Consolidated Balance Sheets

Transcription

1 Consolidated Balance Sheets (March 31, 2009 and 2010) (Note 1) ASSETS Cash and due from banks (Note 3, 4, 12 and 19) 125, ,438 $ 1,628 Call loans and bills purchased (Note 19) 23,569 76, Financial receivables purchased (Note 4 and 19) 25,682 19, Trading assets (Note 3, 4 and 19) 32,166 36, Money held in trust 1,245 1, Securities (Note 3, 4, 6, 10 and 19) 1,382,684 1,537,366 16,524 Loans and bills discounted (Note 5, 7 and 19) 4,427,308 4,354,076 46,798 Foreign exchanges (Note 3) 3,800 3, Other assets (Note 6) 48,163 43, Tangible fixed assets (Note 3) 85,287 85, Intangible fixed assets (Note 3) 9,204 8, Deferred tax assets (Note 3 and 16) 63,306 42, Customers liabilities for acceptances and guarantees (Note 10) 44,062 44, Reserve for possible loan losses (Note 3) (43,939) (39,213) (421) 6,228,006 6,365,855 $ 68,421 LIABILITIES AND NET ASSETS Liabilities: Deposits (Note 6 and 19) 5,412,851 5,599,886 $ 60,188 Call money and bills sold (Note 19) 67,013 6, Deposits received for bonds lending/borrowing transactions (Note 6 and 19) 47,558 88, Trading liabilities (Note 3) 28,915 33, Borrowed money (Note 6, 8, and 19) 145, ,823 1,105 Foreign exchanges (Note 3) Bonds (Note 9 and 19) 147, ,000 1,344 Due to trust account Other liabilities 47,416 40, Reserve for bonus for directors and corporate auditors (Note 3) Allowance for severance and retirement benefits (Note 3 and 15) Reserve for executive retirement benefits (Note 3) Reserve for reimbursement of dormant deposits (Note 3) Reserve for point loyalty programs (Note 3) Deferred tax liabilities for land revaluation reserve (Note 3) 18,400 18, Acceptances and guarantees (Note 10) 44,062 44, Total liabilities 5,961,063 6,062,936 $ 65,165 Net Assets (Note 3 and 11) Common stock : Authorized - 2,000,000,000 shares Issued - 625,266,342 shares 54,573 54, Capital surplus 30,635 30, Retained earnings 160, ,559 1,801 Common stock in treasury (3,015) (3,182) (34) Total stockholders equity 242, ,586 2,683 Net unrealized holding gains (losses) on securities available for sale (27,897) Net deferred losses on hedging instruments, net of tax (1,654) (1,646) (18) Land revaluation reserve, net of tax (Note 3) 23,941 23, Foreign currency translation adjustments (0) (0) (0) Total valuation and translation adjustments (5,610) 23, Minority interests 30,172 30, Total net assets 266, ,919 3,256 6,228,006 6,365,855 $ 68,421 See accompanying notes. 20

2 Consolidated Statements of Income (Years ended March 31, 2009 and 2010) (Note 1) INCOME Interest income: Interest on loans and discounts 89,662 80,369 $ 864 Interest and dividends on securities 21,141 17, Other interest income 1, Fees and commissions 24,393 24, Other operating income 11,550 11, Other income 12,004 4, , ,768 1,492 EXPENSES Interest expenses: Interest on deposits 15,766 11, Interest on borrowings and rediscounts 5,838 4, Other interest expenses 1,834 1, Fees and commissions 9,095 9, Other operating expenses 17,606 9, General and administrative expenses 62,599 61, Other expenses 34,157 21, , ,809 1,288 Income before income taxes 13,214 18, Income taxes (Note 3 and 16): Current 11,319 6, Deferred (6,249) Minority interests Net income 7,188 11,079 $ 119 Yen (Note 1) Amounts per share of common stock (Note 11): Net assets $ 4.75 Net income Diluted net income Cash dividends applicable to the year See accompanying notes. 21

3 Consolidated Statements of Changes in Net Assets (Years ended March 31, 2009 and 2010) Stockholders equity Valuation and translation and adjustments Number of shares of common stock (thousands) Common stock Capital surplus Retained earnings Common stock in treasury Total stockholders equity Net unrealized holding gains (losses) on securities sale Net deferred losses on hedging instruments, net of tax Land revaluation reserve, net of tax Foreign currency translation adjustments Total valuation and translation adjustments Balance at March 31, ,266 54,573 30, ,311 (671) 241,861 (3,268) (893) 23,995 (0) 19,833 30, ,867 Changes of items during the period Dividends from surplus (4,357) (4,357) (4,357) Net income 7,188 7,188 7,188 Purchases of common stock in treasury (2,452) (2,452) (2,452) Disposal of common stock in treasury (11) (8) Reversal of land revaluation reserve Net changes of items other than stockholders equity (24,628) (760) (53) (0) (25,443) (25,443) Total changes of items during the period (11) 2,876 (2,344) 520 (24,628) (760) (53) (0) (25,443) (24,923) Balance at March 31, ,266 54,573 30, ,187 (3,015) 242,381 (27,897) (1,654) 23,941 (0) (5,610) 30, ,943 Changes of items during the period *Dividends from surplus (3,707) (3,707) (3,707) Net income 11,079 11,079 11,079 Purchases of common stock in treasury (202) (202) (202) Disposal of common stock in treasury Reversal of land revaluation reserve (0) (0) 0 Net changes of items other than stockholders equity 28, (0) 28,770 28,770 Total changes of items during the period 0 7,371 (167) 7,205 28, (0) 28,770 35,975 Balance at March 31, ,266 54,573 30, ,559 (3,182) 249, (1,646) 23,941 (0) 23,160 30, ,919 Minority interests Total net assets Common stock Stockholders equity Capital surplus Retained earnings Common stock in treasury (Note 1) Valuation and translation and adjustments Net unrealized holding gains (losses) Total stockholders equity on securities available for sale Net deferred losses on hedging instruments, net of tax Land revaluation reserve, net of tax Foreign currency translation adjustments Total valuation and translation adjustments Balance at March 31, 2009 $ 587 $ 329 $ 1,722 $ (32) $ 2,606 $ (300) $ (18) $ 258 $ 0 $ (60) $ 324 $ 2,870 Changes of items during the period *Dividends from surplus (40) (40) (40) Net income Purchases of common stock in treasury (2) (2) (2) Disposal of common stock in treasury Reversal of land revaluation reserve (0) (0) (0) Net changes of items other than stockholders equity (0) Total changes of items during the period 0 79 (2) (0) Balance at March 31, 2010 $ 587 $ 329 $ 1,801 $ (34) $ 2,683 $ 9 $ (18) $ 258 $ (0) $ 249 $ 324 $ 3,256 *Dividends from surplus are appropriation items of retained earnings in shareholders meeting held in June 2009 and interim dividends in December 2009 See accompanying notes. Minority interests Total net assets 22

