FINANCIAL STATEMENT 2010
CONTENTS Independent Auditors Report------------------------------ 2 Consolidated Balance Sheets ------------------------------ 3 Consolidated Statements of Operations ---------------- 4 Consolidated Statements of Changes In Equity ----- 5 Consolidated Statements of Cash Flows --------------- 7 Notes to Consolidated Financial Statements---------- 9 1
Deloitte Touche Tohmatsu LLC Nagoya Daiya Building 3-goukan, 13-5, Meieki 3-chome, Nakamura-ku Nagoya, Aichi 450-8530 Japan Tel: +81(52)565 5511 Fax: +81(52)569 1394 www.deloitte.com/jp INDEPENDENT AUDITORS REPORT To the Board of Directors of The Chukyo Bank, Ltd.: We have audited the accompanying consolidated balance sheets of The Chukyo Bank, Ltd. (the Bank ) and subsidiaries as of March 31, 2010 and 2009, and the related consolidated statements of operations, changes in equity and cash flows for the years then ended, all expressed in Japanese yen. 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 audits. We conducted our audits in accordance with auditing standards generally accepted in Japan. 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 examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of the Chukyo Bank,Ltd and subsidiaries as of March 31, 2010 and 2009, and the consolidated results of their operations and their cash flows for the years then ended in conformity with accounting principles generally accepted in Japan. Our audits also comprehended the translation of Japanese yen amounts into U.S. dollar amounts and, in our opinion, such translation has been made in conformity with the basis stated in Note 1. Such U.S. dollar amounts are presented solely for the convenience of readers outside Japan. June 29, 2010 Member of Deloitte Touche Tohmatsu 2
THE CHUKYO BANK, LTD. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS MARCH 31, 2010 AND 2009 U.S. Dollars (Note 1) ASSETS: Cash and due from banks (Notes 3 and 22) 77,704 72,022 $ 835,078 Call loans and bills purchased (Note 22) 497 2,095 5,341 Monetary receivables purchased - 266 - Trading securities (Notes 4 and 22) 435 498 4,675 Securities (Notes 4, 10 and 22) 375,410 352,003 4,034,498 Loans and bills discounted (Notes 5 and 22) 1,172,648 1,198,158 12,602,343 Foreign bills of exchange (Notes 6 and 22) 5,143 6,761 55,272 Other assets (Note 7) 12,547 13,040 134,841 Premises and equipment (Notes 8 and 11) 22,291 22,464 239,560 Intangible assets 78 80 838 Deferred tax assets (Note 12) 6,474 9,029 69,575 Customers' liabilities for acceptances and guarantees (Note 9) 10,338 10,640 111,102 Reserve for possible loan losses (Note22) (32,187) (26,818) (345,911) Total assets 1,651,378 1,660,238 $ 17,747,212 LIABILITIES: Deposits (Notes 10, 13 and 22) 1,517,838 1,518,319 $ 16,312,069 Call money and bills sold - 15,000 - Foreign bills of exchange (Notes 6 and 22) 1 3 11 Subordinated bonds (Notes 14 and 22) 20,000 20,000 214,938 Other liabilities (Note 16) 15,277 14,565 164,181 Liability for retirement benefits for employees (Note 15) 2,008 1,497 21,580 Retirement allowances for directors and corporate auditors 221 180 2,375 Reserve for reimbursement of dormant deposits 327 398 3,514 Reserve for contingencies 342 192 3,675 Deferred tax liabilities for land revaluation surplus (Note 11) 4,102 4,106 44,084 Acceptances and guarantees (Note 9) 10,338 10,640 111,102 Total liabilities 1,570,454 1,584,900 16,877,529 COMMITMENTS AND CONTINGENT LIABILITIES (Notes 17, 21 and 23) EQUITY (Notes 18 and 25): Capital stock: Common stock: authorized, 500,000 thousand shares; issued, 217,459 thousand shares in 2010 and 2009 31,844 31,844 342,225 Capital surplus 23,185 23,185 249,167 Retained earnings 16,546 16,458 177,818 Net unrealized gain (loss) on available-for-sale securities 4,048 (1,648) 43,503 Deferred loss on derivatives under hedge accounting (320) (105) (3,439) Land revaluation surplus (Note 11) 5,016 5,022 53,907 Treasury stock, at cost: 596 thousand shares in 2010 and 565 thousand shares in 2009 (224) (215) (2,407) Total 80,095 74,541 860,774 Minority interests 829 797 8,909 Total equity 80,924 75,338 869,683 Total liabilities and equity 1,651,378 1,660,238 $ 17,747,212 See notes to consolidated financial statements. 3
THE CHUKYO BANK, LTD. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS YEARS ENDED MARCH 31, 2010 AND 2009 U.S. Dollars (Note 1) INCOME: Interest on: Loans and discounts 23,061 25,598 $ 247,835 Securities 5,445 5,469 58,517 Other 988 600 10,618 Fees and commissions 4,347 4,561 46,717 Other operating income 3,667 1,369 39,409 Gain on sales of premises and equipment 255-2,740 Collection of previously unrecoverable debts 8 8 86 Other income (Note 19) 2,165 6,745 23,267 Total income 39,936 44,350 429,189 EXPENSES: Interest on: Deposits 3,823 5,048 41,085 Borrowings 3 8 32 Bonds 387 334 4,159 Other 190 93 2,042 Fees and commissions 1,703 1,764 18,302 Other operating expenses 304 2,775 3,267 General and administrative expenses 20,566 21,647 221,021 Provision for possible loan losses 8,446 14,103 90,768 Loss on sales and disposal of premises and equipment 62 80 666 Impairment loss on long-lived assets - 3 - Other expenses (Note 20) 2,951 3,531 31,714 Total expenses 38,435 49,386 413,056 INCOME (LOSS) BEFORE INCOME TAXES AND MINORITY INTERESTS 1,501 (5,036) 16,133 INCOME TAXES (Note 12): Current 879 206 9,447 Deferred (347) (3,048) (3,729) Total income taxes 532 (2,842) 5,718 MINORITY INTERESTS IN NET INCOME 19 18 204 NET INCOME (LOSS) 950 (2,212) $ 10,211 PER SHARE OF COMMON STOCK (Note 2.p): Yen U.S. Dollars Basic net income (loss) 4.38 (10.19) $ 0.05 Cash dividends applicable to the year 5.00 4.00 0.05 See notes to consolidated financial statements. 4
THE CHUKYO BANK, LTD. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY YEARS ENDED MARCH 31, 2010 AND 2009 Thousands Outstanding Net Unrealized Deferred Loss Number of Gain (Loss) on on Derivatives Shares of Common Capital Retained Available-for-sale under Hedge Common Stock Stock Surplus Earnings Securities Accounting BALANCE AT APRIL 1, 2008 216,988 31,844 23,185 19,581 12,209 (224) Net loss - - - (2,212) - - Cash dividends, \5.00 per share - - - (1,085) - - Purchases of treasury stock (112) - - - - - Disposal of treasury stock 18 - - (1) - - Reversal of land revaluation surplus - - - 175 - - Net change in the year - - - - (13,857) 119 BALANCE AT MARCH 31, 2009 216,894 31,844 23,185 16,458 (1,648) (105) Net income - - - 950 - - Cash dividends, \ per share - - - (868) - - Purchases of treasury stock (33) - - - - - Disposal of treasury stock 2 - - (0) - - Reversal of land revaluation surplus - - - 6 - - Net change in the year - - - - 5,696 (215) BALANCE AT MARCH 31, 2010 216,863 31,844 23,185 16,546 4,048 (320) Land Revaluation Treasury Minority Total Surplus Stock Total Interests Equity BALANCE AT APRIL 1, 2008 5,197 (188) 91,604 814 92,418 Net loss - - (2,212) - (2,212) Cash dividends, \5.00 per share - - (1,085) - (1,085) Purchases of treasury stock - (34) (34) - (34) Disposal of treasury stock - 7 6-6 Reversal of land revaluation surplus (175) - - - - Net change in the year - - (13,738) (17) (13,755) BALANCE AT MARCH 31, 2009 5,022 (215) 74,541 797 75,338 Net income - - 950-950 Cash dividends, \ per share - - (868) - (868) Purchases of treasury stock - (10) (10) - (10) Disposal of treasury stock - 1 1-1 Reversal of land revaluation surplus (6) - - - - Net change in the year - - 5,481 32 5,513 BALANCE AT MARCH 31, 2010 5,016 (224) 80,095 829 80,924 5
THE CHUKYO BANK, LTD. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY YEARS ENDED MARCH 31, 2010 AND 2009 U.S. Dollars (Note 1) Net Unrealized Deferred Loss Gain (Loss) on on Derivatives Common Capital Retained Available-for-sale under Hedge Stock Surplus Earnings Securities Accounting BALANCE AT MARCH 31, 2009 $ 342,225 $ 249,167 $ 176,873 $ (17,711) $ (1,128) Net income - - 10,210 - - Cash dividends, $0.04 per share - - (9,328) - - Purchases of treasury stock - - - - - Disposal of treasury stock - - (2) - - Reversal of land revaluation surplus - - 65 - - Net change in the year - - - 61,214 (2,311) BALANCE AT MARCH 31, 2010 $ 342,225 $ 249,167 $ 177,818 $ 43,503 $ (3,439) U.S. Dollars (Note 1) Land Revaluation Treasury Minority Total Surplus Stock Total Interests Equity BALANCE AT MARCH 31, 2009 $ 53,972 $ (2,311) $ 801,087 $ 8,565 $ 809,652 Net income - - 10,210-10,210 Cash dividends, $0.04 per share - - (9,328) - (9,328) Purchases of treasury stock - (107) (107) - (107) Disposal of treasury stock - 11 9-9 Reversal of land revaluation surplus (65) - - - - Net change in the year - - 58,903 344 59,247 BALANCE AT MARCH 31, 2010 $ 53,907 $ (2,407) $ 860,774 $ 8,909 $ 869,683 See notes to consolidated financial statements. 6
