; Delivery of New
Preferred Shares.................................................. 39
Certain Conditions to the Exchange Offer............................... 40
Exchange Agent......................................................... 42
Solicitation of Tenders; Fees and Expenses............................. 42
Transfer Taxes......................................................... 43
Accounting Treatment................................................... 44
Consequences of Failure to Exchange.................................... 44
Resale of New Preferred Shares......................................... 44
BUSINESS AND STRATEGY........................................................ 46
General................................................................ 46
Dividend Policy........................................................ 46
Liquidity and Capital Resources........................................ 47
General Description of Mortgage Assets; Investment Policy.............. 47
Description of the Initial Mortgage Assets............................. 49
Management Policies and Programs....................................... 50
Description of the Initial Mortgage Loans.............................. 53
Servicing.............................................................. 55
Employees.............................................................. 57
Competition............................................................ 57
Legal Proceedings...................................................... 57
MANAGEMENT................................................................... 58
Directors and Executive Officers....................................... 58
Independent Directors.................................................. 59
Audit Committee........................................................ 59
Compensation of Directors and Officers................................. 59
Limitation of Liability and Indemnification of Directors and Officers.. 60
The Advisor............................................................ 61
DESCRIPTION OF NEW PREFERRED SHARES.......................................... 62
General................................................................ 62
Dividends.............................................................. 62
Automatic Exchange..................................................... 64
Ranking................................................................ 66
Voting Rights.......................................................... 66
Redemption............................................................. 67
Rights upon Liquidation................................................ 70
Independent Director Approval.......................................... 71
EXCHANGE OFFER; REGISTRATION RIGHTS.......................................... 71
DESCRIPTION OF CAPITAL STOCK................................................. 75
Common Stock........................................................... 75
viii
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Page
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Preferred Stock........................................................ 76
Power to Issue Additional Shares of Common Stock and Preferred Stock... 78
Restrictions on Ownership and Transfer................................. 78
Super-Majority Director Approval....................................... 80
Business Combinations.................................................. 80
Control Share Acquisitions............................................. 80
Form, Denomination, Book-Entry Procedures and Transfer................. 81
Depositary Procedures.................................................. 82
Certificated New Preferred Shares...................................... 84
UNITED STATES FEDERAL INCOME TAX CONSIDERATIONS.............................. 84
Tax Impact of the Exchange Offer....................................... 85
Qualification of the Company as a REIT................................. 85
Taxation of the Company................................................ 88
Tax Treatment of Automatic Exchange.................................... 88
Taxation of New Preferred Shares....................................... 89
Taxation of Tax-Exempt Entities........................................ 90
State and Local Taxes.................................................. 91
Taxation of Bank Preferred Shares...................................... 91
Certain United States Federal Income Tax Considerations Applicable
to Foreign Holders................................................. 91
Information Reporting and Backup Withholding........................... 92
CANADIAN FEDERAL INCOME TAX CONSIDERATIONS................................... 93
Automatic Exchange..................................................... 93
Taxation of Dividends.................................................. 93
Disposition of Bank Preferred Shares................................... 94
Redemption of Bank Preferred Shares.................................... 94
ERISA CONSIDERATIONS......................................................... 94
Status Under Plan Asset Regulations.................................... 94
Publicly-Offered Security Exception.................................... 96
Exemptions from Prohibited Transactions................................ 97
Unrelated Business Taxable Income...................................... 98
RATINGS .................................................................... 99
PLAN OF DISTRIBUTION......................................................... 99
LEGAL MATTERS................................................................100
ix
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CAUTIONARY NOTICE REGARDING FORWARD-LOOKING STATEMENTS
Certain statements contained in this Prospectus which are not
historical facts contain forward-looking information with respect to the
Company's plans, projections or future performance, the occurrence of which
involve certain risks and uncertainties that could cause the Company's actual
results or plans to differ materially from those expected by the Company.
All written or oral forward-looking statements attributable to the
Company are expressly qualified in their entirety by the foregoing cautionary
statement.
x
<PAGE>
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by the detailed
information appearing elsewhere in this Prospectus. The offering by NB Capital
Corporation (the "Company") of up to 300,000 shares of its 8.35% Noncumulative
Exchangeable Preferred Stock, Series A, par value US$.01 per share (the "New
Preferred Shares") in exchange for up to all the outstanding shares of 8.35%
Noncumulative Exchangeable Preferred Stock, Series A, par value US$.01 per share
(the "Old Preferred Shares"), of the Company is referred to herein as the
"Exchange Offer." References to dollars and US$ are to United States dollars;
references to C$ and $ are to Canadian dollars. As of , 1997, the
Canadian dollar exchange rate was C$ =US$1.00 and certain amounts stated
herein reflect such exchange rate.
The Company
The Company is a Maryland corporation incorporated on August 20, 1997.
The Company's principal business objective is to acquire, hold, finance and
manage Mortgage Assets. The Company will elect to be taxable as a REIT under the
Internal Revenue Code of 1986, as amended (the "Code"), and generally will not
be liable for United States federal income tax to the extent that it distributes
its income to its stockholders and maintains its qualification as a REIT. All of
the common stock, par value $.01, of the Company (the "Common Stock") is owned
by the Bank. The Bank has indicated to the Company that, for as long as any of
the New Preferred Shares are outstanding, the Bank intends to continue to own
all of the outstanding shares of the Common Stock. The Company was formed to
provide investors with the opportunity to invest in Canadian residential
mortgages and other real estate assets and to provide the Bank with a
cost-effective means of raising capital.
The Old Preferred Shares were issued on September 3, 1997 pursuant to
the Purchase Agreement (the "Purchase Agreement"), dated September 3, 1997,
among the Company, the Bank and Merrill Lynch, Pierce, Fenner & Smith & Co.
Incorporated (the "Initial Purchaser"). Pursuant to the Purchase Agreement, the
Company, the Bank and the Initial Purchaser entered into the Registration Rights
Agreement (the "Registration Rights Agreement") dated September 3, 1997. The
Exchange Offer is being effected by the Company in order to satisfy certain
obligations of the Company under the Registration Rights Agreement.
Each of the New Preferred Shares will be exchanged automatically for
one Bank Preferred Share (i) immediately prior to such time, if any, at which
the Bank fails to declare and pay or set aside for payment when due any dividend
on any issue of its cumulative First Preferred Shares or the Bank fails to pay
or set aside for payment when due any declared dividend on any of its
non-cumulative First Preferred Shares, (ii) in the event that the Bank has a
Tier 1 risk-based capital ratio of less than 4.0% or a total risk-based capital
ratio of less than 8.0%, (iii) in the event that the Superintendent takes
control of the Bank pursuant to the Bank Act or proceedings are commenced for
the winding-up of the Bank pursuant to the Winding-up
<PAGE>
and Restructuring Act (Canada), or (iv) in the event that the Superintendent, by
order, directs the Bank to act pursuant to subsection 485(3) of the Bank Act and
the Bank elects to cause the exchange. CONSEQUENTLY, THE NEW PREFERRED SHARES
COULD BE REPLACED, WITHOUT ANY ACTION BY THE HOLDER THEREOF, BY BANK PREFERRED
SHARES AT A TIME WHEN THE BANK'S FINANCIAL CONDITION IS DETERIORATING OR WHEN
THE SUPERINTENDENT HAS TAKEN CONTROL OF THE BANK OR PROCEEDINGS FOR THE
WINDING-UP OF THE BANK HAVE BEEN COMMENCED. POTENTIAL HOLDERS OF NEW PREFERRED
SHARES SHOULD, THEREFORE, CAREFULLY CONSIDER THE DESCRIPTION OF THE BANK SET
FORTH ELSEWHERE IN THIS PROSPECTUS. The Bank believes, however, that based on
various factors, including the Bank's financial condition, the potential effect
of non-payment of dividends on the Bank's business and the Bank's understanding
of the Superintendent's policies and procedures, the likelihood of an Exchange
Event occurring is extremely remote.
The authorized preferred capital of the Bank consists of an unlimited
number of First Preferred Shares and up to 15 million Second Preferred Shares
which may be issued for a maximum aggregate consideration of C$1 billion and
C$300 million, respectively, or the equivalent thereof in other currencies. The
Board of Directors of the Bank may by resolution establish the terms of series
of preferred shares. The Bank currently has six series of First Preferred Shares
outstanding with an aggregate liquidation preference as of October 31, 1997 of
C$376 million.
Under Canadian law, the Bank is required to maintain adequate capital
in relation to its operations. The Superintendent has issued guidelines
concerning the maintenance of adequate capital (the "Capital Guideline") and has
statutory authority to direct the Bank to increase its capital even if the Bank
is in compliance with the Capital Guideline. Pursuant to the Capital Guideline,
requirements are applied to the Bank on a consolidated basis including all
subsidiaries except insurance subsidiaries or other regulated financial
institutions whose leverage is inappropriate for a deposit-taking institution
and which, because of their size, would have a material impact on the leverage
of the consolidated entity. Under the Capital Guideline, it is expected that the
Bank's total assets, including specified off-balance sheet items, should be no
greater than 20 times the Bank's total capital. It is also expected that the
Bank's total capital not be less than 8% of risk-weighted assets and
risk-weighted off-balance sheet items, unless a higher ratio is prescribed by
the Superintendent. The Capital Guideline prescribes risk-weighting and the
treatment of off-balance sheet items. The ratio of total capital to
risk-weighted off-balance sheet items is the "risk-based capital ratio" and is
based upon standards adopted by the Bank for International Settlement. The
Capital Guideline recognizes two tiers of capital. Tier 1 capital comprises the
highest quality capital elements based upon the attributes of permanence,
freedom from mandatory fixed charges against earnings and subordination to the
rights of depositors and other creditors. Tier 2 capital contributes to the
overall strength of a bank as a going concern, but falls short in meeting the
first two capital attributes described for Tier 1 capital. Tier 2 capital
differentiates between Tier 2A hybrid (debt/equity) instruments
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<PAGE>
and Tier 2B limited life instruments. Tier 1 capital elements consist of common
shareholders equity, qualifying non-cumulative perpetual preferred shares and
qualifying non-controlling interests in subsidiaries arising on consolidation
from Tier 1 capital instruments. Tier 1 capital instruments and preferred shares
qualifying as hybrid instruments in Tier 2A are intended to be permanent. Where
the share or instrument provides for redemption by the issuer after 5 years with
supervisory approval, the Superintendent would not normally prevent such
redemption by a healthy and viable bank where the instrument is or has been
replaced by equal or higher quality capital including an increase in retained
earnings, or if the bank is downsizing. All capital instruments must be issued
and fully paid for in money or, with the approval of the Superintendent, in
property. Net of amortization, the amount of Tier 2 capital may not exceed 100%
of Tier 1 capital after deducting goodwill and, consequently, the Capital
Guideline requires the amount of Tier 1 capital to be not less than 4% of
risk-weighted assets and risk-weighted off-balance sheet items, unless a higher
ratio is prescribed by the Superintendent. Also under the Capital Guideline, the
amount of Tier 2B capital net of amortization shall not exceed 50% of Tier 1
capital after deducting goodwill.
At June 30, 1997, the Tier 1 risk-based capital ratio and total
risk-based capital ratio levels of the Bank were 6.8% and 9.7%, respectively.
After giving effect to the issuance of the Old Preferred Shares on September 3,
1997, the Tier 1 risk-based capital ratio and total risk-based capital ratio
levels of the Bank as of that date were 8.0% and 10.8%, respectively. The Bank's
Tier 1 risk-based capital ratio and total risk-based capital ratio were 6.9% and
10.2% at October 31, 1996, 6.8% and 10.4% at October 31, 1995 and 6.9% and 11.1%
at October 31, 1994.
Upon the Superintendent taking control of the Bank pursuant to the Bank
Act or upon the commencement of proceedings for the winding-up of the Bank
pursuant to the Winding-up and Restructuring Act (Canada), each of the New
Preferred Shares will be automatically exchanged for one Bank Preferred Share.
Section 485 of the Bank Act requires Canadian banks to maintain
adequate capital and adequate and appropriate forms of liquidity and to comply
with related regulations. Under subsection 485(3), the Superintendent may, by
order, direct a bank to increase its capital or to provide additional liquidity
in such forms and amounts as the Superintendent may require. The Superintendent
may act under subsection 485(3) even if a bank is in compliance with all
applicable guidelines and regulations.
The Mortgage Assets of the Company consist of obligations issued by NB
Finance, that are recourse only to the Initial Mortgage Loans and that are
secured by real property. NB Finance was organized solely for the purpose of
acquiring Mortgage Loans and issuing the Initial Mortgage Assets, and other
similar obligations, to the Company. All of the ordinary shares of NB Finance
are owned by the Bank. The Bank has indicated to the Company that it intends to
maintain 100% ownership of the ordinary shares of NB Finance so long as the
Initial Mortgage
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Assets or any other obligations of NB Finance are owned by the Company. NB
Finance is not permitted to incur any indebtedness or engage in any business
activities other than the ownership of Mortgage Loans and activities incidental
thereto. See "Business and Strategy--Description of the Initial Mortgage Loans."
The Initial Mortgage Assets will mature semi-annually beginning in 2000 and the
proceeds thereof (net of distributions and expenses) are expected to be
reinvested in additional Mortgage Assets as described under "Business and
Strategy--General Description of Mortgage Assets; Investment Policy."
The principal executive offices of the Company are located at 125 West
55th Street, New York, New York 10019. The telephone number of the Company is
(212) 632-8500.
The Bank
The Bank was formed through a series of amalgamations and its roots
date back to 1859 with the founding of the Banque Nationale in Quebec City. The
Bank is a Schedule I bank under the Bank Act. Its head office and principal
place of business is located at the National Bank Tower, 600 de La Gauchetiere
West, Montreal, Quebec, H3B 4L2, and its telephone number is (514) 394-5000.
The Bank, which ranks sixth among Canadian banks in terms of total
assets, is present in each of Canada's provinces. It delivers an extensive range
of financial services to individuals, commercial enterprises, financial
institutions and governments both in Canada and abroad.
The Bank Preferred Shares will be issued only upon the occurrence of an
Exchange Event. In connection with the Exchange Offer, the Bank Preferred Shares
will be registered with the Commission.
Business and Strategy
General. The Company's principal business objective is to acquire,
hold, finance and manage Mortgage Assets that will generate net income for
distribution to stockholders. The sole Mortgage Assets of the Company consist
of, and in the future are expected to consist of, obligations issued by NB
Finance that are recourse only to the Initial Mortgage Loans and that are
secured by real property. The Company has acquired substantially all of its
Mortgage Assets from the Bank and/or affiliates of the Bank on terms that are
comparable to those that could be obtained by the Company if such Mortgage
Assets were purchased from unrelated third parties. The Company may also from
time to time acquire Mortgage Assets from unrelated third parties. As of the
date of this Prospectus, the Company has not entered into any agreements with
third parties with respect to the purchase of Mortgage Assets. Other than with
respect to the temporary investment
4
<PAGE>
of payments of interest and principal on its Mortgage Assets, the Company
anticipates that it will purchase Mortgage Assets from unrelated third parties
only if neither the Bank nor any affiliate of the Bank has an amount or type of
Mortgage Assets sufficient to meet the requirements of the Company.
The Company maintains, and in the future expects to maintain, at least
90% of its portfolio in Mortgage Assets consisting of the Initial Mortgage
Assets and obligations that are comparable to the Initial Mortgage Assets. The
Company may, however, invest in other assets eligible to be held by a REIT. The
Company's current policy prohibits the acquisition of any Mortgage Asset
constituting an interest in a Mortgage Loan (other than an interest resulting
from the acquisition of Mortgage-Backed Securities), if the Mortgage Loan is
delinquent in the payment of principal or interest. Additional Mortgage Assets
purchased prior to the consummation of the Exchange Offer or the effectiveness
of a Shelf Registration Statement will be invested in Canadian or U.S.
government guaranteed, mortgage-backed certificates and other Canadian or U.S.
government obligations which will be purchased on the open market or from
entities unaffiliated with the Bank or the Company. In the event that the New
Preferred Shares are not treated as "publicly-offered securities" as of the date
on which the Exchange Offer is consummated or a Shelf Registration Statement is
declared effective, then during the period commencing on such date and ending on
the date on which the New Preferred Shares become "publicly-offered securities,"
any investment by the Company in any Mortgage Assets in a transaction with the
Bank and/or affiliates of the Bank will be made only upon the decision of the
Independent Fiduciary. See "ERISA Considerations."
Formation. Simultaneously with the consummation of the offering of Old
Preferred shares (the "Offering"), the Bank, as owner of the Common Stock, made
a capital contribution to the Company equal to approximately US$177 million.
Simultaneously with the consummation of the Offering, the Bank also made an
additional capital contribution equal to the amount of the Initial Purchaser's
discount (the "Initial Purchaser's Discount") and all expenses incurred by the
Company in connection with the Offering and in connection with the Company's
formation. The Company used the aggregate net proceeds of approximately US$477
million received in connection with both the Offering and such capital
contributions by the Bank in connection with the acquisition of the Initial
Mortgage Assets. Concurrently with the consummation of the Offering, the Bank
conveyed the Initial Mortgage Loans to NB Finance pursuant to the Mortgage Loan
Sales Agreement. See "Business and Strategy--Description of the Initial Mortgage
Loans."
The Company and the Bank believe that the fair market value of the
Initial Mortgage Assets are at least equal to the amount (approximately US$477
million) that the Company paid for the Initial Mortgage Assets. However, no
third party valuations of the Initial Mortgage Assets were or will be obtained
for purposes of the Exchange Offer. See "Risk Factors--No Third Party Valuation
of the Initial Mortgage Assets; No Arm's-Length Negotiations with Affiliates."
5
<PAGE>
Servicing Agreement. The Bank services the Initial Mortgage Loans on
behalf of, and as agent for, the Company and is entitled to receive fees in
connection with the servicing thereof pursuant to the Servicing Agreement. The
Bank in its role as servicer under the terms of the Servicing Agreement is
hereinafter referred to as the "Servicer." See "Business and
Strategy--Servicing."
Advisory Agreement. The Company has entered into an advisory agreement
with the Bank (the "Advisory Agreement") pursuant to which the Bank administers
the day-to-day operations of the Company. The Bank in its role as advisor under
the terms of the Advisory Agreement is hereinafter referred to as the "Advisor."
The Advisor is responsible for (i) monitoring the credit quality of Mortgage
Assets held by the Company, (ii) advising the Company with respect to the
reinvestment of income from and payments on, and with respect to the
acquisition, management, financing and disposition of, Mortgage Assets held by
the Company, (iii) holding documents relating to the Company's Mortgage Assets
as custodian, (iv) monitoring the Company's compliance with the requirements
necessary to qualify as a REIT and (v) maintaining its status as a lender
approved by the National Housing Act (a "NHA Approved Lender"). The Advisor may,
with the approval of a majority of the Board of Directors, and a majority of the
Independent Directors, subcontract all or a portion of its obligations under the
Advisory Agreement to one or more related or unrelated third parties. An
"Independent Director" is a director who is not a current officer or employee of
the Company or a current director, officer or employee of the Bank or any
affiliate of the Bank. The Advisor will not, in connection with the
subcontracting of any of its obligations under the Advisory Agreement, be
discharged or relieved in any respect from its obligations under the Advisory
Agreement. The Advisor and its personnel have substantial experience in mortgage
finance and in the administration of Mortgage Assets.
The Advisory Agreement has an initial term of one year, and may be
renewed for additional one-year periods. The Advisory Agreement may be
terminated by the Company at any time upon 60 days' prior written notice. As
long as any of the New Preferred Shares remain outstanding, any decision by the
Company to renew, terminate or modify the Advisory Agreement must be approved by
a majority of the Board of Directors and a majority of the Independent
Directors. The Advisor is entitled to receive an advisory fee equal to C$50,000
per year, payable in equal quarterly installments. See "Management--The
Advisor."
Additional Investments. The Company may from time to time purchase
additional Mortgage Assets out of the proceeds of the issuance of additional
shares of Preferred Stock or additional capital contributions with respect to
the Common Stock. The Company has issued shares of Senior Preferred Stock (as
defined) ranking senior to the New Preferred Shares. Except for the Senior
Preferred Stock, additional shares of preferred stock ranking senior to the New
Preferred Shares may not be issued without the approval of holders of at least
two-thirds of the New Preferred Shares. Additional shares of Preferred Stock
ranking on a parity with the New Preferred Shares may not be issued by the
Company without the approval of a majority of the Board of Directors and a
majority of the Independent Directors (as defined). See "Description of New
Preferred Shares--Independent Director Approval." The Company does not currently
intend to issue any additional shares of Preferred Stock unless it
simultaneously receives additional capital contributions from the Bank equal to
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<PAGE>
approximately 59% of the offering price of such additional Preferred Stock, plus
the Company's expenses (including any discounts or placement fees) incurred in
connection with the issuance of such additional shares of Preferred Stock.
Management. The Board of Directors is composed of five members, two of
whom are Independent Directors. Pursuant to the terms of the New Preferred
Shares, the Independent Directors must consider the interests of the holders of
both the Preferred Stock and the Common Stock in determining whether any
proposed action requiring their approval is in the best interests of the
Company. The Company currently has five employees and does not anticipate that
it will require additional employees. See "Management."
Tax Status of the Company
The Company will elect to be taxable as a REIT under sections 856
through 860 of the Code, commencing with its taxable year ending December 31,
1997. As a REIT, the Company generally will not be liable for United States
federal income tax to the extent that it distributes its income to the holders
of the Common Stock and the Preferred Stock, including the New Preferred Shares,
and maintains its qualification as a REIT.
A REIT is subject to a number of organizational and operational
requirements, including a requirement that it currently distribute to
stockholders at least 95% of its "REIT taxable income" (not including capital
gains). Notwithstanding its election to be taxable as a REIT, the Company may be
subject to federal, state and/or local tax. See "Risk Factors--Tax Risks" and
"United States Federal Income Tax Considerations."
Risk Factors
Prospective exchanging stockholders should carefully consider, in
addition to the other information set forth elsewhere in this Prospectus, the
Risk Factors set forth below:
o Because the dividend rate on the New Preferred Shares is
fixed, a significant decline in interest rates could have an
adverse effect on the Company's cash flow and its ability to
pay dividends on the New Preferred Shares, especially
following the maturity of the Initial Mortgage Assets.
o Because the Initial Mortgage Loans are denominated in Canadian
dollars and the Initial Mortgage Assets are denominated in
U.S. dollars, a significant decrease in the value of the
Canadian dollar could have an adverse effect on the Company's
cash flow and its ability to pay dividends on the New
Preferred Shares.
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<PAGE>
o Dividends on the New Preferred Shares are not cumulative.
Consequently, if the Board of Directors of the Company (the
"Board of Directors") does not authorize and declare a
dividend on the New Preferred Shares for a particular
quarterly dividend period, the holders of the New Preferred
Shares would not be entitled to recover such dividend even if
funds are, or subsequently become, available for payment
thereof. The Board of Directors, the members of which have
been elected by the Bank, may determine, in its business
judgment, that it would be in the best interests of the
Company to pay less than the full amount of the stated
dividend on the New Preferred Shares even if funds are
available to pay such dividend. To remain qualified as a REIT,
however, the Company must distribute annually at least 95% of
its "REIT taxable income" (not including capital gains) to
stockholders and the Company expects that the Board of
Directors will authorize and declare dividends on the New
Preferred Shares quarterly.
o The Initial Mortgage Assets are recourse only to the Initial
Mortgage Loans. Accordingly, in the event of a default on the
Initial Mortgage Loans, the Company may not receive sufficient
payments on the Initial Mortgage Assets to pay dividends on
the New Preferred Shares. All of the real property securing
the Initial Mortgage Assets is located in Canada, primarily in
Quebec, and any actions taken by or on behalf of the Company
with respect to such real property will, therefore, be
dependent upon the laws of the province in which such real
property is located.
o An imminent failure to pay dividends on First Preferred Shares
of the Bank when due, a decline in the capital levels of the
Bank or an act of the Superintendent could result in the New
Preferred Shares being exchanged automatically for the Bank
Preferred Shares. The Bank Preferred Shares would represent an
investment in the Bank and not in the Company. An investment
in the Bank is subject to certain risks that are distinct from
the risks associated with an investment in the Company.
o As a subsidiary of the Bank, the Company is subject to the
risk that the Superintendent will restrict the ability of the
Company to transfer assets, to engage in transactions with the
Bank and its affiliates, to make distributions to stockholders
(including dividends to the holders of the New Preferred
Shares) or to redeem shares of preferred stock of the Company
(the "Preferred Stock"). Under certain circumstances, certain
of these restrictions could result in the Company failing to
qualify as a REIT.
o If the Company fails to maintain its status as a REIT for
United States federal income tax purposes, it will be subject
to United States federal income tax at
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normal corporate tax rates.
o Because of the relationship between the Company and the Bank
and its affiliates, conflicts of interest may arise between
the Company and the Bank and its affiliates.
o The Company will be dependent in virtually every phase of its
operations on the diligence and skill of the Bank and other
agents acting on behalf of the Company.
o Payments of dividends on the Common Stock will reduce the
Company's assets which generate income from which dividends on
the New Preferred Shares are paid.
9
<PAGE>
The Exchange Offer
For a more complete description of the terms of the New Preferred
Shares specified in the following summary, see "Description of New Preferred
Shares."
The Exchange Offer The Company is offering to exchange pursuant to the Exchange
Offer up to 300,000 shares of its New Preferred Shares for
up to all of its outstanding Old Preferred Shares at a rate
of one New Preferred Share for each Old Preferred Share. The
form and terms of the New Preferred Shares (including the
dividend rate, liquidation preference and redemption rights)
are identical in all material respects to the form and terms
of the Old Preferred Shares, except that the New Preferred
Shares have been registered under the Securities Act, and
therefore, will not bear legends restricting their transfer.
Further, the holders of New Preferred Shares will not be
entitled to certain rights of holders of Old Preferred
Shares under the Registration Rights Agreement, which rights
with respect to the Old Preferred Shares will terminate upon
consummation of the Exchange Offer. The issuance of the New
Preferred Shares is intended to satisfy certain obligations
of the Company contained in the Registration Rights
Agreement. Subject to certain conditions, a holder of Old
Preferred Shares who wishes to tender must transmit a
properly completed and duly executed Letter of Transmittal
to The Bank of Nova Scotia Trust Company of New York (the
"Exchange Agent") on or prior to the Expiration Date. For
procedures related to tendering, see "The Exchange Offer."
As of the date hereof, 300,000 shares of Old Preferred Stock
were outstanding.
Minimum Condition The Exchange Offer is not conditioned upon any minimum
aggregate principal amount of Old Preferred Shares being
tendered for exchange.
Expiration Date The Exchange Offer will expire at 5:00 p.m., New York City
Withdrawal time, on the "Expiration Date." As used herein, the term
"Expiration Date" means 5:00 p.m., New York City time, on
, 1998; unless the Company, in its sole discretion,
extends the period of time for which the Exchange Offer is
to remain open. The tender of Old Preferred Shares pursuant
to the Exchange Offer may be withdrawn at any time prior to
the Expiration Date by sending a written notice of
withdrawal to the Exchange Agent.
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<PAGE>
Any Old Preferred Shares so withdrawn will be deemed not to
have been validly tendered for exchange for purposes of the
Exchange Offer. Any Old Preferred Shares not accepted for
exchange for any reason will be returned without expense to
the tendering holder thereof as promptly as practicable
after the expiration or termination of the Exchange Offer.
See "The Exchange Offer--Expiration Date; Extension;
Termination; Amendment" and "--Withdrawal Rights."
Exchange Date The date of acceptance and exchange for the Old Preferred
Shares will be the business day following the
Expiration Date.
Conditions to the The Exchange Offer is subject to certain customary
Exchange Offer conditions which may be waived by the Company. The Company
currently expects that each of these conditions will be
satisfied and that no waivers will be necessary. See "The
Exchange Offer--Certain Conditions to the Exchange Offer."
The Company reserves the right to terminate or amend the
Exchange Offer at any time prior to the Expiration Date upon
the occurrence of any such condition.
Procedure for Each holder of Old Preferred Shares wishing to accept
Tendering the Exchange Offer must complete, sign and date the Letter
Old Preferred of Transmittal, or a facsimile thereof, in accordance with
Shares the instructions contained herein and therein, and mail or
otherwise deliver such Letter of Transmittal, together with
the Old Preferred Shares and any other required
documentation, to the Exchange Agent at the address set
forth herein. See "The Exchange Offer--Procedures for
Tendering Old Preferred Shares" and "Plan of Distribution."
Use of Proceeds There will be no proceeds to the Company from the exchange
of Old Preferred Shares pursuant to the Exchange Offer.
11
<PAGE>
Special Procedures Any beneficial owner whose Old Preferred Shares are
for Beneficial registered in the name of a broker, dealer, commercial bank,
Owners trust company or other nominee who wishes to tender should
contact such registered holder promptly and instruct such
registered holder to tender on such beneficial owner's own
behalf. If such beneficial owner wishes to tender on such
beneficial owner's own behalf, such beneficial owner must,
prior to completing and executing the Letter of Transmittal
and delivering the Old Preferred Shares, either make
appropriate arrangements to register ownership of the Old
Preferred Shares in such beneficial owner's name or obtain a
properly completed bond power from the registered holder.
The transfer of registered ownership may take considerable
time. See "The Exchange Offer--Procedure for Tendering Old
Preferred Shares."
Guaranteed Holders of Old Preferred Shares who wish to tender their Old
Delivery Preferred Shares and whose Old Preferred Shares are not
Procedures entirely available or who cannot deliver their Old Preferred
Shares, the Letter of Transmittal or any other documents
required by the Letter of Transmittal to the Exchange Agent
prior to the Expiration Date must tender their Old Preferred
Shares according to the guaranteed delivery procedures set
forth in "The Exchange Offer--Procedure for Tendering Old
Preferred Shares."
Acceptance of the The Company will accept for exchange any and all Old
Old Preferred Preferred Shares which are properly tendered in the Exchange
Shares and Delivery Offer prior to 5:00 p.m., New York City time, on the
of the New Expiration Date. The New Preferred Shares issued pursuant to
Preferred Shares the Exchange Offer will be delivered promptly following the
Expiration Date. See "The Exchange Offer--Procedures for
Tendering Old Preferred Shares."
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<PAGE>
Effect on the As a result of the making of, and upon acceptance for
Holders of Old exchange of all validly tendered Old Preferred Shares
Preferred Shares pursuant to the terms of, the Exchange Offer, the Company
will have fulfilled the covenant contained in the
Registration Rights Agreement (the "Registration Rights
Agreement") dated September 3, 1997 among the Company, the
Bank and the Initial Purchasers and, accordingly, there
will be no liquidated damages pursuant to the terms of the
Registration Rights Agreement, and the holders of the Old
Preferred Shares will have no further registration or other
rights under the Registration Rights Agreement. Holders of
the Old Preferred Shares who do not tender their Old
Preferred Shares in the Exchange Offer will continue to hold
such Old Preferred Shares without any rights under the
Registration Rights Agreement that, by their terms,
terminate or cease to have further effectiveness as a result
of the making of, and the acceptance for exchange of all
validly tendered Old Preferred Shares pursuant to, the
Exchange Offer. To the extent that the Old Preferred Shares
are tendered and accepted in the Exchange Offer, the trading
market for untendered Old Preferred Shares could be
adversely affected.
Consequence of Holders of Old Preferred Shares who do not exchange for New
Failure to Exchange Preferred Shares pursuant to the Exchange Offer will
Securities Offered continue to be subject to the restrictions on transfer of
such Old Preferred Shares as set forth in the legend thereon
as a consequence of the offer or sale of the Old Preferred
Shares pursuant to an exemption from, or in a transaction
not subject to, the registration requirements of the
Securities Act and the applicable state securities laws. The
Company does not currently anticipate that they will
register any Old Preferred Shares which are not exchanged
pursuant to the Exchange Offer under the Securities Act
after the Expiration Date.
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<PAGE>
The New Preferred Shares
Issuer NB Capital Corporation, a Maryland corporation.
Securities Offered 300,000 Noncumulative Exchangeable Preferred Shares, Series
A.
Ranking The New Preferred Shares rank senior to the Common Stock
with respect to dividend rights and rights upon liquidation.
The Company has issued shares of a series of cumulative,
senior preferred stock ("Senior Preferred Stock") with an
aggregate liquidation preference of up to US$450,000 to meet
the 100 person ownership requirement for REIT status. Except
for the Senior Preferred Stock, additional shares of
preferred stock ranking senior to the New Preferred Shares
may not be issued without the approval of holders of at
least two-thirds of the New Preferred Shares. Additional
shares of preferred stock ranking on a parity with the New
Preferred Shares may not be issued without the approval of a
majority of the Board of Directors and a majority of the
Independent Directors (as defined).
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Dividends Dividends on the New Preferred Shares are payable at the
rate of 8.35% per annum of the liquidation preference (an
amount equal to US$83.50 per annum per share), if, when and
as authorized and declared by the Board of Directors. If
authorized and declared, dividends are payable quarterly in
arrears on the 30th day of March, June, September and
December in each year, commencing June 30, 1998. Except for
the initial period, which shall commence on and include
, 1998 and end on 1998, dividends
accrue in each quarterly period from the first day of such
period, whether or not dividends were paid with respect to
the preceding period. Dividends on the New Preferred Shares
are not cumulative and, accordingly, if no dividend is
authorized and declared on the New Preferred Shares by the
Board of Directors for a quarterly dividend period, holders
of the New Preferred Shares will have no right to receive a
dividend for that period, and the Company will have no
obligation to pay a dividend for that period, whether or not
dividends are authorized, declared and paid for any future
period with respect to either the New Preferred Shares or
the Common Stock. If no dividend is paid on the New
Preferred Shares for a quarterly dividend period, the
payment of dividends on the Common Stock will be prohibited
for that period and at least the following three quarterly
dividend periods. See "Description of New Preferred
Shares--Dividends."
Liquidation The liquidation preference for each of the New Preferred
Preference Shares is US$1,000. Upon liquidation, holders of the New
Preferred Shares will also be entitled to receive an amount
equal to the quarterly accrued and unpaid dividend, if any,
thereon to the date of liquidation. See "Description of New
Preferred Shares--Rights Upon Liquidation."
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<PAGE>
Registration Rights The Old Preferred Shares were sold by the Company on
Agreement September 3, 1997 pursuant to the Purchase Agreement.
Pursuant to the Purchase Agreement, the Company and the
Initial Purchaser entered into the Registration Rights
Agreement. This Exchange Offer is intended to satisfy
certain rights under the Registration Rights Agreement,
which terminate upon the consummation of the Exchange Offer.
The holders of the New Preferred Shares are not entitled to
any exchange or registration rights with respect to the New
Preferred Shares. The Old Preferred Shares are subject to
the payment of additional interest under certain
circumstances if the Company is not in compliance with its
obligations under the Registration Rights Agreement. See
"Exchange Offer; Registration Rights."
Description of the The form and terms of the New Preferred Shares are the same
New Preferred as the form and terms of the Old Preferred Shares except
Shares that (i) the New Preferred Shares will be registered under
the Securities Act and therefore the New Preferred Shares
will not bear legends restricting the transfer thereof and
(ii) holders of the New Preferred Shares will not be
entitled to certain rights of holders of the Old Preferred
Shares under the Registration Rights Agreement, which rights
with respect to Old Preferred Shares will terminate upon the
consummation of the Exchange Offer. See "Description of the
New Preferred Shares."
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Redemption The New Preferred Shares are not redeemable prior to
September 3, 2007 (except upon the occurrence of a Tax
Event, as defined in "Description of New Preferred Shares--
Redemption", on or after September 3, 2002). On and after
September 3, 2007, the New Preferred Shares may be redeemed
for cash at the option of the Company, in whole or in part,
at any time and from time to time, at the redemption prices
set forth herein, plus the quarterly accrued and unpaid
dividend, if any, thereon to the date of redemption. Upon
the occurrence of a Tax Event, on or after September 3,
2002, the Company will have the right to redeem the New
Preferred Shares in whole (but not in part) at a redemption
price equal to the Make-Whole Amount (as defined), plus the
quarterly accrued and unpaid dividend, if any, thereon to
the date of redemption. Any redemption is subject to the
prior written approval of the Superintendent. See
"Description of New Preferred Shares-- Redemption." The New
Preferred Shares are not subject to any sinking fund or
mandatory redemption and are not convertible into any other
securities of the Company.
Automatic Exchange Each of the New Preferred Shares will be exchanged
automatically for one Bank Preferred Share upon the
occurrence of an Exchange Event. See "Description of New
Preferred Shares Automatic Exchange."
Voting Rights Holders of the New Preferred Shares will not have any voting
rights, except as expressly provided herein. On any matter
on which holders of the New Preferred Shares may vote, each
of the New Preferred Shares will be entitled to one vote.
See "Description of New Preferred Shares--Voting Rights."
Ownership Limits Beneficial ownership by any individual of more than 5% of
any outstanding series of Preferred Stock, including the
New Preferred Shares offered hereby, is restricted in order
to preserve the Company's status as a REIT for United States
federal income tax purposes. See "Description of Capital
Stock--Restrictions on Ownership and Transfer."
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Ratings The New Preferred Shares will be rated "a2" by Moody's
Investors Service, Inc. and "BBB+" by Standard & Poor's
Ratings Services. A security rating is not a
recommendation to buy, sell or hold securities and may be
subject to revision or withdrawal at any time by the
assigning rating organization.
Use of Proceeds There will be no proceeds to the Company from the exchange
pursuant to the Exchange Offer.
Federal Income Tax For federal income tax purposes, the exchange pursuant to
Consequences the Exchange Offer will not result in any income gain or
loss to the holders or the Company. See "United States
Federal Income Tax Considerations."
Exchange Agent The Bank of Nova Scotia Trust Company of New York is
serving as Exchange Agent in connection with the Exchange
Offer.
ERISA Each holder of the New Preferred Shares will, by exchanging
Considerations its Old Preferred Shares for New Preferred Shares, be deemed
to have directed the Company to invest in the Initial
Mortgage Assets (as well as the other assets held by the
Company and identified at the time of purchase) and
represented and agreed that either (A) no part of the assets
to be used by it to acquire and hold such New Preferred
Shares constitutes the assets of any (I) employee benefit
plan (as defined in Section 3(3) of the Employee Retirement
Income Security Act of 1974, as amended ("ERISA")) subject
to Title I of ERISA, (II) plan (as defined in section
4975(e)(1) of the Code) or (III) entity whose underlying
assets include "plan assets" under Department of Labor
Regulation 29 C.F.R. Section 2510.3-101 (collectively,
"Plans") or (B) one or more prohibited transaction statutory
or class exemptions apply such that the use of such plan
assets to acquire and hold such New Preferred Shares will
not constitute a non-exempt prohibited transaction under
ERISA or the Code.
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In addition, in the event that the New Preferred Shares are
not treated as "publicly-offered securities" (within the
meaning of the above-referenced regulations) as of the date
on which the Exchange Offer is consummated or (if no
Exchange Offer is consummated) a Shelf Registration
Statement is declared effective, then during the period
commencing on such date and ending on the date on which the
New Preferred Shares become "publicly-offered securities",
each Plan purchaser will be deemed to have appointed an
independent fiduciary (the "Independent Fiduciary"), which
will be identified by the Company to exercise any
discretionary authority with respect to transactions
involving both the Company and the Bank or any Bank
affiliate. The Independent Fiduciary will be identified
prior to any such transaction and will be subject to removal
and replacement by a majority of the holders of the New
Preferred Shares.
Any Plan fiduciary that proposes to cause a Plan to exchange
New Preferred Shares for Old Preferred Shares should consult
with its counsel with respect to the potential applicability
of ERISA and the Code to such investment and whether any
exemption or exemptions would be applicable and determine on
its own whether all conditions of such exemption or
exemptions have been satisfied. Any such Plan fiduciary
should also determine whether the exchange of New Preferred
Shares for Old Preferred Shares is permitted under the
governing Plan instruments and is appropriate for the Plan
in view of the overall investment policy and the composition
and diversification of its portfolio.
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<PAGE>
Selected Financial Data
The selected financial data presented below as of and for the period
from August 20, 1997 (date of inception) to September 30, 1997 are derived from
and are qualified by reference to the Financial Statements contained elsewhere
in this Prospectus. The selected financial data presented below as of and for
the period August 20, 1997 (date of inception) to September 30, 1997, have been
derived from the unaudited financial statements of the Company which, in the
opinion of management, include all adjustments, which consist only of normal
recurring adjustments, necessary for a fair presentation of the financial
position and the results of operations for such period. The following financial
data should be read in conjunction with the Financial Statements contained
elsewhere in this Prospectus.
August 20, 1997
(date of inception) to
September 30, 1997
Statement of Income Data:
Revenue................................................ $ 3,053,269
Operating expenses..................................... 0
-----------------
Operating profit....................................... 3,053,269
Other income (expense):
Income tax............................................. 1,221,307
-----------------
Net income............................................. $ 1,831,962
Balance Sheet Data:
Total assets........................................... $ 480,391,723
Total liabilities...................................... 2,346,307
8.35% Noncumulative Exchangeable
Preferred stock, Series A.............................. 300,000,000
Common stock........................................... 183,338,454
Stockholder deficiency................................. (5,293,038)
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RISK FACTORS
Prospective exchanging stockholders should carefully consider the
following information in conjunction with the other information contained in
this Prospectus before exchanging Old Preferred Shares for the New Preferred
Shares in the Exchange Offer. This Prospectus contains forward-looking
statements that involve risks and uncertainties. The Company's actual results
may differ significantly from the results discussed in the forward-looking
statements. Factors that might cause such differences include those discussed
below.
Consequences of Failure to Exchange Old Preferred Shares
The New Preferred Shares will be issued in exchange for Old Preferred
Shares only after timely receipt by the Exchange Agent of such Old Preferred
Shares, a properly completed and duly executed Letter of Transmittal and all
other required documents. Therefore, holders of Old Preferred Shares desiring to
tender such Old Preferred Shares in exchange for New Preferred Shares should
allow sufficient time to ensure timely delivery. Neither the Exchange Agent nor
the Company is under any duty to give notification of defects or irregularities
with respect to tenders of Old Preferred Shares for exchange. Holders of Old
Preferred Shares who do not exchange their Old Preferred Shares for New
Preferred Shares pursuant to the Exchange Offer will continue to be subject to
the restrictions on transfer of such Old Preferred Shares as set forth in the
legends thereon as a consequence of the issuance of the Old Preferred Shares
pursuant to exemption from, or in transactions not subject to, the registration
requirements of the Securities Act and applicable state securities laws. In
general, the Old Preferred Shares may not be offered or sold, unless registered
under the Securities Act, except pursuant to an exemption from, or in a
transaction not subject to, the Securities Act and applicable securities laws of
states and other jurisdictions. In addition, any holder of Old Preferred Shares
who tenders in the Exchange Offer for the purpose of participating in a
distribution of the New Preferred Shares will be required to comply with the
registration and prospectus delivery requirements of the Securities Act in
connection with any resale transaction. Each broker-dealer that receives New
Preferred Shares for its own account in exchange for Old Preferred Shares, where
such Old Preferred Shares were acquired by such broker-dealer as a result of
market-making activities or any other trading activities, must acknowledge that
it will deliver a prospectus in connection with any resale of such New Preferred
Shares.
Interest Rate Risk
The Company's income consists principally of interest payments from the
Initial Mortgage Assets and obligations which are comparable to the Initial
Mortgage Assets. If there is a significant decline in interest rates at a time
when the Company must reinvest payments of interest and principal in respect of
its Mortgage Assets, the Company may find it difficult to purchase additional
Mortgage Assets which generate sufficient income to
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<PAGE>
support the payment of dividends on the New Preferred Shares. Because the rate
at which dividends on the New Preferred Shares, if, when and as authorized and
declared, are payable is fixed, there can be no assurance that an interest rate
environment in which there is a significant decline in interest rates would not
adversely affect the Company's ability to pay dividends on the New Preferred
Shares.
Currency Exchange Rate Risk
The Company's income consists principally of interest payments from the
Initial Mortgage Assets and obligations which are comparable to the Initial
Mortgage Assets. While the Initial Mortgage Assets are, and the Company's future
Mortgage Assets likely will be, denominated in United States dollars, Mortgage
Loans are denominated and payable in Canadian dollars. If there is a significant
decrease in the value of the Canadian dollar, the value in U.S. dollars of the
cash flow from Mortgage Loans assigned to the Company by NB Finance (including
principal payments) may decrease, which may adversely affect the cash flow to
the Company and the Company's ability to pay the dividends on the New Preferred
Shares. From the beginning of 1994 to and including , 1998, the
exchange rate of the Canadian dollar to the United States dollar has ranged from
C$ to US$1.00 on to C$ to US$1.00 on ; with an
average for such period of C$ to US$1.00.
Dividends Not Cumulative
Dividends on the New Preferred Shares are not cumulative. Consequently,
if the Board of Directors does not authorize and declare a dividend on the New
Preferred Shares for a quarterly dividend period, the holders of the New
Preferred Shares would not be entitled to recover such dividend, even if funds
are, or subsequently become, available for payment thereof. The Board of
Directors may determine, in its business judgment, that it would be in the best
interests of the Company to pay less than the full amount of the stated dividend
on the New Preferred Shares or no dividend for any quarterly dividend period,
notwithstanding that funds are available to pay such dividend. Factors that may
be considered by the Board of Directors in making this determination are the
Company's financial condition and capital needs, legal or regulatory
requirements, economic conditions, and such other factors as the Board may deem
relevant. Notwithstanding the foregoing, to remain qualified as a REIT, the
Company must distribute annually at least 95% of its "REIT taxable income" (not
including capital gains) to stockholders. See "--Tax Risks" below and "United
States Federal Income Tax Considerations--Taxation of the Company."
Real Estate Market Conditions
The results of the Company's operations will be affected by various
factors, many of which are beyond the control of the Company, such as: (i) local
and other economic and political conditions affecting real estate values,
particularly in Quebec, (ii) the level of interest income generated by the
Company's Mortgage Assets, (iii) the market value of the Company's Mortgage
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<PAGE>
Assets and (iv) the supply of and demand for the Company's Mortgage Assets.
Further, there can be no assurance that the value of the Initial Mortgage
Assets, or the value of the real property securing the Initial Mortgage Assets,
will remain at the levels existing on the dates of origination of the Initial
Mortgage Assets. These factors may also have an effect on the business and
financial condition of the Bank and may affect the likelihood of an Exchange
Event.
Limited Recourse Nature of Certain Mortgage Assets; Limitations on CMHC
Insurance
The Initial Mortgage Assets consist of obligations issued by NB
Finance. The Initial Mortgage Assets are recourse only to the Initial Mortgage
Loans, which have been assigned to the Company by NB Finance, and are secured by
real property. In the event of nonpayment of interest or other default on the
Initial Mortgage Loans, the Company's only recourse will be to exercise its
rights under the Initial Mortgage Loans (principally through foreclosure on the
real property securing the Initial Mortgage Assets), either directly or through
the Bank as Servicer. It is anticipated that additional Mortgage Assets acquired
by the Company will consist of similar limited recourse obligations. The CMHC
insurance with respect to the Initial Mortgage Loans is not a guarantee of
timely payment of principal and interest on such Mortgage Loans. Typically, CMHC
will only make payments pursuant to its insurance after the approved lender has
taken certain actions which may be time consuming and can cause delays in the
receipt of such payments. In addition, the CMHC insurance will cease to be in
force if any such Initial Mortgage Loan is sold to a person other than a lender
approved by CMHC unless such Initial Mortgage Loan continues to be administered
by CMHC or a lender approved by CMHC. The regulations of the CMHC stipulate that
the terms of repayment of Mortgage Loans shall not be altered and that no
derogation from the rights of the mortgagee against the mortgaged property by
way of postponement, partial discharge or otherwise shall be granted without
first obtaining the approval of the CMHC.
All of the Real Property Securing the Initial Mortgage Assets Is Located Outside
of the United States
All of the real property securing the Initial Mortgage Assets is
located in Canada, primarily in Quebec, and the real property securing
additional Mortgage Assets acquired by the Company is also expected to be
located in Canada. Any actions taken by or on behalf of the Company with respect
to such real property will therefore be dependent upon the laws of the
jurisdictions in which such real property is located. In addition, from time to
time Canada experiences weaker economic conditions and housing markets than the
United States which may adversely affect the value of real property and
mortgages thereon. Thus, the Initial Mortgage Assets may be subject to a greater
risk of default than comparable obligations secured by U.S. real property.
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<PAGE>
Canadian Legal Considerations
A mortgagee (referred to in the Province of Quebec as a "hypothecary
creditor") holding a mortgage (referred to in the Province of Quebec as a
"hypothec") on a residential property located in the Province of Quebec may,
when the mortgagor is in default and the mortgagee's claim is due and payable,
take possession of such residential property in payment of its claim or have the
property sold by judicial authority. Such mortgagee must notify the mortgagor at
least 60 days prior to taking any action and register such notice at the
appropriate registry office for the residential property before it may seek any
remedies. If at the time the mortgagee's prior notice is registered the
mortgagor has discharged at least one-half of the obligations secured by the
mortgage, the mortgagee must obtain court authorization prior to exercising its
remedy of taking the property in payment. Subsequent mortgagees or the mortgagor
may, within the 60-day period following the registration of the mortgagee's
notice, require the mortgagee to abandon its remedy of taking the property in
payment and, instead, have the property sold by judicial authority. In order to
exercise this right, a subsequent mortgagee must furnish a bond guaranteeing
that the price at which the property will be sold at a judicial sale will
satisfy in full the prior mortgagee's claim.
Under Quebec law, until a mortgagor is notified of the transfer of the
mortgagee's interest in the mortgage, the mortgagor or any third party,
including a trustee in bankruptcy, may not be bound by such transfer.
Furthermore, until such transfer is registered at the registry office where the
mortgaged property is located, and a certified statement of registration is
furnished to the mortgagor, the transferee's rights may be subject to the
rights, title and interest of a subsequent assignee of the mortgage that has
properly registered its interest therein and notified the mortgagor thereof.
For residential properties outside the Province of Quebec, remedial
proceedings in the nature of foreclosure or sale by power of sale may be taken
to enforce the rights of a mortgagee when a mortgagor is in default, provided
that there has been compliance with the laws of the local jurisdiction.
Most provinces in Canada, including Quebec, have laws, public policy
and general principles of equity relating to the protection of mortgagors.
Depending on the provisions of the applicable law and the specific facts and
circumstances involved, violations of these laws, policies and principles may
limit the ability of the Company to collect all or part of the principal of or
interest on the Initial Mortgage Loans, may entitle mortgagors to a refund of
amounts previously paid and, in addition, could subject the Company to damages
and administrative sanctions.
Certain Risks Associated with the Bank
The exchange of Old Preferred Shares for New Preferred Shares involves
risks to the holders of New Preferred Shares with respect to the performance and
capital levels of the Bank. An imminent failure to pay dividends on preferred
shares of the Bank when due, a decline in
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<PAGE>
the capital levels of the Bank or an act of the Superintendent could result in
the New Preferred Shares being exchanged automatically for the Bank Preferred
Shares. The Bank Preferred Shares would be an investment in the Bank and not in
the Company. As a result of an Exchange Event, holders of the New Preferred
Shares would become preferred shareholders of the Bank at a time when the Bank's
financial condition was deteriorating or when the Bank had been taken over by
the Superintendent or proceedings for the winding-up of the Bank had been
commenced. An Exchange Event includes the Superintendent electing to cause the
Automatic Exchange. An investment in the Bank is also subject to certain risks
that are distinct from the risks associated with an investment in the Company,
including the general risks inherent in equity investments in depository
institutions. In the event of a winding-up of the Bank, the claims of depositors
and secured, senior, general and subordinated creditors of the Bank would be
entitled to a priority of payment over the claims of holders of equity
interests, such as the Bank Preferred Shares. As a result, if the Bank were to
be wound up, the holders of the New Preferred Shares likely would receive, if
anything, substantially less than they would have received had the New Preferred
Shares not been exchanged for the Bank Preferred Shares. If an Exchange Event
occurs, the Bank would likely be prohibited from paying dividends on the Bank
Preferred Shares. The Bank's ability to pay dividends on the Bank Preferred
Shares would also be subject to various restrictions under applicable
regulations and certain contractual provisions. In addition, dividends on the
Bank Preferred Shares owned by U.S. investors will generally be subject to
Canadian nonresident withholding tax. The Bank currently has outstanding three
series of cumulative First Preferred Shares and three series of non-cumulative
First Preferred Shares. The Bank may not, without the approval of the holders of
all such series and any future series, create or issue any shares ranking in
priority to or pari passu therewith if any cumulative dividends have not been
declared and paid or set aside for payment or any declared and unpaid
non-cumulative dividends have not been paid or set aside for payment.
Immediately prior to any failure by the Bank to declare and pay or set aside for
payment, the New Preferred Shares will be automatically exchanged for Bank
Preferred Shares. See "Canadian Federal Income Tax Considerations." Potential
holders of the New Preferred Shares should carefully consider the foregoing.
Dividend and Other Regulatory Restrictions on Operations of the Company
Because the Company and NB Finance are subsidiaries of the Bank, the
Superintendent has the right to examine the Company and NB Finance and their
respective activities. Under certain circumstances, including any determination
that the Bank's relationship with the Company or NB Finance results in an unsafe
and unsound banking practice, the Superintendent has the authority to restrict
the ability of the Company or NB Finance to transfer assets, to engage in
transactions with the Bank, to make distributions to their stockholders
(including dividends to the holders of the New Preferred Shares, as described
below), or to redeem shares of Preferred Stock. The Superintendent could also
require the Bank to sever its relationship with or divest its ownership of the
Company. Such actions could potentially result in the Company's failure to
qualify as a REIT. In addition, as subsidiaries of the Bank, the Company and NB
Finance are subject to supervision by U.S. bank regulators.
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<PAGE>
Tax Risks
Adverse Consequences of Failure to Qualify as a REIT. The Company
operates so as to qualify as a REIT under the Code. Although the Company
believes that it will be owned and organized and will operate in such a manner,
and Shearman & Sterling has rendered certain opinions, described under "United
States Federal Income Tax Considerations" below, regarding the Company's
qualification as a REIT, no transaction closely comparable to that contemplated
herein has been the subject of any administrative pronouncement or judicial
decision and no assurance can be given that the Company will be able to operate
in such a manner so as to qualify as a REIT or to remain so qualified.
Qualification as a REIT involves the application of highly technical and complex
Code provisions for which there are only limited judicial and administrative
interpretations. The determination of various factual matters and circumstances
not entirely within the Company's control, and not addressed by the opinion of
Shearman & Sterling, may affect the Company's ability to qualify as a REIT.
Although the Company is not aware of any proposal in Congress to amend the tax
laws in a manner that would materially and adversely affect the Company's
ability to operate as a REIT, no assurance can be given that new legislation or
new regulations, or future administrative interpretations or court decisions,
will not significantly change the tax laws with respect to qualification as a
REIT or the United States federal income tax consequences of such qualification.
The Company has issued shares of a series of cumulative, senior preferred stock
with an aggregate liquidation preference of up to US$450,000 (the "Senior
Preferred Stock") to meet the 100 person ownership requirement for REIT status.
The Company is relying on the opinion of Shearman & Sterling, counsel
to the Company, regarding various issues affecting the Company's ability to
qualify, and retain qualification, as a REIT. Such legal opinion is not binding
on the Internal Revenue Service (the "IRS") or the courts and no assurance can
be given that such opinion will not be challenged by the IRS.
If in any taxable year the Company fails to qualify as a REIT, the
Company would not be allowed a deduction for distributions to stockholders in
computing its taxable income and would be subject to United States federal
income tax on its taxable income in the same manner as a regular, domestic
corporation. As a result, the amount available for distribution to the Company's
stockholders, including the holders of the New Preferred Shares, would be
reduced for the year or years involved. In addition, unless entitled to relief
under certain statutory provisions, the Company would also be disqualified from
treatment as a REIT for the four taxable years following the year during which
REIT qualification was lost. The failure of the Company to qualify as a REIT
would not necessarily give the Company the right to redeem the New Preferred
Shares, nor would it give the holders of the New Preferred Shares the right to
have their shares redeemed. See "Description of New Preferred
Shares--Redemption."
Notwithstanding the fact that the Company currently operates in a
manner designed to enable it to qualify as a REIT, future economic, market,
legal, tax and other considerations may cause the Board of Directors to
determine that it is in the best interests of the Company and the holders of the
Common Stock and the New Preferred Shares to revoke the
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Company's REIT election. As long as any of the New Preferred Shares are
outstanding, any such determination by the Company may not be made without the
approval of a majority of the Independent Directors. United States federal
income tax law prohibits the Company from electing to be taxable as a REIT for
the four taxable years following the year of such revocation.
See "United States Federal Income Tax Considerations."
REIT Requirements with Respect to Stockholder Distributions. To qualify
as a REIT under the Code, the Company is generally required each year to
distribute as dividends to its stockholders at least 95% of its "REIT taxable
income" (excluding capital gains). Failure to comply with this requirement would
result in the Company being subject to tax at normal corporate rates. In
addition, the Company would be subject to a 4% nondeductible excise tax on the
amount, if any, by which certain distributions considered as paid by it with
respect to any calendar year are less than the sum of 85% of its ordinary income
for the calendar year, 95% of its capital gains net income for the calendar year
and any undistributed taxable income from prior periods. Under certain
circumstances, the Superintendent may restrict the ability of the Company, as a
subsidiary of the Bank, to make distributions to its stockholders. Such a
restriction could result in the Company's failing to satisfy the REIT
requirements with respect to stockholder distributions. See "--Dividend and
Other Regulatory Restrictions on Operations of the Company."
Redemption upon Occurrence of a Tax Event. At any time following the
occurrence of a Tax Event on or after September 3, 2002, even if such Tax Event
occurs prior to September 3, 2007, the Company will have the right to redeem the
New Preferred Shares in whole but not in part, subject to the prior written
approval of the Superintendent. The occurrence of a Tax Event will not, however,
give the holders of the New Preferred Shares any right to have such shares
redeemed. See "Description of New Preferred Shares--Redemption."
Automatic Exchange upon Occurrence of an Exchange Event. Upon the
occurrence of an Exchange Event, the outstanding New Preferred Shares will be
exchanged automatically on a one-for-one basis for Bank Preferred Shares. See
"Description of New Preferred Shares--Automatic Exchange." The Automatic
Exchange will be a taxable event, and each holder of the New Preferred Shares
will have a gain or loss, as the case may be, equal to the difference between
the basis of such holder in the New Preferred Shares and the fair market value
of the Bank Preferred Shares received in the Automatic Exchange. See "United
States Federal Income Tax Considerations--Tax Treatment of Automatic Exchange."
Changes in Tax Law. Under current tax law, payments on the Initial
Mortgage Loans and the Initial Mortgage Assets are not subject to any imposition
of withholding tax. There can be no assurance, however, that as a result of any
change in any applicable law, treaty, rule or regulation or any interpretation
thereof, the payments on the Initial Mortgage Loans or the Initial Mortgage
Assets might not in the future become subject to withholding tax. In the event
that any withholding tax is imposed on payments of interest on the Initial
Mortgage Loans, neither NB Finance nor the Company will be entitled to receive
additional amounts to compensate for such withholding tax and accordingly, such
tax would reduce the amount available to make
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<PAGE>
payments on the Initial Mortgage Assets. There can be no assurance that the
remaining payments on the Initial Mortgage Assets would be sufficient to make
timely payments of dividends on the New Preferred Shares.
Ownership of the New Preferred Shares. If the possibility of the
occurrence of the Automatic Exchange caused the Bank to be viewed from the date
of issuance of the New Preferred Shares as the holder for U.S. federal income
tax purposes of the New Preferred Shares, distributions on the New Preferred
Shares would be subject to withholding of United States federal income tax at a
30 percent rate. The Company, as withholding agent, would be liable for the
payment of such tax, which would reduce the amount available to pay dividends on
the New Preferred Shares.
Relationship with the Bank and Its Affiliates; Conflicts of Interest
The Bank and its affiliates are involved in virtually every aspect of
the Company's existence. The Bank is the sole holder of the Common Stock and
administers the day-to-day activities of the Company in its role as Advisor
under the Advisory Agreement. The Bank also services Mortgage Loans on behalf of
the Company under the Servicing Agreement. In addition, other than the
Independent Directors, all of the officers and directors of the Company are also
officers and/or directors of the Bank and/or affiliates of the Bank. As the
holder of all of the outstanding voting stock of the Company, the Bank will have
the right to elect all directors of the Company, including the Independent
Directors.
The Bank and its affiliates may have interests which are not identical
to those of the Company. Consequently, conflicts of interest may arise with
respect to transactions, including, without limitation, the issuance of the
Initial Mortgage Assets; future acquisitions of Mortgage Assets from the Bank
and/or affiliates of the Bank; servicing of Mortgage Loans (including the
Initial Mortgage Loans); future dispositions of Mortgage Assets to the Bank or
affiliates of the Bank; and the renewal, termination or modification of the
Advisory Agreement or the Servicing Agreement. It is the intention of the
Company and the Bank that any agreements and transactions between the Company,
on the one hand, and the Bank and/or its affiliates, on the other hand, be fair
to all parties and consistent with market terms, including the prices paid and
received for Mortgage Assets or in connection with the servicing of Mortgage
Loans. The requirement in the Charter that certain actions of the Company be
approved by a majority of the Independent Directors is also intended to ensure
fair dealings between the Company and the Bank and its affiliates. However,
there can be no assurance that such agreements or transactions will be on terms
as favorable to the Company as those that could have been obtained from
unaffiliated third parties. See "Business and Strategy--Management Policies and
Programs--Conflict of Interest Policies."
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Dependence upon the Advisor and the Servicer
The Company is dependent for the selection, structuring and monitoring
of its Mortgage Assets on the diligence and skill of the officers and employees
of the Advisor. See "Management." In addition, the Company is dependent upon the
expertise of the Servicer for the servicing of Mortgage Loans. The Advisor may
subcontract all or a portion of its obligations under the Advisory Agreement,
and the Servicer may subcontract all or a portion of its obligations under the
Servicing Agreement, to one or more affiliates, and under certain conditions to
non-affiliates, involved in the business of managing Mortgage Assets. In the
event the Advisor or the Servicer subcontracts its obligations in such a manner,
the Company will be dependent upon the subcontractor to provide services. See
"Management--The Advisor" and "Business and Strategy--Servicing."
Risk of Future Revisions in Policies and Strategies by Board of Directors
The Board of Directors has established the investment policies and
operating policies and strategies of the Company, certain of which are described
in this Prospectus. These policies may be amended or revised from time to time
at the discretion of the Board of Directors (in certain circumstances subject to
the approval of a majority of the Independent Directors) without a vote of the
Company's stockholders, including holders of the New Preferred Shares. The
ultimate effect of any change in the policies and strategies of the Company on a
holder of the New Preferred Shares may be positive or negative. See "Business
and Strategy--Management Policies and Programs."
No Third Party Valuation of the Mortgage Assets; No Arm's-Length Negotiations
with Affiliates
The Company and the Bank believe that the fair market value of the
Initial Mortgage Assets was at least equal the amount (approximately US$477
million) that the Company paid for the Initial Mortgage Assets. However, no
third party valuations were obtained for purposes of the Exchange Offer and
there can be no assurance that the fair market value of the Initial Mortgage
Assets did not differ from the amount that the Company paid for the Initial
Mortgage Assets.
In addition, it is not anticipated that any third party valuations will
be obtained in connection with future acquisitions and dispositions of Mortgage
Assets even in circumstances where an affiliate of the Company is selling such
Mortgage Assets to, or purchasing such Mortgage Assets from, the Company.
Accordingly, although the Company and the Bank intend that future acquisitions
or dispositions of Mortgage Assets will be on a fair market value basis, there
can be no assurance that the consideration to be paid (or received) by the
Company to (or from) the Bank or any of its affiliates in connection with future
acquisitions or dispositions of Mortgage Assets will not differ from the fair
market value of such Mortgage Assets.
29
<PAGE>
THE COMPANY
The Company is a Maryland corporation created for the purpose of
providing U.S. investors with the opportunity to invest in Canadian residential
mortgages and other real estate assets. The Company's principal business
objective is to acquire, hold, finance and manage Mortgage Assets that will
generate net income for distribution to stockholders. At least 90% of the
Company's Mortgage Assets consist of obligations that are recourse only to
Mortgage Loans and that are secured by real property.
Generally, the Company acquired its Mortgage Assets from the Bank and
affiliates of the Bank. The Company may also from time to time, however, acquire
Mortgage Assets from unrelated third parties. The Bank administers the
day-to-day operations of the Company in its role as Advisor under the Advisory
Agreement. All of the Common Stock is owned by the Bank. The Company will elect
to be taxable as a REIT under the Code and will generally not be liable for
United States federal income tax to the extent that it distributes its income to
its stockholders and maintains its qualification as a REIT. For a further
description of the operations of the Company, see "Business and Strategy,"
"Management," "Risk Factors" and "United States Federal Income Tax
Considerations."
The New Preferred Shares will be exchanged automatically on a
one-for-one basis for the Bank Preferred Shares upon the occurrence of the
Exchange Event. CONSEQUENTLY, THE NEW PREFERRED SHARES COULD BE REPLACED,
WITHOUT ANY ACTION BY THE HOLDER THEREOF, BY THE BANK PREFERRED SHARES AT A TIME
WHEN THE BANK'S FINANCIAL CONDITION IS DETERIORATING OR WHEN THE SUPERINTENDENT
HAS TAKEN CONTROL OF THE BANK OR PROCEEDINGS FOR THE WINDING-UP OF THE BANK HAVE
BEEN COMMENCED. See "Description of New Preferred Shares--Automatic Exchange."
30
<PAGE>
USE OF PROCEEDS
There will be no proceeds to the Company from the exchange pursuant to
the Exchange Offer.
CAPITALIZATION
The following table sets forth the capitalization of the Company as of
September 30, 1997 (i) on an actual basis and (ii) as adjusted to reflect the
sale of the Old Preferred Shares by the Company and the application of the net
proceeds therefrom.
<TABLE>
<CAPTION>
September 30, 1997
(In thousands, except
share data)
<S> <C>
Debt
Total long-term debt.......................................................................... US$ --
Stockholders' Equity
Preferred Stock, US$.01 par value per share; none authorized,
issued and outstanding, actual; and 10,000,000 shares authorized, 300,000 shares
issued and outstanding, as adjusted.................................................. 3
Common Stock, US$.01 par value per share; 1,000 shares
authorized, 100 shares issued and outstanding, actual and as adjusted................ (1)
--------
Additional paid-in capital.................................................................... 483,335
Total stockholders' equity.................................................................... 483,338(1)
Total Capitalization.......................................................................... US$483,338
==========
<FN>
- -----------------
(1) The Company was formed with an initial capitalization of US$1,000. Contemporaneously with the
consummation of the Offering, the Bank made capital contributions to the Company equal to
US$177,000,000 plus an amount sufficient to pay the Initial Purchaser's Discount of US$6,000,000 and the
expenses of the Offering and the formation of the Company payable by the Company, estimated by the
Company to be approximately US$750,000. The additional paid-in capital of US$483,335,000 represents
(i) the total capital contributions made by the Bank to the Company minus the aggregate Initial Purchaser's
Discount and the expense of the Offering and the formation of the Company payable by the Company and
(ii) the full US$300,000,000 of proceeds of the Offering minus the aggregate US$3,000 par value of the Old
Preferred Shares.
</FN>
</TABLE>
31
<PAGE>
THE EXCHANGE OFFER
General
The Company hereby offers, upon the terms and subject to the conditions
set forth in this Prospectus and in the accompanying Letter of Transmittal
(which together constitute the Exchange Offer), to exchange up to 300,000 New
Preferred Shares for a like number of Old Preferred Shares properly tendered on
or prior to the Expiration Date and not withdrawn as permitted pursuant to the
procedures described below. The Exchange Offer is being made with respect to all
of the Old Preferred Shares.
As of the date of this Prospectus, the aggregate number of the Old
Preferred Shares outstanding is 300,000. This Prospectus, together with the
Letter of Transmittal, is first being sent on or about , 1997, to all
holders of Old Preferred Shares known to the Company. The Company's obligation
to accept Old Preferred Shares for exchange pursuant to the Exchange Offer is
subject to certain conditions set forth under "--Certain Conditions to the
Exchange Offer" below. The Company currently expects that each of the conditions
will be satisfied and that no waivers will be necessary.
Purpose of the Exchange Offer
The Old Preferred Shares were issued on September 3, 1997 in a
transaction exempt from the registration requirements of the Securities Act.
Accordingly, the Old Preferred Shares may not be reoffered, resold, or otherwise
transferred unless registered under the Securities Act or any applicable
securities law or unless an applicable exemption from the registration and
prospectus delivery requirements of the Securities Act is available.
In connection with the issuance and sale of the Old Preferred Shares,
the Company entered into the Registration Rights Agreement, which requires (i)
the Company to file with the Commission a registration statement relating to the
Exchange Offer not later than 150 days after the date of issuance of the Old
Preferred Shares, (ii) the Company to use its best efforts to cause the
registration relating to the Exchange Offer to become effective under the
Securities Act not later than 180 days after the date of issuance of the Old
Preferred Shares and (iii) the Exchange Offer to be consummated not later than
30 days after the date of the effectiveness of the Registration Statement (or,
if the Company is not permitted to effect the Exchange Offer, to use its best
efforts to cause to become effective as promptly as practicable a shelf
registration statement with respect to resales of the Old Preferred Shares). A
copy of the Registration Rights Agreement has been filed as an exhibit to the
Registration Statement.
The Exchange Offer is being made by the Company to satisfy certain of
its obligations under the Registration Rights Agreement. The term "holder," with
respect to the Exchange Offer, means any person in whose name Old Preferred
Shares are registered on the books of the Company or any other person who has
obtained a properly completed bond power from the registered holder, or any
person whose Old Preferred Shares are held of record by The
32
<PAGE>
Depository Trust Company. Other than pursuant to the Registration Rights
Agreement, the Company is not required to file any registration statement to
register any outstanding Old Preferred Shares. Holders of Old Preferred Shares
who do not tender their Old Preferred Shares or whose Old Preferred Shares are
tendered but not accepted would have to rely on exemptions to registration
requirements under the securities laws, including the Securities Act, if they
wish to sell their Old Preferred Shares.
Terms of the Exchange
The Company hereby offers to exchange, subject to the conditions set
forth herein and in the Letter of Transmittal accompanying this Prospectus, each
New Preferred Share for each Old Preferred Share. The terms of the New Preferred
Shares are identical in all material respects to the terms of the Old Preferred
Shares for which they may be exchanged pursuant to this Exchange Offer, except
that the New Preferred Share will generally be freely transferable by holders
thereof and will not be subject to any covenant regarding registration. See
"Description of New Preferred Shares."
The Exchange Offer is not conditioned upon any minimum aggregate
principal amount of Old Preferred Shares being tendered for exchange.
The Company is making the Exchange Offer in reliance on the position of
the Commission as set forth in certain interpretive letters addressed to third
parties in other transactions. However, the Company has not sought its own
interpretive letters, and there can be no assurance that the Commission would
make a similar determination with respect to the New Preferred Shares. Based on
these interpretations by the staff of the Commission, the Company believes that
New Preferred Shares issued pursuant to the Exchange Offer in exchange for Old
Preferred Shares may be offered for sale, resold and otherwise transferred by
any holder of such New Preferred Shares (other than any such holder that is a
broker-dealer or an "affiliate" of the Company within the meaning of Rule 405
under the Securities Act) without compliance with the registration and
prospectus delivery provisions of the Securities Act, provided that such New
Preferred Shares are acquired in the ordinary course of such holder's business
and such holder has no arrangement or understanding with any person to
participate in the distribution of such New Preferred Shares and neither such
holder nor any other such person is engaging in or intends to engage in a
distribution of such New Preferred Shares. Since the Commission has not
considered the Exchange Offer in the context of a no-action letter, there can be
no assurance that the staff of the Commission would make a similar determination
with respect to the Exchange Offer. See "--Resale of New Preferred Shares" and
"Plan of Distribution."
Dividends on the New Preferred Shares, if, when and as authorized and
declared by the Board of Directors, shall accrue from the next business day
after the last day of the last quarterly period on which dividends were paid on
the Old Preferred Shares so surrendered.
Tendering holders of the Old Preferred Shares shall not be required to
pay brokerage commissions or fees or, subject to the instructions in the Letter
of Transmittal, transfer taxes with
33
<PAGE>
respect to the exchange of the Old Preferred Shares pursuant to the Exchange
Offer.
Expiration Date; Extension; Termination; Amendment
The Exchange Offer will expire at 5:00 p.m., New York City time, on
, 1997 (the "Expiration Date"). The Expiration Date will be at least 20
business days after the commencement of the Exchange Offer in accordance with
Rule 14e-1(a) under the Exchange Act. The Company expressly reserves the right,
at any time or from time to time, to extend the period of time during which the
Exchange Offer is open, and thereby delay acceptance for exchange of any Old
Preferred Shares, by giving oral or written notice to the Exchange Agent and by
giving written notice of such extension to the holders thereof or by timely
public announcement no later than 9:00 a.m., New York City time, on the next
business day after the previously scheduled Expiration Date. During any such
extension, all Old Preferred Shares previously tendered will remain subject to
the Exchange Offer unless properly withdrawn. The Company does not anticipate
extending the Expiration Date.
The Company expressly reserves the right to (i) terminate the Exchange
Offer and not to accept for exchange any Old Preferred Shares not theretofore
accepted for exchange upon the occurrence of any of the events specified below
under "--Certain Conditions to the Exchange Offer" which have not been waived by
the Company and (ii) amend the terms of the Exchange Offer in any manner which,
in its good faith judgment, is advantageous to the holders of the Old Preferred
Shares, whether before or after any tender of the Old Preferred Shares. If any
such termination or amendment occurs, the Company will notify the Exchange Agent
and will either issue a press release or give oral or written notice to the
holders of the Old Preferred Shares as promptly as practicable.
For purposes of the Exchange Offer, a "business day" means any day
other than Saturday, Sunday or a date on which banking institutions are required
or authorized by New York State law to be closed, and consists of the time
period from 12:01 a.m. through 12:00 midnight, New York City time. Unless the
Company terminates the Exchange Offer prior to 5:00 p.m., New York City time, on
the Expiration Date, the Company will exchange the New Preferred Shares for the
Old Preferred Shares on the Exchange Date.
Procedures for Tendering Old Preferred Shares
The tender to the Company of Old Preferred Shares by a holder thereof
as set forth below and the acceptance thereof by the Company will constitute a
binding agreement between the tendering holder and the Company upon the terms
and subject to the conditions set forth in this Prospectus and in the
accompanying Letter of Transmittal.
A holder of Old Preferred Shares may tender the same by (i) properly
completing and signing the Letter of Transmittal or a facsimile thereof (all
references in this Prospectus to the Letter of Transmittal shall be deemed to
include a facsimile thereof) and delivering the same, together with the
certificate or certificates representing the Old Preferred Shares being tendered
34
<PAGE>
and any required signature guarantees and any other documents required by the
Letter of Transmittal, to the Exchange Agent at its address set forth below on
or prior to the Expiration Date (or complying with the procedure for book-entry
transfer described below) or (ii) complying with the guaranteed delivery
procedures described below.
The method of delivery of Old Preferred Shares, Letters of Transmittal
and all other required documents is at the election and risk of the holders. If
such delivery is by mail, it is recommended that registered mail, properly
insured, with return receipt requested, be used. In all cases, sufficient time
should be allowed to insure timely delivery. No Old Preferred Shares or Letters
of Transmittal should be sent to the Company.
If tendered Old Preferred Shares are registered in the name of the
signer of the Letter of Transmittal and the New Preferred Shares to be issued in
exchange therefor are to be issued (and any untendered Old Preferred Shares are
to be reissued) in the name of the registered holder (which term, for the
purposes described herein, shall include any participant in The Depository Trust
Company (also referred to as a "book-entry transfer facility") whose name
appears on a security listing as the owner of Old Preferred Shares), the
signature of such signer need not be guaranteed. In any other case, the tendered
Old Preferred Shares must be endorsed or accompanied by written instruments of
transfer in form satisfactory to the Company and duly executed by the registered
holder, and the signature on the endorsement or instrument of transfer must be
guaranteed by a bank, broker, dealer, credit union, savings association,
clearing agency or other institution (each an "Eligible Institution") that is a
member of a recognized signature guarantee medallion program within the meaning
of Rule 17Ad-15 under the Exchange Act. If the New Preferred Shares and/or Old
Preferred Shares not exchanged are to be delivered to an address other than that
of the registered holder appearing on the preferred stock register for the Old
Preferred Shares, the signature in the Letter of Transmittal must be guaranteed
by an Eligible Institution.
The Exchange Agent will establish accounts with respect to the Old
Preferred Shares at the book-entry transfer facility for the purpose of
facilitating the Exchange Offer, and subject to the establishment thereof, any
financial institution that is a participant in the book-entry transfer
facility's system may make book-entry delivery of Old Preferred Shares by
causing such book-entry transfer facility to transfer such Old Preferred Shares
into the Exchange Agent's account with respect to the Old Preferred Shares in
accordance with the book-entry transfer facility's procedures for such transfer.
Although delivery of Old Preferred Shares may be effected through book-entry
transfer into the Exchange Agent's account at the book-entry transfer facility,
an appropriate Letter of Transmittal with any required signature guarantee and
all other required documents must in each case be transmitted to and received or
confirmed by the Exchange Agent at its address set forth below on or prior to
the Expiration Date, or, if the guaranteed delivery procedures described below
are complied with, within the time period provided under such procedures.
If a holder desires to accept the Exchange Offer and time will not
permit a Letter of Transmittal or Old Preferred Shares to reach the Exchange
Agent before the Expiration Date or
35
<PAGE>
the procedure for book-entry transfer cannot be completed on a timely basis, a
tender may be effected if the Exchange Agent has received at its address set
forth below, on or prior to the Expiration Date, a letter by hand or mail, or
sent by facsimile transmission (receipt confirmed by telephone and an original
delivered by guaranteed overnight courier) from an Eligible Institution setting
forth the name and address of the tendering holder, the names in which the Old
Preferred Shares are registered and, if possible, the certificate numbers of the
Old Preferred Shares to be tendered, and stating that the tender is being made
thereby and guaranteeing that within three business days after the Expiration
Date, the Old Preferred Shares in proper form for transfer (or a confirmation of
book-entry transfer of such Old Preferred Shares into the Exchange Agent's
account at the book-entry transfer facility), will be delivered by such Eligible
Institution together with a properly completed and duly executed Letter of
Transmittal (and any other required documents). Unless Old Preferred Shares
being tendered by the above-described method are deposited with the Exchange
Agent within the time period set forth above (accompanied or preceded by a
properly completed Letter of Transmittal and any other required documents), the
Company may, at its option, reject the tender. Copies of the notice of
guaranteed delivery ("Notice of Guaranteed Delivery") which may be used by
Eligible Institutions for the purposes described in this paragraph are available
from the Exchange Agent.
A tender will be deemed to have been received as of the date when (i)
the tendering holder's properly completed and duly executed Letter of
Transmittal accompanied by the Old Preferred Shares is received by the Exchange
Agent, or (ii) a Notice of Guaranteed Delivery or letter, telegram or facsimile
transmission to similar effect (as provided above) from an Eligible Institution
is received by the Exchange Agent. Issuances of New Preferred Shares in exchange
for Old Preferred Shares tendered pursuant to a Notice of Guaranteed Delivery or
letter, telegram or facsimile transmission to similar effect (as provided above)
by an Eligible Institution will be made only against deposit of the Letter of
Transmittal (and any other required documents) and the tendered Old Preferred
Shares (or a confirmation of book-entry transfer of such Old Preferred Shares
into the Exchange Agent's account at the book-entry transfer facility).
All questions as to the validity, form, eligibility (including time of
receipt) and acceptance of Letters of Transmittal or Old Preferred Shares
tendered for exchange will be determined by the Company in its sole discretion,
which determination shall be final and binding. The Company reserves the
absolute right to reject any and all tenders of any particular Old Preferred
Shares not properly tendered and not to accept any particular Old Preferred
Shares for exchange which acceptance might, in the judgment of the Company or
its counsel, be unlawful. The Company also reserves the absolute right to waive
any defects or irregularities as to any particular Old Preferred Shares or
conditions of the Exchange Offer either before or after the Expiration Date
(including the right to waive the ineligibility of any holder who seeks to
tender Old Preferred Shares in the Exchange Offer). The interpretation of the
terms and conditions of the Exchange Offer (including the Letter of Transmittal
and the instructions thereto) by the Company shall be final and binding on all
parties. Unless waived, any defects or irregularities in connection with tenders
of Old Preferred Shares for exchange must be cured within such reasonable period
of time as the Company shall determine. None of the Company, the Exchange Agent
nor any other person shall be under any duty to give notification of any defect
or irregularity with respect to
36
<PAGE>
any tender of Old Preferred Shares for exchange, nor shall any of them incur any
liability for failure to give such notification.
If the Letter of Transmittal is signed by a person or persons other
than the registered holder or holders of Old Preferred Shares, such Old
Preferred Shares must be endorsed or accompanied by appropriate powers of
attorney, in either case signed exactly as the name or names of the registered
holder or holders appear on the Old Preferred Shares.
If the Letter of Transmittal or any Old Preferred Shares or powers of
attorney are signed by trustees, executors, administrators, guardians,
attorneys-in-fact, officers of corporations or others acting in a fiduciary or
representative capacity, such persons should so indicate when signing, and,
unless waived by the Company, proper evidence satisfactory to the Company of
their authority to so act must be submitted.
By tendering, each holder will represent to the Company that, among
other things, (a) New Preferred Shares acquired pursuant to the Exchange Offer
are being acquired in the ordinary course of business of the person receiving
such New Preferred Shares, whether or not such person is the holder, (b) neither
the holder nor any such other person has an arrangement or understanding with
any person to participate in the distribution of such New Preferred Shares and
(c) neither the holder nor any such other person is an "affiliate" of the
Company as defined under Rule 405 of the Securities Act, or if it is an
affiliate, it will comply with the registration and prospectus delivery
requirements of the Securities Act to the extent applicable. Any holder of Old
Preferred Shares using the Exchange Offer to participate in a distribution of
the New Preferred Shares (i) cannot rely on the position of the staff of the
Commission enunciated in its interpretive letter with respect to Exxon Capital
Holdings Corporation (available April 13, 1989) or similar letters and (ii) must
comply with the registration and prospectus delivery requirements of the
Securities Act in connection with a secondary resale transaction.
Each broker-dealer that receives New Preferred Shares for its own
account in exchange for Old Preferred Shares where such Old Preferred Shares
were acquired by such broker-dealer as a result of market-making activities or
other trading activities must acknowledge that it will deliver a prospectus in
connection with any resale of such New Preferred Shares. See "Plan of
Distribution."
Terms and Conditions of the Letter of Transmittal
The Letter of Transmittal contains, among other things, the following
terms and conditions, which are part of the Exchange Offer.
