Annual Report 2004 Year ended March 31, 2004
NANTO BANK PROFILE
The Nanto Bank, Ltd. was established in 1934, with its head office in Nara City, Nara Prefecture, the ancient and first capital of Japan. Since its foundation, the Bank has built a solid business base as a regional bank offering services that benefit the regional community, and expanded its operations by pursuing sound management. With the main client base originating from Nara Prefecture, the Bank has 130 domestic offices, branches and sub-branches. Those extend its services into other prefectures such as Osaka, Kyoto, Wakayama, Mie, and the Tokyo Metropolitan Area. As of March 31, 2004, the Bank’s capital stood at ¥29.2 billion, with consolidated total assets amounting to ¥4,187.1 billion.
CONTENTS
1 Financial Highlights 2 Message from the Management 4 Operating Review 12 Board of Directors and Corporate Auditors 13 Consolidated Financial Review Kyoto 15 Consolidated Balance Sheets 16 Consolidated Statements of Income Osaka 17 Consolidated Statements of Cash Flows 18 Notes to Consolidated Financial Statements 30 Independent Auditors’ Report 31 Capital Management Tokyo 32 Organization, Group Network Mie Prefecture 33 Affiliates and Subsidiaries, Bank Data Nara (Nara Prefecture) Wakayama Prefecture PROFILEFINANCIAL HIGHLIGHTS (CONSOLIDATED FIVE-YEAR SUMMARY)
The Nanto Bank, Ltd. and Consolidated Subsidiaries. Years ended March 31
Thousands of Millions of Yen U.S. Dollars 2004 2003 2002 2001 2000 2004 For the year: Total income ...... ¥ 97,254 ¥ 112,769 ¥ 96,293 ¥ 110,930 ¥ 117,616 $ 920,181 Total expenses ...... 82,815 98,854 142,937 106,145 116,060 783,565 Income (loss) before income taxes ...... 14,439 13,915 (46,644) 4,785 1,556 136,616 Net income (loss) ...... 4,652 5,906 (27,709) 2,235 1,090 44,015 At year-end: Total assets ...... 4,187,141 4,141,238 4,093,107 4,037,667 3,872,822 39,617,191 Loans and bills discounted ...... 2,434,690 2,390,489 2,344,783 2,402,218 2,466,772 23,036,143 Securities ...... 1,389,656 1,349,011 1,349,295 1,311,914 1,120,835 13,148,415 Deposits and negotiable certificates of deposit ...... 3,770,888 3,770,886 3,667,841 3,627,709 3,516,847 35,678,758 Total liabilities ...... 3,996,081 3,968,507 3,925,710 3,839,754 3,691,391 37,809,452 Minority interest ...... 4,196 4,322 4,255 3,556 2,690 39,701 Total stockholders’ equity ...... 186,863 168,407 163,141 194,356 178,741 1,768,029 Common stock ...... 29,249 29,249 27,586 26,962 26,925 276,743
Yen U.S. Dollars Per share data: Net income (loss) ...... ¥ 16.65 ¥ 21.67 ¥(102.76) ¥ 8.30 ¥ 4.05 $0.15 Stockholders’ equity ...... 669.12 602.89 597.99 721.11 663.67 6.33 Capital adequacy ratio (%) ...... 9.51 9.41 9.04 10.16 9.53 9.51
Note: U.S.dollar amounts are included solely for the convenience of readers and are calculated at the exchange rate of ¥105.69 to US$1.00, the rate prevailing on March 31, 2004.
Net Income Total Assets Total Stockholders’ Equity (Billions of yen) (Billions of yen) (Billions of yen) 1.0 2.2 -27.7 5.9 4.6 3,872 4,037 4,093 4,141 4,187 178.7 194.3 163.1 168.4 186.8
20002001 20022003 2004 2000 2001 2002 2003 2004 2000 2001 2002 2003 2004
THE NANTO BANK, LTD. ANNUAL REPORT 2004 1 MESSAGE FROM THE MANAGEMENT
Left: Michitaka Sakamoto, Chairman Right: Hiromune Nishiguchi, President
THE BUSINESS ENVIRONMENT AND THE BANK’S our relationship with the people of the region we serve. Management CURRENT POSITION and employees are working as one, redoubling our efforts to nurture Following a prolonged period of economic recession and price and and support local businesses in order to fulfill the Bank’s role of con- asset deflation, the Japanese economy is at long last showing signs of tributing to the activation of the regional economy. a turnaround and has entered a gradual but steady recovery phase. Translating this way of thinking into action, the Bank is putting in Nevertheless, despite the upturn in business confidence and corpo- place a comprehensive structure for providing support that appropri- rate performance in some sectors of the economy, harsh conditions ately meets every business banking need. The Bank believes that persist in regional economies. smoothly and efficiently providing funds is an important mission for a At Nanto Bank, we believe that in this adverse operating environ- regional bank. Accordingly, we are actively supporting business recov- ment we must further solidify our operating structure in the core ery by putting in place a structure for more rapidly supplying the funds business territory of Nara Prefecture and construct a business frame- our customers need and enhancing the Bank’s financial soundness. work that will remain unshakable in any economic environment. In April 2003, we launched “The Bank of Choice” Medium-Term PROGRESS WITH THE MEDIUM-TERM Management Plan and have worked to build a more solid business MANAGEMENT PLAN framework and to maintain and deepen the trust of customers in the The theme of the Bank’s medium-term management plan is “The region we serve. Bank of Choice.” The theme expresses the Bank’s readiness in an In March 2003, the Financial Services Agency announced the adverse operating environment to build a rock-solid business struc- Action Program Concerning Enhancement of Relationship Banking ture and make further strides forward as a bank that enjoys unshak- Functions. Under this program, the two-year period until March able trust and an excellent reputation among the people in the region 2005 has been designated an “intensive improvement period” during it serves, its customers and shareholders. The key objectives are to be which local financial institutions are required to work to revitalize a bank whose financial position is highly transparent and that rapidly local businesses and activate regional economies while at the same responds to customer needs. To achieve these twin goals we will time solving the problem of non-performing loans. The Bank’s man- improve asset quality and engage in proactive information disclosure agement policy is to render service to promote regional development, while at the same time working to provide high-quality services and and in the conduct of business we have long placed importance on put in place a comprehensive business support structure.
2 THE NANTO BANK, LTD. ANNUAL REPORT 2004 The Bank has set forth improvement of profitability and finan- SOCIAL CONTRIBUTION ACTIVITIES IN THE REGION cial soundness and the enhancement of customer satisfaction as the As a bank that grows in tandem with and is supported by the local basic policies to be pursued to achieve these goals. We will steadily community, we not only strive to contribute to regional economic implement a focused strategy grounded in these policies and strive development through the provision of financial services, but also con- to become “the bank of choice” with a more powerful presence in sider it our social mission to assist in the creation of cheerful, highly the region we serve. Specifically, in fiscal 2004, we have set numeri- livable local communities. The Bank cooperates in public welfare activ- cal targets of net business profit of ¥21.0 billion or higher and a ities, promotes the Small Kindness movement and supports public capital adequacy ratio of 9.30% or higher. In fiscal 2004 (the year welfare and cultural activities such as scholarship and grant assistance. ending March 31, 2005), the final year of the medium-term man- The head office and all branches are active in the environmental pro- agement plan, management and employees will work in unison to tection movement, engaging in initiatives based on the ISO14001 achieve these targets. environmental management system to help preserve the abundant nat- ural wonders and priceless historical assets of the Nara area and partici- REBUILDING THE BUSINESS BASE pating in the Kansai Eco-Office Declaration Movement. Ever since its establishment, the Bank has made Nara Prefecture and neighboring areas its primary business base and has grown and COMMEMORATION OF THE SEVENTIETH ANNIVERSARY developed by serving this region. Over the years we have built a OF THE BANK’S FOUNDING solid business base in the territory: our share of deposits and loans In June 2004, the Bank celebrated the 70th anniversary of its found- within Nara Prefecture exceeds 50%, and nearly all local govern- ing. To commemorate the anniversary, thank the people of the com- ments in the prefecture have designated Nanto Bank as an author- munities we serve for the warm support over the years and position ized financial institution. fiscal 2004 as the year the Nanto Bank makes a new start toward a At the same time, since April 2002 the Bank has aggressively bright future hand in hand with the residents of the Nara region, the invested management resources into establishing corporate banking Bank established the Tourism Planning Office to activate tourism in divisions in Osaka and Kyoto—areas with close ties to Nara the Nara region. And, as a special tribute to the land, the Bank is Prefecture—and upgrading those divisions into branches. In June promoting tree-planting activities as the 70th anniversary memorial 2004 we established a new corporate banking division in Sakai project. Through these commemorative projects, the management City, Osaka and are working to establish relationships with busi- and employees desire to increase awareness of the Bank as a financial nesses in Sakai. institution with deep roots in the region and to provide even higher In Nara Prefecture, the Bank is optimizing the branch network quality services in the coming years, thus ensuring that the Nanto by building new branch buildings, relocating branches and consol- Bank remains the bank of choice in the region we serve. idating branches with the aim of strengthening selling power, We request your continued support and patronage in the especially at core branches, and increasing the efficiency of branch coming years. operation.
CONSTRUCTION OF A NEW BUSINESS OFFICE SYSTEM The Bank is putting in place an operating framework designed to Michitaka Sakamoto provide customer satisfaction. For instance, we completed introduc- Chairman tion at all branches of a new business office system in September 2003. We recently introduced “The Inheritance Consultation System,” a Web-based conference system that is the first of its kind in Japan. We aim to further expand and enhance our consulting Hiromune Nishiguchi services in the coming years. President
THE NANTO BANK, LTD. ANNUAL REPORT 2004 3 OPERATING REVIEW
Enhancing the Business Network and The Bank has expanded its branch network to Kyoto and Banking Functions Osaka, including the Osaka- Kita branch. EXPANDING AND ENHANCING THE BRANCH AND ATM NETWORKS To increase convenience for customers in the region we serve, the Bank is developing an effective branch network, increasing the num- ber of cash points and enhancing ATM functions. During fiscal 2004, the Bank actively revamped the branch net- focusing on major terminal stations in Osaka, Nara and Kyoto. work, opening new branches and relocating existing branches in The bank has a business alliance with E-net and has implement- newly constructed buildings. We opened the new Daito Branch in ed mutual opening of CD and ATM networks with the postal sav- Daito City, Osaka in December 2003 and the Osaka-Kita Branch in ings system. Customers can access the Bank’s ATM services at more Osaka City in January 2004. With regard to moves to new build- than 5,100 convenience stores and at about 25,000 post office ings and branch relocation, in April 2004 we opened the Ikoma ATMs nationwide, in addition to the Bank’s own ATMs installed at Branch in Ikoma City, Nara and the Yao Branch in Yao City, 168 sites other than our branches. In the area of cashing services, we Osaka, and in May 2004 we opened the Mamigaoka Branch in are actively engaged in enhancing ATM functions: customers can Kashiba City, Nara. As a result, as of June 30, 2004, the business now use credit cards issued by a total of 20 companies at our ATMs. office network in Japan consisted of 130 offices—95 being in Nara Prefecture and 35 in other areas. EXPANDING AND ENHANCING DIRECT BANKING Further increasing convenience, the Bank is sequentially CHANNELS installing ATMs at major stations on the Kinki Nippon Railway The Bank also offers Internet banking and cell-phone banking and is (Kintetsu) line, which links population centers in the Kinki Region. working to expand and enhance the services and functions available During fiscal 2004, we installed machines at 18 stations on the line, to customers through these banking channels. In May 2004, we
Corporate Banking Divisions Kyoto Prefecture: 14 branches Kyoto Corporate Banking Division In parallel with building new branches, the Bank relocated branches to strengthen branch operations.