THE CHUKYO BANK, LTD. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS YEARS ENDED MARCH 31, 2010 AND 2009 U.S. Dollars (Note 1) OPERATING ACTIVITIES: Income (loss) before income taxes and minority interests 1,501 (5,036) $ 16,133 Adjustments for: Income tax refund (paid) 544 (1,912) 5,846 Depreciation and amortization 653 641 7,018 Impairment loss on long-lived assets - 3 - Equity in earnings of an affiliated company (24) (45) (258) Net gain on sales and redemption of securities (3,789) (2,434) (40,720) Net foreign exchange loss 124 90 1,333 Net (gain) loss on sales and disposal of premises and equipment (194) 80 (2,085) Changes in assets and liabilities Net decrease (increase) in loans and bills discounted 25,510 (10,939) 274,154 Net (decrease) increase in deposits (481) 15,823 (5,169) Net decrease in borrowed money (excluding subordinated borrowings of the Bank) - (800) - Net decrease (increase) in due from banks (excluding due from the Bank of Japan) 522 (56) 5,610 Net decrease (increase) in call loans and bills purchased 1,598 (834) 17,173 Net (decrease) increase in call money and bills sold (15,000) 15,000 (161,204) Net decrease in monetary receivables purchased 267 1,455 2,869 Net decrease (increase) in foreign bills of exchange, debit 1,618 (869) 17,388 Net decrease in foreign bills of exchange, credit (2) (31) (21) Net increase in reserve for possible loan losses 5,369 11,171 57,700 Net increase in liability for retirement benefits for employees 511 169 5,492 Net increase in retirement allowances for directors and corporate auditors 41 21 440 Net decrease in prepaid pension expense - 160 - Net increase in interest receivable (5,830) (5,819) (62,654) Net increase in interest payable 460 589 4,943 Net increase in other assets (361) (786) (3,880) Net increase in other liabilities 290 158 3,117 Total adjustments 11,826 20,835 127,092 Net cash provided by operating activities 13,327 15,799 143,225 FORWARD 13,327 15,799 $ 143,225 (Continued) 7
THE CHUKYO BANK, LTD. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS YEARS ENDED MARCH 31, 2010 AND 2009 U.S. Dollars (Note 1) FORWARD 13,327 15,799 $ 143,225 INVESTING ACTIVITIES: Purchases of securities (163,749) (78,443) (1,759,796) Proceeds from sales of securities 108,544 31,049 1,166,513 Proceeds from maturities of securities 43,778 47,534 470,478 Dividends and interest received from investing activities 5,819 5,864 62,536 Purchases of premises and equipment (382) (736) (4,105) Proceeds from sales of premises and equipment 210 135 2,257 Net cash (used in) provided by investing activities (5,780) 5,403 (62,117) FINANCING ACTIVITIES: Proceeds from issuance of subordinated bonds 4,970-53,412 Repayment of subordinated bonds (5,000) - (53,736) Interest paid on subordinated loans (390) (335) (4,191) Dividends paid (868) (1,085) (9,328) Dividends paid by subsidiaries to minority shareholders (1) (1) (11) Acquisition of treasury stock (10) (34) (107) Proceeds from sales of treasury stock 1 5 11 Repayment of lease obligations (25) (0) (269) Net cash used in financing activities (1,323) (1,450) (14,219) FOREIGN CURRENCY TRANSLATION ADJUSTMENTS ON CASH AND CASH EQUIVALENTS (20) (23) (215) NET INCREASE IN CASH AND CASH EQUIVALENTS 6,204 19,729 66,674 CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR 71,041 51,312 763,471 CASH AND CASH EQUIVALENTS, END OF YEAR (Note 3) 77,245 71,041 $ 830,145 See notes to consolidated financial statements. 8
THE CHUKYO BANK, LTD. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS YEARS ENDED MARCH 31, 2010 AND 2009 1. Basis of Presenting Consolidated Financial Statements The accompanying consolidated financial statements of The Chukyo Bank, Ltd. (the Bank ) and its subsidiaries (together, the Group ) have been prepared in accordance with the provisions set forth in the Japanese Financial Instruments and Exchange Act and its related accounting regulations and the Enforcement Regulation for the Banking Law, and in conformity with accounting principles generally accepted in Japan, which are different in certain respects as to application and disclosure requirements of International Financial Reporting Standards. In preparing these consolidated financial statements, certain reclassifications and rearrangements have been made to the consolidated financial statements issued domestically in order to present them in a form which is more familiar to readers outside Japan. In addition, certain reclassifications have been made in the 2009 financial statements to conform to the classifications used in 2010. The consolidated financial statements are stated in Japanese yen, the currency of the country in which the Bank is incorporated and operates. The translations of Japanese yen amounts into U.S. dollar amounts are included solely for the convenience of readers outside Japan and have been made at the rate of 93.05 to $1, the approximate rate of exchange at March 31, 2010. Such translations should not be construed as representations that the Japanese yen amounts could be converted into U.S. dollars at that or any other rate. 2. Summary of Significant Accounting Policies a. Consolidation The consolidated financial statements as of March 31, 2010 and 2009 include the accounts of the Bank and all four subsidiaries including The Chukyo Business Service Co., Ltd., The Chukyo Card Co., Ltd., Kikyo Service Co., Ltd. and The Chukyo Finance Co., Ltd. Under the control or influence concept, those companies in which the Bank, directly or indirectly, is able to exercise control over operations are fully consolidated, and those companies over which the Group has ability to exercise significant influence are accounted for by the equity method. An investment in an associated company, The Chukyo Sogo Leasing Co., Ltd., is accounted for by the equity method for the years ended March 31, 2010 and 2009. All significant intercompany balances and transactions have been eliminated in consolidation. All material unrealized profit included in assets resulting from transactions within the Group is eliminated. The fiscal years of all subsidiaries are the same as the Bank. 9
b. Cash and Cash Equivalents Cash and cash equivalents in the consolidated statements of cash flows consist of cash and due from the Bank of Japan, included in cash and due from banks in the consolidated balance sheets. c. Trading Securities Trading securities are stated at fair value, and the related unrealized gains and losses are included in earnings. The cost of trading securities sold is determined based on the moving-average method. d. Securities Securities other than trading securities are classified and accounted for as available-for-sale securities. Available-for-sale securities are reported at fair value, with unrealized gains and losses, net of applicable taxes, reported in a separate component of equity. The cost of securities sold is determined based on the moving-average method. Non-marketable available-for-sale securities are stated at cost determined by the moving-average method. For other than temporary declines in fair value, available-for-sale securities are reduced to net realizable value by a charge to income. On March 10, 2008, the ASBJ revised ASBJ Statement No. 10, Accounting Standard for Financial Instruments, and issued ASBJ Guidance No. 19, Guidance on Accounting Standard for Financial Instruments and Related Disclosures. This accounting standard and the guidance are applicable to financial instruments and related disclosures at the end of the fiscal years ending on or after March 31, 2010 with early adoption permitted from the beginning of the fiscal years ending before March 31, 2010. The Group applied the revised accounting standard and the new guidance effective March 31, 2010. The effect of this change was to increase securities by 123 million ($1,322 thousand), to reduce deferred tax assets by 49 million ($527 thousand), to increase net unrealized gains on available-for-sale securities, net of taxes by 74 million ($795 thousand), and to increase operating income and income before income taxes and minority interests by 53 million ($570 thousand) for the year ended March 31, 2010. e. Premises and Equipment Premises and equipment are stated at cost less accumulated depreciation. Depreciation of premises and equipment other than leased assets of the Bank is computed by the declining-balance method based on the estimated useful lives of the assets, while the straight-line method is applied to buildings acquired after April 1, 1998. Premises and equipment held by the subsidiaries are depreciated mainly using the straight-line method. The range of useful lives is principally from 7 to 50 years for buildings, and from 3 to 20 years for other premises and equipment. Leased assets under finance leases which do not deem to transfer ownership of the leased assets to the lessee included in premises and equipment are depreciated by the straight-line method over the lease 10