The party tendering Old Preferred Shares for exchange (the
"Transferor") exchanges, assigns and transfers the Old Preferred Shares to the
Company and irrevocably constitutes and appoints the Exchange Agent as the
Transferor's agent and attorney-in-fact to cause the Old Preferred Shares to be
assigned, transferred and exchanged. The Transferor represents and warrants that
it has full power and authority to tender, exchange, assign and transfer the Old
37
<PAGE>
Preferred Shares and to acquire New Preferred Shares issuable upon the exchange
of such tendered Old Preferred Shares, and that, when the same are accepted for
exchange, the Company will acquire good and unencumbered title to the tendered
Old Preferred Shares, free and clear of all liens, restrictions, charges and
encumbrances and not subject to any adverse claim. The Transferor also warrants
that it will, upon request, execute and deliver any additional documents deemed
by the Exchange Agent or the Company to be necessary or desirable to complete
the exchange, assignment and transfer of tendered Old Preferred Shares or
transfer ownership of such Old Preferred Shares on the account books maintained
by a book-entry transfer facility. The Transferor further agrees that acceptance
of any tendered Old Preferred Shares by the Company and the issuance of New
Preferred Shares in exchange therefor shall constitute performance in full by
the Company of certain of its obligations under the Registration Rights
Agreement. All authority conferred by the Transferor will survive the death or
incapacity of the Transferor, and every obligation of the Transferor shall be
binding upon the heirs, legal representatives, successors, assigns, executors
and administrators of such Transferor.
The Transferor certifies that neither it, nor the person receiving the
New Preferred Shares, whether or not such person is the Transferor, (a) is an
"affiliate" of the Company within the meaning of Rule 405 under the Securities
Act, (b) is acquiring the New Preferred Shares offered hereby in the ordinary
course of such Transferor's business and (c) has an arrangement with any person
to participate in the distribution of such New Preferred Shares. Each holder,
other than a broker-dealer, must acknowledge that it is not engaged in, and does
not intend to engage in, a distribution of New Preferred Shares. Each Transferor
which is a broker-dealer receiving New Preferred Shares for its own account must
represent that the Old Preferred Shares to be exchanged for New Preferred Shares
were acquired by it as a result of market-making activities or other trading
activities and acknowledge that it will deliver a prospectus in connection with
any resale of such New Preferred Shares. By so acknowledging and by delivering a
prospectus meeting the requirements of the Securities Act, a broker-dealer will
not be deemed to admit that it is an "underwriter" within the meaning of the
Securities Act. This Prospectus, as it may be amended or supplemented from time
to time, may be used by a broker-dealer in connection with resales of New
Preferred Shares received in exchange for Old Preferred Shares where such Old
Preferred Shares were acquired by such broker-dealer as a result of
market-making activities or other trading activities. The Company will, for a
period of up to six months after the Expiration Date, make copies of this
Prospectus available to any broker-dealer or other persons, if any, subject to
similar prospectus delivery requirements, for use in connection with any such
resale.
Withdrawal Rights
Tenders of Old Preferred Shares may be withdrawn at any time prior to
the Expiration Date.
For a withdrawal to be effective, a written notice of withdrawal sent
by telegram, facsimile transmission (receipt confirmed by telephone) or letter
must be received by the Exchange Agent at the address set forth herein prior to
the Expiration Date. Any such notice of withdrawal must (i) specify the name of
the person having tendered the Old Preferred Shares to
38
<PAGE>
be withdrawn (the "Depositor"), (ii) identify the Old Preferred Shares to be
withdrawn (including the certificate number), (iii) specify the number of Old
Preferred Shares to be withdrawn, (iv) include a statement that such holder is
withdrawing his election to have such Old Preferred Shares exchanged, (v) be
signed by the holder in the same manner as the original signature on the Letter
of Transmittal by which such Old Preferred Shares were tendered or as otherwise
described above (including any required signature guarantees) and (vi) specify
the name in which any such Old Preferred Shares are to be registered, if
different from that of the Depositor. The Exchange Agent will return the
properly withdrawn Old Preferred Shares promptly following receipt of notice of
withdrawal. If Old Preferred Shares have been tendered pursuant to the procedure
for book-entry transfer, any notice of withdrawal must specify the name and
number of the account at the book-entry transfer facility to be credited with
the withdrawn Old Preferred Shares or otherwise comply with the book-entry
transfer facility procedure. All questions as to the validity of notices of
withdrawals, including time of receipt, will be determined by the Company and
such determination will be final and binding on all parties.
Any Old Preferred Shares so withdrawn will be deemed not to have been
validly tendered for exchange for purposes of the Exchange Offer. Any Old
Preferred Shares which have been tendered for exchange but which are not
exchanged for any reason will be returned to the holder thereof without cost to
such holder (or, in the case of Old Preferred Shares tendered by book-entry
transfer into the Exchange Agent's account at the book-entry transfer facility
pursuant to the book-entry transfer procedures described above, such Old
Preferred Shares will be credited to an account with such book-entry transfer
facility specified by the holder) as soon as practicable after withdrawal,
rejection of tender or termination of the Exchange Offer. Properly withdrawn Old
Preferred Shares may be retendered by following one of the procedures described
under "--Procedures for Tendering Old Preferred Shares" above at any time on or
prior to the Expiration Date.
Acceptance of Old Preferred Shares for Exchange; Delivery of New Preferred
Shares
Upon satisfaction or waiver of all of the conditions to the Exchange
Offer, the Company will accept, on the Exchange Date, all Old Preferred Shares
properly tendered and will issue the New Preferred Shares promptly after such
acceptance. See "--Certain Conditions to the Exchange Offer." For purposes of
the Exchange Offer, the Company shall be deemed to have accepted properly
tendered Old Preferred Shares for exchange when, as and if the Company has given
oral or written notice thereof to the Exchange Agent.
For each Old Preferred Share accepted for exchange, the holder of such
Old Preferred Share will receive a New Preferred Share.
In all cases, issuance of New Preferred Shares for Old Preferred Shares
that are accepted for exchange pursuant to the Exchange Offer will be made only
after timely receipt by the Exchange Agent of certificates for such Old
Preferred Shares or a timely book-entry confirmation of such Old Preferred
Shares into the Exchange Agent's account at the book-entry transfer facility, a
properly completed and duly executed Letter of Transmittal and all other
required
39
<PAGE>
documents. If any tendered Old Preferred Shares are not accepted for any reason
set forth in the terms and conditions of the Exchange Offer or if Old Preferred
Shares are submitted for a greater principal amount than the holder desires to
exchange, such unaccepted or non-exchanged Old Preferred Shares will be returned
without expense to the tendering holder thereof (or, in the case of Old
Preferred Shares tendered by book-entry transfer into the Exchange Agent's
account at the book-entry transfer facility pursuant to the book-entry transfer
procedures described above, such non-exchanged Old Preferred Shares will be
credited to an account maintained with such book-entry transfer facility) as
promptly as practicable after the expiration of the Exchange Offer.
Certain Conditions to the Exchange Offer
Notwithstanding any other provision of the Exchange Offer, or any
extension of the Exchange Offer, the Company shall not be required to accept for
exchange, or to issue New Preferred Shares in exchange for, any Old Preferred
Shares and may terminate or amend the Exchange Offer (by oral or written notice
to the Exchange Agent or by a timely press release) if at any time before the
acceptance of such Old Preferred Shares for exchange or the exchange of the New
Preferred Shares for such Old Preferred Shares, any of the following events
occur:
(a) any action or proceeding is instituted or threatened in
any court or by or before any governmental agency or regulatory
authority or any injunction, order or decree is issued with respect to
the Exchange Offer which, in the sole judgment of the Company, might
materially impair the ability of the Company to proceed with the
Exchange Offer or have a material adverse effect on the contemplated
benefits of the Exchange Offer to the Company; or
(b) any change (or any development involving a prospective
change) shall have occurred or be threatened in the business,
properties, assets, liabilities, financial condition, operations,
results of operations or prospects of the Company that is or may be
adverse to the Company, or the Company shall have become aware of facts
that have or may have adverse significance with respect to the value of
the Old Preferred Shares or the New Preferred Shares or that may
materially impair the contemplated benefits of the Exchange Offer to
the Company; or
(c) any law, rule or regulation or applicable interpretations
of the staff of the Commission is issued or promulgated which, in the
good faith determination of the Company, do not permit the Company to
effect the Exchange Offer; or
(d) any governmental approval has not been obtained, which
approval the Company, in its sole discretion, deems necessary for the
consummation of the Exchange Offer; or
(e) there shall have been proposed, adopted or enacted any
law, statute, rule or regulation (or an amendment to any existing law,
statute, rule or regulation) which, in the sole judgment of the
Company, might materially impair the ability of the Company
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to proceed with the Exchange Offer or have a material adverse effect
on the contemplated benefits of the Exchange Offer to the Company; or
(f) there shall occur a change in the current interpretation
by the staff of the Commission which permits the New Preferred Shares
issued pursuant to the Exchange Offer in exchange for Old Preferred
Shares to be offered for resale, resold and otherwise transferred by
holders thereof (other than any such holder that is an "affiliate" of
the Company within the meaning of Rule 405 under the Securities Act)
without compliance with the registration and prospectus delivery
provisions of the Securities Act provided that such New Preferred
Shares are acquired in the ordinary course of such holders' business
and such holders have no arrangement with any person to participate in
the distribution of such New Preferred Shares; or
(g) there shall have occurred (i) any general suspension of,
shortening of hours for, or limitation on prices for, trading in
securities on any national securities exchange or in the
over-the-counter market (whether or not mandatory), (ii) any limitation
by any governmental agency or authority which may adversely affect the
ability of the Company to complete the transactions contemplated by the
Exchange Offer, (iii) a declaration of a banking moratorium or any
suspension of payments in respect of banks by Federal or state
authorities in the United States (whether or not mandatory), (iv) a
commencement of a war, armed hostilities or other international or
national crisis directly or indirectly involving the United States, (v)
any limitation (whether or not mandatory) by any governmental authority
on, or other event having a reasonable likelihood of affecting, the
extension of credit by banks or other lending institutions in the
United States, or (vi) in the case of any of the foregoing existing at
the time of the commencement of the Exchange Offer, a material
acceleration or worsening thereof.
The Company expressly reserves the right to terminate the Exchange
Offer and not accept for exchange any Old Preferred Shares upon the occurrence
of any of the foregoing conditions (which represent all of the material
conditions to the acceptance by the Company of properly tendered Old Preferred
Shares). In addition, the Company may amend the Exchange Offer at any time prior
to the Expiration Date if any of the conditions set forth above occur. Moreover,
regardless of whether any of such conditions has occurred, the Company may amend
the Exchange Offer in any manner which, in its good faith judgment, is
advantageous to holders of the Old Preferred Shares.
The foregoing conditions are for the sole benefit of the Company and
may be asserted by the Company regardless of the circumstances giving rise to
any such condition or may be waived by the Company in whole or in part at any
time and from time to time in its sole discretion. The failure by the Company at
any time to exercise any of the foregoing rights shall not be deemed a waiver of
any such right, and each such right shall be deemed an ongoing right which may
be asserted at any time and from time to time. If the Company waives or amends
the foregoing conditions, it will, if required by law, extend the Exchange Offer
for a minimum of five business days from the date that the Company first gives
notice, by public announcement or otherwise,
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of such waiver or amendment, if the Exchange Offer would otherwise expire within
such five business-day period. Any determination by the Company concerning the
events described above will be final and binding upon all parties.
In addition, the Company will not accept for exchange any Old Preferred
Shares tendered, and no New Preferred Shares will be issued in exchange for any
such Old Preferred Shares, if at such time any stop order shall be threatened or
in effect with respect to the Registration Statement of which this Prospectus
constitutes a part. In any such event, the Company is required to use every
reasonable effort to obtain the withdrawal of any stop order at the earliest
possible time.
The Exchange Offer is not conditioned upon any minimum number of Old
Preferred Shares being tendered for exchange.
Exchange Agent
The Bank of Nova Scotia Trust Company has been appointed as the
Exchange Agent for the Exchange Offer. All executed Letters of Transmittal
should be directed to the Exchange Agent at one of the addresses set forth
below:
By Hand/Overnight Courier: By Mail:
The Bank of Nova Scotia The Bank of Nova Scotia
Trust Company of New York Trust Company of New York
One Liberty Plaza, 23rd Floor One Liberty Plaza, 23rd Floor
New York, New York 10006 New York, New York 10006
Attn: Reorganization Section Attn: Reorganization Section
By Facsimile: (212) 225-5436
By Telephone: (212) 225-5422
Questions and requests for assistance, requests for additional copies of this
Prospectus or of the Letter of Transmittal and requests for Notices of
Guaranteed Delivery should be directed to the Exchange Agent at the address and
telephone number set forth in the Letter of Transmittal.
DELIVERY TO AN ADDRESS OTHER THAN AS SET FORTH ABOVE, OR TRANSMISSIONS
OF INSTRUCTIONS VIA A FACSIMILE TO A NUMBER OTHER THAN THE ONES SET FORTH ABOVE,
WILL NOT CONSTITUTE A VALID DELIVERY.
Solicitation of Tenders; Fees and Expenses
The Company has not retained any dealer-manager in connection with the
Exchange Offer and will not make any payments to brokers, dealers or others for
soliciting acceptances of the Exchange Offer. The Company will, however, pay the
Exchange Agent reasonable and customary fees for its services and will reimburse
it for its reasonable out-of-pocket expenses in
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connection therewith. The Company will also pay brokerage houses and other
custodians, nominees and fiduciaries the reasonable out-of-pocket expenses
incurred by them in forwarding copies of this and other related documents to the
beneficial owners of the Old Preferred Shares and in handling or forwarding
tenders for their customers.
The estimated cash expenses to be incurred in connection with the
Exchange Offer will be paid by the Company and are estimated in the aggregate to
be approximately US$ , which includes fees and expenses of the Exchange
Agent, registration fees, accounting, legal, printing and related fees and
expenses.
No person has been authorized to give any information or to make any
representations in connection with the Exchange Offer other than those contained
in this Prospectus. If given or made, such information or representations should
not be relied upon as having been authorized by the Company. Neither the
delivery of this Prospectus nor any exchange made hereunder shall, under any
circumstances, create any implication that there has been no change in the
affairs of the Company since the respective dates as of which information is
given herein. The Exchange Offer is not being made to (nor will tenders be
accepted from or on behalf of) holders of Old Preferred Shares in any
jurisdiction in which the making of the Exchange Offer or the acceptance thereof
would not be in compliance with the laws of such jurisdiction. However, the
Company may, at its discretion, take such action as it may deem necessary to
make the Exchange Offer in any such jurisdiction and extend the Exchange Offer
to holders of Old Preferred Shares in such jurisdiction. In any jurisdiction in
which the securities laws or blue sky laws of which require the Exchange Offer
to be made by a licensed broker or dealer, the Exchange Offer is being made on
behalf of the Company by one or more registered brokers or dealers which are
licensed under the laws of such jurisdiction.
Transfer Taxes
The Company will pay all transfer taxes, if any, applicable to the
exchange of Old Preferred Shares pursuant to the Exchange Offer. If, however,
certificates representing New Preferred Shares are to be delivered to, or are to
be issued in the name of, any person other than the registered holder of the Old
Preferred Shares tendered, or if tendered Old Preferred Shares are registered in
the name of any person other than the person signing the Letter of Transmittal,
or if a transfer tax is imposed for any reason other than the exchange of Old
Preferred Shares pursuant to the Exchange Offer, then the amount of any such
transfer taxes (whether imposed on the registered holder or any other persons)
will be payable by the tendering holder. If satisfactory evidence of payment of
such taxes or exemption therefrom is not submitted with the Letter of
Transmittal, the amount of such transfer taxes will be billed directly to such
tendering holder.
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Accounting Treatment
The New Preferred Shares will be recorded at the carrying value of the
Old Preferred Shares as reflected in the Company's accounting records on the
date of the exchange. Accordingly, no gain or loss for accounting purposes will
be recognized by the Company upon the exchange of New Preferred Shares for Old
Preferred Shares. Expenses incurred in connection with the issuance of the New
Preferred Shares will be amortized over the term of the New Preferred Shares.
Consequences of Failure to Exchange
Holders of Old Preferred Shares who do not exchange their Old Preferred
Shares for New Preferred Shares pursuant to the Exchange Offer will continue to
be subject to the restrictions on transfer of such Old Preferred Shares as set
forth in the legend thereon. Old Preferred Shares not exchanged pursuant to the
Exchange Offer will continue to remain outstanding in accordance with their
terms. In general, the Old Preferred Shares may not be offered or sold unless
registered under the Securities Act, except pursuant to an exemption from, or in
a transaction not subject to, the Securities Act and applicable state securities
laws. The Company does not currently anticipate that it will register the Old
Preferred Shares under the Securities Act.
Participation in the Exchange Offer is voluntary, and holders of Old
Preferred Shares should carefully consider whether to participate. Holders of
the Old Preferred Shares are urged to consult their financial and tax advisors
in making their decision with respect to tendering.
As a result of the making of, and upon acceptance for exchange of all
validly tendered Old Preferred Shares pursuant to the terms of, this Exchange
Offer, the Company will have fulfilled a covenant contained in the Registration
Rights Agreement. Holders of Old Preferred Shares who do not tender their Old
Preferred Shares in the Exchange Offer will continue to hold such Old Preferred
Shares and will not be entitled to any rights under the Registration Rights
Agreement that, by their terms, terminate or cease to have further effectiveness
as a result of the making of this Exchange Offer. To the extent that Old
Preferred Shares are tendered and accepted in the Exchange Offer, the trading
market for untendered Old Preferred Shares could be adversely affected.
Resale of New Preferred Shares
The Company is making the Exchange Offer in reliance on the position of
the Commission as set forth in certain interpretive letters addressed to third
parties in other transactions. However, the Company has not sought its own
interpretive letter, and there can be no assurance that the Commission would
make a similar determination with respect to the Exchange Offer as it has in
such interpretive letters to third parties. Based on these interpretations by
the staff of the Commission, the Company believes that the New Preferred Shares
issued pursuant to the Exchange Offer in exchange for Old Preferred Shares may
be offered for resale, resold and otherwise transferred by a holder (other than
any Holder that is a broker-dealer)
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without further compliance with the registration and prospectus delivery
requirements of the Securities Act. However, any holder who is an "affiliate" of
the Company or who has an arrangement or understanding with respect to the
distribution of the New Preferred Shares to be acquired pursuant to the Exchange
Offer, or any broker-dealer who purchased Old Preferred Shares from the Company
to resell pursuant to Rule 144A or any other available exemption under the
Securities Act (i) cannot rely on the applicable interpretations of the staff of
the Commission and (ii) will not be entitled to tender its Old Preferred Shares
in the Exchange Offer, and (iii) must comply with the registration and
prospectus delivery requirements of the Securities Act. A broker-dealer who
holds Old Preferred Shares that were acquired for its own account as a result of
market-making or other trading activities may be deemed to be an "underwriter"
within the meaning of the Securities Act and must, therefore, deliver a
prospectus meeting the requirements of the Securities Act in connection with any
resale of New Preferred Shares. Each such broker-dealer that receives New
Preferred Shares for its own account in exchange for Old Preferred Shares, where
such Old Preferred Shares were acquired by such broker-dealer as a result of
market-making activities or other trading activities, must acknowledge in the
Letter of Transmittal that it will deliver a prospectus in connection with any
resale of such New Preferred Shares. See "Plan of Distribution."
In addition, to comply with the securities laws of certain
jurisdictions, if applicable, the New Preferred Shares may not be offered or
sold unless they have been registered or qualified for sale in such jurisdiction
or an exemption from registration or qualification is available and is complied
with.
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BUSINESS AND STRATEGY
General
The Company's principal business objective is to acquire, hold, finance
and manage Mortgage Assets that will generate net income for distribution to
stockholders. The Company acquired the Initial Mortgage Assets for an aggregate
purchase price of approximately US$477 million. See "Certain Transactions
Constituting the Formation--The Formation."
In order to preserve its status as a REIT under the Code, substantially
all of the assets of the Company consist of the Initial Mortgage Assets and
other real estate assets that are of the type set forth in Section 856(c)(6)(B)
of the Code. See "United States Federal Income Tax Considerations."
Dividend Policy
The Company expects to pay an aggregate amount of dividends with
respect to its outstanding shares of stock equal to not less than 100% of the
Company's "REIT taxable income" (excluding capital gains). In order to remain
qualified as a REIT, the Company must distribute annually at least 95% of its
"REIT taxable income" (excluding capital gains) to stockholders. The Company
anticipates that none of the dividends on the New Preferred Shares and none or
no material portion of the dividends on the Common Stock will constitute
non-taxable returns of capital.
Dividends will be authorized and declared at the discretion of the
Board of Directors after considering the Company's distributable funds and
financial requirements, tax considerations and other factors. There are,
however, several limitations on the Company's ability to pay dividends on the
Common Stock (none of which should adversely affect the legal right of the
Company to pay dividends on the New Preferred Shares). First, under the
Company's current dividend policy, the Company may not make any distribution in
respect of the Common Stock to the extent that, after taking into account such
proposed distribution, total cash or property distributions on the Company's
outstanding shares of Preferred Stock and Common Stock in any year would exceed
105% of the Company's "REIT taxable income" (excluding capital gains) for that
year, plus net capital gains of the Company for that year. This policy regarding
the limitation on payment of dividends on the Common Stock may not be modified
without the approval of a majority of the Independent Directors. Second, if the
Company fails to authorize and declare and pay the stated dividend on the New
Preferred Shares in any dividend period, the Company may not pay any dividends
with respect to the Common Stock until such time as dividends on all outstanding
New Preferred Shares have been (i) authorized and declared and paid for three
consecutive dividend periods and (ii) authorized and declared and paid or
authorized and declared and a sum sufficient for the payment thereof set apart
for the fourth consecutive dividend period. See "Description of New Preferred
Shares--Dividends." Third, the Maryland General Corporation Law ("MGCL")
provides that dividends may be paid on the stock of a corporation only if, after
payment of the distribution, (i) the corporation would be able to pay its
indebtedness
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as such indebtedness becomes due in the usual course of business and (ii) the
corporation's total assets would not be less than the sum of its total
liabilities plus, unless the corporation's charter provides otherwise (which the
Charter does), the amount that would be needed, if the corporation were to be
dissolved at the time of the distribution, to satisfy the preferential rights on
dissolution of stockholders whose rights on dissolution are superior to those
receiving the distribution. It is possible that these limitations on the
Company's ability to pay dividends on the Common Stock could affect the ability
of the Company to qualify as a REIT under the Code. See "United States Federal
Income Tax Considerations--Taxation of the Company."
Liquidity and Capital Resources
The Company's principal liquidity needs are to pay quarterly dividends
on the New Preferred Shares, to pay fees and expenses of the Advisor and the
Servicer, and to pay franchise fees and expenses of other advisors, if any, to
the Company. To the extent that the cash flow from its Mortgage Assets exceeds
those amounts, the excess will be used to fund the acquisition of additional
Mortgage Assets and make distributions on the Common Stock. The Company does not
have any other material expenditures. The Company believes that the amounts
generated from the payment of interest and principal on the Initial Mortgage
Loans will enable full payments to be made on the Initial Mortgage Assets and
that such payments will provide the Company with sufficient funds to meet its
operating expenses and to pay dividends in accordance with the requirements to
qualify as a REIT under the Code.
General Description of Mortgage Assets; Investment Policy
Initial Mortgage Assets. The Company's assets currently consist solely
of obligations issued by NB Finance that are recourse only to the Initial
Mortgage Loans and that are secured by real property (the "Initial Mortgage
Assets"). See "--Description of the Initial Mortgage Assets."
Mortgage Loans. While no Mortgage Loans are included in the Initial
Mortgage Assets, the Company may from time to time acquire Mortgage Loans from
the Bank or other NHA-Approved Lenders. Mortgage Loans will consist of CMHC
insured residential first mortgages. See "--Description of the Initial Mortgage
Loans."
Residential Mortgage Loans. While no residential mortgages are included
in the Initial Mortgage Assets, the Company may from time to time acquire
individual residential mortgages other than Mortgage Loans ("Residential
Mortgage Loans"). These Residential Mortgage Loans are expected to meet the
requirements for sale to governmental or private mortgage conduit programs or
other investors in the secondary mortgage market. While Mortgage Loans benefit
from CMHC insurance, there can be no assurance that any Residential Mortgage
Loans acquired by the Company will be similarly protected.
Mortgage-Backed Securities. While no Mortgage-Backed Securities are
included in the Initial Mortgage Assets, the Company may from time to time
acquire fixed-rate or variable-rate Mortgage-Backed Securities representing
interests in pools of mortgage loans such as a NHA
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Mortgage-Backed Security ("NHA MBS") that evidences an undivided interest in a
pool of first mortgages originated by certain approved financial institutions in
Canada and insured by CMHC. A portion of any NHA MBS that the Company purchases
may have been originated by the Bank by exchanging pools of Mortgage Loans for
the Mortgage-Backed Securities. The Company does not intend to acquire any
interest-only, principal-only or similar speculative Mortgage-Backed Securities.
Commercial Mortgage Loans. While no Commercial Mortgage Loans are
included in the Initial Mortgage Assets, the Company may from time to time
acquire Commercial Mortgage Loans secured by industrial and warehouse
properties, recreational facilities, office buildings, retail space and shopping
malls, hotels and motels, nursing homes or senior living centers. The Company's
current policy is not to acquire any interest in a Commercial Mortgage Loan if
Commercial Mortgage Loans would constitute more than 5% of the total book value
of the Company's Mortgage Assets immediately following such acquisition. Unlike
Mortgage Loans and Residential Mortgage Loans, Commercial Mortgage Loans
generally lack standardized terms. Commercial Mortgage Loans may also not be
fully amortizing, meaning that they may have a significant principal balance or
"balloon" payment due on maturity. Moreover, commercial properties, particularly
industrial and warehouse properties, are generally subject to relatively greater
environmental risks than non-commercial properties, generally giving rise to
increased costs of compliance with environmental laws and regulations. There is
no requirement regarding the percentage of any commercial real estate property
that must be leased at the time the Company acquires a Commercial Mortgage Loan
secured by such commercial real estate property, and there is no requirement
that Commercial Mortgage Loans have third party guarantees.
Commercial Mortgage Loans will not be CMHC insured and the credit
quality of a Commercial Mortgage Loan may depend on, among other factors, the
existence and structure of underlying leases, the physical condition of the
property (including whether any maintenance has been deferred), the
creditworthiness of tenants, the historical and anticipated level of vacancies
and rents on the property and on other comparable properties located in the same
region, potential or existing environmental risks, the availability of credit to
refinance Commercial Mortgage Loans at or prior to maturity and the local and
regional economic climate in general. Foreclosures of defaulted Commercial
Mortgage Loans are generally subject to a number of complicating factors,
including environmental considerations, which are generally not present in
foreclosures of Residential Mortgage Loans.
Partnership Interests. While no partnership interests are included in
the Initial Mortgage Assets, the Company may from time to time acquire limited
partnership interests in partnerships the only activities of which are the
purchase and ownership of Mortgage Loans ("Partnership Interests").
Other Real Estate Assets. The Company may invest up to 10% of the total
value of its portfolio in assets eligible to be held by REITs other than those
described above. Such assets could include cash, cash equivalents and
securities, including shares or interests in other REITs.
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Description of the Initial Mortgage Assets
The Company acquired the Initial Mortgage Assets pursuant to the terms
of a loan agreement with NB Finance (the "NB Finance Loan Agreement"). Each
Initial Mortgage Asset is recourse only to the Initial Mortgage Loans securing
such Initial Mortgage Asset and is secured by real property located primarily in
Quebec. The Initial Mortgage Assets consist of a series of loans with maturities
ranging from January 2000 to July 2001. The principal amount of the Initial
Mortgage Assets equal approximately US$477 million. The Initial Mortgage Assets
pay interest at rates ranging from 6.90% to 9.77%, with an average rate of
approximately 8.40% per annum.
The following table summarizes the Initial Mortgage Assets:
Initial Mortgage Assets
Outstanding Maturity Interest Monthly
Amount Date Rate* Interest Payments
US$ 24,175,420 Jan. 2000 6.895% US$ 136,954
23,250,351 Jan. 2000 7.471% 142,550
48,236,245 Jan. 2000 8.047% 318,171
16,364,955 Jan. 2000 8.622% 115,524
43,894,121 July 2000 6.895% 248,660
29,713,817 July 2000 7.471% 182,178
7,246,742 July 2000 8.622% 51,156
9,511,225 July 2000 8.047% 62,737
33,305,900 Jan. 2001 9.198% 250,531
46,882,784 Jan. 2001 9.774% 374,309
5,257,516 Jan. 2001 8.047% 34,679
6,342,462 Jan. 2001 8.622% 44,773
22,146,227 July 2001 8.047% 146,079
104,830,848 July 2001 8.622% 740,026
23,008,093 July 2001 9.198% 173,070
32,421,747 July 2001 9.774% 258,853
US$ 476,588,453 8.404% US$ 3,280,250
- ---------------
* All rates quoted on a 30/360 semiannual basis
Payments of interest are made monthly out of payments on the Initial
Mortgage Loans. Pursuant to an agreement between the Company and NB Finance (the
"Mortgage Loan Assignment Agreement"), the Company receives all scheduled
payments made on the Initial Mortgage Loans, retains a portion of any such
payments equal to the amount due and payable on the Initial Mortgage Assets and
remits the balance, if any, to NB Finance. The Company also retains a portion of
any prepayments of principal in respect of the Initial Mortgage Loans equal to
the proportion of such prepayments that the outstanding principal amount of the
Initial Mortgage Loans bears to the outstanding principal amount of the Initial
Mortgage Assets, which
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amount would be applied to reduce the outstanding principal amount of the
Initial Mortgage Assets. Repayment of the Initial Mortgage Assets is secured by
an assignment of the Initial Mortgage Loans to the Company pursuant to the
Mortgage Loan Assignment Agreement, which will be governed by the laws of
Bermuda. The assignment of the Initial Mortgage Loans by NB Finance to the
Company is without recourse. The Company has a security interest in the real
property securing the Initial Mortgage Loans and, subject to fulfilling certain
procedural requirements under applicable Canadian law, is entitled to enforce
payment on the Initial Mortgage Loans in its own name if a mortgagor should
default thereon. In the event of such a default, the Company has the same rights
as NB Finance to force a sale of the mortgaged property and satisfy the
obligations of NB Finance out of the proceeds. In the event of a default in
respect of an Initial Mortgage Loan, the amount of the Initial Mortgage Assets
will be reduced by an amount equal to the portion thereof allocable to
defaulting mortgage. The Initial Mortgage Loans are administered by the
Servicer, as agent of the Company, and the Company has the right to perfect its
security interest in the Initial Mortgage Loans by notice and registration.
Following repayment of the Initial Mortgage Assets, the Company will reassign
any outstanding Initial Mortgage Loans (without recourse) and deliver them to,
or as directed by, NB Finance. All payments in respect of the Initial Mortgage
Loans are made in Canadian dollars. The amounts due on the Initial Mortgage
Assets are retained by the Company free and clear of and without withholding or
deduction for or on account of any present or future taxes imposed by or on
behalf of Bermuda or any political subdivision thereof or therein.
Management Policies and Programs
In administering the Company's Mortgage Assets, the Advisor has a high
degree of autonomy. The Board of Directors has, however, adopted certain
policies to guide the Company and the Advisor with respect to the acquisition
and disposition of assets, use of capital and leverage, credit risk management
and certain other activities. These policies, which are discussed below, may be
amended or revised from time to time at the discretion of the Board of Directors
(in certain circumstances subject to the approval of a majority of the
Independent Directors) without a vote of the Company's stockholders, including
holders of the New Preferred Shares. See also "--Dividend Policy."
Asset Acquisition and Disposition Policies. The Company may, from time
to time, use payments of interest and principal in respect of its Mortgage
Assets to purchase additional Mortgage Assets and may also purchase additional
Mortgage Assets out of the proceeds from the issuance of additional shares of
Preferred Stock or the contribution of additional capital by the Bank; provided,
however, that (i) to the extent that the investment of such payments or proceeds
occurs prior to the consummation of the Exchange Offer, such payments or
proceeds will be invested in Canadian or U.S. government guaranteed,
mortgage-backed certificates and other Canadian or U.S. government obligations
which will be purchased on the open market or from entities unaffiliated with
the Bank or the Company or banks that are not affiliated with the Bank and (ii)
in the event that the New Preferred Shares are not treated as "publicly-offered
securities" as of the date on which the Exchange Offer is consummated, then
during the period commencing on such date and ending on the date on which the
New Preferred Shares become "publicly-offered
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securities," any investment by the Company in any Mortgage Assets in a
transaction with the Bank and/or affiliates of the Bank will be made only upon
the decision of the Independent Fiduciary. The Company has acquired all or
substantially all of such Mortgage Assets from the Bank and/or affiliates of the
Bank, on terms that are comparable to those that could be obtained by the
Company if such Mortgage Assets were purchased from unrelated third parties. The
Company may also from time to time, however, acquire Mortgage Assets from
unrelated third parties. As of the date of this Prospectus, the Company has not
entered into any agreements with any third parties with respect to the purchase
of Mortgage Assets. Other than with respect to the temporary investment of
payments of interest and principal on its Mortgage Assets, the Company
anticipates that it would purchase Mortgage Assets from unrelated third parties
only if neither the Bank nor any affiliate of the Bank had an amount or type of
Mortgage Assets sufficient to meet the requirements of the Company.
At least 90% of the Company's portfolio will consist of the Initial
Mortgage Assets and obligations which are comparable to the Initial Mortgage
Assets. The Company may, however, invest in other assets eligible to be held by
REITs. The Company's current policy prohibits the acquisition of an interest in
any Mortgage Loan (other than an interest resulting from the acquisition of
Mortgage-Backed Securities or a Partnership Interest) which is delinquent in the
payment of principal or interest at the time of proposed acquisition.
Capital and Leverage Policies. To the extent that the Board of
Directors determines that additional funding is required, the Company may raise
such funds through additional equity offerings, or retention of cash flow (after
consideration of the provisions of the Code requiring the distribution by a REIT
of a certain percentage of its income annually and taking into account taxes
that would be imposed on the Company's undistributed taxable income), or a
combination of these methods. The Company will have no debt outstanding
following consummation of the Exchange Offer and its ability to incur any
indebtedness in the future will be extremely limited.
In order to qualify as a REIT, the Company has issued Senior Preferred
Shares with an aggregate liquidation preference of up to US$450,000. Except for
such Senior Preferred Shares, the Company may not issue additional shares of
Preferred Stock senior to the New Preferred Shares either in the payment of
dividends or in the distribution of assets in liquidation, without the consent
of holders of at least two-thirds of the outstanding shares of Preferred Stock
at that time, including the New Preferred Shares, and the Company may not issue
additional shares of Preferred Stock on a parity with the New Preferred Shares
either in the payment of dividends or in the distribution of assets in
liquidation without the approval of a majority of the Independent Directors. The
Company does not currently intend to issue any additional series of Preferred
Stock unless it simultaneously receives additional capital contributions from
the Bank equal to the sum of 59% of the aggregate offering price of such
additional Preferred Stock and the Company's expenses in connection with the
issuance of such additional shares of Preferred Stock. Prior to its issuance of
additional shares of Preferred Stock, the Company will take into consideration
the Bank's regulatory capital requirements and the cost of raising and
maintaining that capital at the time.
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Credit Risk Management Policies. The Company intends that each Mortgage
Loan, if any, acquired from the Bank, an affiliate of the Bank, or an unrelated
third party in the future will represent a first lien position, will be covered
by valid CMHC insurance and will be originated in the ordinary course of the
originator's real estate lending activities based on the underwriting standards
generally applied (at the time of origination) for the originator's own account.
The Company also expects that all Mortgage Loans held by the Company directly or
indirectly will be serviced pursuant to the Servicing Agreement, or a similar
agreement which requires servicing in conformity with accepted secondary market
standards, with any servicing guidelines promulgated by the Company and with
relevant government agency guidelines and procedures.
Conflict of Interest Policies. Because of the nature of the Company's
relationship with the Bank and its affiliates, it is likely that conflicts of
interest will arise with respect to certain transactions, including, without
limitation, the Company's acquisition of Mortgage Assets from, or disposition of
Mortgage Assets to, the Bank or its affiliates and the renewal, termination or
modification of the Advisory Agreement or the Servicing Agreement. It is the
Company's policy that the terms of any dealings with the Bank and its affiliates
will be consistent with those available from third parties. In addition, neither
the Advisory Agreement nor the Servicing Agreement may be renewed, terminated or
modified by the Company without the approval of a majority of the Independent
Directors.
Conflicts of interest between the Company and the Bank and its
affiliates may also arise in connection with making decisions that bear upon the
credit arrangements that the Bank or one of its affiliates may have with a
borrower. Conflicts could also arise in connection with actions taken by the
Bank as a controlling stockholder in the Company. It is the intention of the
Company and the Bank that any agreements and transactions between the Company,
on the one hand, and the Bank or its affiliates, on the other hand, including,
without limitation, the Servicing Agreement, be fair to all parties and
consistent with market terms for such types of transactions. The Servicing
Agreement provides that foreclosures and dispositions in connection with
Mortgage Loans will be performed with a view toward maximizing the recovery by
the Company of amounts due on its Mortgage Assets and the Servicer will be
required to service Mortgage Loans solely with a view toward the interests of
the Company, and without regard to the interests of the Bank or any of its other
affiliates. The requirement in the terms of the New Preferred Shares that
certain actions of the Company be approved by a majority of the Independent
Directors is also intended to ensure fair dealings between the Company and the
Bank and its affiliates. However, there can be no assurance that any such
dealings will be on terms as favorable to the Company as would have been
obtained from unaffiliated third parties.
There are no provisions in the Charter limiting any officer, director,
security holder or affiliate of the Company from having any direct or indirect
pecuniary interest in any Mortgage Asset to be acquired or disposed of by the
Company or in any transaction in which the Company has an interest or from
engaging in acquiring, holding and managing Mortgage Assets. As described
herein, the Bank and its affiliates have direct interests in transactions with
the Company (including without limitation the issuance of Mortgage Assets to the
Company); however, none of the officers or directors of the Company will have
any interests in such Mortgage Assets.
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Other Policies. The Company operates in a manner that will not subject
it to regulation under the Investment Company Act of 1940, as amended, including
by investing primarily in mortgages and other interests in and liens on real
estate.
The Company intends to distribute to stockholders annual reports
containing financial statements prepared in accordance with generally accepted
accounting principles and certified by the Company's independent public
accountants. The Charter provides that following the consummation of the
Exchange Offer the Company shall maintain its status as a reporting company
under the Securities Exchange Act of 1934, as amended (the "Exchange Act"), for
as long as any of the New Preferred Shares are outstanding.
The Company makes investments and operates its business at all times in
such a manner as to comply with the requirements of the Code to qualify as a
REIT. However, future economic, market, legal, tax or other considerations may
cause the Board of Directors, subject to approval by a majority of the
Independent Directors, to determine that it is in the best interests of the
Company and its stockholders to revoke the Company's REIT status.
Description of the Initial Mortgage Loans
Information with respect to the Initial Mortgage Loans is presented as
of August 8, 1997.
The detailed information set forth in this Prospectus with respect to
the Initial Mortgage Loans applies only to the mortgages purchased by NB
Finance.
The Initial Mortgage Loans consist of first mortgages originated by the
Bank or acquired by the Bank from other CMHC approved lenders and are secured by
real property located in Canada, primarily in Quebec. See "Risk Factors--All of
the Real Property Securing the Initial Mortgage Assets is Located Outside of the
United States."
Payments on the Initial Mortgage Loans are due monthly in arrears on
the 1st day of each month through July 2001 or such earlier date on which
payment in full of the Initial Mortgage Loans is made (the "Final Payment Date")
or, if the 1st day of a month is not a business day, on the first business day
following the 1st day of such month (a "Monthly Payment Date"). Payments of
interest and principal on the Initial Mortgage Loans are made in Canadian
dollars.
The Initial Mortgage Loans mature monthly beginning in 1999 and bear
interest at rates ranging from approximately 6.0% to 8.99% with an average
interest rate of 7.53% per annum. The Final Payment Date may occur at an earlier
date if final payment on the Initial Mortgage Loans occurs earlier than such
date, because of unscheduled prepayments.
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The following table summarizes the Initial Mortgage Loans:
<TABLE>
<CAPTION>
Initial Mortgage Loans
Outstanding Maturity Min. Max. Avg. Min. Max. Avg. Number
Amount* -------- ---- ---- ---- ---- ---- ---- of Loans
---------------- --------
Interest rate** Remaining Term (months)
--------------- -----------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
$ 42,004,792 Jan. 2000 6.000% 6.499% 6.225% 24.00 29.00 28.15 644
40,397,485 Jan. 2000 6.500% 6.999% 6.772% 24.00 29.00 27.79 547
83,810,476 Jan. 2000 7.000% 7.499% 7.166% 24.00 29.00 27.57 1,318
28,434,108 Jan. 2000 7.500% 7.999% 7.791% 24.00 29.00 25.38 411
76,266,035 July 2000 6.000% 6.499% 6.199% 30.00 35.00 32.80 1,083
51,627,757 July 2000 6.500% 6.999% 6.639% 30.00 35.00 33.42 848
12,591,214 July 2000 7.500% 7.999% 7.608% 30.00 35.00 32.03 166
16,525,754 July 2000 7.000% 7.499% 7.188% 30.00 35.00 30.84 251
9,134,934 Jan. 2001 7.000% 7.499% 7.234% 36.00 41.00 39.50 130
11,020,027 Jan. 2001 7.500% 7.999% 7.776% 36.00 41.00 39.14 135
57,869,002 Jan. 2001 8.000% 8.499% 8.287% 36.00 41.00 38.85 697
81,458,837 Jan. 2001 8.500% 8.999% 8.718% 36.00 41.00 38.17 1,266
38,479,070 July 2001 7.000% 7.499% 7.299% 42.00 47.00 44.84 417
182,143,599 July 2001 7.500% 7.999% 7.768% 42.00 47.00 44.81 2,561
39,976,562 July 2001 8.000% 8.499% 8.204% 42.00 47.00 45.17 546
56,332,785 July 2001 8.500% 8.999% 8.523% 42.00 47.00 45.89 1,081
$ 828,072,438 7.310% 7.809% 7.526% 34.34 39.34 37.32 12,101
<FN>
- -----------------------
* All amounts quoted in Canadian $
** All rates quoted on a 30/360 semiannual basis
</FN>
</TABLE>
All of the Initial Mortgage Loans were originated in accordance with
underwriting policies customarily employed by the Bank, or with underwriting
policies acceptable to the Bank. As is generally the case in the Canadian
residential mortgage business, the Bank's underwriting policies are derived from
CMHC approved underwriting criteria, and they focus on the borrower's ability to
repay the mortgage loan and the adequacy of the proposed security.
As a CMHC approved lender, the Bank has access to the National Housing
Act (NHA) mortgage insurance program. All of the Initial Mortgage Loans are
insured by CMHC pursuant to that program. The bulk of those loans were insured
at origination. Whether a loan is insured at origination or through the CMHC
portfolio insurance program, the insurance is valid until the expiration of the
loan.
All of the Initial Mortgage Loans are balloon mortgages. Balloon
mortgages are the most prevalent type of mortgage offered by Canadian mortgage
lenders. At the expiration of the term, the mortgage is generally renewed, based
on then current market conditions, for a new term. Although the Bank offers
terms varying from 3 months to 10 years, terms exceeding 5 years are
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relatively rare. Moreover, although the Bank offers monthly, semi-monthly and
weekly pay mortgages, all of the Initial Mortgage Loans are monthly pay
mortgages. In general, loans are amortized over a period not exceeding 25 years.
The Initial Mortgage Loans provide for limited prepayment rights. For
example, typically up to 10% of the original principal amount of an Initial
Mortgage Loan may be prepaid without penalty. Moreover, an Initial Mortgage Loan
may also be prepaid without penalty if the mortgaged property is sold and the
mortgagor enters into a new mortgage with the same terms and conditions as the
Initial Mortgage Loan. In most other circumstances, prepayments or
renegotiations of either the interest rate or the term of an Initial Mortgage
Loan will be subjected to prepayment penalties. During the first three years
following the most recent interest adjustment date, such penalties are
tantamount to a yield maintenance clause. After three years, such penalties will
be limited to three months of interest.
On the date of purchase, the Initial Mortgage Loans have an aggregate
principal amount of approximately C$828 million (US$596 million) and a fair
market value of approximately C$848 million (US$610 million). The Initial
Mortgage Loans mature monthly beginning in 1999, with an average maturity of
approximately September 2000.
Servicing
The Initial Mortgage Loans, and certain other Mortgage Loans, are
serviced by the Bank pursuant to the terms of the Servicing Agreement. The Bank
in its role as servicer under the terms of the Servicing Agreement is herein
referred to as the "Servicer." The Servicer receives a fee equal to 0.25% per
annum on the principal balances of the loans serviced. Payment of such fees is
subordinated to payments of dividends on the New Preferred Shares.
The Servicing Agreement requires the Servicer to service Mortgage Loans
in a manner generally consistent with normal mortgage servicing practices of
prudent mortgage lending institutions which service mortgage loans of the same
type as the Mortgage Loans, with any servicing guidelines promulgated by the
Company and with relevant government agency guidelines and procedures. The
Servicing Agreement requires the Servicer to service Mortgage Loans solely with
a view toward the interests of the Company and without regard to the interests
of the Bank or any of its other affiliates (including NB Finance). The Servicer
collects and remits principal and interest payments, administers mortgage escrow
accounts, submits and pursues mortgage insurance claims and supervises
foreclosure proceedings on any Mortgage Loans it services. The Servicer also
provides accounting and reporting services with respect to such Mortgage Loans.
The Servicing Agreement requires the Servicer to follow such collection
procedures as are customary in normal mortgage servicing practices of prudent
mortgage lending institutions which service mortgage loans of the same type as
the Mortgage Loans. The Servicer may from time to time subcontract all or a
portion of its servicing obligations under the Servicing Agreement to a third
party subject to the prior written approval of the Company. The Servicer will
not, in connection with subcontracting any of its obligations under the
Servicing Agreement, be discharged or relieved in any respect from its
obligation to the Company to perform its
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obligations under the Servicing Agreement.
The Servicer is required to pay all expenses related to the performance
of its duties under the Servicing Agreement. The Servicer is required to make
advances of taxes and required insurance premiums that are not collected from
mortgagors with respect to any Mortgage Loan serviced by it, unless it
determines that such advances are nonrecoverable from the mortgagor, insurance
proceeds or other sources with respect to such Mortgage Loan. If such advances
are made, the Servicer generally will be reimbursed prior to the Company being
reimbursed out of the payments with respect to such Mortgage Loan. The Servicer
also is entitled to reimbursement for expenses incurred by it in connection with
the liquidation of defaulted Mortgage Loans serviced by it and in connection
with the restoration of mortgaged property. The Servicer is responsible to the
Company for any loss suffered as a result of the Servicer's failure to make and
pursue timely claims or as a result of actions taken or omissions made by the
Servicer which cause the policies to be cancelled by the insurer. Subject to
approval by the Company, the Servicer may institute foreclosure proceedings,
exercise any power of sale contained in any Mortgage Loan or deed of trust,
obtain a deed in lieu of foreclosure or otherwise acquire title to a mortgaged
property underlying a Mortgage Loan by operation of law or otherwise in
accordance with the terms of the Servicing Agreement. The Servicer does not,
however, have the authority to conclude contracts in the name of the Company.
The Company may terminate the Servicing Agreement upon the occurrence
of one or more events specified in the Servicing Agreement. Such events relate
generally to the Servicer's proper and timely performance of its duties and
obligations under the Servicing Agreement. In addition, the Company may also
terminate the Servicing Agreement without cause upon 60 days' notice and payment
of a termination fee equal to the product of 0.0002% of the then current
aggregate unpaid principal balance of the Mortgage Loans and the number of
months remaining until the first anniversary of the Servicing Agreement. The
termination fee will be based on the aggregate outstanding principal amount of
the Mortgage Loans then serviced under the Servicing Agreement. As long as any
of the New Preferred Shares remain outstanding, the Company may not renew,
terminate, or modify the Servicing Agreement without the approval of a majority
of the Independent Directors.
As is customary in the mortgage loan servicing industry, the Servicer
is entitled to retain any late payment charges, penalties and assumption fees
collected in connection with the Mortgage Loans serviced by it. The Servicer
will receive any benefit derived from interest earned on collected principal and
interest payments between the date of collection and the date of remittance to
the Company and, to the extent permitted by law, from interest earned on tax and
insurance impound funds with respect to Mortgage Loans serviced by it.
When any mortgaged property underlying a Mortgage Loan is conveyed by a
mortgagor, the Servicer generally will enforce any "due-on-sale" clause
contained in the Mortgage Loan, to the extent permitted under applicable law and
governmental regulations. The terms of a particular Mortgage Loan or applicable
law, however, may provide that the Servicer is prohibited from exercising the
"due-on-sale" clause under certain circumstances related to the security
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<PAGE>
underlying the Mortgage Loan and the buyer's ability to fulfill the obligations
thereunder. Upon any assumption of a Mortgage Loan by a transferee, a nominal
fee is typically required, which sum will be retained by the Servicer as
additional servicing compensation.
Employees
The Company has six employees. Information regarding the executive
officers of the Company is provided below under "Management--Directors and
Executive Officers." The Company does not anticipate that it will require any
additional employees because it retains the Advisor to perform certain functions
pursuant to the Advisory Agreement as described below under "Management--The
Advisor." Each employee of the Company currently is also an officer and/or
director of the Bank and/or affiliates of the Bank. The Company maintains
corporate records and audited financial statements that are separate from those
of the Bank and of any of the Bank's affiliates.
Competition
The Company does not engage in the business of originating Mortgage
Assets. While the Company will purchase additional Mortgage Assets, it
anticipates that such Mortgage Assets will be purchased from the Bank and/or
affiliates of the Bank. Accordingly, the Company does not compete with mortgage
conduit programs, investment banking firms, savings and loan associations,
banks, thrift and loan associations, finance companies, mortgage bankers or
insurance companies in acquiring its Mortgage Assets.
Legal Proceedings
The Company is not the subject of any material litigation. None of the
Company, the Bank or any affiliate of the Bank is currently involved in nor, to
the Company's knowledge, currently threatened with any material litigation with
respect to the Initial Mortgage Assets or the Initial Mortgage Loans, other than
routine litigation arising in the ordinary course of business, most of which is
expected to be covered by liability insurance.
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MANAGEMENT
Directors and Executive Officers
The Board of Directors consists of the individuals set forth below.
Messrs. Hanley and Michel are Independent Directors. Pursuant to the terms of
the New Preferred Shares, the Independent Directors will consider the interests
of the holders of both the New Preferred Shares and the Common Stock in
determining whether any proposed action requiring their approval is in the best
interests of the Company. The Company currently has five employees and does not
anticipate that it will require additional employees. See "Business and
Strategy--Employees."
The persons who are current directors and executive officers of the
Company are as follows:
Name Position and Offices Held
- ---- -------------------------
Michael Hanley Director
Alain Michel Director
Roger Smock Director; President
Real Raymond Director; Chief Financial Officer; Treasurer
Francois Bourassa Director; Vice President--Legal; Secretary
Martin Ouellet, Tom Doss and John Richter, each a Vice-President, are
the only other employees of the Company. The following is a summary of the
experience of the executive officers and current and proposed directors of the
Company:
Mr. Hanley has been Vice President and Chief Financial Officer of Gaz
Metropolitain since June 1997. Prior to that he was Vice President, Finance of
St. Laurent Paperboard Inc., a company spun off from Canadian Pacific Forest
Products Ltd. (now known as Avenor Inc.), and a Senior Advisor for Arthur
Andersen & Co., an international firm of accountants and management consultants.
Mr. Hanley is a chartered accountant and a member of the Ordre des comptables
agrees du Quebec.
Mr. Michel has been Senior Vice President and Chief Financial Officer
of Le Groupe Videotron Ltee since September 1994. Prior to that, he was Vice
President Finance and Treasurer of Videotron since July 1992. Mr. Michel is a
member of the Board of Directors of Group Goyette Inc., a public transportation
company, and is Vice-Chairman of the Board and Chairman of the Audit Committee
of Optel Inc., its U.S. division.
Mr. Smock has been Senior Vice-President, United States of the Bank
since 1988. In this position, he functions as the Bank's senior representative
in the United States. Mr. Smock is Chairman of the Board of several of the
Bank's U.S. subsidiaries, including National Canada Finance Corp. and National
Canada Corporation. He is also Chairman of the Bank's Management Committee in
the United States.
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<PAGE>
Mr. Raymond has been Senior Executive Vice-President, Corporate
Finance, of Levesque Beaubien Geoffrion Inc., a subsidiary of the Bank, since
November 1, 1997. Prior to that he was Senior Vice-President, Treasury and
Financial Markets of the Bank since 1992. Prior to that he was a Vice-President
of the Bank and the Senior Vice-President, Corporate Banking and Real Estate,
Canada. Mr. Raymond is a member of the Board of Directors of the Foundation of
the University of Quebec (Montreal), the St. Mary's Hospital Foundation and the
Quebec Tourism Circle. He is Chairman of the Board of Cancap Preferred
Corporation. Mr. Raymond is also a member of the Professional Society of the
Fellows of the Institute of Canadian Bankers.
Mr. Bourassa has been Senior Advisor, Legal Affairs of the Bank since
1989. Prior to joining the Bank, Mr. Bourassa was engaged in the practice of law
in Montreal.
Independent Directors
The terms of the New Preferred Shares require that, as long as any New
Preferred Shares are outstanding, certain actions by the Company must be
approved by a majority of the Independent Directors. See "Description of New
Preferred Shares--Independent Director Approval." Mr. Hanley and Mr. Michel are
Independent Directors. As long as there are only two Independent Directors, any
action that requires the approval of a majority of Independent Directors must be
approved by both the Independent Directors.
If at any time the Company fails to declare and pay a quarterly
dividend on the New Preferred Shares, the number of directors then constituting
the Board of Directors will be increased by at least two at the Company's next
annual meeting and the holders of the New Preferred Shares, voting together as a
single class with the holders of any other outstanding series of Preferred Stock
entitled to vote on the matter, including the Senior Preferred Shares, will be
entitled to elect two additional directors to serve on the Board of Directors.
Any member of the Board of Directors elected by holders of Preferred Stock will
be deemed to be an Independent Director for purposes of the actions requiring
the approval of a majority of the Independent Directors. The Company expects
that the Bank will elect a majority of the Board of Directors. See "Description
of New Preferred Shares--Voting Rights."
Audit Committee
The Board of Directors has established an audit committee which reviews
the engagement of independent accountants and their independence. The audit
committee also reviews the adequacy of the Company's internal accounting
controls. The audit committee is comprised of Mr. Hanley and Mr. Michel.
Compensation of Directors and Officers
The Company pays the Independent Directors fees for their services as
directors. The Independent Directors receive annual compensation of $10,000 plus
a fee of $750 for attendance (in person or by telephone) at each meeting of the
Board of Directors.
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The Company does not pay any compensation to its officers or employees
or to directors who are not Independent Directors.
Limitation of Liability and Indemnification of Directors and Officers
The MGCL permits a Maryland corporation to include in its charter a
provision limiting the liability of the corporation's directors and officers to
the corporation and its stockholders for money damages except for liability
resulting from (a) actual receipt of an improper benefit or profit in money,
property or services or (b) active and deliberate dishonesty established by a
final judgment as being material to the cause of action. The Charter contains
such a provision which eliminates such liability to the maximum extent permitted
by the MGCL.
The Charter authorizes the Company, to the maximum extent permitted by
Maryland law, to obligate itself to indemnify and to pay or reimburse reasonable
expenses in advance of final disposition of a proceeding to (a) any present or
former director or officer or (b) any individual who, while a director of the
Company and at the request of the Company, serves or has served another
corporation, partnership, joint venture, trust, employee benefit plan or any
other enterprise as a director, officer, partner or trustee of such corporation,
partnership, joint venture, trust, employee benefit plan or other enterprise,
from and against any claim or liability to which such person may become subject
or which such person may incur by reason of his or her status as a present or
former director or officer of the Company. The Bylaws of the Company (the
"Bylaws") obligate it, to the maximum extent permitted by Maryland law, to
indemnify and to pay or reimburse reasonable expenses in advance of final
disposition of a proceeding to (a) any present or former director or officer who
is made a party to the proceeding by reason of his service in that capacity or
(b) any individual who, while a director of the Company and at the request of
the Company, serves or has served another corporation, partnership, joint
venture, trust, employee benefit plan or any other enterprise as a director,
officer, partner or trustee of such corporation, partnership, joint venture,
trust, employee benefit plan or other enterprise and who is made a party to the
proceeding by reason of his service in that capacity. The Charter and Bylaws
also permit the Company to indemnify and advance expenses to any person who
served a predecessor of the Company in any of the capacities described above and
to any employee or agent of the Company or a predecessor of the Company.
The MGCL requires a corporation (unless its charter provides otherwise,
which the Charter does not) to indemnify a director or officer who has been
successful, on the merits or otherwise, in the defense of any proceeding to
which he is made a party by reason of his service in that capacity. The MGCL
permits a corporation to indemnify its present and former directors and
officers, among others, against judgments, penalties, fines, settlements and
reasonable expenses actually incurred by them in connection with any proceeding
to which they may be made a party by reason of their service in those or other
capacities unless it is established that (a) the act or omission of the director
or officer was material to the matter giving rise to the proceeding and (i) was
committed in bad faith or (ii) was the result of active and deliberate
dishonesty, (b) the director or officer actually received an improper personal
benefit in money, property or services or (c) in the case of any criminal
proceeding, the director or officer had reasonable cause
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to believe that the act or omission was unlawful. However, under the MGCL, a
Maryland corporation may not indemnify for an adverse judgment in a suit by or
in the right of the corporation or for a judgment of liability on the basis that
personal benefit was improperly received, unless in either case a court orders
indemnification and then only for expenses. In addition, the MGCL requires the
Company, as a condition to advancing expenses, to obtain (a) a written
affirmation by the director or officer of his good faith belief that he has met
the standard of conduct necessary for indemnification by the Company and (b) a
written statement by or on his behalf to repay the amount paid or reimbursed by
the Company if it shall ultimately be determined that the standard of conduct
was not met.
The Advisor
The Company entered into the Advisory Agreement with the Bank to
administer the day-to-day operations of the Company. The Bank in its role as
advisor under the terms of the Advisory Agreement is hereinafter referred to as
the "Advisor." The Advisor is responsible for (i) monitoring the credit quality
of Mortgage Assets held by the Company, (ii) advising the Company with respect
to the reinvestment of income from and payments on, and with respect to the
acquisition, management, financing and disposition of, Mortgage Assets held by
the Company, (iii) holding documents relating to the Company's Mortgage Assets
as custodian, (iv) monitoring the Company's compliance with the requirements
necessary to qualify as a REIT and (v) maintaining its status as a NHA Approved
Lender. The Advisor may, with the approval of a majority of the Board of
Directors as well as a majority of the Independent Directors, subcontract all or
a portion of its obligations under the Advisory Agreement to one or more related
or unrelated third parties. The Advisor will not, in connection with the
subcontracting of any of its obligations under the Advisory Agreement, be
discharged or relieved in any respect from its obligations under the Advisory
Agreement.
The Advisor and its affiliates have substantial experience in mortgage
finance and in the administration of Mortgage Assets.
The Advisory Agreement has an initial term of one year, and may be
renewed for additional one-year periods. The Advisory Agreement may be
terminated by the Company at any time upon 60 days' prior written notice. As
long as any of the New Preferred Shares remain outstanding, any decision by the
Company to renew, terminate or modify the Advisory Agreement must be approved by
a majority of the Board of Directors, as well as by a majority of the
Independent Directors. The Advisor is entitled to receive an advisory fee equal
to C$50,000 payable in equal quarterly installments with respect to the advisory
and management services provided by it to the Company. Payment of such fees is
subordinated to payments of dividends on the New Preferred Shares.
As a result of the relationship between the Bank and the Company,
certain conflicts of interest may arise. See "Risk Factors--Relationship with
the Bank and its Affiliates; Conflicts of Interest." In addition, under certain
circumstances, The Independent Fiduciary will exercise the discretionary
authority reserved to the Company with respect to transactions involving both
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the Company and the Bank or any Bank affiliate. See "ERISA Considerations."
The principal executive offices of the Advisor are located at 600 de La
Gauchetiere West, Montreal, Quebec, H3B 4L2, and its telephone number is (514)
394-5000.
DESCRIPTION OF NEW PREFERRED SHARES
The following summary of the material terms and provisions of the New
Preferred Shares does not purport to be complete and is qualified in its
entirety by reference to Maryland law and to the terms and provisions of the
Charter establishing the New Preferred Shares and the other provisions of the
Charter, a copy of which is available from the Company upon request. See
"Description of Capital Stock."
General
The New Preferred Shares form a series of Preferred Stock, which
Preferred Stock may be issued from time to time in one or more series with such
designations, preferences, conversion or other rights, voting powers,
restrictions, limitations as to dividends or other distributions, qualifications
and terms and conditions of redemption as are determined by the Board of
Directors. The Board of Directors has authorized the Company to issue the New
Preferred Shares.
When issued, the New Preferred Shares will be validly issued, fully
paid and nonassessable. The holders of the New Preferred Shares will have no
preemptive rights with respect to any shares of the stock of the Company or any
other securities of the Company convertible into or carrying rights or options
to purchase any such shares. The New Preferred Shares are perpetual and will not
be convertible into shares of Common Stock or any other class or series of stock
of the Company and will not be subject to any sinking fund or other obligation
of the Company for their repurchase or retirement. The New Preferred Shares will
be exchanged automatically on a one-for-one basis for the Bank Preferred Shares
upon the occurrence of an Exchange Event.
The transfer agent, registrar and dividend disbursement agent for the
New Preferred Shares will be The Bank of Nova Scotia Trust Company of New York.
The registrar for shares of New Preferred Shares will send notices to
shareholders of any meetings at which holders of the New Preferred Shares have
the right to elect directors of the Company or to vote on any other matter.
Dividends
Holders of the New Preferred Shares shall be entitled to receive, if,
when and as authorized and declared by the Board of Directors out of assets of
the Company legally available therefor, noncumulative cash dividends at the rate
of 8.35% per annum of the liquidation
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preference (equivalent to US$83.50 per share per annum). If authorized and
declared, dividends on the New Preferred Shares shall be payable quarterly in
arrears on the 30th day of March, June, September and December (or, if any such
day is not a business day, on the next business day) of each year, at such
annual rate, commencing , 1998. Except for the initial period, which
shall commence on and include , 1998 and end on , 1998, dividends in
each quarterly dividend period will accrue from the first day of such period,
whether or not authorized, declared or paid for the prior quarterly period. Each
authorized and declared dividend shall be payable to holders of record as they
appear at the close of business on the stock register of the Company on such
record dates, not exceeding 45 calendar days nor less than 10 calendar days
preceding the payment dates thereof, as shall be fixed by the Board of
Directors. Dividends payable on the New Preferred Shares for any dividend period
greater or less than a full dividend period shall be computed on the basis of
twelve 30-day months, a 360-day year and the actual number of days elapsed in
the period; provided, however, that in the event of the Automatic Exchange, any
accrued and unpaid dividends on the New Preferred Shares as of the Time of
Exchange (as defined) shall be deemed to be accrued and unpaid dividends on the
Bank Preferred Shares.
The right of holders of the New Preferred Shares to receive dividends
is noncumulative. Accordingly, if the Board of Directors fails to authorize or
declare a dividend on the New Preferred Shares for a quarterly dividend period,
then holders of the New Preferred Shares will have no right to receive a
dividend for that period, and the Company will have no obligation to pay a
dividend for that period, whether or not dividends are authorized and declared
and paid for any future period with respect to either the Preferred Stock or the
Common Stock authorized. If the Company fails to pay or authorize and set aside
for payment a quarterly dividend on the New Preferred Shares, holders of
Preferred Stock, including the New Preferred Shares and the Senior Preferred
Shares, will be entitled to elect two directors. See "--Voting Rights."
If full dividends on the New Preferred Shares for any dividend period
shall not have been authorized, declared and paid, or authorized, declared and a
sum sufficient for the payment thereof set apart for such payments, no dividends
shall be authorized, declared or paid or set aside for payment with respect to
the Common Stock or any other stock of the Company ranking junior to or on a
parity with the New Preferred Shares as to dividends or amounts upon
liquidation, nor shall any Common Stock or any other capital stock of the
Company ranking junior to or on a parity with the New Preferred Shares as to
dividends or amounts upon liquidation be redeemed, purchased or otherwise
acquired for any consideration (or any monies to be paid to or made available
for a sinking fund for the redemption of any such stock) by the Company (except
by conversion into or exchange for other stock of the Company ranking junior to
the New Preferred Shares as to dividends and amounts upon liquidation), until
such time as dividends on all outstanding New Preferred Shares have been (i)
authorized, declared and paid for three consecutive dividend periods and (ii)
authorized, declared and paid or authorized, declared and a sum sufficient for
the payment thereof has been set apart for payment for the fourth consecutive
dividend period.
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When dividends are not paid in full (or a sum sufficient for such full
payment is not set apart) upon the New Preferred Shares and the shares of any
other series of stock ranking on a parity as to dividends with the New Preferred
Shares, all dividends authorized and declared upon the New Preferred Shares and
any other series of stock ranking on a parity as to dividends with the New
Preferred Shares shall be authorized and declared pro rata so that the amount of
dividends authorized and declared per New Preferred Share and such other series
of stock shall in all cases bear to each other the same ratio that full
dividends, for the then-current dividend period, per New Preferred Share (which
shall not include any accumulation in respect of unpaid dividends for prior
dividend periods) and full dividends, including required or permitted
accumulations, if any, on such other series of stock bear to each other.
For a discussion of the tax treatment of distributions to stockholders,
see "United States Federal Income Tax Considerations--Taxation of United States
Stockholders" and "--Taxation of Foreign Stockholders," and for a discussion of
certain potential regulatory limitations on the Company's ability to pay
dividends, see "Risk Factors--Dividend and Other Regulatory Restrictions on
Operations of the Company."
Automatic Exchange
Each New Preferred Share will be exchanged automatically for one newly
issued Bank Preferred Share (i) immediately prior to such time, if any, at which
the Bank fails to declare and pay or set aside for payment when due any dividend
on any issue of its cumulative First Preferred Shares or the Bank fails to pay
or set aside for payment when due any declared dividend on any of its
non-cumulative First Preferred Shares, (ii) in the event that the Bank has a
Tier 1 risk-based capital ratio of less than 4.0% or a total risk-based capital
ratio of less than 8.0%, (iii) in the event that the Superintendent takes
control of the Bank pursuant to the Bank Act or proceedings are commenced for
the winding-up of the Bank pursuant to the Winding-up and Restructuring Act
(Canada), or (iv) in the event that the Superintendent, by order, directs the
Bank to act pursuant to subsection 485(3) of the Bank Act and the Bank elects to
cause the exchange. Upon an Exchange Event, each holder of the New Preferred
Shares shall be unconditionally obligated to surrender to the Bank the
certificates representing each New Preferred Share held by such holder, and the
Bank shall be unconditionally obligated to issue to such holder in exchange for
each such New Preferred Share a certificate representing one Bank Preferred
Share. Any New Preferred Shares purchased or redeemed by the Company prior to
the Time of Exchange (as defined below) shall be deemed not to be outstanding
and shall not be subject to the Automatic Exchange.
The Automatic Exchange shall occur as of 8:00 a.m. Eastern Time on the
date for such exchange set forth in the requirements of the Superintendent or,
if such date is not set forth in such requirements as of 8:00 a.m. on the
earliest possible date such exchange could occur consistent with such
requirements (the "Time of Exchange"), as evidenced by the issuance by the Bank
of a press release prior to such time. As of the Time of Exchange, all of the
New Preferred Shares will be deemed cancelled without any further action by the
Company, all rights of the holders of the New Preferred Shares as stockholders
of the Company will cease, and such
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persons shall thereupon and thereafter be deemed to be and shall be for all
purposes holders of Bank Preferred Shares. The Company will mail notice of the
occurrence of an Exchange Event to each holder of the New Preferred Shares
within 30 days of such event, and the Bank will deliver to each such holder
certificates for the Bank Preferred Shares upon surrender of such holder's
certificates for the New Preferred Shares. The Charter provides that,
immediately after the delivery of such notice, the existence of the Company
shall terminate and the Company will be liquidated and its affairs wound up in
accordance with the procedures of the MGCL relating to forfeiture of the charter
of a corporation and expiration of corporate existence. Until such replacement
stock certificates are delivered (or in the event such replacement certificates
are not delivered), certificates previously representing the New Preferred
Shares shall be deemed for all purposes to represent the Bank Preferred Shares.
All corporate action necessary for the Bank to issue the Bank Preferred Shares
has been taken by the Bank. Accordingly, once an Exchange Event occurs, no
action will be required to be taken by holders of the New Preferred Shares, by
the Bank or by the Company in order to effect the Automatic Exchange as of the
Time of Exchange.
Holders of the New Preferred Shares, by purchasing such New Preferred
Shares, will be deemed to have agreed to be bound by the unconditional
obligation to exchange such New Preferred Shares for the Bank Preferred Shares
upon the occurrence of an Exchange Event. The obligation of the holders of the
New Preferred Shares to surrender such shares and the obligation of the Bank to
issue the Bank Preferred Shares in exchange for the New Preferred Shares shall
be enforceable by the Bank and such holders, respectively, against the other.
Absent the occurrence of an Exchange Event, no Bank Preferred Shares
will be issued. Upon the occurrence of an Exchange Event, the Bank Preferred
Shares to be issued as part of the Automatic Exchange would constitute a newly
issued series of First Preferred Shares of the Bank and would constitute 100% of
the issued and outstanding Bank Preferred Shares. The Bank Preferred Shares
would have the same liquidation preference and be subject to redemption on the
same terms as the New Preferred Shares (except that there would be no redemption
for a Tax Event). Any accrued and unpaid dividends on the New Preferred Shares
as of the Time of Exchange would be accounted for as accrued and unpaid
dividends on the Bank Preferred Shares. The Bank Preferred Shares would rank
pari passu, in terms of dividend payments and liquidation preference, with, or
senior to, any outstanding First Preferred Shares of the Bank. The Bank
Preferred Shares would not entitle the holders to vote except in certain
circumstances. Dividends on the Bank Preferred Shares would be non-cumulative
and payable at the rate of 8.45% per annum of the liquidation preference, if,
when and as declared by the Board of Directors of the Bank. The Bank does not
intend to apply for listing of the Bank Preferred Shares on any national
securities exchange or for quotation of the Bank Preferred Shares through the
National Association of Securities Dealers Automated Quotation System. Absent
the occurrence of an Exchange Event, however, the Bank will not issue any Bank
Preferred Shares, although the Bank will be able to issue First Preferred Shares
in series other than that of the Bank Preferred Shares. There can be no
assurance as to the liquidity of the trading markets for the Bank Preferred
Shares, if issued, or that an active public market for
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the Bank Preferred Shares would develop or be maintained.
Holders of the New Preferred Shares cannot exchange the New Preferred
Shares for the Bank Preferred Shares voluntarily. In addition, absent the
occurrence of the Automatic Exchange, holders of the New Preferred Shares will
have no dividend, voting, liquidation preference or other rights with respect to
the Bank or any security of the Bank.
Ranking
The New Preferred Shares will rank prior to the Common Stock and to all
other classes and series of equity securities of the Company now or hereafter
issued, other than the Senior Preferred Shares or any other series of equity
securities of the Company expressly designated as being on a parity with
("Parity Stock") or senior to the New Preferred Shares as to dividend rights and
rights upon liquidation, winding up or dissolution. The Company has the power to
create and issue additional Preferred Stock or other classes of stock ranking on
a parity with the New Preferred Shares, or ranking junior to the New Preferred
Shares, without any approval or consent of the holders of New Preferred Shares.
So long as any New Preferred Shares remain outstanding, additional shares of
Senior Stock may not be issued without the approval of the holders of at least
two-thirds of the New Preferred Shares. See "--Voting Rights." So long as any
New Preferred Shares remain outstanding, additional shares of Parity Stock may
not be issued without the approval of a majority of the Board of Directors and a
majority of the Independent Directors. See "--Independent Director Approval."
Voting Rights
Except as indicated below, the holders of the New Preferred Shares will
not be entitled to vote. In the event the holders of the New Preferred Shares
are entitled to vote as indicated below, each New Preferred Share will be
entitled to one vote on matters on which holders of the New Preferred Shares are
entitled to vote.
If, at the time of any annual meeting of the Company's stockholders for
the election of directors, the Company has failed to pay or failed to authorize
and declare and set aside for payment a quarterly dividend on any series of
Preferred Stock of the Company, including the New Preferred Shares, the number
of directors then constituting the Board of Directors will be increased by at
least two (if not already increased by two due to a default in preference
dividends), and the holders of the New Preferred Shares and the holders of
Senior Preferred Shares, voting together with the holders of all other series of
Preferred Stock as a single class, will be entitled to elect such two additional
directors to serve on the Board of Directors at each such annual meeting. Each
director elected by the holders of shares of the Preferred Stock shall continue
to serve as a director until the later of (i) the full term for which he or she
shall have been elected or (ii) the payment of one quarterly dividend on the
Preferred Stock, including the New Preferred Shares. Any such director may be
removed by, and shall not be removed except by, the vote of the holders of
record of the outstanding the New Preferred Shares and Parity Stock entitled to
vote, voting together as a single class with the holders of all other series of
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Preferred Stock entitled to vote on the matter, at a meeting of the Company's
stockholders, or of the holders of the New Preferred Shares and Parity Stock so
entitled to vote thereon, called for that purpose. As long as dividends on the
New Preferred Shares shall not have been paid for the preceding quarterly
dividend period, (i) any vacancy in the office of any such director may be
filled (except as provided in the following clause (ii)) by a person designated
in an instrument in writing signed by any such remaining director and filed with
the Company, and (iii) in the case of the removal of any such director, the
vacancy may be filled by the vote of the holders of the outstanding New
Preferred Shares and Parity Stock entitled to vote, voting together as a single
class with the holders of all other series of Preferred Stock entitled to vote
on the matter, at the same meeting at which such removal shall be voted.
The affirmative vote or consent of the holders of at least two-thirds
of the outstanding shares of each series of Preferred Stock, including the New
Preferred Shares, will be required (a) to create any class or series of stock
(other than the Senior Preferred Stock) which shall, as to dividends or
distribution of assets, rank prior to or on a parity with any outstanding series
of Preferred Stock other than a series which shall not have any right to object
to such creation or (b) alter or change the provisions of the Charter (including
the terms of the New Preferred Shares) so as to adversely affect the voting
powers, preferences or special rights of the holders of a series of Preferred
Stock to any material extent; provided that if such amendment shall not
adversely affect all series of Preferred Stock, such amendment need only be
approved by at least two-thirds of the holders of shares of all series of
Preferred Stock adversely affected thereby.
Redemption
The New Preferred Shares are not redeemable prior to September 3, 2007
(except upon the occurrence of a Tax Event on or after September 3, 2002). On or
after such date, the New Preferred Shares may be redeemed at the option of the
Company, or its successor or any acquiring or resulting entity with respect to
the Company (including by any parent or subsidiary of the Company, any such
successor, or any such acquiring or resulting entity), as applicable, in whole
or in part, at any time or from time to time on not less than 30 nor more than
60 days' notice by mail, at the following redemption prices (expressed as a
percentage of the US$1,000 per share liquidation preference), if redeemed during
the 12-month period beginning September 3 of the years indicated below, plus the
quarterly accrued and unpaid dividend to the date of redemption, if any,
thereon:
Year Redemption Price
- ---- ----------------
2007 104.1750%
2008 103.7575
2009 103.3400
2010 102.9225
2011 102.5050
2012 102.0875
2013 101.6700
2014 101.2525
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2015 100.8350
2016 100.4175
and thereafter at a redemption price of US$1,000 per share, plus the quarterly
accrued and unpaid dividend to the date of redemption, if any, thereon.
In the event that fewer than all the outstanding New Preferred Shares
are to be redeemed, the number of New Preferred Shares to be redeemed shall be
determined by the Board of Directors, and the shares to be redeemed shall be
determined by lot or pro rata as may be determined by the Board of Directors or
by any other method as may be determined by the Board of Directors in its sole
discretion to be equitable, provided that such method satisfies any applicable
requirements of any securities exchange on which the New Preferred Shares are
then listed.
Any such redemption must comply with applicable capital distribution
regulations of the Superintendent, which may prohibit a redemption and will
require the Superintendent's prior written approval. Unless full dividends on
the New Preferred Shares have been, or contemporaneously are, authorized,
declared and paid or authorized and declared and a sum sufficient for the
payment thereof set apart for payment for the then-current dividend period, no
New Preferred Shares shall be redeemed unless all outstanding New Preferred
Shares are redeemed and the Company shall not purchase or otherwise acquire any
New Preferred Shares; provided, however, that the Company may purchase or
acquire New Preferred Shares pursuant to a purchase or exchange offer made on
the same terms to holders of all outstanding New Preferred Shares.
Furthermore, the Company may, at its option, on or after September 3,
2002 and prior to September 3, 2007, redeem the New Preferred Shares, in whole
but not in part, at any time upon a Tax Event, at a redemption price per share
equal to the sum of (i) the quarterly accrued and unpaid dividend to the date of
redemption plus (ii) the Make-Whole Amount (as defined herein).
"Make-Whole Amount" means, with respect to a New Preferred Share, the
greater of (i) 100% of the Maturity Amount of such New Preferred Share and (ii)
the sum of the present values of the remaining scheduled payments of dividends
on such New Preferred Share to September 3, 2007, plus the present value of the
Maturity Amount at September 3, 2007, discounted to the date fixed for
redemption of such New Preferred Share (the "redemption date") on a quarterly
basis (assuming a 360-day year consisting of 30-day months), computed using a
discount rate equal to the Adjusted Treasury Rate.
"Adjusted Treasury Rate" means, with respect to any redemption date,
the rate per annum equal to the semi-annual equivalent yield to maturity of the
Comparable Treasury Issue (as defined herein), assuming a price for the
Comparable Treasury Issue (expressed as a percentage of its principal amount)
equal to the Comparable Treasury Price (as defined herein) for such prepayment
date plus 0.50%.
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"Comparable Treasury Issue" means the United States Treasury security
selected by the Quotation Agent as having a maturity comparable to the
Make-Whole Term that would be utilized, at the time of selection and in
accordance with customary financial practice, in pricing new issues of corporate
debt securities of comparable maturity to the Make-Whole Term.
"Comparable Treasury Price" means, with respect to any redemption date,
(i) the average of the bid and asked prices for the Comparable Treasury Issue
(expressed in each case as a percentage of its principal amount) on the third
Business Day preceding such redemption date, as set forth in the daily
statistical release published by the Federal Reserve Bank of New York and
designated "Composite 3:30 p.m. Quotation for U.S. Government Securities" (or
any successor release) or (ii) if such release is not published or does not
contain such prices on such Business Day, (a) the average of the Reference
Treasury Dealer Quotations for such redemption date, after excluding the highest
and lowest such Reference Treasury Dealer Quotations, or (b) if the Company
obtains fewer than three such Reference Treasury Dealer Quotations, the average
of all such Quotations.
"Make-Whole Term" means the period from the redemption date to
September 3, 2007.
"Maturity Amount" means the liquidation preference of the New Preferred
Shares.
"Quotation Agent" means the Reference Treasury Dealer (as defined
herein) appointed by the Company.
"Reference Treasury Dealer" means (i) Merrill Lynch Government
Securities, Inc. and their respective successors; provided, however, that if the
foregoing shall cease to be a primary U.S. Government securities dealer in New
York City (a "Primary Treasury Dealer"), the Company shall substitute therefor
another Primary Treasury Dealer, and (ii) any other Primary Treasury Dealer
selected by the Company.
"Reference Treasury Dealer Quotations" means, with respect to each
Reference Treasury Dealer and any redemption date, the average, as determined by
the Company, of the bid and asked prices for the Comparable Treasury Issue
(expressed in each case as a percentage of its principal amount) quoted in
writing to the Company by such Reference Treasury Dealer at 5:00 p.m., New York
City time, on the third Business Day preceding such redemption date.
"Tax Event" means the receipt by the Company of an opinion of a
nationally recognized law firm experienced in such matters to the effect that,
as a result of (i) any amendment to, clarification of, or change (including any
announced prospective change) in, the laws or treaties (or any regulations
thereunder) of the United States or Canada, or any political subdivision or
taxing authority thereof or therein, affecting taxation, (ii) any judicial
decision, official administrative pronouncement, published or private ruling,
regulatory procedure, notice or announcement (including any notice or
announcement of intent to adopt such procedures or regulations) ("Administrative
Action") or (iii) any amendment to, clarification of, or change in the official
position or the interpretation of such Administrative Action or any
interpretation or
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pronouncement that provides for a position with respect to such Administrative
Action that differs from the theretofore generally accepted position, in each
case, by any legislative body, court, governmental authority or regulatory body,
irrespective of the manner in which such amendment, clarification or change is
made known, which amendment, clarification or change is effective or such
pronouncement or decision is announced on or after the date of this Prospectus,
there is more than an insubstantial risk that (a) dividends paid or to be paid
by the Company with respect to the stock of the Company are not, or will not be,
fully deductible by the Company for United States federal income tax purposes or
(b) the Company is, or will be, subject to more than a de minimis amount of
other taxes, duties or other governmental charges and shall include an
assessment by the Internal Revenue Service that (a) dividends paid or to be paid
by the Company with respect to the stock of the Company are not, or will not be,
fully deductible by the Company for United States federal income tax purposes or
(b) the Company is, or will be, subject to more than a de minimis amount of
other taxes, duties or other governmental charges.
Rights upon Liquidation
In the event of any voluntary or involuntary liquidation, dissolution
or winding up of the Company, the holders of the New Preferred Shares at the
time outstanding will be entitled to receive out of assets of the Company
legally available for distribution to stockholders under applicable law, before
any distribution of assets is made to holders of Common Stock or any other class
of stock ranking junior to the New Preferred Shares upon liquidation, and
subject to the rights of the holders of any class or series of equity securities
having preference with respect to distribution upon liquidation and the rights
of the Company's general creditors, liquidating distributions in the amount of
US$1,000 per share, plus the quarterly accrued and unpaid dividend thereon, if
any, to the date of liquidation, without interest.
After payment of the full amount of the liquidation distributions to
which they are entitled, the holders of the New Preferred Shares will have no
right or claim to any of the remaining assets of the Company. In the event that,
upon any such voluntary or involuntary liquidation, dissolution or winding up,
the available assets of the Company are insufficient to pay the amount of the
liquidation distributions on all the outstanding New Preferred Shares and the
corresponding amounts payable on all shares of other classes or series of stock
of the Company ranking on a parity with the New Preferred Shares in the
distribution of assets upon any liquidation, dissolution or winding up of the
affairs of the Company, then the holders of the New Preferred Shares and such
other classes or series of stock shall share ratably in any such distribution of
assets in proportion to the full liquidation distributions to which they would
otherwise be respectively entitled.
For such purposes, the consolidation or merger of the Company with or
into any other entity, or the sale, lease or conveyance of all or substantially
all of the property or business of the Company, shall not be deemed to
constitute liquidation, dissolution or winding up of the Company.
