UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549

FORM 10-K/A

Amendment No. 1

x Annual report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the fiscal year ended December 31, 2004.

o  Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the transition period from ________ to ________.

Commission File Number: 1-14103

NB CAPITAL CORPORATION
(Exact name of registrant as specified in its charter)

Maryland
(State or other jurisdiction of
incorporation or organization) 52-2063921
(I.R.S. Employer Identification No.)

65 East 55^th Street, 31^st Floor
New York, New York
(Address of principal executive offices) 10022
(Zip code)

Registrant's telephone number, including area code: (212) 632-8697

Securities registered pursuant to Section 12(b) of the Act: None

Securities registered pursuant to Section 12(g) of the Act:

8.35% Noncumulative Exchangeable Preferred Stock, Series A, par value $ .01 per share,
traded in the form of Depository Shares, each representing a one-fortieth interest therein

        Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days.   Yes x     No o

        Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. o

        Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Act). Yes o     No x

        As of December 31, 2004, all Common Stock, par value $ .01 per share, was held by an affiliate.

        As of December 31, 2004, the number of shares of Common Stock outstanding was 100.

Documents Incorporated by reference:

None

EXPLANATORY NOTE

This Amendment No. 1 to the Annual Report on Form 10-K for NB Capital Corporation for the year ended December 31, 2004 which was filed on March 31, 2005 (the “Original Filing”), is being filed to include the consolidated financial statements for the National Bank of Canada as Item 15(c) of Part IV of this Amendment No. 1 to the Annual Report, which may be found immediately after the NB Capital Corporation financial statements. This Amendment No. 1 does not update any results or information from that contained in the Original Filing. The consolidated financial statements of National Bank of Canada are included in this Amendment No. 1 to the Original Filing, because Note 6 to the Notes to the Financial Statements describes the fact that each share of NB Capital Corporation’s Series A preferred stock is exchangeable, upon the occurrence of certain events, for one newly issued 8.45% Non-Cumulative First Preferred Share, Series Z, of National Bank of Canada.

FORWARD-LOOKING STATEMENTS

        From time to time, NB Capital Corporation (the “Company” or “NB Capital”) makes written and oral forward-looking statements, included in this 10-K report for filling with the U.S. Securities and Exchange Commission, in reports to shareholders, in press releases and in other communications. All such statements are made pursuant to the “safe harbor” provisions of the United States Private Securities Litigation Reform Act of 1995. These forward-looking statements include, among others, statements with respect to the economy, market changes, the achievement of strategic objectives, certain risks as well as statements with respect to our beliefs, plans, expectations, anticipations, estimates and intentions. These forward-looking statements are typically identified by the words “may,”“could,”“should,”“would,”“suspect,”“outlook,”“believe,”“anticipate,”“estimate,”“expect,”“intend,”“plan,” and words and expressions of similar import.

        By their very nature, such forward-looking statements require us to make assumptions and involve inherent risks and uncertainties, both general and specific. There is significant risk that express or implied projections contained in such statements will not materialize or will not be accurate. A number of factors could cause actual future results, conditions, actions or events to differ materially from the targets, expectations, estimates or intentions expressed in the forward-looking statements. Such differences may be caused by factors, many of which are beyond the Company’s control, which include, but are not limited to, changes in North American and/or global economic and financial conditions (particularly fluctuations in interest rates, currencies and other financial instruments), liquidity, market trends, regulatory developments and competition in geographic areas where the Company operates, technological changes, the possible impact on our businesses of international conflicts and other developments including those relating to the war on terrorism and the Company’s anticipation of and success in managing the risks implied by the foregoing.

        The Company cautions that the foregoing list of important factors is not exhaustive. Investors and others who base themselves on the Company’s forward-looking statements should carefully consider the above factors as well as the uncertainties they represent and the risk they entail. The Company therefore cautions readers not to place undue reliance on these forward-looking statements. The Company does not undertake to update any forward-looking statements, whether written or oral, that may be made from time to time by or on behalf of the Company.

EXCHANGE RATE

        References to $ are to United States dollars; references to C$ are to Canadian dollars. As of December 31, 2004, the Canadian dollar exchange rate was C$1.2020 = $1.00 and certain amounts stated herein reflect such exchange rate. The exchange rate was obtained from the Bank of Canada.

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PART I

ITEM 1: BUSINESS

General

        On August 20, 1997, NB Capital Corporation (the “Company”) was incorporated under the laws of the State of Maryland for the purposes of providing U.S. investors with the opportunity to invest in Canadian residential mortgages and other real estate assets. The Company began operations on September 3, 1997 with the consummation of an offering of 300,000 shares of its 8.35% Non-cumulative Exchangeable Preferred Stock, Series A (the “Series A Preferred Shares”). The Series A Preferred Shares trade on the New York Stock Exchange in the form of Depository Shares, each representing a one-fortieth interest in a Series A Preferred Share (the “Depository Shares”). National Bank of Canada (the “Bank”) owns all of the Company’s issued and outstanding common stock, par value $.01 per share (the “Common Stock”). Accordingly, the Company is a wholly owned subsidiary of the Bank.

        The Company’s principal business objective is to acquire, hold, finance and manage assets consisting of obligations secured by real property (“Mortgage Assets”) as well as certain other qualifying real estate investment trust (“REIT”) assets. The Mortgage Assets currently consist of 67 “hypothecation” loans issued to the Company by NB Finance, Ltd. (“NB Finance”), a Bermuda corporation and a wholly owned subsidiary of the Bank, that are recourse only to the “Mortgage Loans”. Hypothecation loans are loans secured by the pledge of mortgages as security therefore. The Mortgage Loans consist of 67 pools of, at December 31, 2004, an aggregate 12,971 residential first mortgages insured by Canada Mortgage and Housing Corporation, an agency of the Government of Canada (“CMHC”), that are secured by real property located in Canada. The Company has acquired and expects to continue to acquire its Mortgage Assets from the Bank and affiliates of the Bank. The Company may also from time to time, however, acquire Mortgage Assets from unrelated third parties.

        The Bank administers the day-to-day operations of the Company pursuant to an Advisory Agreement, dated September 3, 1997, between the Bank and the Company (the “Advisory Agreement”). The Bank also services the Mortgage Loans pursuant to a Servicing Agreement, dated September 3, 1997, between the Bank and NB Finance (the “Servicing Agreement”). Pursuant to an Assignment Agreement, NB Finance has assigned to the Company all of its right, title and interest in the Servicing Agreement.

        In order to preserve the Company’s status as a REIT under the Internal Revenue Code of 1986, as amended (the “Code”), substantially all of the assets of the Company consist of the Mortgage Assets issued by NB Finance and other real estate assets that are of the type set forth in Section 856(c)(6)(B) of the Code.

        For information regarding the Company’s revenue and operating profit, see the Company’s financial statements, beginning on page F-1.

Automatic Exchange

        Each Series A Preferred Share will be exchanged automatically for one newly issued 8.45% Noncumulative First Preferred Share, Series Z, of the Bank (a “Bank Preferred Share”): (i) immediately prior to such time, if any, at which the Bank fails to declare and pay or set aside for payment when due on any dividend on any issue of its cumulative First Preferred Shares or the Bank fails to pay or set aside for payment when due any declared dividend on any of its non-cumulative First Preferred Shares, (ii) in the event that the Bank has a Tier 1 risk-based capital ratio of less than 4.0% or a total risk-based capital ratio of less than 8.0%, (iii) in the event that the Superintendent of Financial Institutions Canada (the “Superintendent”) takes control of the Bank pursuant to the Bank Act (Canada), as amended (the “Bank Act”), or proceedings are commenced for the winding-up of the Bank pursuant to the Winding-up and Restructuring Act (Canada), or (iv) in the event that the Superintendent, by order, directs the Bank to act pursuant to subsection 485(3) of the Bank Act and the Bank elects to cause the exchange (each, an “Exchange Event”). Upon an Exchange Event, the holders of the Series A Preferred Shares shall be unconditionally obligated to surrender to the Bank the certificates representing the Series A Preferred Share held by such holder, and the Bank

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shall be unconditionally obligated to issue to such holder in exchange for each such Series A Preferred Share a certificate representing one Bank Preferred Share.

        The Automatic Exchange shall occur as of 8:00 a.m. Eastern Time on the date for such exchange set forth in the requirements of the Superintendent or, if such date is not set forth in such requirements as of 8:00 a.m. on the earliest possible date such exchange could occur consistent with such requirements (the “Time of Exchange”), as evidenced by the issuance by the Bank of a press release prior to such time. As of the Time of Exchange, all of the Series A Preferred Shares will be deemed canceled without any further action by the Company, all rights of the holders of the Series A Preferred Shares as stockholders of the Company will cease, and such persons 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 Series A Preferred Shares within 30 days of such event, and the Bank will deliver to each such holder certificates for the Bank Preferred Shares upon surrender of such holder’s certificates for the Series A Preferred Shares. The charter provides that, immediately after the delivery of such notice, the existence of the Company shall terminate and the Company will be liquidated and its affairs wound up in accordance with the procedures of the Maryland General Corporation Law relating to forfeiture of the charter of a corporation and expiration of corporate existence. Until such replacement stock certificates are delivered (or in the event such replacement certificates are not delivered), certificates previously representing the Series A Preferred Shares shall be deemed for all purposes to represent the Bank Preferred Shares. Once an Exchange Event occurs, no action will be required to be taken by holders of the Series A Preferred Shares, by the Bank or by the Company in order to effect an automatic exchange as of the Time of Exchange.

        Holders of the Series A Preferred Shares, by purchasing the Series A Preferred Shares, have agreed to be bound by the unconditional obligation to exchange such Series A Preferred Shares for the Bank Preferred Shares upon the occurrence of an Exchange Event. The obligation of the holders of the Series A Preferred Shares to surrender such shares and the obligation of the Bank to issue the Bank Preferred Shares in exchange for the Series A Preferred Shares shall be enforceable by the Bank and such holders, respectively, against the other.

        Upon the occurrence of an Exchange Event, the Bank Preferred Shares to be issued as part of an automatic exchange would constitute a newly issued series of First Preferred Shares of the Bank and would constitute 100% of the issued and outstanding Bank Preferred Shares. The Bank Preferred Shares would have the same liquidation preference and be subject to redemption on the same terms as the Series A Preferred Shares (except that there would be no redemption for certain tax-related events). Any accrued and unpaid dividends on the Series A Preferred Shares as of the Time of Exchange would be accounted for as accrued and unpaid dividends on the Bank Preferred Shares. The Bank Preferred Shares would rank pari passu, in terms of dividend payments and liquidation preference, with, or senior to, any outstanding First Preferred Shares of the Bank. The Bank Preferred Shares would not entitle the holders to vote except in certain circumstances. Dividends on the Bank Preferred Shares would be non-cumulative and payable at the rate of 8.45% per annum of the liquidation preference, if, when and as declared by the Board of Directors of the Bank. The Bank does not intend to apply for listing of the Bank Preferred Shares on any national securities exchange 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 the Bank Preferred Shares would develop or be maintained.

        Holders of the Series A Preferred Shares cannot exchange the Series A Preferred Shares for the Bank Preferred Shares voluntarily. In addition, absent the occurrence of an automatic exchange, holders of the Series A Preferred Shares will have no dividend, voting, liquidation preference or other rights with respect to the Bank or any security of the Bank.

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Advisory Agreement

        The Company entered into the Advisory Agreement with the Bank to administer the day-to-day operations of the Company. The Bank 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 Canadian National Housing Act (an “NHA-Approved Lender”). As long as any Series A Preferred Shares and, accordingly, any Depository Shares remain outstanding, the Company may not renew, terminate, or modify the Advisory Agreement without the approval of a majority of the Board of Directors of the Company (the “Board of Directors”) as well as of a majority of the Independent Directors. An “Independent Director” is a Director meeting the criteria specified in 10A-3 of the Securities Exchange Act of 1934. The Bank may, with the approval of a majority of the Board of Directors as well as a majority of the Independent Directors, subcontract all or a portion of its obligations under the Advisory Agreement to one or more related or unrelated third parties. The Bank will not, in connection with the subcontracting of any of its obligations under the Advisory Agreement, be discharged or relieved in any respect from any of its obligations under the Advisory Agreement. As of the date of this Form 10-K, the Bank has not subcontracted any of its obligations under the Advisory Agreement.

        The Advisory Agreement had an initial term of one year, and has been renewed seven times for additional one-year periods. The last renewal was dated November 3, 2004 and it’s expiration date is November 3, 2005. The advisory fee was revised from $30,000 to $100,000 for 2004 fiscal year. The Company may terminate the Advisory Agreement at any time upon 60 days’ prior written notice. As long as any of the Series A Preferred Shares or Depository Shares remain outstanding, any decision by the Company to renew, terminate or modify the Advisory Agreement must be approved by a majority of the Board of Directors, as well as by a majority of the Independent Directors. The Bank received an advisory fee equal to $100,000 for fiscal year 2004 and is entitled to receive $100,000 for fiscal year 2005, 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 Series A Preferred Shares and, accordingly, the Depository Shares.

Servicing Agreement

        The Mortgage Loans are serviced by the Bank pursuant to the terms of the Servicing Agreement. The Bank receives a fee equal to 0.25% per annum on the principal balances (in CDN$) of the loans serviced.

        The Servicing Agreement, put in place on September 3, 1997, had an initial term of one year, and has been renewed seven times for additional one-year periods. The last renewal was made on May 5, 2004 for a one-year period ending on June 28, 2005. The Servicing Agreement requires the Bank to service Mortgage Loans in a manner generally consistent with normal mortgage servicing practices of prudent mortgage lending institutions that service mortgage loans of the same type as the Mortgage Loans, with any servicing guidelines promulgated by the Company and with relevant government agency guidelines and procedures. The Servicing Agreement requires the Bank to service Mortgage Loans solely with a view toward the interests of the Company and without regard to the interests of the Bank or any of its other affiliates (including NB Finance). The Bank collects and remits principal and interest payments, administers mortgage escrow accounts, submits and pursues mortgage insurance claims and supervises foreclosure proceedings on any Mortgage Loans it services. The Bank also provides accounting and reporting services with respect to such Mortgage Loans. The Servicing Agreement requires the Bank to follow such collection procedures as are customary in normal mortgage servicing practices of prudent mortgage lending institutions that service mortgage loans of the same type as the Mortgage Loans. The Bank may from time to time subcontract all or a portion of its servicing obligations under the Servicing Agreement to a third party subject to the prior written approval of the Company. The Bank will not, in connection with subcontracting any of its obligations under the Servicing Agreement, be discharged or relieved in any respect from its obligation to the Company to perform its obligations under the Servicing Agreement. As of the date of this Form 10-K, the Bank has not subcontracted any of its obligations under the Servicing Agreement.

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        The Bank is required to pay all expenses related to the performance of its duties under the Servicing Agreement. The Bank is required to make advances of taxes and required insurance premiums that are not collected from mortgagors with respect to any Mortgage Loan serviced by it, unless it determines that such advances are non recoverable from the mortgagor, insurance proceeds or other sources with respect to such Mortgage Loan. If such advances are made, the Bank generally will be reimbursed prior to the Company being reimbursed out of the payments with respect to such Mortgage Loan. The Bank also is entitled to reimbursement for expenses incurred by it in connection with the liquidation of defaulted Mortgage Loans serviced by it and in connection with the restoration of mortgaged property. The Bank is responsible to the Company for any loss suffered as a result of the Bank’s failure to make and pursue timely claims or as a result of actions taken or omissions made by the Bank which cause the policies to be canceled by the insurer. Subject to approval by the Company, the Bank may institute foreclosure proceedings, exercise any power of sale contained in any Mortgage Loan or deed of trust, obtain a deed in lieu of foreclosure or otherwise acquire title to a mortgaged property underlying a Mortgage Loan by operation of law or otherwise in accordance with the terms of the Servicing Agreement. The Bank does not, however, have the authority to enter into contracts in the name of the Company.

        The Company may terminate the Servicing Agreement upon the occurrence of one or more events specified in the Servicing Agreement. Such events relate generally to the Bank’s proper and timely performance of its duties and obligations under the Servicing Agreement. In addition, the Company may also terminate the Servicing Agreement without cause upon 60 days’ notice and payment of a termination fee.  The termination fee will be based on the aggregate outstanding principal amount of the Mortgage Loans then serviced under the Servicing Agreement.

        As is customary in the mortgage loan servicing industry, the Bank is entitled to retain any late payment charges, penalties and assumption fees collected in connection with the Mortgage Loans serviced by it. The Bank will receive any benefit derived from interest earned on collected principal and interest payments between the date of collection and the date of remittance (15^th calendar day) to the Company and, to the extent permitted by law, from interest earned on tax and insurance impound funds with respect to Mortgage Loans serviced by it.

        When any mortgaged property underlying a Mortgage Loan is conveyed by a mortgagor, the Bank generally will enforce any “due-on-sale” clause contained in the Mortgage Loan, to the extent permitted under applicable law and governmental regulations. A “due-on-sale” clause states that the Mortgage loan must be paid when the mortgaged property is sold. The terms of a particular Mortgage Loan or applicable law, however, may provide that the Bank is prohibited from exercising the “due-on-sale” clause under certain circumstances related to the security underlying the Mortgage Loan and the buyer’s ability to fulfill the obligations thereunder. Upon any assumption of a Mortgage Loan by a transferee, a nominal fee is typically required, which sum will be retained by the Bank as additional servicing compensation.

Investment Policy

        The Company’s principal business objective is to acquire, hold, finance and manage Mortgage Assets as well as certain other qualifying REIT assets. The Company’s current investment policy is to invest at least 80% of its portfolio in Mortgage Assets issued by NB Finance and the remainder in any other assets eligible to be held by a REIT. Such other assets include Mortgage Loans, residential mortgage loans, mortgage-backed securities, commercial mortgage loans, partnership interests, cash, cash equivalents, government securities and shares or interests in other REITs. As of December 31, 2004, Mortgage Assets issued by NB Finance comprised 85.80% of the Company’s portfolio.

        The Company expects to continue to follow the foregoing investment policy approved at the Board on December 6, 2000. However, this policy may be amended or revised from time to time at the discretion of the Board of Directors (in certain circumstances subject to the approval of a majority of the Independent Directors) without a vote of the Company’s stockholders. All investments will be made primarily for income.

Description of the Mortgage Assets

        The Mortgage Assets issued by NB Finance are comprised of 67 hypothecation loans issued by NB Finance to the Company. As of December 31, 2004, the principal amount of the Mortgage Assets was approximately $410

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million. Each of the 67 hypothecation loans comprising the Mortgage Assets issued by NB Finance is secured by a pool of Mortgage Loans. As of December 31, 2004, the Mortgage Loans were comprised of, in the aggregate, 12,971 Mortgage Loans in an aggregate amount of approximately C$721 million ($600 million). The value of each pool of Mortgage Loans comprising the Mortgage Assets exceeds the principal amount of the hypothecation loan that it secures. Accordingly, the Mortgage Assets issued by NB Finance are overcollateralized by the Mortgage Loans. The aggregate amount of such overcollateralization is, as of December 31, 2004, $190 million. The Company acquired the Mortgage Assets issued by NB Finance pursuant to the terms of a loan agreement with NB Finance.

        Each Mortgage Asset issued by NB Finance is recourse only to the Mortgage Loans securing such Mortgage Asset. Each pool of Mortgage Loans is comprised of entirely CMHC-insured residential first mortgages. Each Mortgage Asset issued by NB Finance is further secured by the residential real properties underlying such CMHC-insured first mortgages. Such residential real properties are located primarily in Quebec, Ontario and New Brunswick. Since the Mortgage Loans are insured, the Company expects little or no loss of principal or interest. However, CMHC insurance does not guarantee timely payment of interest and principal. The Mortgage Assets have maturities ranging from January 2005 to December 2012. The Mortgage Assets pay interest at rates ranging from 5.49% to 10.21%, with a weighted-average rate of approximately 8.19% per annum.

        Payments of interest are made monthly out of payments on the Mortgage Loans. Pursuant to an agreement between the Company and NB Finance (the “Mortgage Loan Assignment Agreement”), dated September 3, 1997, the Company receives all scheduled payments made on the Mortgage Loans, retains a portion of any such payments equal to the amount due and payable on the Mortgage Assets issued by NB Finance and remits the balance, if any, to NB Finance. The Company also retains a portion of any prepayments of principal in respect of the Mortgage Loans equal to the proportion of such prepayments that the outstanding principal amount of the Mortgage Loan bears to the outstanding principal amount of the Mortgage Assets issued by NB Finance, which amount would be applied to reduce the outstanding principal amount of the Mortgage Assets issued by NB Finance. Repayment of the Mortgage Assets issued by NB Finance is secured by an assignment of the Mortgage Loans to the Company pursuant to the Mortgage Loan Assignment Agreement, which is governed by the laws of Bermuda.

        The assignment of the Mortgage Loans by NB Finance to the Company is without recourse. The Company has a security interest in the real property securing the Mortgage Loans and, subject to fulfilling certain procedural requirements under applicable Canadian law, is entitled to enforce payment on the Mortgage Loans in its own name if a mortgagor should default thereon. In the event of such a default, the Company has the same rights as NB Finance to force a sale of the mortgaged property and satisfy the obligations of NB Finance out of the proceeds. In the event of a default in respect of a Mortgage Loan, the amount of the Mortgage Assets issued by NB Finance will be reduced by an amount equal to the portion thereof allocable to the defaulting mortgage.

        Following repayment of the Mortgage Assets issued by NB Finance, the Company will reassign any outstanding Mortgage Loans (without recourse) and deliver them to, or as directed by, NB Finance. All payments in respect of the Mortgage Loans are made in Canadian dollars. The amounts due on the Mortgage Assets issued by NB Finance are retained by the Company free and clear of and without withholding or deduction for or on account of any present or future taxes imposed by or on behalf of Bermuda or any political subdivision thereof or therein.

Description of the Mortgage Loans

        All of the Mortgage Loans were originated in accordance with underwriting policies customarily employed by the Bank, or with underwriting policies acceptable to the Bank. With respect to its underwriting policies, the Bank will not make any residential mortgage loans that exceed a loan to value ratio of 75% unless such loan is insured. If the residential mortgage loan is CMHC-insured (i) a cash down payment of between 5% and 24.9% is required, (ii) the monthly payment for capital, interest, taxes and heating must not exceed 32% of the gross monthly revenue of the borrower and (iii) the monthly payment for capital, interest, taxes, heating and all other monthly payments (including, without limitation, personal loans, lease payments and credit card debt service) must not exceed 40% of the net monthly revenue of the borrower. Additionally, for all mortgage loans, an external credit check must be positive. When a loan is insured, an additional amount may be added to the principal amount of the mortgage loan representing the premium related thereto. The premium rates vary in accordance with the principal

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amount of the loan. Generally, the greater the loan to value ratio, the greater the premium rate. As is generally the case in the Canadian residential mortgage business, such underwriting policies are derived from CMHC — approved underwriting criteria.

