2007 ANNUAL REPORT
DEXIA CREDIT LOCAL
short term has no future SUMMARY
Consolidated financial 1 General presentation p. 1 4 statements p. 81
Working hard for local development p. 1 Consolidated balance sheet p. 82 Dexia, world leader in local public finance p. 2 Consolidated income statement p. 84 Dexia’s business lines p. 3 Consolidated statement of changes in Message from the Chairman equity p. 85 of the Board and the Chief Executive Consolidated cash flow statement p. 87 Officer p. 4 Notes to the consolidated financial Consolidated key figures p. 6 statements p. 89 Board of Directors (March 2008) p. 7 Statutory Auditors’ report on the General organization chart (March 2008) p. 8 consolidated financial statements p. 181 Dexia Credit Local within the Dexia Group p. 10 Principal subsidiaries and affiliated companies p. 11
5 Financial statements p. 183
2 Management report p. 13 Balance sheet p. 184 Off-balance sheet items p. 186
Business review p. 14 Income statement p. 187 Risk management p. 29 Notes to the financial statements p. 188 Operating results p. 38 Statutory Auditors’ general report p. 243 Capital structure and share data p. 46 Human resources and environmental data p. 48 Terms and compensation paid to members of management bodies p. 55 Significant events and outlook p. 61 6 Shareholders’ Meeting p. 245
Statutory Auditors’ special report on Corporate governance and regulated agreements and commitments p. 246 3 internal control p. 63 Resolutions proposed to the Shareholders’ Meeting of May 16, 2008 p. 248
Report of the Chairman of the Board of Directors, prepared in accordance with Article L. 225-37 of the French Commercial Code p. 64 Statutory Auditors’ report p. 80 7 Additional information p. 251
Additional legal and administrative information p. 252 Statutory Auditors p. 255 Statement of the person responsible for the Registration document (document de référence) p. 256 List of information published or released during the previous twelve months (prepared March 21, 2008) p. 257 The annual report may be consulted at the Cross-reference table p. 261 following website www.dexia-creditlocal.fr Annual Report
2007 Annual Report
( PROFILE
DEXIA CREDIT LOCAL
Working hard for local development
Dexia Credit Local is the Dexia Group subsidiary specialized in public and project finance for the local public sector.
In France, Dexia Credit Local is the traditional financial partner of the local authorities. The Bank also provides financing to the public housing, healthcare and public health sectors. Its strengths and unique characteristics make it a one-of-a-kind reference among banks. Its marketing strategy has remained unchanged since the Bank was founded, rooted in taking long-term positions and building long-term relationships with local players, providing specific analyses and financial tools to help its customers to arrive at their decisions, and sharing expertise by disseminating in-depth information and organizing training sessions on their behalf.
Relying on responsiveness that has been certified ISO 9001, the Bank adapts its product and service offer to meet all of its customers’ needs, and in addition to financing their projects, Dexia has also expanded its palette of businesses to optimize their resources and facilitate the implementation of local policies in areas such as tailor-made financing, lease financing, social housing loans, debt optimization, cash management and banking services, administration of public assets, automotive fleet leasing and management, statutory insurance and social engineering products, CESU- type service checks, public sector acquisition cards, etc.
An engaged and responsible partner, the Bank fosters values of citizenship and the participation of young people in the local community through the Dexia France Foundation.
Its branches and subsidiaries are developing the same type of business in nearly thirty countries around the world, especially in the European Union, North America, Mexico, Australia, Japan, etc. Its global leadership is based on financial engineering tailored to the needs of public authorities and acknowledged expertise in financing major infrastructure projects (ranked third globally by Thomson Financial in 2007), namely through public-private partnerships.
The Treasury and Financial Markets (TFM) business line is responsible for the Group’s short-term and long-term funding needs, and the quality of Dexia’s subsidiaries’ credit ratings allows them to raise funds under advantageous conditions. The TFM business also provides the Bank’s commercial customer base with financial markets products, and is responsible for managing Dexia’s ALM risk and its proprietary short-term money market portfolios.
This free translation of the annual report issued in the French language is provided solely for the convenience of English- speaking readers. The French version of the Dexia Credit Local annual report (document de réfé rence) was filed with the French Financial Markets Authority (Autorité des Marchés Financiers, or AMF) on April 3, 2008, in compliance with Article 212-13 of the AMF’s General Regulations. It is available on request.
2007 Annual Report / DEXIA CREDIT LOCAL 1 GENERAL PRESENTATION 1 Dexia, world leader in local public finance
Dexia, world leader in local public finance
Dexia is a European bank and the world leader in local public LONG-TERM COMMITMENT TO GROUP VALUES finance. Dexia is one of the top fifteen banking groups in the euro zone with a stock market capitalization of EUR 20.3 billion and Dexia has made a long-term commitment to the needs and well-being 35,500 employees in 37 countries as of December 31, 2007. of its customers, the harmonious development of society, protection of the environment and sustainable growth. Dexia expresses its unique corporate culture through its motto – short term has no future – which A UNIQUE BUSINESS MODEL IN THE BANKING SECTOR describes its approach to the conception and the management of its GROWTH IS BASED ON TWO PILLARS business lines.
Dexia’s future is built on two pillars: its Universal Banking business in Dexia’s actions and goals are driven by: Europe and world leadership in Public/Project Finance. • Ambition to constantly improve operational and financial Dexia intends to expand its Universal Banking business beyond its performance while adhering to Dexia social and environmental traditional markets of Belgium, Luxembourg, Slovakia, and Turkey to values; become a top-level European player while building upon its global • Respect for all, including customers, shareholders, employees, leadership in Public/Project Finance through geographic expansion. suppliers, and other stakeholders in Dexia businesses;
Dexia is confident it can deliver exceptional operational and financial • Passion for innovation that allows it to meet Dexia goals while results, including a dividend per share increase of at least 10% per contributing to society. annum, one of the Group’s objectives determined and announced in September 2006. DEXIA’S KEY FIGURES AT DECEMBER 31, 2007
FINANCIAL STABILITY Total assets EUR 604.6 billion Dexia has vigorous yet prudent growth plans, which adhere to its core values for managing risk and maintaining financial stability. The Group Net income – Group share EUR 2, 533 million maintains the highest standards for underwriting, risk management, Earnings per share EUR 2. 18 operational discipline and product performance. Tier 1 capital ratio 9.1 % Dexia has one of the highest credit ratings in the banking industry. The Group’s principal banking entities – Dexia Crédit Local, Dexia Return on equity (ROE) 17.8 % Bank Belgium and Dexia BIL – are all rated AA/Aa1/AA+; three of Dexia’s European subsidiaries issue Triple-A rated secured bonds; and Operating ratio 55.6 % FSA one of the world’s three largest bond insurers is a Triple-A rated company (recently affirmed).
2 DEXIA CREDIT LOCAL / 2007 Annual Report GENERAL PRESENTATION Dexia’s business lines 1
Dexia’s business lines GENERAL PRESENTATION
PUBLIC/PROJECT FINANCE AND CREDIT TREASURY AND FINANCIAL MARKETS ENHANCEMENT Dexia’s principal businesses give the Group a strong presence in the Over the last decade, Dexia has become the world leader in Public/ capital markets, where it funds and manages the Group’s balance Project Finance. Dexia operates in more than 30 countries including sheet and structures sophisticated products and solutions for clients France, Belgium, Italy, North America, Mexico, Germany, Spain, the of the various business lines. The Treasury and Financial Markets U.K. , Scandinavia, Switzerland, Austria, Slovakia, Poland, Romania, business segment generates substantial earnings in addition to the Czech Republic, Australia, Israel, Bulgaria, Hungary and Japan. providing support to the entire Group. Dexia meets the financing needs of local public authorities and other public services through direct loans, signed commitments, liquidity ASSET MANAGEMENT guarantees and the purchase of their securities. Dexia offers its customers a full range of products that include structured loans and Dexia Asset Management is a top-tier asset manager in Europe with a debt restructuring. complete range of investment vehicles from traditional and alternative Dexia deploys its know-how to project finance across the globe funds to socially responsible investments, an area in which Dexia is while adhering to highly selective policies in line with the Group’s a leader in Western Europe. Dexia specializes in the management of risk-management standards. Dexia focuses on transportation, mutual funds and institutional and private mandates. environmental and other essential infrastructure as well as the Dexia Asset Management operates through offices in Brussels, renewable energy sector. The Group finances corporate borrowers Luxembourg, Paris and Sydney, and via locally organized client in countries where it is active in Universal Banking, such as Belgium, relationship teams throughout Europe, the Middle East and Luxembourg, Turkey and Slovakia. Australia. Through its U.S. subsidiary Financial Security Assurance (FSA), Dexia provides credit enhancement for municipal bonds, infrastructure projects and asset-backed securities. Today FSA occupies a dominant INVESTOR SERVICES position in the U.S. municipal bond insurance market. RBC Dexia Investor Services was created in 2006 as a joint venture with Royal Bank of Canada to offer its expertise in global custody, fund PERSONAL FINANCIAL SERVICES and pension administration and shareholder services to institutions around the world. The company ranks among the world’s top ten Dexia is a leading European retail bank, offering a wide range of global custodians and does business in fifteen countries on four banking and insurance services to more than six million customers continents. – from individuals to small and medium-sized companies – in Belgium, Luxembourg, Slovakia and Turkey.
Dexia is one of the top retail banks in Belgium and Luxembourg and has a local bank in Slovakia. Dexia’s DenizBank is the sixth-largest privately owned bank in Turkey. Dexia Insurance Services supplies all the life and non-life insurance products sold in the retail networks of the Group in Belgium and Luxembourg, as well as in France.
Dexia is also a major private banking services provider through various entities, including joint ventures, principally in Belgium, Luxembourg, Spain, Switzerland and Denmark.
2007 Annual Report / DEXIA CREDIT LOCAL 3 GENERAL PRESENTATION 1 Message from the Chairman of the Board and the Chief Executive Officer
Message from the Chairman of the Board and the Chief Executive Officer
PIERRE RICHARD Chairman of the Board of Directors of Dexia SA Chairman of the Board of Directors of Dexia Credit Local
Despite the highly turbulent conditions that buffeted the financial itself from its largest competitors by voluntarily refraining from markets in 2007, Dexia proved the aptness of its strategic participating in the market for high-risk structured products. choices, which allowed the Group to continue to expand its business enough to achieve 12.5% growth in its underlying In the face of these worsened conditions, Dexia was able to net income . continue to grow its business in a very satisfactory manner, and continued to improve its internal procedures. During the year, All year long, Dexia remained highly the supervisory authorities duly certified solvent and experienced absolutely no the internal risk control models Dexia uses liquidity problems, against a background All in all, to calculate its “Basel II” capital adequacy that was greatly affected by the financial 2007 was yet another year of ratios. crisis touched off by the subprime profitable growth for Dexia, mortgage market. The subprime crisis, which succeeded once again in All in all, 2007 was yet another year the effects of which grew stronger during of profitable growth for Dexia, which the second half of the year, provoked generating good current earnings succeeded once again in generating generalized suspicion of financial while continuing to strengthen its good current earnings while continuing companies worldwide, owing to the long-term foundations. to strengthen its long-term foundations. size of the asset portfolios concerned and the complexity and opacity of the This is especially true for Dexia Credit financial instruments involved, as well as the only partial and Local, whose staff once again contributed brilliantly to achieving often contradictory information successively released to the this dual objective. In France, at a time when the entire public market by the various participants. sector – including both the central and local governments – is undergoing large-scale review of its actions in order to make Dexia, on the other hand, elected on several occasions to provide public services as high-performance as possible, Dexia Credit transparent and exhaustive real-time information about its Local is striving more than ever to put its expertise to work for financial position, while highlighting notably the fact that Financial those public sector entities responsible for improving the quality Security Assurance (FSA, its U.S. subsidiary) had distinguished of life and competitiveness of our regions.
4 DEXIA CREDIT LOCAL / 2007 Annual Report GENERAL PRESENTATION Message from the Chairman of the Board 1 and the Chief Executive Officer GENERAL PRESENTATION
GÉRARD BAYOL Chief Executive Officer of Dexia Credit Local
In 2007, Dexia Credit Local once again achieved growth in all of Total originations on the structured finance activity rose 24% to its lines of business. EUR 12.3 billion in 2007, and Dexia now ranks among the world’s leaders in the field. Total outstanding long-term credit exposure increased by 18% from EUR 229 billion to EUR 271 billion at December 31, 2007. In 2007, total net income contributed by Dexia Credit Local’s This growth reflects the strength of the Bank’s entire staff, which businesses fell slightly from the previous year to EUR 991 million, had already proven it could drive business significantly higher due primarily to the impact of the application of International by generating increases of 15% and 22% in 2006 and 2005, Financial Reporting Standards (IFRS) to the portfolio of FSA, the respectively. U.S. subsidiary. This excellent general performance is In France, total long-term exposure rose attributable to the progress achieved in by 9 % to EUR 70.7 billion at December every region of the globe in which Dexia 31, 2007, with increases in most of Credit Local is active, and to the strength A nd so, year after Dexia Credit Local’s main businesses. of its traditional local public sector lending year, our Company continues Structured finance exposures were up and structured finance businesses. to confirm Dexia’s world 18%, loans to the local housing and health sectors were 17% higher and - Total new long-term public sector lending leadership in local public in spite of it being the last year of the amounted to EUR 51.2 billion in 2007, sector finance previous administration – outstanding driven by Dexia Credit Local’s now well- loans to local authorities (the primary established European operations – in source of public investment in France) France, Germany, the United Kingdom and went up by 5%. Italy – as well as the very strong level of business in the United States, and the highly remarkable start-up And so, year after year, our Company continues to confirm Dexia’s of the Group’s new operations in Japan and Switzerland. world leadership in local public sector finance, providing our customers with the resources and financial services they need to fulfill their role as the driving force behind local economic and social growth.
2007 Annual Report / DEXIA CREDIT LOCAL 5 GENERAL PRESENTATION 1 Consolidated key figures
Consolidated key figures
PUBLIC AND PROJECT FINANCE (1) LONG-TERM FUNDING
(EUR billions) (EUR billions)
(1) New commitments, excluding FSA and including companies accounted for by the equity method.
OUTSTANDING MEDIUM- AND LONG-TERM LOANS BY COUNTRY (1) CREDIT RATINGS (EUR billions) Moody’s S&P Fitch Long-term r ating
Dexia Credit Local Aa1 AA AA+
Dexia Municipal Agency (1) Aaa AAA AAA
Dexia Kommunalbank Deutschland (2) - AAA -
Financial Security Assurance Inc. Aaa AAA AAA
Dexia Sabadell Aa2 - -
Dexia Crediop Aa2 AA- AA
(1) Mortgage bonds. (2) Pfandbriefe. (1) Including Germany and companies accounted for by the equity method. (2) Austria, Iberian Peninsula, United Kingdom, Central and Eastern Europe, Sweden, Switzerland. DEXIA CREDIT LOCAL GROUP EMPLOYEES (3) Australia and Japan. At December 31, 2007 (4) Including Mexico.
TOTAL ASSETS AND NET INCOME
Total assets Net income - Group share (EUR billions) (EUR millions)
6 DEXIA CREDIT LOCAL / 2007 Annual Report GENERAL PRESENTATION Board of Directors (March 2008) 1
Board of Directors (March 2008) GENERAL PRESENTATION
Chairman Pierre Richard, Chairman of the Board of Directors of Dexia SA
Vice Chairman Chief Executive Officer Dominique Marcel, Gérard Bayol Member of the Management Board of Caisse des Dépôts Director of Dexia SA
Fédération Nationale des Travaux Publics Jean-Pol Henry, represented by Patrick Bernasconi, Chairman Member of Parliament, Municipal Councilor of Charleroi
Fédération Française du Bâtiment Axel Miller, represented by Christian Baffy, Chairman Chief Executive Officer of Dexia SA, Chairman of the Management Board of Dexia SA Christophe Béchu, President of the General Council of Maine-et-Loire François Rebsamen, Mayor of Dijon Jean-Pierre Brunel, Attorney-at-law Antoine Rufenacht, Mayor of Le Havre Philippe Duron, President of the Regional Council of Basse-Normandie Francine Swiggers, Chairman of the Management Board of the ARCO group Jacques Guerber, Vice Chairman of the Management Board of Dexia SA René Thissen, Senator, Municipal Councilor of Waimes
2007 Annual Report / DEXIA CREDIT LOCAL 7 GENERAL PRESENTATION 1 General organization chart
General organization chart (March 2008)
8 DEXIA CREDIT LOCAL / 2007 Annual Report GENERAL PRESENTATION General organization chart 1 GENERAL PRESENTATION
2007 Annual Report / DEXIA CREDIT LOCAL 9 GENERAL PRESENTATION 1 Dexia Credit Local within the Dexia Group
Dexia Credit Local within the Dexia Group
Belgian local Caisse Ethias Free float Arcofin CNP Assurances governments des Dépôts
100% 6.25% 17.66% 1.96% 11.67%
Holding Dexia SA(1) Dexia Group Communal 16.25% (Belgium) 4.20% employees
100% 100% 100% 57.68% Dexia Dexia Banque Dexia Bank Dexia Credit Participation Internationale Belgium Local Luxembourg 42.23% à Luxembourg
(1) Dexia shares are traded on Euronext Paris, Euronext Brussels and the Luxembourg Stock Exchange.
10 DEXIA CREDIT LOCAL / 2007 Annual Report GENERAL PRESENTATION Principal subsidiaries and affiliated companies 1
Principal subsidiaries and affiliated companies GENERAL PRESENTATION
Branches:
Dexia Credit Local Canada branch Dexia Credit Local Dublin branch DEXIA CREDIT LOCAL Dexia Credit Local Grand Cayman branch Dexia Credit Local New York branch Dexia Credit Local Bank Tokyo branch Dexia Public Finance Bank (London branch) Dexia Public Finance Norden (Stockholm branch)
FRENCH SUBSIDIARIES INTERNATIONAL SUBSIDIARIES
Dexia Kommunalbank Kommunalkredit Dexia CLF Banque Crédit du Nord Deutschland Austria AG Group 80% 10% (Germany) 100%(Austria) 49%
Dexia Kommunalkredit Floral Dexia Location 49.16% Longue Durée Bank Group 100% 49% (Austria) 50.84%
Dexia Flobail Dexia Bail Dexia Crediop Group Dexia Crediop Ireland 100% 100% (Italy) (Ireland) 70% 100%
Financial Security Dexia Holdings Inc. Dexia CLF Régions Bail Dexia Municipal Agency Assurance Holdings Ltd. 100% 100% (United States) (1) 90% (United States) 99.13%
Dexia CLF Immo Dexia Municipal Agency Dexia Crédito Local 100% (Dublin branch) México SA de CV (Mexico) 100%
Dexia Israel Dexia Sofaxis Dexia Epargne Pension (Public Finance) Ltd.(2) 100% 25.35% (Israel) 65.31%
SISL CBX.IA 1 Dexia Sabadell Dexia Sabadell (Luxembourg) 100% (Spain) Portugal branch 100% 60%
Domiserve CBX.IA 2 (3) Dexia Delaware LLC 50% 100% (United States) 100%
Dexia Credit Local Asia Pacific Pty Ltd. Consolidated by the equity method (Australia) 100% Fully consolidated Proportionally consolidated Dexia CAD Funding LLC (United States) 100%
Dexia Public Finance Switzerland SA (Switzerland) 100%
(1) The remaining 10 % are held by Dexia SA. (2) As of March 25, 2008 Dexia Israel (Public Finance) Ltd. has been renamed Dexia Israel Bank Ltd. (3) CBX.IA2 is 70.85% - held by Dexia Credit Local and 29.15% - held by CBX.IA1.
2007 Annual Report / DEXIA CREDIT LOCAL 11 12 DEXIA CREDIT LOCAL / 2007 Annual Report MANAGEMENT REPORT Summary 2 2 Management report
Business review 14 Capital structure and share data 46
1. Business review (overview) ...... 14 1. Capital structure and number of shares ...... 46
2. Local public sector ...... 15 2. Delegation of powers with regard to capital increases ...... 46 3. Long-term structured fi nance ...... 20 3. Shareholder structure ...... 46 4. Insurance (Dexia Sofaxis) ...... 24 4. Dividends paid during the past three years ...... 47 5. Deposits & asset management ...... 24
6. Funding and fi nancial markets ...... 25
7. Financial Security Assurance (FSA) ...... 27 Human resources and environmental data 48
1. Human resources management...... 48 Risk management 29 2. Sustainable development ...... 50 1. Credit risk ...... 29
2. Financial risks ...... 31
3. Litigation risks ...... 32 Terms and compensation paid to members of management bodies 55 4. Operational risks ...... 33 1. Functions and other directorships held ...... 55 5. Information systems security...... 33 2. Compensation and regulated agreements...... 58 6. Risk management committees ...... 34
7. Payment systems security ...... 34
8. Risk monitoring in subsidiaries and branches ...... 35 Signifi cant events and outlook 61 9. Risk monitoring at FSA ...... 35 1. Signifi cant events...... 61 10. Dexia Credit Local and FSA portfolios ...... 36 2. Outlook ...... 62
Operating results 38
1. Consolidated fi nancial statements ...... 38
2. Financial statements ...... 43
3. Key fi nancial data for the past fi ve years ...... 45
Document2007 de référenceAnnual Report 2007 / DEXIA CREDITCRÉDIT LOCAL 13 MANAGEMENT REPORT 2 Business review
Business review
( 1. BUSINESS REVIEW (OVERVIEW)
1. Total outstanding loans (excluding subsidiaries accounted for Dexia’s achievements did not pass unnoticed by the market: by the equity method) amounted to EUR 271 billion at December Thomson Financial ranked Dexia third among Mandated Lead 31, 2007, 18% more than the previous year (22% excluding the Arranger (MLA) banks for project finance in all sectors and all unfavorable currency effect), with all locations reporting increases. geographical regions in 2007 (second for North and South America, FSA reported net insured capital of USD 623 billion, an increase of fourth for the EMEA (Europe, Middle East and Africa) region and 13% compared with December 31, 2006. 19th for the Asia-Pacific region), up from 13th place in 2006.
2. Total new lending (excluding subsidiaries accounted for by the Despite the liquidity crisis during the second half, the underwriting equity method) amounted to EUR 63,502 million, an increase of 20% and syndication business was very strong. over the previous year (23% excluding the unfavorable currency 3. FSA generated USD 1,271 million in interest margin and present effect). value premiums in 2007, an increase of 40% over 2006. The crisis • In the public sector, total new lending for the year amounted to besetting the monoline insurance companies underscored the quality EUR 51,167 million, 19% more than in 2006 (23% excluding the of FSA’s signature, which appears to be one of the most reliable in unfavorable currency effect). This increase is attributable to the the market. That enabled FSA to obtain satisfactory margins while higher volumes reported in the United Kingdom (acquisition of selecting strictly the best, highest credit quality transactions. a large public housing portfolio from Bradford & Bingley) and in 4. Total new long-term funding (excluding FSA) amounted to North and South America (excluding FSA), and to the start-up of EUR 24.1 billion in 2007 (EUR 26.3 billion in 2006), with an average operations in Japan, which generated EUR 4,638 million in new term of 7.5 years (8.2 years in 2006). In spite of the subprime crisis, lending. the Dexia Credit Local Group managed to raise practically all of the The debt restructuring business reached EUR 15.3 billion in 2007, funding it had budgeted, notably due to the acceptance of the Dexia with contributions from operations in France (71%), Italy (17%), Municipal Agency name. Germany (8%), the United Kingdom (2%), Mexico (1%) and the 5. In 2007, total new lending exceeded the already ambitious Iberian Peninsula (1%). budget for the year by 20%. • The structured finance business generated EUR 12,335 million in new lending in 2007, a 24% increase over 2006 (EUR 9,988 million). This is attributable primarily to the start-up of the business in Germany and to sharp increases in Australia and Italy.
14 DEXIA CREDIT LOCAL / 2007 Annual Report MANAGEMENT REPORT Business review 2
( 2. LOCAL PUBLIC SECTOR
2.1. LONG-TERM LENDING • new lending to local customers increased the most, by 53% to EUR 864 million; with the approach of municipal elections (March 2008), elected officials borrowed funds to advance their a. New lending expenditure timetable;
NEW LONG-TERM LENDING • conversely, invitations for bids from major accounts were down 20% overall, illustrating the wait-and-see environment for policy announcements from the new government (with possible new REPORT MANAGEMENT transfers of responsibilities). Despite this phenomenon, and given the increase in Dexia’s market share from 37% to 48%, the Group increased its new lending to this market by 2%, to EUR 4,638 million. Five contracts were signed for over EUR 100 million, such as the EUR 500 million loan for the Regional Council of Ile de France which, after issuing bonds for several years, turned once again to the banking market;
• new lending to the “key target segment” rose 3% to EUR 2,279 million.
New lending to the public health and patient services sector continued to increase, rising 10% to EUR 1,882 million. The year was marked by transition from the end of the government’s “Hospital 2007” modernization plan to the beginning of the new “Hospital 2012” plan. Dexia is the largest lender to this very fast-growing sector, with a 44% market share of 2007 flows. Outstanding loans to the public health and patient services sector rose 21%, the sharpest increase In 2007, total new long-term lending amounted to EUR 51,167 million, of any customer segment. Among the notable deals in 2007 were including EUR 6,267 million in off-balance sheet commitments (97% the university hospital centers in Amiens (EUR 150 million) and of which in North and South America). Lyon (EUR 100 million), the Assistance Publique hospital in Paris This amount was 19% higher than in 2006; excluding the currency (EUR 75 million), and the hospitals in Cambrai (EUR 83 million) and effect, new long-term lending would have increased by 23%. Chalon-sur-Saône (EUR 80 million). Total new lending to the institutional client sector declined by 6% BUSINESS REVIEW BY LOCATION to EUR 2,402 million due essentially to a slowdown in the housing France (S) sector (-17%). Refinancing of mortgage subsidiaries was lower, and the agencies all but stopped their active debt restructuring In 2007, total new lending increased by 4% to EUR 12,064 million. operations. Despite the low interest rates paid on Livret A regulated This new record confirms Dexia’s leadership in the local public savings accounts (to which government-controlled loans are indexed), sector. several noteworthy deals were signed with customers including OPAC This performance is even more noteworthy in that new lending was de Paris (the public development and housing construction agency, strongly affected by several political and economic events during the for EUR 78 million) and La Foncière Logement (a public housing year: the presidential election, the pre-electoral period (municipal), association, for EUR 63 million). expiration of the “Hospital 2007” healthcare modernization plan and, The social development sector accelerated considerably compared above all, the subprime mortgage crisis and rising borrowing rates with prior years, and new lending rose 33% to EUR 746 million during the fourth quarter, traditionally a period of strong lending. in 2007. This increase is attributable to the growth of new customer Results varied among the different markets: segments such as national institutions (EUR 60 million with the National Forestry Office), Regional University and Scholastic Service New lending to local authorities rose by 6% to EUR 7,781 million Centers (CROUS), autonomous ports and the municipal credit agencies in 2007, and represented 64% of total new lending. Dexia confirmed in Paris, Marseille and Lyon. Dexia also financed a EUR 78 million its leadership, with a 42% share of the local authorities market. consolidation transaction for the institutions in the “Saint-Joseph The electoral environment had diametrically opposed impacts on Hospital Foundation,” the largest private non-profit establishment in different types of customers: the greater Paris region, thereby confirming Dexia’s leadership in real estate leasing for the private non-profit healthcare sector.
2007 Annual Report / DEXIA CREDIT LOCAL 15 MANAGEMENT REPORT 2 Business review
The debt restructuring activity remained very strong with nearly It is worth noting that the USD lost 9% against the euro in 2007, EUR 11 billion in restructured loans, representing 17% of Dexia falling from an average of 1.27 USD/EUR in 2006 to 1.38 USD/EUR Credit Local’s total outstanding loans (the same level as in 2006). It in 2007. The percentage changes in the corresponding values in euros is worth mentioning the particularly strong deal-flow in the housing presented below include the impact of this unfavorable currency sector, where 14% of all outstanding loans were restructured, a 42% effect. increase over 2006. New off-balance sheet lending increased 28% in 2007 to a record Germany (F) high EUR 6,050 million (EUR 4,720 million in 2006), as decreased competition has benefited the Dexia Credit Local New York branch. New lending fell by 9% to EUR 5,783 million (EUR 6,354 million in 2006), due primarily to a falloff in the securities business T he Dexia Credit Local New York branch generated EUR 107 million in 2007. in 2007 from the new financial engineering activity it has developed. In 2007, the public sector in Germany continued to be affected by very strong competition from the Landesbanken regional banks, the Purchases of securities increased by 21% to EUR 5,264 million savings banks and, to a lesser extent, the commercial banks, with a (EUR 4,349 million in 2006), including EUR 1,880 million in student corresponding impact on margins. Moreover, in the context of the loans (+24% compared with 2006), EUR 1,958 million in tax-exempt subprime mortgage crisis, this trend became even more pronounced, bonds (+50%) and EUR 1,425 million in taxable bonds (stable in USD as borrowing counterparties benefited from the attractiveness of the terms, but 9% lower in EUR). quality of their ratings. Among the noteworthy deals done by the New York branch this year, In 2007, total new lending amounted to EUR 4 billion. Dexia it is worth mentioning the liquidity guarantees provided on issues Kommunalbank Deutschland pursued its strategy of expanding its by the Illinois State Toll Highway Authority (EUR 514 million), by the customized financial engineering offer to its direct customers in the State of California (EUR 372 million) and by the City of Philadelphia local public sector. (EUR 230 million). A EUR 290 million revolving credit agreement was set in place for the Metropolitan Atlanta Rapid Transit Authority. Structured transactions represented a large share of total new lending (EUR 2.1 billion, similar to the volume achieved in 2006). Within the North and South America region, it should be noted that It is important to emphasize that in 2007, the structured products the Montreal branch made two loans this year: one with Société activity was impacted by a difficult German environment following the de Transport de Montreal for EUR 127 million, and the other with marketing by a market competitor of high-risk cumulative products. the University of Sherbrooke for EUR 101 million. This growth was In spite of it all, Dexia Kommunalbank Deutschland was able to facilitated by the partnership with the brokerage firm Casgrain. successfully market a more restrictive range products. Purchases of Canadian securities were lower year on year, at EUR 160 million. Among the noteworthy transactions, it is worth mentioning six EUR 50 million structured transactions with the Land [region] of Nord Australia Rhein Westphalie. New lending amounted to EUR 131 million (AUD 214 million) on a New “plain vanilla” lending increased from EUR 1.3 billion in 2006 total of seven transactions. to EUR 1.9 billion in 2007. The municipal finance business started up in the fourth quarter, and The debt restructuring activity, which was consolidated in 2007, more was concentrated on the State of New South Wales. New lending was than doubled year-on-year to EUR 1.2 billion in 2007. Roughly half greater than expected due to the removal of the primary market player, of the new lending went to restructure loans that had already been which was hit in September by a media campaign that lasted several structured. Lastly, it should be noted that many transactions were with weeks after it was discovered that it had invested the cash assets of leading counterparties such as the cities of Frankfurt, Wiesbaden, certain local authorities in subprime U.S. mortgage securities. Augsburg and Mannheim. Central and Eastern Europe (F) New lending from the forfeiting activity (acquisition of receivables) increased by 13% to EUR 116 million (EUR 102 million in 2006). New lending fell by 51% to EUR 1,123 million in 2007, from EUR 2,305 million in 2006. Dexia Kommunalbank Deutschland invested an additional EUR 1.7 billion in its public finance portfolio in 2007 (EUR 2.6 billion New lending was down from the previous year because 2006 had in 2006), primarily in securities issued by the German Länder. been strongly impacted by large purchases of Polish and Hungarian sovereign securities. In terms of the expansion of its sales and North and South America (excluding Mexico) (S) marketing, Dexia Kommunalkredit Bank pursued its strategy of improving its risk-reward ratio throughout the region, with mixed New lending increased by 28% to EUR 11,758 million (USD 16,220 results depending on the country. The most difficult markets were million) in 2007, from EUR 9,216 million (USD 11,657 million) Poland, Slovakia and the Czech Republic, where the local banks in 2006. This is a new record, replacing the previous high in 2005. offer very aggressive margins in the public finance market. Given The total value of new U.S. bond issues increased by 1.3% to EUR 311 billion in 2007, from EUR 307 billion in 2006.
16 DEXIA CREDIT LOCAL / 2007 Annual Report MANAGEMENT REPORT Business review 2
this situation, Dexia Kommunalkredit Bank’s strategy is to promote Among the significant transactions in 2007, it is worth noting a the development of structured products. EUR 7 million (NIS 39 million) loan for the municipality of Kafar Shaba in May. Moreover, a EUR 12 million (NIS 70 million) loan to In 2007, the Central and Eastern European region was relatively Mei Sheva in September 2007 marked the first deal ever done with a unscathed by the liquidity crisis affecting the countries to the west, water company. Dexia Israel (Public Finance) Ltd. effectively diversified largely due to the fact that the domestic markets in local currencies into this sector, and made two other loans totaling EUR 13 million remained liquid. (NIS 74 million) to water companies (Mei Na and Mei Modi’in). Among the noteworthy transactions in 2007 were a EUR 50 million loan for the National Library of the City of Prague (EUR 24 million of Italy (F) which was covered by a structured swap); loans totaling EUR 42 million New lending was down by 27% to EUR 3,753 million in 2007, due to both the City and the County of Sibiu for the renovation and essentially to the sharp contraction of the Italian public finance REPORT MANAGEMENT expansion of Sibiu’s regional airport; and loans of EUR 29 million market in 2007 (EUR 8 billion, compared with nearly EUR 14 billion to the City of Iasi in Romania and EUR 19 million to the City of Riga the previous year). This decrease was primarily rooted in an increasing in Latvia. It is also worth noting the growth of loans and structured aversion to debt (in compliance with the Stability Pact) and an Italian swaps in the Czech Republic and Slovakia, and, in particular, a major media campaign against the use of derivative products. restructuring of existing loans totaling EUR 35 million with ZSSK, the Slovakian passenger railroad company. Two deals with Zagreb Under these conditions, Dexia Crediop still managed to maintain its (EUR 10 million) and Tallin (EUR 26 million) were also signed during market leadership, with a share of nearly 34%. As the domestic and the year. international bond markets attained historically low levels, most of Dexia Crediop’s deals were loans, including two for the regions of United Kingdom (S) Piedmont (EUR 495 million) and Campania (EUR 325 million). Dexia Crediop also carried off one major deal in the securities market, acting Total new lending amounted to EUR 5,386 million (GBP 3,702 million) as a Joint Lead Manager on EUR 650 million of an asset-backed in 2007, an extraordinary feat compared with the EUR 1,043 million securities (ABS) issue for the region of Campania. (GBP 711 million) obtained in 2006. Under these conditions, new lending from the debt restructuring In the local authority sector, total new lending increased by 21% to activity fell by 19% to EUR 2,629 million in 2007 (EUR 3,264 million EUR 804 million (GBP 553 million) in 2007. in 2006). The largest transaction in 2007 was the restructuring of the In the public housing sector, new lending increased by 78% to a international bonds issued by the Commune of Rome (Dexia’s share: new record of EUR 655 million (GBP 450 million) in 2007. Moreover, EUR 870 million). it is worth noting the acquisition of Bradford & Bingley’s public housing portfolio for EUR 3,953 million (GBP 2,700 million) in Japan (S) November 2007. This acquisition was an extraordinary opportunity New lending amounted to EUR 4,638 million (JPY 752 billion) for Dexia Public Finance Bank (the Dexia Credit Local London branch), in 2007. which allowed it to increase its market share to around 8% in a key sector for its growth in the United Kingdom. This transaction also Most new lending took place during the second and third quarters of increased the year-on-year business volume twelve-fold. the year. The Dexia Credit Local Japan branch was fully operational by the start of the local authorities’ annual refinancing campaign Israel (S) in the spring. The branch was therefore able to take full advantage of the impact of the so-called Japan Tour. The market for loans to New lending increased by 50% to EUR 186 million (NIS 1,045 million) local authorities remained active even after that period, allowing the in 2007. branch to exceed its forecasts. Moreover, the subprime mortgage crisis This considerable growth is attributable to: impacted the bond market all the way into October. New lending for the year was driven by the public sector portfolio (64%) and by loans • deals taken by Dexia Israel (Public Finance) Ltd. under public to local authorities (36%). invitations for bids launched by the State of Israel, which amounted to EUR 38 million (NIS 212 million); New lending during the last quarter amounted to EUR 761 million, or 16% of cumulative new lending since January. The slowdown in the • the strong deal-flow in July and August 2007 with Israeli fall essentially mirrored the annual local authority budget cycle. municipalities which, anticipating the increase in interest rates brought on by the subprime crisis, borrowed while rates were During the second half of the year, the first structured loans were still low. Accordingly, new lending came in at EUR 80 million signed, the customer base was broadened to include medium-sized (NIS 453 million) for July and August. cities, and FSA enhanced its first bond.
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Mexico (S) Sweden (F)
Total new lending increased by 4% in 2007 to EUR 488 million Total new lending declined by 29% in 2007 to EUR 754 million (MXN 7,350 million), from EUR 470 million the previous year. (SEK 6,983 million).
Competition remained very strong in the banking market in 2007, There are two explanations for this significant decrease: very strong confirming the pressure on margins in a booming market. Taking competition in Sweden and Finland, and the deterioration of market advantage of its increasing recognition, Dexia Crédito Local Mexico conditions, which is attributable to the excellent financial position managed to pursue its conquest of the Mexican market: its share of of the Swedish and Finnish municipalities, which limited their use the public finance market increased to nearly 9%, although Banobras of borrowing. still leads with a 35% share. The largest transactions included the purchase of EUR 52 million The Mexican public finance market was quite active during the (SEK 479 million) in bonds issued by the Icelandic company year, with two of the main federated Mexican entities restructuring Landvirkjun, and a EUR 54 million (SEK 500 million) loan to the their debt. The most striking deal of the year was the signing of municipality of Gothenburg. It is also worth noting that in 2007, a contract for a final share of EUR 450 million (MXN 7 billion) 83% of all transactions were carried out in Sweden. with Distrito Federal for the refinancing of Mexico City’s debt Lastly, it is significant that EUR 77 million (SEK 715 million) of new over 33 years. This included the renegotiation of EUR 149 million lending came from structured products, including two with the City (MXN 2,200 million) in existing Dexia Crédito Local Mexico loans. It of Södertälje for a total of EUR 54 million (SEK 500 million). These is also worth mentioning the subsidiary’s participation in the financing results are encouraging for the growth of this activity, especially with of the restructuring of the debt of the State of Michoacán for a final Swedish municipalities. share of EUR 67 million (MXN 972 million) and the subscription of EUR 48 million (MXN 700 million) in bonds issued by the State of Switzerland (S) Chiapas. New lending increased by 20% to EUR 1,285 million Iberian Peninsula (S) (CHF 2,125 million) in 2007, compared with EUR 1,072 million (CHF 1,737 million) the previous year. Total new lending increased by 11% to EUR 1,713 million in 2007 (EUR 1,542 million in 2006). It was split between three categories of customers: cantons (40%), cantonal banks (33%) and cities (27%). Most new lending in 2007 The largest transactions included the purchase, in two consecutive was in the French- (64%) and German-speaking (26%) regions of transactions, of Cédulas Territoriales (public sector bonds) issued by Switzerland. It is worth mentioning the sharp increase in the Italian- BBVA for respectively EUR 100 million and EUR 54 million. It is also speaking region, which represented 10% of the total in 2007, worth noting Dexia’s EUR 175 million participation in a bond issue by compared with 2% in 2006. An analysis by type of distribution channel the Institut Catalàn de Finances (which is attached to the region of shows a slight decrease in direct sales, from 58% of total new lending Catalonia) and a EUR 80 million loan to the City of Barcelona. in 2006 to slightly less than 50% in 2007, due to the traditionally In Portugal, new lending increased due primarily to a resumption of strong relationship that has always existed in Switzerland between demand for public finance following certain significant legal reforms. brokers and local authorities. Dexia Public Finance Switzerland The main transaction of the year was the bond issue by the state- expanded its portfolio to include 93 customers at December 31, owned Aguas de Portugal: Dexia Sabadell acted as Mandated Lead 2007, up from 62 in 2006. Arranger, and retained a final share of EUR 100 million. Austria (49%-held subsidiary accounted for by the equity International Headquarters (F) method) (F)
The International Headquarters generated total new lending New lending decreased by 4% in 2007 to EUR 8,884 million of EUR 2,105 million in 2007, 12% less than in 2006 (EUR 9,244 million in 2006). (EUR 2,393 million). In 2007, 18% of all new lending came from Austria (24% in 2006), Of that total, purchases of securities represented EUR 2,072 million, 14% from Eastern European countries (20% in 2006), 5% from with two categories of customers: Switzerland (3% in 2006) and 63% from the rest of the world (60% in 2006). • non-G12 sovereigns: EUR 2,057 million, or nearly all of the new lending for the year; and There is not much to be said regarding the volume of new lending, as it was generated primarily by several large transactions with Länder. • local authorities: EUR 15 million. The drop in new lending to the Eastern European countries reflects New loans generated an additional EUR 33 million, with two loans their lower volumes of bond issues. In Switzerland, new lending totaling EUR 15 million to Kyivpastrans and Kyivsky Metropolitan, two nearly doubled due to an aggressive commercial strategy, but only public agencies of the City of Kiev (transactions carried out with the through purchases from brokers. Lastly, the growth in the rest of the EBRD), and one EUR 18 million loan to the City of Chuvashavtodor world included the positions taken in Western European sovereigns (Russia). following the widening of spreads that resulted from the subprime crisis.
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A large portion of Kommunalkredit Austria’s new lending in b. Outstanding Austria came from several noteworthy transactions with the Länder of Upper Austria (EUR 337 million, finalized in December) and OUTSTANDING LONG-TERM LOANS Lower Austria (EUR 105 million) and with the Republic of Austria (EUR 149 million).
In Central and Eastern Europe, nearly all of the EUR 1,494 million in new lending corresponded to purchases of bonds and sales of credit default swap (CDS) protection involving sovereigns, including Romania, Croatia, Latvia, Estonia, Lithuania, Bulgaria, Russia and Kazakhstan. It is also worth noting a EUR 50 million transaction with
Eximbank, a Hungarian bank, carried out jointly by the Dexia Credit REPORT MANAGEMENT Local Public Sector Origination department, Dexia Kommunalkredit Bank and Kommunalkredit Austria.
In the rest of the world, total new lending amounted to EUR 4,852 million during the year, with important investments in Western European sovereigns (Germany, Belgium, France and Spain) and various U.S. states during the first half, in order to build Kommunalkredit Austria’s collateralized debt obligation (CDO) portfolio.
Outstanding long-term “public sector” loans amounted to EUR 233 billion at December 31, 2007, 15% higher than the previous year. Excluding the currency effect, the increase would have been 19%.
The increase was particularly significant in France (8%), Switzerland (155%), the United Kingdom (87%), North and South America (19%, excluding the currency effect) and Germany (8%).
Debt restructuring balances represented EUR 15.3 billion at December 31, 2007, divided among France (71%), Italy (17%), Germany (8%), the United Kingdom (2%), Mexico (1%) and the Iberian Peninsula (1%).
2.2 SHORT-TERM LENDING
Outstanding short-term loans totaled EUR 9.5 billion at December 31, 2007, and were 13% lower than the previous year. Most outstanding short-term loans were in France (85% of the total) and Germany (11%).
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( 3. LONG-TERM STRUCTURED FINANCE
3.1 ORIGINATIONS Dexia also purchased a total of EUR 200 million in Cofiroute and ASF bonds.
LONG-TERM ORIGINATIONS Public-private partnership (PPP) originations remained strong, with the financing as Agent and Sole Arranger of three projects totaling EUR 85 million: the INSEP training center and public lighting systems for the cities of Rouen and Hérouville Saint Clair. It should be recalled that nine other PPP transactions were also arranged by the Specialized Finance department for a total of EUR 51 million. Dexia Credit Local also obtained an advisory mandate from the France Télécom/Eiffage/ AXA consortium for an invitation for bids for the telecommunications system of the French Ministry of Defense.
In the environmental sector, Dexia Credit Local notably underwrote EUR 175 million on the financing of the acquisition of SAUR, and as MLA financed EUR 150 million for a waste management center.
In the telecom sector, Dexia Credit Local was underwriter on EUR 100 million for the financing of the acquisition of TDF.
Dexia Credit Local financed four renewable energy projects (wind power and biofuels) totaling EUR 95 million. As MLA, Dexia Credit Local notably financed wind farms for Babcock & Brown in the region of Fruges (EUR 48 million). Total originations in the structured finance sector increased by 24% In the asset-based lending sector, Dexia Credit Local notably financed to EUR 12,335 million in 2007. a ship for the French Gironde department (EUR 25 million). Dexia’s originations did not pass unnoticed by the market: Thomson Financial ranked Dexia third among Mandated Lead Arranger (MLA) Germany banks for project finance in all sectors and all geographical regions Dexia Kommunalbank Deutschland started originating structured in 2007 (second for North and South America, fourth for the EMEA finance deals in 2007, and generated EUR 582 million. (Europe, Middle East and Africa) region and 19th for the Asia-Pacific region), up significantly from 13th place in 2006. Despite the liquidity In the energy sector, Dexia Kommunalbank Deutschland signed crisis during the second half of the year, originations from underwriting several participations totaling EUR 255 million in loans to providers and syndication remained very strong. of public services (“Multi Utilities”), including EUR 127 million for MVV Energie (a company held by the City of Mannheim) and BUSINESS REVIEW BY LOCATION EUR 57 million for EnBW (the fourth largest German electric utility). France (F) Dexia Kommunalbank Deutschland participated in two project finance deals totaling EUR 53 million, including one in the renewable energy Total originations decreased by 10% in 2007 to EUR 1,042 million sector (financing of wind farms for the ArcLight Energy Partners III (EUR 1,152 million in 2006). While several large deals were fund). underwritten in 2007, the risk was distributed in the financial markets, so that the total value of originations for the year does not reflect In the public housing sector, Dexia Kommunalbank Deutschland these large transactions. participated in four financings for municipal public housing administration companies for a total of EUR 176 million (including In the transportation sector, Dexia Credit Local was MLA on two one established jointly with Kommunalkredit Austria), and a major refinancings: EUR 27 million sale and lease-back for the City of Hamburg (Alstria • one for the Millau Viaduct, via a EUR 215 million bank loan indexed Office AG), in partnership with Dexia Bank Belgium. to inflation. This transaction was enhanced by FSA and MBIA; Dexia Kommunalbank Deutschland also participated alongside • one for SANEF , the toll road concession operator (underwriting of DenizBank in the financing of vehicle inspection centers in Turkey EUR 750 million) enhanced by FSA and MBIA. This transaction was (USD 56 million for the Dexia Group) and arranged financing for the separately “repackaged” by the Dexia Credit Local Public Sector acquisition of a toll road operator in Chile for the Hochtief group. Origination department.
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North and South America (excluding Mexico) (S) In the infrastructure sector, Dexia Credit Local Asia Pacific underwrote AUD 596 million in bonds (on the books of Dexia BIL Singapore) for Originations increased by 31% in 2007 to EUR 1,491 million Brisbane Airport, the Royal Melbourne Hospital and the PPP financing (USD 2,056 million), from EUR 1,134 million (USD 1,434 million) of Orange Hospital, and participated notably: in 2006. • in the financing of Asciano (a spin off of Toll Holdings Ltd.), Several large transactions were signed in the transportation sector. the largest integrated operator of port and rail infrastructure in The Dexia Credit Local New York branch acted: Australia (AUD 170 million);
• as MLA in the financing of the acquisition of four toll roads in Mexico • in the refinancing of the construction of ConnectEast’s 1 toll road by the Goldman-ICA consortium, with an initial underwriting of project in Melbourne (AUD 50 million); USD 1.2 billion (target final share: USD 330 million); • for AUD 59 million in the PPP financing of housing for the army. REPORT MANAGEMENT • as underwriter for a total of USD 510 million (final share: Dexia Credit Local Asia Pacific’s Offshore Banking Unit participated USD 146 million) for the financing of two port acquisitions: P&O in two telecom transactions in India for a total of USD 73 million Ports North America by AIG Highstar, and Maher Terminals by (for Reliance Communications, the largest telecom operator in the RREEF; country, and Tata Teleservices). • as MLA and underwriter for USD 350 million (target final share: The total value of bond acquisitions ultimately booked in other Group USD 150 million) of a financing for Carrix Inc, the marine and rail entities amounted to AUD 1,455 million. terminal operator.
The Dexia Credit Local Montreal branch acted as underwriter for Central and Eastern Europe (S) USD 170 million (final share: USD 96 million) of the financing set in Total originations increased by 69% to EUR 645 million in 2007 place for the acquisition of the ports of New York and Vancouver by (EUR 382 million in 2006). a Canadian pension fund, and as MLA for the CAD 170 million PPP financing, enhanced by FGIC, of the Calgary beltway project. The region remained relatively unscathed by the liquidity crisis, but there is still price pressure on the larger infrastructure finance Originations were also strong in the energy sector: transactions syndicated in international markets. The local banks are • in the renewable energy sector, the Dexia Credit Local New York particularly aggressive in Poland, Slovakia and Czech Republic. and Montreal branches finalized ten transactions in the wind The largest transactions during the year were for the Zagreb-Rijeka power sector (eight of which as MLA) and one in the solar power toll roads in Croatia (EUR 48 million, guaranteed by the Croatian sector for a total underwriting of USD 1,215 million (final share: government); Aqualia, a regional producer and distributor of water USD 564 million). Dexia Credit Local New York branch continued in Czech Republic (EUR 20 million); the thermal power plant in to cultivate its relationships with Invenergy and Noble, two of the Belchatow, Poland (EUR 64 million, and an additional EUR 26 million largest U.S. developers in the wind power sector; share taken by the International Headquarters); and three transactions • Dexia Credit Local Canada branch acted as arranger/underwriter, in Bulgaria totaling EUR 72 million for the financing of the Maritza I for CAD 375 million (target final share: CAD 150 million) for the power plant in Bulgaria alongside the EBRD, the water company of financing of a nuclear power plant in Ontario; the City of Varna, and the electric company NEK.
• Dexia Credit Local New York branch also participated in the United Kingdom (F) financing of two drilling platforms for Petrobras in Brazil, for a Originations declined by 23% in 2007 to EUR 934 million total of USD 150 million; (GBP 642 million), from EUR 1,219 million (GBP 831 million) • the New York and Canada branches financed five transactions in in 2006. This decrease is attributable to the signature of two very the thermal energy sector, for a total of USD 225 million. large acquisition financings in 2006.
Australia (S) In the public-private partnership (PPP) and private finance initiative (PFI) sector, the London branch was Sole Arranger: Total originations increased by 208% to EUR 811 million (AUD 1,326 million) in 2007, from EUR 263 million (AUD 440 million) • of the refinancing of UPP Lancaster, a special purpose entity held in 2006. by Alma Mater (a fund in which the London branch is an investor) responsible for the construction, renovation and maintenance of In the energy sector, Dexia Credit Local Asia Pacific acted as MLA for housing at the University of Lancaster (GBP 189 million); AUD 524 million of the financing for Babcock & Brown’s takeover of Alinta (the gas and electricity distributor). • for the financing of hospitals (GBP 77 million);
Dexia Credit Local Asia Pacific also participated in the financing • for the financing of public housing for the Manchester City Council of the acquisition of oil assets in central Asia by Chinese investors (GBP 68 million); (USD 21 million). • for the financing of schools in Scotland (GBP 78 million).
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London branch also co-arranged: Dexia Crediop also signed several advisory mandates, including one with the City of Milan for the sale of shares in toll road companies. • the refinancing of a hospital in Edinburgh (GBP 85 million);
• the financing for UPP Loughborough, a special purpose entity of Japan which 50% is held by the Barclays European Infrastructure Fund Total originations amounted to EUR 35 million (JPY 5.6 billion) (in which the London branch is also an investor) responsible for in 2007. The Dexia Japan branch signed its first deal, in cooperation the construction and maintenance of housing for the University with the staff in Paris: a EUR 33 million share in the refinancing of of Loughborough (GBP 29 million). Softbank Mobile, the third largest mobile telephone operator in Japan. Dexia Credit Local London branch also concluded several participations, Dexia Credit Local Bank Tokyo branch also took a EUR 2 million share including GBP 59 million in the financing of the acquisition of two in the first Japanese PPP to finance a school. waste management companies of (WRG, acquired by FCC - transaction Mexico shared with Dexia Credit Local and Dexia Sabadell - and Cory, acquired by various financial investors), and GBP 35 million in the financing of Total originations of EUR 19 million (MXN 289 million: no originations Macquarie’s acquisition of National Car Parks. in 2006), with a first transaction for the financing of a thermal power plant in Baja California. Italy (S) Iberian Peninsula (S) Total originations rose by 103% to EUR 1,345 million in 2007 (EUR 664 million in 2006). Total originations increased by 44% to EUR 872 million in 2007 (EUR 604 million in 2006). Dexia Crediop’s originations were impacted in 2007 by its underwriting of EUR 1,500 million for the financing of ENEL’s takeover of Endesa In 2007, as MLA, Dexia Sabadell structured the financing of rails for in Spain. The final share (shared among Dexia Crediop, Dexia Credit the Madrid subway (final share: EUR 107 million). This transaction Local and Dexia Banque Belgique) amounted to EUR 408 million. confirms Dexia Sabadell as one of the primary leaders for the financing of infrastructure in Spain. In the energy sector, Dexia Crediop also underwrote EUR 300 million (final share: EUR 200 million) of the bonds issued by TERNA (national Dexia Sabadell also participated for EUR 100 million in four road power grid operator) and as MLA underwrote EUR 180 million transport projects (the M45, a highway in the Valencia region, a on the refinancing of the SET gas fired power plant (final share: highway in the Azores and the Ibiza/San Antonio highway), and EUR 120 million, shared with Kommunalkredit Austria). Dexia Crediop obtained an advisory mandate from the Dragados group for an also took a EUR 32 million share in the financing of the acquisition invitation for bids for the renovation of toll roads. of SGI (operator of a gas pipeline on the east coast of Italy), and Dexia Sabadell participated in two PPPs: a EUR 80 million refinancing underwrote EUR 200 million of an ENEL bond issue that was sold off of Aguas del Huesna (a water company in the Seville region) and the entirely through the market. financing of a prison in Catalonia for EUR 22 million. In the renewable energy sector, Dexia Crediop participated notably In the renewable energy sector, Dexia Sabadell participated in eight as sole MLA for the financing of a photovoltaic project for Solar solar power transactions totaling EUR 208 million (six of which, Ventures (EUR 16 million), and as co-arranger for a wind power deal totaling EUR 157 million, Dexia Sabadell arranged) and four wind (final share: EUR 18 million) in the Apulia region. power transactions totaling EUR 87 million. In the transportation and PPP sector, Dexia Crediop finalized the In the area of acquisition financing, Dexia Sabadell participated following transactions as MLA: in three deals for a total of EUR 88 million: ACS’s acquisition of • financing of line 5 of the Milan subway, underwriting 10% of Iberdrola and Acciona’s acquisition of 20% of Endesa (the EUR 105 million (target final share: EUR 50 million); Dexia Credit Local International Headquarters also participated in both transactions), and FCC’s acquisition of WRG, the U.K waste • PPP financing totaling EUR 27 million for the Legnano Hospital management company (Dexia Credit Local London branch and Dexia (underwriting EUR 84 million). This was the first hospital financing Credit Local Paris also participated in this financing). Dexia Crediop had ever carried out under a PPP; Dexia Sabadell also took a EUR 48 million share in the financing of a • bridge loan for Strada dei Parchi, a toll road concession operator gas fired power plant for AES Cartagena, and a EUR 45 million share in the Abruzzi region (EUR 100 million). in the financing of an incineration plant in the Balearic Islands. Dexia Crediop continued to expand its dealings with local utilities, and financed Hera (in the Bologna region) for EUR 150 million Dexia Credit Local International Headquarters (F) (including EUR 100 million in bonds). It is also worth mentioning total Total originations declined by 3% to EUR 4,430 in 2007 participations of EUR 190 million in financings for various municipally- (EUR 4,569 million in 2006). The decrease was attributable to lower held companies. bond purchases, which fell to EUR 2,613 million in 2007 from EUR 3,446 million in 2006.
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In the infrastructure sector, Dexia Credit Local and Dexia Banque Switzerland (D) Belgique were MLAs for the refinancing of the Brussels Airport, Total originations amounted to EUR 77 million (CHF 127 million) underwriting a total of EUR 197 million (final share: EUR 82 million for in 2007. Dexia Credit Local). Dexia Credit Local was also MLA for the financing of a toll road in Greece, underwriting EUR 230 million (target final Dexia Credit Local participated as Sole Arranger for the refinancing of share: EUR 60 million), and obtained its first MLA mandate in Germany the debt of the Geneva International Airport (CHF 125 million). for the financing of the A4 toll road, underwriting EUR 181 million (target final share: EUR 70 million). Austria (49%-held subsidiary accounted for by the equity method) (S) The following bond purchases are also worth mentioning: GBP 475 million in the water sector (mostly for Thames Water), Kommunalkredit Austria originated EUR 1,610 million in 2007
GBP 329 million in PFIs for the hospital sector in the U.K., (corresponding to a EUR 789 million share for Dexia Credit Local), REPORT MANAGEMENT EUR 110 million of ASF and GBP 206 million of Channel Link. compared with EUR 689 million the previous year.
Dexia Credit Local Paris successfully participated in several transactions In Austria, the largest transactions were the participation in the in the renewable energy sector, as: financing of the Nordautobahn Vienna-Prague link PPP highway project in Austria (EUR 180 million), and the financing of the holding • MLA for the refinancing of Babcock & Brown’s worldwide wind company of the Austrian state of Burgenland (EUR 50 million). power portfolio, underwriting EUR 400 million (target final share: EUR 210 million); In the rest of the world, it is especially worth mentioning the participation alongside Dexia Crediop in the financing of the SET • sole MLA (jointly with Dexia Bank Belgium) for the financing of transaction (EUR 72 million: see discussion above on originations C-Power’s farshore wind farm project in Belgium, underwriting in Italy), the participation in the financing of Glasgow Healthcare EUR 142 million; Facilities under a PFI syndicated by Dexia Credit Local London branch • MLA for the financing of onshore wind farms in Greece, for (EUR 73 million), the participation alongside Dexia Credit Local in the EUR 30 million. financing of Brussels Airport (EUR 65 million) and, in Switzerland, the financing of the Grande Dixence dam (EUR 78 million). In the thermal energy sector, the International Headquarters also Kommunalkredit Austria also participated in syndicated loans for participated in the financing of four electrical power and desalination Gazprom and Rosneft in Russia, and in the financing of the Ukrainian stations for a total of USD 263 million (Taweelah and Fujairah 2 railroads (which was guaranteed by the Ukrainian government). projects in the United Arab Emirates and Shuqaiq and Marafiq in Saudi Arabia), and acquired GBP 100 million in bonds issued by National Grid Gas Holding in the U.K.. Dexia Credit Local also participated as MLA for USD 100 million in the financing for the Qatargas 4 LNG 3.2 LONG-TERM EXPOSURE project, and took a USD 75 million share in the oil export prefinancing for Rosneft, the Russian petroleum company. LONG-TERM EXPOSURE In the telecom sector, Dexia Credit Local was particularly active in the Turkish market, working together with DenizBank:
• MLA for the refinancing of AVEA, the Turkish mobile phone operator, underwriting USD 225 million (final share: USD 63 million);
• underwriter for USD 350 million (final share: USD 215 million, half of which is on the books of DenizBank) of the financing of Ojer Telekomunikasyon’s acquisition of Turk Telecom;
• participation in the financing of capital expenditures for Turkcell (USD 25 million).
Dexia Credit Local also participated as MLA for the financing of the acquisitions of Media Broadcast in Germany and Alticom in the Netherlands, underwriting EUR 146 million (target final share: EUR 90 million), and took a USD 75 million share in the financing of an acquisition of Vodafone in India (Dexia Credit Local Asia Pacific also took a similar share). D Sweden ( ) Dexia’s long-term exposure to the structured finance sector amounted One transaction was completed in 2007: a EUR 51 million to EUR 37.7 billion at December 31, 2007, 41% more than the (SEK 473 million) financing for Hafslund, one of the largest utilities previous year. in Scandinavia.
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( 4. INSURANCE (DEXIA SOFAXIS)
Dexia Sofaxis collected EUR 363 million in premiums in 2007, slightly Fees and commissions amounted to EUR 46 million, roughly the same less than in 2006 (EUR 367 million). This dip is primarily attributable as in 2006. to the market for statutory insurance for the public service sector, which is becoming globally more difficult due to stiffer competition, and a pronounced decrease in rates.
( 5. DEPOSITS & ASSET MANAGEMENT
The Public/Project Finance business line managed assets of • In Israel, total deposits increased by 55% to EUR 0.8 billion. EUR 11.8 billion at December 31, 2007, an increase of 27% compared • In Australia, total deposits were four and a half times higher, at with December 31, 2006. EUR 0.7 billion. • In France, assets under management continued to rise, and • In the United Kingdom, total deposits were about unchanged from increased by 24% to EUR 7.1 billion at December 31, 2007, the previous year (EUR 0.2 billion). EUR 3 billion of which in the form of mutual funds (“OPCVM“).
• In Italy, assets under management decreased by 5% to EUR 1.7 billion.
• In Central and Eastern Europe, total deposits were up by 30% over the previous year, to EUR 0.8 billion.
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( 6. FUNDING AND FINANCIAL MARKETS
6.1 LONG-TERM FUNDING Public offerings continued to be restricted essentially to the Dexia Group’s AAA issuers, namely Dexia Municipal Agency and Dexia Kommunalbank Deutschland. It should also be noted that Dexia Senior debt (1) New issues New issues Credit Local entered this segment in 2007 with the launch of a Swiss (in EUR million) in 2006 in 2007 franc issue. France Dexia Municipal Agency – the Dexia Group’s standard-bearer for Dexia Municipal Agency 11,816 14,831 international public offerings – continued to develop its benchmark REPORT MANAGEMENT yield curves in the major international markets, and actively diversified Dexia Credit Local 3,915 3,363 its range of currencies available for funding during the year . Dexia Italy Municipal Agency raised 79% of its total funding through public offerings, thereby confirming investors’ interest in high-quality Dexia Crediop 3,859 2,732 issuers.