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Independent Director Approval
The terms of the New Preferred Shares require that, as long as any New
Preferred Shares are outstanding, certain actions by the Company be approved by
a majority of the Independent Directors. Mr. Hanley and Mr. Michel are the
Independent Directors. See "Management--Independent Directors." As long as there
are only two Independent Directors, any action that requires the approval of a
majority of the Independent Directors must be approved by both Independent
Directors. In order to be considered "independent," a director must not be a
current officer or employee of the Company or a current director, officer or
employee of the Bank or any other affiliate of the Bank. In addition, any
members of the Board of Directors elected by holders of Preferred Stock,
including the New Preferred Shares, will be deemed to be Independent Directors
for purposes of approving actions requiring the approval of a majority of the
Independent Directors. The actions which require approval of a majority of the
Independent Directors include (i) the issuance of additional Preferred Stock
ranking on a parity with the New Preferred Shares, (ii) the modification of the
Company's general distribution policy or the authorization of any distribution
in respect of the Common Stock for any year if, after taking into account any
such proposed distribution, total distributions on the New Preferred Shares and
the Common Stock would exceed an amount equal to the sum of 105% of the
Company's "REIT taxable income" (excluding capital gains) for such year plus net
capital gains of the Company for that year, (iii) the acquisition of Mortgage
Assets other than obligations which are comparable to the Initial Mortgage
Assets, Mortgage Loans, interests in Mortgage Loans and Partnership Interests,
(iv) the redemption of any shares of Common Stock, (v) the renewal, termination
or modification of the Advisory Agreement or the Servicing Agreement or the
subcontracting of any duties thereunder to third parties unaffiliated with the
Bank, and (vi) the determination to revoke the Company's REIT status. The
Charter requires that, in determining whether any proposed action requiring
their approval is in the best interests of the Company, the Independent
Directors will consider the interests of holders of both the Common Stock and
the Preferred Stock, including, without limitation, holders of the New Preferred
Shares.
EXCHANGE OFFER; REGISTRATION RIGHTS
The Company and the Bank entered into a registration rights agreement
with the Initial Purchaser (the "Registration Rights Agreement") for the benefit
of the holders of the Old Preferred Shares wherein the Company and the Bank
agreed, for the benefit of the holders of the Old Preferred Shares, (i) to use
their best efforts to file with the Commission within 150 days after the Issue
Date the Exchange Offer Registration Statement relating to the Exchange Offer
for the New Preferred Shares, and (ii) to use its best efforts to cause the
Registration Statement to be declared effective under the Securities Act within
180 days after the Issue Date. Promptly after the Registration Statement has
been declared effective, the Company will exchange the New Preferred Shares for
surrender of the Old Preferred Shares. The Company will keep the Exchange Offer
open for not less than 30 days (or longer if required by applicable law) after
the date notice of the Exchange Offer has been mailed to the holders of the Old
Preferred Shares. For each Old Preferred Share validly tendered to the Company
pursuant to the Exchange Offer
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and not validly withdrawn by the holder thereof, the holder of such Old
Preferred Share will receive a New Preferred Share having a liquidation
preference equal to the liquidation preference of the tendered Old Preferred
Share. Dividends on each New Preferred Share will accrue from the first day of
the dividend period in which the Exchange Offer is consummated.
Based on existing interpretations of the Securities Act by the Staff
set forth in several no-action letters to third parties, and subject to the
immediately following sentence, the Company believes that the New Preferred
Shares issued pursuant to the Exchange Offer may be offered for resale, resold
and otherwise transferred by the holders thereof (other than holders who are
broker-dealers) without further compliance with the registration and prospectus
delivery provisions of the Securities Act. However, any prospective holder of
New Preferred Shares who is an affiliate of the Company or who intends to
participate in the Exchange Offer for the purpose of distributing the New
Preferred Shares, or any broker-dealer who purchased the Old Preferred Shares
from the Company to resell pursuant to Rule 144A or any other available
exemption under the Securities Act, (i) will not be able to rely on the
interpretation of the Staff set forth in the above-mentioned no-action letters,
(ii) will not be entitled to tender its Old Preferred Shares in the Exchange
Offer and (iii) must comply with the registration and prospectus delivery
requirements of the Securities Act in connection with any sale or transfer of
the Old Preferred Shares unless such sale or transfer is made pursuant to an
exemption from such requirements. The Company does not intend to seek its own
no-action letter and there can be no assurance that the Staff would make a
similar determination with respect to the New Preferred Shares as it has in such
no-action letters to third parties.
Each holder of the Old Preferred Shares (other than certain specified
holders) who wishes to exchange the Old Preferred Shares for New Preferred
Shares in the Exchange Offer will be required to represent that (i) it is not an
affiliate of the Company, (ii) the New Preferred Shares to be received by it
were acquired in the ordinary course of its business and (iii) at the time of
the Exchange Offer, it has no arrangement with any person to participate in the
distribution (within the meaning of the Securities Act) of the New Preferred
Shares. In addition, in connection with any resales of New Preferred Shares, any
broker-dealer (a "Participating Broker-Dealer") who acquired the New Preferred
Shares for its own account as a result of market-making or other trading
activities must deliver a prospectus meeting the requirements of the Securities
Act. The Commission has taken the position that Participating Broker-Dealers may
fulfill their prospectus delivery requirements with respect to the New Preferred
Shares (other than a resale of an unsold allotment from the original sale of the
Old Preferred Shares) with this Prospectus. Under the Registration Rights
Agreement, the Company is required to allow Participating Broker-Dealers and
other persons, if any, subject to similar prospectus delivery requirements to
use this Prospectus in connection with the resale of such New Preferred Shares
for a period of up to six months.
If, because of any change in law or in the applicable interpretations
of the Staff, the Company is not permitted to effect the Exchange Offer on the
terms set forth herein, or if for any reason the Registration Statement is not
declared effective within 180 days of the Issue Date, or in certain other
circumstances, including upon the request of the Initial Purchaser, then in
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addition to or in lieu of effecting the registration of the New Preferred Shares
pursuant to the Registration Statement, the Company will, at the Company's sole
expense, (a) as promptly as practicable, file a shelf registration covering
resales of the Old Preferred Shares (and underlying interests in the Bank
Preferred Shares) (the "Shelf Registration Statement"), (b) use its best efforts
to cause the Shelf Registration Statement to be declared effective under the
Securities Act and (c) use its best efforts to keep effective the Shelf
Registration Statement until the earlier of two years after the Issue Date (six
months in the case of a Shelf Registration Statement filed at the request of the
Initial Purchaser) or such time as all of the Old Preferred Shares have been
sold thereunder or otherwise cease to be registrable securities within the
meaning of the Registration Rights Agreement. The Company will, in the event
that a Shelf Registration Statement is filed, provide to each holder copies of
the prospectus that is a part of the Shelf Registration Statement, notify each
such holder when the Shelf Registration Statement has become effective and take
certain other actions as are required to permit unrestricted resales of the Old
Preferred Shares. A holder that sells Old Preferred Shares pursuant to the Shelf
Registration Statement generally will be required to be named as a selling
security holder in the related prospectus and to deliver a prospectus to
purchasers, will be subject to certain of the civil liability provisions under
the Securities Act in connection with such sales and will be bound by the
provisions of the Registration Rights Agreement that are applicable to such a
holder (including certain indemnification rights and obligations). In addition,
if required by the Staff, each holder of Old Preferred Shares will be required
to deliver information to be used in connection with the Shelf Registration
Statement in order to have their Old Preferred Shares included in the Shelf
Registration Statement and to benefit from the provisions of the second
succeeding paragraph.
Each Old Preferred Share contains a legend to the effect that the
holder thereof, by its acceptance thereof, is deemed to have agreed to be bound
by the provisions of the Registration Rights Agreement. In that regard, each
holder is deemed to have agreed that, upon receipt of notice from the Company of
the occurrence of any event which makes such statement in the prospectus which
is part of the Shelf Registration Statement (or, in the case of Participating
Broker-Dealers, this Prospectus) untrue in any material respect or which
requires the making of any changes in such prospectus in order to make the
statements therein not misleading or of certain other events specified in the
Registration Rights Agreement, such holder (or Participating Broker-Dealer, as
the case may be) will suspend the sale of Old Preferred Shares pursuant to such
prospectus until the Company has amended or supplemented such prospectus to
correct such misstatement or omission and has furnished copies of the amended or
supplemented prospectus to such holder (or Participating Broker-Dealer, as the
case may be) or the Company has given notice that the sale of the Old Preferred
Shares may be resumed, as the case may be.
If the Company shall give such notice to suspend the sale of the Old
Preferred Shares, it shall extend the relevant period referred to above during
which the Company is required to keep effective the Shelf Registration Statement
(or the period during which Participating Broker-Dealers are entitled to use
this Prospectus in connection with the resale of New Preferred Shares) by the
number of days during the period from and including the date of the giving of
such notice to and including the date when holders shall have received copies of
the supplemented or amended prospectus necessary to permit resales of the Old
Preferred Shares or to and including
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the date on which the Company has given notice that the sale of Old Preferred
Shares may be resumed, as the case may be.
If the Company fails to comply with the Registration Rights Agreement
or if the Registration Statement or the Shelf Registration Statement fails to
become effective, then, an additional amount ("Liquidated Damages") shall become
payable in respect of the Old Preferred Shares as follows:
(i) if (A) neither the Registration Statement nor a Shelf
Registration Statement is filed with the Commission on or prior to the
150th day after the Issue Date or (B) notwithstanding that the Company
has consummated or will consummate the Exchange Offer, the Company is
required to file a Shelf Registration Statement and such Shelf
Registration Statement is not filed on or prior to the date required by
the Registration Rights Agreement, then commencing on the day after
either such required filing date, Liquidated Damages shall be payable
to the holders of the Old Preferred Shares at a rate of 0.25% per annum
(US$2.50 per share); or
(ii) if (A) neither the Registration Statement is declared
effective by the Commission on or prior to the 180th day after the
Issue Date nor a Shelf Registration Statement is declared effective by
the Commission on or prior to the later of the 30th day after the
applicable required filing date or the 180th day after the Issue Date
or (B) notwithstanding that the Company has consummated or will
consummate the Exchange Offer, the Company is required to file a Shelf
Registration Statement and such Shelf Registration Statement is not
declared effective by the Commission on or prior to the later of the
30th day after the date such Shelf Registration Statement was required
to be filed or the 180th day after the Issue Date, then, commencing on
the 181st day after the Issue Day with respect to the Exchange Offer
Registration Statement or the 31st day after the applicable required
filing date (or the 181st day of the Issue Date, if later), Liquidated
Damages shall be payable to the holders of the Old Preferred Shares at
a rate of 0.25% per annum (US$2.50 per share); or
(iii) if (A) the Company has not exchanged New Preferred
Shares for all Old Preferred Shares validly tendered in accordance with
the terms of the Exchange Offer on or prior to the 45th day after the
date on which the Registration Statement was declared effective or (B)
if applicable, the Shelf Registration Statement has been declared
effective and such Shelf Registration Statement ceases to be available
for use by holders of the Old Preferred Shares at any time prior to the
second anniversary of the Issue Date (other than after such time as all
Old Preferred Shares have been disposed of thereunder or otherwise
cease to be registrable securities within the meaning of the
Registration Rights Agreement), and such event continues for a period
exceeding 30 consecutive days or 90 days in any 360-day period, whether
or not consecutive, then Liquidated Damages shall be payable to the
holders of the New Preferred Shares at a rate of 0.25% per annum
(US$2.50 per share) commencing on (x) the 31st day after such effective
date, in the case of (A) above, or (y) the 31st consecutive day or 91st
day in any 360-day period following
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the day such Shelf Registration Statement ceases to be available in the
case of (B) above;
provided, however, that the Liquidated Damages rate on the liquidation
preference of the Old Preferred Shares may not exceed in the aggregate 0.25% per
annum; provided further, however, that (1) upon the filing of the Registration
Statement or a Shelf Registration Statement (in the case of clause (i) above),
(2) upon the effectiveness of the Registration Statement or a Shelf Registration
Statement (in the case of clause (ii) above), or (3) upon the exchange of New
Preferred Shares for all Old Preferred Shares tendered (in the case of clause
(iii) (A) above), or upon the availability of the Shelf Registration Statement
which had ceased to be available (in the case of clause (iii) (B) above),
Liquidated Damages as a result of such clause (or the relevant subclause
thereof) shall cease to accrue.
Any amounts of Liquidated Damages due pursuant to clause (i), (ii) or
(iii) above will be payable in cash quarterly on the 30th day of March, June,
September and December of each year to the Holders of record on the immediately
preceding 15th day of such month.
The Company will also agree that until such time as (a) all Old
Preferred Shares tendered are exchanged for New Preferred Shares or (b) a Shelf
Registration Statement is available, it will invest any payments received on
Initial Mortgage Loans prior to each quarterly dividend payment date in U.S.
government obligations.
The Registration Rights Agreement is governed by, and construed in
accordance with, the laws of the State of New York. The summary herein of
certain provisions of the Registration Rights Agreement does not purport to be
complete and is subject to, and is qualified in its entirety by reference to,
all the provisions of the Registration Rights Agreement, a form of which is
available upon request to the Company. See "Available Information." In addition,
the information set forth above concerning certain interpretations of and
positions taken by the Staff is not intended to constitute legal advice, and
prospective investors should consult their own legal advisors with respect to
such matters.
DESCRIPTION OF CAPITAL STOCK
The following summary of the material terms of the stock of the Company
does not purport to be complete and is qualified in its entirety by reference to
Maryland law and to the Charter and By-laws of the Company, copies of which are
available upon request to the Company.
Common Stock
General. The Company is authorized by the Charter to issue up to 1,000
shares of Common Stock. The Company has outstanding 100 shares of Common Stock,
all of which are held by the Bank. In addition, the Bank currently intends that,
so long as any New Preferred Shares are outstanding, it will maintain direct or
indirect ownership of all of the outstanding
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shares of the Common Stock.
Dividends. Holders of the Common Stock are entitled to receive
dividends if, when, and as authorized and declared by the Board of Directors out
of assets legally available therefor, provided that, if the Company fails to
authorize, declare and pay full dividends on the New Preferred Shares or the
Senior Preferred Shares in any dividend period, the Company may not make any
dividend payments with respect to the Common Stock until such time as dividends
on all outstanding Senior Preferred Shares and New Preferred Shares have
been (i) authorized, declared and paid for three consecutive dividend periods or
(ii) authorized, declared and a sum sufficient for the payment thereof set apart
for payment for the fourth consecutive dividend period.
Voting Rights. Subject to the rights, if any, of the holders of any
class or series of Preferred Stock, including Senior Preferred Stock and New
Preferred Shares, all voting rights are vested in the Common Stock. The holders
of the Common Stock are entitled to one vote per share. All of the issued and
outstanding shares of the Common Stock are currently held by the Bank.
As the holder of all of the outstanding shares of the Common Stock, the
Bank will be able, subject to the terms of the New Preferred Shares and of any
other class or series of stock subsequently issued by the Company, to elect and
remove directors, amend the Charter and approve other actions requiring
stockholder approval under the MCGL or otherwise.
Rights upon Liquidation. In the event of the liquidation, dissolution
or winding up of the Company, whether voluntary or involuntary, after there have
been paid or set aside for the holders of all series of Preferred Stock the full
preferential amounts to which such holders are entitled, the holders of the
Common Stock will be entitled to share equally and ratably in any assets
remaining after the payment of all debts and liabilities.
Preferred Stock
The Company is authorized by the Charter to issue up to 10,000,000
shares of Preferred Stock. Assuming exchange of all outstanding shares of the
Old Preferred Shares, 300,000 shares of New Preferred Shares will be
outstanding. Subject to limitations prescribed by Maryland law and the Charter,
the Board of Directors or, if then constituted, a duly authorized committee
thereof, is authorized to issue, from the authorized but unissued shares of
stock of the Company, Preferred Stock in such classes or series as the Board of
Directors may determine and to establish, from time to time, the number of
shares of Preferred Stock to be included in any such class or series and to fix
the designation and any preferences, conversion or other rights, voting powers,
restrictions, limitations as to dividends or other distributions, qualifications
and terms and conditions of redemption of the shares of any such class or
series, and such other subjects or matters as may be fixed by resolution of the
Board of Directors.
Shares of Preferred Stock, upon issuance against full payment of the
purchase price therefor and in the manner authorized by the Board of Directors,
will be fully paid and
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nonassessable. The specific terms of a particular class or series of Preferred
Stock are described in the Charter.
The terms of the Charter relating to each class or series of Preferred
Stock set forth the preferences and other terms of such class or series,
including, without limitation, the following, as applicable: (1) the designation
of such class or series; (2) the number of shares of such class or series
offered and the liquidation preference per share of such class or series; (3)
the dividend rate(s), period(s), and/or payment date(s) or method(s) of
calculation thereof for such class or series; (4) whether dividends on such
class or series of Preferred Stock are cumulative or not and, if cumulative, the
date from which dividends on such class or series shall accumulate; (5) the
provision for a sinking fund, if any, for such class or series; (6) the terms
and conditions of redemption, if applicable, of such class or series; (7) any
limitations on direct or beneficial ownership and restrictions on transfer, in
each case as may be appropriate to preserve the status of the Company as a REIT
or as otherwise deemed appropriate by the Board of Directors; (8) the relative
ranking and preferences of such class or series as to dividend rights and rights
upon liquidation, dissolution or winding up of the affairs of the Company; (9)
any limitations on issuance of any class or series of Preferred Stock ranking
senior to or on a parity with such class or series of Preferred Stock as to
dividend rights and rights upon liquidation, dissolution or winding up of the
affairs of the Company; (10) any other specific terms, preferences, rights,
limitations or restrictions of such class or series; and (11) any voting powers
of such class or series.
Senior Preferred Stock. The shares of the Senior Preferred Stock are
validly issued, fully paid and nonassessable and will entitle the holders
thereof to cumulative, quarterly dividends. The shares of the Senior Preferred
Stock are redeemable, at any time in whole, but not in part, at the option of
the Company at a price equal to the liquidation preference thereof plus accrued
and unpaid dividends thereon through the redemption date. On the December 30th
following each ten year anniversary of the issuance of the Senior Preferred
Stock, each holder of Senior Preferred Stock may require the Company to purchase
such holder's Senior Preferred Stock at the liquidation preference thereof plus
accrued and unpaid dividends thereon through the date of redemption. The Senior
Preferred Stock rank senior to the Common Stock and the New Preferred Shares as
to dividend rights and rights upon liquidation, winding up or dissolution.
Except as provided below, holders of the Senior Preferred Stock have no voting
rights. If at any time the Company shall have failed to pay all accrued and
unpaid dividends on the Senior Preferred Stock when due, the Company may not pay
dividends on, or make certain other payments with respect to, the New Preferred
Shares or the Common Stock or any other series of stock ranking junior to the
Senior Preferred Stock. If, at the time of any annual meeting of the Company's
stockholders for the election of directors, the Company has failed to pay or
failed to authorize and declare and set aside for payment a quarterly dividend
on any series of Preferred Stock, including the Senior Preferred Shares, the
number of directors then constituting the Board of Directors will be increased
by at least two (if not already increased by two due to a default in preference
dividends), and the holders of the Senior Preferred Shares, voting together with
the holders of all other series of Preferred Stock as a single class, will be
entitled to elect such two additional directors to serve on the Board of
Directors at each such annual meeting.
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Power to Issue Additional Shares of Common Stock and Preferred Stock
The Company believes that the power of the Board of Directors to issue
additional authorized but unissued shares of Common Stock or Preferred Stock and
to classify or reclassify unissued shares of Common Stock or Preferred Stock and
thereafter to cause the Company to use such classified or reclassified shares of
stock will provide the Company with increased flexibility in structuring
possible future financings and acquisitions and in meeting other needs which
might arise. Except as set forth under "Description of New Preferred
Shares--Voting Rights," the additional shares of stock will be available for
issuance without further action by the Company's stockholders, unless such
action is required by applicable law or the rules of any stock exchange or
automated quotation system on which the Company's securities may be listed or
traded.
Restrictions on Ownership and Transfer
The Charter contains certain restrictions on the number of shares of
Preferred Stock that individual stockholders may directly or beneficially own.
For the Company to qualify, and to continue to qualify, as a REIT under the
Code, no more than 50% of the value of its outstanding shares of capital stock
may be owned, directly or indirectly, by five or fewer individuals (defined by
the Code to include certain entities) during the last half of a taxable year
(other than the first year) or during a proportionate part of a shorter taxable
year (the "Five or Fewer Test"). The Five or Fewer Test is applied using certain
consecutive ownership rules. The stock of the Company must also be beneficially
owned by 100 or more persons during at least 335 days of a taxable year (other
than the first year) or during a proportionate part of a shorter taxable year
(the "One Hundred Persons Test"). Absent the restrictions on the number of
shares of Preferred Stock that individual stockholders may acquire and own
(directly or indirectly), there would be a possibility that the Company might
fail the Five or Fewer Test. The Company issued the Senior Preferred Stock in
order to ensure compliance with the One Hundred Persons Test. The provisions of
the Senior Preferred Stock include a restriction that if any transfer of shares
of such stock would cause the shares of such series to be owned by fewer than
100 persons, such transfer shall be null and void and the intended transferee
will acquire no rights to the stock.
Subject to certain exceptions specified in the Charter, no natural
person or entity which is considered to be an individual under Section 542(a)(2)
of the Code is permitted to own (including shares deemed to be owned by virtue
of the relevant attribution provisions of the Code), more than 5% (the
"Ownership Limit") of any issued and outstanding class or series of Preferred
Stock. The Board of Directors may (but in no event will be required to), upon
receipt of a ruling from the IRS or an opinion of counsel satisfactory to it,
raise or waive the Ownership Limit with respect to a holder if such holder's
ownership will not then or in the future jeopardize the Company's status as a
REIT.
The Charter provides that shares of any class or series of Preferred
Stock owned, or deemed to be owned, by, or transferred to, a stockholder in
violation of the Ownership Limit, or which would otherwise cause the Company to
fail to qualify as a REIT (the "Excess Shares"),
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will automatically be transferred, by operation of law, to a trustee in trust
for the exclusive benefit of a charity to be named by the Company as of the day
prior to the day the prohibited transfer took place. Any distributions paid with
respect to such Excess Shares prior to the discovery of the prohibited transfer
or ownership are to be repaid by the original transferee to the Company and by
the Company to the trustee; subject to applicable law, any vote of the Excess
Shares while the Excess Shares were held by the original transferee prior to the
Company's discovery of the prohibited transfer shall be void ab initio and the
original transferee shall be deemed to have given its proxy to the trustee. In
liquidation, the original transferee's ratable share of the Company's assets
would be limited to the price paid by the original transferee for the Excess
Shares or, if no value was given, the price per share equal to the closing
market price on the date of the purported transfer. The trustee of the trust
shall promptly sell the Excess Shares to any person whose ownership thereof is
not prohibited, whereupon the interest of the trust shall terminate. Proceeds of
such sale shall be paid to the original transferee up to its purchase price (or,
if the original transferee did not purchase the shares, the value on the date of
the purported transfer) and any remaining proceeds shall be paid to the
beneficiary of the trust.
The constructive ownership rules of the Code are complex and may cause
Preferred Stock owned, directly or indirectly, by a group of related individuals
and/or entities to be deemed to be constructively owned by a particular
individual or entity. As a result, the acquisition or ownership of less than 5%
of a class or series of issued and outstanding Preferred Stock (or the
acquisition or ownership of an interest in an entity that owns shares of such
series of Preferred Stock) by an individual or entity could cause that
individual or entity (or another individual or entity) to own constructively in
excess of 5% of such class or series of Preferred Stock, and thus subject such
stock to the applicable Ownership Limit. Direct or constructive ownership in
excess of the Ownership Limit would cause ownership of the shares in excess of
the limit to be transferred to the trustee.
The Ownership Limit will not be automatically removed even if the REIT
Provisions (as defined herein) are changed so as to eliminate any ownership
concentration limitation or if the ownership concentration limitation is
increased. The foregoing restrictions on transferability and ownership will not
apply, however, if the Board of Directors determines that it is no longer in the
best interests of the Company to attempt to qualify, or to continue to qualify,
as a REIT.
The Charter requires that any person who beneficially owns 0.5% (or
such lower percentage as may be required by the Code or the Treasury
Regulations) of the outstanding shares of any class or series of Preferred Stock
must provide certain information to the Company within 30 days of June 30 and
December 31 of each year. In addition, each such stockholder shall upon demand
be required to disclose to the Company in writing such information as the
Company may request in order to determine the effect, if any, of such
stockholder's actual and constructive ownership on the Company's status as a
REIT and to ensure compliance with the Ownership Limit.
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Super-Majority Director Approval
The Charter requires approval by two-thirds of the Board of Directors
in order for the Company to file a voluntary petition of bankruptcy.
Business Combinations
Under MGCL, certain "business combinations" (including a merger,
consolidation, share exchange, or, in certain circumstances, an asset transfer
or issuance or reclassification of equity securities) between a Maryland
corporation and any person who beneficially owns, directly or indirectly, 10% or
more of the voting power of the corporation's shares or an affiliate of the
corporation who, at any time within the two-year period prior to the date in
question, was the beneficial owner of 10% or more of the voting power of the
then outstanding voting stock of the corporation (an "Interested Stockholder")
or an affiliate of such an Interested Stockholder are prohibited for five years
after the most recent date on which the Interested Stockholder becomes an
Interested Stockholder. Thereafter, any such business combination must be (i)
approved by the board of directors of such corporation and (ii) approved by the
affirmative vote of at least (a) 80% of the votes entitled to be cast by holders
of outstanding voting shares of the corporation and (b) two-thirds of the votes
entitled to be cast by holders of voting shares other than voting shares held by
the Interested Stockholder with whom (or with whose affiliate) the business
combination is to be effected, unless, among other conditions, the corporation's
common stockholders receive a minimum price (as defined in the statute) for
their shares and the consideration is received in cash or in the same form as
previously paid by the Interested Stockholder for its shares. These provisions
of the MGCL do not apply, however, to business combinations that are approved or
exempted by the board of directors of the corporation prior to the time that the
Interested Stockholder becomes an Interested Stockholder. The Bank beneficially
owns more than 10% of the Company's voting shares and would, therefore, together
with its affiliates, be subject to the business combination provision of the
MGCL. However, pursuant to the statute, the Company has exempted any business
combinations involving the Bank and any present or future affiliate thereof and,
consequently, the five-year prohibition and the super-majority vote requirements
will not apply to business combinations between any of them and the Company. As
a result, the Bank and any present or future affiliate thereof may be able to
enter into business combinations with the Company that may not be in the best
interest of its stockholders without compliance by the Company with the
super-majority vote requirements and the other provisions of the statute.
Control Share Acquisitions
The MGCL provides that "control shares" of a Maryland corporation
acquired in a "control share acquisition" have no voting rights except to the
extent approved by a vote of two-thirds of the votes entitled to be cast by
stockholders, excluding shares owned by the acquiror and officers and directors
who are employees of the corporation. "Control shares" are shares which, if
aggregated with all other shares previously acquired which the person is
entitled to vote, would entitle the acquiror to vote (i) 20% or more but less
than one-third; (ii) one-third or
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more but less than a majority; or (iii) a majority of the outstanding shares.
Control shares do not include shares that the acquiring person is entitled to
vote on the basis of prior stockholder approval. A "control share acquisition"
means the acquisition of control shares subject to certain exemptions.
A person who has made or proposes to make a control share acquisition,
upon satisfaction of certain conditions (including an undertaking to pay
expenses), may compel the board of directors of the corporation to call a
special meeting of stockholders to be held within 50 days of demand to consider
the voting rights of the shares. If no request for a meeting is made, the
corporation may itself present the question at any stockholders meeting.
If voting rights are not approved at the meeting or if the acquiring
person does not deliver an acquiring person statement as required by the
statute, then, subject to certain conditions and limitations, the corporation
may redeem any or all of the control shares (except those for which voting
rights have previously been approved) for fair value determined, without regard
to the absence of voting rights for the control shares, as of the date of the
last control share acquisition by the acquiror or of any meeting of stockholders
at which the voting rights of such shares are considered and not approved. If
voting rights for control shares are approved at a stockholders meeting and the
acquiror becomes entitled to vote a majority of the shares entitled to vote, all
other stockholders may exercise appraisal rights. The fair value of the shares
as determined for purposes of such appraisal rights may not be less than the
highest price per share paid by the acquiror in the control share acquisition.
The control share acquisition statute does not apply to shares acquired
in a merger, consolidation or share exchange if the corporation is a party to
the transaction or to acquisitions approved or excepted by the charter or bylaws
of the corporation prior to a control share acquisition.
The Bylaws of the Company contain a provision exempting from the
control share statute any shares of stock owned by the Bank or any affiliate of
the Bank.
Form, Denomination, Book-Entry Procedures and Transfer
The New Preferred Shares will be issued only as fully registered
securities registered in the name of Cede & Co. (as nominee for The Depositary
Trust Company ("DTC")). One or more fully registered global New Preferred Share
certificates (the "Global Certificate") representing the New Preferred Shares
exchanged for Old Preferred Shares will be deposited with DTC for credit to an
account of a direct or indirect participant in DTC as described below.
Except as set forth below, the Global Certificate may be transferred,
in whole and not in part, only to another nominee of DTC or to a successor of
DTC or its nominee, and such transfer shall be effective only when reflected in
the securities register maintained by or on behalf of the Company. Beneficial
interests in the Global Certificate may not be exchanged for the New Preferred
Shares in certificated form.
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Depositary Procedures
DTC has advised the Company that DTC is a limited-purpose trust company
created to hold securities for its participating organizations (collectively,
the "Participants") and to facilitate the clearance and settlement of
transactions in those securities between Participants through electronic
book-entry changes in accounts of its Participants. The Participants include
securities brokers and dealers (including the Initial Purchaser), banks, trust
companies, clearing corporations and certain other organizations. Access to
DTC's system is also available to other entities such as banks, brokers, dealers
and trust companies that clear through or maintain a custodial relationship with
a Participant, either directly or indirectly (collectively, the "Indirect
Participants"). Persons who are not Participants may beneficially own securities
held by or on behalf of DTC only through the Participants or the Indirect
Participants. The ownership interest and transfer of ownership interest of each
actual purchaser of each security held by or on behalf of DTC are recorded on
the records of the Participants and Indirect Participants.
DTC has also advised the Company that, pursuant to procedures
established by it, (i) upon deposit of the Global Certificate, DTC will credit
the accounts of Participants designated by the Exchange Agent with portions
of the liquidation preference of the Global Certificate and (ii) ownership of
such interests in the Global Certificate will be shown on, and the transfer of
ownership thereof will be effected only through, records maintained by DTC (with
respect to the Participants) or by the Participants and the Indirect
Participants (with respect to other owners of beneficial interests in the Global
Certificate).
Investors in the Global Certificate may hold their interests therein
directly through DTC if they are participants in such system, or indirectly
through organizations which are participants in such system. All interests in
the Global Certificate may be subject to the procedures and requirements of DTC.
The laws of some states require that certain persons take physical delivery in
certificated form of securities that they own. Consequently, the ability to
transfer beneficial interests in the Global Certificate to such persons will be
limited to that extent. Because DTC can act only on behalf of Participants,
which in turn act on behalf of Indirect Participants and certain banks, the
ability of a person having beneficial interests in the Global Certificate to
pledge such interests to persons or entities that do not participate in the DTC
system, or otherwise take actions in respect of such interests, may be affected
by the lack of a physical certificate evidencing such interests. For certain
other restrictions on the transferability of the New Preferred Shares, see
"Certificated New Preferred Shares."
Except as described below, owners of interests in the Global
Certificate will not have New Preferred Shares registered in their name, will
not receive physical delivery of New Preferred Shares in certificated form and
will not be considered the registered owners or holders thereof for any purpose.
Payments in respect of the Global Certificate registered in the name of
DTC or its nominee will be payable to DTC in its capacity as the registered
holder. The transfer agent will treat the persons in whose names the New
Preferred Shares, including the Global Certificate, are
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registered as the owners thereof for the purpose of receiving such payments and
for any and all other purposes whatsoever. Consequently, neither the transfer
agent nor any agent thereof has or will have any responsibility or liability for
(i) any aspect of DTC's records or any Participant's or Indirect Participant's
records relating to or payments made on account of beneficial ownership
interests in the Global Certificate, or for maintaining, supervising or
reviewing any of DTC's records or any Participant's or Indirect Participant's
records relating to the beneficial ownership interests in the Global Certificate
or (ii) any other matter relating to the actions and practices of DTC or any of
its Participants or Indirect Participants. DTC has advised the Company that its
current practice, upon receipt of any payment in respect of securities such as
the New Preferred Shares, is to credit the accounts of the relevant Participants
with the payment on the payment date, in amounts proportionate to their
respective holdings in liquidation preference of beneficial interests in the
relevant security as shown on the records of DTC unless DTC has reason to
believe it will not receive payment on such payment date. Payments by the
Participants and the Indirect Participants to the beneficial owners of New
Preferred Shares will be governed by standing instructions and customary
practices and will be the responsibility of the Participants or the Indirect
Participants and will not be the responsibility of DTC, the transfer agent, or
the Company. Neither the Company nor the transfer agent will be liable for any
delay by DTC or any of its Participants in identifying the beneficial owners of
the New Preferred Shares, and the Company and the transfer agent may
conclusively rely on and will be protected in relying on instructions from DTC
or its nominee for all purposes.
Secondary market trading activity in interests in the Global
Certificates will settle in immediately available funds, subject in all cases to
the rules and procedures of DTC and its participants. Transfers between
Participants in DTC will be effected in accordance with DTC's procedures, and
will be settled in same-day funds.
DTC has advised the Company that it will take any action permitted to
be taken by a holder of New Preferred Shares only at the direction of one or
more Participants to whose account with DTC interests in the Global Certificate
are credited and only in respect of such portion of the liquidation preference
of the New Preferred Shares as to which such Participant or Participants has or
have given such direction.
The information in this section concerning DTC and its book-entry
systems has been obtained from sources that the Company believes to be reliable,
but the Company does not take responsibility for the accuracy thereof.
Although DTC has agreed to the foregoing procedures to facilitate
transfers of interest in the Global Certificates among participants in DTC, they
are under no obligation to perform or to continue to perform such procedures,
and such procedures may be discontinued at any time. Neither the Company nor the
transfer agent will have any responsibility for the performance by DTC or its
participants or indirect participants of their respective obligations under the
rules and procedures governing their operations.
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Certificated New Preferred Shares
The Global Certificate is exchangeable for New Preferred Shares in
registered certificated form if (i) DTC (x) notifies the Company that it is
unwilling or unable to continue as Depositary for the Global Certificate and the
Company thereupon fails to appoint a successor Depositary within 90 days or (y)
has ceased to be a clearing agency registered under the Exchange Act or (ii) the
Company in its sole discretion elects to cause the issuance of the New Preferred
Shares in certificated form. In all cases, certificated New Preferred Shares
delivered in exchange for the Global Certificate or beneficial interests therein
will be registered in the names, and issued in any approved denominations,
requested by or on behalf of the Depositary (in accordance with its customary
procedures).
UNITED STATES FEDERAL INCOME TAX CONSIDERATIONS
The following summary of the material United States federal income tax
considerations with respect to the Exchange Offer is for general information
only and is not tax advice. The discussion set forth below, to the extent that
it constitutes a summary of legal matters or legal conclusions, has been
reviewed by Shearman & Sterling, and it is such firm's opinion that such
discussion is accurate in all material respects. In rendering such opinion,
Shearman & Sterling has relied on Desjardins Ducharme Stein Monast, with respect
to certain matters of Quebec law, Osler Hoskin & Harcourt, with respect to
certain matters of Ontario law, and Conyers Dill & Pearman, with respect to
certain matters of Bermuda law. The discussion below is based on the Internal
Revenue Code of 1986, as amended (the "Code"), existing and proposed Treasury
Regulations issued thereunder, and administrative and judicial interpretations
thereof, all as of the date hereof and all of which are subject to change,
possibly with retroactive effect. The discussion below does not address all
aspects of taxation that may be relevant in the particular circumstances of each
stockholder or to certain types of stockholders (including insurance companies,
tax-exempt entities, financial institutions or broker-dealers persons that hold
stock in the Company other than as a capital asset, foreign corporations and
persons who are not citizens or residents of the United States, except to the
extent discussed) subject to special treatment under the United States federal
income tax laws.
EACH PROSPECTIVE EXCHANGING STOCKHOLDER IS URGED TO CONSULT HIS OR HER
TAX ADVISOR REGARDING THE SPECIFIC TAX CONSEQUENCES OF THE EXCHANGE OFFER,
OWNERSHIP AND SALE OF THE NEW PREFERRED SHARES AND OF THE COMPANY'S ELECTION TO
BE TAXABLE AS A REAL ESTATE INVESTMENT TRUST, INCLUDING THE UNITED STATES
FEDERAL, STATE, LOCAL, FOREIGN, AND OTHER TAX CONSEQUENCES OF SUCH PURCHASE,
OWNERSHIP, SALE AND ELECTION AND OF POTENTIAL CHANGES IN APPLICABLE TAX LAWS.
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Tax Impact of the Exchange Offer
The Exchange Offer will not have a United States federal income tax
impact.
Qualification of the Company as a REIT
General. The Company will elect to be taxable as a REIT under sections
856 through 860 of the Code and the applicable Treasury Regulations (the "REIT
Requirements" or the "REIT Provisions"), commencing with its taxable year ending
December 31, 1997. The Company believes that, commencing with its taxable year
ending December 31, 1997, it will be owned and organized and will operate in
such a manner as to qualify for taxation as a REIT. While the Company intends to
continue to operate in such a manner, no assurance can be given that it will
operate in a manner so as to qualify or remain qualified as a REIT.
The REIT Requirements are technical and complex. The following
discussion sets forth only the material aspects of those requirements. This
summary is qualified in its entirety by the applicable Code provisions, rules
and regulations promulgated thereunder, and administrative and judicial
interpretations thereof.
In the opinion of Shearman & Sterling, commencing with the Company's
taxable year ending December 31, 1997, the Company will be organized in
conformity with the requirements for qualification as a REIT, and its proposed
method of operation will enable it to meet the requirements for qualification
and taxation as a REIT under the Code. However, no transaction closely
comparable to that contemplated herein has been the subject of any
administrative pronouncement or judicial decision and this opinion is based on
certain factual assumptions relating to the organization and operation of the
Company and is conditioned upon certain representations made by the Company as
to factual matters, such as the organization and expected manner of operation of
the Company. In addition, this opinion is based upon the factual representations
of the Company concerning its business and Mortgage Assets set forth in this
Offering Memorandum and certain legal opinions provided by Canadian and
Bermudian counsel to the Bank. Such qualification and taxation as a REIT,
moreover, depends upon the Company's ability to meet, through actual annual
operating results, distribution levels, diversity of stock ownership and the
REIT Requirements discussed below, the satisfaction of which will not be
reviewed by Shearman & Sterling on a continuing basis. No assurance can be given
that the actual results of the Company's operation for any one taxable year will
satisfy such requirements. See "Tax Risks Adverse Consequences of Failure to
Qualify as a REIT."
There can be no assurance that the Company will continue to qualify as
a REIT in any particular taxable year, given the highly complex nature of the
rules governing REITs, the ongoing importance of factual determinations, and the
possibility of future changes in the circumstances of the Company. If the
Company were not to qualify as a REIT in any particular year, it would be
subject to United States federal income tax as a regular, domestic corporation
and its stockholders would be subject to tax in the same manner as stockholders
of such a corporation. In this event, the Company would likely be subject to a
substantial United States
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federal income tax liability in respect of each taxable year that it fails to
qualify as a REIT and the income available for distribution to the holders of
the New Preferred Shares could be significantly reduced or eliminated.
The following is a brief summary of certain of the technical
requirements that the Company must meet on an ongoing basis in order to qualify,
and remain qualified, as a REIT under the Code:
Stock Ownership Tests
The capital stock of the Company must be held by at least 100 persons
during approximately 90% or more of the taxable year and no more than 50% of the
value of such capital stock may be owned, directly or indirectly, by five or
fewer individuals at all times during the last half of the taxable year. Under
the Code, certain tax-exempt entities, such as private foundations and certain
unemployment compensation trusts, are treated as individuals for purposes of the
latter test. These stock ownership requirements must be satisfied in the
Company's second taxable year and in each subsequent taxable year. The Charter
provides restrictions regarding the transfer of the Company's shares in order to
aid in meeting the stock ownership requirements. See "Description of Capital
Stock Restrictions on Ownership and Transfer." The Company has also issued
shares of Senior Preferred Stock to meet the 100 person ownership requirement
for REIT status.
Asset Tests
The Company must generally meet the following asset tests (the "REIT
Asset Tests") at the close of each quarter of each taxable year:
(a) at least 75% of the value of the Company's total assets
must consist of Qualified REIT Real Estate Assets, Government
securities, cash, and cash items (the "75% Asset Test"); and
(b) not more than 25% of the Company's total assets may
consist of securities other than those taken into account for purposes
of the 75% Asset Test and, of those securities, (i) the value of the
securities of any one issuer (other than another REIT) may not exceed
5% of the value of the Company's total assets and, (ii) the Company may
not own more than 10% of the outstanding voting securities of any such
issuer.
The Company expects that the Initial Mortgage Assets will be a
Qualified REIT Real Estate Asset. In addition, the Company does not expect that
the value of any security (other than a Qualified REIT Real Estate Asset) of any
one entity would ever exceed 5% of the Company's total assets, and the Company
does not expect to own more than 10% of any one issuer's voting securities.
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Gross Income Tests
The Company must generally meet the following gross income tests (the
"REIT Gross Income Tests") for each taxable year.
(a) at least 75% of the Company's gross income must be derived
from certain specified sources including interest on obligations
secured by mortgages on real property, gain from the disposition of
Qualified REIT Real Estate Assets or "qualified temporary investment
income" (i.e., income derived from "new capital" within one year of the
receipt of such capital) (the "75% Gross Income Test"); and
(b) at least 95% of the Company's gross income must consist of
income qualifying for the 75% Gross Income Test, dividends, interest,
and gains from the sale of stock or other securities (including certain
interest rate swap and cap agreements entered into to hedge variable
rate debt incurred to acquire Qualified REIT Real Estate Assets) not
held for sale in the ordinary course of business (the "95% Gross Income
Test").
The Company intends to maintain its REIT status by carefully monitoring
its income, including income from sales of Mortgage Assets, to comply with the
REIT Gross Income Tests. Under certain circumstances, such as an unanticipated
decrease in the qualifying income of the Company, which may result in the
Company's nonqualifying income exceeding 5% of its gross income, the Company may
be unable to comply with certain of the REIT Gross Income Tests. See "Taxation
of the Company" for a discussion of the tax consequences of a failure to comply
with the REIT Gross Income Tests.
Distribution Requirement
The Company must generally distribute dividends (other than capital
gain dividends) to its stockholders in an amount at least equal to (A) the sum
of (i) 95% of the Company's REIT taxable income (which is defined generally as
the taxable income of the Company computed without regard to the dividends paid
deduction and the Company's net capital gain) plus (ii) 95% of the net income
(after tax), if any, from foreclosure property, minus (B) the sum of certain
items of noncash income. Such distributions must be paid in the taxable year to
which they relate or in the following taxable year if declared before the
Company timely files its tax return for such year and if paid on or before the
first regular dividend payment after such declaration.
The Company intends to monitor on an ongoing basis its compliance with
the REIT requirements described above. In order to maintain its REIT status, the
Company will be required to limit the types of assets that it might otherwise
acquire, or hold certain assets at times when it might otherwise have determined
that the sale or other disposition of such assets would be desirable.
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Taxation of the Company
In any year in which the Company qualifies as a REIT, the Company will
generally not be subject to United States federal income tax on that portion of
its REIT taxable income or capital gain which is distributed to its
stockholders. The Company will, however, be subject to United States federal
income tax at normal corporate income tax rates upon any undistributed REIT
taxable income or capital gain.
Notwithstanding its qualification as a REIT, the Company may be subject
to tax in certain circumstances. If the Company fails to satisfy either the 75%
Gross Income Test or the 95% Gross Income Test, but nonetheless maintains its
qualification as a REIT because certain other requirements are met, it will
generally be subject to a 100% tax on the greater of the amount by which the
Company fails either the 75% Gross Income Test or the 95% Gross Income Test
(multiplied by a fraction intended to reflect the Company's profitability). The
Company will also be subject to a tax of 100% on net income derived from any
"prohibited transaction" and, if the Company has (i) net income from the sale or
other disposition of "foreclosure property" which is held primarily for sale to
customers in the ordinary course of business or (ii) other non-qualifying net
income from foreclosure property, it will be subject to United States federal
income tax on such income at the highest corporate income tax rate. In addition,
if the Company fails to distribute during each calendar year at least the sum of
(i) 85% of its REIT ordinary income for such year, (ii) 95% of its REIT capital
gain net income for such year, and (iii) any undistributed taxable income from
prior periods, the Company would be subject to a 4% United States federal excise
tax on the excess of such required distribution over the amounts actually
distributed during the year. The Company may also be subject to the corporate
alternative minimum tax, as well as other taxes in certain situations not
presently contemplated.
If the Company fails to qualify as a REIT in any taxable year and
certain relieving provisions of the Code do not apply, the Company would be
subject to United States federal income tax (including any applicable
alternative minimum tax) in the same manner as a regular, domestic corporation.
Distributions to stockholders in any year in which the Company fails to qualify
as a REIT would not be deductible by the Company and would generally not be
required to be made under the Code. Further, unless entitled to relief under
certain provisions of the Code, the Company would be disqualified from
re-electing REIT status for the four taxable years following the year during
which it became disqualified.
Tax Treatment of Automatic Exchange
Upon the occurrence of an Exchange Event, the outstanding New Preferred
Shares will be automatically exchanged on a one-for-one basis for the Bank
Preferred Shares. See "Description of New Preferred Shares--Automatic Exchange."
The Automatic Exchange will be a taxable exchange with respect to which each
holder of the New Preferred Shares will recognize a gain or loss, as the case
may be, measured by the difference between the adjusted basis of such holder in
its New Preferred Shares and the fair market value of the Bank Preferred Shares
received in the Automatic Exchange. Assuming that such holder's New Preferred
Shares were
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held as capital assets prior to the Automatic Exchange, any such gain or loss
will be capital gain or loss. The basis of a holder in the Bank Preferred Shares
received in the Automatic Exchange will be their fair market value at the time
of the Automatic Exchange.
Taxation of New Preferred Shares
Distributions (including constructive distributions) made to holders of
the New Preferred Shares other than tax-exempt entities, will generally be
subject to United States federal income tax as ordinary income to the extent of
the Company's current and accumulated earnings and profits as determined for
United States federal income tax purposes. If the amount distributed to a holder
of the New Preferred Shares exceeds the holder's allocable share of such
earnings and profits, the excess will be treated first as a nontaxable return of
capital to the extent of such holder's adjusted basis in the New Preferred
Shares and, thereafter, as a gain from the sale or exchange of a capital asset.
Distributions designated by the Company as capital gain dividends will
generally be subject to tax as long-term capital gain to the extent that the
distribution does not exceed the Company's actual net capital gain for the
taxable year (although corporations may be required to treat up to 20% of
certain capital gain dividends as ordinary income). Distributions by the
Company, whether characterized as ordinary income or as capital gain, are not
eligible for the corporate dividends received deduction. In the event that the
Company realizes a loss for a taxable year, holders of the New Preferred Shares
will not be permitted to deduct any share of that loss. Future Treasury
Regulations may require that holders of the New Preferred Shares take into
account, for purposes of computing their individual alternative minimum tax
liability, certain tax preference items of the Company.
Dividends declared during the last quarter of a calendar year and
actually paid during January of the following year will generally be treated as
having been received by the holders of New Preferred Shares on December 31st of
the year in which the dividends were declared and not on the date actually
received. In addition, the Company may elect to treat certain other dividends
distributed after the close of a taxable year as having been paid during such
taxable year, but holders of the New Preferred Shares will be treated as having
received such dividends in the taxable year in which the distribution is made.
Upon a sale or other disposition of the New Preferred Shares, a holder
of the New Preferred Shares will generally recognize a capital gain or loss in
an amount equal to the difference between the amount realized and such holder's
adjusted basis in such stock, which gain or loss will be long-term if the stock
has been held for more than the applicable holding period. Any loss on the sale
or exchange of the New Preferred Shares held by the holder thereof for six
months or less will generally be treated as a long-term capital loss to the
extent of any long-term capital gain dividends received by such holder.
In any year in which the Company does not qualify as a REIT,
distributions made to its stockholders would be taxable in the same manner
discussed above, except that (i) no
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distributions could be designated as capital gain dividends, (ii) distributions
would be eligible for the corporate dividends received deduction, (iii) the
excess inclusion income rules would not apply, and (iv) stockholders would not
receive any share of the Company's tax preference items. In such event, however,
the Company would likely be subject to a substantial United States federal
income tax liability, and the amount of income available for distribution to its
stockholders (including holders of the New Preferred Shares) would be
significantly reduced or eliminated.
The Company is required under Treasury Regulations to demand annual
written statements from the record holders of designated percentages of its
stock disclosing the actual and constructive ownership of such stock and to
maintain permanent records showing the information it has received as to the
actual and constructive ownership of such stock and a list of those persons
failing or refusing to comply with such demand.
Taxation of Tax-Exempt Entities
Subject to the discussion below regarding a "pension-held REIT," a
tax-exempt holder of the New Preferred Shares will generally not be subject to
tax on distributions from the Company or gain realized on the sale of the New
Preferred Shares, provided that such holder has not incurred indebtedness to
purchase or hold its New Preferred Shares, that such shares are not otherwise
used in an unrelated trade or business of such holder, and that the Company,
consistent with its present intent, does not hold a residual interest in a REMIC
that gives rise to "excess inclusion" income as defined under section 860E of
the Code.
If a qualified pension trust (i.e., any pension or other retirement
trust that qualifies under section 401(a) of the Code) holds more than 10% by
value of the interests in a "pension-held REIT" at any time during a taxable
year, a substantial portion of the dividends paid to the qualified pension trust
by such REIT may constitute UBTI. For these purposes, a "pension-held REIT" is
any REIT (i) that would not have qualified as a REIT but for the provisions of
the Code which look through qualified pension trust stockholders in determining
ownership of stock of the REIT and (ii) in which at least one qualified pension
trust holds more than 25% by value of the interests in the REIT or one or more
qualified pension trusts (each owning more than a 10% interest by value in the
REIT) hold in the aggregate more than 50% by value of the interests in the REIT.
Assuming compliance with the Ownership Limit described in "Description of
Capital Stock Restrictions on Ownership and Transfer," it is unlikely that
pension plans will accumulate sufficient stock to cause the Company to be
treated as a pension-held REIT.
Distributions to certain types of stockholders exempt from United
States federal income taxation under sections 501(c)(7), (c)(9), (c)(17), and
(c)(20) of the Code may also constitute UBTI, and such prospective investors
should consult their tax advisors concerning the applicable "set aside" and
reserve requirements.
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State and Local Taxes
The Company and its stockholders may be subject to state or local
taxation in various jurisdictions, including those in which it or they transact
business or reside. The state and local tax treatment of the Company and its
stockholders may not conform to the United States federal income tax
consequences discussed above. Consequently, prospective holders of New Preferred
Shares should consult their tax advisors regarding the effect of state and local
tax laws on an investment in the New Preferred Shares.
Taxation of Bank Preferred Shares
Dividends on the Bank Preferred Shares (including any Canadian
nonresident withholding tax with respect thereto) generally will be includible
in the gross income of a holder of the Bank Preferred Shares as ordinary income
at the time such dividends are received. Dividends on the Bank Preferred Shares
will be foreign source income and, subject to certain limitations and
conditions, a holder of the Bank Preferred Shares will be eligible to claim a
foreign tax credit (or, alternatively, a deduction) in respect of any Canadian
nonresident withholding tax imposed thereon. Dividends on the Bank Preferred
Shares will not be eligible for a corporate dividends received deduction.
Holders of the Bank Preferred Shares will generally recognize gain or
loss upon the sale or exchange of the Bank Preferred Shares equal to difference
between the amount realized on the sale or exchange and the holder's adjusted
basis in the Bank Preferred Shares. Any gain realized on the sale or exchange of
the Bank Preferred Shares will generally be U.S. source.
The Bank does not believe that it is currently, for United States
federal income tax purposes, a passive foreign investment company (a "PFIC"),
and does not expect to become a PFIC in the future. If, however, the Bank does
become a PFIC, holders of the Bank Preferred Shares could be subject to
additional United States federal income tax with respect to certain
distributions on, or gains from the disposition of, the Bank Preferred Shares.
Certain United States Federal Income Tax Considerations Applicable to Foreign
Holders
The following discussion summarizes certain United States federal
income tax consequences of the acquisition, ownership and disposition of the New
Preferred Shares by an exchanging stockholder that, for United States federal
income tax purposes, is not a "United States person" (a "Non-United States
Holder"). For purposes of this discussion, a "United States person" means: a
citizen or individual resident of the United States; a corporation, partnership,
or other entity created or organized in or under the laws of the United States
or of any political subdivision thereof; an estate the income of which is
includible in gross income for United States federal income tax purposes
regardless of its source; or a trust if both: (i) a United States court is able
to exercise primary supervision over the administration of the trust, and (ii)
one or more United States trustees or fiduciaries have the authority to control
all substantial decisions of the trust. This discussion is necessarily of a
general nature and does not consider any specific facts
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or circumstances that may apply to a particular Non-United States Holder.
Prospective investors are urged to consult their tax advisors regarding the
United States federal tax consequences of acquiring, holding and disposing of
the New Preferred Shares as well as any tax consequences that may arise under
the laws of any foreign, state, local or other taxing jurisdiction.
Dividends. Dividends paid by the Company out of current and accumulated
earnings and profits, as determined for United States federal income tax
purposes, to a Non-United States Holder will generally be subject to withholding
of United States federal income tax at the rate of 30%, unless reduced or
eliminated by an applicable tax treaty or unless such dividends are treated as
effectively connected with a United States trade or business of the Non-United
States Holder. Distributions paid by the Company in excess of its current and
accumulated earnings and profits will be treated first as a nontaxable return of
capital to the extent of the holder's adjusted basis in his New Preferred Shares
and, thereafter, as gain from the sale or exchange of a capital asset as
described " Gain on Disposition." If it cannot be determined at the time a
distribution is made whether such distribution will exceed the current and
accumulated earnings and profits of the Company, the distribution will be
subject to withholding at the same rate as dividends. Amounts so withheld,
however, will be refundable or creditable against the Non-United States Holder's
United States federal income tax liability if it is subsequently determined that
such distribution was, in fact, in excess of the current and accumulated
earnings and profits of the Company. If the receipt of a dividend is treated as
being effectively connected with the conduct of a United States trade or
business by a Non-United States Holder, the dividend received by such holder
will be subject to United States federal income tax in the same manner as United
States persons generally (and, in the case of a corporate holder, possibly the
branch profits tax).
Gain on Disposition. A Non-United States Holder will generally not be
subject to United States federal income tax on gain recognized on a sale or
other disposition of the New Preferred Shares unless (i) the gain is effectively
connected with the conduct of a United States trade or business by the
Non-United States Holder, (ii) in the case of a Non-United States Holder who is
a nonresident alien individual and holds the New Preferred Shares as a capital
asset, such holder is present in the United States for 183 or more days in the
taxable year and certain other requirements are met, or (iii) the New Preferred
Shares constitute "United States real property interests" ("USRPIs"). The
Company does not believe that the New Preferred Shares are, or are likely to
become, USRPIs. Gain that is effectively connected with the conduct of a United
States trade or business by a Non-United States Holder will be subject to United
States federal income tax in the same manner as United States persons generally
(and, in the case of a corporate holder, possibly the branch profits tax) but
will not be subject to withholding. Non-United States Holders should consult
applicable treaties, which may provide for different rules.
Information Reporting and Backup Withholding
A holder of the New Preferred Shares may be subject to information
reporting and to backup withholding at a rate of 31% in respect of dividends on,
or proceeds from the sale or disposition of, the New Preferred Shares. Certain
holders of the New Preferred Shares (such as corporations and tax-exempt
entities) are not subject to backup withholding.
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Backup withholding is not an additional tax. Any amounts withheld under
the backup withholding rules from a payment to a holder of the New Preferred
Shares will generally be allowed as a refund or a credit against such holder's
United States federal income tax liability, provided that the required
information is furnished to the Internal Revenue Service.
CANADIAN FEDERAL INCOME TAX CONSIDERATIONS
In the opinion of Desjardins Ducharme Stein Monast, the following
summary describes, as of the date hereof, the material Canadian federal income
tax consequences that would generally be applicable to a holder of the Bank
Preferred Shares in the event that the New Preferred Shares of the Company are
exchanged for the Bank Preferred Shares pursuant to the Automatic Exchange. See
"Description of New Preferred Shares--Automatic Exchange." The discussion is
based on the assumption that the holder of the Bank Preferred Shares, for the
purpose of the Income Tax Act (Canada) (the "Income Tax Act") and at all
relevant times, is not a resident of Canada, deals at arm's length with the
Bank, does not use or hold and is not deemed to use or hold the Bank Preferred
Shares in carrying on a business in Canada and is not an insurer that carries on
an insurance business in Canada.
This summary is based on the current provisions of the Income Tax Act
and the regulations thereunder, our understanding of the current administrative
practices of Revenue Canada and all specific proposals to amend the Income Tax
Act and the regulations thereunder announced by the Minister of Finance prior to
the date hereof. This summary does not otherwise take into account any changes
in governing law, nor does it take into account tax legislation or
considerations of any province or territory of Canada or any jurisdiction other
than Canada.
This summary is of general nature only and is not intended to be, and
should not be interpreted as, legal or tax advice to any particular holder of
the Bank Preferred Shares. Holders of the New Preferred Shares are advised to
consult their own tax advisors with respect to their particular tax position.
Automatic Exchange
In the event of the Automatic Exchange, the exchange will not give rise
to any immediate Canadian income tax consequences to a holder of the New
Preferred Shares. The Bank Preferred Shares received pursuant to the Automatic
Exchange will have a cost, for Canadian tax purposes, equal to their fair market
value at the time of the Automatic Exchange, expressed in Canadian dollars.
Taxation of Dividends
Dividends paid on the Bank Preferred Shares to a non-resident of Canada
will be subject to Canadian withholding tax at the general rate of 25% or such
lesser rate as may be provided by an applicable income tax treaty. Pursuant to
the Canada-United States Income Tax Convention
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(1980) (the "Treaty"), dividends paid by the Bank to a holder of the Bank
Preferred Shares that is resident in the United States for purposes of the
Treaty would generally be subject to withholding tax at the rate of 15%.
Dividends paid to an "Exempt Organization," as defined in the Treaty, would
generally be exempt from Canadian withholding tax.
Disposition of Bank Preferred Shares
A disposition or deemed disposition of the Bank Preferred Shares by a
resident of the United States for purposes of the Treaty, will generally not
result in any Canadian income or capital gains taxes being payable by the
holder.
Redemption of Bank Preferred Shares
A redemption of the Bank Preferred Shares could result in a deemed
dividend to the holder, equal to the excess of the amount paid for the Bank
Preferred Shares over their paid-up capital. The "paid-up capital" would
generally be considered to be the fair market value of the New Preferred Shares
received by the Bank at the time of the Automatic Exchange. A deemed dividend
would be subject to Canadian withholding tax, as described above under "Taxation
of Dividends."
ERISA CONSIDERATIONS
The Employee Retirement Income Security Act of 1974, as amended
("ERISA"), and the Code, impose certain restrictions on (a) employee benefit
plans (as defined in Section 3(3) of ERISA) subject to Title I of ERISA, (b)
plans described in Section 4975(e)(1) of the Code, including individual
retirement accounts or Keogh plans, (c) any entities whose underlying assets
include "plan assets" under the Plan Asset Regulation (as defined below) (each a
"Plan") and (d) persons and entities who have certain specified relationships to
such Plans ("Parties-in-Interest" under ERISA and "Disqualified Persons" under
the Code). Moreover, based on the reasoning of the United States Supreme Court
in John Hancock Mutual Life Insurance Co. v. Harris Trust & Savings Bank, 114 S.
Ct. 517 (1993), an insurance company's general account may be deemed to include
assets of the Plans investing in the general account (e.g., through the purchase
of an annuity contract), and the insurance company might be treated as a
Party-in-Interest or Disqualified Person with respect to a Plan by virtue of
such investment. ERISA also imposes certain duties on persons who are
fiduciaries of Plans subject to ERISA, and ERISA and the Code prohibit certain
transactions between a Plan and Parties-in-Interest or Disqualified Persons with
respect to such Plan.
Status Under Plan Asset Regulations
The Department of Labor has issued a regulation (29 C.F.R. ss.
2510.3-101) concerning the definition of what constitutes the assets of a Plan
(the "Plan Asset Regulation"). The Plan Asset Regulation provides that, as a
general rule, the underlying assets and properties of
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corporations, partnerships, trusts and certain other entities in which a Plan
purchases an equity interest will be deemed for purposes of ERISA and Section
4975 of the Code to be assets of the investing Plan unless certain exceptions
apply. Under one such exception, the assets of such an entity are not considered
to be Plan assets where a Plan makes an investment in an equity interest that is
a "publicly-offered security." As described in more detail below, the Company
anticipates that the New Preferred Shares will, following the consummation of
the Exchange Offer or the effectiveness of a Shelf Registration Statement be
"publicly-offered securities" for purposes of the Plan Asset Regulation. Prior
to the consummation of the Exchange Offer or (if no Exchange Offer is
consummated) the effectiveness of a Shelf Registration Statement, however, the
New Preferred Shares will not be "publicly-offered securities" and, accordingly,
the assets of the Company may be treated as assets of a Plan that purchases the
New Preferred Shares.
Under the terms of the Plan Asset Regulation, if the Company were
deemed to hold plan assets by reason of a Plan's investment in the New Preferred
Shares, such plan assets would include an undivided interest in the assets held
by the Company including the Mortgage Assets. In such event, the persons
providing services, or exercising any discretionary authority or control, with
respect to the assets of the Company may become Parties-in-Interest or
Disqualified Persons with respect to such an investing Plan and may be subject
to the fiduciary responsibility provisions of Title I of ERISA (including the
general prohibition against maintaining the indicia of ownership of Plan assets
outside the jurisdiction of the U.S. district courts) and the prohibited
transaction provisions of ERISA and Section 4975 of the Code with respect to
transactions involving such assets. In this regard, if the person or persons
with discretionary responsibilities with respect to the Mortgage Assets were
affiliated with the Company, any such discretionary actions taken with respect
to such Mortgage Assets could be deemed to constitute a prohibited transaction
under ERISA or the Code (e.g., the use of such fiduciary authority or
responsibility in circumstances under which such persons have interests that may
conflict with the interests of the Plans for which they act and affect the
exercise of their best judgment as fiduciaries). In order to avoid such
prohibited transactions or other breaches of fiduciary duty, and to delineate
fiduciary responsibility appropriately, each investing Plan, by purchasing the
New Preferred Shares, will be deemed to have (i) directed the Company to invest
in the Initial Mortgage Assets (as well as the other assets held by the Company
and identified at the time of purchase) and (ii) in the event that the New
Preferred Shares are not treated as "publicly-offered securities" as of the date
on which the Exchange Offer is consummated or (if no Exchange Offer is
contemplated) a Shelf Registration Statement is declared effective, then during
the period commencing on such date and ending on the date on which the New
Preferred Shares become "publicly-offered securities," appointed the Independent
Fiduciary (an entity unaffiliated with and independent of the Bank and the
Company) as a fiduciary of such Plan to exercise any discretionary authority
reserved to the Company, to the extent that the duties of such entity involve
discretionary authority or control respecting transactions with the Bank or the
Bank's affiliates. The Independent Fiduciary will be identified by the Company
prior to any such transaction and will be subject to removal and replacement by
a majority of the holders of the New Preferred Shares.
The Company may from time to time invest the proceeds received in
connection with the repayment or disposition of the Initial Mortgage Assets, the
issuance of additional shares of
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Preferred Stock or additional capital contributions with respect to the Common
Stock. To the extent that the investment of such proceeds occurs prior to the
consummation of the Exchange Offer or (if no Exchange Offer is contemplated) the
effectiveness of a Shelf Registration Statement, such proceeds will be invested
in Canadian or U.S. government guaranteed, mortgage-backed certificates and
other Canadian or U.S. government obligations, which will be purchased on the
open market or from entities unaffiliated with the Bank or the Company. In
addition, in the event that the New Preferred Shares are not treated as
"publicly-offered securities" as of the date on which the Exchange Offer is
consummated or (if no Exchange Offer is contemplated) a Shelf Registration
Statement is declared effective, then during the period commencing on such date
and ending on the date on which the New Preferred Shares become
"publicly-offered securities," such proceeds may be invested in additional
Mortgage Assets, provided that, to the extent any such proceeds are invested in
Mortgage Assets in a transaction with the Bank or any Bank affiliate, any
discretionary authority reserved to the Company in respect of such transaction
will be exercised by the Independent Fiduciary.
Publicly-Offered Security Exception
For purposes of the Plan Asset Regulation, a "publicly-offered
security" is a security that is (a) "freely transferable," (b) part of a class
of securities that is "widely held," and (c) sold to the Plan as part of an
offering of securities to the public pursuant to an effective registration
statement under the Securities Act and part of a class of securities that is
registered under the Exchange Act within 120 days (or such later time as may be
allowed by the Commission) after the end of the fiscal year of the issuer during
which the offering of such securities to the public occurred. It is anticipated
that, in connection with the Exchange Offer, the New Preferred Shares will be
registered under the Securities Act and the Exchange Act within the time periods
specified in the Plan Asset Regulation.
The Plan Asset Regulation provides that a security is "widely held"
only if it is a part of the class of securities that is owned by 100 or more
investors independent of the issuer and of one another. A security will not fail
to be "widely held" because the number of independent investors falls below 100
subsequent to the initial offering as a result of events beyond the control of
the issuer. The Company anticipates that the New Preferred Shares will be
"widely held" upon the consummation of the Exchange Offer or (if no Exchange
Offer is contemplated) the effectiveness of a Shelf Registration Statement.
The Plan Asset Regulation provides that whether a security is "freely
transferable" is a factual question to be determined on the basis of all the
relevant facts and circumstances. The Plan Asset Regulation further provides
that when a security is part of an offering in which the minimum investment is
US$10,000 or less, as is expected to be the case with respect to the Exchange
Offer or a Shelf Registration Statement, certain restrictions ordinarily will
not, alone or in combination, affect the finding that such securities are
"freely transferable." The Company believes that any restrictions imposed on the
transfer of the New Preferred Shares following the consummation of the Exchange
Offer or (if no Exchange Offer is contemplated) the effectiveness of a Shelf
Registration Statement, will be limited to the restrictions on transfer
generally
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<PAGE>
permitted under the Plan Asset Regulation and are not likely to result in the
failure of the New Preferred Shares to be "freely transferable."
Exemptions from Prohibited Transactions
Any purchaser that is an insurance company using the assets of an
insurance company general account should note that the Small Business Job
Protection Act of 1996 added new Section 401(c) of ERISA relating to the status
of the assets of insurance company general accounts under ERISA and Section 4975
of the Code. Pursuant to Section 401(c), the Department of Labor is required to
issue final regulations (the "General Account Regulations") not later than
December 31, 1997 with respect to insurance policies issued on or before
December 31, 1998 that are supported by an insurer's general account. The
General Account Regulations are to provide guidance on which assets held by the
insurer constitute "Plan Assets" for purposes of the fiduciary responsibility
provisions of ERISA and Section 4975 of the Code. Section 401(c) also provides
that, except in the case of avoidance of the General Account Regulations and
actions brought by the Secretary of Labor relating to certain breaches of
fiduciary duties that also constitute breaches of state or federal criminal law,
until the date that is 18 months after the General Account Regulations become
final, no liability under the fiduciary responsibility and prohibited
transaction provisions of ERISA and Section 4975 of the Code may result on the
basis of a claim that the assets of the general account of an insurance company
constitute Plan Assets. The Plan Asset status of insurance company separate
accounts is unaffected by new Section 401(c) of ERISA, and separate account
assets continue to be treated as the assets of any such Plan invested in a
separate account except to the extent provided in the Plan Asset Regulation.
In addition, if the Bank, or in certain circumstances an obligor with
respect to a Mortgage Asset or other debt instrument held by the Company, is a
Party-in-Interest or Disqualified Person with respect to an investing Plan, such
Plan's investment could be deemed to constitute a transaction prohibited under
Title I of ERISA or Section 4975 of the Code (e.g., the extension of credit or
sale of property between a Plan and a Party-in-Interest or Disqualified Person).
Such transactions may, however, be subject to a statutory or administrative
exemption such as Prohibited Transaction Class Exemption ("PTCE") 90-1, which
exempts certain transactions involving insurance company pooled separate
accounts; PTCE 95-60, which exempts certain transactions involving insurance
company general accounts; PTCE 91-38, which exempts certain transactions
involving bank collective investment funds; PTCE 84-14, which exempts certain
transactions effected on behalf of a Plan by a "qualified professional asset
manager"; and PTCE 96-23, which exempts certain transactions effected on behalf
of a Plan by an "in-house asset manager"; or pursuant to any other available
exemption. Such exemptions may not, however, apply to all of the transactions
that could be deemed prohibited transactions in connection with such Plan's
investment.
Each exchanging stockholder will, by its exchange of Old Preferred
Shares for New Preferred Shares, be deemed to have represented and agreed that
either (i) no part of the assets to be used by it to acquire and hold such New
Preferred Shares constitutes the assets of any Plan
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<PAGE>
or (ii) one or more prohibited transaction statutory or class exemptions applies
such that the use of such assets to acquire and hold the New Preferred Shares
will not constitute a non-exempt prohibited transaction under ERISA or the Code.
Any Plan fiduciary that proposes to cause a Plan to acquire New Preferred Shares
should consult with its counsel with respect to the potential applicability of
ERISA and the Code to such investment and whether any exemption would be
applicable and determine on its own whether all conditions of such exemption or
exemptions have been satisfied such that the acquisition and holding of New
Preferred Shares by the purchaser Plan are entitled to the full exemptive relief
thereunder. Any such Plan fiduciary should also determine whether the exchange
of New Preferred Shares is permitted under the governing Plan instruments and is
appropriate for the Plan in view of the overall investment policy and the
composition and diversification of its portfolio.
Unrelated Business Taxable Income
Plan fiduciaries should also consider the consequences of holding more
than 10% of the New Preferred Shares if the Company is "predominantly held" by
qualified trusts. See "United States Federal Income Tax Considerations Treatment
of Tax-Exempt Entities."
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<PAGE>
RATINGS
The Old Preferred Shares are rated "a2" by Moody's Investors Service,
Inc. and "BBB+" by Standard & Poor's Ratings Services. A security rating is not
a recommendation to buy, sell or hold securities and may be subject to revision
or withdrawal at any time by the assigning rating organization. No person is
obligated to maintain any rating on the New Preferred Shares, and, accordingly,
there can be no assurance that the ratings assigned to the New Preferred Shares
upon exchange will not be lowered or withdrawn by the assigning rating
organization at any time thereafter.
PLAN OF DISTRIBUTION
Each broker-dealer that receives New Preferred Shares for its own
account pursuant to the exchange offer must acknowledge that it will deliver a
prospectus in connection with any resale of such New Preferred Shares. This
Prospectus, as it may be amended or supplemented from time to time, may be used
by a broker-dealer in connection with resales of New Preferred Shares received
in exchange for Old Preferred Shares where such Old Preferred Shares were
acquired as a result of market-making activities or other trading activities. To
the extent any such broker-dealer participates in the Exchange Offer, the
Company has agreed that for a period of up to six months after the consummation
of the Exchange Offer, it will make this Prospectus, as amended or supplemented,
available to such broker-dealer for use in connection with any such resale, and
will promptly send additional copies of this Prospectus and any amendment or
supplement to this Prospectus to any broker-dealer that requests such documents.
The Company will not receive any proceeds from any sale of New
Preferred Shares by broker-dealers. New Preferred Shares received by
broker-dealers for their own account pursuant to the Exchange Offer may be sold
from time to time in one or more transactions in the over-the-counter market, in
negotiated transactions, through the writing of options on the New Preferred
Shares or a combination of such methods of resale, at prevailing market prices
at the time of resale, at prices related to such prevailing market prices or at
negotiated prices. Any such resale may be made directly to purchasers or to or
through brokers or dealers who may receive compensation in the form of
commissions or concessions from any such broker-dealer or the purchasers or any
such New Preferred Shares. Any broker-dealer that resells New Preferred Shares
that were received by it for its own account pursuant to the Exchange Offer and
any broker or dealer that participates in a distribution of such New Preferred
Shares may be deemed to be an "underwriter" within the meaning of the Securities
Act and any profit on any such resale of New Preferred Shares and any
commissions or concessions received by any such persons may be deemed to be
underwriting compensation under the Securities Act. The Letter of Transmittal
states that, by acknowledging that it will deliver and by delivering a
prospectus, a broker-dealer will not be deemed to admit that it is an
"underwriter" within the meaning of the Securities Act.
The Company has agreed to pay certain expenses incident to the Exchange
Offer and will indemnify the holders of the Old Preferred Shares against certain
liabilities, including certain
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<PAGE>
liabilities that may arise under the Securities Act.
LEGAL MATTERS
The validity of the New Preferred Shares offered hereby will be passed
upon for the Company by Ballard Spahr Andrews & Ingersoll, Baltimore, Maryland,
with respect to certain matters governed by Maryland law.
---------------------------
100
<PAGE>
INDEX TO FINANCIAL STATEMENTS
Unaudited Interim Financial Statements
Balance Sheet............................................................F-2
Statement of Income......................................................F-3
Statement of Retained Earnings (Deficit).................................F-4
Statement of Changes in Financial Position...............................F-5
F-1
<PAGE>
BALANCE SHEET
as at September 30, 1997
(in dollars)
- --------------------------------------------------------------------------------
(Unaudited)
Assets
Cash $ 3,667,213
Hypothecation note with affiliated company 473,681,802
Accrued interest hypothecation note 3,042,708
-----------
$ 480,391,723
===========
Liabilities
Other liabilities
Accrued dividends $ 1,875,000
Income tax payable 471,307 $ 2,346,307
-------------
Equity
Preferred stock 300,000,000
Common stock 183,338,454
Accumulated deficit (5,293,038)
-----------
$ 480,391,723
===========
F-2
<PAGE>
STATEMENT OF INCOME
for the period from September 3, 1997 to September 30, 1997
(in dollars)
- --------------------------------------------------------------------------------
(Unaudited)
Interest income
Hypothecation note $ 3,042,708
Bank interest 10,561
------------
TOTAL $ 3,053,269
Expenses
Other Fees 0
------------
Income before income taxes 3,053,269
Income taxes 1,221,307
------------
NET INCOME $ 1,831,962
============
F-3
<PAGE>
STATEMENT OF RETAINED EARNINGS (DEFICIT)
For the period from September 3, 1997 to September 30, 1997
(in dollars)
- --------------------------------------------------------------------------------
(Unaudited)
Beginning of the period $ -
Net income 1,831,962
Expenses related to shares issued 6,000,000
Dividends on preferred shares net of $750,000 income taxes (1,125,000)
-----------
End of the period $ (5,293,038)
===========
F-4
<PAGE>
STATEMENT OF CHANGES IN FINANCIAL POSITION
For the period from September 3, 1997 to September 30, 1997
(in dollars)
- --------------------------------------------------------------------------------
(Unaudited)
OPERATING ACTIVITIES
Net income $ 1,831,962
Items note affecting cash:
accrued interest receivable (3,042,708)
accrued liabilities 2,346,307
income taxes charged to retained earnings 750,000
-----------
$ 1,885,561
===========
FINANCING ACTIVITIES
Issue of common stock $ 300,000,000
Issue of preferred stock 183,338,454
Expenses related to shares issued (6,000,000)
Dividends (1,875,000)
-----------
$ 475,463,454
===========
INVESTING ACTIVITIES
Hypothecation note, net of repayment $ 3,667,213
-----------
INCREASE IN CASH $ 3,667,213
Cash, at inception -
-----------
Cash at end of period $ 3,667,213
F-5
<PAGE>
FORM F-9
PART I
INFORMATION REQUIRED TO BE DELIVERED TO OFFEREES OR
PURCHASERS
<PAGE>
New Issue
U.S.$300,000,000
[logo]
NATIONAL BANK OF CANADA
(300,000 Shares)
8.45% Noncumulative First Preferred Shares, Series Z
The 8.45% Noncumulative First Preferred Shares, Series Z (the "Series Z
Preferred Shares") of National Bank of Canada ("National Bank" or the "Bank"),
will be issued only upon the automatic exchange (see "Automatic Exchange") of
the 8.35% Noncumulative Exchangeable Preferred Stock, Series A (the "Old
Preferred Shares") of NB Capital Corporation, a U.S. subsidiary of the Bank,
and/or of the 8.35% Noncumulative Exchangeable Preferred Stock, Series A (the
"New Preferred Shares") of NB Capital Corporation into which the Old Preferred
Shares are exchangeable (see "Exchange Offer") upon the occurrence of certain
events.
Dividends on the Series Z Preferred Shares will be payable at a rate of
8.45% per annum if, when and as declared by the Board of Directors of the Bank.
For a description of the terms of the Series Z Preferred Shares, see
"Description of the Series Z Preferred Shares" herein.
The Bank currently has outstanding, and may in the future issue,
various other series of first preferred shares (the "Other Series of First
Preferred Shares"). See "Capitalization". The Series Z Preferred Shares will
constitute a new series of first preferred shares of the Bank and will rank pari
passu in terms of cash dividend payment and liquidation preference with the
Other Series of First Preferred Shares (the Series Z Preferred Shares and the
Other Series of First Preferred Shares collectively, the "Preferred Shares").
The Preferred Shares rank, in priority of payment of dividends and rights upon
the voluntary or involuntary dissolution, liquidation or winding-up of the Bank,
junior to all claims of the Bank's creditors, including the claims of the Bank's
depositors and holders of the Bank's outstanding subordinated debentures. The
Preferred Shares rank superior and prior to the issued and outstanding Common
Shares of the Bank with respect to dividend rights and rights upon voluntary or
involuntary dissolution, liquidation or winding up of the Bank, and to all other
classes and series of shares of the Bank hereafter issued, other than any class
or series expressly designated as being on parity with or senior to the
Preferred Shares. The Common Shares of the Bank constitute the only class of
shares currently outstanding other than the Preferred Shares.
In the event the Old Preferred Shares and/or New Preferred Shares are
exchanged into Series Z Preferred Shares, the Bank does not intend to apply for
the listing of the Series Z Preferred Shares on any national securities exchange
in Canada or the United States or for quotation through the National Association
of Securities Dealers Automated Quotation System.
- --------------------------------------------------------------------------------
The Old Preferred Shares and/or New Preferred Shares are exchangeable, if ever,
at the rate of one Series Z Preferred Share for each Old Preferred Share or New
Preferred Share tendered.
- --------------------------------------------------------------------------------
The Bank is a Canadian issuer that is permitted, under a
multijurisdictional disclosure system adopted by the United States, to prepare
this short form prospectus in accordance with the disclosure requirements of its
home country. Prospective investors should be aware that such requirements are
different from those of the United States. The consolidated financial statements
included or incorporated by reference herein have been prepared in accordance
with Canadian generally accepted accounting principles, and thus may not be
comparable to financial statements of United States companies, and are subject
to Canadian auditing and auditor independence standards which differ from
standards in the United States.
Prospective investors should be aware that the acquisition of the
securities described herein may have tax consequences both in the United States
and in Canada. Such consequences for investors who are residents in, or citizens
of, the United States may not be described fully herein.
The enforcement by investors of civil liabilities under the federal
securities laws of the United States may be affected adversely by the fact that
the Bank is incorporated or organized under the laws of Canada, that some or all
of its officers and directors may be residents of Canada, that some or all of
the experts named in the registration statement may be residents of Canada and
that all or a significant portion of the assets of the Bank and said persons may
be located outside the United States.
----------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION NOR HAS THE SECURITIES AND EXCHANGE COMMISSION PASSED
UPON THE ACCURACY OR ADEQUACY OF THIS SHORT FORM PROSPECTUS.
ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
----------
The date of this short form prospectus is December 11, 1997.
<PAGE>
ENFORCEMENT OF LIABILITIES AND SERVICE OF PROCESS
National Bank of Canada is a Canadian bank; all of the directors and
executive officers of the Bank and certain of the Bank's advisers named in this
short form prospectus are residents of countries other than the United States of
America ("U.S."); and all or a substantial portion of the assets of such
non-U.S. residents are located outside the U.S. As a result, it may not be
possible for investors to effect service of process within the U.S. upon such
persons or to enforce against them in the U.S. judgments of U.S. Courts
predicated upon the civil liability provisions of the federal securities laws of
the U.S. The Bank will expressly accept the jurisdiction of the Supreme Court of
the State of New York or the U.S. District Court for the Southern District of
New York, in either case in the Borough of Manhattan, The City of New York, for
the purpose of any suit, action or proceeding arising out of the Series Z
Preferred Shares offered hereby, and has appointed NB Capital Corporation, a
subsidiary of the Bank, as its agent in The City of New York to accept service
of process in any such action. The Bank has been advised by Desjardins Ducharme
Stein Monast, Canadian counsel to the Bank, that there is doubt as to the
enforceability in the Province of Quebec, in original actions or in actions for
enforcement of judgments of U.S. Courts, of liabilities predicated solely upon
the federal securities laws of the U.S.
TRANSLATION OF FOREIGN CURRENCY
In this short form prospectus, unless otherwise specified, all dollar
amounts are expressed in Canadian dollars ("C$" or "$"). Solely for convenience,
this short form prospectus contains translations of certain Canadian dollar
amounts into U.S. dollar amounts. Unless otherwise specified, those amounts
presented in U.S. dollars ("U.S.$" or "U.S. dollars") are translated from the
Canadian dollar amounts at the rate of 1.4084 Canadian dollar per U.S. dollar,
the Bank of Canada closing rate for U.S. dollars as at October 31, 1997.
2
<PAGE>
DOCUMENTS INCORPORATED BY REFERENCE
The following documents, filed with the Quebec Securities Commission,
form an integral part of this short form prospectus:
(a) Annual Information Form of the Bank dated December 19, 1996 and
contained in the Bank's Annual Report for the year ended October
31, 1996;
(b) Management's Discussion and Analysis of Operating Results and
Financial Condition of the Bank dated December 19, 1996, and
contained in the Bank's Annual Report for the year ended October
31, 1996;
(c) Audited Consolidated Financial Statements of the Bank for the year
ended October 31, 1997, together with the Auditors' Report
thereon, which include comparative audited consolidated financial
statements for the year ended October 31, 1996; and
(d) Management Circular dated January 16, 1997 in connection with the
Bank's annual meeting of shareholders held on March 12, 1997.
Copies of the documents incorporated herein by reference may be
obtained on request without charge from the Corporate Secretary of the Bank at
National Bank Tower, 600 de La Gauchetiere Street West, Montreal, Quebec, H3B
4L2, telephone (514) 394-6080.