4 Consolidated Statements of Cash Flows (Years ended March 31, 2009 and 2010) (Note 1) Cash flows from operating activities: Income before income taxes 13,214 18,959 $ 204 Adjustments to reconcile income before income taxes to net cash provided by operating activities: Depreciation of premises, equipment and others 4,568 4, Impairment losses of fixed assets Equity in earnings of affiliates 570 (219) (2) Net change in reserve for possible loan losses (595) (4,725) (51) Net change in reserve for bonus for directors and corporate auditors (16) 8 0 Net change in allowance for severance and retirement benefits Net change in reserve for executive retirement benefits Net change in reserve for reimbursement of dormant deposits Net change in reserve for point loyalty programs Interest income (112,163) (98,136) (1,055) Interest expenses 23,439 17, Net (gains) losses on securities transactions (2,496) 2, Net gains on money held in trust (12) (12) (0) Net losses on dispositions of fixed assets Net losses on contribution of securities to employee retirement benefit trust 404 Contribution of securities to employee retirement benefit trust 15,126 Net change in trading assets 6,530 (4,804) (52) Net change in trading liabilities (5,883) 4, Net change in loans (90,713) 73, Net change in deposits 88, ,631 1,888 Net change in negotiable certificates of deposits 15,260 11, Net change in borrowed money excluding subordinated loans 61,104 (42,621) (458) Net change in due from banks other than from the BANK OF JAPAN (2,523) 1, Net change in call loans and bills bought 99,247 (46,208) (497) Net change in call money and bills sold 44,169 (60,250) (648) Net change in deposits received for bonds lending / borrowing transactions 8,829 41, Net change in foreign exchanges (assets) (209) Net change in foreign exchanges (liabilities) (15) 61 1 Net change in issuance and redemption of ordinary bonds (20,000) (20,000) (215) Interest received 122,520 99,646 1,071 Interest paid (22,989) (17,210) (185) Other - net (22,670) 4, Subtotal 210, ,011 1,537 Income taxes paid (18,861) (8,418) (90) Total adjustments 191, ,592 1,447 Net cash provided by operating activities 204, ,551 1,651 Cash flows from investing activities: Purchases of securities (1,714,219) (2,006,526) (21,566) Proceeds from sale of securities 1,387,907 1,799,044 19,336 Proceeds from maturity of securities 65,237 93,091 1,001 Increase in money held in trust (103) (31) (0) Decrease in money held in trust Purchases of tangible fixed assets (3,750) (2,776) (30) Proceeds from sales of tangible fixed assets Purchases of intangible fixed assets (2,446) (2,137) (23) Proceeds from sales of intangible fixed assets Net cash used in investing activities (266,951) (119,197) (1,281) Cash flows from financing activities: Proceeds of subordinated loans 23,000 Repayments of subordinated loans (4,000) Proceeds from issuance of subordinated bonds and bonds with stock subscription rights 10, Repayments of subordinated bonds and bonds with stock subscription rights (10,000) (12,000) (129) Dividends paid (4,352) (3,705) (40) Dividends paid to minority interests (957) (957) (10) Purchases of treasury stock (2,452) (154) (2) Proceeds from sale of treasury stock Payment of lease liabilities (41) (99) (1) Net cash provided by (used in) financing activities 1,284 (6,907) (75) Effect of foreign exchange rate changes on cash and cash equivalents Net change in cash and cash equivalents (60,762) 27, Cash and cash equivalents at the beginning of the year 183, ,527 1,317 Cash and cash equivalents at the end of the year (Note 12) 122, ,998 $ 1,612 See accompanying notes. 23