Germany Dexia Municipal Agency successfully launched its first benchmark of
Dexia Kommunalbank Deutschland 6,745 3,158 the year in euros (EUR 1 billion, maturing in twelve years), thereby marking its return to maturities longer than ten years. The transaction Subtotal – Europe 26,335 24,084 was very well received by the market, testifying to the excellent quality of the order book. United States Dexia Municipal Agency continued to develop its euro yield curve FSA – Financial products (GICs) 4,915 4,424 by creating three new benchmark points: two new 10-year issues TOTAL 31,250 28,508 for respectively EUR 1.25 billion and EUR 1.5 billion, and one new (1) Data include public offerings, private placements and borrowings on the retail and three-year, EUR 1.5 billion issue. subsidized (EIB and CEB) markets, and exclude intercompany loans. The data do not include issues with maturities shorter than two years. Maturities are measured Despite the subprime mortgage crisis, these transactions met with in comparison with the contractual maturity date or, if applicable, the first call a great deal of success with a wide, international investor base. The date. speed with which the order books were put together and the large In 2007, the Dexia Credit Local Group raised EUR 28.5 billion on long- number of investors confirmed the strength of the issuer’s franchise in term markets, compared with EUR 31.3 billion in 2006. Excluding the particularly difficult environment of the liquidity crisis. Accordingly, FSA, total funding raised amounted to EUR 24.1 billion, with an Dexia Municipal Agency was one of the few issuers of covered bonds average term to maturity of 7.5 years (8.2 years in 2006). to retain excellent access to the market during the last quarter of 2007, enabling it to raise three- and ten-year funds. Market conditions were severely impacted during the year by the subprime mortgage crisis brought on by the downturn in the U.S. Dexia Municipal Agency also launched three new eurodollar issues, residential real estate market. The crisis spread rapidly to the banking allowing it to fill out its existing yield curve with three new benchmarks, sector, causing investors to shun bank credits, resulting in a widening one at three years (USD 1 billion), one at five years (USD 1.25 billion) of credit spreads and a liquidity crisis in the short- and long-term and one at ten years (USD 1 billion) . segments. Lastly, Dexia Municipal Agency was also active in the GBP, JPY, CHF, Despite these difficult economic conditions, the reputation of Dexia CAD and AUD markets via the launch of new issues by increasing the Municipal Agency’s signature enabled the Dexia Credit Local Group existing stubs by EUR 5 billion. to raise nearly all of the funds it had budgeted. Dexia Credit Local raised EUR 120 million (CHF 200 million) on the The funding program may be analyzed in the following manner: public market in Switzerland with an average maturity of three years, filling a specific need expressed by institutional investors. a. Public offerings b. Private placements
New issues in 2007 Dexia Credit Local (consolidated) New issues in 2007 Dexia Credit Local (consolidated) Public offerings EUR 11.9 billion (+42.4% vs. 2006) Private placements EUR 9.5 billion (-31% vs. 2006) Average term to maturity 7.3 years Average term to maturity 8.1 years
In 2007, a total of EUR 9.5 billion was raised through private placements, representing 39% of total funds raised (excluding FSA) and 31% less than was issued the previous year.
2007 Annual Report / DEXIA CREDIT LOCAL 25 MANAGEMENT REPORT 2 Business review
With very volatile financial markets and a great deal of uncertainty 6.2 FINANCIAL MARKETS regarding the direction of credit spreads, investors’ appetites turned to liquid public offerings in preference to the structured deals used In 2007, the most significant developments in the financial markets to take positions on changes in interest rates. were the following:
Dexia Kommunalbank Deutschland raised EUR 3.2 billion (46% • The tremendous fragility of the real estate market in the United less than in 2006) with an average maturity of 9.3 years. Dexia States triggered the so-called subprime crisis in early August. This Kommunalbank Deutschland raised all of its funding through private crisis strongly perturbed the money and bond markets, threatening placements in 2007. investors and driving credit spreads up. The size of the banks’ total exposure remained difficult to quantify, due to the use of highly Dexia Municipal Agency raised EUR 3.1 billion (39% of its total new complex securitizations, and continued to weigh upon financial long-term funding and 33% less than in 2006), with an average institutions’ market capitalizations. maturity of 10.1 years. The private placements were essentially restricted to “plain vanilla” issues, thereby confirming the trend that Acknowledging these difficulties, the U.S. Federal Reserve lowered began in 2006 away from structured issues. its key “Fed funds” rate three times, from 5.25% for the twelve previous months down to 4.25%, at the end of the year. The Fed Dexia Credit Local raised EUR 2.5 billion (74% of its total new funding, considered support of economic growth to be more important and similar to the volume issued in 2006), with an average maturity than containing the inflationary pressures brought on by rising of 4.4 years. food and energy prices.
Dexia Crediop raised EUR 718 million in the Italian institutional private • In Europe, after it raised key rates by 50 basis points early in the placement market (26% of its total new funding), with an average year, the ECB suspended its cycle of rate increases in June in hopes maturity of 6.7 years. of relieving the liquidity crisis. Inflation, which reached 3.3% in November, is considered the primary risk in the medium term. c. Retail issues • The euphoria that had reigned over equity markets during the first half stopped short, as the subprime mortgage crisis and New issues in 2007 Dexia Credit Local (consolidated) uncertainty about economic trends in the United States increased risk aversion. Retail issues EUR 1.9 billion (-44% vs. 2006) • Credit spreads widened sharply during the second half, with an Average term to maturity 4.8 years overall reassessment of the scale of risk.
Dexia Crediop was active in the Italian retail segment, raising a total of Dexia Credit Local’s various financial markets activities were affected EUR 1.9 billion (68% its total new funding) with an average maturity in the following manners: of 4.8 years. • Credit spread portfolio-Public sector portfolio (CSP-PSP) in Paris, New York, Rome, Berlin and Tokyo: The CSP activity, which already d. Subsidized funding had ambitious objectives for new investments, was strong, and increased during the second half of 2007 to take advantage of widening spreads in the financial markets. New investments were New issues in 2007 Dexia Credit Local (consolidated) strongest in European and Australian residential mortgage-backed Subsidized funding EUR 880 million (same as in 2006) securities (RMBS) and in high-quality bank assets. The CSP unit also sold off certain assets in order to book the gains. PSP business Average term to maturity 9.4 years was quite active due to the development of Dexia Credit Local’s local authority business in Japan, and remained very strong on Dexia Credit Local signed seven new funding agreements with the sovereigns, PFIs and enhanced utilities in the United Kingdom. European Investment Bank (EIB), the largest of which were designated As was the case for the CSP, important gains were booked on for the French National Agency for Urban Renewal (ANRU) program, PSP disposals. “healthcare solidarity” and “public housing.” • Long-term funding: The Dexia Credit Local Group raised a total In all, Dexia Credit Local raised EUR 730 million with an average term of EUR 24.1 billion (excluding FSA) in 2007 (EUR 26.4 billion the to maturity of 9.4 years under ten drawings with the EIB. previous year), with an average term to maturity of 7.5 years Dexia Crediop did one deal with the EIB: EUR 150 million, with an (8.2 years in 2006). Dexia Municipal Agency issued a record average term to maturity of nine years. EUR 14.8 billion (EUR 11.8 billion in 2006).
FSA issued USD 6.5 billion (EUR 4.4 billion), with an average term • Public finance market engineering: The structuring of debt for public to maturity of 4.8 years, under its guaranteed investment contracts sector customers remained very active in 2007 (EUR 17 billion of (GIC) program. structured loans, including EUR 12 billion in France). The structuring of debt for project finance customers took off, with some 20 derivatives transactions arranged for customers of the structured
26 DEXIA CREDIT LOCAL / 2007 Annual Report MANAGEMENT REPORT Business review 2
finance unit in Paris and some 20 derivatives transactions arranged • Short-term risk management and cash and liquidity management: for customers of the London unit. The nominal value of commercial The very high volatility of interest rates markets and the very flows hedged internally with the trading and macro-hedging activities consequential bidding up of short-term liquidities penalized the was also much higher, with over EUR 1.5 billion hedged on behalf of results of this business in 2007. public sector customers in France, Italy, Belgium and Spain. Lastly, the The following graph presents Dexia Credit Local’s consolidated Value PFME Structuring desk structured its first transactions for institutional at Risk (VaR) on interest rates during the year: customers of the institutional sales units.
VaR ON INTEREST RATES FOR DEXIA CREDIT LOCAL (1) MANAGEMENT REPORT MANAGEMENT EUR millions 70.00 60.00 50.00 40.00 30.00 20.00 10.00 0.00 il t r ay ber ber ber uary arch 1 Apr 1 M 1 June 1 July 1 M 1 Augus 1 January 1 Febr 1 Octobe 1 Septem 1 Novem 1 Decem (1) Value at Risk: statistical assessment of the potential loss over a 99% confidence interval for a 10-day benchmark period for the TFM businesses .
( 7. FINANCIAL SECURITY ASSURANCE (FSA)
Financial Security Assurance had a record year in 2007, with strong Demand for bonds insured by FSA increased spectacularly during increases in all of its businesses. FSA recorded USD 1,271 million in the final months. In February 2008, Dexia Credit Local allocated an interest margin and present value premiums, an increase of 40% additional USD 500 million in capital to FSA so that it can take full over 2006. advantage of the growing opportunities in the U.S. municipal and public sector infrastructure finance sectors. It is necessary to distinguish the results of the first half, which were in line with those of the previous year, from those of the second, which were impacted by the subprime mortgage crisis and were responsible for two-thirds of FSA’s business in 2007. FSA benefited from favorable 7.1 MUNICIPAL FINANCE (S) conditions such as widening margins and the liquidity crisis. The crisis besetting the monoline insurance companies underscored the quality In 2007, FSA generated USD 793 million in present value premiums, of FSA’s signature, which appears to be one of the most reliable in a 26% increase over the previous year that concerned both the the market. That enabled FSA to obtain satisfactory margins while company’s U.S. and international businesses. selecting strictly the best, highest credit quality transactions.
2007 Annual Report / DEXIA CREDIT LOCAL 27 MANAGEMENT REPORT 2 Business review
United States (S) 7.2 ASSET-BACKED SECURITIES AND FINANCIAL PRODUCTS Municipal bond issues increased by 10% to USD 429 billion in 2007, although that increase was partially offset by a decline in enhancement Asset-backed securities (ABS) (S) penetration rates (from 49% to 47%) due primarily to the decreased volumes of refinancings linked to the rise in interest rates. As a result, The total amount of present value premiums more than doubled the volume of municipal bonds insured in the United States increased in 2007, to USD 390 million. by 7% in 2007. UNITED STATES (S) FSA insured USD 50 billion in municipal bonds in 2007, enabling the company to increase its market share from 24% to 25%, thanks to In 2007, the ABS activity generated USD 322 million in present value the image of quality afforded by its high degree of selectivity. Similarly, premiums, nearly three times the level attained in 2006. This growth FSA’s guarantee was sought out to reinsure transactions that had is explained primarily by the widening of credit spreads, which created already been guaranteed by other monolines (so-called secondary many opportunities. wraps). In December 2007, FSA’s market share reached 55%. • In the collateralized debt obligation (CDO) sector, FSA insured a Consequently, present value premiums rose by 25% to total of USD 3.4 billion, generating USD 56 million in present value USD 388 million. premiums.
Highlights of 2007: • Although the Residential Mortgage Backed Security (RMBS) market shrank considerably as investors backed off, the FSA guarantee • in May, FSA insured USD 673 million of bonds for Puerto Rico was increasingly in demand in this sector. FSA took advantage of Electric Power Authority, generating USD 10 million in present these opportunities, while accepting only the transactions with value premiums; the highest credit quality. • in September, FSA underwrote an insurance on an issuance of S USD 650 million to finance a new stadium in New York City, INTERNATIONAL ( ) generating USD 15 million in present value premiums; FSA generated a total of USD 68 million in present value premiums in 2007, an increase of 38% over 2006. • moreover, in the secondary market, FSA reinsured a USD 3 billion Citibank portfolio (previously insured by Ambac and FGIC), It is worth mentioning the following large transactions: generating USD 26 million in present value premiums. • FSA reinsured a CDO of airplane leasing receivables previously guarantee by Financial Guaranty Insurance Company (FGIC), International (S) generating USD 4 million in present value premiums; Total present value premiums increased by 28% to USD 405 million • FSA provided the guarantee on a EUR 387 million securitization in 2007. The largest transactions included the following: of Italian and German mortgages for Deutsche Bank Eurohome, • as part of the refinancing of Eurotunnel during the third quarter, generating USD 5 million in present value premiums; FSA insured USD 1,120 million of bonds denominated in euros • in South Korea, FSA enhanced a credit default swap (CDS) for the and pounds sterling. This transaction generated USD 120 million Royal Bank of Scotland following the securitization of automobile in present value premiums; loans, generating USD 1 million in present value premiums. • FSA insured half of the EUR 573 million (USD 775 million) loan for the refinancing of the Millau Viaduct made in July 2007 by Financial products (F) Dexia Credit Local, Depfa Bank and the European Investment Total deposits in relation to the financial products business (guaranteed Bank. This transaction generated USD 24 million in present value investment contracts, or GICs) amounted to USD 6.5 billion in 2007. premiums; Present value of interest margins declined by 27% to USD 88 million • during the third quarter, FSA enhanced EUR 870 million in 2007. Most new deposits occurred during the three first quarters (USD 1.2 billion) as part of the largest securitization of receivables of 2007. Acquisitions were voluntarily restricted during the fourth ever carried out in the Italian healthcare sector. This issue for the quarter in order to maintain a high level of liquidity. region of Campania (Dexia was Joint Lead Arranger) generated USD 33 million in present value premiums.
28 DEXIA CREDIT LOCAL / 2007 Annual Report MANAGEMENT REPORT Risk management 2
Risk management
The Risk Management and Permanent Control department is The Risk Management and Permanent Control department responsible for monitoring all credit, market, liquidity and operational adheres strictly to the provisions laid down by the Dexia Group Risk risks, within the meaning of French Banking Regulations Committee Management department (Group Risk Management) concerning risk (CRB) Standard 97-02 as modified. appetite, measurement methods, limits and reporting methods. REPORT MANAGEMENT
The EVP-Risk Management and Permanent Control who is Dexia The Risk Management and Permanent Control department operates Credit Local Management Board member, represents Dexia Credit free of any external influence from the front-office function. It does Local on the Group Risk Management Committee (GRMC), which is not report to any operational department, but has functional authority chaired by the Dexia Group EVP-Risk Management, himself a member over the specialized permanent control staff in each of the operating of the Group’s Management Board. units concerned.
The Risk Management and Permanent Control department is Risk is monitored on a consolidated basis via “risk units” organized responsible for guaranteeing that the Bank’s risk profile remains low within each branch or subsidiary, which report directly or functionally in accordance with the strategy defined by the Dexia Management to the head of the department Board, so that the Bank can secure the high credit rating it requires to obtain funding under the best possible terms. I t has also been charged with the organization of the permanent control function.
( 1. CREDIT RISK
The Risk Management and Permanent Control department uses tools and Management Credit Committee) for corporate lending, project it develops to monitor credit risk, in compliance with the guidelines finance, asset-based lending and the financing of local public sector established by the Dexia Group and all regulatory and prudential customers in regions where no delegation of lending authority has constraints. been granted. Restricted delegations of powers were given to the Dexia Credit Local New York and London branches and to the Dexia Sabadell subsidiary for their project finance activity;
1.1 APPROVAL PROCESS • delegates specific powers for commitments relating to the investment and trading portfolios, and turns to the Dexia Group The organization of the approval process takes into account the fact TFM Credit Committee for all amounts related to these activities that the vast majority of lending decisions concern customers in the that exceed the delegated powers. local public sector, which has low risk and is also subject to specific controls due to its public nature; as such, the approval process:
• provides for the delegation of powers to the French sales network 1.2 INTERNAL CREDIT RATINGS and to international entities, for local public sector customers in AND BASEL II REFORMS the Eurozone countries and in North America, as well as in other countries where Dexia Credit Local has a significant local presence Placed under the responsibility of the Group Risk Management and a local Risk Management department (such as certain countries department, the internal credit rating system is of paramount in Central and Eastern Europe, Israel, and Japan), using risk importance for the Dexia Group, which has chosen the advanced measurement tools developed together with the Risk Management approach under the Basel II capital adequacy reforms. By letter dated and Permanent Control department; December 21, 2007, following its meeting of December 18, 2007, the Management Board of the Belgian Banking, Finance and Insurance • respects the limits established by the Dexia Group Risk Management Commission (CBFA) authorized Dexia to use the advanced internal department; ratings-based approach for calculating and reporting credit risk-based • turns to the credit committees organized within the Dexia Group capital adequacy requirements as from January 1, 2008. (Dexia Credit Local Credit Committees, Dexia Credit Committee
2007 Annual Report / DEXIA CREDIT LOCAL 29 MANAGEMENT REPORT 2 Risk management
This project was coordinated by a specialized team within the Risk concrete implementation standpoint, an application for calculating Management and Permanent Control department, which complies the profitability of transactions using Basel II risk parameters has been with the guidelines established by Group Risk Management and deployed in each Dexia Credit Local location around the world, as well maintains daily contact with that department. It draws on all of the as in all Group entities. Several hundred people are now assigned to units in Dexia Credit Local, assigning responsibility for all functional this application, called RAROC. and systems-related aspects of the project to members in each branch and subsidiary, as well as in every Dexia Credit Local Head Office department concerned by the subject. 1.3 CREDIT LIMITS In 2007, the Dexia Credit Local Risk Management department continued to develop internal credit rating in order to cover the Credit limits are set in accordance with the technical specificities primary local authorities in Western Europe and their organizations, of each type of counterparty, as outlined in the procedure manuals the municipal sector in the United States, public housing, state-owned established by Group Risk Management, which have been approved and similar public sector agencies, project finance and other forms by the Risk Policy Committee and implemented at Dexia Credit of specialized finance. Local.
Development of models signifies not only the initial calculation Simply put, the system factors in Dexia’s Tier 1 capital, the counterparty’s and subsequent annual backtesting (namely using re-ratings and capital or the economic capital allocated to the transaction to calculate incorporating incidents of default) of the parameters for PD, LGD, decreasing credit limits on the basis of the internal credit rating. CCF (and other credit risk mitigants [CRM]), but also the development Dexia’s Credit Committees set individual limits for each project and maintenance of robust software applications for the rating and finance and asset-based lending transaction. Country and industry- oversight of each outstanding products covered by the one of the specific credit limits have also been established, depending on the internal credit rating systems. It also includes the implementation and characteristics of certain activities. subsequent monitoring and updating, as needed, of all procedures (e.g. those regarding past dues and defaults) that ensure that the provisions of Basel II are implemented at all of the levels concerned within the Bank. 1.4 MONITORING AND REPORTING
All these issues are presented first to the Validation Advisory First-level monitoring is provided by the sales teams of the Head Committee and then to the Group Risk Policies Committee and the Office, branches and subsidiaries as part of their ongoing controls of Internal Audit department. The regulators are informed of all work their counterparties’ businesses. They are responsible for ensuring performed by these bodies. All of the recommendations concerned that credit limits are respected each time a new lending decision are monitored regularly at the Group level. is presented to the Credit Committee or for locally-delegated approval. The units concerned are continuing their work in 2008: Second-level monitoring is provided by the Risk Management and • the work needed to improve the models to take account of all Permanent Control department, which monitors all of the Dexia Credit recommendations; Local group’s exposures, past-due loans and non-performing loans. • roll-out, corresponding to the development plan for other internal Changes in the quality of the commitments and compliance with credit rating systems for new or emerging types of customers for credit limits are examined quarterly (except for interbank credit limits, Dexia Credit Local; which are reviewed monthly) and are reported to the Management Board as part of the documentation required by CRB Standard 97-02 • the continuous work discussed above regarding the backtesting as modified. and development of software applications; Once a quarter, Watchlist Committees examine changes in sensitive • production of new, “permanent” risk weightings for the calculation transactions and Default Committees examine each case that meets of the capital adequacy ratio, which require very careful verification the criteria of default established by the banking supervisors. of the accuracy of all data reported in Fermat, the central database for adjusted regulatory risk calculation.
All Group counterparties are now described using the same standard 1.5 RESERVE POLICIES coding system, and the various entities continuously populate a common counterparty database (so-called participant database, or Once a quarter, a Reserves Committee, chaired by the Risk Management AIDA). All Dexia Group exposures to the various counterparties are and Permanent Control department, approves the amount of reserves now reported once a month. allocated and monitors the cost of risk. General reserves are calculated Lastly, in 2007, the Bank’s economic (or “risk-adjusted”) capital and maintained as required by IFRS regulations. requirements continued to be calculated on a quarterly basis, with new methodological advances (namely Credit VaR). Work began on stress-testing, in accordance with regulatory requirements. From the
30 DEXIA CREDIT LOCAL / 2007 Annual Report MANAGEMENT REPORT Risk management 2
( 2. FINANCIAL RISKS
The Dexia Credit Local Group makes a clear distinction between asset- The decisions of the Group ALM Committee are adapted operationally liability management (ALM) transactions and market transactions. by the Dexia Credit Local technical committee (Tactical ALCO). The Risk This distinction is based on highly differentiated management Management and Permanent Control department and the Financial objectives: Markets department both participate in the Tactical ALCO.
• ALM includes all activities related to the management of Dexia Credit Local’s structural risks, including interest rate, currency c. Measurement of total interest rate risk and balance sheet and off-balance sheet liquidity risks. Dexia ALM interest rate risk measurement has been standardized throughout REPORT MANAGEMENT uses macro-hedging transactions to reduce its total risk: the the Dexia Group, and is based on several main metrics. effectiveness of these hedges is measured every month, as required by CRB Standard 90-15; The principal measurement used is that of the interest rate sensitivity of the net present value (NPV) of assets and liabilities within the ALM • market transactions include primarily two types of strategies: scope. The scenario used for fixed rate exposures calculates the effect locking in of credit margins, primarily on bonds held, and use of of a 100 basis point uniform shift in the yield curve. If Dexia Credit derivative instruments to take positions on interest rates. Local has too many fixed-rate assets (base case) then its risk increases with an increase in interest rates.
2.1 ALM RISKS 2.2 MARKET RISKS a. Scope
The structural risks may be defined as: a. Scope
• risks of fluctuations in the Bank’s net income subsequent to changes The “Financial Markets” business lines refer to the Dexia Credit Local in market conditions (interest rates, exchange rates and the cost Group’s Treasury and Financial Markets (TFM) activities, including: of liquidity), with the exception of market risks; and • Financial Engineering and Derivatives:
• the risk of the Bank being insolvent. − trading of interest rate derivatives,
The goal of asset-liability management is to hedge - in part or in full − structuring and sale of derivative instruments to its own customers, - all risks related to the structure of the balance sheet, for those assets or to the customers of other business lines under master agreements and liabilities that have different interest rate, currency or amortization signed with those business lines; profiles. Residual risks may be maintained and managed in accordance with the decisions of the ALM Committee, which are generally • Delegated Asset-Liability Management: based on a long-term management horizon. The ALM Committee is − by delegation of powers from the ALM Committee, performs the responsible for all risks other than the interest rate and currency risks Bank’s short-term (less than two years) asset-liability management on the Financial Markets business lines. on the euro and the dollar, and manages all maturities of certain currencies for which powers have been explicitly delegated by b. ALM risk supervision Group ALCO;
The Dexia ALM Committee (ALCO) meets once a month. • Cash and Liability Management (CLM):
It defines risk policy and risk hedging strategies for the entire Group. − raises the Bank’s short-term funding (i.e. less than two years) and The guidelines established by the Dexia ALM Committee give rise to manages its short-term liquidity; individual hedging decisions, but management authority may also • Long-Term Funding: be delegated to the Dexia ALM department. − raises the Bank’s long-term funding (i.e. more than two years), The Dexia ALM Committee ensures that these limits are applied based on an annual issuance schedule established by the ALM consistently based on its own scenarios for changes in interest rates. Committee, The operational autonomy given to certain subsidiaries is supervised by the Dexia ALM Committee, which, by delegating powers and − issues subordinated borrowings, in accordance with the needs establishing limits, retains the means to control the policy set in place expressed by the Finance department; within the subsidiaries. As for all risk committees, the Dexia Credit • Credit Spread Portfolio : Local representative, who is either the Chief Executive Officer or the EVP-Risk Management and Permanent Control, has veto power over − invests almost exclusively in products not included in the usual all decisions he believes may be inappropriate for the entity. scope of operations of the Group’s principal business lines;
2007 Annual Report / DEXIA CREDIT LOCAL 31 MANAGEMENT REPORT 2 Risk management
• Public Spread Portfolio: • the Dexia Credit Local Market Committee (the “Weekly Operational Committee”), which provides weekly monitoring of − invests in bonds issued by counterparties within the scope of the the implementation of all standards and decisions issued by the Group’s Public/Project Finance and Credit Enhancement business Dexia Group Market Risk Committee; line. Because this sector falls under a business line other than TFM it is monitored by both of the business lines concerned; • the TFM Credit Committee, which examines all transactions related essentially to the credit spread portfolio and to credit • Credit Structuring Trading: structuring trading. The Credit Committee reviews all transactions − trading of bonds with short terms to maturity; concerning public sector issuers and corporate or project finance counterparties. • Sales: The Risk Management and Permanent Control department measures − sales force at the disposal of the other Financial Markets business risk regularly, and presents a quarterly market risk report to the lines. Dexia Credit Local Management Board. The report includes various These activities are subject to two types of risks: indicators for monitoring the limits that have been allocated to the different types of risk. • credit risk, or risk of default of the counterparty on a derivative contract or the issuer of a purchased asset (in reality, most of the c. Risk monitoring methods credit risk on TFM activities is concentrated in the credit spread portfolio, the public spread portfolio and the credit structuring The principal risk metric used by Dexia Credit Local, and in fact by trading activities); the entire Dexia Group, is value at risk (VaR). The VaR calculated by the Dexia Group measures the potential loss over a 99% confidence • market risks, which may be defined as risks of fluctuations in interval for a 10-day benchmark period. the Bank’s net income or the value of the positions it has taken subsequent to changes in market conditions (interest rates, The risk monitoring process consists of establishing the following exchange rates, share price, etc.). items for each entity and type of Financial Markets activity:
• a list of currencies and instruments that may be traded; b. Market risk supervision • a VaR limit. Three committees are responsible for monitoring risks relating to the Financial Markets activities:
• the Market Risk and Guideline Committee (MRGC) meets once a month. It is responsible for establishing and monitoring risk policies, such as guidelines and market risk limits for each activity and each desk, and is charged notably with the monitoring of risk indicators;
( 3. LITIGATION RISKS
Dexia Credit Local’s activities do not entail any particular risk of Among the subsidiaries, it should be noted that, like other financial litigation. There are no extraordinary events or legal matters that are institutions, FSA is the subject of an investigation by U.S. authorities likely to have, or to have had in the recent past, a material impact into the marketing of guaranteed investment contracts (GICs). upon the financial position of the issuer, its activity, its earnings and, if applicable, the Group that comprises the Company and its subsidiaries.
32 DEXIA CREDIT LOCAL / 2007 Annual Report MANAGEMENT REPORT Risk management 2
( 4. OPERATIONAL RISKS
Operational risks are defined as the risk of a loss resulting from risk correspondents are responsible for identifying and analyzing all inadequacies or failures in procedures, in staff or in internal systems, incidents with the help of the central operational risk unit. Depending as well as those due to external events. They include all risks related on the results of this analysis, corrective or preventive measures are to information systems security and litigation. Dexia has chosen taken to reduce exposure to operational risk. to include the risk of damage to the Group’s reputation into its Dexia has a shared operational risk management tool that includes a operational risk management. module for compiling incidents in the various Group entities. MANAGEMENT REPORT MANAGEMENT A quarterly report summarizing all significant incidents is sent to the ORGANIZATION AND MONITORING Management Board and to each business line EVP (in the Head Office, subsidiaries and branches). a. Operational risk management c. Risk mapping The Dexia Group has elected to apply the standardized approach allowed under the Basel II directives and has implemented processes In addition to the incidents that have already been observed, it is and a management tool as called for in the paper on “Sound Practices essential that the Bank anticipate all potential risks within each of for the Management and Supervision of Operational Risk” published its activities. By evaluating the principal areas at risk, including the by the Basel Committee on Banking Supervision. effectiveness of all existing controls, the Dexia Group can determine its risk profile. Departments and entities throughout the Dexia Group all A specialized team in the Dexia Credit Local Risk Management and use the same method for these self-evaluatory mappings. Depending Permanent Control department is responsible for operational risk, on the results, action plans may be set in place to control exposure and works with a network of correspondents in each department to risk. and entity. The involvement of the business line EVPs guarantees the effectiveness of the system. The results of the mappings are summarized in the Dexia operational risk management tool. Various reports analyze the Bank’s risk profile b. Compilation, analysis and processing of incidents by entity, by activity, by process and by type of event (as defined in the Basel II accord) and are presented to the Management Board The Dexia Group has defined a procedure for compiling incidents and each year. operational losses as required by the provisions of Basel II. Operational
( 5. INFORMATION SYSTEMS SECURITY
Information systems security includes all measures taken to shield data strategy of reprise is based on the use of formal, documented technical from any threat to its confidentiality, integrity or availability. guidelines, procedures and organizational structures. The BCP and these procedures are all updated once a year and on a regular basis, All these measures are described in the Dexia Credit Local information in accordance with a schedule defined by the Management Board. systems security policy manual, which defines all applicable principles The results of the tests are reported to the steering committee. by area of security, along with the roles and responsibilities of the various players in the IS security process, using a body of directives, Moreover, Dexia Credit Local has placed critical systems for data specific security policies, rules and operating procedures and the production with a service provider, in a single center under highly guidelines provided by ISO standard 27000/17799. secure physical conditions and connected via redundant high-speed links. Dexia Credit Local has also set up a mirror site to prepare for Under the supervision of a specialized steering committee, each any failure in these systems. Dexia periodically backs data up and operating department participated in the preparation of a business can very quickly substitute this site for the main site, if need be. This continuity plan (BCP). Under the plan, the impacts of a disaster system was successfully tested in 2007. affecting IT equipment or facilities or information systems or of a loss of service are analyzed from a “business unit” perspective in order to identify all mission-critical activities. The results of this analysis were used to establish business recovery times that are compatible with operating requirements. The implementation of this recovery
2007 Annual Report / DEXIA CREDIT LOCAL 33 MANAGEMENT REPORT 2 Risk management
Information systems security is managed by three players: policy, increases employee awareness and provides advice to the various departments. The IT Security Manager is a member of • the IT Security Committee is responsible for recommending the Operational Risk Management, Permanent Control and security policies to the Management Board, for establishing Security department, which guarantees his independence from specific directives for each area, and for ensuring that they are the operations area; implemented. The committee comprises representatives from the various “business line” stakeholders, including risk management, • IT departments are responsible for designing and implementing compliance, IT and logistics. The Committee meets every two all security hardware and software, and for implementing all months, and is chaired by the member of the Management Board associated operational rules and procedures. They also perform in charge of risk management and permanent control; first- and second-level controls over the correct application of security. The job of IT Security Manager was created within the IT • the IT Security Manager is responsible for recommending security department in order to coordinate these activities. policies and directives to the IT Security Committee. He oversees the practical implementation of the rules that make up the security
( 6. RISK MANAGEMENT COMMITTEES
Several committees are responsible for risk management within Dexia • the Dexia ALM Committee (monthly) which establishes strategies Credit Local. The Risk Committees were modified in early 2006, in for interest rate, currency and liquidity risks that are adapted as line with the reorganization of the Dexia Group. The roles, areas of needed by Dexia Credit Local’s own Technical ALCO; responsibility and composition of the committees were all specified. • the Dexia Credit Local Weekly Operational Committee, which adapts Decisions are reached by consensus and the risk management the decisions of the Treasury and Financial Markets Committee for representatives of Dexia Credit Local have veto power within the implementation; Group committees if they judge that one of the committee’s decisions is not applicable to the entity. • the New Products Committee (monthly), which validates all of the products of Dexia Credit Local and its branches. Each subsidiary The principal committees are: has its own committee; • the Risk Policy Committee, which adopts all risk measurement • L oan Monitoring Committees at both the Group and entity levels policies, rules and methods; (quarterly Watchlist Committee), which monitor developments in • the Dexia and Dexia Credit Local Credit Committees (weekly), sensitive transactions; which rules on all transactions submitted to it. The Credit Guideline • D efault Committees at both the Dexia and entity levels (quarterly) Committee, a sub-group of the Credit Committee, may establish which classifies loans as being in default in accordance with the limits that are lower than those resulting from the application of criteria established by the banking supervisors; Group principles and recommend delegations of powers to be given to the various entities or establish specific limits for certain • the Validation Advisory Committee which is the Dexia Group industry-specific risks; committee that approves all models for credit, market, ALM, operational and economic capital risks.
( 7. PAYMENT SYSTEMS SECURITY
Dexia Credit Local uses the following types of payment systems: • the French Central Agency of Treasury Accountants (ACCT) network is used for drawings of loans to public sector customers; • the Swift network is used for interbank settlements on transactions negotiated by the front-office traders in the Financial Markets • the French Remote Interbank Compensation (SIT) and Interbank A ctivities department and any funds transfers requested by other Settlement Centre (CRI) systems are used for most payments to Dexia Credit Local departments (especially on the international private sector customers; business managed by the Head Office and on settlements of foreign invoices);
34 DEXIA CREDIT LOCAL / 2007 Annual Report MANAGEMENT REPORT Risk management 2
• lastly, some payments to private sector customers may be made incorporated into the Bank’s user authorization management by check. procedures. More particularly, back-offices and the IT Security Manager are all required to perform controls; Note that Dexia Credit Local does not provide its customers with payment means. • management of messages (technical and functional) from the Swift network has been properly secured; Payment systems security is controlled by a body of procedures and measures: • hardware used for payments (servers, card readers, cards, etc.) is situated in protected areas, and accessible only to officially • lending and financial markets back-offices are responsible for authorized persons. These measures are covered by documented payment processes, and front-office traders are prevented from procedures; accessing these systems;
• the Bank’s business continuity plan includes a body of dispositions REPORT MANAGEMENT • rules regarding the approval of payments are clearly defined. guaranteeing continuity of payment in the event of a disaster. These Specifically all payments must be authorized by two different measures are operational, and the plan is tested regularly; members of the back-office concerned. The only exception to this rule is for payments of amounts under EUR 100,000 initiated • with regard to compliance, the financial markets back office automatically by the Financial Markets information system, which department is responsible for controlling financial flows. require only one authorization. Authorization thresholds in foreign As provided for by its audit program, the Internal Audit department currencies are established and updated regularly; reviews payment systems security every year. Any recommendations • there is an effective segregation of duties between users and issued are monitored regularly to verify that they have been carried operators. Existing profiles accurately reflect all defined rules. out. The process for authorizing access to payment systems has been
( 8. RISK MONITORING IN SUBSIDIARIES AND BRANCHES
Each subsidiary and branch has its own local risk management structure. These structures:
• are segregated strictly from the front offices;
• report to the Dexia Credit Local Risk Management and Permanent Control department either directly (branches) or functionally (subsidiaries).
( 9. RISK MONITORING AT FSA
Risk is monitored at two different levels at FSA. The first level is − the Investment Committee, which establishes guidelines for provided by FSA’s Risk Management department, which is segregated investment policy and evaluates investment performance; from the front office and is managed by a member of the FSA • strict oversight of the business through the use of rules for Management Board. The second is provided by Dexia Credit Local, delegation of authority between Dexia Credit Local and FSA, in collaboration with the Dexia Group, which has set up a three- specifying the types of businesses that are authorized and pronged risk management system: establishing commitment limits for each type of counterparty; • a quarterly review by the Board of Directors of FSA and two • close operational control provided by the Dexia Credit Local Risk specialized risk committees: Management and Permanent Control department and the Dexia − the Underwriting Committee, which is chaired by a member of the Group Risk Management department, with the establishment Dexia Group Management Board, provides a detailed review of all in 2007 of an FSA Risk Monitoring Committee. commitments and examines all issues relating to risk policy,
2007 Annual Report / DEXIA CREDIT LOCAL 35 MANAGEMENT REPORT 2 Risk management
( 10. DEXIA CREDIT LOCAL AND FSA PORTFOLIOS
In 2007, risk management and monitoring were greatly influenced by • medium- and long-term liquidity ratios were tighter than in the the financial crisis that began at the end of the first half of the year in past due of the current crisis of confidence. This tightening of the United States, the so-called subprime mortgage crisis. The crisis liquidity conditions led to the implementation of a more detailed had only a slight impact on Dexia Credit Local and FSA, given the oversight of the various ratios and constraints expressed in all of traditionally prudent risk profile of the two institutions. the Dexia Credit Local entities, using the organization set in place by the Dexia Group. This attenuation of the impacts of the crisis was attributable essentially to the quality of the loan and bond portfolios held or ensured by Dexia Credit Local and FSA: 10.1 DEXIA CREDIT LOCAL PORTFOLIO • exposure is essentially to public sector risk: 67% of Dexia Credit Local’s exposures, and 63% of the portfolio ensured by FSA; Comments
• very highly rated portfolios: 85% of Dexia Credit Local’s exposure The graphs below were put together using a credit risk strategy is rated investment grade, as is 99% of FSA’s exposure; identical to that employed in 2006. Exposures are analyzed by type • subprime mortgages represented only 1.2% of FSA’s insured of counterparty and by geographical region, after taking account of portfolio, and 46% (USD 8,180 million, 91% of which are rated all guarantees; the guarantor was automatically substituted for the AAA) of its GIC investment portfolio. A marginal amount of borrower: exposures are accordingly reported on the basis of the the total insured capital on transactions was originated in 2005 type of counterparty and the geographical region of the guarantor. and 2006 (the years most strongly implicated in the current crisis), Exposures are stated without deduction of any specific reserves. representing only USD 704 million of the entire insured portfolio. The figures provided below do, however, differ from those provided The transactions originated in this same portfolio in 2007 all had in the notes to the financial statements, which are compliant with high levels of protection; IFRS 7 and which are based on a different definition of risk exposure. In • exposure to collateralized debt obligations (CDO) and asset-backed order to comply with the requirements of IFRS 7 relating to the notion securities (ABS) was extremely limited (EUR 363 million for FSA). of maximum credit risk exposure (MCRE), the notion of credit risk Dexia Credit Local’s exposures were all hedged by credit default exposure (CRE) was redefined by Dexia in 2007. CRE is also analyzed swaps (CDS) with well-rated banks. by type of counterparty and by geographical region, after taking account of all guarantees; guarantors are, however, substituted only if The items that may bear watching at the end of 2007 concern the risk weighting of the guarantor is better than that of the borrower. products similar to subprime mortgages - namely HELOCs and AltAs CRE are presented net of any specific reserves. - whose default rates have led the Group to increase its monitoring. In all, these two product categories represented less than 2% of FSA’s Dexia Credit Local portfolio insured portfolio. (consolidated data, excluding FSA)
Excluding this point of attention, the cost of risk of Dexia Credit Local ANALYSIS OF RISK BY TYPE OF COUNTERPARTY - SPECIFIC and FSA remained moderate (EUR 46 million), effectively reflecting the good quality of the portfolio.
Incidentally, the crisis led to the recognition of movements comparable to those of the market:
• a decrease in portfolios recognized at fair value through profit or loss, which mainly consists of FSA’s portfolio of CDSs recognized as derivatives (negative impact of EUR 268 million on net income - Group share ) . Assets recognized at fair value through equity also decreased (see consolidated statement of changes in equity). This phenomenon was due to the general widening of spreads;
Should this continuing widening of spreads continue into the first quarter of 2008, it will have additional negative consequences. The latter will trigger a movement in the opposite direction, with the absorption of the crisis, except for specific cases on which losses shall be incurred. Management continues to pay special attention to FSA’s HELOC and AltA portfolios, in light of the increasing rates of default on these types of instruments during Q1 2008, and which could result in additional provisions being set aside to reflect changes in the U.S. real estate market.
36 DEXIA CREDIT LOCAL / 2007 Annual Report MANAGEMENT REPORT Risk management 2
ANALYSIS OF RISK BY GEOGRAPHICAL REGION ANALYSIS OF RISK BY TYPE OF COUNTERPARTY - GENERAL MANAGEMENT REPORT MANAGEMENT
NON-PERFORMING ASSETS
(EUR millions) At Dec. 31, 2007 At Dec. 31, 2006 Change Change (%) Non-performing loans under collection (including securities) 182 296 (114.0) (38.5%)
Reserves allocated 57 103 (46.0) (44.7%)
10.2 FSA PORTFOLIO credit (HELOC) sector. Still, in the last quarter FSA subscribed to USD 1.8 billion in transactions (compared with USD 2.5 billion for In 2007, the total value of FSA’s net par outstandings increased by the full year), although FSA sought additional levels of protection USD 50.479 billion (13.4%) to USD 426.934 billion. Of this total in order to offset the observed increase in default rates on the exposure, 61.2% was to the public (municipal) sector and 38.8% to underlying loans, especially among subprimes. asset-backed securities and structured finance. Municipal sector: ABS and structured finance: • Net par outstandings increased by USD 23.440 billion (9.8%) to • the value of PFI (infrastructure financing) transactions increased by USD 261.428 billion. In the light of FSA’s good positioning (it was the USD 2.898 billion (37.2%) during the year, from USD 7.783 billion only major monoline to have its AAA rating confirmed, with a stable to USD 10.681 billion. This was a very sharp rise, and reflected outlook, by the three primary rating agencies), the repercussion several large transactions booked during the second half of the year of the subprime crisis was to award FSA a dominant share of the (Eurotunnel, Sanef, the Millau Viaduct, Brisbane Airport, etc.); municipal market. Consequently, during the fourth quarter, FSA’s share of the public sector market increased considerably, as did its • the pooled corporate segment was very active in 2007 (+19%), exposure (by USD 7 billion in the fourth quarter): these conditions especially during the first quarter (USD 7 billion) and is still the are expected to persist into early 2008. largest category of transactions in FSA’s ABS-structured finance portfolio; The impacts of the subprime mortgage crisis on FSA’s financial position are limited, in light of the company’s moderate exposure to subprime • t he appearance of the subprime crisis in the first half of 2007 mortgages, and its extremely marginal exposure to ABS-type CDOs. As mostly perturbed the residential mortgage segment. FSA had total noted previously, the points to watch in the future will be the default exposure to the subprime sector of USD 5.3 billion on its insured on subprime mortgages and other types of residential mortgage- portfolio and USD 8.28 billion on its available-for-sale portfolio. The backed securities (RMBS). The quality of FSA’s outstandings remains company had USD 8 billion in exposure to the home equity line of
2007 Annual Report / DEXIA CREDIT LOCAL 37 MANAGEMENT REPORT 2 Operating results
good due notably to the company’s prudent risk policy. FSA’s cost of ANALYSIS OF FSA INSURED PORTFOLIO BY CREDIT RATING risk increased from USD 23.3 million in 2006 to USD 31.6 million in 2007, due almost entirely to the rise in the insured portfolio. USD 65.5 million in general reserves were reallocated to specific provisions on HELOCs to reflect the default rates currently observed and the composition of the company’s exposure.
FSA’s AAA rating was confirmed by the three rating agencies. The maintenance of this rating confirms the prudent principles adopted by FSA as regards the management of its risk and the quality of its underlyings.
Operating results
( 1. CONSOLIDATED FINANCIAL STATEMENTS
1.1 CHANGES IN THE SCOPE OF CONSOLIDATION • First time consolidation of FSA Seguros Mexico SA in the FSA scope of consolidation. The details of the scope of consolidation and all changes therein are presented in organization chart and in list form in the notes to the Equity method consolidated financial statements. • First time consolidation of Dexia Épargne Pension.
The principal changes to the Group scope of consolidation in 2007 Deconsolidated companies: were: • CLF Patrimoniale was deconsolidated on October 1, 2007 after it Newly consolidated companies: was merged into Dexia Épargne Pension.
Fully-consolidated Other movements and name changes:
• First time consolidation of Dexia CAD Funding LLC and Dexia Public • Otzar Hashilton Hamekomi became Dexia Israel (Public Finance) Finance Switzerland SA; Ltd.;
• First time consolidation of Dexia Crediop Ireland in the Dexia • Dexia Sabadell Banco Local became Dexia Sabadell; Crediop scope of consolidation; • Dexia Holdings Inc. increased its stake in the fully-consolidated • First time consolidation of Dexia Kommunalkredit Polska in the Financial Security Assurance Holdings from 99.02% to 99.13%; Dexia Kommunalkredit Bank AG scope of consolidation; • Dexia Kommunalkredit Bank increased its stake in Dexia banka • First time consolidation of Cymanco Investments and Orosis Slovensko from 78.98% to 84.40%. Investments in the Kommunalkredit Austria AG scope of consolidation;
38 DEXIA CREDIT LOCAL / 2007 Annual Report MANAGEMENT REPORT Operating results 2
1.2 PRESENTATION OF THE CONSOLIDATED FINANCIAL STATEMENTS
The consolidated financial statements of Dexia Credit Local are prepared in accordance with International Financial Reporting Standards (IFRS) as adopted by the European Commission at the time the financial statements were closed. They are presented in accordance with French National Accounting Council (CNC) Recommendation 2004-R.03 dated October 27, 2004.
1.3 CONSOLIDATED INCOME STATEMENT
The main components of consolidated net income are presented below for the years ended December 31: MANAGEMENT REPORT MANAGEMENT
2006 2007 Change 2007/2006 (EUR millions) in %
Net banking income 2,141 1,800 (15.9%)
Operating expenses (615) (661) 7.5%
OPERATING INCOME BEFORE COST OF RISK 1,526 1,139 (25.4%)
Cost of risk (44) (46) 4.5%
OPERATING INCOME 1,482 1,093 (26.2%)
Income from investments in associates 57 61 7.0%
Capital gains (losses) on other assets 0 0
PRE-TAX INCOME FROM CONTINUING OPERATIONS 1,539 1,154 (25.0%)
Corporate income tax (380) (108) (71.6%)
Amortization of goodwill
NET INCOME 1,159 1,046 (9.7%)
Minority interests (77) (55) (28.6%)
NET INCOME - GROUP SHARE 1,082 991 (8.4%)
Basic earnings per share (in euros) 12.43 11.38
Diluted earnings per share (in euros) 12.43 11.38
The 9% decline in the U.S. dollar decreased revenues and costs by a. Net banking income (NBI) EUR 76 million and EUR 16 million, respectively, while the currency hedges set in place generated EUR 40 million in revenue. Consolidated net banking income fell 15.9% to EUR 1,800 million in 2007 (EUR 2,141 million in 2006). The financial crisis that started to spread in the second half caused spreads to widen, thereby increasing the volatility of the fair value Net banking income has three components: interest margin, the of the credit derivatives which, while it did not generate a loss, did technical margin of insurance companies and other revenues. weigh upon the Group’s income. The total cost of risk remained stable during the year.
2007 Annual Report / DEXIA CREDIT LOCAL 39 MANAGEMENT REPORT 2 Operating results
(EUR millions) 2006 2007 Change Change in %
Interest margin 1,325 1,299 (26) (2.0%)
Technical margin of insurance companies 310 306 (4) (1.3%)
Other revenues 506 195 (311) (61.5%)
NET BANKING INCOME 2,141 1,800 (341) (15.9%)
INTEREST MARGIN to net interest income and to other income. Technical margin of Net interest income includes all interest income and expense items on insurance companies decreased by 1.3% to EUR 306 million in 2007 all balance sheet instruments and derivatives, regardless of the type (EUR 310 million in 2006), due to the strong decrease in the value of portfolio in which they have been classified. Net interest income of the U.S. dollar: at a constant exchange rate, the technical margin decreased by EUR 26 million (2.0%) to EUR 1,299 million in 2007 would have increased by 7.7% to EUR 334 million. (EUR 1,325 million in 2006). OTHER REVENUES TECHNICAL MARGIN OF INSURANCE COMPANIES Other revenues include essentially all net fees and commissions, gains The line “Technical margin of insurance companies” is used only to and losses on financial instruments at fair value through profit or loss report the credit enhancement activity of FSA, the U.S. subsidiary. (held for trading, foreign exchange and hedging), and gains and losses This line includes only those specific earnings that cannot be assigned on financial assets available for sale. to either of the other two lines in NBI. Thus, FSA also contributes
(EUR millions) 2006 2007 Change Change in %
Net fees and commissions 94 98 4 4.3% Gains (losses) on financial instruments at fair value through profit or loss 95 (295) (390) NA
Gains on financial assets available for sale 322 388 66 20.5%
Other income and expense (5) 4 9 NA
Other revenues 506 195 (311) (61.5%)
Net fees and commissions continued to increase due to the growth The net loss on financial instruments at fair value through profit or of the structured finance and insurance brokerage (Dexia Sofaxis) loss was EUR 390 million lower than the net gain posted the previous businesses. year; most of this drop (EUR 462 million) was attributable to the value of the credit derivatives in FSA’s portfolio. The gains on financial assets available for sale were generated by decreases of balance sheet items (disposals or repayments) including loans, borrowings and securities classified as available for sale. The b. Operating expenses gains recorded in 2007 were much higher than in 2006, due especially Operating expenses increased by EUR 46 million (7.5%) in 2007 to to capital gains of EUR 79 million on increased disposals of listed EUR 661 million (EUR 615 million in 2006). shares and disposals of fixed income securities.
40 DEXIA CREDIT LOCAL / 2007 Annual Report MANAGEMENT REPORT Operating results 2
(EUR millions) 2006 2007 Change in %
Payroll costs (317) (350) 10.4%
Other general administrative expenses (205) (213) 3.9%
D epreciation, amortization and impairment of non-current assets (43) (52) 20.9%
Amortization of deferred insurance contract acquisition costs (50) (46) (8.0%)
Total general operating expenses (615) (661) 7.5%
Net banking income 2,141 1,800 (15.9%) MANAGEMENT REPORT MANAGEMENT
Operating ratio 28.7% 36.7%
The operating ratio worsened from 28.7% to 36.7% due to the AMORTIZATION OF DEFERRED INSURANCE CONTRACT decrease in revenues. ACQUISITION COSTS This heading was created in order to incorporate FSA’s insurance Dexia Credit Local relocated to its new Head O ffice in La Défense activity. Certain general operating expenses relating to insurance during the first quarter of 2007. contract acquisition costs are deferred and amortized over the life PAYROLL COSTS of the contracts. The premiums relating to these same insurance contracts are also amortized over the same period. Most of the Payroll costs increased by EUR 33 million (10.4%) due mainly to decrease in acquisition cost is due to the fall in the value of the Head Office needs (new business development and organizational dollar. changes), and the international locations, whose activities underwent high growth.
OTHER GENERAL ADMINISTRATIVE EXPENSES Administrative expenses increased by 3.9% to EUR 213 million in 2007 (EUR 205 million in 2006), due mainly to the Head Office and FSA. c. Cost of risk
The cost of risk includes three distinct components, the details of which are presented below.
(EUR millions) 2006 2007 Change
Impairment of fixed income securities available for sale (5) 2 7
Reserves and losses on credit enhancement activity (18) (23) (5)
Reserves and losses on customer loans (21) (25) (4)
TOTAL (44) (46) (2)
FIXED INCOME SECURITIES AVAILABLE FOR SALE CUSTOMER LOANS In 2007, this line reflects a recovery on a line of securities in the The cost of risk on customer loans is very low, in both France and available for sale portfolio. the rest of the world. Most of the EUR 25 million net charge in 2007 reflected the increase in the general reserve due to the increase in CREDIT ENHANCEMENT outstanding loans. The annual charge increased slightly in 2007 due to the normal The quality of the portfolio of financial assets (customer loans and change in the portfolio. During the year, FSA set aside specific reserves securities) and the policy for reserving these assets when they must on a certain number of items by transferring amounts from general be written down for impairment are demonstrated in the ratios reserves. below:
2007 Annual Report / DEXIA CREDIT LOCAL 41 MANAGEMENT REPORT 2 Operating results
At December 31, 2006 At December 31, 2007
Impaired financial assets / Total financial assets 0.21% 0.11%
Allocated reserves / Impaired financial assets 36.2% 37.1%
Allocated reserves / Total financial assets 0.07% 0.04%
See n ote 2-13 of the notes to the consolidated financial statements on the quality of the financial assets.
The reserve coverage ratio on impaired assets remained high at 37% a. Interbank transactions (36% in 2006). Impaired assets remained very low as a percentage of total assets, reflecting the quality of the Group’s portfolios. Certain At December 31, 2007, the Group was a net borrower on the allocated reserves were reversed in 2007, while new general reserves interbank market for a total of EUR 78.4 billion (excluding fair value were set aside; this explains the decrease in the allocated reserves adjustments), compared with EUR 60.8 billion at December 31, 2006, component of ratios of the reserve coverage ratio. an increase of 29.4%.
d. Income from investments in associates b. Customer loans
Income from investments in associates increased by EUR 4 million to Total outstanding customer loans increased by 13.6% to EUR 61 million (EUR 57 million in 2006). This is attributable essentially EUR 146.6 billion at December 31, 2007 (EUR 129.1 billion to Crédit du Nord’s gain on its Euronext shares. in 2006).
e. Corporate income tax c. Securities portfolio
Corporate income tax amounted to EUR 108 million, compared with The total value (including fair value adjustments) of investments in EUR 380 million in 2006. The current income tax rate on companies government securities, bonds and other fixed income securities, and was modified in Germany and Italy in 2007. The net impact of these in equities and other variable income securities increased by 16.0%, modifications generated EUR 18 million in additional taxes. from EUR 129.7 billion to EUR 150.4 billion at December 31, 2007.
f. Net income d. Shareholders’ equity and ratios
Net income - Group share decreased by 8.4% to EUR 991 million The shareholders’ equity of the Dexia Credit Local Group (net of (EUR 1,082 million in 2006). minority interests) decreased by EUR 1.64 billion to EUR 5.53 billion at December 31, 2007 (EUR 7.17 billion in 2006). Minority interests declined from EUR 77 million to EUR 55 million. It should be noted that shareholders’ equity was affected by the The Group’s share of net income reflected a return on equity (ROE) change in reserves for unrealized or deferred gains and losses, which of: decreased by EUR 2.3 billion.
Excluding unrealized items, the normal increase in shareholders’ equity 2006 2007 would have been EUR 663 million; this increase included essentially EUR 991 million in net income for the period, less EUR 320 million Return on equity 21.77% 18.30% on the payment of dividends (including EUR 20 million on the super- subordinated perpetual notes [TSSDI]). The return on equity is calculated as the ratio of the Group’s share of net income to average shareholders’ equity (excluding minority Details of changes in shareholders’ equity are presented in the notes interests and after allocation of net income). The decline in the ROE to the consolidated financial statements. reflects the fact that earnings decreased in 2007 after increasing From a capital adequacy standpoint, Dexia Credit Local had sharply in 2006. consolidated regulatory capital (calculated in accordance with CRB Standard 95-02) of:
1.4 CONSOLIDATED ASSETS AND SHAREHOLDERS’ EQUITY AT DECEMBER 31, 2007 (EUR millions) 2006 2007 Total shareholders’ equity 7,199 8,386 Total consolidated assets increased by 13.7% to EUR 345 billion at December 31, 2007 (EUR 304 billion in 2006). including Tier 1 capital 5,259 5,616
42 DEXIA CREDIT LOCAL / 2007 Annual Report MANAGEMENT REPORT Operating results 2
Ruling that FSA was not a financial institution, at its January 12, 2000 activity) are not included in the calculation of the capital adequacy meeting the French Banking Commission decided that the value of ratios to which the Group, as a credit institution, is subject. the investment in the insurance company should be deducted from Given the 20.2% increase in the Group’s risk-weighted assets, the regulatory capital for purposes of calculating the consolidated capital Tier 1 ratio went from 8.43% to 7.49% and the total capital adequacy adequacy ratio. On the other hand, the risks borne by FSA (insurance ratio from 11.54% to 11.18%.
( 2. FINANCIAL STATEMENTS MANAGEMENT REPORT MANAGEMENT
2.1 INCOME STATEMENT
2006 2007 Change 2007/2006 (EUR millions) in %
Net banking income 805 (12) (101.5%)
Operating expenses (256) (273) 6.8%
OPERATING INCOME BEFORE COST OF RISK 549 (286) (152.0%)
Cost of risk (18) (13) (30.1%)
OPERATING INCOME 531 (298) (156.2%)
Capital gains (losses) on other assets 0 32
PRE-TAX INCOME FROM CONTINUING OPERATIONS 531 (266) (150.1%)
Corporate income tax (58) 107 (284.0%)
Recovery of general banking risks reserve (FRBG) 0 478
NET INCOME 473 319 (32.6%)
Basic earnings per share (in euros) 5.43 3.66
Diluted earnings per share (in euros) 5.43 3.66
Dexia Credit Local’s net income decreased by 32.6% to EUR 319 million 2.2 BALANCE SHEET in 2007 (EUR 473 million in 2006). Total assets increased by 48% to EUR 212.8 billion at December 31, Net banking income showed a loss of EUR 12 million due to the high 2007 (EUR 143.6 billion in 2006). reserves set aside on all of the available for sale portfolios. These reserves, which represented a total charge of EUR 804 million, were a. Assets attributable to the crisis in the spreads of the issuers, although no actual loss was recognized on these portfolios during the year. CUSTOMER LOANS The cost of risk remained low at EUR 13 million (EUR 18 million Outstanding customer loans, excluding credit institutions, increased in 2006). by 20.6% to EUR 41.8 billion at December 31, 2007 (EUR 34.6 billion in 2006). Dexia Credit Local recognized tax income of EUR 107 million, due to the recognition of deferred taxes on the reserves set aside on the SECURITIES HELD FOR TRADING, SECURITIES AVAILABLE securities portfolios. FOR SALE AND SECURITIES HELD TO MATURITY
Dexia Credit Local recovered the EUR 478 million general banking The total value of securities held reached EUR 112.8 billion, compared risks reserve (FRBG). with EUR 62.8 billion at December 31, 2006. Changes in the various portfolios are presented in the notes to the financial statements. These securities consist mainly of French and foreign bonds, negotiable debt securities, and government securities, with the balance consisting of shares of mutual funds.
2007 Annual Report / DEXIA CREDIT LOCAL 43 MANAGEMENT REPORT 2 Operating results
INVESTMENTS IN SUBSIDIARIES, ASSOCIATES, AFFILIATED COMPANIES AND OTHER LONG-TERM EQUITY INVESTMENTS Total long-term equity investments amounted to EUR 5.2 billion at December 31, 2007, approximately the same level as in 2006. The main acquisitions of shares and control were:
New equity investment in 2007 Name, business structure and capital of the company
Representing > 10% of the capital Dexia Épargne Pension S.A. with capital stock of EUR 93,562,500 DCL Projets S.A. with capital stock of EUR 40,000 Dexshiplease S.A. with capital stock of EUR 40,000 Rodexbail S.A. with capital stock of EUR 40,000 Representing > 66% of the capital Dexiarail S.A. with capital stock of EUR 40,000 DCL Investissements S.A. with capital stock of EUR 40,000 Dexia CAD Funding LLC with capital stock of USD 10,000 DCL Research and Development India Private Ltd. with capital stock of USD 2,350
b. Liabilities DEBT SECURITIES Debt securities traditionally represent a significant portion of BANKS AND FINANCIAL INSTITUTIONS Dexia Credit Local’s liabilities, and amounted to EUR 57.3 billion at Dexia Credit Local’s interbank debt amounted to EUR 94.0 billion at December 31, 2007 (EUR 48.6 billion in 2006). December 31, 2007, and consisted primarily of medium- and long- Most of the long-term debt is issued by Dexia Municipal Agency. term borrowings. The European Investment Bank is Dexia Credit Local’s largest unaffiliated partner (EUR 6.6 billion). Most of the Company’s funding is provided by members of the Dexia Group.
44 DEXIA CREDIT LOCAL / 2007 Annual Report MANAGEMENT REPORT Operating results 2
( 3. KEY FINANCIAL DATA FOR THE PAST FIVE YEARS
(in Euros) 2003 2004 2005 2006 2007
EQUITY
Capital stock 1,327,004,846 1,327,004,846 1,327,004,846 1,327,004,846 1,327,004,846
Number of shares 87,045,757 87,045,757 87,045,757 87,045,757 87,045,757
SIMPLIFIED INCOME STATEMENT MANAGEMENT REPORT MANAGEMENT
Revenues 2,516,161,072 3,173,995,095 4,823,522,282 5,720,380,887 6,286,809,567 Earnings before income tax, depreciation, amortization and net impairment charges 419,236,689 621,013,426 581,231,271 674,274,260 1,083,821,549
Income tax expense (income) 122,004,913 87,787,313 65,109,549 60,748,365 (107,696,680) Earnings after income tax, depreciation, amortization, and net impairment charges 334,957,558 519,268,420 424,907,461 472,624,576 319,477,197
Dividends 330,773,876 579,724,742 341,219,367 (2) 300,307,862 396,058,194 (1)
PER SHARE DATA
Revenues 28.91 36.46 55.41 65.72 72.22 Earnings after income tax but before depreciation, amortization and net impairment charges 3.41 6.13 5.93 7.05 13.69
Income tax expense 1.40 1.01 0.75 0.70 (1.24) Earnings after income tax, depreciation, amortization, and net impairment charges 3.85 5.97 4.88 5.43 3.67
Dividends 3.80 6.66 (2)3.92 3.45 4.55(1)
Employees at December 31 1,329 1,394 1,513 1,472 1,612
Managerial staff 892 934 1,120 1,068 1,178
Other staff 437 460 393 404 434
Gross payroll 84,482,339 88,598,443 105,254,010 116,441,912 129,010,486
Payroll taxes and employee benefits 28,038,961 32,751,363 40,323,671 40,387,857 37,544,986 (1) Proposed dividend. (2) Includes payment of a EUR 250,691,780 dividend (EUR 2.88 per share) approved by the annual Shareholders’ Meeting of May 16, 2006 and a EUR 90,527,587 (EUR 1.04 per share) extraordinary dividend approved by the Shareholders’ Meeting of September 4, 2006.
2007 Annual Report / DEXIA CREDIT LOCAL 45 MANAGEMENT REPORT 2 Capital structure and share data
Capital structure and share data
( 1. CAPITAL STRUCTURE AND NUMBER OF SHARES
At December 31, 2007, Dexia Credit Local had capital stock of No other securities have been issued that provide access to the capital EUR 1,327,004,846, divided into 87,045,757 shares. Each share stock of Dexia Credit Local. provides the holder with one voting right, and none are subject to any liens.
( 2. DELEGATION OF POWERS WITH REGARD TO CAPITAL INCREASES
A resolution authorizing a capital increase while maintaining by issuing, with or without additional paid-in capital, common stock preemptive subscription rights for existing shareholders was adopted and eventually by capitalizing reserves, share premium or income in by the Shareholders’ Meeting of May 21, 2002 for a five-year period line with a correlating distribution of bonus common stock or increase as from said meeting. in the par value of the existing shares.