Mie Prefecture: Osaka Corporate Banking Division 3 branches Sakai Corporate Banking Division Osaka Prefecture: 10 branches
Corporate Banking Supervisory Division
Nara Prefecture: Wakayama Prefecture: 95 branches 7 branches
4 THE NANTO BANK, LTD. ANNUAL REPORT 2004 introduced the Inheritance Consulting System, Japan’s first Web- Enhancing Support for the Regional based conference system. With this system, customers use personal computers installed at our business offices to consult directly with Economy specialists at the Bank’s Inheritance Center over the Internet. We have launched the new Web Business Banking dedicated service for A COMPREHENSIVE SUPPORT FRAMEWORK FOR LOCAL corporate customers. Businesses that use this service can conduct bal- BUSINESSES ance inquiries, move funds and access functions such as comprehen- In today’s changing business environment, the wide-ranging bank- sive transfer and salary payment transfer. ing needs of local businesses extend beyond fund procurement. To At the same time, we are improving our service offering in the reliably respond to such diverse business needs, the Bank put in area of mobile banking for individual customers. Customers can con- place a comprehensive support structure under which specialized duct account balance inquiries and transaction inquiries and remit or departments collaborate to provide high value-added services for transfer funds using a variety of handsets, including NTT corporate customers. DoCoMo’s iMode handsets, Vodafone’s Vodafone Live! handsets At the corporate banking divisions, knowledgeable specialists and AU’s EZweb handsets. highly experienced in corporate banking proactively meet customers’ diverse banking needs, including loan accommodations and the issuance of corporate bonds. In June 2004, the Bank launched full- scale corporate banking operations in Sakai City when it established the Sakai Corporate Banking Division to complement other divi- sions strategically located in the Osaka and Kyoto areas. The Corporate Banking Supervisory Division, staffed by solutions sales The Bank cooperates with specialists who have sophisticated financial expertise, will reinforce local companies using its comprehensive capabilities, the Bank’s solutions selling approach. including financial services With regard to venture business development and support activi- and consulting. ties to nurture the businesses that will lead the regional economy in
To provide convenient services to customers, the Bank increased the number of ATM corners to 168 in its service area.
The Bank is installing ATMs in the major train stations of the Kinki Nippon Railway (Kintetsu) line.
THE NANTO BANK, LTD. ANNUAL REPORT 2004 5 the coming years, the Bank established the Venture Business Support The Bank collaborates with the Development Bank of Japan, the Division to support venture businesses that demonstrate originality Japan Finance Corporation for Small Business and The Shoko and high growth potential. This division engages in loans and invest- Chukin Bank and has put in place a framework for meeting the ment, management consulting and business matching services in col- diverse needs of local companies. laboration with Mitsubishi Research Institute, Inc., ORIX In addition to the specialized divisions, in June 2004 the Bank Corporation, Japan M&A Center, Inc. and other organizations. established the Higashi-Osaka Business Center, the Bank’s first call Since the division was established in April 2001, it has provided sup- center for corporate customers. The Center specializes in loans for port for 236 companies, provided loans in the amount of ¥295 mil- small businesses, actively providing small business customers with lion to 17 companies and invested ¥269 million in 12 companies. consultation on cash management and business management The successful completion of the Bank’s first M&A project in through activities centered on telephone sales. September 2003 is another example of the division’s active support for venture businesses. NANTO VENTURE BUSINESS FAIR To support companies aiming to establish business operations The Bank held the second Nanto Venture Business Fair in overseas, the Bank established the Asian Business Support Team. January 2004, following the highly successful first fair in January This team provides information on circumstances abroad and con- 2003. The fair provides a venue for business matching, for instance, ducts seminars that provide support and advice for business expan- opportunities for the Bank’s business clients to acquire new cus- sion into overseas markets. To date, the team has provided support tomers, publicize new technologies and products or develop new on 339 occasions (174 cases of information provision, 71 cases of participation in business meetings and 94 cases of supporting foreign exchange transactions). The Corporate Finance Support Team cooperates with manage- The Bank held the second ment of client businesses, providing advice and support for the for- Nanto Venture Business Fair mulation and execution of business revitalization plans. in January 2004, following Other business support activities include management consulting the highly successful first fair sessions for individual customers and lectures for company managers. in January 2003.
Comprehensive Business Support Framework
The Bank is also aggressively Branches engaged in the provision of new loan products and financial services for local Corporate Consulting Venture Business SMEs. Banking Division Support Team Asset Administrational Management Efficiency
Local Enterprises Financing Financial Enforcement
Asian Business Property Overseas Corporate Finance Support Team Administration Trade Support Division
Business 6 THE NANTO BANK, LTD. ANNUAL REPORT 2004 Center technical development partners. The second fair attracted 113 We are also pouring efforts into the development of new products, exhibitors, including public institutions, and about 5,800 visitors. for instance “Cash Quick,” a new type of credit-card loan that enables customers to apply for loans without visiting a bank office. LOANS TO SMALL BUSINESSES As a result of aggressive promotion of housing loans and other per- As a result of this active support for local companies, the Bank’s sonal loans, the balance of personal loans increased by ¥36.6 billion loans to small businesses reached ¥1,671.6 billion as of March 31, over the previous term to ¥613.5 billion at the end of March 2004. 2004. Small business loans accounted for 68.25% of total loans. To satisfy the funding needs of this important class of borrowers, the INCREASING PERSONAL ASSETS ON DEPOSIT Bank actively participates in loans sponsored by local public institu- In today’s prolonged period of low interest rates, customer demand tions; the balance of local guarantee association loans as of March 31, for asset management is increasing year by year. In response to this 2004 was ¥248.1 billion. development, the Bank has expanded and enhanced its offering of investment trust, foreign currency deposits and government bonds and is working to strengthen its asset management consultation Responding to Personal Customers' Needs framework through such means as developing financial planners and other staff who have specialized knowledge. PROMOTING PERSONAL LOANS The Bank has offered private pension insurance since sales of In addition to offering a wide variety of loan products, the Bank is life insurance at bank counters was deregulated in October 2002. putting in place a framework for meticulously responding to the This product enjoys an excellent reputation as a means of prepar- diverse financing requirements of individual customers. One aspect ing for life after retirement and as an advantageous asset manage- of this initiative involves the expansion and enhancement of cus- ment product. tomer consultation centers: we have established “The Kurashi no As a result of these activities, personal assets on deposit increased Sodan Kan” (Family Financial Consulting Corners) and Housing by ¥59.3 billion over the previous term to ¥147.2. billion at the end Loan Center to provide consultation even on weekends and have of March 2004. The cumulative amount of private pension insur- opened dedicated counters where customers can obtain advice on ance sold at the end of the term reached ¥34.6 billion, double the matters such as home mortgages, auto loans and education loans. level of the previous year.
Consumer Loans Outstanding Individual Custody (Billions of yen) Outstanding (Billions of yen) 531.8 576.8 613.5 49.8 87.8 147.2
The Bank has established the “Kurashi no Sodan Kan” where customers can obtain various advice about home mortgages.
2002 2003 2004 2002 2003 2004
THE NANTO BANK, LTD. ANNUAL REPORT 2004 7 Strengthening a Sound Management The Bank is also working to enhance the credit screening support system. To this end, we efficiently employ a loan portfolio manage- Structure ment system that features analyses of borrowers by industrial category and credit-rating group, statistical methods to estimate credit risk and RISK MANAGEMENT SYSTEMS real estate security assessment. In recent years, the risks confronting banks have become increasingly varied and complicated. In these circumstances, the Bank recognizes Market Risk Management that accurately ascertaining, analyzing, managing and administering The Bank has put in place a system for the effective management of risk is its most important management priority. To that end, it is market risk by clearly dividing market operations into the front office working to develop and continually enhance its risk management and back office and by establishing the ALM & Risk Management capabilities. Division to serve as a middle office to check on market operations. We The Bank has constructed a system of checks and balances for each utilize a number of methods to achieve a more accurate grasp of quan- risk category, consisting of the Board of Directors, various committees, titative risk amounts, including the Basis Point Value and Value at risk management and risk administration units, internal auditing units Risk methods. The ALM Committee sets risk limits for each market and external auditing. once every six months, and Bank staff endeavor to secure sufficient earnings while remaining within these risk limits. At monthly meet- Credit Risk Management ings, the ALM Committee examines the balance of risk and earnings The Nanto Bank conducts credit risk management through a credit for the Bank’s operations in each market and considers matters such as screening system that is independent of marketing operations. appropriate methods of controlling risk. Through strict self-assessment of assets and the application of an in- house customer credit rating system, the Bank is able to ascertain the Liquidity Risk Management credit risk of each borrower. By introducing pricing of loans according At the Nanto Bank, the ALM & Risk Management Division takes the to the borrower’s credit risk, we have implemented measures to lead in overall monitoring and supervision in connection with cash strengthen risk management and improve profitability. flow risk, including drawing up and revising fund supply plans on a
Risk Management Structure Board of Corporate Auditors Board of Directors
Emergency Council Managing Directors’ Committee
General Managers’ Committee
Committees ALM Committee Operating Systems Head Office Deputy General Managers’ Committee Compliance Commitee Committee Operational Risk Risk Categories Credit Risk Market Risk Liquidity Risk Administrative Systems Risk Reputational Legal Risk Compliance Risk Risk Supervising Division General Planning Division Compliance Administration Division ALM & Risk Management Division Operating Operation General Planning Main Division Asset Assessment Administration Systems Division Division in Charge Division Administration Division/ Securities & International Division Operating General Business Supporting Credit Analysis Division/ Securities & Administration Division Division Credit Supervision Division International Division Division
Operation Head Office Divisions/Branches/Consolidated Subsidiaries
Auditing Inspection Division
External Auditing
8 THE NANTO BANK, LTD. ANNUAL REPORT 2004 monthly basis. A three-level risk management system (for normal management priority and engages in the following compliance meas- times, periods of concern and crises) has been put in place according to ures to earn the continuing trust of customers, shareholders and the the tightness or slackness of money supply. The Bank’s liquidity risk people in the region we serve. management system is designed to facilitate flexible response to changes in the risk situation following the imposition of a ¥10 million Maintenance of a Compliance System insurance cap on long-term bank deposits. Important matters related to the maintenance and reinforcement of the compliance system are discussed and decided by the Bank’s Operational Risk Management Compliance Committee, which is chaired by the president. Such To retain the trust of our customers, the Bank periodically conducts matters include establishment of basic policy on compliance and the training sessions and provides on-site guidance at branch offices to compliance program. The Bank has established the Compliance ensure that clerical operations are carried out accurately and in strict Administration Division as the department that oversees compliance. accordance with established procedures. Moreover, we are actively The Bank also designates one staff member in each division, office, moving forward with automation and systematization of clerical work or branch as a compliance officer to ensure thorough compliance. to raise the level of accuracy and increase efficiency. The Inspection Division carries out strict inspections of clerical work and provides guidance to clerical staff in the avoidance of error.
Systems Risk Management The Bank makes every effort to In addition to implementing redundancy of online systems equip- maintain a thorough ment and the communications network, the Bank has drawn up con- compliance structure tingency plans to deal with major natural disasters, stores data off-site comprising management and and has constructed a Backup Storage Center. This system ensures each employee. that the Bank can quickly resume operations even if a serious mal- function of the computer system occurs or if the system goes offline. Compliance Training To minimize the possibility of unauthorized access to the computer The Bank conducts training for compliance officers and incorporates system or information leaks, the Bank has implemented thorough compliance matters into programs for collective training and training safety precautions involving strict rules governing operation and con- at individual business units. All business units within the Bank periodi- trol. The Bank periodically undergoes audits conducted by outside cally conduct compliance study sessions to increase awareness of com- experts and is engaged in enhancing the overall system for managing pliance among management and employees. systems risk. Compliance Handbook Reputational Risk Management The Compliance Handbook is a detailed guide to compliance that Recognizing that damage to a bank’s reputation would have a serious explains the Code of Conduct, which sets down basic guidelines and impact on its business performance, the management of the Nanto rules for conduct, and laws that pertain to banking business. The Bank strives to prevent such damage by increasing management trans- Bank distributes the Compliance Handbooks to all managers and parency through the appropriate disclosure of information. employees.
COMPLIANCE MEASURES Legal-risk Management Compliance refers to the rigorous observance not only of laws and gov- Legal risk is the risk of loss owing to violation of law or insufficient ernment ordinances, but also of corporate ethics, social norms, indus- knowledge of legal matters in the conduct of business. The Bank try association agreements and internal regulations. Compliance is avoids and mitigates legal risk through legal checks conducted by legal essential for a bank to fulfill its social responsibility and public mission. advisors and other external specialists and by the Compliance The Nanto Bank regards thorough compliance as an important Administration Division.