period. f. Long-lived Assets Residual value is zero unless residual value is stipulated in lease agreements. The Group reviews its long-lived assets for impairment whenever events or changes in circumstance indicate the carrying amount of an asset or asset group may not be recoverable. An impairment loss would be recognized if the carrying amount of an asset or asset group exceeds the sum of the undiscounted future cash flows expected to result from the continued use and eventual disposition of the asset or asset group. The impairment loss would be measured as the amount by which the carrying amount of the asset exceeds its recoverable amount, which is the higher of the discounted cash flows from the continued use and eventual disposition of the asset or the net selling price at disposition. g. Intangible Assets Intangible assets are amortized by the straight-line method. Software for internal use is charged to income as incurred because its contribution to revenues or reduction of expenses in the future is uncertain. h. Reserve for Possible Loan Losses The Bank implemented a self-assessment system for asset quality. The quality of all loans is assessed by the related lending division and subsequently audited by the asset audit division, which is independent from the lending division, in accordance with the Bank s policies and rules for self-assessment of asset quality. The Bank has established a credit rating system under which its customers are classified into five categories such as normal, caution, possible bankruptcy, virtual bankruptcy and legal bankruptcy. The credit rating system is used for self-assessment of asset quality. For normal and caution loans, the reserve for possible loan losses is provided for based on actual past loss ratios. For loans to customers classified as possible bankruptcy, the reserve is provided for in an amount deemed necessary to cover possible loan losses. The amount is determined by considering the customer s solvency and other factors, after the estimated fair value of the real estate collateral or guaranteed amount has been deducted. For loans to customers classified as virtual bankruptcy or legal bankruptcy, the reserve is provided for in an amount deemed necessary to cover possible loan losses after the estimated fair value of the real estate collateral or guaranteed amount has been deducted. Reserve for possible loan losses of subsidiaries is provided based on actual past loss ratios and estimated collectability of specific claims. 11
i. Retirement and Pension Plans The Bank has defined benefit plans such as lump-sum retirement payment and corporate pension fund for its employees. The Bank also has a defined contribution pension plan for its employees. Additionally, the consolidated subsidiaries have lump-sum retirement payment plans for their employees. Effective April 1, 2000, the Group adopted an accounting standard for retirement benefits and accounted for the liability for employees retirement benefits based on projected benefit obligations and plan assets at the balance sheet date. Unrecognized transitional obligation, excluding exempted portions of the governmental pension program and transferred portion to the defined contribution pension plan managed by the Bank, is amortized over 15 years (See Note 15). The unrecognized prior service benefit and unrecognized actuarial loss are amortized over a certain period (11 years) within the average remaining working lives of employees. Retirement allowance for directors and corporate auditors are recorded to state the liability at the amount that would be required if all directors and corporate auditors retired at each balance sheet date. j. Reserve for Reimbursement of Dormant Deposits Reserve for reimbursement of dormant deposits is provided for the deposits derecognized from the liabilities at the estimated amount of future claims for withdrawal based on the actual past loss amount. Effective from the year ended March 31, 2008, the Group adopted the JICPA Auditing and Assurance Practice Committee Statement No. 42, Auditing Treatment relating to Reserve defined under the Special Tax Measurement Law, Reserve defined under the Special Law and Reserve for Director and Corporate Auditor Retirement Benefits, issued on April 13, 2007. k. Reserve for Contingencies Reserve for contingencies is provided for contingent liabilities to the Credit Guarantee Corporations at the estimated amount of future payment based on the Joint Responsibility System with the Credit Guarantee Corporations. The Group recognized reserve for contingencies for the year ended March 31, 2008 in accordance with commencement of the Joint Responsibility System with the Credit Guarantee Corporations on October 1, 2007. l. Income Taxes The provision for income taxes is computed based on the pretax income included in the consolidated statements of operations. The asset and liability approach is used to recognize deferred tax assets and liabilities for the expected future tax consequences of temporary differences between the carrying amounts and the tax bases of assets and liabilities. Deferred taxes are measured by applying currently enacted tax laws to the 12
temporary differences. Future tax benefits are recognized to the extent that such benefits are more likely than not to be realized. m. Leases In March 2007, the ASBJ issued ASBJ Statement No. 13, Accounting Standard for Lease Transactions, which revised the previous accounting standard for lease transactions issued in June 1993. The revised accounting standard for lease transactions is effective for fiscal years beginning on or after April 1, 2008 with early adoption permitted for fiscal years beginning on or after April 1, 2007. Under the previous accounting standard, finance leases that deem to transfer ownership of the leased property to the lessee were to be capitalized. However, other finance leases were permitted to be accounted for as operating lease transactions if certain as if capitalized information is disclosed in the notes to the lessee s financial statements. The revised accounting standard requires that all finance lease transactions should be capitalized to recognize leased assets and lease obligations in the balance sheet. In addition, the revised accounting standard permits leases which existed at the transition date and do not transfer ownership of the leased assets to the lessee to be accounted for as operating lease transactions with certain as if capitalized information disclosed in the notes to the lessee s financial statements. The Group applied the revised accounting standard effective April 1, 2008. In addition, the Group accounted for leases which existed at the transition date and do not transfer ownership of the leased assets to the lessee as operating lease transactions. n. Foreign Currency Translations Foreign currency assets and liabilities of the Group are translated into Japanese yen amounts at the exchange rates prevailing at the fiscal year end. The foreign exchange gains and losses from translation are recognized in the statements of operations to the extent that they are not hedged by forward exchange contracts. o. Derivatives and Hedging Activities The Group uses a variety of derivative financial instruments such as foreign currency forward contracts and interest rate swaps. Derivative financial instruments are classified and accounted for as follows: a) all derivatives are recognized as either assets or liabilities and measured at fair value, and gains or losses on derivative transactions are recognized in the consolidated statements of operations and b) for derivatives used for hedging purposes, if derivatives qualify for hedge accounting because of high correlation and effectiveness between the hedging instruments and the hedged items, gains or losses on derivatives follow hedge accounting. Interest rate risk hedges The Bank applies the principle treatment of the JICPA Industry Audit Committee Statement No. 24. The effectiveness of hedge transactions to offset the fluctuations of fair value is evaluated by inspecting each hedged item, such as deposits and loans, and the hedging instruments, such as interest rate swaps, 13
14 Financial Statement 2010 separately, or aggregating some hedged item and hedging instruments. The effectiveness of cash flow hedges is evaluated by verifying the correlation between the hedged items and the hedging instruments concerning interest volatility. Exchange rate risk hedges The Bank applies the principle treatment of the JICPA Industry Audit Committee Statement No. 25. Foreign exchange swaps and currency swaps, originated for the purpose of conversion between borrowing and lending currencies, are recorded using hedge accounting. The effectiveness of currency swaps and foreign exchange swaps transactions is verified by confirming that these hedging instruments are executed for the purpose of offsetting the risk of currency exchange rates of the corresponding hedged items, such as foreign currency monetary receivables and payables. p. Per Share Information Basic net income (or loss) per share is computed by dividing net income (or loss) available to common shareholders by the weighted-average number of common shares outstanding for the period, retroactively adjusted for stock splits. The weighted average number of common shares used in the computation for the years ended March 31, 2010 and 2009 was 216,876, 581 shares and 216,951,480 shares, respectively. Diluted net income per share reflects the potential dilution that could occur if securities were exercised or converted into common stock. Diluted net income per share of common stock