5 Notes to Consolidated Financial Statements (March 31, 2009 and 2010) 1. Basis of presenting consolidated financial statements The accompanying consolidated financial statements of the Hiroshima Bank, Ltd. (the Bank ) and its consolidated subsidiaries have been prepared in accordance with the provisions set forth in the Japanese Financial Instruments and Exchange Law and its related accounting regulations, and in conformity with accounting principles generally accepted in Japan ( Japanese GAAP ), which are different in certain respects as to application and disclosure requirements of International Financial Reporting Standards. The accompanying consolidated financial statements have been restructured and translated into English (with some expanded descriptions) from the consolidated financial statements of the Bank prepared in accordance with Japanese GAAP and filed with the appropriate Local Finance Bureau of the Ministry of Finance as required by the Financial Instruments and Exchange Law. Some supplementary information included in the statutory Japanese language consolidated financial statements, but not required for fair presentation, is not presented in the accompanying consolidated financial statements. The Bank maintains its accounting records in Japanese yen, the currency in which the Bank is incorporated and operates. In preparing the accompanying consolidated financial statements and notes thereto, Japanese yen figures one million yen have been rounded down to the nearest million yen, except for per share data, in accordance with the Financial Instruments and Exchange Law and Enforcement Regulation concerning Banking Law of Japan. Therefore, total or subtotal amounts shown in the accompanying consolidated financial statements and notes thereto do not necessarily agree with the sums of individual amounts. The translations of the Japanese yen amounts into are included solely for the convenience of readers, using the prevailing exchange rate at March 31, 2010, which was to U.S.$1.00. The convenience translations should not be construed as representations that the Japanese yen amounts have been, could have been, or could in the future be, converted into at this or any other rate of exchange. 2. Principles of consolidation The consolidated financial statements include the accounts of the Bank and all of its majority-owned subsidiaries. The Bank includes the accounts of several companies which are 50% owned in the accompanying consolidated financial statements in case that the Bank has control over these companies through cross-shareholdings, transfer of management, and provision of debt guarantees and loans. All significant intercompany balances and transactions have been eliminated. Investments in 20% to 50% owned companies are carried at cost adjusted for equity in undistributed earnings or losses since acquisition (the equity method). The Bank also applies the equity method for investments in certain companies which are 20% owned in case that the Bank is able to exercise significant influence over these companies. Consequently, the consolidated financial statements include the account of the Bank and its subsidiaries and affiliated companies (six subsidiaries and six affiliated companies). As of March 31, 2010, the fiscal year ending dates are March 31 for 5 subsidiaries and January 31 for 1 subsidiary. 1 subsidiary whose fiscal year ends at the date other than March 31 is consolidated using its fiscal year end financial statements. 3. Significant accounting policies Trading assets and trading liabilities The Bank adopted mark-to-market accounting for trading assets and trading liabilities including securities, financial receivables and financial derivatives for trading purpose. Trading assets and trading liabilities are recorded on a trade date basis, and revenues and expenses related to trading securities transactions are also recorded on a trade date basis. Securities 24

6 and financial receivables for trading purpose are stated at market or fair value at the balance sheet date. Financial derivatives such as futures and option transactions are stated at a deemed settlement amount at the balance sheet date. Unrealized gains or losses incurred by the mark-to-market method are charged to income. Securities All companies are required to examine the intent of holding each security and classify those securities as (a) securities held for trading purposes (hereafter, trading securities ), (b) debt securities intended to be held to maturity (hereafter, held-tomaturity debt securities ), (c) equity securities issued by subsidiaries and affiliated companies, and (d) for all other securities that are not classified in any of the above categories (hereafter, available-for-sale securities ) Trading securities are stated at fair market value. Gains and losses realized on disposal and unrealized gains and losses from market value fluctuations are recognized as gains or losses in the period of the change. Held-to-maturity debt securities are stated at amortized cost. Equity securities issued by subsidiaries and affiliated companies which are not consolidated or accounted for using the equity method are stated at moving-average cost. Available-for-sale securities with available fair market values are stated at fair market value. Unrealized gains and unrealized losses on these securities are reported, net of applicable income taxes, as a separate component of net assets. Realized gains and losses on sale of such securities are computed using moving-average cost. Securities available-for-sale for which fair value cannot be reliably determined are carried at cost determined by the moving average method. Debt securities with no available fair market value are stated at amortized cost, net of the amount considered not collectible. Other securities with no available fair market value are stated at moving-average cost. If the market value of held-to-maturity debt securities, equity securities issued by subsidiaries and affiliated companies not consolidated or accounted for by the equity method, and available-for-sale securities, declines significantly, such securities are stated at fair market value and the difference between fair market value and the carrying amount is recognized as loss in the period of the decline. If the fair market value of equity securities issued by unconsolidated subsidiaries and affiliated companies not on the equity method is not readily available, such securities should be written down to net asset value with a corresponding charge in the income statement in the event net asset value declines significantly. In these cases, such fair market value or the net asset value will be the carrying amount of the securities at the beginning of the next year. When market values of available-for-sale securities with fair market values decline by 50% or more of the acquisition cost at the balance sheet date, the Bank writes down such securities to the fair market values and records the related write-downs as loss in its consolidated statement of income. When market values of available-for-sale securities with fair market value decline by 30% or more but 50% of the acquisition cost, write-downs to the fair market values may be recognized for certain issuers based on evaluation of issuers debtor classification. The Bank devaluated the available-for-sale securities and recognized a loss of 11,012 million ( 1,574 million for equity securities and 9,437 million for bonds and 2,329 million ($25 million)( 147 million ($2 million) for equity securities and 192 million ($2 million) for bonds and 1,989 million ($21 million) for financial receivables purchased) as for the year ended March 31, 2009 and 2010, respectively. Derivatives and hedge accounting Companies are required to state derivative financial instruments at fair value and to recognize changes in the fair value as gains or losses unless derivative financial instruments are used for hedging purposes. (A) Hedging against interest rate fluctuations The Bank applies deferred hedge accounting to hedge transactions such as interest rate swaps entered into to mitigate interest rate risk arising from financial assets and liabilities. 25