THE NANTO BANK, LTD. ANNUAL REPORT 2004 9 Partnership with the Community ronmental management system, all branches engage in activities to protect the environment. As a good citizen of the communities we serve, Nanto Bank will continue to strive to contribute to the devel- PUBLIC WELFARE, CULTURAL AND ENVIRONMENTAL opment of the regional economy and the creation of highly livable INITIATIVES local communities. In our role as a bank that grows in tandem with the local community, we not only strive to promote regional development through ordinary ENVIRONMENTAL INITIATIVES banking activities, but also actively engage in public welfare and cul- In recent years, changing from a mass consumption, throwaway socie- tural activities and environmental protection activities. Local public ty to a recycling society has become an increasingly important public welfare and cultural support activities include the donation of social priority in Japan. Nanto Bank recognizes that grappling with environ- services vehicles to the Nara Prefecture Council of Social Welfare, mental problems is an important management task. In October 2001 promotion of “The Small Kindness” movement and scholarship grant the Bank announced its Environmental Policy and Code of Conduct, assistance. In addition to environmental protection initiatives by the setting forth the basic environmental policies that guide our efforts to head office and Administrative Center based on the ISO14001 envi- minimize the environmental impact of our business activities.
ENVIRONMENTAL POLICY
Nanto Bank has its headquarters in historic Nara, ancient capital of Japan and a spiritual hometown to the Japanese people. To preserve for future generations the splendid natural features of Nara that have been protected from time immemorial, the Bank strives to be cognizant of the impact its business activities have on the natural environment, assume a position of regional leadership, and work to protect the environment and promote the cre- ation of a recycling society. 1. The Bank will construct environmental management systems for the purpose of promoting due consideration of preservation of the natural environment and features of the region and promoting action based on the recognition that reducing environmental impact is the proper basis for business activities. 2. The Bank observes all laws, regulations and other requirements related to the environment and engages in envi- ronmental protection activities. 3. To implement these policies, the Bank will establish specific environmental objectives and targets and review them periodically. 4. The bank will continuously improve its environmental management systems and strive to prevent pollution of the environment. 5. The bank will thoroughly publicize its environmental policies to all officers and staff and promote behavior grounded in consideration of the regional environment. We hereby proclaim this environmental policy within the Bank and to the community at large. October 1, 2001 Hiromune Nishiguchi President The Nanto Bank, Ltd.
CODE OF CONDUCT Nanto Bank will engage in environmental activities based on the following policies. 1. We will support customers who engage in environmental protection through the development and provision of environmentally sound financial products and services. 2. We will promote resource and energy conservation and waste reduction by considering environmental impact in the day-to-day conduct of business.
10 THE NANTO BANK, LTD. ANNUAL REPORT 2004 ISO 14001 ENVIRONMENTAL MANAGEMENT SYSTEMS NANTO SCHOLARSHIP FOUNDATION ACTIVITIES — NANTO BANK RECEIVES THE NARA CITY To render service in developing the region’s human resources, the GLOBAL ENVIRONMENT AWARD Bank provides academic scholarship support to high school and uni- On February 22, 2002 the Bank obtained ISO 14001 environmental versity students of excellent character and scholastic ability who reside management systems certification for the head office and in Nara Prefecture. As of April 2004 the Bank was providing scholar- Administrative Center. The 21 departments at these sites engage in ships to 52 students, and the number of graduated former scholarship environmental activities that conform to ISO standards. This enthusi- recipients was 1,133. astic commitment to environmental initiatives resulted in the Bank receiving a Global Environment Award in accordance with Nara NANTO MANYO CIRCLE City’s program for recognizing organizations that have exemplary To further exchanges with the people in the region we serve, the trash reduction and recycling practices. With the objective of protect- Bank sponsors various group activities for the purpose of deepening ing the local environment through afforestation, in April 2004 the knowledge of local cul- Bank engaged in tree-planting in Asukamura as a project to com- ture and history. memorate the 70th anniversary of the Bank’s founding.
The Nanto Manyo Circle holds the “Manyo Walk,” an event to seek out and enjoy As a part of its historical places in Nara environmental activities, Prefecture. the Bank held the “Nanto Environment ISO Seminar” for customers in THE SMALL KINDNESS SOCIETY the region. “The Nanto Bank Small Kindness Society” engages in a variety of public welfare initiatives such as cleaning activities and blood dona- PARTICIPATION IN THE KANSAI ECO-OFFICE tion activities. Each year since 1987 the society has led “The Book DECLARATION MOVEMENT from the Heart Movement” by which bank employees solicit dona- Beginning in April 2003, 163 business units of Nanto Bank Group tions of books to be given to the Nara Juvenile Prison. About 37,000 organizations — including all branch offices, subsidiaries, and affiliates books have been — began to engage in “close to home” environmental protection activ- donated to date. Donation of ities. The Bank has issued to every employee in these units the books to the Environment Check! Card, and undertaken activities such as energy Nara Juvenile conservation, reduced use of paper, and trash separation. Building on Prison. this commitment, these business units participate in “The Kansai Eco- Office Declaration Movement” sponsored by the Kansai Council: COOPERATION IN PUBLIC WELFARE ACTIVITIES extinguishing unnecessary lighting, practicing green purchasing, and Since 1994, the 60th anniversary of the Bank’s founding, each year promoting the movement to leave work early to conserve energy. we have donated social services vehicles to the Nara Prefecture Council of Social Welfare.
The Bank promotes various energy- conservation activities as a participant in the Kansai The Bank has donated Eco-Office Declaration vehicles to social-service groups movement. every year since 1994.
THE NANTO BANK, LTD. ANNUAL REPORT 2004 11 BOARD OF DIRECTORS AND CORPORATE AUDITORS
As of July 1, 2004
Michitaka Sakamoto Hiromune Nishiguchi Takahiko Sakamoto Chairman President Deputy President
Yasuo Ueno Tadashi Kasei Yasuo Horiuchi Senior Managing Director Managing Director Managing Director
Chairman Directors and General Managers Standing Corporate Auditor Michitaka Sakamoto Tadatsugu Yorita Takashi Nakanishi (Inspection Division) President Corporate Auditors Hiromune Nishiguchi Yoshihiro Takatsuka Yoshifumi Nakai (Head Office) Kazuo Taniguchi Deputy President Takaji Okumura Syuzo Ogura Takahiko Sakamoto (Osaka Branch) Senior Managing Director Munehisa Kiguchi Yasuo Ueno (Public Institutions Division) Managing Directors Toshio Onishi Tadashi Kasei (General Affairs Division) Yasuo Horiuchi Etsuji Kusuda (Credit Analysis Division) Yasuo Shimakawa (Tokyo Branch) Akira Uchida (Operating Systems Division) Tadashi Issaki (Personnel Division)
12 THE NANTO BANK, LTD. ANNUAL REPORT 2004 CONSOLIDATED FINANCIAL REVIEW
Performance under the Review PROFIT AND LOSS Reflecting the continuing low-interest environment, which brought a DEPOSITS AND LOANS drop-off in interest income from loans, total income decreased by The performance of the Nanto Bank Group for the consolidated fis- ¥15.5 billion, or 13.7%, to ¥97.2 billion, compared to the previous cal year under review is as described below. year. This result reflects a decrease in interest on loans, interest and Despite efforts to increase deposits by enhancing various financial dividends on securities, and other income, which included a transfer products and services that match the needs of customers, overall from loan loss provisions in the previous year. Fees and commissions deposits including negotiable certificates of deposit remained level increased slightly to ¥16.7 billion. with the previous year. Growth in individual deposits was slightly In the area of expenses, despite the write off of loans and the exceeded, but there was a decline in public institutional deposits. occurrence of valuation losses on securities, total expenses decreased Together, these brought total deposits to ¥3,770.8 billion, a slight ¥16.0 billion, or 16.2%, to ¥82.8 billion, owing to a decrease in increase from the previous year’s results. Ordinary deposits increased interest on deposits. As a contributing factor, there was a decrease of ¥73.9 billion to ¥1,479.8 billion, while time deposits decreased ¥60.2 ¥5.2 billion in losses on sales and redemption of bonds. billion to ¥2,013.3 billion and current deposits and other deposits As a result, income before income taxes increased ¥0.5 billion, or slightly decreased from the previous year. Negotiable certificates of 3.7%, compared to the previous year to ¥14.4 billion. But, due to an deposit increased ¥5.9 billion to ¥34.2 billion. increase in deferred income taxes, net income decreased ¥1.2 billion In the loan sector, the Bank responded to the funding needs of to ¥4.6 billion. local customers, including individuals, small and medium-sized com- panies and local governments. As a result, overall loans outstanding at CASH FLOWS fiscal year-end increased ¥44.2 billion, or 1.8%, to ¥2,434.6 billion, In net cash flows from operating activities, there were increases in mainly due to increases in loans to individual customers, reflecting non-deposit products such as investment trust and pension insurance. steady demand for housing loans, and to corporate customers, mainly Due to the above, growth of deposits slowed down, compared to the in the small and medium-size category. previous fiscal year. As a result, for the year under review, net cash provided by operating activities decreased ¥20.2 billion, compared to SECURITIES the previous year, to ¥38.6 billion. Securities increased ¥40.6 billion, or 3.0%, during the year under Net cash flows from investing activities include items such as pur- review to ¥1,389.6 billion. This result reflects the Bank's continued chases and sales of securities. For the year under review, net cash used holding of national government bond and efficient investments in by investing activities was ¥48.9 billion, an increase of ¥16.9 billion corporate stocks. compared to the year before. Larger expenditures were made for the
Deposits Loans and Bills Discounted Securities (Billions of yen) (Billions of yen) (Billions of yen)
3,667.8 3,770.8 3,770.8 2,466.7 2,402.2 2,434.6 1,311.9 1,349.2 1,349.0 1,389.6 3,516.8 3,627.7 2,344.7 2,390.4 1,120.8
20002001 2002 2003 2004 20002001 2002 2003 2004 20002001 2002 2003 2004
THE NANTO BANK, LTD. ANNUAL REPORT 2004 13 purchase of investment securities and premises and equipment. LOANS DISCLOSED UNDER THE FINANCIAL For the year under review, ¥1.4 billion in net cash was used in RECONSTRUCTION LAW financing activities, a decrease of ¥11.1 billion from the previous year due to the nonrecurrence of repayment of convertible bonds, made in Classification under Self- Assessment (Non-consolidated) the previous year. (As of March 31, 2004) Billions of yen As a result, the balance of cash and cash equivalents at the fiscal Bankrupt Debtors/Assets ...... ¥10.1 year-end decreased by ¥11.6 billion, compared to the previous term, Effectively Bankrupt Debtors/Assets ...... ¥10.1 to ¥111.8 billion. Potentially Bankrupt Debtors/Assets ...... ¥98.8 Debtors/Assets Requiring Caution Asset Position Substandard Debtors /Assets ...... ¥54.5 TOTAL ASSETS Other Debtors/Assets Requiring Caution ...... ¥222.4 Total assets increased ¥45.9 billion, or 1.1%, during the year under Normal Debtors/Assets ...... ¥2,103.3 review, for a balance at fiscal year-end of ¥4,187.1 billion. Total ...... ¥2,499.4
CAPITAL ADEQUACY RATIO In compliance with the Financial Reconstruction Law, which relates The capital ratio at fiscal year-end increased 0.10 percentage points, to emergency measures for the rehabilitation of financial functions, compared to the previous term, to 9.51% on a consolidated basis and we assessed our assets, classifying loans and other assets on the basis of according to domestic criteria. This level far exceeds the minimum debtors’ financial position and management conditions, and disclosed domestic target of 4%. these results. According to the standards set by the Financial Reconstruction DISPOSAL OF BAD DEBTS Law, the Bank’s total of bad debts decreased by ¥11.9 billion to To ensure the strength of our assets, the Bank has taken steps to pre- ¥161.7 billion, as of March 31, 2004: of these, 80.9% were covered vent the occurrence of bad debts and has allowed adequate write-offs by reserves and collateral or guarantees. or provisions based on strict asset self-assessment. In the fiscal year under review, the Bank implemented provisions to ensure soundness by preventing the deterioration of future assets, including declines in collateral value.