The Bank is required to file with the U.S. Securities and Exchange
Commission (the "Commission") all documents that it is required to send to its
shareholders, including its Annual Report, notices of Shareholders' Meetings and
Management Proxy Circulars. Such documents may be inspected and copied at the
Public Reference Section of the Commission, 455 Fifth Street, N.W., Washington,
DC 20549.
Any documents of the type referred to in the preceding paragraph and
any material change report (excluding confidential material change reports)
filed by the Bank with the Quebec Securities Commission, after the date of this
short form prospectus and prior to the termination of the offering, will be
deemed to be incorporated by reference into this short form prospectus.
Any statement contained in a document incorporated or deemed to be
incorporated by reference into this short form prospectus will be deemed to be
modified or superseded, for purposes of this short form prospectus, to the
extent that a statement contained in this short form prospectus or in any other
subsequently filed document which also is or is deemed to be incorporated by
reference into this short form prospectus modifies or supersedes such statement.
Any statement so modified or superseded will not be deemed, except as so
modified or superseded, to constitute a part of this short form prospectus.
The financial information incorporated in this short form prospectus
has been prepared in accordance with Canadian generally accepted accounting
principles including the accounting requirements of the Superintendent of
Financial Institutions Canada.
3
<PAGE>
SHORT FORM PROSPECTUS SUMMARY
This short form prospectus summary does not purport to be complete and is
qualified in its entirety by the more detailed information and financial
statements and notes hereto appearing elsewhere in this short form prospectus
and in the documents incorporated by reference herein. Capitalized terms used in
the summary and not defined herein have the meanings ascribed to such terms
elsewhere in this short form prospectus or in the documents incorporated by
reference herein.
INCORPORATION AND HEAD OFFICE OF THE BANK
The Bank was formed through a series of amalgamations and its roots
date back to 1859 with the founding of Banque Nationale in Quebec City, Quebec,
Canada. The Bank is chartered under the Bank Act (Canada) (the "Bank Act").
The head office and executive offices of the Bank are at the National
Bank Tower, 600 de La Gauchetiere West, Montreal, Quebec, Canada H3B 4L2.
BUSINESS OF THE BANK
The Bank, which ranks sixth among Canadian banks in terms of total
assets, is present in each of Canada's provinces. It delivers an extensive range
of financial services to individuals, commercial enterprises, financial
institutions and governments both in Canada and abroad.
The Bank's main sectors and divisions are the following: Banking, which
consists of Retail Banking, Commercial Banking and International; Trust
Services; Insurance; Treasury, Brokerage and Corporate Banking; and Human
Resources and Administration.
BANKING
Retail Banking
Through its network of 637 branches at October 31, 1997, Retail Banking
provides services to individuals and serves as support to the commercial banking
centres and the Corporate Banking, International Commercial Operations and
Treasury divisions.
In addition to personal and mortgage loans, the Bank offers a broad
range of transaction accounts and investment vehicles, such as term deposits and
investment certificates, mutual funds (managed by the Bank or by third parties)
and registered retirement savings plans and income funds, as well as credit card
and travelers cheque services. In response to clients' growing demand for
financial advisory services, the Bank embarked on a new phase in 1996 when it
integrated more than 50 accredited financial planners into its branches.
Clients can access their accounts at any of the Bank's 738 banking
machines as well as at the more than 303,426 banking machines in North America
and Europe which belong to the Cirrus, Interac and MasterCard ATM networks.
Furthermore, through the Interac Direct Payment network, debit card holders can
pay for their purchases without using cash at any of the Bank's 28,337
point-of-sale terminals.
The Bank continues to assume a leadership role in customer service by
offering its customers non-traditional services such as TelNat for banking by
phone and Personal CompuTeller for banking by computer. The first service of its
kind in Canada, Personal CompuTeller gives customers direct access to their
transaction accounts via their personal computer.
4
<PAGE>
To meet the new reality of consumer demand for fast, easy access to
banking services, the Bank developed another delivery concept in the form of
specially designed service units in supermarkets, open seven days a week.
Commercial Banking
The Commercial Banking division administers loans to independent
businesses and offers them an array of complementary services. Of the 38
commercial banking centres in operation as at October 31, 1997, 20 were in
Quebec, 9 in Ontario and 9 in Atlantic Canada. The centres are staffed by
account managers, each of whom services a small number of business clients, and
by experts in special financing methods. In addition to the specialized services
offered by Treasury and International Commercial Operations, businesses can
obtain a full range of services such as bankers' acceptances, operating loans
and fixed or variable-rate term loans, as well as computerized payroll
processing, bank reconciliation with cheques in consignment and pre-authorized
payments.
The Bank also serves mid-market companies through offices in 20 U.S.
cities, including its own representative offices and the offices of its
subsidiary National Canada Finance Corp.
International
The International division is responsible for all the services offered
to the Bank's Canadian clients who are involved in foreign transactions.
Available through centres in Moncton, Quebec City, Montreal, Toronto and
Vancouver, as well as the branch network, these services include guarantees and
letters of credit, foreign exchange transactions, foreign payments and
documentary collections. In addition to these transaction services, the Bank
offers financing adapted to the needs of exporters, such as discounted foreign
receivables, identification of foreign partners or clients, as well as advisory
services for establishing foreign trade or an international strategy.
The International division has also made its presence felt abroad
through its representative offices in New York, the Caribbean, Mexico, Santiago,
London, Paris, Hong Kong, Seoul, Singapore, Taiwan and Shanghai; cooperation
agreements with seven European financial institutions and a Mexican bank; and
via a vast network of some 2,800 banking correspondents spanning 120 countries.
Through this presence abroad, the International division can serve its
clientele which includes Canadian clients, foreign companies, international
banks which obtain traditional services such as correspondent banking, and
immigrant investors to whom the Bank provides private banking services as well
as other products designed specifically to meet their needs.
The Bank has also developed partnerships with private enterprise and
all three levels of public administration. Partnerships created in 1996 include
the Action Asia Group, Montreal International, the Canada-Poland Development
Fund and a France-Quebec network for independent businesses, as well as the
agreement to accommodate Quebec trade delegates in the Bank's offices in Boston,
Los Angeles, Chicago and Atlanta.
Through its International division, the Bank is able to offer
international products and services adapted to the increasingly sophisticated
needs of its clients, including guarantees and letters of credit, foreign
exchange transactions, foreign payments and management of foreign accounts.
TRUST SERVICES
With its investment services, personal trust services and branches now
integrated into the Bank's network, General Trust offers wealth management
services for high net worth households. Its corporate trust services are geared
to the needs of independent businesses and large corporations in Quebec.
General Trust and National Bank Securities Inc. another Bank
subsidiary, provide active fund management on behalf of their clients. National
Bank Securities Inc. also offers its clients a wide selection of mutual funds
and discount brokerage services.
5
<PAGE>
INSURANCE
National Bank Life Insurance Company administers credit insurance plans
for loans granted by the Bank and markets various general insurance products.
Personal and group insurance products are delivered through National Bank
Financial Services, a joint company formed by the Bank and Metropolitan Life.
BROKERAGE AND CORPORATE BANKING
The Corporate Banking division, with the support of specialized teams
based in Montreal and Toronto, offers a broad range of services customized to
clients' needs. In addition to providing traditional operating credit and term
financing, these teams structure financing for acquisitions or recapitalizations
and arrange high-yield financing, often through loan syndicates involving other
institutions. They also offer advisory services for restructuring, mergers and
acquisitions and for hybrid financings combining debt and equity. Together with
the Treasury division, Corporate Banking offers financial risk management
instruments for hedging interest rates, foreign exchange and import-export
transactions. The division's specialists in banking operations can suggest a
vast range of electronic products, such as point-of-sale debit and electronic
data interchange (EDI), and tailor them to each client's requirements.
The securities brokerage subsidiary Levesque Beaubien Geoffrion Inc.
provides services to business clients and individuals, in addition to playing an
important role in securing financing for various levels of government. This
subsidiary is active on all the major markets through its network of 65 offices.
Another subsidiary, Natcan Investment Management Inc., specializes in
portfolio management for institutional clients and identifies investment
opportunities in Canada the United States and abroad. Pension funds, insurance
companies, mutual funds, foundations and religious orders are among the many
clients for which this subsidiary manages assets in excess of $8.8 billion.
6
<PAGE>
THE OFFERING
Securities Offered: 300,000 Series Z Preferred Shares.
The Exchange Offer: Simultaneously with the filing of this short
form prospectus by the Bank, NB Capital
Corporation, a 100% controlled subsidiary of
the Bank, is offering to exchange (the
"Exchangeable Offer") up to 300,000 shares of
its 8.35% Noncumulative Exchangeable Preferred
Stock, Series A (the "New Preferred Shares")
for up to all of its outstanding 8.35%
Noncumulative Exchangeable Preferred Stock,
Series A (the "Old Preferred Shares") at the
rate of one New Preferred Share for each Old
Preferred Share tendered. The issuance of the
New Preferred Shares is intended to satisfy
certain obligations of NB Capital Corporation
contained in the Registration Rights Agreement
(as defined). See "The Exchange Offer".
Registration Rights Agreement: The Old Preferred Shares were sold by NB
Capital Corporation on September 3, 1997 to
Merrill Lynch, Pierce, Fenner & Smith
Incorporated as initial purchaser (the
"Initial Purchaser") pursuant to the purchase
agreement among NB Capital Corporation, the
Bank and the Initial Purchaser (the "Purchase
Agreement"). Pursuant to the Purchase
Agreement, NB Capital Corporation and the
Initial Purchaser entered into the
Registration Rights Agreement on September 3,
1997. Pursuant to the Registration Rights
Agreement, the Bank and NB Capital Corporation
agreed to each file a registration statement
within a certain time period and to use their
best efforts to cause such registration
statements to become effective within an
additional time period with respect to the
Exchange Offer. The Exchange Offer is intended
to satisfy such rights under the Registration
Rights Agreement which terminate upon the
consummation of the Exchange Offer. See
"Registration Rights Agreement".
Automatic Exchange: The Series Z Preferred Shares are to be
issued, if ever, in connection with the
automatic exchange of the Old Preferred Shares
and/or New Preferred Shares into which the Old
Preferred Shares are exchangeable pursuant to
the Exchange Offer. See "Automatic Exchange"
and "The Exchange Offer".
Ranking: The Series Z Preferred Shares rank senior to
the Bank's common shares (the "Common Shares")
and all other classes and series of shares of
the Bank hereafter issued other than those
expressly designated as being on a parity with
or senior to the First Preferred Shares of the
Bank, pari passu with the other First
Preferred Shares of the Bank with respect to
cash dividend payments and rights upon
liquidation and junior to all claims of the
Bank's creditors, including the claims of the
Bank's depositors and holders of the Bank's
outstanding subordinated debentures. Preferred
shares ranking senior to the Series Z
Preferred Shares may not be issued without the
approval of holders of at least two-thirds of
all series of First Preferred Shares.
7
<PAGE>
Dividends: Dividends on the Series Z Preferred Shares are
payable at the rate of 8.45% per annum of the
liquidation preference (being an amount equal
to U.S.$84.50 per share), if, when and as
declared by the Board of Directors of the
Bank. If declared, dividends are payable
quarterly in arrears on the 30th day of March,
June, September and December in each year, or,
if such day is not a business day, on the next
business day. Dividends on the Series Z
Preferred Shares are not cumulative and,
accordingly, if no dividend is declared on the
Series Z Preferred Shares by the Bank for a
quarterly dividend period, holders of the
Series Z Preferred Shares will have no right
to receive a dividend for that period, and the
Bank will have no obligation to pay a dividend
for that period, whether or not dividends are
declared and paid for any future period. See
"Description of the Series Z Preferred
Shares-Dividends". The Bank's ability to pay
cash dividends is subject to regulatory and
other restrictions described herein.
Redemption: The Bank may not redeem the Series Z Preferred
Shares before September 3, 2007. After such
date, the Series Z Preferred Shares may be
redeemed for cash at the option of the Bank,
in whole or in part at any time and from time
to time, at the redemption prices set forth
herein, plus the quarterly accrued and unpaid
dividends, if any, thereon for the then-
current dividend period to, but excluding, the
date fixed for redemption. Redemption of the
Series Z Preferred Shares will be subject to
compliance with applicable regulatory and
other restrictions, including the requirement
of the prior consent of the Superintendent.
See "Description of Series Z Preferred Shares
-Redemption".
Voting Rights: Holders of Series Z Preferred Shares will not
have any voting rights, except as expressly
provided herein. On any matter on which
holders of the Series Z Preferred Shares may
vote, each Series Z Preferred Share will be
entitled to one vote. See "Description of
Series Z Preferred Shares-Voting Rights".
Use of Proceeds: The Series Z Preferred Shares will only be
issued, if ever, upon the automatic exchange
of the Old Preferred Shares and/or New
Preferred Shares resulting from the Exchange
Offer. The proceeds from the sale of the Old
Preferred Shares were used by NB Capital
Corporation to acquire a portfolio of mortgage
related assets. The automatic exchange of the
Old Preferred Shares and/or New Preferred
Shares into Series Z Preferred Shares will
produce no proceeds to the Bank. See "Use of
Proceeds".
Absence of a Public Market: There is currently no public market for the
Series Z Preferred Shares and such shares will
not be listed on any securities exchange or
for quotation through the National Association
of Securities Dealers Automated Quotation
System.
8
<PAGE>
CAPITALIZATION
The following table sets forth the actual capital of the Bank at
October 31, 1997 and as adjusted as of such date to give effect to the automatic
exchange of the Old Preferred Shares and/or New Preferred Shares into Series Z
Preferred Shares of the Bank. This table should be read in conjunction with the
Consolidated Financial Statements of the Bank and the notes thereto included
elsewhere in this Short Form Prospectus and in the documents incorporated herein
by reference.
<TABLE>
<CAPTION>
October 31, 1997
-----------------------------------
Actual As adjusted(1)
(in millions of Canadian dollars)
<S> <C> <C>
Liabilities
Deposits .................................................... $43,270 $43,270
Bankers acceptances ......................................... 2,273 2,273
Obligations related to securities sold short ................ 4,225 4,225
Securities sold under repurchase agreements ................. 9,038 9,038
Other liabilities ........................................... 3,134 3,134
------- -------
61,940 61,940
------- -------
Non-controlling interest .................................... 466 43
------- -------
Bank debentures ............................................. 1,069 1,069
------- -------
Shareholders' equity
First Preferred shares without par value:
Unlimited number of shares authorized Issued and outstanding:
286,610 Series 5 shares ..................................... 29 29
422,633 Series 7 shares ..................................... 10 10
789,638 Series 8 shares ..................................... 20 20
3,680,000 Series 10 shares .................................. 92 92
4,000,000 Series 11 shares .................................. 100 100
5,000,000 Series 12 shares .................................. 125 125
300,000 Series Z shares(2) .................................. -- 423
------- -------
Total ....................................................... 376 799
Common shares without par value:
Unlimited number of shares authorized .......................
170,461,483 shares issued and outstanding ................... 1,309 1,309
Retained earnings ........................................... 1,075 1,075
------- -------
2,760 3,183
------- -------
Total liabilities and shareholders' equity .................. 66,235 66,235
======= =======
Regulatory capital ratios
Assets to capital multiple .................................. 16.4 16.4
Tier 1 risk-based ........................................... 8.1% 8.1%
Total risk-based ............................................ 11.3% 11.3%
</TABLE>
(1) Adjusted to give effect to the automatic exchange of the Old Preferred
Shares and/or New Preferred Shares into Series Z Preferred Shares of the
Bank assuming that the limit on the amount of Preferred Shares includable
as core capital is applicable to the Series Z Preferred Shares of the Bank.
(2) Exchange rate is 1.4084 Canadian dollars for 1 U.S. dollar.
9
<PAGE>
DESCRIPTION OF THE SERIES Z PREFERRED SHARES
The following is a summary of the rights, privileges, restrictions and
conditions of the First Preferred Shares as a class and of the Series Z
Preferred Shares as a series.
Certain Provisions of the First Preferred Shares as a Class
The authorized first preferred share capital of the Bank consists of an
unlimited number of First Preferred Shares, without par value, which may be
issued for a maximum aggregate consideration of $1,000,000,000 or the equivalent
thereof in foreign currencies. The Board of Directors of the Bank may by
resolution divide any unissued First Preferred Shares into series and fix the
number of shares in each series and determine the designation, rights,
privileges, restrictions and conditions thereof.
Priority
The First Preferred Shares of each series will rank on a parity with
First Preferred Shares of every other series and are entitled to preference over
the Common Shares, and any other shares of the Bank ranking junior to the First
Preferred Shares with respect to the payment of dividends and upon any
distribution of assets in the event of liquidation, dissolution or winding-up of
the Bank.
Restriction
The Bank will not, without the approval of the holders of the First
Preferred Shares, create or issue any shares ranking in priority to or pari
passu with the First Preferred Shares, nor create or issue any additional series
of First Preferred Shares, unless all cumulative dividends have been declared
and paid or set aside for payment and all declared and unpaid non-cumulative
dividends have been paid or set aside for payment.
Voting Rights
The Board of Directors is empowered to set voting rights for each
series. The holders of the First Preferred Shares are not entitled to any voting
rights as a class except as provided above or by law or with respect to the
right to vote on certain matters as specified under "Approval of the Holders of
the First Preferred Shares".
Approval of the Holders of the First Preferred Shares
The provisions with respect to First Preferred Shares will not be
deleted or modified except with a resolution carried by the affirmative vote of
not less than 66 2/3% of the votes cast at a meeting of holders of First
Preferred Shares at which a majority of the outstanding First Preferred Shares
is represented or, if no quorum is present at such meeting, at any adjourned
meeting at which no quorum requirements would apply.
Certain Provisions of the Series Z Preferred Shares as a Series
Issue Price
The Series Z Preferred Shares will have an issue price of U.S.$1,000
per share.
Dividends
Holders of Series Z Preferred Shares shall be entitled to receive, if,
when and as declared by the Board of Directors of the Bank out of assets of the
Bank legally available therefor, non-cumulative preferential cash dividends at
the rate of 8.45% per annum of the liquidation preference (equivalent to
U.S.$1,000 per share). If declared, dividends on the Series Z Preferred Shares
shall be payable quarterly in arrears on the 30th day of March, June, September
and December of each year, or, if such day is not a business day, on the next
business day. Each declared dividend shall be payable to holders of record as
they appear at the close of business on the share register of the Bank
10
<PAGE>
on such record dates, not exceeding 45 days preceding the payment dates thereof,
as shall be fixed by the Board of Directors of the Bank.
If, within 21 days after the expiration of any financial year of the
Bank, the Board of Directors has not declared any dividend or part thereof on
the Series Z Preferred Shares for such year, then the right of the holders of
the Series Z Preferred Shares to such dividend or part thereof for such year
shall be extinguished.
Restrictions on Dividends and Retirement of Shares
As long as any of the Series Z Preferred Shares are outstanding, the
Bank shall not, without the prior approval of the holders of such Series Z
Preferred Shares given as specified below:
(a) declare or pay or set aside for payment any dividends on any
shares of any class of shares of the Bank ranking junior to the
Series Z Preferred Shares (other than stock dividends ranking
junior to the Series Z Preferred Shares);
(b) call for redemption or redeem, call for purchase or purchase, or
otherwise retire or reduce or make any return of capital in
respect of shares of any class of shares of the Bank ranking
junior to the Series Z Preferred Shares;
(c) call for redemption or redeem, call for purchase or purchase, or
otherwise retire or reduce or make any return of capital in
respect of part only of the Series Z Preferred Shares; or
(d) call for redemption or redeem, call for purchase or purchase, or
otherwise retire or reduce or make any return of capital in
respect of any shares of any class of shares of the Bank ranking
pari passu with the Series Z Preferred Shares, except in
satisfaction of an obligation to purchase or obligation in respect
of a sinking fund, of a right of retraction or of any other
mandatory redemption provision of any given series of any
preferred shares;
unless all dividends up to and including the dividend payment date for the last
completed period for which dividends shall be payable shall have been declared
and paid or set apart for payment in respect of each series of cumulative first
preferred shares then issued and outstanding and on all other cumulative shares
ranking on a parity with the First Preferred Shares and there shall have been
paid or set apart for payment all declared dividends in respect of each series
of non-cumulative First Preferred Shares (including the Series Z Preferred
Shares) then issued and outstanding and on all other non-cumulative shares
ranking on a parity with the First Preferred Shares.
Redemption
The Series Z Preferred Shares will not be redeemable prior to September
3, 2007. On or after such date, but subject to the provisions of the Bank Act,
including the requirements of the prior consent of the Superintendent, the
Series Z Preferred Shares will be redeemable at the option of the Bank, in whole
or in part, at any time or from time to time on not less than 30 nor more than
60 days' notice by mail, at the following redemption prices (expressed as a
percentage of the $1,000 per share liquidation preference), if redeemed during
the 12-month period beginning September 3 of the years indicated below, plus the
quarterly accrued unpaid dividend to the date of redemption, if any, thereon:
Year Redemption Price
- ---- ----------------
2007...................................................... 104.2550%
2008...................................................... 103.8025
2009...................................................... 103.3800
2010...................................................... 102.9575
2011...................................................... 102.5350
2012...................................................... 102.1125
2013...................................................... 101.6900
2014...................................................... 101.2675
2015...................................................... 100.8450
2016...................................................... 100.4225
11
<PAGE>
and thereafter at a redemption price of $1,000 per share, plus the quarterly
accrued and unpaid dividend to the redemption date, if any, thereon.
If there are any accrued and unpaid dividends on any Series Z Preferred
Shares, no Series Z Preferred Shares shall be redeemed unless all outstanding
Series Z Preferred Shares are redeemed and the Bank shall not purchase or
otherwise acquire any Series Z Preferred Shares; provided, however, that the
Bank may purchase or acquire Series Z Preferred Shares pursuant to a purchase or
exchange offer made on the same terms to holders of all outstanding Series Z
Preferred Shares.
In the event that fewer than all the outstanding Series Z Preferred
Shares are to be redeemed, the number of Series Z Preferred Shares to be
redeemed shall be determined by the Board of Directors, and the shares to be
redeemed shall be determined by lot or pro rata as may be determined by the
Board of Directors or by any other method as may be determined by the Board of
Directors in its sole discretion to be equitable.
Voting Rights
The holders of the Series Z Preferred Shares as such will not be
entitled to receive notice of or to attend or to vote at any meeting of the
shareholders of the Bank unless and until the first time at which the rights of
such holders to any undeclared dividends have become extinguished as described
under "Dividends".
In that event, the holders of the Series Z Preferred Shares will be
entitled to receive notice of, and to attend, meetings of shareholders at which
directors are elected and will be entitled to one vote for each share held. The
voting rights of the holders of the Series Z Preferred Shares shall forthwith
cease upon payment by the Bank of the first quarterly dividend on the Series Z
Preferred Shares to which the holders are entitled subsequent to the time such
voting rights first arose. At such time as the rights of such holders to any
undeclared dividends on the Series Z Preferred Shares have again become
extinguished, such voting rights shall become effective again and so on from
time to time.
Rights Upon Liquidation
In the event of any voluntary or involuntary liquidation, dissolution
or winding-up of the Bank, the holders of the Series Z Preferred Shares at the
time outstanding will be entitled to receive out of assets of the Bank legally
available for distribution to shareholders, under applicable law, before any
distribution of assets is made to holders of Common Shares or any other class of
shares ranking junior to the Series Z Preferred Shares upon liquidation, and
subject to the rights of the holders of any class or series of equity securities
having preference with respect to distribution upon liquidation and the rights
of the Bank's general creditors, an amount of $1,000 per share, plus the
quarterly accrued and unpaid dividend thereon, if any, to, but excluding, the
date of liquidation.
After payment of the full amount of said amount to which they are
entitled, the holders of Series Z Preferred Shares will have no right or claim
to any of the remaining assets of the Bank. In the event that, upon any such
voluntary or involuntary liquidation, dissolution or winding-up, the available
assets of the Bank are insufficient to pay the amount of the liquidation
distributions on all outstanding Series Z Preferred Shares and the corresponding
amounts payable on all shares of other classes or series of share capital of the
Bank ranking on a parity with the Series Z Preferred Shares in the distribution
of assets upon any liquidation, dissolution or winding-up of the affairs of the
Bank, then the holders of the Series Z Preferred Shares and such other classes
or series of share capital shall share ratably in any such distribution of
assets in proportion to the full liquidation distributions to which they would
otherwise be respectively entitled.
For such purposes, the consolidation or merger of the Bank with or into
any other entity, or the sale, lease or conveyance of all or substantially all
of the property or business of the Bank, shall not be deemed to constitute
liquidation, dissolution or winding-up of the Bank.
Taxation
To the extent that dividends on the Series Z Preferred Shares are
subject to Canadian non-resident withholding tax, the Bank will pay such
additional amounts as may be necessary in order that the net amounts
12
<PAGE>
received by U.S. holders of the Series Z Preferred Shares shall equal the
amounts which would have been received thereon in the absence of such tax.
COMMON SHARES
The authorized Common Share capital of the Bank consists of an
unlimited number of Common Shares without par value, issuable for a maximum
aggregate consideration of $3 billion, of which 170,461,483 Common Shares were
outstanding as at October 31, 1997.
The holders of Common Shares are entitled to receive dividends as and
when declared by the Board of Directors of the Bank, subject to the preference
of holders of First Preferred Shares. Subject to the restrictions set forth in
"Restraints on Bank Shares under the Bank Act", a holder of Common Shares is
entitled to one vote for each share at all meetings of shareholders except
meetings at which only holders of a specified class or series are entitled to
vote. In the event of the liquidation, dissolution or winding-up of the Bank,
after payment of all outstanding debts and subject to the preference of the
holders of First Preferred Shares, the remaining assets of the Bank would be
distributed pro rata to the holders of Common Shares.
USE OF PROCEEDS
The Series Z Preferred Shares are to be issued only, if ever, in
connection with the automatic exchange of the Old Preferred Shares and/or New
Preferred Shares into which the Old Preferred Shares are exchangeable pursuant
to the Exchange Offer. The proceeds from the sale of the Old Preferred Shares
were used by NB Capital Corporation to acquire a portfolio of mortgage related
assets. The automatic exchange of Old Preferred Shares and/or New Preferred
Shares into Series Z Preferred Shares will produce no proceeds to the Bank.
THE EXCHANGE OFFER
Simultaneously with the filing of this short form prospectus by the
Bank, NB Capital Corporation, a 100% controlled subsidiary of the Bank, is
offering to exchange (the "Exchange Offer") up to 300,000 shares of its 8.35%
Noncumulative Exchangeable Preferred Stock, Series A (the "New Preferred
Shares") for up to all of its outstanding 8.35% Noncumulative Exchangeable
Preferred Stock, Series A (the "Old Preferred Shares") at the rate of one New
Preferred Share for each Old Preferred Share tendered. The issuance of the New
Preferred Shares is intended to satisfy certain obligations of NB Capital
Corporation contained in the Registration Rights Agreement.
REGISTRATION RIGHTS AGREEMENT
The Old Preferred Shares were sold by NB Capital Corporation on
September 3, 1997 to Merrill Lynch, Pierce, Fenner & Smith Incorporated as
initial purchaser (the "Initial Purchaser") pursuant to the purchase agreement
among NB Capital Corporation, the Bank and the Initial Purchaser (the "Purchase
Agreement"). Pursuant to the Purchase Agreement, NB Capital Corporation and the
Initial Purchaser entered into the Registration Rights Agreement on September 3,
1997. Pursuant to the Registration Rights Agreement, the Bank and NB Capital
Corporation agreed to each file a registration statement within a certain time
period and to use their best efforts to cause such registration statements to
become effective within an additional time period with respect to the Exchange
Offer. If certain events do not permit NB Capital Corporation to effect the
Exchange Offer on the terms set forth therein, the Bank and NB Capital
Corporation will use their best efforts to cause to become effective shelf
registration statements with respect to the resale of the Old Preferred Shares
and of the Series Z Preferred Shares and to keep the shelf registration
statements effective until two (2) years after the issue date of the Old
Preferred Shares or such shorter period ending when all of the Old Preferred
Shares have been sold thereunder.
AUTOMATIC EXCHANGE
The Series Z Preferred Shares are to be issued, if ever, in connection
with an automatic exchange of the Old Preferred Shares and/or New Preferred
Shares into which the Old Preferred Shares are exchangeable pursuant to the
Exchange Offer. The Old Preferred Shares and/or New Preferred Shares are subject
to an automatic exchange in
13
<PAGE>
whole and not in part, on a share-for-share basis, into Series Z Preferred
Shares (i) immediately prior to such time, if any, at which the Bank fails to
declare and pay or set aside for payment when due any dividend on any issue of
cumulative First Preferred Shares or the Bank fails to pay or set aside for
payment when due any declared dividend on any non-cumulative First Preferred
Shares, (ii) in the event that the Bank has a Tier 1 risk-based capital ratio of
less than 4.0% or a total risk-based capital ratio of less than 8.0%, (iii) in
the event that the Superintendent takes control of the Bank pursuant to the Bank
Act, or proceedings are commenced for the winding-up of the Bank pursuant to the
Winding-up and Restructuring Act (Canada), or (iv) in the event that the
Superintendent, by order, directs the Bank to act pursuant to subsection 485(3)
of the Bank Act and the Bank elects to cause the exchange.
BANK ACT RESTRICTIONS AND APPROVALS
Under the Bank Act, the Bank cannot redeem or purchase any of its
shares, including the Series Z Preferred Shares, unless the consent of the
Superintendent has been obtained. In addition, the Bank Act prohibits the
payment to purchase or redeem any shares or the payment of a dividend if there
are reasonable grounds for believing that the Bank is, or the payment would
cause the Bank to be, in contravention of the Bank Act requirement to maintain,
in relation to its operations, adequate capital and appropriate forms of
liquidity and to comply with any regulations or directions of the Superintendent
in relation thereto. Currently these limitations do not restrict the payment of
dividends on or the redemption or purchase of the Series Z Preferred Shares.
RESTRAINTS ON BANK SHARES UNDER THE BANK ACT
The Bank Act contains restrictions on the issue, transfer, acquisition,
beneficial ownership and voting of all shares of a bank. By way of summary, no
person is permitted to have a significant interest in any class of shares of a
Schedule I bank, including the Bank. For purposes of the Bank Act, a person has
a significant interest in a class of shares of a bank where the aggregate of any
shares of that class beneficially owned by that person, by entities controlled
by that person and by any person associated or acting jointly or in concert with
that person (as contemplated by the Bank Act) exceeds 10% of all of the
outstanding shares of that class of shares of the Bank.
In addition, these restrictions do not permit Schedule I banks,
including the Bank, to issue or transfer shares of any class to Her Majesty in
right of Canada or of a province, an agent of Her Majesty or a foreign
government or any agent of a foreign government.
Purchasers of the Series Z Preferred Shares may be required to furnish
declarations relative to certain of the foregoing matters in a form prescribed
by the Bank.
REGULATION
Canada
The Bank Act
The Bank is a Schedule 1 bank under the Bank Act, and the Bank Act is
its charter. See "The Canadian Banking Industry". In accordance with the Bank
Act, the Bank may engage in and carry on such business generally as appertains
to the business of banking. The Bank Act grants banks broad powers of investment
in the securities of other corporations and entities, but imposes limits upon
banks' substantial investments. A bank has a substantial investment in a body
corporate when (i) the voting shares beneficially owned by the Bank and by
entities controlled by the Bank exceed 10% of the outstanding voting shares of
the body corporate or (ii) the total of the shares of any class of the body
corporate that are beneficially owned by the Bank and entities controlled by the
Bank exceed 25% of the total shareholders' equity of the body corporate. A bank
is entitled to have a substantial investment in a body corporate that is one of
the following, provided that the Bank controls the body corporate and, in
certain cases, the Bank obtains the prior approval of the Minister of Finance of
Canada: a financial institution; a factoring corporation; a financial leasing
corporation; a specialized financing corporation; and a financial holding
corporation, provided that the financial holding corporation does not have a
substantial investment that the Bank may not have. In addition, a bank may have
a substantial investment which can, but need not be, a controlling interest in
the following types of corporations or in any corporation that engages in any
combination of the following: an information services
14
<PAGE>
corporation; an investment counseling and portfolio management corporation; a
mutual fund corporation; a mutual fund distribution corporation; a real property
brokerage corporation; a real property corporation; a service corporation; and a
body corporate whose activities are ancillary to the business of the Bank or of
a financial institution that is a subsidiary of the Bank. Unlike under the
former banking legislation, the investments of Schedule 1 banks in foreign
bodies corporate are now generally subject to the same rules applicable to
investments in Canadian bodies corporate. A bank may not, without the prior
approval of the Superintendent, create a security interest in any of its
property to secure an obligation of the Bank.
Inspection
The Bank Act also contemplated the appointment of the Superintendent
who administers the Bank Act under the authority granted to him by the Minister
of Finance of Canada. Among other things, the Superintendent is required under
the Bank Act, at least once in each calendar year, to examine and inquire into
the business and affairs of each bank to the extent necessary or expedient to
determine that the provisions of the Bank Act are being observed and that each
bank is in a sound financial condition. Reports of these examinations and
inquiries are submitted to the Minister of Finance of Canada. Outside of Canada,
a bank's branches, agencies, subsidiaries and associates are also subject to
local regulatory requirements applicable in the countries in which it conducts
business.
Auditors
Under the Bank Act, the financial statements of the Bank may be audited
by either one or two firms of chartered accountants. During the five fiscal
years ended October 31, 1997, the firm of Raymond, Chabot, Martin, Pare, a
general partnership, served in 1995 and 1996, the firm of Price Waterhouse
served in 1993, 1996 and 1997, the firm of Samson Belair/Deloitte & Touche, a
general partnership, served in 1993, 1994 and 1997 and the firm of Mallette
Maheu, a general partnership, served in 1994 and 1995. The auditors are
independent of the Bank as required by all applicable securities legislation of
all the provinces of Canada and the Bank Act. These rules differ from those in
the United States. The firms that served as auditors for the fiscal year ended
October 31, 1997 have informed the Bank that they were independent under U.S.
rules.
United States
The Bank's only United States branch is located in New York (the
"Branch") and is licensed by the New York Superintendent under the Banking laws
of the State of New York (the "NYBL"). The Branch is examined by the New York
State Banking Department and is subject to banking laws and regulations
applicable to a foreign bank that operates a New York branch. Under the NYBL,
the Bank must maintain with approved banks or trust companies in the State of
New York specified types of interest-bearing governmental obligations, U.S.
dollar deposits, investment grade commercial paper, obligations of certain
international financial institutions and other specified obligations in an
aggregate amount to be determined by the New York Superintendent as security for
the benefit of depositors and other creditors of the Branch. This amount is
currently set at the greater of (i) 5% of the liabilities of the Branch
(excluding liabilities to other offices and certain affiliates of the Bank and
liabilities of the Branch that are booked at its international banking
facility), (ii) 1% of the liabilities of the Branch (excluding liabilities to
other offices and certain affiliates of the Bank) and (iii) $1 million. Under
the NYBL, the New York Superintendent is also empowered to require foreign banks
operating a New York branch to maintain in New York specified assets equal to
such percentage of the branch's liabilities payable at or through the branch as
the New York Superintendent may designate. At present, the New York
Superintendent has set this percentage at 0% for such branches (including the
Branch), although specific asset maintenance requirements may be imposed by the
New York Superintendent on a case-by-case basis.
The banking laws of the State of New York authorize the New York
Superintendent to take possession of the business and property of a New York
branch of a foreign bank under circumstances similar to those which would permit
the New York Superintendent to take possession of the business and property of a
New York state-chartered bank. These circumstances include the violation of any
law, unsafe business procedures, capital impairments, the suspension of payment
of obligations and the initiation of liquidation proceedings against the foreign
bank at its domicile or elsewhere or the existence of reason to doubt the
ability or willingness of such bank to pay in full the claims of holders of
accepted claims specified in the Banking laws of the State of New York. Pursuant
to Section 606.4 of the NYBL, in liquidating or dealing with the branch's
business after taking possession of the branch,
15
<PAGE>
only the claims of creditors which arose out of transactions with the branch are
to be accepted by the New York Superintendent for payment out of the business
and property of the foreign bank in the State of New York.
Under the NYBL, the Branch is generally subject to the same lending
limits to a single borrower, expressed as a ratio of capital, that apply to a
New York state-chartered bank, except that for the Branch such limits are based
on the capital of the Bank.
Under Section 4(j) of the International Banking Act of 1978 (the
"IBA"), if the Bank were to open a federally licensed branch or agency in the
United States and such federally licensed branch or agency were subsequently to
be closed by the U.S. Comptroller of the Currency, the Comptroller of the
Currency could appoint a receiver for all the property and assets of the Bank in
the United States, including the property and assets of the Branch. In that
case, the liquidation of the Branch's business would be administered by a
federal receiver applying United States federal law, which provides that claims
arising out of transactions with any branch or agency of the Bank located in any
State in the United States shall be paid out of all the properties and assets of
the Bank in the United States.
In addition to being subject to New York State laws and regulations,
the Bank and the Branch are also subject to federal regulation under the IBA and
the Bank is subject to federal regulation under the Bank Holding Company Act of
1956 (the "BHCA"). Under the IBA, United States branches of foreign banks, such
as the Branch, are subject to reserve requirements on deposits held by such
branches and to restrictions on the payment of interest on demand deposits
pursuant to regulations of the Board of Governors of the Federal Reserve System
(the "Board"). Because the Branch engages in a wholesale banking business, its
deposits are not insured by the Federal Deposit Insurance Corporation.
Under the IBA and BHCA, the Bank is subject to certain restrictions
with respect to opening new U.S. domestic deposit-taking branches in states
outside its "home state," which is New York. Recently enacted U.S. Federal law
has generally removed restrictions on acquisitions of banks outside the home
state of the acquiring bank or holding company. These laws and related
regulations also contain certain restrictions on the Bank's ability to engage,
directly or through subsidiaries, in non-banking activities in the United
States.
The BHCA also generally prohibits the Bank from, directly or
indirectly, acquiring more than 5% of the voting shares of any company engaged
in non-banking activities in the United States unless the Board has determined,
by order or regulation, that such proposed activities are so closely related to
banking or managing or controlling banks as to be a proper incident thereto. In
addition, the BHCA requires the Bank to obtain the prior approval of the Board
before acquiring, directly or indirectly, the ownership or control of more than
5% of the voting shares of any United States bank or bank holding company.
Federal law also imposes limitations on the ability of the Bank and its
subsidiaries to engage in certain aspects of the securities business in the
United States.
The Foreign Bank Supervision Enhancement Act of 1991 (the "FBSEA"),
enacted December 19, 1991, increased the degree of United States Federal bank
regulation of and supervision over United States branches of foreign banks. The
FBSEA provides, among other things, that the Board may examine such a branch and
provides that each branch of a foreign bank shall be examined at least once
during each 12-month period in an on-site examination. The FBSEA also provides
that the Board may order a foreign bank that operates a state branch to
terminate the activities of such branch if the Board finds that the foreign bank
is not subject to comprehensive supervision or regulation on a consolidated
basis by the appropriate authorities in its home country, or that there is
reasonable cause to believe that such foreign bank, or any affiliate of such
foreign bank, has committed a violation of law or engaged in an unsafe or
unsound banking practice in the United States, and, as a result of such
violation or practice, the continued operation of the branch would not be
consistent with the public interest or with the IBA, the BHCA or the Federal
Deposit Insurance Act. A foreign bank so required to terminate activities
conducted at a branch in the United States must comply with the requirements of
applicable United States Federal and state law with respect to procedures for
the closure or dissolution thereof. The FBSEA also provides that a state branch
of a foreign bank may not engage in any type of activity that is not permissible
for a United States Federal branch of a foreign bank unless the Board has
determined that such activity is consistent with sound banking practice.
16
<PAGE>
THE CANADIAN BANKING INDUSTRY
Canadian banks are a vital force in Canada's economy, facilitating the
flow of a large part of the nation's savings into various productive uses. As at
September 30, 1997, there were 53 banks in Canada, of which eleven were domestic
banks and 42 were Canadian subsidiaries of foreign-owned banks. The Banks as a
group are the largest financial intermediaries in Canada. As at September 30,
1997, Canadian banks had total assets of some $1,205 billion, of which the
largest six banks, including the Bank, accounted for over 91%. Other important
financial institutions include investment dealers, property and casualty
insurance companies, life insurance companies, trust companies, pension funds
and credit unions.
ASSET COVERAGE
As at October 31, 1997, after giving effect to the automatic exchange
and taking into account the items mentioned below, the adjusted net tangible
assets of the Bank available to cover all the outstanding First Preferred Shares
and debentures were as follows:
<TABLE>
<CAPTION>
As at
October 31, 1997
---------------------------------
(unaudited)
(in millions of Canadian dollars)
<S> <C> <C>
Total Assets .................................................... $ 66,235
Deduct: Deposit liabilities.................................... $ 43,270
Other liabilities ..................................... 19,136
Deferred income taxes ................................. 172
Goodwill .............................................. 154 (62,732)
-------- --------
Net Tangible Assets ............................................. 3,503
Add: Proceeds of the automatic exchange ......................... --
--------
Adjusted net tangible assets before deduction of debentures ..... 3,503
Deduct: Debentures .............................................. (1,069)
--------
Adjusted net tangible assets available for First Preferred Shares $ 2,434
========
</TABLE>
The adjusted net tangible assets available for the outstanding First
Preferred Shares of the Bank amounted to approximately 3.1 times the aggregate
issue price for the outstanding First Preferred Shares (including the proceeds
of the automatic exchange in the case of the Series Z Preferred Shares). The
adjusted net tangible assets (before deduction of debentures) amounted to 1.9
times the sum of the principal amount of such debentures and the aggregate issue
price of the First Preferred Shares.
DIVIDEND AND INTEREST COVERAGE
Based on an annual dividend rate on the Series Z Preferred Shares of
8.45% and assuming an average prime rate of 5.75%, the annual dividend
requirement of the Series Z Preferred Shares, of the First Preferred Shares
Series 5 (286,610 shares), Series 7 (422,633 shares), Series 8 (789,638 shares),
Series 10 (3,680,000 shares), Series 11 (4,000,000 shares) and Series 12
(5,000,000 shares) outstanding of the Bank (collectively, the "First Preferred
Shares"), would amount to $62.3 million. The Bank's net income, after income
taxes and non-controlling interest, for the twelve months ended October 31, 1997
was $342 million. This amount is 5.5 times such annual dividend requirement.
The annual interest requirement on all debentures of the Bank
outstanding as at October 31, 1997 amounts to $76.5 million, assuming a six
month London interbank offered rate (LIBOR, of 5.8125% on floating rate
debentures and assuming the following exchange rates: Cdn. $1.4084 per US$1.00;
Cdn. $0.0117 per (Y) 1; Cdn. $2.3570 per (pound) 1.00; and Cdn. $1.0134 per
AUD$1.00, being the closing rates of the Bank of Canada at October 31, 1997.
17
<PAGE>
The Bank's net income, before income taxes and non-controlling interest
and before deduction of interest on outstanding debentures for the twelve months
ended October 31, 1997, amounted to $680 million. This amount is 8.9 times the
total amount of $76.5 million required for total payment of interest on
outstanding debentures.
Taking into account the items described above, the annual dividend
requirement for the First Preferred Shares would amount to $103.8 million
grossed up on a pre-tax equivalent basis assuming an effective marginal tax rate
of 40%. The Bank's net income before income taxes and non-controlling interest
and before deduction of interest on the outstanding debentures, for the twelve
months ended October 31, 1997 of $680 million, is equal to 3.8 times the
aggregate interest on the outstanding debentures and grossed-up dividend
requirements totalling $180.3 million.
CHANGES IN SHARE AND LOAN CAPITAL
Since October 31, 1997, the only material changes in the share and loan
capital of the Bank have been the issue of 78,513 Common Shares for a
consideration of $1,562,515 under the Bank's Dividend Reinvestment and Share
Purchase Plan.
RATING
The outstanding non-cumulative First Preferred Shares of the Bank are
rated P-3 (high) by Canadian Bond Rating Service Inc. ("CBRS"), the third
highest of the five categories used by CBRS.
The outstanding non-cumulative First Preferred Shares of the Bank are
rated Pfd-2 (low) by Dominion Bond Rating Service Limited ("DBRS"), the second
highest of five categories of rating used by DBRS for preferred shares. In
certain cases, preferred shares may have a "low" characterization to reflect an
issuer's relative strength within a rating category.
Neither of the foregoing ratings should be construed as a
recommendation to buy, sell or hold securities, including the Series Z Preferred
Shares. The foregoing ratings are effective as of the date of this short form
prospectus. Either of the foregoing ratings may be revised or withdrawn at any
time by the respective rating organization and, as a consequence, may not be the
same if and when an automatic exchange for the Series Z Preferred Shares takes
place, as contemplated under "Automatic Exchange" in this short form prospectus.
LEGAL MATTERS
The legality of the securities offered by this short form prospectus
has been passed upon for the Bank by Desjardins Ducharme Stein Monast, a general
partnership, Montreal, Canada. Gerard Coulombe, who is a member of that firm, is
a director of the Bank since February 3, 1994. The partners and associates of
Desjardins Ducharme Stein Monast, as a group, beneficially owned, directly or
indirectly, less than one percent of any class of outstanding securities of the
Bank.
TRANSFER AGENT AND REGISTRAR
General Trust of Canada, at its principal transfer office in Montreal,
will be the transfer agent and registrar for the Series Z Preferred Shares. The
Bank of Nova Scotia Trust Company of New York, at its principal office in New
York, will act as co-agent in the United States.
18
<PAGE>
-----------------
No dealer, salesman or other
person has been authorized to give any
information or to make any representations [LOGO NBC]
other than those contained or incorporated NATIONAL BANK OF CANADA
by reference in this Short Form Prospectus
and, if given or made, such information or
representations must not be relied upon as
having been authorized by the Bank. This
Short Form Prospectus does not constitute
an offer to sell or a solicitation of an offer to
buy any security in any jurisdiction in
which or to any person to whom it is
unlawful to make such offer or solicitation.
Neither the delivery of this Short Form
Prospectus nor any sale made hereunder
shall under any circumstances create an ---------------------
implication that there has been no change
in the affairs of the Bank since the date SHORT FORM PROSPECTUS
hereof.
--------------------- ---------------------
TABLE OF CONTENTS
Page
----
THE DATE OF THIS SHORT FORM
PROSPECTUS IS DECEMBER 11, 1997....1
ENFORCEMENT OF LIABILITIES AND
SERVICE OF PROCESS ................2
TRANSLATION OF FOREIGN
CURRENCY ..........................2
DOCUMENTS INCORPORATED BY
REFERENCE .........................3
SHORT FORM PROSPECTUS SUMMARY .....4
THE OFFERING ......................7
CAPITALIZATION ....................9
DESCRIPTION OF THE SERIES Z
PREFERRED SHARES .................10
COMMON SHARES ....................13
USE OF PROCEEDS ..................13
THE EXCHANGE OFFER ...............13 Short Form Prospectus dated December 11,
REGISTRATION RIGHTS AGREEMENT ....13 1997
AUTOMATIC EXCHANGE ...............13
BANK ACT RESTRICTIONS AND
APPROVALS ........................14
RESTRAINTS ON BANK SHARES
UNDER THE BANK ACT ...............14
REGULATION .......................14
THE CANADIAN BANKING INDUSTRY ....17
ASSET COVERAGE ...................17
DIVIDEND AND INTEREST COVERAGE ...17
CHANGES IN SHARE AND LOAN
CAPITAL ..........................18
RATING ...........................18
LEGAL MATTERS ....................18
TRANSFER AGENT AND REGISTRAR .....18
- ------------------------------------
------------------------------------
<PAGE>
AMENDMENT NO. 1 TO
FORM S-4
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 20. Indemnification of Directors and Officers
Indemnification under Maryland Law and under the Company's Charter
and Bylaws
The Maryland General Corporation Law ("MGCL") permits a Maryland
corporation to include in its charter a provision limiting the liability of the
corporation's directors and officers to the corporation and its stockholders for
money damages except for liability resulting from (a) actual receipt of an
improper benefit or profit in money, property or services or (b) active and
deliberate dishonesty established by a final judgment as being material to the
cause of action. The Charter contains such a provision which eliminates such
liability to the maximum extent permitted by the MGCL.
The Charter authorizes the Company, to the maximum extent permitted
by Maryland law, to obligate itself to indemnify and to pay or reimburse
reasonable expenses in advance of final disposition of a proceeding to (a) any
present or former director or officer or (b) any individual who, while a
director of the Company and at the request of the Company, serves or has served
another corporation, partnership, joint venture, trust, employee benefit plan or
any other enterprise as a director, officer, partner or trustee of such
corporation, partnership, joint venture, trust, employee benefit plan or other
enterprise, from and against any claim or liability to which such person may
become subject or which such person may incur by reason of his or her status as
a present or former director or officer of the Company. The Bylaws of the
Company (the "Bylaws") obligate it, to the maximum extent permitted by Maryland
law, to indemnify and to pay or reimburse reasonable expenses in advance of
final disposition of a proceeding to (a) any present or former director or
officer who is made a party to the proceeding by reason of his service in that
capacity or (b) any individual who, while a director of the Company and at the
request of the Company, serves or has served another corporation, partnership,
joint venture, trust, employee benefit plan or any other enterprise as a
director, officer, partner or trustee of such corporation, partnership, joint
venture, trust, employee benefit plan or other enterprise and who is made a
party to the proceeding by reason of his service in that capacity. The Charter
and Bylaws also permit the Company to indemnify and advance expenses to any
person who served a predecessor of the Company in any of the capacities
described above and to any employee or agent of the Company or a predecessor of
the Company.
The MGCL requires a corporation (unless its charter provides
otherwise, which the Charter does not) to indemnify a director or officer who
has been successful, on the merits or otherwise, in the defense of any
proceeding to which he is made a party by reason of his service in that
capacity. The MGCL permits a corporation to indemnify its present and former
directors and officers, among others, against judgments, penalties, fines,
settlements and reasonable expenses actually incurred by them in connection with
any proceeding to which they may be made
II-1
<PAGE>
a party by reason of their service in those or other capacities unless it is
established that (a) the act or omission of the director or officer was material
to the matter giving rise to the proceeding and (i) was committed in bad faith
or (ii) was the result of active and deliberate dishonesty, (b) the director or
officer actually received an improper personal benefit in money, property or
services or (c) in the case of any criminal proceeding, the director or officer
had reasonable cause to believe that the act or omission was unlawful. However,
under the MGCL, a Maryland corporation may not indemnify for an adverse judgment
in a suit by or in the right of the corporation or for a judgment of liability
on the basis that personal benefit was improperly received, unless in either
case a court orders indemnification and then only for expenses. In addition, the
MGCL requires the Company, as a condition to advancing expenses, to obtain (a) a
written affirmation by the director or officer of his good faith belief that he
has met the standard of conduct necessary for indemnification by the Company and
(b) a written statement by or on his behalf to repay the amount paid or
reimbursed by the Company if it shall ultimately be determined that the standard
of conduct was not met.
II-2
<PAGE>
Item 21. Exhibits and Financial Statement Schedules
3(i) -- Articles of Incorporation and Articles of Amendment and Restatement
of NB Capital Corporation*
3(ii) -- By-Laws of NB Capital Corporation*
4.1 -- Registration Rights Agreement dated as of September 3, 1997 by and
among NB Capital Corporation, National Bank of Canada and Merrill
Lynch, Pierce, Fenner & Smith Incorporated*
5.1 -- Opinion letter of Ballard, Spahr, Andrews & Ingersoll as Special
Counsel to NB Capital Corporation and its Consent
8.1 -- Tax Opinion of Shearman & Sterling and its Consent
10.1 -- Advisory Agreement dated as of September 3, 1997 between National
Bank of Canada and NB Capital Corporation*
10.2 -- Servicing Agreement dated as of September 3, 1997 between National
Bank of Canada and NB Finance, Ltd.**
10.3 -- Loan Agreement dated as of September 3, 1997 between NB Finance,
Ltd. and NB Capital Corporation*
10.4 -- Custodial Agreement dated as of September 3, 1997 between National
Bank of Canada and NB Capital Corporation*
23.1 -- Consent of Deloitte & Touche LLP**
99.1 -- Letter of Transmittal*
99.2 -- Notice of Guaranteed Delivery
- --------------------------
* Previously filed.
** To be filed by amendment.
Item 22. Undertakings
The undersigned hereby undertakes:
(a) The undersigned registrant hereby undertakes that, for purposes
of determining any liability under the Securities Act of 1933, each
filing of the registrant's annual report pursuant to Section 13(a) or
15(d) of the Securities Exchange Act of 1934 that is incorporated by
reference in the registration statement shall be deemed to be a new
registration statement relating to the securities offered therein, and
the offering of such securities at that time shall be deemed to be the
initial bona fide offering thereof.
(b) Insofar as indemnification for liabilities arising under the
Securities Act of 1933 may be permitted to directors, officers, and
controlling persons of the registrant pursuant to the foregoing
provisions, or otherwise, the registrant has been advised that in the
opinion of the Securities and Exchange Commission such indemnification is
against public policy as expressed in the Act and is, therefore,
unenforceable. In the event that a claim for indemnification against such
liabilities (other than the payment by the registrant of expenses
incurred or paid by a director, officer or controlling person of the
registrant in the successful defense of any action, suit or proceeding)
is asserted by such director, officer or controlling person in connection
with the securities being registered, the registrant will, unless in the
opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question
whether such indemnification by
II-3
<PAGE>
it is against public policy as expressed in the Act and will be governed
by the final adjudication of such issue.
(c) The undersigned registrant hereby undertakes to provide to the
underwriter at the closing specified in the underwriting agreements
certificates in such denominations and registered in such names as
required by the underwriter to permit prompt delivery to each purchaser.
(d) The undersigned registrant hereby undertakes to respond to
requests for information that is incorporated by reference into the
prospectus pursuant to Item 4, 10(b), 11 or 13 of this form, within one
business day of receipt of such request, and to send the incorporated
documents by first class mail or other equally prompt means. This
includes information contained in documents filed subsequent to the
effective date of the registration statement through the date of
responding to the request.
(e) The undersigned registrant hereby undertakes to supply by means
of a post-effective amendment all information concerning a transaction,
and the company being acquired involved therein, that was not the subject
of and included in the registration statement when it became effective.
II-4
<PAGE>
FORM F-9
PART II
INFORMATION NOT REQUIRED
TO BE DELIVERED TO OFFEREES OR PURCHASERS
Indemnification of Directors and Officers
Under the Bank Act, the Bank may indemnify a present or former director or
officer or another person who acts or acted at the Bank's request as a director
or officer of another entity of which the Bank is or was a shareholder or
creditor, and his heirs or personal representatives, against all costs, charges
and expenses, including an amount paid to settle an action or satisfy a
judgment, reasonably incurred by the person in respect of any civil, criminal or
administrative action or proceeding to which he is made a party by reason of
such person's position with the Bank or such other corporation, except for
actions or proceedings brought by or on behalf of the Bank or such entity, to
procure a judgment in its favour, and provided that the director or officer
acted honestly and in good faith with a view to the best interests of the Bank
and, in the case of a criminal or administrative action or proceeding that is
enforced by a monetary penalty, had reasonable grounds for believing that the
person's conduct was lawful. Such indemnification may be made in connection with
a derivative action only with court approval. Such a director or officer or
person is entitled to indemnification from the Bank as a matter of right if such
person was substantially successful on the merits and fulfilled the conditions
set forth above.
In accordance with the Bank Act, the by-laws of the Bank provide that
the Bank shall indemnify out of its funds a director or officer, a former
director or officer, or a person who acts or acted at the Bank's request as a
director or officer of an entity of which the Bank is or was a shareholder or
creditor and the assigns, heirs and personal representatives of such person,
from and against all costs, charges and expenses, including amounts paid to
settle an action or satisfy a judgment reasonably incurred by the person in
respect of any civil, criminal or administrative action or proceeding to which
the person is made a party by reason of being or having been director or officer
of the Bank or such entity, except for actions or proceedings brought by or on
behalf of the Bank or such entity, to procure a judgment in its favour, if the
person acted honestly and in good faith with a view to the best interest of the
Bank and in the case of a criminal or administrative action or proceeding that
is enforced by a monetary penalty, he had reasonable grounds for believing that
his conduct was lawful. Such indemnification may be made in connection with a
derivative action only with court approval. Such person is also entitled to
indemnification from the Bank for all of its costs, charges and expenses
reasonably incurred during or as a result of business as a director or officer
of the Bank or of the entity. No indemnification is available, however, for
costs, charges and expenses resulting from the person's own fault, negligence or
willful omission.
A policy of directors and officers' liability insurance is maintained
by the Bank which insures directors and officers of the Bank and its
subsidiaries for losses as a result of claims based upon the acts or omissions
as directors and officers of the Bank and also reimburses the Bank for payments
made pursuant to the indemnity provisions under the Bank Act.
Insofar as indemnification for liabilities arising under the Securities
Act of 1933 may be permitted to directors, officers or persons controlling the
Bank pursuant to the foregoing provisions, the Bank has been informed that in
the opinion of the U.S. Securities and Exchange Commission such indemnification
is against public policy as expressed in the Act and is therefore unenforceable.
II-1
<PAGE>
Exhibits.
Exhibit
Number
- ------
4.1 Annual Report for the year ended October 31, 1996.*
4.2 Annual Information Form dated December 19, 1996 (included in Exhibit 4.1
hereto).*
4.3 Management's Discussion and Analysis of Operating Results and Financial
Condition dated December 19, 1996 (included in Exhibit 4.1 hereto).*
4.4 Audited Consolidated Financial Statements of the Bank for the year ended
October 31, 1997, together with the Auditors' Report thereon, which
include comparative audited consolidated financial statements for the
year ended October 31, 1996 (included in Exhibit 4.1 hereto).*
4.5 Management Circular dated January 16, 1997.*
5.1 Consent of Raymond, Chabot, Martin, Pare, a general partnership, Price
Waterhouse and Samson Belair / Deloitte & Touche, a general
partnership.*
5.2 Consent of Desjardins Ducharme Stein Monast, a general partnership.*
6.1 Power of Attorney (contained on the signature page of the Registration
Statement of Form F-9)
99.1 Form F-X of National Bank of Canada
- ----------------------
* As filed with the Quebec Securities Commission.
II-2
<PAGE>
FORM F-9
PART III
UNDERTAKING AND CONSENT TO SERVICE OF PROCESS
Item 1. Undertaking
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 F-9 or to transactions in
said securities.
Item 2. Consent to Service of Process.
The registrant is concurrently filing with the Commission a written
irrevocable consent and power of attorney on Form F-X.
Any change to the name or address of the agent for service of the
registrant shall be communicated promptly to the Commission by amendment to Form
F-X referencing the file number of the relevant registration statement.
III-1
<PAGE>
AMENDMENT NO. 1 TO
FORM S-4
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the
registrant has duly caused this registration statement to be signed on its
behalf by the undersigned, thereunto duly authorized, in the City of New York,
State of New York, on December 19, 1997.
NB CAPITAL CORPORATION
By: /s/ Roger Smock
-----------------------
Roger Smock
President
Pursuant to the requirements of the Securities Act of 1933, this
registration statement has been signed by the following persons in the
capacities and on the dates indicated.
Signature Title Date
--------- ----- ----
/s/ Roger Smock
----------------------- President and Director December 19, 1997
Roger Smock (Principal Executive
Officer)
/s/ Real Raymond
----------------------- Chief Financial Officer, December 19, 1997
Real Raymond Treasurer and Director
(Principal Financial Officer
and Accounting Director)
/s/ Francois Bourassa
----------------------- Vice President -- Legal, December 19, 1997
Francois Bourassa Secretary and Director
/s/ Michael Hanley
----------------------- Director December 19, 1997
Michael Hanley
/s/ Alain Michel
----------------------- Director December 19, 1997
Alain Michel
<PAGE>
FORM F-9
SIGNATURES
Pursuant to the requirements of the U.S. Securities Act of 1993 (the
"Securities Act", as amended), the registrant certifies that it has reasonable
grounds to believe that it meets all of the requirements for filing on Form F-9
and has duly caused this registration statement to be signed on its behalf by
the undersigned, thereunto duly authorized, in the City of Montreal, Country of
Canada, on December 11, 1997.
NATIONAL BANK OF CANADA
By: /s/ Jean Turmel
---------------------------------------
Name: Jean Turmel
Title: Senior Executive Vice President,
Treasury, Brokerage and
Corporate Banking
(Principal Financial Officer)
Pursuant to the requirements of the Securities Act, this registration
statement has been signed by the following persons in the capacities and on the
dates indicated.
Signature Title Date
--------- ----- ----
____________*____________ Chairman of the Board and Chief December 11, 1997
Andre Berard Executive Officer and Director
(Principal Executive Officer)
____________*____________ Director December 11, 1997
Leon Courville
____________*____________ Director December 11, 1997
Maurice J. Closs
____________*____________ Director December 11, 1997
Gerard Coulombe
____________*____________ Director December 11, 1997
Shirley A. Dawe
____________*____________ Director December 11, 1997
Jean Douville
____________*____________ Director December 11, 1997
Donald M. Green
<PAGE>
Signature Title Date
--------- ----- ----
____________*____________ Director December 11, 1997
Suzanne Leclair
____________*____________ Director December 11, 1997
Gaston Malette
____________*____________ Director December 11, 1997
Leonce Montambault
____________*____________ Director December 11, 1997
J.-Robert Ouimet
____________*____________ Director December 11, 1997
Robert Parizeau
____________*____________ Director December 11, 1997
Lino Saputo
____________*____________ Senior Executive Vice-President, December 11, 1997
Jean Turmel Treasury, Brokerage and
Corporate Banking
(Principal Financial Officer)
____________*____________ Vice-President and Chief December 11, 1997
Jean Dagenais Accounting Officer,
(Principal Accounting Officer)
* By: /s/ Francoise Bureau
______________________________
As Attorney-in-Fact
<PAGE>
Pursuant to the requirements of Section 6(a) of the Securities Act of
1933, the undersigned has signed this Registration Statement, solely in the
capacity of the duly authorized representative of National Bank of Canada in the
United States, in the City of New York, State of New York, on this 11th day of
December, 1997.
By: NB Capital Corporation
Authorized Representative in the United States
125 West 55th Street
New York, New York 10019
By: /s/ Roger Smock
----------------------------------------------
Name: Roger Smock
Title: President
<PAGE>
AMENDMENT NO. 1
TO FORM S-4
EXHIBITS
Exhibit Number Description Page Number
- -------------- ----------- -----------
3(i) Articles of Incorporation and Articles of Amendment of
and Restatement of NB Capital Corporation.
3(ii) By-Laws of NB Capital Corporation.
4.1 Registration Rights Agreement dated as of September 3,
1997 by and among NB Capital Corporation, National
Bank of Canada and Merrill Lynch, Pierce, Fenner &
Smith Incorporated.
5.1 Opinion letter of Ballard, Spahr, Andrews & Ingersoll as
Special Counsel to NB Capital Corporation and its Consent.
8.1 Tax Opinion of Shearman & Sterling and its Consent.
10.1 Advisory Agreement dated as of September 3, 1997
between National Bank of Canada and NB Capital
Corporation.
10.2 Servicing Agreement dated as of September 3, 1997
between National Bank of Canada and NB Finance, Ltd.
10.3 Loan Agreement dated as of September 3, 1997 between
NB Finance, Ltd. and NB Capital Corporation.
10.4 Custodial Agreement dated as of September 3, 1997
between National Bank of Canada and NB Capital
Corporation.
23.1 Consent of Deloitte & Touche LLP.
99.1 Letter of Transmittal.
99.2 Notice of Guaranteed Delivery.
December 19, 1997
NB Capital Corporation
125 West 55th Street
New York, New York 10019
Re: Registration Statement on Form S-4
Ladies and Gentlemen:
We have served as Maryland counsel to NB Capital Corporation,
a Maryland corporation (the "Company"), in connection with certain matters of
Maryland law arising out of the registration of 300,000 shares (the "Shares") of
its 8.35% Noncumulative Exchangeable Preferred Stock, Series A, $.01 par value
per share (the "New Preferred Stock"), covered by the above-referenced
Registration Statement, and all amendments thereto (the "Registration
Statement"), filed by the Company with the Securities and Exchange Commission
(the "Commission") under the Securities Act of 1933, as amended (the "1933
Act"). The Shares are to be issued in exchange for up to all of the outstanding
shares of 8.35% Noncumulative Exchangeable Preferred Stock, Series A, $.01 par
value per share, of the Company (the "Old Preferred Stock"). Unless otherwise
defined herein, capitalized terms used herein shall have the meanings assigned
to them in the Registration Statement.
In connection with our representation of the Company, and as a
basis for the opinion hereinafter set forth, we have examined originals, or
copies certified or otherwise identified to our satisfaction, of the following
documents (collectively, the "Documents"):
<PAGE>
NB Capital Corporation 2 December 19, 1997
1. The Registration Statement and the related form of
prospectus included therein in the form in which it was transmitted to the
Commission under the 1933 Act;
2. The charter of the Company (the "Charter") certified as of
a recent date by the State Department of Assessments and Taxation of Maryland
(the "SDAT");
3. The Bylaws of the Company, certified as of a recent date
by its Secretary;
4. Resolutions adopted by the Board of Directors of the
Company (the "Board") relating to the sale, issuance and registration of the
Shares, certified as of a recent date by the Secretary of the Company (the
"Resolutions");
5. The form of certificate representing a share of New
Preferred Stock, certified as of a recent date by the Secretary of the Company;
6. A certificate of SDAT as to the good standing of the
Company, dated as of a recent date;
7. A certificate executed by the Secretary of the Company,
dated as of December 19,1997;
8. Such other documents and matters as we have deemed
necessary or appropriate to express the opinion set forth in this letter,
subject to the assumptions, limitations and qualifications stated herein.
In expressing the opinion set forth below, we have assumed,
and so far as is known to us there are no facts inconsistent with the following:
1. Each individual executing any of the Documents, whether on
behalf of such individual or another person, is legally competent to do so.
2. Each individual executing any of the Documents on behalf
of a party (other than the Company) is duly authorized to do so.
3. Each of the parties (other than the Company) executing any
of the Documents has duly and validly executed and delivered each of the
Documents to which such party is a signatory, and such party's obligations set
forth therein are legal, valid and binding and are enforceable in accordance
with their terms.
<PAGE>
NB Capital Corporation 2 December 19, 1997
4. All Documents submitted to us as originals are authentic.
All Documents submitted to us as certified or photostatic copies conform to the
original documents. All signatures on all such Documents are genuine. All public
records reviewed or relied upon by us or on our behalf are true and complete.
All statements and information contained in the Documents are true and complete.
There are no oral or written modifications or amendments to the Documents, and
there has been no waiver of any provision of any of the Documents, by action or
omission of the parties or otherwise.
5. Articles Supplementary designating 300,000 shares of
Preferred Stock, $.01 par value per share, as Series A Preferred Shares (as
defined in the Charter), with the preferences, conversion and other rights,
voting powers, restrictions, limitations as to dividends and other
distributions, qualifications, and terms or conditions of redemption as set
forth in the Charter will be filed with and accepted for record by the SDAT
prior to the issuance of the Shares.
The phrase "known to us" is limited to the actual knowledge,
without independent inquiry of the lawyers at our firm who have performed legal
services in connection with the issuance of this opinion.
Based upon the foregoing, and subject to the assumptions,
limitations and qualifications stated herein, it is our opinion that:
1. The Company is a corporation duly incorporated and existing
under and by virtue of the laws of the State of Maryland and is in good standing
with the SDAT.
2. Upon acceptance for record by the SDAT of the Articles
Supplementary, the Shares will be duly authorized and, when issued in accordance
with the resolutions of the Board of Directors of the Company in exchange for
shares of Old Preferred Stock as described in the Registration Statement, will
be validly issued, fully paid and nonassessable.
The foregoing opinion is limited to the laws of the State of
Maryland and we do not express any opinion herein concerning any other law. The
opinion expressed herein is subject to the effect of judicial decisions which
may permit the introduction of parol evidence to modify the terms or the
interpretation of agreements. We express no opinion as to compliance with the
securities (or "blue sky") laws of the State of Maryland.
We assume no obligation to supplement this opinion if any
applicable law changes after the date hereof or if we become aware of any fact
that might change the opinion expressed herein after the date hereof.
<PAGE>
NB Capital Corporation 2 December 19, 1997
This opinion is being furnished to you for submission to the
Commission as an exhibit to the Registration Statement and, accordingly, may not
be relied upon by, quoted in any manner to, or delivered to any other person or
entity without, in each instance, our prior written consent.
We hereby consent to the filing of this opinion as an exhibit
to the Registration Statement and to the use of the name of our firm herein. In
giving this consent, we do not admit that we are within the category of persons
whose consent is required by Section 7 of the 1933 Act.
Very truly yours,
/s/ Ballard Spahr Andrews & Ingersoll
[Shearman & Sterling letterhead]
December __, 1997
Merrill Lynch, Pierce, Fenner & Smith Incorporated
World Financial Center-North Tower
250 Vesey Street, 7th Floor
New York, New York 10281
NB Capital Corporation
8.35% Noncumulative Exchangeable Preferred Stock, Series A
----------------------------------------------------------
Ladies and Gentlemen:
At the request of NB Capital Corporation (the "Company"), we
hereby confirm as of the date hereof our opinion that the statements set forth
under the caption "United States Federal Income Tax Consideration" in the
Prospectus dated December __, 1997 contained in the Company's Registration
Statement on Form S-4 (Registration No. 333-41009) (the "Registration
Statement"), insofar as such statements relate to statements of law or legal
conclusions under the laws of the United States or matters of United States law,
fairly present the information called for and fairly summarize the matters
referred to therein.
We hereby consent to the filing of this opinion as an exhibit
to the Registration Statement and the reference to us under the caption "United
States Federal Income Tax Considerations" contained in the Prospectus.
Very truly yours,
PHB/LMB/DRM
NOTICE OF GUARANTEED DELIVERY
FOR TENDER OF ANY AND ALL OUTSTANDING
8.35% NONCUMULATIVE EXCHANGEABLE
PREFERRED STOCK, SERIES A
OF
NB CAPITAL CORPORATION
As set forth in the Prospectus, dated December __, 1997 (the
"Prospectus"), of NB Capital Corporation (the "Company"), in the accompanying
Letter of Transmittal and instructions thereto (the "Letter of Transmittal"),
this form or one substantially equivalent hereto must be used to accept the
Company's exchange offer (the "Exchange Offer") to purchase all of its
outstanding 8.35% Noncumulative Exchangeable Preferred Stock, Series A (the "Old
Preferred Shares") if (i) certificates representing the Old Preferred Shares to
be tendered for purchase and payment are not lost but are not immediately
available, (ii) time will not permit the Letter of Transmittal, certificates
representing such Old Preferred Shares or other required documents to reach the
Exchange Agent prior to the Expiration Date or (iii) the procedures for
book-entry transfer cannot be completed prior to the Expiration Date. This form
may be delivered by an Eligible Institution by mail or hand delivery or
transmitted, via telegram, telex or facsimile, to the Exchange Agent as set
forth below. This Notice of Guaranteed Delivery may be delivered by hand,
overnight courier or mail, or transmitted by facsimile transmission, to the
Exchange Agent. See "The Exchange Offer--Procedures for Tendering Old Preferred
Shares" in the Prospectus. In addition, in order to utilize the guaranteed
delivery procedure to tender Old Preferred Shares pursuant to the Exchange
Offer, a completed, signed and dated Letter of Transmittal relating to the Old
Preferred Shares (or facsimile thereof) must also be received by the Exchange
Agent prior to 5:00 P.M., New York City time, on the Expiration Date. All
capitalized terms used herein but not defined herein shall have the meanings
ascribed to them in the Prospectus.
THE EXCHANGE OFFER WILL EXPIRE AT 5:00 P.M., NEW YORK CITY TIME, ON ________,
1998 UNLESS THE OFFER IS EXTENDED (THE "EXPIRATION DATE"). TENDERS OF OLD
PREFERRED SHARES MAY BE WITHDRAWN AT ANY TIME PRIOR TO 5:00 P.M. ON THE BUSINESS
DAY PRIOR TO THE EXPIRATION DATE.
<PAGE>
2
The Exchange Agent:
THE BANK OF NOVA SCOTIA
TRUST COMPANY OF NEW YORK
BY REGISTERED OR FACSIMILE TRANSMISSIONS: BY HAND OR OVERNIGHT
CERTIFIED MAIL: (ELIGIBLE INSTITUTIONS ONLY) DELIVERY:
The Bank of Nova Scotia (212) 225-5436 The Bank of Nova Scotia
Trust Company of New York Trust Company of New York
One Liberty Plaza TO CONFIRM BY TELEPHONE: One Liberty Plaza
New York, New York 10006 OR FOR YOUR INFORMATION New York, New York 10006
Attn: George Timmes (212) 225-5436 Attn: George Timmes
DELIVERY OF THIS NOTICE OF GUARANTEED DELIVERY TO AN ADDRESS
OTHER THAN AS SET FORTH ABOVE OR TRANSMISSIONS OF THIS NOTICE OF GUARANTEED
DELIVERY VIA FACSIMILE TO A NUMBER OTHER THAN AS SET FORTH ABOVE WILL NOT
CONSTITUTE A VALID DELIVERY.
THIS NOTICE OF GUARANTEED DELIVERY IS NOT TO BE USED TO
GUARANTEE SIGNATURES. IF A SIGNATURE ON A LETTER OF TRANSMITTAL IS REQUIRED TO
BE GUARANTEED BY AN "ELIGIBLE INSTITUTION" UNDER THE INSTRUCTIONS THERETO, SUCH
SIGNATURE GUARANTEE MUST APPEAR IN THE APPLICABLE SPACE PROVIDED IN THE
SIGNATURE BOX ON THE LETTER OF TRANSMITTAL.
<PAGE>
3
Ladies and Gentlemen:
The undersigned hereby tender(s) to the Company, upon the
terms and subject to the conditions set forth in the Exchange Offer and the
Letter of Transmittal, receipt of which is hereby acknowledged, the aggregate
principal amount of Old Preferred Shares set forth below pursuant to the
guaranteed delivery procedures set forth in the Prospectus.
The undersigned understands that tenders of Old Preferred
Shares will be accepted only in principal amounts equal to $1,000 or integral
multiples thereof. The undersigned understands that tenders of Old Preferred
Shares pursuant to the Exchange Offer may not be withdrawn after 5:00 P.M., New
York City time on the Business Day prior to the Expiration Date. Tenders of Old
Preferred Shares may also be withdrawn if the Exchange Offer is terminated
without any such Old Preferred Shares being purchased thereunder or as otherwise
provided in the Prospectus.
All authority herein conferred or agreed to be conferred by
this Notice of Guaranteed Delivery shall survive the death or incapacity of the
undersigned and every obligation of the undersigned under this Notice of
Guaranteed Delivery shall be binding upon the heirs, personal representatives,
executors, administrators, successors, assigns, trustees in bankruptcy and other
legal representatives of the undersigned.
PLEASE SIGN AND COMPLETE
Signature(s) of Registered Owner(s) or Name(s) of Registered Holder(s):
Authorized Signatory:
_________________________________________ ________________________________
Principal Amount of Old Preferred Address:
Shares Tendered:
_________________________________________ ________________________________
Certificate No(s). of Old Preferred Area Code and Telephone No.:
Shares (if available):
_________________________________________ ________________________________
If Old Preferred Shares will be
delivered by book-entry transfer
at The Depository Trust Company,
insert Depository Account No.:
Date: __________________ ________________________________
<PAGE>
4
This Notice of Guaranteed Delivery must be signed by the registered
holder(s) of Old Preferred Shares exactly as its (their) name(s) appear on
certificates for Old Preferred Shares or on a security position listing as the
owner of Old Preferred Shares, or by person(s) authorized to become registered
Holder(s) by endorsements and documents transmitted with this Notice of
Guaranteed Delivery. If signature is by a trustee, executor, administrator,
guardian, attorney-in-fact, officer or other person acting in a fiduciary or
representative capacity, such person must provide the following information.
Please print name(s) and address(es)
Name(s): ___________________________________________________________________
___________________________________________________________________
Capacity: ___________________________________________________________________
Address(es): ___________________________________________________________________
___________________________________________________________________
DO NOT SEND OLD PREFERRED SHARES WITH THIS FORM. OLD PREFERRED SHARES SHOULD BE
SENT TO THE EXCHANGE AGENT TOGETHER WITH A PROPERLY COMPLETED AND DULY EXECUTED
LETTER OF TRANSMITTAL.
<PAGE>
5
GUARANTEE
(NOT TO BE USED FOR SIGNATURE GUARANTEE)
The undersigned, a firm or other entity identified in rule 17Ad-15
under the Securities Exchange Act of 1934, as amended, as an "eligible guarantor
institution," including (as such terms are defined therein): (i) a bank; (ii) a
broker, dealer, municipal securities broker, municipal securities dealer,
government securities broker, government securities dealer; (iii) a credit
union; (iv) a national securities exchange, registered securities association or
learning agency; or (v) a savings association that is a participant in a
Securities Transfer Association recognized program (each of the foregoing being
referred to as an "Eligible Institution"), hereby guarantees to deliver to the
Exchange Agent, at one of its addresses set forth above, either the Old
Preferred Shares tendered hereby in proper form for transfer, or confirmation of
the book-entry transfer of such Old Preferred Shares to the Exchange Agent's
account at The Depository Trust Company, pursuant to the procedures for
book-entry transfer set forth in the Prospectus, in either case together with
one or more properly completed and duly executed Letter(s) of Transmittal (or
facsimile thereof) and any other required documents within five business days
after the date of execution of this Notice of Guaranteed Delivery.
THE UNDERSIGNED ACKNOWLEDGES THAT IT MUST DELIVER THE LETTER OF
TRANSMITTAL AND OLD PREFERRED SHARES TENDERED HEREBY TO THE EXCHANGE AGENT
WITHIN THE TIME PERIOD SET FORTH ABOVE AND THAT FAILURE TO DO SO COULD RESULT IN
FINANCIAL LOSS TO THE UNDERSIGNED.
Name of Firm: ____________________________ ______________________________
Authorized Signature
Address: _________________________________ Name: _______________________
Area Code and Telephone No: ______________ Title: _______________________
Date: _______________________
NOTE: DO NOT SEND CERTIFICATES FOR OLD PREFERRED SHARES WITH THIS
FORM. CERTIFICATES FOR OLD PREFERRED SHARES SHOULD ONLY BE SENT
WITH YOUR LETTER OF TRANSMITTAL.
<PAGE>
FORM F-9
EXHIBITS
Exhibit Number Description Page Number
4.1 Annual Report for the year ended October 31, 1996.
4.2 Annual Information Form of National Bank of Canada
dated December 19, 1996 (included in Exhibit 4.1 hereto).
4.3 Management's Discussion and Analysis of Operating
Results and Financial Condition of National Bank of
Canada for the year ended October 31, 1996
(included in Exhibit 4.1 hereto).
4.4 Audited Consolidated Financial Statements of the Bank
for the year ended October 31, 1997, together with the
Auditors' Report thereon, which include comparative
audited consolidated financial statements for the year
ended October 31, 1996 (included in Exhibit 4.1 hereto).
4.5 Management Proxy Circular dated January 16, 1997,
relating to the Annual Meeting of Shareholders of
National Bank of Canada held on March 12, 1997.
5.1 Consent of Raymond, Chabot, Martin, Pare, a general
partnership,Price Waterhouse and Samson Belair / Deloitte &
Touche, a general partnership.
5.2 Consent of Desjardins Ducharme Stein Monast, a general
partnership.
6.1 Powers of Attorney (contained on the signature pages of
this Registration Statement).
99.1 Form F-X of National Bank of Canada.
1996 ANNUAL REPORT [NATIONAL BANK OF CANADA LOGO]
<PAGE>
THE BANK'S CORPORATE MISSION
TO BE A BANKING INSTITUTION ATTUNED TO THE NEEDS OF ITS VARIED CLIENTELE,
PRIMARILY BASED IN QUEBEC, AND TO STRIVE FOR GREATER PROFITABILITY THAN THE
AVERAGE OF THE MAJOR CANADIAN BANKS BY EFFICIENTLY MANAGING ITS OPERATIONS,
DIVERSIFYING ITS ACTIVITIES ACCORDING TO MARKET NEEDS AND IMPROVING THE
QUALITY OF ITS HUMAN RESOURCES.
Table of Contents
1 Commitments and Challenges
2 Major Accomplishments in 1996
3 Highlights
4 Message to Shareholders
10 Annual Information Form
13 Description of the Business of the Bank
17 Management's Discussion and
Analysis of Operating Results
and Financial Condition
47 Glossary of Financial Terms
50 Management's Report
50 Auditors' Report
51 Consolidated Financial Statements
71 Disclosure of the Corporate Governance
Practices of the Bank
73 Directors
74 Committees of the Board of Directors
77 Officers
79 Business Development Committee Members
82 Subsidiaries and Offices Abroad
84 Information for Shareholders and Investors
<PAGE>
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
8e etage
Montreal (Quebec) H3B 4L2
Legal deposit: 4th quarter 1996
Bibliotheque nationale
du Quebec
Printed in Canada
ISBN 2-921835-03-7
Graphic Design
Belanger Legault
Communications Design ltee
Photography: Messrs. Berard and Courville
Guy Schiele
Photography: Regions
Reflexion Phototheque
Publiphoto
Printing
Litho Acme inc.
<PAGE>
COMMITMENTS AND CHALLENGES
STABILITY CONTINUE ON A COURSE OF STEADY GROWTH IN INCOME AND
PROFITABILITY.
GROWTH MAINTAIN GROWTH IN NET INCOME WHILE OFFERING EXCEPTIONAL
SERVICE TO OUR TARGET CLIENT GROUPS.
PRUDENCE MANAGE RISK PRUDENTLY BY APPLYING INCREASINGLY SOPHISTICATED
ANALYSIS AND DECISION-MAKING METHODS. MAINTAIN SUFFICIENT
RESERVES TO COVER ANY EVENTUALITY.
PURSUE OUR ORDERLY WITHDRAWAL FROM THE REAL ESTATE SECTOR AND
TAKE ADVANTAGE OF OPPORTUNITIES TO LIQUIDATE OUR RISKIEST
ASSETS.
LEADERSHIP CONSOLIDATE OUR DOMINANT POSITION IN THE INDEPENDENT BUSINESS
MARKET IN QUEBEC.
DIVERSIFICATION INCREASE GEOGRAPHIC DIVERSIFICATION BY CAPITALIZING ON
NICHES THAT TIE IN WITH THE BANK'S STRATEGY.
STRENGTHEN THE BANK'S PRESENCE IN INTERMEDIATION-RELATED
FINANCIAL ACTIVITIES: INSURANCE, PORTFOLIO MANAGEMENT, PAYMENT
SYSTEMS AND ELECTRONIC TRANSACTIONS, MUTUAL FUNDS, ADVISORY
SERVICE FOR CUSTOMERS.
FOSTER SYNERGIES BETWEEN PRODUCTS AND SUBSIDIARIES.