7 Notes to Consolidated Financial Statements (March 31, 2009 and 2010) As for the year ended March 31, 2003, pursuant to the temporary treatment regulated by Treatment for Accounting and Auditing of Application of Accounting Standard for Financial Instruments in Banking Industry (Industry Audit Committee Report No.24) issued by JICPA, the Bank adopted the macro hedging approach, referred to as the risk adjustment approach, to control, in the aggregate, interest rate risk arising from many financial assets and liabilities, such as loans and bills discounted and borrowed money, that is set forth in the Industry Audit Committee Report No.15 Temporary Treatment for Accounting and Auditing of Application of Accounting Standard for Financial Instruments in Banking Industry, and the Bank deferred recognition of gains or losses resulting from changes in fair value of derivative financial instruments until the related losses or gains on the hedged items were recognized. The Bank assessed the hedge s effectiveness by considering whether interest rate risk was mitigated and whether risks relating to derivatives fell within the limits placed under the risk management policy. Effective April 1, 2003, the Bank ceased the application of the macro hedging approach and applied the hedge accounting, pursuant to the standard treatments of the Report No.24. The Bank assessed the hedge s effectiveness by considering the adequacy of offsetting movement of the fair value by the changes in interest rates through classifying the hedged items such as loans and borrowed money and the hedging transactions such as interest rate swaps by their maturity. The deferred hedge losses and gains related to hedging transactions resulting from the application of the macro hedging approach were recognized as Interest income or Interest expenses over one year to seven years including the year ended March 31, 2004 according to their remaining maturity. (B) Hedging against foreign currency fluctuations The Bank applies deferred hedge accounting to hedging transactions such as currency swaps and foreign exchange swaps entered into to mitigate foreign exchange risk arising from foreign-currency-denominated financial assets and liabilities. The Bank applies the hedge accounting pursuant to Treatment of Accounting and Auditing Concerning Accounting for Foreign Currency Transactions in Banking Industry (JICPA Industry Audit Committee Report No.25) to currency swap transactions and foreign exchange swap transactions for the purpose of funds lending and borrowing in different currencies. The Bank assesses the hedge s effectiveness by confirming that the positions of hedge instruments (currency swap and foreign exchange swap transactions) exceed the corresponding foreign-currency-denominated financial receivables and debts as hedged items. (C) Exceptional treatment For some assets and liabilities, the Bank defers recognition of gains or losses resulting from changes in fair value of derivative financial instruments until the related losses or gains on the hedged items are recognized. Also, if interest rate swap contracts are used as hedge and meet certain hedging criteria, the net amount to be paid or received under the interest rate swap contract is added to or deducted from the interest on the assets or liabilities for which the swap contract was executed. Tangible fixed assets (except for lease assets) Tangible fixed assets except for land utilized for business operations are stated at cost less accumulated depreciation. Accumulated impairment losses are deducted from acquisition costs. The Bank and its consolidated subsidiaries depreciate their tangible fixed assets under the declining-balance method over their estimated useful lives. Estimated useful lives of major items are as follows: Buildings: years Others: 3 20 years 26

8 Pursuant to the Law concerning Revaluation of Land (the Law ), land for business operations as of March 31, 1998 was revalued at fair value. Due to the revaluation, the carrying value of the land was increased by 53,429 million to 71,380 million as of March 31, 1998, and the related net unrealized gain was reported in liabilities as Land revaluation reserve. Effective March 31, 1999, the Law has been revised for presentation of the unrealized gain. According to the revised Law, net unrealized gain reported in liabilities shall be reclassified in a separate component of stockholders equity net of applicable income taxes as Land revaluation reserve, net of tax as of March 31, According to the revised Law, the Bank is not permitted to revalue the land at any time even in case that the fair value of the land declines. Such unrecorded revaluation loss as of March 31, 2009 and 2010 was 28,039 million and 28,673 million ($308 million), respectively. Accumulated depreciation for tangible assets, recognized as for the fiscal year ended March 31, 2009 and 2010, amounted to 38,888 million and 40,241 million ($432 million), respectively. Intangible fixed assets (except for lease assets) Intangible fixed assets are amortized using the straight-line method. Software utilized by the Bank is amortized over the period in which it is expected to be utilized (mainly five or ten years in 2009 and 2010). Lease assets Lease assets in Tangible fixed assets or Intangible fixed assets of the finance leases other than those that transfer the ownership of leased property to the lessees is computed under the straight line method over the lease term with zero residual value unless residual value is guaranteed by the corresponding lease contracts. Reserve for possible loan losses For loans to insolvent customers who are undergoing bankruptcy or other collection proceedings or in a similar financial condition, the reserve for possible loan losses is provided in the full amount of such loans, excluding the portion that is estimated to be recoverable due to available security interests or guarantees. For the unsecured and unguaranteed portions of loans to customers not presently in the above circumstances, but for which there is a high probability of so becoming, the reserve for possible loan losses is provided for estimated unrecoverable amounts determined after evaluating the customer s overall financial conditions. Effective April 1, 2003, in order to estimate a reserve for possible loan losses in cases where the Bank is able to rationally evaluate cash flows from collection of principals and interests of the relevant loans, the Bank introduced the Discounted Cash Flow method ( the DCF method ) for claims on borrowers whose loans are classified as Restructured loans, including loans to supported companies as referred in Note 5 and whose total loans outstanding exceeds a certain threshold. Under the DCF method, the difference between the cash flows discounted by the original interest rate and the book value of the loan is provided as a reserve for possible loan losses. For other loans, the reserve for possible loan losses is provided based on the Bank s actual rate of loan losses in the past. Consolidated subsidiaries provide the reserve for possible loan losses mainly based on the actual rate of loan losses in the past. All branches and the credit supervision department evaluate all loans in accordance with the self-assessment rule, and their evaluations are audited by the asset audit section, which is independent from branches and credit supervision department, and the evaluations are revised as required based on the audits. Secured and guaranteed loans which are for insolvent borrowers or in a similar financial condition are disclosed based on the amount of loans net of amounts estimated not to be collected through disposition of collateral or through execution of 27