assumes full conversion of the outstanding convertible notes and bonds at the beginning of the year (or at the time of issuance) with an applicable adjustment for related interest expense, net of tax, and full exercise of outstanding warrants. Diluted net income per share is not disclosed because there are no dilutive shares for the year ended March 31, 2010. Cash dividends per share presented in the accompanying consolidated statements of operations are dividends applicable to the respective years including dividends to be paid after the end of the year. q. New Accounting Pronouncements Asset Retirement Obligations In March 2008, the ASBJ published a new accounting standard for asset retirement obligations, ASBJ Statement No. 18, Accounting Standard for Asset Retirement Obligations and ASBJ Guidance No. 21, Guidance on Accounting Standard for Asset Retirement Obligations. Under this accounting standard, an asset retirement obligation is defined as a legal obligation imposed either by law or contract that results from the acquisition, construction, development and the normal operation of a tangible fixed asset and is associated with the retirement of such tangible fixed asset. The asset retirement obligation is recognized as the sum of the discounted cash flows required for the future asset retirement and is recorded in the period in which the obligation is incurred if a reasonable estimate can be made. If a reasonable estimate of the asset retirement obligation cannot be made in the period the asset retirement obligation is incurred, the liability should be recognized when a reasonable estimate of the asset retirement obligation can be made. Upon initial recognition of a liability for an asset retirement obligation, an asset retirement cost is capitalized by increasing the carrying
amount of the related fixed asset by the amount of the liability. The asset retirement cost is subsequently allocated to expense through depreciation over the remaining useful life of the asset. Over time, the liability is accreted to its present value each period. Any subsequent revisions to the timing or the amount of the original estimate of undiscounted cash flows are reflected as an increase or a decrease in the carrying amount of the liability and the capitalized amount of the related asset retirement cost. This standard is effective for fiscal years beginning on or after April 1, 2010 with early adoption permitted for fiscal years beginning on or before March 31, 2010. 3. Cash and Due from Banks Cash and due from banks as of March 31, 2010 and 2009 consisted of the following: U.S. Dollars Cash on hand 17,359 20,638 $ 186,556 Due from banks 60,345 51,384 648,522 Total 77,704 72,022 $ 835,078 A reconciliation of the cash and due from banks in the consolidated balance sheets to the cash and cash equivalents in the consolidated statements of cash flows for the years ended March 31, 2010 and 2009 was as follows: U.S. Dollars Cash and due from banks 77,704 72,022 $ 835,078 Due from banks other than the Bank of Japan (459) (981) (4,933) Cash and cash equivalents 77,245 71,041 $ 830,145 4. Trading Securities and Securities Trading securities as of March 31, 2010 and 2009 consisted of the following: U.S. Dollars Debt securities: National government bonds 434 496 $ 4,664 Local government bonds 1 2 11 Total 435 498 $ 4,675 Valuation gains of trading securities included in income (loss) before income taxes and minority interests for the years ended March 31, 2010 and 2009 were 12 million ($126 thousand) and 9 million, respectively. 15
Securities as of March 31, 2010 and 2009 consisted of the following: U.S. Dollars Equity securities 26,918 24,245 $ 289,285 Debt securities: National government bonds 164,713 129,756 1,770,156 Local government bonds 28,057 38,926 301,526 Corporate bonds 79,019 86,777 849,210 Other securities 76,703 72,299 824,321 Total 375,410 352,003 $ 4,034,498 Investments in an affiliated company, which were included in securities in the accompanying consolidated balance sheets, for the years ended March 31, 2010 and 2009 were 980 million ($10,537 thousand) and 956 million, respectively. The carrying amounts and aggregate fair values of trading and available-for-sale securities as of March 31, 2010 and 2009 were as follows: March 31, 2010 Cost 16 Unrealized Gains Unrealized Losses Fair Value Securities classified as: Trading 435 Available-for-sale: Equity securities 17,231 6,472 1,473 22,230 Debt securities National government bonds 164,078 1,037 402 164,713 Local government bonds 27,419 642 4 28,057 Corporate bonds 77,535 1,561 77 79,019 Other 77,873 707 2,969 75,611 March 31, 2009 Cost Unrealized Gains Unrealized Losses Fair Value Securities classified as: Trading 498 Available-for-sale: Equity securities 17,034 4,509 2,017 19,526 Debt securities National government bonds 129,626 1,405 1,275 129,756 Local government bonds 38,510 466 50 38,926 Corporate bonds 73,222 728 625 73,325 Other 78,692 465 6,858 72,299
March 31, 2010 Cost U.S. Dollars Unrealized Unrealized Gains Losses Fair Value Securities classified as: Trading $ 4,675 Available-for-sale: Equity securities $ 185,180 $ 69,554 $ 15,830 $ 238,904 Debt securities: National government bonds 1,763,332 11,144 4,320 1,770,156 Local government bonds 294,670 6,899 43 301,526 Corporate bonds 833,262 16,776 828 849,210 Other 836,894 7,598 31,908 812,584 Available-for-sale securities and held-to-maturity securities whose fair value is not readily determinable as of March 31, 2009 were as follows. The similar information for 2010 is disclosed in Note 22. Carrying amount Available-for-sale: Unlisted equity securities 3,763 Unlisted debt securities 13,451 Total 17,214 Proceeds from sales of available-for-sale securities for the year ended March 31, 2009 were 30,552 million. Gross realized gains and losses on these sales, computed on the moving-average cost basis, were 6,678 million and 1 million, respectively, for the year ended March 31, 2009. The information of available-for-sale securities which were sold during the year ended March 31, 2010 was as follows: March 31, 2010 Proceeds Realized gains Realized losses Available-for-sale: Equity securities 1,979 1,329 - Debt securities: National government bonds 77,438 1,401 9 Local government bonds 14,125 397 - Corporate bonds - - - Other 13,000 1,447 40 Total 106,542 4,574 49 17
March 31, 2010 Proceeds U.S. Dollars Realized gains Realized losses Available-for-sale: Equity securities $ 21,268 $ 14,283 - Debt securities: National government bonds 832,219 15,056 $ 97 Local government bonds 151,800 4,267 - Corporate bonds - - - Other 139,710 15,551 430 Total $ 1,144,997 $ 49,157 $ 527 The impairment losses on available-for-sale securities are recognized when their fair value declines more than or equal to 30% of the carrying amounts and such decline is expected to continue for approximately a year or longer. The impairment losses on available-for-sale securities for the years ended March 31, 2010 and 2009 were 274 million ($2,945 thousand) and 4,048 million, respectively. The carrying values of debt securities and other by contractual maturities for available-for-sale securities as of March 31, 2010 were disclosed in Note 22. 5. Loans and Bills Discounted Loans and bills discounted as of March 31, 2010 and 2009 consisted of the following: U.S. Dollars Bills discounted 15,827 20,651 $ 170,091 Loans on bills 88,234 96,539 948,243 Loans on deeds 869,580 862,031 9,345,298 Overdrafts 199,007 218,937 2,138,711 Total 1,172,648 1,198,158 $ 12,602,343 Nonaccrual loans, which include loans to borrowers in bankruptcy and past due loans, are defined as loans which the Bank and its subsidiaries discontinue the accrual of interest income. Borrowers are generally placed on nonaccrual status when substantial doubt is deemed to exist as to ultimate collectability of either the principal or interest, and if the loans are past due for a certain period or for other reasons. Loans to borrowers in bankruptcy represent nonaccrual loans to debtors who are legally bankrupt, which are defined in Article 96, Paragraph 1, Subparagraphs 3 and 4 of the Enforcement Ordinance for the Corporation Tax Law. Loans to borrowers in legal bankruptcy as of March 31, 2010 and 2009 were 14,475 million ($155,560 thousand) and 13,388 million, respectively. 18