        As a CMHC — approved lender, the Bank has access to the National Housing Act mortgage insurance program. All of the Mortgage Loans are insured by CMHC pursuant to that program. The bulk of those loans were insured at origination. Whether a loan is insured at origination or through the CMHC portfolio insurance program, the insurance is valid until the expiration of the loan.

        All of the Mortgage Loans are balloon mortgages. This means that the Mortgage Loans do not provide for the amortization of the principal balance thereof equally over their term to maturity: thus, a principal payment equal to the original balance less any principal amount paid will be due on each Mortgage Loan at maturity. Balloon mortgages are the most prevalent type of mortgage offered by Canadian mortgage lenders. At the expiration of the term, the mortgage is generally renewed, based on then current market conditions, for a new term. Although the Bank offers terms varying from 3 months to 10 years, terms exceeding 5 years are relatively rare. Moreover, although the Bank offers monthly, semi-monthly and weekly pay mortgages, the majority of the Mortgage Loans are monthly pay mortgages. In general, loans are amortized over a period not exceeding 25 years.

        The Mortgage Loans provide for limited prepayment rights. For example, typically up to 10% of the original principal amount of a Mortgage Loan may be prepaid once annually without penalty. Moreover, a Mortgage Loan may also be prepaid without penalty if the mortgaged property is sold and the mortgagor enters into a new mortgage with the same terms and conditions as the Mortgage Loan. In most other circumstances, prepayments or renegotiations of either the interest rate or the term of a Mortgage Loan will be subjected to prepayment penalties. During the first 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.

        The Company intends and has the ability to hold the Mortgage Loans to maturity unless there is a prepayment by the customer or a Mortgage Loan is impaired.

Tax Status

        The Company elected to be taxable as a REIT under Sections 856 through 860 of the Code. As a REIT, the Company generally will not be liable for United States federal income tax to the extent that it distributes its income to the holders of its Common Stock and its preferred stock, including the Series A Preferred Shares and, accordingly, Depository Shares, and maintains its qualification as a REIT.

        As a REIT, the Company is subject to a number of organizational and operational requirements, including a requirement that it currently distribute to stockholders at least 90% of its “REIT taxable income”. REIT taxable income is essentially taxable income, as determined in accordance with the Code, with certain adjustments. The most significant of such adjustments are (i) no deduction is allowed for dividends received, (ii) a deduction is allowed for dividends paid (other than the portion of any dividend attributable to net income from foreclosure property) and for taxes imposed for failing to satisfy certain statutory REIT requirements, and (iii) net income from foreclosure property and net income derived from prohibited transactions is excluded from the determination.

Employees

        The Company has nine employees whose salaries are covered by the Advisory Agreement. The Company does not anticipate that it will require any additional employees because the Company retains the Bank to perform certain functions pursuant to the Advisory Agreement. The Company maintains corporate records and audited financial statements that are separate from those of the Bank and of any of the Bank’s affiliates.

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Competition

        The Company does not engage in the business of originating Mortgage Assets. While the Company will purchase additional Mortgage Assets, it anticipates that such Mortgage Assets will be purchased from the Bank and/or affiliates of the Bank. Accordingly, the Company does not compete with mortgage conduit programs, investment banking firms, savings and loan associations, banks, thrift and loan associations, finance companies, mortgage bankers or insurance companies in acquiring its Mortgage Assets.

        As of October 31, 2004, the Bank held more than C$19.5 billion of residential mortgage assets. Slightly more than 75.5% of such mortgages were located in Quebec, the Bank’s principal place of business. The major competitor of the Bank in Quebec is the Caisses Populaires Desjardins (a credit union). According to the Bank’s economics and strategy department, the market share of the Bank for such mortgages in Quebec is approximately 15.6% compared with a significantly greater market share for Caisses Populaires Desjardins.

ITEM 2: PROPERTIES

        The principal executive offices of the Company were located in the U.S. branch office of the Bank at 125 West 55th Street, New York, New York 10019 on December 31, 2004. The Company moved its principal executive office to 65 East ^55th Street, New York, New York 10022 on March 14, 2005. The Company neither owns nor leases any properties.

ITEM 3: LEGAL PROCEEDINGS

        The Company is not subject to any material litigation. The Company is not currently involved in nor, to the Company’s knowledge, is it currently threatened with any material litigation other than routine litigation arising in the ordinary course of business, most of which is expected to be covered by liability insurance.

ITEM 4: SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

        None.

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PART II

ITEM 5: MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED SHAREHOLDER MATTERS

        Since the incorporation of the Company, the Bank has owned, and the Bank expects to continue to own, all of the issued and outstanding shares of the Common Stock of the Company. The Common Stock is the Company’s only class of common equity issued and outstanding. Accordingly, there is no established public trading market for the Company’s common equity.

        For the year ended December 31, 2003, the Company paid one dividend with respect to the Common Stock in an amount of $14,500,000. For the year ended December 31, 2004, the Company paid one dividend with respect to the Common Stock in an amount of $10,500,000. In 2003 the Company paid a higher dividend to reduce its distribution shortfall at year-end.

        On January 19, 1998, the Company sold 110 shares of its Adjustable Rate Cumulative Senior Preferred Shares, par value $.01 per share (the “Senior Preferred Shares”) in a nonpublic offering. The Senior Preferred Shares are not and were not required to be registered under the Securities Act of 1933, as amended (the “Securities Act”). The offering of the Senior Preferred Shares was not underwritten. The Senior Preferred Shares were offered to (a) accredited investors (as defined in Rule 501(a) of Regulation D under the Securities Act) in reliance on an exemption from registration pursuant to Section 4(2) of the Securities Act relating to transactions not involving a public offering and (b) certain directors and officers of the Company and its affiliates who reside in Canada and who were able to make certain representations and warranties pursuant to Regulation S of the Securities Act. Investors were required to complete an Investor Questionnaire to verify their status as: (a) an accredited investor or (b) a resident of Canada. The Senior Preferred Shares are not convertible or exchangeable. The Senior Preferred Shares were offered and sold for $3,000 each or $330,000 in the aggregate and the proceeds were used to meet the working capital needs of the Company.

ITEM 6: SELECTED FINANCIAL DATA

	Year Ended December 31, 2004		Year Ended December 31, 2003		Year Ended December 31, 2002		Year Ended December 31, 2001		Year Ended December 31, 2000
Statement of Income Data:
Operating Revenues	$	36,322,291	$	37,895,366	$	37,707,287	$	38,387,349	$	36,319,928
Income from Operations	$	34,459,040	$	36,103,421	$	36,054,804	$	36,800,230	$	34,800,780
Income from Operations per Common Share	$	344,590	$	361,034	$	360,548	$	368,002	$	348,008
Balance Sheet Data:
Total assets	$	477,763,501	$	478,884,177	$	482,278,189	$	481,787,476	$	482,038,157
Total liabilities	$	444,371	$	456,663	$	386,175	$	379,706	$	1,849,465
Stockholders' Equity	$	477,319,130	$	478,427,514	$	481,892,014	$	481,407,770	$	480,188,692
Cash Dividends Declared per Common Share	$	105,000	$	145,000	$	105,000	$	105,000	$	102,000

–10–

ITEM 7: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION

General

        The Company’s principal business objective is to acquire, hold, finance and manage Mortgage Assets as well as other qualifying REIT assets. The Company elected to be taxed as a REIT under the Code and, accordingly, is generally not liable for United States federal income tax to the extent that it distributes at least 90% of its taxable income, subject to certain adjustments, to its stockholders.

Results of Operations

        Income from operations for the year ended December 31, 2004 decreased by $1,644,381 or 4.56 % over the prior year ended December 31, 2003, which increased by $48,617 or 0.13 % over the prior year ended December 31, 2002. Operating revenues for the year ended December 31, 2004, the year ended December 31, 2003 and the year ended December 31, 2002, each of which were comprised entirely of interest income, were $36,322,291, $37,895,366 and $37,707,287, respectively. The decrease in 2004 was mainly due to lower interest rates on newly acquired Mortgage Assets. Because the Company has elected to be taxed as a REIT, no income tax was recorded during the year except for non-resident income taxes withheld.

        Ninety-nine percent of revenues were derived from the Mortgage Assets issued by NB Finance. The Mortgage Assets issued by NB Finance are collateralized by the Mortgage Loans that consist of 67 pools of residential first mortgages insured by CMHC and that are secured by real property located in Canada. The balance of the revenues resulted from interest on bank deposits and short-term investments (i.e., commercial paper of National Bank of Canada and U.S. Treasury bills).

        Expenses for the year ended December 31, 2004, the year ended December 31, 2003 and the year ended December 31, 2002 totaled $1,863,251, $1,791,945 and $1,652,483, respectively. Servicing and advisory fees for the year ended December 31, 2004, the year ended December 31, 2003 and the year ended December 31, 2002 totaled $1,598,279, $1,527,130 and $1,387,859, respectively. Pursuant to the Servicing Agreement and the Advisory Agreement, the Bank performs all necessary operations in connection with administering the Mortgage Assets issued by NB Finance and the Mortgage Loans. Other professional fees include payment to the transfer agent, external accounting fees and miscellaneous expenses.

        During the year ended December 31, 2004, the Board of Directors of the Company authorized dividends of, in the aggregate, $25,067,424 on Preferred Stock (i.e., Senior Preferred Shares and the Series A Preferred Shares and, accordingly, the Depository Shares) and a dividend of $10,500,000 on Common Stock.

Capital Resources and Liquidity

        The Company’s revenues are derived primarily from interest payments on the Mortgage Assets. As of December 31, 2004, $410 million of Mortgage Assets issued by NB Finance were over-collateralized by C$721 million ($600 million) of Mortgage Loans. The Company believes that the amounts generated from the payment of interest and principal on such Mortgage Loans will provide more than sufficient funds to make full payments with respect to the Mortgage Assets issued by NB Finance and that such payments will provide the Company with sufficient funds to meet its operating expenses and to pay quarterly dividends on the Senior Preferred Shares and the Series A Preferred Shares and, accordingly, the Depository Shares. To the extent that the cash flow from its Mortgage Assets exceeds those amounts, the Company will use the excess to fund the acquisition of additional Mortgage Assets and make distributions on the Common Stock.

–11–

        The Company does not require any capital resources for its operations and, therefore, it does not expect to acquire any capital assets in the foreseeable future.

        As of December 31, 2004, the Company had cash resources of $58,327,311, or 12.21% of total assets compared to $19,405,571 or 4.05% of total assets as of December 31, 2003 and $5,454, or 1.1% of total assets as at December 31, 2002. It is expected that the Company will invest in additional Mortgage Assets when cash resources reach 15% of total assets. The liquidity level is sufficient for the Company to pay fees and expenses pursuant to the Servicing Agreement and the Advisory Agreement. The Company expects to make a purchase of additional Mortgage Assets in the beginning of 2005.

        The Company’s principal short-term and long-term liquidity needs are to pay quarterly dividends on the Senior Preferred Shares and the Series A Preferred Shares and, accordingly, the Depository Shares, to pay fees and expenses of the Bank pursuant to the Servicing Agreement and the Advisory Agreement, and to pay expenses of advisors, if any, of the Company.

Disclosure of Contractual Obligations

        The Company does not have any indebtedness (current or long-term), material capital expenditures, balloon payments or other payments due on other long-term obligations. No negative covenants have been imposed on the Company.

Off-Balance Sheet Accounting

        The Company does not have any off-balance sheet obligations.

Disclosure About Market Risk

        Any market risk to which the Company would be exposed would result from fluctuations in: (a) interest rates and (b) currency exchange rates affecting the interest payments received by the Company in respect of the Mortgage Assets issued by NB Finance. Since the Mortgage Assets are significantly overcollateralized by the Mortgage Loans, interest rate fluctuations should not present significant market risk. The Company expects that the interest and principal generated by the Mortgage Loans should enable full payment by NB Finance of all of its obligations as they come due. Since the Mortgage Loans are guaranteed by a fixed ratio of exchange predetermined on the date of purchase and applicable until the maturity of the Mortgage Loans pursuant to the Mortgage Loan Assignment Agreement, fluctuations in currency exchange rates should not present significant market risk.

Critical Accounting Policies

        In December 2001, the Securities and Exchange Commission requested that all registrants discuss their most “critical accounting policies” in management’s discussion and analysis of financial condition and results of operations. The SEC indicated that a “critical accounting policy” is one which is both important to the portrayal of the Company’s financial condition and results and requires management’s most difficult, subjective or complex judgments, often as a result of the need to make estimates about the effect of matters that are inherently uncertain. We believe, based on our current business, that there are no critical accounting policies in connection with the preparation of the financial statements of the Company.

Recently Issued Accounting Pronouncements

        In December 2003, FASB issued a revised interpretation of FIN 46 (FIN 46-R), which supersedes FIN 46 and clarifies and expands current accounting guidance for variable interest entities. FIN 46 and FIN 46-R are effective immediately for all variable interest entities created after January 31, 2003, and for variable interest entities prior to February 1, 2003, no later than the end of the first reporting period after March 15, 2004. The adoption of FIN 46 and FIN 46-R did not have a material impact on the Company’s financial reporting and disclosure.

–12–

ITEM 7A: QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

        This information is included under Item 7 of this report under the caption “Disclosure About Market Risk”.

ITEM 8: FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

        The financial statements are contained on pages F-1 through F-10 of this Form 10-K.

        Selected Quarterly Financial Data (Unaudited)

	Quarter Ended March 31, 2004		Quarter Ended June 30, 2004		Quarter Ended September 30, 2004		Quarter Ended December 31, 2004
Statement of Income Data:
Operating Revenues	$	8,885,094	$	9,339,454	$	9,226,625	$	8,871,118
Income from Operations	$	8,439,642	$	8,874,899	$	8,741,613	$	8,402,886
Income from Operations per Common Share	$	84,396	$	88,749	$	87,416	$	84,029

	Quarter Ended March 31, 2003		Quarter Ended June 30, 2003		Quarter Ended September 30, 2003		Quarter Ended December 31, 2003
Statement of Income Data:
Operating Revenues	$	9,630,658	$	9,671,618	$	8,883,397	$	9,709,693
Income from Operations	$	9,196,557	$	9,217,985	$	8,480,090	$	9,208,789
Income from Operations per Common Share	$	91,965	$	92,180	$	84,801	$	92,088

ITEM 9: CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

        None.

–13–

ITEM 9A: CONTROLS AND PROCEDURES

        Based on their evaluation as of the end of the period covered by this report, the Company’s President and Chief Financial Officer have concluded that the Company’s disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)), are effective to ensure that information required to be disclosed by the Company in reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms.

PART III

ITEM 10: DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

MANAGEMENT

Directors and Executive Officers

The Board of Directors of the Company consists of the individuals set forth below. Mr. Belzile, Mr. Michel and Mr. Dubé are Independent Directors. The Company currently has nine employees and does not anticipate that it will require additional employees.

As of December 31, 2004, the persons who are directors and executive officers of the Company are as follows:

Name	Age	Position and Offices Held	Director Since
Christian Dubé	48	Director and Member of the Audit	2001
		Committee
Donna Goral	47	Director and Vice President	2001
André Belzile	43	Director and Member of the Audit	1999
		Committee
Alain Michel	55	Director and Chairman of the	1997
		Audit Committee
Monique Baillergeau	46	Director and Vice President	2003
Hoda Abdelmessih	50	Director and Vice President	2004
Serge Lacroix	47	Director, Chairman of the Board	2002
		and President
Jean Dagenais	46	Chief Financial Officer	N/A

–14–

        James J. Hanks, Jr. (Secretary) is an officer of the Company. Vanessa Fontana (Assistant Secretary), Martin-Pierre Boulianne (Assistant Secretary) and Martin Ouellet (Vice-President) are the only other employees of the Company. The following is a summary of the experience of the executive officers and current directors of the Company.

        Since May 2004, Mr. Belzile has been Senior Vice-President Finance and Corporate Affairs of The Jean Coutu Group (PJC) Inc., a leading retail drugstore chain operating in Canada and the United States. From 1992 to 2004, he was Vice-President and Chief Financial Officer of Cascades Inc., a producer and marketer of packaging products. From 1986 to 1992, he worked in financial reporting for Cascades Inc. From 1984 to 1986, he worked as an external auditor for the accounting firm Coopers & Lybrand.

        Since 2001, Mr. Michel has been a business consultant for the Caisse de dépôt et placement du Québec, a financial institution that performs management services for public and private pension and insurance funds. From 1994 until 2001, he was Senior Vice-President and Chief Financial Officer of Le Groupe Vidéotron Ltée. From 1992 until 1994, he was Vice-President of Finance and Treasurer of Le Groupe Vidéotron Ltée.

        Since May 2004, Mr. Christian Dubé has been Vice-President and Chief Financial Officer of Cascades Inc., a leader in the manufacturing of packaging products, tissue paper and specialty fine papers. From 1998 until 2004, Mr. Dubé occupied the position of Senior Vice-President and Chief Financial Officer of Domtar Inc. From 1996 until 1998, he was Vice-President Corporate Development and Vice-President Treasurer of Domtar Inc. He currently serves on the Board of Directors for Heroux-Devtek Inc.

        Ms. Donna Goral is a director of NB Finance, Ltd. and has also been Vice-President – Taxation, USA Operations for National Bank of Canada since 1992. Ms. Goral’s tax experience also includes positions with KPMG Peat Marwick and Ernst & Whinney. She is a member of the American Institute of Public Accountants, the New York State Society of CPAs and the Institute of International Bankers.

        Serge Lacroix has been Chairman of the Board and President of NB Capital Corporation since June 2002 and director of NB Finance, Ltd. since July 2002. He has been with National Bank of Canada or one of its subsidiaries since 1993 in various positions, most recently as Managing Director and Senior Vice-President of the New York Branch. Mr. Lacroix was also General Manager, President and CEO of NBC Financial (UK) Ltd. and Senior Vice-President at National Bank Financial. From 1982 until 1993, he held various positions at Wood Gundy in London, Montreal and Vancouver. Prior to that, he was a Trader at Nesbitt Thompson Inc. and he started his career in 1976 as a Foreign Exchange Trader with Banque Canadienne Nationale.

        Ms. Hoda Abdelmessih joined the Bank in 1993 as the Treasury Manager. In 1996, Hoda assumed the responsibility of Treasury Control and in 1999 was promoted to Assistant Vice President of Treasury. In 2001, the Bank decided to repatriate all Treasury Back Office functions to Montreal and Hoda was appointed as the Project Manager for New York to decommission the Back Office. With the sale of the Loan Portfolio to PNC Hoda’s mandate changed, she became a key person in ensuring the conversion of the Loan System that would support all Cross Border Loans administered in New York.

        Jean Dagenais joined the National Bank of Canada in 1990 as Manager and Chief Accountant. In 1997, he was promoted to Vice-President. As such, he is responsible for the preparation of the Bank’s consolidated financial statements as well as other financial information presented to management, shareholders and regulatory authorities. He began is career in 1980 as external auditor with a major international accounting firm. From 1985 to 1990, he held various positions in accounting and financial reporting with large corporations. He studied at the University of Sherbrooke, where he obtained a Bachelor in Administration. He was admitted to the Order of Certified Management Accountants in 1982 and to the Order of Chartered Accountants in 1983.

        Monique Baillergeau was appointed Director of NB Capital and NB Finance, Ltd. in May 2003. She has been with the National Bank of Canada New York branch since February 1986. In 1998, she was assigned to manage the Operations of the London branch. In May 2003, she accepted the position of Vice President in charge of Operations and Administration in New York.

–15–

        The Company pays the Independent Directors fees for their services. The Independent Directors receive annual compensation of $10,000 plus a fee of $750 for attendance (in person or by telephone) at each meeting of the Board of Directors. The Company also pays the directors who comprise the Audit Committee a fee for their additional services. The Audit Committee is comprised of the Independent Directors. Each Independent Director receives annual compensation of $1,500 per year plus a fee of $750 for attendance (in person or by telephone) at each meeting of the Audit Committee. Additionally, Mr. Michel receives annual compensation of $1,000 for acting as Chairman of the Audit Committee.

        The Company does not pay any compensation to its officers or employees or to directors who are not Independent Directors.

Audit Committee Financial Expert

        The Audit Committee of the Company consists of the three following members : Mr. Alain Michel (Chairman of the Audit Committee), Mr. Christian Dubé and Mr. André Belzile. On May 14, 2003, the Board of Directors of the Company determined that all three of the members of the Audit Committee are Audit Committee Financial Experts and are independent of the Company and of the Bank.

Code of Ethics

        On October 31, 2003, the Company adopted a Code of Conduct and Ethics (as an exhibit to this Form 10-K Report) (the “Code”) that applies to all of the Company’s directors, officers and employees. No amendments to the provisions of the Code have been made nor any waivers have been granted by the Company since its adoption. The Company undertakes to provide a copy of this Code without charge, upon request. Investors may send a request for a copy of the Code in writing to the Company’s principal executive office by certified mail with a self-addressed envelope attached to such request.

        In 2003, the Company named Ms. Alexa Topolski the Compliance Officer of the Company in connection with the Company’s effort to keep open lines of dialogue between management and employees and her mandate was renewed in 2004.

Section 16(a) Beneficial Ownership Reporting Compliance

        Section 16(a) of the Securities Exchange Act of 1934, as amended, requires the Company’s officers and directors and certain other persons to file timely certain reports regarding ownership of, and transactions in, the Company’s securities with the Securities and Exchange Commission. Copies of the required filings must also be furnished to the Company.

        Based solely on its review of such forms received by it, or written representations from certain reporting persons, the Company believes that during the year ended December 31, 2004, all reports for the Company’s executive officers and directors that were required to be filed under Section 16 of the Securities Exchange Act of 1934 were timely filed.

–16–

ITEM 11: EXECUTIVE COMPENSATION

Summary Compensation Table

	Annual Compensation(1)				Long Term Compensation Awards
Name and Principal Position	Year	Salary	Bonus	Other Annual Compensation	Securities Underlying Options/SARs(4)	All Other Compensation
Serge Lacroix, CEO	2004	$181,000	$135,000(2)	$ 0	--	--
	2003	$181,000	$175,000(3)	$ 0	--	--

_________________

(1) The services of executive officers of the Company are provided pursuant to the Advisory Agreement between the Bank and the Company (see “Business — Advisory Agreement”).  The advisory fee paid by the Company to the Bank in 2004 was $100,000.  This amount includes all compensation payable to the Company’s executive officers for services rendered to the Company.  Accordingly, no executive officer of the Company was paid more than $100,000 of compensation for the fiscal year ended December 31, 2004 that would be attributable to services performed for the Company and its subsidiaries.  The compensation disclosed in this table with respect to Mr. Lacroix represents the entire compensation paid to him by the Bank for services rendered by him to the Bank and its subsidiaries, including the Company.

(2) $50,000 paid in May 2004 and $75,000 granted in December 2004 but paid in January 2005; plus an extra $10,000 bonus paid in December 2004 by the Cross border NY Group.