9 Notes to Consolidated Financial Statements (March 31, 2009 and 2010) guarantees. Such amounts directly set off against those loans at March 31, 2009 and 2010 were 43,450 million and 48,512 million ($521 million), respectively. Reserve for bonus for directors and corporate auditors Reserve for bonus for directors and corporate auditors are provided for payments of bonus to directors and corporate auditors in the amount deemed accrued on the consolidated balance sheet date. Employees severance and retirement benefits The liabilities and expenses for severance and retirement benefits were determined based on the amounts actuarially calculated using certain assumptions. The Bank and its consolidated subsidiaries provided allowance for employees severance and retirement benefits at March 31, 2009 and 2010 based on the estimated amounts of projected benefit obligation and the fair value of the plan assets at those dates. Actuarial gains and losses were recognized in expenses using the straight-line method over fourteen years, which was not longer than the average of the estimated remaining service lives, commencing with the following period. Prior service costs were recognized in the consolidated statements of operations as incurred. Effective from the fiscal year ended March 31, 2010, the Bank and consolidated domestic subsidiaries adopted the Partial Amendments to Accounting Standard for Retirement Benefits (Part3) (Accounting Standards Board of Japan ( ASBJ ) Statement No.19 issued on July 31, 2008). The new accounting standard requires domestic companies to use the rate of return on long-term government or gift-edged bonds as of the end of the fiscal year for calculating the projected benefit obligation of a defined-benefit plan. Previously, domestic companies were allowed to use a discount rate determined by taking into consideration fluctuations in the yield of long-term government or gilt-edged bonds over a certain period. This change had no material impact on the consolidated financial statements for the year ended March 31, Reserve for executive retirement benefits Reserve for executive retirement benefits is provided for payment of retirement benefits to directors, corporate auditors and other executive officers, in the amount deemed accrued at the fiscal year-end based on our internal regulations. Reserve for reimbursement of dormant deposits Reserve for reimbursement of dormant deposits which were derecognized as liabilities under certain conditions is provided for the possible losses on the future claims of withdrawal. Reserve for point loyalty programs Reserve for point loyalty program is provided for the estimated expenses based on an estimate of the future usage of points. Points are granted to credit card holders through card usage under the point loyalty program which is designed to promote card usage. Foreign currency translation The consolidated financial statements of the Bank are maintained in Japanese yen. Assets and liabilities denominated in foreign currencies are translated into Japanese yen at the exchange rates prevailing at the balance sheet dates. Income taxes Income taxes consist of corporation, enterprise and inhabitants taxes. The provision for income taxes is computed based on the pretax income of the Bank and each of its consolidated subsidiaries with certain adjustments required for consolidation and tax purposes. The asset and liability approach is used to recognize deferred tax assets and liabilities for loss carryforwards and the expected future tax consequences of temporary differences between the carrying amounts and the tax bases of assets and liabilities. 28

10 Valuation allowances are recorded to reduce deferred tax assets based on the assessment of the realizability of the tax benefits. Accounting Standard for Financial Instruments The ASBJ has revised Accounting Standard for Financial Instruments. This standard, among other things, expanded the scope of fair value measurement and, therefore, certain nonmarketable available-for-sale securities, which were previously accounted for at cost and regarded without readily determinable fair value, are now recorded at fair value unless the fair value cannot be reliably determined. The Bank applied the standard from the year ended March 31, As result, Financial receivables purchased decreased by 1,125 million, Deferred tax assets increased by 461 million, Net unrealized gains (losses) on securities available for sale, net of taxes decreased by 664 million, respectively, in comparison to previous accounting treatments. Amortization of goodwill The period of amortization of goodwill (including negative goodwill) is set appropriately based on an estimation of the period of its effect, in principle, and goodwill with minimal monetary value is amortized entirely in the year of its generation. Consolidated Statements of Cash Flows and Cash Equivalents In preparing the consolidated statements of cash flows, cash and due from THE BANK OF JAPAN are considered to be cash and cash equivalents. Amounts per share Net assets per share is calculated by dividing net assets by the number of common stocks outstanding at the year end (excluding treasury stock ). Net income per share is calculated by dividing net income attributable to the stockholders by the average number of common stocks outstanding during the year (excluding treasury stock ). Cash dividends per share represent the actual amounts declared as applicable to the respective years. Reclassifications Certain amounts in the 2009 consolidated financial statements have been reclassified to conform with the 2010 presentation. Accounting Standard for Disclosures about Fair Value of Investment and Rental Property Effective from the fiscal year ended March 31, 2010, the Bank adopted the Accounting Standard for Disclosures about Fair Value of Investment and Rental Property (Accounting Standards Board of Japan ( ASBJ ) Statement No.20 issued on November 28, 2008) and Guidance on Accounting Standard for Disclosures about Fair Value of Investment and Rental Property (ASBJ Guidance No.23 issued on November 28, 2008) for the years ending on or after March 31, The amount of Investment and Rental Property comments are omitted, because they are immaterial. 4. Securities A. Trading account securities included in Trading assets, certificate of deposits with banks included in Cash and due from banks, and trust beneficiary rights included in Financial receivables purchased, which are separately reported from Securities in the consolidated balance sheets, are included in this section. 29