Past due loans are nonaccrual loans other than loans to borrowers in bankruptcy and loans of which interest payments are deferred in order to assist the financial recovery of debtor in financial difficulties. Past due loans as of March 31, 2010 and 2009 were 37,927 million ($407,599 thousand) and 34,235 million, respectively. Accruing loans past due three months or more are defined as loans on which principal or interest is past due more than three months. Loans classified as loans to borrowers in bankruptcy or past due loans are excluded from accruing loans past due three months or more. The balances of accruing loans past due three months or more as of March 31, 2010 and 2009 were 95 million ($1,016 thousand) and 541 million, respectively. Restructured loans are defined as loans to which the lender is providing financial support to a borrower by a reduction of the interest rate, deferral of interest payment, extension of maturity date, or reduction of the face or maturity amount of the debt or accrued interest. Loans classified as loans to borrowers in bankruptcy, past due loans, or accruing loans past due three months or more are excluded from restructured loans. The balances of restructured loans as of March 31, 2010 and 2009 were 2,669 million ($28,684 thousand) and 3,047 million, respectively. Total amounts of loans to borrowers in bankruptcy, past due loans, accruing loans past due three months or more and restructured loans as of March 31, 2010 and 2009 were 55,166 million ($592,859 thousand) and 51,211 million, respectively. The loan amounts above represent amounts prior to the deduction of reserves for possible loan losses. Bills discounted are accounted for as financial transactions in accordance with Treatment of Accounting and Auditing in Applying Accounting Standard for Financial Instruments in the Banking Industry issued by the JICPA. The Bank has rights to sell or pledge accepted commercial bills discounted and foreign bills of exchange bought without restrictions. The total face value of commercial bills discounted and foreign bills of exchange bought included in foreign exchanges as of March 31, 2010 and 2009 was 17,741 million ($190,663 thousand) and 23,286 million, respectively. The total amount of loan participations which was accounted for as loans to original debtors included in loans and bills discounted in accordance with the JICPA Accounting Standard Committee Statement No. 3 issued on June 1, 1995 was 20,488 million ($220,178 thousand) as of March 31, 2010. 6. Foreign Bills of Exchange Foreign bills of exchange as of March 31, 2010 and 2009 consisted of the following: U.S. Dollars Assets: Due from foreign correspondent account 644 1,126 $ 6,921 Foreign bills of exchange bought 1,914 2,635 20,570 Foreign bills of exchange receivable 2,585 3,000 27,781 Total 5,143 6,761 $ 55,272 19
U.S. Dollars Liabilities: Overdraft from foreign banks 1 0 $ 11 Foreign bills of exchange sold - 2 - Foreign bills of exchange payable - 1 - Total 1 3 $ 11 7. Other Assets Other assets as of March 31, 2010 and 2009 consisted of the following: U.S. Dollars Domestic exchange settlement, debit 271 324 $ 2,912 Accrued income 2,197 2,275 23,611 Accounts receivable - other 3,381 3,350 36,335 Rights of indemnity 1,645 2,064 17,679 Temporary payments 2,947 2,083 31,671 Other 2,106 2,944 22,633 Total 12,547 13,040 $ 134,841 8. Premises and Equipment The accumulated depreciation of premises and equipment as of March 31, 2010 and 2009 amounted to 16,482 million ($177,131 thousand) and 16,218 million, respectively. Deferred gains on premises and equipment deductible for tax purposes were 1,400 million ($15,046 thousand) as of March 31, 2010 and 1,400 million as of March 31, 2009, respectively. 9 Customers Liabilities for Acceptances and Guarantees All contingent liabilities arising from acceptances and guarantees are reflected in acceptances and guarantees. As contra accounts, customers liabilities for acceptances and guarantees are presented as assets, representing the Bank s rights of indemnity from applicants. The Bank offset customer s liabilities for acceptance and guarantees with acceptance and guarantees of 10,509 million ($112,939 thousand) and 13,451 million arising from guarantees of private placement securities in 2010 and 2009, respectively. 20
9. Assets Pledged Assets pledged as collateral and their relevant liabilities as of March 31, 2010 were as follows: Carrying amount U.S. Dollars Assets pledged as collateral: Securities 1,176 $ 12,638 Relevant liabilities to above assets: Deposits 5,033 $ 54,089 In addition, securities of 37,172 million ($399,484 thousand) were pledged as collateral for settlement of exchange. Guarantee money included in other assets as of March 31, 2010 and 2009 was 398 million ($4,277 thousand) and 399 million, respectively. 10. Land Revaluation Under the Law of Land Revaluation, the Bank elected a one-time revaluation of its own-use land to a value based on real estate appraisal information as of March 31, 1998. The resulting land revaluation surplus represents unrealized appreciation of land and is stated, net of income taxes, as a component of equity. There is no effect on the consolidated statements of operations. Continuous readjustment is not permitted unless the land value subsequently declines significantly such that the amount of the decline in value should be removed from the land revaluation surplus account and related deferred tax liabilities. The carrying amount of the land after the above one-time revaluation exceeded the market value by 1,599 million ($17,184 thousand) as of March 31, 2010. 11. Income Taxes The Bank and its subsidiaries are subject to Japanese national and local income taxes which, in the aggregate, resulted in a normal effective statutory tax rate of 39.5% for the years ended March 31, 2010 and 2009. The tax effects of significant temporary differences, which resulted in deferred tax assets and liabilities as of March 31, 2010 and 2009, were as follows: 21
U.S. Dollars Deferred tax assets: Reserve for possible loan losses 9,027 7,731 $ 97,013 Write-down of securities 3,187 3,855 34,250 Liability for retirement benefits 751 528 8,071 Deferred loss on derivatives under hedge accounting 209 69 2,246 Depreciation 1,276 1,173 13,713 Accrued bonuses 317 368 3,407 Impairment loss on land 244 244 2,622 Unrealized loss on available-for-sale securities - 1,594 - Tax loss carryforwards - 737 - Other 1,441 1,328 15,486 Subtotal 16,452 17,627 176,808 Less valuation allowance (8,489) (8,520) (91,231) Total 7,963 9,107 $ 85,577 Deferred tax liabilities: Unrealized gain on available-for-sale securities (1,451) (7) $ (15,594) Income taxes refundable - (31) - Reserve for advanced depreciation of fixed assets (38) (40) (408) Net deferred tax assets 6,474 9,029 $ 69,575 A reconciliation between the normal effective statutory tax rate and the actual effective tax rate reflected in the accompanying consolidated statements of operations for the year ended March 31, 2010 is as follows: 2010 Normal effective statutory tax rate 39.5 % Dividend income and other income excluded permanently for income tax purpose (6.6) Entertainment expenses and other expenses permanently not deductible for income tax purposes 1.3 Per capita tax 3.1 Tax deduction arising from land expropriation (0.7) Equity in earnings of an associated company 0.6 Net change in valuation allowance (2.1) Other - net 0.3 Actual effective tax rate 35.4% A reconciliation for the year ended March 31, 2009 was not disclosed because of the net loss position. 22
13. Deposits Deposits as of March 31, 2010 and 2009 consisted of the following: U.S. Dollars Current, ordinary and saving deposits, and deposits at notice 674,264 685,023 $ 7,246,255 Time deposits and installment savings 815,944 811,548 8,768,877 Other 27,630 21,748 296,937 Total 1,517,838 1,518,319 $ 16,312,069 14. Subordinated Bonds Subordinated bonds as of March 31, 2010 and 2009 consisted of the following: U.S. Dollars Series 1, 2.02% unsecured subordinated bond due March 2, 2015 5,000 5,000 $ 53,735 Series 2, unsecured subordinated bond due March 2, 2015 *1-5,000 - Series 3, unsecured subordinated bond due December 21, 2017 *2 10,000 10,000 107,468 Series 4, unsecured subordinated bond due September 25, 2019 *3 5,000-53,735 Total 20,000 20,000 $ 214,938 *1 On January 13, 2010, the board of directors of the Bank resolved to redeem series 2, unsecured subordinated bond due March 2, 2015 before its maturity, and the Bank redeemed it on March 2, 2010. *2 Fixed interest rate of 1.73% up to December 21, 2012 and floating rate of LIBOR plus 1.93% from December 22, 2012 to December 21, 2017 for Series 3, unsecured subordinated bond. *3 Fixed interest rate of 2.22% up to September 25, 2014 and floating rate of LIBOR plus 2.85% from September 26, 2014 to September 25, 2019 for Series 4, unsecured subordinated bond. 23
Annual maturities of subordinated bonds as of March 31, 2010 for the next five years and thereafter were as follows: Year ending March 31 U.S. Dollars 2011 - - 2012 - - 2013 - - 2014 - - 2015 5,000 $ 53,735 2016 and thereafter 15,000 161,203 Total 20,000 $ 214,938 15. Liability for Retirement Benefits for Employees The Bank has defined benefit plans such as lump-sum retirement payment and corporate pension fund for its employees. The Bank also has a defined contribution pension plan for its employees. Additionally, the consolidated subsidiaries have lump-sum payment plans for their employees. Under most circumstances, employees terminating their employment are entitled to retirement benefits determined based on the rate of pay at the time of termination, years of service and certain other factors. Such retirement benefits are made in the form of a lump-sum severance payment or in the form of an annuity. The liability for retirement benefits as of March 31, 2010 and 2009 consisted of the following: U.S. Dollars Projected benefit obligation 15,163 15,229 $ 162,956 Fair value of plan assets (8,315) (7,491) (89,361) Unrecognized transitional obligation (1,128) (1,354) (12,123) Unrecognized actuarial loss (4,516) (5,949) (48,533) Unrecognized prior service benefit 804 1,062 8,641 Net liability 2,008 1,497 $ 21,580 The components of net periodic benefit costs for the years ended March 31, 2010 and 2009 were as follows: U.S. Dollars Service cost 353 345 $ 3,794 Interest cost 297 295 3,192 Expected return on plan assets (187) (224) (2,010) Amortization of prior service benefit (258) (258) (2,773) Recognized actuarial loss 896 722 9,629 Amortization of transitional obligation 226 226 2,429 Net periodic benefit costs 1,327 1,106 $ 14,261 24