ALLIANCES CONTINUE FORGING STRATEGIC ALLIANCES AS A MEANS OF EXPANDING
THE BANK'S MARKETS.
INNOVATION REMAIN AT THE FOREFRONT OF NEW TECHNOLOGIES FOR ELECTRONIC
PAYMENTS.
REDEPLOY THE NETWORK OF BRANCHES AND SERVICES TO MEET THE
NEEDS OF OUR CLIENTELE MORE EFFECTIVELY.
PURSUE TECHNOLOGICAL TRANSFORMATION.
PROMOTE TRAINING TO ENABLE PERSONNEL TO ADAPT TO THE NEW
FINANCIAL REALITY.
NET INCOME AND DIVIDENDS PER SHARE ($)
[GRAPH]
RETURN ON COMMON SHAREHOLDERS' EQUITY (%)
[GRAPH]
1
<PAGE>
MAJOR ACCOMPLISHMENTS IN 1996
IMPORTANT PROGRESS ACHIEVED IN FULFILLING THE COMMITMENTS MADE BY THE BANK IN
RECENT YEARS: STABLE AND PRUDENT GROWTH COMBINED WITH HIGHER PROFITABILITY.
HIGHER PROFITABILITY
Record earnings, with net income up by 30% to $318 million and earnings per
common share climbing 50 cents to $1.76.
Return of 14.5% on common shareholders' equity; dividends up 22.5% during the
year.
With the dividend increase and higher share value, total yield on common shares
reached 25%.
Pre-tax gain of $80 million from the sale of our stake in the Chilean bank Banco
Osorno, versus an initial investment of less than $10 million.
FINANCIAL STABILITY
Reduction in the charge for loan impairment posted to income despite the
creation of a special sectoral provision.
Risk-control measures successful: net impaired loans represented no more than
19.2% of common shareholders' equity.
Continued orderly withdrawal from the real estate sector: net real estate loans
down 21.3%, with the decline occurring in all geographic markets.
Common shareholders' equity up $188 million.
Greater geographic diversification in high-potential markets, especially in
Ontario and the United States.
STABLE GROWTH
Selective acquisitions continued with the purchase of two financial institutions
in Ontario.
Increase in our business with small and medium-sized businesses in Quebec.
Increase of 6% in business loans and bankers' acceptances.
Residential mortgage loans rose by 12.2%.
Non-interest income up 17.5% owing to the exceptional performance of Levesque
Beaubien Geoffrion and, more generally, to the Bank's success in diversifying
its revenue streams.
New financial services: an advisory service that enables Bank customers to
select the most suitable mutual funds on the market for them; the Personal
CompuTeller software for use on PCs; new financial planner position created.
The Bank signed major agreements to set up electronic payment networks.
SECURNAT, for instance, is the first system in Canada that ensures secure
payment of purchases via the Internet.
Continued focus on strategic alliances: with Metropolitan Life for the sale of
life insurance; with CyberCash for developing SECURNAT; and with the MOUVEMENT
DESJARDINS for the electronic payment network used by Quebec's COMMISSION DE LA
SANTE ET DE LA SECURITE DU TRAVAIL.
Last phase of the technological transformation of the branch network completed.
Opening of the first National Bank branch in a supermarket.
Synergies: General Trust focusing on specialized advisory services; new joint
achievements with Levesque Beaubien Geoffrion.
Consolidation of tools for personnel training and introduction of the new
National Bank university program.
2
<PAGE>
HIGHLIGHTS
PERCENTAGE
CHANGE
1996 1995 1996/1995
- --------------------------------------------------------------------------------
RESULTS OF OPERATIONS
(MILLIONS OF DOLLARS)
Net interest income $ 1,270 $ 1,170 9
Other income 836 712 17
Net income 318 245 30
----------------------------------
FINANCIAL RATIOS
Return on common shareholders' equity 14.5% 11.0%
Return on average assets 0.64% 0.51%
----------------------------------
PER COMMON SHARE
Net income
- Basic $ 1.76 $ 1.26 40
- Fully diluted 1.74 1.24 40
Dividends 0.49 0.40 23
Book value 12.70 11.88 7
Stock trading range
- High 13.90 11.88
- Low 10.38 8.63
- Close 13.00 11.00
----------------------------------
FINANCIAL POSITION
(MILLIONS OF DOLLARS)
Total assets $ 53,134 $ 48,913 9
Loans and bankers' acceptances 39,660 35,088 13
Deposits 40,125 40,424 (1)
Shareholders' equity and bank debentures 3,515 3,488 1
Capital ratios (BIS)
- Tier 1 6.9% 6.8%
- Total (1) 10.2% 10.4%
----------------------------------
OTHER INFORMATION
Number of common shares
at end of the year (IN THOUSANDS) 167,151 163,963 2
Number of common shareholders
of record 36,549 39,053 (6)
Number of employees 11,992 12,198 (2)
Number of branches in Canada 632 629 -
Number of banking machines 712 624 14
- --------------------------------------------------------------------------------
(1) TAKING INTO ACCOUNT THE ISSUE OF $150 MILLION IN DEBENTURES ON
NOVEMBER 1, 1996
NET INCOME TOTAL ASSETS RETURNS ON SHAREHOLDERS' EQUITY
(MILLIONS OF $) (BILLIONS OF $) AVERAGE ASSETS AND DEBENTURES
(BILLIONS OF $)
[GRAPH] [GRAPH] [GRAPH] [GRAPH]
AS AT OCTOBER 31 AS AT OCTOBER 31
3
<PAGE>
MESSAGE TO SHAREHOLDERS
THE NATIONAL BANK: AN INSTITUTION TO BANK ON SIGNIFICANTLY HIGHER NET INCOME
AND EARNINGS PER SHARE, RETURN ON COMMON SHAREHOLDERS' EQUITY OF 14.5%, A
CONSISTENT DECLINE IN LOAN LOSSES AND IMPAIRED LOANS, AND INCREASED ASSET
GROWTH: ALL THESE ATTEST TO THE ONGOING IMPROVEMENT IN RESULTS IN 1996 AND
CONFIRM THAT THE NATIONAL BANK IS AN INSTITUTION THAT CUSTOMERS AND
SHAREHOLDERS CAN BANK ON.
The Bank's performance throughout 1996 clearly demonstrates that the strategy
applied in recent years to achieve both steady growth in profitability and sound
risk management has been successful. Although the economy was not as buoyant in
Canada as in the United States, and Quebec's economy was even more uncertain,
the Bank did not deviate from its course.
SUSTAINED PROFITABILITY
For the 12 months ended October 31, 1996, the Bank reported net income of $318.3
million, for an increase of 30%, the largest such increase since the 1993
recovery. Earnings per share rose from $1.26 to $1.76 while return on common
shareholders' equity climbed from 11.0% to 14.5%. With the dividend increases in
1995 and 1996, the Bank's shareholders were rewarded for their patience.
Financial markets began to acknowledge the stability and consistency of our
results. Even though the Quebec economy was sluggish, the Bank's shares
continued to rise in value by 20%; the combination of higher share value and
higher dividends yielded a total return of 24.6%.
In spite of fierce competition within the industry, net interest income grew at
a slightly faster pace in 1996 than in 1995.
[PHOTO]
WITH THE DIVIDEND INCREASES IN 1995 AND 1996, THE BANK'S SHAREHOLDERS WERE
REWARDED FOR THEIR PATIENCE.
ANDRE BERARD
Other income rose a remarkable 17.5%, the result of the Bank's efforts to
diversify its revenue streams over the years. Securities operations,
particularly those of our subsidiary Levesque Beaubien Geoffrion which turned in
a record performance in 1996, generated most of this increase. Our subsidiary
National Bank Securities also made an exceptional contribution to growth in
other income.
4
<PAGE>
STEADY BALANCE SHEET GROWTH
As at October 31, 1996, balance sheet assets had risen $4,221 million compared
to a year earlier, with loans and bankers' acceptances up by 13.0%.
The Bank continued to focus on strengthening its financial structure during the
year.
For instance, in 1996, it was able to reduce loan loss provisions charged to
income by $20 million, or 7.8%, taking into account the special sectoral
provision of $60 million.
Moreover, increasingly sophisticated credit assessment methods were
introduced, and measures were adopted to clean up problem loans by drawing on
the special sectoral provision, particularly with respect to the real estate
portfolio. The Bank also sold a $215 million loan portfolio (chiefly real
estate loans) dating back to the acquisition of General Trust. As
anticipated, this operation had no effect on income.
In 1996, net impaired loans were down 20.6% and represented no more than 19.2%
of common shareholders' equity.
[PHOTO]
THE NATIONAL BANK IS THE UNCONTESTED LEADER IN QUEBEC'S COMMERCIAL SECTOR, AND
IT HAS EVERY INTENTION OF REMAINING SO.
LEON COURVILLE
CONTINUITY AND DIVERSITY FOR FUTURE GROWTH
The Bank has done everything to ensure that the present trend of steady growth
in profitability, lower risks and higher shareholder value will continue in the
future.
Our core market is in Quebec, where we plan to focus on our personal customers
and consolidate our dominant position in the independent business market. In
1996, in line with these goals, we maintained our personal deposit base and
increased our business with small and medium-sized businesses.
The National Bank is the uncontested leader in Quebec's commercial sector, and
it has every intention of remaining so. Despite accelerating competition, the
Bank is still ideally placed to serve Quebec's independent businesses, whether
they require traditional financial services, related services such as payroll,
or the entire range of new -- and future -- electronic services.
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In addition to flourishing in its primary markets in Quebec, the Bank is
actively diversifying its revenue streams. For instance, it is increasingly
involved in financial sectors which go beyond traditional banking activities.
It has also become a player in specialized markets elsewhere in Canada and in
the United States where it can apply its industry expertise and diversify
risk. A universal bank in Quebec, the National Bank occupies and will
continue to occupy profitable niches in other parts of Canada, in the United
States and in the rest of the world.
The expansion of our international operations in 1996 is a case in point. In
the United States, the Bank continued its withdrawal from less profitable
activities while simultaneously advancing into target markets, such as the
mid-market in which it enjoys a comparative advantage. The Bank zeros in on
highly profitable, low-risk activities like asset-based lending, which now
accounts for the lion's share of our U.S. commercial portfolio. In order to
capitalize on opportunities in these market segments, the Bank opened three
new offices in the United States during the year -- in St. Louis, New Orleans
and Richmond, Virginia -- as well as a new Canadian office in Toronto.
A number of other international projects are also on the drawing board,
notably with our South American and European partners. Moreover, the Bank
signed an agreement with the Quebec government to house Quebec trade
delegations in four U.S. cities, a form of cooperation that could well be
applied elsewhere in the world.
THE GEOGRAPHIC DIVERSITY OF THE BANK IS FURTHER REFLECTED IN ITS ACQUISITION OF
TWO ONTARIO-BASED FINANCIAL INSTITUTIONS, FAMILY TRUST AND MUNICIPAL SAVINGS &
LOAN.
The Bank's many achievements in 1996 also included the acquisition of a $180
million mortgage portfolio from an institutional investor. In addition, the
Canada Deposit Insurance Corporation gave the Bank the mandate to pay out $40
million in deposits of the Home Mortgage Securities Corporation, and the Bank
succeeded in retaining half of this deposit portfolio. Furthermore, the Bank
was awarded a contract by the Quebec department of finance to set up and
administer a new agency, PLACEMENTS QUEBEC, whose mission is to receive and
manage government securities.
ADAPTATION AND INNOVATION
The new technological and financial reality demands that our delivery network
be redeployed. In 1996, the National Bank continued to transform its
branches, develop electronic networks and adapt its products in response to
the dictates of the market. The technological transformation program for its
branches is virtually completed, while implementation of a computer platform
geared to independent businesses is on schedule.
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THE BANK OF THE FUTURE WILL HAVE MANY FACETS, AND WE HAVE ALREADY BEGUN TO
EXPERIMENT WITH NON-TRADITIONAL FORMULAS FOR SERVICE DELIVERY, SUCH AS OPENING
BRANCHES IN SUPERMARKETS.
A major challenge facing banks today is meshing old and new delivery
channels. The National Bank has long been a leader in the area of banking
machines and point-of-sale terminals; now it has started exploring the many
possibilities of electronic networks, which are rapidly expanding and clearly
offer great potential for the future.
In 1996, the National Bank became the first bank in Canada to offer its
customers home banking via personal computer. Personal CompuTeller, as this
new service is known, comes with an exclusive software package. The 7,570
customers who had already signed up for this service by October 31 are ample
proof of its success. The Bank's strong position in the electronic payments
sector was further reinforced, notably when it obtained a contract from a
Quebec government agency, the COMMISSION DE LA SANTE ET DE LA SECURITE DU
TRAVAIL.
The groundwork has also been laid for the Bank's future role as a financial
intermediary in Internet payments. By launching SECURNAT, the National Bank
scored another first among Canadian banks by offering consumers a secure way
to buy products and services on the Internet. Designed in collaboration with
the U.S. firm CyberCash, SECURNAT enables consumers to pay for their Internet
purchases by electronic funds transfer, a payment method that ensures
complete security.
In order to retain their customers, banks will increasingly have to become a
marketplace where a variety of financial and advisory services can be
obtained. The challenge lies in knowing our customers and targeting their
needs more precisely so that we can give them the product and service
combinations they want.
The National Bank Group covers the whole gamut: comprehensive banking
services, life insurance, credit insurance and a full range of other
financial products. We recently introduced a new service, through InvesTel,
to offer our customers the mutual funds of other companies and to provide
them with mutual fund advice so that they can select the funds best suited to
their needs.
Further steps were taken to more closely link the Bank and its subsidiary
Levesque Beaubien Geoffrion. For instance, a common trading room was set up,
and joint programs were introduced to promote retail sales and corporate
financing. The Bank also issued stock index-linked notes which were marketed
by dealers at Levesque Beaubien Geoffrion. As mentioned in our 1995 Annual
Report, the role of General Trust of Canada was redefined so that it could
specialize in providing wealth management services. Its intermediation
activities were also integrated into those of the Bank's network.
Forging alliances with other companies is an excellent way to redeploy the
delivery network. In addition to our association with Metropolitan Life, we
secured another strategic alliance by teaming up with the MOUVEMENT
DESJARDINS in the electronic payments network for Quebec's COMMISSION DE LA
SANTE ET DE LA SECURITE DU TRAVAIL.
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COST AND RISK CONTROL
Cost control is another challenge, one which the Bank will continue to tackle
with determination.
Central to controlling costs is reducing credit risk, and we implemented a
number of measures aimed at accomplishing this: a gradual and orderly
withdrawal from risky markets such as real estate, use of sophisticated
credit assessment methods and criteria, and careful follow-up with our
clients. These measures produced results. In 1996, real estate volumes
outstanding were significantly lower, and loan losses and impaired loans were
generally down as well.
Naturally, some sectors were harder hit than others by the economic context.
In line with our strategy, we continued to expand our independent business
lending portfolio in Quebec. However, although this portfolio has been
strengthened, economic conditions in Quebec are having a contrary effect.
These conditions are especially difficult for individuals and very small
businesses; the loyalty of these customers to the Bank readily justifies the
agreements we have reached with them to help them overcome their problems.
Loan losses and impaired loans may well evolve differently in Quebec than in
the Bank's other markets for some time to come, particularly among consumers.
Even if the economic climate calls for additional loan loss provisions to be
taken, the Bank would not be adversely affected as it enjoys a strong
financial position which will become even stronger through increased
profitability and expanded business lines.
Excluding the costs related to the reduction in value of certain assets as
well as Levesque Beaubien Geoffrion expenses, non-interest expenses rose by
6.1%.
The Bank's massive investment in new technologies was responsible for this
increase as we realized a few years ago that we had some catching up to do.
The accelerated phase is over, for all intents and purposes, and we foresee a
period of more moderate spending, as indicated by the results for the second
half of 1996.
We must continue to focus on achieving the right balance between
entrepreneurial initiative and cost control. One approach adopted by the Bank
to meet this goal was to set up a centralized independent sales force in
eight of our regions.
Another reason for the increase in the Bank's expenses in 1996 was its higher
tax burden, chiefly because of capital taxes. In fact, data for the first
three quarters of the year reveal that the National Bank, with average total
assets of slightly less than 6% of the aggregate total for the six major
banks, paid more than 8% of the indirect taxes (e.g. capital taxes, payroll
taxes and deposit insurance) levied on the six banks combined.
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A SOLID BANK
Greater emphasis was placed on the Bank's training activities in 1996 in
order to prepare employees to serve a diverse clientele in an advisory
capacity. Training tools already introduced were consolidated, and the
National Bank university program was launched. Some 20% of the Bank's
employees in Quebec branches registered for the first session of the program
in the fall of 1996, clear proof that it is meeting a need. The amount of
time spent on training by our personnel was up 15% over 1995.
WITH THEIR ENTHUSIASM, THEIR FLEXIBILITY AND THE NEW SKILLS THEY ARE LEARNING,
THE BANK'S PERSONNEL WILL BE WELL EQUIPPED TO TAKE ON THE CHALLENGES THAT LIE
AHEAD AND, AS IN THE PAST, WILL BE THE CHIEF ARCHITECTS OF OUR SUCCESS.
Finally, we wish to express our thanks to four members of the Board of
Directors, namely, Marc Bourgie, Mary S. Lamontagne, Pierre Lortie and Louise
B. Vaillancourt, who will not be standing for re-election in 1997.
Overall, fiscal 1996 was characterized by growth in both business and
profitability. At year end, the Bank was even better positioned to ensure
continued prosperity, maintain a strong balance sheet and provide a good
return to its shareholders.
The National Bank is an institution to bank on and its value will be
increasingly appreciated. Our shareholders and customers alike will reap the
benefits.
ANDRE BERARD LEON COURVILLE
CHAIRMAN OF THE BOARD AND PRESIDENT AND
CHIEF EXECUTIVE OFFICER CHIEF OPERATING OFFICER
9
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ANNUAL INFORMATION FORM
INCORPORATION
National Bank of Canada (the "Bank") was formed through a series of
amalgamations, including amalgamations with The Provincial Bank of Canada in
1979, with The Mercantile Bank of Canada effective November 1, 1985, and with
National Bank Leasing Inc., its wholly owned subsidiary, on November 1, 1992.
The Bank's roots in fact date back to 1859 with the founding of the BANQUE
NATIONALE in Quebec City.
The Bank is a Schedule I bank under the Bank Act (the "Act"). Its head office
and principal place of business is located at the National Bank Tower, 600 de
La Gauchetiere West, Montreal, Quebec, Canada, H3B 4L2.
COMPETITION
The barriers to competition in the financial industry are steadily
disappearing as the various markets merge and new types of investments and
transactions are developed. The Bank's competitors in traditional banking
services are the major Canadian banks together with the credit unions in its
primary market of Quebec, where it has an aggregate market share of 20%. The
same competitive environment exists in the brokerage industry, which has
increasingly come under the control of the major banks. At the Bank,
brokerage operations are carried out by Levesque Beaubien Geoffrion Inc. and
National Bank Securities Inc. through its InvesTel service. For mutual funds,
trust services and investment management, there is a greater range of
competitors, including various financial companies that specialize in these
areas. In the United States, even though a large number of financial
corporations compete for asset-based lending business, the relative size of
our portfolio enables us to precisely target markets in order to limit risk
exposure. In addition, the Bank understands the importance of being at the
leading edge when it comes to the new electronic payment and marketing
methods which are experiencing phenomenal growth as computer networks become
more open. The ongoing development of a number of products in this area
reflects the Bank's determination to rise to the challenge of this new source
of competition.
ENVIRONMENTAL ISSUES
In order to minimize risks related to the environment, a few years ago the
Bank introduced a procedure setting out its environmental responsibilities
when granting credit and taking possession of contaminated assets. To date,
these risks have not had a material impact on the Bank's operations.
FINANCIAL DATA
ALL AMOUNTS IN THIS ANNUAL INFORMATION FORM ARE EXPRESSED IN CANADIAN DOLLARS
UNLESS OTHERWISE INDICATED.
REFERENCES TO LEGISLATION
THE INFORMATION CONTAINED IN THIS ANNUAL INFORMATION FORM IS SUBMITTED IN
COMPLIANCE WITH THE APPLICABLE REGULATIONS GOVERNING SECURITIES.
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BANK SUPERVISION
The Superintendent of Financial Institutions Canada (the "Superintendent") is
responsible to the Minister of Finance for applying the Act. The
Superintendent must, at least once a year, examine the affairs and business
of the Bank for the purpose of determining whether the provisions of the Act
are being duly observed and that the Bank is in sound financial condition,
and report to the Minister. Outside Canada, the Bank's subsidiaries, branches
and representative offices are required to comply with the Act and with
legislation in the various jurisdictions in which they operate.
RESTRICTIONS ON OWNERSHIP OF BANK SHARES
The Act prohibits any person from owning, either directly or by way of
entities controlled by the person, more than 10% of all the outstanding
shares of any class of shares of the Bank. Governments, their agents or
agencies, whether in Canada or a foreign country, may not own shares of the
Bank.
EXECUTIVE OFFICERS
All the officers whose names appear on page 77 have held management,
executive or senior executive positions with the Bank during the past five
years, with the exception of Pierre Desbiens who, from 1989 to 1990, was
employed by Connecticut National Life (Hartford) as President and Chief
Operating Officer, and, from 1990 to 1994, was employed by Empire Financial
Group as Regional Vice-President and General Manager; Gisele Desrochers who,
from 1989 to 1994, was employed by the Quebec Government as Deputy Minister -
Department of Recreation, Fish and Game; Associate Secretary General -
Administrative Reform and Higher Employment; and Deputy Minister - Department
of Revenue; and Michel Labonte who, from 1988 to 1993, was employed by
Hydro-Quebec as Vice-President - Industrial Markets; Vice-President -
Financing and Treasurer; and Executive Vice-President - Finance and
Administration.
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, 1996 with the
accompanying report of the auditors and a copy of any subsequent quarterly
financial statements; a copy of the Management Proxy Circular of the Bank 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 Bank's Management Proxy Circular dated December 19, 1996, which is
enclosed with the Notice of Annual Meeting of Shareholders scheduled for
March 12, 1997, contains additional information such as the remuneration and
indebtedness of directors and executive officers, the number of Bank shares
held and share options awarded.
Copies of these documents may be obtained upon request from the Corporate
Secretary's Office of the Bank, 600 de La Gauchetiere West, Montreal, Quebec,
H3B 4L2.
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DOCUMENTS INCORPORATED BY REFERENCE
Additional items comprising the Bank's Annual Information Form are disclosed
in portions of this Annual Report and are incorporated by reference as set
out below.
ITEM REFERENCE
1. Main Subsidiaries PAGE 82
2. Description of the Business PAGES 13 TO 15
3. General Development of the Business PAGES 4 TO 9
4. Loans by Borrower Category PAGE 29, TABLE 7
5. Impaired Loans PAGE 38, TABLE 14 AND PAGE 58,
NOTE 4
6. Interest on Impaired Loans PAGE 39, TABLE 15
7. Charge for Loan Impairment PAGE 24, TABLE 3
8. Designated Countries PAGE 37, TABLE 13
9. Personal, Business and Mortgage Loans PAGE 22, TABLE 2 AND PAGE 52
10. Earning Assets Abroad PAGE 28, TABLE 6
11. Assets Under Administration/Management PAGE 33, TABLE 11
12. Personnel PAGES 3, 15 AND 70
13. Cash Dividends and Dividend Policy PAGE 45 AND PAGE 61, NOTE 11
14. Main Consolidated Financial Data PAGES 45, 46 AND 70
15. Quarterly Results PAGES 45 AND 46
16. Management's Discussion and Analysis PAGES 17 TO 47
17. Market for Trading Bank's Securities PAGE 84
18. Directors and Officers PAGES 71 TO 77
12
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DESCRIPTION OF THE BUSINESS OF THE BANK
The National Bank, which ranks sixth among Canadian banks in terms of total
assets, is present in each of Canada's provinces. It delivers an extensive range
of financial services to individuals, commercial enterprises, financial
institutions and governments both in Canada and abroad.
The Bank's main sectors and divisions are the following: Banking, which consists
of Retail Banking, Commercial Banking and International; Trust Services;
Insurance; Treasury, Brokerage and Corporate Banking; and Human Resources and
Administration.
BANKING
RETAIL BANKING
Through its network of 632 branches, Retail Banking provides services to
individuals and serves as support to the commercial banking centres and the
Corporate Banking, International Commercial Operations and Treasury divisions.
In addition to personal and mortgage loans, the Bank offers a broad range of
transaction accounts and investment vehicles, such as term deposits and
investment certificates, mutual funds (managed by the Bank or by third parties)
and registered retirement savings plans and income funds, as well as credit card
and travellers cheque services. In response to clients' growing demand for
financial advisory services, the Bank embarked on a new phase in 1996 when it
integrated more than 50 accredited financial planners into its branches.
Clients can access their accounts at any of the Bank's 712 banking machines as
well as at the more than 236,600 banking machines in North America and Europe
which belong to the Cirrus, Interac and MasterCard ATM networks. Furthermore,
through the Interac Direct Payment network, debit card holders can pay for their
purchases without using cash at any of the Bank's 25,062 point-of-sale
terminals.
The Bank continues to assume a leadership role in customer service by offering
its customers non-traditional services such as TelNat for banking by phone and
Personal CompuTeller for banking by computer. The first service of its kind in
Canada, Personal CompuTeller gives customers direct access to their transaction
accounts via their personal computer.
To meet the new reality of consumer demand for fast, easy access to banking
services, the Bank developed another delivery concept in the form of specially
designed service units in supermarkets, open seven days a week.
COMMERCIAL BANKING
The Commercial Banking division administers loans to independent businesses
and offers them an array of complementary services. Of the 38 commercial
banking centres in operation as at October 31, 1996, 20 were in Quebec, nine
in Ontario and nine in Atlantic Canada. The centres are staffed by account
managers, each of whom services a small number of business clients, and by
experts in special financing methods. In addition to the specialized services
offered by Treasury and International Commercial Operations, businesses can
obtain a full range of services such as bankers' acceptances, operating loans
and fixed- or variable-rate term loans, as well as computerized payroll
processing, bank reconciliation with cheques in consignment and
pre-authorized payments.
The Bank also serves mid-market companies through offices in 16 U.S. cities,
including its own representative offices and the offices of its subsidiary
National Canada Finance Corp.
INTERNATIONAL
Present in over 120 countries around the world through its network of
correspondents, the Bank offers its international clients service of the highest
calibre. With years of experience and a network of carefully selected partners,
the International division has more than 35 offices in Canada, the United
States, Latin America, Asia and Europe, as well as some 2,800 banking
correspondents throughout the world and seven cooperation agreements with highly
respected financial institutions.
The Bank has also developed partnerships with private enterprise and all three
levels of public administration. Partnerships created in 1996 include the Action
Asia Group, Montreal International, the Canada-Poland Development Fund and a
France-Quebec network for independent businesses, as well as the agreement to
accommodate Quebec trade delegates in the Bank's offices in Boston, Los Angeles,
Chicago and Atlanta.
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Through its dynamic International division, the Bank is able to offer
international products and services that are fully adapted to the increasingly
sophisticated needs of its clients: guarantees and letters of credit, foreign
exchange transactions, foreign payments and management of foreign accounts, to
name but a few. Whether their needs include international banking and corporate
credit, export financing, identification of clients or partners, foreign risk
capital management or financing and management of international commercial
operations, the Bank's clients can count on the expertise of this division's
attentive, experienced specialists.
TRUST SERVICES
Further to its acquisition by the Bank in July 1993, General Trust has been
restructured to focus on its primary vocation, namely, providing trust services.
With its investment services, personal trust services and branches now
integrated into the Bank's network, General Trust offers wealth management
services for high net worth households. Its corporate trust services are geared
to the needs of independent businesses and large corporations in Quebec.
General Trust and National Bank Securities Inc., another Bank subsidiary,
provide active fund management on behalf of their clients. National Bank
Securities Inc. also offers its clients a wide selection of mutual funds and
discount brokerage services.
INSURANCE
The Insurance division is responsible for managing the Bank's insured risks and
credit insurance and for marketing its various insurance products to clients.
As part of its management of insured risks, this division ensures that the
various policies underwritten by the Bank provide good coverage for possible
claims related to the Bank's assets and premises as well as its officers'
liability. National Bank Life Insurance Company administers credit insurance
plans for loans granted by the Bank and markets various general insurance
products. Personal and group insurance products are delivered through National
Bank Financial Services, a joint company formed by the Bank and Metropolitan
Life.
TREASURY, BROKERAGE AND CORPORATE BANKING
With offices in Montreal, Toronto, Vancouver, London, New York and Singapore,
the Treasury division of the Treasury, Brokerage and Corporate Banking sector
manages the Bank's liquidity; it is responsible for matching assets and
liabilities, and is in constant communication with financial markets in
Canada and abroad. It develops financial instruments adapted to the needs of
both institutional and commercial clients and is responsible for raising and
managing the Bank's Tier 1 and Tier 2 capital. This division, which oversees
the securitization of NHA mortgage loans, is also very active in the
negotiation and sale of off-balance sheet instruments such as options, swaps
and other futures contracts. It handles foreign exchange transactions on
behalf of the Bank and its clients on both the spot and futures markets.
The Corporate Banking division, with the support of specialized teams based in
Montreal and Toronto, offers a broad range of services customized to clients'
needs. In addition to providing traditional operating credit and term financing,
these teams structure financing for acquisitions or recapitalization and arrange
high-yield financing, often through loan syndicates involving other
institutions. They also offer advisory services for restructuring, mergers and
acquisitions and for hybrid financings combining debt and equity. Together with
the Treasury division, Corporate Banking offers financial risk management
instruments for hedging interest rates, foreign exchange and import-export
transactions. The division's specialists in banking operations can suggest a
vast range of electronic products, such as point-of-sale debit and electronic
data interchange (EDI), and tailor them to each client's requirements.
The securities brokerage subsidiary Levesque Beaubien Geoffrion Inc. provides
services to business clients and individuals, in addition to playing an
important role in securing financing for various levels of government.
This subsidiary is active on all the major markets through its network of 32
offices.
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Another subsidiary, Natcan Investment Management Inc., specializes in portfolio
management for institutional clients and identifies investment opportunities in
Canada, the United States and abroad. Pension funds, insurance companies, mutual
funds, foundations and religious orders are among the many clients for which
this subsidiary manages assets in excess of $6 billion.
HUMAN RESOURCES AND ADMINISTRATION
The Human Resources and Administration sector is responsible for policies
concerning personnel and certain areas of administration.
In its human resources function, the sector is responsible for employee
relations, staffing, succession planning, training, employee benefits,
compensation and employment equity. In terms of administration, it is
responsible for public relations, legal affairs and the corporate secretary's
office as well as audit, premises and administrative services.
As at October 31, 1996, the Bank had 11,992 employees compared to 12,198 a year
earlier. This net decrease was due to the restructuring of the branch network as
part of the Continuous Improvement Program, the goal of which was to increase
efficiency by centralizing certain activities and implementing new technologies.
The number of employees, however, rose in other Bank sectors as a result of the
diversification in products and delivery channels.
PROPERTIES
With respect to real estate holdings, as at October 31, 1996, the Bank owned its
head office in Montreal and, for its operations, also owned 127 other properties
across Canada and leased 565 premises, including 35 abroad.
The Bank's consolidated fixed assets at cost, less accumulated depreciation, and
excluding furniture, equipment and leasehold improvements, amounted to $178
million as at October 31, 1996. However, no independent assessment of the market
value of the Bank's fixed assets was available. Information concerning the
Bank's fixed assets is contained in Note 6 to the Consolidated Financial
Statements on page 59.
15
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF
OPERATING RESULTS AND FINANCIAL CONDITION
ECONOMIC ENVIRONMENT
The main characteristic of the international economy in 1996 was the contrast
between intense economic activity in the United States and sluggish economic
growth in Europe and Canada. Japan, for its part, embarked on a fragile
recovery after more than two years of economic stagnation.
In the United States, buoyant consumer demand spurred growth. Employment and
personal income grew rapidly. Rising wages, combined with lower productivity
gains, pushed up unit labour costs. The Federal Reserve's monetary policy
remained relatively accommodating during what was a presidential election
year. Prices rose moderately despite fears of inflationary pressure.
Inflationary expectations, natural in a context of strong growth, dwindled
and the U.S. bond market remained calm.
Canada's economic performance overall was somewhat disappointing in 1996.
In the first quarter, when consumer spending jumped, growth was compromised
by a startling downtrend in exports. In the second quarter, even though
exports picked up, inventories plummeted and investment spending lost steam,
hampering economic growth. As in 1995, exports remained the main engine of
economic growth throughout the year as domestic demand proved lacklustre.
The job market was especially bleak during the first half of the year with
only Western Canada reporting significant employment growth. In the eastern
part of the country, and especially in Quebec, the job losses reported in the
first six months mean that net employment gains will no doubt be marginal for
the year as a whole.
Unlike the gloomy situation that existed in 1995, the strong upturn in
residential construction in Canada was one of the most positive developments
in 1996. New home buyers took advantage of enticing interest rates and a very
favourable market.
However, business spending on non-residential construction continued to trend
down. The real estate market remained difficult and disappointing.
Government finances continued to improve. In its last budget, the federal
government affirmed its intention of reducing the deficit to $24.3 billion or
3% of gross domestic product in 1996-97, then to 2% of GDP the following
year. The Ontario government plans to cut provincial income tax by 30%
between 1996 and 1999, while trimming its budget deficit; in 1996-97 it
projects a deficit of $8.2 billion, down almost $1 billion from the previous
year. As for the Quebec government, it forecasts a budget deficit of $3.2
billion in 1996-97, compared with $3.9 billion in 1995-96.
For the first time in more than 10 years, Canadian short- and medium-term
interest rates (three months to seven years) fell well below U.S. rates. The
Bank of Canada consistently reduced its target range, quite independently of
the policies of the U.S. Federal Reserve.
The Canadian dollar strengthened, reflecting investor confidence. The
turnaround in public finances, inflation below the U.S. rate and the
disappearance of the current account deficit were some of the factors that
attracted investors.
In Quebec, the Bank's geographic base and its principal market, economic
performance was even more uncertain than for Canada as a whole.
Whereas personal bankruptcies in Quebec returned to within the Canadian
average, business bankruptcies remained well above the numbers reported in
the rest of Canada. In addition, new problems surfaced in the real estate
market.
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Even though Canadian banks had an excellent year overall, the banking
industry in Canada was prevented from fully benefitting from the turnaround
measures implemented in recent years for several reasons. These included
narrower interest spreads on transaction deposits, continuing job market
uncertainty, weak growth in personal income and stagnant commercial loans as
businesses focussed on strengthening their balance sheets.
Fortunately, the housing market and, by extension, mortgage credit were
stimulated by interest rates that fell to historically low levels. However,
low interest rates had the effect of shifting savings away from the more
traditional investments such as term deposits.
Banks now have to offer their clients a much more extensive range of
investment options as well as provide related advisory services. The mature
market for traditional bank products is largely responsible for these
changes. It is also the reason why banks are seeking to diversify their
financial activities into allied products and services such as insurance and
electronic transactions.
Insofar as economic conditions remain more difficult in Quebec than in the
rest of Canada or in the United States, it is to be expected that the
financial situation of our clientele will continue to place specific
constraints on the Bank. However, their impact will be lessened by the
opportunities available in its core market.
Moreover, the Bank's active presence in leading-edge financial products and
services, as well as its diversification in specialized markets throughout
Canada and elsewhere in the world, will enable it to take full advantage of
the new opportunities that present themselves.
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OVERVIEW OF RESULTS
STEADY PROGRESSION IN RESULTS
Table 1 summarizes the Bank's results for 1996. The strong growth of 29.9% in
net income was generated by the positive changes in net interest income,
other income and the charge for loan impairment.
Net interest income rose 8.1% on a taxable equivalent basis. Other income was
up 17.5%, as explained further on. Loan losses charged to income declined by
7.8%.
As at October 31, 1996, the Bank's total assets stood at $53,134 million,
which was $4,221 million or 8.6% higher than at the same date in 1995.
FROM 1992 TO 1996, THE BANK'S TOTAL ASSETS ROSE BY $13,099 MILLION, OR 32.7%.
Average assets for the year amounted to $49,239 million, for an increase of
3.5%. The upward trend in return on average assets, which began in 1993,
accelerated in 1996, rising from 0.51% to 0.64% during the year. Net interest
income and other income were up in relation to average assets while loan
losses were down. These favourable developments more than offset the rise in
non-interest expenses.
During the year, the Bank declared a dividend of $0.49 per common share,
which was 22.5% higher than for the previous 12 months. Dividend payouts on
preferred shares totalled $27 million, down slightly from 1995 chiefly
because of the redemption of Series 9 shares at the end of fiscal 1995.
Return on common shareholders' equity was 14.5% in 1996, a substantial
increase over the 11.0% recorded in the previous year and the highest return
since 1988. The 20% increase in share value combined with the higher dividend
yield brought the total return on common shares for the year to 24.6%.
DOMESTIC
Despite lacklustre economic conditions in 1996, profitability was driven by
the domestic market, where four-fifths of the Bank's average assets are
concentrated. As Table 1A shows, domestic net income rose $34.6 million or
21.3%. Return on average assets climbed from 0.41% to 0.47%.
Other income as a percentage of average assets increased from 1.71% to 1.95%,
mainly as a result of the higher income recorded by our brokerage subsidiary,
Levesque Beaubien Geoffrion. Loan losses continued to decline, dropping to
0.46% of average assets as against 0.55% at the end of 1995.
TABLE 1
OVERVIEW OF RESULTS
FOR THE YEAR ENDED OCTOBER 31
(TAXABLE EQUIVALENT BASIS)
(MILLIONS OF DOLLARS AND AS A PERCENTAGE OF AVERAGE ASSETS)
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------------
1996 1995 1994 1993 1992
-------------- --------------- --------------- --------------- -----------------
$ % $ % $ % $ % $ %
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net Interest Income 1,275.9 2.59 1,180.6 2.48 1,094.9 2.54 1,016.2 2.56 1,040.5 2.67
Charge For Loan Impairment 235.0 0.48 255.0 0.54 275.0 0.64 325.0 0.82 570.0 1.46
Other Income 836.4 1.70 711.6 1.50 719.3 1.67 635.3 1.60 540.6 1.39
Non-Interest Expenses 1,413.1 2.87 1,229.3 2.58 1,168.7 2.71 1,042.0 2.63 1,016.0 2.61
Income Taxes 135.8 0.28 156.3 0.33 144.6 0.34 101.3 0.25 (13.0) (0.03)
Non-Controlling Interest 10.1 0.02 6.6 0.02 8.7 0.02 8.6 0.02 7.1 0.02
-------------- --------------- --------------- --------------- -----------------
Net Income 318.3 0.64 245.0 0.51 217.2 0.50 174.6 0.44 1.0 -
- ----------------------------------------------------------------------------------------------------------------------------
AVERAGE ASSETS 49,239 47,582 43,160 39,657 38,908
- ----------------------------------------------------------------------------------------------------------------------------
</TABLE>
19
<PAGE>
As a percentage of average assets, net interest income dipped slightly, from
2.51% in 1995 to 2.47% in 1996, while non-interest expenses rose from 2.92%
to 3.21%. As explained later, the main factors responsible for the increase
in these expenses were a non-recurring item which affected certain assets,
variable remuneration and technological developments.
INTERNATIONAL - UNITED STATES
The net income of $17.2 million earned in the United States corresponded to
0.40% of our U.S. assets, down from 0.63% in fiscal 1995 (Table 1B). This
decline was essentially due to the higher charge for loan impairment, which
served to improve the real estate portfolio in line with the Bank's strategy.
The changes in the components of U.S. net income can be attributed to our
strategy which consists of gradually withdrawing from less profitable
operations while simultaneously zeroing in on target markets where the Bank
enjoys a comparative advantage, such as services to mid-market companies.
For several years now, the Bank has been radically altering the make-up of
its commercial lending portfolio by reducing conventional loan levels in
favour of asset-based lending. Loans outstanding in the U.S. commercial
portfolio amounted to US $2,072 million (or CDN $2,773 million) as at October
31, 1996, for a year-over-year increase of 10%. We are benefitting from the
special expertise we have acquired in asset-based lending as it is a highly
profitable niche for the Bank. This is borne out by the rise in net interest
income from 2.51% to 2.59% of U.S. assets.
Lending to mid-market companies, it is worth pointing out, is a fiercely
competitive business because of the many financing instruments available and
the ever growing number of competitors.
TABLE 1A
OVERVIEW OF RESULTS - DOMESTIC OPERATIONS
FOR THE YEAR ENDED OCTOBER 31
(TAXABLE EQUIVALENT BASIS)
(MILLIONS OF DOLLARS AND AS A PERCENTAGE OF AVERAGE ASSETS)
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------
1996 1995 1994 1993 1992
------------- ------------- ------------- ------------ -------------
$ % $ % $ % $ % $ %
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net interest income 1,027.3 2.47 997.8 2.51 942.9 2.65 851.8 2.74 885.8 2.93
Charge for loan impairment 190.3 0.46 220.1 0.55 238.4 0.67 218.3 0.70 398.8 1.32
Other income 809.1 1.95 680.1 1.71 688.5 1.93 607.9 1.95 511.4 1.69
Non-interest expenses 1,336.2 3.21 1,162.2 2.92 1,105.1 3.11 978.1 3.14 951.0 3.15
Income taxes 102.7 0.25 126.5 0.32 121.7 0.34 107.2 0.34 21.4 0.07
Non-controlling interest 10.1 0.03 6.6 0.02 8.7 0.02 8.6 0.04 7.1 0.02
------------- ------------- ------------- ------------ -------------
Net income 197.1 0.47 162.5 0.41 157.5 0.44 147.5 0.47 18.9 0.06
- ----------------------------------------------------------------------------------------------------------------
Average assets 41,584 39,790 35,590 31,141 30,186
</TABLE>
TABLE 1B
OVERVIEW OF RESULTS - INTERNATIONAL OPERATIONS - UNITED STATES
FOR THE YEAR ENDED OCTOBER 31
(TAXABLE EQUIVALENT BASIS)
(MILLIONS OF DOLLARS AND AS A PERCENTAGE OF AVERAGE ASSETS)
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------
1996 1995 1994 1993 1992
$ % $ % $ % $ % $ %
------------ ------------ ------------ --------------- ---------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net interest income 110.1 2.59 105.1 2.51 101.7 2.45 94.9 1.95 88.3 1.74
Charge for loan impairment 43.4 1.02 29.5 0.71 33.7 0.81 86.2 1.77 83.2 1.64
Other income 21.8 0.51 24.2 0.58 25.0 0.60 22.4 0.46 24.0 0.47
Non-interest expenses 55.6 1.31 49.3 1.18 46.3 1.11 38.8 0.80 35.4 0.70
Income taxes 15.7 0.37 23.8 0.57 19.7 0.48 (0.6) (0.01) (0.3) (0.01)
------------ ------------ ------------ --------------- ---------------
Net income (loss) 17.2 0.40 26.7 0.63 27.0 0.65 (7.1) (0.15) (6.0) (0.12)
- ------------------------------------------------------------------------------------------------------------------
Average assets 4,250 4,182 4,149 4,876 5,064
- ------------------------------------------------------------------------------------------------------------------
</TABLE>
20
<PAGE>
To serve this market more efficiently, the Bank opened three new offices in
the United States: in St. Louis, New Orleans and Richmond, Virginia. This
expansion accounted for the rise in non-interest expenses, although it was
still lower than for the Bank's domestic operations.
The Bank's prudent expansion in specialized U.S. operations is being
internally generated at a time when the cost of potential acquisitions would
be too high. This factor, combined with the reduction in the real estate
portfolio and in liquid assets, accounted for the relatively low growth of
1.6% recorded in U.S. average assets.
INTERNATIONAL - OTHER COUNTRIES
Our international operations outside the United States are in full expansion,
reflecting the Bank's decision to diversify its revenue streams, to accompany
its clients wherever they go, and to capitalize on financial opportunities
whenever they arise.
In line with its intention to increase its investments in Latin America, the
Bank is looking at the possibility of becoming a stakeholder in local banks
and of participating in joint ventures. In Asia, where we have a solid
presence, growth was stalled as the Bank pared down its Hong Kong assets in
readiness for the upcoming handover of Hong Kong to China. While further
consolidating its alliances in Europe, the Bank in collaboration with its
partners is studying investment possibilities in Eastern Europe. Other
projects are also being considered in the Middle East.
In 1996, our international operations other than in the United States
mobilized $3,405 million of average assets (Table 1C), which is down from the
$3,610 million recorded for 1995 mainly because of the reduction in
international liquid assets and the lull in our growth in Southeast Asia.
International net income in 1996 included a special gain from the sale of
79% of the Bank's interest in Banco Osorno y la Union in Chile. This
transaction generated a gain, included in net interest income, of $80
million before taxes, or $60 million after taxes (taking into account the
Bank's initial investment of less than $10 million). Moreover, a $60 million
special sectoral provision for Canada and the United States was created at
an after-tax cost of $37 million. The $23 million difference between the two
after-tax amounts was included in the Bank's net income.
Excluding the special gain of $80 million before taxes on the Banco Osorno
transaction, as well as the $30 million from the sale of past-due interest
bonds in 1995, international net income grew by $8 million in 1996. Return
on average international assets outside the United States reached 1.29%,
compared to 0.99% in 1995.
As a result of the Bank's cleanup of its international portfolio in recent
years, the annual charge for loan impairment was reduced from $5.4 million to
$1.3 million.
If the non-recurring gain and special sectoral provision were not included in
the Bank's overall results, net income would have risen by 20.5%, translating
into a return on shareholders' equity of 13.4%. Even though the gain from the
Banco Osorno transaction was non-recurring, it was consistent with the Bank's
strategy to exploit all market opportunities to increase shareholder value.
TABLE 1C
OVERVIEW OF RESULTS - INTERNATIONAL OPERATIONS - OTHER
FOR THE YEAR ENDED OCTOBER 31
(TAXABLE EQUIVALENT BASIS)
(MILLIONS OF DOLLARS AND AS A PERCENTAGE OF AVERAGE ASSETS)
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------
1996 1995 1994 1993 1992
$ % $ % $ % $ % $ %
------------ ------------ ------------ -------------- ---------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net interest income 138.5 4.07 77.7 2.15 50.3 1.47 69.5 1.91 66.4 1.82
Charge for loan impairment 1.3 0.04 5.4 0.15 2.9 0.08 20.5 0.56 88.0 2.41
Other income 5.5 0.16 7.3 0.20 5.8 0.17 5.0 0.14 5.2 0.14
Non-interest expenses 21.3 0.63 17.8 0.49 17.3 0.51 25.1 0.69 29.6 0.81
Income taxes 17.4 0.51 6.0 0.17 3.2 0.09 (5.3) (0.14 (34.1) (0.93)
Net income (loss) 104.0 3.05 55.8 1.54 32.7 0.96 34.2 0.94 (11.9) (0.33)
------------ ------------ ------------ -------------- ---------------
Average assets 3,405 3,610 3,421 3,640 3,658
- ----------------------------------------------------------------------------------------------------------------
</TABLE>
21
<PAGE>
ANALYSIS OF RESULTS
NET INTEREST INCOME
Table 2 presents changes in net interest income by major asset and liability
category on a taxable equivalent basis. Assets generated interest income of
$3,170 million, for an average interest rate of 6.44%, compared to 7.27% in
1995. Liabilities cost the Bank $1,894.1 million in interest, equivalent to a
rate of 3.85%, versus 4.79% the previous year. The difference between
interest earned and interest paid on asset and liability volumes is referred
to as net interest income, and the difference between average interest rates,
as the interest spread.
Net interest income reached $1,275.9 million for the year, up 8.1% or $95.3
million over 1995. The contribution of rate and volume variances can be
analyzed using the last two columns of Table 2, where the net impact is
broken down into its volume component and its rate component, calculated on
the 1996 rates and on 1995 volumes respectively.
On the assets side, the main contribution to interest income came from growth
in residential mortgages where average volumes advanced 4.4% from $10,839
million to $11,315 million. However, because of falling interest rates,
interest income on these loans rose by only 1.0%. Mortgage loans are a very
low risk sector and constitute a priority market for the Bank.
TABLE 2
CHANGES IN NET INTEREST INCOME
FOR THE YEAR ENDED OCTOBER 31
(TAXABLE EQUIVALENT BASIS)
(MILLIONS OF DOLLARS)
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------------------
$ Variance
1996 1995 1996-1995 due to
--------------------------- ------------------------ ------------------------- ----------------
Average Average Average
volume Rate Interest volume Rate Interest volume Rate Interest Volume Rate
--------------------------- ------------------------ ------------------------- ----------------
$ % $ $ % $ $ % $
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Assets
Deposits with other banks 3,497 5.66 197.8 4,388 6.17 270.8 (891) (0.51) (73.0) (50.4) (22.6)
Securities 8,256 3.79 313.1 8,727 4.03 351.9 (471) (0.24) (38.8) (17.9) (20.9)
Mortgage loans 11,315 8.19 926.2 10,839 8.46 917.3 476 (0.27) 8.9 39.0 (30.1)
Personal loans 5,822 10.08 587.1 6,046 10.59 640.1 (224) (0.51) (53.0) (22.6) (30.4)
Business and other loans 16,642 6.94 1,154.3 14,372 8.80 1,264.9 2,270 (1.86) (110.6) 157.5 (268.1)
Impaired loans, net 678 (1.25) (8.5) 576 2.17 12.5 102 (3.42) (21.0) (1.3) (19.7)
------- ------ ------- ------ ----- ------- ----- ------ ------ ----- -------
Earning assets 46,210 6.86 3,170.0 44,948 7.69 3,457.5 1,262 (0.83) (287.5) 104.3 (391.8)
Other assets 3,029 - - 2,634 - - 395 - - - -
------- ------ ------- ------ ----- ------- ----- ------ ------ ----- -------
Total assets 49,239 6.44 3,170.0 47,582 7.27 3,457.5 1,657 (0.83) (287.5) 104.3 (391.8)
- ----------------------------------------------------------------------------------------------------------------------------------
Liabilities
Personal deposits 21,279 5.22 1,111.1 20,614 5.66 1,167.0 665 (0.44) (55.9) 34.7 (90.6)
Deposits by banks 6,177 5.82 359.5 7,204 6.31 454.9 (1,027) (0.49) (95.4) (59.8) (35.6)
Other deposits 11,352 4.68 531.1 11,208 5.68 636.9 144 (1.00) (105.8) 6.7 (112.5)
------- ------ ------- ------ ----- ------- ----- ------ ------ ----- -------
38,808 5.16 2,001.7 39,026 5.79 2,258.8 (218) (0.63) (257.1) (18.4) (238.7)
Debentures 1,175 7.23 85.0 1,259 6.99 88.0 (84) 0.24 (3.0) (6.1) 3.1
Liabilities other than deposits 2,056 0.14 2.9 1,725 0.59 10.2 331 (0.45) (7.3) 0.5 (7.8)
Other (1) - - (195.5) - - (80.1) - - (115.4) - (115.4)
------- ------ ------- ------ ----- ------- ----- ------ ------ ----- -------
Interest-bearing liabilities 42,039 4.51 1,894.1 42,010 5.42 2,276.9 29 (0.91) (382.8) (24.0) (358.8)
Other liabilities 4,804 - - 3,197 - - 1,607 - - - -
Shareholders' equity 2,396 - - 2,375 - - 21 - - - -
Impact of non-interest bearing
assets and liabilities - - - - - - - - - 85.4 (85.4)
- ----------------------------------------------------------------------------------------------------------------------------------
Total liabilities and
shareholders' equity 49,239 3.85 1,894.1 47,582 4.79 2,276.9 1,657 (0.94) (382.8) 61.4 (444.2)
- ----------------------------------------------------------------------------------------------------------------------------------
Net interest income 2.59 1,275.9 2.48 1,180.6 0.11 95.3 42.9 52.4
- ----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Other interest income and interest expense including hedging operations.
22
<PAGE>
Average business loan volumes also increased by a substantial 15.8% during
the year, with most of this growth concentrated in loans to U.S. businesses
and corporate loans. This success, however, was more than offset by falling
rates.
Of the $53 million decrease in interest income on personal loans, 43% was due
to lower volumes. The financial difficulties experienced by many consumers,
the intense competition for personal loans and our withdrawal from indirect
lending all contributed to this decline.
Lower interest rates, which fell on average from 7.27% to 6.44%, were
responsible for the $287.5 million drop in interest income overall. This
decrease was partially offset by a 2.8% increase in the volume of earning
assets.
On the liabilities side, the $382.8 million reduction in interest expense was
wholly attributable to lower interest rates, while the increase in volumes,
notably in personal deposits, had the opposite effect. Purchased funds--
essentially deposits by other banks--were down $1,027 million or 14.3% from
the previous year, cutting interest expense by $59.8 million.
The average rate paid by the Bank on its liabilities fell more than the rate
obtained on its assets (a decline of 0.94% versus 0.83% respectively). The
interest spread therefore widened by 0.11%.
The last three figures on the lower right-hand side of Table 2 summarize the
impact of variations in volumes and rates on net interest income. Volume
changes generated 45% of the $95.3 million increase in net interest income
and rate changes accounted for the remainder.
Excluding the special gains recorded in 1996 (Banco Osorno transaction) and
in 1995 (sale of past-due interest bonds), the interest spread held steady at
2.43% compared to 2.42% in 1995 because the narrower margin on transaction
accounts was offset by a wider margin on commercial loans.
LOAN LOSSES
For the fourth consecutive year, the Bank was able to reduce its provision
for loan losses (or charge for loan impairment). The annual provision was
$235 million, for a reduction of 7.8% as against 7.3% in 1995. Since the
general provision had been boosted significantly in 1995 as a precautionary
measure, no additional provisions had to be taken in 1996 (Table 3).
In domestic operations, the provision for losses on private risks declined
from $221 million as at October 31, 1995 to $190 million at year-end 1996,
representing a 14.0% improvement.
The ongoing cleanup of our domestic commercial lending portfolio allowed us
to cut the annual provision for loan losses in this sector (total loans to
independent businesses and corporations) by 34.7%. However, the financial
difficulties experienced by individuals and very small businesses in Quebec,
which we had anticipated in our 1995 Annual Report, prompted us to increase
provisions in this sector from $69 million to $115 million. It should be
noted that sole proprietorships and very small businesses are included under
the heading "Individuals".
In the third quarter of the year, the Bank took a $60 million special
provision. The purpose of this precautionary measure was to implement
specific initiatives in order to improve the quality of problem portfolios in
the real estate sector and other sectors. The special provision accounted for
$25 million of the $115 million provision allocated under "Individuals" and,
most notably, enabled the Bank to dispose of a block of close to 200
foreclosed properties.
The charge for loan impairment in the domestic real estate sector fell by
21.2%.
In the United States, the provision for real estate loan losses rose from $26
million to $39 million. Approximately $15 million of the special provision
was earmarked for this sector in support of our strategic withdrawal.
Losses in the U.S. commercial sector were unchanged from 1995 and represented
only a small percentage of our portfolio totalling about $2,800 million.
23
<PAGE>
TABLE 3
CHARGE FOR LOAN IMPAIRMENT
FOR THE YEAR ENDED OCTOBER 31
(MILLIONS OF DOLLARS)
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------
1996 1995 1994 1993 1992
----------- --------- --------- ------- -------
<S> <C> <C> <C> <C> <C>
Charge for loan impairment
Domestic
Individuals 115 69 64 66 70
Independent businesses 45 41 72 66 74
Corporations 4 34 31 28 49
Real Estate sector 26 33 41 26 288
General provision - 44 25 25 -
Other - - 3 6 2
------ ------ ------ ------ ------
Domestic - Private risks 190 221 236 217 483
- ---------------------------------------------------------------------------------------------------
International
Commercial - United States 5 4 19 41 38
Real Estate - United States 39 26 15 41 45
Real Estate - Other (8) - 2 10 63
Other 9 4 3 16 11
------ ------ ------ ------ ------
International - Private risks 45 34 39 108 157
- ---------------------------------------------------------------------------------------------------
Designated countries - - - - (70)
- ---------------------------------------------------------------------------------------------------
Charge for loan impairment
posted to income 235 255 275 325 570
- ---------------------------------------------------------------------------------------------------
Net average private-risk loans
and bankers' acceptances
Domestic 29,200 28,358 26,399 26,296 24,998
International - United States 3,968 3,179 3,148 3,482 3,556
- Other 656 1,448 1,461 1,302 1,484
------ ------ ------ ------ ------
Total 33,824 32,985 31,008 31,080 30,038
- ---------------------------------------------------------------------------------------------------
Charge for impairment on private-risk
loans as a percentage of net average
loans and bankers' acceptances
Domestic 0.65% 0.78% 0.89% 0.83% 1.93%
International - United States 1.11% 0.94% 1.08% 2.35% 2.33%
- Other 0.15% 0.28% 0.34% 2.00% 4.99%
Total 0.69% 0.77% 0.89% 1.05% 2.13%
- ---------------------------------------------------------------------------------------------------
Allowance for loan impairment
Balance at beginning of year 688 714 868 1,027 717
Retroactive application of new accounting
standard as at November 1, 1995 77 - - - -
Charge for loan impairment
posted to income 235 255 275 325 570
Write-offs (1) (345) (312) (450) (495) (266)
Recoveries 11 31 21 11 6
------ ------ ------ ------ ------
Balance as at October 31 666 688 714 868 1,027
- ---------------------------------------------------------------------------------------------------
Components:
Allowances for loan impairment
Designated countries 69 86 85 274 279
Specific 497 502 573 563 742
General 100 100 56 31 6
- ---------------------------------------------------------------------------------------------------
</TABLE>
(1) Including exchange rate fluctuations.
24
<PAGE>
The $235 million charge for loan impairment posted to 1996 income was
equivalent to 0.69% of the average volume of net private-risk loans and
bankers' acceptances, and represented the fourth decline in as many years.
The allowance for loan impairment appearing on the balance sheet is analyzed
in the lower two sections of Table 3. In 1996, the allowance continued its
downward trend, dropping to $666 million under the combined effect of the new
$235 million provision, $11 million in recoveries, $345 million in
write-offs, and the application of a new accounting standard for impaired
loans retroactive to November 1, 1995. This standard, which meets the
requirements of the Canadian Institute of Chartered Accountants and the
Superintendent of Financial Institutions Canada, added $77 million to
specific provisions.
The general allowance remained unchanged at $100 million, while the specific
allowance held fairly steady at $497 million in spite of the impact of the
new standard for impaired loans. As Table 14 on page 38 indicates, gross
private risks are amply covered by these allowances.
OTHER INCOME
Other income, described in Table 4, includes all income other than interest
and dividend income. In 1996, other income amounted to $836 million, up $124
million or 17.5% from the previous year.
Capital market fees rose 50.3%, accounting for four-fifths of other income
growth. The credit for this goes to the brokerage operations of Levesque
Beaubien Geoffrion which generate most of this type of income. Other
noteworthy performances included that of InvesTel, the Bank's discount
brokerage service, which recorded an 81.6% increase in its income.
The 5.3% advance in deposit service charges stemmed primarily from the
improved correlation between charges and the actual cost of administration.
Combined revenues from credit fees, bankers acceptances and letters of
credit and guarantee rose from $114 million to $117 million, or 2.6%. This
growth rate is indicative of the fierce competition on commercial lending
markets. The 7.8% growth in card service revenues shows how business has
expanded in this sector; in 1996, volumes outstanding on the Bank's credit
cards climbed 8.9%.
Of the increase in the "Other" category, 14.3% can be attributed to
additional revenues from debit cards, and 28.6% to the sale of insurance
products, evidence that the Bank's strategy in this area is producing
results. Among the insurance products available are credit insurance, offered
by National Bank Life Insurance Company, and various insurance products for
MasterCard balances.
TABLE 4
OTHER INCOME
FOR THE YEAR ENDED OCTOBER 31
(MILLIONS OF DOLLARS)
- -----------------------------------------------------------------------------
1996 1995 1994 1993 1992
------ ------ ------ ------ ------
Capital market fees 290 193 212 211 176
Deposit service charges 140 133 123 109 106
Card service revenues 69 64 59 56 51
Credit fees 82 83 81 71 69
Bankers' acceptances, letters
of credit and guarantee 35 31 28 25 29
Foreign exchange revenues 50 51 39 45 36
Trust services 20 21 22 5 -
Other 150 136 155 113 74
------ ------ ------ ------ ------
836 712 719 635 541
- -----------------------------------------------------------------------------
Domestic 809 680 688 608 512
International - United States 22 24 25 22 24
- Other 5 8 6 5 5
- -----------------------------------------------------------------------------
Other income as a percentage
of total income 39.6% 37.6% 39.6% 38.5% 34.2%
- -----------------------------------------------------------------------------
25
<PAGE>
Mutual fund revenues, which are also classified under "Other", grew by 23.5%
in 1996 thanks to National Bank Securities. This subsidiary turned in its
best performance to date with a contribution of $22.4 million before taxes to
the Bank's income, for an increase of 24.4%.
Great strides were made in 1996 in coordinating the activities of our various
subsidiaries. The Bank's dealers and traders now work alongside the
fixed-income investment team of Levesque Beaubien Geoffrion in a
state-of-the-art trading room. Among the other joint accomplishments were the
Bank's three issues of stock index-linked notes marketed through the Levesque
Beaubien Geoffrion network.
Fiscal 1996 was also the year in which the role of General Trust of Canada
was redefined, as mentioned in last year's Annual Report. With the
integration of its branches into the Bank's branch network, General Trust
withdrew from intermediation activities in favour of a specialized mission to
provide advisory services in the area of wealth management. The financial
planner positions introduced at the Bank therefore come under General Trust.
Strategic consideration is also being given to phase two of this operation,
namely, to redefine this subsidiary's institutional trust function.
The Bank has every intention of continuing to diversify its financial
services. One new financial product it launched in 1996 was a computerized
market risk evaluation and management tool based on our VAR system (see the
"Risk Management" section of this report on page 34 and following). In
collaboration with U.S. partners, we now offer this management tool to our
commercial clients.
Other income represented 39.6% of the Bank's total income, compared to 37.6%
in 1995. With close to 40% of its revenue generated by sources other than
interest, the National Bank continues to rank among the leading Canadian
banks, in line with its strategy to diversify and stabilize the income it
earns.
FROM 1992 TO 1996, TOTAL INCOME ROSE 33.6%, NET INTEREST INCOME 22.6% AND
OTHER INCOME 54.7%. OTHER INCOME AS A PERCENTAGE OF TOTAL INCOME ADVANCED
FROM 34.2% IN 1992 TO 39.6% IN 1996.
NON-INTEREST EXPENSES
Total non-interest expenses were $1,413 million (Table 5) and included a $56
million expense (before taxes) related to the sale of a $215 million loan
portfolio dating back to the acquisition of General Trust. The Bank received
$80.7 million from the REGIE DE L'ASSURANCE-DEPOTS DU QUEBEC, as provided for
when the trust company was acquired, and these funds were added to the
provisions created at that time. These transactions, when combined with the
permanent reduction in the value of IMMOBILIERE NATGEN INC. debentures, the
write-off of variable-capital notes, the provisions taken by the Bank and the
related tax effects, had no impact on net income.
Had it not been for this non-recurring item, non-interest expenses would have
been $1,357 million, up $128 million over the previous year.
Over half of this $128 million was attributable to salaries and staff
benefits, while three-quarters of the increase under that heading was related
to variable remuneration, which was up $50 million, chiefly at Levesque
Beaubien Geoffrion. The increase in remuneration was more than offset by the
45% growth in this subsidiary's revenues. Over the course of the year, the
number of Bank employees, including employees of Bank subsidiaries, decreased
by 1.7% in full-time equivalent terms, and the salaries paid by the Bank and
its subsidiaries (apart from variable remuneration and staff benefits) posted
a very modest 2.7% increase.
Excluding Levesque Beaubien Geoffrion expenses -- $186 million in 1995 and
$250 million in 1996 -- non-interest expenses rose 6.1% in 1996.
Expenses for "Premises, computers and equipment" were up $23 million or 7.9%.
Of this increase, 95% was due to information technology expenses and
equipment depreciation. The Bank's technological transformation, which called
for substantial investments in branch transformation and in new technologies
for electronic banking services, explains this growth in expenses.
26
<PAGE>
Another factor that served to push up expenses was the higher capital and
payroll taxes the Bank had to pay as a result of the government's broadening
of the capital tax base. In 1996, these taxes rose $9 million, or 23.1% over
the previous year (in addition to the 30.0% rise recorded in 1995 alone).
As a percentage of total income, non-interest expenses edged up from 65.0% to
66.9%. Had it not been for the cost related to the sale of the portfolio
mentioned earlier, the percentage would have been 64.3% in 1996.
Even though operating expenses are rigorously managed by the Bank, the
technological transformation entailed special costs that will ultimately
benefit the Bank in its positioning and revenues in the years ahead. The 1995
Annual Report anticipated an increase in non-interest expenses for this very
reason. Although technological developments will always exert pressure on
spending to some extent, the bulk of the work has now been completed. Growth
in this expense category should therefore be more moderate in 1997.
INCOME TAXES
In 1996, income taxes amounted to $130 million, for an 11.0% reduction from
the previous year. Detailed information is presented in Note 14 to the
financial statements on page 63. The Bank's effective income tax rate was
28.4%. Two factors essentially explain the reduction compared to the previous
year: the tax treatment of the sale of the block of loans forming part of the
General Trust acquisition, and the lower tax rate applied to the special
gain on the Banco Osorno transaction.
<TABLE>
<CAPTION>
TABLE 5
NON-INTEREST EXPENSES
FOR THE YEAR ENDED OCTOBER 31
(MILLIONS OF DOLLARS)
- --------------------------------------------------------------------------------------------------
1996 1995 1994 1993 1992
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Salaries and staff benefits 705 637 642 596 574
Premises, computers and equipment,
including depreciation 316 293 249 218 206
Other expenses
Messenger services and communications 55 50 45 50 49
Advertising and external relations 32 27 29 23 25
Stationery 16 14 14 14 14
Loan and deposit insurance 37 36 30 21 18
Professional fees 48 42 39 24 17
Travel expenses 11 11 12 9 12
Security and theft 12 10 13 14 15
Capital taxes and salaries 48 39 30 21 28
Reduction in value of assets 56 - - - -
Other 77 70 65 52 58
-------- -------- -------- -------- --------
392 299 277 228 236
----------------------------------------------------
Total 1,413 1,229 1,168 1,042 1,016
- --------------------------------------------------------------------------------------------------
Domestic 1,336 1,162 1,105 978 951
International - United States 56 49 46 39 35
- Other 21 18 17 25 30
- --------------------------------------------------------------------------------------------------
Total expenses as a percentage
of total income 66.9% 65.0% 64.4% 63.1% 64.3%
- --------------------------------------------------------------------------------------------------
Excluding the reduction
in value of assets 64.3% 65.0% 64.4% 63.1% 64.3%
Excluding Levesque Beaubien Geoffrion 61.6% 62.3% 61.9% 60.2% 62.0%
- --------------------------------------------------------------------------------------------------
</TABLE>
27
<PAGE>
ANALYSIS OF FINANCIAL CONDITION
- --------------------------------------------------------------------------------
The balance sheet contained in the Consolidated Financial Statements (page
52) shows that total assets stood at $53,134 million as at October 31, 1996,
for an increase of $4,221 million or 8.6% over the previous year. Loans and
bankers' acceptances were up $4,572 million or 13.0%, while liquid assets
(including securities) were down $517 million or 4.1%.
The main liability categories -- deposits and capital -- are discussed later.
ASSETS
Table 6 presents a geographic breakdown of earning assets (including
interest-bearing liquid assets) by ultimate risk as at September 30 of each
year. As at that date in 1996, the Bank's earning assets amounted to $48,361
million, representing a $117 million increase over the year-earlier figure of
$48,244 million.
<TABLE>
<CAPTION>
TABLE 6
GEOGRAPHIC DISTRIBUTION OF EARNING ASSETS BY ULTIMATE RISK (1)
AS AT SEPTEMBER 30
(MILLIONS OF DOLLARS)
- -----------------------------------------------------------------------------------------------------------------------------------
1996 1995 1994 1993 1992
--------------- --------------- --------------- --------------- ---------------
$ % $ % $ % $ % $ %
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
North America
Canada 39,738 82.2 38,293 79.4 34,428 80.5 33,037 82.3 28,898 77.8
United States 4,188 8.7 4,326 9.0 5,088 11.9 4,206 10.5 4,916 13.2
--------------- --------------- --------------- --------------- ---------------
Europe 43,926 90.9 42,619 88.4 39,516 92.4 37,243 92.8 33,814 91.0
----------------------------------------------------------------------------------------------
United Kingdom 1,140 2.9 1,579 3.3 1,290 3.0 652 1.6 740 2.0
France 464 1.0 966 2.0 251 0.6 206 0.5 522 1.4
Germany 266 0.5 454 0.9 93 0.2 122 0.3 107 0.3
Switzerland 14 - 14 - 50 0.1 26 0.1 361 1.0
Other 612 1.3 808 1.7 447 1.1 470 1.2 564 1.5
--------------- --------------- --------------- --------------- ---------------
2,766 5.7 3,821 7.9 2,131 5.0 1,476 3.7 2,294 6.2
----------------------------------------------------------------------------------------------
Latin America and Caribbean 357 0.7 361 0.7 258 0.6 355 0.9 310 0.8
----------------------------------------------------------------------------------------------
Asia and Pacific
Japan 258 0.5 393 0.8 90 0.2 217 0.5 248 0.7
Other 1,012 2.1 1,014 2.1 743 1.7 790 2.0 469 1.2
--------------- --------------- --------------- --------------- ---------------
1,270 2.6 1,407 2.9 833 1.9 1,007 2.5 717 1.9
----------------------------------------------------------------------------------------------
Middle East and Africa 42 0.1 36 0.1 34 0.1 34 0.1 34 0.1
----------------------------------------------------------------------------------------------
Earning assets as at September 30 48,361 100.0 48,244 100.0 42,772 100.0 40,115 100.0 37,169 100.0
----------------------------------------------------------------------------------------------
----------------------------------------------------------------------------------------------
Other assets as at September 30 3,511 3,058 2,929 2,863 3,180
Net change in assets in October 1,262 (2,389) (927) (244) (314)
----------------------------------------------------------------------------------------------
Total assets as at October 31 53,134 48,913 44,774 42,734 40,035
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Earning assets are those which bear interest. Consequently, they do
not include cash resources, deposits with the Bank of Canada, cheques and
other items in transit (net value), fixed assets, other assets and
customers' liability under acceptances. 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 general and specific
provisions and presented separately for each country where the Bank's
exposure exceeds an amount equal to 3/4% of total earning assets.
28
<PAGE>
Table 7, which provides a breakdown of loans by borrower category as at
September 30, 1996, shows growth of 7.4% in loans outstanding for a total of
$37,905 million. Excluding reverse repos concluded by Levesque Beaubien
Geoffrion, the loan portfolio advanced 5.7%.
Personal loans (mainly consumer loans and credit cards) were fairly stable at
$5,329 million, primarily because of reduced consumer demand and the Bank's
withdrawal from indirect lending. Other contributing factors included the
financial problems affecting many consumers, as well as our credit criteria.
As a percentage of the Bank's total portfolio, these loans continued to
decline in 1996, dropping to 14.1% as against 15.0% in the previous year.
However, residential mortgages rose by $650 million or 6.0% in 1996, almost
the same as the 6.9% recorded in 1995. The proportion of residential
mortgages in the Bank's portfolio remained virtually unchanged at 30.5%.
These figures are consistent with the Bank's deliberate strategy to focus on
a relatively low-risk loan category that has the added advantage of fostering
customer loyalty.
The most vigorous growth was in business loans, which were up $1,169 million
or 7.2% over the previous year. U.S. commercial operations generated
approximately 20% of this growth.
Despite the fragile economic environment and strong competition for credit,
the National Bank successfully expanded its market share of business loans in
Quebec.
<TABLE>
<CAPTION>
TABLE 7
DISTRIBUTION OF LOANS BY BORROWER CATEGORY
AS AT SEPTEMBER 30
(MILLIONS OF DOLLARS)
- -----------------------------------------------------------------------------------------------------------------------------------
1996 1995 1994 1993 1992
--------------- --------------- --------------- --------------- ---------------
$ % $ % $ % $ % $ %
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Personal (1) 5,329 14.1 5,305 15.0 5,234 15.7 5,061 16.2 4,864 16.4
Residential mortgage 11,552 30.5 10,902 30.9 10,196 30.6 9,037 28.9 7,859 26.5
Non-residential mortgage 608 1.5 781 2.2 835 2.5 870 2.8 379 1.3
Agricultural 698 1.8 675 1.9 622 1.9 584 1.9 548 1.8
Financial institutions 1,774 4.7 766 2.2 1,307 3.9 1,082 3.5 979 3.3
Manufacturing and industrial 1,985 5.2 2,192 6.2 1,732 5.2 1,930 6.2 1,917 6.5
Construction and real estate 2,425 6.4 2,718 7.7 2,653 8.0 2,806 9.0 3,056 10.3
Transportation and communications 3,055 8.1 2,914 8.3 2,431 7.3 3,001 9.6 3,287 11.1
Mines, quarries and energy 300 0.8 275 0.8 215 0.6 249 0.8 301 1.0
Forestry sector 242 0.6 264 0.7 346 1.0 456 1.5 500 1.7
Government and other
public agencies 520 1.4 488 1.4 635 1.9 478 1.5 697 2.3
Wholesale trade 591 1.5 655 1.9 691 2.1 595 1.9 563 1.9
Retail trade 977 2.6 1,201 3.4 1,193 3.6 1,118 3.6 1,124 3.8
Services 1,969 5.2 1,784 5.1 1,920 5.8 2,151 6.9 2,136 7.2
Reverse repos 3,062 8.1 2,313 6.6 1,467 4.4 869 2.8 - -
Other 2,818 7.4 2,048 5.7 1,879 5.5 1,006 2.9 1,497 4.9
------ ----- ------ ----- ------ ----- ------ ----- ------ -----
37,905 100.0 35,281 100.0 33,356 100.0 31,293 100.0 29,707 100.0
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Includes consumer loans, credit cards and other personal loans.
29
<PAGE>
FUNDING
The Bank finances its lending and investment activities through funds
obtained from its depositors, investors and shareholders. Acting as an
intermediary between lenders and borrowers, savers and investors, constitutes
the core business of a bank. To do so successfully, it must be financially
sound. For instance, a bank must manage its liquidity in such a way as to
meet its day-to-day financial obligations. Activities must be funded at the
lowest possible cost and with maximum efficiency. It must also maintain a
solid capital base that will safeguard it against any economic or financial
eventuality.
LIQUIDITY MANAGEMENT
As at October 31, 1996, the Bank's balance sheet contained $11,942 million of
liquid assets, compared to $12,459 million a year earlier. Securities
represented 70.5% of these liquid assets with cash resources (especially
deposits with other banks) making up the remainder. Liquid assets amounted to
22.5% of total assets, down from 25.5% at the end of 1995. Since financial
markets were less volatile in 1996, the Bank reduced the liquid assets on its
balance sheet.
DEPOSITS
The Bank funded more than three-quarters of its assets through deposits. As
at October 31, 1996, personal deposits accounted for 55.9% of the deposit
mix, commercial deposits for 17.6% and purchased funds (primarily deposits by
other financial institutions) for 26.5%, as shown in Table 8.
Personal deposits as at October 31, 1996 were up $1,024 million over a year
earlier and represented a larger share of total deposits.
Lower interest rates prompted depositors to shift to other types of
investments, particularly mutual funds. The Bank's personal deposits
nonetheless rose by 4.8% following the acquisition of two financial
institutions in Ontario, Family Trust and Municipal Savings & Loan. As
predicted in last year's Annual Report, attracting personal deposits
presented a challenge in 1996. We project a modest improvement in this
deposit category in 1997.
Nevertheless, the Bank was able to capitalize on the popularity of mutual
funds; in 1996, it managed total funds of $2,385 million, for an increase of
49% since the end of 1995.
The strong growth in commercial deposits translated into an increase of $645
million or 10.1% over the previous year.
In all, core deposits (personal plus commercial) advanced $1,669 million or
6.0%. As a result of this strong performance, core deposits accounted for
73.5% of total deposits, compared to 68.8% as at October 31, 1995.
<TABLE>
<CAPTION>
TABLE 8
DEPOSITS
AS AT OCTOBER 31
(MILLIONS OF DOLLARS)
- ----------------------------------------------------------------------------------------------------------------------------------
1996 1995 1994 1993 1992
--------------- --------------- --------------- --------------- --------------
$ % $ % $ % $ % $ %
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Personal 22,413 55.9 21,389 52.9 20,172 54.7 19,004 54.1 15,720 47.0
Commercial 7,056 17.6 6,411 15.9 5,599 15.2 5,136 14.6 4,247 12.7
Purchased funds 10,656 26.5 12,624 31.2 11,079 30.1 10,973 31.3 13,466 40.3
--------------- --------------- --------------- --------------- --------------
40,125 100.0 40,424 100.0 36,850 100.0 35,113 100.0 33,433 100.0
- ----------------------------------------------------------------------------------------------------------------------------------
Domestic 32,471 80.9 30,197 74.7 28,357 77.0 26,903 76.6 23,062 69.0
International - United States 3,597 9.0 3,359 8.3 3,359 9.1 3,653 10.4 4,702 14.0
- Other 4,057 10.1 6,868 17.0 5,134 13.9 4,557 13.0 5,669 17.0
- ----------------------------------------------------------------------------------------------------------------------------------
Personal deposits
as a percentage of total assets 42.2 43.7 45.0 44.5 39.3
- ----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
30
<PAGE>
The Bank continued to pare down the proportion of purchased funds, which fell
from 31.2% to 26.5% of total deposits. As core deposits are more stable and
cost effective, the Bank prefers to use them as its main source of funding.
OVER THE PAST FOUR YEARS, DEPOSIT LIABILITIES (TOTAL DEPOSITS ON THE
BANK'S BALANCE SHEET) CLIMBED FROM $33,433 MILLION TO $40,125 MILLION, FOR
A 20.0% INCREASE. PERSONAL DEPOSITS ROSE 42.6% AND COMMERCIAL DEPOSITS
66.1%, WHILE PURCHASED FUNDS DROPPED BY 20.9%. CORE DEPOSITS INCREASED
FROM 59.7% TO 73.5% OF TOTAL DEPOSITS OVER THE PERIOD.
CAPITAL MANAGEMENT
In addition to funding operations, the Bank's capital ensures the financial
stability of the institution by allowing it to deal with loan losses without
undue risk to depositors. As at October 31, 1996, total capital stood at
$3,515 million. The capital mix is presented in Table 9.
Capital is obtained through external financing -- debenture and share issues
- -- and from internally generated capital, namely, earnings not paid out as
dividends. In 1996, internally generated capital totalled $154 million,
representing net income of $318 million less the dividend payout of $108
million and an amount of $56 million which included the prior period
adjustments required by the new accounting standard for impaired loans.
Internally generated capital in 1996 was up 25.2% over 1995 and established a
new record for the Bank.
With such high internally generated capital and strong capitalization, we
were able to decrease external financing and, by extension, the cost of
capital for the second year in a row. The Bank reduced its outstanding
debentures by $161 million, specifically by redeeming $65 million in
debentures and converting another $66 million into deposit notes, with
exchange rate fluctuations accounting for the remainder. Following the issue
of $34 million of common shares, total external financing was reduced by $127
million.
Common shareholders' equity as at October 31, 1996 amounted to $2,123
million, for an increase of 9.7%. The Bank raised the dividend on its common
shares from $0.40 to $0.49 during the year, and shareholders reinvested 42%
of their dividends through the Dividend Reinvestment and Share Purchase Plan.
TABLE 9
SOURCE OF CAPITAL
FOR THE YEAR ENDED OCTOBER 31
(MILLIONS OF DOLLARS)
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------
1996 1995 1994 1993 1992
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Bank debentures 1,016 1,177 1,241 1,037 969
Shareholders' equity
Preferred shares 376 376 532 426 468
Common shares 1,268 1,234 1,207 1,083 906
Retained earnings 855 701 578 462 380
-------- -------- -------- -------- --------
2,499 2,311 2,317 1,971 1,754
----------------------------------------------------
Total capital 3,515 3,488 3,558 3,008 2,723
- -------------------------------------------------------------------------------------
Internally generated capital
Net income 318 245 217 175 1
Other amounts affecting
retained earnings (56) (18) 1 (4) 8
-------- -------- -------- -------- --------
262 227 218 171 9
Less: dividends (108) (104) (102) (89) (126)
-------- -------- -------- -------- --------
154 123 116 82 (117)
----------------------------------------------------
External financing
Debentures (161) (64) 204 68 163
Preferred shares - (156) 106 (42) 83
Common shares 34 27 124 177 1
-------- -------- -------- -------- --------
(127) (193) 434 203 247
----------------------------------------------------
Increase (decrease) in capital 27 (70) 550 285 130
- -------------------------------------------------------------------------------------
</TABLE>
31
<PAGE>
The Bank's Tier 1 capital climbed $192 million during 1996 to reach
$2,321 million (Table 10). Conversely, Tier 2 capital edged down slightly by
$14 million following the redemption of debentures during the year and the
issue of $150 million in new debentures on November 1, 1996. Total capital
grew by 5% to $3,443 million as at October 31, 1996.
The lower half of Table 10 presents the value of balance sheet and
off-balance sheet items, risk-weighted according to the rules of the Bank for
International Settlements (BIS). Calculated by dividing Tier 1 and total
capital by total risk-weighted assets, the Bank's Tier 1 capital ratio was
6.9% and its total capital ratio 10.2% (as at November 1, 1996). Both ratios
comfortably exceeded regulatory requirements and the Bank's total capital
ratio continued to be higher than the average for the other major Canadian
banks. The benchmark Tier 1 capital ratio was up from the 6.8% recorded as at
October 31, 1995.
TABLE 10
CAPITAL RATIOS
AS AT OCTOBER 31
(MILLIONS OF DOLLARS)
(IN ACCORDANCE WITH BIS GUIDELINES)
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------
1996(3) 1995 1994 1993(1) 1992
------------- ----------- ---------- ------------- ----------
<S> <C> <C> <C> <C> <C>
Tier 1 capital
Common shareholders' equity 2,123 1,935 1,785 1,643 1,286
Non-cumulative preferred shares,
permanent 317 317 442 317 317
Non-controlling interest 42 36 44 41 34
Less: goodwill (161) (159) (169) (179) (100)
------------- ----------- ---------- ------------- ----------
2,321 2,129 2,102 1,822 1,537
------------- ----------- ---------- ------------- ----------
Tier 2 capital
Cumulative preferred shares 59 59 90 110 147
Bank debentures 1,064 1,078 1,184 881 969
Less: investments in
affiliated corporations (1) (1) (1) (1) (1)
------------- ----------- ---------- ------------- ----------
1,122 1,136 1,273 990 1,115
-------------------------------------------------------------------
Total capital 3,433 3,265 3,375 2,812 2,652
- --------------------------------------------------------------------------------------------------------------
Risk-weighted balance sheet items
Cash resources 761 1,019 805 698 755
Securities 2,861 2,334 2,230 1,435 1,683
Mortgage loans 4,156 4,118 4,029 4,008 2,900
Other loans 20,143 19,144 18,412 18,401 19,719
Other assets 3,098 2,500 2,542 2,431 1,965
------------- ----------- ---------- ------------- ----------
31,019 29,115 28,018 26,973 27,022
-------------------------------------------------------------------
Risk-weighted off-balance sheet items (2)
Commitments to extend credit
Guarantees, letters of credit and
transaction-related contingencies 1,174 1,121 978 1,134 934
Other commitments to extend credit 1,358 1,086 1,250 1,095 2,452
Interest rate contracts 66 38 21 40 40
Foreign exchange contracts 136 197 145 147 212
Equity contracts 21 - - - -
------------- ----------- ---------- ------------- ----------
2,755 2,442 2,394 2,416 3,638
-------------------------------------------------------------------
Total risk-weighted assets 33,774 31,557 30,412 29,389 30,660
- --------------------------------------------------------------------------------------------------------------
Ratios
Tier 1 6.9% 6.8% 6.9% 6.2% 5.0%
Tier 2 3.3% 3.6% 4.2% 3.4% 3.7%
------------- ----------- ---------- ------------- ----------
Total 10.2% 10.4% 11.1% 9.6% 8.7%
- --------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Taking into account the redemption of $100 million in debentures through
the issue of common shares on November 1, 1993.