The Supervisory Board was authorized to increase the capital either This authorization was granted for a period of 26 months as from by issuing new shares for which the existing shareholders will be able the Shareholders’ Meeting of May 15, 2007. to exercise the preemptive subscription rights, or by capitalization of Pursuant to Article L.225-129 of the French Commercial Code, and reserves, net income or share premium by distributing free shares in application of the aforementioned authorization, the Board of and/or by increasing the par value of the existing shares. Directors has also been delegated full powers to proceed with any The Extraordinary Shareholders’ Meeting of May 15, 2007 granted capital increases it approves, for a period of five years as from the the Board of Directors a new authorization, to increase, at its Shareholders’ Meeting of May 15, 2007. discretion, the capital stock in an amount not to exceed EUR 1 billion,
( 3. SHAREHOLDER STRUCTURE
The capital stock of Dexia Credit Local is held directly and almost No material changes have taken place in the shareholder structure exclusively by Dexia SA. In accordance with Article 14 of the in the past five years. Company’s by-laws, each member of the Board of Directors holds one registered share of its stock.
(EUR) 2003 2004 2005 2006 2007
Capital stock 1,327,004,846 1,327,004,846 1,327,004,846 1,327,004,846 1,327,004,846
Number of shares 87,045,757 87,045,757 87,045,757 87,045,757 87,045,757
Dexia SA 99.98% 99.98% 99.98% 99.98% 99.98%
Individual investors 0.02% 0.02% 0.02% 0.02% 0.02%
46 DEXIA CREDIT LOCAL / 2007 Annual Report MANAGEMENT REPORT Capital structure and share data 2
Indirect ownership of the capital of Dexia Credit Local: • Arcofin, a Belgian limited liability cooperative company and Holding Communal, a Belgian corporation, each hold more than 15% of • Ethias, a Belgian consortium of insurance associations holds more the Bank’s capital. than 5% of the Bank’s capital;
• Caisse des Dépôts, a French public administrative institution, holds more than 10% of the Bank’s capital;
4. DIVIDENDS PAID DURING THE PAST THREE YEARS ( REPORT MANAGEMENT
Dividends paid in respect of the three previous years:
(in euros) 2004 2005 2006
Net dividend per share 8.61 (1) 2.88 4.49 (2)
Amount per share eligible for the tax credit 1.95 (3) Amount per share eligible for the tax allowance (Article 158-3-2 of the French General Tax Code) 6.66 (3) 2.88 (4) 4.49 (4)
Total amount eligible for the tax credit 169,739,226.15 (3) -- Total amount eligible for the tax allowance (Article 158-3-2 of the French General Tax Code) 579,724,741.62 (3) 250,691,780.16 (4) 390,835,448.93 (4) (1) Including EUR 1.95 under the terms of the Extraordinary Shareholders’ Meeting held November 9, 2004. (2) Including EUR 1.04 under the terms of the Extraordinary Shareholders’ Meeting held September 4, 2006. (3) At a rate of 50%. (4) At a rate of 40%.
It is proposed to the Shareholders’ Meeting held to approve the 2007 financial statements that an annual dividend of EUR 396,058,194.35 be paid, representing a dividend of EUR 4.55 per share.
2007 Annual Report / DEXIA CREDIT LOCAL 47 MANAGEMENT REPORT 2 Human resources and environmental data
Human resources and environmental data
( 1. HUMAN RESOURCES MANAGEMENT
1.1 EMPLOYEE AGREEMENT contribution for all discretionary profit-sharing invested in shares of Dexia via a mutual fund. The employee agreement concerning across-the-board salary The following amounts were paid in past years in respect of increases as from January 1, 2007 was signed with three of the five discretionary profit-sharing (gross amounts excluding matching labor unions party to the UES collective bargaining agreement signed contribution): by Dexia Credit Local and Dexia CLF Banque. • 2005 (amount allocated) EUR 3.50 million (payment in 2006);
• 2006 (amount allocated) EUR 4.28 million (payment in 2007); 1.2 GROUP EMPLOYEE SAVINGS PLAN • 2007 (amount accrued) EUR 4.36 million (payment in 2008). The following agreements were applied to calculate the amounts paid in 2007 in respect of 2006: French legal profit-sharing
• the discretionary profit-sharing agreement dated June 30, 2005 in The amount set aside for the special reserve for French legal profit- respect of financial years 2005, 2006 and 2007; sharing (RSP) is the higher of the RSP calculated by the statutory formula and the RSP calculated by an extraordinary formula that is • the French legal profit-sharing agreement dated June 30, 2006 in capped under the terms of the French legal profit-sharing agreement respect of financial year 2006. dated June 30, 2006. The following were negotiated in 2007: The ceiling applied to the profit-sharing paid in 2007 in respect • an amendment to the discretionary profit-sharing agreement in of 2006 was EUR 9.21 million. respect of financial year 2007; Eligibility for French legal profit-sharing is subject to the same seniority • the French legal profit-sharing agreement in respect of financial requirement as that imposed for discretionary profit-sharing. years 2007, 2008 and 2009. The amount due is prorated on the employee’s salary, which is capped at four times the social security ceiling. The total amount paid to an Discretionary profit-sharing employee within a single year may not exceed three-fourths of that Under the terms of the June 30, 2005 agreement and its amendment same ceiling. dated June 29, 2007, the amount of discretionary profit-sharing Employees are required to allocate their individual profit-sharing depends on the degree to which the annual budget is met. If the payment to either the PEG or to a restricted savings account. contractual target is met fully, this amount would represent 0.3% of the Dexia Credit Local Group’s consolidated gross operating income The following gross amounts were paid in past years in respect of (GOI), excluding the income of FSA and any currency effects. French legal profit-sharing:
Employees must have been with the company at least three months • 2005 (amount allocated) EUR 8.55 million (payment in 2006); to qualify for discretionary profit-sharing. • 2006 (amount allocated) EUR 9.21 million (payment in 2007);
Discretionary profit-sharing is paid based on two criteria: 60% is • 2007 (amount accrued) EUR 10.55 million (payment in 2008). prorated on the length of service of each beneficiary and 40% is proportional to the gross annual compensation paid for the year in Employee stock ownership program question (capped at three times the annual social security ceiling at December 31 of that year). Employees of Dexia Credit Local are eligible to participate in the employee stock ownership program established for the entire Dexia The amounts paid out under the discretionary profit-sharing program Group. Only shares issued by Dexia SA, the Group’s Belgian holding may be paid directly to the beneficiaries or invested in the Group company, may be included in mutual funds or directly held by employee savings plan (PEG). The employer makes a 30% matching employees as part of the Group employee savings program.
48 DEXIA CREDIT LOCAL / 2007 Annual Report MANAGEMENT REPORT Human resources and environmental data 2
1.3 KEY HUMAN RESOURCES DATA WITHIN THE UES
(Dexia Credit Local and Dexia CLF Banque)
2006 2007
Employee present at December 31 1,427 1,587
Under fixed-term contracts 168 175
Under long-term contracts 1,259 1,412
Analysis of changes in long-term contracts during the year REPORT MANAGEMENT
New hires 139 218
Terminations (18) (16)
Resignations (52) (66)
Working hours
35-hour workweek Master agreement of November 14, 2000, with effect from January 1, 2001
Absenteeism (all classifications of personnel) 3.38% 3.10%
Part-time employees (% of total workforce) 7.1% 6.9%
Compensation (in euros)
Gross distributed payroll 96,982,606 102,959,424
Employer payroll taxes 56,358,859 60,933,056
Average annual salary - men 65,207 65,541
Average annual salary - women 45,450 47,094
Training
% of gross payroll 4.35% 4.45%
Number of days (all training programs) 4,124 5,061
Health and safety conditions Number of times the health and safety committee met during the year 17 8
Employee benefit programs (in euros)
Contribution to the funding of employee council programs 1,165,678 1,259,356
2007 Annual Report / DEXIA CREDIT LOCAL 49 MANAGEMENT REPORT 2 Human resources and environmental data
( 2. SUSTAINABLE DEVELOPMENT
In order to help its customers and employees make sustainable The following text is intended to provide a summary of Dexia Credit development a normal part of their dealings, in 2007 the Dexia Group Local’s sustainable development policy in 2007, as required by Articles 1 reinforced its sustainable development strategy by implementing an and 2 of Decree 2002-221 dated February 20, 2002, pursuant to action plan with the following objectives: Article L. 225-102-1 of the French Commercial Code. The information provided herein will be expanded upon in detail for the Dexia Group • compliance with the commitments already undertaken by the as a whole when the Dexia Group sustainable development report is Group; released (on the Group website: www.dexia.com). • establishment of shared Group objectives in the area of sustainable development;
• implementation of substantive actions with all of its 2.1 COMMITMENTS TO AND MEMBERSHIP IN stakeholders; INTERNATIONAL AND DOMESTIC INITIATIVES
• planning of actions to attain the objectives that have been set; The values on which Dexia Credit Local was founded, namely a long- term perspective and regard for the public interest, are illustrated • transparent communications policy. through its membership in three United Nations programs. Dexia Credit Local plays a pivotal role in the success of this plan, especially through its public and project finance business, which is one of its areas of strategic focus.
Program Objectives
United Nations Environment Programme for the This statement is intended to get the banks and (UNPE) “Statement by Financial Institutions on the financial agencies that are signatories (171 to date) Environment & Sustainable Development” to commit to sustainable development, notably by helping to preserve the environment.
United Nations Global Compact Launched in July 2000 and placed under the direct authority of the Secretary General of the U.N., the “United Nations Global Compact” brings together companies that commit to implementing the goal of “sustainable development” on the basis of ten principles in the areas of human rights, labor standards, the environment, and anti-corruption measures.
United Nations Environment Programme (UNPE) Launched in June 2007, on the eve of the G8 “Declaration on Climate Change by the Financial Summit in Potsdam, the “Declaration on Climate Services Sector” Change by the Financial Services Sector” is the financial services sector’s first global commitment to address this problem. The signatories recognize the contribution of human activities to climate change and undertake to incorporate this issue into their decisions on a daily basis.
50 DEXIA CREDIT LOCAL / 2007 Annual Report MANAGEMENT REPORT Human resources and environmental data 2
In 2007, Dexia Credit Local manifested its commitments and policy of taking environmental and social impacts into account in a series of substantive actions, namely in the area of climate change:
Commitments undertaken Dexia Credit Local in relation to the Actions taken by Dexia Credit Local “Declaration on Climate Change by the Financial Services Sector” Promote awareness and understanding of the risks and opportunities - Participation in the “Carbon Disclosure Project”. associated with climate change. - Participation in the MEDEF [the French employers confederation] workgroup on climate change, as part of the multi-party Grenelle Environment initiative. - Sustainable development training for Dexia Credit Local employees, and incorporation of the specific issues associated with their business lines. Quantify these risks and opportunities and incorporate them into lending - Increased financing for the renewable energy sector.
activities. - Launch of an innovative carbon neutral strategy for vehicle fleets in the public REPORT MANAGEMENT sector.
- Launch of a voluntary fund to offset CO2 emissions using reforestation. Help customers manage the risks and opportunities associated with climate - Roll-out of the Display® campaign for displaying the energy efficiency of change by assessing their exposure and providing products and services that buildings. improve their ability to adapt. - Launch of a tool for calculating thermal renovation and the energy efficiency of buildings.
Reduce Dexia Credit Local’s direct impact on climate change and its carbon - Quarterly disclosure of direct CO2 emissions. footprint, assessing and disclosing its annual emissions with transparency. - Implementation of measures to reduce the impacts of business trips and daily commutes. - Implementation of measures to reduce the impacts of energy consumption in buildings (Tour Dexia, the Dexia corporate office building). Incorporate climate change into the decision-making process in order to - Publication of the second comparative European study on municipal promote and protect growth in the companies in which Dexia Credit Local environmental policies, especially those related to climate change. invests. - Signature of the commitment charter of the local climate plan for the greater Grenoble area. - Support for Dexia Crediop in the launch of an inter-parliamentary workgroup on sustainable finance via the Italian Sustainable Finance Forum.
2.2 LOCAL AND REGIONAL SUSTAINABLE EUR 106 million, was the first non-recourse financing ever set in DEVELOPMENT place in Belgium for an offshore wind farm.
In 2007, Dexia Credit Local built up its range of project finance - In 2007 Dexia Credit Local approved the refinancing of Babcock products in the environmental and renewable energies and social & Brown Wind Partners’ global wind power portfolio (in the United welfare sectors. States, Australia and Europe). The original amount of financing approved was EUR 1 billion, which amount may, using a modular Environmental and renewable energies sector structure, subsequently be increased by EUR 630 million via additional tranches also arranged by Dexia. Highly conscious of the vital challenge posed by climate change, - In 2007, Dexia Credit Local approved the EUR 48 million financing Dexia Credit Local is pursuing an active policy in this area with two of a wind farm developed by Babcock & Brown. Located in Fruges, areas of strategic focus: in the French department of Pas-de-Calais, the farm will produce • development of renewable energies, the financing of which total power of 32 MW. represents a major strategic opportunity for Dexia Credit Local’s sales − Dexia Credit Local is contributing to the growth of the wood energy growth and its dedication to the fight against climate change: sector by supporting the “1, 000 wood boilers in a rural setting” − Dexia provided total financing of EUR 896 million for new program, as part of a partnership entered into in May 2007 with the wind power projects in 2007, representing annual wind power French National Federation of Forest Communes (FNCOFOR). This production of 2,232 MW. program, which is included among the measures in the National Climate Plan, creates the equivalent of 80,000 metric tonnes of - On May 23, 2007, Rabobank, Dexia Credit Local and Dexia Bank oil and will reduce CO emissions by three million tonnes over the Belgium set in place financing for the C-Power consortium for the 2 life of the facilities. construction and operation of the first phase of the Thornton Bank offshore wind farm. This farshore wind farm, located 28 km off − The new solar projects signed in 2007 represented financing of the coast of Zeebrugge, uses six 5 MW wind turbines delivered by EUR 188 million and 120 MW in total installed power; the German producer REpower. This transaction, which totaled
2007 Annual Report / DEXIA CREDIT LOCAL 51 MANAGEMENT REPORT 2 Human resources and environmental data
• energy-savings on the primary sources of CO emissions, 2 Financing of environmental services namely by developing financial solutions to promote energy savings for public facilities and services: Dexia Credit Local’s environmental services policy is generally put into practice in the arrangement of environmental financing − In 2007, Dexia Credit Local launched a program to enhance the for the local public sector. In 2007, Dexia Credit Local signed a value of the energy savings certificates generated by authorities’ partnership agreement with Trivalis for the financing of three investments in energy efficiency projects. mechanical and biological waste separation and sorting plants. − In 2007, Dexia Credit Local launched a voluntary fund to offset CO2 emissions using reforestation. Social welfare sector − Green transport Along with its efforts on behalf of the environment and energy - In 2007 Dexia Location Longue Durée launched an innovative conservation, Dexia Credit Local is increasing its support to the social carbon neutral strategy for vehicle fleets in the public sector welfare sector by setting in place partnerships and providing specific
through a comprehensive offer to prevent, reduce and offset CO2 financial structures. emissions. Highlights of 2007: - In 2007 Dexia Credit Local won a significant share (EUR 150 million) • Assistance to the disabled of the Syndicat Mixte des Transports en Commun’s (public-private public transport joint venture) consultation for the construction of − In 2007, Dexia Credit Local expanded its actions in favor of a tramway for the City of Toulouse. the disabled through a consistent “Social Range” of measures combining grants, financing, subsidized loans and raising the − Building awareness of local public sector participants in order to improve - As part of their partnership, the Fédération Régionale du Bâtiment the accessibility of public buildings and to support the social and for the Pays de la Loire region of France, the Pays de la Loire professional mainstreaming of persons with disabilities, under Regional Office of the French Agency for the Environment and the terms of the Act of 2005. More than 350 customers received Energy Management (ADEME) and Dexia Credit Local’s Regional training in this area. Lastly, Dexia Credit Local signed its first Headquarters for Pays de la Loire undertook a regional campaign agreement to provide free accessibility studies, with the General entitled “Energy Savings 2008” in the form of several joint Council of the Maine-et-Loire department. transactions to help improve energy efficiency when public sector − Since December 31, 2006, Dexia Credit Local has partnered with office buildings were renovated. the French Federation of Organizations for Parents and Friends - In order to help local authorities post the energy efficiency ratings of Mentally Disabled Persons (UNAPEI) to provide financing of their buildings, Dexia Credit Local has made the Display® for establishments that welcome disabled persons and the tool available to its customers. Display® is an online application management of a specially-adapted vehicle fleet; developed by the European association Energie-Cités that allows • Access to housing the energy-saving performance of public buildings to be evaluated and publicly displayed in the form of an energy poster. − Dexia Credit Local is the sole bank signatory of the National Urban Renewal Agency (ANRU) convention in favor of local authorities for - In 2007, Dexia Credit Local and Association Promodul signed the National Urban and Social Renewal Program, and accordingly is a partnership agreement to promote a three-pronged energy the first distributor of Social Housing Loans for real estate projects management strategy for public, residential and office buildings: in favor of the most vulnerable members of society. In April 2007, - Dexia Credit Local will provide local authority customers with the in connection with one of the largest urban renewal programs in mass market version of the “Promodul Toolbox;” France, Dexia Credit Local entered into a partnership agreement with the City of Mulhouse to help several neighborhoods in that - by June 2008, Promodul will finalize a specialized application city, with nearly 34,000 residents (approximately one third of the for evaluating the energy efficiency of public office buildings; total population of Mulhouse). Dexia Credit Local will have the exclusive rights to distribute the application to government authorities; − After the success of the first global budget made available in 2006, the European Investment Bank (EIB), the National Urban - cooperation in identifying sources of expertise in the field of Renewal Agency (ANRU) and Dexia Credit Local renewed their energy efficiency for buildings. EUR 500 million protocol financing agreement in 2007 to support local authorities’ efforts in favor of a “national urban and social renewal program.”
− In September 2007, the Ministry of Housing and Cities, the EIB, Dexia Credit Local and Caisse Nationale des Caisses d’Épargne all signed a protocol financing agreement to develop and rehabilitate the stock of available public housing in France. Dexia is responsible for a total budget of EUR 125 million.
52 DEXIA CREDIT LOCAL / 2007 Annual Report MANAGEMENT REPORT Human resources and environmental data 2
• Assistance to the public health and social welfare sector − Creation of an incubator for talent in 2008, with three long-term posts devoted to the recruitment of young graduates who will cycle − T o support investment in the public health sector, in October 2007 through three different departments; the EIB and Dexia Credit Local signed a EUR 175 million protocol financing agreement intended to contribute to the rollout of the • The need to incorporate disabled persons into certain posts was a National Agency for Solidarity and Autonomy’s (CNSA) program selection criterion for the companies providing services within the to modernize and improve public health services for dependent Tour Dexia corporate office building in La Défense. In 2007, three and disabled senior citizens. disabled persons work in reception, open spaces management and caretaking. − In November 2007, EIB and Dexia Credit Local signed a protocol financing agreement to be used for the French hospitals for the period 2007-2009, primarily to finance information systems. Dexia Corporate social responsibility MANAGEMENT REPORT MANAGEMENT Credit Local was allocated a total budget of EUR 100 million under In 2007, the Dexia Group defined a two-pronged corporate social the terms of this agreement. responsibility strategy based on increasing awareness about sustainable development and promoting social and corporate actions. Local and regional sustainable development Dexia Credit Local has taken many initiatives to develop its socially In 2007, Dexia Credit Local and the Federation of Public-Private awareness and notably through its Foundation. Joint Ventures (SEM) established a partnership to support sustainable development projects undertaken by SEM-type joint Created in 1993, the Dexia France Foundation promotes civic spirit venture companies. This agreement is intended to promote the so that everyone participates in sustainable development at the local many actions already undertaken by SEMs, and to optimize the and regional levels. information available to them and sensitize them to the issue of • In March 2007, the Dexia France Foundation created its Citizenship sustainable development. Academy. This initiative is intended to allow nearly sixty young people each year from troubled neighborhoods throughout France Human resources management to acquire the principles of citizenship, living it and expressing the concept fully. Of the fifty-six young people who are or were For many years Dexia Credit Local has been pursuing a comprehensive involved in the program, twenty-eight found employment under action plan to incorporate its corporate social responsibility policy into a fixed- or long-term employment contract, or enrolled in further the everyday management of human resources. vocational training. Highlights of 2007: Dexia Credit Local maintains an active policy of communicating and • Leadership model sensitizing its customers to the importance of environmental and social issues: − Building the “leadership model” concept into the recruitment interview; • Dexia Credit Local participates in sharing best sustainable development practices through various national and international − Building the “leadership model” concept into the annual review events, including in 2007: form used for all employees; − participation in the “Bordeaux Sustainable Development − Training managers who are one and two levels below that of the Workshops” program, in the workshop on “Financial products Management Board in the use of the leadership model. and sustainable development,”
• Attracting talent − participation in the MEDEF [the French employers confederation] − In 2008, each regional headquarters and the Head Office partnered workgroup on climate change, as part of the multiparty Grenelle with a school: participating in forums, inviting students to visit Environment initiative; Dexia’s regional headquarters and Head Office, inviting corporate − participation in the Association of Mayors of Large French Cities relationship managers and setting up group meetings; (AMGVF) conference on “sustainable development in the heart − Innovation, by participating in a virtual job fair on Second Life; of the city; ”
− Centralization of communications, with the “Youth on the Move” − participation in the Energies-Cités “Imagine” forum on the topic school relations platform; “Imagine the energy future for European local authorities;
− Improvement of the orientation process, with the overhaul of the − organization of the “Oak of the Future” program: distribution booklet for new employees (the collective bargaining agreement of 5,000 grafted oak plants to the elected officials present at is now provided in a CD-Rom, rather than in paper form) and the the 90th Mayors Conference, and financing of the planting of creation of a day-long orientation program for all new employees 5,000 trees; during their first month on the job: general presentation of Dexia, − organization of the fifth annual “Rubans du developpement the human resources process, the Quality action plan, the Dexia durable“ for local authorities; Foundation and the leadership model, followed by a visit to a department other than the one for which the employee was hired;
2007 Annual Report / DEXIA CREDIT LOCAL 53 MANAGEMENT REPORT 2 Human resources and environmental data
− participation in the first “Festival of Nature” organized by the - elevator management: a program was initiated in 2007 to optimize International Union for the Conservation of Nature and Natural the management of the elevators in order to reduce their energy Resources (IUCN); consumption;
− participation in a day-long sustainable development discussion − selective sorting of waste: recycling areas are available on each organized by the French Association of Urban Communities. floor of the Tour Dexia;
• this sensitization policy is also manifest through the publication of − paper consumption: various works and studies for local authorities: - purchasing of recycled, bleach-free paper, and virgin paper from − in 2007, Dexia Credit Local started a new series of works on sustainably-managed forests; sustainable development training and sensitization for local elected - printers are set by default to print on both sides. officials with Dexia Editions, on the topics of waste management and renewable energies. • In 2007, Dexia structured the reporting of its environmental metrics around six families of indicators, which are reported on a Management of direct environmental impacts quarterly basis: business trips; waste management; toner and ink cartridges; paper consumption; energy and fluids consumptions; Insofar as Dexia Credit Local is a service provider, its risks of direct and greenhouse gas emissions. Contracts covered by the Group’s environmental impact and those related to its purchasing policy are Supplier Charter are also subject to quarterly reporting. Dexia Credit relatively low; these risks are not, however, neglected. Local has been able to increase the reliability of its data by increasing • Several steps were taken in 2007 in connection with the move of reporting frequency and strengthening internal controls. Dexia Credit Local’s Paris staff to La Défense: • In order to involve its staff in the decrease of the Company’s environmental impact, Dexia Credit Local organized an in-house − energy consumption and CO2 emissions: contest to elicit ideas to reduce CO2 emissions as part of 2007 - the Tour Dexia is equipped with interior climate control tools that Sustainable Development Week. Six proposals were selected and allow the Company, for example, to turn off the lights in all of the implemented in 2007 in the Company, and feasibility studies are offices from 10 p.m. to 7 a.m., and to automatically program the presently being performed on fifteen others. air conditioning;
Quality action plan
The implementation of a quality action plan is an important part of the Company’s corporate social responsibility policy. It allows a financial performance-based culture to be expanded into a culture that promotes both performance and sustainable development. In 2007, Dexia Credit Local and its subsidiaries pursued a quality action plan covering both their internal management and their relationships with their customers.
The ISO 9001 certification of all of Dexia Credit Local’s activities in France was renewed.
Dexia recognized for its sustainable development strategy
Vigeo is the leading European supplier of extra-financial analysis.
Since 2004, Vigeo has been rating Dexia in six areas: human rights, the environment, human resources, market behavior, corporate governance and social responsibility.
In the autumn of 2007, Vigeo published its rankings of the social and environmental performances of 49 banks in France and throughout Europe. This was the first time Vigeo had performed this ranking, which will now be updated every year.
In France, Dexia was ranked first in the banking sector in the three following areas:
• Global social: human resources and human rights;
• Social: indicator of promotion of social discourse;
• Global environment.
Dexia was also ranked second in the area of the environment, on the metric for energy consumption and pollution emissions.
54 DEXIA CREDIT LOCAL / 2007 Annual Report MANAGEMENT REPORT Terms and compensation paid to members of management bodies 2
Terms and compensation paid to members of management bodies
Pursuant to Article L. 225-102-1 of the French Commercial Code, Readers are reminded that on January 24, 2007, the Dexia Credit the directorships and functions of each director and officer of Dexia Local Shareholders’ Meeting approved changes to the Company’s Credit Local during 2007 are presented below, together with the management and administrative structure, replacing the Executive
compensation paid them during that year. Board and Supervisory Board structure with a Board of Directors REPORT MANAGEMENT structure.
( 1. FUNCTIONS AND OTHER DIRECTORSHIPS HELD
Chairman of the Board of Directors • Chairman of the Board of Directors of CDC Holding Finances (since January 24, 2007) (through June 2007) (Chairman of the Supervisory Board through January 24, 2007) • Director of Société Forestière de la Caisse des Dépôts Pierre Richard Chairman of the Board of Directors of Dexia SA • Chairman of the Supervisory Board of Compagnie des Alpes Dexia SA – Place Rogier 11 – B-1210 Brussels – Belgium • Permanent representative of Caisse des Dépôts, Director of Icade • Chairman of the Board of Directors of Dexia SA (through February 2007)
• Vice Chairman of Dexia Bank Belgium • Member of the Supervisory Board (through July 2007) then Director (since July 2007) of CNP Assurances • Vice Chairman of Dexia BIL • Director of Accor • Director of Crédit du Nord (through February 2007) • Permanent representative of Caisse des Dépôts, member of the • Member of the Supervisory Board of Le Monde Supervisory Board of Caisse Nationale des Caisses d’Épargne et • Director of Air France - KLM de Prévoyance (CNCEP) (through January 2007)
• Director of Generali France Holding • Permanent representative of Caisse des Dépôts, member of the Supervisory Board of Société Nationale Immobilière • Director of EDF Energies Nouvelles • Director of Société du Grand Théâtre des Champs-Elysées
Vice Chairman of the Board of Directors • Chairman and Chief Executive Officer of CDC Entreprises Capital (since January 24, 2007) Investissement (Vice Chairman of the Supervisory Board through January 24, 2007) • Chairman and Chief Executive Officer of CDC Infrastructure Dominique Marcel (formerly Map Holding) Member of the Management Board of Caisse des Dépôts • Chairman of the Board of Directors of BAC Participations (since 56, rue de Lille – 75007 Paris June 2007) • Director of Dexia SA • Director of CDC Entreprises (formerly FP Gestion) (since • Chairman and Chief Executive Officer of Financière Transdev October 2007)
• Permanent representative of Financière Transdev, Director of • Director of Icade SA (from February 2007 through Société Européenne pour le Développement des Transports Publics November 2007) (Transdev) • Director of Icade EMGP (now Icade SA), (since October 2007) • Chairman of the Supervisory Board of CDC-DI GmbH (Germany)
• Member of the Supervisory Board of CDC Entreprises Holding (formerly CDC Entreprises) (through July 2007)
2007 Annual Report / DEXIA CREDIT LOCAL 55 MANAGEMENT REPORT 2 Terms and compensation paid to members of management bodies
Chief Executive Officer (since January 24, 2007) Jacques Guerber (Chairman of the Executive Board through January 24, 2007) Vice Chairman of the Management Board of Dexia SA Gérard Bayol Dexia SA – Place Rogier 11 – B-1210 Brussels – Belgium Dexia Credit Local - Tour Dexia La Défense 2-1, passerelle des Reflets • Director of Dexia SA (since May 2007) - 92913 La Défense cedex • Member of the Management Board (through February 2007) and • Permanent representative of Dexia Credit Local, member of the Director of Dexia Bank Belgium Supervisory Board of Dexia Municipal Agency • Member of the Management Board (through February 2007) and • Director of Dexia Crediop Director (since March 2007) of Dexia BIL • Chairman of the Supervisory Board (through September 2007) • Director of Crédit du Nord then Chairman of the Board of Directors (since September 2007) of Dexia Sofaxis • Director of Financial Security Assurance Holdings Ltd.
• Permanent representative of Dexia Credit Local, Director of Dexia • Chairman of the Supervisory Board of Dexia Municipal Agency CLF Banque • Member of the Supervisory Board of Financière Centuria (through • Director of Dexia Épargne Pension October 2007)
• Permanent representative of Dexia Credit Local, member of SOF- • Chairman of the Board of Directors of Dexia Participation GIE (through September 2007) Luxembourg (since June 2007)
• Permanent representative of Dexia Credit Local, member of SOFCA- Members of the Board of Directors GIE (since January 24, 2007) • Partner and legal manager of SCI Bayoli (Members of the Supervisory Board through January 24, 2007)
Fédération Nationale des Travaux Publics, represented by Members of the Board of Directors Patrick Bernasconi (1) (since January 24, 2007) Chairman of Fédération Nationale des Travaux Publics (Members of the Executive Board through January 24, 2007) 3, rue de Berri – 75008 Paris Axel Miller • Chairman of Fédération Nationale des Travaux Publics Chairman of the Management Board of Dexia SA Dexia SA – Place Rogier 11 – B-1210 Brussels – Belgium • Chairman of Bernasconi T.P.
• Chief Executive Officer of Dexia SA • Chairman of Science et Industrie
• Member of the Management Board (through February 2007) and • Chairman of the Board of Directors and Chief Executive Officer of Director of Dexia Bank Belgium L’Immobilière des Travaux Publics
• Member of the Management Board (through February 2007) and • Director of SMAVIE BTP Director (since March 2007) of Dexia BIL • Permanent representative of Fédération Nationale des Travaux • Director of Crédit du Nord Publics, member of the Supervisory Board of BTP Banque.
• Vice Chairman of the Board of Directors of Financial Security • Permanent representative of Fédération Nationale des Travaux Assurance Holdings Ltd Publics, Vice Chairman of SMA BTP
• Director of Ethias Vie (through January 2007) • Co-legal manager of SCI Bernasconi Frères
• Director of LVI Holding (through September 2007) • Partner and legal manager of Casa Déco
• Director of Carmeuse Holding SA (since September 2007) Fédération Française du Bâtiment, represented by Christian Baffy (1) • Member of the Management Board of Fédération des Entreprises Chairman of Fédération Française du Bâtiment de Belgique 33, avenue Kléber – 75016 Paris
• Chairman of Fédération Française du Bâtiment
• Vice Chairman of the Supervisory Board of Banque du Bâtiment et des Travaux Publics
• Director (in a personal capacity) and permanent representative of Fédération Française du Bâtiment, Vice Chairman of SMAVIE BTP
(1) Independent member
56 DEXIA CREDIT LOCAL / 2007 Annual Report MANAGEMENT REPORT Terms and compensation paid to members of management bodies 2
• Director (in a personal capacity) and permanent representative of Patrick Lachaert (1) Fédération Française du Bâtiment, Vice Chairman of SMA BTP (Director through November 6, 2007) Member of Parliament – Municipal Councilor of Merelbeke • Chairman and Chief Executive Officer of Baffy SA Hundelgemsesteenweg 166 – 9820 Merelbeke – Belgium • Legal manager of Baffy Invest SARL • Director of Dexia Bank Belgium (since March 2007) • Legal manager of B J Immobilier SARL Loïc Le Masne de Chermont (1) • Legal manager, then legal liquidator (since February 2008) of BD (Director through November 6, 2007) General Councilor of Loire-Atlantique • Legal manager, then legal liquidator (since October 2007) of L’Orle La Juliennais – 44360 Saint-Etienne de Montluc d’Or
• Director of Dexia Bank Belgium (through February 2007) REPORT MANAGEMENT • Legal manager of PIC Transactions • Permanent representative of the Loire-Atlantique department, • Legal manager of SCI Espace Cracovie Director of Société d’Equipement de la Loire-Atlantique (SELA) • Legal manager of La Ferme de Champlon • Chairman of SAS La Juliennais • Non-voting board member of Ecofi Euro Crédit • Legal manager of SCI Locla and SCI Locla 1-2-3-4-5-6 • Non-voting board member of BTP Obligations • Co-legal manager of SCI Lorod • Non-voting board member of BTP Associations • Partner and legal manager of SCI Racan • Non-voting board member of BTP Rendement François Rebsamen (1) • Chairman of SAS Cap Foncier 21 (through February 2007) Mayor of Dijon – 19, rue Amiral Courbet – 21000 Dijon
• Director of SGAM BTP (since January 2007) Antoine Rufenacht (1) Mayor of Le Havre – Place de l’Hôtel de Ville – 76600 Le Havre Christophe Béchu (1) (Director since November 6, 2007) • Legal manager of Société Financière Interocéanique President of the General Council of Maine-et-Loire • Chairman of the Board of Directors of Armor Hôtel du Département – Place Michel Debré – 49000 Angers • Director of Établissement Public Foncier de Normandie • Permanent representative of the Maine-et-Loire department, Chairman of the Board of Directors and Chief Executive Officer Francine Swiggers of SODEMEL (Société d’ Equipement du Département de Maine- Chairman of the Management Board of the ARCO Group et-Loire) 6, avenue Livingstone – 1000 Brussels – Belgium
• Permanent representative of the Maine-et-Loire department, • Director of Dexia SA (since November 2007) Chairman of the Board of Directors and Chief Executive Officer • Director and member of the Management Board of Arcofin of SEM T.B. 49 • Director and member of the Management Board of Arcopar Jean-Pierre Brunel (1) 226, rue Georges Besse – 30000 Nîmes • Director and member of the Management Board of Arcoplus
• Director of Services Conseil Expertises Territoires • Director and member of the Management Board of Auxipar
• Chairman of the Board of Directors of the SA of HLM Le Nouveau • Director of Interfinance Logis - Centre Limousin • Director and member of the Management Board of Arcosyn Philippe Duron (1) • Director of Sofato President of the Regional Council of Basse-Normandie Abbaye aux Dames – Place Reine Mathilde – 14035 Caen cedex • Director of Procura
Jean-Pol Henry (1) • Director of Aquafin Member of Parliament – Municipal Councilor of Charleroi • Director of VDK – Caisse d’Épargne 118, rue de la Madeleine – 6041 Gosselies – Belgium
(1) Independent member
2007 Annual Report / DEXIA CREDIT LOCAL 57 MANAGEMENT REPORT 2 Terms and compensation paid to members of management bodies
René Thissen (1) • Director of VEV (through May 2007) Senator – Municipal Councilor of Waimes • Chairman of the Executive Board of Dexia Bank Nederland 23, rue de Bouhémont – 4950 Waimes – Belgium • Member of the Executive Board of Dexia Nederland Holding • Chief Executive Officer of SAGI (through July 2007) • Chairman of the Board of Directors of RBC Dexia Investor Services Ltd . • Chief Executive Officer of MACOMA (through July 2007) • Director of Dexia Participation Belgique • Director of Centre Hospitalier Chrétien • Chairman of the Board of Directors of DenizBank • Director of Espace Tourisme et Culture (through June 2007) • Chairman of the Board of Directors of DenizBank Kültür Sanat • Chairman of Contrat de Rivière Amblève Yayincilik Ticaret Ve Sanayi (Deniz Culture) • Director of Unio Brussels ASBL Rembert von Lowis • Chairman of the Board of Directors of Société Wallonne des Member of the Management Board of Dexia SA Eaux (since July 2007) Dexia SA – Place Rogier 11 – B-1210 Brussels – Belgium • Chairman of the Board of Directors of SAGIMA SA (since • Member of the Management Board and Director of Dexia Bank July 2007) Belgium (through February 2007) Members of the Executive Board through • Director of Financial Security Assurance Holdings Ltd. January 24, 2007 • Director of Dexia Holdings Incorporated Dirk Bruneel • Director and Chairman of the Board of Directors of Dexia AM Member of the Management Board of Dexia SA Luxembourg Dexia SA – Place Rogier 11 – B-1210 Brussels – Belgium • Member of the Management Board of Dexia BIL (through February Representatives of the employee council 2007) Jean-Claude Trochain • Director of Dexia Financière SA (through December 2007) Valérie Hudé • Director of Ehsal (through January 2008)
( 2. COMPENSATION AND REGULATED AGREEMENTS
2.1 COMPENSATION AND BENEFITS PAID IN 2007
On April 26, 2005, the Board of Directors of Dexia SA set the gross annual compensation of its Chairman at EUR 400,000.
Gross fixed compensation (2) Gross variable compensation Pension Number of stock options plan (3) 2006 2007 In respect of 2006, In respect of 2007, Allocated (6) Exercised (EUR thousands) paid in 2007 payable in 2008
Axel Miller (5)(7) 725 825 989.63 1,039.50 137.80 150,000 / Jacques Guerber (5) 625 640 671.25 607.50 (4) 70,000 50,000 at EUR 11.27 55,000 at EUR 12.68
Dirk Bruneel (1)(5)(8) 560 560 439.60 403.20 90.80 60,000 93,500 at EUR 13.81
Rembert von Lowis (1)(5) 500 500 410.00 360.00 (4) 60,000 / Gérard Bayol 438 (9) 450 398.25 402.75 (4) 50.000 25,000 at EUR 17.86 25,000 at EUR 11.37 (1) Directors of Dexia Credit Local (members of the Executive Board) through January 24, 2007. (2) In addition to the amounts shown in this section, the Dexia Group also paid “employer” social security taxes on behalf of Jacques Guerber and Rembert von Lowis. (3) Amount paid by Dexia in 2007 for supplemental pension plans. (4) A total of EUR 1,017,083 was paid in respect of the discretionary supplemental pension. This contribution is not considered to be a vested benefit. (5) Other benefits: death, disability, and health insurance: collective annual premiums of EUR 157,993 were paid in 2007 for supplemental death, permanent incapacity, and health coverage for the Belgian members of the Dexia SA Management Board, and EUR 39,796.60 for supplemental death and disability coverage for the French members of the Dexia SA Management Board. (6) Options allocated on June 29, 2007 with an exercise price of EUR 23.25. (7) Fixed annual compensation for entertainment expenses and rental of a personal car: EUR 26,340. (8) Fixed annual compensation for entertainment expenses: EUR 6,320. (9) As from January 11, 2006. (1) Independent member
58 DEXIA CREDIT LOCAL / 2007 Annual Report MANAGEMENT REPORT Terms and compensation paid to members of management bodies 2
The compensation of members of the Management Board of Dexia SA depending on the case, are planned between the Chief Executive is set by the Board of Directors of Dexia SA based on the proposals Officer and the persons concerned to evaluate the extent to which of the Compensation Committee. The compensation of members of these objectives have been attained. In most cases, the attainment the Management Board of Dexia SA is subject to periodic review by of these objectives is measured in comparison with performance the Compensation Committee with the assistance of a specialized, indicators included in the management contract; independent consultant. • the third, individual portion is based on the achievement Gérard Bayol’s compensation is established by the Board of Directors of individual objectives established for each member of the of Dexia Credit Local, after discussion with the Compensation Management Board on the basis of Dexia’s in-house leadership Committee. model. The Chief Executive Officer is responsible for identifying all personal objectives and evaluating the degree to which they The compensation of the members of the Management Board of were achieved. REPORT MANAGEMENT Dexia SA comprises both a fixed and a variable component. The same principles are applicable to Gérard Bayol’s compensation, Fixed compensation is set in function of the types and importance although the second portion of his variable compensation is based of the duties performed by each (and taking account of market almost entirely on the degree to which Dexia Credit Local’s own benchmarks for similarly-scaled functions). goals are met. The variable compensation paid to the members of the Management The variable compensation paid to the Chief Executive Officer (Axel Board of Dexia SA, with the exception of the Chief Executive Officer Miller) and the Vice Chairman (Jacques Guerber) comprises two (Axel Miller) and the Vice Chairman (Jacques Guerber), comprises portions: three portions: • the first, Group portion is based on the same formula related to • the first, Group portion is based on a formula related to the results the results of Dexia SA described above; of Dexia SA, and is applied identically to all employees concerned within the Dexia Group. The formula is based on four indicators: • the second, individual portion is based on the achievement of gross operating income, excluding non-recurring items; net income individual objectives established on the basis of Dexia’s in-house excluding non-recurring items; total net income; and the Group’s leadership model. The Chief Executive Officer is responsible for relative PER (compared to the average PER of the DJ EuroStoxx identifying all of the Vice Chairman’s personal objectives and Bank index). For the first three indicators, Dexia’s performance is evaluating the degree to which they were achieved, and the compared to the budget; Compensation Committee is responsible for those of the Chief Executive Officer. • a second, business portion is specific to each member of the Management Board on the basis of his individual responsibilities. A coefficient between 0% and [X]% (with a 50% target rate) is applied This portion is evaluated using the performance management to each of these portions. An upper limit on variable compensation is system that has been in place since January 1, 2007, whereby a established for each member of the Management Board, resulting in management contract was established for each member of the each portion representing between 0 and a maximum of [X]% of fixed Management Board (with the exception of the Chief Executive compensation. These maximums and target rates were established Officer). This management contract establishes a series of duties in the following manner: and objectives to attain in 2007. Quarterly or half-yearly meetings,
Maximum Group Maximum business Maximum individual Total maximum (% of fixed compensation) portion portion portion
Axel Miller 150% / 75% 225%
Jacques Guerber 106.67% / 53.33% 160%
Dirk Bruneel 50% 50% 50% 150%
Rembert von Lowis 50% 50% 50% 150%
Gérard Bayol 50% 50% 50% 150%
2007 Annual Report / DEXIA CREDIT LOCAL 59 MANAGEMENT REPORT 2 Terms and compensation paid to members of management bodies
2.2 DIRECTORS’ FEES PAID IN 2007 2.3. COMMITMENTS SUBSCRIBED
Directors’ fees were set by the Shareholders’ Meeting of May 16, I t is specified that Dexia Credit Local has never entered into any special 2006 at EUR 300,000. agreement that would benefit a member of its senior management. Some of them do, however, participate in a discretionary supplemental In 2007, a total of EUR 229,000 in directors’ fees was paid, in the pension plan set in place by Dexia. following manner: Several pension plans are applicable to the directors of Dexia Credit • EUR 26,000 (1) to Loïc Le Masne de Chermont and Christian Local: Baffy; • Jacques Guerber, Rembert von Lowis and Gérard Bayol are all • EUR 20,000 to Patrick Bernasconi, Antoine Rufenacht, François entitled, so long as certain conditions are met, to receive pension Rebsamen, Dominique Marcel, Philippe Duron, Jean-Pierre annuities, should they live to retirement, of an amount equal to Brunel; 75% of the gross fixed compensation they each received during • EUR 19,500 (2) to Francine Swiggers; the two years preceding their retirement, less any amounts they may receive in respect of the pension légale d’origine privée legal • EUR 15,000 (3) to René Thissen and Jean-Pol Henry; pension. A supplemental survivors’ annuity is also provided for their • EUR 7,500 (4) to Patrick Lachaert. beneficiaries in the event that they should die prior to retirement. In 2007, Dexia SA decided to close the discretionary supplemental All directors’ fees or directors’ shares of profits paid by a Dexia Group pension plan. company to a member of the Management Board are deducted from the latter’s fixed or variable compensation. • Axel Miller and Dirk Bruneel are both entitled, so long as certain conditions are met (namely that they attain a minimum of 35 years’ seniority within the Dexia Group), to receive pension annuities, should they live to retirement, of an amount equal to 80% of their capped fixed compensation. In 2007, Dexia SA decided to close the discretionary supplemental pension plan, although the affiliated parties retain all vested and future rights acquired prior to December 31, 2006.
(1) Due to their participation in the Audit Committee. (2) Due to their participation in the Audit Committee and including the withholding tax. (3) Including the withholding tax. (4) Including the withholding tax – term expired during the year
60 DEXIA CREDIT LOCAL / 2007 Annual Report MANAGEMENT REPORT Significant events and outlook 2
Significant events and outlook
( 1. SIGNIFICANT EVENTS MANAGEMENT REPORT MANAGEMENT
1.1 REORGANIZATION OF DEXIA CREDIT LOCAL’S 1.3 IMPLEMENTATION OF THE MARKETS IN LEGAL AND OPERATIONAL STRUCTURE FINANCIAL INSTRUMENTS DIRECTIVE (MiFID)
For purposes of consistency with the other entities, and as decided In 2006, the Dexia Group prepared for the entry into effect on by its Shareholders’ Meeting of January 24, 2007, Dexia Credit November 1, 2007 of the MiFID by establishing a group-wide project, Local adopted the legal form of French corporation with a Board of overseen by the Group Compliance department and covering all of the Directors (société anonyme à conseil d’administration) in place of its European entities concerned. For Dexia Credit Local, the Compliance Executive Board and Supervisory Board structure. The 13 members of department and the General Secretariat which were responsible for the Supervisory Board were all appointed to the Board of Directors, oversight of the project, in coordination with the correspondents as were Axel Miller, Jacques Guerber and Gérard Bayol. appointed in the entities, carried out the action plans in order to be ready for November 1, 2007, while taking into account all of the The Board of Directors, at their January 24, 2007 meeting, appointed transpositions required for the different countries. Pierre Richard Chairman of the Board of Directors, and named Gérard Bayol the Company’s Chief Executive Officer.
The Executive Committee became the Management Board, with no 1.4 UTILIZATION OF THE ADVANCED INTERNAL changes to its composition. RATINGS-BASED METHOD (BASEL II REFORM) Insofar as the Company’s operations are concerned, it is worth On December 31, 2007, the Management Board of the Belgian mentioning that the IT and ALM departments were reorganized, Banking, Finance and Insurance Commission (CBFA) authorized and that the Public Sector Origination business now reports to the Dexia to use the advanced internal ratings-based approach for Chief Executive Officer of Dexia Credit Local. the calculation and reporting of credit risk-based capital adequacy requirements as from January 1, 2008.
1.2 CHANGE OF REGISTERED OFFICE
During the first quarter of 2007, the Dexia Group’s Paris-based staff 1.5 QUALITY ACTION PLAN moved into the building in the La Défense area on the outskirts of The ISO 9001 certification of all of Dexia Credit Local’s activities in Paris acquired on December 1, 2005, and to which all necessary France was renewed. improvements were made in 2006.
The Company’s registered office was transferred as from March 1, 2007 to the following address:
1, passerelle des Reflets Tour Dexia La Défense 2 TSA 92202 92919 La Défense Cedex
2007 Annual Report / DEXIA CREDIT LOCAL 61 MANAGEMENT REPORT 2 Significant events and outlook
( 2. OUTLOOK
Today, in France as elsewhere, local and regional authorities play a The implementation of the major EU community infrastructure vital role alongside central governments in managing public policies programs that have been approved by the European Union and and delivering public services to their inhabitants, both directly the Member States causes local and regional authorities to turn and indirectly. In many countries, the local and regional strata of increasingly to co-financing. Investment in the 12 new Member States government are increasingly being entrusted with responsibilities, increased at an exceptional rate of nearly +30% in 2006. Moreover, leading to financial transfers and a new distribution of budgets the desire to speed up completion of certain projects should result in a between the public sector players. greater use of public-private partnerships, which are already drawing the growing interest of new Member States, several of which have In Europe, due to the continuing decentralization process and transfers just established specific laws concerning this subject. of responsibilities, local and regional authorities have increased their clout in the economy. This is a continuous process and one that is far The size and diversity of programs to be undertaken should lead from over. Accordingly, the reform of the role of the Autonomous local and regional authorities to turn increasingly to debt financing. Communities that began in Spain in 2006 continued in 2007, as did Sub-national public sector debt (EUR 1,190 billion in 2006, or 10.3% the reform of the federal system in Germany. Other countries are of GDP) increased by an average of +2.9% per year between 2000 undertaking profound territorial reforms, as in Denmark, which is and 2006, rising by +2.0% in 2006. Local public sector debt alone considered one of the most decentralized countries in Europe and increased by an average of +2.6% per year between 2000 and 2006, which since January 1, 2007 has established a new institutional rising by +3.9% to EUR 679 billion in 2006 (5.8% of GDP). Because organization: the number of municipalities was reduced from 271 of the stringent prudential rules applied to the local public sector (e.g. to 98, and the 13 counties were replaced by 5 regions, responsible borrowing may only be used to finance capital expenditure), major essentially for healthcare. Lastly, the new EU Member States all equilibria remain protected, especially as the sub-national sector is established decentralization programs aimed at increasing local increasingly assigned responsibility for and governance over public responsibilities and adapting financing methods by measures such funds, notably through the use of “internal stability pacts.” as creating new operating and investment grants , introducing This expansion of local and regional responsibilities is observed equalisation mechanisms, reforming the national and local tax even beyond Europe’s borders. A veritable “globalization of systems, deregulating borrowing, etc. Several of them (Slovenia, decentralization” is witnessed, characterized by an increasing reliance Hungary, Latvia and Romania) are now looking to create regional on local authorities to ensure a country’s democratic development. self-governments to improve the administration of major programs, This new system of economic and social governance is encouraged such as infrastructure and healthcare. by international financial backers in most of the countries in which These changes had a quantifiable impact: in Europe, sub-national they operate. public sector expenditure (i.e. by local and regional governments, With strength derived from its expertise in the local public sector, federated entities and related public sector agencies) grew an average historically acquired in Belgium and France and gradually expanded of +2.6% in volume per year between 2000 and 2006, to nearly throughout the rest of Europe and the world, Dexia Credit Local EUR 1,800 billion, representing 15.7% of total GDP and 33.6% of is particularly well positioned to meet the growing needs of local total public spending. Public sector investment is now made mostly financial managers worldwide. Given these conditions, Dexia Credit by the sub-national public sector which, with nearly EUR 200 billion Local’s business of providing financial services and products will in 2006, accounted for more than two thirds of total public investment continue to grow, as will its earnings, in 2008. in Europe in 2006.
62 DEXIA CREDIT LOCAL / 2007 Annual Report CORPORATE GOVERNANCE AND INTERNAL CONTROL Summary 3 Corporate governance and 3 internal control
Report of the Chairman of the Statutory Auditors’ report 80 Board of Directors, prepared in accordance with Article L. 225-37 of the French Commercial Code 64
1. Preparation and organization of the duties of the Board of Directors ...... 64
2. Corporate internal control objectives ...... 65
3. Main participants in the internal control process (organization, roles, resources) ...... 66
4. Preparation and processing of the accounting and fi nancial information ...... 71
5. Internal controls: main risks and specifi c measures ...... 75
6. Assessment of internal controls ...... 78
Document2007 de référenceAnnual Report 2007 / DEXIA CREDITCRÉDIT LOCAL 63 CORPORATE GOVERNANCE AND INTERNAL CONTROL 3 Report of the Chairman of the Board of Directors, prepared in accordance with Article L. 225-37 of the French Commercial Code
Report of the Chairman of the Board of Directors, prepared in accordance with Article L. 225-37 of the French Commercial Code
This report describes the principles and procedures in effect The Board of Directors of Dexia Credit Local, at their January 24, during 2007, under the Executive Board and Supervisory Board 2007 meeting, and subsequent to the decision of the Extraordinary administrative structure until January 24, 2007 and under the Board Shareholders’ Meeting to change the administrative structure of of Directors structure since that date. the Company, appointed Pierre Richard Chairman of the Board of Directors, named Dominique Marcel Vice Chairman of the Board of Readers are reminded that for purposes of consistency with the other Directors and named Gérard Bayol the Company’s Chief Executive Dexia Group entities, and as approved by its Shareholders’ Meeting of Officer. January 24, 2007, Dexia Credit Local adopted the legal form of French corporation with a Board of Directors (société anonyme à conseil Insofar as the preparation of the present report is concerned, as a credit d’administration) in place of its Executive Board and Supervisory Board institution, Dexia Credit Local complies with the provisions of French structure. The thirteen members of the Supervisory Board were all Banking Regulations Committee (CRB) Standard 97-02, as modified appointed to the Board of Directors, as were Axel Miller, Jacques by the decrees of March 31, 2005, June 17, 2005, February 20, 2007 Guerber and Gérard Bayol. and July 2, 2007, which defines the roles, principles and methods applicable to internal controls. Dexia Credit Local also referred to the guidelines published by the French Financial Markets Authority (AMF) for the preparation of the present report.
( 1. PREPARATION AND ORGANIZATION OF THE DUTIES OF THE BOARD OF DIRECTORS
Dexia Credit Local applies best practices with regard to corporate 2007); and five other directors, three of whom are independent governance. These practices govern the functioning of the Board of members. The criterion used to ascertain independence is based on Directors and its specialized committees. the recommendations contained in the so-called “Bouton” report on corporate governance.
The members of the Board of Directors are required to comply with 1.1 BOARD OF DIRECTORS a charter defining their responsibilities; this charter was drawn up in accordance with the principles embodied in Dexia Credit Local’s The Board of Directors is responsible for establishing the operational code of ethics. guidelines of Dexia Credit Local and ensuring that they are implemented. It acts out of concern for the Company, including This charter reminds members in particular how important it is that its shareholders, customers and employees. There are no potential they participate actively in the Board’s work. The charter also reminds conflicts of interest between the duties of the members of the Board members of the Board of Directors that they fill sensitive roles, and of Directors with respect to Dexia Credit Local and their personal therefore are subject to the strictest requirements regarding trading interests or other duties. in the shares of Dexia. All transactions must be signaled in advance to the Chief Compliance Officer of Dexia Credit Local, and receive The Board of Directors is composed of 15 members (16 through his prior approval. November 6, 2007), who are elected by the Shareholders’ Meeting in light of their individual expertise and the contribution that they The Board of Directors meets at least once every quarter: in 2007, may make to the administration of the Company. The Board is it met five times. composed of: a Chief Executive Officer; three members representing The Chairman of the Board of Directors and the Chief Executive Officer the Company’s virtually exclusive shareholder, Dexia; four French provide the members of the Board of Directors with all information and two Belgian local elected officials (three through November 6,
64 DEXIA CREDIT LOCAL / 2007 Annual Report CORPORATE GOVERNANCE AND INTERNAL CONTROL Report of the Chairman of the Board of Directors, prepared in accordance with Article L. 225-37 3 of the French Commercial Code
- strategic information in particular - that they require to correctly 1.2 SPECIALIZED COMMITTEES OF THE BOARD OF perform their duties DIRECTORS
Prior to each meeting, the members of the Board of Directors are The Board of Directors may create specialized committees, comprising provided with an agenda and all reports and documents relating to between two and five members of the Board of Directors, including items appearing on the agenda. a Chairman. Committee meetings may be held in the absence of the All statutory appointments made to the Board of Directors are done Chairman of the Board of Directors or of the Chief Executive Officer. in compliance with the prevailing legislation and the terms of the The Chairman of each specialized committee presents a report on its Company’s by-laws. At each meeting, the Chief Executive Officer actions to the Board of Directors. presents the activity and the accounts for the preceding period. The The Audit Committee includes three members of the Board of Board also reviews the work of the Audit Committee, internal controls, Directors (1), who were confirmed in their functions by the Board and risk monitoring on an ongoing basis. of Directors of February 27, 2007, following the modification of In 2007, in addition to the administrative subjects for which it is Dexia Credit Local’s corporate governance structure. The Audit responsible, the Board of Directors also examined the Dexia Group’s Committee meets at least twice yearly; the Committee met three strategy, the condition of the financial markets, the positioning of times in 2007. Given the importance of the Audit Committee in Dexia Credit Local and its prospects in the public hospital sector, and verifying and monitoring the preparation of the financial statements, the Basel II models used by Dexia Credit Local. its assignments and resources are discussed in detail in the second part of the present report, which addresses internal control.
The Compensation Committee of the Board of Directors of Dexia SA
is consulted about policies regarding the compensation and benefits GOVERNANCE CORPORATE AND INTERNAL CONTROL provided to the members of the Dexia Credit Local Management Board, as well as about the employee shareholding policy.
( 2. CORPORATE INTERNAL CONTROL OBJECTIVES
2.1 ROLE OF INTERNAL CONTROL Risk management is the very heart of banking. Given the nature of its business and its desire to uphold the rules of prudence, As is true for all credit institutions, the objectives and organization diversification and quality with regard to its lending, Dexia Credit of the internal control function at Dexia Credit Local are defined by Local has made its approach to risk a cornerstone of its reputation the Monetary and Financial Code and French Banking and Financial in the financial markets. The internal control function is designed Regulatory Committee (CRB) Standard 97-02 as modified (compliance to provide the Management Board with a guarantee that the with which is verified regularly by the Internal Audit department), and risks assumed by the Group accurately reflect this priority and are by the laws and regulations of the countries in which Dexia Credit compatible with the performance targets that have been set. Local conducts business. • Ensure that the accounting and financial information produced is The internal control procedures provided for by CRB Standard 97-02 accurate and relevant. as modified state that several control systems should be established to ensure: The main objective of the financial information is to present a true and fair view of the financial situation of Dexia Credit Local in a • the compliance of transactions and internal procedures; consistent, exhaustive and transparent fashion. The internal control process is centered around attaining this objective. • accurate and reliable accounting and financial information; Dexia Credit Local has established a body of procedures and controls • security of information processing; as part of the organization of the internal control system designed to • systems for measuring and monitoring risks and results. improve the Bank’s compliance with all regulations and supervisory policies, while ensuring that available resources are productively More specifically, the roles assigned to the internal control function managed. in place within Dexia Credit Local are designed to: It should be mentioned that this system, like any control system, cannot • Verify that the risk management process in place is sound and be considered an absolute guarantee of the proper achievement of effective. the Company’s objectives.
(1) Christian Baffy, Chairman; Loïc Le Masne de Chermont; Francine Swiggers.
2007 Annual Report / DEXIA CREDIT LOCAL 65 CORPORATE GOVERNANCE AND INTERNAL CONTROL 3 Report of the Chairman of the Board of Directors, prepared in accordance with Article L. 225-37 of the French Commercial Code
2.2. GENERAL STRUCTURE OF THE INTERNAL Dexia Credit Local Group has compiled a standard reference system CONTROL FUNCTION of instructions.