Assumptions used for the years ended March 31, 2010 and 2009 were set forth as follows: 2010 2009 Discount rate 2.0 % 2.0 % Expected rate of return on plan assets 2.5 % 2.5 % Amortization period of prior service cost 11 years 11 years Amortization period of actuarial loss 11 years 11 years Amortization period of transitional obligation 15 years 15 years Financial Statement 2010 16. Other Liabilities Other liabilities as of March 31, 2010 and 2009 consisted of the following: U.S. Dollars Domestic exchange settlement, debt 546 561 $ 5,868 Income taxes payable 784 79 8,426 Accrued expenses 3,217 3,166 34,573 Accounts payable other 2,225 2,096 23,912 Deferred income 3,005 3,721 32,294 Deposits received 2,158 1,840 23,192 Other 3,342 3,102 35,916 Total 15,277 14,565 $ 164,181 17. Commitments and Contingent Liabilities Commitment line contracts on overdrafts and loans are agreements to lend to customers when they apply for borrowing, to the prescribed amount as long as there is no violation of any condition established in the contracts. The amount of unused commitments as of March 31, 2010 was 218,040 million ($2,343,256 thousand), including 180,943 million ($1,944,578 thousand) of unused commitments whose original contract terms were within one year. Since many of these commitments are expected to expire without being drawn upon, the total amount of unused commitments does not necessarily represent actual future cash flow requirements. Many of these commitments have clauses that allow the Bank and subsidiaries to reject the application from customers or reduce the contract amounts in case economic conditions are changed, the Bank and subsidiaries need to secure claims, or other events occur. In addition, the Bank and subsidiaries request their customers to pledge collateral such as premises and securities at the conclusion of the contracts, and take necessary measures, such as understanding the customers financial positions based upon procedures predetermined in the Bank and subsidiaries, revising contracts when the need arises, and securing claims after conclusion of the contracts. 25
18. Equity Japanese companies have been subject to the Companies Act of Japan (the Companies Act ). The significant provisions in the Companies Act that affect financial and accounting matters are summarized below: (a) Dividends Under the Companies Act, companies can pay dividends at any time during the fiscal year in addition to the year-end dividend upon resolution at the shareholders meeting. For companies that meet certain criteria such as; (1) having a Board of Directors, (2) having independent auditors, (3) having a Board of Corporate Auditors, and (4) the term of service of the directors is prescribed as one year rather than two years of normal term by its articles of incorporation, the Board of Directors may declare dividends (except for dividends in kind) at any time during the fiscal year if the company has prescribed so in its articles of incorporation. However, the Bank cannot do so because it has not prescribed so in its articles of incorporation. The Companies Act permits companies to distribute dividends-in-kind (non-cash assets) to shareholders subject to a certain limitation and additional requirements. Semiannual interim dividends may also be paid once a year upon resolution by the Board of Directors if the articles of incorporation of the company so stipulate. The Companies Act provides certain limitations on the amounts available for dividends or the purchase of treasury stock. The limitation is defined as the amount available for distribution to the shareholders, but the amount of equity after dividends must be maintained at no less than 3 million. (b) Treasury stock and treasury stock acquisition rights The Companies Act also provides for companies to purchase treasury stock and dispose of such treasury stock by resolution of the Board of Directors. The amount of treasury stock purchased cannot exceed the amount available for distribution to the shareholders which is determined by specific formula. Under the Companies Act, stock acquisition rights are presented as a separate component of equity. The Companies Act also provides that companies can purchase both treasury stock acquisition rights and treasury stock. Such treasury stock acquisition rights are presented as a separate component of equity or deducted directly from stock acquisition rights. Other than above, the Japanese Banking Law provided that an amount at least equal to 20% of the aggregate amount of cash dividends and certain other cash payments which are made as an appropriation of retained earnings applicable to each fiscal period shall be set aside as a legal reserve until the total additional paid-in capital and legal reserve equals 100% of stated capital. The amount of total additional paid-in capital and legal reserve which exceeds 100% of stated capital can be transferred to retained earnings by resolution of the shareholders, which may be available for dividends. The Bank s legal reserve amount, which is included in retained earnings, totals 1,493 million ($16,045 thousand) and 1,320 million as of March 31, 2010 and 2009, respectively. 26
19. Other Income Other income for the years ended March 31, 2010 and 2009 consisted of the following: U.S. Dollars Gain on sales of stocks and other securities 1,331 5,789 $ 14,304 Equity in earnings of an associated company 24 45 258 Other 810 911 8,705 Total 2,165 6,745 $ 23,267 20. Other Expenses Other expenses for the years ended March 31, 2010 and 2009 consisted of the following: U.S. Dollars Loss on sales of stocks and other securities 159 145 $ 1,709 Write-down of loans 50 70 537 Write-down of securities and other assets 336 1,340 3,611 Reserve for contingent losses 327 207 3,514 Other 2,079 1,769 22,343 Total 2,951 3,531 $ 31,714 21. Leases Finance lease The Group leases certain equipment under finance leases. Total rental expense under the above leases for the years ended March 31, 2010 and 2009 were 633 million ($6,803 thousand) and 742 million, respectively. As discussed in Note 2.m, the Group accounts for leases which existed at the transition date and do not transfer ownership of the leased assets to the lessee as operating lease transactions. Pro forma information of leased assets such as acquisition cost, accumulated depreciation, obligations under finance leases, depreciation expense, interest expense and other information of finance leases that do not transfer ownership of the leased assets to the lessee on an as if capitalized basis as of March 31, 2010 and 2009 were as follows: 27
U.S. Dollars Acquisition cost 4,043 4,136 $ 43,450 Accumulated depreciation (2,703) (2,250) (29,049) Net leased assets 1,340 1,886 $ 14,401 Obligations under finance leases as of March 31, 2010 and 2009 were as follows: U.S. Dollars Due within one year 552 548 $ 5,932 Due after one year 927 1,479 9,962 Total 1,479 2,027 $ 15,894 Financial Statement 2010 The amounts of acquisition costs and obligations under finance leases exclude the imputed interest expense portions. Depreciation expense and interest expense under finance leases as of March 31, 2010 and 2009 were as follows: U.S. Dollars Depreciation expense 546 611 $ 5,868 Interest expense 85 111 913 Depreciation expense and interest expense, which were not reflected in the accompanying statements of operations, were computed by the straight-line method and interest method, respectively. Operating lease The minimum rental commitments under noncancelable operating leases as of March 31, 2010 were as follows: U.S. Dollars Due within one year 64 24 $ 688 Due after one year 111 54 1,193 Total 175 78 $ 1,881 28