(2) As at September 30.
(3) Taking into account the issue of $150 million in debentures on November 1,
1996.
32
<PAGE>
Under U.S. rules for capital ratios, the Bank's total capital ratio would
have been 10.9% versus 11.0% a year earlier as these rules allow the general
provision for loan losses, up to 1.5% of total risk-weighted assets, to be
included in Tier 2 capital.
ASSETS UNDER ADMINISTRATION/MANAGEMENT
Table 11 lists the principal asset administration and management services
which the National Bank and its subsidiaries offer to clients. As at October
31, 1996, the value of these assets amounted to $44,652 million, for an
increase of 9.8%. Except for institutional trust services which were affected
by the general softening in the municipal bond market, and mortgage loans
sold to third parties which were down because of principal repayments, all
products and services contributed to this increase.
TABLE 11
ASSETS UNDER ADMINISTRATION/MANAGEMENT
AS AT OCTOBER 31
(MILLIONS OF DOLLARS)
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------------------
General Levesque National Natcan Bank Total
Trust Beaubien Bank Investment excluding ---------------------
of Canada Geoffrion Securities Inc. Management Inc. subsidiaries 1996 1997
------------- ------------- ------------------ ----------------- -------------- --------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Custodial services - 16,388 1,366 - - 17,754 13,800
Institutional trust 14,603 - - - - 14,603 15,438
Personal trust 2,076 - - - - 2,076 1,951
Portfolio management - 315 - - - 4,448 3,916
Mutual funds 4,133
- Managed - 35 2,350 - - 2,385 1,603
- Administered 1,501 - - - - 1,501 1,313
Mortgage loans sold
to third parties - - - - 1,885 1,885 2,629
------------- ------------- ------------------ ----------------- -------------- --------------------
Total assets under -
administration/management 18,180 16,738 3,716 1,885 44,652 40,650
- ---------------------------------------------------------------------------------------------------------------------------------
</TABLE>
33
<PAGE>
RISK MANAGEMENT
- -----------------------------------------------------------------------------
Risk is an inherent feature of banking intermediation and financial products,
and managing that risk is one of a bank's main responsibilities. This section
contains a description of the various types of risks and control methods used
by the Bank, an analysis of the Bank's balance sheet as at October 31, 1996
in terms of credit and market risks, and a review of the risks in off-balance
sheet activities (notably derivatives) at the end of the fiscal year. This
will complement the analyses already presented in this Management's
Discussion and Analysis.
RISK CATEGORIES AND CONTROL MEASURES
Market risk, credit risk and liquidity risk are the three main risk
categories. In addition, there are legal risks and risks associated with
operations.
Risks related to financial instruments are managed using a portfolio
approach, which means that they are not considered individually but as
components of portfolios that may contain both on- and off-balance sheet
items.
MARKET RISK
Market risk denotes the probability of variations in the value of a financial
instrument because of fluctuations in economic conditions and market prices.
For a bank, this risk is tied more specifically to changes in interest and
currency rates. Accordingly, "interest rate risk" designates the risk that
the value of a financial instrument will be affected by market variations in
interest rates while "foreign currency risk" or "foreign exchange risk"
refers to the impact of exchange rate movements on the value of a financial
instrument.
The Bank has established specific, detailed policies for managing market risk
which have been approved by the Board of Directors. These policies are aimed
not at neutralizing such risk, but at maximizing risk/return trade-offs
within carefully defined limits.
Market risk is managed by the Bank's Treasury sector, notably by using a
"value at risk" (VAR) method. With this simulation model, it is possible to
estimate the impact of potential market fluctuations on the financial
instruments held by the Bank. The model concentrates on worst-case scenarios
and excludes only those risks with a probability of less than 0.5%. In
addition to daily VAR simulations, at least once a week, the Bank carries out
a simulation aimed at gauging the impact of catastrophic events that exceed
the 99.5% confidence level. To complement these methods, the Bank also uses
other standard financial risk measurements and various sensitivity analysis
techniques.
The Executive Committee of the Board of Directors establishes maximum risk
limits and the procedures to follow depending on the level of risk involved.
Responsibility for managing market risk lies with the Chairman of the Board
and the Senior Executive Vice-President in charge of Treasury. Managers are
required to respect strict follow-up and reporting procedures. If losses were
at any time to exceed certain specified levels, stop-loss mechanisms would be
triggered. Moreover, an independent unit within the Bank is responsible for
monitoring and controlling transactions.
CREDIT RISK
Credit risk is the risk that a loss may occur if the counterparty to a
financial instrument fails to honour its commitments. It can apply to both
on- and off-balance sheet assets, such as a loan or a derivative with a
positive market value.
Credit risks are controlled using specific policies which are designed to
maximize the risk/return trade-offs. These policies are approved by the Board
of Directors. An explanation of credit risk management as it applies to
balance sheet items and off-balance sheet items is provided below.
34
<PAGE>
LIQUIDITY RISK
Liquidity risk refers to an institution's ability to raise the funds needed
to meet its financial commitments, whether for balance sheet items or
off-balance sheet activities. An integral part of asset and liability
management, liquidity risk is included in the strategies applied by Treasury.
Since it is extremely important for a bank to have liquid assets available at
all times, considerable emphasis is placed on managing them.
The Bank's liquidity management policy, which is approved by the Board of
Directors, sets out the objectives, measurement methods, minimum liquid asset
requirements and control procedures as well as strategies for obtaining
market funds and the steps to be taken to deal with any unforeseen events.
The Senior Vice-President in charge of Treasury is responsible for applying
the liquidity management policy, a report on which is submitted each year to
the Executive Committee. The situation is regularly monitored through weekly
follow-up 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 sources, based on a high proportion of core deposits
on the balance sheet (Table 8, page 30), capital adequacy (Tables 9 and 10,
pages 31 and 32 respectively), and the Bank's access to capital markets.
Other techniques (such as loan syndication and securitization, product
marketing and use of derivatives) are instrumental in ensuring sufficient
liquidity.
ANALYSIS OF BALANCE SHEET RISKS
Credit and market risks represent the main balance sheet risks.
CREDIT RISK MANAGEMENT
Credit risk has a direct bearing on the quality of a banks portfolio. A
two-fold approach is taken to managing such risk, one for prospective loans
and the other for existing loans.
The first involves applying the measures and methods adopted by the Bank to
limit credit risks in the loans it makes. During the year ended October 31,
1996, not only did the Bank continue to apply very strict credit limits, but
it further refined the criteria applied in the credit-granting process. All
the regional credit centres are now fully operational and our computer-based
credit risk assessment tools have placed us at the forefront of the industry.
The Bank continues to carry out syndication activities in order to spread the
risk in certain loans among several financial institutions.
The second approach in improving portfolio quality is to lessen the risks
that inevitably arise in loans after they have been granted. Just like the
other banks, the National Bank in recent years has had to improve the quality
of its portfolio of loans to designated countries as well as its real estate
portfolio by shedding the riskiest assets and taking provisions against
potential losses. This process has essentially been completed in the case of
loans to designated countries and is progressing as planned for real estate
loans.
Economic conditions in Canada have forced the Bank to be extremely vigilant
regarding its loans in general, and especially its loans to individuals and
very small businesses. In Quebec, the residential real estate market is going
through an especially difficult time. In its core markets and particularly
with its regular clients, the Bank intends to proceed with caution and
understanding by seeking amicable solutions that protect both the interests
of its clients and its shareholders.
The Bank's credit risk management policy is adopted by the Board of Directors
in collaboration with the Executive Committee and the Credit Committee of the
Board. It sets out the objectives and the methods and procedures for
identifying and measuring risks (including concentration risk), evaluating
credit, approving applications, as well as checking, monitoring and
controlling such risk.
35
<PAGE>
The Chief Executive Officer and the Chairman of the Credit Committee of the
Bank (a separate entity from the Credit Committee of the Board) are
responsible for implementing these policies. Line management with the
authority to approve credit applications varies in accordance with the size
and potential risk of the loan being contemplated. Beyond certain limits, the
decisions are made by the Credit Committee of the Board. Each credit
application must meet the requirements stipulated in the Bank's policy. The
portfolio is monitored on an ongoing basis and a specialized team analyzes
the risks associated with the various credit categories and sectors in which
the Bank wants to be involved.
At least once a year, the Chairman of the Credit Committee of the Bank
presents a detailed risk management report to the Board of Directors.
Periodic or special reports are also submitted to the Board of Directors, the
Executive Committee and the Credit Committee of the Board. Accounts which are
potentially problematic are monitored very closely and independent
examinations are carried out.
The Bank continued its orderly withdrawal from the real estate market in
1996. Gross real estate loans amounted to $1,610 million as at October 31,
1996, down 21.5% from a year earlier (Table 12). Less the $116 million in
provisions set aside to cover potential losses in this sector, net volumes
outstanding were $1,494 million, for a decrease of 21.3% from the same date a
year earlier. Net real estate exposure represented only 60% of shareholders'
equity, compared to 82% in 1995 and 133% in 1992. It also dropped to 4% of
total loans and bankers' acceptances.
Real estate loan volumes shrank in every region this year, including Quebec.
We took advantage of good opportunities as they arose to sell or restructure
domestic real estate loans, with the result that gross volumes declined by
$136 million or 12.3%. The Bank also continued to liquidate its U.S. real
estate portfolio, reducing gross loans outstanding by $190 million or 23.0%
by the end of the year. The Bank's strategy of sustained effort and prudence
is clearly producing results.
TABLE 12
REAL ESTATE LOANS
AS AT OCTOBER 31
(MILLIONS OF DOLLARS)
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------
1996 1995 1994 1993 1992
------------ ------------ ------------ ------------ ------------
$ % $ % $ % $ % $ %
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Geographic distribution
Canada
Ontario 437 27 491 24 570 26 612 25 711 26
Quebec 503 31 562 27 494 22 503 21 432 16
Other 34 2 57 3 101 4 112 5 118 4
------------ ------------ ------------ ------------ ------------
974 60 1,110 54 1,165 52 1,127 51 1,261 46
---------------------------------------------------------------------------
United States
California 232 15 302 14 329 15 336 14 386 14
New York 96 6 118 6 131 6 173 7 196 7
Illinois 114 7 144 7 149 7 151 6 147 6
Other 194 12 262 13 327 15 377 15 383 14
------------ ------------ ------------ ------------ ------------
636 40 826 40 936 43 1,037 42 1,112 41
Other - - 116 6 121 5 164 7 348 13
- ---------------------------------------------------------------------------------------------------------
1,610 100 2,052 100 2,222 100 2,428 100 2,721 100
By type of project
Retail 414 26 511 25 531 24 570 23 588 22
Office 572 36 815 40 974 44 1,080 44 1,215 45
Residential 188 11 214 10 243 11 281 12 317 12
Industrial 110 7 157 8 173 8 184 8 189 7
Land 47 3 64 3 43 2 47 2 62 2
Other 279 17 291 14 258 11 266 11 350 12
------------ ------------ ------------ ------------ ------------
1,610 100 2,052 100 2,222 100 2,428 100 2,721 100
Allowance for loan
impairment (116) (153) (173) (227) (394)
---------------------------------------------------------------------------
Real estate loans, net 1,494 1,899 2,049 2,201 2,327
- ---------------------------------------------------------------------------------------------------------
As a percentage of
shareholders' equity 60 82 88 112 133
As a percentage of total loans
and bankers' acceptances 4 5 6 7 7
- ---------------------------------------------------------------------------------------------------------
</TABLE>
36
<PAGE>
It should be noted that this reduction in real estate volumes occurred in all
sectors.
The situation with respect to loans to designated countries again improved
during the year as the Bank continued to reduce this portfolio (Table 13).
Gross volumes outstanding, at $189 million, were down 45.1% from 1995.
Taking into account the $154 million allowance for loan impairment, net
volumes amounted to $35 million -- a decrease of 77.3% -- and represented
only 1.4% of shareholders' equity. Moreover, the provisioning rate for the
loans still on our books was 81.5%. As at October 31, 1996, the estimated
market value of this portfolio exceeded its book value by $72 million.
The accounting treatment for impaired loans (formerly known as non-performing
loans) was modified in 1996 in accordance with the requirements of the
Superintendent of Financial Institutions Canada and the new standard of the
Canadian Institute of Chartered Accountants. Under the new policy, when
collection of a loan or a loan portfolio becomes doubtful because the
quality of credit has deteriorated to the point where the lender is no longer
reasonably assured of recovering the entire balance of principal and
interest outstanding on the specified date, the book value of the loan is
reduced to its estimated realizable amount. To estimate this amount, the
expected future cash flows are discounted using the interest rates inherent
in the loans. This new standard was applied retroactively by making a $52
million adjustment (net of income taxes of $32 million) to the opening
balance of retained earnings for fiscal 1996.
The steadily improving quality of the Bank's portfolio again caused impaired
loans to decline in 1996, with volumes, net of the allowance for loan
impairment, falling 20.6% from $511 million to $406 million (Table 14). Of
this $105 million reduction, $77 million stemmed from the application of the
new accounting standard governing impaired loans. Had it not been for the
impact of this new standard, net impaired loans outstanding would have
declined 5.5% in spite of the difficult economic conditions in Canada, and
particularly in Quebec.
TABLE 13
DESIGNATED COUNTRIES
AS AT OCTOBER 31
(MILLIONS OF DOLLARS)
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
1996 1995 1994 1993 1992
---- ---- ---- ---- ----
Loans and securities, gross
Poland - 81 82 148 146
Brazil 43 79 81 103 100
Argentina 44 44 45 55 65
Cuba - - - - 53
Venezuela 13 13 13 13 35
Chile - - - - 29
Morocco - 28 28 27 25
Peru 22 21 22 21 20
Other 67 78 76 70 69
---- ---- ---- ---- ----
189 344 347 437 542
Allowance for impaired loans
to designated countries 154 190 190 274 279
---- ---- ---- ---- ----
Loans and securities, net
of allowance for loan impairment 35 154 157 163 263
- --------------------------------------------------------------------------------
Allowance for loan impairment as a %
of loans and securities 81.5% 55.2% 54.7% 62.8% 51.5%
Loans and securities, net, as a % of
shareholders' equity 1.4% 6.6% 6.8% 8.3% 15.0%
- --------------------------------------------------------------------------------
During fiscal 1996, the Bank converted the loan granted to Panama into
discount bonds for an amount of $6 million under the Brady Plan. Particulars
by country of private-risk and sovereign-risk loans classified as
restructured for previous years are as follows: 1994: Brazil $81 million,
Poland $82 million and Argentina $45 million.
37
<PAGE>
If this impact is excluded from the data in Table 14, gross impaired real
estate volumes in the United States decreased by $24 million or 34.3%.
Impaired real estate loans elsewhere in the world were eliminated.
Domestic impaired real estate loans shrank by $13 million or 13.3% (again net
of the impact of the new standard). While this was a respectable performance,
it fell short of the improvement achieved elsewhere, owing to the sluggish
Canadian economy. The Bank is continuing to improve its domestic real estate
portfolio as and when favourable opportunities arise, but it is prepared to
take new provisions in this sector if necessary as a precautionary measure.
The economic climate in Canada and in our core market of Quebec also
explains the rise in domestic net impaired loans to individuals, which
include loans made to entrepreneurs by the Bank's branch network. This loan
category recorded a $62 million or 44.9% increase, excluding the impact of
the new accounting standard. Using the same calculation basis, impaired loans
were also up 6.2% in the independent businesses category, mainly because of
the economic situation in Quebec, where individuals and small businesses were
particularly hard hit and the bankruptcy rate remained high. As a way of
dealing with these difficulties over which it had no control, the Bank took
the provisions required (Table 3, page 24).
However, domestic impaired loans to corporations were down 35.5%, net of the
impact of the new accounting standard.
<TABLE>
<CAPTION>
TABLE 14
IMPAIRED LOANS
AS AT OCTOBER 31
(MILLIONS OF DOLLARS)
- ----------------------------------------------------------------------------------------
1996 1995 1994 1993 1992
------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C>
Private impaired loans, net
Domestic
Individuals(1) 192 138 119 104 123
Independent businesses 175 194 212 251 280
Corporations 18 31 56 54 41
Real Estate sector 61 98 182 166 149
Other(2) (90) (90) (42) (11) 17
------ ------ ------ ------ ------
356 371 527 564 610
------------------------------------------
International
Commercial - United States 3 3 11 80 69
Real Estate - United States 39 70 83 133 214
Real Estate - Other - 50 52 51 53
Other(2) - 8 8 13 37
------ ------ ------ ------ ------
42 131 154 277 373
------------------------------------------
Total private impaired loans, net 398 502 681 841 983
------------------------------------------
Impaired loans to designated countries
Gross 77 95 92 337 393
Allowance for loan impairment 69 86 85 274 279
------ ------ ------ ------ ------
8 9 7 63 114
------------------------------------------
Total impaired loans, net(3) 406 511 688 904 1,097
- ----------------------------------------------------------------------------------------
Private impaired loans, gross 995 1,104 1,310 1,435 1,731
Allowance for loan impairment 597 602 629 594 748
Private impaired loans, net 398 502 681 841 983
Provisioning rate 60.0% 54.5% 48.0% 41.4% 43.2%
- ----------------------------------------------------------------------------------------
As a percentage of net loans and
bankers' acceptances
Domestic - Private 1.0% 1.2% 1.8% 2.1% 2.4%
International - Private 0.8% 2.8% 3.3% 5.7% 6.5%
International - Designated countries 0.2% 0.2% 0.2% 1.3% 2.0%
Total 1.0% 1.5% 2.1% 2.8% 3.6%
As a percentage of common
shareholders' equity 19.2% 26.4% 38.5% 58.5% 85.3%
- ----------------------------------------------------------------------------------------
</TABLE>
(1) Including $37 million in net consumer loans in 1996 (1995: $39 million;
1994: $28 million; 1993: $22 million; 1992: $26 million).
(2) Including $100 million in general provisions in 1996 (1995: $100
million; 1994: $56 million; 1993: $31 million; 1992: $6 million).
(3) The Bank has no loans classified as other past due loans (90 days and
over) except for those already designated as impaired.
38
<PAGE>
In the United States, the Bank's problem loans in the commercial sector
remained low as the Bank pursued its strategy of reorientation towards the
mid-market sector and specialization in promising niches like asset-based
lending. Total impaired loans outstanding in the United States fell $31
million or 42.5% compared to 1995.
As a percentage of the $995 million in gross private impaired loans, the $597
million allowance for loan impairment as at October 31, 1996 represented a
provisioning rate of 60.0%. This was much higher than the previous year's
54.5%, as this rate continued its upward trend for the third consecutive year.
All in all, net impaired loans accounted for only 1.0% of the value of loans
and bankers' acceptances, down sharply from 1.5% in 1995 and 3.6% in 1992. As
a percentage of common shareholders' equity, they shrank from 26.4% as at
October 31, 1995 to 19.2% at the end of 1996. As stated in our 1995 Annual
Report, the Bank believes that its success in improving its lending portfolio
will sustain this positive trend.
The new standard governing impaired loans also affects the treatment of
interest on impaired loans. The estimated realizable amounts of such loans
are now measured by taking into consideration interest not received, while
interest earned is deducted from the recorded investment in the loan or, if
the loan has been written off, is credited to the allowance for loan
impairment.
Net interest earned on impaired loans went from a positive amount of $13
million to a negative amount of $5 million (Table 15). Interest earned on
international loans was down as a result of the past-due interest bonds
received. Aggregate net interest earned on all impaired loans dropped from
2.3% to -1.1%.
Average impaired loans outstanding declined in both the domestic sector
(-17.1%) and the international sector (-35.6%).
<TABLE>
<CAPTION>
TABLE 15
INTEREST ON IMPAIRED LOANS
FOR THE YEAR ENDED OCTOBER 31
(MILLIONS OF DOLLARS)
- ----------------------------------------------------------------------------------------
1996 1995 1994 1993 1992
------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C>
Interest on impaired loans (1)
Domestic (20) (18) (16) (7) (9)
International 15 31 18 37 21
------ ------ ------ ------ ------
(5) 13 2 30 12
- ----------------------------------------------------------------------------------------
Average impaired loans
Domestic 354 427 554 569 467
International 96 149 309 502 654
------ ------ ------ ------ ------
450 576 863 1,071 1,121
- ----------------------------------------------------------------------------------------
Interest as a %
of average impaired loans
Domestic (5.7)% (4.2)% (2.9)% (1.2)% (1.9)%
International 15.6% 20.8% 5.8% 7.4% 3.2%
Total (1.1)% 2.3% 0.2% 2.8% 1.1%
- ----------------------------------------------------------------------------------------
</TABLE>
(1) Interest earned includes interest receipts and reversals for loans newly
classified as impaired.
39
<PAGE>
MARKET RISK MANAGEMENT
Interest rate risk in the balance sheet results from mismatching between the
maturities of assets and liabilities. The level of risk varies according to
the frequency and extent of fluctuations in interest rates. To control this
risk, the Bank manages its asset and liability matching, using a vast range
of both balance sheet and off-balance sheet financial instruments to adjust
the mix of its portfolios.
Analyzing interest rate sensitivity gaps is one of the methods used to
control interest rate risk. Table 16 presents a breakdown of assets and
liabilities by maturity and illustrates the sensitivity of the Bank's balance
sheet to interest rate fluctuations as at October 31, 1996. In this table, a
distinction is made between items in Canadian dollars (Table 16A) and those
in foreign currencies (Table 16B), while the trading account and the
investment account are shown separately.
The net sensitivity gap for maturities of one year and under in the Canadian
dollar investment account varied little, going from a liability-sensitive
position of $848 million (or 2.6% of assets) as at October 31, 1995 to a
liability-sensitive position of $793 million (or 2.2% of assets) as at
October 31, 1996. The asset-sensitive position of net gaps for maturities of
over one year also remained much the same, going from $2,829 million at year
end 1995 to $2,717 million at year end 1996.
TABLE 16A
INTEREST RATE SENSITIVITY ANALYSIS - CANADIAN DOLLAR ITEMS
AS AT OCTOBER 31, 1996
(MILLIONS OF CANADIAN DOLLARS)
- ----------------------------------------------------------------------------
- ----------------------------------------------------------------------------
3 MONTHS
ASSETS TOTAL VARIABLE RATE AND UNDER YIELD
------- ------------- ----------- -----
Trading account
Cash resources 50 49 - -
Securities 3,756 - 618 3.27
Loans 3,760 1,560 1,635 3.79
Other assets 30 26 - -
------- ------------- ----------- -----
7,596 1,635 2,253 3.65
---------------------------------------------------
Investment account
Cash resources 1,346 528 736 3.86
Securities 3,167 1 170 3.52
Loans 29,232 10,684 3,744 7.97
Other assets 2,860 670 16 -
------- ------------- ----------- -----
36,605 11,883 4,666 7.13
---------------------------------------------------
Total 44,201 13,518 6,919 6.00
- ----------------------------------------------------------------------------
LIABILITIES
Trading account
Deposits 1,743 1,743 - -
Other liabilities 5,763 825 1,901 3.57
------- ------------- ----------- -----
7,506 2,568 1,901 3.57
---------------------------------------------------
Investment account
Deposits 30,045 5,830 6,282 4.05
Subordinated debt 305 - 51 9.00
Other liabilities 2,852 438 - -
Shareholders' equity 2,499 - 59 7.00
------- ------------- ----------- -----
35,701 6,268 6,392 4.12
---------------------------------------------------
Total 43,207 8,836 8,293 3.99
- ----------------------------------------------------------------------------
Trading gap 90 (933) 352
Investment gap 904 5,615 (1,726)
On-balance sheet gap 994 4,682 (1,374)
- ----------------------------------------------------------------------------
DERIVATIVES
Trading derivatives (90) - 579
Investment derivatives (995) - (5,431)
Total (1,085) - (4,852)
- ----------------------------------------------------------------------------
Total trading gap - (933) 931
Total investment gap (91) 5,615 (7,157)
Total gap, net (91) 4,682 (6,226)
- ----------------------------------------------------------------------------
40
<PAGE>
The use of derivatives greatly contributed to extending the average maturity
of the Bank's net assets, thereby making the interest spread less sensitive
to interest rate fluctuations. In fact, had derivatives not been used, the
asset-sensitive position of net gaps for maturities of over one year would
have shrunk by $1,398 million.
Information on sensitivity gaps for the foreign currency investment account
shows that mismatches were limited and that the vast majority of assets and
liabilities had maturities of under one year.
Another risk assessment method used by the Bank is to measure the impact of
interest rate movements on net interest income and on the present value of
shareholders' equity. The Bank structured the investment sensitivity gaps for
maturities of one year and under in such a way as to minimize the impact of
interest rate fluctuations on the interest spread. Based on the matching
position as at October 31, 1996, simulations demonstrate that an immediate
and sustained 1% rise in interest rates would reduce net interest income by
less than $1 million (before taxes) over 12 months. Such an increase would
reduce the present value of common shareholders' equity by $60 million
(before taxes).
To complement the traditional tools used for measuring financial risk, the
Bank applies the VAR method to trading activities. By simulating the impact
of interest and foreign exchange rate fluctuations on the Bank's trading
account,
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------
3 TO 6 6 TO 12 TOTAL 1 YEAR OVER 5 NON-INTEREST
MONTHS YIELD MONTHS YIELD AND UNDER 1 TO 5 YEARS YIELD YEARS YIELD SENSITIVE
- ------ ----- ------- ----- ------------ ------------ ----- ----- ----- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
- - - - 49 - - - - 1
113 3.43 330 2.93 1,061 497 4.59 1,899 4.98 299
292 3.79 53 3.79 3,540 (24) 3.79 - - 244
- - - - 26 - - - - 4
- ------ ----- ------- ----- ------------ ------------ ----- ----- ----- ------------
405 3.69 383 3.05 4,676 473 4.63 1,899 4.98 548
- ------------------------------------------------------------------------------------------------------------------
129 4.18 15 5.00 1,408 - - - - (62)
246 5.06 307 5.64 724 1,483 6.34 523 7.79 437
2,077 8.23 3,839 8.29 20,344 8,467 8.31 149 8.53 272
16 - 31 - 733 252 - - - 1,875
- ------ ----- ------- ----- ------------ ------------ ----- ----- ----- ------------
2,468 7.65 4,192 8.02 23,209 10,202 7.82 672 7.95 2,522
- ------------------------------------------------------------------------------------------------------------------
2,873 7.09 4,575 7.61 27,885 10,675 7.68 2,571 5.76 3,070
- ------------------------------------------------------------------------------------------------------------------
- - - - 1,743 - - - - -
68 3.30 163 3.83 2,957 570 5.26 1,424 8.25 812
- ------ ----- ------- ----- ------------ ------------ ----- ----- ----- ------------
68 3.30 163 3.83 4,700 570 5.26 1,424 8.25 812
- ----------------------------------------------------------------------------------------------------------------
3,573 4.31 5,376 4.58 21,061 8,976 5.12 8 5.92 -
- - - - 51 129 10.84 125 7.50 -
- - - - 438 - - - - 2,414
- - - - 59 - - 317 9.41 2,123
- ------ ----- ------- ----- ------------ ------------ ----- ----- ----- ------------
3,573 4.31 5,376 4.58 21,609 9,105 5.20 450 8.82 4,537
- ----------------------------------------------------------------------------------------------------------------
3,641 4.29 5,539 4.55 26,309 9,675 5.20 1,874 8.39 5,349
- ----------------------------------------------------------------------------------------------------------------
337 220 (24) (97) 475 (264)
(1,105) (1,184) 1,600 1,097 222 (2,015)
(768) (964) 1,576 1,000 697 (2,279)
- ----------------------------------------------------------------------------------------------------------------
(633) 556 502 (596) 4 -
653 2,385 (2,393) 1,178 220 -
20 2,941 (1,891) 582 224 -
- ----------------------------------------------------------------------------------------------------------------
(296) 776 478 (693) 479 (264)
(452) 1,201 (793) 2,275 442 (2,015)
(748) 1,977 (315) 1,582 921 (2,279)
- ----------------------------------------------------------------------------------------------------------------
</TABLE>
41
<PAGE>
the value of the maximum potential loss within a 99.5% probability can be
determined. Not including potential losses with a probability of 0.5% or
less, the VAR of trading activities as at October 31, 1996 was limited to
$1.5 million in foreign exchange operations and $1.0 million in interest rate
operations, for a holding period of one day. The VAR of these two types of
operations combined amounted to $2.1 million. These amounts are considerably
lower than the notional amount of the balance sheet and off-balance sheet
financial instruments used for trading purposes.
ANALYSIS OF OFF-BALANCE SHEET RISK EXPOSURE
Risks are also associated with off-balance sheet activities, which consist of
commitments to extend credit and derivatives. These financial instruments are
usually components of portfolios which include balance sheet items and, as
such, are subject to the full range of control measures described earlier. In
addition, commitments to extend credit must comply with the same credit
policies as loan operations recorded on the balance sheet. Additional control
measures are also applied to derivatives.
This section provides more information on the nature of off-balance sheet
activities, the risks they involve, and the assessments and control measures
applicable to such risks.
<TABLE>
<CAPTION>
TABLE 16B
INTEREST RATE SENSITIVITY ANALYSIS - FOREIGN CURRENCY ITEMS
AS AT OCTOBER 31, 1996
(MILLIONS OF CANADIAN DOLLARS)
- ----------------------------------------------------------------------------------------
3 MONTHS
ASSETS TOTAL VARIABLE RATE AND UNDER YIELD
--------------- --------------- ------------ --------
<S> <C> <C> <C> <C>
Trading account
Cash resources 10 7 - -
Securities 659 54 30 5.53
Loans 311 62 143 5.49
Other assets - - - -
--------------- --------------- ------------ --------
980 123 173 5.50
-----------------------------------------------------------
Investment account
Cash resources 2,122 116 1,663 5.56
Securities 832 - 281 5.35
Loans 4,632 1,523 2,326 5.62
Other assets 367 126 - -
--------------- --------------- ------------ --------
7,953 1,765 4,270 5.58
-----------------------------------------------------------
Total 8,933 1,888 4,443 5.58
- ----------------------------------------------------------------------------------------
LIABILITIES
Trading account
Deposits 117 117 - -
Other liabilities 959 227 597 5.61
--------------- --------------- ------------ --------
1,076 344 597 5.61
-----------------------------------------------------------
Investment account
Deposits 8,220 697 5,438 5.26
Subordinated debt 711 - - -
Other liabilities (80) (227) - -
Shareholders' equity - - - -
--------------- --------------- ------------ --------
8,851 470 5,438 5.26
-----------------------------------------------------------
Total 9,927 814 6,035 5.29
- ----------------------------------------------------------------------------------------
Trading gap (96) (221) (424)
Investment gap (898) 1,295 (1,168)
On-balance sheet gap (994) 1,074 (1,592)
- ----------------------------------------------------------------------------------------
DERIVATIVES
Trading derivatives 96 - (1,191)
Investment derivatives 985 - 440
Total 1,081 - (751)
- ----------------------------------------------------------------------------------------
Total trading gap - (221) (1,615)
Total investment gap 87 1,295 (728)
Total gap, net 87 1,074 (2,343)
- ----------------------------------------------------------------------------------------
</TABLE>
42
<PAGE>
CREDIT EQUIVALENT AMOUNT OF OFF-BALANCE SHEET ITEMS
Table 10 (page 32) provides a breakdown of the risk-weighted credit
equivalent amount of the various off-balance sheet items included in the
calculation of total risk-weighted assets. They represent a relatively low
proportion in comparison to the other credit risks recorded on the balance
sheet. Off-balance sheet items accounted for 8.9% of risk-weighted assets on
the balance sheet, compared to 8.4% in 1995.
DERIVATIVE FINANCIAL INSTRUMENTS
The derivative financial instruments used by the Bank (forwards, futures,
swaps and options) are contracts whose value is derived mainly from interest
rates and foreign exchange rates and, to a lesser extent, commodity prices
and equity prices.
Derivatives are the strategic tool of choice for risk management. The Bank
uses them for two purposes: trading activities and asset/liability management.
The Bank's trading portfolio is used to carry out market-making or trading
operations and to position the Bank on markets. The Bank also makes its
expertise in risk management available to its commercial and institutional
clients by offering management solutions for risk exposure.
Derivatives are one of the tools available for managing interest rate and
foreign exchange risk exposure in the balance sheet. It is essential that
these risks, which are a normal part of banking, be managed in order to
protect the interest spread and the present value of capital.
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------------------
TOTAL 1 YEAR NON-INTEREST
3 TO 6 MONTHS YIELD 6 TO 12 MONTHS YIELD AND UNDER 1 TO 5 YEARS YIELD OVER 5 YEARS YIELD SENSITIVE
- ------------- ----- -------------- ----- ------------ ------------ ----- ------------ ----- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
- - - - 7 - - - - 3
14 5.59 26 5.93 124 455 5.74 11 0.23 69
68 5.29 - - 273 - - - - 38
- - - - - - - - - -
- ------------- ----- -------------- ----- ------------ ------------ ----- ------------ ----- ------------
82 5.34 26 5.93 404 455 5.74 11 0.23 110
- -------------------------------------------------------------------------------------------------------------------------------
220 5.39 33 5.46 2,032 - - - - 90
63 6.33 13 12.71 357 193 6.91 194 7.58 88
305 5.90 100 6.59 4,254 138 7.55 14 7.66 226
- - - - 126 - - - - 241
- ------------- ----- -------------- ----- ------------ ------------ ----- ------------ ----- ------------
588 5.76 146 6.88 6,769 331 7.18 208 7.59 645
- -------------------------------------------------------------------------------------------------------------------------------
670 5.71 172 6.73 7,173 786 6.35 219 7.22 755
- -------------------------------------------------------------------------------------------------------------------------------
- - - - 117 - - - - -
- - - - 824 48 5.89 30 6.27 57
- ------------- ----- -------------- ----- ------------ ------------ ----- ------------ ----- ------------
- - - - 941 48 5.89 30 6.27 57
- -------------------------------------------------------------------------------------------------------------------------------
1,318 5.30 499 5.73 7,952 80 7.42 - - 188
141 3.67 - - 141 235 5.71 335 8.13 -
- - - - (227) - - - - 147
- - - - - - - - - -
- ------------- ----- -------------- ----- ------------ ------------ ----- ------------ ----- ------------
1,459 5.14 499 5.73 7,866 315 6.14 335 8.13 335
- -------------------------------------------------------------------------------------------------------------------------------
1,459 5.14 499 5.73 8,807 363 6.11 365 7.98 392
- -------------------------------------------------------------------------------------------------------------------------------
82 26 (537) 407 (19) 53
(871) (353) (1,097) 16 (127) 310
(789) (327) (1,634) 423 (146) 363
- -------------------------------------------------------------------------------------------------------------------------------
894 569 272 (88) (88) -
678 197 1,315 (406) 76 -
1,572 766 1,587 (494) (12) -
- -------------------------------------------------------------------------------------------------------------------------------
976 595 (265) 319 (107) 53
(193) (156) 218 (390) (51) 310
783 439 (47) (71) (158) 363
- -------------------------------------------------------------------------------------------------------------------------------
</TABLE>
43
<PAGE>
For trading activities, transactions are accounted for on a mark-to-market
basis. For asset/liability management operations, the derivatives are
accounted for on an accrual basis in order to match the accounting treatment
of the assets and liabilities being hedged. Note 19 to the financial
statements (pages 65 and 66) presents the maturity profile of the derivatives
held by the Bank as at September 30, 1996. It should be noted that most of
these instruments have short maturities: 71% of interest rate contracts and
69% of foreign exchange contracts mature within six months.
In addition, Note 19 presents the notional (or nominal) amounts of
derivatives used by the Bank for trading and asset/liability management
(other activities). Table 16 (pages 40 to 43) shows how, for asset/liability
management purposes, derivatives modify interest rate sensitivity gaps and
how, by extending the maturity of capital, they reduced balance sheet risk
exposure in 1996. The notional amount of derivatives in the trading account
is not necessarily representative of their risk level but rather reflects the
high number of transactions.
The risks inherent in derivatives are similar to the general risks for
financial instruments. These can be divided into four major categories:
market risk, especially interest and foreign exchange rate risk; credit risk;
liquidity risk and legal risk.
Market risk is defined as the potential for a deterioration in the value of a
derivative instrument because of fluctuations in the underlying primary
instrument (interest rates or foreign exchange rates). All derivative risks
are accurately measured, reevaluated on a daily basis and managed in
accordance with the policies approved by the Bank's Board of Directors.
Credit risk, also called the credit equivalent amount, is the value of the
loss incurred in the event a counterparty fails to honour its commitments. It
is measured as the sum of the current replacement cost of the contract, if
the risk is positive, and future credit risk exposure, which is the estimated
change in the value of the contract to maturity.
Note 20 to the financial statements (pages 66 and 67), which provides data on
credit risk exposure calculated in this way, confirms the analysis of Table
10 (page 32) with respect to the low proportion of derivatives compared to
balance sheet items.
The Bank limits credit risk exposure related to derivatives in various ways.
For instance, in dealings with certain counterparties, it can reduce its
exposure by means of netting or mark-to-market agreements. In addition,
credit risk is reduced substantially when the relevant instruments are listed
on a stock exchange. As shown in Note 19 to the financial statements, most of
the credit equivalent amount for derivatives is contracted with reliable
counterparties, particularly major banks and OECD governments.
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. The Bank
controls this risk by taking relatively short positions and by operating on
markets where its positions represent only a very small proportion of total
volume. In the second instance, 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.
Legal risk exists where there is a possibility that a counterparty does not
have the necessary legal power to enter into 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 derivative operations, another type of risk that is often discussed
concerns operations and systems, namely, the risk of losses that would be
incurred should information systems or operations control and management
systems fail.
44
<PAGE>
The Bank has a number of ways to limit this risk exposure. For example, it
establishes specific policies and procedures, including emergency plans such
as recovery measures in the event of equipment breakdown, continuous
monitoring and follow-up of procedures and systems, daily backup of
transactions, regular presentation of reports to senior line management,
separation of transaction and control functions, and personnel training.
In addition to being managed as part of the Bank's general risk management
policies, derivative risk exposure is also subject to special assessment and
control measures. 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.
<TABLE>
<CAPTION>
QUARTERLY RESULTS
(MILLIONS OF DOLLARS, EXCEPT FOR PER SHARE AMOUNTS)
- ---------------------------------------------------------------------------------------------------------------------------------
Net interest Dividends
income Net income (loss) (in thousands) Return on
(taxable Charge for per common share ------------------ common share-
equivalent loan Other Non-interest Net income ----------------------- Common Preferred holders' equity
basis) impairment income expenses (loss) Basic Fully diluted shares shares %
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1st Q 262 68 141 255 50 0.32 0.32 25,406 9,118 11.4
2nd Q 248 94 136 242 30 0.16 0.16 25,407 9,517 5.8
3rd Q 270 358 141 253 (118) (1.00) (1.00) 25,406 9,478 (36.5)
4th Q 261 50 123 266 39 0.23 0.22 12,703 9,300 9.2
- ---------------------------------------------------------------------------------------------------------------------------------
1992 1,041 570 541 1,016 1 (0.29) (0.29) 88,922 37,413 (2.6)
- ---------------------------------------------------------------------------------------------------------------------------------
1st Q 260 75 141 254 45 0.28 0.28 12,789 9,168 11.0
2nd Q 244 100 173 251 40 0.23 0.24 12,869 8,314 9.5
3rd Q 254 75 161 261 48 0.27 0.26 14,760 8,195 10.4
4th Q 258 75 160 276 42 0.23 0.22 14,844 8,116 8.8
- ---------------------------------------------------------------------------------------------------------------------------------
1993 1,016 325 635 1,042 175 1.01 1.00 55,262 33,793 9.9
- ---------------------------------------------------------------------------------------------------------------------------------
1st Q 265 63 185 296 51 0.27 0.26 15,869 8,063 10.4
2nd Q 267 63 177 294 52 0.27 0.27 15,931 8,933 10.4
3rd Q 281 87 194 292 57 0.29 0.29 16,010 10,679 10.8
4th Q 282 62 163 286 57 0.29 0.28 16,096 10,435 10.6
- ---------------------------------------------------------------------------------------------------------------------------------
1994 1,095 275 719 1,168 217 1.12 1.10 63,906 38,110 10.5
- ---------------------------------------------------------------------------------------------------------------------------------
1st Q 281 56 167 292 61 0.31 0.31 16,173 10,167 11.1
2nd Q 303 76 171 301 57 0.29 0.28 16,256 9,968 10.5
3rd Q 293 56 185 314 64 0.33 0.33 16,327 9,983 11.4
4th Q 304 67 189 322 63 0.33 0.32 16,393 9,370 11.0
- ---------------------------------------------------------------------------------------------------------------------------------
1995 1,181 255 712 1,229 245 1.26 1.24 65,149 39,488 11.0
- ---------------------------------------------------------------------------------------------------------------------------------
1st Q 297 44 198 328 75 0.41 0.41 18,926 6,855 14.0
2nd Q 300 44 210 401 71 0.39 0.38 20,667 6,787 13.2
3rd Q 379 104 212 340 98 0.55 0.54 20,769 6,724 17.7
4th Q 300 43 216 344 74 0.41 0.41 20,893 6,675 12.8
- ---------------------------------------------------------------------------------------------------------------------------------
1996 1,276 235 836 1,413 318 1.76 1.74 81,255 27,041 14.5
- ---------------------------------------------------------------------------------------------------------------------------------
</TABLE>
45
<PAGE>
<TABLE>
<CAPTION>
QUARTERLY RESULTS (CONT.)
Number of
shares common
Impaired loans (in thousands) Per common share
------------------------------------------------- ----------------- --------------------------
Net private Designated countries Net total Average End of Book Stock trading range Number of
----------------------- period value ------------------- Number of branches
Gross Allowance employees in
outstanding High Low (1) Canada
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1st Q 780 371 368 783 127,031 127,031 11.23 12.75 11.00 12,637 662
2nd Q 983 371 287 1,067 127,031 127,031 11.19 12.63 8.25 12,351 659
3rd Q 938 383 272 1,049 127,031 127,031 10.02 9.25 8.25 12,197 654
4th Q 983 393 279 1,097 127,057 127,152 10.11 9.38 7.38 11,962 652
- ----------------------------------------------------------------------------------------------------------------------------------
1992
- ----------------------------------------------------------------------------------------------------------------------------------
1st Q 938 393 280 1,051 127,689 127,954 10.26 8.63 7.38 11,935 646
2nd Q 915 331 276 970 133,411 146,968 10.11 9.88 7.25 11,654 645
3rd Q 917 327 274 970 147,544 147,599 10.27 10.75 10.13 11,683 632
4th Q 841 337 274 904 148,390 148,474 10.41 10.63 9.50 12,149 650
- ----------------------------------------------------------------------------------------------------------------------------------
1993
- ----------------------------------------------------------------------------------------------------------------------------------
1st Q 812 340 277 875 158,680 158,708 10.55 11.63 10.13 12,081 647
2nd Q 786 251 222 815 159,306 159,339 10.71 11.38 9.00 10,870 646
3rd Q 733 257 226 764 160,093 160,126 10.89 9.25 8.25 10,882 645
4th Q 681 92 85 688 160,947 160,976 11.09 10.00 8.63 10,746 641
- ----------------------------------------------------------------------------------------------------------------------------------
1994
- ----------------------------------------------------------------------------------------------------------------------------------
1st Q 620 96 88 628 161,714 161,740 11.30 10.00 8.63 10,774 643
2nd Q 556 96 86 566 162,545 162,573 11.51 10.25 9.00 10,576 644
3rd Q 530 96 87 539 163,259 163,279 11.74 11.50 10.13 10,796 641
4th Q 502 95 86 511 163,940 163,963 11.88 11.88 10.38 10,620 629
- ----------------------------------------------------------------------------------------------------------------------------------
1995
- ----------------------------------------------------------------------------------------------------------------------------------
1st Q 399 94 86 407 164,575 164,594 11.86 11.38 10.38 10,702 648
2nd Q 395 93 84 404 165,330 165,348 12.13 12.00 11.00 10,471 649
3rd Q 392 81 72 401 166,161 166,182 12.53 12.00 11.05 10,696 632
4th Q 398 77 69 406 167,119 167,151 12.70 13.90 11.15 10,567 632
- ----------------------------------------------------------------------------------------------------------------------------------
1996
- ----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Excluding Levesque Beaubien Geoffrion Inc.
46
<PAGE>
ALLOWANCE FOR LOAN IMPAIRMENT
Aggregate of provisions taken to absorb anticipated credit-related losses
(loans, acceptances, guarantees, letters of credit, deposits by other banks
and derivatives), namely, the sum of annual provisions less write-offs, net
of recoveries. The allowance for loan impairment includes country risk
provisions, specific provisions and the general provision.
ASSET-BASED LENDING
Loans or other forms of credit secured by assets belonging to the borrower
(e.g. accounts receivable or inventory items) which are strictly controlled
by the lender until settlement of the debt.
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.
BANKERS' ACCEPTANCE
Short-term debt security traded on the money market which a bank guarantees
on behalf of a borrower and for which the borrower pays a stamping fee.
CAPITAL
Amount which would be owed to the holders of shares and bank debentures if
assets had to be liquidated to reimburse depositors and other creditors.
Capital consists of bank debentures and shareholders' equity.
CAPITAL RATIOS
Ratios of capital, as defined by regulatory authorities, to risk-weighted
assets. The Bank for International Settlements distinguishes 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, or supplementary capital, consists of
other preferred shares and subordinated debentures at their book value less
investments in associated companies. Total regulatory capital, or total
capital, is the sum of Tier 1 and and Tier 2 capital.
CHARGE FOR LOAN IMPAIRMENT (FORMERLY REFERRED TO AS "PROVISION FOR LOAN
LOSSES")
Charge to income which is added to the allowance for loan impairment in order
to adjust impaired loans to their estimated realizable amount.
DERIVATIVES
Financial futures or options 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.
EARNING ASSETS
Total assets which generate interest for the Bank. Earning assets are
calculated as total assets less cash and other non-interest bearing assets.
FOREIGN CURRENCY AND INTEREST RATE SWAPS
Transactions in which counterparties agree to exchange, for a specified
period, currencies or streams of interest payments (generally by exchanging a
fixed rate for a floating one) based on an amount of notional principal.
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 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
net price (strike price).
GUARANTEES AND LETTERS OF CREDIT
Irrevocable assurances that a bank will make payments for a client which
cannot meet its financial obligations to third parties.
IMPAIRED LOAN (FORMERLY REFERRED TO AS "NON-PERFORMING 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 FUTURE
Contractual obligation to buy or sell, on or before a specified future date,
a given quantity of a financial instrument at a given interest rate.
LIQUID ASSETS
Assets held as cash or securities easily convertible to cash, such as
deposits with other banks and securities.
NET INCOME 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 fiscal year.
NET INTEREST INCOME
Difference between the interest earned on assets and the interest paid on
liabilities. When expressed as a percentage of average assets, it is called
net interest margin or interest agreed.
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.
POINT
Unit of measure equal to one percentage (1%).
RETURN ON ASSETS (ROA)
Net income expressed as a percentage of total average assets during a year.
This ratio is used to assess the profitability of the Bank's total resources.
RETURN ON COMMON SHAREHOLDERS' EQUITY
Amount available to holders of common shares, namely, net income less
dividends on preferred shares, expressed as a percentage of average 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 for 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.
SECURITIZATION
Transaction in which certain assets, such as mortgages, are sold to an entity
which finances their acquisition by issuing negotiable securities.
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 subordinated 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 not 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
Liquid assets used for trading on financial markets. This account is
recorded on the balance sheet at its market value.
47
<PAGE>
CONSOLIDATED FINANCIAL STATEMENTS
[LOGO]
YEAR ENDED OCTOBER 31,
1 9 9 6
49
<PAGE>
MANAGEMENT'S REPORT
The consolidated financial statements and all information contained in this
document were prepared by the management of the Bank, which is responsible
for their accuracy, objectivity and completeness. These consolidated
financial statements were prepared in accordance with generally accepted
accounting principles, including the accounting requirements of the
Superintendent of Financial Institutions Canada.
Management maintains the necessary accounting and internal control systems
designed to ensure that reliable financial information is produced and that
assets are safeguarded, to a reasonable extent, against any loss or
unauthorized use. The procedures used include following up relevant criteria
for hiring and training personnel, establishing an organizational structure
to ensure appropriate distribution of tasks, regularly updating policies,
procedures and permanent instructions and appropriate budget control by
centre of responsibility. These systems are regularly evaluated by a group of
inspectors and internal auditors, whose findings are presented from time to
time to the Audit Committee. The Board of Directors, through its Audit
Committee composed entirely of directors who are neither officers nor
employees of the Bank, is responsible for examining and overseeing the Bank's
practices with respect to accounting and to the disclosure of financial
information.
The Superintendent of Financial Institutions each year makes such examination
of the Bank's affairs as he deems necessary to satisfy himself that the
provisions of the Bank Act having reference to the protection of the
depositors and shareholders of the Bank are duly observed, and that the Bank
is in a sound financial condition. He meets with the Audit Committee, with or
without management being present.
The independent auditors, whose report follows, have audited the consolidated
financial statements of the Bank. They meet with the Audit Committee from
time to time, with or without management being present, to discuss their
audit and questions related thereto.
LEON COURVILLE
President and Chief Operating Officer
Montreal, November 28, 1996
AUDITORS' REPORT
TO THE SHAREHOLDERS OF NATIONAL BANK OF CANADA
We have audited the Consolidated Balance Sheet of National Bank of Canada as
at October 31, 1996 and the Consolidated Statements of Income, Changes in
Shareholders' Equity and Changes in Financial Position for the year then
ended. These financial statements are the responsibility of the Bank's
management. Our responsibility is to express an opinion on these financial
statements based on our audit.
We conducted our audit in accordance with 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,
1996 and the results of its operations and the changes in its financial
position for the year then ended in accordance with generally accepted
accounting principles, including the accounting requirements of the
Superintendent of Financial Institutions Canada.
The consolidated financial statements for the year ended October 31, 1995
were audited by Mallette Maheu and Raymond, Chabot, Martin, Pare who
expressed an opinion thereon without reservation in their report dated
December 7, 1995.
RAYMOND, CHABOT, MARTIN, PARE
General Partnership
Chartered Accountants
PRICE WATERHOUSE
Chartered Accountants
Montreal, November 28, 1996
50
<PAGE>
CONSOLIDATED FINANCIAL STATEMENTS
YEAR ENDED OCTOBER 31, 1996
CONSOLIDATED STATEMENT OF INCOME
(MILLIONS OF DOLLARS EXCEPT FOR PER SHARE AMOUNTS) 1996 1995
- ------------------------------------------------------------------------------
INTEREST INCOME AND DIVIDENDS
Loans $2,672 $2,838
Securities 485 464
Deposits with other banks 206 275
------------------------------
3,363 3,577
------------------------------
INTEREST EXPENSE
Deposits 1,970 2,297
Bank debentures 85 88
Other 38 22
------------------------------
2,093 2,407
------------------------------
NET INTEREST INCOME 1,270 1,170
Charge for loan impairment 235 255
------------------------------
NET INTEREST INCOME AFTER CHARGE
FOR LOAN IMPAIRMENT 1,035 915
------------------------------
OTHER INCOME
Deposit and payment service charges 175 164
Lending fees 82 83
Capital market fees 290 193
Foreign exchange revenues 50 51
Card service revenues 69 64
Trust services 20 21
Other 150 136
------------------------------
836 712
------------------------------
NET INTEREST AND OTHER INCOME 1,871 1,627
------------------------------
NON-INTEREST EXPENSES
Salaries and staff benefits 705 637
Premises 137 135
Computers and equipment 179 158
Communications 55 50
Reduction in value of assets (NOTE 13) 56 -
Other 281 249
------------------------------
1,413 1,229
------------------------------
NET INCOME BEFORE INCOME TAXES 458 398
Income taxes (NOTE 14) 130 146
------------------------------
NET INCOME BEFORE NON-CONTROLLING INTEREST 328 252
Non-controlling interest 10 7
------------------------------
NET INCOME $ 318 $ 245
- ------------------------------------------------------------------------------
NET INCOME PER COMMON SHARE (NOTE 15)
- Basic $1.76 $1.26
- Fully diluted $1.74 $1.24
- ------------------------------------------------------------------------------
51
<PAGE>
CONSOLIDATED BALANCE SHEET
AS AT OCTOBER 31
(MILLIONS OF DOLLARS) 1996 1995
- ------------------------------------------------------------------------------
ASSETS
CASH RESOURCES
Cash and deposits with Bank of Canada $ 212 $ 253
Deposits with other banks 3,316 4,921
------------------------------
3,528 5,174
------------------------------
SECURITIES (NOTE 3)
Investment account securities 3,999 4,426
Trading account securities 4,415 2,859
------------------------------
8,414 7,285
------------------------------
LOANS (NOTE 4)
Residential mortgages 12,229 10,895
Personal and credit card loans 5,382 5,273
Business and government loans 17,627 16,973
Securities purchased under resale agreements 2,697 654
------------------------------
37,935 33,795
------------------------------
OTHER
Customers' liability under acceptances 1,725 1,293
Premises and equipment (NOTE 6) 343 333
Other assets (NOTE 7) 1,189 1,033
------------------------------
3,257 2,659
------------------------------
$53,134 $48,913
- ------------------------------------------------------------------------------
LIABILITIES
DEPOSITS (NOTE 8)
Individuals $22,750 $21,763
Businesses and governments 11,616 9,787
Banks 5,759 8,874
------------------------------
40,125 40,424
------------------------------
OTHER
Acceptances 1,725 1,293
Cheques and other items in transit, net - 196
Obligations related to securities sold short 4,058 1,531
Securities sold under repurchase agreements 2,373 342
Other liabilities (NOTE 9) 1,338 1,533
------------------------------
9,494 4,895
------------------------------
SUBORDINATED DEBT
Variable-capital notes (NOTE 13) - 106
Bank debentures (NOTE 10) 1,016 1,177
------------------------------
1,016 1,283
------------------------------
SHAREHOLDERS' EQUITY
Capital stock (NOTE 11)
Preferred 376 376
Common 1,268 1,234
Retained earnings 855 701
------------------------------
2,499 2,311
------------------------------
$53,134 $ 48,913
- ------------------------------------------------------------------------------
ANDRE BERARD LEON COURVILLE
Chairman of the Board President and Chief Operating Officer
and Chief Executive Officer
52
<PAGE>
CONSOLIDATED STATEMENT OF CHANGES
IN SHAREHOLDERS' EQUITY
YEAR ENDED OCTOBER 31
(MILLIONS OF DOLLARS) 1996 1995
- ------------------------------------------------------------------------------
CAPITAL STOCK, AT BEGINNING OF YEAR $1,610 $1,739
Issue of common shares 34 27
Redemption or purchase of preferred shares - (156)
------------------------------
CAPITAL STOCK, AT END OF YEAR $1,644 $1,610
- ------------------------------------------------------------------------------
RETAINED EARNINGS, AT BEGINNING OF YEAR
As previously reported $ 715 $ 578
Prior period adjustments (NOTE 16) (66) (14)
------------------------------
As restated 649 564
Net income 318 245
Dividends
Preferred shares (27) (39)
Common shares (81) (65)
Income taxes related to dividends on Preferred Shares,
Series 9, 10, 11 and 12 (1) (2)
Expenses related to share issues, net of income taxes (1) (1)
Unrealized foreign currency translation losses,
net of income taxes of ($1)(1995: ($2)) (2) (1)
------------------------------
RETAINED EARNINGS, AT END OF YEAR $ 855 $ 701
- ------------------------------------------------------------------------------
53
<PAGE>
CONSOLIDATED STATEMENT OF CHANGES
IN FINANCIAL POSITION
YEAR ENDED OCTOBER 31
(MILLIONS OF DOLLARS) 1996 1995
- ------------------------------------------------------------------------------
OPERATING ACTIVITIES
Net income $ 318 $ 245
Items not affecting cash resources:
Charge for loan impairment 235 255
Depreciation and amortization 57 53
Deferred income taxes (25) 8
Pension expense 2 1
------------------------------
587 562
Current income taxes 32 4
Accrued interest (142) 170
Other (407) 372
------------------------------
70 1,108
------------------------------
FINANCING ACTIVITIES
Deposits (1,400) 3,574
Obligations related to securities sold short 2,527 258
Securities sold under repurchase agreements 2,031 (105)
Reduction in variable-capital notes (106) (7)
Bank debentures:
Redemption and conversion (131) (45)
Adjustment for foreign currency translation (30) (19)
Common shares:
Issues 34 27
Preferred shares:
Redemption or purchase - (156)
Dividends (108) (104)
Other 34 (28)
------------------------------
2,851 3,395
------------------------------
INVESTING ACTIVITIES
Acquisition of subsidiaries (45) -
Securities (1,090) (1,214)
Loans (3,619) (1,823)
Premises and equipment (57) (57)
------------------------------
(4,811) (3,094)
------------------------------
INCREASE (DECREASE) IN CASH RESOURCES (1,890) 1,409
CASH RESOURCES, AT BEGINNING OF YEAR 5,174 3,765
CASH RESOURCES OF SUBSIDIARIES AT DATE OF 244 -
ACQUISITION
------------------------------
CASH RESOURCES, AT END OF YEAR $ 3,528 $ 5,174
- ------------------------------------------------------------------------------
54
<PAGE>
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
OCTOBER 31, 1996
(FIGURES IN TABLES ARE IN MILLIONS OF DOLLARS, UNLESS OTHERWISE SPECIFIED)
1. STATEMENT OF SIGNIFICANT ACCOUNTING POLICIES
The financial statements were prepared in accordance with section 308(4) of
the Bank Act, which states that generally accepted accounting principles are
to be applied unless otherwise specified by the Superintendent of Financial
Institutions Canada (the "Superintendent"). The significant accounting
policies used in preparing these financial statements, including the
accounting requirements of the Superintendent, are summarized below.
CONSOLIDATION
The consolidated financial statements of the Bank include the assets,
liabilities and operating results of the Bank and all its subsidiaries. The
purchase method is used to account for the acquisition of subsidiaries.
Goodwill is amortized using the straight-line method over a period
corresponding to its estimated useful life, namely 20 years. Goodwill is
written down to fair value when the decline in value is considered to be
permanent based on projected investment yield which takes into account the
related risks.
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. Income 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 offices abroad.
Gains and losses on net foreign currency investments in branches and
subsidiaries abroad are recorded under retained earnings, less the impact of
after-tax gains and losses applicable to instruments used for hedging
purposes. These gains and losses are not charged to income until they are
realized.
SECURITIES
Securities are divided into two major categories: investment account
securities and trading account securities.
Investment account securities are purchased with the intention of holding
them to maturity. 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
of the related securities or, on occasion, until disposal of the security.
Gains and losses realized on the disposal of securities and the amortization
of premiums and discounts are recorded under income for the year. Any
permanent impairment in the value of securities held for investment is
charged to the year's income.
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 or unrealized
gains or losses on these securities are recorded in income.
The Bank records all income relating to securities on an accrual basis.
LOANS
Investments recorded as loans or groups of loans are recorded at their
principal amounts, including accrued interest, less allowances for loan
impairment.
A loan or group of loans 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 or group of loans may revert
to performing status only when principal and interest payments have become
fully current.
When loans are deemed impaired, interest income ceases to be recorded and the
book value of the loans is adjusted to its estimated realizable amount by
writing off all or part of the recorded investment in the loan and/or by
taking a provision for loan impairment.
Foreclosed assets held for sale in settlement of an impaired loan are
recorded at the time of foreclosure at the lower of the recorded investment
in the foreclosed loan and the estimated net proceeds from the sale of the
assets. Any difference between the carrying amount of the loan and the
estimated realizable amount of the assets is posted to the charge for loan
impairment. The recorded investment in the foreclosed loan is then adjusted
to take into account the revenues received or the costs incurred after
foreclosure.
The charge for loan impairment, posted directly to income for the year,
consists of the net change in the allowance for loan impairment and
write-offs of the carrying amounts resulting from foreclosed assets, less
recoveries.
Fees and commissions related to the granting of loans and commitments to
extend credit are amortized over the term thereof and recorded in the
Consolidated Statement of Income.
Loans also include securities sold under 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 operation 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.
ALLOWANCE FOR LOAN IMPAIRMENT
The allowance for loan impairment related to the total recorded investment in
individual loans considered impaired was established for all impaired loans
for which the impairment could be estimated individually, reducing them to
their estimated realizable amounts. For groups of loans consisting of large
numbers of homogeneous balances of relatively small dollar amounts, the
extent of impairment is estimated for each group of loans by applying
formulas that take into account past loss experience, economic conditions and
other relevant circumstances. For loans identified individually, the
estimated realizable amounts are measured by discounting the expected future
cash flows for each loan.
The general allowance for loan impairment related to the total recorded
investment in groups of loans reflects the risk represented by loans which
cannot be identified individually and for which it is currently not possible
to establish a provision on a loan-by-loan basis. An aggregate impairment is
estimated by Management for such loans collectively.
The allowance for impairment in relation to loans to countries designated by
the Superintendent is constantly reevaluated on the basis of exposure in the
various countries and the underlying economic conditions.
55
<PAGE>
1. STATEMENT OF SIGNIFICANT ACCOUNTING POLICIES (CONT.)
MORTGAGE-BACKED SECURITIES
The Bank finances a portion of its 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 coupon
rate set in advance 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, CMHC can assign the servicing of the securitized loans to another
servicer.
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 charged 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, based on the
assumption that the annual mortgage prepayment rate is 12%, 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.
CUSTOMERS' LIABILITY UNDER ACCEPTANCES
The potential liability of the Bank under acceptances is reported as a
liability in the Consolidated Balance Sheet. The Bank's potential recourse is
recorded as an equivalent offsetting asset.
PREMISES AND EQUIPMENT
Premises and equipment are recorded at cost and depreciated over their
estimated useful lives according to the following methods and rates:
Methods Rates
- -----------------------------------------------------------------------------
Buildings (a) or (b) 2% to 10%
Equipment and furniture (a) or (b) 20% to 33 1/3%
Leasehold improvements (a) (c)
(A) STRAIGHT-LINE
(B) DIMINISHING-BALANCE
(C) OVER THE LEASE TERM PLUS THE FIRST RENEWAL OPTION
CHEQUES AND OTHER ITEMS IN TRANSIT, NET
Cheques and other items in transit represent uncleared settlements with other
banks and are recorded at cost.
SECURITIES SOLD SHORT
These liabilities represent the Bank's obligation to deliver securities it
has sold but which were not owned at the time of sale. They are recorded at
their market value. Gains and losses on the sale and adjustments to market
value are recorded as interest.
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 operation 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 income tax allocation method.
Deferred income taxes result from timing differences in the recognition of
various items for financial reporting and income tax purposes, the main such
item being the allowance for loan impairment; they represent tax benefits
with respect to deductions the Bank may claim to reduce its taxable income in
future years.
No provision for deferred income taxes was taken for the portion of retained
earnings of foreign subsidiaries which is permanently reinvested.
DERIVATIVE FINANCIAL INSTRUMENTS
The Bank uses various types of derivatives to enable clients to manage their
market risk exposures as well as for its own asset/liability management and
trading purposes.
The main derivative instruments used by the Bank are foreign exchange forward
contracts, futures, forward rate agreements, currency and/or interest rate
swaps and interest rate or foreign currency options.
Derivatives used to enable clients to manage their market risk exposures and
to generate income from the Bank's trading positions are marked to market and
the resulting gains and losses are recorded in income.
When asset/liability management derivatives are used to manage interest rate
and foreign currency exposures, they are accounted for on the accrual basis.
The resulting gains and losses are deferred and amortized to income over the
life of the hedged assets or liabilities.
PENSION PLANS
Pension costs related to current services are charged to the Consolidated
Statement of Income in the period during which the services are rendered;
past service costs, experience gains or losses and the funding excess
existing on the date the accounting principle came into effect, which have
not yet been charged to the Consolidated Statement of Income, are amortized
over the expected average remaining service life of the employee group
covered by the plans. The difference between the pension expense and the
funding payments is recorded in the Consolidated Balance Sheet under "Other
Assets" or "Other Liabilities", as applicable.
56
<PAGE>
2. MORTGAGE-BACKED SECURITIES
1996 1995
- -----------------------------------------------------------------------------
Principal amount of securitized mortgage pools $1,476 $1,952
Average rate of mortgage pools 9.17% 9.47%
Average coupon rate paid to investors 7.59% 7.87%
Maturity dates of securities DECEMBER 1996 March 1996
TO SEPTEMBER 2001 to October 2000
Present value of interest spread $ 17 $ 38
- -----------------------------------------------------------------------------
3. SECURITIES
Securities held and effective yields on the investment account were as follows:
<TABLE>
<CAPTION>
1996 1995
WITHIN 3 TO 6 6 TO 12 1 TO 5 OVER NO SPECIFIC BOOK MARKET BOOK
3 MONTHS MONTHS MONTHS YEARS 5 YEARS MATURITY VALUE VALUE VALUE
- -----------------------------------------------------------------------------------------------------------------------------------
$ % $ % $ % $ % $ % $ % $ % $ $
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
INVESTMENT ACCOUNT
Securities issued or guaranteed by
Canada 36 5.4 25 4.5 224 5.6 1,222 6.2 394 7.0 2 -- 1,903 6.2 1,960
Provinces 58 5.7 101 5.3 46 4.7 103 7.5 54 7.6 -- -- 362 6.3 367
Municipalities
or school corporations 9 3.7 5 7.1 6 5.7 -- -- 23 10.2 -- -- 43 7.8 46
Debt securities 188 7.0 123 1.4 55 7.1 405 6.5 362 8.2 2 -- 1,135 6.6 1,179
Equity securities
Floating-rate preferred shares 50 3.8 -- -- -- -- 6 4.6 -- -- 2 4.0 58 3.9 50
Fixed-rate preferred shares 1 7.0 -- -- -- -- 44 6.1 12 0.5 8 -- 65 4.4 63
Other securities 3 0.8 1 -- -- -- 1 -- -- -- 428 -- 433 -- 485
- -----------------------------------------------------------------------------------------------------------------------------------
Total of Investment Account 345 6.0 255 3.4 331 5.7 1,781 6.3 845 7.5 442 -- 3,999 5.6 4,150 4,426
- -----------------------------------------------------------------------------------------------------------------------------------
TRADING ACCOUNT
Securities issued or guaranteed by
Canada 122 57 339 400 1,107 -- 2,025 2,025
Provinces 156 10 9 233 558 -- 966 966
Municipalities
or school corporations 16 5 20 113 59 -- 213 213
Debt securities 408 55 40 515 111 -- 1,129 1,129
Equity securities
Floating-rate preferred shares -- -- -- -- -- 2 2 2
Other securities -- -- -- 2 -- 78 80 80
- -----------------------------------------------------------------------------------------------------------------------------------
Total of Trading Account 702 127 408 1,263 1,835 80 4,415 4,415 2,859
- -----------------------------------------------------------------------------------------------------------------------------------
TOTAL SECURITIES
Securities issued or guaranteed by
Canada 158 82 563 1,622 1,501 2 3,928 3,985 3,294
Provinces 214 111 55 336 612 -- 1,328 1,333 1,363
Municipalities
or school corporations 25 10 26 113 82 -- 256 259 252
Debt securities 596 178 95 920 473 2 2,264 2,308 1,752
Equity securities
Floating-rate preferred shares 50 -- -- 6 -- 4 60 52 87
Fixed-rate preferred shares 1 -- -- 44 12 8 65 63 67
Other securities 3 1 -- 3 -- 506 513 565 470
- -----------------------------------------------------------------------------------------------------------------------------------
Total of Securities Account 1,047 382 739 3,044 2,680 522 8,414 8,565 7,285
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
A) WHERE NO ORGANIZED MARKET EXISTS FOR WHICH PRICES ARE PUBLICLY DISCLOSED,
THE FAIR VALUE IS BASED ON THE MARKET PRICES OF SIMILAR SECURITIES OR ON THE
DISCOUNTED VALUE OF FUTURE CASH FLOWS AT THE CURRENT INTEREST RATE.
B) THE CALCULATION OF THE YEILD RATE IS BASED ON ANNUAL AVERAGE BALANCES.
THE YIELD RATE OF TAX-EXEMPT SECURITIES, INCLUDING IN PARTICULAR MOST OF THE
DIVIDENDS RECEIVED, HAS NOT BEEN ADJUSTED ON A TAXABLE EQUIVALENT BASIS.
C) LDC BONDS INCLUDE LOANS GRANTED TO LESSER DEVELOPED COUNTRIES AND
SUBSEQUENTLY RESTRUCTURED AS BONDS UNDER THE BRADY PLAN, NET OF THE COUNTRY
RISK PROVISION.
SUCH BONDS ARE GUARANTEED BY THE UNITED STATES GOVERNMENT AND HAVE LONGER
MATURITIES AND MORE FAVOURABLE CONDITIONS FOR THE BORROWING COUNTRY.
57
<PAGE>
3. SECURITIES (CONT.)
<TABLE>
<CAPTION>
1996
- ------------------------------------------------------------------------------------------------------------------
BOOK GROSS GROSS MARKET
VALUE UNREALIZED GAINS UNREALIZED LOSSES VALUE
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
INVESTMENT ACCOUNT: Unrealized gains or losses
Securities issued or guaranteed by
Canada $1,903 $ 58 $ (1) $1,960
Provinces 362 6 (1) 367
Municipalities or school corporations 43 3 - 46
Debt securities 1,135 54 (10) 1,179
Equity securities
Floating-rate preferred shares 58 1 (9) 50
Fixed-rate preferred shares 65 - (2) 63
Other securities 433 71 (19) 485
- ------------------------------------------------------------------------------------------------------------------
Total of Investment Account $3,999 $193 $(42) $4,150
- ------------------------------------------------------------------------------------------------------------------
</TABLE>
4. IMPAIRED LOANS
The table below sets out impaired loans. The recorded investment in loans or
groups of loans was reduced, as applicable, by the related allowance for loan
impairment.
As at October 31, they amounted to:
<TABLE>
<CAPTION>
1996 1995
- -------------------------------------------------------------------------------------------------------------------
RECORDED ALLOWANCE FOR CARRYING CARRYING
INVESTMENT LOAN IMPAIRMENT AMOUNT AMOUNT
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
PRIVATE LOANS
DOMESTIC
Residential mortgages $ 72 $ 11 $ 61 $ 62
Personal loans 68 31 37 39
Small business loans 141 47 94 37
Commercial loans 347 172 175 194
Corporate loans 65 47 18 31
Real estate loans 142 81 61 98
Other loans 8 3 5 5
General provision (1) - 95 (95) (95)
- --------------------------------------------------------------------------------------------------------------------
$ 843 $487 $356 $371
- --------------------------------------------------------------------------------------------------------------------
INTERNATIONAL
Commercial loans - United States $ 10 $ 7 $ 3 $ 3
Real estate loans - United States 74 35 39 70
Real estate loans - Other - - - 50
Other loans 68 63 5 13
General provision (1) - 5 (5) (5)
- --------------------------------------------------------------------------------------------------------------------
$ 152 $110 $ 42 $131
- --------------------------------------------------------------------------------------------------------------------
TOTAL PRIVATE LOANS $ 995 $597 $398 $502
- --------------------------------------------------------------------------------------------------------------------
Loans to designated countries 77 69 8 9
- --------------------------------------------------------------------------------------------------------------------
TOTAL IMPAIRED LOANS $1,072 $666 $406 $511
- --------------------------------------------------------------------------------------------------------------------
</TABLE>
The total recorded investment in foreclosed assets to be resold included in
total impaired loans and the related allowance for loan impairment amounted to
$168 million and $16 million respectively as at October 31, 1996.
(1) THE GENERAL PROVISION WAS TAKEN FOR THE BANK'S LOANS IN THEIR ENTIRETY.
5. ALLOWANCE FOR LOAN IMPAIRMENT
The changes made to the allowance for loan impairment during the year were as
follows:
<TABLE>
<CAPTION>
1996 1995
- --------------------------------------------------------------------------------------------------------------------
INDIVIDUAL GROUPS DESIGNATED
LOANS OF LOANS COUNTRIES TOTAL TOTAL
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
ALLOWANCE AT BEGINNING OF YEAR $502 $100 $ 86 $688 $714
Retroactive application of new standard
as at November 1, 1995 77 - - 77 -
- --------------------------------------------------------------------------------------------------------------------
Restated allowance 579 100 86 765 714
- --------------------------------------------------------------------------------------------------------------------
Charge for loan impairment posted to income 235 - - 235 255
Write-offs (328) - (17) (345) (312)
Recoveries 11 - - 11 31
- --------------------------------------------------------------------------------------------------------------------
ALLOWANCE AT END OF YEAR $497 $100 $ 69 $666 $688
- --------------------------------------------------------------------------------------------------------------------
</TABLE>
58
<PAGE>
6. PREMISES AND EQUIPMENT
<TABLE>
<CAPTION>
1996 1995
- --------------------------------------------------------------------------------------------------------------------
NET NET
ACCUMULATED BOOK BOOK
COST DEPRECIATION VALUE VALUE
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Land $ 23 $ - $ 23 $ 22
Buildings 215 60 155 153
Equipment and furniture 315 231 84 84
- --------------------------------------------------------------------------------------------------------------------
$553 $291 $ 262 $259
- --------------------------------------------------------------------------------------------------------------------
Leasehold improvements 81 74
- --------------------------------------------------------------------------------------------------------------------
$ 343 $333
- --------------------------------------------------------------------------------------------------------------------
Depreciation for the year charged to the Consolidated
Statement of Income $ 46 $ 43
- --------------------------------------------------------------------------------------------------------------------
</TABLE>
7. OTHER ASSETS
<TABLE>
<CAPTION>
1996 1995
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Accrued interest $ 298 $333
Deferred income taxes 170 151
Prepaid expenses and other receivables 363 214
Goodwill less accumulated
amortization of $56 (1995: $45) 161 159
Sundry 197 176
- --------------------------------------------------------------------------------------------------------------------
$ 1,189 $1,033
- --------------------------------------------------------------------------------------------------------------------
Amortization of goodwill for the year charged
to the Consolidated Statement of Income $ 11 $ 10
- --------------------------------------------------------------------------------------------------------------------
</TABLE>
8. DEPOSITS
<TABLE>
<CAPTION>
1996 1995
- --------------------------------------------------------------------------------------------------------------------
PAYABLE PAYABLE PAYABLE
ON DEMAND AFTER NOTICE ON A FIXED DATE TOTAL TOTAL
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Individuals $ 897 $ 5,051 $16,802 $22,750 $21,763
Businesses and governments 2,478 3,578 5,560 11,616 9,787
Banks 58 9 5,692 5,759 8,874
- --------------------------------------------------------------------------------------------------------------------
$ 3,433 $ 8,638 $28,054 $40,125 $40,424
- --------------------------------------------------------------------------------------------------------------------
</TABLE>
9. OTHER LIABILITIES
<TABLE>
<CAPTION>
1996 1995
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Accrued interest $ 717 $895
Current income taxes 88 70
Liabilities of subsidiary 50 5
Non-controlling interest 42 36
Trade and other payables 215 261
Sundry 226 266
- --------------------------------------------------------------------------------------------------------------------
$1,338 $1,533
- --------------------------------------------------------------------------------------------------------------------
</TABLE>
59
<PAGE>
10. BANK DEBENTURES
The debentures, subordinated in right of payment to the claims of depositors
and certain other creditors, consist of:
<TABLE>
<CAPTION>
MATURITY INTEREST
DATE RATE CHARACTERISTICS 1996 1995
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
June 1998 10.875 % Convertible into 10 7/8% deposit notes at the Bank's option;
interest payable semi-annually on June 1 and December 1 $ 9 $ 75
February 1999 5.60 % Yen 5 billion; interest payable annually on February 23 59 66
April 1999 7.325 % Yen 5 billion / AUD 45.7 million equivalent; interest payable
annually in AUD at the rate indicated for the AUD equivalent on
April 21 59 66
April 2001 10.50 % Interest payable semi-annually on April 5 and October 5;
not redeemable prior to maturity 100 100
June 2001 12.50 % Convertible into 2,391,600 common shares, redeemable at the
Bank's option on certain conditions; interest payable
semi-annually on June 5 and December 5 20 20
December 2001 9.00 % Redeemable at the Bank's option on or after December 30, 1996;
annual interest payable semi-annually on June 30 and December 30
up until December 30, 1996; interest at the Bankers' Acceptance
Rate plus 1% subject to a minimum annual rate of 9%, payable
monthly on the 30th day of each month, commencing January 30, 1997 51 56
December 2003 7.50 % Not redeemable by the Bank prior to maturity; interest payable
semi-annually on June 30 and December 30 125 125
August 2004 8.125 % US $250 million; not redeemable by the Bank prior to maturity
except in the event that the debentures become subject to foreign
taxes; interest payable semi-annually on February 15 and August 15 334 337
October 2004 6.92 % Yen 5 billion / L22 million equivalent; interest for the first 10
years payable in L at the rate indicated for the L equivalent,
thereafter payable annually in yen at the Japanese long-term prime
rate plus 1% on October 25; redeemable at the Bank's option on
October 25, 1999 59 66
October 2004 7.00 % Yen 5 billion / L22.1 million equivalent; interest payable annually
in L at the rate indicated for the L equivalent on October 31;
redeemable at the Bank's option on October 31, 1999 59 66
February 2087 floating US $105 million bearing interest at an annual rate of 1/8% above
the LIBOR rate; interest payable semi-annually on February 28 and
August 31; redeemable at the Bank's option since February 28, 1993 141 200
- ---------------------------------------------------------------------------------------------------------------------------------
$ 1,016 $ 1,177
- ---------------------------------------------------------------------------------------------------------------------------------
</TABLE>
The debenture maturities are as follows:
<TABLE>
<S> <C>
1997 $ -
- ---------------------------------------------------------------------------------------------------------------------------------
1998 $ 9
- ---------------------------------------------------------------------------------------------------------------------------------
1999 $ 117
- ---------------------------------------------------------------------------------------------------------------------------------
2000 $ -
- ---------------------------------------------------------------------------------------------------------------------------------
2001 $ 171
- ---------------------------------------------------------------------------------------------------------------------------------
2002 and thereafter $ 719
- ---------------------------------------------------------------------------------------------------------------------------------
</TABLE>
On November 1, 1996, the Bank issued $150 million in debentures due 2011.
Interest at a rate of 7.50% per annum is payable semi-annually on April 17
and October 17 of each year until October 17, 2006. Thereafter, interest is
payable at a rate per annum equal to the 90-day Bankers' Acceptance Rate plus
1%. These debentures are not redeemable prior to October 17, 2001.
60
<PAGE>
11. CAPITAL STOCK
AUTHORIZED
<TABLE>
<CAPTION>
FIRST PREFERRED SHARES SECOND PREFERRED SHARES COMMON SHARES
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
AN UNLIMITED NUMBER OF SHARES, WITH- 15,000,000 SHARES WITHOUT PAR VALUE, AN UMLIMITED NUMBER OF SHARES, WITH-
OUT ISSUABLE FOR A MAXIMUM AGGREGATE OUT
PAR VALUE, ISSUABLE FOR A MAXIMUM CONSIDERATION PAR VALUE, ISSUABLE FOR A MAXIMUM
AGGREGATE CONSIDERATION OF $1 BILLION OF $300 MILLION AGGREGATE CONSIDERATION OF $3 BILLION
</TABLE>
ISSUED AND FULLY PAID
<TABLE>
<CAPTION>
1996 1995
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
FIRST PREFERRED SHARES
286,610 shares, Series 5 (1995: 286,610) $ 29 $ 29
422,633 shares, Series 7 (1995: 422,633) 10 10
789,638 shares, Series 8 (1995: 789,638) 20 20
3,680,000 shares, Series 10 (1995: 3,680,000) 92 92
4,000,000 shares, Series 11 (1995: 4,000,000) 100 100
5,000,000 shares, Series 12 (1995: 5,000,000) 125 125
- ---------------------------------------------------------------------------------------------------------------------------------
376 376
- ---------------------------------------------------------------------------------------------------------------------------------
167,151,381 Common Shares (1995: 163,963,293) 1,268 1,234
- ---------------------------------------------------------------------------------------------------------------------------------
$ 1,644 $ 1,610
- ---------------------------------------------------------------------------------------------------------------------------------
</TABLE>
The Bank paid the following dividends:
<TABLE>
<CAPTION>
1996 1995 1994 1993 1992
- ---------------------------------------------------------------------------------------------------------------------------------
(DIVIDENDS PER SHARE IN DOLLARS)
<S> <C> <C> <C> <C> <C>
Common Shares $ 0.49 $ 0.40 $ 0.40 $ 0.40 $ 0.70
First Preferred Shares
Series 1 $ - $ - $ - $ 40.9746 $ 58.3199
Series 5 4.8235 5.9462 4.4495 4.6618 5.3654
Series 6 - - - 0.3461 US 2.6876 US
Series 7 1.2576 1.5503 1.1601 1.2154 1.3988
Series 8 1.2059 1.4865 1.1125 1.1655 1.3414
Series 9 - 2.275771 2.3750 2.3750 2.3750
Series 10 2.1875 2.1875 2.1875 2.1875 2.1875
Series 11 2.00 2.00 2.00 2.00 1.8671
Series 12 1.625 1.625 1.05625 - -
- ---------------------------------------------------------------------------------------------------------------------------------
</TABLE>
ISSUE OF COMMON SHARES (AMOUNTS IN DOLLARS)
During the year ended October 31, 1996, 3,188,088 Common Shares were issued
under the Dividend Reinvestment and Share Purchase Plan for an aggregate
consideration of $33,880,633.
During the year ended October 31, 1995, 2,987,564 Common Shares were issued
under the Dividend Reinvestment and Share Purchase Plan for an aggregate
consideration of $27,537,602.