(3) $75,000 paid in May 2003 and $100,000 granted in December 2003 but paid in January 2004.

(4) “SAR” means stock appreciation rights.

–17–

SAR Grants in Last Fiscal Year

        Mr. Serge Lacroix did not receive a SAR award during the fiscal year ended December 31, 2004.

Individual Grants
Name	Number of Securities Underlying Options/SARs Grant (#)	% of Total Options/SAR Granted to Employees in Fiscal Year		Base Price (C$/Sh)	Expiration Date	Potential Realizable Value at Assumed Annual Rates of Stock Price Appreciation For Options/SAR Term 5% (C$)          10% (C$)
Serge Lacroix	0	0	%

Aggregated Option/SAR Exercises in Last Fiscal Year and FY-End Option/SAR Values
Name	Shares Acquired on Exercise (#)	Value Realized ($)	Number of Securities Underlying Unexercised Options/SARs at Fiscal Year-End (#) Exercisable / Unexercisable	Value of Unexercised In-the-Money Options/SARs at Fiscal Year End ($) Exercisable / Unexercisable
Serge Lacroix	0	0	3,650 / 1,150	$81,740/$22578

Value based on a share price of 49.56$, at the closing on last day of the fiscal year ending December 31st, 2004.

–18–

Pension Plan Table

(All numbers, Except for Years of Service, are in Canadian Dollars)

Canadian Dollars Remuneration	Years of Service
	15	20	25	30	35
100,000	26,797	36,260	45,724	55,187	64,954
125,000	34,297	46,260	58,224	70,187	82,454
150,000	41,797	56,260	70,724	85,187	99,954
175,000	49,297	66,260	83,224	100,187	117,454
200,000	56,797	76,260	95,724	115,187	134,954
225,000	64,297	86,260	108,224	130,187	152,454
250,000	71,797	96,260	120,724	145,187	169,954
300,000	71,797	96,260	120,724	145,187	169,954

        The above table illustrates the estimated annual retirement benefit payable on a straight line annuity basis to participating employees at normal retirement age (generally age 60), in the earnings and years of service classifications indicated, under the defined benefit pension plan sponsored by the Bank (the "Bank Pension Plan") and an excess benefit plan which covers certain employees of the Bank and its subsidiaries. For each year of service credited to a participant in the Bank Pension Plan, a participant will be entitled to 2% of his or her annual eligible earnings, less the amount earned under the Canada or Quebec pension plans while participating in the Bank Pension Plan. Annual eligible earnings is defined as a participant's average earnings for such participant's 60 highest-paid consecutive months, based on salary and 25% of bonus.

        In addition to the Bank Pension Plan, certain employees of the Bank and its subsidiaries, including those of the Company, may also participate in an excess benefit plan for participants in the Bank Pension Plan whose benefits are reduced pursuant to limitations on pensions imposed by the Income Tax Act (Canada). Employees covered by the excess benefit plan receive a benefit equal to the amount of benefit disallowed under the Pension Plan due to such limitations.

ITEM 12: SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

        The Common Stock is the only voting security of the Company issued and outstanding. As of December 31, 2004, 100 shares of Common Stock were issued and outstanding and 100% were beneficially owned directly by the Bank. The Bank's address is National Bank Tower, 600 de La Gauchetière West, Montreal, Quebec, H3B 4L2, Canada. No officer or director beneficially owns more than five percent of any class of the Company's securities.

        The Company does not maintain any equity compensation plans for its executive officers.

–19–

ITEM 13: CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

        The Bank administers the day-to-day operations of the Company pursuant to the Advisory Agreement. See "Business-Advisory Agreement." The Bank also services the Mortgage Loans pursuant to the Servicing Agreement. See "Business- Servicing Agreement."

ITEM 14: PRINCIPAL ACCOUNTING FEES AND SERVICES

Audit Fees

Deloitte & Touche LLP's aggregate fees billed for professional services rendered for the audit of our annual financial statements for the 2004 fiscal year and the review of the quarterly financial statements for the 2004 fiscal year were $36,950 (compared to $33,500 for 2003). The engagement of Deloitte & Touche LLP for the 2004 fiscal year and the scope of audit, audit-related and tax services were pre-approved by our Audit Committee.

Audit-Related Fees

Deloitte & Touche LLP's aggregate fees billed for audit-related professional services (special report on procedures performed on the mortgage loans) for the 2004 fiscal year were $5,300 (compared to $5,000 for 2003).

Tax Fees

Deloitte & Touche LLP's aggregate fees for all tax related services for the 2004 fiscal year were $35,000 for tax compliance and consulting services (compared to $31,250 for 2003).

The Company's Audit Committee pre-approves the services - both permitted audit services and permitted non-audit services - of the external auditor before the external auditor is engaged by the Company to render such permitted audit services or permitted non-audit services. The Audit Committee evidences its pre-approval by resolution of the Audit Committee.

PART IV

ITEM 15: EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K

(a) The following documents are filed as part of this report:

(1) The report of independent registered chartered accountants and financial statements appearing in Item 8.

(2) The Company is not filing separately financial statement schedules because of the absence of conditions under which they are required or because the required information is included in the financial statements or the notes thereto.

–20–

(3) The exhibits required by this item are listed in the Exhibit Index which appears elsewhere in this Form 10-K and is incorporated herein by reference. The Company is not a party to any management contracts or compensation plans or arrangements required to be filed as exhibits to this Form 10-K.

(b) During the quarter ended December 31, 2004, the Company did not file any Current Reports on Form 8-K.

 

(c) Each Series A share is exchangeable, upon the occurrence of certain events, for one newly issued 8.45% Non-Cumulative First Preferred Share, Series Z, of National Bank of Canada. National Bank of Canada is the parent company of NB Capital Corporation and the holder of 100% of the common shares of NB Capital Corporation. In light of this exchangeable feature, the audited consolidated financial statements for the National Bank of Canada for the years ended October 31, 2004 and October 31, 2003, as well as the Auditors' Report, are filed as part of this annual report on Form 10-K.

–21–

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, on the 17th day of November, 2005.

NB CAPITAL CORPORATION

By:   /s/ Serge Lacroix                                
        Serge Lacroix
        Chairman of the Board and President
        (Principal Executive Officer)

By:  /s/ Jean Dagenais                                
       Jean Dagenais
       Chief Financial Officer
       (Principal Financial Officer)

        Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities indicated on the 17th day of November, 2005.

By:    /s/ Donna Goral                                       
          Donna Goral
          Director By:   /s/ Alain Michel                                       
         Alain Michel
         Director

By:   /s/ Hoda Abdelmessih                             
         Hoda Abdelmessih
         Director By:   /s /André Belzile                                      
         André Belzile
         Director

By:   /s/ Christian Dubé                                   
         Christian Dubé
         Director

By:   /s / Monique Baillergeau                        
         Monique Baillergeau
         Director

By:   /s/ Serge Lacroix                                       
         Serge Lacroix
         Director

–22–

NB CAPITAL CORPORATION

Financial statements as of
December 31, 2004, 2003 and 2002, and
Report of Independent Registered Chartered Accountants

NB CAPITAL CORPORATION
Table of contents

Report of Independent Registered Chartered Accountants	F-1
Balance sheets	F-2
Statements of income	F-3
Statements of stockholders' equity	F-4
Statements of cash flows	F-5
Notes to the financial statements	F-6: F-9

Report of Independent Registered Chartered Accountants

To the Board of Directors and Stockholders of
NB Capital Corporation

We have audited the accompanying balance sheets of NB Capital Corporation (the “Company”) as of December 31, 2004 and 2003 and the related statements of income, stockholders’ equity and cash flows for each of the three years in the period ended December 31, 2004. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes consideration of internal control over financial reporting as a basis for designing procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit includes examining, on a test basis, evidence supporting the amounts and disclosure in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of the Company as of December 31, 2004, 2003 and 2002 and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2004, in conformity with accounting principles generally accepted in the United States of America.

/s/ Deloitte & Touche LLP 

Montreal, Canada

February 8, 2005

F-1

NB CAPITAL CORPORATION
Balance sheets
as of December 31 2004 and 2003
(in U.S. dollars)

	2004	2003
	$	$
Assets
Current Assets
Cash and cash equivalents	58,327,311	19,405,571
Due from an affiliated company	9,474,360	11,111,916
Promissory notes - current portion	51,678,372	87,511,017
Prepaid expenses	30,520	28,000
Accrued interest on cash equivalents	25,499	5,234
	119,536,062	118,061,738
Promissory notes	358,227,439	360,822,439
Total assets	477,763,501	478,884,177
Liabilities
Current Liabilities
Due to the parent company	414,084	414,954
Accounts payable	30,287	41,709
Total liabilities	444,371	456,663
Stockholders' equity
Preferred stock, $0.01 par value per share;
10,000,000 shares authorized,
300,000 Series A shares issued and paid	3,000	3,000
110 Senior preferred shares issued and paid	1	1
Common stock, $0.01 par value per share;
1,000 shares authorized,
100 shares issued and paid	1	1
Additional paid-in capital	476,761,014	476,761,014
Retained earnings	555,114	1,663,498
Total stockholders' equity	477,319,130	478,427,514
Total liabilities and stockholders' equity	477,763,501	478,884,177

See accompanying notes to financial statements.

F-2

NB CAPITAL CORPORATION
Statements of income
years ended December 31, 2004, 2003 and 2002
(in U.S. dollars)

	2004	2003	2002
	$	$	$
Revenue
Interest income
Short-term investments	441,053	346,591	419,235
Promissory notes	35,879,238	37,529,935	37,246,934
Bank interest	2,000	18,840	41,118
	36,322,291	37,895,366	37,707,287
Expenses
Legal	62,265	41,292	98,916
Other professional fees	202,707	223,523	165,708
Servicing fees	1,498,279	1,497,130	1,357,859
Advisory fees	100,000	30,000	30,000
	1,863,251	1,791,945	1,652,483
Net income	34,459,040	36,103,421	36,054,804
Preferred stock dividends	25,067,424	25,067,921	25,070,560
Income available to common stockholders	9,391,616	11,035,500	10,984,244
Weighted average number of common
shares outstanding	100	100	100
Earnings per common share - basic	93,916	110,355	109,842

See accompanying notes to financial statements.

F-3

NB CAPITAL CORPORATION
Statements of stockholders’ equity
years ended December 31, 2004, 2003 and 2002
(in U.S. dollars)

	Series A Preferred Stock	Senior Preferred Stock	Common Stock	Additional Paid-in Capital	Required Earnings		Total
	$	$	$	$	$		$
Stockholders' equity as of
December 31, 2001	3,000	1	1	476,761,014	4,643,754		481,407,770
Net income	--	--	--	--	36,054,804		36,054,804
Dividends on senior preferred stock and
Series A preferred stock	--	--	--	--	(25,070,560	)	(25,070,560	)
Dividend on common stock	--	--	--	--	(10,500,000	)	(10,500,000	)
Stockholders' equity as of
December 31, 2002	3,000	1	1	476,761,014	5,127,998		481,892,014
Net income	--	--	--	--	36,103,421		36,103,421
Dividends on senior preferred stock and
Series A preferred stock	--	--	--	--	(25,067,921	)	(25,067,921	)
Dividend on common stock	--	--	--	--	(14,500,000	)	(14,500,000	)
Stockholders' equity as of
December 31, 2003	3,000	1	1	476,761,014	1,663,498		478,427,514
Net income	--	--	--	--	34,459,040		34,459,040
Dividends on senior preferred stock and
Series A preferred stock	--	--	--	--	(25,067,424	)	(25,067,424	)
Dividend on common stock	--	--	--	--	(10,500,000	)	(10,500,000	)
Stockholders' equity as of
December 31, 2004	3,000	1	1	476,761,014	555,114		477,319,130

See accompanying notes to financial statements.

F-4

NB CAPITAL CORPORATION
Statements of cash flows
years ended December 31, 2004, 2003 and 2002
(in U.S. dollars)

	2004		2003		2002
	$		$		$
Operating activities
Net income	34,459,040		36,103,421		36,054,804
Adjustment to reconcile net income to
net cash provided by operating activities
Prepaid expenses	(2,520	)	(1,333	)	(2,333	)
Due from an affiliated company	1,637,556		(4,134,609	)	5,154,888
Due to the parent company	(870	)	70,008		14,215
Accounts payable	(11,422	)	(26,187	)	(5,413	)
Accrued interest on cash equivalents	(20,265	)	(4,934	)	6,410
Net cash provided by operating activities	36,061,519		32,006,366		41,222,571
Investing activities
Investment in promissory notes	(170,612,901	)	(176,972,855	)	(188,141,611	)
Repayments of promissory notes	209,040,546		198,485,678		134,178,298
Net cash provided by (used in)
investing activities	38,427,645		21,512,823		(53,963,313	)
Financing activities
Dividends	(35,567,424	)	(39,567,921	)	(35,570,560	)
Net cash used in financing activities	(35,567,424	)	(39,567,921	)	(35,570,560	)
Cash position, beginning of year	19,405,571		5,454,303		53,765,605
Cash position, end of year	58,327,311		19,405,571		5,454,303

See accompanying notes to financial statements.

F-5

NB CAPITAL CORPORATION
Notes to the financial statements
years ended December 31, 2004, 2003 and 2002
(in U.S. dollars)

1. Incorporation and nature of operations

NB Capital Corporation (the “Company”) was incorporated in the state of Maryland on August 20, 1997. The Company’s principal business is to acquire, hold, finance and manage mortgage assets. The Company issued, through an Offering Circular, dated August 22, 1997, $300 million of preferred stock and simultaneously, National Bank of Canada, the parent company, made a capital contribution in the amount of $183 million. The Company used the aggregate net proceeds of $477 million to acquire promissory notes of NB Finance, Ltd., a wholly-owned subsidiary of National Bank of Canada.

2. Significant accounting policies

Financial statements

The financial statements are prepared in accordance with accounting principles generally accepted in the United States of America and are expressed in U.S. dollars.

Promissory notes

In accordance with Statement of Financial Accounting Standards (“SFAS”) No. 115 “Accounting for certain Investments in debt and equity Securities” and based on the Company’s intentions regarding these instruments, the Company has classified the Promissory notes as held to maturity and has accounted for them at amortized cost.

Income taxes

The Company has elected to be taxable as a Real Estate Investment Trust (“REIT”) under the InternalRevenue Code of 1986, as amended, and accordingly, is generally not liable for United States federal income tax to the extent that it distributes at least 90% of its taxable income to its stockholders, maintains its qualification as a REIT and complies with certain other requirements.

Per share data

Basic earnings per share with respect to the Company for the years ended December 31, 2004, 2003 and 2002 are computed based upon the weighted average number of common shares outstanding during the year.

Estimates

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting year. Actual results could differ from those estimates.

F-6

NB CAPITAL CORPORATION
Notes to the financial statements
years ended December 31, 2004, 2003 and 2002
(in U.S. dollars)

Interest on promissory notes and short-term investments.

Interest income on promissory notes and short-term investments is accrued using the simple interest method based on the amount of principle outstanding. The accrual of interest is discontinued when management believes that the collection of interest is doubtful.

Reclassification of prior year balances.

Certain prior year balances have been reclassified to conform with the current year presentation.

3. Promissory notes

The Company entered into loan agreements evidenced by promissory notes with NB Finance, Ltd., an affiliated company. The promissory notes are collateralized only by mortgage loans which are secured by residential first mortgages and insured by the Canada Mortgage and Housing Corporation.

The promissory notes have maturities ranging from January 2005 to December 2012, at rates ranging from 5.49% to 10.21%, with a weighted-average rate of approximately 8.19% per annum.

The fair value of the Promissory notes as at December 31, 2004 is $431,273,000. Fair value is estimated by using the present value of expected future cash flows and may not be indicative of the net realizable value.

These rates approximate market interest rates for loans of similar credit and maturity provisions and, accordingly, management believes that the carrying value of the promissory notes receivable approximates their fair value.

	2004		2003
	$		$
Promissory notes, beginning of year	448,333,456		469,846,279
Acquisitions	170,612,901		176,972,855
Principal repayments	(209,040,546	)	(198,485,678	)
Promissory notes, end of year	409,905,811		448,333,456

The scheduled principal repayments as of December 31, 2004 are as follows:

	$
2005	51,678,372
2006	103,758,296
2007	30,504,808
2008	30,392,394
2009	40,797,848
2010	50,892,163
2011	70,958,535
2012	30,923,395

F-7

NB CAPITAL CORPORATION
Notes to the financial statements
years ended December 31, 2004, 2003 and 2002
(in U.S. dollars)

4. Transactions with an affiliated company

During the year, the Company earned interest from NB Finance, Ltd. on the promissory notes, in the amount of $35,879,238 ($37,529,935 in 2003 and $37,246,934 in 2002) (see Note 3).

The amounts due from an affiliated company as of December 31, 2004 and 2003 represent interest and principal repayments due on the promissory notes from NB Finance, Ltd.

5. Transactions with the parent company

The Company entered into agreements with National Bank of Canada in relation to the administration of the Company’s operations. The agreements are as follows:

Advisory agreement

In exchange for a fee equal to $100,000 per year ($30,000 in 2003 and 2002), payable in equal quarterly installments, National Bank of Canada will furnish advice and recommendations with respect to all aspects of the business and affairs of the Company.

Servicing agreement

National Bank of Canada will service and administer the promissory notes and the collateralized mortgage loans and will perform all necessary operations in connection with such servicing and administration.

The fee will equal one-twelfth (1/12) of 0.25% per annum of the aggregate outstanding balance (in CDN$) of the collateralized mortgage loans as of the last day of each calendar month. The average outstanding balance of the collateralized mortgage loans securing the promissory notes amounted to $542,179,064 ($551,360,385 in 2003). During the year, fees of $1,498,279 ($1,497,130 in 2003 and $1,357,859 in 2002) were charged to the Company.

Custodian agreement

National Bank of Canada will hold all documents relating to the collateralized mortgage loans. During the years ended December 31, 2004, 2003 and 2002, no fee was charged to the Company.

Interest on bank account and short-term investments

The Company received $2,000 ($18,840 in 2003 and $41,118 in 2002) in interest on a bank account held with National Bank of Canada.

The Company received $441,053 ($346,591 in 2003 and 419,235 in 2002) in interest on term deposits held with National Bank of Canada.

F-8

NB CAPITAL CORPORATION
Notes to the financial statements
years ended December 31, 2004, 2003 and 2002
(in U.S. dollars)

6. Stockholders’equity

Common stock

The Company is authorized to issue up to 1,000 shares of $0.01 par value common stock. The common shares issued as at December 31, 2004 are as follows:

• 100 shares are authorized, issued and paid.

Preferred stock

The Company is authorized to issue up to 10,000,000 shares of $0.01 par value preferred stock. The preferred shares issued as at December 31, 2004 are as follows:

• 300,000 shares authorized and issued as 8.35% Non-Cumulative Exchangeable Preferred Stock, Series A, non-voting, ranked senior to the common stock and junior to the Adjustable Rate Cumulative Senior Preferred Shares, with a liquidation value of $1,000 per share, redeemable at the Company’s option on or after September 3, 2007, except upon the occurrence of certain changes in tax laws in the United States of America and in Canada, on or after September 3, 2002.

Each Series A share is exchangeable, upon the occurrence of certain events, for one newly issued 8.45% Non-Cumulative First Preferred Share, Series Z, of National Bank of Canada.

These Series A shares are traded in the form of Depositary Shares, each representing a one-fortieth interest therein.

• 1,000 shares authorized and 110 shares issued as Adjustable Rate Cumulative Senior Preferred Shares, non-voting, ranked senior to the common stock and to the 8.35% Non-Cumulative Exchangeable Preferred Stock, with a liquidation value of $3,000 per share, redeemable at the Company’s option at any time and retractable at the holders’option on December 30, 2007 and every ten-year anniversary thereof.

7. Recent pronouncements

In December 2003, FASB issued a revised interpretation of FIN 46 (FIN 46-R), which supersedes FIN 46 and clarifies and expands current accounting guidance for variable interest entities. FIN 46 and FIN 46-R are effective immediately for all variable interest entities created after January 31, 2003, and for variable interest entities prior to February 1, 2003, no later than the end of the first reporting period after March 15, 2004. The adoption of FIN 46 and FIN 46-R did not have a material impact on the Company’s financial reporting and disclosure.

F-9

Item 15(c) to Annual Report of NB Capital Corporation on Form 10-K for the Year Ended December 31, 2004

Consolidated Financial Statements of National Bank of Canada

Management’s Report

The consolidated financial statements of National Bank of Canada (the “Bank”) and the other financial information presented in the Annual Report were prepared by Management, which is responsible for their integrity, including the material estimates and judgments incorporated therein. The consolidated financial statements were prepared in accordance with Canadian generally accepted accounting principles.

Management maintains the necessary accounting and control systems in discharging its responsibility and ensuring that the Bank’s assets are safeguarded. These controls include establishing standards for hiring and training personnel, defining and evaluating tasks and functions, and implementing operating policies and procedures and budget controls.

The Board of Directors (the “Board”) is responsible for examining and approving the financial information which appears in the Annual Report. Acting through the Audit and Risk Management Committee (the “Committee”), the Board also oversees the presentation of the consolidated financial statements and ensures that accounting and control systems are maintained.

The Committee, composed of directors who are neither officers nor employees of the Bank, is responsible for evaluating internal control procedures on an ongoing basis, examining the consolidated financial statements, and recommending them to the Board for approval. The Committee oversees a team of internal auditors, which reports to it on a regular basis.

The control systems are further supported by the Bank’s observance of the laws and regulations that apply to its operations. The Superintendent of Financial Institutions Canada regularly examines the affairs of the Bank to ensure that the provisions of the Bank Act with respect to the safety of the Bank’s depositors and shareholders are being duly observed and that the Bank is in a sound financial condition.

The independent auditors, Samson Bélair / Deloitte & Touche, s.e.n.c.r.l., whose report follows, were appointed by the shareholders on the recommendation of the Board. They were given full and unrestricted access to the Committee to discuss their audit and financial reporting matters.

Réal Raymond	Michel Labonté
President and	Senior Vice-President
Chief Executive Officer	Finance, Technology and Corporate Affairs

Montreal, December 2, 2004

15(c)-1

Auditors’ Report

To the Shareholders of National Bank of Canada

We have audited the Consolidated Balance Sheet of National Bank of Canada (the “Bank”) as at October 31, 2004 and the Consolidated Statements of Income, Changes in Shareholders’ Equity and Cash Flows for the year then ended. These consolidated financial statements are the responsibility of the Bank’s Management. Our responsibility is to express an opinion on these consolidated financial statements based on our audit.

We conducted our audit in accordance with Canadian generally accepted auditing standards. Those standards require that we plan and perform an audit to obtain reasonable assurance whether the consolidated financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated financial statements. An audit also includes assessing the accounting principles used and significant estimates made by Management, as well as evaluating the overall consolidated 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, 2004 and the results of its operations and its cash flows for the year then ended in accordance with Canadian generally accepted accounting principles.