22. Financial instruments and related disclosures On March 10, 2008, the ASBJ revised ASBJ Statement No. 10, Accounting Standard for Financial Instruments and issued ASBJ Guidance No. 19, Guidance on Accounting Standard for Financial Instruments and Related Disclosures. This accounting standard and the guidance are applicable to financial instruments and related disclosures at the end of the fiscal years ending on or after March 31, 2010 with early adoption permitted from the beginning of the fiscal years ending before March 31, 2010. The Group applied the revised accounting standard and the new guidance effective March 31, 2010. (1) Group policy for financial instruments The Group engages in financial services mainly related to banking services including deposit-taking, lending services and security investments. A consolidated subsidiary provides credit card service. Since the Group has financial assets and liabilities with variable interest rates, to minimize the market risk from fluctuation of interest rates, the Group manages market risk from fluctuation of interest rates and conducts asset and liability management (ALM). Derivatives are used to manage exposure to financial risks as described in (2) below. (2) Nature and extent of risks arising from financial instruments The Group s financial assets mainly consist of loans to customers. Such loans are exposed to customer credit risk. At March 31, 2010, 19.85%, 16.89% and 14.61% of loans were made to customers engaging in real estate and lease business, wholesaling and retailing, and manufacturing, respectively. Although customers are not concentrated on particular industries, changes in economic environments might affect the credit risk of customers. Investment securities are all available-for-sale equity instruments, bonds and investment trusts. These securities are exposed to credit risk of issuers of securities and market risk from interest rate and market price fluctuations. The Group issues bonds for financing. Bonds are exposed to the liquidity risk that the Group cannot meet its contractual obligations in full on maturity dates under circumstances that the Group cannot finance from market at a certain level. Interest rate swaps are used for ALM to hedge interest rate risks of deposits, loans and bonds. Hedge accounting is applied for the interest rate swaps and the Group assesses effectiveness of hedges by comparing cash flows of hedged instruments and hedged items. Please see Note 23 for more detail about derivatives. (3) Risk management for financial instruments Credit Risk Management Credit risk is the risk of economic loss arising from a counterparty s failure to repay or service debt according to the contractual terms. The Group manages its credit risk from loans by each branch office and loan department to identify the default risk of customers at as early stage, on the basis of internal guidelines relating to credit policies and credit risk management, which include credit screening of each customer, authorization to set credit 29
limit, credit portfolio management, credit information management, credit ratings, guarantees and assets pledged, and actions to be taken for loans with some concerns. The internal audit department audits credit risk management. Managing directors meetings and board of directors meetings are held to discuss credit risk management and report on credit risk management periodically. With respect to investment securities and derivatives, the Group manages its exposure to credit risk by reviewing credit information of issuers and counter parties periodically by treasury department. Market risk management (interest rate risk and foreign exchange risk) Market risk including interest rate risk is basically managed by limiting market risk exposures determined by a board of directors meeting twice a year. Market risk is measured using Value at Risk (VaR) on a daily basis. Market risk is monitored monthly by the risk management committee, and, when necessary, the committee discussed plans to reduce market risk. Results of monitoring and discussions are reported at managing directors meetings and board of directors meetings. Interest rate risk is managed by monitoring assets and liabilities by the ALM committee held quarterly. Results of the monitoring are reported at managing directors meetings and board of directors meetings. Interest rate risk is also monitored by risk management committee held monthly. Interest rate risk from banking accounts and its ratio to equity (outlier criteria) are measured and monitored by the risk management committee. When necessary, interest rate swap transactions are entered to hedge interest rate risk. Foreign currency position on banking accounts are monitored by the treasury department and market risk resulting from fluctuations in foreign currency exchange rates are hedged by foreign currency spot and foreign currency forward contracts. The foreign currency position after hedge transactions are monitored daily by the risk management group of the strategic planning department. Securities are managed in accordance with the investment plan set twice a year and internal rules on investments. Market risk exposures and investment limit by security are set on market risk management policy twice a year. Decline in market prices are monitored by setting alert system. Most of securities are equity securities of customers and managed by monitoring relationship with customers and financial position of issuers periodically. Derivative transactions are mainly entered into for hedging purposes and monitored by the risk management group of the strategic planning department. Liquidity risk management Liquidity risk comprises the risk that the Group cannot meet its contractual obligations in full on maturity dates. The Bank manages its liquidity risk by monitoring cash flows based on internal guidelines on liquidity risk management set twice a year. Market environment and investing/funding balance are also monitored by the risk management committee. (4) Fair values of financial instruments Fair values of financial instruments are based on quoted price in active markets. If quoted price is not available, other rational valuation techniques are used instead. Also please see Note 23 for the detail of fair value for derivatives. 30
(a) Fair value of financial instruments Carrying amount Fair value Unrealized gain/loss Cash and due from banks 77,704 77,704 - Call loans and bills purchased 497 497 - Trading securities 435 435 - Available-for-sale securities 369,630 369,630 - Loans and bills discounted 1,172,648 - - Less : Reserve for possible loan losses (30,066) - - Loans and bills discounted - net 1,142,582 1,147,612 5,030 Foreign exchanges 5,143 5,143 - Total 1,595,991 1,601,021 5,030 Deposits 1,517,838 1,519,762 1,924 Foreign exchanges 1 1 - Bonds 20,000 20,083 83 Total 1,537,839 1,539,846 2,007 Derivatives applied hedge accounting 43 43 - Derivatives not applied hedge accounting (529) (529) - Millions of U.S. Dollars Carrying amount Fair value Unrealized gain/loss Cash and due from banks $ 835,078 $ 835,078 - Call loans and bills purchased 5,341 5,341 - Trading securities 4,675 4,675 - Available-for-sale securities 3,972,380 3,972,380 - Loans and bills discounted 12,602,343 - - Less : Reserve for possible loan losses (323,117) - - Loans and bills discounted - net 12,279,226 12,333,283 $ 54,057 Foreign exchanges 55,272 55,272 - Total $ 17,151,972 $ 17,206,029 $ 54,057 Deposits $ 16,312,069 $ 16,332,746 $ 20,677 Foreign exchanges 11 11 - Bonds 214,938 215,830 892 Total $ 16,527,018 $ 16,548,587 $ 21,569 Derivatives applied hedge accounting $ 462 $ 462 - Derivatives not applied hedge accounting $ (5,685) $ (5,685) - Cash and due from banks Cash and due from banks have no maturity. Therefore, the carrying amount represents the fair value because the fair value approximates such carrying amount. 31
Call loans and bills purchased Contract terms of call loans and bills purchased are short (within 1 year). Therefore, the carrying amount represents the fair value because the fair value approximates such carrying amount. Trading securities For securities such as bonds that are held for over-the-counter sales, the fair value is determined based on the prices quoted by the exchange or the financial institutions from which these securities are purchased. Securities The fair value of equity securities is determined based on the prices quoted by the exchange and the fair value of bonds is determined based on the prices quoted by the exchange or the financial institutions from which they are purchased. The fair value of investment trusts is determined based on the publicly available price. For privately placed guaranteed bonds held by the group, internal ratings and maturity length, the fair value is calculated by discounting the total principal and interest with the rate which is adjusted to reflect default risk. The information of the securities by classification is included in Note 4, Trading securities and Securities. Loans and bills discounted For loans with variable interest rates, the carrying amount represents the fair value as the fair value approximates such carrying value as it reflects the market interest rate in a short term as long as the creditworthiness of the borrower has not been changed significantly. For loans with fixed interest rates, which are classified by the type of loan, the internal rating and the contract term, the fair value is calculated by discounting the total loan principal and interest with the same rate as a similar loan. Also, for short term loans and bills discounted (within 1 year), the carrying amount represents the fair value as the fair value approximates such carrying value. In addition, as for