RESERVED COMMON SHARES (AMOUNTS IN DOLLARS)
As at October 31, 1996, 2,391,600 Common Shares (1995: 2,391,600) were
reserved for future conversion, 8,207,218 Common Shares (1995: 1,395,306)
were reserved under the Dividend Reinvestment and Share Purchase Plan and
8,000,000 Common Shares (1995: 3,000,000) were reserved under the Stock
Option Plan of which 1,799,000 options (1995: 1,376,400) were awarded at an
exercise price of $11.00 per share (1995: $9.50). Options may be exercised
over a maximum term of 10 years. In addition, in 1995 the equivalent of
$16,000,000 in Common Shares plus an amount equal to the annual dividend was
reserved for issue as part of the 1993 acquisition of the shares of General
Trust of Canada.
REDEMPTION AND PURCHASE OF PREFERRED SHARES (AMOUNTS IN DOLLARS)
On February 7 and 22, 1995, the Bank purchased for cancellation 131,945 First
Preferred Shares, Series 5, 149,211 First Preferred Shares, Series 7 and
581,524 First Preferred Shares, Series 8 on the market for a consideration of
$9,895,875, $2,946,917 and $11,048,956 respectively. In addition, on October
16, 1995, the Bank redeemed for cancellation all First Preferred Shares,
Series 9 for an aggregate consideration of $132,500,000.
CHARACTERISTICS OF FIRST PREFERRED SHARES (AMOUNTS IN DOLLARS)
Series 5
Redeemable at the Bank's option at $100 per share plus accrued and unpaid
dividends; cumulative preferential dividends at a quarterly rate equal to one
quarter of 70% of the average of the Bank's Prime Lending Rate in effect on
each day during the three months ending on the first day of the month
preceding the month in which the dividend payment is to be made.
Series 7
Redeemable at the Bank's option at $25 per share plus accrued and unpaid
dividends; cumulative preferential dividends at a quarterly rate equal to one
quarter of 73% of the average of the Bank's Prime Lending Rate in effect on
each day during the three months ending on the first day of the month
preceding the month during which the dividend payment is to be made.
61
<PAGE>
11. CAPITAL STOCK (CONT.)
Series 8
Redeemable at the Bank's option at $25 per share plus accrued and unpaid
dividends; cumulative preferential dividends at a quarterly rate equal to one
quarter of 70% of the average of the Bank's Prime Lending Rate in effect on
each day during the three months ending on the first day of the month
preceding the month in which the dividend payment is to be made.
Series 10
Redeemable at the Bank's option on or after November 16, 2001 at $25 per
share in cash plus accrued and unpaid dividends, or by conversion into Common
Shares in accordance with the privileges and conditions related to such
Preferred Shares; non-cumulative preferential dividends, payable quarterly in
an amount of $0.546875 per share.
Convertible at the holder's option on or after February 18, 2002 into Common
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 February 18,
2002, to constitute 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 11
Redeemable at the Bank's option on or after February 15, 2002 at $25 per
share in cash plus accrued and unpaid dividends, or by conversion into Common
Shares in accordance with the privileges and conditions related to such
Preferred Shares; non-cumulative preferential dividends, payable quarterly in
an amount of $0.50 per share.
Convertible at the holder's option on or after May 15, 2002 into Common
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 February 15,
2002, to constitute 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 12
Redeemable at the Bank's option on or after May 15, 2001 at $25 per share in
cash plus a premium, if redeemed before May 15, 2003, together with accrued
and unpaid dividends, in accordance with the privileges and conditions
related to such Preferred Shares and 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 on or after May 15, 2001 into Common Shares,
subject to the approval of the stock exchanges on which any shares of the
Bank 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 constitute 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.
12. PENSION PLANS
The Employee Pension Plan of National Bank of Canada provides for the payment
of benefits based on the length of service and final average earnings of the
employees covered. According to the latest actuarial valuation of the plan
conducted as at December 31, 1995, accrued pension benefits, projected as at
October 31, 1996, were $652 million and the adjusted market value of the
assets of the plan as at October 31, 1996 amounted to $739 million. The
pension expense included in the Statement of Income amounted to $2.1 million
(1995: $1.3 million), taking into account the amortization on a straight-line
basis over a 13-year period of the experience gains and losses and the
funding excess existing on the date the accounting principle came into effect.
13. REDUCTION IN VALUE OF CERTAIN ASSETS
In July 1993, the Bank acquired General Trust of Canada for a consideration
of $95 million in variable-capital notes. At that time, the Bank exchanged
subordinated notes and debt securities issued by General Trust of Canada or
its subsidiary for $25 million in variable-capital notes.
The variable-capital notes, bearing interest at a rate of 6.76% per annum,
would have been convertible into common shares of the Bank on or after June
21, 1997. At maturity, namely, July 21, 1997, the notes were to be redeemed,
at the Bank's option, either in cash or by issue of common shares of the Bank.
Potential losses on most of the loans acquired and on the IMMOBILIERE NATGEN
INC. debentures received in exchange for non-performing loans and
repossessed properties reduced the value of the variable-capital notes issued
by the Bank. These losses were to be subsequently offset by financial
assistance from the REGIE DE L'ASSURANCE-DEPOTS DU QUEBEC (Quebec deposit
insurance board).
During 1996, the Bank sold a loan portfolio of $215 million and recorded a
permanent reduction in the value of the IMMOBILIERE NATGEN INC. debentures.
In addition, the REGIE DE L'ASSURANCE-DEPOTS DU QUEBEC agreed to pay an
amount of $80.7 million, representing the discounted value of the assistance
agreed upon. This amount was added to the provisions taken by the Bank on the
acquisition date, bringing total provisions to $133.2 million before the
impact of the bulk sale of loans and of the reduction in the value of the
IMMOBILIERE NATGEN INC. debentures.
The difference between the proceeds of the disposal of the loans and their
book value together with the permanent decrease in the value of the
debentures was applied to reduce the value of the variable-capital notes to
zero and lower the provisions taken by the Bank when General Trust was
acquired. The remainder was recorded in the Statement of Income. The impact
on results, taking the tax effect into account, was nil.
The table below summarizes the impact of these operations:
- -------------------------------------------------------------------------------
Difference between the proceeds of the disposal
of loans and their book value $ 138.0
Permanent reduction in the value of the debentures 80.0
Less: Write-off of variable-capital notes (95.4)
Bank provisions (66.6)
- -------------------------------------------------------------------------------
Net impact on earnings before income taxes 56.0
Related income taxes (56.0)
- -------------------------------------------------------------------------------
Net impact $ 0.0
- -------------------------------------------------------------------------------
62
<PAGE>
14. INCOME TAXES
Total income taxes reported in the consolidated financial statements are as
follows:
1996 1995
- -------------------------------------------------------------------------------
CONSOLIDATED STATEMENT OF INCOME
Income taxes $ 130 $ 146
- -------------------------------------------------------------------------------
CONSOLIDATED STATEMENT OF RETAINED EARNINGS
Income taxes related to:
Prior period adjustments (18) 14
Dividends on Preferred Shares, Series 9, 10, 11 and 12 1 2
Unrealized foreign currency translation gains (losses) (1) 2
- -------------------------------------------------------------------------------
(18) 18
- -------------------------------------------------------------------------------
$ 112 $ 164
- -------------------------------------------------------------------------------
Current and deferred income taxes are as follows:
Current $ 171 $ 156
Deferred (59) 8
- -------------------------------------------------------------------------------
$ 112 $ 164
- -------------------------------------------------------------------------------
The Bank's effective income tax rate, on net income before income taxes, was
calculated as follows:
<TABLE>
<CAPTION>
1996 1995
- ----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net income before income taxes $ 458 100.0 % $ 398 100.0 %
- ----------------------------------------------------------------------------------------------------
Income taxes at Canadian statutory
income tax rate $ 179 39.0 % $ 155 39.0 %
- ----------------------------------------------------------------------------------------------------
Reduction (Increase) in income tax rate due to:
Tax-exempt income from securities, mainly dividends
from Canadian corporations 3 0.6 6 1.5
Rate applicable to subsidiaries and branches abroad 19 4.1 9 2.3
Reduction in value of certain assets (NOTE 13) 34 7.4 - -
Previous years' rate applicable to deferred taxes 3 0.7 (2) (0.5)
Federal large corporations tax (4) (0.9) (4) (1.0)
Other items (6) (1.3) - -
- ----------------------------------------------------------------------------------------------------
49 10.6 9 2.3
- ----------------------------------------------------------------------------------------------------
Income taxes and effective income tax rate $ 130 28.4 % $ 146 36.7 %
- ----------------------------------------------------------------------------------------------------
</TABLE>
15. NET INCOME PER COMMON SHARE
Basic net income per share was calculated on the basis of the net income
available for holders of Common Shares, less dividends on Preferred Shares,
and the average number of Common Shares outstanding of 165,799,000 in 1996
(1995: 162,867,000).
Fully diluted net income per share was calculated on the basis of the net
income available for holders of Common Shares less the dividends on
non-convertible Preferred Shares and the average number of Common Shares of
168,191,000 in 1996 (1995: 166,765,000), assuming that all securities
convertible at the holder's option (except for Preferred Shares, Series 10,
11 and 12) were converted at the beginning of each fiscal year.
16. PRIOR PERIOD ADJUSTMENTS
IMPAIRED LOANS
On November 1, 1995, in accordance with the recommendations of the Canadian
Institute of Chartered Accountants and guidelines from the Superintendent,
the Bank began to apply the new accounting standard governing impaired loans.
The estimated realizable amount of impaired loans is now measured by
discounting expected future cash flows. This new accounting standard has been
applied retroactively with no restatement for prior years. A cumulative
adjustment of $52 million, net of income taxes of $32 million, was made to
the opening balance of retained earnings as at November 1, 1995.
TAX LIABILITY
Further to audits by and discussions with taxation authorities, the Bank
considers it likely that certain transactions executed in years prior to
November 1, 1994 will be reassessed. In order to account for this contingent
liability, the Bank reduced the balances of retained earnings as at November
1, 1994 and 1995 by $14 million.
63
<PAGE>
17. COMMITMENTS
As at October 31, 1996, minimum commitments under leases, a service contract
for outsourced information technology services and other leasing agreements
were as follows:
SERVICE EQUIPMENT
PREMISES CONTRACT AND FURNITURE TOTAL
- --------------------------------------------------------------------------------
1997 $ 80 $ 119 $ 3 $ 202
1998 73 115 2 190
1999 65 - 1 66
2000 52 - 1 53
2001 45 - - 45
2002 and thereafter 275 - - 275
- --------------------------------------------------------------------------------
$ 590 $ 234 $ 7 $ 831
- --------------------------------------------------------------------------------
18. COMMITMENTS TO EXTEND CREDIT
In the normal course of its business, the Bank enters into commitments to
extend credit in order to meet the financial needs of its clients.
AS AT SEPTEMBER 30 1996 1995
- --------------------------------------------------------------------------------
Guarantees and letters of credit $ 1,589 $ 1,573
Commitments to extend credit
- Firm 2,569 2,473
- General 9,659 9,523
Note issuance and revolving underwriting facilities 500 492
- --------------------------------------------------------------------------------
Guarantees and letters of guarantee are a firm commitment by the Bank to make
the related payments on behalf of a client who is unable to meet its
contractual obligations to a third party. The credit risk they represent is
considered equivalent to a loan.
Documentary letters of credit, which are used in international trade and
usually issued on behalf of an importer, enable a third party such as an
exporter to draw drafts on the Bank up to a pre-set amount under specific
terms and conditions. The amounts are collateralized by the delivery of the
underlying goods.
Commitments to extend credit represent the unused portions of credit
authorizations granted in the form of loans, bankers' acceptances or other
credit instruments. The Bank is required at all times to make the unused
portion of the authorization available, subject to certain conditions.
Note issuance and revolving underwriting facilities represent arrangements to
acquire short-term notes for a pre-set price in the event that the client is
unable to sell or issue the notes.
64
<PAGE>
19. DERIVATIVE FINANCIAL INSTRUMENTS
The Bank utilizes derivative instruments for asset/liability management and
for trading purposes. The derivatives used to manage the balance sheet serve
to protect the interest spread against the risk of fluctuations in interest
and exchange rates. Trading activities enable clients to manage their risks
and also include proprietary trading undertaken by the Bank.
As at September 30, the type and maturity by type of contract were as follows:
<TABLE>
<CAPTION>
REMAINING TERM TO MATURITY
----------------------------------------------------------------------
CONTRACTS HELD TOTAL 0 - 3 3 - 6 6 - 12 1 - 3 3 - 5 OVER
FOR TRADING PURPOSES CONTRACTS MONTHS MONTHS MONTHS YEARS YEARS 5 YEARS
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
FOREIGN EXCHANGE CONTRACTS
OTC contracts
Forwards $ 16,137 $ 19,208 $ 9,178 $ 3,766 $ 4,163 $ 1,939 $ 162 $ -
Swaps - 721 - 152 104 106 359 -
Purchased options 4,488 4,488 2,385 787 847 469 - -
Written options 4,897 4,897 2,926 842 732 397 - -
- -------------------------------------------------------------------------------------------------------------------------------
Total 25,522 29,314 14,489 5,547 5,846 2,911 521 -
- -------------------------------------------------------------------------------------------------------------------------------
Exchange-traded contracts
Futures
Long positions 72 72 72 - - - - -
Short positions 301 301 250 36 14 1 - -
Purchased options 38 38 22 16 - - - -
Written options 123 123 89 34 - - - -
- -------------------------------------------------------------------------------------------------------------------------------
Total 534 534 433 86 14 1 - -
- -------------------------------------------------------------------------------------------------------------------------------
INTEREST RATE CONTRACTS
OTC contracts
Forwards 7,129 8,197 6,156 1,774 267 - - -
Swaps 7,738 17,201 5,408 2,279 3,000 2,854 2,832 828
Purchased options 3,322 4,062 3,149 417 400 27 69 -
Written options 3,296 3,346 2,830 417 - 30 69 -
- -------------------------------------------------------------------------------------------------------------------------------
Total 21,485 32,806 17,543 4,887 3,667 2,911 2,970 828
- -------------------------------------------------------------------------------------------------------------------------------
Exchange-traded contracts
Futures
Long positions 518 1,145 650 12 346 137 - -
Short positions 2,131 1,606 469 632 299 206 - -
Purchased options 752 752 752 - - - - -
Written options 1,234 2,255 2,255 - - - - -
- -------------------------------------------------------------------------------------------------------------------------------
Total 4,635 5,758 4,126 644 645 343 - -
- -------------------------------------------------------------------------------------------------------------------------------
OTHER DERIVATIVES
OTC contracts
Swaps - 68 - 35 - 26 7 -
Purchased options 2 252 - 149 4 39 60 -
- -------------------------------------------------------------------------------------------------------------------------------
Total 2 320 - 184 4 65 67 -
- -------------------------------------------------------------------------------------------------------------------------------
Exchange-traded contracts
Futures
Short positions 21 21 21 - - - - -
Long positions - 151 151 - - - - -
- -------------------------------------------------------------------------------------------------------------------------------
Total 21 172 172 - - - - -
- -------------------------------------------------------------------------------------------------------------------------------
TOTAL: 1996 $ 52,199 $ 68,904 $ 36,763 $ 11,348 $ 10,176 $ 6,231 $ 3,558 $ 828
Total: 1995 $ 65,678 $ 88,351 $ 46,466 $ 18,502 $ 14,146 $ 6,996 $ 1,809 $ 432
- -------------------------------------------------------------------------------------------------------------------------------
</TABLE>
The above table shows the notional amounts of derivative instruments. These
amounts are used to calculate payments and measure business volumes. They do
not indicate credit or market risk.
As at September 30, the market value of derivatives was as follows:
<TABLE>
<CAPTION>
1996 1995
- ------------------------------------------------------------------------------------------------------------------------------------
CONTRACTS HELD FOR CONTRACTS HELD FOR
COMMERCIAL PURPOSES NON-COMMERCIAL PURPOSES TOTAL TOTAL
- ------------------------------------------------------------------------------------------------------------------------------------
GROSS ASSETS GROSS LIABILITIES NET AMOUNT GROSS ASSETS GROSS LIABILITIES NET AMOUNT NET AMOUNT NET AMOUNT
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Interest rate contracts $ 137 $ 94 $ 43 $ 171 $ 65 $ 106 $ 149 $ 17
Foreign exchange and gold
contracts 212 189 23 17 8 9 32 92
Equity contracts - - - 45 - 45 45 -
- ------------------------------------------------------------------------------------------------------------------------------------
TOTAL $ 349 $ 283 $ 66 $ 233 $ 73 $ 160 $ 226 $ 109
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
65
<PAGE>
19. DERIVATIVE FINANCIAL INSTRUMENTS (CONT.)
The credit equivalent amount for financial derivatives is based on the
current replacement cost of all outstanding contracts in a gain position,
taking into account master netting agreements, and an amount representing the
future credit risk calculated in accordance with the capital adequacy
requirements set by the Superintendent.
As at September 30, credit risk exposure on the derivatives portfolio was as
follows:
<TABLE>
<CAPTION>
1996 1995
- -----------------------------------------------------------------------------------------------------------------------------------
NOTIONAL PRINCIPAL FUTURE CREDIT RISK- NOTIONAL PRINCIPAL FUTURE CREDIT RISK-
AMOUNT REPLACEMENT CREDIT EQUIVALENT WEIGHTED AMOUNT REPLACEMENT CREDIT EQUIVALENT WEIGHTED
COST RISK EQUIVALENT COST RISK EQUIVALENT
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Foreign exchange
contracts $ 24,455 $ 165 $ 342 $ 472 $ 136 $ 30,961 $ 401 $394 $ 795 $ 197
Interest rate contracts 30,212 256 43 278 66 37,422 141 24 165 38
Equity contracts 320 45 23 68 21 433 -- -- -- --
- -----------------------------------------------------------------------------------------------------------------------------------
TOTAL $ 54,987 $ 466 $ 408 $ 818 $ 223 $ 68,816 $ 542 $ 418 $ 960 $ 235
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
As at September 30, the distribution of risk exposure by counterparty was as
follows:
<TABLE>
<CAPTION>
1996 1995
- --------------------------------------------------------------------------------
REPLACEMENT FUTURE CREDIT CREDIT CREDIT
COST RISK EQUIVALENT EQUIVALENT
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
OECD governments $ 7 $ 2 $ 10 $ 11
OECD banks 489 287 606 796
Other 86 119 202 153
- --------------------------------------------------------------------------------
$ 582 $ 408 $ 818 $ 960
- --------------------------------------------------------------------------------
</TABLE>
20. CREDIT RISK EXPOSURE
(In accordance with the guidelines of the Bank for International Settlements)
<TABLE>
<CAPTION>
BALANCE RISK RISK-WEIGHTED BALANCE
ON-BALANCE SHEET ITEMS SHEET AMOUNT WEIGHT (%) 1996 1995
- -------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Cash and deposits with Bank of Canada $ 212 0 $ -- $ --
Deposits with other banks 3,316 20-100 761 1,019
Securities issued or guaranteed by Canada,
provinces, municipalities or school corporations 5,512 0-20 51 50
Other securities 2,902 0-100 2,810 2,284
Mortgage loans 12,901 0-100 4,156 4,118
Other loans and acceptances 26,759 0-100 21,868 20,437
Other assets 1,532 0-100 1,373 1,207
- -------------------------------------------------------------------------------------------------
$53,134 $31,019 $29,115
- -------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
NOTIONAL CREDIT CONVERSION RISK RISK-WEIGHTED EQUIVALENT
CREDIT INSTRUMENTS (1) AMOUNT FACTOR (%) WEIGHT (%) 1996 1995
- -------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Guarantees, letters of credit and
trade-related contingencies $1,731 50-100 20-100 $1,174 $1,121
Sale and repurchase agreements 1,721 100 0 -- --
Note issuance and revolving
underwriting facilities 500 50 0-100 -- --
Commitments to extend credit 12,228 0-50 0-100 1,358 1,086
- ------------------------------------------------------------------------------------------------------
$16,180 $2,532 $2,207
- ------------------------------------------------------------------------------------------------------
</TABLE>
(1) AS AT SEPTEMBER 30
66
<PAGE>
20. CREDIT RISK EXPOSURE (CONT.)
<TABLE>
<CAPTION>
NOTIONAL REPLACEMENT FUTURE CREDIT RISK RISK-WEIGHTED EQUIVALENT
DERIVATIVE FINANCIAL INSTRUMENTS (1) AMOUNT COST RISK WEIGHT (%) 1996 1995
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Foreign exchange contracts
Swaps 721 0-50
Purchased options 4,526 0-50
Forwards 19,208 0-50
- ----------------------------------------------------------------------------------------------------------------
$24,455 $165 $342 $ 136 $ 197
- ----------------------------------------------------------------------------------------------------------------
Interest rate contracts
Swaps 17,201 0-50
Purchased options 4,814 0-50
Forwards 8,197 0-50
- ----------------------------------------------------------------------------------------------------------------
$30,212 $256 $ 43 $ 66 $ 38
- ----------------------------------------------------------------------------------------------------------------
Equity contracts
Swaps 68 0-50
Purchased options 252 0-50
- ----------------------------------------------------------------------------------------------------------------
$ 320 $ 45 $ 23 $ 21 $ --
- ----------------------------------------------------------------------------------------------------------------
Total financial instruments $71,167 $466 $408 $ 2,755 $ 2,442
- ----------------------------------------------------------------------------------------------------------------
Total risk-weighted assets $33,774 $31,557
- ----------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
RATIOS 1996 1995
- --------------------------------------------------------------------------------
<S> <C> <C>
Tier 1 capital 6.9 % 6.8 %
Tier 2 capital (2) 3.3 % 3.6 %
Total capital (2) 10.2 % 10.4 %
- --------------------------------------------------------------------------------
</TABLE>
(1) AS AT SEPTEMBER 30
(2) TAKING INTO ACCOUNT THE ISSUE OF $150 MILLION IN DEBENTURES ON NOVEMBER 1,
1996
21. RELATED PARTY TRANSACTIONS
In the normal course of its business, the Bank provides various banking
services to its subsidiaries which are recorded at the exchange value
reflecting the consideration determined and accepted by both parties.
The Bank also grants loans to its directors, officers and personnel under
various conditions. Total outstanding loans of this type amounted to:
<TABLE>
<CAPTION>
1996 1995
- --------------------------------------------------------------------------------
<S> <C> <C>
Loans to directors (August 31) $260 $295
Loans to officers and personnel (October 31) $462 $479
- --------------------------------------------------------------------------------
</TABLE>
22. LITIGATION
Various legal proceedings are pending against the Bank and its subsidiaries.
In management's opinion, the aggregate amount of potential liability related
thereto will not have a material impact on the Bank's financial position.
23. DOMESTIC AND INTERNATIONAL OPERATIONS
Domestic operations encompass all business carried on by the Bank's network
of branches and commercial banking centres in Canada, treasury operations on
Canadian financial markets and international commercial operations carried
out by the Canadian branch network.
International operations comprise transactions on international financial
markets effected with public and private sector corporations in Canada and
abroad, and with governments and their agencies.
<TABLE>
<CAPTION>
DOMESTIC INTERNATIONAL TOTAL
- ---------------------------------------------------------------------------------------------------------
UNITED STATES OTHER
------------- -----------
1996 1995 1996 1995 1996 1995 1996 1995
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net interest income $ 1,021 $ 987 $ 110 $ 105 $ 139 $ 78 $ 1,270 $ 1,170
Charge for loan impairment 190 220 43 29 2 6 235 255
Other income 809 680 22 24 5 8 836 712
Non-interest expenses 1,336 1,162 56 49 21 18 1,413 1,229
Income taxes 97 116 16 24 17 6 130 146
Non-controlling interest 10 7 -- -- -- -- 10 7
- ---------------------------------------------------------------------------------------------------------
Net income $ 197 $ 162 $ 17 $ 27 $ 104 $ 56 $ 318 $ 245
- ---------------------------------------------------------------------------------------------------------
Average total assets $41,584 $39,790 $4,250 $4,182 $3,405 $3,610 $49,239 $47,582
- ---------------------------------------------------------------------------------------------------------
</TABLE>
67
<PAGE>
24. ACQUISITIONS
FAMILY TRUST CORPORATION
On March 31, 1996, the Bank acquired all of the voting common shares of
Family Trust Corporation, an Ontario trust company, for a consideration of
$16 million paid in cash. The assets acquired amounted to approximately $229
million and were composed mainly of mortgage loans, while the liabilities
assumed, totalling approximately $218 million, consisted chiefly of
guaranteed investment certificates.
This acquisition was accounted for using the purchase method.
The results of Family Trust Corporation are recorded in the Consolidated
Statement of Income as of the date of acquisition. Goodwill of $5 million is
amortized using the straight-line method over a 20-year period.
THE MUNICIPAL SAVINGS & LOAN CORPORATION
On August 21, 1996, the Bank acquired all of the common shares of The
Municipal Savings & Loan Corporation, an Ontario loan com-pany, and its
wholly owned subsidiaries The Municipal Trust Company, MSLProperties Limited
and Municipal Securities Inc. As at October 31, 1996, the final acquisition
price had not been determined but an initial payment of $29 million had been
made.
This acquisition was accounted for using the purchase method and is
summarized below:
- --------------------------------------------------------------------------------
NET ASSETS ACQUIRED
Tangible assets
Cash resources and securities $273
Mortgages and other loans 596
Other assets 40
- --------------------------------------------------------------------------------
909
- --------------------------------------------------------------------------------
Less liabilities assumed
Deposits 883
Other liabilities 1
- --------------------------------------------------------------------------------
884
- --------------------------------------------------------------------------------
Net tangible assets acquired 25
Goodwill 4
- --------------------------------------------------------------------------------
Total cost of investment $ 29
- --------------------------------------------------------------------------------
Consideration paid in cash $ 29
- --------------------------------------------------------------------------------
Once the transaction is completed, changes to the consideration paid or the
tangible assets acquired could affect the amount of goodwill.
The results of The Municipal Savings & Loan Corporation are recorded in the
Consolidated Statement of Income as of the date of acquisition. Goodwill is
amortized using the straight-line method over a 20-year period.
68
<PAGE>
SUBSIDIARIES AND AFFILIATED
CORPORATIONS
AS AT OCTOBER 31, 1996
SUBSIDIARIES
<TABLE>
<CAPTION>
PERCENTAGE INVESTMENT
PRINCIPAL OF VOTING AND AT COST
NAME OFFICE ADDRESS PARTICIPATING SHARES (MILLIONS OF $)
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Natcan Trust Company Montreal, Canada 100% $ 55
General Trust of Canada Montreal, Canada 100% $155
National Bank Life Insurance Company Montreal, Canada 100% $ 10
General Trust Investment Funds Ltd. Montreal, Canada 100% $ --
NBC Export Development
Corporation Inc. Montreal, Canada 100% $ --
Lvesque, Beaubien and Company Inc. Montreal, Canada 75% $129
- Lvesque Beaubien Geoffrion Inc. Montreal, Canada 75% $ --
National Bank Securities Inc. Montreal, Canada 100% $ 5
NBC Clearing Services Incorporated Montreal, Canada 100% $ --
Natcan Investment Management Inc. Montreal, Canada 100% $ 8
The Municipal Savings & Loan
Corporation Barrie, Canada 100% $ 37
- The Municipal Trust Company Barrie, Canada 100% $ --
- MSL Properties Limited Barrie, Canada 100% $ --
- Municipal Securities Inc. Barrie, Canada 100% $ --
Family Trust Corporation Markham, Canada 100% $ 43
Mercantile Canada Finance B.V. Amsterdam, Netherlands 100% $ 5
National Bank Information
Corporation Montreal, Canada 100% $ --
NBC Holdings USA, Inc. New York, United States 100% $488
- National Canada Finance Corp. New York, United States 100% $ --
- National Canada Business Corp. New York, United States 100% $ --
- National Canada Corporation New York, United States 100% $ --
NatBC Holding Corporation Florida, United States 100% $ 9
- Natbank, F.S.B. Florida, United States 100% $ --
Natcan Holdings International Limited Nassau, Bahamas 100% $ 5
- National Bank of Canada
(International) Limited Nassau, Bahamas 100% $ --
Natcan Finance (Asia) Ltd. Hong Kong 100% $ 7
National Bank of Canada (Asia) Ltd. Singapore 100% $ 3
Natcan Insurance Company Limited Bridgetown, Barbados 100% $ 1
- ----------------------------------------------------------------------------------------------------------
</TABLE>
AFFILIATED CORPORATIONS
<TABLE>
<CAPTION>
PERCENTAGE INVESTMENT
OF VOTING AND AT EQUITY
PARTICIPATING SHARES (MILLIONS OF $)
- --------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Natdev Inc. Quebec City, Canada 50% $ 1
National Bank Financial Services Inc. Montreal, Canada 50% $ 1
- --------------------------------------------------------------------------------------------------
</TABLE>
69
<PAGE>
STATISTICAL REVIEW
<TABLE>
<CAPTION>
1996 1995 1994 1993 1992 1991 1990 1989 1988
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA
Cash resources $ 3,528 $ 5,174 $ 3,765 $ 3,204 $ 3,693 $ 1,883 $ 2,216 $ 2,206 $ 2,420
Securities 8,414 7,285 6,071 5,985 4,273 3,899 3,129 2,842 2,407
Loans 37,935 33,795 32,226 30,692 30,003 28,360 27,420 25,322 22,894
Bankers' acceptances 1,725 1,293 1,255 1,081 940 1,335 2,151 2,618 2,395
Other assets 1,532 1,366 1,457 1,772 1,126 962 987 939 810
- ----------------------------------------------------------------------------------------------------------------------------------
TOTAL ASSETS $53,134 $48,913 $44,774 $42,734 $40,035 $36,439 $35,903 $33,927 $30,926
- ----------------------------------------------------------------------------------------------------------------------------------
Deposits $40,125 $40,424 $36,850 $35,113 $33,433 $29,987 $28,929 $26,646 $24,319
Other liabilities 9,494 4,895 4,253 4,476 3,645 3,451 3,976 4,295 3,899
Long-term debt
Variable-capital notes - 106 113 120 - - - - -
Bank debentures 1,016 1,177 1,241 1,037 969 806 727 765 691
Liabilities of subsidiaries - - - 17 234 408 535 589 446
Capital stock
Preferred 376 376 532 426 468 385 387 394 274
Common 1,268 1,234 1,207 1,083 906 905 904 828 786
Retained earnings 855 701 578 462 380 497 445 410 511
- ----------------------------------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES AND SHAREHOLDERS'
EQUITY $53,134 $48,913 $44,774 $42,734 $40,035 $36,439 $35,903 $33,927 $30,926
- ----------------------------------------------------------------------------------------------------------------------------------
Average assets $49,239 $47,582 $43,160 $39,657 $38,908 $36,740 $36,040 $32,267 $30,909
Average capital funds(1) 3,511 3,620 3,230 2,871 2,723 2,593 2,463 2,397 2,261
- ----------------------------------------------------------------------------------------------------------------------------------
INCOME STATEMENT DATA
Net interest income $ 1,270 $ 1,170 $ 1,081 $ 996 $ 1,012 $ 972 $ 902 $ 927 $ 887
Other income 836 712 719 635 541 472 439 381 301
- ----------------------------------------------------------------------------------------------------------------------------------
TOTAL INCOME $ 2,106 $ 1,882 $ 1,800 $ 1,631 $ 1,553 $ 1,444 $ 1,341 $ 1,308 $ 1,188
- ----------------------------------------------------------------------------------------------------------------------------------
Charge for loan impairment 235 255 275 325 570 270 250 442 232
Non-interest expenses 1,413 1,229 1,168 1,042 1,016 919 868 785 611
Income taxes 130 146 131 81 (41) 64 54 55 123
Non-controlling interest 10 7 9 8 7 5 - - -
- ----------------------------------------------------------------------------------------------------------------------------------
NET INCOME $ 318 $ 245 $ 217 $ 175 $ 1 $ 186 $ 169 $ 26 $ 222
- ----------------------------------------------------------------------------------------------------------------------------------
COMMON STOCK DATA
Number of common shares at
end of year (in thousands) 167,151 163,963 160,976 148,474 127,152 127,031 126,875 118,200 114,725
Number of common shareholders
of record 36,549 39,053 41,974 46,121 49,200 56,901 60,911 64,478 66,914
Net income (loss) per share
- Basic $ 1.76 $ 1.26 $ 1.12 $ 1.01 $ (0.29) $ 1.20 $ 1.10 $ 0.01 $ 1.84
- Fully diluted $ 1.74 $ 1.24 $ 1.10 $ 1.00 $ (0.29) $ 1,19 $ 1.09 $ 0.01 $ 1.81
Dividends per share $ 0.49 $ 0.40 $ 0.40 $ 0.40 $ 0.70 $ 0.80 $ 0.80 $ 0.72 $ 0.64
Stock trading range
- High 13.90 11.88 11.63 10.75 12.75 11.38 14.00 15.13 12.63
- Low 10.38 8.63 8.25 7.25 7.38 7.00 7.13 11.00 8.75
- Close 13.00 11.00 9.38 10.50 8.13 11.13 7.13 14.00 12.00
Book value per share $ 12.70 $ 11.88 $ 11.09 $ 10.41 $ 10.11 $ 11.03 $ 10.63 $ 10.48 $ 11.30
- ----------------------------------------------------------------------------------------------------------------------------------
FINANCIAL RATIOS
Return on common
shareholders' equity 14.5% 11.0% 10.5% 9.9% (2.6)% 11.0% 9.8% 0.1% 17.0%
Return on average assets 0.64% 0.51% 0.50% 0.44% -- % 0.51% 0.47% 0.08% 0.73%
Return on average capital funds 10.6% 8.3% 7.9% 7.3% 1.5 % 8.7% 8.7% 3.3% 12.4%
Capital ratios (BIS)
- Tier 1 6.9% 6.8% 6.9% (3) 6.2% 5.0 % 5.2% 4.9% 4.8% 5.0%
- Total (2) 10.2% 10.4% 11.1% (3) 9.6% 8.7 % 8.8% 8.2% 8.1% 8.3%
- ----------------------------------------------------------------------------------------------------------------------------------
OTHER INFORMATION
Impaired loans, net 406 511 688 904 1,097 733 665 345 372
Number of Bank employees
- In Canada 10,187 10,249 10,423 11,822 11,629 12,275 12,210 12,030 11,661
- Outside Canada 380 371 323 327 333 369 372 316 296
- LBG 1,425 1,578 1,481 1,398 1,339 1,293 1,291 1,478 1,167
Number of branches in Canada 632 629 641 650 652 662 650 625 603
Number of banking machines 712 624 551 496 482 454 397 335 271
- ----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) AVERAGE CAPITAL FUNDS INCLUDE COMMON SHAREHOLDERS' EQUITY, REDEEMABLE
PREFERRED SHARES AND BANK DEBENTURES.
(2) TAKING INTO ACCOUNT THE ISSUE OF $150 MILLION IN DEBENTURES ON
NOVEMBER 1, 1996.
(3) TAKING INTO ACCOUNT THE REDEMPTION OF $100 MILLION IN DEBENTURES THROUGH
THE ISSUE OF COMMON SHARES AS AT NOVEMBER 1, 1993.
70
<PAGE>
DISCLOSURE OF THE CORPORATE GOVERNANCE PRACTICES OF THE BANK
[LOGO]
This disclosure section gives effect to the requirements set out in Policy
I-15 of the Montreal Exchange and the By-Laws of the Toronto Stock Exchange
further to the recommendations set out in the December 1994 Report of the
Toronto Stock Exchange Committee on Corporate Governance in Canada.
The Board of Directors of the Bank recognizes the importance of maintaining
sound internal governance practices at all times in the interest of the
Bank's shareholders. It also considers that the relevance of these practices
must be reevaluated on a regular basis. In accordance with the
recommendations set out in the AD HOC Corporate Governance Committee Report
presented to the Board of Directors on October 25, 1995, the Board of
Directors created the Conduct Review and Corporate Governance Committee on
January 1, 1996.
The new Conduct Review and Corporate Governance Committee was assigned the
responsibilities previously delegated to the Human Resources Committee and
the Conduct Review Committee of the Board of Directors as well as the new
corporate governance responsibilities established for companies. This
Committee is mainly composed of directors who are considered unrelated
directors as defined in Policy I-15 of the Montreal Exchange(1) and who are
not affiliated with the Bank as defined in banking regulations(2). No officer
or employee of the Bank or its affiliated companies is a member of this
Committee.
The text below summarizes the work of the Conduct Review and Corporate
Governance Committee since January 1, 1996. It also describes the mandate of
the Board of Directors and outlines certain corporate governance practices of
the Bank.
ACHIEVEMENTS OF THE CONDUCT REVIEW AND CORPORATE GOVERNANCE COMMITTEE
The main achievements of the Conduct Review and Corporate Governance
Committee were as follows:
CORPORATE GOVERNANCE
- - Adopted a guideline specifying that each director was to hold a portfolio of
a minimum of 1,500 shares of the Bank.
- - Reduced the size of the Board of Directors, mainly through attrition, while
ensuring that adequate representation was maintained and that statutory
requirements regarding the independence of directors were respected.
- - Implemented a review process for the mandates of all the committees of the
Board of Directors. Updated the mandate of the Audit Committee in order to
take into account the most recent regulatory requirements.
- - Approved a new compensation policy for directors which emphasizes incentive
compensation while remaining within the current budget envelope and
accurately reflecting the responsibilities and risks associated with the
role of director. This policy came into effect on July 1, 1996.
- - Adopted a communications process favouring the establishment of formal links
between the Executive Committee and the Conduct Review and Corporate
Governance Committee. In the future, these two committees may hold joint
meetings for the purposes of considering items of common interest. The Chair
of the Conduct Review and Corporate Governance Committee may also attend
meetings of the Executive Committee whenever appropriate in order to ensure
better coordination between the work of these two committees.
- - Reviewed the rules of conduct applicable to Quebec subsidiaries which are
wholly owned by the Bank in order to determine the relevance of such rules.
- - Implemented a process of informal meetings of Bank directors on a semi-annual
basis, without Bank officers being present. The first such meeting
was held on November 7, 1996 and enabled directors to discuss various ways
to make the Board of Directors and its committees more efficient.
HUMAN RESOURCES
- - Updated the salary policy for executive officers of the Bank, taking into
account the findings of a consulting firm specializing in compensation which
had been mandated to analyze the policies and practices of the comparison
market.
The members of the Committee were therefore able to compare the salary
position of the executive officers of the Bank with those of the comparison
market. Based on the findings of the study, the following recommendations
were made to the Board of Directors with regard to the aggregate compensation
of executive officers: salary freeze maintained for 1996, emphasis on
short-term incentive compensation, increase in the number of options awarded,
and changes to be made to their pension plan in order to ensure that it
remains competitive with the comparison market.
CONDUCT REVIEW
- - Examined the conduct review procedures for related party transactions at the
Bank.
- - Monitored related party transactions at the Bank (directors and officers).
- - Reviewed procedures for disclosing information to clients.
- - Reviewed procedures for examining client complaints and statistical reports
produced for this purpose.
MANDATE OF THE BOARD OF DIRECTORS AND OUTLINE OF CERTAIN CORPORATE GOVERNANCE
PRACTICES OF THE BANK
MANDATE OF THE BOARD OF DIRECTORS
Pursuant to the Bank Act (Canada), the Board of Directors manages or supervises
the management of the business and internal affairs of the Bank. The Board of
Directors, directly or through its various committees, assumes overall
stewardship, in particular with respect to the following:
- - Definition of the Bank's mission, its long-term objectives, both qualitative
and quantitative, and the approval of strategies to ensure their
realization.
71
<PAGE>
- - Credit risk management policies as well as credit limits and latitudes.
- - Selection and succession of senior management, as well as the compensation
of its members and other employment conditions.
- - Approval of all matters which the Bank Act assigns exclusively to the
directors, including approval of the procedures for settling conflicts of
interest, procedures for disclosing information to Bank clients and
shareholders, procedures for examining client complaints, approval of the
annual financial statements and the remuneration of external auditors.
It should be noted that changes made from time to time to the Bank's management
structure must also be submitted to the Board of Directors for approval.
OUTLINE OF CERTAIN CORPORATE GOVERNANCE PRACTICES OF THE BANK
COMPOSITION OF THE BOARD
The selection of directors reflects the Bank's concern for maintaining a
balanced representation on its Board of Directors based on the geographical
distribution of its market, as well as on the diversity of experience and the
different sectors of economic activity in Canada.
Management of the Bank intends to nominate 23 candidates for election as
directors at the next Annual Meeting of Shareholders. At the previous meeting,
27 candidates were nominated.
As at the date hereof, 13 Bank directors out of 27 were affiliated with the
Bank. This number is within the regulatory limit of two-thirds set out in the
Bank Act. As at the same date, 23 directors, representing 85% of duly-appointed
directors, were not considered related directors.
OFFICERS WHO ARE MEMBERS OF THE BOARD OF DIRECTORS
The Chairman of the Board and Chief Executive Officer as well as the President
and Chief Operating Officer of the Bank are directors of the Bank. As at the
date hereof, the Board of Directors and the Conduct Review and Corporate
Governance Committee are of the opinion that these executive officers'
in-depth knowledge of the Bank's operations and their participation in the
proceedings of the Board and certain of its committees make an important
contribution to the efficiency and effectiveness of the Board and such
committees.
COMMUNICATIONS
The Bank maintains ongoing communications with its shareholders at statutory
meetings by sending them the prescribed disclosure material and providing
services through its Public Relations and Communications Department and the
Corporate Secretary's Office.
In addition to the communications which it must provide to its clients pursuant
to the Bank Act, the Bank remains close to its clients and the public in general
through its involvement in numerous charitable, social and business activities
in the community. The Bank also acts through its regional Business Development
Committees and its High Technology Committee, which give advice on the
expectations and needs of the Bank's various client groups. Further information
in this regard is presented under "Business Development Committees" on page 75
and pages 79 to 81.
BOARD'S EXPECTATIONS OF MANAGEMENT
The Board of Directors has specific major expectations related to managing human
resources and obtaining the information it needs to fulfill its mission.
The Conduct Review and Corporate Governance Committee assesses the performance
of executive officers as part of its mandate concerning human resources. The
Executive Committee assesses the performance of the other members of management.
In both cases, each committee shares the results of its assessments with the
Chair of the other committee. The assessment is followed by recommendations to
the Board of Directors, in particular with respect to compensation. Members of
management are responsible for proposing annual short-term objectives which take
into account the personal contribution of each officer to the Bank's annual
results. The committee responsible assesses the performance of the officers on
the basis of their personal results and the Bank's net income in relation to its
budget.
Management must provide the Board of Directors on a regular basis with
information pertaining to the Bank's business practices, business strategies,
investments, and financial and business risks. Control of this information is
largely the responsibility of the Conduct Review and Corporate Governance
Committee, the Audit Committee and the Executive Committee of the Board of
Directors.
APPROVED BY THE BOARD OF DIRECTORS OF THE BANK ON DECEMBER 19, 1996
1 "Unrelated director" means 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 in the best interest of the company, other than
interests and relationships arising from shareholding.
2 "Director affiliated with the Bank" refers to any director who is an officer
or employee of the Bank, an officer or employee of a corporation controlled
by the Bank or a person who, directly or through companies with whom such
person is affiliated, maintains significant relations covering a range of
business or shareholding situations, as well as the spouse of such person.
72
<PAGE>
DIRECTORS
[L0GO]
ANDRE BERARD
CHAIRMAN OF THE BOARD AND
CHIEF EXECUTIVE OFFICER
National Bank of Canada
Montreal, Quebec
MARC BOURGIE
CHAIRMAN OF THE BOARD
SOCIETE FINANCIERE
Bourgie (1996) Inc.
Laval-sur-le-Lac, Quebec
MAURICE J. CLOSS
CORPORATE DIRECTOR
St. Clair Beach, Ontario
GERARD COULOMBE
SENIOR PARTNER
Desjardins Ducharme
Stein Monast
Ste-Marthe, Quebec
LEON COURVILLE
PRESIDENT AND
CHIEF OPERATING OFFICER
National Bank of Canada
Outremont, Quebec
FRANCOIS JEAN COUTU
PRESIDENT AND
CHIEF OPERATING OFFICER
The Jean Coutu Group
(PJC) Inc.
Outremont, Quebec
SHIRLEY A. DAWE
PRESIDENT
Shirley Dawe
Associates Inc.
Toronto, Ontario
JEAN DOUVILLE
CHAIRMAN OF THE BOARD AND
CHIEF EXECUTIVE OFFICER
UAP Inc.
Montreal, Quebec
MARCEL DUTIL
CHAIRMAN OF THE BOARD, PRESIDENT AND
CHIEF EXECUTIVE OFFICER
Canam Manac Group Inc.
Montreal, Quebec
PAUL GOBEIL
VICE-CHAIRMAN OF THE BOARD
Metro-Richelieu Inc.
Montreal, Quebec
DONALD M. GREEN
CHAIRMAN OF THE BOARD
ACD Tridon Inc.
Burlington, Ontario
MARY S. LAMONTAGNE
CORPORATE DIRECTOR
Quebec City, Quebec
SUZANNE LECLAIR
PRESIDENT AND CHIEF EXECUTIVE OFFICER
Transit Truck Bodies Inc.
Laval, Quebec
BERNARD LEMAIRE
CHAIRMAN OF THE BOARD
Cascades Inc.
Kingsey Falls, Quebec
PIERRE LORTIE
PRESIDENT
Regional Aircraft Division
Bombardier Inc.
Saint-Lambert, Quebec
GASTON MALETTE
CHAIRMAN OF THE BOARD
Malette Inc.
Timmins, Ontario
LEONCE MONTAMBAULT
CORPORATE DIRECTOR
Sillery, Quebec
GORDON F. OSBALDESTON
PROFESSOR EMERITUS
Ivey School of Business
University of Western Ontario
London, Ontario
J.-ROBERT OUIMET
PRESIDENT AND CHIEF EXECUTIVE OFFICER
Ouimet-Cordon Bleu Inc.
Montreal, Quebec
ROBERT PARIZEAU
PRESIDENT AND CHIEF EXECUTIVE OFFICER
Sodarcan inc.
Montreal, Quebec
MICHEL PERRON
CHAIRMAN OF THE BOARD AND
CHIEF EXECUTIVE OFFICER
Somiper Inc.
Westmount, Quebec
RAYMOND ROYER
PRESIDENT AND
CHIEF EXECUTIVE OFFICER
Domtar Inc.
Ile Bizard, Quebec
GUY ST-GERMAIN
PRESIDENT
Placements Laugerma inc.
Outremont, Quebec
LINO SAPUTO
PRESIDENT AND
CHIEF EXECUTIVE OFFICER
Saputo Cheese Limited
Montreal, Quebec
CLAUDE F. SAVOIE
PRESIDENT
Acadian Construction (1991) Ltd.
Moncton, New Brunswick
PAUL-GASTON TREMBLAY
PRESIDENT
Primo-Gestion Inc.
Chicoutimi, Quebec
LOUISE B. VAILLANCOURT
CORPORATE DIRECTOR
Outremont, Quebec
73
<PAGE>
COMMITTEES OF THE BOARD OF DIRECTORS
[LOGO]
EXECUTIVE COMMITTEE
The Executive Committee submits to the Board of Directors policies on the
Bank's orientation and development as well as its salary policy with respect
to the Bank's senior management, excluding the five most highly compensated
officers. It periodically evaluates the performance of members of senior
management in relation to the objectives previously set and accepted. It
examines the investment policies of the Pool Fund for Participating Pension
Plans and the aggregate performance of the Pool Fund and its managers. It
meets once a month and, between meetings of the Board of Directors, exercises
all the powers of the Board, except for those assigned under the Bank Act
exclusively to the Directors. The Executive Committee also exercises the
principal functions of the Credit Committee of the Board between the latter's
meetings. During the past fiscal year, this Committee met nine times.
MEMBERS
ANDRE BERARD
CHAIR AND EX-OFFICIO MEMBER
LEON COURVILLE
EX-OFFICIO MEMBER
MARCEL DUTIL
BERNARD LEMAIRE
PIERRE LORTIE
LEONCE MONTAMBAULT
ROBERT PARIZEAU
GUY ST-GERMAIN
LINO SAPUTO
THE CHAIR OF EACH OF THE OTHER COMMITTEES OF THE BOARD OF DIRECTORS IS
INVITED ON A ROTATING BASIS.
CREDIT COMMITTEE OF THE BOARD
The Credit Committee examines the credit risk management policies, the
loaning limits and maximum credit limits by borrower or group of borrowers
and makes recommendations to the Board of Directors. It approves the credits
which exceed the powers set out for officers. It verifies changes in the
quality of the portfolio and the amount of the charge for loan impairment and
approves provisions for impaired loans exceeding $1 million. During the past
fiscal year, this Committee met nine times.
MEMBERS
MARC BOURGIE
CHAIR
ANDRE BERARD
EX-OFFICIO MEMBER
FRANCOIS JEAN COUTU
DONALD M. GREEN
J.-ROBERT OUIMET
RAYMOND ROYER
LINO SAPUTO
TWO MEMBERS OF THE BOARD OF DIRECTORS
ARE INVITED ON A ROTATING BASIS.
AUDIT COMMITTEE
The Audit Committee examines all documents containing financial information
and the annual and quarterly financial statements of the Bank and its
subsidiaries and recommends approval thereof to the Board of Directors. It
examines the mandate, nature and scope of the Bank's internal and external
audit work and veriPes the effectiveness of its internal control policies and
systems; it ensures that internal audit personnel cooperates with the
external auditors. It ensures that the necessary measures are taken to follow
up the suggestions resulting from the internal and external auditors' reports
and recommends the appointment and remuneration of the Bank's external
auditors. The Committee meets with external auditors and representatives of
the Office of the Superintendent of Financial Institutions and takes their
recommendations into consideration. During the past fiscal year, this
Committee met four times.
MEMBERS
PAUL-GASTON TREMBLAY
CHAIR
MARC BOURGIE
PAUL GOBEIL
SUZANNE LECLAIR
CLAUDE F. SAVOIE
LOUISE B. VAILLANCOURT
74
<PAGE>
BUSINESS DEVELOPMENT COMMITTEE
After first being introduced 10 years ago, the Bank's regional advisory
committees have now been transformed into business development committees.
The purpose of this change was to have the Bank's "ambassadors" play a more
active role with respect to business development.
Since their inception, these committees have enabled the Bank's senior
management and its regional representatives to gauge the pulse of its retail
and business clients. To further facilitate the exchange of information, each
member of the Bank's senior management has been assigned to liaise with a
specific business development committee. In addition, each year, one of these
committees will be selected as the "Business Development Committee of the
Year" based on a certain number of preset criteria dealing primarily with
business development.
MEMBERS
THE LIST OF MEMBERS APPEARS
ON PAGES 79 TO 81.
AD HOC COMMITTEE ON CORPORATE GOVERNANCE
The AD HOC Committee on Corporate Governance was created in February 1995 for
the purpose of examining the rules and practices pertaining to corporate
governance in effect at the Bank, in keeping with the recommendations of the
Dey Committee. The AD HOC Committee submitted its final recommendations to
the Board of Directors in October 1995.
The mandate of the AD HOC Committee terminated on January 1, 1996. During the
past fiscal year, this Committee met once.
MEMBERS
GERARD COULOMBE
CHAIR
MARC BOURGIE
ROLAND GIGUERE
MARY S. LAMONTAGNE
LEONCE MONTAMBAULT
GUY ST-GERMAIN
LOUISE B. VAILLANCOURT
75
<PAGE>
CONDUCT REVIEW AND CORPORATE GOVERNANCE COMMITTEE
This new Committee was created by the Board of Directors in October 1995 on
the recommendations of the AD HOC Committee on Corporate Governance, in
keeping with the by-laws and corporate governance policies of the Montreal
and Toronto stock exchanges. This Committee, which came into effect on
January 1, 1996, consists exclusively of external Directors, most of whom are
unrelated directors within the meaning of the by-laws and corporate
governance policies of the Montreal and Toronto stock exchanges, and not
affiliated directors of the Bank within the meaning of the Bank Act.
Following the creation of this Committee, the former Conduct Review and Human
Resources committees were abolished on January 1, 1996, with the new
Committee assuming the functions previously exercised by them.
The Conduct Review and Corporate Governance Committee has a threefold mandate:
- - With respect to conduct review, the Committee is responsible for
establishing and monitoring procedures for reviewing transactions with
related parties of the Bank. To that end, it ensures, together with the
Credit Committee of the Board, that the Bank's policies regarding such
transactions are respected. The Committee also monitors the application
of procedures established to resolve conflicts of interest and for
disclosing information to Bank clients and shareholders.
- - With respect to human resources, the Committee appraises the
performance of the five most highly paid officers of the Bank and
submits its recommendations regarding their remuneration, benefits,
various allowances and other employment conditions to the Board
of Directors.
- - With respect to corporate governance, the Committee determines and
periodically revises the criteria for selecting directors and the terms
and conditions of their remuneration. It also oversees the entire
disclosure process with respect to any discrepancy between the Bank's
conduct in terms of corporate governance and the Montreal and Toronto
stock exchange guidelines.
During the past fiscal year, this Committee met three times.
MEMBERS
GERARD COULOMBE
CHAIR
MARC BOURGIE
MARY S. LAMONTAGNE
GASTON MALETTE
LEONCE MONTAMBAULT
ROBERT PARIZEAU
MICHEL PERRON
GUY ST-GERMAIN
LOUISE B. VAILLANCOURT
76
<PAGE>
OFFICERS
[LOGO]
ANDRE BERARD
CHAIRMAN OF THE BOARD AND
CHIEF EXECUTIVE OFFICER
LEON COURVILLE
PRESIDENT AND
CHIEF OPERATING OFFICER
SENIOR EXECUTIVE VICE-PRESIDENTS
- --------------------------------
PIERRE PAQUETTE
Operations
JEAN TURMEL
Treasury, Brokerage
and Corporate Banking
SENIOR VICE-PRESIDENTS
- ----------------------
HARVEY L. BROOKS
Ontario and
Western Canada
RICHARD CARTER
Research and
Product Management
JACQUES DAOUST
EXECUTIVE VICE-PRESIDENT
General Trust of Canada
PIERRE DESBIENS
Insurance
GISELE DESROCHERS
Human Resources and Administration
JEAN HOUDE
Banking
MICHEL LABONTE
Finance and Control
MARIO LECALDARE
Corporate Banking, Canada
TONY P. METI
Banking
REAL RAYMOND
Treasury and
Financial Markets
ROGER P. SMOCK
United States
GABY TOUMA
International
EXECUTIVE VICE-PRESIDENT
- ------------------------
JEAN-PIERRE BELANGER
CHAIRMAN OF THE
CREDIT COMMITTEE
PRESIDENTS OF SUBSIDIARIES
- --------------------------
PIERRE BRUNET
PRESIDENT AND
CHIEF EXECUTIVE OFFICER
Levesque Beaubien Geoffrion Inc.
PIERRE DESROCHES
PRESIDENT AND
CHIEF EXECUTIVE OFFICER
General Trust of Canada
MARC ST-PIERRE
PRESIDENT AND
CHIEF OPERATING OFFICER
Natcan Investment Management Inc.
OMBUDSMAN
- ---------
ROLAND ROBICHAUD
77
<PAGE>
VICE-PRESIDENTS
RICHARD BARRIAULT
Taxation
ANDRE BELANGER
Corporate Services
General Trust of Canada
GUY BERARD
Risk Management and Administration
Financial Markets
GILLES BISSONNETTE
South Shore
ANDRE BOILEAU
Chaudiere/Appalaches
ANDRE BOLDUC
Finance and Administration
National Bank
Securities Inc.
LUC BORDELEAU
Lower St. Lawrence/Gaspe
MICHEL BROUILLETTE
Drummond/Bois-Francs
DIANE CADIEUX
Monteregie Sud
JEAN-MARIE CANUEL
Eastern Townships
JEAN-PAUL CARON
Corporate Affairs
GILLES CHOQUET
Laurentians/Lanaudiere
ROBERT COURCHESNE
Sales and Business
Development
PATRICIA CURADEAU-GROU
Special Loans Quebec/Atlantic
and Syndication
IAN A. DALRYMPLE
Central Ontario
PHILIPPE DESROSIERS
Atlantic
YVAN DESROSIERS
Saguenay/Lac Saint-Jean/
North Shore
FRANK DE VRIES
Special Loans
Ontario, Western Canada
and United States
TOM DOSS
Credit, United States
LEVIS DOUCET
Richelieu/Yamaska
CHRIS ELGAR
Treasury, Europe
MICHEL FAUBERT
Operations Support
LUC FREDETTE
Credit, Canada
JULES G. GAGNE
Centralized Operations
FRANCINE GAUDREAULT
Abitibi/Temiscamingue
RENALD GELINAS
Government and
Public Sector Banking
JACQUES GRANDMAISON
Eastern and Northern Ontario
GORDON C. HAINSTOCK
Latin America
RAYMOND H. KEROACK
Bank Tower and
North/Central Montreal
PIERRETTE LACROIX
Treasury, United States
JEAN-PIERRE LAMBERT
Outaouais
JACQUES LATENDRESSE
Nassau
RICHARD LECLERC
Personal Trust Services
General Trust of Canada
REJEAN LEVESQUE
Western Montreal
BENOIT LORANGER
Central Montreal
PAUL-ANDRE MALO
Audit
J. ARCHIE MARSHALL
Central Ontario North
PASQUALE MINICUCCI
Continuous Improvement
Program
RENAUD NADEAU
Mauricie
MARTIN OUELLET
Treasury and Financial Markets
PAUL ANDRE PARADIS
Eastern Montreal
ALAIN PELCHAT
Capital Markets
DENIS PELLERIN
International Credit
and Investment
JACQUES PICHE
International
Commercial Operations
GERARD PROULX
Laval/North Shore
JOHANNE L. REMILLARD
Legal Affairs and Corporate Secretary
JOHN RICHTER
Eastern United States
NICOLE RONDOU
Marketing
LILI J. SHAIN
Corporate Banking
Central Canada
VINCENT SOFIA
Asia
JOHN W. SWENDSEN
Western Canada
MARC TAILLON
Sainte-Foy/Portneuf
JACINTHE VAILLANCOURT
Quebec City
78
<PAGE>
BUSINESS DEVELOPMENT COMMITTEE MEMBERS
[LOGO]
ATLANTIC PROVINCES
JIM BATEMAN
PRESIDENT
Paturel Seafood Ltd
Shediac
NORMAND CAISSIE
PRESIDENT
Imperial Sheet Metal Ltd
Richibucto
BERNARD CYR *
PRESIDENT
Cyr Holding Inc.
Moncton
EUGENE DURETTE
PRESIDENT
Brunswick Shopping Centre Ltd.
Edmundston
BRIGITTE ROBICHAUD
LAWYER
Drapeau, Robichaud & McNally
Moncton
JEAN-CLAUDE SAVOIE
PRESIDENT
Cedre Restigouche Ltee
Saint-Quentin
BRIGITTE SIVRET
LAWYER
Cabinet Brigitte Sivret
Bathurst
QUEBEC
ABITIBI/TEMISCAMINGUE
LOUIS BLANCHETTE
GENERAL MANAGER
Roc d'Or Automobiles Ltee
Malartic
FRANTZ BOIVIN
MANAGER
C.K.V.D. & C.H.O.I. Rock Detente
Val-d'Or
ROBERT CLOUTIER *
PRESIDENT AND
CHIEF EXECUTIVE OFFICER
Gestion Montemurro Ltee
Rouyn-Noranda
YVON LAFONTAINE, C.A.
VICE-PRESIDENT
Raymond, Chabot, Martin, Pare
Val-d'Or
NORMAND LANGLOIS
SECRETARY AND TREASURER
Blais & Langlois Inc.
Matagami
GEORGES LAROUCHE
PRESIDENT AND
CHIEF EXECUTIVE OFFICER
Papeterie Larouche Inc.
Amos
GUYLAINE PAQUIN
PRESIDENT AND
CHIEF EXECUTIVE OFFICER
Lesage Tremblay Ultima
Rouyn-Noranda
REAL PROVENCHER
VICE-PRESIDENT,
TEMISCAMINGUE DIVISION
Produits forestiers Tembec (1990) Inc.
Bearn
CHAUDIERE/APPALACHES
ERIC BROCHU
EXECUTIVE VICE-PRESIDENT
Salaisons Brochu Inc.
Saint-Henri
RICHARD DUVAL
EXECUTIVE VICE-PRESIDENT
Les Lainages Victor Ltee
Saint-Victor
ANDRE GOSSELIN
PRESIDENT
Entreprises Dufour
& Gosselin Inc.
Quebec City
PAUL-EMILE GRENIER *
PRESIDENT
Societe Grenco Inc.
Thetford Mines
MONIQUE JACOB
CHARTERED ACCOUNTANT
Renaud & Jacob, C.A.
Ville Saint-Georges
DRUMMOND/BOIS-FRANCS
ALAIN DUMONT
PRESIDENT
Cercueils Vic Royal Inc.
Victoriaville
PIERRE FRADET
NOTARY
Fradet, Langevin,
Fradet, Notaries
Drummondville
FERNAND LALLIER
PRESIDENT AND
CHIEF EXECUTIVE OFFICER
Imprimerie d'Asbestos
(1980) Inc.
Asbestos
LUCIE LATRAVERSE
PRESIDENT
Voyage Conseil
Drummondville Inc.
Drummondville
MICHELINE LOCAS *
GENERAL MANAGER
Association des Clubs
d'Entrepreneurs d'Etudiants - Quebec
Drummondville
CLAUDE PEPIN
SALES REPRESENTATIVE
Warwick
LEO-PAUL THERRIEN
PRESIDENT
Les Petroles Therrien Inc.
Drummondville
JEAN-LUC VIGNEAULT
PRESIDENT AND
CHIEF EXECUTIVE OFFICER
Vexco Inc.
Plessisville
EASTERN TOWNSHIPS
GERALD BOUCHARD
SECRETARY-TREASURER
Service de l'Estrie
Sherbrooke
JACINTHE DUBE
PRESIDENT
Groupe Immobilier Jacinthe Dube Courtier Inc.
Sherbrooke
GILLES FONTAINE *
LAWYER
Fontaine, Desy et Associes
Sherbrooke
YVAN MICHEL
DIRECTOR OF ADMINISTRATIVE SERVICES
Industries Manufacturieres Megantic Inc.
Lac Megantic
JEAN PELCHAT
PRESIDENT
Marche Jean Pelchat Inc.
Magog
YOLANDE VANIER
COUNCILLOR
Municipality of Rock Forest
Rock Forest
MALCOLM L. WHEELER
PRESIDENT
Herwood Inc.
Windsor
LANAUDIERE
PAUL ARBEC *
PRESIDENT
Paul Arbec Inc.
Rawdon
MARIE BERNIER
VICE-PRESIDENT
Imprimerie Bernier & Fils Inc.
L'Epiphanie
LISE CHARBONNEAU
OWNER
Ferme Lise Charbonneau
Saint-Roch-de-L'Achigan
LUC GAUDREAULT
PRESIDENT
Sabem Inc.
Repentigny
MARIE GREGOIRE
PRESIDENT
Creacom
Berthierville
DIANE NICOLETTI
PRESIDENT
Maison de la Cigogne au Pierro
Joliette
ANDRE THERRIEN
PRESIDENT
Marche Provigo
Saint-Donat
LAURENTIANS
CAROLE BEAUCHAMP
NOTARY
Sainte-Adele
ANDRE BILODEAU
PRESIDENT
Pneus Legault Inc.
Saint-Jovite
ANDRE BOLDUC
PHARMACIST
Pharmacie Andre Bolduc
Mont-Laurier
RAYMOND DESCHAMPS
SENIOR PARTNER
Construction Desjardins
& Deschamps Inc.
Saint-Jerome
FRANCOIS LEGER
PRESIDENT
Immeubles Leger Inc.
Saint-Jerome
MICHELINE MONETTE
PRESIDENT
Eugene Monette Inc.
Val-David
CHANTAL ROCHETTE *
PRESIDENT
Au Coin du Jardin Inc.
Saint-Sauveur
LAVAL/NORTH SHORE
GUY BOISVERT
PRESIDENT
Boisvert Pontiac Buick Ltee
Blainville
MARIE-HELENE DESROSIERS
VICE-PRESIDENT - CONSULTING SERVICES
Conseil & Gestion d'Organisation Inc. (C.G.O.)
Montreal
DENIS F. GAUTHIER *
LAWYER
Gauthier, Dion, Avocats
Laval
MARIELLE HEBERT
PRESIDENT
ISO Concept Inc.
Laval
79
<PAGE>
JEAN-CLAUDE LANGLOIS
PRESIDENT
Les Editions Blainville
Deux-Montagnes Inc.
Saint-Eustache
BENOIT ROY
GENERAL MANAGER
De La Fontaine & Associes Inc.
Terrebonne
LOWER ST. LAWRENCE/
GASPE
GILLES BERUBE
PRESIDENT
Groupe Cedrico Inc.
Price
GEORGES HARRISSON
MANAGEMENT CONSULTANT
Les Habitations Mont-Carleton 1994 Inc.
Carleton
CLAIRE LANGLOIS
NOTARY AND LEGAL ADVISOR
Amqui
DANIEL MARQUIS
PRESIDENT
Marquis Pontiac Buick Inc.
Matane
ANDRE RACINE
PRESIDENT
Boutique Vagabond Inc.
Rimouski
REINE-MARIE ROY *
LAWYER
Gendreau, Roy, Beaulieu
& Carrier
Rimouski
RENAUD SAMUEL
PRESIDENT
Groupe RT
Riviere-au-Renard
PIERRE SIMON
PRESIDENT
Le Cable de Riviere-du-Loup Ltee
Riviere-du-Loup
MAURICIE
FERNANDE BOISVERT
PRESIDENT
Secretariat Plus
(Trois-Rivieres) Inc.
Trois-Rivieres
GASTON FORTIN
MAYOR
City of La Tuque
La Tuque
LOUISE GAMACHE
VICE-PRESIDENT - FINANCE
Estampage J.P.L. Ltee
Sainte-Marthe-du-Cap-de-
la-Madeleine
NICOLE GELINAS
PRESIDENT AND
CHIEF EXECUTIVE OFFICER
Aspasie Inc.
Saint-Barnabe-Nord
RAYMOND MAILHOT
PRESIDENT
Les Boiseries Ste-Gertrude Inc.
Sainte-Gertrude
PIERRE TREMBLAY
CHAIRMAN OF THE COMMISSION SCOLAIRE DE TROIS-RIVIERES
DIRECTOR OF PERSONNEL
Universite du Quebec
a Trois-Rivieres
Trois-Rivieres
LAURENT VERREAULT *
CHAIRMAN OF THE BOARD,
PRESIDENT AND CHIEF EXECUTIVE OFFICER
Groupe Laperriere
& Verreault Inc.
Trois-Rivieres
MONTEREGIE SUD
CLAUDE BOYER
CHARTERED ACCOUNTANT
Societe Bourassa Boyer, C.A.
Vaudreuil-Dorion
BEATRICE LAJOIE
PRESIDENT
Archipel des Tisserands
Coteau-du-Lac
CLEMENT LEBLANC
NOTARY AND LEGAL ADVISOR
Chateauguay
LOUISE MONTPETIT *
PRESIDENT
Automobiles Regate Inc.
ValleyPeld
ANIE ROULEAU
EXECUTIVE VICE-PRESIDENT
Hydrocom International
Chateauguay
ANDRE ST-AMOUR
VICE-PRESIDENT - ADMINISTRATION
L.A. Hebert Ltee
Saint-Constant
NORMAND VINET
FARM PRODUCER
Saint-Etienne-de-Beauharnois
OUTAOUAIS
ANDRE BEAUDOIN *
PRESIDENT
Slush Puppie Canada Inc.
Hull
GUSTAVE BRUNET
PRESIDENT AND
CHIEF EXECUTIVE OFFICER
Sylvio Brunet & Fils Ltee
Fassett
JEAN-GUY HUBERT
PRESIDENT
G. Hubert Auto Ltee
Maniwaki
ANDRE LACASSE
PRESIDENT
Materiaux Aylmer Lucerne Ltee
Aylmer
MARTIN LACHAPELLE
MANAGER
Roger Lachapelle
Pontiac Buick G.M.
Hull
CHRISTINE LAPOINTE
CHAIR OF THE BOARD
Commission scolaire
des Draveurs
Cantley
MAURICE MAROIS
PRESIDENT
Marois Electrique (1980) Ltee
Hull
GERMAIN PIGEON
PRESIDENT
Construction BGP
Gatineau
ROBERT ROY
PRESIDENT
Le Groupe Sotramont
Hull
RICHELIEU/YAMASKA
GERARD BERNARD
PRESIDENT AND
CHIEF EXECUTIVE OFFICER
Les Placements Robert
Bernard Ltee
Saint-Paul-d'Abbotsford
YVES BLAIS
GENERAL MANAGER
Centre de renovation Pointe
& Meunier Inc.
Carignan
JEAN CARTIER *
PRESIDENT
Emballages Jean Cartier Inc.
Saint-Cesaire
PIERRETTE LUSSIER
Granby
JEAN-PIERRE ROBIN
PRESIDENT
Gestion Valentine Inc.
Saint-Hyacinthe
REJANE SALVAIL
MAYOR
Sainte-Anne-de-Sorel
SAGUENAY/LAC ST-JEAN/
NORTH SHORE
CLEMENT BELLEY
PRESIDENT
Constructions Industrielles
Sept-Iles
GERMAIN DESCHENES
PRESIDENT
Hamilton & Bourassa (1988) Enr.
Baie-Comeau
GILLES EMOND
PRESIDENT
Meubles Gilles Emond Inc.
Delisle
PIERRE LEVESQUE
GENERAL MANAGER
Gravel & Levesque Inc.
Jonquiere
MARLENE OUELLET *
NOTARY
Chicoutimi
BENOIT ROUSSEAU
PRESIDENT
Motel Chutes des Peres Inc.
Mistassini
DENISE TREMBLAY
OWNER
Salon Coup d'Oeil
Ville de la Baie
LUC VERREAULT
PRESIDENT
Maison de l'Auto Saint-Felicien (1983) Ltee
Saint-Felicien
SOUTH SHORE
LOUIS BLAIN
CHARTERED ACCOUNTANT
Blain, Joyal, Charbonneau
& Assoc.
Sainte-Julie
DIANNE DUFOUR
COMMISSIONER
ECONOMIC DEVELOPMENT
Boucherville
RAYMOND LANDRY
PRESIDENT
Gestion Savoie Landry Inc.
Saint-Hubert
JACQUES LEBEL *
FINANCE OFFICER
Calixa Lavallee Construction Ltee
Longueuil
JEAN MONTPETIT
VICE-PRESIDENT
Power Battery (Iberville) Ltd.
Iberville
PIERRE TRAHAN
PRESIDENT
Cedarome Canada Inc.
Brossard
80
<PAGE>
FARM COMMITTEE
VICTOR BLAIS
PARTNER
Ferme Diane R. & Victor Blais
Coaticook
COLETTE DUCHESNE-LAPOINTE *
FARM PRODUCER
Jonquiere
JACINTHE GAGNON
FARM PRODUCER
Union des producteurs agricoles
Saint-Agnes
VICTOR GIROUARD
ENGINEER - AGRONOMIST
Saint-Valerien
HEINZ GROGG
FARM PRODUCER
Maskinonge
GERARD KEURENTJES
FARM PRODUCER
Henryville
JEAN-MARC LACROIX
PRESIDENT
J.M. Lacroix & Fils
Sainte-Dorothee
MARIE-CLAIRE LAFRENIERE
FARM PRODUCER
Saint-Charles-de-Bellechasse
HIGH TECHNOLOGY COMMITTEE
FRANCOIS AIRD
PRESIDENT
CEDROM SNi
Outremont
ROBERT CARRIER
PRESIDENT
Genicom Consultants Inc.
Montreal
RICHARD CORMIER
CHAIRMAN OF THE BOARD
Buzz Image Group Inc.
Montreal
GILLES L. GAGNON
VICE-PRESIDENT - MARKETING & SALES
Technologies Ad Opt
Montreal
LOUISE GUAY
PRESIDENT
Public Technologies Multimedias
Montreal
BERNARD HAMEL *
PRESIDENT
Aerocapital
Montreal
SHIRLEY KIERAN
PRESIDENT
Best-Seller Library Management
Montreal
CLAUDE MARTEL
PRESIDENT AND
CHIEF EXECUTIVE OFFICER
Inno-Centre
Montreal
CLAUDE MCMASTER
SENIOR PARTNER AND CO-FOUNDER
Avingo Consulting Group Inc.
Boucherville
DANIEL OUELLETTE
VICE-PRESIDENT - DEVELOPMENT
MicroSlate Inc.
Brossard
SERGE PICHETTE
LAWYER - PARTNER
Hudon, Gendron, Harris, Thomas
Montreal
JACQUES PLOURDE
PRESIDENT AND
CHIEF OPERATING OFFICER
Institut de la technologie
du magnesium
Quebec City
JEAN-MARIE TOULOUSE
DIRECTOR
Ecole des Hautes Etudes Commerciales
Montreal
REGIONAL COMMITTEE (ONTARIO)
CHARLES COPPA
PRESIDENT
Highland Farms Inc.
North York
MURRAY G. CUMMINGS
PRESIDENT
TSC Stores Ltd.
London
JOHN K. MACDONALD
PRESIDENT
Armak Resilient Floor Covering Corporation
Mississauga
W. JOHN MORRIS
CHAIRMAN, MANAGING PARTNER
McLaren Morris & Todd Limited
Mississauga
MARLENE OILGISSER
PRESIDENT
Judy Wells Inc.
Richmond Hill
TED PATTENDEN
PRESIDENT AND
CHIEF EXECUTIVE OFFICER
National Rubber
Toronto
CLAUDE THEBERGE *
CHIEF EXECUTIVE OFFICER
C.M.L. Industries Ltd.
Unionville
EASTERN ONTARIO (OTTAWA)
NOEL J. BERTHIAUME
LAWYER
Berthiaume, Perrier, Brisebois, D'Amours
Hawkesbury
GUY R. BRUNET
PRESIDENT
Theo Brunet & Sons Ltd.
Rockland
JOCELYNE DOYLE-RODRIGUE
PRESIDENT
Translex Translations
Ottawa
JEAN DUMONT
PRESIDENT
Mechron Energy Ltd.
Ottawa
JACQUES LAMARCHE
Lefaivre
CHRISTINE LAMOTHE-MOIR
MANAGING PARTNER
Performance Development Training
Ottawa
JEAN-GUY RIVARD
PRESIDENT
Valecraft Homes Limited
Orleans
MICHAEL WILSON
PRESIDENT
Bells Corners Auto Parts Ltd.
Nepean
ANDREW WOLFF
CHIEF FINANCIAL OFFICER
MD Realty Corporation
Ottawa
CAROLE WORKMAN *
VICE-RECTOR - RESOURCES
University of Ottawa
Ottawa
WINDSOR/ESSEX
FRED COWLIN
PRESIDENT
Clydesdale Insurance
Brokerage Limited
Windsor
JOHN FURLAN
PRESIDENT AND
CHIEF EXECUTIVE OFFICER
H.E. Vannatter Limited
Wallaceburg
TOM O'BRIEN
SENIOR PARTNER
Price Waterhouse
Windsor
JOHN E. OMSTEAD
PRESIDENT
Family Tradition Foods Inc.
Wheatley
ELEANOR PAINE *
VICE-PRESIDENT AND
CHIEF EXECUTIVE OFFICER
Capitol Theatre & Arts Centre
Windsor
KARL RICHTER
PRESIDENT
Schukra of North America Ltd.
Windsor
JEFFREY M. SLOPEN
PARTNER
Wilson, Walker, Hochberg, Slopen
Windsor
MICHAEL G. SOLCZ
PRESIDENT AND
CHIEF EXECUTIVE OFFICER
Valiant Machine & Tool Inc.
Windsor
ROCHELLE TEPPERMAN
VICE-PRESIDENT
Tepperman Furniture Appliance Electronic
Windsor
* CHAIR OF THE COMMITTEE
81
<PAGE>
SUBSIDIARIES AND OFFICES ABROAD
[LOGO]
SUBSIDIARIES
CANADA
TRUST SERVICES
General Trust of Canada
1100 University
Montreal, Quebec H3B 2G7
Natcan Trust Company
600 de La Gauchetiere West
Montreal, Quebec H3B 4L2
The Municipal Savings
& Loan Corporation
70 Collier Street, P.O. Box 147
Barrie, Ontario L4M 4S9
SECURITIES
National Bank Securities Inc.
1100 University
Montreal, Quebec H3B 2G7
Natcan Investment Management Inc.
1100 University
Montreal, Quebec H3B 2G7
Levesque, Beaubien and
Company Inc.
1155 Metcalfe, 5th Floor
Montreal, Quebec H3B 4S9
NBC Clearing Services Incorporated
1155 Metcalfe
Montreal, Quebec H3B 4S9
General Trust Investment Funds Ltd
1100 University
Montreal, Quebec H3B 2G7
INSURANCE
National Bank Life Insurance Company
600 de La Gauchetiere West, 6th Floor
Montreal, Quebec H3B 4L2
National Bank Financial Services Inc.
600 de La Gauchetiere West, 6th Floor
Montreal, Quebec H3B 4L2
EXPORT FINANCING
NatExport, a division of
Natcan Trust Company
600 de La Gauchetiere West, 5th Floor
Montreal, Quebec H3B 4L2
NBC Export Development Corporation Inc.
600 de La Gauchetiere West, 5th Floor
Montreal, Quebec H3B 4L2
INFORMATION SERVICES
National Bank Information Corporation Inc.
600 de La Gauchetiere West
Montreal, Quebec H3B 4L2
UNITED STATES
Natbank, F.S.B.
4031 Oakwood Boulevard
Oakwood Plaza
Hollywood, FL 33020
NBC Holdings USA, Inc.
125 West 55th Street
New York, NY 10019
National Canada Corporation
125 West 55th Street
New York, NY 10019
National Canada Finance Corp.
125 West 55th Street
New York, NY 10019
National Canada Business Corp.
125 West 55th Street
New York, NY 10019
BAHAMAS
Natcan Holdings International Limited
Charlotte House
Charlotte Street, P.O. Box N3015
Nassau, Bahamas
National Bank of Canada (International) Limited
Charlotte House
Charlotte Street, P.O. Box N3015
Nassau, Bahamas
BARBADOS
Natcan Insurance Company Limited
Alleyne House
White Park Road
Bridgetown, Barbados
HONG KONG
Natcan Finance (Asia) Limited
Room 4001, Jardine House
1 Connaught Place, Central
Hong Kong
NETHERLANDS
Mercantile Canada Finance B.V.
Hoekenrode 6-8
Postbox 1469
1000BL Amsterdam
Netherlands
SINGAPORE
National Bank of Canada (Asia) Ltd.
331 North Bridge Road, #11-04/06
Odeon Towers
Singapore 0718
OFFICES ABROAD
UNITED STATES
REGIONAL OFFICE
125 West 55th Street
New York, NY 10019
BRANCHES
225 West Washington Street
Suite 1100
Chicago, IL 60606
125 West 55th Street
New York, NY 10019
AGENCIES
Riverfront Plaza
200 Galleria Parkway, Suite 800
Atlanta, GA 30339
725 South Figueroa Street, Suite 1690
Los Angeles, CA 90017
REPRESENTATIVE OFFICES
World Trade Center
401 East Pratt Street, Suite 631
Baltimore, MD 21202
5200 Town Center Circle, Suite 306
Boca Raton, FL 33486
1 Federal Street, 27th Floor
Boston, MA 02110
Empire Tower
350 Main Street, Suite 2540
Buffalo, NY 14202
2 First Union Center, Suite 2020
Charlotte, NC 28282
312 Walnut Street, Suite 1900
Cincinnati, OH 45202
82
<PAGE>
1 Cleveland Center
1375 East 9th Street, Suite 2430
Cleveland, OH 44114
2121 San Jacinto Street, Suite 1850
Dallas, TX 75201
1200 17th Street, Suite 2760
Denver, CO 80202
1 Commerce Square, Suite 2675
Memphis, TN 38103
1 Oxford Center
301 Grant Street, Suite 3440
Pittsburgh, PA 15219
901 East Byrd Street
Suite 1140, West Tower
Richmond, VA 23219
American Center
27777 Franklin Road, Suite 1570
Southfield, MI 48034
OFFICES OF NATIONAL CANADA
FINANCE CORP.
201 St. Charles Avenue, Suite 4205
New Orleans, LA 70170
8 Livingston Avenue
Roseland, NJ 17068
1 Metropolitan Square, Suite 2980
St. Louis, MO 63102
OFFICES OF NATIONAL CANADA
CORPORATION
225 West Washington Street
Suite 1100
Chicago, IL 60606
725 South Figueroa Street, Suite 1690
Los Angeles, CA 90017
125 West 55th Street
New York, NY 10019
OFFICES OF NATIONAL CANADA
BUSINESS CORP.
1 Cleveland Center
1375 East 9th Street, Suite 2430
Cleveland, OH 44114
1 Commerce Square, Suite 2275
Memphis, TN 38103
85 Livingston Avenue
Roseland, NJ 17068
OFFICES OF NATBANK, F.S.B.
4031 Oakwood Boulevard
Oakwood Plaza
Hollywood, FL 33020
990 North Federal Highway
Pompano Beach, FL 33062
CHILE
REPRESENTATIVE OFFICE
Pedro De Valdivia
100 Piso 14
Santiago, Chile
MEXICO
REPRESENTATIVE OFFICE
Montes Urales 723
Piso 3
Lomas de Chapultepec 11 000
Mexico, D.F.
EUROPE, AFRICA, MIDDLE EAST
REGIONAL OFFICE
Princes House, 95 Gresham Street
London, England EC2V 7LU
BRANCH
Princes House, 95 Gresham Street
London, England EC2V 7LU
REPRESENTATIVE OFFICE
23, avenue des Champs-Elysees
Paris 75008 France
ASIA, PACIFIC
REGIONAL OFFICE
Room 4001, Jardine House
1 Connaught Place, Central
Hong Kong
BRANCHES
Room 4001, Jardine House
1 Connaught Place, Central
Hong Kong
6th Floor, Leema Building
146-1 Soosong-Dong
Chongro-Ku
Seoul 110-140
Republic of Korea
331 North Bridge Road, #11-04/06
Odeon Towers
Singapore 0718
REPRESENTATIVE OFFICES
8th Floor
117, Min Shen East Road, Section 3
Taipei, Taiwan 105
Republic of China
4-C Shanghai Apollo Building
1440 Yan An Road (C)
Shanghai 200040
People's Republic of China
83
<PAGE>
INFORMATION FOR SHAREHOLDERS
AND INVESTORS
[LOGO]
STOCK EXCHANGE LISTINGS
The Common Shares of the Bank as well as the First Preferred Shares, Series 7,
8, 10, 11 and 12 are listed on the Montreal, Toronto and Vancouver stock
exchanges. The First Preferred Shares, Series 5 are listed on the Montreal
Exchange. The ticker symbols and newspaper abbreviations for the Bank's shares
listed on the Montreal, Toronto and
Vancouver stock exchanges are as follows:
- ----------------------------------------------------------------------
TICKER NEWSPAPER
SYMBOL ABBREVIATIONS
- ----------------------------------------------------------------------
Montreal Toronto
Exchange & Vancouver
Stock Exchanges
- -----------------------------------------------------------------------
Common
Shares NA Natl Bk Natl Bk
- ----------------------------------------------------------------------
First Preferred
Shares
- - Series 5 NA.PR.C Natl Bk s5 --
- - Series 7 NA.PR.D Natl Bk s7 Natl Bk s7
- - Series 8 NA.PR.E Natl Bk s8 Natl Bk s8
- - Series 10 NA.PR.G Natl Bk s10 Natl Bk s10
- - Series 11 NA.PR.H Natl Bk s11 Natl Bk s11
- - Series 12 NA.PR.I Natl Bk s12 Natl Bk s12
- ----------------------------------------------------------------------
TRANSFER AGENT AND REGISTRAR
General Trust of Canada
1100 University
9th Floor
Montreal, Quebec
H3B 2G7
Telephone: (514) 871-7171
1 800 341-1419
HEAD OFFICE
National Bank Tower
600 de La Gauchetiere West
Montreal, Quebec
H3B 4L2
Telephone: (514) 394-5000
Telex: 0525181
(Nabacan Montreal)
Internet address:
http://www.nbc.ca/
General Trust of Canada acts as Transfer Agent and Registrar in Montreal,
Toronto, Regina, Calgary, Halifax, Saint John, Vancouver and Winnipeg.