The consolidated financial statements as at October 31, 2003 and for the year then ended were audited by Samson Bélair / Deloitte & Touche, s.e.n.c.r.l., and PricewaterhouseCoopers LLP, who issued an unqualified opinion on the consolidated financial statements in their report dated November 28, 2003.

Samson Bélair / Deloitte & Touche, s.e.n.c.r.l.

Chartered Accountants

Montreal, December 2, 2004

15(c)-2

NATIONAL BANK OF CANADA FINANCIAL STATEMENTS

Consolidated Statement of Income

Year ended October 31
(millions of dollars except per share amounts)	Note		2004		2003
Interest income and dividends
Loans				1,904		1,977
Securities				588		526
Deposits with financial institutions				113		131
				2,605		2,634
Interest expense
Deposits				800		1,030
Subordinated debentures				99		105
Other				323		175
				1,222		1,310
Net interest income				1,383		1,324
Other income
Financial market fees				633		544
Deposit and payment service charges				200		192
Trading revenues				198		335
Gains on investment account securities, net				91		1
Card service revenues				49		49
Lending fees				238		204
Acceptances, letters of credit and guarantee				65		63
Securitization revenues				180		204
Foreign exchange revenues				72		66
Trust services and mutual funds				244		210
Other				196		170
				2,166		2,038
Total revenues				3,549		3,362
Provision for credit losses		6		86		177
Operating expenses
Salaries and staff benefits				1,359		1,287
Occupancy				200		192
Computers and equipment				334		312
Communications				77		80
Professional fees				118		112
Other				304		274
				2,392		2,257
Income before income taxes and non-controlling interest				1,071		928
Income taxes		16		318		277
				753		651
Non-controlling interest				28		27
Net income				725		624
Dividends on preferred shares		14		23		25
Net income available to common shareholders				702		599
Average number of common shares outstanding (thousands)		17
Basic				170,918		177,751
Diluted				173,276		179,235
Net earnings per common share		17
Basic				4.10		3.37
Diluted				4.05		3.34
Dividends per common share		14		1.42		1.08

15(c)-3

NATIONAL BANK OF CANADA FINANCIAL STATEMENTS

Consolidated Balance Sheet

As at October 31
(millions of dollars)	Note		2004			2003
ASSETS
Cash resources
Cash				481			222
Deposits with financial institutions				5,296			6,825
				5,777			7,047
Securities
Investment account		4		7,428			6,998
Trading account		4		20,561			19,151
Loan substitutes				18			30
				28,007			26,179
Securities purchased under reverse repurchase agreements				4,496			3,955
Loans		5 and 6
Residential mortgage				15,500			13,976
Personal and credit card				7,825			6,101
Business and government				18,751			18,934
Allowance for credit losses				(578	)		(630	)
				41,498			38,381
Other
Customers’ liability under acceptances				3,076			3,334
Premises and equipment		7		267			263
Goodwill		8		662			660
Intangible assets		8		180			183
Other assets		9		4,844			4,929
				9,029			9,369
				88,807			84,931
LIABILITIES AND SHAREHOLDERS’ EQUITY
Deposits		10
Personal				23,675			23,512
Business and government				24,299			22,700
Deposit-taking institutions				5,458			5,251
				53,432			51,463
Other
Acceptances				3,076			3,334
Obligations related to securities sold short				10,204			8,457
Securities sold under repurchase agreements				8,182			8,674
Other liabilities		11		7,931			6,992
				29,393			27,457
Subordinated debentures		12		1,408			1,516
Non-controlling interest				370			398
Shareholders’ equity
Preferred shares		14		375			375
Common shares		14		1,545			1,583
Contributed surplus		15		7			2
Unrealized foreign currency translation adjustments				(10	)		6
Retained earnings				2,287			2,131
				4,204			4,097
				88,807			84,931

15(c)-4

NATIONAL BANK OF CANADA FINANCIAL STATEMENTS

Consolidated Statement of Changes in Shareholders’ Equity

Year ended October 31
(millions of dollars)	Note		2004			2003
Preferred shares at beginning				375			300
Issuance of preferred shares, Series 15				-			200
Redemption of preferred shares, Series 12 for cancellation				-			(125	)
Preferred shares at end		14		375			375
Common shares at beginning				1,583			1,639
Issuance of common shares				42			26
Repurchase of common shares for cancellation				(80	)		(82	)
Common shares at end		14		1,545			1,583
Contributed surplus at beginning				2			-
Stock option expense				5			2
Contributed surplus at end		15		7			2
Unrealized foreign currency translation adjustments at beginning				6			17
Losses on foreign exchange operations with a functional currency
other than the Canadian dollar, net of income taxes				(16	)		(11	)
Unrealized foreign currency translation adjustments at end				(10	)		6
Retained earnings at beginning				2,131			1,945
Net income				725			624
Dividends
Preferred shares		14		(23	)		(25	)
Common shares		14		(243	)		(193	)
Income taxes related to dividends on preferred shares,
Series 12, 13 and 15		16		(1	)		-
Premium paid on common shares repurchased for cancellation		14		(302	)		(216	)
Share issuance expenses, net of income taxes				-			(4	)
Retained earnings at end				2,287			2,131
Shareholders’ equity				4,204			4,097

15(c)-5

NATIONAL BANK OF CANADA FINANCIAL STATEMENTS

Consolidated Statement of Cash Flows

Year ended October 31
(millions of dollars)	2004			2003
Cash flows from operating activities
Net income		725			624
Adjustments for:
Provision for credit losses		86			177
Amortization of premises and equipment		52			49
Future income taxes		50			5
Translation adjustment on foreign currency subordinated debentures		(29	)		(76	)
Gains on sale of investment account securities, net		(91	)		(1	)
Gains on asset securitizations		(67	)		(86	)
Stock option expense		5			2
Change in interest payable		4			72
Change in interest and dividends receivable		320			(34	)
Change in income taxes payable		(160	)		208
Change in unrealized losses (gains) and net amounts payable
on derivative contracts		10			(458	)
Change in trading account securities		(1,410	)		(5,972	)
Excess of pension plan contributions over expenses		(20	)		(255	)
Change in other items		807			1 034
		282			(4,711	)
Cash flows from financing activities
Change in deposits		1,969			(227	)
Maturity of subordinated debentures		(79	)		-
Issuance of common shares		42			26
Issuance of preferred shares		-			200
Repurchase of common shares for cancellation		(382	)		(298	)
Redemption of preferred shares for cancellation		-			(125	)
Dividends paid on common shares		(179	)		(235	)
Dividends paid on preferred shares		(23	)		(25	)
Change in obligations related to securities sold short		1,747			2,915
Change in securities sold under repurchase agreements		(492	)		4,258
Change in other items		(16	)		(16	)
		2,587			6,473
Cash flows from investing activities
Change in loans		(4,730	)		(1,528	)
Proceeds from securitization of assets		1,527			1,729
Purchases of investment account securities		(15,480	)		(21,342	)
Sales of investment account securities		15,141			21,208
Change in securities purchased under reverse repurchase agreements		(541	)		(1,589	)
Net acquisitions of premises and equipment		(56	)		(57	)
		(4,139	)		(1,579	)
Increase (decrease) in cash and cash equivalents		(1,270	)		183
Cash and cash equivalents at beginning		7,047			6,864
Cash and cash equivalents at end		5,777			7,047
Cash and cash equivalents
Cash		481			222
Deposits with financial institutions		5,296			6,825
		5,777			7,047
Supplementary information
Interest and dividends paid		1,420			1,498
Income taxes paid		460			127

15(c)-6

NATIONAL BANK OF CANADA FINANCIAL STATEMENTS

Notes to the Consolidated Financial Statements

1 Summary of Significant Accounting Policies

The consolidated financial statements of National Bank of Canada (the “Bank”) were prepared in accordance with Section 308(4) of the Bank Act, which states that Canadian generally accepted accounting principles (“GAAP”) are to be applied unless otherwise specified by the Superintendent of Financial Institutions Canada (the “Superintendent”). These principles differ in some regards from United States GAAP, as explained in Note 25.

The preparation of consolidated financial statements in conformity with Canadian GAAP requires Management to make estimates and assumptions that affect the reported amounts of balance sheet assets and liabilities and disclosure of contingent assets and liabilities as at the balance sheet date and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

The significant accounting policies used in preparing these consolidated financial statements are summarized below.

The consolidated financial statements of the Bank include the assets, liabilities and operating results of the Bank and all its subsidiaries, after the elimination of intercompany transactions and balances.

Investments in companies over which the Bank exercises significant influence are accounted for using the equity method and are included in “Other assets” in the Consolidated Balance Sheet. The Bank’s share of income (losses) from these companies is included in “Interest income and dividends” in the Consolidated Statement of Income.

Translation of foreign currencies

Assets and liabilities denominated in foreign currencies are translated into Canadian dollars at month-end exchange rates at the date of the consolidated financial statements. Operating revenues and expenses are translated using average monthly exchange rates. Realized and unrealized translation gains and losses are recorded in the current year Consolidated Statement of Income.

Assets and liabilities of foreign operations with a functional currency other than the Canadian dollar are translated into Canadian dollars at month-end exchange rates as at the balance sheet date, while operating revenues and expenses are translated using the average monthly exchange rates. Exchange gains and losses arising from translation of foreign operations with a functional currency other than the Canadian dollar, and the results of hedging these positions, net of income taxes, are recorded in unrealized foreign currency translation adjustments.

Cash resources

Cash resources consist of cash and cash equivalents. Cash comprises cash on hand, bank notes and coin. Cash equivalents consist of deposits with the Bank of Canada, deposits with financial institutions, including net receivables related to cheques and other items in the clearing process, as well as the net amount of cheques and other items in transit.

Securities

Securities are held in the investment or the trading account, depending on Management’s intention.

Investment account securities are purchased with the intention of holding them to maturity or until market conditions favour other types of investments. Equity securities are stated at acquisition cost if the Bank does not exercise a significant influence over the investee. Debt securities are stated at unamortized acquisition cost and any premiums and discounts are amortized using the effective yield method over the period to maturity or disposal of the security. Dividend and interest income as well as the amortization of premiums and discounts are recorded in “Interest income and dividends.” Gains or losses realized on the disposal of securities, calculated using the average cost method, and any loss in value that is other than a temporary impairment is recorded in “Other income.”

Trading account securities purchased for resale in the short term are presented at fair value based on publicly disclosed market prices. In the event market prices are not available, the fair value is estimated on the basis of the market prices of similar securities.

Dividend and interest income is recorded in “Interest income and dividends.” Realized and unrealized gains or losses on these securities are recorded in “Other income.”

Securities purchased under reverse repurchase agreements and sold under repurchase agreements

The Bank purchases securities under reverse repurchase agreements and sells securities under repurchase agreements. These securities are recorded at cost in the Consolidated Balance Sheet. Interest income from reverse repurchase agreements and interest expense under repurchase agreements are recorded on an accrual basis in the Consolidated Statement of Income.

15(c)-7

NATIONAL BANK OF CANADA FINANCIAL STATEMENTS

Loans

A loan, other than a credit card loan, is considered impaired when, in the opinion of Management, there is reasonable doubt as to the ultimate collectibility of a portion of principal or interest or where payment of interest is contractually 90 days past due, unless there is no doubt as to the collectibility of the principal or interest. A loan may revert to performing status only when principal and interest payments have become fully current. Credit card loans are written off when payments are more than 180 days in arrears.

When a loan is deemed impaired, interest ceases to be recorded and the carrying value of the loan is adjusted to its estimated realizable amount by writing off all or part of the loan or by taking an allowance for credit losses.

Foreclosed assets held for sale in settlement of an impaired loan are presented at fair value less selling costs at the date of foreclosure. Any difference between the carrying value of the loan before foreclosure and the initially estimated realizable amount of the assets is recorded as a charge to “Provision for credit losses.” For any subsequent change in their fair value, gains or losses are recognized under “Other income” in the Consolidated Statement of Income. Gains may not exceed losses in value recognized after the date of foreclosure. Revenues generated by foreclosed assets and the related operating expenses are included in the Consolidated Statement of Income.

Foreclosed assets held for use in settlement of an impaired loan are measured at fair value at the date of foreclosure. Any difference in the carrying value of the loan exceeding fair value is recorded under “Provision for credit losses.” These assets are subsequently presented at the date of foreclosure as premises and equipment and are subject to the same accounting rules as those applicable to the premises and equipment to which they relate.

Loan origination fees, including loan commitment, restructuring and renegotiation fees, are considered an integral part of the yield earned on the loan and are deferred and amortized to interest income over the term of the loan. Commitment fees are treated on the same basis if there is reasonable expectation that the commitment will result in a loan; the fees are then amortized to interest income over the term of the loan. Otherwise, the fees are included in other income over the term of the commitment. Loan syndication fees are recognized as other income, unless the yield on any loan retained by the Bank is less than that of other comparable lenders involved in the financing. In such cases, an appropriate portion of the fees is deferred and amortized to interest income over the term of the loan.

Allowance for credit losses

The allowance for credit losses reflects Management’s best estimate of losses in its loan portfolio as at the balance sheet date. The allowance relates primarily to loans, but may also cover the credit risk associated with deposits with other banks, derivative products, loan substitute securities and other credit instruments such as acceptances, letters of guarantee and letters of credit. The allowance for credit losses, which consists of specific allowances for impaired loans, the country risk allowance and the general allowance for credit risk, is increased by the provision for credit losses, which is charged to income, and decreased by the amount of write-offs, net of recoveries.

The specific allowances for impaired loans are established for all such loans for which impairment could be estimated individually, reducing them to their estimated realizable amounts. The estimated realizable amounts are measured by discounting expected future cash flows. For groups of impaired loans consisting of large numbers of homogeneous balances of relatively small amounts, the realizable amounts are determined by discounting expected future cash flows for each group of loans using formulas that take into account past loss experience, economic conditions and other relevant circumstances. No specific allowance is established for credit card loans, as balances are written off if payment has not been received within 180 days.

The allowance for credit losses in relation to loans to countries designated by the Superintendent is revalued on an ongoing basis according to risk exposure in the various countries and their related economic conditions.

The allocated general allowance for credit risk represents Management’s best estimate of probable losses within the portion of the portfolio that has not yet been specifically identified as impaired. This amount is determined by applying expected loss factors to outstanding and undrawn facilities. The allocated general allowance for corporate and government loans is based on the application of expected default and loss factors, determined by statistical loss migration analysis, according to loan type. For more homogeneous portfolios, such as residential mortgage loans, small and medium-sized enterprise loans, personal loans and credit card loans, the allocated general allowance is determined on a product portfolio basis. Losses are determined by the application of loss ratios determined through statistical analysis of loss migration over an economic cycle. The unallocated general allowance for credit risk is based on Management’s assessment of probable losses in the portfolio that have not been captured in the determination of the specific allowances for impaired loans, the country risk allowance and the allocated general allowance. This assessment takes into account general economic and business conditions, recent loan loss experience, and trends in credit quality and concentrations. This allowance also reflects model and estimation risks. The unallocated general allowance does not represent future losses or serve as a substitute for the allocated general allowance.

Asset securitization

The Bank enters into securitization transactions involving residential and commercial mortgage loans, consumer loans, personal loans and credit card receivables by selling them to special purpose entities or trusts that issue securities to investors. These transactions are recorded as sales when the Bank is deemed to have surrendered control over the assets sold and to have received consideration other than beneficial interests in these assets. Gains and losses on securitization transactions are recognized in income on the transaction date.

15(c)-8

NATIONAL BANK OF CANADA FINANCIAL STATEMENTS

As part of securitization transactions, the Bank may retain certain interests in the securitized receivables in the form of one or more subordinated tranches, rights to future excess interest and, in some cases, a cash reserve account. Gains and losses on securitizations, net of transaction fees, are carried in the Consolidated Statement of Income under “Securitization revenues.” Gains and losses on the sale of receivables depend in part on the allocation of the previous carrying amount of the receivables between the assets sold and the retained interests. This allocation is based on their relative fair value at the date of transfer. Fair value is based on market prices, when available. However, as quotes are usually not available for retained interests, fair value is determined using the present value of future expected cash flows estimated in relation to assumptions on credit losses, prepayment rates, forward yield curves, and discount rates commensurate with the risks involved.

Retained interests are recorded at cost and included in investment account securities. Any impairment in the value of retained interests that is other than temporary is recorded in the Consolidated Statement of Income under “Securitization revenues.”

The Bank generally transfers receivables on a fully serviced basis. At the time of transfer, a servicing liability is recognized and amortized to income over the term of the transferred assets. This servicing liability is presented in the Consolidated Balance Sheet under “Other liabilities.”

Prior to July 1, 2001, securitization transactions were accounted for in accordance with Emerging Issues Committee Abstract No. 9 “Transfers of Receivables” (EIC-9) of the CICA Handbook. Gains on securitization transactions were amortized to income over time, while losses were recognized as incurred. For securitization transactions that provide for the payment of the proceeds of sale when the sum of interest and fees collected from borrowers exceeded the yield paid to investors, these proceeds were considered income when the amount could legally be paid by the trust. Since July 1, 2001, gains and losses have been recognized in income on the date of the transaction. Transactions entered into prior to July 1, 2001 (or completed after that date pursuant to commitments to sell prior to July 1, 2001) have not been restated, and deferred gains and other income will continue to be recorded under the original terms of the agreements.

Guaranteed mortgage loans

The Bank finances a portion of its residential mortgage loan portfolio through the mortgage-backed securities program provided for in the National Housing Act. Under this program, the Bank pools eligible mortgage loans and sells ownership rights in these pools to investors. Investors are paid a pre-set coupon rate and the principal from the underlying mortgages. The Canada Mortgage and Housing Corporation (“CMHC”) unconditionally guarantees the payments to the investors. The Bank continues to service the securitized mortgage loans.

The Bank is committed to the CMHC to make sufficient funds regularly available to the paying agent and the 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 paying agent and the transfer agent. Should the Bank default, the CMHC can assign the servicing of the securitized loans to another servicer.

Acceptances and customers’ liability under acceptances

The potential liability of the Bank under acceptances is recorded as a liability in the Consolidated Balance Sheet. The Bank’s potential recourse to customers is recorded as an equivalent offsetting asset. Fees are recorded in “Other income” in the Consolidated Statement of Income.

Premises and equipment

Premises, equipment, furniture and leasehold improvements are recognized at cost less accumulated amortization and are amortized over their estimated useful lives according to the following methods and rates. Land is recorded at cost.

	Methods	Rates
Buildings	(a) or (b)	2% to 14%
Equipment and furniture	(a) or (b)	20% to 50%
Leasehold improvements	(a)	(c)

(a) straight-line

(b) diminishing balance

(c) over the lease term plus the first renewal option

Goodwill

The purchase method is used to account for the acquisition of subsidiaries. Goodwill represents the excess of the price paid for the acquisition of subsidiaries over the fair value of the net assets acquired. Goodwill is tested for impairment annually (or more frequently if changes in circumstances indicate that the asset might be impaired) to ensure that the fair value remains greater than or equal to the carrying value. Any excess of the carrying value over the fair value is charged to income for the period during which the impairment has been determined.

Intangible assets

The intangible assets of the Bank result from the acquisition of subsidiaries or groups of assets and are mainly composed of management contracts recorded at their fair value at the time of acquisition. Since these assets have indefinite lives, they are not amortized, but are tested for impairment annually, or more frequently if changes in circumstances indicate that they might be impaired. The impairment test consists of comparing the fair value of the asset with its carrying value. The excess of the carrying value over the fair value is charged to income for the period during which the impairment is determined. Intangible assets with finite useful lives are amortized over their useful lives. These assets are written down when the long-term expectation is that their carrying values will not be recovered. Any excess of the carrying value over the net recoverable value is charged to income.

15(c)-9

NATIONAL BANK OF CANADA FINANCIAL STATEMENTS

Obligations related to securities sold short

These liabilities represent the Bank’s obligation to deliver securities it sold but did not own at the time of sale. Obligations related to securities sold short are recorded as liabilities at fair value; obligations related to securities that are used as hedges are accounted for at unamortized cost. Realized and unrealized gains and losses on trading activities are recorded in “Trading revenues” in the Consolidated Statement of Income.

Gains and losses on securities sold short used for hedging purposes are included in the Consolidated Statement of Income concurrently with the gains and losses on the hedged items.

Income taxes

The Bank provides for income taxes under the asset and liability method. The Bank determines future income tax assets and liabilities based on the differences between the carrying values and the tax bases of assets and liabilities, according to income tax laws and income tax rates enacted or substantively enacted on the date the differences are reversed. Future income tax assets represent tax benefits related to deductions the Bank may claim to reduce its taxable income in future years. No future income tax expense is recorded for the portion of retained earnings of foreign subsidiaries that is permanently reinvested.

Derivative financial instruments

The Bank offers various types of derivatives to accommodate the needs of its clients in managing their risk exposure and investment and trading activities. It also uses derivatives in its own risk management and trading activities.

The main derivative instruments used by the Bank are exchange-traded contracts such as futures and options as well as over-the-counter products such as forward rate agreements, credit derivatives, swaps and options.

Derivatives held for trading purposes

Derivatives used to accommodate the needs of clients and to enable the Bank to generate income from its trading activities are recognized on the fair value basis. Unrealized gains are presented as assets and unrealized losses as liabilities in the Consolidated Balance Sheet. Realized and unrealized gains and losses on trading activities are recorded in “Other income” in the Consolidated Statement of Income.

Derivatives held for asset/liability management

Derivative instruments used to manage the Bank’s own risks, in particular interest and exchange rate risks, are recorded using hedge accounting, when appropriate.

Documentation

The Bank prepares formal documentation for all hedging relationships which identifies the hedging derivative and the specific asset or liability or cash flow being hedged. It also documents the risk management objective and strategy used for all hedging activities. The Bank also systematically determines, at inception of the hedge and over the term of the hedging relationship, whether changes in the fair value or cash flows of the hedged item can be effectively offset by changes in the fair value or cash flows of the hedging derivative.

Types of derivatives

The Bank uses mainly interest rate swaps to hedge against changes in the fair values of assets and liabilities and changes in the cash flows related to a variable rate asset or liability.

Recognition

When the derivative is designated and deemed effective as a fair value or cash flow hedge, the related gains and losses are recorded in “Other income” in the Consolidated Statement of Income at the same time as the gains or losses on the assets and liabilities hedged.

Discontinuance of hedge accounting

Realized and unrealized gains and losses on terminated financial instruments or financial instruments that have ceased to be effective before they expire are presented with assets or liabilities in the Consolidated Balance Sheet and recognized in “Other income” in the period during which the underlying hedge activity is recognized. Should the financial instrument once again qualify as a hedging relationship, any fair value already presented in the Consolidated Balance Sheet will be amortized to “Other income.” If a designated hedged item is sold, terminated or expires before the related instrument is terminated, any realized or unrealized gain or loss on the instrument is recognized in “Other income” in the Consolidated Statement of Income.