Total Income Capital Adequacy Ratio Loans Disclosed under (Billions of yen) (%) the Financial Reconstruction Law (Billions of yen) 117.6 110.9 112.7 10.16 96.2 97.2 9.41 9.51
9.53 9.04
�
Bankrupt and Quasi-Bankrupt Assets ¥ 20.2 (0.81%) Doubtful Assets ¥ 98.8 (3.95%) 20002001 2002 2003 2004 20002001 2002 2003 2004 Substandard Loans ¥ 42.6 (1.70%) Normal Assets ¥2,337.7 (93.52%) Total ¥2,499.4
14 THE NANTO BANK, LTD. ANNUAL REPORT 2004 CONSOLIDATED BALANCE SHEETS
The Nanto Bank, Ltd. and Consolidated Subsidiaries as of March 31, 2004 and 2003
Thousands of Millions of yen U.S. dollars 2004 2003 2004 Assets: Cash and due from banks (Note 5) ...... ¥ 114,233 ¥ 126,208 $ 1,080,830 Call loans and bills bought ...... 65,822 75,405 622,783 Commercial paper and other debt purchased ...... 2,864 1,389 27,098 Trading account securities ...... 728 1,210 6,888 Money held in trust (Note 6) ...... 44,000 43,003 416,311 Securities (Notes 6, 17)...... 1,389,656 1,349,011 13,148,415 Loans and bills discounted (Note 7) ...... 2,434,690 2,390,489 23,036,143 Foreign exchanges...... 823 878 7,786 Other assets (Note 8) ...... 35,102 34,742 332,122 Premises and equipment (Note 9)...... 69,390 65,694 656,542 Deferred tax assets (Note 10) ...... 44,175 63,874 417,967 Customers’ liabilities for acceptances and guarantees (Note 15) . . . . 46,557 50,941 440,505 Reserve for possible loan losses (Note 11) ...... (60,904) (61,611) (576,251) Total assets ...... ¥4,187,141 ¥4,141,238 $39,617,191
Liabilities, minority interest and stockholders’ equity Liabilities: Deposits and negotiable certificates of deposit (Notes 12, 17)...... 3,770,888 ¥3,770,886 35,678,758 Call money and bills sold ...... — 3,365 — Payables under securities lending transactions (Note 17)...... 130,841 93,775 1,237,969 Borrowed money (Note 17) ...... 7,492 12,425 70,886 Foreign exchanges...... 117 86 1,107 Other liabilities (Note 13) ...... 37,325 30,999 353,155 Liabilities for severance and retirement benefits (Note 14) ...... 2,859 4,531 27,050 Reserve for residual losses on loans sold ...... — 1,496 — Acceptances and guarantees (Note 15) ...... 46,557 50,941 440,505 Total liabilities ...... 3,996,081 3,968,507 37,809,452 Minority interest ...... 4,196 4,322 39,701 Stockholders’ equity (Note 16): Common stock; Authorized 640,000 thousand shares and issued 281,756 thousand shares ...... 29,249 29,249 276,743 Capital surplus ...... 18,814 18,813 178,011 Retained earnings ...... 114,928 111,672 1,087,406 Net unrealized gains on available-for-sale securities, net of taxes . . . . 24,804 9,575 234,686 Less treasury stock; Issued 2,489 thousand shares in 2004 and 2,424 thousand shares in 2003 ...... (933) (904) (8,827) Total stockholders’ equity...... 186,863 168,407 1,768,029 Total liabilities, minority interest and stockholders’ equity . . . . ¥4,187,141 ¥4,141,238 $39,617,191
See notes to consolidated financial statements.
THE NANTO BANK, LTD. ANNUAL REPORT 2004 15 CONSOLIDATED STATEMENTS OF INCOME
The Nanto Bank, Ltd. and Consolidated Subsidiaries for the Years Ended March 31, 2004 and 2003
Thousands of Millions of yen U.S. dollars 2004 2003 2004 Income: Interest income: Interest on loans and discounts ...... ¥ 45,145 ¥ 46,434 $ 427,145 Interest and dividends on securities ...... 20,015 21,561 189,374 Other interest income ...... 203 162 1,920 Fees and commissions...... 16,723 16,108 158,226 Gains on sales and redemption of bonds ...... 9,452 13,259 89,431 Other income (Note 19)...... 5,713 15,243 54,054 Total income ...... 97,254 112,769 920,181 Expenses: Interest expense: Interest on deposits ...... 2,404 3,045 22,745 Interest on borrowing and rediscounts...... 2,180 2,281 20,626 Interest on convertible bonds ...... — 120 — Other interest expense ...... 1,844 2,029 17,447 Fees and commissions...... 8,886 9,445 84,076 Losses on sales and redemption of bonds ...... 2,795 8,084 26,445 General and administrative expenses...... 45,782 44,145 433,172 Other expenses (Note 19) ...... 18,921 29,701 179,023 Total expenses ...... 82,815 98,854 783,565 Income before income taxes ...... 14,439 13,915 136,616 Income taxes—current ...... 551 988 5,213 deferred ...... 9,395 6,956 88,892 Minority interest...... (160) 64 (1,513) Net income ...... ¥ 4,652 ¥ 5,906 $ 44,015
Yen U.S. dollars Per share of common stock: Net income—basic ...... ¥16.66 ¥21.67 $ 0.15 Net income—diluted ...... 16.66 19.42 0.15 Dividends ...... 5.00 5.00 0.04
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY The Nanto Bank, Ltd. and Consolidated Subsidiaries for the Years Ended March 31, 2004 and 2003
Millions of yen Thousands of U.S. dollars Number of Net unrealized Net unrealized shares of gains on available- gains on available- common stock Common Capital Retained for-sale securities, Treasury Common Capital Retained for-sale securities, Treasury (thousands) stock surplus earnings net of taxes stock stock surplus earnings net of taxes stock Balance at March 31, 2002 ...... 272,863 ¥27,586 ¥17,159 ¥107,129 ¥11,284 ¥ (18) $229,500 $142,753 $891,256 $93,876 $(149) Increase in common stock on conversion of convertible bonds...... 8,892 1,662 1,654 — — — 13,826 13,760 — — — Cash dividends ...... — — — (1,363) — — — — (11,339) — — Net income ...... — — — 5,906 — — —Thousands — of 49,134 U.S. dollars — — (Decrease) in net unrealized gains on Net unrealized gains on available- available-for-sale securities, net of taxes...... ————(1,708) —Common — Capital — Retained — for-sale (14,209) securities, Treasury — Treasury stock ...... —————(885)stock — surplus — earnings — net of taxes — (7,362) stock Balance at March 31, 2003 ...... 281,756 29,249 18,813 111,672 9,575 (904) $276,743 $178,001 $1,056,599 $ 90,595 $(8,553) Increase in capital surplus ...... —— 1——— — 9——— Cash dividends ...... — — — (1,396) — — — — (13,208) — — Net income ...... — — — 4,652 — — — — 44,015 — — Increase in net unrealized gains on securities available for sale, net of taxes ...... ————15,228 — — — — 144,081 — Treasury stock ...... —————(28) — — — — (264) Balance at March 31, 2004 ...... 281,756 ¥29,249 ¥18,814 ¥114,928 ¥24,804 ¥(933) $276,743 $178,011 $1,087,406 $234,686 $(8,827)
See notes to consolidated financial statements.
16 THE NANTO BANK, LTD. ANNUAL REPORT 2004 CONSOLIDATED STATEMENTS OF CASH FLOWS
The Nanto Bank, Ltd. and Consolidated Subsidiaries for the Years Ended March 31, 2004 and 2003
Thousands of Millions of yen U.S. dollars 2004 2003 2004 Cash flows from operating activities: Income before income taxes ...... ¥ 14,439 ¥ 13,915 $ 136,616 Depreciation...... 8,727 8,133 82,571 Decrease in reserve for possible loan losses ...... (706) (16,805) (6,679) Decrease in liabilities for severance and retirement benefits...... (1,671) (5,712) (15,810) Decrease in reserve for residual losses on loans sold...... (1,496) (547) (14,154) Interest income...... (65,365) (68,158) (618,459) Interest expense ...... 6,429 7,476 60,828 Investment securities losses (gains) ...... (10,315) 10,345 (97,596) Loss (gains) on money held in trust ...... (327) 169 (3,093) Foreign exchanges losses ...... 22,175 6,783 209,811 Losses on sales of premises and equipment ...... 523 940 4,948 Net decrease (increase) in due from banks...... 291 (1,595) 2,753 Net increase in loans and bills discounted...... (44,201) (45,705) (418,213) Net increase (decrease) in deposits ...... (5,910) 77,353 (55,918) Net increase in negotiable certificates of deposit ...... 5,912 25,691 55,937 Net decrease in call loans and bills bought ...... 8,107 15,083 76,705 Net decrease in call money and bills sold ...... (3,365) (41,893) (31,838) Net decrease in borrowed money ...... (4,933) (3,227) (46,674) Net decrease in foreign exchanges (assets) ...... 55 395 520 Net increase (decrease) in foreign exchanges (liabilities) ...... 30 (8) 283 Net increase in payables under securities lending transactions...... 37,065 36,074 350,695 Interest received ...... 73,313 77,722 693,660 Interest paid ...... (6,818) (7,790) (64,509) Other ...... 7,401 (28,865) 70,025 Subtotal ...... 39,362 59,774 372,428 Income taxes paid ...... (696) (869) (6,585) Net cash provided by operating activities ...... 38,665 58,905 365,834
Cash flows from investing activities: Purchases of securities...... (1,066,901) (1,029,004) (10,094,625) Proceeds from sales of securities ...... 469,540 476,074 4,442,615 Proceeds from maturities of securities ...... 562,071 525,093 5,318,109 Increase in money held in trust ...... (2,098) (11,179) (19,850) Decrease in money held in trust ...... 1,428 15,007 13,511 Purchases of premises and equipment ...... (15,317) (9,360) (144,923) Proceeds from sales of premises and equipment ...... 2,371 1,441 22,433 Net cash used in investing activities ...... (48,904) (31,928) (462,711)
Cash flows from financing activities: Repayment of convertible bonds...... — (10,363) — Dividends paid ...... (1,394) (1,363) (13,189) Dividend paid by subsidiaries to minority stockholders ...... (0) (0) (0) Other ...... (27) (885) (255) Net cash used in financing activities ...... (1,422) (12,612) (13,454)
Effect of exchange rate changes on cash and cash equivalents . . . . . (21) (18) (198)
Net increase (decrease) in cash and cash equivalents ...... (11,682) 14,346 (110,530) Cash and cash equivalents at beginning of year ...... 123,553 109,207 1,169,013 Cash and cash equivalents at end of year (Note 5) ...... ¥111,870 ¥123,553 $1,058,472
See notes to consolidated financial statements.