The Dexia Credit Local internal control system is based on a segregation These reference documents can be divided into four major of duties adapted to the specific characteristics of each entity. It categories: distinguishes between: • charters have been drafted for each business line or activity, detailing the objectives and reference policies that the Group Permanent control, excluding compliance has established and creating a conceptual framework for the organization and running of the area concerned. Two examples This control function is responsible for verifying that the risk are the Internal Audit and Compliance charters that have been set management system set in place is sound and effective, and in place by the Dexia Group; guarantees the quality of all accounting and financial information. • codes provide a set of rules of conduct, or best practices to be The organization of the permanent control function (excluding observed by all employees in each activity, regardless of their direct compliance) is discussed in detail in paragraph 3.5 below. and functional reporting lines. With respect to this, in 2002 the Group adopted a code of ethics which was then distributed to all Compliance control employees at the Head Office and in the subsidiaries and branches This control function ensures that all regulations and procedures are and is regularly updated; continuously applied and that no risk of administrative, disciplinary, • rules of conduct – also called directives – are the first-level financial or reputational sanction arises due to their absence or non- operating impact of these charters and codes. They spell out the application. practical implications of the quality standards that have been The organization of the compliance function is discussed in detail in set, define limits and organize the system whereby authority is paragraph 3.6 below. delegated. In this manner, the rules of conduct established by Dexia Group Risk Management specify how all credit limits are to Periodic control, or internal audit be determined throughout the Dexia Credit Local Group; • procedures define – in compliance with all relevant charters, codes This control function, carried out by the Internal Audit department of and directives – the organization, tasks and monitoring necessary Dexia Credit Local, in close cooperation with the internal audit function for the performance of a given activity. Each employee must have of the Dexia Group, is responsible for continuously monitoring the access within his or her department or area to a procedure manual performance and the effective application of controls, in the parent covering his or her function. Similarly, service contracts allow two company and all its subsidiaries and branches. departments with a customer-supplier relationship to formalize The organization of the internal audit function is discussed in detail this by establishing the level of service expected. in paragraph 3.7 below. Moreover, the definition of processes performed as part of quality certification, even though focusing primarily on customer satisfaction, Internal reference documents has led the Company to develop a comprehensive control plan for To ensure that everyone participating in the internal control system its activity. has access to the same relevant information and instructions, the
( 3. MAIN PARTICIPANTS IN THE INTERNAL CONTROL PROCESS (ORGANIZATION, ROLES, RESOURCES)
3.1 OPERATIONS STAFF control, they must propose or implement – depending upon their level of responsibility – any changes required in order to maintain As provided by the policies of the Dexia Group, the heads and risk management at the desired level. employees of areas involved in operations are responsible for the application and smooth running of internal control procedures within their areas of activity. They are responsible namely for analyzing the 3.2 RISK MANAGEMENT AND PERMANENT risk on each transaction they initiate, and for verifying that such CONTROL DEPARTMENT transactions are in compliance with the internal control procedures in their departments. In the event that a change in the internal or The Management Board has entrusted the Risk Management external conditions under which they work should affect internal and Permanent Control department with a dual responsibility:
66 DEXIA CREDIT LOCAL / 2007 Annual Report CORPORATE GOVERNANCE AND INTERNAL CONTROL Report of the Chairman of the Board of Directors, prepared in accordance with Article L. 225-37 3 of the French Commercial Code
guaranteeing that the Bank’s risk profile remains low, so that the These committees intervene in several aspects of internal control: Bank can secure the high credit rating it requires to obtain funding • Total risk is defined and managed at the Dexia Group level by under the best possible terms and achieve its expected ROE targets, the Risk Policy Committee (RPC); and oversight of the Bank’s permanent controls. • Credit risk is managed by several different committees, including The Executive Vice President-Risk Management and Permanent notably: Control is a member of the Dexia Credit Local Management Board and is a member of the committee placed under the authority of − C redit Committees (weekly) approve those public finance, corporate the EVP-Risk of the Dexia Group, which includes all of the EVPs-Risk and project finance, and financial markets credit proposals over within the entities and the functional EVPs at the Dexia Group level. which they have responsibility, as determined by the types of The EVP-Risk Management and Permanent Control has no reporting counterparties, the degree of complexity, and the exposure limits relationship with the other units, and carries out his assignments free involved; of any intervention by the operating functions. − the Loan Monitoring Committees (Watchlist Committee, quarterly) The Risk Management and Permanent Control department is examine sensitive loans; responsible for all of the risks generated by the banking activity, as − the Dexia Group and Dexia Credit Local Default Committees defined by CRB Standard 97-02 as modified, namely credit, market, (quarterly) are responsible for ranking the potential severity of liquidity and operational risks. As stated above, the Risk Management delinquencies in accordance with the Dexia Group’s classification and Permanent Control department is responsible for the permanent system for non-performing loans and identifying the measures to control function within the Bank. be taken to limit any losses; The Department adheres strictly to the provisions laid down by the − the Reserves Committee (quarterly) decides on the appropriate GOVERNANCE CORPORATE AND INTERNAL CONTROL Dexia Group concerning risk measurement methods, exposure limits, reserves to be allocated to non-performing loans under and reporting procedures, all of which are defined by Group Risk collection; Management. − the Validation Advisory Committee, which is the Dexia Group In order to consolidate the monitoring of risk in the Dexia Credit Local committee that approves all models for credit, market, ALM, Group, the risk management structures in place in each branch and operational and economic capital risks. subsidiary all report directly (branches) or functionally (subsidiaries) to the EVP-Risk Management and Permanent Control. • Market risk:
− the ALM committee (ALCO, monthly), which meets at the Dexia Group level, establishes strategies for interest rate, currency and 3.3. COMMITTEES liquidity risks for all Group entities and for Dexia Credit Local and its subsidiaries and branches for whom this activity is significant; A number of committees form an integral part of the Dexia Credit Local internal control mechanism. − the Market Risk and Guidelines Committee (MRGC, monthly) monitors compliance with the market risk limits set by the Dexia The organization of these committees was modified following Group or Dexia Credit Local, analyzes operations and defines the reorganization of the Dexia Group in January 2006 to include operational guidelines. committees at Group level and committees specific to the entity. The definition of the role of each committee, its scope of responsibility The role of these committees is explained in greater detail in the and its composition were approved by the Group Management Board sections on market risk and ALM. early in 2006. In each of the Group risk committees, Dexia Credit • Diversification: Local is represented by its Chairman and the EVP-Risk Management and Permanent Control or a member of the Risk Management − the New Products Committee (monthly) verifies prior to the launch and Permanent Control department. All decisions are reached by of any new activities or products that the corresponding risks consensus, but Dexia Credit Local’s representative on these bodies have been correctly analyzed, measured and managed, and that does retain veto power for his entity if he believes that the risk profile adequate risk management systems have been put in place. Each or measure proposed is not suited to the specific characteristics of subsidiary has its own New Products Committee; his entity. − the Commercial Risk Evaluation Committee (quarterly) follows sales The responsibilities and composition of the Dexia Credit Local activity and analyzes commercial risks in connection with sales of committees were redefined based on the organization and the structured products and operations. It guides sales planning of committees created at Group level. All decisions are reached by these operations on this basis. consensus. In the event of a persistent disagreement, the Chairman • Major IT, regulatory and organizational projects: of the committee, himself a member of the Management Board, makes the final decision. − project steering committees monitor the progress of projects, provide the corresponding resource planning, make all final decisions and organize reporting to the Management Board of the Dexia Credit Local Group;
2007 Annual Report / DEXIA CREDIT LOCAL 67 CORPORATE GOVERNANCE AND INTERNAL CONTROL 3 Report of the Chairman of the Board of Directors, prepared in accordance with Article L. 225-37 of the French Commercial Code
− the IT Security Committee, whose principal duties are described 3.5. PERMANENT CONTROL EXCLUDING below in the section on IT Security. COMPLIANCE
The performances of most of these bodies are reviewed by the The EVP-Risk Management and Permanent Control, a member of Management Board every quarter. the Management Board, has oversight over all permanent controls other than compliance.
Oversight of the permanent control function is based on the use of 3.4. MONITORING OF SUBSIDIARIES AND decentralized risk measurement and monitoring teams within the BRANCHES Head Office departments or the subsidiaries and branches, and on the use of permanent control monitoring committees to perform The Dexia Credit Local Group employs many tools to monitor and monitoring on a consolidated basis. verify the operations of its subsidiaries and branches, depending upon the degree of their autonomy from the parent company. French The organization of the permanent control function is based on three subsidiaries that have been created to house a specific activity (special levels of control: purpose entities, or filiales outils) rely on the support of the services provided by Head Office departments, and are included within the • first-level controls are performed by the operating departments. scope of the latter’s internal control system. Hence, monitoring is Each employee and his line manager perform these controls directly quite well integrated. The leasing companies and Dexia Municipal on all transactions processed by that employee, in compliance with Agency are examples of these SPEs. the procedures in effect;
Other French subsidiaries, such as Dexia Sofaxis and Dexia CLF • second-level controls are performed by specialized personnel Banque, have a far more extensive scope of activity and operate using within each operating department, who submit their reports and their own staff. These subsidiaries have, consequently, established observations to the Risk Management and Permanent Control their own internal control systems within their organizations. These department; systems are modeled on the best practices developed at the Head • third-level controls are performed within the Risk Management Office, while taking into account the special characteristics of these and Permanent Control department by the unit responsible for subsidiaries’ own activities. oversight of these controls. In order to guarantee all possible Foreign subsidiaries and branches each have their own staffs and engage synergies between these various levels of control, the unit is in a broad range of activities as appropriate to their local markets. They housed within the Operational Risk Management, IT Security and are granted varying degrees of autonomy according to their size, and Permanent Control department. rely to a greater or lesser extent on the services provided by the Head Third-level controls are carried out in accordance with a control plan, Office departments. Like the French subsidiaries, foreign subsidiaries and results are reported quarterly to the Dexia Credit Local Management and branches have set up internal control systems that are adapted to Board. These controls cover the Bank’s main operating procedures, and their size, their activities and the specificities of the local market. have been selected with the cooperation of the operating departments. Monitoring of international entities is coordinated by the Executive They are based on both the operating process mapping carried out as Vice President of Dexia SA responsible for Public Finance & Credit part of the ISO 9001 Quality project and the risk and control mapping Enhancement, with the help of the Dexia Group’s International performed for operational risk management purposes. Headquarters. This department is organized into geographical regions The subsidiaries and branches have taken into account all laws and and includes correspondents for each subsidiary and branch. These regulations in the countries in which they operate and their own correspondents are responsible for day-to-day monitoring of these organization and size when setting up their permanent control entities, and for coordination with the appropriate departments at systems. Head Office. These controls are performed on behalf and under the control of the The risk management and permanent control, compliance and Risk Management and Permanent Control department, which has internal audit functions are all overseen directly by the appropriate functional authority to ensure that they are performed in a consistent departments of the Head Office of Dexia Credit Local. and independent manner and prepares the consolidated reports. The Under this setup, the manager of each of these functions in a Department may request justification of any malfunctions observed. subsidiary or branch reports either functionally (subsidiaries) or directly (branches) to the manager of the same department at Head Office. The latter participates in the recruitment, evaluation, compensation 3.6. COMPLIANCE and target setting of his counterpart in each subsidiary and branch. The Dexia Credit Local Group participates in highly regulated sectors, For all entities, monitoring is based on a system of delegation of and must at all times be in a position to verify that it remains in authority and regular reviews provided to the appropriate departments compliance with all laws, regulations and securities exchange rules. at Head Office and the Management Board of Dexia Credit Local , In addition to the aforementioned constraints, the Group has also and the participation of the members of the Management Board in developed its own internal rules. The rules of good conduct have the various administrative and decision-making bodies within each been put together in two sets of documents: a general integrity policy subsidiary.
68 DEXIA CREDIT LOCAL / 2007 Annual Report CORPORATE GOVERNANCE AND INTERNAL CONTROL Report of the Chairman of the Board of Directors, prepared in accordance with Article L. 225-37 3 of the French Commercial Code
and a compliance charter. Since 2002, a copy of the code of ethics with all of the standard documents to prepare the basic rules to be recapping these rules has been provided to all employees. A specific applied locally. front-office code of good conduct was drawn up and is distributed In 2007, in response to Dexia Group policy, the Compliance action plan to all concerned employees. In June 2007 the Code was updated, was successfully completed. The Compliance department performs a primarily to combine all of the main applicable procedures in a single regulatory watch by continuously updating all of the applicable laws document: market manipulation and insider trading, prevention of and regulations. A comprehensive guide to compliance procedures money laundering, confidentiality and “Chinese walls,” personal was prepared and is kept up to date. A control plan was organized transactions and conflicts of interest, gifts and benefits. and implemented. As part of its fight against money laundering, the Dexia Group respects The project to set the in place the new regulations resulting from the all French rules as well as the local rules in each of its international Markets in Financial Instruments Directive (MiFID) was co-managed locations. In addition to these basic conditions, the Group has also by the General Secretariat and the Compliance department for the implemented even stricter standardized criteria in terms of the entire Dexia Credit Local Group, as part of the general oversight of acceptability and respectability of its customers. The Group strives the Dexia Group. It was also adapted for all European subsidiaries to secure relationships only with counterparties whose identities are and branches that are subject to MiFID. The MiFID regulations were clearly established and who meet its own criteria in terms of integrity effective in all entities by November 1, 2007. and responsibility. The general position paper regarding antiterrorist measures and the prevention of money laundering is available to all employees. Mandatory training sessions are regularly organized in France and in all of the subsidiaries and branches for all new 3.7. PERIODIC CONTROL employees and for similar groups of employees (financial markets CORPORATE GOVERNANCE GOVERNANCE CORPORATE AND INTERNAL CONTROL personnel, institutional and local customer relationship managers, Periodic control includes both the internal audit and bank inspection structured finance units, etc). “USA Patriot Act” certification for all functions. appropriate Group entities is available on the Dexia website. Internal audit is responsible for promoting internal controls within Compliance is organized as a single function, from the holding the Group and providing ongoing verification of the efficiency and company of the Dexia Group all the way down to the foreign correct application of the internal control systems in place. subsidiaries of Dexia Credit Local. Compliance is an independent In order to do so, internal audit notably assesses through its assignments function that ultimately reports to the Chief Executive Officer, who whether the risks assumed by the Dexia Credit Local Group in the is the Chairman of the Dexia Management Board. In 2007, the performance of its various activities and in all the entities which it organization of the compliance function was modified to better comprises are identified and hedged sufficiently. It also verifies that the reflect the Dexia Group’s organization by business lines; the Chief guidelines and directives of the Chief Executive Officer are applied. Compliance Officer of Dexia Credit Local was given responsibility for monitoring all compliance issues for the Public Finance business A Group-wide internal audit charter lays out the fundamental throughout the entire Company. principles governing the internal audit function within the Dexia Group, by describing its aims, role, responsibilities and operating At Dexia Credit Local, the Chief Compliance Officer reports directly procedures. to the Chief Executive Officer, and reports on a functional basis to the Chief Compliance Officer of the Dexia Group. He also serves The Internal Audit department of Dexia Credit Local evaluates the as the French Ministry of Finance’s anti-money laundering (Tracfin) functioning of the internal control system for all entities that make correspondent, as part of the Bank’s obligations in the fight against up Dexia Credit Local, including the Head Office, the French sales money laundering and the financing of terrorism. One of the CCO’s network, and all subsidiaries, branches, and representative offices employees, who is formally accredited by the French Financial Markets in France and abroad. Authority (AMF), acts as Investment Services Control Manager for The Internal Audit department is held accountable for the performance both Dexia Credit Local and Dexia CLF Banque, both of which provide of its assignment by the Board of Directors and the Chief Executive investment services. Officer of Dexia Credit Local.
Each Dexia Credit Local Group entity has a compliance manager. Internal Audit reports to the Chief Auditor, who in turn reports directly Their role is to ensure that the Group’s general integrity policy and the to the Chief Executive Officer of Dexia Credit Local and functionally compliance charter are respected in each of the entities, to update to the Group Chief Auditor, as provided for by the internal audit the rules in response to changes in the local activities or environment charter. The Chief Auditor also has direct access to the Chairman of (legal or economic) and to inform managers and employees about the Board of Directors. In addition, the Bank Inspection function is the importance of measures against money laundering, the financing also assigned to him. of terrorism and market manipulation. They report to the Chief Compliance Officer of Dexia Credit Local on either a functional The managers of the Internal Audit departments of the subsidiaries (subsidiaries) or a direct (branches) basis. When new locations are report directly to the Chairman of the local Management Board, created (in 2006, this concerned notably Mexico, Canada, and the Board of Directors or the Supervisory Board (or to the Audit Japan) they are immediately assigned a compliance manager. The Committee), and report functionally to the Chief Auditor of Dexia latter receives support from the Head Office, which provides him Credit Local. The procedures for putting this horizontal functional
2007 Annual Report / DEXIA CREDIT LOCAL 69 CORPORATE GOVERNANCE AND INTERNAL CONTROL 3 Report of the Chairman of the Board of Directors, prepared in accordance with Article L. 225-37 of the French Commercial Code
structure in place were approved by the management and supervisory to highlight all changes in internal control systems. In 2007, the bodies of the subsidiaries in 2003. internal audit function was again able to verify the good state of progress achieved in the preparation of action plans in response to its The New York branch Internal Audit department reports directly to recommendations and to those of the Banking Commission. the Chief Auditor of Dexia Credit Local. A new organization of the internal audit function was approved by In 2007, the Dexia Credit Local Tokyo branch, which obtained its the executive bodies of both Dexia and Dexia Credit Local, and took banking license on December 31, 2006, was given a local internal effect in 2007. It better reflects the organization of the Dexia Group audit function, which reports directly to the Chief Auditor of Dexia and promotes the consolidation of the existing audit function by Credit Local, and for administrative purposes to the CEO of the establishing a single audit plan for the entire Group, overseen by the branch. five heads of the “Segments,” which are the lines of business and The role of bank inspection is to carry out tests of compliance with combined horizontal support functions. fraud prevention procedures and respect for the rules of compliance This new organization has not modified the responsibilities of the and the Company’s by-laws. Dexia Credit Local Internal Audit department. The existing auditors Every year, the Dexia Credit Local Bank Inspection unit prepares an all continue to report directly to the Chief Auditor of Dexia Credit action plan including some 20 investigations and controls, involving Local, who remains the primary contact for the Management Board the providing of investment services and employee ethics, and of Dexia Credit Local, its Audit Committee and its banking regulators. specific functions such as controls of trading rooms in the Head The Chief Auditor continues to ensure that all risks generated by the Office and the subsidiaries and branches. It also carries out inquiries activities of Dexia Credit Local, its subsidiaries and its branches are at the request of the Chief Executive Officer and the Chief Auditor. properly hedged. The Chief Auditor participates in the oversight of In 2007, the Bank Inspection unit successfully performed a total of the audit function within the Dexia Group. 21 assignments, identifying the causes of and responsibilities for The internal audit function is based on two structures: the Internal several small internal incidents of fraud and establishing corrective Audit Management Committee (IAMC) and the Internal Audit and preventive measures. Executive Committee (IAEC). Dexia banka Slovensko, the Slovak subsidiary, which is developing The Internal Audit Management Committee is composed of the generalist banking activities, has both central and regional audit units, Chief Auditor of Dexia SA, who serves as Chairman, and the Chief which are namely responsible for supervision of the regional branches Auditors of Dexia Bank Belgium , Dexia Credit Local, and Dexia Banque and agencies. Internationale à Luxembourg. The IAMC defines the Dexia Group’s In all, there were 48 auditors and inspectors working in the internal internal audit procedures, approves the Group’s comprehensive audit audit and bank inspection areas in 2007. This level of staffing is plan, identifies the resources to be used, defines the segments, and considered appropriate taking into account the Dexia Credit Local appoints the segment heads. activities. The Internal Audit Executive Committee is composed of the Chief A standardized audit methodology developed in cooperation with Auditor of Dexia SA, who serves as Chairman; the Chief Auditors Dexia Group covers analysis of the risk universe and the planning and of Dexia Bank Belgium , Dexia Credit Local, and Dexia Banque performance of audits, and is used by all Group entities. Internationale à Luxembourg; the heads of the various segments; and the head of the Planning, Tools & Reporting unit. The IAEC defines The frequency with which activities are audited (every one, two, three, the audit universe and updates it regularly; validates the risk mapping four or five years at Dexia Credit Local, and at least once every three prepared by each of the segment heads; prepares the Group’s years in the United States and for certain subsidiaries) is determined by comprehensive audit plan for approval; ensures the optimization of an analysis of the degree of risk they each present. As from 2007, all all audit assignments; suggests changes needed to the function’s operating processes are audited at least once every three years, while resources, procedures and tools; defines the training policy for the the remaining, less risky processes will be audited less frequently. The audit staff; analyzes the results of performance monitoring of the annual audit plan is established based upon these frequencies and internal audit function; and validates all reports prepared for internal submitted to the Management Boards of the entities concerned, and and external use. subsequently to their Audit Committees for approval. A Planning, Tools & Reporting unit exists at the Dexia SA level, with Each audit gives rise to a list of recommendations, which are correspondents within each of Dexia Bank Belgium , Dexia Credit Local incorporated into action plans. These are intended to correct any and Dexia Banque Internationale à Luxembourg. It is responsible for vulnerabilities discovered during the audits, in order to strengthen regulatory watch issues; audit procedures and tools; monitoring of the internal control mechanism. Each action plan is approved by recommendations; reports prepared for internal and external use; the Management Board of the entity concerned and is monitored contacts with the operational risk management and compliance regularly to ensure it is correctly implemented. functions; and coordination of the auditors’ schedules for carrying Action plans are monitored as part of the annual management report out the audit plan. provided for by CRB Standard 97-02 as modified and the half-yearly report requested by the Group Internal Audit department and presented at the Dexia and Dexia Credit Local Audit Committees,
70 DEXIA CREDIT LOCAL / 2007 Annual Report CORPORATE GOVERNANCE AND INTERNAL CONTROL Report of the Chairman of the Board of Directors, prepared in accordance with Article L. 225-37 3 of the French Commercial Code
3.8. CHIEF EXECUTIVE OFFICER AND The Group Management Board may meet in its expanded form (known MANAGEMENT BOARD as the Group Executive Committee), to address subjects with a Group- wide impact or other importance. The chairmen of the management To guarantee the smooth running and growth of the Dexia Credit Local bodies of the three main entities (Dexia Credit Local, Dexia Banque Group, the Chief Executive Officer has the final line of responsibility in Belgique and Dexia Banque Internationale à Luxembourg) and the terms of the implementation and maintenance of appropriate internal heads of the specialized insurance, asset management and finance controls. He defines and coordinates the internal control policies of the activities also participate in Group Executive Committee meetings. Dexia Credit Local Group. He also allocates resources and establishes deadlines for implementation of the actions that have been decided The departments most specifically concerned by internal control are upon with respect to these policies. He verifies that the objectives that the following: have been set are attained, and that the internal control system meets • the Group Internal Audit department, which reports directly to the all requirements. Lastly, he modifies these requirements whenever Chief Executive Officer and Chairman of the Management Board, warranted by internal and external changes. establishes all procedures used within the Group, coordinates To assist him in this assignment, the Chief Executive Officer relies on and helps perform audits of horizontal functions in all concerned the Management Board, whose members are continuously involved entities, audits all Group functions, and audits the audit functions in the internal control system through their operational functions, within the different entities; their participation in various supervisory committees and the audit I n 2007, the new organization described in paragraph 3.7 will and other reports that are systematically provided to them. encourage a greater degree of consolidation of the various components of the internal audit function within the group;
• the Group Risk Management department prepares the decisions GOVERNANCE CORPORATE AND INTERNAL CONTROL 3.9. DEXIA GROUP to be taken in the Group in terms of risk strategy and appetite for exposure, and identifies the internal resources needed to manage The organization of the Dexia Credit Local Group mirrors that of the this risk. The roles of the Group Risk Management department and Dexia Group. the committees organized at the Dexia Group level, were described Dexia’s executive body is the Group Management Board, which is in paragraphs 3.2 and 3.3; composed of ten members and is chaired by the Chief Executive • the Chief Compliance Officer, who reports directly to the Chief Officer. The Group Management Board is responsible for overseeing Executive Officer and Chairman of the Management Board, the entire Dexia Group, approving its strategy, rising to its challenges heads up the network of Compliance Officers within the various and developing its human capital. The members of the Management entities and ensures compliance with the integrity policy and Board are responsible for the business lines and the primary horizontal the propagation of the ethical culture that has represented one functions for the entire Group: Public/Project Finance and Credit of Dexia Group’s primary assets ever since it was founded (see Enhancement; Personal Financial Services; Treasury and Financial paragraph 3.6). Markets; Finance; Risk; and Operation and Technology. They each have a correspondent in the main operating entities, who reports to them on a functional basis.
( 4. PREPARATION AND PROCESSING OF THE ACCOUNTING AND FINANCIAL INFORMATION
4.1. FINANCIAL STATEMENTS a. Duties and organization of the Accounting Functions department The principal goal of the financial statements is to present a true and fair view of a company’s net worth, financial position and earnings. The Accounting Functions department of Dexia Credit Local plays a This is particularly important for a financial institution, where the unit of central role. It reports directly to the Chief Financial Officer (CFO) of measurement – currency – is integral to the actual business purpose. the Company, who is a member of the Management Board.
CRB Standard 97-02 as modified concerning internal control stipulates The Accounting Functions department is responsible for preparation in its section on accounting that the organization put in place must of the financial statements of Dexia Credit Local, as well as those of guarantee the existence of a set of procedures referred to as the “audit any subsidiaries that do not have their own accounting departments. trail.” This audit trail must allow all accounting information provided It is also responsible for the preparation of the consolidated financial to be tied back to an original supporting document, and vice versa. statements of the Dexia Credit Local Group. One unit specializes This is the basic policy on which the Dexia Credit Local Group bases in monitoring compliance with regulatory standards and rules of the organization of its accounting function. prudence.
2007 Annual Report / DEXIA CREDIT LOCAL 71 CORPORATE GOVERNANCE AND INTERNAL CONTROL 3 Report of the Chairman of the Board of Directors, prepared in accordance with Article L. 225-37 of the French Commercial Code
The Accounting Functions department also monitors and verifies the comparable average rates. Finally, these departments also draft a accounting data produced by foreign subsidiaries and branches, as report summarizing the work performed and identifying any points part of the consolidation process. In particular, it verifies that the requiring special attention or procedural improvements to be made information provided is consistent and complies with Group rules. in subsequent closings.
Generally speaking, the Accounting Functions department has Additional checks are also performed by other units of the Accounting various means at its disposal to obtain the information it requires to Functions department during monthly, quarterly and annual closings. fulfill its assignment of monitoring the accounting function in the The work done by the business line accounting teams is reviewed broadest sense of the term. It is represented on all committees that periodically to ensure that all controls included in a standardized may relate to its assignment, or is at least provided with a copy of list have been correctly performed. The summary report issued by the meeting minutes. Accounting staff frequently make site visits to these accounting teams is also reviewed. The financial accounts foreign subsidiaries and branches. The department participates in are reconciled with the management accounts every quarter, and changes to IT systems in order to ensure that its specific needs are comparability between periods is verified using analytical tests. taken into account. Explanations of the main changes must be provided.
In addition to the units in charge of the accounting IT system and The accounting entries generated during this process are subsequently standards, the accounting standards, control and development unit compiled and aggregated using an automated, standardized process, within the Accounting Functions department includes an independent to form the financial statements of Dexia Credit Local prepared under accounting verification team and a quality assurance team. The French GAAP and the Company’s contribution to the consolidated accounting system has been adapted to raise the level of quality and financial statements prepared under EU IFRS. The same is true of all of efficiency of its processes and to make the consolidated accounting Dexia Credit Local’s subsidiaries whose accounting is performed at the information it produces more reliable on a continuing basis, especially Head Office. From these financial statements, supplemented in some in the context of the uniform application of the new IFRS standards cases by data provided by the management systems, the Accounting throughout the Dexia Credit Local Group. The independent verification Functions department will establish the tables for the notes which form team was set in place in 2005 and participates in the permanent an integral part of the financial statements. The Accounting Functions control system. It strives to verify the materiality and the relevance of department then performs crosschecks between the summary reports the controls performed during the quarterly account closings for the and the notes to the financial statements. Throughout the entire consolidation scope within the Head Office of Dexia Credit Local, and process, reviews and tests of reasonableness and of compliance with regularly carries out assignments in the international entities, with a the established procedures are conducted in accordance with the frequency suited to the size and financial risks of the entity involved, reporting delegations that have been established. notably to ensure that all accounting methods are properly applied. The same work is performed in each of the entities that make up PREPARATION OF THE FINANCIAL STATEMENTS the Dexia Credit Local Group, although the degrees of complexity may vary with the size of these entities and the activities in which In order to prepare the financial statements, data is largely they engage. automatically posted to Dexia Credit Local’s accounting system by the downstream management systems used to manage customer PREPARATION OF THE CONSOLIDATED transactions, financial market counterparties and general operating FINANCIAL STATEMENTS expenses. When a transaction is recorded in any of these management The financial statements of the international entities that are prepared systems, automated charts of accounts automatically generate under local standards are restated to ensure consistency with the accounting entries. These entries feed into the financial statements accounting policies of the Dexia Credit Local Group (IFRS as adopted in using a single accounting system incorporating dual standards (French the European Union). These policies are compiled into a consolidation GAAP and EU IFRS). manual that is provided to each of the entities of the Dexia Credit Local The exhaustiveness and reliability of the source entries are guaranteed Group. Operational instructions are also provided to the entities at by the internal control systems of the financial control departments. each closing date by the head office financial accounting consolidation The team in charge of enforcing standards and policies validates the unit. These instructions set out improvements to be made to the automated charts of accounts under both sets of accounting standards, process in light of remarks evinced during preceding periods, and as well as the processing of complex or unusual transactions. The provide details of any changes (systems, new data to be provided, latter are occasionally entered manually, but they are then covered etc.) to be taken into consideration during the period. by specific internal control procedures. Should an entity experience any difficulty interpreting these policies, First-level controls are performed by accounting teams specializing by it can request help from the consolidation unit who, in collaboration line of business, notably through the analysis of bank reconciliations with the accounting standards unit, will provide an appropriate reply. and technical suspense accounts. Each month, all transactions Members of these teams make periodic trips to the entities in France recorded in the general ledger system are reconciled with those in and abroad in order to undertake a regular review and to identify the management systems, and tests of symmetry are performed on any changes in internal or external conditions which may have an micro hedging transactions. In order to verify the comparability of accounting impact. interest expense and income from one period to another, these items Using their financial statements that have been restated to Group are measured against average outstandings to calculate more easily norms, each of the entities of the Dexia Credit Local Group fills in a
72 DEXIA CREDIT LOCAL / 2007 Annual Report CORPORATE GOVERNANCE AND INTERNAL CONTROL Report of the Chairman of the Board of Directors, prepared in accordance with Article L. 225-37 3 of the French Commercial Code
consolidation package which is incorporated automatically into the The Accounting Functions department and the Corporate consolidation system. Checks are performed on the information that Communications department perform reciprocal control crosschecks is collected every quarter as well as on data relating to intercompany to ensure the consistency of the accounting and financial information transactions, the financial statements, and the notes to the financial published and made available to the public. statements.
These checks are aimed at ensuring the comparability of the b. Role of the Statutory Auditors information provided and its compliance with Group rules, and A committee of two statutory audit firms (the “Statutory Auditors”) gaining a better understanding of the principal changes that have is involved throughout the entire process of verifying the financial taken place in comparison with prior periods. The consolidation and accounting information in order to increase efficiency and unit performs specific adjustments intended notably to eliminate transparency. As part of their review, the Statutory Auditors analyze intercompany transactions and incorporate any changes in the scope accounting procedures and evaluate the internal control systems in of consolidation. place for the sole purpose of determining the type, period and scope A specialized accounting permanent control team performs additional of their tests. Their review is not intended to provide any specific checks to ensure the quality of the control procedures of the various opinions regarding the effectiveness and reliability of the internal accounting teams in the Head Office and the subsidiaries, suggesting controls; however, they may choose to share any recommendations improvements to enhance the effectiveness and standardization of they have with regard to internal control procedures and systems that these procedures and incorporating all of the best practices found could improve the quality of the accounting and financial information within the Group. prepared. Their evaluation of internal controls is based notably on substantive
ACCOUNT CLOSING PROCESS GOVERNANCE CORPORATE AND INTERNAL CONTROL tests, such as obtaining confirmations from a sample of external Once it has finalized the company financial statements and the counterparties. consolidated financial statements, the Accounting Functions department presents them to the Chief Financial Officer and the They issue instructions to the statutory or internal auditors of the Chief Executive Officer of Dexia Credit Local for review. The financial subsidiaries and centralize all work performed. They call summary statements are subsequently examined by the Management Board, review meetings to present the findings of their audits, and evaluate and then presented to the Audit Committee. As required by law, the interpretation of legal and regulatory statutes as performed by the the financial statements and consolidated financial statements accounting standards team. They are provided with all accounting and are then approved by the Board of Directors of Dexia Credit Local consolidation procedure manuals, as well as the instructions issued and presented to the Shareholders’ Meeting along with the Group by the Accounting Functions department. They examine the internal management report. The Board of Directors also examines the report audit reports provided to them. Lastly, they verify the accuracy and of its Chairman on internal control procedures as presented to the consistency of the management report and the financial accounting Shareholders’ Meeting. statements, as well as the consistency of the overall document with the items they have audited. PUBLICATION OF THE FINANCIAL STATEMENTS OF DEXIA CREDIT LOCAL These reviews enable the Statutory Auditors to obtain reasonable assurance that the financial statements they are certifying are free The summary financial statements are then incorporated into the from any material misstatement. annual report, which is equivalent to the document de référence required in France by Article 212-13 of the General Regulations of the French Financial Markets Authority (AMF). Using these reports together with information gathered throughout the closing process, 4.2. MANAGEMENT AND SEGMENT DATA the Accounting Functions department also prepares the written comments for the section of the management report that covers the The financial statements (balance sheet, off-balance sheet, income preparation and analysis of the accounts. statement, cash flow statement, and notes) are not the only quantified analyses released by Dexia Credit Local to its shareholders and the This accounting and financial information is made public through public. They are supplemented by activity reports, results by business several means: line, outlooks and risk assessments, which are all incorporated into the • the financial statements are published in BALO, the French official annual report or transmitted at presentations to financial analysts. journal of required publications; Some of these reports are provided directly by the operating • the annual report is filed in both paper and electronic formats with departments and the Risk Management and Permanent Control the French Financial Markets Authority (AMF) as the document de department. Their accuracy is therefore guaranteed by each référence and with the Clerk of the French Commercial Court, and department’s internal control system. is posted on the Dexia Credit Local website; Most of this information calls for data from different sources to be • as required by disclosure regulations, all annual and interim rearranged or compiled; certain high-level figures must be broken reports are posted on the website of an AMF-certified distributor down and accounting data needs to be restated in order to respect of financial news releases (Hugin). management constraints. All this information is provided to the
2007 Annual Report / DEXIA CREDIT LOCAL 73 CORPORATE GOVERNANCE AND INTERNAL CONTROL 3 Report of the Chairman of the Board of Directors, prepared in accordance with Article L. 225-37 of the French Commercial Code
editors of the annual report by the Planning and Financial Control automatically in much the same way as the pure accounting department. Like the Accounting Functions department, the latter data; reports to the member of the Dexia Credit Local Management Board • financial margins (Treasury and Financial Markets and responsible for accounting and financial control. The Planning and transformation) are calculated by the Market Risk Management Financial Control department contributes to the preparation of department, which reports to the Risk Management and Permanent financial information in two main ways: Control department, using the internal bill-back system present in each profit center in the financial activities area. a. Preparation of the management dashboard for the Public/Project Finance and Credit Loan margins and financial margins are combined with the other Enhancement business line types of income, such as commissions and the like, to calculate the net banking income (NBI) for each business line, and the sum of these The monthly management dashboard includes a number of key NBI figures by business line is reconciled with the NBI figure generated indicators, including new lending and outstanding long- and short- by the Accounting Functions department. term loans; fees and commissions; amounts on deposit and assets under management; present value premiums and insured capital on The other items in the income statement are also allocated by the credit enhancement business; etc. The report is compiled based business line, especially as concerns “general operating expenses ” on information provided by the Sales and Financial Engineering-France and “depreciation, amortization and impairment provisions.” The department, sourced from its information system, and also by the sum of these business line income statement items is reconciled at international entities. Written comments on the various figures are subtotal level with the income statement generated by the Accounting prepared in collaboration with the respective departments. Functions department.
The controls implemented systematically during the preparation of The earnings from the Personal Financial Services line of business this management dashboard are based on the following principles: are passed through to Crédit du Nord (of which Dexia is a 20% shareholder) and Dexia banka Slovensko, the Slovak subsidiary. • the Proofreading Committee, composed of all contributors to the management dashboard, ensures the overall consistency between In sum, all of these procedures allow complete income statements the results presented and the activity effectively reported within to be prepared for each business line, in order to foster a better each scope. For certain activities, checks of operational consistency understanding of individual profitability and contribution to the total are performed by the Financial Control department on the basis net income of Dexia Credit Local. of disclosures created and distributed by the teams in charge of the various activities; activity is analyzed in relation to the previous COMPILATION PROCESS year’s results, providing an economic explanation and confirmation French and foreign entities with their own financial control units of results for the current year; produce the Public/ Project Finance and Credit Enhancement management dashboard and calculation of earnings by business line • the management dashboard is presented for final validation by locally using the same standards and principles, which may be adapted the Management Board. The report, which provides year-to-date with respect to each entity’s size, organization and systems. This information, and a commentary that is updated each month, is standardized list of instructions - the “Financial Control Procedures used during the closing of the annual accounts to provide data for and Standards Manual” - is used throughout the Dexia Group. inclusion in the annual report. Dexia Credit Local’s Planning and Financial Control department b. Calculation of earnings by line of business coordinates, monitors, and supervises the entire process. It provides all Dexia Credit Local Group entities with standardized, secure data- The business lines are defined at the Dexia Group level. Dexia Credit gathering tools in order to render the data collection process more Local is active essentially in the Public/ Project Finance and Credit reliable and effective. Lastly, it compiles all of the data collected. Enhancement line of business and Treasury and Financial Markets line of business, field in which all the entities of the Dexia Group While information is being compiled by line of business, the Accounting are active. Functions department is overseeing the consolidation process.
In order to provide investors with a deeper understanding of the At each stage of the preparation of the consolidated data, the Planning profitability of these different business lines, the Planning and and Financial Control department and the Accounting Functions Financial Control department is responsible for preparing an income department have set in place controls of consistency based on the statement for each of them. reconciliation of the management and accounting data. Reconciliation of management earnings with accounting earnings is an important The calculation of income by business line is monitored each quarter, component of internal control, that ensures the accuracy of both. and relies essentially on two types of management data: These reconciliations continued to be improved in 2007, notably at • loan margins (Public/ Project Finance and Credit Enhancement) are the Head Office of Dexia Credit Local where any variances are analyzed prepared by the Planning and Financial Control department, by and explained. One of the challenges for 2008, along with the compiling data from the accounting system – such as average Accounting Functions department and the Market Risk Management outstanding loans and the interest margin rate – that is generated unit, will be the tightening of quarterly closing deadlines.
74 DEXIA CREDIT LOCAL / 2007 Annual Report CORPORATE GOVERNANCE AND INTERNAL CONTROL Report of the Chairman of the Board of Directors, prepared in accordance with Article L. 225-37 3 of the French Commercial Code
( 5. INTERNAL CONTROLS: MAIN RISKS AND SPECIFIC MEASURES
Banking generates four main types of risks: credit risk, market risk, b. Credit limits structural risk (relating to interest rates, exchange rates and liquidity) and operational risk. Credit limits are established for each type of counterparty on the basis of Dexia’s Tier 1 capital, the counterparty’s equity or internal economic Monitoring of all these risks is performed jointly by the appropriate capital, generating variable amounts based on the internal rating of committees and the Risk Management and Permanent Control the counterparty, the type of transaction and the country involved. department, with the help of tools that it develops, in compliance with Specific rules for private-sector companies have been set at the Dexia the guidelines established by the Dexia Group and all legal constraints Group level, with a view to limiting the impact on shareholders’ and rules of prudence. equity in the event of a default. Specific limits are established for each individual project and asset finance transaction. Limits have As regards the supervision of risks in the subsidiaries and branches, also been established for certain sectors, such as the wind power each entity has its own local risk management structure. These generation and photovoltaic sectors. structures are strictly independent of the front offices and report to the Dexia Credit Local Risk Management and Permanent Control department either directly (branches) or functionally (subsidiaries). c. Monitoring and reporting
Each local risk management structure has one or more correspondents The monitoring process is based upon two levels: in charge of managing operational risk and permanent controls and • first-level monitoring is provided by front offices in the Head Office, GOVERNANCE CORPORATE AND INTERNAL CONTROL implementing the Basel reforms. In general, all the risk management branches and subsidiaries as part of the ongoing monitoring of the measures present at Dexia Credit Local are also found in each financial health of their counterparties; subsidiary and branch. • second-level monitoring is provided by the Risk Management and Apart from the general principles described above, the means used Permanent Control department, which collects and consolidates by Dexia Credit Local to manage these risks in practice, both on exposures, delinquent payments, consolidated non-performing a day-today basis and in exceptional circumstances, are described loans and consolidated allowances every quarter. hereafter. Commitment and credit limit levels are examined quarterly (except interbank limits, which are verified monthly) and are reported to the Management Board as part of the documentation required by CRB 5.1. CREDIT RISK Standard 97-02 as modified.
Credit risk is the risk of loss relating to the inability of the Bank’s The consolidated monitoring of risks at the level of the subsidiaries customers or other counterparties to meet their financial and branches is based on the risk methodology described above. obligations. Risk monitoring at FSA is basically provided by the quarterly, internal Underwriting Committee, which is chaired by a member of the a. Approval process Dexia Management Board. The Underwriting Committee reviews Any commitment that can give rise to a credit risk must be approved all transactions that took place the previous quarter; approves all in accordance with a lending approval process organized according to guidelines and procedures; approves all transactions not included in volume, type of counterparty and complexity of the commitment. The the delegations of powers granted to management, especially in new process is based on the delegation of decision-making authority for areas of activity; and certifies the quarterly risk reviews. The committee relatively low-risk customers in the local government sector in Western also examines FSA’s reinsurance terms, which are a major criterion Europe and in North America. Limited powers in the area of project for evaluation in the monitoring of the subsidiary’s risks. Lastly, all finance have been delegated to Dexia Credit Local’s New York and transactions whose sizes exceed certain limits are submitted to the London branches and to the Spanish subsidiary Dexia Sabadell. These Dexia Management Credit Committee. Dexia has also established a delegations of authority are governed by stringent rules. Outside the FSA Risk Monitoring Committee, which regularly assesses all subjects areas covered by delegated authority, however, it is mandatory to of interest involving the risk management of FSA. obtain the approval of the Dexia Credit Committees (those of Dexia Credit Local and Dexia, and the Management Credit Committee) d. Internal credit ratings for matters pertaining to private sector financing, project finance In accordance with the rules applicable to the entire Dexia Group, (except for limited cases), asset-based lending and lending to local each counterparty is assigned an internal risk rating. This rating is public sector customers. determined solely by the risk methodology at the start of a relationship or transaction and is subsequently assessed on a regular and formal basis, in principle annually, except for counterparties classified as “watch list,” which are reviewed quarterly.
2007 Annual Report / DEXIA CREDIT LOCAL 75 CORPORATE GOVERNANCE AND INTERNAL CONTROL 3 Report of the Chairman of the Board of Directors, prepared in accordance with Article L. 225-37 of the French Commercial Code
As Dexia Credit Local has elected to apply the advanced internal it of all changes in the Bank’s consolidated risks (exposures, limits, ratings-based method under the Basel II reform of the solvency ratio limits that have been exceeded) and changes to its monitoring and capital adequacy requirements, the Company develops internal system (modification of measurement methods or guidelines); credit rating systems (SNI) for each type of counterparty. This 18-level • the Dexia Credit Local financial markets committee is called the scale includes two levels for counterparties in default. Counterparties Weekly Operational Committee. It provides local monitoring of not currently covered by an SNI are rated based on expert systems the correct application of the standards and decisions set down and credit scores. In 2007, a specialized unit developed the Quality by the Dexia Market Risk Group Committee, and ensures that Control process, ensuring that the internal credit rating systems are all information is provided to the appropriate Dexia Credit Local used properly. managers. e. Reserve policies The Risk Management and Permanent Control department’s Market Risk Management unit measures risk regularly. Once a quarter, a Reserves Committee, chaired by the Risk Management and Permanent Control department, approves the amount of reserves Their report, which is presented quarterly to the Management allocated and monitors the cost of risk. General reserves are calculated Board, is based on various indicators for monitoring the limits and maintained as required by IFRS regulations. allocated to the various risks, and which are presented in detail in the management report.
5.2. MARKET RISKS 5.3. STRUCTURAL RISKS: INTEREST RATES, EXCHANGE RATES AND LIQUIDITY a. Scope Market risk is the risk of loss relating to fluctuations in market prices a. Scope and interest rates, their interactions and their level of volatility. Due to the nature of its activity, the Dexia Credit Local Group is prevented Structural risks are grouped together and designated as Asset-Liability from assuming significant exposure to market risk. Management (ALM) risks. The purpose of ALM is to hedge the risks relating to this balance sheet structure, either partially or in full. Apart Dexia Credit Local also manages a bond portfolio including: a from interest rate risks and exchange rate risks relating to the Financial proprietary credit spread portfolio, aimed at building up a liquidity Markets activity, all other significant interest rate risks, exchange rate reserve and generating a stable lending margin; an investment risks and liquidity risks of Dexia Credit Local are the responsibility of portfolio, comprising positions taken in the course of the Bank’s the ALM Committee. lending to players in the local sector; and lastly a more actively managed held-for-trading portfolio, whose scope, contents and total b. Monitoring value are subject to stringent and low limits, consistent with the Bank’s principle of maintaining a low risk profile. The monitoring of ALM risks is organized around two committees:
This bond portfolio is managed without any exposure to interest rate • the Dexia ALM Committee (ALCO) meets monthly: risk by means of appropriate hedges, but remains subject to price risk For the entire scope of the Group, it defines risk policy and the relating to the market’s assessment of the issuer’s situation. methods used to hedge risks. The guidelines set by the Dexia ALM Committee enable individual hedging decisions to be made, but b. Monitoring management authority may also be delegated to the Dexia ALM Two committees are responsible for the monitoring of financial department; markets-related risks is: It ensures that these limits are used consistently according to its own • the Market Risk Group Committee (MRGC) meets monthly at scenarios for interest rate movements. As with all risk committees, the Dexia Group level. Dexia Credit Local is represented by the the representative of Dexia Credit Local is either the Chief Executive EVPs of either the Risk Management and Permanent Control or Officer or the EVP-Risk Management and Permanent Control. the Financial Markets department, who have an explicit mandate • the decisions of the Group ALM Committee are adapted defining their decision-making authority. The MRGC is responsible operationally by the Tactical ALCO Committee, which meets for for defining and monitoring all risk policies such as guidelines and the Dexia Credit Local entity and in which the Risk Management market risk limits. and Permanent Control department and the Financial Markets The committee notably establishes guidelines for the development department participate. of all new market activities. In any case, every month the committee monitors the change in The Dexia Credit Local Risk Management and Permanent Control risk based on the sensitivity of the “net present value” of the assets department provides the Dexia Credit Local Management Board and liabilities within the ALM scope (ALM NPV) to a given change with a quarterly (or more frequently, if need be) report informing (100 basis points) in market interest rates.
76 DEXIA CREDIT LOCAL / 2007 Annual Report CORPORATE GOVERNANCE AND INTERNAL CONTROL Report of the Chairman of the Board of Directors, prepared in accordance with Article L. 225-37 3 of the French Commercial Code
Given the new organization defined at Group level, important the same method for these self-evaluatory mappings. Depending steps are being taken to update all existing procedures, implement on the results, action plans may be set in place to control exposure new procedures for the new activities, and define and enrich the to risk. appropriate controls. The results of the mappings are summarized in the Dexia operational risk management tool. Various reports analyze the Bank’s risk profile by entity, by activity, by process and by type of event (as defined in 5.4. OPERATIONAL RISKS the Basel II accord) and are presented to the Management Board each year. a. Scope c. Information systems security Operational risks are defined as the risk of a loss resulting from inadequacies or failures in procedures, in staff or in internal systems, Information systems security includes all measures taken to shield data as well as those due to external events. They include all risks related from any threat to its confidentiality, integrity or availability. to information systems security and litigation. Dexia has chosen All these measures are described in the Dexia Credit Local information to include the risk of damage to the Group’s reputation into its systems security policy manual, which defines all applicable principles operational risk management. by area of security, along with the roles and responsibilities of the various players in the IS security process, using a body of directives, b. Organization and monitoring specific security policies, rules and operating procedures and the guidelines provided by ISO standard 27000/17799. OPERATIONAL RISK MANAGEMENT CORPORATE GOVERNANCE GOVERNANCE CORPORATE AND INTERNAL CONTROL The Dexia Group has elected to apply the standardized approach Under the supervision of a specialized steering committee, each allowed under the Basel II directives and has implemented processes operating department participated in the preparation of a business and a management tool as called for in the paper on “Sound Practices continuity plan (BCP). Under the plan, the impacts of a disaster for the Management and Supervision of Operational Risk” published affecting IT equipment or facilities or information systems or of a by the Basel Committee on Banking Supervision. loss of service are analyzed from a “business” perspective in order to identify all mission-critical activities. The results of this analysis A specialized team in the Dexia Credit Local Risk Management and were used to establish business recovery times that are compatible Permanent Control department is responsible for operational risk, with operating requirements. The implementation of this recovery and works with a network of correspondents in each department strategy of reprise is based on the use of formal, documented technical and entity. The involvement of the business line EVPs guarantees the guidelines, procedures and organizational structures. The BCP and effectiveness of the system. these procedures are all updated once a year and on a regular basis, Operational risk management is coordinated at Dexia Group level in accordance with a schedule defined by the Management Board. by the Operational Risk Committee (ORCO) which meets once a The results of the tests are reported to the steering committee. month. Moreover, Dexia Credit Local has placed critical systems for data production with a service provider, in a single center under highly COMPILATION, ANALYSIS AND PROCESSING OF INCIDENTS secure physical conditions and connected via redundant high-speed The Dexia Group has defined a procedure for compiling incidents and links. Dexia Credit Local has also set up a mirror site to prepare for operational losses as required by the provisions of Basel II. Operational any failure in these systems. Dexia periodically backs data up and risk correspondents are responsible for identifying and analyzing all can very quickly substitute this site for the main site, if need be. This incidents with the help of the central operational risk unit. Depending system was successfully tested in 2007. on the results of this analysis, corrective or preventive measures are taken to reduce exposure to operational risk. Information systems security is managed by three players:
Dexia has a shared operational risk management tool that includes a • the IT Security Committee is responsible for recommending module for compiling incidents in the various Group entities. security policies to the Management Board, for establishing specific directives for each area, and for ensuring that they are A quarterly report summarizing all significant incidents is sent to the implemented. The committee comprises representatives from the Management Board and to each business line EVP (in the Head Office, various “business line” stakeholders, including risk management, subsidiaries and branches). compliance, IT and logistics. The Committee meets every two months, and is chaired by the member of the Management Board RISK MAPPING in charge of risk management and permanent control; In addition to the incidents that have already been observed, it is essential that the Bank anticipate all potential risks within each of • the IT Security Manager is responsible for recommending security its activities. By evaluating the principal areas at risk, including the policies and directives to the IT Security Committee. He oversees effectiveness of all existing controls, the Dexia Group can plot its risk the practical implementation of the rules that make up the security profile. Departments and entities throughout the Dexia Group all use policy, increases employee awareness and provides advice to the
2007 Annual Report / DEXIA CREDIT LOCAL 77 CORPORATE GOVERNANCE AND INTERNAL CONTROL 3 Report of the Chairman of the Board of Directors, prepared in accordance with Article L. 225-37 of the French Commercial Code
various departments. The IT Security Manager is a member of It therefore plays a key role in preventing matters from being taken to the Operational Risk Management, Permanent Control and litigation, anticipating changes in the law and ensuring compliance Security department, which guarantees his independence from with the principles of corporate governance. the operations area; Functional relationships have been established between the General • IT departments are responsible for designing and implementing Secretariat of Dexia Credit Local and the equivalent structure for the all security hardware and software, and for implementing all Dexia Group, in order to promote discussion of legal strategies and associated operational rules and procedures. They also perform cases. A formal mapping of legal risks is currently being formally first- and second-level controls over the correct application of drafted. security. The job of IT Security Manager was created within the IT Similarly, the General Secretariat of Dexia Credit Local has established department in order to coordinate these activities. regular contacts with its counterparts in the subsidiaries and branches, Moreover, the business continuity plans of the subsidiaries and branches with exchanges of all appropriate information. are reviewed every year to ensure that they all provide sufficient security and to draft any action plans that may be needed. e. Insurance of operational risks
d. Litigation risks Dexia Credit Local currently has traditional property insurance, including general hardware and facilities multi-risk, vehicle and The General Secretariat performs six main functions: third-party liability. All French subsidiaries are covered under these polices. • internal consulting; Dexia Credit Local has also subscribed policies for the following risks: • drafting and supervision of legal / tax binding deeds and directors and officers liability for the members of the management documents; bodies, third-party professional liability, loss of banking operations and • management of amounts under collection; so-called “comprehensive bank coverage,” which covers fraud and the financial impact of damage to assets and/or documents. These • maintaining a watch in its areas of specialization; guarantees are likewise in effect for all French and foreign entities • legal secretariat services for Dexia Credit Local and its controlled by Dexia Credit Local (given its special nature and size, FSA subsidiaries; has an appropriately-scaled, specific level of guarantee).
• administrative supervision of investments, trademarks and delegations of power.
( 6. ASSESSMENT OF INTERNAL CONTROLS
6.1 CHIEF EXECUTIVE OFFICER AND The most sensitive horizontal, Group-wide committees are chaired MANAGEMENT BOARD by a member of the Management Board, who can subsequently summarize the work involved for all the members. Under the organization in effect in 2007, the Chief Executive Officer, assisted by the Management Board, plays a vital role in the assessment The Management Board has also implemented a system of delegation of internal control. He therefore has access to several sources of and reporting that requires the operational departments to present information to enable him to accomplish all of his duties in this area. and approve the key indicators, through which it is able to judge the The Chief Executive Officer has no potential conflicts of interest quality and smooth running of the internal control system. between his duties with respect to Dexia Credit Local and his personal Internal audit is also a valued source of information for the Chief interests or other duties. Executive Officer and the Management Board. They receive all The members of the Management Board each have a personal interest the audit reports, which are discussed and commented on during in operational responsibilities by business line or by function. They meetings. They approve all recommendations and action plans. therefore have a comprehensive understanding of the constraints and All audit recommendations are now monitored quarterly, and the opportunities in their respective fields of activity, and are thus able to Internal Audit department provides the Management Board with define internal control procedures and to judge their efficacy. quarterly monitoring reports. The Chief Executive Officer can also
78 DEXIA CREDIT LOCAL / 2007 Annual Report CORPORATE GOVERNANCE AND INTERNAL CONTROL Report of the Chairman of the Board of Directors, prepared in accordance with Article L. 225-37 3 of the French Commercial Code
request Internal Audit to perform assignments that are not scheduled 6.3. DEXIA GROUP in the annual audit plan on topics that he feels require immediate attention. The Dexia Group plays a major role in monitoring internal control within the Dexia Credit Local Group. The latter’s managerial The Statutory Auditors, as part of their audit of the financial statements, organization includes many representatives of the Dexia Group: the and the regulators (in France, essentially the Banking Commission and Board of Directors of Dexia Credit Local includes the Chairman and the Financial Markets Authority), as part of their inspections, make the Vice Chairman of the Dexia SA Management Board. In addition, recommendations for improving specific internal control issues. The the Group Executive Committee is provided with copies of all reports Management Board subsequently takes the necessary steps so that on Company-wide audits and the most significant audit assignments these recommendations are implemented as quickly as possible. performed by Dexia Credit Local.
The Chairman of the Board of Directors of Dexia Credit Local is copied on the Internal Audit department’s business review, and he 6.2. AUDIT COMMITTEE has access to all audit reports. He may regularly query the Chief Executive Officer of Dexia Credit Local about internal controls. Lastly, At its meeting of September 9, 2003, the Supervisory Board of he may ask the Group Internal Audit department to audit a Dexia Dexia Credit Local approved the creation of an Audit Committee, Credit Local function, if he feels it is warranted. in accordance with the Company’s principles of corporate governance.
The Audit Committee is delegated by the Board of Directors to assist 6.4. PREPARATION OF THE REPORT it in performing its financial control of Dexia Credit Local. The Audit CORPORATE GOVERNANCE GOVERNANCE CORPORATE AND INTERNAL CONTROL Committee focuses specifically on those procedures covering the The present report, established by the Chairman of the Board of preparation of the financial statements and risk management, and Directors of Dexia Credit Local, was prepared by the General Secretariat is also responsible for managing relationships with the Statutory in cooperation with the Internal Audit department, which gathered Auditors. the appropriate information from all of the operating and support The Audit Committee reports on its work and observations to the departments concerned. Board of Directors. This report also takes account of the meetings of the Chairman of the In performing its assignments, the Audit Committee has unfettered Board of Directors and the Chairman of the Management Board, as access to the Statutory Auditors, the Chief Auditor and the Chief well as the summaries of the meetings of the Audit Committee. Compliance Officer of Dexia Credit Local. It informs the Chief Executive Officer of its contacts immediately. Pierre Richard It is aware of the conclusions drawn from any inspections performed by the regulatory bodies and from any internal audit assignments, Chairman of the Board of Directors and may request copies of the audit reports. It is also empowered to suggest any additional assignments.
The committee can request any information that it may deem to be useful.
2007 Annual Report / DEXIA CREDIT LOCAL 79 CORPORATE GOVERNANCE AND INTERNAL CONTROL 3 Statutory Auditors’ report
Statutory Auditors’ report
Statutory Auditors’ report on the report of the Chairman of the Board of Directors on internal control procedures for the preparation and processing of accounting and financial information, in accordance with Article L. 225-235 of the French Commercial Code.
This is a free translation into English of the Statutory Auditors’ report issued in the French language and is provided solely for the convenience of English-speaking readers. This Statutory A uditors’ report includes information specifically required by French law and this is presented after the Opinion on the financial statements. This information includes an explanatory paragraph discussing the auditors’ assessment of certain significant accounting matters. These assessments were made for the purpose of issuing an opinion on the financial statements taken as a whole and not to provide separate assurance on individual account captions or on information taken outside of the financial statements. The report also includes information relating to the specific verification of information in the management report. This report together with the Statutory Auditors’ report addressing financial and accounting information in the Chairman’s report on internal control, should be read in conjunction with French law and professional auditing standards applicable in France.
To the shareholders:
In our capacity as Statutory Auditors of Dexia Credit Local, and in accordance with Article L. 225-235 of the French Commercial Code, we hereby report to you on the report prepared by the Chairman of the Board of Directors of your Company in accordance with Article L. 225-37 of the French Commercial Code for the year ended December 31, 2007.
It is the responsibility of the Chairman of the Board of Directors to give an account in his report on the conditions under which the tasks and governance of the Board of Directors are prepared and organized and on the internal control procedures implemented within the Company.
It is our responsibility to report to you our observations on the information set out in the Chairman’s report on internal control procedures for the preparation and processing of financial and accounting information.
We performed our work in accordance with professional guidelines applicable in France. Those guidelines require that we assess the accuracy of the information provided in the report prepared by the Chairman on internal control procedures for the preparation and processing of financial and accounting information.
We have, notably:
• examined the internal control procedures for the preparation and processing of financial and accounting information underlying the information presented in the report of the Chairman of the Board of Directors, as well as existing documentation;
• examined the work undertaken to prepare that information and existing documentation;
• assessed whether the principal deficiencies in internal control procedures for the preparation and processing of financial and accounting information we observed during the performance of our assignment are appropriately disclosed in the report of the Chairman of the Board of Directors.
Based on the procedures we have performed, we have no comments to make regarding the information provided on the Company’s internal control procedures for the preparation and processing of financial and accounting information contained in the report of the Chairman of the Board of Directors, prepared in accordance with the provisions of Article L. 225-37 of the French Commercial Code.
Paris - April 2, 2008
Statutory Auditors
CADERAS MARTIN MAZARS & GUERARD Daniel Butelot Olivier Avril Guillaume Potel Anne Veaute Partner Partner Partner Partner
80 DEXIA CREDIT LOCAL / 2007 Annual Report CONS OLIDATED FINANCIAL STATEMENTS Summary 4
Cons olidated 4 financial statements
Consolidated balance sheet 82 Notes to the consolidated fi nancial statements 89 Assets ...... 82 1. Accounting methods and scope of consolidation Liabilities ...... 83 - accounting policies and valuation methods ...... 89
2. Notes on the assets ...... 110
Consolidated income statement 84 3. Notes on the liabilities ...... 126 4. Other notes on the balance sheet ...... 140
5. Notes on the income statement ...... 149
Consolidated statement of changes 6. Notes on off-balance sheet items ...... 160 in equity 85 7. Notes on exposure to risk at December 31, 2007 ...... 161
8. Analysis by geographic region and by line of business ...... 179 Consolidated cash fl ow statement 87
Cash and cash equivalents ...... 88 Statutory Auditors’ report on the consolidated fi nancial statements 181
Document2007 de référenceAnnual Report 2007 / DEXIA CREDITCRÉDIT LOCAL 81 CONS OLIDATED FINANCIAL STATEMENTS 4 Consolidated balance sheet
Consolidated balance sheet
( ASSETS
Note At At At (EUR millions) December 31, 2005 December 31, 2006 December 31, 2007
I. Cash, central banks and postal checking accounts 2.0 708 1,069 1,553
II. Financial assets at fair value through profit or loss 2.1 16,569 17,970 24,098
III. Hedging derivatives 4.1 6,375 7,449 10,367
IV. Financial assets available for sale 2.2 100,066 114,360 130,761
V. Interbank loans and advances 2.3 20,745 20,212 20,832
VI. Customer loans and advances 2.4 113,889 129,131 146,568
VII. Fair value revaluation of portfolio hedges 415 123 (364)
VIII. Financial assets held to maturity 2.5 1,697 1,364 1,272
IX. Current tax assets 2.6 157 141 161
X. Deferred tax assets 2.6 54 67 436
XI. Accruals and other assets 2.7 8,827 9,625 7,324
XIII. Investments in associates 2.8 386 417 459
XIV. Investment property 2.9 2 2 0
XV. Tangible fixed assets 2.9 465 494 499
XVI. Intangible assets 2.10 60 60 71
XVII. Goodwill 2.11 1,385 1,385 1,387
TOTAL ASSETS 271,800 303,869 345,424
82 DEXIA CREDIT LOCAL / 2007 Annual Report CONS OLIDATED FINANCIAL STATEMENTS Consolidated balance sheet 4
( LIABILITIES
Note At At At (EUR millions) December 31, 2005 December 31, 2006 December 31, 2007
I. Central banks and postal checking accounts 3,349 3,388 7,630 II. Financial liabilities at fair value through profit or loss (1) 3.1 16,370 11,575 12,290
III. Hedging derivatives 4.1 13,946 13,277 13,755
IV. Interbank loans and deposits 3.2 60,370 80,796 99,247
V. Customer borrowings and deposits (1) 3.3 10,978 20,141 19,938
VI. Debt securities 3.4 149,302 157,445 176,010
VII. Fair value revaluation of portfolio hedges 727 (31) (447)
VIII. Current tax liabilities 3.5 89 61 77
IX. Deferred tax liabilities 3.5 714 699 260
X. Accruals and other liabilities 3.6 3,574 3,953 5,199
XII. Technical provisions of insurance companies 3.7 142 145 134
XIII. Provisions 3.8 122 127 102
XIV. Subordinated debts 3.9 4,638 4,309 4,942
XV. Shareholders’ equity 3.10 7,479 7,984 6,287
XVI. Shareholders’ equity, Group share 6,709 7,172 5,528 OLIDATED
XVII. Capital stock and additional paid-in capital 3,114 3,114 3,114 CONS FINANCIAL STATEMENTS
XVIII. Reserves and retained earnings 1,628 2,123 2,877
XIX. Unrealised or deferred gains and losses 1,106 853 (1,454)
XX. Net income 861 1,082 991
XXI. Minority interests 770 812 759
TOTAL LIABILITIES 271,800 303,869 345,424 (1) As explained in n ote 1.3 “Accounting policies and valuation methods,” EUR 6.7 billion was reclassified from line II. “Financial liabilities at fair value through profit or loss” into line V. “Customer bollowings and deposits” at December 31, 2006. This reclassification had no impact on earnings for the period.