15(c)-10

NATIONAL BANK OF CANADA FINANCIAL STATEMENTS

Financial instruments held for non-trading purposes and ineligible for hedge accounting

Financial instruments held for non-trading purposes and which do not qualify for hedge accounting are carried at fair value as an asset or liability. Any change in the fair value of these instruments is recorded in “Other income” in the Consolidated Statement of Income.

Insurance revenues and expenses

Premiums less claims and changes in actuarial liabilities are reflected in “Other income.” Income from securities held by the insurance subsidiaries is included in “Interest income and dividends” in the Consolidated Statement of Income and under “Securities” in the Consolidated Balance Sheet. Amortization of deferred gains and losses on the disposal of securities is included in “Other income.” Administrative costs are recorded in “Operating expenses” in the Consolidated Statement of Income.

Assets under administration and assets under management

The Bank administers and manages assets that are owned by clients but which are not reflected on the Consolidated Balance Sheet. Asset management fees are earned for providing investment and mutual fund management services. Asset administration fees are earned for providing trust, estate administration and custodial services. Fees are recognized in “Other income” as the services are provided.

Employee future benefits

The Bank offers defined benefit pension plans that cover substantially all salaried employees. These defined benefit plans are funded pension plans. The Bank also offers its employees certain post-retirement and post-employment benefits, compensated leave and termination benefits (non-pension employee benefits), which are generally not funded. These benefits include health care, life insurance and dental benefits. Employees eligible for the post-retirement benefits are those who retire at certain retirement ages. Employees eligible for post-employment benefits are those on long-term disability or maternity leave.

The Bank records its benefit obligation under employee pension plans and the related costs net of plan assets.

Actuarial valuations are made periodically to determine the present value of plan obligations. The actuarial valuation of accrued pension and post-retirement benefit obligations is based on the projected benefit method prorated on services using the most likely assumptions according to Management as regards future salary levels, cost escalation, retirement age and other actuarial factors. The accrued benefit obligation is valued using market rates as at the measurement date. With regard to the expected long-term returns of plan assets used to calculate pension expense, most of the fixed-income securities in the plans are measured using fair value while equity securities and other assets are measured using a market-related value. This value takes into account the changes in the fair value of assets over a three-year period. Prior to November 1, 2003, all portfolio securities were valued at market-related values. The impact of this change for the year ended October 31, 2004 is negligible.

The cost of pension and other post-retirement benefits earned by employees is established by calculating the sum of the following: the current period accrued benefit cost; the notional interest on the actuarial liability of the plans and the expected long-term return on plan assets; the amortization, over the estimated average remaining service lives of employees, of actuarial gains and losses; and the amounts resulting from the changes made to the assumptions and the plans. The cumulative excess of pension plan contributions over the amounts recorded as expenses is recognized in “Other assets” in the Consolidated Balance Sheet while the cumulative cost of other post-retirement benefits, net of disbursements, is recognized in “Other liabilities.”

Past service costs arising from amendments to the plans are amortized on a straight-line basis over the average remaining service period of active employees on the date of the amendments. The portion of the actuarial net gain or loss which exceeds 10% of either the accrued benefit obligation or the fair value of the plan assets, whichever is higher, is amortized over the average remaining service period of active employees. This average remaining service period varies from 9 to 12 years depending on the plan. When the restructuring of an employee benefit plan gives rise to both a curtailment and a settlement of obligations, the curtailment is accounted for prior to the settlement.

Stock-based compensation plans

On November 1, 2002, the Bank adopted the requirements of CICA standard “Stock-Based Compensation and Other Stock-Based Payments,” which establishes standards for the recognition, measurement and disclosure of stock-based compensation and other stock-based payments made in exchange for goods and services.

In accordance with this standard, rights awarded under the Stock Appreciation Rights (SARs) Plan are recorded at fair value by measuring, on an ongoing basis, the excess of the stock price over the exercise price of the option. The standard applies to SARs outstanding as at the date of the adoption of the recommendations and to subsequent awards. The Bank’s obligation, which results from the variation in the stock’s market price, is recognized in income on a straight-line basis over the vesting period, i.e., four years, and a corresponding amount is included in “Other liabilities.” When the vesting period expires and until the SARs are exercised, the change in the obligation attributable to variations in the stock price is recognized by increasing or decreasing the compensation expense for the period in which the variations occur. With regard to SARs outstanding as at the date of the adoption of the recommendations, the application of the new transitional provisions of the standard, taking into account the liability previously recognized by the Bank, did not require any cumulative adjustment to the balance of retained earnings as at November 1, 2002.

15(c)-11

NATIONAL BANK OF CANADA FINANCIAL STATEMENTS

The Bank uses the fair value based method to account for stock options awarded under its Stock Option Plan subsequent to November 1, 2002. The fair value of the stock options is estimated on the grant date using the Black-Scholes model.

This cost is recognized on a straight-line basis over the vesting period, i.e., four years, as an increase in compensation expense and contributed surplus. When the options are exercised, the proceeds and the contributed surplus are credited to common share paid-up capital. For options awarded before November 1, 2002, no compensation expense is recognized. Any consideration paid by employees upon exercise of stock options is also credited to common share paid-up capital. The exercise price of each option awarded is equal to the closing price of the common shares of the Bank on The Toronto Stock Exchange on the business day preceding the date of the award.

The Bank also offers a Deferred Stock Unit (“DSU”) Plan for Officers intended for certain members of senior management and other key employees of the Bank and its subsidiaries. Under the Plan, a portion of the value of the officer’s compensation is tied to the future value of the Bank’s common shares as an incentive award. A DSU is a right whose value corresponds to the market value of a common share of the Bank at the time the DSU is awarded. DSUs vest according to specific criteria and on the dates established in the officer’s grant letter. Additional DSUs are allocated to the officer’s account in proportion to the dividends paid on common shares of the Bank. DSUs can only be exercised when the officer retires or ceases to be a Bank employee. The compensation expense for this plan is recorded under “Operating expenses” in the year the incentive award vests to the officer. Any change in the value of DSUs is recorded to “Operating expenses” in the Consolidated Statement of Income.

Comparative figures

Certain comparative figures have been reclassified to conform with the presentation adopted in the current year.

2 Changes in Accounting Policies

2a. Recent Accounting Standards Adopted

Generally accepted accounting principles

On November 1, 2003, the Bank adopted the requirements of Section 1100 of the CICA Handbook, “Generally Accepted Accounting Principles.” This Section establishes standards for financial reporting in accordance with generally accepted accounting principles (“GAAP”) and identifies other sources to consult when selecting accounting policies and determining appropriate disclosures when a matter is not dealt with explicitly in the primary sources of GAAP. The application of this standard eliminates certain practices that may have been used within a particular industry. The only material impact on the results of the Bank is that mortgage loan prepayment fees are no longer amortized. Since November 1, 2003, certain prepayment fees have been recognized in the Consolidated Statement of Income under “Lending fees” when earned. Prior to November 1, 2003, these fees were deferred and amortized to interest income over the term of the loan. Following the adoption of Section 1100, an unamortized balance of mortgage loan prepayment fees, which amounted to $25 million as at October 31, 2003 ($16 million net of income taxes), was recorded during the year in the Consolidated Statement of Income under “Lending fees.” In addition, the net amounts receivable from financial institutions related to cheques and other items in the clearing process are now presented as assets in the Consolidated Balance Sheet, while net amounts payable to individual financial institutions are presented as liabilities. As at October 31, 2003, the net balance for all financial institutions was presented as an asset in the Consolidated Balance Sheet.

Hedging relationships

On November 1, 2003, the Bank adopted CICA Accounting Guideline No. 13 “Hedging Relationships” (AcG-13). This Guideline identifies the circumstances in which hedge accounting is appropriate and discusses the identification, designation, documentation and effectiveness of hedging relationships and the discontinuance of hedge accounting, but does not cover hedge accounting techniques. Monetary or derivative financial instruments used in risk management that satisfy the conditions for hedge accounting are recorded using the hedge accounting methodology described in Note 1.

Derivative financial instruments that do not qualify for hedge accounting under AcG-13 are carried at fair value on the Consolidated Balance Sheet as at November 1, 2003. The resulting $16 million net transitional gain is deferred and recognized in income over the remaining life of the hedged item.

Impairment of long-lived assets

Effective November 1, 2003, the Bank adopted the recommendations of CICA standard “Impairment of Long-Lived Assets,” which establishes the standards for the recognition, measurement and disclosure of the impairment of long-lived assets. This standard stipulates that an impairment loss should be recognized when the carrying value of a long-lived asset intended for use exceeds the sum of the undiscounted cash flows expected from its use and eventual disposition. The impairment loss is to be measured as the excess of the carrying value of the asset over its fair value. The adoption of this standard had no impact on the consolidated financial statements for the fiscal year ended October 31, 2004.

Equity-linked deposit contracts

On November 1, 2003, the Bank adopted CICA Accounting Guideline No. 17 “Equity-Linked Deposit Contracts.” Under this Guideline, the Bank may record at fair value certain deposit obligations for which the obligation varies according to the return on equities or an equity index and which entitle investors, after a specified period of time, to receive the higher of a stated percentage of their principal investment and a variable amount based on the return of equities or an equity index. Any subsequent changes in fair value are recognized in the Consolidated Statement of Income as they arise.

15(c)-12

NATIONAL BANK OF CANADA FINANCIAL STATEMENTS

The adoption of this Guideline did not have a material impact on the consolidated financial statements for the year ended October 31, 2004.

2b. Recent Accounting Standards Pending Adoption

Variable interest entities

On November 1, 2004, the Bank will adopt Accounting Guideline No. 15 “Consolidation of Variable Interest Entities” (AcG-15). This Guideline is harmonized with new FASB Interpretation No. 46 (FIN 46R) “Consolidation of Variable Interest Entities” and provides guidance on the application of the standards set out in CICA Handbook Section 1590 “Subsidiaries” for certain entities defined as variable interest entities (“VIEs”). VIEs are entities in which equity investors do not have controlling financial interest or the equity investment at risk is not sufficient to permit the entity to finance its activities without additional subordinated financial support provided by other parties. AcG-15 requires the consolidation of a VIE by its primary beneficiary, i.e., the party that receives the majority of the expected residual returns and/or absorbs the majority of the entity’s expected losses. Based on information currently available, the application of the provisions of AcG-15 on November 1, 2004 will result in the consolidation of certain mutual funds in which the Bank has a significant investment and the consolidation of the VIE that leases the Bank’s head office building under a capital lease. The estimated impact of this standard will be an increase in “Premises and equipment” of $84 million, “Securities” of $54 million, “Other assets” of $3 million, “Other liabilities” of $93 million, “Non-controlling interest” of $45 million, and “Retained earnings” of $3 million. The Bank continues to evaluate the impact of this new Guideline on its consolidated financial statements.

Investment companies

In January 2004, the CICA issued Accounting Guideline No. 18 “Investment Companies.” Under this Guideline, investment companies are required to account for all their investments at fair value, including investments that would otherwise be consolidated or accounted for using the equity method. The Guideline sets out the criteria for determining whether a company is an investment company and also provides guidance on the circumstances in which the parent company of, or equity method investor in, an investment company should account for the investment company’s investments at fair value.

The provisions of the Guideline will apply to the Bank as of November 1, 2004. They will be applied prospectively. The Bank is currently evaluating the impact of this new Guideline.

3Securitization Transactions

Mortgage loans

During 2004, the Bank securitized $1,527 million of guaranteed residential mortgage loans (2003: $1,529 million) through the creation of mortgage-backed securities. The Bank received net cash proceeds of $1,520 million (2003: $1,522 million) and retained the rights to the excess spread of $47 million (2003: $66 million) earned on the mortgage loans. The Bank also recorded a servicing liability of $9 million (2003: $10 million). A pre-tax gain of $31 million (2003: $50 million, $1 million of which was from mortgage-backed securities created and unsold before November 1, 2002), net of transaction fees, was recognized in the Consolidated Statement of Income under “Securitization revenues.”

During 2003, the Bank made an upward revision to one of its assumptions, the prepayment rate, which is used to evaluate the fair value of retained rights to the excess spread on all securitized mortgage loans. As a result of this change in assumption, the Bank recorded a permanent impairment charge for retained rights of approximately $3 million in the Consolidated Statement of Income under “Securitization revenues.”

Credit card receivables

Under a 1998 agreement, the Bank sells credit card receivables on a revolving basis to a trust. During 2003, the Bank sold an additional $200 million of its credit card receivables. The Bank received cash proceeds of $199 million, net of an initial reserve of $1 million, and transaction fees, and retained the rights to the excess spread of $6 million generated on the receivables, net of any credit losses. The Bank also recorded a servicing liability of approximately $1 million and recognized a pre-tax gain of approximately $5 million, net of transaction fees. Following the maturity of a $200 million bond during fiscal 2004 (net repayment of $300 million in 2003), gross securitized credit card receivables outstanding declined from $1.1 billion as at October 31, 2003 to $900 million as at October 31, 2004.

15(c)-13

NATIONAL BANK OF CANADA FINANCIAL STATEMENTS

Key assumptions

The key assumptions used to measure the fair value of retained interests as at the securitization date for transactions carried out during 2004 and 2003 were as follows:

	Guaranteed						Credit card						Personal
	mortgage loans						receivables						loans
	2004			2003			2004			2003			2004			2003
Weighted average term (months)		27.1			29.7			-			-			13.3			13.4
Payment rate		-			-			31.2	%		30.8	%		-			-
Prepayment rate		20.0	%		20.0	%		-			-			30.0	%		30.0	%
Excess spread, net of credit losses		1.3	%		1.7	%		10.3	%		11.3	%		1.8	%		3.8	%
Expected credit losses		-			-			3.4	%		3.3	%		1.2	%		1.2	%
Discount rate		3.9	%		4.1	%		21.0	%		21.0	%		21.0	%		21.0	%

The table below presents certain amounts recorded in the consolidated financial statements with respect to securitization operations:

	Securitization									Investment				Other
	revenues									account securities				liabilities
	Gains (losses)									Cash deposits
	on sale of assets					Retained interests				at a trust				Servicing liability
	2004			2003		2004		2003		2004		2003		2004		2003
Mortgage loans
- Guaranteed		31			50		99		97		-		-		16		15
- Other(1)		-			-		-		-		20		23		-		-
Credit card receivables		38			33		13		17		5		6		3		3
Consumer loans(2)		-			-		-		1		-		19		-		-
Personal loans(3)		(2	)		4		7		17		26		25		4		4
Total		67			87		119		132		51		73		23		22

(1) During 2000, the Bank sold uninsured mortgage loans on properties with five or more units to a trust.

(2) During 2001, the Bank sold consumer loans to a trust. The Bank terminated this program in March 2004. At that time, outstanding loans represented less than 10% of the portfolio originally sold.

(3) During 2002, the Bank sold a $515 million portfolio of fixed-rate personal loans to a trust, and the trust issued $515 million of bonds. On a revolving basis, the Bank sells most of its new fixed-rate loans to this trust each month.

The table below presents total securitized assets and certain credit data on securitized assets:

						2004							2003
	Securitized			Impaired		Net credit		Securitized			Impaired		Net credit
	assets			loans		losses		assets			loans		losses
Mortgage loans
- Guaranteed		3,520	(1)		-		-		3,643	(1)		-		-
- Other		293			-		-		443			-		-
Credit card receivables		900			4		40		1,100			8		31
Consumer loans		-			-		1		145			3		2
Personal loans		515			3		8		515			2		7
Total		5,228	(2)		7		49		5,846			13		40

(1) Includes $243 million of mortgage-backed securities created and unsold in 2004 (2003: $720 million). These securities are presented in the Consolidated Balance Sheet under “Securities - Investment account.”

(2) Commitments under securitization programs, maturing or renewable in 2005, amount to $706 million, or $500 million for the credit card program and $206 million for the personal loans program.

 

15(c)-14

NATIONAL BANK OF CANADA FINANCIAL STATEMENTS

The table below summarizes certain cash flows received from securitization vehicles:

	Guaranteed				Credit card				Consumer				Personal
	mortgage loans				receivables				loans				loans
	2004		2003		2004		2003		2004		2003		2004		2003
Proceeds from new securitizations		1,527		1,529		-		200		-		-		-		-
Proceeds collected and reinvested in
revolving securitizations		-		-		3,273		3,085		-		-		377		345
Cash flows from retained interests
in securitizations		55		61		64		48		-		6		27		25

As at October 31, the sensitivity of the current fair value of these retained interests to immediate 10% and 20% adverse changes in key assumptions was as follows:

Sensitivity of key assumptions to adverse changes

	Guaranteed						Credit card						Personal
Assumptions	mortgage loans						receivables						loans
	2004			2003			2004			2003			2004			2003
Prepayment rate		20.0	%		20.0	%		31.2	%		30.8	%		30.0	%		30.0	%
Impact on fair value of 10% adverse change	$	(2.6	)	$	(3.0	)	$	(0.9	)	$	(1.2	)	$	(0.2	)	$	(0.3	)
Impact on fair value of 20% adverse change	$	(5.2	)	$	(5.8	)	$	(1.7	)	$	(2.3	)	$	(0.4	)	$	(0.6	)
Excess spread, net of credit losses		1.5	%		1.6	%		10.3	%		11.3	%		1.8	%		3.8	%
Impact on fair value of 10% adverse change	$	(9.9	)	$	(9.8	)	$	(1.3	)	$	(1.7	)	$	(1.3	)	$	(1.7	)
Impact on fair value of 20% adverse change	$	(19.7	)	$	(19.5	)	$	(2.7	)	$	(3.5	)	$	(2.6	)	$	(3.4	)
Discount rate		4.2	%		4.7	%		21.0	%		21.0	%		21.0	%		21.0	%
Impact on fair value of 10% adverse change	$	(0.4	)	$	(0.5	)	$	(0.1	)	$	(0.1	)	$	(0.6	)	$	(0.7	)
Impact on fair value of 20% adverse change	$	(0.8	)	$	(1.0	)	$	(0.1	)	$	(0.2	)	$	(1.1	)	$	(1.4	)
Servicing		0.3	%		0.3	%		2.0	%		2.0	%		1.0	%		1.0	%
Impact on fair value of 10% adverse change	$	(1.6	)	$	(1.5	)	$	(0.3	)	$	(0.3	)	$	(0.4	)	$	(0.4	)
Impact on fair value of 20% adverse change	$	(3.3	)	$	(3.0	)	$	(0.5	)	$	(0.6	)	$	(0.8	)	$	(0.9	)

These sensitivities are hypothetical and should be used with caution. Changes in fair value attributable to changes in assumptions generally cannot be extrapolated because the relationship between the change in the assumption and the change in fair value may not be linear. Changes affecting one factor may result in changes to another, which might magnify or counteract the sensitivities attributable to changes in assumptions.

15(c)-15

NATIONAL BANK OF CANADA FINANCIAL STATEMENTS

4 Securities

 

Securities held are as follows:

	Under		1 to		5 to		Over		No		2004		2003
	1 year		5 years		10 years		10 years		maturity		Total		Total
Investment account
Securities issued or guaranteed by
Canada
Unamortized cost		316		1,980		77		20		-		2 393		2 564
Fair value		319		2,015		80		21		-		2 435		2 615
Provinces
Unamortized cost		1		44		80		25		-		150		617
Fair value		1		44		84		27		-		156		646
Municipalities or school boards
Unamortized cost		-		-		2		-		-		2		9
Fair value		-		-		2		-		-		2		10
U.S. Treasury and other U.S. agencies
Unamortized cost		25		126		112		-		-		263		604
Fair value		25		127		113		-		-		265		601
Other debt securities
Unamortized cost		1,309		1,416		449		127		172		3,473		1,692
Fair value		1,315		1,415		461		128		172		3,491		1,687
Equity securities
Cost		74		180		24		19		850		1,147		1,512
Fair value		77		190		26		17		893		1,203		1,567
Total carrying value		1,725		3,746		744		191		1,022		7,428		6,998
Total fair value		1,737		3,791		766		193		1,065		7,552		7,126
Trading account
Securities issued or guaranteed by
Canada		5,180		1,536		1 261		254		-		8,231		9,610
Provinces		596		1,258		939		781		-		3,574		3,616
Municipalities or school boards		119		224		83		8		-		434		393
U.S. Treasury and other U.S. agencies		448		1,037		304		215		-		2,004		34
Other debt securities		1,280		677		684		135		-		2,776		2,127
Equity securities		10		5		1		8		3,518		3,542		3,371
		7,633		4,737		3,272		1,401		3,518		20,561		19,151
Total carrying value of securities		9,358		8,483		4,016		1,592		4,540		27,989		26,149
Total fair value of securities		9,370		8,528		4,038		1,594		4,583		28,113		26,277

Where no organized market exists for which prices are available, the fair value is estimated using the market prices of similar securities.

15(c)-16

NATIONAL BANK OF CANADA FINANCIAL STATEMENTS

Unrealized gains (losses) are as follows:

								2004									2003
			Gross		Gross							Gross		Gross
	Carrying		unrealized		unrealized			Fair		Carrying		unrealized		unrealized			Fair
	Value		gains		losses			value		value		gains		losses			value
Investment account
Securities issued or
guaranteed by
Canada		2,393		42		-			2,435		2,564		51		-			2,615
Provinces		150		6		-			156		617		29		-			646
Municipalities or school boards		2		-		-			2		9		1		-			10
U.S. Treasury and other
U.S. agencies		263		2		-			265		604		-		(3	)		601
Other debt securities		3,473		24		(6	)		3,491		1,692		16		(21	)		1,687
Equity securities		1,147		83		(27	)		1,203		1,512		90		(35	)		1,567
Total investment account		7,428		157		(33	)		7,552		6,998		187		(59	)		7,126

5 Loans and Impaired Loans

			Impaired loans
							Country
	Gross		Gross		Specific		risk		Net
	amount		allowance		allowances		allowance		balance
October 31, 2004
Residential mortgage		15,500		4		2		-		2
Personal and credit card		7,825		32		17		-		15
Business and government		18,751		352		209		-		143
		42,076		388		228		-		160
General allowance(1)										(350	)
Impaired loans, net of specific and general allowances										(190	)
October 31, 2003
Residential mortgage		13,976		7		3		-		4
Personal and credit card		6,101		33		17		-		16
Business and government		18,934		436		186		19		231
		39,011		476		206		19		251
General allowance(1)										(405	)
Impaired loans, net of specific and general allowances										(154	)

As at October 31, 2004, net foreclosed assets held for sale represented a negligible net amount (2003: $6 million) and foreclosed assets held for use, $1 million (2003: $4 million).

(1) The general allowance for credit risk was created taking into account the Bank’s credit in its entirety.