11 Notes to Consolidated Financial Statements (March 31, 2009 and 2010) B. The following tables summarize acquisition costs, book values and fair values of securities with available fair values as of March 31, 2009 and 2010: (a) Trading securities : Amount of net unrealized gains (losses) included in the income statement (5) 6 $ 0 (b) Available-for-sale securities : At March 31, 2009 Type Acquisition cost Book value Difference Unrealized holding gains Unrealized holding losses Equity Securities 97,256 87,151 (10,105) 12,259 22,364 Bonds: 988, ,980 2,929 5,828 2,899 National government bonds 804, ,078 4,302 5, Local government bonds 88,609 88, Bonds 94,665 92,916 (1,749) 336 2,085 Others 322, ,660 (40,117) ,929 Total 1,408,086 1,360,792 (47,293) 18,900 66,193 At March 31, 2010 Fair value exceeding cost: Book value Acquisition cost Gross unrealized gain Equity Securities 57,691 38,368 19,323 Bonds: 780, ,825 12,951 National government bonds 629, ,507 10,779 Local government bonds 87,850 86,514 1,335 Bonds 63,639 62, Others 120, ,806 3,248 Sub Total 958, ,999 35,523 Fair value not exceeding cost: Book value Acquisition cost Gross unrealized loss Equity Securities 40,295 52,152 (11,856) Bonds: 337, ,744 (1,285) National government bonds 287, ,739 (781) Local government bonds 20,255 20,342 (86) Bonds 29,245 29,661 (416) Others 208, ,200 (20,942) Sub Total 586, ,096 (34,083) Total 1,544,536 1,543,096 1,439 At March 31, 2010 Fair value exceeding cost: Book value Acquisition cost Gross unrealized gain Equity Securities $ 620 $ 412 $ 208 Bonds: 8,392 8, National government bonds 6,764 6, Local government bonds Bonds Others 1,290 1, Sub Total $ 10,302 $ 9,920 $ 382 Fair value not exceeding cost: Book value Acquisition cost Gross unrealized loss Equity Securities $ 433 $ 561 $ (127) Bonds: 3,627 3,641 (14) National government bonds 3,095 3,103 (8) Local government bonds (1) Bonds (5) Others 2,239 2,463 (226) Sub Total $ 6,299 $ 6,665 $ (367) Total $ 16,601 $ 16,585 $ 15 30

12 C. The following tables summarize book values of securities with no available fair values as of March 31, 2009: Similar information for the year ended March 31, 2010, is disclosed in Note 19. Held-to-maturity debt securities Available-for-sale securities: 40,587 Unlisted stocks except for those traded over the counter 6,483 Bonds 1,941 Negotiable certificates of due from banks 8,780 Financial receivable purchased 23,381 D. Available-for-sale securities with maturities and held-to-maturity debt securities are as follows: Similar information for the year ended March 31, 2010, is disclosed in Note 19. At March 31, 2009 Type Within one year Over one year but within five years Over five years but within ten years Over ten years Bonds: 62, , ,477 28,692 National government bonds 46, , ,114 22,427 Local government bonds 2,155 8,581 78,249 Bonds 13,993 65,484 9,113 6,265 Others 5,285 88,410 49, ,508 Total 67, , , ,200 E. Total sales of available-for-sale securities sold at March 31, 2009 and 2010 were as follows: At March 31, 2009 Type Proceeds from sales Total amount of gains on sales Total amount of losses on sales Other securities 1,363,033 14,934 12,423 At March 31, 2010 Type Proceeds from sales Total amount of gains on sales Total amount of losses on sales Equity Securities 12, ,159 Bonds: 1,624,860 7,904 1,974 National government bonds 1,508,759 6,952 1,956 Local government bonds 72, Bonds 43, Others 159,198 1,403 6,691 Total 1,796,375 10,258 10,825 At March 31, 2010 Type Proceeds from sales Total amount of gains on sales Total amount of losses on sales Equity Securities $ 132 $ 10 $ 23 Bonds: 17, National government bonds 16, Local government bonds Bonds Others 1, Total $ 19,308 $ 110 $