2007 Annual Report / DEXIA CREDIT LOCAL 83 CONS OLIDATED FINANCIAL STATEMENTS 4 Consolidated income statement
Consolidated income statement
(EUR millions) Note 2005 2006 2007
I. Interest income 5.1 27,292 38,438 50,407
II. Interest expense 5.1 (26,039) (37,113) (49,108)
III. Fee and commission income 5.2 109 128 147
IV. Fee and commission expense 5.2 (38) (34) (49) V. Net gains (losses) on financial instruments at fair value though profit or loss 5.3 65 95 (295) VI. Net gains (losses) on financial assets available for sale 5.4 76 322 388
VII. Other income (1) 5.5 816 504 506
VIII. Other expense (1) 5.6 (489) (199) (196)
IX. NET BANKING INCOME 1,792 2,141 1,800
X. Operating expense 5.7 (514) (572) (609) XI. Depreciation, amortisation and impairment of tangible fixed assets and intangible assets 5.8 (41) (43) (52)
XII. GROSS OPERATING INCOME 1,237 1,526 1,139
XIII. Cost of risk 5.9 (36) (44) (46)
XIV. OPERATING INCOME 1,201 1,482 1,093
XV. Income (losses) from associates 5.10 51 57 61
XVI. Net gains (losses) on other assets 5.11 12 0 0
XVII. Impairment of goodwill 0 0 0
XVIII. INCOME BEFORE TAX 1,264 1,539 1,154
XIX. Corporate income tax 5.12 (328) (380) (108)
XXI. NET INCOME 936 1,159 1,046
XXII. MINORITY INTERESTS 75 77 55
XXIII. NET INCOME, GROUP SHARE 861 1,082 991
Earnings per share, Group share
- Basic (in EUR) 9.89 12.43 11.38
- Diluted (in EUR) 9.89 12.43 11.38
(1) Including technical margin of insurance companies 329 310 306
84 DEXIA CREDIT LOCAL / 2007 Annual Report CONS OLIDATED FINANCIAL STATEMENTS Consolidated statement of changes in equity 4
Consolidated statement of changes in equity
Core shareholders’ equity Unrealized or deferred gains and losses Minority interests
Capital Reserves, Total Change in Change in Cumulative Total Share- Core sha- Unrealized Total Share- stock, retained fair value fair value of translation holders’ reholders’ or deferred holders’ additional earnings of financial cash flow differences equity, equity gains and equity paid-in and net assets hedges, net Group losses capital income for available of taxes share the period for sale, net of (EUR millions) taxes
At January 1, 2005 2,414 2,213 4,627 624 (86) (94) 444 5,071 675 (2) 673 5,744
Movements during the period
Changes in capital 0 0 0 0 0 17 17 17 Changes in additional paid-in capital 000 000 00
Dividends (580) (580) 0 (580) (22) (22) (602)
Translation adjustments 0 26 0 153 179 179 0 34 34 213 Changes in fair value of financial assets available for sale through shareholders’ equity 0 467 467 467 1 1 468 OLIDATED Changes in fair value FINANCIAL STATEMENTS CONS of derivatives through shareholders’ equity 0 16 16 16 37 37 53 Changes in fair value of financial assets available for sale through profit or loss 0 0 0 0 0 0 0 Changes in fair value of derivatives through profit or loss 0 0 0 0 0 0 0
Net income for the period 861 861 0 861 75 75 936
Other movements (1) 700 (5) 695 0 0 0 0 695 (45) 0 (45) 650
At December 31, 2005 3,114 2,489 5,603 1,117 (70) 59 1,106 6,709 700 70 770 7,479 (1) The other movements are all discussed in note 3.10. c
2007 Annual Report / DEXIA CREDIT LOCAL 85 CONS OLIDATED FINANCIAL STATEMENTS 4 Consolidated statement of changes in equity
Core shareholders’ equity Unrealized or deferred gains and lossesMinority interests
Capital Reserves, Total Change in Change in Cumulative Total Share- Core sha- Unrealized Total Share- stock, retained fair value fair value of translation holders’ reholders’ or deferred holders’ additional earnings of financial cash flow differences equity, equity gains and equity paid-in and net assets hedges, net Group losses capital income for available of taxes share the period for sale, net of (EUR millions) taxes
At December 31, 2005 3,114 2,489 5,603 1,117 (70) 59 1,106 6,709 700 70 770 7,479
Movements during the period
Changes in capital 0 0 0 0 0 13 13 13 Changes in additional paid-in capital 000 000 00
Dividends (361) (361) 0 (361) (21) (21) (382)
Translation adjustments 0 (25) 1 (150) (174) (174) 0 (23) (23) (197) Changes in fair value of financial assets available for sale through shareholders’ equity 0 58 58 58 (4) (4) 54 Changes in fair value of derivatives through shareholders’ equity 0 43 43 43 2 2 45 Changes in fair value of financial assets available for sale through profit or loss 0 (181) (181) (181) 0 0 (181) Changes in fair value of derivatives through profit or loss 0 0 0 0 0 0 0
Net income for the period 1082 1,082 0 1,082 77 77 1,159
Other movements (1) 0(4)(4)0000(4)(2)0(2)(6)
At December 31, 2006 3,114 3,206 6,320 969 (26) (91) 852 7,172 767 45 812 7,984
Movements during the period
Changes in capital 0 0 0 0 0 18 18 18 Changes in additional paid-in capital 000 000 00
Dividends (320) (320) 0 (320) (19) (19) (339)
Translation adjustments 0 41 12 (194) (141) (141) 0 (21) (21) (162) Changes in fair value of financial assets available for sale through shareholders’ equity 0 (2,010) (2,010) (2,010) (89) (89) (2,099) Changes in fair value of derivatives through shareholders’ equity 0 89 89 89 1 1 90 Changes in fair value of financial assets available for sale through profit or loss 0 (215) (215) (215) 2 2 (213) Changes in fair value of derivatives through profit or loss 0 (29) (29) (29) 0 0 (29)
Net income for the period 991 991 0 991 55 55 1,046
Other movements (1 ) 0(9)(9)0000(9)000(9)
AT DECEMBER 31, 2007 3,114 3,868 6,982 (1,215) 46 (285) (1,454) 5,528 821 (62) 759 6,287 (1) The other movements are all discussed in note 3.10. c
86 DEXIA CREDIT LOCAL / 2007 Annual Report CONS OLIDATED FINANCIAL STATEMENTS Consolidated cash flow statement 4
Consolidated cash flow statement
(EUR millions) At December 31, 2005 At December 31, 2006 At December 31, 2007
Cash flow from operating activities Net income 936 1,159 1,046
Adjustments for: • Depreciation, amortization and other impairment 46 50 62 • Impairment on bonds, equities, loans and other assets (3) (55) (58) • Net gains on investments (79) (136) (237) • Changes in provisions 20 61 42 • Unrealized gains and losses (23) (39) (82) • Income from associates (51) (57) (61) • Dividends from associates 21 17 21 • Deferred taxes 14 58 (161) • Other adjustments 000 Changes in operating assets and liabilities 5,775 7,386 (202) NET CASH PROVIDED (USED) BY OPERATING ACTIVITIES 6,656 8,444 370
Cash flow from investing activities Purchases of fixed assets (84) (89) (106) Sales of fixed assets 32 5 9 Acquisitions of unconsolidated equity shares (48) (128) (122) Sales of unconsolidated equity shares 314 288 463 OLIDATED OLIDATED Acquisitions of subsidiaries (64) (45) (24)
Sales of subsidiaries 443CONS FINANCIAL STATEMENTS NET CASH PROVIDED (USED) BY INVESTING ACTIVITIES 154 35 223
Cash flow from financing activities Issuance of new shares (1) 729 18 18 Reimbursement of capital 000 Issuance of subordinated debts 1,016 36 1,142 Reimbursement of subordinated debts (126) (67) (282) Purchases of treasury stock 000 Sales of treasury stock 000 Dividends paid (602) (382) (339) NET CASH PROVIDED (USED) BY FINANCING ACTIVITIES 1,017 (395) 539 NET CASH PROVIDED 7,827 8,084 1,132 Cash and cash equivalents at the beginning of the period 3,203 11,263 18,900 Cash flow provided (used) by operating activities 6,656 8,444 370 Cash flow provided (used) by investing activities 154 35 223 Cash flow provided (used) by financing activities 1,017 (395) 539 Effect of exchange rate changes and changes in scope of consolidation on cash and cash equivalents 233 (447) (324) CASH AND CASH EQUIVALENTS AT THE END OF THE PERIOD 11,263 18,900 19,708
Additional information Income tax paid (357) (308) (309) Dividends received 40 45 45 Interest received 25,603 37,501 48,945 Interest paid (25,070) (36,655) (47,683) (1) Dexia Credit Local issued a EUR 700 million super subordinated perpetual note in the fourth quarter of 2005.
2007 Annual Report / DEXIA CREDIT LOCAL 87 CONS OLIDATED FINANCIAL STATEMENTS 4 Consolidated cash flow statement
( CASH AND CASH EQUIVALENTS
For the purpose of the consolidated cash flow statement, cash and cash equivalents include the following balances with current maturities of less than 90 days:
Analysis by nature (in EUR millions) At December 31, 2005 At December 31, 2006 At December 31, 2007
Cash, central banks and postal checking acounts (note 2.0) 708 1,069 1,552
Interbank loans and advances (note 2.3) 9,023 6,806 9,948
Loans and securities available for sale (note 2.2) 954 2,632 2,207
Loans and securities held for trading (note 2.1) 578 286 153
Loans and securities designated at fair value (note 2.1) 0 0 0
Accruals and other assets (note 2.7) 0 8,107 5,848
TOTAL 11,263 18,900 19,708
Of which restricted cash (in EUR millions) At December 31, 2005 At December 31, 2006 At December 31, 2007
Mandatory reserves (1) 611 1 037 951
Other 000
TOTAL 611 1 037 951 (1) Minimum reserve deposits credit institutions must have with the European Central Bank (ECB) or other central banks.
88 DEXIA CREDIT LOCAL / 2007 Annual Report CONS OLIDATED FINANCIAL STATEMENTS Notes to the consolidated financial statements 4
Notes to the consolidated financial statements
( 1. ACCOUNTING METHODS AND SCOPE OF CONSOLIDATION - ACCOUNTING POLICIES AND VALUATION METHODS
1.1 GROUP COMPANIES AND CONSOLIDATION b. Changes in the scope of consolidation compared METHODS with December 31, 2006.
The principal changes to the Group scope of consolidation in 2007 a. Criteria for consolidation and use of the equity are shown below: method NEWLY CONSOLIDATED COMPANIES Dexia Credit Local applies all rules pertaining to credit institutions with • First time consolidation of Dexia Kommunalkredit Bank Polska in regard to the scope of consolidation resulting from: the Dexia Kommunalkredit Bank scope of consolidation; • IAS 27 preparation and the presentation of the consolidated • First time consolidation of Dexia CAD Funding LLC, Dexia Public financial statements of a group of companies controlled by a Finance Switzerland SA and Dexia Crediop Ireland; parent company; • First time consolidation of FSA Seguros Mexico SA in the FSA scope • IFRS 3 Business Combinations, and the impact of accounting of consolidation. methods on consolidation;
• IAS 28 Investment in Associates; DECONSOLIDATED COMPANIES: OLIDATED OLIDATED • CLF Patrimoniale was deconsolidated on October 1, 2007; • IAS 31 Interest in Joint Ventures. FINANCIAL STATEMENTS CONS • SA DS Info was merged into SA DS Services France on January 1, The policies laid down by these standards imply that all companies 2007; over which the Group exercises exclusive or joint control or notable influence must be consolidated. • Kofis Leasing and Kofis Finance were deconsolidated from the Kommunalkredit Austria AG scope of consolidation. All companies that are controlled exclusively or jointly, or over which is held some notable influence, are consolidated. OTHER MOVEMENTS AND CHANGES OF NAME Pursuant to the principle of a fair presentation of the financial • Otzar Hashilton Hamekomi became Dexia Israel (Public statements of the Group, any companies not making a material Finance) Ltd.; contribution to the consolidated financial statements should not be • Dexia Sabadell Banco Local became Dexia Sabadell; included in the scope of consolidation. • Dexia Kommunalkredit Bank increased its stake in Dexia banka Companies whose cumulative total assets and net income represent Slovensko from 78.98% to 84.40%. less than 1% of total consolidated assets and net income (i.e. respectively EUR 3.45 billion and EUR 9.91 million in 2007) are considered to be below the materiality threshold. At December 31, c. Impact of changes of scope on the consolidated income statement 2007, the sum of the total assets and the sum of the net incomes of the companies that were not consolidated were below these None of these changes had a material impact on the 2007 consolidated thresholds. financial statements.
2007 Annual Report / DEXIA CREDIT LOCAL 89 CONS OLIDATED FINANCIAL STATEMENTS 4 Notes to the consolidated financial statements
d. Significant events in 2007 Excluding this point of attention, the cost of risk of Dexia Credit Local and FSA remained moderate (EUR 46 million), effectively • SISL sold 336 million listed securities, generating EUR 197 million reflecting the good quality of the portfolio. in capital gains. The crisis did, however, prompt the companies to recognize • In 2007, risk management and monitoring were greatly influenced adjustments comparable to those of the market: by the financial crisis that began at the end of the first half of the year in the United States, the so-called subprime mortgage crisis. − A decrease in portfolios recognized at fair value through profit or The crisis had only a slight impact on Dexia Credit Local and FSA, loss, which mainly consists of FSA’s portfolio of CDSs recognized given the traditionally prudent risk profile of the two institutions. as derivatives (negative impact of EUR 268 million on net income - Group share) . Assets recognized at fair value through This attenuation of the impacts of the crisis was attributable equity also decreased (see consolidated statement of changes in essentially to the high quality of the loan and bond portfolios held equity). This phenomenon was due to the general widening of or insured by Dexia Credit Local and FSA: spreads;
− Exposure is essentially to public sector risk: 67% of Dexia Credit S hould this continuing widening of spreads continue into the first Local’s exposures, and 63% of the portfolio ensured by FSA. quarter of 2008, it will have additional negative consequences. The − Very highly rated portfolios: 85% of Dexia Credit Local’s exposure latter will trigger a movement in the opposite direction, with the is rated investment grade, as is 99% of FSA’s exposure. absorption of the crisis, except for specific cases on which losses shall be incurred. Management continues to pay special attention − Subprime mortgages represented only 1.2% of FSA’s insured to FSA’s HELOC and AltA portfolios, in light of the increasing rates portfolio, and 46% (USD 8,180 million, 91% of which are rated of default on these types of instruments during Q1 2008, and AAA) of its GIC investment portfolio. A marginal amount of the which could result in additional provisions being set aside to reflect total insured capital on transactions was originated in 2005 and changes in the U.S. real estate market. 2006 (the years most stron gly implicated in the current crisis ), representing only USD 704 million of the entire insured portfolio. − Medium- and long-term liquidity ratios were tighter than in the The transactions originated in this same portfolio in 2007 all had past due to the current crisis of confidence. This tightening of high levels of protection. liquidity conditions led to the implementation of a more detailed oversight of the various ratios and constraints expressed in all of − Exposure to collateralized debt obligations (CDO) and other asset- the Dexia Credit Local entities, using the organization set in place backed securities (ABS) was extremely limited (EUR 363 million by the Dexia Group. for FSA). Dexia Credit Local’s exposures were all hedged by credit default swaps (CDS) with well-rated banks. Given the excellent quality of the financial instruments, the Dexia Credit Local Group expects that these negative valuations will turn The subprime crisis had only a slight impact on FSA due to its around in time. moderate exposure to the subprime sector and its extremely low exposure to CDOs and other ABS. • L ike other financial institutions, Financial Security Assurance is the subject of an investigation by U.S. authorities into the marketing The items that may bear watching at the end of 2007 concern of guaranteed investment contracts (GICs). products similar to subprime mortgages - namely HELOCs and AltAs - whose default rates have led the Group to increase its monitoring. In all, these two product categories represented less than 2% of FSA’s insured portfolio.
90 DEXIA CREDIT LOCAL / 2007 Annual Report CONS OLIDATED FINANCIAL STATEMENTS Notes to the consolidated financial statements 4
1.2 DEXIA CREDIT LOCAL SCOPE OF CONSOLIDATION AT DECEMBER 31, 2007
Branches:
Dexia Credit Local Canada branch Dexia Credit Local Dublin branch DEXIA CREDIT LOCAL Dexia Credit Local Grand Cayman branch Dexia Credit Local New York branch Dexia Credit Local Bank Tokyo branch Dexia Public Finance Bank (London branch) Dexia Public Finance Norden (Stockholm branch)
FRENCH SUBSIDIARIES INTERNATIONAL SUBSIDIARIES
Dexia Kommunalbank Kommunalkredit Dexia CLF Banque Crédit du Nord Deutschland Austria AG Group 80% 10% (Germany) 100%(Austria) 49%
Dexia Kommunalkredit Floral Dexia Location 49.16% Longue Durée Bank Group 100% 49% (Austria) 50.84%
Dexia Flobail Dexia Bail Dexia Crediop Group Dexia Crediop Ireland 100% 100% (Italy) (Ireland) 70% 100%
Dexia Holdings Inc. Financial Security Dexia CLF Régions Bail Dexia Municipal Agency Assurance Holdings Ltd. 100% 100% (United States) (1) 90% (United States) 99.13%
Dexia CLF Immo Dexia Municipal Agency Dexia Crédito Local 100% (Dublin branch) México SA de CV (Mexico) 100% OLIDATED
Dexia Israel CONS FINANCIAL STATEMENTS Dexia Sofaxis Dexia Epargne Pension (Public Finance) Ltd.(2) 100% 25.35% (Israel) 65.31%
SISL CBX.IA 1 Dexia Sabadell Dexia Sabadell (Luxembourg) 100% (Spain) Portugal branch 100% 60%
Domiserve CBX.IA 2 (3) Dexia Delaware LLC 50% 100% (United States) 100%
Dexia Credit Local Asia Pacific Pty Ltd. Consolidated by the equity method (Australia) 100% Fully consolidated Proportionally consolidated Dexia CAD Funding LLC (United States) 100%
Dexia Public Finance Switzerland SA (Switzerland) 100%
(1) The remaining 10 % are held by Dexia SA. (2) As of March 25, 2008 Dexia Israel (Public Finance) Ltd. has been renamed Dexia Israel Bank Ltd. (3) CBX.IA2 is 70.85% - held by Dexia Credit Local and 29.15% - held by CBX.IA1.
2007 Annual Report / DEXIA CREDIT LOCAL 91 CONS OLIDATED FINANCIAL STATEMENTS 4 Notes to the consolidated financial statements
a. Fully-consolidated subsidiaries
Name Head office % interest
Dexia CLF Banque 1 passerelle des Reflets, Tour Dexia, La Défense 2, 92913 La Défense France 80
Dexia CLF Immo 1 passerelle des Reflets, Tour Dexia, La Défense 2, 92913 La Défense France 100
Dexia CLF Régions Bail 1 passerelle des Reflets, Tour Dexia, La Défense 2, 92913 La Défense France 100
Dexia Kommunalbank Deutschland AG Charlottenstrasse 82 - D - 10969 Berlin Germany 100
Dexia Crediop Via Venti Settembre 30 - 00187 Roma Italy 70
Dexia Flobail 1 passerelle des Reflets, Tour Dexia, La Défense 2, 92913 La Défense France 100
Floral 1 passerelle des Reflets, Tour Dexia, La Défense 2, 92913 La Défense France 100
SISL 180 rue des Aubépines L1145 Luxembourg 100
Crediop Overseas Bank Ltd.(1) P.O. Box 707 G- 1446 West Bay Road -Grand Cayman British West Indies 100
Dexia Crediop per la Cartolarizzazione (1) Via Venti Settembre 30 - 00187 Roma Italy 100
Dexia Crediop Ireland (1) 6 George’s Dock IFSC DUBLIN 1 - Ireland 100
Dexia Kommunalkredit Bank AG Turkenstrasse 9 - A-1092 Vienna - Austria 50.84
Dexia banka Slovensko (2) Hodzova ul. 11 010 11 - Zilina - Slovakia 84.40
Dexia Kommunalkredit Czech Republic (2) Krakovskà 1366/25 - CZ - 110 00 Prague Czech Republic 100
Dexia Kommunalkredit Bank Polska (2) ul. Sienna 39 00-121 Warsaw - Poland 100
Dexia Sofaxis Route de Créton 18100 Vasselay France 99.98
SNC SOFCAH (3) Route de Créton 18100 Vasselay France 99.98
SNC SOFCAP(3) Route de Créton 18100 Vasselay France 99.98
SARL DS Formation France (3) Route de Créton 18100 Vasselay France 99.98
SNC SOFIM(3) Route de Créton 18100 Vasselay France 99.98
SA Dexia DS Services (3) Route de Créton 18100 Vasselay France 99.98
Dexia Location Longue Durée (4) 1 passerelle des Reflets, Tour Dexia, La Défense 2, 92913 La Défense France 49
Dexia Bail 1 passerelle des Reflets, Tour Dexia, La Défense 2, 92913 La Défense France 99.83
Dexia Municipal Agency 1 passerelle des Reflets, Tour Dexia, La Défense 2, 92913 La Défense France 100
Dexia Israel (Public Finance) Ltd. (5) 19 Ha’arbaha str., Hatihon building - Tel Aviv PO BOX 709 - Tel Aviv 61200 - Israel 65.31 Dexia Sabadell (ex Dexia Sabadell Banco Local) Paseo de las doce Estrellas, 4 Campo de las naciones 28042 Madrid Spain 60
CBX.IA 1 1 passerelle des Reflets, Tour Dexia, La Défense 2, 92913 La Défense France 100
CBX.IA 2 (6) 1 passerelle des Reflets, Tour Dexia, La Défense 2, 92913 La Défense France 100
Dexia Credit Local Asia Pacific Pty Ltd. Level 23, Veritas House - 207 Kent Street Sydney NSW 2000, Australia 100
Dexia Delaware LLC 15, East North Street - Dover, Delaware 19901- USA 100 (1) Companies consolidated by Dexia Crediop. (2) Companies consolidated by Dexia Kommunalkredit Bank AG. (3) Companies consolidated by Dexia Sofaxis. (4) Dexia Location Longue Durée is fully consolidated due to the contractually-defined relationships existing between the shareholders. (5) 65,99% of voting rights held. (6) CBX.IA2 is 70.85%-held by Dexia Credit Local and 29. 15%-held by CBX.IA1.
92 DEXIA CREDIT LOCAL / 2007 Annual Report CONS OLIDATED FINANCIAL STATEMENTS Notes to the consolidated financial statements 4
Name Head office % interest
Torre Hemicor Insurgentes - Sur 826 Piso 10 Ala Sur CP 03100 Colonia Dexia Crédito Local México SA de CV del Valle Delegacion Benito Juarez Mexico D.F. 100 Torre Hemicor Insurgentes - Sur 826 Piso 10 Ala Sur CP 03100 Colonia Dexia México Servicios SA de CV (7 ) del Valle Delegacion Benito Juarez Mexico D.F. 100
Dexia Holdings Inc. 31 West 52nd street - New York, NY 10019 USA 90
Financial Security Assurance Holdings Ltd. 31 West 52nd street - New York, NY 10019 USA 99.13
Transaction Services Corporation (8 ) 31 West 52nd street - New York, NY 10019 USA 100
CLFG Corp (8 ) 31 West 52nd street - New York, NY 10019 USA 100
FSA Portfolio Management Inc (8 ) 31 West 52nd street - New York, NY 10019 USA 100
FSA Services (Australia) Pty Ltd. (8 ) Level 23, Veritas House - 207 Kent Street Sydney NSW 2000, Australia 100
Financial Security Assurance Inc (8 ) 31 West 52nd street - New York, NY 10019 USA 100
FSA Insurance Company (8 ) 31 West 52nd street - New York, NY 10019 USA 100
Financial Security Assurance (UK) Ltd. (8 ) 1 Angel Court - London, EC2R 7AE United Kingdom 100
FSA Services (Japan) Inc. (8) Meiji Seimei Kan 5F 2-1-1 Marunouchi Chiyoda-ku Tokyo 100-0000 Japan 100
Financial Security Assurance International Ltd. (8 ) XL house 3 Bermudiana Road - PO Box HM 11 Hamilton, Bermuda 100
FSA Asset Management LLC (8 ) 31 West 52nd street - New York, NY 10019 USA 100
FSA Capital Markets Services LLC (8 ) 31 West 52nd street - New York, NY 10019 USA 100
FSA Capital Management Services LLC (8 ) 31 West 52nd street - New York, NY 10019 USA 100
FSA Administrative Services LLC NY (8 ) 31 West 52nd street - New York, NY 10019 USA 100 OLIDATED OLIDATED P.O Box 1093 GT, Cowpass Center 2nd Floor, Crewe Road FSA Global Funding Ltd. (8) Grand Cayman, Cayman Islands Bristish West Indies 100 CONS FINANCIAL STATEMENTS P.O Box 1093 GT, Cowpass Center 2nd Floor, Crewe Road Commercial Mortgage Company III-R2, Inc. (9 ) Grand Cayman, Cayman Islands Bristish West Indies 100 P.O Box 1093 GT, Cowpass Center 2nd Floor, Crewe Road Enterprise Company R, Inc. (9 ) Grand Cayman, Cayman Islands Bristish West Indies 100 P.O Box 1093 GT, Cowpass Center 2nd Floor, Crewe Road Premier International Funding (8 ) Grand Cayman, Cayman Islands Bristish West Indies 0 P.O Box 1093 GT, Cowpass Center 2nd Floor, Crewe Road FSA Capital Markets Services (Caymans) Ltd. (8 ) Grand Cayman, Cayman Islands Bristish West Indies 100
FSA Credit Protection Ltd U.K. (8 ) 1 Angel Court - London, EC2R 7AE United Kingdom 100
FSA Services (Americas) Inc. (8 ) Paseo de Las Palmas 405-604 Col Lomas de Chapultepec, 11000 Mexico 100
FSA Mexico Holding Inc. (8 ) 31 West 52nd street - New York, NY 10019 USA 100 FSA International Credit Protection Ltd. Offices of M&C Corporate Services Limited, PO Box 309 GT, (Cayman) (8 ) Ugland House, South Church Street, George Town, GC, Cayman Islands 100
FSA Seguros Mexico SA (8 ) Paseo de Las Palmas 405-604 Col Lomas de Chapultepec, 11000 Mexico 100
FSA Portfolio Asset Limited (U.K.) (8 ) 1 Angel Court - London, EC2R 7AE United Kingdom 100
Dexia CAD Funding LLC 445 Park Avenue 7th Floor New York New York 10022 USA 100
Dexia Public Finance Switzerland SA Rue de Jargonnant 2 - CH 1207 Geneva Switzerland 100 (7 ) Company consolidated by Dexia Crédito Local México. (8 ) Companies consolidated by FSA Holdings Ltd. (9 ) Companies consolidated by FSA Global Funding Ltd.
2007 Annual Report / DEXIA CREDIT LOCAL 93 CONS OLIDATED FINANCIAL STATEMENTS 4 Notes to the consolidated financial statements
b. Non-consolidated subsidiaries
Name Head office % interest Net book value of Reason f or exclusion shares i ncluding fair- value adjustment (EUR thousands) 1 passerelle des Reflets, Tour Dexia, La Défense 2, Below materiality Dexia Assuréco 92913 La Défense France 99.99 1,798 threshold 1 passerelle des Reflets, CLF Marne La Vallée Tour Dexia, La Défense 2, Below materiality Participations 92913 La Défense France 99.94 96 threshold 1 passerelle des Reflets, Tour Dexia, La Défense 2, Below materiality Dexia Editions 92913 La Défense France 99.98 138 threshold 1 passerelle des Reflets, Tour Dexia, La Défense 2, Below materiality CBX. GEST 92913 La Défense France 99.94 174 threshold 1 passerelle des Reflets, Tour Dexia, La Défense 2, Below materiality Dexint Développement 92913 La Défense France 99. 89 55 threshold 1 passerelle des Reflets, Compagnie pour le Foncier Tour Dexia, La Défense 2, Below materiality et l’Habitat 92913 La Défense France 100 3,049 threshold 1001 Connecticut Avenue. Below materiality Astris Finance NW - Suite 905 Washington, D.C. 20036 USA 55 787 threshold Dexia Global Structured Below materiality Finance 445 Park Avenue New York NY 10022 100 0 threshold Dexia Kommunalkredit Below materiality Polska sp. Z o.o ul. Sienna 3900-121 Warsaw - Poland 100 500 threshold 1 passerelle des Reflets, Guide Pratique de la Tour Dexia, La Défense 2, Below materiality Décentralisation 92913 La Défense France 99. 74 68 threshold Dexia Kommunalkredit Below materiality Bulgaria 19 Karnigradska Sofia 1000 - Bulgaria 100 496 threshold Dexia Kommunalkredit 42 Dorobantilor street, 1st district 010573 Below materiality Romania Bucharest , Romania 100 290 threshold Hodzova 11, 010 11 Zilina Below materiality Municipalia - Slovakia 60 18 threshold Dexia Kommunalkredit Below materiality Hungary Horvat u. 14-24 - 1027 Budapest - Hungary 100 354 threshold 1 passerelle des Reflets, Tour Dexia, La Défense 2, Below materiality Dexia CLF Avenir 92913 La Défense France 99. 92 74 threshold 1 passerelle des Reflets, Tour Dexia, La Défense 2, Below materiality Dexia CLF Développement 92913 La Défense France 99. 83 58 threshold 1 passerelle des Reflets, Tour Dexia, La Défense 2, Below materiality Dexia CLF Energy 92913 La Défense France 99. 89 56 threshold 1 passerelle des Reflets, Tour Dexia, La Défense 2, Below materiality Dexia CLF Organisation 92913 La Défense France 99. 89 53 threshold 1 passerelle des Reflets, Genebus Lease Tour Dexia, La Défense 2, Below materiality (ex Dexia CLF Energia) 92913 La Défense France 99. 89 55 threshold Below materiality SISL UK CO Limited One Skill street London EC2Y 8HQ U.K. 100 68 threshold Dexia Credit Local Research & Below materiality Development India Private Ltd. A/320, Defence Colony, New Dehli 110024 India 100 2 threshold 1 passerelle des Reflets, Tour Dexia, La Défense 2, Below materiality Dexia Finance 92913 La Défense France 99.97 2,935 threshold
94 DEXIA CREDIT LOCAL / 2007 Annual Report CONS OLIDATED FINANCIAL STATEMENTS Notes to the consolidated financial statements 4
Name Head office % interest Net book value of Reason f or exclusion shares including fair- value adjustment (EUR thousands) 1 passerelle des Reflets, Tour Dexia, La Défense 2, Below materiality DCL Investissements 92913 La Défense France 99.76 40 threshold 1 passerelle des Reflets, Tour Dexia, La Défense 2, Below materiality DCL Projets 92913 La Défense France 99.76 40 threshold 1 passerelle des Reflets, Tour Dexia, La Défense 2, Below materiality Dexiarail 92913 La Défense France 99.76 40 threshold 1 passerelle des Reflets, Tour Dexia, La Défense 2, Below materiality Dexshiplease 92913 La Défense France 99.76 40 threshold 1 passerelle des Reflets, Tour Dexia, La Défense 2, Below materiality Rodexbail 92913 La Défense France 99.76 40 threshold c. Joint companies consolidated by the proportionate method
Name Head office % interest
Domiserve 6 rue André Gide 92320 Châtillon France 50 d. Joint companies not consolidated by the proportionate method
None. OLIDATED OLIDATED CONS FINANCIAL STATEMENTS
2007 Annual Report / DEXIA CREDIT LOCAL 95 CONS OLIDATED FINANCIAL STATEMENTS 4 Notes to the consolidated financial statements
e. Associated companies accounted for by the equity method
Name Head office % interest
Kommunalkredit Austria AG Turkenstrasse 9 - A-1092 Vienna - Austria 49
Crédit du Nord (1) 28, place Rihour 59800 Lille France 10
Kommunalkredit International Bank Ltd. (2) 25 Spyrou Araouzou St. - Cy - 3036 Limassol Cyprus 100
Kommunalkredit Beteiligungs und Immobilien GmbH (2) Turkenstrasse 9 - A-1092 Vienna - Austria 100
Kommunalleasing GmbH (2) Turkenstrasse 9 - A-1092 Vienna - Austria 50
Kommunalkredit Public Consulting GmbH (2) Turkenstrasse 9 - A-1092 Vienna - Austria 90
Kommunalkredit Depotbank AG (2) Turkenstrasse 9 - A-1092 Vienna - Austria 100
Kommunalkredit Capital I Ltd. (2) 22 Grenville Street, St Helier - Jersey JE4 8PX 100
Orosis Investments Ltd. (2) 25 Spyrou Araouzou St. 3304 Limassol Cyprus 100
Cymanco Investments Ltd. (2) 25 Spyrou Araouzou St. 3304 Limassol Cyprus 100
Dexia Epargne Pension 76 rue de la Victoire, 75009 Paris France 25 (1) The 10% stake by Dexia Credit Local must be considered cumulatively with the 10% stake held by Dexia Bank Belgium, giving the Dexia group a notable influence that justifies the use of the equity method. (2) Companies consolidated by Kommunalkredit Austria AG: some are fully consolidated, others are accounted for by the equity method (50%). The consolidated financial statements of Kommunalkredit Austria AG are accounted for by the equity method in the financial statements of the Dexia Credit Local Group, due to the contractually-defined relationships between the shareholders.
96 DEXIA CREDIT LOCAL / 2007 Annual Report CONS OLIDATED FINANCIAL STATEMENTS Notes to the consolidated financial statements 4
f. Associated companies not accounted for by the equity method
Name Head office % interest Net book value of Reason f or exclusion shares including fair- value adjustment (EUR thousands) Below materiality Le Monde Investisseurs 80, bd Auguste Blanqui 75013 Paris France 35.75 3,291 threshold Fonds Innovation Plus Nord Below materiality - Pas-de-Calais 23 rue du 11 Novembre 62300 Lens France 37.5 229 threshold Queensgate House Grand Cayman, Cayman Below materiality Cypress Point Islands British West Indies 23 17 threshold Below materiality Istituto per il Credito Sportivo Via Giovanbattista Vico, 5 00192 Roma Italy 21.62 24,658 threshold SPS - Sistema Permanente di Servizi Scpa in liquidazione Via Livorno, 36 Below materiality e concordato preventivo 00162 Roma Italy 20.4 0 threshold Below materiality Sogama Crédit Associatif 75, rue Saint-Lazare 75009 Paris France 14.71 815 threshold Below materiality SNC du Chapitre 72, rue Riquet 31000 Toulouse France 50 4 threshold Dexia Fondelec Energy Walker house P.O. Box 265 GT George Town, Efficiency and Emissions Grand Cayman Cayman Islands, British West Below materiality R eduction Fund Indies 28.2 8,770 threshold Broughton House 6-8 sackville street - London Below materiality Impax New Energy Investor - W1S 3DG U.K. 24.99 6,200 threshold European P ublic Infrastructure 283, route d’A rlon - Below materiality M anagers 1150 Luxembourg 20.00 3 threshold 17 cours V almy - Tour Société Générale 92972 Paris La Défense Below materiality
GIE loco 13 bis - France 20.00 0 threshold OLIDATED Below materiality
SAS Qualnet Route de Créton 18100 Vasselay France 25.50 542 threshold CONS FINANCIAL STATEMENTS 1 av Eugène Freyssinet 78280 Guyancourt - Below materiality SAS THEMIS France 40.50 267 threshold
2007 Annual Report / DEXIA CREDIT LOCAL 97 CONS OLIDATED FINANCIAL STATEMENTS 4 Notes to the consolidated financial statements
g. Companies which are neither consolidated nor accounted for by the equity method in which the Group has at least a 10% stake and whose carrying amount is over EUR 10 million
Name Head office % interest Shareholders’ e quity Net income Year end (EUR thousands) (EUR thousands) Cumberland House - 1 Victoria street Hamilton, XL Financial Assurance Bermuda 12.90 819,428 3,572 12/31 /2006 5 The North Colonnade Canary Wharf London Barclays European E14 4BB United Infrastructure Fund Kingdom 11.30 261 17,947 03/31 /2007
1.3 ACCOUNTING POLICIES AND VALUATION • Standards METHODS − IFRS 8 - Operating segments, applicable as from January 1, 2009, which will allow to bring the segment reporting in line with the a. Applicable accounting standards internal management reporting.
APPLICATION OF IFRS RULES ADOPTED BY EUROPEAN • Interpretations COMMISSION (IFRS EU) − IFRIC 10 - Interim Financial Reporting and Impairment, which was The European Commission published Regulation EC 1606/2002 on already applied by Dexia Credit Local, July 19, 2002, requiring listed groups to apply IFRS as from January 1, 2005. This regulation has been updated several times since 2002, − IFRIC 11 - IFRS 2 - Group and Treasury Share Transactions: the validating the various texts published by the International Accounting impact of this interpretation is being assessed. Standards Board (IASB) with the exception of certain rules included in IAS 39. FIRST TIME APPLICATION OF IFRS 7 AND THE AMENDMENT TO IAS 1: PRESENTATION OF FINANCIAL STATEMENTS The European Commission has carved out some paragraphs of On January 1, 2007, Dexia Credit Local applied for the first time the IAS 39 with the objective of enabling European companies to disclosure requirements for financial Instruments under IFRS 7 and the reflect appropriately in their consolidated financial statements the amendment to IAS 1: Presentation of Financial Statements – Capital financial hedges they enter into in the course of their interest rate disclosures. These standards have no impact on recognition and risk management (application of interest rate portfolio hedging and measurement of financial instruments and no effect on net income the possibility of hedging deposits). nor on equity.
Dexia Credit Local’s consolidated financial statements have The new disclosures required under IFRS 7 mainly relate to the nature therefore been prepared in accordance with all IFRS regulations and the extent of risk exposures. The application of IFRS 7 implies the and interpretations published and endorsed by the EC up to the addition and the change of several appendices. accounting closing. RECLASSIFICATION OF SECURITIES PERFECTLY HEDGED BY The consolidated financial statements are stated in millions of CREDIT DEFAULT SWAPS (CDS) euros (EUR) unless otherwise noted. They are compliant with CNC Dexia Credit Local reclassified securities perfectly hedged by CDS Recommendation 2004 R 03 published on October 27, 2004. from “assets designated at fair value” to “assets held for trading” In preparing the consolidated financial statements, management is as it better reflects the intention of short-term profit taking in its required to make estimates and assumptions that affect amounts consolidated financial statements. reported. While management believes it has considered all available Dexia Credit Local has applied the principles of IAS 8 Accounting information in developing these estimates, actual results could differ Policies, Changes in Accounting Estimates and Errors for the from such estimates and the differences have a material impact on reclassification, which has not impact on P&L accounts nor in the the consolidated financial statements. face of the balance sheet.
b. Changes in accounting standards during the year This reclassification has an impact of 4.965 million in the disclosures related to “assets designated at fair value” and “assets held for In 2007, the European Commission endorsed the following IASB and trading”. IFRIC texts. For information purposes, note that the following IASB and IFRIC texts published in 2007 had not been adopted by the European Commission at December 31, 2007 and are not applicable to Dexia Credit Local.
98 DEXIA CREDIT LOCAL / 2007 Annual Report CONS OLIDATED FINANCIAL STATEMENTS Notes to the consolidated financial statements 4
• Amendments to existing standards influence, but does not exercise control. This is usually the case when Dexia Credit Local owns between 20% and 50% of the voting rights. − IAS 23 - Borrowing Costs – Amendment applicable as from The ownership share of net income for the year is recognized as January 1, 2009 that requires the capitalization of borrowing costs. income from associates and the investment is recorded in the balance The impact of this amendment is being assessed; sheet at an amount that reflects its share of the net assets including − IAS 1 - Presentation of F inancial S tatements - Amendment applicable net goodwill. as from January 1, 2009. The impact mainly results in additional Unrealized gains on transactions between Dexia Credit Local and disclosures regarding Dexia Credit Local’s statement of changes in its associates are eliminated to the extent of Dexia Credit Local’s equity. The impact of this amendment is being assessed. interest. Unrealized losses are also eliminated unless the transaction • Interpretations shows evidence of an impairment of the asset transferred. Losses from investments in associates cease to be recorded once the carrying − IFRIC 13 - Customer Loyalty Programmes, which will be applicable amount of the investment reaches zero, unless Dexia Credit Local is as from July 1, 2008 but has no impact on Dexia Credit Local; required to assume or guarantee the associate’s obligation. − IFRIC 14 - IAS 19 – The limit of a defined benefit asset, minimum funding requirements and their interaction, which will be applicable Offsetting financial assets and financial liabilities as from January 1, 2008. The impact of this interpretation is being In certain circumstances, financial assets and financial liabilities assessed. are offset and the net amount reported in the balance sheet. This may happen when there is a legally enforceable right to set off the c. Accounting policies applied to the consolidated recognized amounts and there is an intention that expected future financial statements cash flows will be settled on a net basis, or that the asset will be realized and the liability settled simultaneously. Assets are presented CONSOLIDATION before any allowance for loss on impairment.
Scope of consolidation Foreign currency translation and transactions The consolidated financial statements include the parent company, its The consolidated financial statements are stated in EUR (functional subsidiaries and Special Purpose Entities (SPE). Subsidiaries and SPEs and presentation currency) which is the currency of the country where are those entities in which Dexia Credit Local, directly or indirectly, has Dexia Credit Local is registered. the power to exercise control over financial and operating policies.
Foreign currency translation OLIDATED Subsidiaries are consolidated from the date on which effective control On consolidation, the income statements and cash flow statements is transferred to Dexia Credit Local and are no longer consolidated as CONS FINANCIAL STATEMENTS of foreign entities that have a functional currency different from from the date on which Dexia Credit Local loses significant influence Dexia Credit Local’s presentation currency are translated into Dexia over such subsidiary. Intercompany transactions, balances and Credit Local’s presentation currency (EUR) at average exchange rates unrealized gains and losses on transactions between Dexia Credit for the year or the period and their assets and liabilities are translated Local’s companies have been eliminated. Intragroup losses may at the closing rate. indicate an impairment that requires recognition in the consolidated financial statements. When necessary, adjustments have been Exchange differences arising from the translation of the net investment amended to ensure consistency with the policies applied by Dexia in foreign subsidiaries and associates and of borrowings and other Credit Local. currency instruments designated as hedges of such investments, are recorded as a cumulative translation difference within shareholders’ Equity and net income attributable to minority interests are shown equity. On disposal of a foreign entity, such exchange differences are separately in the balance sheet and income statement respectively. recognized in the income statement. Jointly controlled entities Foreign currency transactions A joint venture (JV) is a contractual arrangement whereby two or more For individual Dexia Credit Local entities, foreign currency transactions parties undertake an economic activity that is subject to joint control. are accounted for using the approximate exchange rate at the date Joint ventures are accounted for via the proportionate consolidation of the transaction. Outstanding balances denominated in foreign method. In the consolidated financial statements, joint ventures are currencies at year-end are translated at closing rates for monetary integrated by combination of their share of the assets, liabilities, items and non-monetary items carried at fair value. Historical rates are income and expenses. used for non-monetary items carried at cost. The resulting exchange The same consolidation treatment as for subsidiaries, is applied for differences from monetary items are recorded in the consolidated intercompany transactions. income statement; for non-monetary items carried at fair value, the exchange differences follow the same accounting treatment as for Associates fair value adjustments. Investments in associates are accounted for using the equity method. Associates are investments where Dexia Credit Local has significant
2007 Annual Report / DEXIA CREDIT LOCAL 99 CONS OLIDATED FINANCIAL STATEMENTS 4 Notes to the consolidated financial statements
TRADE DATE AND SETTLEMENT DATE ACCOUNTING • when a group of financial assets, financial liabilities or both is All “regular way” purchases and sales of financial assets and financial managed and its performance is evaluated on a fair value basis, in liabilities are recognized on the settlement date, which is the date accordance with a documented risk management or investment on which a financial asset or a financial liability is delivered to or by strategy; Dexia Credit Local, except for trading financial instruments which are • when an instrument contains an embedded derivative that is not recognized and derecognized at trade date. For assets and liabilities narrowly linked to the host contract. recognized at fair value, Dexia Credit Local recognizes from the trade date any unrealized gains or losses arising from revaluing the contract The use of the fair value option is an accounting policy choice which to fair value at the reporting date. should be made for the entire financial instrument, at initial recognition and when certain conditions of documentation are fulfilled. These unrealized gains and losses are recognized in the income statement unless the transactions have been assigned to cash flow Financial assets available for sale and held to maturity hedge relationships or are related to assets available for sale. Management determines the appropriate classification of its investments at the time of the purchase. FINANCIAL ASSETS Listed securities with fixed maturity are classified as “financial assets Interbank and customer loans and advances held to maturity” (HTM) when management has both the intent and Loans categorized as “loans and advances,” being those not included the ability to hold the assets to maturity. within held for trading, available for sale or designated at fair value through profit or loss, are carried at amortized cost, i.e. the historical Securities, loans and receivables intended to be held for an indefinite cost principal amount, net of any deferred fees and material direct period of time, which may be sold in response to needs for liquidity or costs on loans and of any unamortized premiums or discounts. changes in interest rates, exchange rates or equity prices, are classified as available for sale (AFS). Financial assets held for trading Securities held for trading are securities acquired for generating a Securities, loans and receivables are initially recognized at fair value profit from short-term fluctuations in price or dealer’s margin, or are (which includes transaction costs). Interest is recognized based on securities included in a portfolio in which a pattern of short-term the effective interest rate method and is recognized within the profit taking exists. Trading securities are initially recognized at fair interest margin. Available-for-sale financial assets are subsequently value and subsequently re-measured at fair value. All related realized re-measured at fair value based on quoted bid prices or amounts and unrealized gains and losses are included in “Net gains (losses) derived from cash flow models. Unrealized gains and losses arising on financial instruments at fair value through profit or loss.” Interest from changes in the fair value of financial assets classified as available- earned while holding trading assets is reported under interest income. for-sale are recognized within equity. Dividends received are recognized in “Net gains (losses) on financial Held-to-maturity (HTM) investments are carried at amortized cost using instruments at fair value through profit or loss.” the effective interest method, less any allowance for impairment. All purchases and sales of securities held for trading that require Realized gains and losses on sales of financial assets delivery within the time frame established by regulation or market For financial assets not revalued through the income statement, convention (“regular way” purchases and sales) are recognized on the realized gains or losses on disposals are the differences between the settlement date. Other trading transactions are treated as derivatives proceeds received (net of transaction costs) and the costs or amortized until settlement occurs (see also “Trade date and settlement date costs of the investments. The cost is systematically determined (FIFO) accounting”). on a portfolio basis.
Financial assets designated at fair value through profit or loss When a financial asset available for sale is sold, the total of gains These assets are recognized at fair value through profit or loss. or losses recognized earlier in equity is reclassified in the income Unrealized gains or losses are recognized in the income statement statement. under “Net gains (losses) on financial instruments at fair value through profit or loss.” Interest income is accrued using the effective interest Accounting for early repayment indemnities rate method. Interest is classified as “Interest income.” Dexia Credit Local has determined the accounting principles applicable to the restructuring of loans in accordance with AG 62 of IAS 39 Under the fair value option amendment, a financial asset, a financial dealing with the restructuring of financial liabilities. liability or a group of financial instruments can be designated by the entity as “at fair value through profit or loss,” provided that doing Regarding the method of accounting for early repayment indemnities, so results in more relevant information. It is used: there are several possibilities depending on whether the early repayment is recognized as not being an extinguishment (with • when such designation eliminates or significantly reduces a refinancing) or as an extinguishment (no refinancing). measurement or recognition inconsistency that would otherwise arise;
100 DEXIA CREDIT LOCAL / 2007 Annual Report CONS OLIDATED FINANCIAL STATEMENTS Notes to the consolidated financial statements 4
Case of early repayment with refinancing • collective allowance: Loss impairments cover incurred losses not The method of accounting for early repayment indemnities differs covered by specific impairment where there is objective evidence depending on whether the restructuring results in terms that are that probable losses are present in segments of the portfolio or substantially different from those set initially. other lending-related commitments at the balance-sheet date. These have been estimated based upon historical patterns of losses In accordance with the principles of AG 62, Dexia Credit Local in each segment, the credit ratings allocated to the borrowers and considers that the terms are substantially different when the net the current economic environment in which the borrowers operate. present value of the cash flows under the new terms, including any Dexia Credit Local develops for that purpose credit risk models fees paid net of any fees received, is at least 10% different from the using an approach that combines appropriate default probabilities discounted net present value of the remaining cash flows from the and losses given default that are subject to regular back testing original loan. and are based on Basel II data and risk models. The early repayment indemnity is recognized immediately in the The country risk component is included within collective and specific income statement or else amortized over the remaining term of impairment. the modified loan depending on the results of the eligibility test. If the eligibility test is passed, i.e. the income statement difference is When a financial asset is determined by management as being less than 10%, the early repayment indemnity is amortized over the uncollectible, it is written off against its related impairment; remaining term of the new loan. If not, i.e. the difference exceeds subsequent recoveries are recognized within the cost of risk in 10%, the early repayment indemnity is recognized immediately in the income statement, in the heading “Impairment on loans and the income statement. provisions for credit commitments.” If the amount of the impairment subsequently decreases due to an event occurring after the write- Case of early repayment without refinancing down of the initial impairment, the release of the provision is credited When the loan has been extinguished, the early repayment indemnity, to the cost of risk. as well as any gains or losses of unamortized premium or discount, is recognized in the income statement as income for the period, as Financial assets available for sale (AFS) are only subject to specific required by IFRS. loss risk allowance “Available for sale” (AFS) listed equities are valued at fair value Impairment on financial assets through “Unrealized or deferred gains and losses” or within the Dexia Credit Local records allowances for impairment losses when income statement in the case of impairment. Impairment is recognized there is an objective evidence that a financial asset or group of if the carrying amount is no longer considered as recoverable. OLIDATED financial assets is impaired, in accordance with IAS 39 (§58-70). The impairment represents the management’s best estimates of losses at Dexia Credit Local analyses all equities that have declined by more CONS FINANCIAL STATEMENTS each balance-sheet date. than 25% of their quoted price. Management examines the risk and takes the decision to impair based on its recoverability. A prolonged An interest-bearing financial asset is impaired if its carrying amount decline in the fair value below its cost is also objective evidence of is greater than its estimated recoverable amount. impairment. Impairment on equity securities cannot be reversed in Off-balance sheet commitments are impaired in case of uncertainty the income statement due to later recovery of quoted prices. about the counterparty. Loan commitments are classified as impaired Impairment on financial assets included in HTM or fixed income if the credit worthiness of the client has deteriorated to an extent financial assets in AFS are reported in “Cost of risk.” Impairment that makes repayment of any loan and associated interest payments on variable income financial assets in AFS is reported in “Net gains doubtful. (losses) on financial assets available for sale.” Two types of allowances for impairment losses are recorded on assets: Sale and repurchase agreements and lending of securities Securities sold subject to a linked repurchase agreement (repos) • specific loss allowance: The amount of the provision on specifically remain recognized in the financial statements as financial assets held identified assets is the difference between the carrying amount for trading, financial assets available for sale or financial assets held and the recoverable amount, being the present value of expected to maturity. The corresponding liability is included in “Interbank loans cash flows, excluding guarantees and collateral, discounted using and deposits” or “Customer deposits” as appropriate. The asset is the effective interest rate at the time of the test of impairment. reported as pledged in the notes. Impairment and reversal of impairment are recognized on a case- by-case basis in accordance with the standard.
Financial assets with small balances that share similar risk characteristics are generally aggregated in their measurement.
2007 Annual Report / DEXIA CREDIT LOCAL 101 CONS OLIDATED FINANCIAL STATEMENTS 4 Notes to the consolidated financial statements
Securities purchased under agreements to resell (reverse repos) are DERIVATIVES recorded as: Fair value derivatives • an obligation to return securities within off-balance sheet items; Derivative financial instruments generally include foreign exchange and contracts, currency and interest rate futures, forward rate agreements, currency and interest rate swaps and currency and interest rate • “Interbank loans and advances” or “Customers loans and options (both written and purchased). All derivatives are initially advances” as appropriate. recognized in the balance sheet at fair value and are subsequently The difference between the sale and repurchase price is treated re-measured at fair value. Fair values are obtained from quoted market as interest income or expense and is amortized over the life of the prices, discounted cash flow models and option pricing models as agreements using the effective interest rate method. Securities lent appropriate. to counterparties are retained in the financial statements. The amount reported on these lines of the balance sheet includes the Securities borrowed are not recognized in the financial statements. premium paid/received net of amortization, the fair value adjustment and accrued interest, the sum of all elements representing the fair If they are sold to third parties, the gain or loss is included in “Net value of the derivative. gains (losses) on financial instruments at fair value through profit or loss” and the obligation to return them is recorded at fair value in Certain derivatives embedded in other financial instruments are “Financial liabilities at fair value though profit or loss.” treated as separate derivatives when: • their risks and characteristics are not closely related to those of FINANCIAL LIABILITIES the host contract; Liabilities held for trading Liabilities held for trading follow the same accounting rules as those • the hybrid contract is not carried at fair value with unrealized gains for loans and securities held for trading. and losses reported in the income statement.
Liabilities designated at fair value through profit or loss Hedging derivatives Accounting principles for financial liabilities designated at fair On the date a derivative contract is entered into, Dexia Credit Local value through profit or loss are the same as those used for financial may designate certain derivatives as either: assets. • a hedge of the fair value of a recognized asset or liability or a firm In 2006, the headline “Liabilities designated at fair value through commitment (fair value hedge); profit or loss” included 6.7 billion in non-revalued customer deposits • a hedge of a future cash flow attributable to a recognized asset or (GIC’s) . This amount was classified by error with transactions of the liability or a forecasted transaction (cash flow hedge); same nature subject to reevaluation and effectively designated at fair value through profit or loss. This amount was reclassified to “customer • a hedge of a net investment in a foreign entity (net investment deposits” in the comparative balance sheet as of December 31, 2006. hedge). This reclassification has no impact on profit or loss accounts. If a derivative is not designated in a hedging relationship, it is to be deemed held for trading or as part of operation designated at fair Borrowings value through profit or loss Borrowings are recognized initially at fair value, being their issue proceeds net of transaction costs incurred. Subsequently borrowings Hedge accounting may be used for derivatives designated in this way, are stated at amortized cost and any difference between net proceeds provided certain criteria are met. and the redemption value is recognized in the statement of income The primary criteria for a derivative instrument to be accounted for over the period of the borrowings using the effective interest rate as a hedge include inter alia: method. • formal documentation of the hedging instrument, hedged item, Debts are included in the financial statement s, based on their hedging objective, strategy and relationship between the hedging underlying economic characteristics more than their legal form. instrument and the hedged item must be prepared before hedge accounting is applied;
• the hedge is documented showing that it is expected to be effective both prospectively and retrospectively in offsetting changes in fair value or cash flows attributable to the hedged risk in the hedged item throughout the reporting period;
• the hedge shall be effective at inception and on an ongoing basis.
102 DEXIA CREDIT LOCAL / 2007 Annual Report CONS OLIDATED FINANCIAL STATEMENTS Notes to the consolidated financial statements 4
Dexia Credit Local entities use internal derivative contracts (internal The Company performs a global analysis of interest rate risk exposure. hedging) mainly to cover their interest rate risk. If the contracts This consists of assessing fixed rate exposure taking into account cannot be offset with non-Group counterparties, then the criteria all the exposure coming from balance sheet and off-balance sheet for employing hedge accounting have not been met. items. This global analysis may exclude certain components of the exposure, such as financial market activities, provided that the risk Internal derivative contracts between separate divisions within the exposure stemming from the excluded activities is monitored on an same legal entity and between separate entities within the consolidated activity-by-activity basis. group can qualify for hedge accounting in the consolidated financial statements only if the internal contracts are offset by derivative The entity selects assets and/or liabilities to be entered into the hedge contracts with a party external to the consolidated group. In this of interest rate risk exposure of the portfolio. The entity defines at case, the external contract is regarded as the hedging instrument. inception the risk exposure to be hedged, the length of the time-band, the method and the frequency with which it performs tests. The entity Changes in the fair value of derivatives that are designated and consistently applies the same methodology for selecting assets and documented in a fair value hedging relationship, and which comply liabilities entering in the portfolio. Assets and liabilities are included with the criteria provided above, are recorded in the income statement, on a cumulative basis in all the time-bands of the portfolio. Hence, along with the corresponding change in fair value of the hedged when they are removed from the portfolio, they must be removed assets or liabilities that is attributable to that specific hedged risk. from all the time-bands on which they had an impact. If the hedge no longer meets the criteria for hedge accounting, the The entity may choose which assets and/or liabilities it wishes to adjustment to the carrying amount of a hedged interest-bearing classify into the portfolio provided they are included in the global financial instrument is amortized to net profit or loss over the period analysis. Demand deposits and savings accounts may be included to maturity through an adjustment of the yield of the hedged item. in the portfolio based on behavioral study for estimating expected Changes in the fair value of derivatives that are designated and qualify maturity date. The entity may designate as qualifying hedged items as cash flow hedges and that prove to be highly effective in relation different categories of assets or liabilities such as “available for sale” to the hedged risk, are recognized in the hedging reserve in equity assets or loan portfolios. as “Unrealized or deferred gains and losses” (see ”Consolidated Hedging consists of derivatives whose positions may offset each other. Statement of c hanges in equity”). The hedging items are recognized at their full fair value (including The in effective portion of the changes in the fair value of the derivatives accrued interest expense or income) with adjustments accounted for
is recognized in the income statement. Amounts deferred in equity in the income statement. OLIDATED are transferred to the income statement and classified as revenue or In the balance sheet, revaluations are recognized as: expense in the periods during which the hedged firm commitment CONS FINANCIAL STATEMENTS or forecast transaction affects the income statement. • fair value revaluation of portfolio hedges in assets;
Certain derivative transactions, while providing effective economic • fair value revaluation of portfolio hedges in liabilities; hedges under Dexia Credit Local’s risk management positions, do not • part of the heading “Financial assets available for sale.” qualify for hedge accounting under the specific rules in IFRS and are therefore treated as derivatives held for trading with fair value gains Effectiveness tests consist of verifying that the hedging objective, i.e. and losses reported in income. reducing the interest rate risk exposure, is fulfilled. Inefficiency can come only from overhedging due to non-contractual events occurring Hedging of the interest rate risk exposure of a portfolio within the categories of assets or liabilities. Dexia Credit Local has decided to apply IAS 39 as adopted by the European Union because it better reflects the way Dexia Credit Local manages its activities.
Hedge relationships are used to reduce the interest rate risk exposure stemming from the selected category of assets or liabilities designated as the qualifying hedged items.
2007 Annual Report / DEXIA CREDIT LOCAL 103 CONS OLIDATED FINANCIAL STATEMENTS 4 Notes to the consolidated financial statements
FAIR VALUE OF FINANCIAL INSTRUMENTS Where such evidence does not exist, day one profit or loss is deferred Fair value is the amount for which an asset could be exchanged, and recognized in the income statement to the extent that it arises or a liability settled, between knowledgeable, willing parties in an from a change in a factor (including time) that market participants arm’s-length transaction. would consider in setting a price. The unrecognized amount of day one profit is amortized on the remaining life of the transaction. If Market prices are used to determine fair value, where an active market subsequently, the inputs become market observable, or when the (such as a recognized exchange) exists, as it is the best evidence of the instrument is derecognized, the remaining amount of the deferred fair value of a financial instrument. Market prices are not, however, day one profit or loss, is taken entirely in the income statement. available for a significant number of the financial assets and liabilities held or issued by Dexia Credit Local. INTEREST INCOME AND EXPENSE Therefore, for financial instruments where no market price is available, Interest income and expense are recognized in the income statement the fair values have been estimated using present value or other for all interest bearing instruments on an accrual basis using the estimation and valuation techniques based on market conditions effective interest rate method based on the purchase price (including existing at balance-sheet dates. The values derived from applying these transaction costs). techniques are significantly affected by the underlying assumptions Transaction costs are incremental costs that are directly attributable made concerning both the amounts and timing of future cash flows to the acquisition of a financial asset or liability and are used for the and the discount rates. calculation of effective interest rate. An incremental cost is one that Financial investments classified as held for trading, available for sale, would not have been incurred if the entity had not acquired the or designated at fair value through profit or loss, derivatives and other financial instrument. transactions undertaken for trading purposes are measured at fair Accrued interest is reported in the same line as the related financial value by reference to quoted market prices when available. If quoted asset or liability in the balance sheet. market prices are not available, then fair values are estimated on the basis of pricing models or discounted cash flows. Once a financial asset has been written down to its estimated recoverable amount, interest income is thereafter recognized based For assets and liabilities classified as available for sale (AFS), or on the rate of interest that was used to discount the future cash flows designated at fair value through profit or loss, when quoted prices for measuring the recoverable amount. are not available, the pricing models try to reflect as precisely as possible the market conditions at the calculation date as well as the FEE AND COMMISSION INCOME AND EXPENSE changes in the credit quality of the financial instruments. Fees and commissions are recognized in accordance with IAS 18. The following remarks may be said of the fair value of loans and Per this standard, most of the commissions arising from Dexia Credit receivables: Local’s activities are recognized on an accrual basis over the life of the underlying transaction. • the fair value of fixed-rate loans and mortgages is estimated by comparing market interest rates when the loans were granted with Commissions and fees arising from significant acts such as negotiating, current market rates offered on similar loans; or participating in the negotiation of a transaction for a third party, such as the arrangement of the acquisition of loans, equity securities • cap, floor and prepayment options are included in determining the or other securities or the purchase or sale of businesses, are recognized fair value of loans and securities. based on the stage of completion of the underlying transaction.
Day one profit or loss For asset management operations, revenue consists principally of The best evidence of the fair value of a derivative at initial recognition unit trust and mutual fund management and administration fees. is the transaction price (i.e., the fair value of the consideration given Revenue from asset management is recognized as earned when the or received) unless the fair value of that instrument is: service is provided. Performance fees are recognized when they are definitively acquired. • evidenced by comparison with other observable current market transactions in the same instrument (i.e., without modification Commitment fees on lines of credit are recognized as part of the or repackaging) or; effective interest rate if the line is used, and recorded as commission income on expiry if the line is not used. • based on a valuation technique whose variables include only data from observable markets. When the underlying transaction is included in the scope of IAS 39, the commission pertaining to the transaction is recognized according The difference between the transaction price and the fair value based to IFRS based on the date of first time adoption of IAS 39, i.e. on a valuation technique is commonly referred to as “Day one profit January 1, 2005. or loss.”
Where the fair value is determined using valuation models for which all inputs are market observable, Dexia recognizes the day one profits or losses at initial recognition in the income statement.