THE NANTO BANK, LTD. ANNUAL REPORT 2004 17 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The Nanto Bank, Ltd. and Consolidated Subsidiaries
1. BASIS OF PRESENTATION d) Trading account securities and securities The accompanying consolidated financial statements have been pre- Trading securities are stated at fair market value. Gains and losses pared in accordance with the provisions set forth in the Japanese realized on disposal and unrealized gains and losses from market Securities and Exchange Law and its related accounting regulations, value fluctuations are recognized as gains or losses in the period of and in conformity with accounting principles generally accepted in the change. Held-to-maturity debt securities are stated at amortized Japan, which are different in certain respects as to application and cost, net of the amount considered not collectible. Available-for-sale disclosure requirements of International Financial Reporting securities with available fair market values are stated at fair market Standards. value. Unrealized gains and unrealized losses on these securities are The accompanying consolidated financial statements have been reported, net of applicable income taxes, as a separate component of restructured and translated into English (with some expanded stockholders’ equity. Realized gains and losses on sale of such securi- descriptions and the inclusion of consolidated statements of share- ties are computed using moving-average cost based on carrying value holders’ equity) from the consolidated financial statements of the at March 31, 2000, or later date of purchase. Company prepared in accordance with Japanese GAAP and filed Other securities with no available fair market value are stated at with the appropriate Local Finance Bureau of the Ministry of moving-average cost. Finance as required by the Securities and Exchange Law. Some If the market value of held-to-maturity debt securities and avail- supplementary information included in the statutory Japanese lan- able-for-sale securities, declines significantly, such securities are stated guage consolidated financial statements, but not required for fair at fair market value and the difference between fair market value and presentation is not presented in the accompanying consolidated the carrying amount is recognized as loss in the period of the decline. financial statements. In these cases, such fair market value will be the carrying amount of As permitted by the Securities and Exchange Law of Japan, the securities at the beginning of the next year. amounts less than one million yen have been omitted. As a result, the e) Derivatives and hedge accounting totals shown in the financial statements do not necessarily agree with the sum of the individual amounts. As for the hedge accounting method applied to hedging transactions The translation of the Japanese yen amounts into U.S. dollars are for interest rate risk arising from financial assets and liabilities, the included solely for the convenience of the readers outside Japan, Bank applies deferred hedge accounting. In the previous fiscal year, the using the prevailing exchange rate at March 31, 2004, which was Bank applied the temporary treatment stipulated in the “Treatment for ¥105.69 to US$1.00. The convenience translations should not be Accounting and Auditing of Application of Accounting Standard for construed as representations that the Japanese yen amounts have Financial Instruments in Banking Industry” ( JICPA Industry Audit been, could have been, or could in the future be, converted into U.S. Committee Report No.24) to the “macro hedge,” which is the man- dollars at this or any other rate of exchange. agement of interest rate risk arising from large-volume transactions in loans, deposits and other interest-earning assets and interest-bearing 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES liabilities as a whole using derivatives. From this fiscal year, the Bank applies the full treatment of JICPA Industry Audit Committee Report a) Principles of consolidation No.24. The Bank assesses the effectiveness of such hedges in offsetting The consolidated financial statements include the accounts of the movement of the fair value by the changes in interest rates, by classify- Bank and all ten of its subsidiaries. The Bank has no affiliates, over ing the hedged items (such as deposits and loans) and the hedging which it has the ability to exercise significant influence over operat- instruments (such as interest rate swaps) by their maturity. As to the ing and financial policies of the investees. cash flow hedges, the Bank assesses the effectiveness of such hedges in All consolidated subsidiaries have fiscal years ending on March 31. fixing cash flows by verifying the correlation between the hedged items All significant intercompany accounts, transactions and unreal- and the hedging instruments. ized profits on transactions are eliminated. A portion of deferred hedge losses and gains, which was previously b) Cash and cash equivalents under the macro hedge, is no longer subject to hedge accounting. The In preparing the consolidated statements of cash flows, cash and cash deferred hedge losses and gains are charged to “Interest income” or equivalents represent cash and deposits with the Bank of Japan. “Interest expenses” over a 15-year period (maximum) from this fiscal c) Finance leases year according to their maturity and notional principal amount. At Finance leases which do not transfer ownership are accounted for in March 31, 2004 gross amounts of deferred hedge losses and gains on the same manner as operating leases under Japanese GAAP. “macro hedge” were ¥3,702 million ($35,026 thousand).
18 THE NANTO BANK, LTD. ANNUAL REPORT 2004 f ) Premises and equipment Employees of Japanese companies are compulsorily included in Depreciation for premises and equipment of the Bank is computed the Welfare Pension Insurance Scheme operated by the government. by the declining-balance method. Employers are legally required to deduct employees’ welfare pension The estimated useful lives of major items are as follows: insurance contributions from their payroll and to pay them to the Buildings...... 6 to 50 years government together with employers’ own contributions. For com- Equipment ...... 3 to 20 years panies that have established their own Employees’ Pension Fund For leased assets of consolidated subsidiaries, the straight-line which meets certain legal requirements, it is possible to transfer a method is applied for the duration of the lease term. Depreciation of part of their welfare pension insurance contributions (referred to as other assets is principally provided on the declining balance method the “substitutional portion” of the government’s Welfare Pension over the estimated useful lives of the respective assets. Insurance Scheme) to their own Employees’ Pension Fund under the g) Reserve for possible loan losses government’s permission and supervision. The reserve for possible loan losses is provided according to predeter- For the year ended March 31, 2003, the Bank did not apply the mined standards for write-offs and provisions, as follows: transitional provisions as prescribed in paragraph 47-2 of the JICPA For loans to insolvent customers who are undergoing bankruptcy Accounting Committee Report No. 13, “Practical Guideline for or other special liquidation or in a similar financial condition, the Accounting of Retirement Benefits (Interim Report),” which allows reserve for possible loan losses is provided based on the amount of recognition of the effect of transferring the substitutional portion on claims net of the expected amount of recoveries from collateral and the date permission was received from the Ministry of Health, Labor guarantees net of the deducted amount mentioned below. and Welfare for financial accounting purposes. It chose instead to For the unsecured and unguaranteed portions of loans to cus- defer the recognition to the date transfer of the substitutional portion tomers not presently in the above circumstances, but for which there is actually completed. is a high probability of so becoming, the reserve for possible loan However, on the receipt of permission from the Minister of Health, losses is provided for estimated unrecoverable amounts determined Labor and Welfare on April 1, 2004 to return the substitutional portion after an evaluation of the customer’s overall financial condition. of the Welfare Pension Insurance Scheme following enforcement of the For other loans, the reserve for possible loan losses is provided Defined-Benefit Corporate Pension Law, the Bank changed to a corpo- based on the Bank’s actual rate of loan losses in the past. rate pension plan and termination allowance plan. For claims on “bankrupt borrowers” and “effectively bankrupt Consequently, the Bank recorded a gain on the release from the borrowers,” the amount exceeding the estimated value of collateral substitutional portion of the Welfare Pension Insurance Scheme and guarantees, is deducted, as deemed uncollectible directly from amounting to ¥2 million ($18 thousand) in other income for the those claims. At March 31, 2004 and 2003, the deducted amounts year ended March 31, 2004. are ¥70,706 million (US$668,994 thousand) and ¥68,390 million, i) Reserve for residual losses on loans sold respectively. The reserve for residual losses on loans sold to the Cooperative Reserve for possible loan losses of consolidated subsidiaries is pro- Credit Purchasing Company, Limited, is provided for in an amount vided for general claims by the amount deemed necessary based on estimated for possible future losses based on management’s evalua- the historical loan-loss ratio, and for doubtful claims by the amount tion of real estate securing such loans. deemed uncollectible based on respective assessments. j) Income taxes h) Severance and retirement benefits Deferred income taxes are recorded to reflect tax effects of temporary Liabilities for severance and retirement benefits, which are provided differences between the carrying amounts of assets and liabilities for for the future pension payments to employees, are recorded, based tax and financial reporting purposes. on the projected benefit obligation and the estimated pension plan The asset and liability approach is used to recognize deferred tax assets at the end of the year. Prior service costs and actuarial gains or assets and liabilities for the expected future tax consequences of tem- losses are amortized mainly as follows: porary differences between the carrying amounts of assets and liabili- Prior service costs are charged to profit/loss at the time of occur- ties for financial reporting purposes and the amounts used for rence, and actuarial gains and losses are recognized in expenses in income tax purposes. equal amounts from the following fiscal year on the straight-line k) Reclassifications method over ten years, which is within the average remaining service Certain prior year amounts have been reclassified to conform to the period of the current employees. 2004 presentation. These changes had no impact on previously reported results of operations or stockholders’ equity.
THE NANTO BANK, LTD. ANNUAL REPORT 2004 19 3. ADDITIONAL INFORMATION (3) Earnings per share (1) Accounting standards for foreign currency transactions Effective April 1, 2002, the Company adopted the new accounting As for the accounting method of foreign currency transactions, in standard for earnings per share and related guidance (Accounting the previous fiscal year, the Bank applied the temporary treatment Standards Board Statement No. 2, “Accounting Standard for stipulated in JICPA Industry Audit Committee Report No.25. Earnings Per Share” and Financial Standards Implementation From this fiscal year, the Bank applies hedge accounting pursuant Guidance No. 4, “Implementation Guidance for Accounting to the full treatment of JICPA Industry Audit Committee Report Standard for Earnings Per Share”, issued by the Accounting No.25. Standards Board of Japan on September 25, 2002). Consequently, foreign currency translation differences arising The effect on earnings per share of the adoption of the new from forward foreign exchange transactions were formerly account- accounting standard was not material. ed for as “Other assets” or “Other liabilities” on a net basis, but from this fiscal year they are accounted for as “Other assets” and (4) New accounting standard for impairment of fixed assets “Other liabilities” on a gross basis pursuant to JICPA Industry In the year ended March 31, 2004, the Bank did not adopt early Audit Committee Report No.25. the new accounting standard for impairment of fixed assets Consequently, “Other assets” and “Other liabilities” each (Opinion Concerning Establishment of Accounting Standard for increased by ¥2,669 million ($25,253 thousand). Impairment of Fixed Assets issued by the Business Accounting Deliberation Council on August 9, 2002 ) and the implementation (2) Accounting standards for treasury stock and reversal of statu- guidance for the accounting standard for impairment of fixed assets tory reserves (the Financial Accounting Standard Implementation Guidance Effective April 1, 2002, the Companies adopted the new accounting No.6 issued by the Accounting Standards Board of Japan on standard for treasury stock and reversal of statutory reserves October 31, 2003 ). The new accounting standard does not pro- (Accounting Standards Board Statement No. 1, “Accounting hibit earlier adoption. Standard for Treasury Stock and Reversal of Statutory Reserves”, The bank has begun its analysis of possible impairment of fixed issued by the Accounting Standards Board of Japan on February assets. The Bank cannot currently estimate the effect of adoption of 21, 2002). the new standard, because the Bank has not yet completed its The effect on net income of the adoption of the new accounting analysis. However, adoption of the new standard could have a standard was not material. material effect on the Bank’s financial statement.
4. SEGMENT INFORMATION (1) Segment information by type of business The business segment information for the years ended March 31, 2004 is summarized as follows: Millions of yen 2004 Banking Other Eliminations/Corporate Consolidated Ordinary income: Outside customers ...... ¥ 87,846 ¥ 7,882 ¥ — ¥ 95,728 Intersegment income ...... 481 5,541 6,022 — Total ...... 88,327 13,423 6,022 95,728 Ordinary expenses ...... 74,801 13,082 5,608 82,274 Ordinary profit ...... ¥ 13,526 ¥ 341 ¥ 414 ¥ 13,453
Assets, depreciation and capital expenditures: Assets ...... ¥4,173,543 ¥36,823 ¥23,225 ¥4,187,141 Depreciation ...... 1,059 7,668 — 8,728 Capital expenditures ...... 4,647 10,064 — 14,712
20 THE NANTO BANK, LTD. ANNUAL REPORT 2004 Thousands of U.S. Dollars 2004 Banking Other Eliminations/Corporate Consolidated Ordinary income: Outside customers ...... $ 831,166 $ 74,576 $ — $ 905,743 Intersegment income ...... 4,551 52,426 56,977 — Total ...... 835,717 127,003 56,977 905,743 Ordinary expenses ...... 707,739 123,777 53,060 778,446 Ordinary profit ...... $ 127,978 $ 3,226 $ 3,917 $ 127,287
Assets, depreciation and capital expenditures: Assets ...... $39,488,532 $348,405 $219,746 $39,617,191 Depreciation ...... 10,019 72,551 — 82,581 Capital expenditures ...... 43,968 95,221 — 139,199
Notes: 1. The business segmentation is classified based on the Bank’s internal administrative purposes. Ordinary income and ordinary profit are presented as counterparts of sales and operating profit of companies in other industries. 2. “Other” includes credit guarantees, leasing and credit cards.
(2) Segment information by geographical area Since the Bank has no overseas branches or subsidiaries, no segment information by geographical area is required to be disclosed.
(3) Recurring income from international operations Thousands of Millions of yen U.S. dollars 2004 2003 2004 Recurring income from international operations (A)...... ¥ 15,315 ¥ 15,603 $144,904 Consolidated recurring income (B)...... 95,728 103,443 905,743 (A) / (B)...... 15.99% 15.08% 15.99% Recurring income from international operations consists of recurring income on foreign currency-denominated transactions in Japan, yen- denominated trade-related transactions, non-resident transactions, and Japan off-shore market account transactions.