13 Notes to Consolidated Financial Statements (March 31, 2009 and 2010) 5. Loans and bills discounted A. Doubtful loans of loans and bills discounted at March 31, 2009 and 2010 were as follows: Non-accrual loans: Loans to borrowers under bankruptcy proceedings 12,490 5,394 $ 58 Other delinquent loans 93,255 79, Accrual loans past due three months or more 6,566 4, Restructured loans, including loans to supported companies 8,898 18, The Bank does not accrue interest on loans to borrowers under bankruptcy proceeding and other delinquent loans, which are classified based on the results of self-assessment. B. Bills discounted are accounted for as financial transactions in accordance with Treatment for Accounting and Auditing of Application of Accounting Standard for Financial Instruments in Banking Industry (Industry Audit Committee Report No.24), issued by JICPA. The Bank and its consolidated banking subsidiaries have rights to sell or pledge commercial bills discounted and foreign bills of exchanges purchased without restrictions, and their total face amounts were 39,791 million and 30,520 million ($328 million) at March 31, 2009 and 2010, respectively. 6. Assets pledged At March 31, 2009 and 2010, the following assets were pledged as collateral for certain liabilities of the Bank and subsidiaries Securities 365, ,029 $ 3,257 Other assets The collateral was pledged to secure: Deposits 3,020 3,007 $ 32 Call money and bills sold 24,557 Deposits received for bonds lending / borrowing transactions 47,558 88, Borrowed money 54,700 11, In addition, securities not included in the above schedules were pledged as collateral for operating transactions, such as exchange settlements. These securities amounted to 127,281 million and 131,472 million ($1,413 million) at March 31, 2009 and 2010, respectively. Security deposits, included in other assets, amounted to 3,023 million and 2,842 million ($31 million) at March 31, 2009 and 2010, respectively. Bills rediscounted are accounted for as financial transactions in accordance with Treatment for Accounting and Auditing of Application of Accounting Standard for Financial Instruments in Banking Industry (Industry Audit Committee Report 32

14 No.24), issued by JICPA, and the total face amount of commercial bills discounted and foreign exchanges purchased that have been pledged were 76 million and 4 million ($0 million) at March 31, 2009 and 2010, respectively. 7. Commitment line Commitment line contracts on overdrafts and loans are the contracts, under which the Bank lends to customers up to the prescribed limits in response to customers application of loan as long as there is no violation of any condition in the contracts. The unused amount within the limits totaling 1,319,298 million and 1,337,905 million ($14,380 million) relating to these contracts at March 31, 2009 and 2010, respectively. Among them, the amounts of unused commitment of which term of contracts is one year or revocable at any time totaling 1,280,699 million and 1,298,142 million ($13,953 million) as of March 31, 2009 and 2010, respectively. Since many of these commitments expire without being drawn down, the unused amount does not necessarily represent a future cash requirement. Most of these contracts have conditions that the Bank and its consolidated subsidiaries can refuse customers application for loan or decrease the contract limits with proper reasons (e.g., changes in financial situation, deterioration in customers creditworthiness). At the inception of contracts, the Bank and its consolidated subsidiaries obtain real estate, securities, etc. as collateral if considered to be necessary. Subsequently, the Bank and its consolidated subsidiaries perform periodic review of the customers business results based on internal rules, and take necessary measures to reconsider conditions in contracts and require additional collateral and guarantees. 8. Borrowed money Borrowed money included subordinated loans totaling 67,000 million and 67,000 million ($720 million) at March 31, 2009 and 2010, respectively. 9. Bonds Bonds included subordinated bonds totaling 67,000 million and 65,000 million ($699 million) at March 31, 2009 and 2010, respectively. 10. Privately-placed bonds The amount guaranteed by banking subsidiaries to privately-placed bonds (stipulated by Article 2-3 of Financial Instruments and Exchange Law) in Securities was 43,261 million and 45,931 million ($494 million) at March 31, 2009 and 2010, respectively. 11. Net assets Under the Company Law of Japan, the entire amount of the issue price of shares is required to be accounted for as capital, although a company may, by resolution of its board of directors, account for an amount not exceeding one-half of the issue price of the new shares as additional paid-in capital, which is included in capital surplus. The Banking Law of Japan provides that an amount equal to at least 20% of cash dividends and other cash appropriations shall be appropriated and set aside as a legal earnings reserve until the total amount of legal earnings reserve and additional 33

15 Notes to Consolidated Financial Statements (March 31, 2009 and 2010) paid-in capital equals 100 % of common stock. The legal earnings reserve and additional paid-in capital may be used to eliminate or reduce a deficit by resolution of the stockholders meeting or may be capitalized by resolution of the Board of Directors. On condition that the total amount of legal earnings reserve and additional paid-in capital remains being equal to or exceeding 100% of common stock, they are available for distributions or certain other purposes by the resolution of stockholders meeting. Legal earnings reserve is included in retained earnings in the accompanying financial statements. The maximum amount that the Bank can distribute as dividends is calculated based on the unconsolidated financial statements of the Bank in accordance with the Company Law of Japan. In accordance with the customary practice in Japan, the appropriations are not accrued in the financial statements for the period to which they relate, but are recorded in the subsequent accounting period in which the stockholders approval has been obtained. Retained earnings at March 31, 2010 include the amount representing the year-end cash dividend of 1,544 million ($17 million), 2.50 ($0.03) per share, which was approved at the stockholders meeting held on June 29, Cash and cash equivalents The reconciliation of cash and due from banks in the consolidated balance sheets and cash and cash equivalents in the consolidated statements of cash flows at March 31, 2009 and 2010, were as follows: Cash and due from banks 125, ,438 $ 1,628 Foreign currency deposits with banks (2,500) (1,000) (11) Other deposits with banks (438) (439) (5) Cash and cash equivalents 122, ,998 $ 1, Lease Transactions (a) Finance Leases : Tangible fixed assets in lease assets mainly consisted of equipment. Intangible fixed assets in lease assets are software. Depreciation method of lease assets is shown in 3. Significant accounting policies. Finance leases other than those that transfer the ownership of leased property to the lessees which commenced in fiscal years beginning prior to April 1, 2008 are accounted for in a similar way to operating leases. A summary of assumed amounts of acquisition cost, accumulated depreciation and net book value of such leases at March 31, 2009 and 2010 were as follows: March 31, 2009 Acquisition cost Accumulated depreciation Net book value Tangible fixed assets Intangible fixed assets Others Total