104 DEXIA CREDIT LOCAL / 2007 Annual Report CONS OLIDATED FINANCIAL STATEMENTS Notes to the consolidated financial statements 4
INSURANCE ACTIVITY portfolio, a general reserve is established to account for the inherent credit losses that can be statistically estimated. General principles Financial Security Assurance (FSA) (s ubsidiary of Dexia Credit Local Dexia Credit Local establishes a specific reserve for the present value of located in the U.S.) is active in credit enhancement of public finance the estimated loss, net of recoveries, when, in management’s opinion, and asset-backed obligations. likelihood of a future loss on a particular insured obligation is probable and reasonably estimable at the balance sheet date. When an insured Dexia Credit Local is applying IFRS 4, which allows a company to obligation has met the criteria for establishing a specific reserve and account for insurance contracts under local GAAP if they qualify as the transaction pays a premium in installments, those premiums, such under this standard. if expected to be received prospectively, are considered a form of Hence, Dexia Credit Local has decided to use local accounting policies recovery and are no longer earned as premium revenue. to evaluate technical provisions for contracts that fall under the scope A specific reserve is determined using cash flow or similar models of IFRS 4. that represent Dexia Credit Local’s estimate of the net present value The amounts received and paid relating to insurance products of the anticipated shortfall between: (including non-life claims) are reported respectively under “other • expected payments on the insured obligation plus anticipated loss income” and “other expense.” “Technical margin of insurance adjustment expenses; and companies” is stated in a footnote to the income statement. • anticipated cash flow from and proceeds to be received on sales Losses and changes in provisions for credit enhancement activities, of any collateral supporting the obligation and other anticipated which are similar to banking activities, are reported under “Cost of recoveries. risk.” The estimated loss, net of recovery, on a transaction is discounted Amortization of deferred acquisition costs is presented under a using the risk-free rate appropriate for the term of the insured separate heading within operating expense. obligation at the time the reserve is established. All other items arising from insurance activities are classified according Dexia Credit Local records a general reserve to reflect the credit to their nature in the balance sheet, except for technical provisions, risks inherent in its portfolio. General reserves in addition to specific which are identified under a separate heading. reserves represent Dexia Credit Local’s estimate of the total reserves. Technical provisions of insurance companies Generally, when an insured credit deteriorates to a point where claims are expected, a specific reserve is established. OLIDATED FSA activity
Financial guaranty insurance generally provides an unconditional and The general reserve amount established considers all levels of CONS FINANCIAL STATEMENTS irrevocable guaranty that protects the holder of a financial obligation protection (e.g. reinsurance and over-collateralization). Net par against non-payment of principal and interest when due. Upon a outstanding for policies originated in the current period is multiplied payment default on an insured obligation, Dexia Credit Local is by loss frequency and severity factors. The loss factors used for generally required to pay the principal, interest or other amounts calculation are the product of default frequency rates obtained from due in accordance with the obligation’s original payment schedule Moody’s and severity factors obtained from S&P. Moody’s is chosen or, at its option, to pay such amounts on an accelerated basis. The due to its credibility, large population, statistical format and reliability contract may be considered a derivative or an insurance contract of future update. Dexia applies an experience factor to the results of depending on certain legal or economic characteristics. the statistical calculation.
Gross and ceded premiums received in upfront payouts are earned in Liability adequacy test proportion to the amount of risk outstanding over the expected period An insurer applies a Liability Adequacy Test for its insurance of coverage. Deferred premium revenue and prepaid reinsurance products, in accordance with IFRS 4. Dexia Credit Local assesses at premiums represent the portion of premium that is applicable to each reporting date whether its recognized insurance liabilities are coverage of risk to be provided in the future on policies in force. adequate, using current estimates of future cash flows under its Dexia Credit Local establishes provisions for losses based on its insurance contracts. estimate of specific and non-specific losses. Dexia Credit Local also For non-life insurance, the Liability Adequacy Test is a sufficiency test establishes provisions for loss adjustment expenses, consisting of within IFRS 4 that examines if premium and reserves are sufficient the estimated cost of settling claims, including legal and other fees to cover any open claim files and claims that are expected to occur and expenses associated with administering the claim process. Dexia within the contractual duration of the contracts. Credit Local calculates a loss and loss adjustment expenses liability based upon identified risks inherent in its insured portfolio. If an Reinsurance individual policy risk has a probable loss as of the balance sheet date, Dexia Credit Local’s reinsurance contracts with third parties that a specific reserve is established. For the remaining policy risks in the contain enough insurance risk to be classified as an insurance contracts continue to be accounted for in accordance with local GAAP.
2007 Annual Report / DEXIA CREDIT LOCAL 105 CONS OLIDATED FINANCIAL STATEMENTS 4 Notes to the consolidated financial statements
A reinsurance asset is impaired if, and only if: An item of property, equipment can be composed of different parts with individually varying useful lives. In such a case, each part is • there is objective evidence, as a result of an event that occurred depreciated separately over its estimated useful life. after initial recognition of the reinsurance asset, that the cedant may not receive all amounts due to it under the terms of the Foreign exchange losses on liabilities for the acquisition of an asset as contract; and well as the interest on specific or general borrowings to finance the construction of qualifying assets are expensed immediately. Where the • that event has a reliably measurable impact on the amounts that carrying amount of an asset is greater than its estimated recoverable the cedant will receive from the reinsurer. amount, it is written down to its recoverable amount. Gains and To measure the solvency of a reinsurer, we refer to its attributed credit losses on disposals of property and equipment are determined by rating and the impairment rules. reference to their carrying amount and are included in “Net gains (losses) on other assets.” Expenditure that enhances or extends the Deferred acquisition costs benefits of real estate or fixed assets is capitalized and subsequently Deferred acquisition costs are comprised of expenses related to the depreciated. production of business, including commissions paid on reinsurance assumed, compensation and related costs of underwriting and Investment properties are those properties held to earn rentals or for marketing personnel, certain rating agency fees, premium taxes, and capital appreciation. Dexia Credit Local may also partly use certain certain other underwriting expenses, and reduced by commission investment properties. income on premiums ceded to reinsurers. If the “own use” portions can be sold separately or leased out Deferred acquisition costs are amortized over the period in which the separately under a finance lease then these portions are accounted related premiums are earned. Amortization of deferred acquisition for separately. If the “own use” portions cannot be sold separately, costs is presented on a separate heading within general operating the property is an investment property only if Dexia Credit Local holds expense. an insignificant portion for its own use.
When an insured issue is retired or defeased prior to the end of the Investment properties are recorded at acquisition cost less accumulated expected period of coverage, the remaining deferred acquisition cost depreciation and impairment. I nvestment properties are depreciated is recognized in the income statement. Recoverability of deferred over their useful lives on a straight-line basis. acquisition costs is determined by: INTANGIBLE ASSETS • considering future revenues (deferred premium revenue and Intangible assets mainly consist of internally generated and acquired expected future installments); software. Costs associated with maintaining computer software programs are recognized as expense as incurred. However, expenditure • and the present value of anticipated losses and loss adjustment that enhances or extends the benefits of computer software programs expenses. beyond one year is used to increase the original cost of the software. TANGIBLE FIXED ASSETS Computer software development costs recognized as assets are Tangible fixed assets include office buildings, furnishings and amortized using the straight-line method over their useful lives from equipment and investment properties. the time the software is available for use. This amortization period is usually between 3 and 5 years. All office buildings, furnishings and equipment are stated at historical cost less accumulated depreciation and impairment . Depreciation is When the carrying amount of an intangible asset is greater than its calculated using the straight-line method to write down the cost of estimated recoverable value, an impairment loss is recognized and such assets to their residual values over their estimated useful lives. the carrying amount of this asset is written down to its estimated recoverable value. Gains and losses on disposals of intangible assets The service lives for the main tangible fixed assets are as follows: are determined by reference to their carrying amount and are included • structure of the building: 50 years; in “Other income” and “Other expense” in the income statement. Expenditure that enhances or extends the benefits is capitalized and • roof and frontage: 30 years; subsequently depreciated. • technical installations: 10 to 30 years; GOODWILL • fixture and fittings: 10 to 30 years; Positive goodwill • leasehold improvements, equipment and furniture: 2 to Goodwill represents the excess of the cost of an acquisition over the 12 years; fair value of Dexia Credit Local’s share of the net assets of the acquired subsidiary or associated undertaking at the date of acquisition. • computer equipment: 3 to 6 years; Goodwill on acquisitions occurring on or after January 1, 2004 is • vehicles: 2 to 5 years. reported in the balance sheet as an intangible asset.
106 DEXIA CREDIT LOCAL / 2007 Annual Report CONS OLIDATED FINANCIAL STATEMENTS Notes to the consolidated financial statements 4
Goodwill is allocated to cash generating units for the purpose of DEFERRED INCOME TAX impairment testing. Cash generating units are designed by the criteria Deferred income tax is recognized in full, using the liability method, of legal entity, geographic area and business segment. on temporary differences arising between the tax bases of assets and Changes in percentage of ownership in fully-consolidated companies liabilities and their carrying amounts in the financial statements. are considered as transactions with shareholders. Therefore, neither The rates enacted or substantively enacted at the balance-sheet date fair value adjustments nor goodwill adjustments are made, when are used to determine deferred income tax. percentage increases or decreases take place without necessitating a change in the consolidation method. The difference between the Deferred tax assets are recognized to the extent that it is probable that value of the net assets purchased or sold and the purchase or selling future taxable profit will be available against which the temporary price is recorded directly in equity. differences can be utilized. Deferred income tax is recognized on temporary differences arising Impairment of goodwill from investments in subsidiaries, associates and joint ventures, except The carrying amount of goodwill is reviewed at year-end or when where the timing of the reversal of the temporary difference can be circumstances or events indicate that there may be uncertainty over controlled and it is probable that the difference will not reverse in the carrying amount. It is written down for impairment when the the foreseeable future. recoverable amount of the business is insufficient to support the net book value. Deferred tax related to fair value re-measurement of available-for-sale investments and cash flow hedges, which are charged or credited Other assets directly to equity, is also credited or charged directly to equity and is Other assets are comprised primarily of accrued income (non-interest subsequently recognized in the income statement together with the related), prepayments and other accounts receivable. They also include deferred gain or loss. insurance products (reinsurance, insurance premiums receivable, etc.), construction contracts, inventories and plan assets relating EMPLOYEE BENEFITS to employee benefit obligations. These other assets are recorded Employee benefit obligations are measured at the present value of the at amortized cost less impairment if applicable. Benefits granted to estimated future cash outflows using interest rates of corporate bonds employees are recognized in accordance with IAS 19 requirements. rated AA, which have terms to maturity approximating the terms of the related liability, and taking into consideration also actuarial and LEASES demographic assumptions. A Dexia Credit Local company is the lessor OLIDATED Qualified internal and independent actuaries carry out valuations of
When assets held are subject to a finance lease, the present value CONS FINANCIAL STATEMENTS these obligations. All valuation assumptions and results are reviewed of the lease payments is recognized as a receivable. The difference and validated by an independent actuary for Dexia Credit Local who between the gross receivable and the present value of the receivable ensures that all calculations are standardized and calculated in is recognized as unearned finance income. Lease income is recognized compliance with IAS 19 and IFRS 2. over the term of the lease using the net investment method (before tax), which reflects a constant periodic rate of return. Pension obligations Dexia Credit Local operates a number of defined benefit and defined A Dexia Credit Local company is the lessee contribution plans throughout the world, the assets of which are A finance lease is a lease that transfers substantially all the risks and generally held in separate insurance companies. The pension plans rewards incidental to ownership of an asset. An operating lease is a are generally funded by payments from employees and by the relevant lease other than a finance lease. Dexia Credit Local companies. When an operating lease is terminated before the lease period has expired, any payment to be made to the lessor by way of penalty is Defined benefit plans For defined benefit plans, pension expense is assessed using the recognized as an expense in the period in which termination takes projected unit credit method. Under this method, the cost of providing place. pensions is charged to the income statement so as to spread the Amortization of those assets is included in “Other expense.” regular cost over the service lives of employees. Dexia Credit Local has elected to apply the “corridor“ method. Net cumulative unrecognized If the lease agreement substantially transfers the risk and rewards of actuarial gains and losses exceeding the corridor (the greater of 10% ownership of the asset, the lease is recorded as a finance lease and of the present value of the gross defined benefit obligation or 10% the related asset is capitalized. At inception the asset is recorded at the of the fair value of any plan assets) are recognized in income over the lower of the present value of the minimum lease payments or fair value average remaining life of the plan. and is depreciated over its estimated useful life. The corresponding rental obligations are recorded as borrowings and interest payments The defined obligation is presented net of plan assets as a liability are recorded using the effective interest rate method. unless the assets are held by a Group entity in which case the assets are recorded gross in the related lines of the assets.
2007 Annual Report / DEXIA CREDIT LOCAL 107 CONS OLIDATED FINANCIAL STATEMENTS 4 Notes to the consolidated financial statements
Defined contribution pension plans RELATED-PARTY TRANSACTIONS Dexia Credit Local’s contributions to defined contribution pension Parties are considered to be related if one party has the ability to plans are charged to the income statement in the year to which control the other party or exercise significant influence over the other they relate. The obligation of Dexia Credit Local is limited to the party in making financial or operational decisions. The ultimate parent contributions that Dexia Credit Local agrees to pay into the fund on of the Group is Dexia SA, incorporated in Belgium. Relations with behalf of the employee. companies accounted for by the equity method are reported, as are relationships with the directors. Other postretirement obligations Some Dexia Credit Local companies provide postretirement health care SEGMENT REPORTING benefits to their retirees. The entitlement to these benefits is usually A segment is a distinguishable component of Dexia Credit Local based on the employee remaining in service up to retirement age and that is engaged either in providing products or services (business the completion of a minimum service period. The expected costs of segment) or in providing products or services within a particular these benefits are accrued over the period of employment, using a economic environment (geographic segment), which is subject to methodology similar to that for defined benefit pension plans. risks and rewards that are different from those of other segments. Other long-term benefits Segments with a majority of revenue earned from sales to external customers and whose revenue, result or assets are 10% or more of This mainly includes provisions for service awards that will be received all the segments are reported separately. by employees when they become entitled to this right. Geographic segments (primary segment reporting) Termination benefits Dexia Credit Local’s business segments are managed on a worldwide These benefits are provided for when all conditions of eligibility are basis. They operate in four main geographic areas: met. • Eurozone (countries using the euro as currency); Vacation benefits Standard annual leave and seniority-based vacation leave are • Rest of Europe (European countries which do not belong to the recognized when they accrue to employees. A provision is made for euro zone); the estimated liability for annual leave and long-service leave accrued • U.S.; to employees up to the balance-sheet date. • Rest of world. PROVISIONS FOR CONTINGENCIES AND CHARGES A provision represents a liability of uncertain timing or amount. Segmentation by activity (secondary segment reporting) Provisions are recognized based on their discounted value when: Dexia Credit Local’s reportable segments are defined using the “management approach,” which are those used by management • Dexia Credit Local has a present legal or implicit obligation as a to strategically manage Dexia Credit Local and make business result of past events; decisions.
• it is probable that an outflow of resources embodying economic Dexia Credit Local is organized as follows: benefits will be required to settle the obligation; • P ublic/Project Finance and Credit Enhancement; • a reliable estimate of the amount of the obligation can be made. • P ersonal Financial Services; DIVIDENDS ON COMMON STOCK • T reasury and Financial Markets; Dividends on common stock are recognized in equity in the period in which they are declared (authorized and no longer at the discretion of • other. the entity). Dividends for the year that are declared after the balance- The “other” part is mainly composed of: sheet date are disclosed in the subsequent events note. • equity portfolios not allocated to other segments; EARNINGS PER SHARE • unallocated equity; Basic earnings per share is calculated by dividing net income before minority interests available to common shareholders by the weighted • building property, other tangible fixed assets and intangible assets average number of shares of common stock outstanding during the not attributable to other business lines; year. • items non attributable to other segments.
108 DEXIA CREDIT LOCAL / 2007 Annual Report CONS OLIDATED FINANCIAL STATEMENTS Notes to the consolidated financial statements 4
The results of each business line also include: CASH AND CASH EQUIVALENTS
• the earnings from commercial transformation, including the For the purposes of the cash flow statement, cash and cash equivalents management costs of this transformation and the Group equity comprise balances with terms to maturity of under 3 months included allocated to this activity on the basis of medium and long-term within cash and balances with central banks, loans and advances due outstandings; from banks, loans and advances due from customers, financial assets held for trading, financial assets available for sale and financial assets • interest on economic capital: economic capital is allocated to the designated at fair value through profit or loss. business lines for internal purposes and the return on economic capital is used to measure the performance of each business line;
• funding cost.
Segment assets and liabilities are comprised of operating assets and liabilities, being the majority of the balance sheet but excluding items such as tax assets and liabilities.
The accounting policies of the segments are the same as those described in the summary of significant accounting policies. OLIDATED OLIDATED CONS FINANCIAL STATEMENTS
2007 Annual Report / DEXIA CREDIT LOCAL 109 CONS OLIDATED FINANCIAL STATEMENTS 4 Notes to the consolidated financial statements
( 2. NOTES ON THE ASSETS
2.0 CASH, CENTRAL BANKS AND POSTAL CHECKING ACCOUNTS (ITEM I - ASSETS)
(EUR millions) 2006 2007
Cash 24 27
Mandatory reserve deposits with central banks 1037 951
Other central bank deposits and balances with postal checking accounts 8 575
TOTAL 1,069 1,553
of which included in cash and cash equivalents 1,069 1,552
2.1 FINANCIAL ASSETS AT FAIR VALUE THROUGH PROFIT OR LOSS (ITEM II - ASSETS)
This line includes both the held for trading portfolio and all financial assets at fair value through profit or loss (see point regarding “Financial assets at fair value through profit or loss” in note 1.3 “Accounting policies and valuation methods“).
(EUR millions) 2006 2007
Loans and securities 14,017 18,370
Derivatives (see note 4.1.b) 3,953 5,728
TOTAL 17,970 24,098
a. Analysis by counterparty
2006 2007
Held Designated Total Held Designated Total (EUR millions) for trading at fair value for trading at fair value
Public sector 214 242 456 2,104 210 2,314
Banks 4,864 144 5,008 4,720 260 4,980
Other sectors (1) 8,359 194 8,553 11,015 61 11,076
TOTAL 13,437 580 14,017 17,839 531 18,370 of which included in cash and cash equivalents 286 0 286 153 0 153
of which included in finance leases 000000 (1) In 2006, the Dexia Credit Local Group reclassified EUR 5 billion in securities perfectly hedged by credit default swaps (Negative Basis Trade) from the line “Assets at fair value” to the line “Assets held for trading.”
110 DEXIA CREDIT LOCAL / 2007 Annual Report CONS OLIDATED FINANCIAL STATEMENTS Notes to the consolidated financial statements 4
b. Analysis by nature
2006 2007
Held Designated Total Held Designated Total (EUR millions) for trading at fair value for trading at fair value
Loans 181 179 360 423 140 563
Bonds issued by public bodies 137 234 371 112 210 322
Other bonds and fixed-income instruments (1) 13,119 167 13,286 17,304 158 17,462
Equities and other variable-income instruments 0 0 0 0 23 23
TOTAL 13,437 580 14,017 17,839 531 18,370 (1) In 2006, the Dexia Credit Local Group reclassified EUR 5 billion in securities perfectly hedged by credit default swaps (Negative Basis Trade) from the line “Assets at fair value” to the line “Assets held for trading.” c. Treasury bills and other bills eligible for refinancing with central banks
(EUR millions) 2006 2007
TOTAL 25 d. Securities pledged under repurchase agreements (repos)
(EUR millions) 2006 2007 OLIDATED OLIDATED Included in bonds issued by public bodies 09 CONS FINANCIAL STATEMENTS
Included in other bonds and fixed-income instruments 3,633 561
e. Analysis by maturity and interest rate: see To determine the fair value of unlisted financial instruments classified notes 7.7 and 7.4 under the fair value option, the pricing tools used and procedures followed are determined by Group Risk Management. The pricing f. Analysis of fair value: see note 7.1 tool is a discounted cash flow model whereby the net present value is determined by an interest rate based on available market rates The Dexia Credit Local Group uses the fair value option mainly to applicable for similar securities and taking into account our own eliminate or significantly reduce the measurement or the recognition credit rating. inconsistency (also called the accounting mismatch) that otherwise arises from measuring financial assets or recognizing the gains and losses on them on a different basis.
2007 Annual Report / DEXIA CREDIT LOCAL 111 CONS OLIDATED FINANCIAL STATEMENTS 4 Notes to the consolidated financial statements
2.2 FINANCIAL ASSETS AVAILABLE FOR SALE (ITEM IV - ASSETS)
a. Analysis by counterparty
(EUR millions) 2006 2007
Public sector 50,058 54,908
Banks 29,082 33,786
Other sectors 34,895 41,960
Performing assets 114,035 130,654
Impaired loans 00
Impaired bonds issued by public bodies 00
Other impaired bonds and fixed-income instruments 11 9
Impaired equities and other variable-income instruments 413 165
Impaired assets 424 174
Total assets before impairment 114,459 130,828
Specific impairment (99) (67)
Collective impairment 00
TOTAL 114,360 130,761
of which included in cash and cash equivalents 2,632 2,207
b. Analysis by nature
(EUR millions) 2006 2007
Loans 00
Bonds issued by public bodies 39,366 46,253
Other bonds and fixed-income instruments 73,892 83,806
Equities and other variable-income instruments 1,201 769
TOTAL 114,459 130,828
c. Transfers between portfolios
(EUR millions) 2006 2007
Securities held to maturity transferred to the available for sale portfolio during the year 0 0
Unrealized gains and losses recognized in shareholders’ equity on the transfer of securities held to maturity 0 0
Securities transferred to the held to maturity portfolio during the year 0 0
Impact on shareholders’ equity of the transfer to the held to maturity portfolio 0 0
112 DEXIA CREDIT LOCAL / 2007 Annual Report CONS OLIDATED FINANCIAL STATEMENTS Notes to the consolidated financial statements 4
d. Convertible bonds included in the available for sale portfolio
None. e. Analysis by maturity and interest rate: see notes 7.7 et 7.4 f. Analysis of fair value: see note 7.1 g. Analysis of quality: see note 2.13 “Quality of financial assets”
2.3 INTERBANK LOANS AND ADVANCES (ITEM V - ASSETS) a. Analysis by type
(EUR millions) 2006 2007
Nostro accounts 1,751 808
Reverse repurchase agreements (reverse repos) 2,695 2,274
Other interbank loans and advances 15,766 17,750
Performing assets 20,212 20,832
Impaired loans and advances 00
Impaired assets 00
Total assets before impairment 20,212 20,832 OLIDATED
Specific impairment 00CONS FINANCIAL STATEMENTS
Collective impairment 00
TOTAL 20,212 20,832
of which included in cash and cash equivalents 6,806 9,948
of which included in finance leases 00 b. Analysis by maturity and interest rate: see notes 7.7 et 7.4 c. Analysis of fair value: see note 7.1 d. Analysis of quality: see note 2.13 “Quality of financial assets”
2007 Annual Report / DEXIA CREDIT LOCAL 113 CONS OLIDATED FINANCIAL STATEMENTS 4 Notes to the consolidated financial statements
2.4 CUSTOMER LOANS AND ADVANCES (ITEM VI - ASSETS)
a. Analysis by counterparty
(EUR millions) 2006 2007
Public sector 104,901 109,904
Other sectors 24,202 36,758
Performing assets 129,103 146,662
Impaired loans and advances 293 179
Impaired assets 293 179
Total assets before impairment 129,396 146,841
Specific impairment (94) (52)
Collective impairment (171) (221)
TOTAL 129,131 146,568
of which included in finance leases 1,148 1,294
b. Analysis by maturity and interest rate: see notes 7.7 and 7.4
c. Analysis of fair value: see note 7.1
d. Analysis of quality: see note 2.13 “Quality of financial assets”
2.5 FINANCIAL ASSETS HELD TO MATURITY (ITEM VIII - ASSETS)
a. Analysis by counterparty
(EUR millions) 2006 2007
Public sector 1,084 1,015
Banks 96 75
Other sectors 184 182
Performing assets 1,364 1,272
Impaired bonds issued by public bodies 00
Other impaired bonds and fixed-income instruments 00
Impaired assets 00
Total assets before impairment 1,364 1,272
Specific impairment 00
TOTAL 1,364 1,272
114 DEXIA CREDIT LOCAL / 2007 Annual Report CONS OLIDATED FINANCIAL STATEMENTS Notes to the consolidated financial statements 4
b. Analysis by type
(EUR millions) 2006 2007
Bonds issued by public bodies 788 731
Other bonds and fixed-income instruments 576 541
TOTAL 1,364 1,272 c. Analysis by maturity and interest rate: see notes 7.7 and 7.4 d. Analysis of fair value: see note 7.1 e. Analysis of quality: see note 2.13 “Quality of financial assets”
2.6 TAX ASSETS (ITEMS IX AND X - ASSETS)
(EUR millions) 2006 2007
Current income tax 122 142
Other taxes 19 19
Current tax assets 141 161
Deferred tax assets (see note 4.2) 67 436 OLIDATED OLIDATED CONS FINANCIAL STATEMENTS
2.7 ACCRUALS AND OTHER ASSETS (ITEM XI - ASSETS)
(EUR millions) 2006 2007
Other assets 465 391
Other assets specific to insurance companies 1,053 1,074
Cash collateral 8,107 5,859
ACCRUALS AND OTHER ASSETS 9,625 7,324
of which included in cash and cash equivalents 8,107 5,848
2007 Annual Report / DEXIA CREDIT LOCAL 115 CONS OLIDATED FINANCIAL STATEMENTS 4 Notes to the consolidated financial statements
a. Other assets
Analysis by nature (EUR millions) 2006 2007
Accrued income 67
Deferred expense 14 12
Other accounts receivable 445 372
Plan assets 00
Long- term construction contracts 00
Inventories 00
Performing assets 465 391
Impaired assets 00
Total assets before impairment 465 391
Specific impairment 00
Collective impairment 00
TOTAL 465 391
b. Other assets specific to insurance companies
Analysis by nature (EUR millions) 2006 2007
Share of the reinsurers in the technical reserves 00
Receivables resulting from direct insurance transactions 31 42
Premiums still to be issued 00
Deferred acquisition costs 259 236
Other insurance assets 763 796
Performing assets 1,053 1,074
Impaired insurance assets 00
Impaired assets 00
Total assets before impairment 1,053 1,074
Specific impairment 00
Collective impairment 00
TOTAL 1,053 1,074
116 DEXIA CREDIT LOCAL / 2007 Annual Report CONS OLIDATED FINANCIAL STATEMENTS Notes to the consolidated financial statements 4
2.8 INVESTMENTS IN ASSOCIATES (ITEM XIII - ASSETS) a. Carrying amount
(EUR millions) 2006 2007
At January 1 386 417
• Acquisitions 33 0
• Disposals 00
• Change in consolidation scope (in) (2) 022
• Change in consolidation scope (out) (44) 0
• Share of income before income taxes 76 81
• Share of income tax (19) (20)
• Dividends paid (17) (21)
• Share of gains and losses not recognized in the income statement 4 (35)
• Changes in goodwill (see below) (2) 014
• Impairment: additions 00
• Impairment: disposals and retirements 00
• Translation adjustments (1) (2) 1
• Other movements 00 OLIDATED OLIDATED At December 31 417 459
(1) Impact of changes in exchange rates between January 1, and December 31, on balances in foreign currencies at January 1, and impact of the difference between average and year-end CONS FINANCIAL STATEMENTS exchange rates on movements for the year. (2) Dexia Epargne Pension is accounted for by the equity method as from October 1, 2007.
2007 Annual Report / DEXIA CREDIT LOCAL 117 CONS OLIDATED FINANCIAL STATEMENTS 4 Notes to the consolidated financial statements
b. Positive goodwill included in carrying amount
(EUR millions) 2006 2007
Acquisition cost at January 1 106 106
• Change in consolidation scope (in) (2) 014
• Change in consolidation scope (out) 00
• Transfers 00
• Post-acquisition adjustment 00
• Translation adjustments (1) 00
• Other movements 00
Acquisition cost at December 31 106 120
Accumulated amortization at January 1 (23) (23)
Accumulated amortization at December 31 (23) (23)
Accumulated impairment at January 1 00
• Additions 00
• Disposals, retirements and reversals 00
• Change in consolidation scope (in) 00
• Change in consolidation scope (out) 00
• Transfers 00
• Post-acquisition adjustment 00
• Translation adjustments (1) 00
• Other movements 00
Accumulated impairment at December 31 00
NET CARRYING AMOUNT AT DECEMBER 31 83 97 (1) Impact of changes in exchange rates between January 1, and December 31, on balances in foreign currencies at January 1, and impact of the difference between average and year-end exchange rates on movements for the year. (2) Substantially all of the goodwill recognized on Dexia Epargne Pension reflects the change in the value of the building contributed by CLF Patrimoniale.
c. List of major associates at December 31, 2007
Year of acquisition Goodwill Carrying value Fair value (EUR millions) at December 31, 2007 at December 31, 2007
Kommunalkredit Austria AG 1992 12 169 397
Crédit du Nord 2000 71 254 410
Dexia Epargne Pension 2007 14 36 36
TOTAL 97 459 843
118 DEXIA CREDIT LOCAL / 2007 Annual Report CONS OLIDATED FINANCIAL STATEMENTS Notes to the consolidated financial statements 4
2.9 INVESTMENT PROPERTY AND TANGIBLE FIXED ASSETS (ITEMS XIV AND XV - ASSETS) a. Movements
Investment Tangible fixed assets property Land and buildings Office furniture and other equipment Total
Own use Own use Own use Own use Operating (EUR millions) owner finance lease owner finance lease lease
Acquisition cost at January 1, 2006 6 409 0 164 0 38 611
• Acquisitions 01501802154
• Post acquisition adjustment 0000000
• Disposals and retirements 0 0 0 (24) 0 (5) (29)
• Change in consolidation scope (in) 0000000
• Change in consolidation scope (out) 0000000
• Transfers 0000000
• Translation adjustments (1) 0 2 0 (3) 0 0 (1)
• Other movements 0000000
Acquisition cost at December 31, 2006 6 426 0 155 0 54 635 Accumulated depreciation and impairment at January 1, 2006 (4) (29) 0 (105) 0 (12) (146)
• Post acquisition adjustment 0000000 OLIDATED
• Additions 0 (3) 0 (11) 0 (8) (22) CONS FINANCIAL STATEMENTS
• Disposals and retirements 0 0 0230 326
• Change in consolidation scope (in) 0000000
• Change in consolidation scope (out) 0000000
• Transfers 0000000
• Translation adjustments (1) 0001001
• Other movements 0000000 Accumulated depreciation and impairment at December 31, 2006 (4) (32) 0 (92) 0 (17) (141) NET CARRYING AMOUNT AT DECEMBER 31, 2006 2 394 0 63 0 37 494 (1) Impact of changes in exchange rates between January 1, and December 31, on balances in foreign currencies at January 1, and impact of the difference between average and year-end exchange rates on movements for the year.
2007 Annual Report / DEXIA CREDIT LOCAL 119 CONS OLIDATED FINANCIAL STATEMENTS 4 Notes to the consolidated financial statements
Investment Tangible fixed assets property Land and buildings Office furniture and other equipment Total
Own use Own use Own use Own use Operating (EUR millions) owner finance lease owner finance lease lease
Acquisition cost at January 1, 2007 6 426 0 155 0 54 635
• Acquisitions 01601502960
• Post acquisition adjustment 0000000
• Disposals and retirements (6) (1) 0 (18) 0 (7) (26)
• Change in consolidation scope (in) 0000000
• Change in consolidation scope (out) (2) 0 (19) 0 0 0 0 (19)
• Transfers 0 3 0 (8) 0 0 (5)
• Translation adjustments (1) 0 1 0 (3) 0 0 (2)
• Other movements 0000000
Acquisition cost at December 31, 2007 0 426 0 141 0 76 643 Accumulated depreciation and impairment at January 1, 2007 (4) (32) 0 (92) 0 (17) (141)
• Post acquisition adjustment 0000000
• Additions 0 (8) 0 (12) 0 (10) (30)
• Disposals and retirements 4 0 0 17 0 4 21
• Change in consolidation scope (in) 0000000
• Change in consolidation scope (out) 0300003
• Transfers 0004004
• Translation adjustments (1) 0001001
• Other movements 0 0 0 (2) 0 0 (2) Accumulated depreciation and impairment at December 31, 2007 0 (37) 0 (84) 0 (23) (144) NET CARRYING AMOUNT AT DECEMBER 31, 2007 0 389 0 57 0 53 499 (1) Impact of changes in exchange rates between January 1, and December 31, on balances in foreign currencies at January 1, and impact of the difference between average and year-end exchange rates on movements for the year. (2) Disposals of buildings with a gross value of EUR 19 million are related to the deconsolidation of CLF Patrimoniale, following its merger into Dexia Epargne Pension (which is accounted for by the equity method).
b. Fair value of investment property
None.
c. Capitalized expenses on the construction of tangible fixed assets
None.
d. Contractual obligations relating to investment property at the end of the period
None.
120 DEXIA CREDIT LOCAL / 2007 Annual Report CONS OLIDATED FINANCIAL STATEMENTS Notes to the consolidated financial statements 4
2.10 INTANGIBLE ASSETS (ITEM XVI - ASSETS)
2006 2007
Internally Other Total Internally Other Total developed intangible developed intangible (EUR millions) software assets (2) software assets (2)
Acquisition cost at January 1 127 89 216 144 98 242
• Acquisitions 17 17 34 27 19 46
• Post-acquisition adjustment 000000
• Disposals and retirements 0 (3) (3) (2) (1) (3)
• Change in consolidation scope (in) 000011
• Change in consolidation scope (out) 000000
• Transfers 0 0 0 (2) (2) (4)
• Translation adjustments (1) 0 (1) (1) 0 (1) (1)
• Other movements 0 (4) (4) 0 (1) (1)
Acquisition cost at December 31 144 98 242 167 113 280 Accumulated depreciation and impairment at January 1 (91) (65) (156) (106) (76) (182)
• Post-acquisition adjustment 000000
• Additions (15) (13) (28) (19) (13) (32)
• Disposals and retirements 022000 OLIDATED
• Change in consolidation scope (in) 000000CONS FINANCIAL STATEMENTS
• Change in consolidation scope (out) 000000
• Transfers 000224
• Translation adjustments (1) 000011
• Other movements 000000 Accumulated depreciation and impairment at December 31 (106) (76) (182) (123) (86) (209) NET CARRYING AMOUNT AT DECEMBER 31 38 22 60 44 27 71 (1) Impact of changes in exchange rates between January 1, and December 31, on balances in foreign currencies at January 1, and impact of the difference between average and year-end exchange rates on movements for the year. (2) Other intangible assets include primarily purchased software.
2007 Annual Report / DEXIA CREDIT LOCAL 121 CONS OLIDATED FINANCIAL STATEMENTS 4 Notes to the consolidated financial statements
2.11 GOODWILL (ITEM XVII - ASSETS)
a. Movements
(EUR millions) 2006 2007
Acquisition cost at January 1 1,703 1,703
• Acquisitions 00
• Post-acquisition adjustment 00
• Disposals 00
• Change in consolidation scope (in) (2) 02
• Change in consolidation scope (out) 00
• Transfers 00
• Translation adjustments (1) 00
• Other movements 00
Acquisition cost at December 31 1,703 1,705
Accumulated amortization and impairment at January 1 (318) (318)
• Post-acquisition adjustment 00
• Additions 00
• Disposal, retirements and reversals 00
• Change in consolidation scope (in) 00
• Change in consolidation scope (out) 00
• Transfers 00
• Translation adjustments (1) 00
• Other movements 00
Accumulated depreciation and impairment at December 31 (318) (318)
CARRYING AMOUNT AT DECEMBER 31 1,385 1,387 (1) Impact of changes in exchange rates between January 1, and December 31, on balances in foreign currencies at January 1, and impact of the difference between average and year-end exchange rates on movements for the year. (2) The goodwill is attributable to the first-time consolidation of Dexia Kommunalkredit Polska.
At December 31, 2007, all goodwill was tested for impairment: no adjustment was required.
122 DEXIA CREDIT LOCAL / 2007 Annual Report CONS OLIDATED FINANCIAL STATEMENTS Notes to the consolidated financial statements 4
b. Analysis of net goodwill by company
(EUR millions) Year of acquisition Goodwill
Dexia Crediop 1996 129
Dexia Sofaxis 1999 59
Financial Security Assurance Holdings Ltd. 2000 1,181
Dexia banka Slovensko 2000 4
Dexia Israel (Public Finance) Ltd. 2001 12
Dexia Kommunalkredit Polska 2007 2
TOTAL 1,387
2.12 LEASES a. Group as lessor
FINANCE LEASES
Gross investment in finance leases (EUR millions) 2006 2007
Less than 1 year 98 126
1 year to 5 years 278 337 OLIDATED OLIDATED
Over 5 years 770 829 CONS FINANCIAL STATEMENTS
Subtotal (1) 1,146 1,292
Unearned future finance income on finance leases (2) 00
NET INVESTMENT IN FINANCE LEASES (1) - (2) 1,146 1,292
Additional information (EUR millions) 2006 2007
Contingent lease payments recognized in income statement during the period 0 0
Uncollectible finance lease receivables included in the provision for loan losses at the end of the period 1 1
Residual values unguaranteed by lessees 00
Estimated fair value of finance leases 1,149 1,293
Accumulated impairment for uncollectible minimum lease payments receivable 1 1
2007 Annual Report / DEXIA CREDIT LOCAL 123 CONS OLIDATED FINANCIAL STATEMENTS 4 Notes to the consolidated financial statements
OPERATING LEASES
Future net minimum lease receivables under operating leases (EUR millions) 2006 2007
Less than 1 year 917
1 year to 5 years 14 36
Over 5 years 08
TOTAL 23 61
Amount of contingent rents recognized in income during the period 0 0
b. Group as lessee
FINANCE LEASES None.
OPERATING LEASES
Future net minimum lease payments under operating leases (EUR millions) 2006 2007
Less than 1 year 18 15
1 year to 5 years 43 42
Over 5 years 106 79
TOTAL 167 136
Future minimum sublease payments expected to be received under non-cancelable subleases at the balance sheet date 02
Lease and sublease payments recognized as expenses during the year (EUR millions) 2006 2007
Minimum lease payments 28 31
Contingent lease payments 00
Sublease payments 0 (1)
TOTAL 28 30
124 DEXIA CREDIT LOCAL / 2007 Annual Report CONS OLIDATED FINANCIAL STATEMENTS Notes to the consolidated financial statements 4
2.13 QUALITY OF FINANCIAL ASSETS
Analysis of performing financial assets (EUR millions) 2006 2007
Interbank loans and advances 20,212 20,832
Customer loans and advances 129,103 146,662
Financial assets held to maturity 1,364 1,272
Financial assets available for sale 114,035 130,654
Assets from insurance companies (note 2.7) 1,053 1,074
Other accounts receivable and other assets (note 2.7) 445 372
TOTAL PERFORMING FINANCIAL ASSETS 266,212 300,866
Collective impairment (171) (221)
NET TOTAL PERFORMING FINANCIAL ASSETS 266,041 300,645
Gross amount Specific impairment Net amount
(EUR millions) 2006 2007 2006 2007 2006 2007
Analysis of impaired financial assets
Interbank loans and advances 0 0 0000
Customer loans and advances 293 179 (94) (52) 199 127 OLIDATED OLIDATED Financial assets held to maturity 0 0 0000
Financial assets available for sale 424 174 (99) (67) 325 107 CONS FINANCIAL STATEMENTS Assets from insurance companies (note 2.7) 0 0 0000 Other accounts receivable and other assets (note 2.7) 0 0 0000
Total impaired financial assets 717 353 (193) (119) 524 234
Analysis of performing and impaired financial assets
Interbank loans and advances 20,212 20,832 0 0 20,212 20,832
Customer loans and advances 129,396 146,841 (94) (52) 129,302 146,789
Financial assets held to maturity 1,364 1,272 0 0 1,364 1,272
Financial assets available for sale 114,459 130,828 (99) (67) 114,360 130,761 Assets from insurance companies (note 2.7) 1,053 1,074 0 0 1,053 1,074 Other accounts receivable and other assets (note 2.7) 445 372 0 0 445 372
Total financial assets 266,929 301,219 (193) (119) 266,736 301,100
Collective impairment (171) (221) 0 0 (171) (221)
NET TOTAL 266,758 300,998 (193) (119) 266,565 300,879
2007 Annual Report / DEXIA CREDIT LOCAL 125 CONS OLIDATED FINANCIAL STATEMENTS 4 Notes to the consolidated financial statements
( 3. NOTES ON THE LIABILITIES
3.1 FINANCIAL LIABILITIES AT FAIR VALUE THROUGH PROFIT OR LOSS (ITEM II - LIABILITIES)
This item includes the port folio held for trading and liabilities designated at fair value through profit or loss (see “Financial liabilities at fair value through profit or loss” in note 1.3 “Accounting policies and valuation methods“).
(EUR millions) 2006 2007
Liabilities held for trading 00
Liabilities designated at fair value (1) 7,472 7,008
Derivatives (see note 4.1.b) 4,103 5,282
TOTAL 11,575 12,290 (1) As explained in note 1.3 “Accounting policies and valuation methods,” EUR 6.7 billion was reclassified into line V. “Customer borrowings and deposits” at December 31, 2006.
a. Analysis by type of liabilities held for trading The modifications of the credit spreads of these liability instruments are considered to be only marginal, as these liabilities are all rated None. AAA. This conclusion has been confirmed by quantitative analyses showing that the spreads of these transactions were not correlated b. Analysis by maturity and interest rate: see with the credit spreads of FSA or of other issues with equivalent notes 7.7 and 7.4 characteristics.
c. Analysis of fair value: see notes 7.1 and 7.2.i Nevertheless, following a sharp increase in the liquidity spread in 2007, the fair value of FSA’s liabilities was adjusted downward by The Dexia Credit Local Group uses the fair value option mainly to EUR 30 million. eliminate or significantly reduce the measurement or the recognition The fair value of unlisted financial instruments was measured in inconsistency (also called the accounting mismatch) that otherwise comparison with recent similar transactions, using valuation tools arises from measuring financial liabilities or recognising the gains and designated by the Group Risk Management department. The pricing losses on them on a different basis. tools are discounted cash flow models whereby the net present value The fair value option is mainly used at FSA for financial liabilities is determined by a yield curve rate based on available market rates where the hedge accounting requirements are not met or there is a applicable for similar securities and taking into account an appropriate risk that they will not be met. credit rating.
3.2 INTERBANK LOANS AND DEPOSITS (ITEM IV - LIABILITIES)
a. Analysis by type
(EUR millions) 2006 2007
Demand deposits 6,456 564
Repurchase agreements 29,868 58,716
Other debts 44,472 39,967
TOTAL 80,796 99,247
b. Analysis by maturity and interest rate: see notes 7.7 and 7.4
c. Analysis of fair value: see note 7.1
126 DEXIA CREDIT LOCAL / 2007 Annual Report CONS OLIDATED FINANCIAL STATEMENTS Notes to the consolidated financial statements 4
3.3 CUSTOMER BORROWINGS AND DEPOSITS (ITEM V - LIABILITIES) a. Analysis by type
(EUR millions) 2006 2007
Demand deposits 1,073 1,340
Saving deposits 70 53
Term deposits 14,758 14,602
Repurchase agreements 926 855
Other debts (1) 3,314 3,088
TOTAL 20,141 19,938 (1) Primarily debts issued other that debt securities. (2) In 2006, EUR 6.7 billion was reclassified from line II. “Financial liabilities designated at fair value” into term deposits. b. Analysis by maturity and interest rate: see notes 7.7 and 7.4 c. Analysis of fair value: see note 7.1
3.4 DEBT SECURITIES (ITEM VI - LIABILITIES) a. Analysis by type OLIDATED OLIDATED
2006 2007 (EUR millions) CONS FINANCIAL STATEMENTS
Certificates of deposits 22,779 28,873
Savings bonds 00
Non-convertible bonds issue 134,666 147,137
Convertible debt 00
Other dilutive instruments 00
TOTAL 157,445 176,010 b. Analysis by maturity and interest rate: see notes 7.7 and 7.4 c. Analysis of fair value see: note 7.1
2007 Annual Report / DEXIA CREDIT LOCAL 127 CONS OLIDATED FINANCIAL STATEMENTS 4 Notes to the consolidated financial statements
3.5 TAX LIABILITIES (ITEMS VIII AND IX - LIABILITIES)
(EUR millions) 2006 2007
Current income tax 55 60
Other taxes 617
Current tax liabilities 61 77
Deferred tax liabilities (see note 4.2) 699 260
3.6 ACCRUALS AND OTHER LIABILITIES (ITEM X - LIABILITIES)
(EUR millions) 2006 2007
Other liabilities 935 896
Other liabilities specific to insurance companies 2,057 2,016
Cash collateral 961 2,287
TOTAL 3,953 5,199
a. Other liabilities
(EUR millions) 2006 2007
Accrued costs 47 42
Deferred income 87 108
Grants 78 86
Other assistance received 95 1
Salaries and social charges (payable) 265 245
Dividends payable to shareholders 00
Long- term construction contracts 00
Other accounts payable and other liabilities 363 414
TOTAL 935 896
b. Liabilities relating to insurance companies
(EUR millions) 2006 2007
Deposits from assignees 00
Debts resulting from direct insurance transactions 2,014 1,980
Debts resulting from reinsurance transactions 42 33
Other insurance liabilities 13
TOTAL 2,057 2,016
128 DEXIA CREDIT LOCAL / 2007 Annual Report CONS OLIDATED FINANCIAL STATEMENTS Notes to the consolidated financial statements 4
3.7 TECHNICAL PROVISIONS OF INSURANCE COMPANIES (ITEM XII - LIABILITIES) a. Analysis by type
(EUR millions) 2006 2007
General r eserve related to credit enhancement 105 68
Case-basis reserve to credit enhancement 40 66
TOTAL 145 134
b. Movements
General reserve related Case-basis reserve related Total (EUR millions) to credit enhancement to credit enhancement
At January 1, 2006 91 51 142
Additions 18 5 23
Unused amounts reversed and amounts utilized during the year 0 (6) (6)
Passage of time and effect of changes in discount rate 0 0 0
Change in consolidation scope (in) 0 0 0
Change in consolidation scope (out) 0 0 0
Transfers 7 (7) 0 OLIDATED OLIDATED Translation adjustments (1) (11) (3) (14) CONS FINANCIAL STATEMENTS Other movements 000
AT DECEMBER 31, 2006 105 40 145 (1) Impact of changes in exchange rates between January 1 and December 31 on balances in foreign currencies at January 1, and impact of the difference between average and year-end exchange rates on movements for the year.
General reserve Case-basis reserve Total related to credit related to credit (EUR millions) enhancement enhancement
At January 1, 2007 105 40 145
Additions 05353
Unused amounts reversed and amounts utilized during the year (28) (21) (49)
Passage of time and effect of changes in discount rate 0 0 0
Change in consolidation scope (in) 0 0 0
Change in consolidation scope (out) 0 0 0
Transfers 000
Translation adjustments (1) (9) (6) (15)
Other movements 000
AT DECEMBER 31, 2007 68 66 134 (1) Impact of changes in exchange rates between January 1 and December 31 on balances in foreign currencies at January 1, and impact of the difference between average and year-end exchange rates on movements for the year.
2007 Annual Report / DEXIA CREDIT LOCAL 129 CONS OLIDATED FINANCIAL STATEMENTS 4 Notes to the consolidated financial statements
3.8 PROVISIONS (ITEM XIII - LIABILITIES)
a. Analysis by type
(EUR millions) 2006 2007
Litigation claims 103 81
Restructuring 00
Long- term defined benefit plans 16 14
Other postretirement obligations 10
Other long term employee benefits 33
Provision for off-balance sheet credit commitments 11
Onerous contracts 00
Other provisions 33
TOTAL PROVISIONS 127 102
b. Movements
Litigation Restructuring Pensions Provision for Onerous Other Total and other off-balance contracts provisions employee sheet credit (EUR millions) benefits commitments
At January 1, 2006 96 0 21 1 0 4 122
Additions 35 0 4 3 0 1 43 Unused amounts reversed and amounts utilized (20) 0 (5) (4) 0 (2) (31) Passage of time and effect of changes in discount rate 0 0 0 0 0 0 0 Change in consolidation scope (in) 0 0 0 0 0 0 0 Change in consolidation scope (out) 0 0 0 0 0 0 0
Transfers 0 0 0 1 0 0 1
Translation adjustments (1) (8)00000(8)
Other movements 0 0 0 0 0 0 0
AT DECEMBER 31, 2006 103 0 20 1 0 3 127 (1) Impact of changes in exchange rates between January 1 and December 31 on balances in foreign currencies at January 1, and impact of the difference between average and year-end exchange rates on movements for the year.
130 DEXIA CREDIT LOCAL / 2007 Annual Report CONS OLIDATED FINANCIAL STATEMENTS Notes to the consolidated financial statements 4
Litigation Restructuring Pensions Provision for Onerous Other Total and other off-balance contracts provisions employee sheet credit (EUR millions) benefits commitments
At January 1, 2007 103 0 20 1 0 3 127
Additions 210410127 Unused amounts reversed and amounts utilized (34) 0 (7) (1) 0 (1) (43) Passage of time and effect of changes in discount rate 0000000 Change in consolidation scope (in) 0000000 Change in consolidation scope (out) 0000000
Transfers (1)00000(1)
Translation adjustments (1) (8)00000(8)
Other movements 0000000
AT DECEMBER 31, 2007 81 0 17 1 0 3 102 (1) Impact of changes in exchange rates between January 1 and December 31 on balances in foreign currencies at January 1, and impact of the difference between average and year-end exchange rates on movements for the year. OLIDATED OLIDATED CONS FINANCIAL STATEMENTS
2007 Annual Report / DEXIA CREDIT LOCAL 131 CONS OLIDATED FINANCIAL STATEMENTS 4 Notes to the consolidated financial statements
c. Provisions for pensions and other long-term benefits
(EUR millions) 2006 2007
Change in long-term benefit obligations
Benefit obligation at beginning of year 61 63
Current service cost 33
Interest cost 23
Plan participants’ contributions 00
Adjustments 00
Actuarial losses (gains) (1) (4)
Benefits paid 00
Expenses paid 00
Taxes paid 00
Premiums paid (2) (3)
Acquisitions/divestitures 00
Plan curtailments 0 (1)
Plan settlements 00
Exchange rate changes 00
BENEFIT OBLIGATIONS AT END OF YEAR 63 61
Change in plan assets
Fair value of plan assets at beginning of year 35 40
Expected return on plan assets 12
Actuarial gains (losses) on plan assets 00
Employer contributions 64
Mem ber contributions 00
Benefits paid (2) (3)
Expenses paid 00
Taxes paid 00
Premiums paid 00
Plan settlements 00
Acquisitions / divestitures 00
Exchange rate changes 00
FAIR VALUE OF PLAN ASSETS AT END OF YEAR 40 43
Amounts recognized in the balance sheet
Present value of funded obligations 50 48
Fair value of plan assets 40 43
Deficit (surplus) for funded plans 10 5
Present value of unfunded obligations 10 8
Unrecognized net actuarial gains (losses) (1) 4
Unrecognized past service benefits (costs) (1) (1)
Effect of limit 00
132 DEXIA CREDIT LOCAL / 2007 Annual Report CONS OLIDATED FINANCIAL STATEMENTS Notes to the consolidated financial statements 4
(En EUR millions) 2006 2007
NET LIABILITY (ASSET) 18 16
Amounts recognized in the balance sheet
Liabilities 18 17
Assets 0 (1)
NET 18 16
Components of costs
Amounts recognized in the income statement
Current service cost 33
Interest cost 23
Expected return on plan assets (1) (2)
Expected return on reimbursement assets 00
Amortization of past service cost 10
Amortization of net gain/loss 00
Effect of limit 00
Curtailment loss (gain) recognized 0 (1)
Settlement loss (gain) recognized 00
TOTAL COSTS RECOGNIZED IN THE INCOME STATEMENT 5 3 OLIDATED OLIDATED Actual return on plan assets 12
Actual return on reimbursement assets 00CONS FINANCIAL STATEMENTS
Balance sheet reconciliation
Balance sheet liability (asset) 19 18
Expense recognized in income statement during the year 5 3
Amounts recognized in equtiy during the year 00
Employer contributions made during the year (6) (4)
Benefits paid directly by the company during the year 00
Credit to reimbursements 00
Acquisitions/divestitures 00
Exchange rate adjustment - gain/loss 00
BALANCE SHEET LIABILITY (ASSET) AT END OF YEAR 18 17
Breakdown of plans by type of assets 2006 2007
1. Equity securities 5.90% 4.97%
2. Debt securities 93.09% 92.41%
3. Real estate assets 0.00% 0.00%
4. Other 1.01% 2.62%
100,00 100,00 %
2007 Annual Report / DEXIA CREDIT LOCAL 133 CONS OLIDATED FINANCIAL STATEMENTS 4 Notes to the consolidated financial statements
Historical gain and loss data 2006 2007
1. Difference between the actual and expected return on plan assets
a. In amount 00
b. In percentage of plan assets 0% 0%
2. Difference between the assumptions used and the values observed for liabilities (1)
a. In amount (1) (4)
b. In percentage of present value of plan liabilities (2%) (7%) (1) Due essentially to change in assumptions.
Range of assumptions used to calculate expense Europe Discount r ate (1) Inflation Expected return Expected return Expected return Salary increase on equities on bonds on other assets rate
December 31, 2006 3.61% - 4.50% 2.50% 5.90% - 7.90% 2.90% - 4.50% 2.90% - 7.50% 2.00% - 4.00%
December 31, 2007 4.42% - 5.50% 2.50% 6.50% - 8.50% 3.50% - 5.50% 3.80% - 5.80% 2.50% - 4.00% (1) As a general principle, the discount rate is equal to the expected return on bonds in plan assets.
3.9 SUBORDINATED DEBT (ITEM XIV - LIABILITIES)
a. Analysis by type
Convertible subordinated debt (EUR millions) 2006 2007
Perpetual subordinated notes 00
Other subordinated notes 00
TOTAL 00
Non-convertible subordinated debt (EUR millions) 2006 2007
Perpetual subordinated notes 1,311 1,195
Other subordinated notes 2,998 3,747
TOTAL 4,309 4,942
(EUR millions) 2006 2007
Hybrid capital and redeemable preference shares 00
b. Analysis by maturity and interest rate: see notes 7.7 and 7.4
c. Analysis of fair value: see note 7.1
134 DEXIA CREDIT LOCAL / 2007 Annual Report CONS OLIDATED FINANCIAL STATEMENTS Notes to the consolidated financial statements 4
d. Detailed information
Currency Due Amount a) Early repayment conditions Interest rate (in millions) b) Subordination conditions (%) c) Convertibility conditions USD No fixed maturity 250.0 a) Early repayment impossible during first 10 years without the approval of Libor USD 3M + 1.1 the General Secretariat of the Banking Commission and unless replaced by shareholders’equity of equivalent or better quality. Repayment possible at each due date for interest payments beginning 10/01/2012 with the approval of the General Secretariat of the Banking Commission b) Repayment at par value, after all creditors but preferred ranking over From 10/02/2012, Libor subordinated profit-sharing loans and preference shares USD 3M + 1.85 c) No conversion USD No fixed maturity 1,190.0 a) Early repayment impossible during first 10 years without the approval of Libor USD 3M + 0.39 the General Secretariat of the Banking Commission and unless replaced by shareholders’equity of equivalent or better quality. Repayment possible at each due date for interest payments beginning 04/05/2015 with the approval of the General Secretariat of the Banking Commission b) Repayment at par value, after all creditors but preferred ranking over From 04/06/2015, Libor subordinated profit-sharing loans and preference shares USD 3M + 1.14 c) No conversion EUR No fixed maturity 200.0 a) Early repayment impossible during first 10 years without the approval of Euribor 3M + 0.79 the General Secretariat of the Banking Commission and unless replaced by shareholders’equity of equivalent or better quality. Repayment possible at each due date for interest payments beginning 07/01/2015 with the approval of the General Secretariat of the Banking Commission b) Repayment at par value, after all creditors but preferred ranking over From July 2015 through subordinated profit-sharing loans and preference shares July 2020, Euribor 3M + 1.40, then Euribor 3M +2.15
c) No conversion OLIDATED EUR 12/01 /2014 100.0 a) Repayment possible at each due date for interest payments beginning 93.25% * CMS 12/22/2004, subject to prior approval of the General Secretariat of the CONS FINANCIAL STATEMENTS Banking Commission b) No specific conditions F rom 12/01/2005 through 12/01/2006, 3.49 c) No conversion EUR 02/12 /2019 300.0 a) Repayment possible at each due date for interest payments beginning 4,375 02/12/2014 with the approval of the General Secretariat of the Banking Commission. b) Repayment at par value, after all creditors but preferred ranking over F rom 02/12/14 subordinated profit-sharing loans and preference shares 4.412 c) No conversion EUR 07/09 /2017 500.0 a) Repayment possible at each due date for interest payments beginning Euribor 3M + 0.15 07/09/2012 with the approval of the General Secretariat of the Banking Commission. b) Repayment at par value, after all creditors but preferred ranking over From 07/09/2012, Euribor subordinated profit-sharing loans and preference shares 3M + 0.65 c) No conversion USD 06/27 /2013 200.0 a) Repayment possible at each due date for interest payments beginning Libor USD 3M + 0.35 06/27/2008 with the approval of the General Secretariat of the Banking Commission. b) Repayment at par value, after all creditors but preferred ranking over From 06/27/2008, Libor subordinated profit-sharing loans and preference shares USD 3M + 0.85 c) No conversion USD 09/30 /2013 300.0 a) Repayment possible at each due date for interest payments beginning Libor USD 3M + 0.35 09/30/2008 with the approval of the General Secretariat of the Banking Commission. b) Repayment at par value, after all creditors but preferred ranking over From 09/30/2008, Libor subordinated profit-sharing loans and preference shares USD 3M + 0.85 c) No conversion
2007 Annual Report / DEXIA CREDIT LOCAL 135 CONS OLIDATED FINANCIAL STATEMENTS 4 Notes to the consolidated financial statements
Currency Due Amount a) Early repayment conditions Interest rate (in millions) b) Subordination conditions (%) c) Convertibility conditions EUR 06/10 /2009 13.0 a) Repayment possible at each due date for interest payments, subject to Euribor 3M + 0.35 prior approval of the General Secretariat of the Banking Commission b) No specific conditions c) No conversion EUR 06/10 /2009 48.6 a) Repayment possible at each due date for interest payments, subject to Euribor 3M + 0.35 prior approval of the General Secretariat of the Banking Commission b) No specific conditions c) No conversion EUR 06/27 /2011 640.0 a) No early repayment possible. Euribor 3M + 0.58 b) Repayment at par value, after all creditors but preferred ranking over subordinated profit-sharing loans and preference shares c) No conversion EUR 01/01/2015 450.0 a) Repayment possible at each due date for interest payments beginning Euribor 3M + 0.32 01/01/2010 subject to the prior approval of the General Secretariat of the Banking Commission b) Repayment at par value, after all creditors but preferred ranking over subordinated profit-sharing loans and preference shares c) No conversion EUR 12/28/2017 300.0 a) Repayment possible at each due date for interest payments beginning Euribor 3M + 1.45 12/28/2012 subject to the prior approval of the General Secretariat of through 12/28/2012, the Banking Commission then Euribor 3M + 1.95 b) Repayment at par value, after all creditors but preferred ranking over subordinated profit-sharing loans and preference shares c) No conversion USD 09/27 /2012 60.0 a) Repayment possible at each due date for interest payments beginning Libor USD 3M + 0.5925 10/01/2007 subject to the prior approval of the General Secretariat of the Banking Commission b) Repayment at par value, after all creditors but preferred ranking over subordinated profit-sharing loans and preference shares c) No conversion USD 04/01 /2013 130.0 a) Repayment possible at each due date for interest payments beginning Libor USD 3M + 0.5475 04/01/2008 subject to the prior approval of the General Secretariat of the Banking Commission b) Repayment at par value, after all creditors but preferred ranking over subordinated profit-sharing loans and preference shares c) No conversion USD 04/01 /2013 200.0 a) Repayment possible at each due date for interest payments beginning Libor USD 3M + 0.4975 04/01/2008 subject to the prior approval of the General Secretariat of the Banking Commission b) Repayment at par value, after all creditors but preferred ranking over subordinated profit-sharing loans and preference shares c) No conversion USD 10/01 /2013 200.0 a) Repayment possible at each due date for interest payments beginning Libor USD 3M + 0.4625 10/01/2008 subject to the prior approval of the General Secretariat of the Banking Commission b) Repayment at par value, after all creditors but preferred ranking over subordinated profit-sharing loans and preference shares c) No conversion USD 01/02 /2014 100.0 a) Repayment possible at each due date for interest payments beginning Libor USD 3M + 0.485 01/01/2009 subject to the prior approval of the General Secretariat of the Banking Commission b) Repayment at par value, after all creditors but preferred ranking over subordinated profit-sharing loans and preference shares c) No conversion USD 07/01 /2014 135.0 a) Repayment possible at each due date for interest payments beginning Libor USD 3M + 0.43 07/01/2009 subject to the prior approval of the General Secretariat of the Banking Commission b) Repayment at par value, after all creditors but preferred ranking over subordinated profit-sharing loans and preference shares c) No conversion
136 DEXIA CREDIT LOCAL / 2007 Annual Report CONS OLIDATED FINANCIAL STATEMENTS Notes to the consolidated financial statements 4
Currency Due Amount a) Early repayment conditions Interest rate (in millions) b) Subordination conditions (%) c) Convertibility conditions USD 10/01 /2014 265.0 a) Repayment possible at each due date for interest payments beginning Libor USD 3M + 0.33 10/01/2009 subject to the prior approval of the General Secretariat of the Banking Commission b) Repayment at par value, after all creditors but preferred ranking over subordinated profit-sharing loans and preference shares c) No conversion EUR 11/20 /2012 3.0 a) No early repayment 6.450 b) No specific conditions c) No conversion EUR 12/09 /2009 5.0 a) No early repayment 6.150 b) No specific conditions c) No conversion EUR 10/11 /2010 2.5 a) No early repayment 6.550 b) No specific conditions c) No conversion EUR 06/30 /2013 1.0 a) No early repayment 6.600 b) No specific conditions c) No conversion EUR (DEM) 06/01 /2008 1.0 a) No early repayment 6.950 b) No specific conditions c) No conversion EUR (DEM) 06/01 /2008 1.0 a) No early repayment 6.890 b) No specific conditions c) No conversion EUR (DEM) 06/02 /2008 5.1 a) No early repayment 6.890 b) No specific conditions OLIDATED c) No conversion CONS FINANCIAL STATEMENTS EUR (DEM) 06/02 /2008 2.6 a) No early repayment 6.860 b) No specific conditions c) No conversion EUR (DEM) 06/02 /2008 2.6 a) No early repayment 6.860 b) No specific conditions c) No conversion EUR (DEM) 06/02 /2008 1.0 a) No early repayment 6.830 b) No specific conditions c) No conversion EUR (DEM) 06/02 /2008 2.6 a) No early repayment 6.830 b) No specific conditions c) No conversion EUR (DEM) 06/02 /2008 3.1 a) No early repayment 6.830 b) No specific conditions c) No conversion EUR (DEM) 06/02 /2008 1.5 a) No early repayment 6.830 b) No specific conditions c) No conversion EUR (DEM) 06/02 /2008 2.6 a) No early repayment 6.800 b) No specific conditions c) No conversion EUR (DEM) 06/02 /2008 2.6 a) No early repayment 6.650 b) No specific conditions c) No conversion EUR (DEM) 06/02 /2008 2.6 a) No early repayment 6.650 b) No specific conditions c) No conversion
2007 Annual Report / DEXIA CREDIT LOCAL 137 CONS OLIDATED FINANCIAL STATEMENTS 4 Notes to the consolidated financial statements
Currency Due Amount a) Early repayment conditions Interest rate (in millions) b) Subordination conditions (%) c) Convertibility conditions EUR (DEM) 06/02 /2008 7.7 a) No early repayment 6.650 b) No specific conditions c) No conversion EUR (DEM) 06/02 /2008 0.5 a) No early repayment 6.540 b) No specific conditions c) No conversion EUR (DEM) 06/02 /2009 10.2 a) No early repayment 6.630 b) No specific conditions c) No conversion EUR (DEM) 06/02 /2009 4.6 a) No early repayment 6.630 b) No specific conditions c) No conversion EUR 06/01 /2012 3.5 a) No early repayment 6.970 b) No specific conditions c) No conversion EUR 06/30 /2009 13.0 a) No early repayment Euribor 6 M + 1.25 b) No specific conditions c) No conversion EUR 06/30 /2011 15.0 a) No early repayment 6.400 b) No specific conditions c) No conversion EUR 07/01 /2013 5.0 a) No early repayment Euribor 6 M + 2.10 b) No specific conditions c) No conversion EUR 11/07 /2012 5.0 a) No early repayment 6.210 b) No specific conditions c) No conversion EUR 11/12 /2012 5.0 a) No early repayment 6.080 b) No specific conditions c) No conversion EUR 03/07 /2013 10.0 a) No early repayment 5.280 b) No specific conditions c) No conversion EUR 01/04 /2010 18.0 a) No early repayment 5.500 b) No specific conditions c) No conversion EUR 08/17 /2011 10.0 a) No early repayment 30 Y CMS Pounds b) No specific conditions c) No conversion EUR 06/30 /2014 10.0 a) No early repayment 6.520 b) No specific conditions c) No conversion EUR 06/30 /2014 10.0 a) No early repayment 6.450 b) No specific conditions c) No conversion EUR 06/02 /2014 20.0 a) No early repayment 6.250 b) No specific conditions c) No conversion EUR 06/01 /2017 14.0 a) No early repayment 5.080 b) No specific conditions c) No conversion
138 DEXIA CREDIT LOCAL / 2007 Annual Report CONS OLIDATED FINANCIAL STATEMENTS Notes to the consolidated financial statements 4
Currency Due Amount a) Early repayment conditions Interest rate (in millions) b) Subordination conditions (%) c) Convertibility conditions EUR 06/01 /2017 22.0 a) No early repayment 4.875 b) No specific conditions c) No conversion EUR 06/01 /2018 20 a) No early repayment 5.570 b) No specific conditions c) No conversion EUR 06/01 /2018 21.784 a) No early repayment 5.625 b) No specific conditions c) No conversion EUR 12/23 /2015 6.8 a) No early repayment b) after all creditors but preferred ranking over subordinated profit-sharing Euribor 3M + 0.25 loans and preference shares c) No conversion
3.10 SHAREHOLDERS’ EQUITY At December 31, 2005, the value of the debt was EUR 94 million, split between minority interests for EUR 48 million and Group equity for EUR 46 million. The revaluation of debt reduced Group’s equity a. Capital stock by EUR 6 million and minority interests by EUR 6 million. Dexia Credit Local has a capital stock of EUR 1,327,004, 846 divided On May 12, 2006, Dexia Cre dit Local acquired White Mountains’ into 87,045,757 shares. 1% holding for EUR 43 million, with respective negative impacts of EUR 2.5 million and EUR 1.5 million on the Group shareholders’ b. Super subordinated perpetual note equity and on the minority interests.