15(c)-17

NATIONAL BANK OF CANADA FINANCIAL STATEMENTS

6 Allowance for Credit Losses

The changes made to allowances during the year are as follows:

				Allocated			Unallocated			Country
	Specific			general			general			risk			2004			2003
	allowances			allowance			allowance			allowance			Total			Total
Allowances at beginning		206			300			105			19			630			662
Provision for credit losses		141			(28	)		(27	)		-			86			177
Write-offs		(178	)		-			-			(19	)		(197	)		(259	)
Recoveries		59			-			-			-			59			50
Allowances at end		228			272			78			-			578			630

7 Premises and Equipment

					2004		2003
			Accumulated		Net		Net
			amorti-		carrying		carrying
	Cost		zation		value		value
Land		8		-		8		10
Buildings		73		38		35		53
Equipment and furniture		516		393		123		102
		597		431		166		165
Leasehold improvements		101		-		101		98
		698		431		267		263
Amortization for the year recorded in the
Consolidated Statement of Income						52		49

8 Goodwill and Intangible Assets

The Bank performs an annual impairment test of goodwill and intangible assets with indefinite lives. No impairment loss was recorded in 2004 or 2003.

The change in the carrying value of goodwill is as follows:

				Wealth
	Personal and			Manage-			Financial
	Commercial			ment			Markets		Total
Balance as at October 31, 2002		61			408			192		661
Other		-			(1	)		-		(1	)
Balance as at October 31, 2003		61			407			192		660
Acquisitions		-			1			-		1
Other		(12	)		13			-		1
Balance as at October 31, 2004		49			421			192		662

15(c)-18

NATIONAL BANK OF CANADA FINANCIAL STATEMENTS

Intangible assets are:

					2004		2003
			Accumulated		Net		Net
			Amorti-		carrying		carrying
	Cost		zation		value		value
Trademarks(1)		11		-		11		11
Management contracts(1)		160		-		160		160
Other		16		7		9		12
Total		187		7		180		183

(1) Not subject to amortization.

9 Other Assets

	2004		2003
Fair value of trading derivatives (Note 19)		2,735		2,560
Interest and dividends receivable		601
Prepaid expenses and other receivables		378		353
Future income tax assets (Note 16)		334
Brokers’ client accounts		135
Investments in companies subject to significant influence		119		124
Accrued benefit asset (Note 13)		347
Other		475
		4,844		4,929

10 Deposits

 

			Payable		Payable
	Payable		after		on a fixed		2004		2003
	on demand		notice		date		Total		Total
Personal		2,143		6,905		14,627		23,675		23,512
Business and government		7,542		5,327		11,430		24,299		22,700
Deposit-taking institutions		442		41		4,975		5,458		5,251
		10,127		12,273		31,032		53,432		51,463

11 Other Liabilities

 

	2004		2003
Fair value of trading derivatives (Note 19)		2,386		2,327
Interest and dividends payable		570
Income taxes payable		289
Future income tax liabilities (Note 16)		255		215
Accrued benefit liability (Note 13)		91
Trade and other payables		1,839
Brokers’ client accounts		132
Commitments related to insurance operations		92		99
Subsidiaries’ debts to third parties		511
Accounts payable and deferred income		324		342
Other		577
		7,931		6,992

15(c)-19

NATIONAL BANK OF CANADA FINANCIAL STATEMENTS

12 Subordinated Debentures

Debentures are subordinated in right of payment to the claims of depositors and certain other creditors.

Maturity date		Interest rate	Characteristics	Denominated in foreign currency	2004	2003
December	2003	7.50%	Not redeemable by the Bank prior to maturity		-	45
August	2004	8.13%	Not redeemable by the Bank prior to maturity unless the debentures become subject to foreign taxes	(2003: US 26)	-	34
November	2009	7.75%	Not redeemable by the Bank prior to maturity unless the debentures become subject to foreign taxes	US 250	305	330
June	2010	6.90%(1)	Not redeemable prior to June 7, 2005		350	350
October	2011	7.50%(2)	Redeemable since October 17, 2001		150	150
October	2012	6.25%(3)	Not redeemable prior to October 31, 2007		300	300
April	2014	5.70%(4)	Redeemable since April 16, 2004		250	250
February	2087	Floating(5)	Redeemable at the Bank’s option since February 28, 1993	US 44	53	57
Total					1,408	1,516

(1) Bearing interest at a rate of 6.90% until June 7, 2005, and thereafter at an annual rate equal to the 90-day acceptance rate plus 1%.

(2) Bearing interest at a rate of 7.50% until October 17, 2006, and thereafter at an annual rate equal to the 90-day acceptance rate plus 1%.

(3) Bearing interest at a rate of 6.25% until October 31, 2007, and thereafter at an annual rate equal to the 90-day acceptance rate plus 1%.

(4) Bearing interest at a rate of 5.70% until April 16, 2009, and thereafter at an annual rate equal to the 90-day acceptance rate plus 1%.

(5) Bearing interest at an annual rate of 1/8% above LIBOR.

The subordinated debenture maturities are as follows:

2005	-
2006	-
2007	-
2008	-
2009	305
2010 to 2014	1,050
2015 and thereafter	53

13 Employee Future Benefits

The Bank offers defined benefit pension plans that cover substantially all salaried employees. These defined benefit plans are funded pension plans.

The effective dates of the most recent actuarial valuations and those of compulsory future valuations to ensure the funded status of these plans are:

	Date of most recent		Date of compulsory
	actuarial valuation		actuarial valuation
Employee pension plan		December 31, 2002		December 31, 2005
Pension plan for designated employees		December 31, 2003		December 31, 2006
Post-Retirement Allowance Program		January 1, 2003		December 31, 2004

The Bank’s employee pension plans provide for the payment of benefits based on length of service and final average earnings of the employees covered by the plans. The Bank also offers a variety of complementary, contributory insurance plans to eligible current and retired employees, their spouses and their dependants. However, these benefit plans are not funded.

The following tables describe the Bank’s commitments and costs for these employee future benefits, presented in accordance with the standards defined in Section 3461 of the CICA Handbook, “Employee Future Benefits.” The measurement date used is October 31 of each year.

15(c)-20

NATIONAL BANK OF CANADA FINANCIAL STATEMENTS

Accrued benefit asset (liability)

	Pension benefit plans						Other benefit plans
	2004			2003			2004			2003
Accrued benefit obligation
Balance at beginning		1,305			1,172			104			109
Current service cost		31			28			4			11
Interest cost		89			84			7			8
Employee contributions		15			14			-			-
Benefits paid		(56	)		(54	)		(5	)		(11	)
Plan amendments		-			9			-			-
Settlement of long-term disability obligations		-			-			-			(27	)
Actuarial losses		96			52			6			14
Balance at end		1,480			1,305			116			104
Plan assets
Fair value at beginning		1,365			965			-			-
Actual return on plan assets		104			156			-			-
Bank contributions		49			284			-			-
Employee contributions		15			14			-			-
Benefits paid		(56	)		(54	)		-			-
Fair value at end		1,477			1,365			-			-
Funded status - plan surplus (deficit)		(3	)		60			(116	)		(104	)
Unamortized net actuarial losses		346			271			18			13
Unamortized past service costs		15			16			-			-
Accrued benefit asset (liability) at end		358			347			(98	)		(91	)

The accrued benefit asset (liability) is presented as follows in the Consolidated Balance Sheet:

	Pension benefit plans				Other benefit plans
	2004		2003		2004			2003
Accrued benefit asset included in “Other assets”		358		347		-			-
Accrued benefit liability included in “Other liabilities”		-		-		(98	)		(91	)
		358		347		(98	)		(91	)

Included in the above accrued benefit obligation and fair value of plan assets at year-end are the following amounts in respect of benefit plans with accrued benefit obligations in excess of plan assets:

	2004			2003
Fair value of plan assets		1,390			35
Accrued benefit obligation		1,424			42
Funded status - plan deficit		(34	)		(7	)

As at October 31, plan assets consist of:

	2004		2003
	%		%
Asset category
Money market		5		12
Bonds		28		24
Equities		56		53
Other		11		11
		100		100

15(c)-21

NATIONAL BANK OF CANADA FINANCIAL STATEMENTS

Plan assets include securities issued by the Bank. As at October 31, 2004, these investments totalled $128 million (2003: $94 million).

In fiscal 2004, the Bank or its subsidiaries received close to $5 million in management fees for related management, administration and custodial services.

Elements of defined benefit expense for the years ended October 31:

	Pension benefit plans						Other benefit plans
	2004			2003			2004			2003
Current service cost		31			28			4			11
Interest cost		89			84			7			8
Actual return on plan assets		(104	)		(156	)		-			-
Actuarial losses on accrued benefit obligation		96			52			6			14
Plan amendments		-			9			-			-
Additional settlement cost for long-term disability benefits		-			-			-			7
Curtailment and settlement loss		2			-			-			-
Expense before adjustments to recognize the long-term nature
of employee future benefits		114			17			17			40
Difference between expected return and actual
return on plan assets for year		5			70			-			-
Difference between actuarial losses (gains) recognized for year
and actual actuarial losses (gains) on accrued benefit
obligation for year		(83	)		(48	)		(6	)		(14	)
Difference between amortization of past service costs for
year and actual plan amendments for year		2			(7	)		-			-
Defined benefit expense		38			32			11			26

The significant assumptions used by the Bank are as follows (weighted average):

	Pension benefit plans				Other benefit plans
	2004		2003		2004		2003
	%		%		%		%
Accrued benefit obligation as of October 31
Discount rate		6.25		6.75		6.50		6.75
Rate of compensation increase		4.00		4.00		4.00		4.00
Defined benefit expense determined for years ended
as at October 31
Discount rate		6.75		7.00		6.75		7.00
Expected long-term rate of return on plan assets		7.50		7.75		-		-
Rate of compensation increase		4.00		4.25		4.00		3.25

For measurement purposes, a 7.7% annual rate of increase (2003: 8.3%) in the per capita cost of covered healthcare benefits was assumed for 2004. The rate was assumed to decrease gradually to 5.9% for 2008 and remain at that level thereafter.

15(c)-22

NATIONAL BANK OF CANADA FINANCIAL STATEMENTS

A 1% change in the expected healthcare cost trend rate would have the following impact:

	1% increase		1% decrease
Sensitivity analysis of other benefit plans
Impact on current service and interest cost		1		(1	)
Impact on accrued benefit obligation		12		(10	)

The table below shows the possible impact of changes in certain significant weighted average assumptions used to measure the accrued pension benefit obligation and the related expense:

Sensitivity of significant actuarial assumptions in 2004

	Obligation			Pension plans Expense
Impact of a 0.25% change in significant actuarial assumptions:
Discount rate
Decrease of 0.25%		51			6
Increase of 0.25%		(51	)		(6	)
Expected long-term rate of return on plan assets
Decrease of 0.25%		-			3
Increase of 0.25%		-			(3	)
Rate of compensation increase
Decrease of 0.25%		(13	)		(3	)
Increase of 0.25%		13			3

The sensivity analysis presented in the above table must be used with caution given that the changes are hypothetical and the changes in each significant assumption may not be linear.

Cash payments for employee future benefits for the years ended October 31 are as follows:

	2004		2003
Bank pension benefit plan contributions		49		284
Benefits paid (other benefit plans), excluding the settlement of long-term disability benefits		5		11

14 Capital Stock

Authorized

First preferred shares

An unlimited number of shares, without par value, issuable for a maximum aggregate consideration of $1 billion.

Second preferred shares

15 million shares, without par value, issuable for a maximum aggregate consideration of $300 million.

Common shares

An unlimited number of shares, without par value, issuable for a maximum aggregate consideration of $3 billion.

15(c)-23

NATIONAL BANK OF CANADA FINANCIAL STATEMENTS

									2004
Shares outstanding and dividends declared				Shares					Dividends
	Number of shares			$			$		Per share
First preferred shares
Series 13		7,000,000			175			11		1.6000
Series 15		8,000,000			200			12		1.4625
Preferred shares and dividends		15,000,000			375			23
Common shares at beginning		174,619,903			1,583
Issued pursuant to the Dividend Reinvestment and
Share Purchase Plan and the Stock Option Plan		1,510,350			42
Repurchase of common shares		(8,700,000	)		(80	)
Common shares at end and dividends		167,430,253			1,545			243		1.4200
Total dividends								266

									2003
Shares outstanding and dividends declared				Shares					Dividends
	Number of shares			$			$		Per share
First preferred shares
Series 12		-			-			4		0.8125
Series 13		7,000,000			175			11		1.6000
Series 15		8,000,000			200			10		1.1480
Preferred shares and dividends		15,000,000			375			25
Common shares at beginning		182,596,351			1,639
Issued pursuant to the Dividend Reinvestment and
Share Purchase Plan and the Stock Option Plan		1,123,552			26
Repurchase of common shares		(9,100,000	)		(82	)
Common shares at end and dividends		174,619,903			1,583			193		1.0800
Total dividends								218

Characteristics of first preferred shares(amounts in dollars)

Series 13

Redeemable in cash at the Bank’s option, subject to the prior approval of the Superintendent and upon notice of not more than 60 and not less than 30 days, i) on August 15, 2005 and on the last day of each period of five years plus one day thereafter (conversion date), in whole at any time or in part from time to time, at a price equal to $25 per share plus all declared and unpaid dividends at the date fixed for redemption and, ii) after August 15, 2005, other than on a conversion date, in whole but not in part, at a price equal to $25.50 per share, plus all declared and unpaid dividends at the date fixed for redemption; non-cumulative preferential dividends at a quarterly rate of $0.40 per share for the first five years and at a variable rate thereafter.

Convertible at the holder’s option on August 15, 2005 or a subsequent conversion date into fully paid preferred shares, Series 14.

Series 15

Redeemable in cash at the Bank’s option, subject to the prior approval of the Superintendent, on or after May 15, 2008, in whole or in part, at a price equal to $26 per share if redeemed before May 15, 2009, at a price equal to $25.75 per share if redeemed during the 12-month period preceding May 15, 2010, at a price equal to $25.50 per share if redeemed during the 12-month period preceding May 15, 2011, at a price equal to $25.25 per share if redeemed during the 12-month period preceding May 15, 2012, and at a price equal to $25 per share if redeemed on or after May 15, 2012, plus, in all cases, all declared and unpaid dividends at the date fixed for redemption.

Issuance and redemption of preferred shares

On January 31, 2003, the Bank issued 8,000,000 first preferred shares with non-cumulative preferential dividends at a quarterly rate of $0.365625 per share, Series 15, for a consideration of $195 million, net of fees of $5 million.

On May 15, 2003, the Bank redeemed for cancellation all 5,000,000 first preferred shares with non-cumulative dividends, Series 12, at a price equal to $25 per share, plus all declared and unpaid dividends until the date of redemption.

15(c)-24

NATIONAL BANK OF CANADA FINANCIAL STATEMENTS

Repurchase of common shares

On December 8, 2003, the Bank commenced a normal course issuer bid for the repurchase of up to 8,700,000 common shares over a 12-month period ending no later than December 7, 2004. Purchases were made in the open market at market prices through the facilities of The Toronto Stock Exchange. Premiums paid above the average carrying value of the common shares were charged to retained earnings. As at October 31, 2004, the Bank completed the repurchase of 8,700,000 common shares at a cost of $382 million, which reduced common equity capital by $80 million and retained earnings by $302 million.

On January 20, 2003, the Bank commenced a normal course issuer bid for the repurchase of up to 9,100,000 common shares over a 12-month period ending no later than January 19, 2004. Purchases were made in the open market at market prices through the facilities of The Toronto Stock Exchange. Premiums paid above the average carrying value of the common shares were charged to retained earnings. As at October 31, 2003, the Bank completed the repurchase of 9,100,000 common shares at a cost of $298 million, which reduced common equity capital by $82 million and retained earnings by $216 million.

Reserved common shares

As at October 31, 2004, 3,964,354 common shares (2003: 4,251,099) were reserved under the Dividend Reinvestment and Share Purchase Plan and 16,155,918 common shares (2003: 17,392,723) were reserved under the Stock Option Plan.

In connection with the acquisition of Putnam Lovell Group Inc., 476,119 common shares were reserved, with issuance contingent upon certain profitability targets being met as at December 31, 2004. If applicable, the value of the shares granted will increase goodwill.

Restriction on the payment of dividends

Under the Bank Act, the Bank is prohibited from declaring dividends on its common or preferred shares if there are reasonable grounds for believing that the Bank would, by so doing, be in contravention of the regulations of the Bank Act or the guidelines of the Superintendent with respect to capital adequacy and liquidity. In addition, the ability to pay common share dividends is restricted by the terms of the outstanding preferred shares pursuant to which the Bank may not pay dividends on its common shares without the approval of the holders of the outstanding preferred shares, unless all preferred share dividends have been declared and paid or set aside for payment.

15 Stock-Based Compensation

The Bank has four stock-based compensation plans:

Stock Appreciation Rights (SARs) Plan

The Bank offers a Stock Appreciation Rights Plan to senior management and other key employees of the Bank and its subsidiaries (“designated employees”). Under the SARs Plan, when designated employees exercise their SARs, they receive a cash amount equal to the difference between the market price of a common share of the Bank on the exercise date of the SAR and the exercise price of the SAR. The exercise price of each SAR awarded is equal to the market price of the stock at closing on the day before the date of the award. SARs vest evenly over a four-year period and expire 10 years from the award date or, in certain circumstances set out in the Plan, within specified time limits.

				2004					2003
				Weighted					Weighted
				average					average
	Number			exercise		Number			exercise
	of SARs			price		of SARs			price
SARs Plan
Outstanding at beginning		1,269,640		$	17.71		1,869,225		$	17.42
Awarded		16,000		$	41.00		24,500		$	30.95
Exercised		(566,310	)	$	17.19		(600,285	)	$	17.31
Cancelled		(3,650	)	$	27.34		(23,800	)	$	19.01
Outstanding at end		715,680		$	18.59		1,269,640		$	17.71
Exercisable at end		668,649		$	17.58		956,293		$	17.20

15(c)-25

NATIONAL BANK OF CANADA FINANCIAL STATEMENTS

	SARs		SARs
Exercise price	outstanding		exercisable		Expiry date
$13.50		66,100		66,100		December 2006
$24.50		5,900		5,900		December 2007
$25.00		7,025		7,025		December 2008
$17.35		556,080		556,080		December 2009
$24.90		25,025		18,769		December 2010
$28.01		19,550		9,775		December 2011
$30.95		20,000		5,000		December 2012
$41.00		16,000		-		December 2013
Total		715,680		668,649

Stock Option Plan

The Bank offers a Stock Option Plan to senior management and other key employees of the Bank and its subsidiaries (“designated employees”). Under the Bank’s Stock Option Plan, options are periodically awarded to designated employees. These options provide employees with the right to subscribe for common shares of the Bank at an exercise price equal to the market price of shares on the day before the date of the award. The options vest evenly over a four-year period and expire 10 years from the award date or, in certain circumstances set out in the Plan, within specified time limits. The maximum number of common shares that may be issued under the Stock Option Plan is 16,155,918 as at October 31, 2004. The maximum number of common shares reserved for a participant may not exceed 5% of the total number of Bank shares issued and outstanding. Each participant in the SARs Plan who is a resident of Canada may exchange each SAR held for a stock option governed by the Stock Option Plan at an exercise price representing the market value of a common share at closing on the day preceding the date the option is exchanged.

				2004					2003
				Weighted					Weighted
				average					average
	Number			exercise		Number			exercise
	of options			price		of options			price
Stock Option Plan
Outstanding at beginning		6,134,765		$	26.40		5,692,822		$	24.38
Awarded		1,376,900		$	41.00		1,542,700		$	30.95
Exercised		(1,240,055	)	$	23.39		(858,482	)	$	20.65
Cancelled		(90,650	)	$	30.04		(242,275	)	$	28.45
Outstanding at end		6,180,960		$	30.20		6,134,765		$	26.40
Exercisable at end		2,826,403		$	25.72		2,788,017		$	23.68

	Options		Options
Exercise price	outstanding		exercisable		Expiry date
$11.00		86,930		86,930		December 2005
$13.50		92,500		92,500		December 2006
$25.20		309,700		309,700		December 2007
$25.20		564,870		564,870		December 2008
$24.90		931,690		698,768		December 2010
$28.01		1,480,070		740,035		December 2011
$30.95		1,349,400		333,600		December 2012
$41.00		1,365,800		-		December 2013
Total		6,180,960		2,826,403

The fair value on the grant date of options awarded in 2004 was estimated at $9.10 (2003: $6.90) using the Black-Scholes model. The following assumptions were used: i) a risk-free interest rate of 4.37% (2003: 4.54%), ii) an expected life of options of 6 years (2003: 6 years), iii) an expected volatility of 27% (2003: 27%), and iv) an expected dividend yield of 5.00% (2003: 3.36%).

The compensation expense recorded for these stock options was $5 million for the year ended October 31, 2004 (2003: $2 million). The offsetting entry was credited to contributed surplus.

Deferred Stock Unit Plan for Officers

The Deferred Stock Unit (“DSU”) Plan for Officers is for certain members of senior management and other key employees of the Bank and its subsidiaries. A total of 328,851 DSUs were outstanding as at October 31, 2004 (2003: 215,965). The expense for the Plan amounted to $7 million in 2004 (2003: $2 million).

15(c)-26

NATIONAL BANK OF CANADA FINANCIAL STATEMENTS

Employee Share Ownership Plan

Under the Bank’s Employee Share Ownership Plan, employees who meet the eligibility criteria can contribute up to 8% of their annual gross salary by way of payroll deductions. The Bank matches 25% of the employee contribution amount, to a maximum of $1,500 per annum. Bank contributions vest to the employee after one year of continuous participation in the Plan. Subsequent contributions vest immediately. The Bank’s contributions, amounting to $4 million in 2004 (2003: $4 million), were charged to “Operating expenses” when paid.

16 Income Taxes

The Bank’s income taxes for the years ended October 31 in the consolidated financial statements are as follows:

	2004		2003
Consolidated Statement of Income
Income taxes		318		277
Consolidated Statement of Changes in Shareholders’ Equity
Income taxes related to
Share issuance expenses		-		(2	)
Dividends on preferred shares, Series 12, 13 and 15		1		-
Unrealized foreign currency translation adjustments		31		63
		32		61
		350		338
Income taxes were as follows:
Current income taxes		300		333
Future income taxes relating to the inception
and reversal of temporary differences		50		5
Income taxes		350		338

The temporary differences and carryforwards resulting in future income tax assets and liabilities are as follows:

	2004		2003
Future income tax assets
Allowance for credit losses and other liabilities		294		307
Accrued benefit liability - Other benefit plans		30		27
		324		334
Future income tax liabilities
Premises and equipment		20		19
Securitization		30		32
Accrued benefit asset - Pension benefit plans		108		103
Other		97		61
		255		215

15(c)-27

NATIONAL BANK OF CANADA FINANCIAL STATEMENTS

Reconciliation of the Bank’s income tax rate for the years ended October 31 is as follows:

				2004						2003
	$			%			$			%
Income before income taxes and non-controlling interest		1,071			100.0			928			100.0
Income taxes at Canadian statutory income tax rate		364			34.0			335			36.1
Reduction in income tax rate due to:
Tax-exempt income from securities,
mainly dividends from Canadian corporations		(40	)		(3.7	)		(35	)		(3.8	)
Capital gain		-			-			(6	)		(0.6	)
Rates applicable to subsidiaries abroad		(32	)		(3.0	)		(30	)		(3.2	)
Federal large corporations tax and surtax		5			0.5			7			0.8
Other items		21			1.9			6			0.6
		(46	)		(4.3	)		(58	)		(6.2	)
Income taxes and effective income tax rate		318			29.7			277			29.9

17 Earnings per Share

Diluted net earnings per common share are calculated based on net income, less dividends on non-convertible preferred shares divided by the average number of common shares outstanding.