5. STATEMENTS OF CASH FLOWS The reconciliations of cash and due from banks in the consolidated balance sheets and cash and cash equivalents in the consolidated state- ments of cash flows as of March 31, 2004 and 2003 are as follows: Thousands of Millions of yen U.S. dollars 2004 2003 2004 Cash and due from banks on the consolidated balance sheets ...... ¥114,233 ¥126,208 $1,080,830 Current deposits due from banks ...... (1,725) (1,995) (16,321) Time deposits due from banks ...... (550) (550) (5,203) Other due from banks ...... (88) (109) (832) Cash and cash equivalents on the consolidated statements of cash flows ...... ¥111,870 ¥123,553 $1,058,472
THE NANTO BANK, LTD. ANNUAL REPORT 2004 21 6. SECURITIES AND MONEY HELD IN TRUST (1) At March 31, 2004 and 2003, information on trading account securities and securities with available market prices, is as follows: (a) Trading securities Thousands of Millions of yen U.S. dollars 2004 2003 2004 Book value (fair market value) ...... ¥728 ¥1,210 $6,888 Amount of net unrealized gains (losses) included in the statements of income ...... (0) 1 (0) (b) Held-to-maturity debt securities Not applicable (c) Available-for-sale securities with available fair market values Millions of yen At March 31, 2004 Acquisition cost Book value Difference Unrealized gains Unrealized losses Stocks ...... ¥ 57,082 ¥ 90,221 ¥33,139 ¥33,454 ¥ 314 Bonds ...... 901,893 905,550 3,657 6,602 2,944 Japanese government bonds ...... 516,720 518,561 1,841 3,321 1,480 Japanese local government bonds ...... 181,536 182,189 652 1,614 961 Japanese corporate bonds ...... 203,635 204,799 1,163 1,666 502 Other ...... 376,607 381,431 4,823 6,101 1,277 Total ...... ¥1,335,582 ¥1,377,203 ¥41,621 ¥46,158 ¥4,537
Millions of yen At March 31, 2003 Acquisition cost Book value Difference Unrealized gains Unrealized losses Stocks ...... ¥ 59,311 ¥ 60,070 ¥ 759 ¥ 4,277 ¥3,518 Bonds ...... 957,729 973,301 15,571 16,160 588 Japanese government bonds ...... 486,932 493,674 6,742 7,210 467 Japanese local government bonds ...... 219,055 224,505 5,450 5,515 65 Japanese corporate bonds ...... 251,741 255,121 3,379 3,434 55 Other ...... 304,506 304,231 (274) 5,000 5,275 Total ...... ¥1,321,547 ¥1,337,603 ¥16,055 ¥25,438 ¥9,382
Thousands of U.S. dollars At March 31, 2004 Acquisition cost Book value Difference Unrealized gains Unrealized losses Stocks ...... $ 540,088 $ 853,637 $313,549 $316,529 $ 2,970 Bonds ...... 8,533,380 8,567,981 34,601 62,465 27,855 Japanese government bonds ...... 4,889,015 4,906,433 17,418 31,422 14,003 Japanese local government bonds ...... 1,717,627 1,723,805 6,168 15,271 9,092 Japanese corporate bonds ...... 1,926,719 1,937,732 11,003 15,763 4,749 Other ...... 3,563,317 3,608,960 45,633 57,725 12,082 Total ...... $12,636,786 $13,030,589 $393,802 $436,730 $42,927
Notes: 1. Market value is calculated using market prices at the fiscal year end. 2. Unrealized gains (losses) represent differences between book values and acquisition costs. 3. Available-for-sale securities with available fair market values in the amount of ¥14,569 million at March 31, 2003 were revalued under impairment accounting. Impairment accounting is totally applied for securities whose market values have decreased 50% or more from the acquisition cost at the end of the year, or have decreased 30% or more but less than 50% at the end of the year, and whose market values are not expected to recover to the acquisition cost within one year.
(2) The following tables summarize book values of securities with no available fair values as of March 31, 2004 and 2003: (a) Held-to-maturity debt securities Thousands of Millions of yen U.S. dollars 2004 2003 2004 Non-listed domestic debt securities ...... ¥5,429 ¥3,359 $51,367
22 THE NANTO BANK, LTD. ANNUAL REPORT 2004 (b) Available-for-sale securities Thousands of Millions of yen U.S. dollars 2004 2003 2004 Non-listed stocks ...... ¥1,459 ¥1,434 $13,804 Non-listed domestic bonds...... — 50 — Non-listed foreign securities ...... 7,062 7,562 66,818 Commercial paper ...... 999 — 9,452
(3) Available-for-sale securities with maturities and held-to-maturity debt securities mature as follows: Millions of yen As of March 31, 2004 1 year or less 1 to 5 years 5 to 10 years Over 10 years Bonds ...... ¥137,762 ¥471,373 ¥211,851 ¥ 89,993 Japanese government bonds ...... 46,935 242,271 139,719 89,635 Japanese local government bonds ...... 35,505 98,654 47,914 114 Japanese corporate bonds ...... 55,321 130,446 24,217 243 Other ...... 12,229 206,954 120,830 25,624 Total ...... ¥149,991 ¥678,327 ¥332,681 ¥115,617
Millions of yen As of March 31, 2003 1 year or less 1 to 5 years 5 to 10 years Over 10 years Bonds ...... ¥166,985 ¥642,729 ¥135,990 ¥31,006 Japanese government bonds ...... 65,330 353,598 44,713 30,032 Japanese local government bonds ...... 36,837 118,099 68,908 658 Japanese corporate bonds ...... 64,816 171,031 22,367 315 Other ...... 10,034 123,721 123,749 31,272 Total ...... ¥177,020 ¥766,450 ¥259,739 ¥62,279
Thousands of U.S. dollars As of March 31, 2004 1 year or less 1 to 5 years 5 to 10 years Over 10 years Bonds ...... $1,303,453 $4,459,958 $2,004,456 $851,480 Japanese government bonds ...... 444,081 2,292,279 1,321,969 848,093 Japanese local government bonds ...... 335,935 933,427 453,344 1,078 Japanese corporate bonds ...... 523,427 1,234,232 229,132 2,299 Other ...... 115,706 1,958,122 1,143,249 242,444 Total ...... $1,419,159 $6,418,081 $3,147,705 $1,093,925
(4) Held-to-maturity debt securities sold in the years ended March 31, 2004 and 2003: Not applicable
(5) Available-for-sale securities sold during the years ended March 31, 2004 and 2003: Millions of yen Thousands of U.S. dollars 2004 2003 2004 Sales Gains Losses Sales Gains Losses Sales Gains Losses amount on sales on sales amount on sales on sales amount on sales on sales Available-for-sale securities ...... ¥469,540 ¥10,950 ¥688 ¥470,944 ¥13,690 ¥4,843 $4,442,615 $103,604 $6,509
(6) At March 31, 2004 and 2003, information on money held in trust is as follows: Money held in trust Thousands of Millions of yen U.S. dollars 2004 2003 2004 Book value (fair market value) ...... ¥44,000 ¥43,003 $416,311 Amount of net unrealized gains (losses) included in the statements of income ...... 166 (24) 1,570
THE NANTO BANK, LTD. ANNUAL REPORT 2004 23 7. LOANS AND BILLS DISCOUNTED 10. INCOME TAXES Loans and bills discounted as of March 31, 2004 and 2003 were as The Companies are subject to a number of taxes based on follows: income, which, in the aggregate, indicate a statutory rate in Japan of Thousands of approximately 41.7% for the years ended March 31, 2004 and 2003. Millions of yen U.S. dollars 2004 2003 2004 The following table summarizes the significant differences Loans on bills ...... ¥ 214,937 ¥ 239,937 $ 2,033,655 between the statutory tax rate and the Companies’ effective tax rates Loans on deeds ...... 1,810,003 1,687,327 17,125,584 for financial statement purposes for the years ended March 31, 2004 Overdrafts ...... 362,357 412,466 3,428,488 and 2003. Bills discounted ...... 47,391 50,757 448,396 Total ...... ¥2,434,690 ¥2,390,489 $23,036,143 2004 2003 Statutory tax rate ...... 41.7% 41.7% Bills discounted are accounted for as financial transactions in accor- Decrease in deferred tax assets due to dance with ‘Treatment for Accounting and Auditing of Application the change in the aggregate statutory of Accounting Standard for Financial Instruments in Banking income tax rates ...... —% 15.0% Valuation allowance ...... 24.9% —% Industry’ (JICPA Industry Audit Committee Report No. 24). The Other ...... 2.2% 0.3% Companies have rights to sell or pledge bank acceptances bought, Effective tax rate ...... 68.8% 57.0% commercial bills discounted, documentary bills and foreign Significant components of the Companies’ deferred tax assets and exchanges bought without restrictions. The total face values of these liabilities as of March 31, 2004 and 2003 are as follows: instruments were ¥47,704 million ($451,357 thousand) at March Thousands of 31, 2004 and ¥50,877 million at March 31, 2003. Millions of yen U.S. dollars 2004 2003 2004 8. OTHER ASSETS Deferred tax assets: Other assets at March 31, 2004 and 2003 are comprised as follows: Excess bad debt expenses ...... ¥43,610 ¥45,635 $412,621 Retirement benefits ...... 3,310 2,605 31,318 Thousands of Millions of yen U.S. dollars Depreciation ...... 1,318 1,465 12,470 2004 2003 2004 Write-down of land ...... 3,603 3,603 34,090 Accrued income ...... ¥ 9,857 ¥ 9,262 $ 93,263 Valuation loss on securities ...... 10,813 14,702 102,308 Derivatives ...... 12,083 1,303 114,324 Other ...... 1,894 2,332 17,920 Deferred unrealized losses on hedges ...... 3,184 5,353 30,125 Total deferred tax assets ...... 64,551 70,344 610,757 Other ...... 9,977 18,822 94,398 Valuation allowance ...... (3,602) — (34,080) Total ...... ¥35,102 ¥34,742 $332,122 Deferred tax liabilities: Net unrealized gains on securities 9. PREMISES AND EQUIPMENT available for sale ...... 16,773 6,470 158,699 Net deferred tax assets ...... ¥44,175 ¥63,874 $417,967 Premises and equipment at March 31, 2004 and 2003 are comprised as follows: The aggregate statutory income tax rate used for calculation of Thousands of deferred income tax assets and liabilities was 41.7% for the year Millions of yen U.S. dollars 2004 2003 2004 ended March 31, 2002. Effective for years commencing on April 1, Land ...... ¥29,744 ¥28,758 $281,426 2004 or later, according to the revised local tax law, income tax rates Buildings ...... 33,720 33,625 319,046 for enterprise taxes will be reduced as a result of introducing the Furniture and equipment ...... 63,269 68,999 598,628 assessment by estimation on the basis of the size of business. Based Construction in progress ...... 898 398 8,496 Guarantee money ...... 2,315 2,556 21,903 on the change of income tax rates, for calculation of deferred income Total ...... 129,949 134,338 1,229,529 tax assets and liabilities, the Companies used the aggregate statutory Less: income tax rates of 41.7% and 40.3% for current items and non-cur- Accumulated depreciation ...... 60,559 68,644 572,987 rent items, respectively, at March 31, 2003. Net book value ...... ¥69,390 ¥65,694 $656,542 As a result of the change at and for the year ended March 31, 2003 in the aggregate statutory income tax rates, deferred income tax assets decreased by ¥1,869 million and provision for deferred income taxes increased by ¥2,094 million, and net unrealized gains on securities available for sale, net of taxes increased by ¥224 mil- lion, compared with what would have been recorded under the pre- vious local tax law.