Dexia Credit Local issued a EUR 700 million super subordinated At December 31, 2006, the liability owed the directors of FSA perpetual note in the fourth quarter of 2005. holding the residual 1% not held by the Group following the OLIDATED purchase of White Mountains amounted to EUR 48 million, including The notes bear interest at a fixed rate of 4.3% for the first 10 years. CONS FINANCIAL STATEMENTS Subsequently, if they are not called, they will bear interest at a EUR 20 million for the minority interests and EUR 28 million for the floating rate equal to 3-month Euribor plus 1.73% per year, payable Group’s share of shareholders’ equity. To date, the reevaluation of quarterly. this liability has resulted in a EUR 2 million reduction of the Group’s share of shareholders’equity and a EUR 0.5 million increase in The payment of interest may, and in certain cases must, be suspended. minority interest. At December 31, 2007, this liability amounted to The principal may also be reduced through the incorporation of EUR 39 million , including EUR 14 million for the minority interests losses. and EUR 25 million for the Group’s share of shareholders’ equity. All interest not paid at these dates will be lost and will no longer be To date, the remeasurement of this liability has resulted in a owed by the issuer. EUR 2 million reduction of the Group’s share of shareholders’equity and a EUR 3 million increase in minority interests. The note is included in both accounting and regulatory capital calculations. Interest payments are treated like dividends and deducted The other changes in minority interests also includes a 40 million directly from shareholders’s equity. decrease on FSA’s acquisition of the minority interest in FSA International Ltd in 2005, and a EUR 1.5 million decrease on FSA In 2006 and 2007, such interest payments amounted to EUR 20 million, Global Funding in 2006. These two transactions had no impact on tax included. the Group’s shares of shareholders’ equity. c. Other movements In 2007, Dexia Kommunalkredit Bank’s acquisition of 5.42% of the minority interests in Dexia banka Slovensko resulted in a EUR 3 million Dexia Credit Local has signed agreements to buy the shares held by decrease in the Group’s share of shareholders’ equity. the directors of Financial Security Assurance Holdings Ltd. (FSA) and the company White Mountains at a price based on a contractually established formula. The contracts covered the remaining 2% of FSA not held by the Group.
2007 Annual Report / DEXIA CREDIT LOCAL 139 CONS OLIDATED FINANCIAL STATEMENTS 4 Notes to the consolidated financial statements
( 4. OTHER NOTES ON THE BALANCE SHEET
4.1 DERIVATIVES
a. Analysis by type
2006 2007
(EUR millions) Assets Liabilities Assets Liabilities Derivatives at fair value through profit or loss (see notes 2.1 and 3.1) 3,953 4,103 5,728 5,282
Derivatives designated as fair value hedges 2,918 9,081 4,641 8,383
Derivatives designated as cash flow hedges 581 473 1,180 803 Derivatives designated as hedges of a net investment in a foreign entity 0000
Derivatives designated as portfolio hedges 3,950 3,723 4,546 4,569
Hedging derivatives 7,449 13,277 10,367 13,755
TOTAL DERIVATIVES 11,402 17,380 16,095 19,037
b. Detail of derivatives held at fair value through profit or loss
2006 2007
Notional amount Assets Liabilities Notional amount Assets Liabilities
(EUR millions) To receive To deliver To receive To deliver
Foreign exchange derivatives 20,072 20,157 453 349 26,466 26,293 884 162
Interest rate derivatives (1) 229,534 230,229 3,331 3,659 310,499 314,864 4,428 4,700
Equity derivatives (1) 361 361 82 82 351 351 10 10
Credit derivatives (1) 18,272 68,510 82 8 24,414 71,608 396 399
Commodity derivatives (1) 46 46 5 5 62 62 10 11
TOTAL 268,285 319,303 3,953 4,103 361,792 413,178 5,728 5,282 (1) The December 31, 2006 figures have been revised.
140 DEXIA CREDIT LOCAL / 2007 Annual Report CONS OLIDATED FINANCIAL STATEMENTS Notes to the consolidated financial statements 4
c. Detail of derivatives designated as fair value hedges
2006 2007
Notional amount Assets Liabilities Notional amount Assets Liabilities
(EUR millions) To receive To deliver To receive To deliver
Foreign exchange derivatives 51,954 53,468 925 2,647 43,416 45,104 997 2,777
Interest rate derivatives (1) 171,087 162,350 1,644 6,271 171,347 169,713 3,150 5,223
Equity derivatives (1) 10,187 9,888 297 159 11,343 11,045 442 383
Credit derivatives 70 70 5 0 50 50 3 0
Commodity derivatives (1) 178 178 47 4 123 123 49 0
TOTAL 233,476 225,954 2,918 9,081 226,279 226,035 4,641 8,383 (1) The December 31, 2006 figures have been revised. d. Detail of derivatives designated as cash flow hedges
2006 2007
Notional amount Assets Liabilities Notional amount Assets Liabilities
(EUR millions) To receive To deliver To receive To deliver
Foreign exchange derivatives 2,728 2,384 371 59 2,110 1,690 490 77 OLIDATED OLIDATED Interest rate derivatives 73,185 73,179 210 414 52,704 52,699 690 726 CONS FINANCIAL STATEMENTS Equity derivatives 0 0 0 0 0 0 0 0
Credit derivatives 0 0 0 0 0 0 0 0
Commodity derivatives 0 0 0 0 0 0 0 0
TOTAL 75,913 75,563 581 473 54,814 54,389 1,180 803
(EUR millions) 2006 2007 Amount transfered into the cost of a non-financial asset from the fair value reserve on cash flow hedges (cash flow hedge for a highly probable transaction). 00
2007 Annual Report / DEXIA CREDIT LOCAL 141 CONS OLIDATED FINANCIAL STATEMENTS 4 Notes to the consolidated financial statements
e. Detail of derivatives designated as hedges of a net investment in a foreign entity
2006 2007
Notional amount Assets Liabilities Notional amount Assets Liabilities
(EUR millions) To receive To deliver To receive To deliver
Foreign exchange derivatives 00000000
TOTAL 00000000
f. Detail of derivatives designated as portfolio hedges
2006 2007
Notional amount Assets Liabilities Notional amount Assets Liabilities
(EUR millions) To receive To deliver To receive To deliver
Foreign exchange derivatives 00000000
Interest rate derivatives 398,615 399,134 3,950 3,723 477,877 472,763 4,546 4,569
TOTAL 398,615 399,134 3,950 3,723 477,877 472,763 4,546 4,569
4.2 DEFERRED TAXES
a. Analysis by type
(EUR millions) 2006 2007
Deferred tax assets before impairment 70 437
Impairment on deferred tax assets (3) (1)
Deferred tax assets (see note 2.6) (1) 67 436
Deferred tax liabilities (see note 3.5) (1) (699) (260)
TOTAL (632) 176 (1) Deferred tax assets and liabilities are netted out when they concern the same tax entity.
Nearly all of the sharp rise in net deferred assets is attributable to the recognition of deferred tax assets on the fair value reserve for financial assets available for sale at December 31, 2007.
142 DEXIA CREDIT LOCAL / 2007 Annual Report CONS OLIDATED FINANCIAL STATEMENTS Notes to the consolidated financial statements 4
b. Movements
(EUR millions) 2006 2007
At January 1 (660) (632 )
Charge/credit recognized in the income statement (see note 5.12) (57) 139
Effect of change in tax rates - impact on the income statement (see note 5.12) (1) 22
Movements directly recognized in shareholders’ equity 87 646
Effect of change in tax rates - impact on shareholders’equity (19) 5
Change in scope of consolidation 00
Translation adjustments 15 (18)
Other movements 314
At December, 31 (632) 176 c. Deferred taxes coming from assets of the balance sheet
(EUR millions) 2006 2007
Loans (and loan loss provisions) (460) 130
Securities (726) 243
Derivatives (647) (475) OLIDATED OLIDATED Investments in associates 00 CONS FINANCIAL STATEMENTS Tangible fixed assets and intangible assets (8) (13)
Other asset specific to insurance companies (83) (76)
Accruals and other assets 58
TOTAL (1,919) (183) d. Deferred taxes coming from liabilities of the balance sheet
(EUR millions) 2006 2007
Derivatives 1,814 1,052
Borrowings, deposits and issues of debt securities (51) (244)
Provisions 21
Pensions 55
Other liabilities specific to insurance companies (12) (26)
Tax losses carried forward 44 76
Regulatory provisions (403) (400)
Entity with special tax status (190) (173)
Accruals and other liabilities 81 69
TOTAL 1,290 360
2007 Annual Report / DEXIA CREDIT LOCAL 143 CONS OLIDATED FINANCIAL STATEMENTS 4 Notes to the consolidated financial statements
4.3 RELATED-PARTY TRANSACTIONS
Analysis by type
Directors Parent Entities with Subsidiaries (3) Associates (3) Joint ventures Other related and k ey company joint control in which the parties (4) management (Dexia) or significant entity is a influence over shareholder (3) the entity (2)
(EUR millions) 2006 2007 2006 2007 2006 2007 2006 2007 2006 2007 2006 2007 2006 2007
Loans (1) 1 1 3,319 3,114 0 0 0 0 0 0 1 0 6,398 8,036
Interest income on loans 0 0 115 156 0 0 0 0 0 0 0 0 259 497
Deposits 0 0 43 34 369 340 0 0 36 56 0 0 42,174 61,445
Interest expense on deposits 0 0 (1) (1) (10) (21) 0 0 0 (4) 0 0 (1,175) (2,133)
Net commissions 0 0 0 0 0 0 0 0 0 1 0 0 5 2
Guarantees issued by the Group 0 0 0 0 0 0 0 0 0 0 0 0 18,739 47,759 Guarantees received by the Group 0 0 3 0 0 0 0 0 23 54 0 0 4,375 9,356 (1) Loans to key management personnel were granted at general market conditions. (2) This refers to the main shareholders of Dexia (2006-2007): Arcofin, Holding Communal, Groupe Caisse des Dépôts. (3) This includes the non-consolidated investments listed in notes 1.2.b N on consolidated subsidiaries, 1.2.d Joint companies not consolidated by the proportionate method, and 1.2.f Associated companies not accounted for by the equity method. (4) This item includes loans with entities of Belgian and Luxemburg sub-groups consolidated by Dexia, the parent company of Dexia Credit Local.
4.4 COMPENSATION OF KEY MANAGEMENT PERSONNEL
(EUR millions) 2006 2007
Short-term benefits (1) 45
Postretirement obligations (2) 00
Other long-term benefits 00
Termination benefits 00
Share-based payments (3) 00 (1) Includes salary, bonus and other benefits. (2) Includes pension obligations calculated in compliance with IAS 19. (3) Includes the cost of stock options and the discount given on capital increases reserved for employees.
4.5 ACQUISITIONS AND DISPOSALS OF CONSOLIDATED COMPANIES
a) Acquisitions
No significant acquisitions with significant impact were made in 2006 or 2007.
b) Disposals
No significant disposals with significant impact were made in 2006 or 2007.
144 DEXIA CREDIT LOCAL / 2007 Annual Report CONS OLIDATED FINANCIAL STATEMENTS Notes to the consolidated financial statements 4
4.6 SHARE-BASED PAYMENTS
Dexia stock option plans (number of options) (1) 2006 2007
Outstanding at beginning of period 12,424,199 12,604,164
Granted during the period 2,037,000 2,296,200
Forfeited during the period (48,160) (22,000)
Exercised during the period (2) (1,808,875) (2,068,082)
Outstanding at the end of the period 12,604,164 12,810,282
Exercisable at the end of the period 5,296,806 5,975,924 (1) Oustanding options also include the options granted to the employees of Dexia Credit Local in 1999. (2) The weighted average exercise prices for 2006 and 2007 were respectively EUR 14.10 and EUR 13.58 per share.
Range of exercise prices 2006 2007
Number of Weighted- Weighted- Number of Weighted- Weighted- outstanding average average outstanding average average options exercise price remaining options exercise price remaining (EUR) contractual life (EUR) contractual life (years) (years)
5.95 - 8.10 76,929 7.09 0.40 0 0 0
10.97 - 11.37 2,386,310 11.27 6.22 1,644,035 11.37 4.00
11.88 - 13.66 3,673,557 13.27 6.33 3,023,236 13.31 4.77
13.81 - 14.58 814,047 14.58 3.94 647,800 14.58 2.38 OLIDATED
17.23 - 17.86 1,305,071 17.86 5 .00 880,761 17.86 4.00 CONS FINANCIAL STATEMENTS
18.03 - 18.20 2,311,250 0 8.49 2,296 ,250 0 7 .44
18.20 - 18.62 2,037,000 0 9.5 0 2,022 ,000 0 8 .50
23,25 0 0 0 2,296,282 0 9.50
TOTAL 12,604,164 12,810,282
(1) (1) Dexia stock option plans 2006 Plan 2007 Plan
Grant d ate 30/06/2006 29/06/2007
Number of instruments granted 2,037,000 2,037,000
Exercise price (EUR) 18.62 23.25
Share price at grant date (EUR) 18.85 23.35
Contractual life (years) 10 years 10 years
Settlement Dexia shares Dexia shares
Fair value per granted instrument at grant date (EUR) 2.33 3.65 (1) The fair value of the plans is obtained from a third party .
Rights become vested as follows: 40% immediately and 20% per year over the next three years.
2007 Annual Report / DEXIA CREDIT LOCAL 145 CONS OLIDATED FINANCIAL STATEMENTS 4 Notes to the consolidated financial statements
(EUR millions) 2006 2007
Equity-settled arrangements 99
Cash-settled arangements (1) 17 19
Arrangements with alternative settlements 00
TOTAL EXPENSES 26 28
(EUR millions) 2006 2007
Debts for cash-settled arrangements (1) 85 76
Debts for arrangements with alternative settlements 00
TOTAL LIABILITIES 85 76 (1) FSA’s incentive plan.
Amounts included in expense for the year
(EUR millions) 2006 2007
Dexia Credit Local Group 2003 plan 11
Dexia Credit Local Group 2004 plan 10
Dexia Credit Local Group 2005 plan 11
Dexia Credit Local Group 2006 plan 31
Dexia Credit Local Group 2007 plan 4
Capital increase 32
Dexia contribution (9) (9)
NET EXPENSE 00
Performance shares granted at FSA Payout percentages are interpolated for compound annual growth rates between 7% and 19%. Through 2004, performance shares were awarded under the 1993 Equity Participation Plan (the “1993 Equity Plan”). This plan In 2004, FSA adopted a new 2004 Equity Participation Plan (the authorizes the discretionary grant of performance shares by the “2004 Equity Plan”) that continues the incentive compensation Human Resources Committee to key employees. The amount earned program formerly provided under the company’s 1993 Equity for each performance share depends on the attainment of certain Participation Plan. The 2004 Equity Plan provides for the performance growth rates of adjusted book value per outstanding share over a share units comprised 90% of performance shares (which provided three-year period. for payment based upon the FSA’s performance over specified three- year performance cycles as described above) and 10% of shares of Performance shares issued prior to January 1, 2005 permitted the Dexia SA restricted stock. The Dexia SA restricted share component is participant to elect, at the time of award, growth rates including or a fixed plan, where FSA purchases Dexia SA shares and establishes a excluding realized and unrealized gains and losses on the investment prepaid expense for the amount paid which is amortized over 2.5 and portfolio. Performance shares issued after January 1, 2005 do not 3.5 year vesting period. In 2006 and 2007, FSA purchased shares to offer the option to include the impact of unrealized gains and losses economically defease its liability for USD 4.6 million and 4.7 million, on the investment portfolio. No payout occurs if the compound annual respectively, which is being amortized over the employees’ vesting growth rate of adjusted book value and book value per outstanding periods. share over specified three-year performance cycles is less than 7%, and a 200% payout occurs if the compound annual growth rate is 19% or greater.
146 DEXIA CREDIT LOCAL / 2007 Annual Report CONS OLIDATED FINANCIAL STATEMENTS Notes to the consolidated financial statements 4
FSA s hares Oustanding at Granted during Earned during Forfaited during Outstanding Share price at date (in USD) beginning of period the period the period the period at end of period of grant (USD)
2006 1,195,978 370,441 (340,429) (15,696) 1,210,294 139.22
2007 1,210,294 306,368 (364,510) (37,550) 1,114,602 145.61
4.7 INSURANCE CONTRACTS • note 5.5 “Other income,” “Income included in the technical margin of insurance companies;” In the Dexia Credit Local group, the insurance contracts are related to FSA’s credit enhancement activity. • note 5.6 “Other expense,” “Expense included in the technical margin of insurance companies;” The main figures related to this activity feature in the following notes: • note 5.7 “Operating expense,” for information concerning the amounts of deferred acquisition costs; • note 2.7 “Accruals and other assets” item b. “Other assets specific to insurance companies;” • note 5.9 “Cost of risk;”
• note 3.6 “Accruals and other liabilities” item b. “Other liabilities • note 6.4 “Insurance activity - commitments given” and “Insurance specific to insurance companies;” activity - commitments received;”
• note 3.7 “Technical provisions of insurance companies;” • the technical margin of insurance companies is provided in footnote (1) to the consolidated income statement.
4.8 CAPITAL SHARES
2006 2007
Number of shares authorized 87,045,757 87,045,757 OLIDATED OLIDATED Number of shares issued and fully paid 87,045,757 87,045,757 CONS FINANCIAL STATEMENTS Number of shares issued and not fully paid 00
Par value of the share NA NA
Outstanding as of January 1 87,045,757 87,045,757
Number of shares issued 00
Number of shares cancelled 00
Outstanding as of December 31 87,045,757 87,045,757
Rights, preferences and restrictions, including restrictions 0 0
Number of shares of treasury stock 00
Number of shares reserved for issue under stock options and contracts for the sale of shares (1) NA NA (1) Under the stock option plans of Dexia Credit Local, employees are granted shares of Dexia.
2007 Annual Report / DEXIA CREDIT LOCAL 147 CONS OLIDATED FINANCIAL STATEMENTS 4 Notes to the consolidated financial statements
4.9 EXCHANGE RATES
The primary exchange rates are presented in the following schedule.
2006 2007
Closing rate (1) Average rate (2) Closing rate (1) Average rate (2)
Australian dollar AUD 1.66988 1.66952 1.67488 1.63595
Canadian dollar CAD 1.53368 1.42995 1.44391 1.46757
Swiss franc CHF 1.60810 1.57628 1.65515 1.64623
Czech koruna CZK 27.54924 28.26385 26.59395 27.70165
Danish krone DKK 7.45456 7.45882 7.45754 7.45178
British pound sterling GBP 0.67264 0.68197 0.73357 0.68741
Hong Kong dollar HKD 10.24380 9.82766 11.47739 10.75978
Hungarian forint HUF 251.44689 264.13239 252.66391 251.30372
Israeli shekel ILS 5.55200 5.60866 5.66349 5.63379
Japenese yen JPY 156.84559 146.85826 164.90047 162.09071
Korean won KRW 1224.99600 1202.28930 1377.67839 1279.97630
Mexican peso MXN 14.26330 13.79879 16.05866 15.06571
Norwegian krone NOK 8.21149 8.04504 7.96428 8.01127
New Zealand dollar NZD 1.87036 1.94480 1.89946 1.86280
Swedish krona SEK 9.02980 9.24586 9.42195 9.26363
Singapore dollar SGD 2.01947 1.99869 2.11858 2.06969
New Turkish lira TRY 1.85150 1.86850 1.70600 1.77191
U.S. dollar USD 1.31720 1.26491 1.47180 1.37942 (1) Rate observed on Reuters at 4:45 pm on the last business day of the month of December. (2) Average of the closing rates used by the Dexia Group.
148 DEXIA CREDIT LOCAL / 2007 Annual Report CONS OLIDATED FINANCIAL STATEMENTS Notes to the consolidated financial statements 4
( 5. NOTES ON THE INCOME STATEMENT
5.1 INTEREST INCOME - INTEREST EXPENSE (ITEMS I AND II - INCOME STATEMENT)
(EUR millions) 2006 2007
Interest income 38,438 50,407
a) Interest income on assets not measured at fair value 10,482 13,135
Cash, central banks and postal checking accounts 20 63
Interbank loans and advances 886 1,204
Customer loans and advances 4,595 5,928
Financial assets available for sale 4,540 5,596
Financial assets held to maturity 75 63
Impaired assets 51
Other 361 280
b) Interest income on assets measured at fair value 27,956 37,272
Financial assets held for trading (1) 625 778
Financial assets designated at fair value (1) 34 30
Derivatives held for trading 7,520 10,313
Derivatives used for hedging 19,777 26,151 OLIDATED
Interest expense (37,113) (49,108) CONS FINANCIAL STATEMENTS
a) Interest expense on liabilities not measured at fair value (9,970) (12,475)
Interbank loans and deposits (2,704) (4,404)
Customer borrowings and deposits (2) (787) (894)
Debt securities (6,255) (6,886)
Subordinated debts (220) (244)
Preferred shares and hybrid capital 00
Other (4) (47)
b) Interest expense on liabilities measured at fair value (27,143) (36,633)
Financial liabilities held for trading 00
Financial l iabilities designated at fair value (2) (330) (537)
Derivatives held for trading (7,484) (10,303)
Derivatives used for hedging (19,329) (25,793)
INTEREST MARGIN 1,325 1,299 (1) EUR 210 million was reclassified from “Interest income on assets measured at fair value” into “Interest income on loans and securities held for trading” in 2006 (see note 1.3 “Accounting policies and valuation methods”). (2) EUR 275 million was reclassified from “Interest expense on financial liabilities designated at fair value into “Interest expense on customer borrowings and deposits” in 2006 (see note 1.3 “Accounting policies and valuation methods”).
2007 Annual Report / DEXIA CREDIT LOCAL 149 CONS OLIDATED FINANCIAL STATEMENTS 4 Notes to the consolidated financial statements
5.2 FEE AND COMMISSION (ITEMS III AND IV - INCOME STATEMENT)
2006 2007
(EUR millions) Income Expense Net Income Expense Net
Lending activity 39 (8) 31 48 (23) 25
Insurance activity and brokerage 50 (1) 49 47 (4) 43
Purchase and sale of securities 3 (1) 2 2 (3) (1)
Purchase and sales of shares of mutual f unds 6 0 6 6 0 6
Management of mutual funds 0 0 0 0 0 0
Administration of mutual funds 0 0 0 0 0 0
Payment services 0 (6) (6) 7 (5) 2
Commissions paid to business providers 0 0 0 0 0 0
Financial engineering 8 (1) 7 15 0 15 Services on securities other than custodial services 0 (6) (6) 1 (2) (1)
Custodial services 1 (1) 0 1 (1) 0
Issuance and underwriting of securities 7 (4) 3 4 (2) 2
Securitization commissions 0 0 0000
Private banking 0 0 0000
Compensation and settlement-delivery 4 0 4101
Intermediation on repo and reverse repo 0 0 0000
Other 10 (6) 4 15 (9) 6
TOTAL 128 (34) 94 147 (49) 98
5.3 NET GAINS (LOSSES) ON FINANCIAL INSTRUMENTS AT FAIR VALUE THROUGH PROFIT OR LOSS (ITEM V - INCOME STATEMENT)
(EUR millions) 2006 2007
Net trading income 59 (431)
Net result of hedge accounting (26) 47
Net result of financial instruments designated at fair value through profit or loss(*) 73
Change in own credit risk 033
Net result of foreign exchange transactions 55 53
TOTAL 95 (295)
(*) of which trading derivatives included in a fair value option strategy 45 165
All interest received and paid on assets, liabilities and derivatives is recorded in the net interest income, as required by IFRS.
Thus, net gains (losses) on trading transactions and net gains (losses) on hedging transactions include only the change in the clean value of derivatives, the revaluation of assets and liabilities qualified as hedges and the revaluation of the held- for- trading portfolio.
150 DEXIA CREDIT LOCAL / 2007 Annual Report CONS OLIDATED FINANCIAL STATEMENTS Notes to the consolidated financial statements 4
Analysis of net result of hedge accounting
(EUR millions) 2006 2007
Fair value hedges (26) 2
Fair-value changes of the hedged item attributable to the hedged risk (871) (2,302)
Fair-value changes of the hedging derivatives 845 2,304
Cash flow hedges 045
Fair-value changes of the hedging derivatives – ineffective portion 0 0
Discontinuation of cash flow hedge accounting (cash flows no longer expected to occur) 0 45
Hedges of net investments in a foreign operation 00
Fair-value changes of the hedging derivatives – ineffective portion 0 0
Portfolio hedge 00
Fair-value changes of the hedged item 373 (84)
Fair-value changes of the hedging derivatives (373) 84
TOTAL (26) 47 Amount transfered into net interest income from the fair value reserve on cash flow hedges (due to derivatives for which the hedging relationship was interrupted) 17 19
5.4 NET GAINS (LOSSES) ON FINANCIAL ASSETS AVAILABLE FOR SALE OLIDATED OLIDATED (ITEM VI - INCOME STATEMENT) CONS FINANCIAL STATEMENTS
(EUR millions) 2006 2007
Dividends on securities available for sale 28 24
Net gain (loss) on disposals of loans and securities available for sale (1) 293 356
Impairment of variable-income securities available for sale (4) (1)
Net gain (loss) on disposals of securities held to maturity 00
Net gain (loss) on disposals of debt securities 59
TOTAL 322 388 (1) Including EUR 134 million and EUR 213 million in capital gains on sales of listed shares in 2006 and 2007, respectively.
2007 Annual Report / DEXIA CREDIT LOCAL 151 CONS OLIDATED FINANCIAL STATEMENTS 4 Notes to the consolidated financial statements
5.5 OTHER INCOME (ITEM VII - INCOME STATEMENT)
Income included in the technical margin of insurance companies (EUR millions) 2006 2007
Premiums and subscription fees received (1) 486 486
Charges to provisions- reinsurers’ share 00
Changes in technical reserves - reinsurers’ share 00
Other technical income 00
TOTAL 486 486 (1) Premiums and subscription fees received correspond to FSA’s financial guaranty activity.
Other operating income (EUR millions) 2006 2007
Changes in inventory 00
Operating taxes 00
Lease income 913
Other banking income 00
Other income 97
TOTAL 18 20
TOTAL OTHER INCOME 504 506
5.6 OTHER EXPENSE (ITEM VIII - INCOME STATEMENT)
Expenses included in the technical margin of insurance companies (EUR millions) 2006 2007
Premiums received transferred to reinsurers (1) (176) (180)
Premiums and subscription fees paid 00
Charges to provisions 00
Adjustments of technical reserves 00
Other technical expenses 00
TOTAL (176) (180) (1) Premiums received correspond to FSA’s F inancial G uaranty activity.
152 DEXIA CREDIT LOCAL / 2007 Annual Report CONS OLIDATED FINANCIAL STATEMENTS Notes to the consolidated financial statements 4
Other operating expense (EUR millions) 2006 2007
Changes in inventory 00
Operating taxes 00
Maintenance and repair of investment property that generated income during the year 0 0
Other banking expense 00
Other expense (23) (16)
TOTAL (23) (16)
TOTAL OTHER EXPENSE (199) (196)
5.7 OPERATING EXPENSE (ITEM X - INCOME STATEMENT)
(EUR millions) 2006 2007
Payroll costs (317) (350)
General and administrative expenses (205) (213)
Deferred acquisition costs (50) (46)
TOTAL (572) (609) OLIDATED CONS FINANCIAL STATEMENTS a. Payroll Costs
(EUR millions) 2 006 2 007
Compensation and salary expense (1) (218) (220)
Social security and insurance expense (76) (70)
Employee benefits (31) (38)
Restructuring costs 00
Other (1) 8 (22)
TOTAL (317) (350) (1) Amounts for 2006 have been revised.
2007 Annual Report / DEXIA CREDIT LOCAL 153 CONS OLIDATED FINANCIAL STATEMENTS 4 Notes to the consolidated financial statements
EMPLOYEE INFORMATION
2006 2007
Proportionately Proportionately (Full time equivalent) Fully consolidated consolidated Total Fully consolidated consolidated Total
Executive staff 60 3 63 59 4 63
Administrative staff 3,490 7 3,497 3,763 10 3,773 Non-administrative and other personnel 19 0 19 23 0 23
TOTAL 3,569 10 3,579 3,845 14 3,859
2006
France Belgium Luxem- Italy Spain Rest of U.S. Rest of Total (Full time equivalent) bourg Europe world
Executive staff 28 0 0 3 1 15 11 5 63
Administrative staff 1,777 0 1 233 34 865 518 69 3,497 Non-administrative and other personnel 0 0 0 0 0 2 11 6 19
TOTAL 1,805 0 1 236 35 882 540 80 3,579
2007
France Belgium Luxem- Italy Spain Rest of U.S. Rest of Total (Full time equivalent) bourg Europe world
Executive staff 24 0 0 3 1 18 11 6 63
Administrative staff 1,891 0 1 235 42 955 549 100 3,773 Non-administrative and other personnel 0 0 0 0 0 5 12 6 23
TOTAL 1,915 0 1 238 43 978 572 112 3,859
154 DEXIA CREDIT LOCAL / 2007 Annual Report CONS OLIDATED FINANCIAL STATEMENTS Notes to the consolidated financial statements 4
b. General and administrative expenses
(EUR millions) 2006 2007
Cost of premises (12) (8)
Rent expense (1) (28) (28)
Fees (39) (39)
Marketing, advertising and public relations (16) (17)
IT expense (17) (21)
Software, research and development (6) (8)
Maintenance and repair (5) (8)
Restructuring costs 00
Stamp tax (3) (3)
Insurance (except related to pensions) (3) (5)
Other taxes (25) (25)
Other general and administrative expenses (51) (51)
TOTAL (205) (213)
of which maintenance and repair expenses of investment property that did not generate income during the year. 0 0 (1) This amount does not include IT rental expenses, which appear on the “IT expense” line. OLIDATED OLIDATED
5.8 DEPRECIATION, AMORTIZATION AND IMPAIRMENT OF TANGIBLE FIXED ASSETS AND INTANGIBLE CONS FINANCIAL STATEMENTS ASSETS (ITEM XI - INCOME STATEMENT)
Depreciation and amortization (EUR millions) 2006 2007
Depreciation of investment property 00
Depreciation of land and buildings, office furniture and other equipment (3) (8)
Depreciation of computer equipment (4) (4)
Depreciation of other tangible fixed assets (7) (8)
Amortization of intangible assets (28) (32)
TOTAL (42) (52)
2007 Annual Report / DEXIA CREDIT LOCAL 155 CONS OLIDATED FINANCIAL STATEMENTS 4 Notes to the consolidated financial statements
Impairment (EUR millions) 2006 2007
Impairment of investment property 00
Impairment of land and buildings, office furniture and other equipment 0 0
Impairment of other tangible fixed assets (1) 0
Impairment of assets held for sale 00
Impairment of long term construction contracts 00
Impairment of intangible assets 00
TOTAL (1) 0
TOTAL DEPRECIATION, AMORTIZATION AND IMPAIRMENT (43) (52)
5.9 COST OF RISK (ITEM XIII - INCOME STATEMENT)
2006 2007
Collective Specific Total Collective Specific Total impairment impairment impairment impairment (EUR millions) and losses and losses Credit (loans, commitments and securities held to maturity) (32) 11 (21) (54) 29 (25)
Credit enhancement (1) (17) (1) (18) 28 (51) (23)
Fixed-income securities available for sale (5) (5) 2 2
TOTAL (49) 5 (44) (26) (20) (46) (1) The increase in specific impairment in 2007 is attributable to the greater number of calls on guarantees, which had been provided for in the general reserves.
DETAIL OF COLLECTIVE AND SPECIFIC IMPAIRMENT
2006 2007
Collective impairment Charges Recoveries Total Charges Recoveries Total (EUR millions) and uses and uses
Loans and securities held to maturity (51) 19 (32) (78) 24 (54)
Off-balance sheet commitments 0 0 0 0 0 0
Total credit (51) 19 (32) (78) 24 (54)
Credit enhancement (17) 0 (17) 0 28 28
TOTAL (68) 19 (49) (78) 52 (26)
156 DEXIA CREDIT LOCAL / 2007 Annual Report CONS OLIDATED FINANCIAL STATEMENTS Notes to the consolidated financial statements 4
2006 Total Specific impairment (EUR millions) Charges Recoveries Losses Collections
Interbank loans and advances 00000
Customer loans and advances (32) 62 (21) 1 10
Financial assets held to maturity 00000
Accruals and other assets 00000
Off-balance sheet commitments (3) 4001
Total credit (35) 66 (21) 1 11
Credit enhancement (5) 6 (2) 0 (1)
Fixed-income securities (1) (5) 0 0 0 (5)
TOTAL (45) 72 (23) 1 5 (1) 2006 Figures have been reclassified.
2007 Total Specific impairment (EUR millions) Charges Recoveries Losses Collections
Interbank loans and advances 00000
Customer loans and advances (21) 50 (2) 2 29 OLIDATED OLIDATED Financial assets held to maturity 00000 CONS FINANCIAL STATEMENTS Accruals and other assets 00000
Off-balance sheet commitments (1) 1000
Total credit (22) 51 (2) 2 29
Credit enhancement (54) 21 (18) 0 (51)
Fixed-income securities (8) 10002
TOTAL (84) 82 (20) 2 (20)
5.10 INCOME (LOSSES) FROM ASSOCIATES (ITEM XV - INCOME STATEMENT)
(EUR millions) 2006 2007
Income before tax 76 81
Taxes (19) (20)
Impairment on goodwill 00
TOTAL 57 61
2007 Annual Report / DEXIA CREDIT LOCAL 157 CONS OLIDATED FINANCIAL STATEMENTS 4 Notes to the consolidated financial statements
5.11 NET GAINS (LOSSES) ON OTHER ASSETS (ITEM XVI - INCOME STATEMENT)
None.
5.12 CORPORATE INCOME TAX (ITEM XIX - INCOME STATEMENT)
Detail of tax expense 2006 2007 (EUR millions)
Current taxes (307) (279)
Deferred taxes (65) 154
Tax on prior years’ income 4 (6)
Deffered taxes on prior years 77
Provisions for tax litigation (19) 16
TOTAL (380) (108)
2007 effective tax expense
The standard corporate tax rate applicable in France is 34.43%. The tax rate applied on the contributions of foreign subsidiaries is the rate applied locally in accordance with each individual national tax treatment.
The effective tax rate observed in 2007 amounted to 9.91%.
The difference between these two rates can be analysed as follows:
(EUR millions) 2006 2007
Income before income taxes 1,539 1,154
Net income from associates 57 61
Tax base 1,482 1,093
Applicable tax rate at end of the period 34.43% 34.43%
Theoretical corporate income tax at the standard rate 510 376
Impact of differences between foreign tax rates and the standard French tax rate (8) (23)
Tax effect of non-deductible expenses 44
Tax effect of non-taxable income (137) (187)
Impact of items taxed at a reduced rate (2) (4)
Other additional taxes or tax saving (7) (20)
Liability method 1 (22)
Provision for tax litigation 19 (16)
Corporate income tax recorded in the income statement 380 108
Effective tax rate 25.66% 9.91%
158 DEXIA CREDIT LOCAL / 2007 Annual Report CONS OLIDATED FINANCIAL STATEMENTS Notes to the consolidated financial statements 4
Tax consolidation group • Dexia CLF Organisation;
Dexia Etablissement Stable in France is the head of the tax group • Dexia CLF Avenir; consolidating the following companies: • Dexia Habitat; • Dexia Credit Local; • CBX. Gest (formerly Europrojet Développement); • Floral; • Dexint Développement; • Dexia CLF Immo; • Dexia Flobail; • Compagnie pour le Foncier et l’Habitat; • Dexia Bail; • CLF Marne-la-Vallée Participation; • Dexia Finance; • Dexia Editions; • Dexia Sofaxis; • Dexia Assuréco; • Guide Pratique de la Décentralisation; • Dexia Municipal Agency; • CBX.IA 1; • Dexia CLF Développement; • CBX.IA 2. • Genebus Lease (formerly Dexia CLF Energia); Tax savings arising from the netting off of the profits and losses of • Dexia CLF Energy; companies within the tax group are recognized as a profit in the accounts of Dexia Etablissement Stable.
5.13 EARNINGS PER SHARE a. Basic earnings per share
Basic earnings per share is obtained by dividing “Net income - Group share” by the weighted average number of common shares outstanding during the year, less the average number of common shares purchased by the company and held as treasury stock. OLIDATED OLIDATED
2006 2007 CONS FINANCIAL STATEMENTS
Net income - Group share (EUR millions) 1,082 991
Weighted-average number of common shares (millions) 87 87
Basic earnings per share (in EUR) 12.43 11.38 b. Diluted earnings per share share price) is based on the monetary value of the subscription rights attached to the outstanding options. Diluted earnings per share is calculated by adjusting the average number of common shares outstanding to reflect the potential The number of shares calculated in the manner described above conversion into dilutive common shares of the options granted to is compared to the number of shares that would have been issued employees. assuming the options were exercised.
For stock options, the calculation of the number of shares that could No adjustments were made to “Net income - Group share” as there have been acquired at fair value (calculated as the average annual are no financial instruments convertible into Dexia shares.
2006 2007
Net income, Group share (EUR millions) 1,082 991
Weighted-average number of common shares (millions) 87 87
Adjustment for stock-options (millions) 00
Weighted- average number of common shares used for the calculation of diluted earnings per share (millions) 87 87
Diluted earnings per share (in EUR) 12.43 11.38
2007 Annual Report / DEXIA CREDIT LOCAL 159 CONS OLIDATED FINANCIAL STATEMENTS 4 Notes to the consolidated financial statements
( 6. NOTES ON OFF-BALANCE SHEET ITEMS
6.1 REGULAR WAY TRADE
(EUR millions) 2006 2007
Assets to be delivered 5,123 3,229
Liabilities to be received 4,558 10,249
6.2 GUARANTEES
(EUR millions) 2006 2007
Guarantees given to credit institutions 2,216 566
Guarantees given to customers 31,097 32,549
Guarantees received from credit institutions 3,449 927
Guarantees received from customers 13,874 13,753
6.3 LOAN COMMITMENTS
(EUR millions) 2006 2007
Loan commitments given to credit institutions 732 807
Loan commitments given to customers 30,900 33,720
Loan commitments received from credit institutions 2,547 6,330
Loan commitments received from customers 323
6.4 OTHER COMMITMENTS
(EUR millions) 2006 2007
Insurance activity - Commitments given 378,545 394,270
Insurance activity - Commitments received 92,745 93,780
Banking activity - Commitments given (1) 40,310 100,224
Banking activity - Commitments received 6,852 24,359 (1) The amount as of December 31, 2006 was revised.
160 DEXIA CREDIT LOCAL / 2007 Annual Report CONS OLIDATED FINANCIAL STATEMENTS Notes to the consolidated financial statements 4
( 7. NOTES ON EXPOSURE TO RISK AT DECEMBER 31, 2007
7.0 EXPOSURE TO RISK AND HEDGING measurement tools developed together with the Risk Management STRATEGIES and Permanent Control department;
• respects the limits established by the Dexia Group Risk Management a. Risk factors and risk management department;
The Risk Management and Permanent Control department is • turns to the credit committees organized within the Dexia Group responsible for monitoring all credit, market, liquidity and operational (Dexia Credit Local Credit Committees, Dexia Credit Committee risks, within the meaning of French Banking Regulations Committee and Management Credit Committee) for corporate lending, project (CRB) Standard 97-02 as modified. finance, asset-based lending and the financing of local public sector customers in regions where no delegation of lending authority The EVP-Risk Management and Permanent Control who is Dexia has been granted. Restricted delegations of powers were given to Credit Local Management Board member, represents Dexia Credit the Dexia Credit Local New York and London branches and to the Local on the Group Risk Management Committee (GRMC), which is Dexia Sabadell subsidiary for their project finance activity; chaired by the Dexia Group EVP-Risk Management, himself a member of the Group’s Management Board. • delegates specific powers for commitments relating to the investment and trading portfolios, and turns to the Dexia Group The Risk Management and Permanent Control department is TFM Credit Committee for all amounts related to these activities responsible for guaranteeing that the Bank’s risk profile remains low that exceed the delegated powers. in accordance with the strategy defined by the Dexia Management Board, so that the Bank can secure the high credit rating it requires Internal credit ratings and the Basel II reforms to obtain funding under the best possible terms. It has also been Placed under the sole responsibility of the Group Risk Management charged with the organization of the permanent control function . department, the internal credit rating system is of paramount Since early 2006, it has also been charged with the organization of importance for the Dexia Group, which has chosen the advanced the permanent control function. approach under the Basel II capital adequacy reforms. By letter dated The Risk Management and Permanent Control department December 21, 2007, following its meeting of December 18, 2007, the Management Board of the Belgian Banking, Finance and Insurance
adheres strictly to the provisions laid down by the Dexia Group Risk OLIDATED Management department (Group Risk Management) concerning risk Commission (CBFA) authorized Dexia to use the advanced internal appetite, measurement methods, limits and reporting methods. ratings-based approach for calculating and reporting credit risk-based CONS FINANCIAL STATEMENTS capital adequacy requirements as from January 1, 2008. The Risk Management and Permanent Control department operates free of any external influence from the front-office function. It does This project was coordinated by a specialized team within the Risk not report to any operational department, but has functional authority Management and Permanent Control department, which complies over the specialized permanent control staff in each of the operating with the guidelines established by Group Risk Management and units concerned. maintains daily contact with that department. It draws all of the units in Dexia Credit Local, assigning responsibility for all functional and Risk is monitored on a consolidated basis via “risk units” organized systems-related aspects of the project to members in each branch and within each branch or subsidiary, which report directly or functionally subsidiary, as well as in every Dexia Credit Local central department to the head of the department concerned by the subject.
CREDIT RISK In 2007, the Dexia Credit Local Risk Management department The Risk Management and Permanent Control department uses tools continued to develop better internal credit rating models, which it develops to monitor credit risk, in compliance with the procedure cover the primary local authorities in Western Europe and their manuals established by the Dexia Group and all regulatory and organizations, the municipal sector in the United States, public prudential constraints. housing, state-owned and similar public sector agencies, project finance and other forms of specialized finance. Approval process Development of models signifies not only the initial calculation The organization of the approval process takes into account the fact and subsequent annual backtesting (namely using re-ratings and that the vast majority of lending decisions concern customers in the incorporating incidents of default) of the parameters for PD, LGD, local public sector, which has low risk and is also subject to specific CCF (and other credit risk mitigators [CRM]), but also the development controls due to its public nature; as such, the approval process: and maintenance of robust software applications for the rating • provides for the delegation of powers to the French sales network and oversight of each outstanding loan covered by the one of the and to international entities, for local public sector customers in internal credit rating systems. It also includes the implementation and the Eurozone countries and in North America, as well as in other subsequent monitoring and updating, as needed, of all procedures countries where Dexia Credit Local has a significant local presence (e.g. those regarding past dues and defaults) that ensure that the and a local Risk Management department (such as certain countries provisions of Basel II are implemented at all of the levels concerned in Central and Eastern Europe, Israel, and Japan), using risk within the Bank.
2007 Annual Report / DEXIA CREDIT LOCAL 161 CONS OLIDATED FINANCIAL STATEMENTS 4 Notes to the consolidated financial statements
All these issues are presented first to the Validation Advisory Once a quarter, Loan Monitoring Committees examine changes in Committee and then to the Group Risk Policies Committee and the sensitive transactions and Default Committees examine each case that Internal Audit department. The regulators are informed of all work meets the criteria of default established by the banking supervisors. performed by these bodies. All of the recommendations concerned are monitored regularly at the Group level. Reserve policies Once a quarter, a Reserves Committee, chaired by the Risk Management The units concerned are continuing their work in 2008: and Permanent Control department, approves the amount of reserves • the work needed to improve the models to take account of all allocated and monitors the cost of risk. General reserves are calculated recommendations; and maintained as required by IFRS regulations.
• roll-out, corresponding to the development plan for other internal FINANCIAL RISKS credit rating systems for new or emerging types of customers for The Dexia Credit Local Group makes a clear distinction between asset- Dexia Credit Local; liability management (ALM) transactions and market transactions. • the continuous work discussed above regarding the backtesting This distinction is based on highly differentiated management and development of software applications; objectives:
• production of new, “permanent” risk weightings for the calculation • ALM includes all activities related to the management of Dexia of the capital adequacy ratio, which require very careful verification Credit Local’s structural risks, including interest rate, currency of the accuracy of all data reported in Fermat, the central database and balance sheet and off-balance sheet liquidity risks. Dexia for adjusted regulatory risk calculation. uses macro-hedging transactions to reduce its total risk: the effectiveness of these hedges is measured every month, as required All Group counterparties are now described using the same standard by CRB Standard 90-15; coding system, and the various entities continuously populate a common counterparty database (so-called participant database, or • market transactions include primarily two types of strategies: AIDA). All Dexia Group exposures to the various counterparties are locking in of credit margins, primarily on bonds held, and use of now reported once a month. derivative instruments to take positions on interest rates.
Credit limits ALM RISKS Credit limits are set in accordance with the technical specificities Scope of each type of counterparty, as outlined in the procedure manuals The structural risks may be defined as: established by Group Risk Management, which have been approved • risks of fluctuations in the Bank’s net income subsequent to changes by the Risk Policy Committee and implemented at Dexia Credit in market conditions (interest rates, exchange rates and the cost Local. of liquidity), with the exception of market risks; and Simply put, the system factors in Dexia’s Tier 1 capital, the counterparty’s • the risk of the Bank being insolvent. equity or the economic capital allocated to the transaction to calculate decreasing credit limits on the basis of the internal credit rating. The goal of asset-liability management is to hedge - in part or in full - all risks related to the structure of the balance sheet, for those assets Dexia’s Credit Committees set individual limits for each project and liabilities that have different interest rate, currency or amortization finance and asset-based lending transaction. Country and industry- profiles. Residual risks may be maintained and managed in accordance specific credit limits have also been established, depending on the with the decisions of the ALM Committee, which are generally characteristics of certain activities. based on a long-term management horizon. The ALM Committee is Monitoring and reporting responsible for all risks other than the interest rate and currency risks First-level monitoring is provided by the sales teams of the Head on the Treasury and Financial Markets business line. Office, branches and subsidiaries as part of their ongoing controls of ALM risk supervision their counterparties’ businesses. They are responsible for ensuring The Dexia ALM Committee (ALCO) meets once a month. that credit limits are respected each time a new lending decision is presented to the Credit Committee or for locally-delegated It defines risk policy and risk hedging strategies for the entire Group. approval. The guidelines established by the Dexia ALM Committee give rise to individual hedging decisions, but management authority may also Second-level monitoring is provided by the Risk Management and be delegated to the Dexia ALM department. Permanent Control department, which monitors all of the Dexia Credit Local group’s exposures, past-due loans and non-performing loans. The Dexia ALM Committee ensures that these limits are applied Changes in the quality of the commitments and compliance with consistently based on its own scenarios for changes in interest rates. credit limits are examined quarterly (except for interbank credit limits, The operational autonomy given to certain subsidiaries is supervised which are reviewed monthly) and are reported to the Management by the Dexia ALM Committee, which, by delegating powers and Board as part of the documentation required by CRB Standard 97-02 establishing limits, retains the means to control the policy set in place as modified. within the subsidiaries. As for all risk committees, the Dexia Credit
162 DEXIA CREDIT LOCAL / 2007 Annual Report CONS OLIDATED FINANCIAL STATEMENTS Notes to the consolidated financial statements 4
Local representative, who is either the Chief Executive Officer or the • Public Spread Portfolio EVP-Risk Management and Permanent Control, has veto power over − invests in bonds issued by counterparties within the scope of the all decisions he believes may be inappropriate for the entity. Public/Project Finance and Credit Enhancement business line. The decisions of the Group ALM Committee are adapted operationally Because this sector falls under a business line other than TFM it is by the Dexia Credit Local Tactical ALCO technical committee. The Risk monitored by both of the business lines concerned. Management and Permanent Control department and the Financial • Credit Structuring Trading Markets department both participate in the Tactical ALCO. − trading of bonds with short terms to maturity. Measurement of total interest rate risk ALM interest rate risk measurement has been standardized throughout • Sales the Dexia Group, and is based on several main metrics. − sales force at the disposal of the other Financial Markets business The principal measurement used is that of the interest rate sensitivity lines. of the net present value (NPV) of assets and liabilities within the These activities are subject to two types of risks: ALM scope. The scenario used for fixed rate exposures calculates the effect of a 100 basis point uniform shift in the yield curve. If • credit risk, or risk of default of the counterparty on a derivative Dexia Credit Local has too many fixed-rate assets (base case) then contract or the issuer of a purchased asset (in reality, most of the its risk increases with an increase in interest rates. credit risk on TFM activities is concentrated in the credit spread portfolio, the public spread portfolio and the credit structuring MARKET RISKS trading activities);
Scope • market risks, which may be defined as risks of fluctuations in The “Financial Markets” business lines refer to the Dexia Credit Local the Bank’s net income or the value of the positions it has taken Group’s Treasury and Financial Markets (TFM) activities, including: subsequent to changes in market conditions (interest rates, exchange rates, share price, etc.). • Financial Engineering and Derivatives
− trading of interest rate derivatives, Market risk supervision Three committees are responsible for monitoring risks relating to the − structuring and sale of derivative instruments to its own customers, Financial Markets activities:
or to the customers of other business lines under master agreements OLIDATED signed with those business lines. • the Market Risk and Guideline Committee (MRGC) meets once
a month. It is responsible for establishing and monitoring risk CONS FINANCIAL STATEMENTS • Delegated Asset-Liability Management policies, such as guidelines and market risk limits for each activity − by delegation of powers from the ALM Committee, performs the and each desk, and is charged notably with the monitoring of Bank’s short-term (less than two years) asset-liability management risk indicators; on the euro and the dollar, and manages all maturities of certain • the Dexia Credit Local Market Committee (the “Weekly currencies for which powers have been explicitly delegated by Operational Committee”), which provides weekly monitoring of Group ALCO. the implementation of all standards and decisions issued by the • Cash and Liability Management (CLM) Dexia Group Market Risk Committee;
− raises the Bank’s short-term funding (i.e. less than two years) and • the TFM Credit Committee, which examines all transactions manages its short-term liquidity. related essentially to the credit spread portfolio and to credit structuring trading. The Credit Committee reviews all transactions • Long- Term Funding concerning public sector issuers and corporate or project finance − raises the Bank’s long-term funding (i.e. more than two years), counterparties. based on an annual issuance schedule established by the ALM The Risk Management and Permanent Control department measures Committee, risk regularly, and presents a quarterly market risk report to the − issues subordinated borrowings, in accordance with the needs Dexia Credit Local Management Board. The report includes various expressed by the Finance department. indicators for monitoring the limits that have been allocated to the different types of risk. • Credit Spread Portfolio Risk monitoring methods − invests almost exclusively in products not included in the usual The principal risk metric used by Dexia Credit Local, and in fact by scope of operations of the Group’s principal business lines. the entire Dexia Group, is value at risk (VaR). The VaR calculated by the Dexia Group measures the potential loss over a 99% confidence interval for a 10-day benchmark period.
2007 Annual Report / DEXIA CREDIT LOCAL 163 CONS OLIDATED FINANCIAL STATEMENTS 4 Notes to the consolidated financial statements
The risk monitoring process consists of establishing the following RISK MONITORING AT FSA items for each entity and type of financial m arkets activity: Risk is monitored at two different levels at FSA. The first level is • a list of currencies and instruments that may be used; provided by FSA’s Risk Management department, which is segregated from the front office and is managed by a member of the FSA • a VaR limit. Management Board. The second is provided by Dexia Credit Local, in collaboration with the Dexia Group, which has set up a three- RISK MANAGEMENT COMMITTEES pronged risk management system: Several committees are responsible for risk management within Dexia Credit Local. The Risk Committees were modified in early 2006, in • a quarterly review by the Board of Directors of FSA and two line with the reorganization of the Dexia Group. The roles, areas of specialized risk committees: responsibility and composition of the committees were all specified. − the Underwriting Committee, which is chaired by a member of the Decisions are reached by consensus and the risk management Dexia Group Management Board, provides a detailed review of all representatives of Dexia Credit Local have veto power within the commitments and examines all issues relating to risk policy, Group committees if they judge that one of the committee’s decisions is not applicable to the entity. − the Investment Committee, which establishes guidelines for investment policy and evaluates investment performance; The principal committees are: • strict oversight of the business through the use of rules for • the Risk Policy Committee, which adopts all risk measurement delegation of authority between Dexia Credit Local and FSA, policies, rules and methods; specifying the types of businesses that are authorized and • the Dexia and Dexia Credit Local Credit Committees (weekly), establishing commitment limits for each type of counterparty; which rules on all transactions submitted to it. The Credit Guideline • close operational control provided by the Dexia Credit Local Committee, a sub-group of the Credit Committee, may establish Risk Management and Permanent Control department and the limits that are lower than those resulting from the application of Dexia Group Risk Management department, with the establishment Group principles and recommend delegations of powers to be in 2007 of an FSA Risk Monitoring Committee. given to the various entities or establish specific limits for certain industry-specific risks; b. Management of hedging and interest rate risk • the Dexia ALM Committee (monthly) which establishes strategies The Group uses hedging relationships (swaps, options, and forward for interest rate, currency and liquidity risks that are adapted as foreign currency contracts) primarily to cover its interest rate risk and needed by Dexia Credit Local’s own Technical ALCO; foreign currency risk. • the Dexia Credit Local Weekly Operational Committee, which adapts Depending on the purpose for which they are used, the derivatives the decisions of the Treasury and Financial Markets Committee for are classified either as fair value hedges, cash flow hedges or hedges implementation; of a net investment in a foreign currency. • the New Products Committee (monthly), which validates all of the In every case, each hedging relationship is formally documented from products of Dexia Credit Local and its branches. Each subsidiary the outset, with a description of the strategy pursued, designating has its own committee; the instrument hedged and the hedging instrument, the type of risk • L oan Monitoring Committees at both the Group and entity levels covered, and the method used to evaluate – both prospectively and (quarterly Watchlist Committee), which monitor developments in retrospectively – the effectiveness of the hedging relationship. sensitive transactions; Insofar as interest rate risk is concerned, fair value hedges are used • D efault Committees at both the Dexia and entity levels (quarterly) either for specified fixed rate assets or liabilities, or for portfolios which classifies loans as being in default in accordance with the of fixed rate assets or liabilities. Derivatives are used to reduce the criteria established by the banking supervisors; exposure of the value of these instruments to changes in interest rates. • the Validation Advisory Committee which is the Dexia Group committee that approves all models for credit, market, ALM, Hedges of specified assets or liabilities concern primarily loans, operational and economic capital risks. securities available for sale, and debt securities issued by the Group. RISK MONITORING IN SUBSIDIARIES AND BRANCHES Hedges of portfolios of financial assets or liabilities, classified by Each subsidiary and branch has its own local risk management currency, concern: structure. These structures are: • fixed rate loans: customer loans; • segregated strictly from the front offices; • fixed rate customer borrowings (debt issues). • report to the Dexia Credit Local Risk Management and Permanent Control department either directly (branches) or functionally Amounts hedged are identified by establishing a maturity schedule for (subsidiaries). the items hedged and selecting one amount for each maturity band
164 DEXIA CREDIT LOCAL / 2007 Annual Report CONS OLIDATED FINANCIAL STATEMENTS Notes to the consolidated financial statements 4
considered. These maturities are established based on the contractual Highly-probable future transactions are also hedged. The items terms of the transactions. hedged are positioned in maturity schedules, by currency and by interest rate index. The Group uses derivatives to hedge all or a part The prospective effectiveness of each hedging relationship is of the risk exposure created by these adjustable- rate instruments. measured by ensuring that the total value of the items hedged in each maturity band is greater than the total value of the designated During 2007, several hedges of identified, future financing hedging derivatives. transactions were disqualified as the likelihood of the latter coming to pass was no longer considered highly probable. This resulted in Retrospective effectiveness is measured by ensuring that monthly the immediate recognition of a EUR 44 million gain on the market changes in the amount hedged at the beginning of the period do value of those hedges. not reveal ex post facto any over-hedging.
Insofar as interest rate risk is concerned, the Group uses derivatives to hedge changes in the income and expenses associated with adjustable -rate assets and liabilities.
7.1 FAIR VALUE a. Fair value of assets
At December 31, 2006 At December 31, 2007
Carrying Fair Unrecognized Carrying Fair Unrecognized amount value fair value amount value fair value (EUR millions) adjustment adjustment
Cash, central banks and postal checking accounts 1,069 1,069 0 1,553 1,553 0 Loans and securities at fair value through profit or loss (see note 2.1) (1) 14,017 14,017 18,370 18,370
Derivatives (see note 4.1.a) (1) 11,402 11,402 16,095 16,095 OLIDATED
Financial assets available for sale (1) 114,360 114,360 130,761 130,761 CONS FINANCIAL STATEMENTS
Interbank loans and advances 20,212 20,886 674 20,832 20,852 20
Customer loans and advances 129,131 129,802 671 146,568 148,549 1,981
Fair value revaluation of portfolio hedges (1) (2) 123 123 (364) (364)
Financial assets held to maturity 1,364 1,428 64 1,272 1,448 176
Investments in associates 417 617 200 459 843 384
Other assets 11,774 11,774 0 9,878 9,878 0
TOTAL 303,869 305,478 1,609 345,424 347,985 2,561 (1) The fair value of these items is equal to their carrying amount. (2) The line “Fair value revaluation of portfolio hedges” corresponds to the remeasurement of the interest rate risk on assets covered by portfolio hedges. These assets are included in the lines “Customer loans and advances,” “Interbank loans and advances” and “Financial assets available for sale.”
2007 Annual Report / DEXIA CREDIT LOCAL 165 CONS OLIDATED FINANCIAL STATEMENTS 4 Notes to the consolidated financial statements
b. Analysis of fair value of liabilities, excluding shareholders’equity
At December 31, 2006 At December 31, 2007
Carrying Fair value Unrecognized Carrying Fair value Unrecognized amount fair value amount fair value (EUR millions) adjustment adjustment Central banks, postal checking accounts, interbank loans and deposits 84,184 82,051 (2,133) 106,877 106,903 26 Financial liabilities at fair value through profit and loss (see note 3.1) (3) 7,472 7,472 7,008 7,008
Derivatives (see note 4.1.a) (1) 17,380 17,380 19,037 19,037
Customer borrowings and deposits (3) 20,141 20,200 59 19,938 19,944 6
Fair value revaluation of portfolio hedges (1) (2) (31) (31) (447) (447)
Debt securities 157,445 156,148 (1,297) 176,010 176,018 8
Subordinated debt 4,309 3,798 (511) 4,942 4,945 3
Other liabilities 4,985 4,985 0 5,772 5,772 0
TOTAL 295,885 292,003 (3,882) 339,137 339,180 43 (1) The fair value of these items is equal to their carrying amount. (2) The line “Fair value revaluation of portfolio hedge” corresponds to the remeasurement of the interest rate risk on liabilities covered by portfolio hedges. These liabilities are included in the lines “Interbank loans and deposits,” “Customer borrowings and deposits” and “Debt securities.” (3) The figures at December 31, 2006 have been revised.