	2004			2003
Net income	$	725		$	624
Dividends on preferred shares		(23	)		(25	)
Net income available to common shareholders - basic and diluted		702			599
Average number of common shares outstanding (thousands)
Average basic number of common shares outstanding		170,918			177,751
Adjustment to number of common shares
Stock options		2,358			1,484
Average diluted number of common shares outstanding		173,276			179,235

18 Guarantees, Commitments and Contingent Liabilities

Guarantees

On April 30, 2003, the Bank adopted the requirements of CICA Accounting Guideline No. 14 “Disclosure of Guarantees” (AcG-14). This Guideline broadens the definition of guarantees and requires that the guarantor disclose significant information on the guarantees which it has provided.

AcG-14 defines a guarantee as a contract (including an indemnity) that contingently requires the guarantor to make payments (either in cash, financial instruments, other assets or shares of the entity, or provision of services) to the beneficiary due to (a) changes in interest rate, security or commodity price, foreign exchange rate, index or other variable, including the occurrence or non-occurrence of a specified event, that is related to an asset, a liability or an equity security of the beneficiary of the guarantee, (b) failure of a third party to perform under a contractual agreement or (c) failure of a third party to pay its indebtedness when due.

Significant guarantees issued by the Bank and in effect as at October 31, 2004 are described below.

Letters of guarantee

In the normal course of business, the Bank issues letters of guarantee. These letters of guarantee represent irrevocable commitments that the Bank will make payments in the event that a client cannot meet its financial obligations to third parties. The Bank’s policy for requiring collateral security with respect to letters of guarantee is similar to that for loans. Generally, the term of these letters of guarantee is less than two years. The maximum potential future payments for letters of guarantee totalled approximately $1,225 million as at October 31, 2004 (2003: $903 million). The general allowance for credit losses covers all credit risks including those relating to letters of guarantee.

Backstop liquidity facilities

The Bank provides backstop liquidity facilities under asset-backed commercial paper conduit programs administered by it further to securitization operations. The Bank also administers a multi-seller conduit that buys various financial assets from clients and finances these purchases by issuing asset-backed commercial paper. The Bank also provides backstop liquidity facilities for commercial paper to this multi-seller conduit.

15(c)-28

NATIONAL BANK OF CANADA FINANCIAL STATEMENTS

The backstop liquidity facilities may only be drawn upon if, after market disruption, the conduit was unable to access the commercial paper market. These guarantees have a duration of less than one year and are renewable periodically. The terms of the backstop liquidity facilities do not require the Bank to advance money to the conduit in the event of a bankruptcy or to fund non-performing or defaulted assets. None of the backstop liquidity facilities provided by the Bank have been drawn upon to date. As at October 31, 2004, the maximum potential future payments the Bank may be required to make under these backstop liquidity facilities was $1,378 million (2003: $441 million). No amount has been accrued in the Consolidated Balance Sheet with respect to these backstop liquidity facilities.

Derivatives

In the normal course of business, the Bank enters into written put options to meet the needs of its clients and for its own risk management and trading activities. Put options are contractual agreements where the Bank conveys to the purchaser the right, but not the obligation, to sell to the Bank by or before a predetermined date, a specific amount of currency, commodity or financial instrument, at a price agreed to when the option is contracted. Written put options that qualify as a guarantee under AcG-14 include primarily over-the-counter currency options with companies other than financial institutions and over-the-counter stock options when it is probable that the counterparty holds the underlying securities. The terms of these options vary based on the contracts but do not exceed two years. The maximum potential future payments with respect to these options sold totalled $385 million as at October 31, 2004 (2003: $1,022 million). As at that date, the Bank recorded a liability of $3 million in the Consolidated Balance Sheet with respect to these written put options (2003: $5 million).

Securities lending

Under securities lending agreements the Bank has entered into with certain clients who have entrusted it with the safekeeping of their securities, the Bank, as the agent for these clients, lends their securities to third parties and indemnifies these clients in the event of loss. In order to protect itself against any contingent loss, the Bank requires as security from the borrower a cash amount or highly liquid marketable securities with a fair value greater than that of the securities loaned. The fair value of the securities loaned totalled $761 million as at October 31, 2004 (2003: $579 million). No amount has been accrued in the Consolidated Balance Sheet with respect to potential indemnities resulting from these securities lending agreements.

Sale of a business and operations

Under agreements for the sale of a business and operations, the Bank agreed to indemnify the purchaser for losses incurred resulting from certain types of claims from the Bank’s past conduct of the business or operations, as well as any representations and guarantees that may have been incorrect on the date they were made. Where the maximum potential future payments are limited by the agreements, the maximum amount for all such agreements totalled $230 million as at October 31, 2004 (2003: $244 million). One of these agreements does not limit the maximum potential future payments if the guarantee is enforced. The nature of these commitments prevents the Bank from estimating the maximum potential liability it may be required to pay. The applicable periods of the various indemnification clauses are described in the agreements and may vary. No amount has been accrued in the Consolidated Balance Sheet with respect to these indemnification agreements.

Other indemnification agreements

In the normal course of business, including securitization activities, the Bank enters into contractual agreements other than those described above. Under these agreements, the Bank undertakes to compensate the counterparty for costs incurred as a result of litigation, changes in laws and regulations (including tax legislation), claims with respect to past performance, incorrect representations or the non-performance of certain restrictive covenants. Moreover, as a member of a securities transfer network and pursuant to the membership agreement and the regulations governing the operation of the network, the Bank granted a movable hypothec to the network that could be used in the event another member fails to meet its contractual obligations. The nature of these commitments prevents the Bank from estimating the maximum potential liability it may be required to pay. The duration of these agreements is stipulated in each contract. No amount has been accrued in the Consolidated Balance Sheet with respect to these agreements.

Other guarantee

Pursuant to a mutual guarantee agreement required by a regulatory authority, a subsidiary of the Bank has agreed to guarantee all commitments, debts and liabilities of a company subject to significant influence to the maximum of its regulatory capital, $22 million as at October 31, 2004 (2003: $28 million). This guarantee expires on the date the investment in the company subject to significant influence is sold, or sooner if deemed appropriate by the regulatory authority. To date, this guarantee remains undrawn and no amount has been accrued in the Consolidated Balance Sheet with respect to the agreement.

15(c)-29

NATIONAL BANK OF CANADA FINANCIAL STATEMENTS

Commitments

As at October 31, 2004, minimum commitments under leases, contracts for outsourced information technology services and other leasing agreements are as follows:

			Service		Equipment
	Premises		contracts		and furniture		Total
2005		99		192		6		297
2006		94		183		2		279
2007		83		179		1		263
2008		75		171		-		246
2009		69		163		-		232
2010 and thereafter		422		390		-		812
		842		1,278		9		2,129

Pledged assets

In the normal course of business, the Bank pledges securities and other assets as collateral for various liabilities it contracts. A breakdown of assets pledged as collateral is provided below.

As at October 31

	2004		2003
Assets pledged to:
- Bank of Canada		25		25
- Direct clearing organizations		2,812		3,395
Assets pledged in relation to:
- Derivative transactions		544		202
- Borrowing, securities lending and securities sold under repurchase agreements		12,016		9,304
- Other		643		225
Total		16,040		13,151

Credit instruments

In the normal course of business, the Bank enters into various off-balance sheet commitments. The credit instruments used to meet the financing needs of its clients represent the maximum amount of additional credit the Bank could be obligated to extend if the commitments were fully drawn.

As at October 31

	2004		2003
Letters of guarantee(1)		1,225		903
Documentary letters of credit(2)		102		93
Credit card loans(3)		4,882		4,838
Commitments to extend credit(3)
Original term of one year or less		6,756		6,415
Original term of more than one year		10,346		9,689

(1) See “Letters of guarantee” on page 115.

(2) Documentary letters of credit are documents issued by the Bank and used in international trade to enable a third party to draw drafts on the Bank up to an amount established under specific terms and conditions; these instruments are collateralized by the delivery of the goods they represent.

(3) Credit card loans and commitments to extend credit represent the undrawn portions of credit authorizations granted in the form of loans, acceptances, letters of guarantee and documentary letters of credit. The Bank is required at all times to make the undrawn portion of the authorization available, subject to certain conditions.

Other commitments

The Bank acts as an investor in investment banking activities by entering into agreements to finance external private equity funds and investments in equity and debt securities at market value at the time the agreements are signed. In connection with these activities, the Bank had commitments to invest up to $747 million as at October 31, 2004 (2003: $647 million).

Litigation

In the normal course of business, the Bank is engaged in various legal proceedings, most of which are related to lending activities and arise when the Bank takes measures to collect delinquent loans. Recently, motions for authorization to institute class action suits were filed against various financial institutions, including the Bank, contesting, among other things, certain transaction fees. The subsidiary National Bank Financial is also engaged in various legal proceedings in the normal course of business. Most of these proceedings concern services to individual investors and may relate to the suitability of investments. In Management's opinion, based on past experience, the related aggregate potential liability will not have a material impact on the Bank's financial position.

15(c)-30

NATIONAL BANK OF CANADA FINANCIAL STATEMENTS

19 Derivative Financial Instruments

Derivative financial instruments are financial contracts whose value is derived from an underlying interest rate, exchange rate, or equity, commodity or credit instrument or index. The Bank uses these instruments to accommodate the needs of its clients and for its own risk management and trading activities.

The main derivative financial instruments used are as follows:

Foreign exchange forward contracts are tailor-made agreements transacted between counterparties in the over-the-counter market to buy or sell foreign currencies for delivery on a future date at a specified rate.

Futures are contractual obligations to buy or deliver a specific amount of currency, commodities or financial instruments on a future date at a specified price. Futures are standardized contracts traded on organized exchanges and are subject to daily cash margining.

Forward rate agreements are contracts fixing an interest rate to be paid or received, calculated on a notional principal amount, with a specified maturity commencing at a specified future date.

Swaps are transactions in which two parties agree to exchange cash flows having specific characteristics in terms of rates (fixed or floating), currency, commodity price, index, etc. based on a notional principal amount for a specified period of time.

Options are agreements between two parties in which the writer of the option conveys to the buyer the right, but not the obligation, to buy or to sell, at or by a predetermined date, a specific amount of currency, commodities or financial instruments at a price agreed to when the option is arranged. The writer receives a premium for selling this instrument.

Notional principal amounts

Notional principal amounts, which are presented off balance sheet, represent the set underlying principal of a derivative instrument and serve as a reference for currency and interest rates and stock market prices to determine the amount of cash flows to be exchanged.

15(c)-31

NATIONAL BANK OF CANADA FINANCIAL STATEMENTS

					Remaining term to maturity						2004				2003
	Contracts												Contracts
	held												held
	for trading		Within		3 to 12		1 to 5		Over		Total		for trading		Total
	purposes		3 months		months		years		5 years		contracts		purposes		contracts
Foreign exchange contracts
OTC contracts
Forwards		6,277		4,126		1,482		698		-		6,306		6,652		6,748
Swaps		25,227		19,236		9,154		1,169		-		29,559		36,874		42,889
Options purchased		5,514		3,395		1,788		331		-		5,514		9,459		9,459
Options written		5,284		2,867		2,163		254		-		5,284		9,676		9,676
Total		42,302		29,624		14,587		2,452		-		46,663		62,661		68,772
Exchange-traded contracts
Futures
Long positions		90		90		-		-		-		90		9		9
Short positions		62		3		32		27		-		62		306		306
Options purchased		30		30		-		-		-		30		160		160
Options written		1		1		-		-		-		1		11		11
Total		183		124		32		27		-		183		486		486
Interest rate contracts
OTC contracts
Forward rate agreements		7,033		1,675		5,283		75		-		7,033		7,487		7,487
Swaps		95,709		38,983		30,776		39,391		7,611		116,761		66,528		88,477
Options purchased		12,908		3,476		8,340		1,265		76		13,157		7,275		7,590
Options written		13,566		3,914		8,331		1,319		2		13,566		13,455		13,455
Total		129,216		48,048		52,730		42,050		7,689		150,517		94,745		117,009
Exchange-traded contracts
Futures
Long positions		12,316		1,197		9,606		1,513		-		12,316		6,804		6,804
Short positions		20,756		8,228		13,442		-		-		21,670		15,584		16,862
Options purchased		21,748		18,732		3,016		-		-		21,748		31,115		31,115
Options written		21,002		13,381		7,621		-		-		21,002		28,761		33,706
Total		75,822		41,538		33,685		1,513		-		76,736		82,264		88,487
Equity, commodity and
credit derivative contracts
OTC contracts
Forwards		107		1		14		33		59		107		164		164
Swaps		13,166		6,089		4,807		1,814		456		13,166		7,993		8,018
Options purchased		1,635		63		380		995		197		1,635		640		648
Options written		1,405		60		101		1,036		208		1,405		342		342
Total		16,313		6,213		5,302		3,878		920		16,313		9,139		9,172
Exchange-traded contracts
Futures
Long positions		94		94		-		-		-		94		86		102
Short positions		755		707		43		5		-		755		1,012		1,012
Options purchased		387		210		103		51		27		391		219		219
Options written		102		78		22		11		-		111		24		24
Total		1,338		1,089		168		67		27		1,351		1,341		1,357
Total 2004		265,174		126,636		106,504		49,987		8,636		291,763		250,636		285,283
Total 2003		250,636		120,693		106,655		47,986		9,949		285,283

15(c)-32

NATIONAL BANK OF CANADA FINANCIAL STATEMENTS

Credit risk

Credit risk on derivative financial instruments is the risk of a financial loss occurring as a result of a counterparty failing to honour its contractual obligations to the Bank. The current replacement cost, which is the positive fair value of all outstanding derivative financial instruments, represents the Bank’s maximum credit derivative exposure. The credit equivalent amount is calculated by taking into account the current replacement cost of all outstanding contracts in a gain position, potential future exposure and the impact of master netting agreements. The risk-weighted amount is the credit equivalent amount multiplied by the counterparty risk factors prescribed by the Superintendent. The Bank negotiates master netting agreements with counterparties with which it has significant credit risk exposure resulting from derivative transactions. Such agreements provide for the simultaneous close-out and settling of all transactions with a counterparty in the event of default. Some of these agreements also provide for the exchange of collateral between parties where the fair value of outstanding transactions between the parties exceeds an agreed threshold.

As at October 31, credit risk exposure on the derivatives portfolio is as follows:

												2004														2003
	Current replacement cost														Current replacement cost
									Credit			Risk-											Credit			Risk-
				Non-					equiv-			weighted						Non-					equiv-			weighted
	Trading(1)			trading		Total			alent			amount			Trading(1)			trading		Total			alent			amount
Interest rate contracts		743			376		1,119			1,443			281			509			514		1,023			1,172			225
Foreign exchange contracts		1,111			23		1,134			1,619			354			1,403			75		1,478			2,280			515
Equity, commodity and credit
derivative contracts		841			4		845			2,048			504			597			3		600			1,346			380
		2,695			403		3,098			5,110			1,139			2,509			592		3,101			4,798			1,120
Impact of master netting
agreements		(1,560	)		-		(1,560	)		(2,394	)		(535	)		(1,586	)		-		(1,586	)		(2,319	)		(534	)
		1,135			403		1,538			2,716			604			923			592		1,515			2,479			586

(1) Excluding, in accordance with the guidelines of the Office of the Superintendent of Financial Institutions Canada, exchange traded instruments and forward contracts with an original maturity of 14 days. The total positive fair value of these excluded contracts amounted to $40 million as at October 31, 2004 (2003: $51 million).

Fair value

The fair value of derivatives is determined before factoring in the impact of master netting agreements. When available, market prices are used to determine the fair value of derivatives. Otherwise, fair value is determined using pricing models that incorporate current market prices and the contractual prices of the underlying instruments, the time value of money, yield curves and volatility factors. If necessary, fair value is adjusted to take market, model and credit risks into account, as well as related costs.

As at October 31, 2004, the positive fair value of trading derivatives is presented in “Other assets” on the Consolidated Balance Sheet. The negative fair value is presented under “Other liabilities.” Figures as at October 31, 2003 have been reclassified to conform with the presentation adopted in the current year.

15(c)-33

NATIONAL BANK OF CANADA FINANCIAL STATEMENTS

As at October 31, the fair value of derivative financial instruments is as follows:

							2004									2003
(millions of dollars)	Positive			Negative			Net			Positive			Negative			Net
Contracts held for trading purposes
Interest rate contracts
Forwards		6			7			(1	)		10			4			6
Swaps		675			501			174			481			609			(128	)
Options		72			65			7			27			48			(21	)
Total		753			573			180			518			661			(143	)
Foreign exchange contracts
Forwards		54			143			(89	)		74			183			(109	)
Swaps		971			603			368			1,195			724			471
Options		102			157			(55	)		165			213			(48	)
Total		1,127			903			224			1,434			1,120			314
Equity, commodity and credit
derivative contracts
Forwards		24			171			(147	)		59			147			(88	)
Swaps		615			475			140			492			372			120
Options		216			264			(48	)		57			27			30
Total		855			910			(55	)		608			546			62
Total - Contracts held for trading purposes		2,735			2,386			349			2,560			2,327			233
Contracts held for non-trading purposes
Interest rate contracts
Forwards		-			-			-			-			-			-
Swaps		374			183			191			512			145			367
Options		2			-			2			2			-			2
Total		376			183			193			514			145			369
Foreign exchange contracts
Forwards		-			-			-			-			-			-
Swaps		23			50			(27	)		75			227			(152	)
Options		-			-			-			-			-			-
Total		23			50			(27	)		75			227			(152	)
Equity, commodity and credit
derivative contracts
Forwards		-			-			-			-			-			-
Swaps		-			-			-			1			-			1
Options		4			1			3			2			-			2
Total		4			1			3			3			-			3
Total - Contracts held for non-trading purposes		403			234			169			592			372			220
Total fair value		3,138			2,620			518			3,152			2,699			453
Impact of master netting agreements		(1,577	)		(1,577	)		-			(1,600	)		(1,600	)		-
		1,561			1,043			518			1,552			1,099			453

15(c)-34

NATIONAL BANK OF CANADA FINANCIAL STATEMENTS

As at October 31, the distribution of risk exposure by counterparty is as follows:

			2004				2003
	Replace-				Replace-
	ment		Credit		ment		Credit
	cost		equivalent		cost		equivalent
OECD governments		13		625		31		407
OECD banks		2,545		1,473		2,432		1,501
Other		540		618		638		571
Total		3,098		2,716		3,101		2,479

20 Geographic Distribution of Earning Assets by Ultimate Risk

 

			2004				2003
	$		%		$		%
North America
Canada		63,103		85.4		62,698		84.3
United States		6,111		8.3		4,717		6.3
		69,214		93.7		67,415		90.6
Europe
United Kingdom		1,087		1.5		2,283		3.1
Germany		244		0.3		648		0.9
Other		2,048		2.8		2,651		3.5
		3,379		4.6		5,582		7.5
Asia and Pacific		612		0.8		1,091		1.5
Latin America and Caribbean		627		0.9		315		0.4
Middle East and Africa		30		-		18		-
Earning assets as at September 30		73,862		100.0		74,421		100.0
Other assets as at September 30		9,483				9,456
Net change in assets in October		5,462				1,054
Total assets as at October 31		88,807				84,931

Earning assets are those which bear interest. Consequently, they do not include cash, cheques and other items in the clearing process (net value), customers’ liability under acceptances, premises and equipment, and other assets. The Bank’s earning assets as at September 30 were distributed according to location of ultimate risk, i.e., the geographic location of the borrower or, if applicable, the guarantor. Earning assets are calculated net of any allowance for credit losses.

There is no material concentration of credit risk in any given operating segment.

15(c)-35

NATIONAL BANK OF CANADA FINANCIAL STATEMENTS

21 Interest Rate Sensitivity Position

The Bank offers a range of financial products for which the cash flows are sensitive to interest rate fluctuation. Interest rate risk arises from on- and off-balance sheet cash flow mismatches. The degree of exposure is based on the size and direction of interest rate movements and on the maturity of the mismatched positions. Analyzing interest rate sensitivity gaps is one of the techniques used by the Bank to manage interest rate risk.

The table below illustrates the sensitivity of the Bank’s Consolidated Balance Sheet to interest rate fluctuations as at October 31, 2004.

															Non-
	Floating		Within			3 to 12			1 to 5			Over			interest
	rate		3 months			months			years			5 years			sensitive			Total
Assets
Cash resources		1,269		3,700			582			-			-			226			5,777
Effective yield				1.9	%		2.6	%		-	%		-	%
Securities		1,228		2,130			6,000			8,484			5,608			4,557			28,007
Effective yield				1.0	%		2.4	%		3.8	%		3.9	%
Loans		1,371		25,549			5,830			9,021			390			3,833			45,994
Effective yield				3.8	%		4.9	%		5.7	%		7.0	%
Other assets		-		-			-			-			-			9,029			9,029
		3,868		31,379			12,412			17,505			5,998			17,645			88,807
Liabilities and shareholders’ equity
Deposits		2,972		26,788			6,911			13,850			557			2,354			53,432
Effective yield				2.2	%		3.1	%		3.6	%		4.4	%
Other debt(1)		-		8,584			993			2,025			2,706			4,078			18,386
Effective yield				2.1	%		2.2	%		3.3	%		4.1	%
Subordinated debentures		53		-			-			-			1,355			-			1,408
Effective yield				-	%		-	%		-	%		6.8	%
Acceptances and
other liabilities		-		-			-			-			-			11,377			11,377
Shareholders’ equity		-		-			-			375			-			3,829			4,204
		3,025		35,372			7,904			16,250			4,618			21,638			88,807
On-balance sheet gap		843		(3,993	)		4,508			1,255			1,380			(3,993	)		-
Derivative financial instruments		-		(27,772	)		13,414			14,164			194			-			-
Total		843		(31,765	)		17,922			15,419			1,574			(3,993	)		-
Position in Canadian dollars
On-balance sheet total		187		335			3,054			24			460			(3,999	)		61
Derivative financial instruments		-		(15,288	)		6,318			8,553			116			-			(301	)
Total		187		(14,953	)		9,372			8,577			576			(3,999	)		(240	)
Position in foreign currency
On-balance sheet total		656		(4,328	)		1,454			1,231			920			6			(61	)
Derivative financial instruments		-		(12,484	)		7,096			5,611			78			-			301
Total		656		(16,812	)		8,550			6,842			998			6			240
Total 2004		843		(31,765	)		17,922			15,419			1,574			(3,993	)		-
Total 2003		67		(18,920	)		11,574			6,298			2,839			(1,858	)		-

(1) Obligations related to securities sold short and securities sold under repurchase agreements.