24 THE NANTO BANK, LTD. ANNUAL REPORT 2004 11. LOAN LOSS PROVISIONS 12. DEPOSITS Loan loss provisions at March 31, 2004 and 2003, were as follows: Deposits outstanding at March 31, 2004 and 2003, are comprised as Thousands of follows: Millions of yen U.S. dollars Thousands of 2004 2003 2004 Millions of yen U.S. dollars General provision ...... ¥22,579 ¥23,348 $213,634 2004 2003 2004 Specific provision ...... 38,325 38,262 362,617 Current deposits ...... ¥ 89,580 ¥ 90,911 $ 847,573 Total ...... ¥60,904 ¥61,611 $576,251 Ordinary deposits ...... 1,479,832 1,405,900 14,001,627 Liquid savings deposits ...... 47,576 48,201 450,146 Deposits at notice ...... 9,130 13,724 86,384 Time deposits ...... 2,013,394 2,073,620 19,049,995 Negotiable certificates of deposits ...... 34,200 28,288 323,587 Other deposits ...... 97,173 110,239 919,415 Total ...... ¥3,770,888 ¥3,770,886 $35,678,758
13. OTHER LIABILITIES Other liabilities at March 31, 2004 and 2003, are comprised as follows: Thousands of Millions of yen U.S. dollars 2004 2003 2004 Accrued income taxes ...... ¥ 417 ¥ 562 $ 3,945 Accrued expenses...... 7,202 7,599 68,142 Other payables ...... 9,123 760 86,318 Derivatives ...... 6,855 6,350 64,859 Deferred unrealized gains on hedges ...... 1,027 — 9,717 Other ...... 12,698 15,725 120,143 Total...... ¥37,325 ¥30,999 $353,155
14. LIABILITIES FOR SEVERANCE AND RETIREMENT BENEFITS (1) The liabilities for severance and retirement benefits at March 31, 2004 and 2003 are comprised as follows: Thousands of Millions of yen U.S. dollars 2004 2003 2004 Projected benefit obligation...... ¥(39,278) ¥(59,594) $(371,634) Pension assets ...... 25,753 33,236 243,665 Unfunded projected benefit obligation ...... (13,524) (26,358) (127,959) Unrecognized actuarial net loss ...... 10,665 21,827 100,908 Net amount recorded on the consolidated balance sheet ...... ¥ (2,859) ¥ (4,531) $ (27,050)
Notes: 1. These figures include a portion attributable to the government’s employee welfare plan. 2. The principal assumptions used in determining benefit obligation and pension expenses at or for the year ended March 31, 2004 were as follows:. (a) Discount rate: 2.5%. (b) Expected rate of return on plan assets: 4.0%.
THE NANTO BANK, LTD. ANNUAL REPORT 2004 25 (2) Included in the consolidated statements of income for the years ended March 31, 2004 and 2003 are net severance and retirement bene- fit expenses comprised of the following: Thousands of Millions of yen U.S. dollars 2004 2003 2004 Service costs-benefits earned during the year ...... ¥1,904 ¥ 1,821 $ 18,014 Interest cost on projected benefit obligation ...... 1,487 1,740 14,069 Expected return on plan assets...... (1,149) (1,232) (10,871) Prior service costs (adjustments) ...... (3,316) (5,336) (31,374) Amortization of actuarial differences ...... 2,354 1,113 22,272 Other ...... 37 51 350 The release from the substitutional portion of the Welfare Pension Insurance Scheme . . . (2) — (18) Total ...... ¥1,315 ¥(1,841) $12,442
15. ACCEPTANCES AND GUARANTEES 17. PLEDGED ASSETS Acceptances and guarantees at March 31, 2004 and 2003 are com- At March 31, 2004 and 2003, securities of ¥241,613 million prised as follows: (US$2,286,053 thousand) and ¥226,126 million, were pledged as Thousands of Millions of yen U.S. dollars collateral for deposits and negotiable certificates of deposit of ¥53,945 2004 2003 2004 million (US$510,407 thousand) and ¥71,344 million, borrowed Letters of credit ...... ¥ 677 ¥ 846 $ 6,405 money of ¥1,056 million (US$9,991 thousand) and ¥7,212 million, Guarantees ...... 45,879 50,095 434,090 and payables under securities lending transactions of ¥130,841 mil- Total ...... ¥46,557 ¥50,941 $440,505 lion (US$1,237,969 thousand) and ¥93,775 million respectively. The unexpired lease contract claim of ¥3,511 million 16. STOCKHOLDERS’ EQUITY (US$33,219 thousand) and ¥3,862 million were pledged as collateral Under the Banking Law of Japan, the entire amount of the issue for borrowed money of ¥6,434 million (US$60,876 thousand) and price of shares is required to be accounted for as capital, although the ¥5,212 million at March 31, 2004 and 2003, respectively. Bank may, by resolution of its Board of Directors, account for an Other securities of ¥66,424 million (US$628,479 thousand) and amount not exceeding one-half of the issue price of the new shares as ¥66,566 million, were pledged for transaction guarantees, at March additional paid-in capital, which is included in capital surplus. 31, 2004 and 2003, respectively. Banking Law provides that an amount equal to at least 20% of cash dividends and other cash appropriations shall be appropriated 18. LOAN COMMITMENTS and set aside as a legal earnings reserve until the total amount of legal Commitment line contracts on overdrafts and loans are agreements earnings reserve and additional paid-in capital equals 100% of com- to lend to customers when they apply for borrowing, to the pre- mon stock. The total amount of legal earnings reserve and additional scribed amount as long as there is no violation of any condition paid-in capital of the Bank has reached 100% of common stock, and established in the contracts. therefore the Bank is not required to provide any more legal earnings The amount of unused commitments at March 31, 2004 is reserve. ¥909,849 million (US$8,608,657 thousand), and the amount of The legal earnings reserve and additional paid-in capital may be unused commitments whose original contract terms are within one used to eliminate or reduce a deficit by resolution of the stockholders’ year or unconditionally cancelable at any time is ¥907,849 million meeting or may be capitalized by resolution of the Board of Directors. (US$8,589,734 thousand). On condition that the total amount of legal earnings reserve and addi- Since many of these commitments are expected to expire without tional paid-in capital remains being equal to or exceeding 100% of being drawn upon, the total amount of unused commitments does common stock, they are available for distribution by the resolution of not necessarily represent actual future cash flow requirements. stockholders’ meeting. Legal earnings reserve is included in retained Many of these commitments have clauses that allow the Bank and earnings in the accompanying financial statements. consolidated subsidiaries to reject the application from customers or The maximum amount that the Bank can distribute as dividends reduce the contract amounts in case economic conditions change. In is calculated based on the non-consolidated financial statements of addition, the Bank and consolidated subsidiaries may request the the Bank in accordance with the Commercial Code. customers to pledge collateral such as premises and securities, and take necessary measures such as scrutinizing customers’ financial positions, revising contracts when need arises and securing claims.
26 THE NANTO BANK, LTD. ANNUAL REPORT 2004 19. OTHER INCOME AND OTHER EXPENSES 21. NON-PERFORMING LOANS Other income for the years ended March 31, 2004 and 2003 is com- Non-performing loans at March 31, 2004 and 2003 were as follows: prised as follows: Thousands of Millions of yen U.S. dollars Thousands of Millions of yen U.S. dollars 2004 2003 2004 2004 2003 2004 Loans to bankrupt companies ...... ¥ 10,942 ¥ 19,359 $ 103,529 Reversal of loan loss provisions ...... ¥ — ¥ 8,441 $ — Past due loans ...... 108,737 118,941 1,028,829 Other ...... 5,713 6,802 54,054 Loans past due three months or more ...... 1,929 2,152 18,251 Total ...... ¥5,713 ¥15,243 $54,054 Loans with altered lending conditions ...... 40,796 33,349 385,996 Total ...... ¥162,405 ¥173,803 $1,536,616 Other expenses for the years ended March 31, 2004 and 2003 are Notes: 1. Loans to bankrupt companies refers to loans for which there is judged to be a strong comprised as follows: possibility that the principal is unrecoverable and for which the Bank has received Thousands of approval not to record accrued interest as income in accordance with the individual Millions of yen U.S. dollars notification stipulations of the Corporation Tax Law, specifically to borrowers in the 2004 2003 2004 following categories: Provision for possible losses on loans . . . . ¥ 4,907 ¥ — $ 46,428 a. Borrowers that have begun legal reorganization procedures under the Stock Company Rehabilitation and Reorganization Act Losses on devaluation of stocks b. Borrowers that have declared bankruptcy under the Bankruptcy Act and other securities ...... 8 13,514 75 Other ...... 14,005 16,186 132,510 c. Borrowers that have entered legal negotiations under the Composition Act d. Borrowers that have begun clearance proceedings or liquidation proceedings under Total ...... ¥18,921 ¥29,701 $179,023 the Commercial Code of Japan e. Borrowers that have had their transactions with the Promissory Note Clearinghouse 20. FINANCE LEASES suspended At March 31, 2004 and 2003, under finance leases, as lessors, are as f. Borrowers that have begun liquidation proceedings equivalent to those described in the preceding items under the laws and regulations of foreign countries follows: 2. Past due loans refers to loans for which the Bank has received approval not to record Thousands of accrued interest as income in accordance with the individual notifications stipulations Millions of yen U.S. dollars of the Corporation Tax Law, with the following two exceptions: 2004 2003 2004 a. Loans to bankrupt companies as described in Note 1, above Equipment ...... ¥43,393 ¥44,926 $410,568 b. Loans for which interest is not accrued due to the suspension of interest payments Less: Accumulated depreciation ...... 27,838 28,945 263,392 3. Loans past due more than three months are defined as loans on which interest or prin- Net ...... ¥15,554 ¥15,980 $147,166 cipal payments are past due three months or more from the day after the contracted payment date and are not included in loans to bankrupt companies or past due loans. 4. Loans with altered lending conditions are those loans for which the Bank has made The above depreciation is calculated on the straight-line method over certain concessions to borrowers in financial difficulties with the objective of restoring lease terms. the soundness of their operations and thus the recovery of such credit exposure. Concessions include reduced interest rates, the deferral of interest payments, the defer- Lease receipts, excluding financing changes, under finance leases for ral of principal payments, the forgiveness of debt, the provision of liquid funds, and the acceptance of non-monetary assets in the settlement of claims. Loans with altered the years ended March 31, 2004 and 2003 were ¥5,803 million lending conditions include the categories “Restructured loans” and “Loans to borrow- (US$54,905 thousand) and ¥6,305 million, respectively. ers receiving special restructuring assistance.” Depreciation was ¥4,937 million (US$46,712 thousand) and ¥5,115 million and interest was ¥1,062 million (US$10,048 thou- sand) and ¥1,162 million for the years ended March 31, 2004 and 2003, respectively. Future lease receipts under finance leases, excluding the imputed interest portion, at March 31, 2004 and 2003 were as follows: Thousands of Millions of yen U.S. dollars 2004 2003 2004 Due within one year ...... ¥ 5,561 ¥ 5,654 $ 52,616 Due after one year ...... 11,433 11,683 108,174 Total ...... ¥16,995 ¥17,337 $160,800
THE NANTO BANK, LTD. ANNUAL REPORT 2004 27 22. DERIVATIVE TRANSACTIONS At March 31, 2004 and 2003, information on derivative transactions was as follows : (a) Interest rate related transactions Thousands of Millions of yen U.S. dollars Contract value or notional principal amount Maturities Unrealized gain Unrealized gain At March 31, 2004 Total over one year (loss) (loss) Over-the-counter transactions Interest rate swaps: Receive fixed rate/pay floating rate ...... ¥9,897 ¥7,783 ¥835 $7,900 Receive floating rate/pay fixed rate ...... 2,113 — (101) (955) Total ...... ¥733 $6,935
Thousands of Millions of yen U.S. dollars Contract value or notional principal amount Maturities Unrealized gain Unrealized gain At March 31, 2003 Total over one year (loss) (loss) Over-the-counter transactions Interest rate swaps: Receive fixed rate/pay floating rate ...... ¥15,464 ¥10,656 ¥1,273 $10,590 Receive floating rate/pay fixed rate ...... 2,404 2,404 (211) (1,755) Total ...... ¥1,062 $ 8,835
Notes: 1. Unrealized gains (losses) are recognized in the consolidated statements of income. Derivatives which qualify for hedge accounting are not included in the above table. 2. Market values of over-the-counter transactions are based on the discounted cash flow method, option pricing models, etc.
(b) Currency related transactions Thousands of Millions of yen U.S. dollars Contract value or notional principal amount Maturities Unrealized gain Unrealized gain At March 31, 2004 Total over one year (loss) (loss) Over-the-counter transactions Currency swaps ...... ¥141,593 ¥95,130 ¥(829) $(7,843) Forward Foreign Exchange Contracts: Sold ...... 1,825 — 33 312 Bought ...... 1,832 — (7) (66) Total ...... ¥(803) $(7,597)
Thousands of Millions of yen U.S. dollars Contract value or notional principal amount Maturities Unrealized gain Unrealized gain At March 31, 2003 Total over one year (loss) (loss) Over-the-counter transactions Currency swaps ...... ¥128,642 ¥55,126 ¥(754) $(6,272)
Notes: 1. Unrealized gains (losses) are recognized in the consolidated statements of income. Derivatives which qualify for hedge accounting are not included in the above table. The following types of forward foreign exchange and currency options are not included in the above amounts. (a) Derivative transactions to which hedge accounting is applied (b) Those that are allotted to financial assets/liabilities denominated in foreign currency and whose market values are already reflected in the amount of the financial assets/lia- bilities on the consolidated balance sheets. Notes: 2. Market values are based on the discounted cash flow method. Notes: 3. The forward foreign exchange and currency options that were formerly revaluated are included in the amounts from this fiscal year. In accordance with JICPA Industry Audit Committee Report No.25., currency swaps, which qualify for hedge accounting, are excluded from the above tables.