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, General Trust of Canada, 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 General Trust of Canada.
NUMBER OF SHAREHOLDERS
As at October 31, 1996, there were 36,542 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 5, 7, 8, 10, 11
and 12, the dividend payment date is the 15th day of the above months.
The dividend record dates for Common Shares are December 27, 1996, and March
27, June 26 and September 26, 1997; for First Preferred Shares, Series 5, 7,
8, 10, 11 and 12, they are January 10, April 11, July 11 and October 10, 1997.
INFORMATION
For any additional information, shareholders are requested to contact the
Transfer Agent and Registrar, General Trust of Canada.
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, 1997, at 9:30a.m. at The Queen Elizabeth Hotel, 900
Rene-Levesque Blvd. West, Montreal, Quebec.
84
<PAGE>
[NATIONAL BANK OF CANADA LOGO]
Head Office:
National Bank Tower
600 de La Gauchetiere West
Montreal, Quebec
H3B 4L2
Printed in Canada
Exhibit 4.5
to Form F-9
NOTICE OF ANNUAL MEETING
OF SHAREHOLDERS
AND MANAGEMENT PROXY
CIRCULAR
NATIONAL BANK OF CANADA
<PAGE>
Notice is hereby given that the Annual Meeting of Holders of
Common Shares of National Bank of Canada (the "Bank") will be held on Wednesday,
March 12, 1997 at 8:30 a.m. at the Queen Elizabeth Hotel, 900 Rene-Levesque
Blvd. West, Montreal, Canada, for the following purposes:
(a) to receive the Annual Report including the Consolidated
Financial Statements for the financial year ended October 31, 1996 and
the Auditors' Report thereon;
(b) to elect Directors;
(c) to appoint Auditors;
(d) to examine and to pass a special resolution confirming the
proposed amendment to Section 4.1 of By-Law 1 of the Bank regarding the
minimum and maximum number of Directors of the Bank;
(e) to examine and to vote on the proposals submitted by a
Shareholder regarding the following matters:
o limit on the remuneration of the senior Executive Officer:
o abolition of the loan program for Executive Officers;
o separation of the role of the Chairman of the Board from
that of the Chief Executive Officer;
o ineligibility of a provider of services to sit as a
Director;
o limit on the term of Board Members; and
(f) to transact such other business as may properly be brought
before the Meeting.
By Order of the Board.
Johanne L. Remillard
Vice-President--Legal Affairs
and Corporate Secretary
Montreal, January 16, 1997
<PAGE>
2
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.
In order to be valid, proxies must be returned to:
General Trust of Canada
P.O. Box 888, Station B
Montreal, Quebec H3B 9Z9
in the postage-paid envelope provided or by fax to:
(514) 871-7442, no later than 5:00 p.m.
on March 10, 1997.
as at January 16, 1997
Solicitation of Proxies
This Management Proxy 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"), to be held at the time and place and for the purposes set forth
in the Notice of Meeting accompanying this Management Proxy Circular and at any
adjournment thereof. The solicitation will be done by mail and by telephone by
employees or agents of the Bank. The costs of the solicitation by Management
will be borne by the Bank. The Bank also reserves the option of calling on the
services of an external firm to solicit proxies on its behalf. The Bank
estimates that the costs of such solicitation will be nominal.
Appointment and Revocation of Proxies
The proxyholders designated in the enclosed Form of Proxy are
Directors or Officers of the Bank. If a Shareholder wishes to appoint a person
not designated in the Form of Proxy, he may do so by striking out the names
appearing thereon and inserting the name of such person in the blank space
provided. A proxyholder is not required to be a Shareholder of the Bank. In
order to be valid, proxies must be returned to General Trust of Canada, in the
postage-paid envelope provided or by fax and be received by its Stock and Bond
Transfer Services, P.O. Box, 888, Station B, Montreal, Quebec, H3B 9Z9, fax
(514) 871-7442, no later than 5:00 p.m. on March 10, 1997.
A Shareholder may revoke a proxy by depositing an instrument
in writing executed by him or by his proxyholder authorized in writing:
<PAGE>
3
(i) at the Head Office of the Bank, c/o Secretary's Office,
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 adjournment thereof; or
(ii) with the Chairman of the Meeting on the day of the
Meeting or any adjournment thereof.
Voting by Proxies
Shares represented by a proxy are to be voted or withheld from
voting on any ballot by the proxyholders designated in the enclosed Form of
Proxy, in accordance with the directions of the Shareholders.
If no instructions are given, Common Shares will be voted FOR
the election of the proposed Directors, the appointment of Auditors and the
confirmation of the amendment to Section 4.1 of By-Law 1 of the Bank and AGAINST
the proposals regarding the limit on the remuneration of the senior Executive
Officer, the abolition of the loan program for Executive Officers, the
separation of the role of the Chairman of the Board from that of the Chief
Executive Officer, the ineligibility of a provider of services to sit as a
Director, and the limit on the term of Board Members.
The enclosed Form of Proxy, if duly signed, confers
discretionary authority upon the designated proxyholders with respect to matters
not specifically identified in the Notice of Meeting and which may properly come
before the Meeting and to any amendments or variations to matters identified in
the Notice of Meeting.
Voting Common Shares
As at January 10, 1997, 168,307,543 Common Shares of the Bank
were issued and outstanding. Holders of Common Shares of record at the close of
business on January 13, 1997 or their duly designated proxyholders are entitled
to receive notice of the Annual Meeting and to vote at the Meeting. However, any
transferee of any share after that date who requests, not later than 10 days
before the Meeting, that his name be included in the list is also entitled to
vote.
Unless restricted as hereinafter provided, each holder of
Common Shares of record is entitled to one vote for each share held. To the
knowledge of the Directors and Officers of the Bank, no individual or
corporation beneficially owns, directly or indirectly,
<PAGE>
4
or exercises control or direction over Common Shares carrying more than 10% of
the voting rights attached to the Common Shares of the Bank.
Voting Restrictions
The Bank Act (Canada) (the "Act") contains provisions which,
under certain circumstances, restrict the voting rights pertaining to the share
capital of the Bank as regards voting in person or by proxy. These provisions
may be summarized as follows:
Shares held by the government or other persons - No person
shall, in person or by proxy, exercise the voting rights attached to any class
of shares of the Bank that are beneficially owned by:
(i) Her Majesty in right of Canada or in right of a province
or an agency thereof;
(ii) the government of a foreign country or any political
subdivision thereof or an agency thereof.
The foregoing is a summary only and is subject to the express
provisions of the Act.
Confidentiality Of Votes
In order to protect the confidential nature of voting by
proxy, General Trust of Canada ("General Trust"), the registrar and transfer
agent of the Bank, records the votes exercised by proxy as received and compiles
the results for the Meeting. It submits a Form of Proxy to the Bank only when a
Shareholder clearly wants his or her personal opinion made known to Management
or when it is required to do so by law.
Presentation of Financial Statements
The Annual Report including the Consolidated Financial
Statements of the Bank for the financial year ended October 31, 1996 and the
Auditors' Report on these financial statements will be submitted to the Meeting.
<PAGE>
5
Election of Directors
The proxyholders appointed in the Form of Proxy for the
Meeting intend to vote for the 23 nominees proposed on pages 4, 5 and 6. Each
Director elected at the Meeting will hold office until the next Annual Meeting
of the Bank, the election or appointment of a replacement, or until the position
is vacated, whichever event occurs first. The table below provides a list of the
names of the nominees to the Board of Directors, their principal occupation and
sector of activity, the number of shares of the Bank which they beneficially
own, directly or indirectly, or over which they exercise control or direction,
as well as the date of their initial appointment as Director of the Bank.
In accordance with the Act, the following table also contains
a record of attendance by Directors at meetings of the Board of Directors and of
the Executive Committee during the 12 months immediately preceding the date of
the Notice of Meeting enclosed herewith, namely, January 16, 1997. During this
period, the Board of Directors held 10 meetings and the Executive Committee held
eight meetings.
<PAGE>
6
<TABLE>
<CAPTION>
Common (a) and Attendance at Attendance at
First Preferred (b) Meetings of the Meetings of the
Shares Beneficially Board of Executive
Name and Place of Owned, Controlled Directors Committee
Residence Principal Occupation Director Since or Directed (10) (8)
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Andre Berard Chairman of the Board and Chief July 1985 98,300(a) 10 8
Montreal, Quebec Executive Officer
National Bank of Canada
Maurice J. Closs Corporate Director August 1988 2,000(a) 7
St. Clair Beach, Ontario
Gerard Coulombe Senior Partner February 1994 1,650(a) 10
Sainte-Marthe, Quebec Desjardins Ducharme Stein
Monast (Barristers and solicitors)
Leon Courville President and Chief Operating November 1993 31,896(a) 9 8
Outremont, Quebec Officer
National Bank of Canada
Francois Jean Coutu President and Chief Operating January 1993 1,000(a) 6
Outremont, Quebec Officer
Le Groupe Jean Coutu (PJC) Inc.
(Franchisor of a chain of pharmacies
and distributor of pharmaceuticals and
other products)
Shirley A. Dawe President July 1988 1,500(a) 9
Toronto, Ontario Shirley Dawe Associates Inc.
(Consultants)
Jean Douville Chairman of the Board and Chief January 1992 2,000(a) 7
Montreal, Quebec Executive Officer
UAP Inc.
(Distributor of automotive parts)
Marcel Dutil Chairman of the Board, President January 1982 88,418(a) 8 8
Montreal, Quebec and Chief Executive Officer
Canam Manac Group Inc.
(industrial and holding company -
frames, joists and steel decks,
steelworks and transportation
equipment)
Paul Gobeil* Vice-Chairman of the Board February 1994 4,000(a) 10
Montreal, Quebec Metro-Richelieu Inc.
(Distributor of food products)
Donald M. Green Chairman of the Board July 1988 9
Burlington, Ontario ACD Tridon Inc.
(Automotive parts manufacturer)
Suzanne Leclair* President and Chief Executive July 1989 5,150(a) 10
Laval, Quebec Officer
Transit Truck Bodies Inc.
(Manufacturer of truck bodies)
Bernard Lemaire Chairman of the Board October 1983 65,712(a) 7 7
Kingsey Falls, Quebec Cascades Inc.
(Manufacturer of paper and plastic)
</TABLE>
<PAGE>
7
<TABLE>
<CAPTION>
Common (a) and Attendance at Attendance at
First Preferred (b) Meetings of the Meetings of the
Shares Beneficially Board of Executive
Name and Place of Owned, Controlled Directors Committee
Residence Principal Occupation Director Since or Directed (10) (8)
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Gaston Malette Chairman of the Board July 1988 11,600(a) 7
Timmins, Ontario Malette Inc. 26,460(b)
(Kraft pulp and forestry
produces company)
Leonce Montambault Corporate Director January 1990 10,703(a) 9 7
Sillery, Quebec
Gordon F. Osbaldston Professor Emeritus July 1988 1,270(a) 7
London, Ontario Ivey School of Business
University of Western Ontario
(Educational institution)
J. Robert Ouimet President and Chief Executive November 1972 20,000(a) 7
Montreal, Quebec Officer
Ouimet-Cordon Bleu Inc.
(Manufacturing and marketing
of food products)
Robert Parizeau President and Chief Executive December 1978 21,673(a) 9 8
Montreal, Quebec Officer
Sodarean Inc.
(Insurance and reinsurance
holding company)
Michel Perron Chairman of the Board and Chief October 1979 50,000(a) 6
Westmount, Quebec Executive Officer
Somiper Inc.
(Investment Company)
Raymond Royer President and Chief Executive July 1989 22,844(a) 8
Ile-Bizard, Quebec Officer
Domtar Inc.
(Manufacturer of pulp, paper
and forestry products)
Guy St.-Germain President November 1974 6,108(a) 6 7
Outremont, Quebec Placements Laugerm, inc.
(Investment company)
Lino Saputo President and Chief Executive July 1989 235,287(a) 8 7
Montreal, Quebec Officer
Saputo Cheese Limited
(Manufacturer of dairy products)
Claude F. Savoie* President January 1988 7,350(a) 9
Moncton, New Brunswick Acadian Construction (1991) Ltd.
(General contractors)
Paul-Gaston Tremblay* President October 1978 5,665(a) 10
Chicoutimi, Quebec Primo-Gestion Inc.
(Management Consultant and
Corporate Director)
*Member of the Audit Committee
</TABLE>
<PAGE>
8
The above nominees provided the information as to the shares
beneficially owned, directly or indirectly, or over which control or direction
was exercised by them as at December 19, 1996.
Marc Bourgie, Mary Schaefer Lamontagne, Pierre Lortie and
Louise B. Vaillancourt, Directors since September 1974, August 1977, January
1986 and October 1976 respectively, will not be standing for re-election. During
the past financial year, Mr. Bourgie, Ms. Schaefer Lamontagne, Mr. Lortie and
Ms. Vaillancourt attended 3, 10, 6 and 10 meetings of the Board of Directors,
respectively. Mr. Lortie also attended 2 meetings of the Executive Committee.
Mr. Bourgie and Ms. Vaillancourt were also members of the Audit Committee.
Other Functions Held by Directors in Bank Subsidiaries
Andre Berard is a Director of Natcan International Trade
Finance and Investment Company Ltd. and Natcan Finance (Asia) Limited, wholly
owned subsidiaries of the Bank.
Jean Douville and Robert Parizeau are Directors of Levesque,
Beaubien and Company Inc., a subsidiary of the Bank.
Maurice J. Closs, Suzanne Leclair, Gordon F. Osbaldeston and
Michel Perron are Directors of Natcan Trust Company, a wholly owned subsidiary
of the Bank.
Gerard Coulombe, Francois Jean Coutu, Jean Douville, Paul
Gobeil, Leonce Montambault and Claude F. Savoie are Directors of National Bank
Life Insurance Company, a wholly owned subsidiary of the Bank.
Paul-Gaston Tremblay is a Director of General Trust, a wholly
owned subsidiary of the Bank.
Leon Courville is a Director and Chairman of the Board of
General Trust and of National Bank Life Insurance Company, and a Director of
Natcan (Nominees) Ltd. and Natcan Finance (Asia) Limited, subsidiaries of the
Bank that are wholly owned either directly or indirectly.
<PAGE>
9
Appointment of Auditors
The Act provides that the financial statements of the Bank
shall be audited by at least one firm of auditors but may be audited by two
separate firms of auditors until the close of the next Annual Meeting.
During the past five years, four firms have acted as auditors
of the Bank: Mallette Maheu (formerly Mallette, Benoit, Boulanger, Rondeau &
Associes) and Raymond, Chabot, Martin, Pare, each appointed on January 24, 1991;
Price Waterhouse, appointed on January 30, 1992; and Samson Belair Deloitte &
Touche, appointed on January 28, 1993.
For the financial year ending October 31, 1997, the
proxyholders designated in the enclosed Form of Proxy for the Meeting intend to
vote for the appointment of Price Waterhouse and Samson Belair Deloitte &
Touche, general partnership, as auditors of the Bank to hold office until the
next Annual Meeting.
Amendment to Section 4.1 of By-Law 1 of the Bank Regarding the
Minimum and Maximum Number of Directors on the Board of Directors of the Bank.
The Board of Directors, at its meeting of December 19, 1996,
passed a resolution to amend Section 4.1 of By-Law 1 of the Bank regarding the
minimum and maximum number of Directors on the Board of Directors of the Bank so
that it would in future consist of no less than twenty (20) and no more than
thirty (30) Directors. This section previously stated that the Board of
Directors should consist of no less than twenty-four (24) and no more than
forty-eight (48) Directors.
The wording of the draft shareholder resolution is provided in
Appendix 1 of this Circular. The amendment to Section 4.1 of By-Law 1 of the
Bank shall be submitted for approval to the holders of Common Shares, who must
confirm it by way of a special resolution passed by two-thirds of the votes
cast.
The Management of the Bank recommends voting FOR this
resolution.
<PAGE>
10
Proposals Made by a Shareholder
The text of these proposals is presented in Appendix 2 of this
Circular.
The Board of Directors of the Bank recommends voting AGAINST
these proposals.
<PAGE>
11
REMUNERATION PAID BY THE BANK AND ITS SUBSIDIARIES TO
COMPENSATED DIRECTORS AND OFFICERS
The following information is provided in accordance with the
provisions of the Act as well as the securities legislation in effect in the
provinces of Canada.
All amounts in this Circular are in Canadian currency.
Preliminary Note: For the purposes hereof, the following
expressions have the meanings set out below.
Executive Officers: Designates, within the meaning of
applicable securities legislation, the Chairman of the Board and Chief Executive
Officer, the President and Chief Operating Officer, the Senior Executive
Vice-President--Operations, the Senior Executive Vice-President--Treasury,
Brokerage and Corporate Banking, the Executive Vice-President and Chairman of
the Credit Committee, the President and Chief Executive Officer--General Trust
of Canada, the Executive Vice-Presidents and the Senior Vice-Presidents.
Named Executive Officers: Designates, within the meaning of
applicable securities legislation, the Chairman of the Board and Chief Executive
Officer, the President and Chief Operating Officer, the Senior Executive
Vice-President--Operations, the Senior Executive Vice-President--Treasury,
Brokerage and Corporate Banking, and the Senior Vice-President--Treasury and
Financial Markets.
Officers: Designates the Officers of the Bank, namely, the
Chairman of the Board and Chief Executive Officer, the President and Chief
Operating Officer, the Senior Executive Vice-President--Operations, the Senior
Executive Vice-President--Treasury, Brokerage and Corporate Banking, the
Executive Vice-President and Chairman of the Credit Committee, the President and
Chief Executive Officer--General Trust of Canada, the Executive Vice-Presidents,
the Senior Vice-Presidents and the Vice-Presidents.
Compensated Directors: Designates the Directors of the Bank
who are not Officers and who receive compensation from the Bank in their
capacity as Directors thereof or of one of its subsidiaries, as applicable.
<PAGE>
12
Aggregate Remuneration:
The table below shows the aggregate remuneration paid during
the last completed financial year to Compensated Directors, as Directors of the
Bank or one of its subsidiaries, and to Officers of the Bank, who have received
as Officers of the Bank or one of its subsidiaries aggregate remuneration in
excess of $75,000.
The Compensated Directors receive annual base remuneration and
attendance vouchers.
Up until June 30, 1996, their annual base remuneration was
$9,000 for the Board of Directors of the Bank, $3,000 for the Executive
Committee and $1,500 for each of the other Board committees as well as for the
Boards of Directors and committees of the Bank's subsidiaries. The Chair of each
committee received additional base remuneration of $2,500 in the case of the
Bank and its subsidiaries. The Compensated Directors of the Bank also received
an attendance voucher of $700 per meeting of the Board of Directors or of a
committee. This remuneration did not apply to Directors of General Trust.
On July 1, 1996, the base remuneration of Compensated
Directors and Directors of certain subsidiaries of the Bank was amended. Their
annual base remuneration is now $10,000 for the Board of Directors of the Bank,
$3,500 for the Executive Committee and $1,800 for each of the other Board
committees as well as for the Boards of Directors and committees of the Bank's
subsidiaries. The Chair of each committee receives additional base remuneration
of $3,000 in the case of the Bank and its subsidiaries. Compensated Directors
also now receive an attendance voucher of $1,000 per meeting of the Board of
Directors or of a committee. This remuneration does not apply to Directors of
General Trust.
The Directors of General Trust, with the exception of those
who are salaried Officers of General Trust or the Bank, also receive annual base
remuneration and attendance vouchers. Their base remuneration is $6,000 for the
Board of Directors of General Trust and $1,000 for each of the Board committees.
The Chair of each General Trust committee receives additional base remuneration
of $1,000. The Chairman of the Board of General Trust would receive $2,500 per
annum if he were not an Officer of the Bank. Directors of General Trust also
receive an attendance voucher of $500 per meeting of the Board of Directors or
of a committee.
<PAGE>
13
The Bank pays the cost of expenses incurred by Compensated Directors to attend
meetings of the Boards of Directors and committees.
STATEMENT OF REMUNERATION OF COMPENSATED DIRECTORS AND OFFICERS OF THE BANK AND
ITS SUBSIDIARIES FOR THE FINANCIAL YEAR ENDED OCTOBER 31, 1996
<TABLE>
<CAPTION>
Fees Salaries Bonuses Other Total
$ $ $ $ $
---------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Remuneration of Directors
Number of Compensated Directors: 28
Corporations incurring the expenses:
National Bank of Canada 578,446 578,446
Natcan Trust Company 13,633 13,633
Levesque, Beaubien and Company Inc. 23,500 23,500
General Trust of Canada 14,500 14,500
National Bank Life Insurance Company 46,233 46,233
Remuneration of Officers
Number of Officers: 78
Corporation incurring the expenses:
National Bank of Canada 11,440,967 6,194,030(1) 595,465(2) 18,230,462
Totals 676,312 11,440,967 6,194,030 595,465 18,906,774
</TABLE>
(1) Bonuses granted under the short-term incentive compensation program.
(2) Contributions made by the Bank to the Pension Plan for Designated Employees
and the Employee Share Ownership Plan of the Bank.
During the past financial year, a total of $123,692 in
severance payments was paid to three Officers of the Bank.
<PAGE>
14
Summary of Compensation
For the last completed financial year, the Bank had 20
Executive Officers.
The table below, presented in accordance with applicable
securities legislation, shows the aggregate compensation paid by the Bank and
its subsidiaries during each of the three most recently completed financial
years to the persons who, as at October 31, 1996, were Named Executive Officers.
SUMMARY OF AGGREGATE COMPENSATION OF NAMED EXECUTIVE OFFICERS
<TABLE>
<CAPTION>
Long-Term Companies
Annual Compensation -------------------------
-------------------------------------- Payouts
Awards Long-Term
Securities Incentive
Other Annual Under Options Program All Other
Salary Bonus Compensation(1) Awarded(2) Payouts(3) Compensation
Name and Position Year $ $ $ $ $ $
- ----------------- -----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Andre Berard, Chairman of the
Board and Chief Executive
Officer 1996 487,910 588,080 31,330 134,000 nil nil
1995 487,910 454,940 27,616 90,000 363,870 nil
1994 487,910 364,683 40,753 62,000 201,352 nil
Leon Courville, President and
Chief Operating Officer 1996 329,096 360,000 10,228 75,000 nil nil
1995 329,096 275,000 11,303 48,000 134,134 nil
1994 319,095 200,000 19,428 32,000 74,180 nil
Pierre Paquette, Senior
Executive Vice-President
- --Operations 1996 251,808 125,000 4,860 50,000 nil nil
1995 251,808 125,000 7,159 32,000 134,134 nil
1994 251,808 90,000 11,139 26,000 74,180 nil
Jean Termel, Senior Executive
Vice President--Treasury,
Brokerage and Corporate
Banking 1996 306,159 574,216 10,055 60,000 nil nil
1995 306,159 449,246 7,046 32,000 163,081 nil
1994 306,159 404,246 14,625 26,000 87,807 nil
Real Raymond, Senior Vice-
President--Treasury and
Financial Markets 1996 199,452 100,000 3,046 32,000 nil nil
1995 186,507 70,000 2,608 20,000 54,172 nil
1994 176,726 55,000 3,800 14,000 26,162 nil
</TABLE>
(1) The amounts in this column only represent benefits relating to loans
granted at preferred interest rates to Named Executive Officers. The Named
Executive Officers also have the use of a leased car and may, at their
option, participate in the Employee Share Purchase Plan of the Bank, the
aggregate value of these other benefits for the financial year ended
October 31, 1996 does not exceed the lesser of (i) $50,000 or (ii) 10% of
the annual salary and aggregate bonuses paid to Named Executive Officers.
(2) These options were granted under the Stock Option Plan of the Bank. For
further information, refer to the "Stock Option Plan" section.
(3) These amounts represent loans granted under the Bank's former long-term
bonus program for the 1991-1994 and 1992-1995 cycles. For further
information, refer to the "Long-Term Incentive Compensation Programs"
section.
<PAGE>
15
Short-Term Incentive Compensation Program
The Bank has a short-term incentive compensation program which
complements the base salary of Officers. Under this program, bonuses are
generally granted once a year if so justified by the results of the Bank and the
relevant sector in relation to the objectives set.
Long-Term Incentive Compensation Programs
Long-Term Bonus Program
On November 1, 1993, the Bank decided to discontinue the
Long-Term Bonus Program described below.
Under the provisions of this former program based on
three-year cycles, interest-free loans were granted to Officers in accordance
with their line level, salary and individual performance. These loans were used
to purchase Common Shares of the Bank at the market price prevailing at the time
of purchase. Each of the loans remained in effect as long as it had not been
repaid, unless the participant ceased to be employed by the Bank or to be a
qualified Officer. A bonus, granted to participants at the end of the three-year
cycle, allowed them to repay all or part of the loan granted at the start of the
cycle. For the cycles of 1991-1994 and 1992-1995, a total of 62 and 63 Officers
respectively participated in this program and acquired shares for an aggregate
consideration of $1,120,273 and $1,184,660.
At the end of the 1991-1994 cycle and the 1992-1995 cycle,
total bonuses of $1,312,036 and $2,390,702, respectively, were paid to
participants which, before taxes, represent repayment of 57% of the loans
granted at the start of the 1991-1994 cycle and 100% of those granted for the
1992-1995 cycle. Repayment of these loans, approved by the Board of Directors,
was effected based on the performance objectives reached for each cycle. All the
loans granted under this program were repaid between December 15, 1994 and
December 22, 1995.
Stock Option Plan
The Stock Option Plan (the "Plan") was introduced by the Bank
on September 30, 1993 following approval by its Shareholders at the Annual
Meeting held on February 3, 1994. The purpose of the Plan is to give Officers
and other selected managers an opportunity to benefit from the appreciation in
the value of the Common Shares of the Bank, thereby ensuring their interests are
compatible with those of the Shareholders.
The Plan is administered by a Bank committee established by
the Plan (the "Committee") which grants the options to employees based on their
performance and their
<PAGE>
16
contribution to the Bank's success. This Committee is responsible for
determining, from time to time, which employees may participate, and for setting
the terms and conditions of each award.
The maximum number of Common Shares that may be issued under
the Plan is 8,000,000 and the maximum number of Common Shares reserved for any
one participant may not exceed 5% of the total number of Common Shares issued
and outstanding.
The exercise price for each option awarded shall be equal to
the closing price of the Common Shares of the Bank on the Montreal Exchange or
the Toronto Stock Exchange, whichever is higher, on the business day preceding
the date of the award.
In accordance with the Plan, 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 shall
expire on the termination date or, in the event of certain circumstances
provided for in the Plan, shall expire in a specific timeframe.
A third award was granted under the Plan during the financial
year ended October 31, 1996, with options on a total of 1,799,000 Common Shares
being awarded to 295 Bank employees. In fact, options on a total of 699,000 and
534,000 Common Shares were awarded to 20 Executive Officers and 51 other
Officers respectively. These options were awarded at an exercise price of
$11.00. These options, up to 25% of which will be exercisable by their holders
as of December 1996, with a further 25% exercisable as of December 1997 and
1998, and the remainder as of December 1999, shall expire on December 31, 2005.
During the 30-day period prior to the options being awarded, the closing price
of the Common Shares on the Montreal Exchange and the Toronto Stock Exchange
fluctuated between $10.38 and $11.00.
Stock Appreciation Rights Plan
This new plan, which complements the Stock Option Plan without
increasing the total amount of bonuses awarded, was presented to the Conduct
Review and Corporate Governance Committee on October 30, 1996 and took effect
following approval by the Board of Directors at its meeting of November 7, 1996.
This plan has the same objectives as the Stock Option Plan and enables the Bank
to award stock appreciation rights ("SARs") to Officers and selected managers
instead of options. Under this plan, participants entitled to SARs may receive,
on the exercise date of the SAR, a cash amount equal to the difference between
(i) the fair market value of a Bank Common Share on the award date and ii) its
fair market value on the date it is exercised. Linking compensation to the
appreciation in the value of Common Shares in this way ensures that the
interests of employees awarded SARs are compatible with those of the
Shareholders.
<PAGE>
17
The table below indicates the number of share options awarded
to Named Executive Officers under the Plan during the financial year ended
October 31, 1996.
OPTIONS AWARDED TO NAMED EXECUTIVE OFFICERS DURING
THE FINANCIAL YEAR ENDED OCTOBER 31, 1996
<TABLE>
<CAPTION>
% of Total
Options Market Value of
Number of Awarded to Shares on
Shares Under Employees Exercise Price Award Date of
Options During of Option Options
Name Awarded Financial Year $ $ Expiry Date
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Andre Berard 134,000 7.4 11.00 11.00 31/12/2005
Leon Courville 75,000 4.2 11.00 11.00 31/12/2005
Pierre Paquette 50,000 2.8 11.00 11.00 31/12/2005
Jean Turmel 60,000 3.3 11.00 11.00 31/12/2005
Real Raymond 32,000 1.8 11.00 11.00 31/12/2005
</TABLE>
The following table lists the options exercised during the
financial year ended October 31, 1996 by each of the Named Executive Officers
and the value of options unexercised at year end.
OPTIONS EXERCISED BY NAMED EXECUTIVE OFFICERS DURING THE FINANCIAL YEAR ENDED
OCTOBER 31, 1996 AND NUMBER AND VALUE OF UNEXERCISED OPTIONS AT FINANCIAL YEAR
END
<TABLE>
<CAPTION>
Value of Unexercised
Number of Aggregate Value Number of Options at Financial Year
Shares Acquired Realized Unexercised Options at End(1)(2)
Name on Exercise $ Financial Year End(1) $
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Andre Berard nil nil 286,000 691,500
Leon Courville nil nil 155,000 374,000
Pierre Paquette nil nil 108,000 257,500
Jean Turmel nil nil 118,000 277,500
Real Raymond nil nil 66,000 158,500
</TABLE>
(1) The information provided in this table is for the financial year ended
October 31, 1996, and includes all the options awarded, in terms of number
and value, since the Plan was introduced. No option could be exercised
before December 2, 1996.
(2) The value of unexercised options at financial year end is equal to the
difference between the exercise price of the options and the market value
of Common Shares of the Bank as at October 31, 1996, namely, $13.00 per
share.
<PAGE>
18
Pension Plans for Named Executive Officers of the Bank
Pension Plan
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 credited service, the plan grants 2% of
the average eligible earnings (defined as the average eligible earnings for the
60 highest-paid consecutive months based on salary alone) less the pension
acquired under the Canada or Quebec pension plans ("CPP/QPP") while the Named
Executive Officer participated in the Bank pension plan. However, this benefit
shall not exceed the maximum pension prescribed under the Income Tax Act
(Canada), currently $1,722 per year of credit service. The normal retirement age
under the plan is 60. However, the plan does allow for early retirement, with
the employer's consent, as of 55 years of age. In such cases, the benefits
payable shall be reduced by the lesser of (i) 5% for each year of early
retirement prior to age 60 or (ii) 2.5% for each year by which the sum of the
participant's age and years of service falls short of 90.
Post-Retirement Allowance Program
Named Executive Officers of the Bank are also entitled to
receive a post-retirement allowance for life. Two such programs exist.
The first, which is restricted to the Chairman of the Board
and Chief Executive Officer and the President and Chief Operating Officer,
grants an allowance which, for each year of credited service in the program
(maximum 35 years), is equal to $900 plus 1.4% of the average annual
compensation (base salary) for the 60 highest-paid consecutive months, less the
pension payable under the CPP/QPP and the Bank pension plan. The payment
conditions of this allowance are identical to those of the pension plan.
The second program, in which the other three 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
and the pension actually paid under the pension plan for the years recognized
under the Post-Retirement Allowance Program. For purposes of calculating the
pension not subject to a maximum, the average salary is limited to $150,000 for
the years of service recognized under the allowance program prior to 1992 and to
$180,000 as of 1992. The payment conditions of this allowance are identical to
those of the pension plan.
<PAGE>
19
Estimated Annual Benefits Payable at Retirement
The following tables show the estimated annual benefits
payable under the pension plan and the Post-Retirement Allowance Program to the
Named Executive Officers.
PENSION PAYABLE TO THE CHAIRMAN OF THE BOARD AND CHIEF EXECUTIVE OFFICER AND TO
THE PRESIDENT AND CHIEF OPERATING OFFICER AS OF AGE 60(1)
<TABLE>
<CAPTION>
Salary Years of Service
------ -------------------------------------------------------------------------------------------------
$ 15 20 25 30 35
<S> <C> <C> <C> <C> <C>
225,000 57,204 76,272 95,341 115,305 135,555
250,000 62,454 83,272 104,091 125,805 147,805
300,000 72,954 97,272 121,591 146,805 172,305
400,000 93,954 125,272 156,591 188,805 221,305
500,000 114,954 153,272 191,591 230,805 270,305
600,000 135,954 181,272 226,591 272,805 319,305
</TABLE>
- ---------------
(1) The amounts in the "Salary" column of the "Summary of Aggregate
Compensation of Named Executive Officers" table are used for the purposes
of the above programs. Years of credited service, on the normal retirement
date, have been estimated as follows: for the Chairman of the Board and
Chief Executive Officer, 37 years; and for the President and Chief
Operating Officer, 38 years. The pension is payable for life. Upon the
participant's death, 50% of the pension is payable to the spouse. If there
is no spouse, part of the pension is payable to the dependent children.
PENSION PAYABLE TO THE SENIOR EXECUTIVE VICE-PRESIDENT -- OPERATIONS AND THE
SENIOR EXECUTIVE VICE-PRESIDENT -- TREASURY, BROKERAGE AND CORPORATE BANKING AS
OF AGE 60 (1)
<TABLE>
<CAPTION>
Salary Years of Service
------ -------------------------------------------------------------------------------------------------
$ 15 20 25 30 35
<S> <C> <C> <C> <C> <C>
100,000 26,454 35,272 44,091 53,805 63,805
125,000 39,954 45,272 56,591 68,805 81,305
150,000 41,454 55,272 69,091 83,805 98,805
175,000 43,871 57,689 71,507 86,222 101,222
200,000 44,354 58,172 71,991 86,705 101,705
225,000 44,354 58,172 71,991 86,705 101,705
250,000 44,354 58,172 71,991 86,705 101,705
300,000 44,354 58,172 71,991 86,705 101,705
400,000 44,354 58,172 71,991 86,705 101,705
500,000 44,354 58,172 71,991 86,705 101,705
</TABLE>
<PAGE>
20
- ----------
(1) The amounts in the "Salary" column of the "Summary of Aggregate
Compensation of Named Executive Officers" table are used for the purposes
of the above programs. Years of credited service, on the normal retirement
date, have been estimated as follows: for the Senior Executive
Vice-President - Operations, 38 years; for the Senior Executive
Vice-President - Treasury, Brokerage and Corporate Banking, 24 years. The
pension is payable for life. Upon the participant's death, 50% of the
pension is payable to the spouse. If there is no spouse, part of the
pension is payable to the dependent children.
PENSION PAYABLE TO THE SENIOR VICE-PRESIDENT - TREASURY AND FINANCIAL MARKETS AS
OF AGE 60(1)
<TABLE>
<CAPTION>
Salary Years of Service
------ -------------------------------------------------------------------------------------------------
$ 15 20 25 30 35
<S> <C> <C> <C> <C> <C>
100,000 26,033 34,645 43,256 52,011 60,765
125,000 28,450 37,061 45,672 54,428 63,181
150,000 30,867 39,478 48,089 56,844 65,598
175,000 33,283 41,895 50,506 59,261 68,015
200,000 33,767 42,378 50,989 59,744 68,498
225,000 33,767 42,378 50,989 59,744 68,498
250,000 33,767 42,378 50,989 59,744 68,498
</TABLE>
- ---------------
(1) The amounts in the "Salary" column of the "Summary of Aggregate
Compensation of Named Executive Officers" table are used for the purposes
of the above programs. Years of credited service, on the normal retirement
date, have been estimated as follows: for the Senior Vice-President -
Treasury and Financial Markets, 35 years. The pension is payable for life.
Upon the participant's death, 50% of the pension is payable to the spouse.
If there is no spouse, part of the pension is payable to the dependent
children.
<PAGE>
21
REPORT ON THE COMPENSATION OF THE EXECUTIVE OFFICERS OF THE
BANK
Respective Roles of the Executive Committee and the Conduct Review and Corporate
Governance Committee
It is the responsibility of the Executive Committee to set and
recommend to the Board of Directors the guidelines for the Bank in matters of
aggregate compensation for Management, namely, the Executive Vice-Presidents,
the Senior Vice-Presidents and the Vice-Presidents; it also submits timely
recommendations to the Board of Directors with respect to their salaries and
bonuses.
For its part, the Conduct Review and Corporate Governance
Committee is responsible for specifically allocating aggregate compensation to
the Named Executive Officers. It analyzes their compensation conditions and
submits timely recommendations to the Board of Directors in this regard based on
the objectives assigned to them and the results they obtained.
Compensation Policies
Compensation policies are designed to attract and retain
competent Offices in order to ensure the long-term success of the company.
Over the past 10 years or so, the Bank has increasingly
emphasized the variable aspect of compensation, which is essentially based on
corporate results, both annual and long-term.
The recommendations of the Executive Committee and the Conduct
Review and Corporate Governance Committee are based on the practices of the
comparison market, namely, a group of Canadian financial institutions consisting
of banks and trust companies, and on all other pertinent information obtained
from compensation specialists at the Bank and from external consultants.
The basic principles underlying the Bank's current
compensation policies are as follows:
o The aggregate compensation of Officers is aligned with
corporate performance;
o Base salaries are generally below those of our comparison
market;
<PAGE>
22
o Short- and long-term incentive compensation programs support
corporate objectives and allow for a fully competitive
compensation program if justified by financial and business
development results;
o The proportion of variable compensation increases in line with
the level of responsibility. For example, in the case of the
Chairman of the Board and Chief Executive Officer, the portion
of variable compensation is larger than in the case of a
Vice-President; and
o The employee benefits and pension plan are comparable, on the
whole, to those of the Bank's comparison market.
All compensation programs must be submitted to the Board of
Directors for approval.
o Base Salary
The base salary of the Named Executive Officers is based
mainly on competitive salaries for positions of similar responsibilities and
complexity. Salary surveys allow for a comparison to be made with the practices
of the Bank's comparison market. In its recommendations to the Board of
Directors regarding the base salary of the Named Executive Officers, the Conduct
Review and Corporate Governance Committee notably takes into account each one's
individual performance as well as the size and profitability of the Bank in
relation to our comparison market.
As for all Officers, the base salary of the Named Executive
Officers is revised annually or adjusted as required by major changes
(promotions or reorganizations). The base salary changes in accordance with
individual performance, corporate results and the comparison market.
Given market trends, a salary freeze was imposed on Management
in 1994, 1995 and 1996, except in the case of certain Officers whose salary had
to be repositioned owing to increased responsibilities and an inappropriate
spread versus the comparison market. In addition, greater emphasis has been
placed on variable compensation.
o Incentive Compensation Programs
Short-Term Incentive Compensation
The annual short-term incentive compensation program offers
Officers potential additional remuneration most notably based on their personal
contribution to the Bank's annual results. The target objective each year is to
reach the budgeted level of net
<PAGE>
23
income as established by the Bank; the size of the bonus is determined by the
year-end results obtained.
For the financial year ended October 31, 1996, the Bank's
financial results were very satisfactory, with net income increasing 30% over
the previous financial year. The Bank's performance in 1996 therefore attests to
the soundness of its strategy in recent years despite a precarious economic
situation in Canada as a whole and what are still difficult conditions in
Quebec.
Moreover, these results were obtained in an economic climate
characterized by a small increase in credit demand. They also reflect the Bank's
efforts to improve asset quality, step up the implementation of new technology
and maintain a prudent investment strategy.
In addition, accomplishments such as the implementation of the
Continuous Improvement Program in the branch network, the significant expansion
in international operations, innovations in financial and electronic products,
new networks for delivering services to client, the acquisition of The Municipal
Savings & Loan Corporation and Family Trust Corporation and the Bank's increased
presence in the insurance sector will help it to continue building on the
progress made in recent years.
In light of these results, in December 1996 the Board of
Directors approved the payment of bonuses to Officers.
Long-Term Incentive Compensation
The purpose of the Stock Option Plan and the Stock
Appreciation Rights Plan is to motivate Officers by aligning their interests
with those of the Bank's Shareholders. For further information, refer to the
"Stock Option Plan" and the "Stock Appreciation Rights Plan" sections on pages
11 and 12.
Compensation of Chairman of the Board and Chief Executive Officer
The base salary of the Chairman of the Board and Chief
Executive Officer was not increased in 1996 and has remained unchanged since
July 1992.
The Conduct Review and Corporate Governance Committee awarded
Mr. Berard a bonus of $588,080 in recognition of his special contribution, as
head of the Bank, to the 1996 financial results.
<PAGE>
24
The proportion of long-term incentive compensation was
increased with the award of 134,000 stock options, thereby placing more emphasis
on the appreciation of Bank shares.
In the opinion of the Conduct Review and Corporate Governance
Committee, the aggregate compensation paid to Mr. Berard is reasonable but
remains below the practices of the Bank's comparison market.
The table entitled "Summary of Aggregate Compensation of Named
Executive Officers" on page 10 contains the data pertaining to the compensation
of the Chairman of the Board and Chief Executive Officer, as approved by the
Board of Directors in December 1994, 1995 and 1996 under the incentive
compensation programs.
This report is submitted by the Conduct Review and Corporate
Governance Committee in accordance with applicable securities legislation. As at
December 12, 1996, this Committee was made up of the nine Directors listed
below. The Committee met four times between January 1, 1996, the date on which
it was created, and October 31, 1996. The Chairman of the Board and Chief
Executive Officer is not a member of this Committee.
Gerard Coulombe, Chair
Marc Bourgie
Mary S. Lamontagne
Gaston Malette
Leonce Montambault
Robert Parizeau
Michel Perron
Guy St-Germain
Louise B. Vaillancourt
Performance Graph for Common Shares of the Bank
The following graph compares the cumulative total return of a
$100 investment in Common Shares of the Bank made on October 31, 1991 and the
cumulative total return on the TSE 300 Stock Index as well as the "Banks and
Trusts" and "Financial Services" components of said index for the five most
recently completed financial years, assuming dividends are fully reinvested at
the market price on each dividend payment date.
<PAGE>
25
[Graphic]
<TABLE>
<CAPTION>
Oct. 1991 Oct. 1992 Oct. 1993 Oct. 1994 Oct. 1995 Oct. 1996
$ $ $ $ $ $
<S> <C> <C> <C> <C> <C> <C>
National Bank of Canada 100.00 78.47 107.00 99.74 118.80 148.07
TSE - Banks and Trusts 100.00 105.66 127.14 130.14 151.22 223.58
TSE - Financial Services 100.00 101.72 124.77 127.98 148.86 223.81
TSE 300 100.00 98.12 128.85 133.01 141.54 181.62
</TABLE>
Since December 22, 1995, there have been no loans outstanding
granted to Officers and employees of the Bank and its subsidiaries for the
purposes of purchasing Common Shares of the Bank under the former Long-Term
Bonus Program. None of these loans was granted to a Director who was not an
Officer.
As at January 10, 1997, total loans outstanding (other than
routine indebtedness as defined by Canadian securities legislation) granted to
Officers and employees of the Bank and its subsidiaries amounted to
$284,126,565. This total includes loans secured by a mortgage for an aggregate
amount of $271,226,675 and personal loans for an aggregate amount of
$12,899,890. None of these loans was granted to a Director who was not an
Officer.
The table below shows the loans granted by the Bank to
Executive Officers.
<PAGE>
26
TABLE OF INDEBTEDNESS OF EXECUTIVE OFFICERS
<TABLE>
<CAPTION>
Largest Amount
tstanding During
the Year Ended Balance as at
Name and Position October 31, 1996 January 10, 1997 (1)
--------------- --------------------
$ $
<S> <C> <C>
Andre Berard (2) 199,000 88,000
Chairman of the Board and Chief Executive Officer
Jean-Pierre Belanger 403,300 389,350
Executive Vice-President and Chairman of the Credit
Committee
Harvey L. Brooks 251,987 200,461
Senior Vice-President - Ontario and Western Canada
Richard Carter 120,000 106,964
Senior Vice-President - Research and Product
Management
Gisele Desrochers 189,438 184,159
Senior Vice-President - Human Resources and
Administration
Tony P. Meti 30,000 30,000
Senior Vice-President - Banking
Roger P. Smock 762,513 763,415
Senior Vice-President - United States
</TABLE>
- ---------------
(1) All these loans were granted by the Bank and are: i) loan is secured by a
mortgage, at one-third of Prime on the first $50,000 and at Prime less 5%
on the amount in excess thereof but such rate cannot be lower than the
rate applied to the first $50,000 or ii) personal loans granted at half of
Prime.
(2) Mr. Berard is a proposed nominee for election as a Director of the Bank.
Liability Insurance
The Bank purchases and maintains liability insurance for the
benefit of its Directors and Officers; this insurance is also for the benefit of
the Bank, to cover any and all indemnity it may have to pay to a Director or
Officer for any liability incurred by such person in his or her capacity as
Director or Officer of the Bank. The policy provides coverage in the amount of
$20,000,000 and the deductible for the Bank under this policy is $1,000,000. A
premium of $178,670 was paid for the period from December 31, 1995 to December
31, 1996.
<PAGE>
27
Directors' Approval
The Board of Directors of the Bank has approved the contents
of this Management Proxy Circular and the mailing thereof to the Shareholders.
Johanne L. Remillard
Vice-President -- Legal Affairs
and Corporate Secretary
Montreal, January 16, 1997
<PAGE>
28
Confirmation of the Amendment to Section 4.1 of By-Law 1 of National Bank of
Canada
Text of the resolution presented to Shareholders:
ON A MOTION DULY MADE AND SECONDED, IT WAS RESOLVED BY WAY OF
A SPECIAL RESOLUTION THAT:
the amendment to section 4.1 of By-Law 1 of the Bank, adopted by a
resolution of the Board of Directors, dated December 19, 1996, be
confirmed to read as follows:
"The Board of Directors shall consist of no less than twenty
(20) and no more than thirty (30) Directors of whom at least
three-quarters shall be, at the time of their election of
appointment, Canadian residents within the meaning of the Act.
"The number of Directors to be elected at any Annual Meeting
of Shareholders shall be determined by resolution of the Board
of Directors prior to the meeting and the Directors may
furthermore, at any time provided there is a quorum, appoint a
Director to fill any vacancy existing where the number of
Directors is less than the maximum number authorized under
these by-laws."
<PAGE>
29
Proposals Made by a Shareholder
The following five proposals were presented to the Management of the Bank by Mr.
Yves Michaud, residing at 4765 Meridian Avenue, Montreal, Quebec H3W 2C3.
The proposals submitted by the above Shareholder were translated into
English by the Bank.
PROPOSAL NO. 1
"REMUNERATION OF OFFICERS"
"It is proposed that the aggregate remuneration of the most highly paid officer
of the bank, including annual salary, bonuses, awards, long-term incentive
program payouts and any other form of compensation, not exceed 20 times the
average salary of employees of the bank."
Statement by Shareholder:
"This recommendation was made in the February 12, 1996 issue of TIME magazine,
quoting J.P. Morgan, president of the financial institution of that name.
Furthermore, Stephen A. Jarislowsky, formerly a director of several Canadian
corporations, stated in the magazine AFFAIRES PLUS of June 1996 that while it
was important to pay competent persons a good salary, base salaries were often
too high, bonuses excessive, purchase options ridiculous, stock purchase loans
stupid, and that it was not right for such loans to be interest-free.
"Mr. Jarislowsky added that he found these inflated salaries grotesque, and felt
that they were more indicative of greed than of management skill."
The Bank's position:
The Board of Directors recommends voting AGAINST this proposal for the following
reasons:
The Board of Directors of the Bank is aware of the need to have a compensation
policy that is based on establishing a reasonable link between the compensation
of its Executive Officers, notably that of its Chief Executive Officer, and
their respective contributions to the Bank's performance.
The aggregate compensation of the Bank's Chief Executive Officer is approved by
the Board of Directors on the recommendation of its Conduct Review and Corporate
Governance Committee. This Committee works in collaboration with external
consultants specializing in compensation. This Management Proxy Circular
contains a detailed description of the
<PAGE>
30
Bank's aggregate compensation policy for Officers as well as the report of the
Conduct Review and Corporate Governance Committee specifying the process
involved, the frame of reference and the reasons justifying the decisions made.
According to data obtained from the firm Towers Perrin and compiled from
information contained in the management circulars of 257 of the publicly-held
Canadian companies comprising the TSE 300, the Bank ranked 37th in terms of
revenue and 28th in terms of net profits in 1995 whereas the compensation
(salary + short-term bonus) paid to the Chief Executive Officer, as a percentage
of profits, ranked 219th.
The Board of Directors deems that it is in the interest of Shareholders to
maintain an aggregate compensation policy for its most senior officer that
reflects changes in the comparison market and the Bank's performance, rather
than to cap it arbitrarily on the basis of a standard of compensation attributed
to J.P. Morgan, a 19th century financier.
PROPOSAL NO. 2
"LOAN PROGRAM FOR EXECUTIVE OFFICERS"
"It is proposed that the loan program for directors, executive officers and
senior officers, other than under securities purchase programs, be terminated on
December 31, 1997."
Statement by Shareholder:
"This type of program includes loans at one-third or one-half of the prime
lending rate, depending on the institution in question, for the purchase of
residential properties or personal borrowings. This practice, which benefits
executive officers who are already amply compensated under other programs, is
clearly abusive. Royal Bank of Canada terminated its program on December 6,
1995. Since the comparison market is often invoked with respect to the
remuneration of bank officers to justify exorbitant salaries, given the step
taken by the country's largest bank, the other banking institutions might be
expected to follow suit."
The Bank's position:
The Board of Directors recommends voting AGAINST this proposal for the following
reasons:
As part of its compensation policy, the Bank offers all its employees, including
Officers, reduced interest rates on personal loans and loans secured by a
mortgage. This practice is widespread among both financial and other types of
companies and involves offering various advantages based on the nature of the
products and services provided.
<PAGE>
31
The cost of this form of compensation is insignificant, amount to about $250,000
for the Bank's approximately 70 Officers combined. This benefit is taxable on a
personal basis.
In the Bank's opinion, this component of its compensation policy should be
maintained as it fosters greater loyalty among employees and Officers alike.
PROPOSAL NO. 3
"CHAIRMAN OF THE BOARD OF DIRECTORS"
"It is proposed that the chairman of the board of directors be designated from
among the members of the board who are not members of the bank's personnel."
Statement by Shareholder:
"This proposal is in line with recommendation 6.15 (page 41) of the Toronto
Stock Exchange report on corporate governance in Canada (December 1994).
"The report states that the board of directors must conduct an independent
evaluation of the performance of a company's senior executives. This is not the
case when the president and chief operating officer who is at the same time
chairman of the board must evaluate himself and his senior colleagues. To avoid
any real or apparent conflict of interest, the report states that 'the means for
implementing this guideline is for the board to appoint a strong non- executive
chair of the board whose principal responsibility is managing the board of
directors'."
The Bank's position:
The Board of Directors recommends voting AGAINST this proposal for the following
reasons:
While separating the role of the Chairman of the Board from that of the Chief
Executive Officer is favoured by financial market participants, the two roles
are not separate in the case of most publicly-held companies in Canada. Indeed,
many believe that combining these two functions can be very beneficial, notably
by holding the incumbent of such position more accountable for the smooth
running of the company and by attracting a higher caliber of candidates for the
position of Chief Executive Officer.
The Board of Directors of the Bank fees that the approach to be taken in this
regard should always be a function of the circumstances, the company's
strategies and the experience of the persons in place. At present, the Board is
of the opinion that it is advantageous to continue
<PAGE>
32
combining these two functions. The Chief Executive Officer's in-depth knowledge
of the Bank's business and his involvement as Chairman of the Board represent an
invaluable contribution to the Board of Directors and to the Bank as a whole.
This does not, however, preclude the possibility that these two functions might
be separated at some stage in the future.
In order to ensure its independence, the Board of Directors has adopted
appropriate procedures and, notably, has instituted semi-annual meetings of the
Board of Directors at which Bank Officers are not present. It also benefits from
the expertise and recommendations of members of its Conduct Review and Corporate
Governance Committee, most of whom are independent Directors, when it evaluates
the performance of the Chairman of the Board and Chief Executive Officer of the
Bank.
Lastly, the Toronto Stock Exchange report on corporate governance (the "Dey
Report") does not contain any formal recommendation on the matter and limits
itself to formulating certain suggestions.
PROPOSAL NO. 4
"INELIGIBILITY OF PROVIDERS OF SERVICES"
"It is proposed that a person who is related to the bank as a provider of
services not be eligible to be a member of the board of directors."
Statement by Shareholder:
"The Toronto Stock Exchange report, on page 24 (sections 5.9 and 5.10), deals
with the independence of members of the board of directors vis-a-vis management.
According to the report, the board should be constituted so that it can bring
objective judgment to bear on all issues in all circumstances.
"To quote from the report: 'An easy example is the director who provides
services to the company, for example legal or financial services. He or she
would generally not be regarded as an unrelated director because the dependence
of the advisor/director upon management of the company as a client could ...
interfere with the director's ability to objectively assess, for example, the
performance of management'."
The Bank's position:
The Board of Directors recommends voting AGAINST this proposal for the following
reasons:
<PAGE>
33
Of the Bank's 23 Directors, 19 are unrelated directors (83%) within the meaning
of the Dey Report, which is in keeping with the report's guideline that "every
board should be constituted with a majority of individuals who qualify as
unrelated" (section 5.7).
The Board of Directors is of the opinion that adopting an arbitrary rule that
goes beyond the regulatory requirements and excludes all providers of services
could deprive the Bank of the expertise of persons who have made an invaluable
contribution to it specifically through their extensive knowledge of the Bank's
business as well is their professional training and experience.
PROPOSAL NO. 5
"LIMITING THE TERM OF BOARD MEMBERS"
"It is proposed that the term of members of the board of directors, other than
officers of the bank, not exceed 10 consecutive years."
Statement by Shareholder:
"Although the Toronto Stock Exchange does not make any official recommendation
in this regard in its report, representation were made by the witnesses
consulted to the effect that the term of a director should be limited to six or
seven years in order to ensure a steady influx of new people and fresh ideas,
and to prevent directors from considering their positions as a sinecure.
"The suggestion seems opportune, and the suggested compromise of 10 years is
judicious and apt to provide reasonable leeway for the optimal functioning of
the board of directors."
The Bank's position:
The Board of Directors recommends voting AGAINST this proposal for the following
reasons:
The Bank deems that there is no need to set specific limits on the term of a
Director's mandate, believing that all Directors should retain their seat on the
Board as long as they contribute to the effectiveness of deliberations.
Establishing an arbitrary limit, such as 10 years, would deprive the Board of
the Bank of the experience accumulated during economic cycles spanning more than
10 years and diminish the Board's collective memory with respect to the Bank.
<PAGE>
34
This approach is in keeping with the Dey Report which, after expressing the view
that a guideline setting a maximum term for directors would be artificial and
unnecessary, declared:
"We believe that the nominating committee, which will be
assessing the performance of the board, can propose changes to
the board composition which can result in the injection of a
fresh approach to board decisions where appropriate."
To pass, the resolutions presented in Appendix 2 must be approved by the
majority of votes cast by the Shareholders, present or represented by proxy, who
are entitled to vote at the Meeting.
<PAGE>
35
Legal deposit:
1st Quarter 1997
Bibliotheque nationale du Quebec
[LOGO]
Head Office:
National Bank Tower
600 de La Gauchetiere West
Montreal, Quebec
Canada H3B 4L2
Exhibit 6.1
to Form F-9
NATIONAL BANK OF CANADA
POWER OF ATTORNEY
The undersigned, in his/her capacity as a Director of National Bank of
Canada, does hereby appoint Jean Turmel and Francoise Bureau, and each of them,
severally, his/her true and lawful attorneys, or attorney, to execute in his/her
name, place and stead, in his/her capacity as a Director of said Bank, a
Registration Statement on Form F-9 for the registration of U.S. $300,000,000
aggregate principal amount of 8.45% Noncumulative First Preferred Shares, Series
Z of National Bank of Canada and any and all amendments and post-effective
amendments to said Registration Statement, and all instruments necessary or
incidental in connection therewith, and to file the same with the Securities and
Exchange Commission. Each of said attorneys shall have the power to act
hereunder with or without the other of said attorneys and shall have full power
and authority to do and perform, in the name and on behalf of the undersigned,
in any and all capacities, every act whatsoever requisite or necessary to be
done in the premises, as fully and to all intents and purposes as the
undersigned might or could do in person, the undersigned hereby ratifying and
approving the acts of said attorneys and each of them.
IN TESTIMONY WHEREOF, the undersigned has executed this instrument this
4th day of December, A.D. 1997.
/s/ Maurice J. Closs
-------------------------------
Maurice J. Closs
Director
<PAGE>
NATIONAL BANK OF CANADA
POWER OF ATTORNEY
The undersigned, in his/her capacity as a Director of National Bank of
Canada, does hereby appoint Jean Turmel and Francoise Bureau, and each of them,
severally, his/her true and lawful attorneys, or attorney, to execute in his/her
name, place and stead, in his/her capacity as a Director of said Bank, a
Registration Statement on Form F-9 for the registration of U.S. $300,000,000
aggregate principal amount of 8.45% Noncumulative First Preferred Shares, Series
Z of National Bank of Canada and any and all amendments and post-effective
amendments to said Registration Statement, and all instruments necessary or
incidental in connection therewith, and to file the same with the Securities and
Exchange Commission. Each of said attorneys shall have the power to act
hereunder with or without the other of said attorneys and shall have full power
and authority to do and perform, in the name and on behalf of the undersigned,
in any and all capacities, every act whatsoever requisite or necessary to be
done in the premises, as fully and to all intents and purposes as the
undersigned might or could do in person, the undersigned hereby ratifying and
approving the acts of said attorneys and each of them.
IN TESTIMONY WHEREOF, the undersigned has executed this instrument this
4th day of December, A.D. 1997.
/s/ Leon Courville
-------------------------------
Leon Courville
Director
<PAGE>
NATIONAL BANK OF CANADA
POWER OF ATTORNEY
The undersigned, in his/her capacity as a Director of National Bank of
Canada, does hereby appoint Jean Turmel and Francoise Bureau, and each of them,
severally, his/her true and lawful attorneys, or attorney, to execute in his/her
name, place and stead, in his/her capacity as a Director of said Bank, a
Registration Statement on Form F-9 for the registration of U.S. $300,000,000
aggregate principal amount of 8.45% Noncumulative First Preferred Shares, Series
Z of National Bank of Canada and any and all amendments and post-effective
amendments to said Registration Statement, and all instruments necessary or
incidental in connection therewith, and to file the same with the Securities and
Exchange Commission. Each of said attorneys shall have the power to act
hereunder with or without the other of said attorneys and shall have full power
and authority to do and perform, in the name and on behalf of the undersigned,
in any and all capacities, every act whatsoever requisite or necessary to be
done in the premises, as fully and to all intents and purposes as the
undersigned might or could do in person, the undersigned hereby ratifying and
approving the acts of said attorneys and each of them.
IN TESTIMONY WHEREOF, the undersigned has executed this instrument this
4th day of December, A.D. 1997.
/s/ Gerard Coulombe
-------------------------------
Gerard Coulombe
Director
<PAGE>
NATIONAL BANK OF CANADA
POWER OF ATTORNEY
The undersigned, in his/her capacity as a Director of National Bank of
Canada, does hereby appoint Jean Turmel and Francoise Bureau, and each of them,
severally, his/her true and lawful attorneys, or attorney, to execute in his/her
name, place and stead, in his/her capacity as a Director of said Bank, a
Registration Statement on Form F-9 for the registration of U.S. $300,000,000
aggregate principal amount of 8.45% Noncumulative First Preferred Shares, Series
Z of National Bank of Canada and any and all amendments and post-effective
amendments to said Registration Statement, and all instruments necessary or
incidental in connection therewith, and to file the same with the Securities and
Exchange Commission. Each of said attorneys shall have the power to act
hereunder with or without the other of said attorneys and shall have full power
and authority to do and perform, in the name and on behalf of the undersigned,
in any and all capacities, every act whatsoever requisite or necessary to be
done in the premises, as fully and to all intents and purposes as the
undersigned might or could do in person, the undersigned hereby ratifying and
approving the acts of said attorneys and each of them.
IN TESTIMONY WHEREOF, the undersigned has executed this instrument this
4th day of December, A.D. 1997.
/s/ Shirley A. Dawe
-------------------------------
Shirley A. Dawe
Director
<PAGE>
NATIONAL BANK OF CANADA
POWER OF ATTORNEY
The undersigned, in his/her capacity as a Director of National Bank of
Canada, does hereby appoint Jean Turmel and Francoise Bureau, and each of them,
severally, his/her true and lawful attorneys, or attorney, to execute in his/her
name, place and stead, in his/her capacity as a Director of said Bank, a
Registration Statement on Form F-9 for the registration of U.S. $300,000,000
aggregate principal amount of 8.45% Noncumulative First Preferred Shares, Series
Z of National Bank of Canada and any and all amendments and post-effective
amendments to said Registration Statement, and all instruments necessary or
incidental in connection therewith, and to file the same with the Securities and
Exchange Commission. Each of said attorneys shall have the power to act
hereunder with or without the other of said attorneys and shall have full power
and authority to do and perform, in the name and on behalf of the undersigned,
in any and all capacities, every act whatsoever requisite or necessary to be
done in the premises, as fully and to all intents and purposes as the
undersigned might or could do in person, the undersigned hereby ratifying and
approving the acts of said attorneys and each of them.
IN TESTIMONY WHEREOF, the undersigned has executed this instrument this
4th day of December, A.D. 1997.
/s/ Jean Douville
-------------------------------
Jean Douville
Director
<PAGE>
NATIONAL BANK OF CANADA
POWER OF ATTORNEY
The undersigned, in his/her capacity as a Director of National Bank of
Canada, does hereby appoint Jean Turmel and Francoise Bureau, and each of them,
severally, his/her true and lawful attorneys, or attorney, to execute in his/her
name, place and stead, in his/her capacity as a Director of said Bank, a
Registration Statement on Form F-9 for the registration of U.S. $300,000,000
aggregate principal amount of 8.45% Noncumulative First Preferred Shares, Series
Z of National Bank of Canada and any and all amendments and post-effective
amendments to said Registration Statement, and all instruments necessary or
incidental in connection therewith, and to file the same with the Securities and
Exchange Commission. Each of said attorneys shall have the power to act
hereunder with or without the other of said attorneys and shall have full power
and authority to do and perform, in the name and on behalf of the undersigned,
in any and all capacities, every act whatsoever requisite or necessary to be
done in the premises, as full and to all intents and purposes as the undersigned
might or could do in person, the undersigned hereby ratifying and approving the
acts of said attorneys and each of them.
IN TESTIMONY WHEREOF, the undersigned has executed this instrument this
4th day of December, A.D. 1997.
/s/ Donald M. Green
-------------------------------
Donald M. Green
Director
<PAGE>
NATIONAL BANK OF CANADA
POWER OF ATTORNEY
The undersigned, in his/her capacity as a Director of National Bank of
Canada, does hereby appoint Jean Turmel and Francoise Bureau, and each of them,
severally, his/her true and lawful attorneys, or attorney, to execute in his/her
name, place and stead, in his/her capacity as a Director of said Bank, a
Registration Statement on Form F-9 for the registration of U.S. $300,000,000
aggregate principal amount of 8.45% Noncumulative First Preferred Shares, Series
Z of National Bank of Canada and any and all amendments and post-effective
amendments to said Registration Statement, and all instruments necessary or
incidental in connection therewith, and to file the same with the Securities and
Exchange Commission. Each of said attorneys shall have the power to act
hereunder with or without the other of said attorneys and shall have full power
and authority to do and perform, in the name and on behalf of the undersigned,
in any and all capacities, every act whatsoever requisite or necessary to be
done in the premises, as fully and to all intents and purposes as the
undersigned might or could do in person, the undersigned hereby ratifying and
approving the acts of said attorneys and each of them.
IN TESTIMONY WHEREOF, the undersigned has executed this instrument this
4th day of December, A.D. 1997.
/s/ Suzanne Leclair
-------------------------------
Suzanne Leclair
Director
<PAGE>
NATIONAL BANK OF CANADA
POWER OF ATTORNEY
The undersigned, in his/her capacity as a Director of National Bank of
Canada, does hereby appoint Jean Turmel and Francoise Bureau, and each of them,
severally, his/her true and lawful attorneys, or attorney, to execute in his/her
name, place and stead, in his/her capacity as a Director of said Bank, a
Registration Statement on Form F-9 for the registration of U.S. $300,000,000
aggregate principal amount of 8.45% Noncumulative First Preferred Shares, Series
Z of National Bank of Canada and any and all amendments and post-effective
amendments to said Registration Statement, and all instruments necessary or
incidental in connection therewith, and to file the same with the Securities and
Exchange Commission. Each of said attorneys shall have the power to act
hereunder with or without the other of said attorneys and shall have full power
and authority to do and perform, in the name and on behalf of the undersigned,
in any and all capacities, every act whatsoever requisite or necessary to be
done in the premises, as fully and to all intents and purposes as the
undersigned might or could do in person, the undersigned hereby ratifying and
approving the acts of said attorneys and each of them.
IN TESTIMONY WHEREOF, the undersigned has executed this instrument this
4th day of December, A.D. 1997.
/s/ Gaston Malette
-------------------------------
Gaston Malette
Director
<PAGE>
NATIONAL BANK OF CANADA
POWER OF ATTORNEY
The undersigned, in his/her capacity as a Director of National Bank of
Canada, does hereby appoint Jean Turmel and Francoise Bureau, and each of them,
severally, his/her true and lawful attorneys, or attorney, to execute in his/her
name, place and stead, in his/her capacity as a Director of said Bank, a
Registration Statement on Form F-9 for the registration of U.S. $300,000,000
aggregate principal amount of 8.45% Noncumulative First Preferred Shares, Series
Z of National Bank of Canada and any and all amendments and post-effective
amendments to said Registration Statement, and all instruments necessary or
incidental in connection therewith, and to file the same with the Securities and
Exchange Commission. Each of said attorneys shall have the power to act
hereunder with or without the other of said attorneys and shall have full power
and authority to do and perform, in the name and on behalf of the undersigned,
in any and all capacities, every act whatsoever requisite or necessary to be
done in the premises, as fully and to all intents and purposes as the
undersigned might or could do in person, the undersigned hereby ratifying and
approving the acts of said attorneys and each of them.
IN TESTIMONY WHEREOF, the undersigned has executed this instrument this
4th day of December, A.D. 1997.
/s/ Leonce Montambault
-------------------------------
Leonce Montambault
Director
<PAGE>
NATIONAL BANK OF CANADA
POWER OF ATTORNEY
The undersigned, in his/her capacity as a Director of National Bank of
Canada, does hereby appoint Jean Turmel and Francoise Bureau, and each of them,
severally, his/her true and lawful attorneys, or attorney, to execute in his/her
name, place and stead, in his/her capacity as a Director of said Bank, a
Registration Statement on Form F-9 for the registration of U.S. $300,000,000
aggregate principal amount of 8.45% Noncumulative First Preferred Shares, Series
Z of National Bank of Canada and any and all amendments and post-effective
amendments to said Registration Statement, and all instruments necessary or
incidental in connection therewith, and to file the same with the Securities and
Exchange Commission. Each of said attorneys shall have the power to act
hereunder with or without the other of said attorneys and shall have full power
and authority to do and perform, in the name and on behalf of the undersigned,
in any and all capacities, every act whatsoever requisite or necessary to be
done in the premises, as fully and to all intents and purposes as the
undersigned might or could do in person, the undersigned hereby ratifying and
approving the acts of said attorneys and each of them.
IN TESTIMONY WHEREOF, the undersigned has executed this instrument this
4th day of December, A.D. 1997.
/s/ J. Robert Ouimet
-------------------------------
J. Robert Ouimet
Director
<PAGE>
NATIONAL BANK OF CANADA
POWER OF ATTORNEY
The undersigned, in his/her capacity as a Director of National Bank of
Canada, does hereby appoint Jean Turmel and Francoise Bureau, and each of them,
severally, his/her true and lawful attorneys, or attorney, to execute in his/her
name, place and stead, in his/her capacity as a Director of said Bank, a
Registration Statement on Form F-9 for the registration of U.S. $300,000,000
aggregate principal amount of 8.45% Noncumulative First Preferred Shares, Series
Z of National Bank of Canada and any and all amendments and post-effective
amendments to said Registration Statement, and all instruments necessary or
incidental in connection therewith, and to file the same with the Securities and
Exchange Commission. Each of said attorneys shall have the power to act
hereunder with or without the other of said attorneys and shall have full power
and authority to do and perform, in the name and on behalf of the undersigned,
in any and all capacities, every act whatsoever requisite or necessary to be
done in the premises, as fully and to all intents and purposes as the
undersigned might or could do in person, the undersigned hereby ratifying and
approving the acts of said attorneys and each of them.
IN TESTIMONY WHEREOF, the undersigned has executed this instrument this
4th day of December, A.D. 1997.
/s/ Robert Parizeau
-------------------------------
Robert Parizeau
Director
<PAGE>
NATIONAL BANK OF CANADA
POWER OF ATTORNEY
The undersigned, in his/her capacity as a Director of National Bank of
Canada, does hereby appoint Jean Turmel and Francoise Bureau, and each of them,
severally, his/her true and lawful attorneys, or attorney, to execute in his/her
name, place and stead, in his/her capacity as a Director of said Bank, a
Registration Statement on Form F-9 for the registration of U.S. $300,000,000
aggregate principal amount of 8.45% Noncumulative First Preferred Shares, Series
Z of National Bank of Canada and any and all amendments and post-effective
amendments to said Registration Statement, and all instruments necessary or
incidental in connection therewith, and to file the same with the Securities and
Exchange Commission. Each of said attorneys shall have the power to act
hereunder with or without the other of said attorneys and shall have full power
and authority to do and perform, in the name and on behalf of the undersigned,
in any and all capacities, every act whatsoever requisite or necessary to be
done in the premises, as fully and to all intents and purposes as the
undersigned might or could do in person, the undersigned hereby ratifying and
approving the acts of said attorneys and each of them.
IN TESTIMONY WHEREOF, the undersigned has executed this instrument this
4th day of December, A.D. 1997.
/s/ Lino Saputo
-------------------------------
Lino Saputo
Director
<PAGE>
NATIONAL BANK OF CANADA
POWER OF ATTORNEY
The undersigned, in his/her capacity as Chairman of the Board and Chief
Executive Officer and Director (Principal Executive Officer) of National Bank of
Canada, does hereby appoint Jean Turmel and Francoise Bureau, and each of them,
severally, his/her true and lawful attorneys, or attorney, to execute in his/her
name, place and stead, in his/her capacity as Chairman of the Board and Chief
Executive Officer and Director (Principal Executive Officer) of said Bank, a
Registration Statement on Form F-9 for the registration of U.S. $300,000,000
aggregate principal amount of 8.45% Noncumulative First Preferred Shares, Series
Z of National Bank of Canada and any and all amendments and post-effective
amendments to said Registration Statement, and all instruments necessary or
incidental in connection therewith, and to file the same with the Securities and
Exchange Commission. Each of said attorneys shall have the power to act
hereunder with or without the other of said attorneys and shall have full power
and authority to do and perform, in the name and on behalf of the undersigned,
in any and all capacities, every act whatsoever requisite or necessary to be
done in the premises, as fully and to all intents and purposes as the
undersigned might or could do in person, the undersigned hereby ratifying and
approving the acts of said attorneys and each of them.
IN TESTIMONY WHEREOF, the undersigned has executed this instrument this
4th day of December, A.D. 1997.
/s/ Andre Berard
-------------------------------
Andre Berard
Chairman of the Board and
Chief Executive Officer
and Director
(Principal Executive Officer)
<PAGE>
NATIONAL BANK OF CANADA
POWER OF ATTORNEY
The undersigned, in his/her capacity as Senior Executive
Vice-President, Treasury, Brokerage and Corporate Banking (Principal Financial
Officer) of National Bank of Canada, does hereby appoint Jean Turmel and
Francoise Bureau, and each of them, severally, his/her true and lawful
attorneys, or attorney, to execute in his/her name, place and stead, in his/her
capacity as Senior Executive Vice-President, Treasury, Brokerage and Corporate
Banking (Principal Financial Officer) of said Bank, a Registration Statement on
Form F-9 for the registration of U.S. $300,000,000 aggregate principal amount of
8.45% Noncumulative First Preferred Shares, Series Z of National Bank of Canada
and any and all amendments and post-effective amendments to said Registration
Statement, and all instruments necessary or incidental in connection therewith,
and to file the same with the Securities and Exchange Commission. Each of said
attorneys shall have the power to act hereunder with or without the other of
said attorneys and shall have full power and authority to do and perform, in the
name and on behalf of the undersigned, in any and all capacities, every act
whatsoever requisite or necessary to be done in the premises, as fully and to
all intents and purposes as the undersigned might or could do in person, the
undersigned hereby ratifying and approving the acts of said attorneys and each
of them.
IN TESTIMONY WHEREOF, the undersigned has executed this instrument this
4th day of December, A.D. 1997.
/s/ Jean Turmel
-------------------------------
Jean Turmel
Senior Executive Vice-President,
Treasury, Brokerage and
Corporate Banking
(Principal Financial Officer)
<PAGE>
NATIONAL BANK OF CANADA
POWER OF ATTORNEY
The undersigned, in his/her capacity as Vice-President and Chief
Accounting Officer (Principal Accounting Officer) of National Bank of Canada,
does hereby appoint Jean Turmel and Francoise Bureau, and each of them,
severally, his/her true and lawful attorneys, or attorney, to execute in his/her
name, place and stead, in his/her capacity as Vice-President and Chief
Accounting Officer (Principal Accounting Officer) of said Bank, a Registration
Statement on Form F-9 for the registration of U.S. $300,000,000 aggregate
principal amount of 8.45% Noncumulative First Preferred Shares, Series Z of
National Bank of Canada and any and all amendments and post-effective amendments
to said Registration Statement, and all instruments necessary or incidental in
connection therewith, and to file the same with the Securities and Exchange
Commission. Each of said attorneys shall have the power to act hereunder with or
without the other of said attorneys and shall have full power and authority to
do and perform, in the name and on behalf of the undersigned, in any and all
capacities, every act whatsoever requisite or necessary to be done in the
premises, as fully and to all intents and purposes as the undersigned might or
could do in person, the undersigned hereby ratifying and approving the acts of
said attorneys and each of them.
IN TESTIMONY WHEREOF, the undersigned has executed this instrument this
4th day of December, A.D. 1997.
/s/ Jean Dagenais
-------------------------------
Jean Dagenais
Vice-President and
Chief Accounting Officer
(Principal Accounting Officer)
INDEPENDENT AUDITORS' CONSENT
We consent to the use in and incorporation by reference in this Registration
Statement of National Bank of Canada (the "Bank") on Form F-9 of our report
dated November 24, 1997, relating to the consolidated financial statements of
the Bank for the year ended October 31, 1997 with comparative amounts for the
year ended October 31, 1996, included and incorporated by reference in the
prospectus dated December 11, 1997, which is part of this Registration
Statement.
We consent to the reference to us under the heading "Auditors" included in the
prospectus dated December 11, 1997. The auditors of the Bank for the year ended
October 31, 1996 were not independent auditors under the United States standards
because certain partners and employees had loans with the Bank.
Our signatures to this letter relate to the years for which we were the auditors
of the Bank, as set forth below our respective signatures hereto at the end of
this letter.
/s/ Price Waterhouse /s/ Samson Belair Deloitte & Touche
Price Waterhouse Samson Belair Deloitte & Touche
Chartered Accountants Chartered Accountants
As to the years ended As to the year ended October 31, 1997
October 31, 1997 and 1996
/s/ Raymond, Chabot, Martin, Pare
Raymond, Chabot, Martin, Pare
General Partnership
Chartered Accountants
As to the year ended October 31, 1996
Montreal, Canada
December 19, 1997
Exhibit 5.2 to
FORM F-9
DESJARDINS DUCHARME STEIN MONAST
GENERAL PARTNERSHIP
BARRISTERS & SOLICITORS
Montreal, Quebec, Canada, December 19, 1997
BY EDGAR
SECURITIES AND EXCHANGE COMMISSION
Dear Sirs/Mesdames:
Re: $300,000,000
NATIONAL BANK OF CANADA
(300,000 Shares)
8.45% Noncumulative First Preferred Shares, Series Z
We have acted as counsel to National Bank of Canada in
connection with the preparation of its (final) short form prospectus dated
December 11, 1997 (the "Prospectus") relating to the above-captioned potential
distribution.
We consent to the use of, and reference to, our name and
opinion under the heading "Legal Matters" in the Prospectus.
In giving this consent, we do not thereby concede that we come
within the category of persons whose consent is required by the Securities Act
of 1933 as amended, or the general rules and regulations promulgated thereunder.
Yours truly,
/s/ DESJARDINS DUCHARME STEIN MONAST
PYC/ds
U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM F-X
APPOINTMENT OF AGENT FOR SERVICE OF
PROCESS AND UNDERTAKING
A. Name of issuer or person filing ("Filer"): National Bank of Canada
B. This is (check one):
|_| An original filing for the Filer.
|_| An amended filing for the Filer.
C. Identify the filing in conjunction with which this form is being filed:
Name of registrant National Bank of Canada
Form type F-9
File number (if known)
Filed by National Bank of Canada
Date filed (if filed concurrently, so indicate) December 19, 1997; filed
concurrently with Form F-9
D. The Filer is incorporated or organized under the laws of (name of the
jurisdiction under whose laws the issuer is organized or incorporated) Canada
and has its principal place of business at (address in full and telephone
number): 600 de La Gauchetiere Street West, Montreal, Quebec, Canada H3B 4L2,
(514) 394-6080.
E. The Filer designates and appoints (name of United States person
serving as agent) NB Capital Corporation ("Agent") located at (address in full
in the United States and telephone number): 125 West 55th Street, New York, New
York 10019, (212) 632-8500, as the agent of the Filer upon whom may be served
any process, pleadings, subpoenas, or other papers in:
(a) Any investigation or administrative proceeding conducted by the
Commission; and
(b) Any civil suit or action brought against the Filer or to which the
Filer has been joined as defendant or respondent, in any appropriate court in
any place subject to the jurisdiction of any State or of the United States, or
of any of its Territories or possessions, or of the District of Columbia, where
the investigation, proceeding or
<PAGE>
2
cause of action arises out of or relates to or concerns: (i) any offering made
or purported to be made in connection with the securities registered or
qualified by the Filer on Form (name of form) F-9 on December 17, 1997 or any
purchases or sales of any security in connection therewith; (ii) the securities
in relation to which the obligation to file an annual report on Form 40-F
arises, or any purchases or sales of such securities; (iii) any tender offer for
the securities of a Canadian issuer with respect to which filings are made by
the Filer with the Commission on Schedule 13E- 4F, 14D-1F or 14D-9F; or (iv) the
securities in relation to which the Filer acts as trustee pursuant to Rule 10a-5
under the Trust Indenture Act of 1939. The Filer stipulates and agrees that any
such civil suit or action or administrative proceeding may be commenced by the
service of process upon, and that service of an administrative subpoena shall be
effected by service upon such agent for service of process, and that the service
as aforesaid shall be taken and held in all courts and administrative tribunals
to be valid and binding as if personal service thereof had been made.
F. Each person filing this form in connection with:
(a) The use of Form F-9, F-10, 40-F or SB-2, or Schedule 13E-4F, 14D-IF
or 14D-9F stipulates and agrees to appoint a successor agent for service of
process and file an amended Form F-X if the Filer discharges the Agent or the
Agent is unwilling or unable to accept service on behalf of the Filer at any
time until six years have elapsed from the date the issuer of the securities to
which such forms and schedules relate has ceased reporting under the Exchange
Act;
(b) The use of Form F-8 or Form F-80 stipulates and agrees to appoint a
successor agent for service of process and file an amended Form F-X if the Filer
discharges the Agent or the Agent is unwilling or unable to accept service on
behalf of the Filer at any time until six years have elapsed following the
effective date of the latest amendment to such Form F-8 or Form F-80;
(c) Its status as trustee with respect to securities registered on Form
F-7, F- 8, F-9, F-10, F-80, or SB-2, stipulates and agrees to appoint a
successor agent for service of process and file an amended Form F-X if the Filer
discharges the Agent or the Agent is unwilling or unable to accept service on
behalf of the Filer at any time during which any of the securities subject to
the indenture remain outstanding; and
(d) The use of Form 1-A or other Commission form for an offering
pursuant to Regulation A stipulates and agrees to appoint a successor agent for
service of process and file an amended Form F-X if the Filer discharges the
Agent or the Agent
<PAGE>
3
is unwilling or unable to accept service on behalf of the Filer at any time
until six years have elapsed from the date of the last sale of securities in
reliance upon the Regulation A exemption.
Each Filer further undertakes to advise the Commission promptly of any
change to the Agent's name or address during the applicable period by amendment
of this form, referencing the file number of the relevant form in conjunction
with which the amendment is being filed.
G. Each person filing this form, other than a trustee filing in
accordance with General Instruction I.(e) of this form, 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 forms, schedules and
offering statements described in General Instructions I.(a), I.(b), I.(c), I.(d)
and I.(f) of this form, as applicable, the securities to which such forms,
schedules and offering statements relate; and the transactions in such
securities.
<PAGE>
4
The Filer certifies that it has duly caused this power of attorney,
consent, stipulation and agreement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of Montreal, Country of
Canada, this 19th day of December, 1997.
Filer: National Bank of Canada
---------------------------------
By: /s/ Francoise Bureau
-------------------------------------
Name:
Title: Assistant Secretary
This statement has been signed by the following persons in the
capacities and on the dates indicated.
(Signature) NB Capital Corporation
--------------------------
By: /s/ Roger Smock
------------------------
Name: Roger Smock
Title: President
(Title) Agent for Service of Process in the United States
-------------------------------------------------------
(Date) December 19, 1997
---------------------