Effective yield represents the weighted average effective yield based on the earlier of contractual repricing and the maturity date.

15(c)-36

NATIONAL BANK OF CANADA FINANCIAL STATEMENTS

22 Fair Value of Financial Instruments

The following table presents the fair value of balance sheet financial instruments, except for instruments whose fair value is estimated to approximate their carrying value. This fair value is determined using the valuation methods and assumptions described below. The fair values of derivative financial instruments are not included in the table and are presented separately in Note 19.

Fair value represents the amount at which a financial instrument could be exchanged in an arm’s length transaction between willing parties under no compulsion to act and is best evidenced by a quoted market price. If no quoted market prices are available, the fair values presented are estimates derived using present value or other valuation techniques and may not be indicative of the net realizable value.

The fair values disclosed exclude the values of assets and liabilities that are not considered financial instruments such as premises and equipment. Due to the judgment used in applying a wide range of acceptable valuation techniques and estimations in calculating fair value amounts, fair values are not necessarily comparable among financial institutions. The calculation of estimated fair values is based on market conditions at a specific point in time and may not be reflective of future fair values.

			2004				2003
	Carrying		Fair		Carrying		Fair
	value		value		value		value
Assets
Securities		28,007		28,131		26,179		26,307
Loans		41,498		41,700		38,381		38,758
Liabilities
Deposits		53,432		53,682		51,463		51,831
Subordinated debentures		1,408		1,496		1,516		1,627

Valuation methods and assumptions

Securities

The fair value of securities is presented in Note 4 to the consolidated financial statements. It is based on quoted market prices. If quoted market prices are not available, fair value is estimated using the quoted market prices of similar securities.

Loans

The fair value of floating-rate loans is assumed to approximate their carrying value. The fair value of other loans is estimated based on a discounted cash flows calculation that uses market interest rates currently charged for similar new loans as at the balance sheet date applied to expected maturity amounts (adjusted for any prepayments).

Deposits

The fair value of fixed-rate deposits is determined by discounting the contractual cash flows, using market interest rates currently offered for deposits with the same remaining terms to maturity. The fair value of deposits with no stated maturity is assumed to approximate their carrying value.

Subordinated debentures

The fair value of subordinated debentures is determined by discounting the contractual cash flows, using market interest rates currently offered for similar financial instruments with the same remaining term to maturity.

15(c)-37

NATIONAL BANK OF CANADA FINANCIAL STATEMENTS

23 Related Party Transactions

The Bank grants loans to its directors and officers under various conditions. The balance of loans granted is:

	2004		2003
Mortgage loans		3		2
Other loans		71		83

Since January 1, 2003, loans to eligible officers have been granted under the same conditions as those applicable to loans granted to any other employee of the Bank. The principal conditions are as follows: the employee must meet the same credit requirements as a client; mortgage loans are granted at the market rate less 2%; personal loans and credit card advances bear interest at the client rate divided by 2; and personal lines of credit bear interest at the Canadian prime rate less 3%, but never lower than Canadian prime divided by 2.

For personal loans, credit cards advances and personal lines of credit, employees may not borrow more than 50% of their annual salary at the reduced rate. The Canadian prime rate is applied to the remainder.

Loans granted to officers before January 1, 2003 are administered according to the conditions previously in effect, for a transitional period ending December 31, 2005. These conditions are as follows: loans to directors are granted under market conditions for similar risks; residential mortgage loans to officers are granted at the market rate divided by 3 for the first $50,000 and at the lower of the market rate divided by 3 and the market rate less 5% for the remainder; and other loans granted to officers, mainly personal lines of credit, bear interest at the prime rate divided by 2 for the first $10,000 to $20,000 and at the lower of prime less 3% and prime divided by 2 for the remainder, to an aggregate maximum of 50% of the officer’s annual salary.

24 Segment Disclosures

The Bank carries out its activities in three reportable segments, defined below. The other operating activities are grouped for presentation purposes. Each reportable segment is distinguished by services offered, type of client and marketing strategy. The operations of each of the Bank’s reportable segments are summarized below.

Personal and Commercial

The Personal and Commercial segment comprises the branch network, intermediary services, credit cards, insurance, commercial banking services and real estate.

Wealth Management

The Wealth Management segment comprises full-service retail brokerage, discount brokerage, mutual funds, trust services and portfolio management.

Financial Markets

The Financial Markets segment encompasses corporate financing and lending, treasury operations, including asset and liability management for the Bank, and corporate brokerage.

Other

This heading comprises securitization transactions, certain non-recurring items, and the unallocated portion of centralized services.

The accounting policies are the same as those presented in the note on accounting policies (Note 1), with the exception of the net interest income, other income and income taxes of the operating segments, which are presented on a taxable equivalent basis. Taxable equivalent basis is a calculation method that consists in grossing up certain tax-exempt income by the amount of income tax that would have been otherwise payable. The impact of these adjustments is reversed under the “Other” heading. Head office expenses are allocated to each operating segment and disclosed in segmented results. The Bank assesses performance based on net income. Intersegment revenues are recognized at the exchange amount. Segment assets correspond to average assets directly used in segment operations.

15(c)-38

NATIONAL BANK OF CANADA FINANCIAL STATEMENTS

Results by business segment

	Personal and				Wealth				Financial
	Commercial				Management				Markets				Other						Total
	2004		2003		2004		2003		2004		2003		2004			2003			2004		2003
Net interest income(1)		1,289		1,248		93		91		256		186		(255	)		(201	)		1,383		1,324
Other income(1)		666		629		650		567		731		745		119			97			2,166		2,038
Total revenues		1,955		1,877		743		658		987		931		(136	)		(104	)		3,549		3,362
Operating expenses		1,216		1,162		576		526		541		527		59			42			2,392		2,257
Contribution		739		715		167		132		446		404		(195	)		(146	)		1,157		1,105
Provision for credit losses		136		155		-		-		52		63		(102	)		(41	)		86		177
Income before income taxes and
non-controlling interest		603		560		167		132		394		341		(93	)		(105	)		1,071		928
Income taxes(1)		215		202		58		46		144		122		(99	)		(93	)		318		277
Non-controlling interest		-		-		4		4		-		-		24			23			28		27
Net income (net loss)		388		358		105		82		250		219		(18	)		(35	)		725		624
Average assets		40,544		38,679		834		805		42,364		37,819		(5,070	)		(5,493	)		78,672		71,810

(1) Net interest income was grossed up by $62 million (2003: $42 million) and other income by $46 million (2003: $55 million) to bring the tax-exempt income earned on certain securities in line with the income earned on other financial instruments. An equivalent amount was added to income taxes. The effect of these adjustments is reversed under the “Other ” heading.

Results by geographic segment

Total revenues are allocated based on the country in which the client conducts business. More than 93.8% (2003: 94.5%) of revenues are concentrated in Canada.

25 Comparison with Generally Accepted Accounting Principles in the United States

The consolidated financial statements of the Bank were prepared in accordance with Canadian GAAP. The principal differences resulting from the application of U.S. GAAP on net income and on the Consolidated Balance Sheet are presented below. In addition, a Consolidated Statement of Comprehensive Income is presented in conformity with U.S. GAAP.

	2004			2003
Reported net income		725			624
Charge for other-than-temporary impairment		-			(20	)
Investment account securities		(2	)		(2	)
Sale of premises - FIN 46R		(2	)		(2	)
Mutual funds - FIN 46R		13			-
Loan securitization		6			4
Derivatives and hedging		(21	)		(11	)
Income tax effect on above items		2			11
Net income per U.S. GAAP		721			604
Net earnings per common share, basic - U.S. GAAP	$	4.08		$	3.26
Net earnings per common share, diluted - U.S. GAAP	$	4.03		$	3.23

15(c)-39

NATIONAL BANK OF CANADA FINANCIAL STATEMENTS

Consolidated Statement of Comprehensive Income

	2004			2003
Net income per U.S. GAAP		721			604
Other comprehensive income
Change in unrealized gains (losses) on securities available for sale,
net of income taxes (income tax savings) of $(5) (2003: $59)		(6	)		104
Change in gains (losses) on derivatives designated as cash flow hedges,
net of income tax savings of $(26) (2003: $(35))		(60	)		(64	)
Minimum pension liability adjustment, net of income taxes of $2 (2003: $1)		4			1
Change in unrealized foreign currency translation adjustments,
net of income taxes of $31 (2003: $63)		(16	)		(11	)
Comprehensive income		643			634

Consolidated Condensed Balance Sheet

						2004							2003
	Canadian					U.S.		Canadian					U.S.
	GAAP			Increase		GAAP		GAAP		Increase			GAAP
Assets
Cash resources		5,777			2		5,779		7,047		-			7,047
Investment account securities		7,428			176		7,604		6,998		121			7,119
Trading account securities		20,561			-		20,561		19,151		-			19,151
Loan substitutes		18			-		18		30		-			30
Securities purchased under
reverse repurchase agreements		4,496			-		4,496		3,955		-			3,955
Loans		41,498			-		41,498		38,381		588			38,969
Premises and equipment		267			84		351		263		81			344
Goodwill		662			22		684		660		22			682
Other assets		8,100			288		8,388		8,446		599			9,045
Total assets		88,807			572		89,379		84,931		1,411			86,342
Liabilities
Deposits		53,432			-		53,432		51,463		514			51,977
Other liabilities		29,393			212		29,605		27,457		533			27,990
Subordinated debentures		1,408			131		1,539		1,516		114			1,630
Non-controlling interest		370			45		415		398		-			398
Total liabilities		84,603			388		84,991		80,834		1,161			81,995
Shareholders’ equity
Preferred shares		375			-		375		375		-			375
Common shares		1,545			24		1,569		1,583		24			1,607
Contributed surplus		7			-		7		2		-			2
Unrealized foreign currency translation adjustments		(10	)		10		-		6		(6	)		-
Retained earnings		2,287			27		2,314		2,131		31			2,162
Accumulated other comprehensive income		-			123		123		-		201			201
Total shareholders’ equity		4,204			184		4,388		4,097		250			4,347
Total liabilities and shareholders’ equity		88,807			572		89,379		84,931		1,411			86,342

Impairment charge

Under Canadian GAAP, unless compelling evidence is provided to indicate otherwise, a decrease in the value of an investment is considered an other-than-temporary impairment when the carrying value exceeds the market value for a prolonged period. The factors indicative of an impairment that is other than temporary under Canadian GAAP differ from those under U.S. GAAP as regards the period during which the carrying value may exceed the market value before it must be concluded that the decrease in value is an other-than-temporary impairment. In comparison to Canadian GAAP, the period under U.S. GAAP is significantly shorter. Lastly, under U.S. GAAP, when there has been a loss in value of an investment that is other than a temporary decline, the investment should be written down to fair value, based on market prices.

15(c)-40

NATIONAL BANK OF CANADA FINANCIAL STATEMENTS

Investment account securities

Under U.S. GAAP, investment account securities are separated into two categories: securities available for sale (recognized in the balance sheet at fair value) and securities held to maturity (carried in the balance sheet at unamortized cost). Unrealized gains and losses on securities available for sale, net of income taxes, are presented separately in “Accumulated other comprehensive income” under “Shareholders’ equity,” while the change in unrealized gains and losses, net of income taxes, is recorded in the Consolidated Statement of Comprehensive Income. Under U.S. GAAP, the Bank records substantially all investment account securities as available for sale. Furthermore, under U.S. GAAP, all obligations related to securities sold short must be recorded at fair value as liabilities, and any changes in fair value must be accounted for in the Consolidated Statement of Income. Under Canadian GAAP, securities sold short that are used in hedging relationships are recorded at unamortized cost. Gains and losses realized on these securities are included in the Consolidated Statement of Income concurrently with the gains and losses on the hedged items.

Sale of premises

Under Canadian GAAP, the head office building leases are considered a sales-type lease followed by an operating lease as a lessee. Under U.S. GAAP (SFAS No. 98 “Accounting for Leases”), in order to be accounted for as a sales-type lease, title of property must be transferred at the end of the lease term; therefore, the two leases must be accounted for as operating leases. Consequently, the building remains on the balance sheet, and the proceeds received are recorded as a liability. In addition, under new FASB Interpretation No. 46 (FIN 46R), revised in December 2003, on the consolidation of variable interest entities (“VIEs”), applicable to quarters ending after March 15, 2004, the Bank, as the primary beneficiary, must consolidate, as of October 31, 2004, the VIE that leases the head office building under a capital lease. VIEs are entities in which equity investors do not have controlling financial interest or where the equity investment at risk is not sufficient to permit the entity to finance its activities without additional subordinated financial support provided by other parties. The primary beneficiary is the party that receives the majority of the expected residual returns and/or absorbs the majority of the entity’s expected losses. The Canadian standard, Accounting Guideline No. 15 “Consolidation of Variable Interest Entities” (AcG-15), is harmonized with FIN 46R and will apply to the Bank effective November 1, 2004.

Loan securitization

A new Canadian GAAP standard applies to loan securitization transactions carried out as of July 1, 2001, substantially harmonizing the Canadian accounting treatment with that required under U.S. GAAP. However, certain differences remain with respect to transactions entered into before July 1, 2001 and the conditions under which special purpose entities (“SPEs”) require consolidation. Under Canadian GAAP, SPEs are consolidated only when the Bank is deemed to control these SPEs and retains substantially all the residual risks and rewards of the SPEs. U.S. GAAP, applicable in 2003, required SPEs to be consolidated unless they received a substantial investment from an independent third party or they qualified as entities because their activities were sufficiently limited. In 2004, under new U.S. FIN 46R, the Bank must consolidate SPEs, other than qualifying special purpose entities which are specifically exempt from consolidation, if the Bank is the primary beneficiary. Under Canadian standards, the Bank has not consolidated any SPEs in 2003 and 2004, whereas under U.S. standards, two entities were consolidated in 2003 (total assets: $588 million) and no entities were consolidated in 2004.

Mutual funds

Under U.S. GAAP (FIN 46R), in 2004 the Bank must consolidate certain mutual funds it manages because, by virtue of its investments in these funds, the Bank is deemed to be the primary beneficiary. In accordance with current consolidation standards under Canadian GAAP, the Bank is not required to consolidate these mutual funds. However, effective November 1, 2004, following the adoption of AcG-15, the Bank will have to consolidate them.

Derivative financial instruments

Under Canadian GAAP, derivatives used in sales or trading activities as well as instruments that do not qualify for hedge accounting are recorded on the Consolidated Balance Sheet at fair value. Under the U.S. standard, the Bank is required to recognize all derivatives at fair value on the Consolidated Balance Sheet as an asset or liability. The Canadian and U.S. accounting treatments for derivatives held for sale or trading are therefore the same.

However, the Canadian and U.S. accounting treatments for derivatives held for hedging purposes differ. In accordance with the U.S. standard, changes in the fair value of derivatives designated as fair value hedges are recorded in income and are generally offset by changes in the fair value of the hedged items. With respect to derivatives designated as cash flow hedges, the effective portion of the changes in fair value is recorded as a separate component of comprehensive income in the Consolidated Statement of Comprehensive Income until the hedged items are recognized in the Consolidated Statement of Income. The ineffective portion of the changes in fair value of a hedged item is always recognized in the Consolidated Statement of Comprehensive Income.

15(c)-41

NATIONAL BANK OF CANADA FINANCIAL STATEMENTS

Minimum pension liability

Under U.S. GAAP (SFAS No. 87 “Employers’ Accounting for Pensions”), if the accrued benefit obligation, without salary projections, exceeds the fair value of the assets of a pension plan, a liability (minimum pension liability) equivalent to the difference must be recorded in the consolidated balance sheet. Recognition of an additional liability is required where the accrued benefit obligation, without salary projections, exceeds the fair value of the pension plan assets, and a net accrued benefit asset is recognized in the consolidated balance sheet. If an additional liability is recognized, an equal amount is recognized as an intangible asset, up to the amount of unamortized prior service cost, with any excess recorded, net of income taxes, under “Other comprehensive income.”

Goodwill

In 1999, the value of the shares issued by the Bank as part of the acquisition of First Marathon was based on the market price of the shares over a reasonable period of time before and after the acquisition date, as required by Canadian GAAP in effect before July 1, 2001. Under U.S. GAAP, the value of these shares would have been based on their market price over a reasonable period of time before and after the date the terms of the acquisition were agreed to and announced. Had the Bank followed U.S. GAAP, goodwill and common shares would have increased.

15(c)-42

INDEX TO EXHIBITS

Exhibit
Number
Description

3.1.1 Articles of Incorporation and Articles of Amendment and Restatement and Articles Supplementary of NB Capital Corporation*

3.2.1 Bylaws of NB Capital Corporation*

4.1 Registration Rights Agreement dated as of September 3, 1997 by and among NB Capital Corporation, National Bank of Canada and Merrill Lynch, Pierce, Fenner & Smith Incorporated*

10.1 Advisory Agreement dated 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*

10.5 Deed of Sale of Mortgage Loans dated September 3, 1997 between National Bank of Canada and NB Finance, Ltd.*

10.6 Mortgage Loan Assignment Agreement dated September 3, 1997 among National Bank of Canada, NB Capital Corporation and NB Finance, Ltd.*

10.7 Promissory Notes representing the 16 hypothecation loans executed by NB Finance, Ltd. in favor of NB Capital Corporation*

10.8 Deposit Agreement among NB Capital Corporation, National Bank of Canada and The Bank of Nova Scotia Trust Company of New York, including Form of Depository Receipt*

10.9 First Supplemental Servicing Agreement dated December 4, 1998 between National Bank of Canada and NB Capital Corporation*

–23–

10.10 Loan Agreement dated as of December 4, 1998 between NB Finance, Ltd. and NB Capital Corporation*

10.11 Custodial Agreement dated as of December 4, 1998 between NB Capital Corporation and National Bank of Canada*

10.12 Amended and Restated Servicing Agreement dated June 28, 2001 between National Bank of Canada and NB Capital Corporation.*

10.13 Deed of Sale of Mortgage Loans dated December 4, 1998 between National Bank of Canada and NB Finance, Ltd.*

10.14(i) Mortgage Loan Assignment Agreement dated as of December 4, 1998 among NB Finance, Ltd., NB Capital Corporation and National Bank of Canada*

10.14(ii) Mortgage Loan Assignment Agreement dated as of December 4, 1998 among NB Finance, Ltd., NB Capital Corporation and National Bank of Canada*

10.15(i) Promissory Note representing $25,836,597.23 executed by NB Finance, Ltd. in favor of NB Capital Corporation*

10.15(ii) Promissory Note representing $29,880,126.51 executed by NB Finance, Ltd. in favor of NB Capital Corporation*

10.16 Mortgage Loan Assignment Agreement dated as of September 7, 1999 among NB Finance, Ltd., NB Capital Corporation and National Bank of Canada*

10.17 Promissory Note representing $85,989,203.22 executed by NB Finance, Ltd. in favor of NB Capital Corporation*.

10.18 Mortgage Loan Assignment Agreement dated as of April 14, 2000 among NB Finance, Ltd., NB Capital Corporation and National Bank of Canada*

10.19 Promissory Note representing $98,836,341.23 executed by NB Finance, Ltd. in favor of NB Capital Corporation*

10.20 Mortgage Loan Assignment Agreement dated as of September 28, 2000 among NB Finance, Ltd., NB Capital Corporation and National Bank of Canada*

10.21 Promissory Note representing $67,323,437.74 executed by NB Finance, Ltd. in favor of NB Capital Corporation*

–24–

10.22 Mortgage Loan Assignment Agreement dated as of January 30, 2001 among NB Finance, Ltd., NB Capital Corporation and National Bank of Canada*

10.23 Promissory Note representing $107,179,964.89 executed by NB Finance, Ltd. in favor of NB Capital Corporation*

10.24 Mortgage Loan Assignment Agreement dated as of June 12, 2001 among NB Finance, Ltd., NB Capital Corporation and National Bank of Canada*

10.25 Promissory Note representing $121,357,226.22 executed by NB Finance, Ltd. in favor of NB Capital Corporation*

10.26 Mortgage Loan Assignment Agreement dated as of September 24, 2001 among NB Finance, Ltd., NB Capital Corporation and National Bank of Canada*

10.27 Promissory Note representing $55,963,732.07 executed by NB Finance, Ltd. in favor of NB Capital Corporation*

10.28 Mortgage Loan Assignment Agreement dated as of January 29, 2002 among NB Finance, Ltd., NB Capital Corporation and National Bank of Canada*

10.29 Promissory Note representing $71,866,079.87 executed by NB Finance, Ltd. in favor of NB Capital Corporation*

10.30 Mortgage Loan Assignment Agreement dated as of June 20, 2002 among NB Finance, Ltd., NB Capital Corporation and National Bank of Canada*

10.31 Promissory Note representing $64,221,362.98 executed by NB Finance, Ltd. in favor of NB Capital Corporation*

10.32 Mortgage Loan Assignment Agreement dated as of December 16, 2002 among NB Finance, Ltd., NB Capital Corporation and National Bank of Canada*

10.33 Promissory Note representing $52,054,168.88 executed by NB Finance, Ltd. in favor of NB Capital Corporation*

10.34 Mortgage Loan Assignment Agreement dated as of May 27, 2003 among NB Finance, Ltd., NB Capital Corporation and National Bank of Canada*

10.35 Promissory Note representing $70,420,135.45 executed by NB Finance, Ltd. in favor of NB Capital Corporation*

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10.36 Mortgage Loan Assignment Agreement dated as of October 21,2003 among NB Finance, Ltd., NB Capital Corporation and National Bank of Canada*

10.37 Promissory Note representing $106,552,720.44 executed by NB Finance, Ltd. in favor of NB Capital Corporation*

10.38 Mortgage Loan Assignment Agreement dated as of April 28, 2004 among NB Finance, Ltd., NB Capital Corporation and National Bank of Canada*

10.39 Promissory Note representing $76,053,456.93 executed by NB Finance, Ltd. in favor of NB Capital Corporation*

10.40 Mortgage Loan Assignment Agreement dated as of August 26, 2004 among NB Finance, Ltd., NB Capital Corporation and National Bank of Canada*

10.41 Promissory Note representing $94,559,444.49 executed by NB Finance, Ltd. in favor of NB Capital Corporation*

14 NB Capital Code of Ethics*

31.1 Certification of Chairman and President pursuant to Section 302 of the Sarbanes-Oxley Act of 2002**

31.2 Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002**

32.1 Written Statement of Chairman and President Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (18 U.S.C. Section 1350)**

32.2 Written Statement of Chief Financial Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (18 U.S.C. Section 1350)**

* As previously filed.

** As filed herewith.

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