28 THE NANTO BANK, LTD. ANNUAL REPORT 2004 Foreign exchange-related transactions such as forward exchange contracts and currency options, for which valuation gains (losses) have been recognized in the consolidated statements of income.
Millions of yen Thousands of U.S. dollars At March 31, 2003 Contract value or notional principal amount Contract value or notional principal amount Forward foreign exchange contracts: Sold ...... ¥4,153 $34,550 Bought...... 3,356 27,920
(c) Stock-related transactions None (d) Bond derivatives None (e) Commodity derivatives None (f) Credit derivative transaction Thousands of Millions of yen U.S. dollars Contract value or notional principal amount Maturities Unrealized gain Unrealized gain At March 31, 2004 Total over one year (loss) (loss) Over-the-counter transactions Credit Default Swaps Sold ...... ¥14,288 ¥4,288 ¥(33) $(312)
At March 31, 2003 None
THE NANTO BANK, LTD. ANNUAL REPORT 2004 29 INDEPENDENT AUDITORS’ REPORT
To the Shareholders and the Board of Directors of The Nanto Bank, Ltd.:
We have audited the accompanying consolidated balance sheets of The Nanto Bank, Ltd. and subsidiaries as of March 31, 2004 and 2003, and the related consolidated statements of income, stockholders’ equity and cash flows for the years then ended, expressed in Japanese yen. These consolidated financial statements are the responsibility of the Bank’s management. Our responsibility is to independently 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 Nanto Bank, Ltd. and subsidiaries as of March 31, 2004 and 2003, 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.
The U.S. dollar amounts in the accompanying consolidated financial statements with respect to the year ended March 31, 2004 are presented solely for convenience. Our audit also included the translation of yen amounts into U.S. dollar amounts and, in our opinion, such translation has been made on the basis described in Note 1 to the consolidated financial statements.
KPMG AZSA & Co.
Osaka, Japan June 29, 2004
30 THE NANTO BANK, LTD. ANNUAL REPORT 2004 CAPITAL MANAGEMENT
As of March 31,
CONSOLIDATED CAPITAL ADEQUACY RATIO Millions of yen 2004 2003 2002 2001 2000 Tier I: Capital ...... ¥ 165,514 ¥ 162,446 ¥ 155,424 ¥ 182,563 ¥ 180,738 Tax effect amount ...... — — — — — Tier I Total (A) ...... 165,514 162,446 155,424 182,563 180,738 Tier II : General provision...... 11,626 11,546 11,536 11,954 12,673 Subordinate debt ...... — — — — — Tier II Total ...... 11,626 11,546 11,536 11,954 12,673 Of which, added to capital (B) ...... 11,626 11,546 11,536 11,954 12,673 Deductions from Capital (Internal holdings for other financial institutions’ fund-raising purpose) (C) ...... 50 50 50 50 — Total Capital [(A)+(B)-(C)] (D) ...... ¥ 177,090 ¥ 173,942 ¥ 166,910 ¥ 194,467 ¥ 193,412 Risk-Weighted Assets ...... On-Balance Sheet Risk Weighted Assets ...... ¥1,837,497 ¥1,827,752 ¥1,830,249 ¥1,897,112 ¥2,012,088 Off-Balance Sheet Risk Weighted Assets ...... 22,805 19,701 15,652 15,620 15,725 Total (E)...... ¥1,860,303 ¥1,847,453 ¥1,845,902 ¥1,912,733 ¥2,027,813 Capital Adequacy Ratio (based on Domestic standards) (D)/(E)X100% ...... 9.51% 9.41% 9.04% 10.16% 9.53%
Note: The capital adequacy ratio was calculated on the basis of the formula announced by the Ministry of Finance under Provision 14, Clause 2 of the Banking Law.
NON-CONSOLIDATED CAPITAL ADEQUACY RATIO Millions of yen 2004 2003 2002 2001 2000 Tier I: Capital ...... ¥ 159,459 ¥ 156,206 ¥ 149,285 ¥ 177,343 ¥ 176,555 Tax effect amount ...... — — — — — Tier I Total (A) ...... 159,459 156,206 149,285 177,343 176,555 Tier II :...... General provision...... 11,533 11,469 11,467 11,881 12,598 Subordinate debt ...... — — — — — Tier II Total ...... 11,533 11,469 11,467 11,881 12,598 Of which, added to capital (B) ...... 11,533 11,469 11,467 11,881 12,598 Deductions from Capital (Internal holdings for other financial institutions’ fund-raising purpose) (C) ...... 50 50 50 50 — Total Capital [(A)+(B)-(C)] (D) ...... ¥ 170,942 ¥ 167,625 ¥ 160,702 ¥ 189,174 ¥ 189,153 Risk-Weighted Assets ...... On-Balance Sheet Risk Weighted Assets ...... ¥1,822,617 ¥1,815,373 ¥1,819,136 ¥1,885,457 ¥2,000,036 Off-Balance Sheet Risk Weighted Assets ...... 22,804 19,701 15,652 15,620 15,725 Total (E)...... ¥1,845,421 ¥1,835,074 ¥1,834,788 ¥1,901,078 ¥2,015,762 Capital Adequacy Ratio (based on Domestic standards) (D)/(E)X100% ...... 9.26% 9.13% 8.75% 9.95% 9.38%
Note: The capital adequacy ratio was calculated on the basis of the formula announced by the Ministry of Finance under Provision 14, Clause 2 of the Banking Law.
THE NANTO BANK, LTD. ANNUAL REPORT 2004 31 ORGANIZATION, GROUP NETWORK
As of July 1, 2004
ORGANIZATION
STOCKHOLDERS’ MEETING HEAD OFFICE General Secretariat BOARD OF DIRECTORS Compliance Administration Division General Planning Division Asset Assessment Administration Division MANAGING DIRECTORS’ ALM & Risk Management Division COMMITTEE General Business Division Direct Call Center Business Center Chairman Corporate Banking Division President Venture Business Support Division • DOMESTIC Deputy President Tourism Planning Division OFFICES Senior Managing Director Hong Kong Representative Office Managing Directors Public Institutions Division Credit Analysis Division Directors Housing Loan Center Corporate Finance Support Division Credit Supervision Division BOARD OF CORPORATE AUDITORS Securities & International Division Capital Market Division Standing Corporate Auditor Operating Administration Division Corporate Auditors Head Office Operations & Data Processing Center Branch Operations & Data Processing Center Board of Corporate Auditors’ Bureau Loan Document Center Operating Systems Division Inspection Division Personnel Division General Affairs Division Tokyo Liaison Office
NANTO BANK GROUP Head Office and 113 Branches Banking 16 Sub-Branches 1 Representative Office (Hong Kong)
Securities Securities & International Division
Credit Guarantees Nanto Credit Guarantee Co., Ltd.
THE NANTO BANK, LTD. Leasing Nanto Lease Co., Ltd.
Computer Software Development and Nanto Computer Service Co., Ltd. Services Nanto DC Card Co., Ltd. Credit Card Business Nanto Card Services Co., Ltd.
Nanto Estate Co., Ltd. Nanto Asset Management Co., Ltd. Other Operations Nanto Business Service Co., Ltd. Nanto Staff Service Co., Ltd. Nanto Investment Management Co., Ltd.
32 THE NANTO BANK, LTD. ANNUAL REPORT 2004 AFFILIATES AND SUBSIDIARIES, BANK DATA
As of March 31, 2004
OUTLINE OF CONSOLIDATED SUBSIDIARIES Indirect Capital Direct Holdings of Holdings through Subsidiaries Address Established (Millions of Yen) the Company (%) Subsidiaries (%) Business Line Nanto Credit 2-1, Omiya-cho 6-chome October 9, ¥10 3% 69% Credit guarantee Guarantee Co., Ltd. Nara City, Nara, Japan 1984 Nanto Lease Co., Ltd. 52-1, Omori-cho December 22, 50 5 65 Leasing Nara City, Nara, Japan 1984
Nanto Computer 93-2, Minami-kyobate-cho July 1, 1986 10 5 69 Computer software devel- Service Co., Ltd. 1-chome, Nara City, Nara, Japan opment and services Nanto DC Card 2-1, Omiya-cho 6-chome October 12, 50 5 71 Credit card business Co., Ltd. Nara City, Nara, Japan 1990 Nanto Card Services 2-1, Omiya-cho 6-chome December 10, 50 5 71 Credit card business Co.,Ltd. Nara City, Nara, Japan 1990 Nanto Estate Co., Ltd. 16, Hashimoto-cho November 8, 30 100 — Leasing and management Nara City, Nara, Japan 1969 of real estate
Nanto Asset 16, Hashimoto-cho December 17, 300 100 — Purchase, sale and leasing Management Co., Ltd. Nara City, Nara, Japan 1998 of real estate Nanto Business Service 93-2, Minami-kyobate-cho June 1, 10 100 — Centralized processing of Co., Ltd. 1-chome, Nara City, Nara 1984 clerical operations for the Japan Bank
Nanto Staff Service 2-1, Omiya-cho 6-chome March 18, 20 100 — Dispatch of temporary Co., Ltd. Nara City, Nara, Japan 1991 staff Nanto Investment 28, Tsunofuri-cho November 21, 120 5 68 Investment advisory Management Co., Ltd. Nara City, Nara, Japan 1986 service
HEAD OFFICE CORPORATE DATA 16, Hashimoto-cho Authorized Shares: 640,000,000 Nara City, Nara 630-8677, Japan Outstanding Shares: 281,756,564 Phone: (0742) 22-1131 Stated Capital: ¥29,249 million URL: http://www.nantobank.co.jp/ Number of Stockholders: 13,293 Date of Incorporation: June 1934 SECURITIES & INTERNATIONAL DIVISION Domestic Network: 130 offices 16, Hashimoto-cho Overseas Network: 1 representative office Nara City, Nara 630-8677, Japan Number of Employees: 2,798 Phone: (0742) 27-1560 Ordinary Stockholders’ Meeting: June 29, 2004 Fax: (0742) 26-1734 Stock Listings: Tokyo Stock Exchange SWIFT Address: NANT JP JT Osaka Securities Exchange e-mail Address: [email protected] MAJOR STOCKHOLDERS CAPITAL MARKET DIVISION Number of shares Percentage 12-5, Kyobashi 1-chome (Thousands) (%) Chuo-ku, Tokyo 104-0031, Japan The Bank of Tokyo-Mitsubishi, Ltd. 12,854 4.56 Phone: (03) 3535-8824 The Nanto Bank Employees’ Fax: (03) 3535-1245 Shareholders Association 10,187 3.61 The Meiji Yasuda Life Insurance Co. 8,430 2.99 HONG KONG REPRESENTATIVE OFFICE Sumitomo Mitsui Banking Co. 5,425 1.92 Suite 3008, 30/F. Sumitomo Mutual Life Insurance Co. 5,420 1.92 Two Exchange Square The Tokio Marine and Fire Insurance Co., Ltd. 5,407 1.91 8 Connaught Place Nippon Life Insurance Co. 5,102 1.81 Central, Hong Kong, China The Master Trust Bank of Japan, Ltd. 4,976 1.76 Phone: 852-2868-9932 Shigeki Kitamura 4,937 1.75 Fax: 852-2530-1583 Japan Trustee Services Bank, Ltd. 4,866 1.72 e-mail Address: [email protected] Total 67,607 23.99
THE NANTO BANK, LTD. ANNUAL REPORT 2004 33 THE NANTO BANK, LTD. 16, Hashimoto-cho, Nara City, Nara 630-8677, Japan Phone : (0742) 22-1131
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