loans to legally bankrupt borrowers, virtually bankrupt borrowers, and potentially bankrupt borrowers, the fair value is calculated by deducting the allowance from the balance in the consolidated balance sheet as of March 31, 2010 since its allowance is estimated by collectability based on discounted future cash flows and collateral. Regarding loans which do not have repayment terms because the outstanding amount of the loan is limited to the value of collateral assets, the carrying amount represents the fair value as the fair value approximates such carrying amount according to estimated repayment periods and conditions of interest. Foreign exchanges Foreign exchanges consist of foreign currency deposits with other banks (due from other foreign banks), short-term loans involving foreign currencies (due from other foreign banks), export bills (purchased foreign bills). For these items, the carrying amount is presented as the fair value, as the fair value approximates such carrying amount because most of these items are deposits without maturity or have short contract terms (1 year or less). Liabilities Deposits For demand deposits, the amount payable on demand as of the consolidated balance sheet date (i.e., the carrying amount) is considered to be the fair value. For variable rate time deposits, the carrying amount represents the fair value as the fair value approximates such carrying amount because the market interest rate is 32
reflected in such deposits within a short time period. Fixed rate time deposits are grouped by certain maturity lengths. Their fair value is calculated by discounting future cash flows with the same interest rate as that of accepted new deposits. Foreign exchanges Among foreign exchange contracts, foreign currency deposits accepted from other banks and non-resident yen deposits are deposits without maturity (due to other foreign banks). Moreover, foreign currency short-term borrowings have short contract terms (1 year or less). Thus, the carrying amount is presented as the fair value for these contracts as the fair value approximates such carrying amount. Bonds The fair value of corporate bonds issued by the Group is determined based on their market price. Derivatives The information of the fair value for derivatives is included in Note 23. (b) Financial instruments whose fair value cannot be reliably determined Carrying amount March 31, 2010 U.S.Dollars Investments in subsidiaries and an associated company 981 $ 10,543 Unlisted equity securities 3,707 39,842 Union investments 1,092 11,733 Total 5,780 $ 62,118 (5) Maturity analysis for financial assets and securities with contractual maturities March 31, 2010 Due in one year or less Due after one year through three years 33 Due after three years through five years Due after five years through seven years Due after seven years Cash and due from banks 60,345 - - - - Call loans and bills purchased 497 - - - - Monetary receivables purchased 40,005 46,863 47,793 54,624 137,409 Loans and bills discounted 491,969 281,709 152,569 72,451 173,950 Total 592,816 328,572 200,362 127,075 311,359 Deposits 1,285,860 170,857 46,549 33 14,538 Bonds - - 5,000 10,000 5,000 Total 1,285,860 170,857 51,549 10,033 19,538
March 31, 2010 Due in one year or less Due after one year through three years U.S. Dollars Due after three years through five years Due after five years through seven years Due after seven years Cash and due from banks $ 648,522 - - - - Call loans and bills purchased 5,341 - - - - Monetary receivables purchased 429,933 $ 503,632 $ 513,627 $ 587,039 $ 1,476,722 Loans and bills discounted 5,287,145 3,027,499 1,639,642 778,629 1,869,428 Total $ 6,370,941 $ 3,531,132 $ 2,153,269 $ 1,365,668 $ 3,346,150 Deposits $ 13,819,025 $ 1,836,187 $ 500,253 $ 360 $ 156,244 Bonds - - 53,735 107,469 53,375 Total $ 13,819,025 $ 1,836,187 $ 553,987 $ 107,829 $ 209,987 Loans and bills discounted, presented above, includes loans of 54,477 million ($585,459 thousand) which are unable to estimate amount of redemption such as loans classified as possible bankruptcy, virtual bankruptcy and legal bankruptcy and loans of 196,870 million ($2,115,744 thousand) which have no contractual maturities. 23. Derivative Financial Instruments The Group enters into derivative transactions such as interest rate swaps and forward exchange contracts. The Group enters into derivative transactions as a means of managing its interest rate and foreign currency exposures on certain assets and liabilities. The Group mainly uses derivative transactions to reduce market risks on fixed rate assets in the event interest rates increase and/or foreign exchange rates fluctuate. Derivatives are subject to market risk and credit risk. The Group s exposure to market risk is limited, since derivative transactions are primarily used for hedging purposes, and exposure to credit risk is also limited, since the counterparties to those derivatives are limited to major financial institutions and the amount of transactions is restricted. In order to control the risks related with derivative transactions, the risk management department monitors and measures the risk exposures, and reports to the management and the relevant departments. In addition, the Bank established the Assets and Liabilities Management Committee ( ALMC ) which consists of management and the relevant departments. The ALMC meetings are periodically held to discuss various risks and risk controls of the derivative transactions. As noted in Note 22, the Group applied ASBJ Statement No. 10, Accounting Standard for Financial Instruments and ASBJ Guidance No. 19, Guidance on Accounting Standard for Financial Instruments and Related Disclosures. The accounting standard and the guidance are applicable to financial instruments and related disclosures at the end of the fiscal years ending on or after March 31, 2010; therefore, the required information is disclosed only for 2010. 34
Derivative transactions to which hedge accounting is not applied at March 31, 2010: Contract or At March 31, 2010 Notional Amount Due after one year Fair Value Unrealized Gain (Loss) Forward exchange contracts: Sell 10,059 - (221) 221 Buy 10,155-266 266 Interest rate swap contracts: Floating rate receipt, fixed rate payment 578 - (1) (1) Contract or Notional Amount U.S. Dollars Due after one year Unrealized Gain (Loss) At March 31, 2010 Fair Value Forward exchange contracts: Sell $ 108,103 - $ (2,375) $ 2,375 Buy $ 109,135 - $ 2,859 $ 2,859 Interest rate swap contracts: Floating rate receipt, fixed rate payment $ 6,212 - $ (10) $ (10) Derivative transactions to which hedge accounting is applied at March 31, 2010: Contract or Notional At March 31, 2010 Contract or Notional Amount Amount due after One Year Fair Value Unrealized Gain (Loss) Interest rate swap contracts: Floating rate receipt, fixed rate payment 20,430 15,650 (148) - Fix rate receipt, floating rate payment 28,087 15,798 (381) - Contract or Notional Amount U.S. Dollars Contract or Notional Amount due after One Year Fair Value Unrealized Gain (Loss) At March 31, 2010 Interest rate swap contracts: Floating rate receipt, fixed rate payment $ 219,559 $ 168,189 $ (1,589) - Fix rate receipt, floating rate payment $ 301,845 $ 169,775 $ (4,099) - 35
The following is the fair value information for foreign currency forward contracts and interest rate swap contracts to which hedge accounting is not applied at March 31, 2009. Foreign currency forward contracts which qualify for hedge accounting are excluded from the information below: Contract or Notional Amount 2009 Unrealized Gain (Loss) Fair Value Forward exchange contracts: Sell 6,531 (154) (154) Buy 7,219 224 224 Interest rate swap contracts: Fixed rate receipt, floating rate payment 800 8 8 Floating rate receipt, fixed rate payment 1,148 1 1 (Notes) 1. Derivative transactions are recorded at fair value and the gains / (losses) are recognized in the consolidated statements of operations. 2. Derivative transactions which qualify for hedge accounting are excluded from the disclosure of fair value information. 24. Segment Information The Bank and its subsidiaries operate primarily in one segment, banking, which constitutes most of their consolidated ordinary operations and total assets. Accordingly, the figures for ordinary operations and assets by business segment for the Bank and its subsidiaries are not presented. The Bank and its subsidiaries operate in Japan. Accordingly, the figures for ordinary operations and assets by geographical segment for the Bank and its subsidiaries are not presented. Ordinary operations arising from international operations both inside and outside of Japan constitute less than 10% of the consolidated ordinary operations. Accordingly, the figures for ordinary operations arising from international operations are not presented. 25. Subsequent Event (1) Appropriations of Retained Earnings The following appropriations of retained earnings at March 31, 2010 were approved at the Bank s shareholders meeting held on June 29, 2010: U.S. Dollars Year-end cash dividends, 2.5 ($0.02) per share 542 $ 5,825 36