16 March 31, 2010 Acquisition cost Accumulated depreciation Net book value Tangible fixed assets Intangible fixed assets Total March 31, 2010 Acquisition cost U.S. Dollars Accumulated depreciation Net book value Tangible fixed assets $ 0 $ 0 $ 0 Intangible fixed assets Total $ 0 $ 0 $ 0 Future minimum lease payments excluding interests at March 31, 2009 and 2010 were as follows: Due within one year 10 6 $ 0 Due after one year Total $ 0 Total lease expenses for the years ended March 31, 2009 and 2010 were 102 and 11 million ($0 million), respectively. Assumed depreciation expenses for the years ended March 31, 2009 and 2010 amounted to 94 million and 10 million ($0 million), respectively. Assumed depreciation is calculated using the straight-line method over the lease term of the respective assets. The difference between the minimum lease payments and the acquisition costs of the lease assets represents interest expenses. The allocation of such interest expenses over the lease term is computed using the effective interest method. Interest expenses for the years ended March 31, 2009 and 2010 amounted to 2 million and 0 million ($0 million), respectively. (b) Operating leases : Operating leases at March 31, 2009 and 2010 consisted of the following: Future minimum lease payments on operating leases which were not cancelable at March 31, 2009 and 2010 were as follows: Due within one year $ Due after one year Total $ 35

17 Notes to Consolidated Financial Statements (March 31, 2009 and 2010) 14. Derivative transactions The Bank actively enters into derivative transactions to mitigate interest rate risk and liquidity risk of foreign currencies in the normal course of Asset Liability Management ( ALM, comprehensive management of assets and liabilities). The Bank also deals with forward exchange contracts, currency swaps and interest rate swaps to meet customers needs in the inter-bank markets. The Bank does not have large outstanding positions related to customers deals. The Bank engages in derivatives such as forward currency exchange contracts and interest rate futures for its proprietary trading activity, considering risk management. The Bank does not trade high-risk products such as leveraged transactions. Derivative transactions are accompanied by losses arising from credit risk and losses resulting from market risk. Credit risk represents the potential loss arising from the transaction partner s breaching the contract. Market risk represents the potential loss arising from fluctuations in interest and exchange rate. To cope with increasing risks, the Bank is strengthening its credit reviewing system, monitoring position limits, and establishing effective internal control organization. Derivative transactions to which hedge accounting is not applied. The notional principal amount, fair value and unrealized gains or losses of financial derivatives at March 31, 2009 and 2010 were as follows: Interest related : Year ended March 31, 2009 Type Contracted amount Over one year Fair value Unrealized gains (losses) Items not traded Interest rate swap (*1): on exchanges Receive fixed, pay variable 187, ,616 3,524 3,524 Receive variable, pay fixed 189, ,554 (2,600) (2,600) Receive variable, pay variable 15,986 14, Other contracts (*1): Sell 103,296 1,050 (325) 366 Buy 103,268 1, Total 1,123 1,773 Interest related : Year ended March 31, 2010 Type Contracted amount Over one year Fair value Unrealized gains (losses) Items not traded Interest rate swap (*1): on exchanges Receive fixed, pay variable 164, ,704 3,992 3,992 Receive variable, pay fixed 164, ,682 (3,137) (3,137) Receive variable, pay variable 12,733 12, Other contracts (*1): Sell 129, (387) 366 Buy 129, Total 996 1,718 36

18 Interest related : Year ended March 31, 2010 Type Contracted amount Over one year Fair value Unrealized gains (losses) Items not traded Interest rate swap (*1): on exchanges Receive fixed, pay variable $ 1,768 $ 1,211 $ 43 $ 43 Receive variable, pay fixed 1,766 1,211 (34) (34) Receive variable, pay variable Other contracts (*1): Sell 1,390 8 (4) 4 Buy 1, Total $ 11 $ 19 (*1): The unrealized gains or losses on interest rate swap and other contracts are recognized in the consolidated statements of income. Currency related : Year ended March 31, 2009 Type Contracted amount Over one year Fair value Unrealized gains (losses) Items not traded Currency swap (*2): 2,703,652 2,419,263 7,891 7,891 on exchanges Forward foreign exchange contracts (*2): Sell 21, (1,431) (1,431) Buy 6, Currency option (*2): Sell 2,741 (137) (67) Buy 2, Total 6,621 6,628 Currency related : Year ended March 31, 2010 Type Contracted amount Over one year Fair value Unrealized gains (losses) Items not traded Currency swap (*2): 2,544,584 2,237, ,772 on exchanges Forward foreign exchange contracts (*2): Sell 28, (429) (429) Buy 27, Currency option (*2): Sell 18,455 1,395 (534) 93 Buy 18,455 1, Total 1,022 8,330 Currency related : Year ended March 31, 2010 Type Contracted amount Over one year Fair value Unrealized gains (losses) Items not traded Currency swap (*2): $ 27,349 $ 24,050 $ 10 $ 84 on exchanges Forward foreign exchange contracts (*2): Sell (5) (5) Buy Currency option (*2): Sell (6) 1 Buy Total $ 10 $ 89 (*2): The unrealized gains or losses on currency swap, forward foreign exchange contracts and currency option are recognized in the consolidated statements of income. 37