With the exception of “Liabilities held for trading” and “Liabilities designated at fair value,” the variance in interest rates linked to own credit risk was considered to be unchanged for the calculation of the fair value.
c. Methods used to determine the fair value of financial instruments
31/12/2007
Market price Model Model Total (based on (absence of market prices observable Fair value of financial assets and interest market (EUR millions) rates) parameters) (1)
Interbank loans and advances 0 20,852 0 20,852
Customer loans and advances 0 148,549 0 148,549
Loans and securities at fair value through profit or loss (see note 2.1) 14,473 3,897 0 18,370
Derivatives (see note 4.1.a) 78 15,887 130 16,095
Financial assets available for sale 79,883 50,399 479 130,761
Financial assets held to maturity 1,241 207 0 1,448
Fair value revaluation of portfolio hedge 0 (364) 0 (364)
TOTAL 95,675 239,427 609 335,711 (1) The main items estimated using valuation models that do not take account of observable market parameters are FSA’s CDSs and GICs. On FSA’s CDS portfo lio, a one basis point increase in the credit spread would generate a pre-tax fair value loss of EUR 21 million. On GICs designated at fair value through profit or loss, a 1% uniform shift in the yield curve would generate a net gain of EUR 167 million. This gain would be offset by the change in the value of other balance sheet items and derivatives used to hedge them. This includes the amortized cost of assets for which neither a market price nor a model using observable market parameters is available (e.g. unlisted stocks). The fair value may, if appropriate, be measured by interpolating market prices.
166 DEXIA CREDIT LOCAL / 2007 Annual Report CONS OLIDATED FINANCIAL STATEMENTS Notes to the consolidated financial statements 4
At December 31, 2007
Market price Model (based on Model (absence of Total Fair value of financial liabilities market prices and observable market (EUR millions) interest rates) parameters) (1) Central banks, postal checking accounts, interbank loans and deposits 0 106,775 128 106,903
Customer borrowings and deposits 0 19,944 0 19,944
Financial liabilities at fair value through profit and loss (see note 3.1) 174 4 6,830 7,008
Derivatives (see note 4.1.a) 124 18,514 399 19,037
Fair value revaluation of portfolio hedges 0 (447) 0 (447)
Debt securities 4,706 171,312 0 176,018
Subordinated debts 0 4,945 0 4,945
TOTAL 5,004 321,047 7,357 333,408 (1) The main items estimated using valuation models that do not take account of observable market parameters are FSA’s CDSs and GICs. On FSA’s CDS portfolio, a one basis point increase in the credit spread would generate a pre-tax fair value loss of EUR 21 million. On GICs designated at fair value through profit or loss, a 1% uniform shift in the yield curve would generate a net gain of EUR 167 million. This gain would be offset by the change in the value of other balance sheet items and derivatives used to hedge them. This includes the amortized cost of assets for which neither a market price nor a model using observable market parameters is available (e.g. unlisted stocks). The fair value may, if appropriate, be measured by interpolating market prices.
d. Disclosure of difference between transaction a. Banking prices and modeled values deferred (day one profit) Credit risk exposure is broken down by geographical region and by counterparty taking into account all guarantees obtained. No material deferred day one profit was recognized in 2006 or 2007.
Transactions generating a profit on the first day (essentially perfect This means that when credit risk exposure is guaranteed by a third party OLIDATED matches) are measured using observable market parameters. whose weighted risk (for Basel regulations) is lower than that of the direct borrower, the exposure is assigned to the guarantor’s geographical CONS FINANCIAL STATEMENTS region and industrial segment, except in 2006, as explained below.
7.2 EXPOSURE TO CREDIT RISK C redit risk exposure is based on a scope that encompasses the fully- consolidated subsidiaries of Dexia Credit Local Group and includes 50% Credit risk exposure is disclosed in the same way as it reported to of the joint venture Domiserve. Management, and is: In 2006, exposures were presented in accordance with the direct • the net carrying amount for balance sheet assets other than borrower, and before any specific provisions. derivative contracts (i.e. after deduction of specific provisions); The data in the tables below have not been restated. • the marked-to market value and the add-on for derivatives contracts (the add-ons represent an estimate of the potential future credit exposure;
• the full commitment amount for off-balance sheet commitments. The full commitment amount is either the undrawn part of liquidity facilities or the maximum amount that may be called under guarantees provided;
• the net par outstanding for FSA’s credit risk exposure.
2007 Annual Report / DEXIA CREDIT LOCAL 167 CONS OLIDATED FINANCIAL STATEMENTS 4 Notes to the consolidated financial statements
Exposure by geographic region
(EUR millions) At December 31, 2006 At December 31, 2007
France 91,010 98,326
Belgium 3,761 17,115
Germany 33,234 38,671
Italy 48,888 53,260
Luxembourg 41 3,129
Other EU countries 59,793 68,100
Rest of Europe 6,263 9,870
Turkey 63 409
U.S. and Canada 55,771 66,514
South and Central America 1,385 2,588
Southeast Asia 1,147 4,965
Japan 6,772 10,212
Rest of world (1) 4,061 10,805
TOTAL 312,189 383,964 (1) Includes supranational entities.
Exposure by category of counterparty
(EUR millions) At December 31, 2006 At December 31, 2007
Central governments 39,744 44,312
Local governments 168,427 207,829
Financial institutions 44,980 66,330
Private companies 8,789 16,372
Monoline insurers 28,344 14,918
ABS/MBS 13,744 22,343
Project finance 7,968 11,618
Private individuals, SME, sole traders 193 242
TOTAL 312,189 383,964
168 DEXIA CREDIT LOCAL / 2007 Annual Report CONS OLIDATED FINANCIAL STATEMENTS Notes to the consolidated financial statements 4
b. Credit enhancement
All credit enhancement pertains to FSA.
Analysis by sector
At December 31, 2006 At December 31, 2007 At December 31, 2007 (EUR millions) at constant dollar
Corporate debt 34,874 40,229 44,951
Home mortgages 11,928 13,458 15,038
Consumer finance 8,047 7,863 8,786
Other securitized assets 39,955 35,189 39,319
Asset-backed securities (ABS) 94,804 96,739 108,094
General municipal spending 78,281 77,609 86,718
Specific municipal spending financed by taxes 35,286 33,875 37,851
Public services 30,718 30,129 33,665
Transportation 12,271 11,827 13,215
Health 9,987 9,510 10,626
Housing 5,752 5,207 5,818
Other municipal spending 18,573 23,940 26,750
Municipal bonds (Munis) 190,868 192,097 214,643 OLIDATED OLIDATED
TOTAL 285,672 288,836 322,737 CONS FINANCIAL STATEMENTS
The par ceded to reinsurers represented EUR 94 billion at December 31, 2006 and December 31, 2007.
Analysis by internal credit rating
(EUR millions) At December 31, 2006 At December 31, 2007
AAA 78,663 86,862
AA 79,135 80,685
A 91,458 86,735
BBB 35,497 31,751
Speculative categories 919 2,803
TOTAL 285,672 288,836
In connection with the implementation of IFRS 7, 2006 amounts have been restated in order to classify the underlying assets of the f inancial p roducts portfolio by range of ratings, rather than using the average rating for the whole portfolio as presented last year.
2007 Annual Report / DEXIA CREDIT LOCAL 169 CONS OLIDATED FINANCIAL STATEMENTS 4 Notes to the consolidated financial statements
c. Maximum exposure to credit risk
At December 31, 2006 At December 31, 2007
Maximum exposure Maximum exposure (EUR millions) to credit risk to credit risk
Debt securities 121,781 147,155
Loans and advances 129,254 169,169
Other financial instruments 8,223 8,789
Off balance-sheet items 330,230 337,403
TOTAL 589,488 662,516
When a bond insured by FSA is recognized among Group assets, Financial collateral consists primarily of cash collateral and term the guarantee provided by FSA has been taken out of the exposures deposits, but also includes investment grade bonds (AAA to AA shown above. sovereign or bank issuers), shares of mutual funds and equities listed on recognized markets. In all, 86% of debt securities are classified as available for sale. This table includes only collateral eligible under Basel II and held The collateral held by Dexia Credit Local is comprised of financial directly by Dexia Credit Local. collateral.
d. Credit quality of unimpaired financial assets
At December 31, 2007
AAA to AA- A+ to BBB- Non investment grade Total (EUR millions)
Debt securities 99,040 41,938 6,170 147,148
Loans and advances 102,622 52,321 13,990 168,933
Other financial instruments 6,270 2,080 439 8,789
Off balance-sheet items 195,143 131,474 10,785 337,402
TOTAL 403,075 227,813 31,384 662,272
No significant restructured loan assets are on the balance sheet. The ratings classification was reviewed in line with Basel II categories. Therefore, the identical analysis is not available for 2006, but analysis The credit quality of financial assets reflects internal credit ratings, or performed by Risk Management on Dexia Credit Local Group’s total external credit ratings when internal ratings are not available. exposure suggests that the contents and the ratings of the portfolio Credit quality reporting to management does not distinguish financial have not changed significantly in comparison with 2007. assets that are past due from those that are unimpaired.
A G roup world risk information system was set in place in 2007, providing a detailed analysis of credit quality of unimpaired financial assets.
170 DEXIA CREDIT LOCAL / 2007 Annual Report CONS OLIDATED FINANCIAL STATEMENTS Notes to the consolidated financial statements 4
e. P ast-due and impaired financial assets
At December 31, 2006 At December 31, 2007
Past-due but not impaired Carrying Collateral Past-due but not impaired Carrying Collateral financial assets amount of received on financial assets amount of received individually past due or individual- on past Less than 90 days to Over 180 impaired impaired Less than 90 days to Over 180 ly impaired due or 90 days 180 days days financial loans 90 days 180 days days financial impaired assets assets loans
(EUR millions)
Debt securities 3 0 0 12 0 00090
Loans and advances 466 45 198 293 43 508 130 26 179 90
TOTAL 469 45 198 305 43 508 130 26 188 90
Financial assets are classified as impaired in accordance with the description provided in chapter 1.3 “Accounting policies and valuation methods.” f. Collateral and other credit enhancements obtained by taking possession of collateral held
None. OLIDATED OLIDATED CONS FINANCIAL STATEMENTS
2007 Annual Report / DEXIA CREDIT LOCAL 171 CONS OLIDATED FINANCIAL STATEMENTS 4 Notes to the consolidated financial statements
g. Changes in impairment of financial assets
2006
At January 1 Additions Reversals Other Transfers At Recoveries Charge-offs adjustments (1) between December 31 directly directly allowances recognized in recognized in (EUR millions) profit and loss profit and loss Specific impairment on financial assets (263) (37) 96 11 0 (193) 1 (21)
Interbank loans and advances 00000000
Customer loans and advances (132) (32) 62 8 0 (94) 1 (21) Financial assets held to maturity 00000000 Financial assets available for sale (131) (5) 34 3 0 (99) 0 0 Other accounts and receivables 00000000 Collective impairment on financial assets (140) (51) 19 1 0 (171) 0 0
TOTAL (403) (88) 115 12 0 (364) 1 (21) (1) Other adjustments include notably the impact of changes in exchange rates and in the scope of consolidation during the year.
2007
At January 1 Additions Reversals Other Transfers At Recoveries Charge-offs adjustments (1) between December 31 directly reco- directly allowances gnized in profit recognized in (EUR millions) or loss profit or loss Specific impairment on financial assets (193) (30) 87 17 0 (119) 2 (2)
Interbank loans and advances 00000000
Customer loans and advances (94) (21) 50 13 0 (52) 2 (2) Financial assets held to maturity 00000000 Financial assets available for sale (99) (9) 37 4 0 (67) 0 0
Other accounts and receivables 00000000 Collective impairment on financial assets (171) (78) 24 4 0 (221) 0 0
TOTAL (364) (108) 111 21 0 (340) 2 (2) (1) Other adjustments include notably the impact of changes in exchange rates and in the scope of consolidation during the year.
172 DEXIA CREDIT LOCAL / 2007 Annual Report CONS OLIDATED FINANCIAL STATEMENTS Notes to the consolidated financial statements 4
h. Credit risk information on loans and receivables designated at fair value through profit or loss
Maximum Maximum Change in fair value attributable Change in the fair value of credit exposure exposure to changes in credit risk derivative hedging loans and to credit risk to credit risk receivables designated at fair value hedged through profit or loss by a credit derivative Change for the Cumulative Change for the Cumulative (EUR millions) period amount period amount
At December 31, 2006 179 0 0 0 0 0
At December 31, 2007 123 0 5 5 0 0
Every quarter, the Dexia Credit Local Group measures the fair value of its assets by discounting future cash-flows.
i. Credit risk on financial liabilities designated at fair value through profit or loss
Carrying amount Change in fair value attributable Difference between carrying amount to changes in credit risk and amount contractually required to be paid at maturity (1) (EUR millions) Change for the period Cumulative amount
At December 31, 2006 7,472 0 0 148
At December 31, 2007 7,008 0 0 161 (1) Amount includes the premium/discount and change in market value.
N o change in the fair value of the Dexia Credit Local Group’s financial liabilities is attributable to changes in the credit risk of the liabilities.
At December 31, 2007, however, a EUR 30 million reduction was recognized in the fair value of FSA’s liabilities. This reduction was not attributable OLIDATED OLIDATED to changes in the creditworthiness of the liability, but rather to the impact of the general liquidity crisis on credit spreads (see also note 3.1 “Financial
liabilities at fair value through profit or loss”). CONS FINANCIAL STATEMENTS
7.3 INFORMATION ABOUT COLLATERAL a. Type of assets received as collateral if this collateral can be sold or repledged
2006 2007
Fair value Fair value of Fair value Fair value of (EUR millions) of collateral held collateral sold or repledged of collateral held collateral sold or repledged
Equity instruments 0 0 0 0
Debt securities 2,139 0 110 0
Loans and advances 1,144 0 3,585 0
Non financial assets 503 0 0 0
TOTAL 3,786 0 3,695 0
Collateral is obtained in connection with the repurchase agreement activities.
2007 Annual Report / DEXIA CREDIT LOCAL 173 CONS OLIDATED FINANCIAL STATEMENTS 4 Notes to the consolidated financial statements
b. F inancial assets pledged as collateral for liabilities or contingent liabilities
(EUR millions) 2006 2007
Carrying amount of financial assets pledged as collateral for liabilities 28,471 49,117
Carrying amount of financial assets pledged as collateral for contingent liabilities 0 0
Assets are pledged primarily to collateralize repurchase agreements and debts to Dexia Credit Local Group sister companies.
7.4 RISK ON RESETTING OF INTEREST RATES: until the next date of which interest rates are reset from an accounting ANALYSIS BY TIME UNTIL NEXT INTEREST standpoint, rather than assumptions based on oberved behavorial RATE RESET DATE data. The latter strategy is employed for the calculation of ALM sensitivity (see note 7.5) Demand deposits are declared in the “Demand”column, as the information presented below takes into account the current maturity All fixed-rate assets and liabilities are categorized in the tables below on the basis of their maturity date.
a. Analysis of assets
At December 31, 2007
Demand Less than 3 months to 1 to 5 years Over 5 years No fixed Accrued Fair value Impairment Total (EUR millions) 3 months 1 year maturity interest adjustment Cash, central banks and postal checking accounts 1,133 419 0 0 0 0 1 1,553 Loans and securities at fair value through profit or loss 0 13,900 917 138 3,582 23 1,492 4,046 24,098
Derivatives 6,027 4,340 10,367 Financial assets available for sale 85 41,907 13,258 18,959 56,464 24 1,517 (1,387) (66) 130,761 Interbank loans and advances 752 8,895 2,780 4,490 3,384 0 241 290 0 20,832 Customer loans and advances 1,583 29,788 31,965 19,006 63,237 0 1,693 (431) (273) 146,568 Fair value revaluation of portfolio hedges (364) (364) Financial assets held to maturity 0 101 181 424 548 0 18 0 0 1,272
Tax assets 598 (1) 597
Accruals and other assets 241 6,025 90 361 426 170 11 0 0 7,324
Investments in associates 481 (22) 459
Tangible fixed assets 643 (144) 499 Intangible assets and goodwill 1,984 (526) 1,458
TOTAL 3,794 101,035 49,191 43,378 127,641 3,923 11,000 6,494 (1,032) 345,424
174 DEXIA CREDIT LOCAL / 2007 Annual Report CONS OLIDATED FINANCIAL STATEMENTS Notes to the consolidated financial statements 4
b. Analysis of liabilities excluding shareholders’ equity
At December 31, 2007
Demand Less than 3 months to 1 to 5 years Over 5 years No fixed Accrued Fair value Total (EUR millions) 3 months 1 year maturity interest adjustment Central banks, postal checking accounts, interbank loans and deposits 744 99,835 2,475 2,928 272 16 445 162 106,877 Financial liabilities at fair value through profit and loss 0 443 103 3,664 2,549 0 1,303 4,228 12,290
Hedging derivatives 5,999 7,756 13,755
Customer borrowings and deposits 2,385 6,585 2,311 6,557 1,951 0 154 (5) 19,938
Debt securities 52 70,313 29,515 31,325 43,328 0 2,550 (1,073) 176,010
Fair value revaluation of portfolio hedge (447) (447)
Tax liabilities 337 337
Accruals and other liabilities 38 2,716 267 1,004 1,019 149 6 5,199 Technical provisions of insurance companies 134 134
Provisions 102 102
Subordinated debts 0 4,215 64 72 528 0 74 (11) 4,942
TOTAL 3,219 184,107 34,735 45,550 49,647 738 10,531 10,610 339,137 c. Balance sheet sensitivity gap OLIDATED OLIDATED CONS FINANCIAL STATEMENTS (EUR millions) Demand Less than 3 months 3 months to 1 year 1 to 5 years Over 5 years No fixed maturity
At December 31, 2007 575 (83,072) 14,456 (2,172) 77,994 3,185
The sensitivity gap of the balance sheet is hedged by derivatives. TFM engages in trading activities, and takes non trading-related risk positions in relation to the short-term balance sheet and to capital management activities.
7.5 SENSITIVITY TO INTEREST RATE RISK TFM also manages the credit spread portfolio (CSP) business line . As a regular user of financial markets products and transactions, CSP No average interest rate by asset and liability is published, as Dexia develops expertise in spreads, credit instruments and techniques that Credit Local has set in place a broad hedging strategy through its can be used by core business lines to manage the balance sheet and ALM department. global or specific credit exposures.
The interest margin is thus equal to the difference between interest The detailed Value at Risk usage of the Dexia Credit Local Group is received and interest paid on transactions, less any gains or losses on shown in the table below. In 2007, the average VaR the Group faced the hedging transactions. on its financial markets activities was kept to EUR 30.98 million.
Value at risk (VaR) is a more appropriate risk indicator for Treasury and The Dexia Credit Local Group calculated interest rate and Forex VaR Financial Markets activities and of sensitivity on ALM activities. based mainly on a parametrical method (99%, 10 days), and since quarter 4, 2006, calculates a credit spread VaR based on an historical Treasury and Financial Markets (TFM) method (but only for the trading desks).
Treasury and Financial Markets activities are mainly intended as a support function for the Group.
2007 Annual Report / DEXIA CREDIT LOCAL 175 CONS OLIDATED FINANCIAL STATEMENTS 4 Notes to the consolidated financial statements
2006 2007
Interest rate Equities Spread Interest rate Equities Spread and forex (trading) (trading) (1) and forex (trading) (trading) (trading and (trading and banking) banking)
Average 9.8 Average 0.0 Average 5.7 Average 15.6 Average 0.0 Average 15.4
Individual Maximum 24.8 Maximum 0.0 Maximum 7.9 Maximum 29.0 Maximum 0.0 Maximum 24.3
Average 15.5 Average 31
Maximum 31.8 Maximum 33.5
Global Limit 78.6 Limit 78.6 (1) Calculation of Spread VaR started only in the last quater of 2006.
ALM sensitivity (1)
The basis point value (BPV) measures the change in the net economic value of assets and liabilities for a 1 basis point increase in the yield curve.
BPV (EUR millions) At December 31, 2006 At December 31, 2007
TOTAL (263) (66) (1) Excluding positions of insurance companies.
For the sensitivity calculation, the term to maturity of the portfolio until the next interest rate reset date is defined using assumptions on the observed behavior of customers and not on contractual repayment date (see note 7.4).
7.6 SENSITIVITY OF LISTED SHARES EaR is lower than VaR because most listed shares have a positive AFS reserve. Value at Risk (VaR) measures the potential change in market value, while the notion of Earnings at Risk (EaR) measures the impact of the Listed shares are tested for impairment when market value is more VaR scenario on reported earnings. that 25% below cost, and/or when the share price suffers a prolonged decline. The VaR calculated by Dexia Credit Local measures the potential loss over a 99% confidence interval for a 10-day holding period. The -25% column represents the value of the impairment that could be recognized if share prices were to fall by 25%.
(1) (EUR millions) Market value VaR % VaR EaR -25%
At March 31, 2006 616.8 36.1 5.9% 0.0 0.0
At June 30, 2006 484.7 38.8 8.0% 0.0 0.0
At September 30, 2006 421.1 33.6 8.0% 0.0 (0.3)
At December 31, 2006 478.0 38.0 7.9% 0.0 0.0
At March 31, 2007 460.3 36.6 8.0% 0.0 0.0
At June 30, 2007 509.6 33.6 6.6% 0.0 0.0
At September 30, 2007 442.0 36.3 8.2% 0.0 (7.2)
At December 31, 2007 182.2 23.8 13.1% 0.0 (4.6) (1) VaR measures the potential loss that could be incurred on a position of EUR 100 million.
176 DEXIA CREDIT LOCAL / 2007 Annual Report CONS OLIDATED FINANCIAL STATEMENTS Notes to the consolidated financial statements 4
7.7 LIQUIDITY RISK : ANALYSIS BY TERM TO MATURITY
Demand deposits and saving deposits are included in the “Demand” column, even though they have no fixed repayment date. a. Analysis of assets
At December 31, 2007
Demand Less than 3 months 1 to Over No fixed Accrued Fair value Impairment Total (EUR millions) 3 months to 1 year 5 years 5 years maturity interest adjustment Cash, central banks and postal checking accounts 1,133 419 0 0 0 0 1 1,553 Loans and securities at fair value through profit or loss 0 156 1,415 6,988 9,978 23 1,492 4,046 24,098
Derivatives 6,027 4,340 10,367
Financial assets available for sale 86 2,214 5,236 31,375 91,761 25 1,517 (1,387) (66) 130,761
Interbank loans and advances 688 8,023 1,296 5,252 5,042 0 241 290 0 20,832
Customer loans and advances 1,373 4,980 9,866 33,580 95,780 0 1,693 (431) (273) 146,568 Fair value revaluation of portfolio hedges (364) (364)
Financial assets held to maturity 0 102 133 435 584 0 18 0 0 1,272
Tax assets 598 (1) 597
Accruals and other assets 240 6,024 91 361 425 172 11 0 0 7,324
Investments in associates 481 (22) 459 OLIDATED OLIDATED Tangible fixed assets 643 (144) 499 CONS FINANCIAL STATEMENTS Intangible assets and goodwill 1,984 (526) 1,458
TOTAL 3,520 21,918 18,037 77,991 203,570 3,926 11,000 6,494 (1,032) 345,424
2007 Annual Report / DEXIA CREDIT LOCAL 177 CONS OLIDATED FINANCIAL STATEMENTS 4 Notes to the consolidated financial statements
b. Analysis of liabilities, excluding shareholders’ equity
At December 31, 2007
Demand Less than 3 months 1 to Over No fixed Accrued Fair value Total 3 months to 1 year 5 years 5 years maturity interest adjust- (EUR millions) ment
Central banks, postal checking accounts, interbank loans and deposits 557 87,127 2,492 8,334 7,744 16 445 162 106,877
Financial liabilities at fair value through profit and loss 0 351 136 3,724 2,548 0 1,303 4,228 12,290
Hedging derivatives 5,999 7,756 13,755
Customer borrowings and deposits 2,051 4,885 1,553 6,883 4,417 0 154 (5) 19,938
Debt securities 52 29,069 26,497 54,947 63,968 0 2,550 (1,073) 176,010
Fair value revaluation of portfolio hedges (447) (447)
Tax liabilities 337 337
Accruals and other liabilities 29 2,718 268 1,004 1,019 155 6 5,199
Technical provisions of insurance companies 134 134
Provisions 102 102
Subordinated debts 0 0 36 837 4,006 0 74 (11) 4,942
TOTAL 2,689 124,150 30,982 75,729 83,702 744 10,531 10,610 339,137
c. Net liquidity gap
Demand Less than 3 months 3 months to 1 year 1 to 5 years Over 5 years No fixed maturity (EUR millions)
At December 31, 2007 831 (102,232) (12,945) 2,262 119,868 3,182
This table takes into account neither the liquidity of assets nor any decision to refinance an asset; certain long-term assets may be sold to meet liquidity needs.
7.8 CURRENCY RISK
At December 31, 2006 At December 31, 2007 Classification by original currency EUR Other EU USD Other Total EUR Other EU USD Other Total (EUR millions) currencies currencies currencies currencies
Total assets 182,415 19,275 90,685 11,494 303,869 239,271 21,779 53,390 30,984 345,424 Total liabilities and shareholders’ equity 184,951 17,912 89,750 11,256 303,869 235,914 18,538 69,689 21,283 345,424 NET BALANCE SHEET POSITION (2,536) 1,363 935 238 0 3,357 3,241 (16,299) 9,701 0
178 DEXIA CREDIT LOCAL / 2007 Annual Report CONS OLIDATED FINANCIAL STATEMENTS Notes to the consolidated financial statements 4
7.9 RISK WEIGHTED ASSETS
(EUR millions) 2006 2007
Counterparties assigned a risk weighting of 20% 32,325 35,544
Counterparties assigned a risk weighting of 50% 1,820 3,443
Counterparties assigned a risk weighting of 100% 23,940 32,830
Trading portfolio 4,299 3,233
TOTAL 62,384 75,050
( 8. ANALYSIS BY GEOGRAPHIC REGION AND BY LINE OF BUSINESS
8.1 ANALYSIS BY GEOGRAPHIC REGION
Eurozone Rest of Europe United States Rest of world Total (countries employing (EUR millions) the euro)
At December 31, 2006
Net banking income 1,270 74 772 25 2,141 OLIDATED OLIDATED Income (losses) from associates 57 0 0 0 57 CONS FINANCIAL STATEMENTS Income before income taxes 891 58 578 12 1,539
TOTAL ASSETS 247,307 1,905 53,976 681 303,869
Of which, investments in associates 417 0 0 0 417
At December 31, 2007
Net banking income 1,266 112 374 48 1,800
Income (losses) from associates 61 0 0 0 61
Income before income taxes 876 90 164 24 1,154
TOTAL ASSETS 279,367 1,032 59,341 5,683 345,423
Of which, investments in associates 459 0 0 0 459
The geographic region is assigned on the basis of the country in which the company that engaged in the transaction is located, and not the country in which the counterparty is located.
2007 Annual Report / DEXIA CREDIT LOCAL 179 CONS OLIDATED FINANCIAL STATEMENTS 4 Notes to the consolidated financial statements
8.2 ANALYSIS BY LINE OF BUSINESS
Public /Project Personal Treasury and Other Total Finance Financial Financial and Credit Services M arkets (EUR millions) Enhancement
At December 31, 2006
Net banking income 1,809 35 201 96 2,141
Income (losses) from associates 21 26 0 10 57
Income before income taxes 1,284 40 152 63 1,539
Subtotal assets (1)(3) 207,605 507 77,983 616 286,711
Of which, investments in associates 175 242 0 0 417
Subtotal liabilities (2)(3) 144,751 594 117,529 2 262,876
At December 31, 2007
Net banking income 1,455 35 90 220 1,800
Income (losses) from associates 21 29 0 11 61
Income before income taxes 868 41 42 203 1,154
Subtotal assets (1) 240,088 643 81,925 738 323,394
Of which, investments in associates 169 254 0 36 459
Subtotal liabilities (2) 157,479 741 147,025 1 305,246 (1) Includes interbank loans and advances, customer loans and advances, loans and securities held for trading, financial assets available for sale, investments in associates, and other assets specific to insurance companies. (2) Includes interbank loans and deposits, customer deposits, debt securities, and technical provisions of insurance companies. (3) The 2006 figures have been revised.
Various costs and income are retroceded or transferred at market conditions in the management accounts between the various lines of business and, more particularly, between the commercial lines of products, financial markets and new lending and service centers. The net results of each line of products also include:
• payments of commercial transformation margins, including the costs of managing such transformations and the capital allocated to this activity on the basis of the level of outstanding medium-and long-term loans;
• interest on capital at risk: capital at risk is allocated to the commercial lines of products for internal purposes, and return on capital at risk is used to measure the performance of each commercial line;
• the cost of funding.
180 DEXIA CREDIT LOCAL / 2007 Annual Report CONS OLIDATED FINANCIAL STATEMENTS Statutory Auditors’ report on the consolidated financial statements 4
Statutory Auditors’ report on the consolidated financial statements
This is a free translation into English of the Statutory Auditors’ report issued in the French language and is provided solely for the convenience of English-speaking readers. This Statutory Auditors’ report includes information specifically required by French law and this is presented after the Opinion on the financial statements. This information includes an explanatory paragraph discussing the auditors’ assessment of certain significant accounting matters. These assessments were made for the purpose of issuing an opinion on the financial statements taken as a whole and not to provide separate assurance on individual account captions or on information taken outside of the financial statements. The report also includes information relating to the specific verification of information in the management report. This report together with the Statutory Auditors’ report addressing financial and accounting information in the Chairman’s report on internal control, should be read in conjunction with French law and professional auditing standards applicable in France.
To the shareholders,
In accordance with the assignment entrusted to us by your Shareholders’ Meeting, we hereby report to you on the audit of the accompanying consolidated financial statements of Dexia Credit Local for the year ended December 31, 2007.
The consolidated financial statements have been approved by the Board of Directors. Our responsibility is to express an opinion on these financial statements based on our audit.
1. OPINION ON THE CONSOLIDATED FINANCIAL STATEMENTS OLIDATED OLIDATED We performed our audit in accordance with professional standards applicable in France. Those standards require that we plan and perform the
audit so as to obtain reasonable assurance about whether the financial statements are free from any material misstatement. An audit includes CONS FINANCIAL STATEMENTS 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 audit provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements present fairly the assets and liabilities of the consolidated group of companies at December 31, 2007 and the results of its operations and its cash flows for the year then ended in accordance with the International Financial Reporting Standards (IFRS) adopted by the European Union.
2. BASIS OF OUR OPINION
In accordance with the provisions of Article L. 823-9 of the French Commercial Code regarding the basis of our opinion, we call to your attention the following points.
The provisioning of credit risks and valuation of financial instruments represent significant areas of accounting estimates in your banking activity:
• as mentioned in n ote 1.3.c of the notes to the consolidated financial statements, your Company establishes provisions to cover the credit risks inherent to its activities. We examined the system used to control monitoring of credit risks, impairment procedures, evaluation of the risk of non-collection and the level of credit risk cover provided by specific and general provisions;
• your Company uses internal models and methods to value financial instruments that are not traded on active markets, to estimate certain provisions, and to assess the appropriateness of the use of hedge accounting (notably as concerns financial assets and liabilities at fair value through profit and loss, assets available for sale, and financial instruments recognized at amortized cost whose fair value is presented in note 7.1 of the notes to the consolidated financial statements). We examined the control system used to verify the models and to establish the parameters used.
2007 Annual Report / DEXIA CREDIT LOCAL 181 CONS OLIDATED FINANCIAL STATEMENTS 4 Statutory Auditors’ report on the consolidated financial statements
Note 1.1.d presents the impact of the financial crisis, which prompted your Company to establish a process for evaluating its direct and indirect exposure to the subprime market. We examined the internal controls over the identification and measurement of these exposures, along with the appropriateness of the information provided.
Your Company also established provisions for its employee benefits commitments (notes 1.3 .c and 3.8 of the notes to the consolidated financial statements). We examined the method used to evaluate these commitments and the assumptions and parameters used.
We evaluated the reasonableness of these estimates.
The assessments we made of these items register within the framework of our audit approach which relates to the consolidated financial statements as a whole and contributed to the unqualified opinion we expressed in the first part of this report.
3. SPECIFIC VERIFICATIONS
In accordance with professional standards applicable in France, we also examined the information provided in the Group management report. We have no comments to make regarding its accuracy and consistency with the consolidated financial statements.
Paris - April 2, 2008
Statutory Auditors
CADERAS MARTIN MAZARS & GUERARD Daniel Butelot Olivier Avril Guillaume Potel Anne Veaute Partner Partner Partner Partner
182 DEXIA CREDIT LOCAL / 2007 Annual Report FINANCIAL STATEMENTS Summary 5
5 Financial statements
Balance sheet 184 Notes to the fi nancial statements 188
Assets ...... 184 1. Accounting policies and valuation methods ...... 188
Liabilities and shareholders’ equity ...... 185 2. Notes on the assets ...... 195
3. Notes on the liabilities ...... 213
4. Notes on off-balance sheet items ...... 225 Off-balance sheet items 186 5. Notes on the income statement ...... 231
6. Notes on the long-term equity investments ...... 238
Income statement 187 7. Dexia Credit Local securities portfolios ...... 240
Statutory Auditors’ general report 243
20072007 ANNUAL Annual Report REPORT / DEXIA/ DEXIA CREDIT CREDIT LOCALLOCAL 183 FINANCIAL STATEMENTS 5 Balance sheet
Balance sheet
( ASSETS
Note At At At (EUR millions) December 31, 2005 December 31, 2006 December 31, 2007
I. Cash, central banks and postal checking accounts 2.0 512 949 685
II. Government securities 2.1 6,210 4,678 3,607
III. Interbank loans and advances 28,013 26,385 36,248
A. Demand 6,021 4,404 8,744
B. Term 2.2 21,992 21,981 27,504
IV. Customer loans 2.3 29,716 34,628 41,757
V. Bonds and other fixed income securities 2.4 49,192 58,141 109,818
A. Public issuers 11,072 17,117 40,977
B. Other issuers 38,120 41,024 68,841
VI. Equities and other variable income securities 2.5 230 278 280
VII. Long-term equity investments 2.6 4,925 5,042 5,151
VIII. Intangible assets 2.8 49 48 56
IX. Tangible fixed assets 2.9 13 17 20
X. Unpaid capital 000
XI. Uncalled capital 000
XII. Treasury stock 000
XIII. Other assets 2.11 5,807 5,038 4,182
XIV. Accruals and other assets 2.10 6,859 8,433 11,059
TOTAL ASSETS 131,526 143,637 212,863
184 DEXIA CREDIT LOCAL / 2007 Annual Report FINANCIAL STATEMENTS Balance sheet 5
( LIABILITIES AND SHAREHOLDERS’ EQUITY
Note At At At (EUR millions) December 31, 2005 December 31, 2006 December 31, 2007
I. Interbank borrowings and deposits 57,629 70,927 93,995
A. Demand 4,272 8,497 1,044
B. Term 3.1 53,357 62,430 92,951
II. Customer deposits 3.2 4,642 5,322 4,551
A. Savings deposits 0 0 0
B. Other deposits 4,642 5,322 4,551
1. Demand 0500
2. Term 4,642 5,272 4,551
III. Debt securities 3.3 51,746 48,627 57,269
A. Notes and bonds 7,321 7,036 9,734
B. Other 44,425 41,591 47,535
IV. Other liabilities 3.13 497 615 36,623
A. Other 497 615 36,623
B. Insurance activity 0 0 0
V. Accruals and other liabilities 3.4 7,552 8,875 10,922
VI. Provisions and reserves 842 846 978
A. Provisions for risks and charges 3.5 375 369 462
B. Deferred taxes 3.6 146 137 174 FINANCIAL STATEMENTS
C. Regulated reserves 3.7 321 340 342
VII. General banking risks reserve 3.8 478 478 0
VIII. Subordinated debt 3.9 5,056 4,763 5,373
SHAREHOLDERS’ EQUITY 3.11 3,084 3,184 3,152
IX. Capital stock 3.11 1,327 1,327 1,327
X. Additional paid-in capital 3.11 1,087 1,087 1,087
XI. Reserves and retained earnings 3.11 245 297 419
XVII. Net income for the year 3.11 425 473 319
XIII. Interim dividends 3.11 000
TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY 131,526 143,637 212,863
2007 Annual Report / DEXIA CREDIT LOCAL 185 FINANCIAL STATEMENTS 5 Off-balance sheet items
Off-balance sheet items
Note At At At (EUR millions) December 31, 2005 December 31, 2006 December 31, 2007
I. Contingent liabilities 4.1 56,639 60,283 66,357
II. Financing commitments 4.2 17,231 18,689 22,066
III. Assets held on behalf of third parties 4.3 000
IV. Amounts due on shares in subsidiaries 0 0 0
V. Commitments received 4.7 11,881 10,785 21,402
A. Financing commitments 4,999 2,390 12,104
B. Guarantees 6,882 8,395 9,298
C. Commitments received by insurance companies 0 0 0 VI. Commitments related to foreign currency transactions 4.9 98,914 123,415 107,460
A. Amounts to be received 49,142 61,411 53,467
B. Amounts to be delivered 49,772 62,004 53,993
VII. Commitments related to derivatives 4.4 590,423 665,119 831,549
VIII. Securities transactions 4.8 1,452 1,380 798
IX. Other commitments given 9,586 10,151 59,401
A. Other 9,586 10,151 59,401
B. Insurance activity 000
186 DEXIA CREDIT LOCAL / 2007 Annual Report FINANCIAL STATEMENTS Income statement 5
Income statement
Note At At At (EUR millions) December 31, 2005 December 31, 2006 December 31, 2007
I Interest income 14,449 19,592 26,508
A. Interbank transactions 959 1,174 1,848
B. Customer loans 5.0 11,788 15,194 20,619
C. Bonds and other fixed income securities 5.0 1,702 3,224 4,041
II Interest expense (14,297) (19,468) (26,761 )
A. Interbank transactions (1,669) (2,672) (4,186 )
B. Customer deposits (11,006) (13,901) (19,030 )
C. Bonds and other fixed income securities 5.0 (1,622) (2,895) (3,545)
III Income from variable income securities 5.1 143 191 213
Equities and other variable income securities 1 2 0
Long-term equity investments (142) 189 213
IV Commission income 5.2 11 13 17
V Commission expense 5.2 (10) (12) (18 ) VI A. Net gains (losses) on held-for- trading port folio transactions 5.3 330 519 778 B. Net gains (losses) on portfolio transactions available for sale 5.3 89 (28) (750)
VII Other banking income 5.7 212
X Other banking expense 5.7 (1) (3) (1)
NET BANKING INCOME 716 805 (12)
VIII General operating expenses 5.4 (198) (229) (248)
IX Depreciation and amortization (26) (27) (25) FINANCIAL STATEMENTS GROSS OPERATING INCOME 492 549 (285)
XI Cost of risk 5.5 (24) (18) (13)
OPERATING INCOME AFTER COST OF RISK 468 531 (298)
XII Net gains (losses) on long-term investments 5.6 22 0 32
INCOME BEFORE INCOME TAX 490 531 (266)
XV Non-recurring items 5.8 000
XVII Corporate income tax 5.9 (65) (58) 107
XIII Net allocation to general banking risks reserve 0 0 478
NET INCOME 425 473 319
Basic earnings per share 4.88 5.43 3.66
Diluted earnings per share 4.88 5.43 3.66
2007 Annual Report / DEXIA CREDIT LOCAL 187 FINANCIAL STATEMENTS 5 Notes to the financial statements
Notes to the financial statements
( 1. ACCOUNTING POLICIES AND VALUATION METHODS
1.1 SIGNIFICANT EVENTS − the available-for-sale portfolio was written down by EUR 695 million. Highlights of 2007: Medium- and long-term liquidity ratios were tighter than in the • In 2007, the Dexia Credit Local London branch acquired Bradford & past due to the current crisis of confidence. This tightening of Bingley’s EUR 3.6 billion portfolio of loans to public housing finance liquidity conditions led to the implementation of a more detailed companies in the United Kingdom, paying the face value of the oversight of the various ratios and constraints expressed in all of loans. At December 31, 2007, EUR 1.9 billion of this portfolio is the Dexia Credit Local entities, using the organization set in place recognized among assets, and EUR 1.7 billion is recognized in the by the Dexia Group. form of financing commitments;
• Dexia Credit Local generated a EUR 15 million gain on the shares it held in CLF Patrimoniale, a property management company. The 1.2 ACCOUNTING POLICIES AND VALUATION gain was generated by the merger of CLF Patrimoniale into Dexia METHODS USED TO PRESENT THE FINANCIAL Epargne Pension, of which Dexia Credit Local now holds 25.3% STATEMENTS of the capital; The balance sheet, income statement and off-balance sheet are • In accordance with French Banking Regulations Committee (CRB) presented in accordance with the standards applicable to banks. Standard 90-02, a reserve fund for general banking risks (FRBG) was created on January 1, 1990 by transferring EUR 478 million They have been prepared in accordance with the principles and from retained earnings. This fund was taken back through profit standards contained in European Council Directives governing the during the year. financial statements of banking institutions, and in accordance with French Accounting Regulations Committee (CRC) standards 99-04 • In 2007, risk management and monitoring were greatly influenced and 00-03, as modified. by the financial crisis that began at the end of the first half of the year in the United States, the so-called subprime mortgage crisis. a. Changes in accounting policies and valuation The crisis had only a slight impact on Dexia Credit Local, given the methods Company’s traditionally prudent risk profile. No changes have been made to the accounting policies and valuation This blunted impact of the crisis was attributable essentially to methods applied to the annual financial statements. the quality of the loan and bond portfolios held by Dexia Credit Local: b. Measurement of items in the balance sheet, − 67% of Dexia Credit Local’s total exposure is to the public sector; off-balance sheet, income statement and summary financial statements − 85% of the Company’s portfolios are very highly rated (investment grade or higher); VALUATION METHODS AND PRESENTATION − exposure to collateralized debt obligations (CDO) and other asset- The financial statements have been prepared in accordance with the backed securities (ABS) was extremely limited, and Dexia Credit rules of prudence and fundamental accounting principles: Local’s exposures were all hedged by credit default swaps (CDS) • business continuity; with well-rated banks. • segregation of accounting periods; Dexia Credit Local’s cost of risk remained moderate (EUR 13 million) due primarily the good quality and low non-payment risk of its • consistency of methods. portfolio. The crisis did, however, lead the Company to recognize adjustments in line with those of the market, due to the widening Customer loans of spreads: Any loans granted but not yet disbursed are shown as off-balance sheet items. − the value of the held-for-trading portfolio declined by EUR 143 million;
188 DEXIA CREDIT LOCAL / 2007 Annual Report FINANCIAL STATEMENTS Notes to the financial statements 5
Current and accrued interest on customer loans is recognized in In accordance with French Banking Regulations Committee (CRB) banking income on an accrual basis, as is the interest on missed Standard 2005-01 concerning early application as from January 1, payments. Interest on non-performing loans under collection and 2005 and modifying CRB Standard 90-01, they are analyzed in the doubtful non-performing loans reported in net banking income notes to the financial statements under “Securities held for trading,” is neutralized by the recognition of an equivalent amount of “Securities available for sale” and “Securities held to maturity.” impairment. Securities held for trading All related commissions received are recorded directly to income. Securities held for trading are securities traded on a liquid market that For both accounting and tax purposes, all early repayment penalties are purchased or sold with the intention of being sold or repurchased on loans recognized up to December 31, 2004 will continue to be within a short period of time. The Dexia Credit Local held for trading amortized over the remaining life of the related loans in proportion portfolio consists primarily of adjustable-rate bonds. Securities held to the outstanding interest that would have had to be paid. The for trading are taken to the balance sheet at cost, including accrued balance of outstanding penalties to be amortized is classified under interest and excluding acquisition expenses. At each period end, they deferred income. are marked to market and the resulting unrealized gain or loss is taken to the income statement. Since January 1, 2005, all early repayment penalties on loans are taken into income at the repayment date. Securities available for sale These consist of securities that are not recognized as securities held Customer loans are stated in the balance sheet net of allowances for for trading, securities held to maturity, portfolio activity securities, possible losses. They are broken out into four separate categories: other long-term investments, investments in associates or investments performing loans, restructured performing loans, non-performing in related parties. loans under collection and doubtful non-performing loans. The portfolio constitutes a liquidity reserve, and consists primarily of Loans that have been restructured under non-market conditions are fixed – and adjustable – rate bonds but also includes some variable- included in the second category through their final maturity. They income securities. Fixed-rate bonds are generally hedged against are marked down for impairment in an amount equal to the present interest rate risk by means of interest rate and/or currency swaps value of the future interest payments gap. This mark-down is taken representing specific, allocated hedges (micro hedges). The use of this immediately into expense under the cost of risk, and is reversed into technique has the effect of creating synthetic adjustable or variable- income on an accrual basis over the remaining term of the loan. rate assets that are immunized against interest rate risk. Non-performing loans are considered to be doubtful as soon as their Securities available for sale are taken to the balance sheet at cost, repayment becomes highly uncertain and it becomes apparent that excluding acquisition expenses and accrued interest, which are they will eventually be written off. recorded separately. Any premiums or discounts, corresponding to Non-performing loans are downgraded from “under collection” to the difference between the acquisition cost and redemption price, are “doubtful” either one year at latest after they were initially classified recorded in the balance sheet and amortized to the income statement as non-performing or immediately if the loan had previously been on a quasi yield-to-maturity basis over the remaining life of the classified as a restructured performing loan. securities. This method is applied to all securities in the portfolio.
Loans are classified as non-performing when there is a contingent or At each period end, in keeping with the prudence principle, an certain risk of total or partial non-payment. Non-performing loans are allowance is booked for any impairment in value, determined after defined as follows: local government loans with installments that are taking into account any unrealized hedging gains. If the impairment more than nine months overdue; real estate loans with installments in the value of the securities exceeds the related unrealized hedging FINANCIAL STATEMENTS that are more than six months overdue; loans with installments that gain, an allowance corresponding to the difference is deducted from are more than three months overdue. Loans to borrowers that have the securities’ carrying value. A reserve is booked on the liabilities side filed for bankruptcy are classified as loans under collection, this of the balance sheet for any unrealized hedging losses that are not category being analyzed in the notes to the financial statements in offset by an increase in the market value of the hedged securities. the same way as non-performing loans. Gains and losses on disposals of marketable securities available for Impairment on non-performing loans is computed on the basis of the sale are calculated using the FIFO method. estimated loss exposure. Interest is written down fully. Any securities available for sale transferred to the held- to- maturity Securities transactions portfolio are transferred at cost. Securities held by the Dexia Credit Local Group are recorded on the Any allowances for impairment in value that are no longer required assets side of the balance sheet under the following headings: are released to the income statement over the remaining life of the securities. • government securities eligible for central bank refinancing;
• bonds and other fixed-income securities;
• equities and other variable-income securities.
2007 Annual Report / DEXIA CREDIT LOCAL 189 FINANCIAL STATEMENTS 5 Notes to the financial statements
Securities held to maturity Sale and repurchase agreements and lending of securities Securities held to maturity consists of fixed-income securities Securities may be sold under repurchase agreements, lent or borrowed with fixed maturities that have been acquired or transferred from for the purpose of reducing Dexia Credit Local’s short-term liquidity “securities available for sale” with the explicit intention of being cost. The securities may or may not be physically delivered to the held to maturity. buyer.
They are either financed with back-to-back resources or hedged in When securities are sold under a repurchase agreement, a debt order to neutralize the effect of interest rate fluctuations on earnings. corresponding to the value of the repurchase commitment is Hedging instruments consist solely of interest rate and/or currency recognized in the balance sheet. The interest paid on the funds swaps. received is recognized in the income statement on an accrual basis.
The use of these specific, allocated hedges has the effect of creating Gains and losses on repurchase agreements are calculated using the synthetic adjustable – or variable-rate assets that are immunized same method as for outright sales, depending on the portfolio from against interest rate risk. which the securities were taken.
Securities held to maturity are stated at cost, excluding acquisition Transactions involving the simultaneous cash sale and forward expenses and accrued interest at the date of acquisition, which purchase of the same securities are accounted for in the same way as are recorded separately. Premiums and discounts, representing the repurchase agreements. The cash held in connection with repurchase difference between the cost of the securities, excluding accrued agreements is periodically adjusted to take account of changes in interest, and the redemption price, are amortized on a yie ld-to- the market value of the securities during the term of the contract, maturity basis over the remaining life of the securities. so as to reduce the credit risk incurred by the buyer as a result of any impairment in value of the collateral represented by the securities. Unrealized gains are not recognized and no allowances are booked for unrealized losses at the balance sheet date except in cases where: Loaned securities are reclassified as receivables for an amount equal to the carrying value of the loaned securities. At each balance sheet date, • the ability of the issuer to honor its repayment obligations appears the receivable is remeasured using the valuation principles applicable uncertain; or to the securities that have been loaned. • it is probable that the securities will not be held to maturity due to Borrowed securities are recorded as securities held for trading, with a change in circumstances. a contra entry to a liability to the lender. At each balance sheet Should a material proportion of all securities held to maturity be date, the borrowed securities and the corresponding liability are sold or transferred to another portfolio category, Dexia Credit Local remeasured using the valuation principles applicable to securities would no longer be authorized to classify any securities previously held for trading. or subsequently acquired as held to maturity until the third following full fiscal year. All previously acquired securities held to maturity are Long-term investments reclassified as “Securities available for sale” at their carrying amount I nvestments in associates at the same time that the other securities are reclassified. Investments in associates represent investments that are intended to: Portfolio securities This category includes variable-income securities purchased on a • b e held on a long-term basis to exercise influence or control over regular basis with the intention of selling them at a profit in the the issuer; or medium term. At the time of purchase, the Company has no intention • u nderpin banking relations with the company concerned. of investing in the long-term development of the issuer’s business or of actively participating in its day-to-day management. They are stated at cost excluding any related acquisition expenses. At the balance sheet date, these shares are measured at the lower Portfolio securities are taken to the balance sheet at cost excluding of cost or value in use, i.e. the fair value based on the utility of the acquisition expenses. At each period end, they are stated at the lower investment to Dexia Credit Local. of historical cost and fair value to the Group. Fair value is determined based on a range of criteria, including the issuer’s outlook and the In the case of companies whose net assets are at least equal to their length of the estimated holding period. For listed securities, fair value value when the last shares were acquired, fair value to the Group is the average market price determined over a sufficiently long period is considered as being at least equal to the historical cost of the in view of the estimated holding period to eliminate the impact of investment. The same applies when any impairment in value can any wide swings in market prices. At each period end, and for each reasonably be expected to reverse in the current year. In all other line of securities, if the fair value represents less than book value, cases, a range of criteria are applied to determine the possible need an allowance is booked for the unrealized loss. For the purpose of to record an allowance for impairment in value in accordance with determining the allowance, unrealized losses are not netted against the rules of prudence. unrealized gains, which are not recognized. In accordance with CRB Standard 89-01, differences arising on Gains and losses on disposals of portfolio securities are determined translation at the year-end rate of investments denominated in foreign using the FIFO method. currencies that are financed in euro are taken to shareholders’ equity,
190 DEXIA CREDIT LOCAL / 2007 Annual Report FINANCIAL STATEMENTS Notes to the financial statements 5
under “Cumulative translation adjustments,” and not to the income expense” on an accrual basis. Prepaid interest on commercial paper statement. is recorded under “Accruals and other assets” on the transaction date and amortized over the residual life of the paper. In the event of disposal of part of the Group’s interest in an associate, the resulting gain or loss is determined using the FIFO method. Bond d iscounts and premiums, redemption premiums Bond discounts and premiums and redemption premiums are Other long-term investments amortized on a straight-line basis over the remaining life of the bonds This category comprises variable-income securities acquired with the from the date of acquisition. They are recorded in the consolidated aim of developing long-term business ties with the issuer, although balance sheet under the relevant liabilities accounts. Amortization is Dexia Credit Local is not in a position to influence the management taken to the income statement under “Interest expense on bonds of the issuer due to the small proportion of voting rights held. Other and other fixed-income securities.” long-term securities are taken to the balance sheet at cost, excluding acquisition expenses. At each period end, they are stated at the lower Other liabilities of historical cost and value in use. The value in use of other long-term This heading includes mainly collateral (guarantee deposits) payable securities corresponds to the price that the Company would be willing under swap transactions, which is recognized at its carrying to pay to acquire them, taking into account the purpose for which amount. they are acquired, irrespective of whether or not the securities are listed. Gains and losses on disposals of other long-term securities are Provisions determined using the FIFO method. Provisions are set aside to cover various risks, losses and expenses. Collective provisions on customer loans are included in this heading. Tangible and intangible fixed assets These provisions cover the risk of impairment in the absence of any Those assets are stated at cost and depreciated or amortized using the signs of specific impairment but when there are objective indications straight-line method over their estimated useful lives, unless otherwise that losses will probably be incurred in certain sectors of the portfolio stated, as follows: furniture and fixtures are depreciated over ten years or on other financing commitments underway at the balance sheet and office equipment generally over five years. Software is amortized date. These potential losses are estimated on the basis of the historical over three to five years. loss record and trends specific to each sector, while taking account of the general economic environment in which the borrower operates. Other assets To calculate these provisions , Dexia Credit Local has created a credit This heading includes mainly collateral (guarantee deposits) receivable risk model based on an approach including probabilities of default under swap transactions, which is recognized at its carrying and of losses given default. amount. Regulatory tax provisions are set aside in the financial statements Debt securities for medium- and long-term credits and accelerated depreciation. Debt securities include bonds and money market instruments. Allowances against derivatives are booked in accordance with the rules specified below in the paragraph concerning derivatives. Bonds Bonds are recorded at face value. The related accrued interest Retirement and other post-employment benefits are calculated in is computed at contractual rates and recorded under interest accordance with the local regulations applicable in each country and expense. are recognized as expenses for the year. These commitments are recalculated each year using an actuarial method and recognized Zero-coupon bonds are recorded at their issue price. At each period under reserves. The amounts concerned are not material, and are
end, accrued interest for the period, computed on the basis of the FINANCIAL STATEMENTS presented in note 5.4.b. yield to maturity announced at the time of issue, is charged to the income statement as expenses on debt securities and an equivalent These provisions also include provisions for deferred taxes. amount is added to the debt on the liabilities side of the balance sheet through to the maturity date so as to gradually increase the carrying Subordinated debt amount of the debt to the amount repayable at maturity. Subordinated redeemable notes issued by Dexia Credit Local are considered as Tier 2 capital for the purpose of calculating the European Bond issuance costs are deferred and amortized on a straight-line capital adequacy ratio, in accordance with CRB Standard 90-02 basis over the life of the bonds. Since January 1, 2005, premiums paid (Article 4-d). or received on bonds acquired by Dexia Credit Local are recognized directly through profit or loss. Derivatives Dexia Credit Local uses derivatives in the normal course of business, Bonds denominated in foreign currencies are accounted for in the mainly as hedges against interest rate and currency risks and, to a same way as foreign currency transactions. lesser extent, in order to take advantage of favorable interest rate and Money market instruments currency trends. The instruments used include interest rate and/or Money market instruments are stated at face value. Interest on currency swaps, FRAs, caps, floors, interest rate options, futures, medium-term notes, BMTN (domestic short- or medium-term notes) credit default swaps and credit spread options. and negotiable certificates of deposit is recorded under “Interest
2007 Annual Report / DEXIA CREDIT LOCAL 191 FINANCIAL STATEMENTS 5 Notes to the financial statements
Derivatives are valued and accounted for in accordance with CRB that exceeds gains not yet recorded in income on the symmetric Standards 90-15 and 92-04 based on the initial purpose of the position. transaction. The four transaction categories are specific hedges, In both cases, the inventory of deferred equalization payments is hedges of overall exposures, isolated open positions and specialist recorded in accrued assets or liabilities. portfolio management.
For transactions in all categories, the commitment or notional amount Macro-hedging is recorded as an off-balance sheet commitment over the life of the This category includes contracts that are intended to hedge and contract, i.e. from the date of signing of the contract to its maturity manage Dexia Credit Local’s overall exposure to interest rate risks or the start date of the reference period in the case of forward rate on assets, liabilities and off-balance sheet items, other than micro- agreements. The amount of the commitment is adjusted to reflect any hedges, contracts representing isolated open positions and contracts changes in notional amounts, so as to show at all times the maximum acquired for specialist portfolio management purposes. current or future commitment. Each contract is recorded separately Macro-hedges have the effect of reducing Dexia Credit Local’s overall and is classified in one of the above four categories. The accounting exposure to interest rate risks on its business transactions. treatment of gains and losses depends on the underlying purpose of the transaction, as determined by its category. Expenses and income on macro-hedges are recorded in the income statement on an accrual basis under “Interest income on macro- Upfront cash payments on hedging transactions are amortized hedges” and “Interest expense on macro-hedges.” The contra entry over the remaining life of the instrument. All transactions are now is recorded in the balance sheet in an accruals account until such time amortized on a quasi-yield-to-maturity basis. as the funds are collected or disbursed.
Hedging transactions Equalization payments on unwound macro-hedges are recognized Micro-hedging in the following manners: Micro-hedges are used to cover interest rate risks on a specific item • equalization payments on swaps unwound before January 1, 2005 or group of items with similar characteristics, identified at the outset. are amortized when the unwinding of the position is not linked to The criteria applied to determine whether transactions qualify as a prior change in the overall interest rate risk to be hedged, or are micro-hedges are as follows: taken into income symmetrically to those components that resulted • the hedged item must contribute to the bank’s overall exposure to in the modification of said risk; fluctuations in prices or interest rates; • as from January 1, 2005, the equalization payment is recognized • the contracts must be purchased or sold for the specific purpose through profit or loss. of reducing the bank’s exposure to fluctuations in prices or interest Position management rates in respect of the hedged item and are identified as such at • Dexia Credit Local conducts three types of position management the outset. transactions: Instruments meeting this definition consist primarily of swaps acquired − specialist held-for- trading portfolio management; as micro-hedges of primary issues, bonds held in the “securities available for sale” and “securities held to maturity” portfolios and − position-taking transactions; customer loans. The hedging instruments have the effect of creating − credit derivatives transactions. synthetic variable- or adjustable-rate assets or liabilities which are immunized against interest rate risk. Specialist held-for- trading portfolio management Expenses and income on micro-hedges are recorded in the income This activity covers transactions with local governments and their statement in the same way as the expenses and income on the hedged symmetrical transactions entered into with banks. Its purpose is the item or group of similar items. specialist management of a held for trading portfolio comprising specific interest rate swaps and other interest rate-based derivatives. In cases where the hedged item is repaid early (or even disposed of), The portfolio is actively managed based on sensitivity criteria, within the following accounting treatment is applied to the equalization predefined interest rate exposure limits set internally in accordance payment received or paid due to the early unwinding of the hedging with CRB Standard 97-02, as modified. Positions are centralized and instrument: results calculated on a daily basis.
• if the hedge was unwound before January 1, 2005 the equalization Gains and losses are recognized on a mark-to-market basis, as payment is spread over the remaining life of the cancelled follows: transaction; • total future cash flows are marked to market on a monthly basis • if the hedge was unwound after January 1, 2005 the equalization and the resulting unrealized gain or loss is taken to the income payment is recognized in profit or loss during the period in which statement; the hedge was unwound. However, the equalization payment paid by Dexia Credit Local is charged against income only for the portion • all payments made or received are recorded directly in the income statement.
192 DEXIA CREDIT LOCAL / 2007 Annual Report FINANCIAL STATEMENTS Notes to the financial statements 5
Mark-to-market gains and losses are calculated on derivatives using Currency instruments in both categories are recorded as off-balance the replacement cost method. This method consists of taking each sheet commitments over the life of the contract, i.e. from the date of individual contract and simulating a new contract which, at the signing of the contract to the start date of the reference period. balance sheet date, closes the open position created by the original Each contract is recorded separately and is classified in one of the contract. The differences in cash flows between the actual and categories defined by the regulation. The accounting treatment of simulated contracts are then discounted. income depends on the category and reflects the substance of the The portfolio valuation takes into account portfolio management transaction. costs and credit risks. Hedging transactions For purposes of this activity, the Dexia Credit Local New York branch The difference between the forward rate and the spot rate – the centrally manages the risks generated by the portfolios. The transfer contango or backwardation – is recognized in the income statement of risk is performed through internal contracts. These contracts on an accrual basis. The position is initially recorded at the spot rate are put in place, recorded and valued in accordance with CRB and its value is gradually adjusted over the life of the contract to take Standard 90-15. into account the contango or backwardation.
Position-taking transactions Position-management transactions Derivatives held in the position-taking portfolio are intended to keep These represent forward currency transactions that do not isolated positions open in order to take advantage of any favorable meet the criteria for qualification as hedged forward currency interest rate movements. The portfolio also includes all contracts that transactions as defined in CRB Standard 89-01, in that they do not do not fulfill the criteria for classification in the other categories. relate simultaneously to loans and borrowings or to spot currency Gains and losses are recognized in accordance with the prudence transactions. Such transactions are entered into with the aim of taking principle as follows: advantage of exchange rate movements.
• provisions are booked for any unrealized losses calculated as a Gains and losses on position-management transactions are determined result of periodic mark-to-market valuations; unrealized gains are and accounted for by converting movements in the currency accounts not recognized in the income statement; into euros at the forward rate applicable to the remaining terms of the contracts. • interest and equalization payments are recognized in the income statement on an accrual basis. Foreign currency transactions In accordance with CRB Standard 89-01, as amended by Credit derivatives Standard 90-01, Dexia Credit Local recognizes foreign currency Dexia Credit Local acquires credit risks primarily when the Group is transactions in the currencies concerned. the end investor in the underlying bonds. These transactions therefore represent credit substitutes. They are recorded as off-balance sheet Specific foreign currency position accounts are maintained in commitments under “isolated open positions” and are periodically each currency showing the position in that currency and the EUR marked-to-market. equivalent.
Premiums received on credit derivatives are accrued on a straight-line At each period end, the difference between the value of the foreign basis over the life of the derivatives. currency position account translated into EUR at the year-end spot rate and the value of the foreign currency position in the euro equivalent These contracts are periodically remeasured. Unrealized losses account is taken to the income statement. Differences arising on the are recorded even when there is no established default risk, while translation into EUR of investments in foreign currency-denominated FINANCIAL STATEMENTS unrealized gains are never recognized. non-consolidated companies financed in euros are recorded in shareholders’ equity under “Cumulative translation adjustments.” Currency instruments Dexia Credit Local uses currency swaps and forward purchases and Differences arising on the translation into EUR of securities held sales of foreign currencies to hedge its currency risks. Currency swaps to maturity denominated and financed in foreign currencies are are used to match funding currencies with the currencies of the assets recognized on a symmetrical basis with the differences arising on financed. Forward purchases and sales of foreign currencies are used translation of the related financing. to offset or reduce the impact of exchange rate fluctuations on specific The balance sheets of foreign consolidated branches of Dexia Credit items or groups of similar items. A limited number of unhedged Local are translated into EUR at the period-end exchange rate, with foreign exchange positions are also established in connection with the exception of shareholders’ equity, which is translated at the Dexia Credit Local’s position-taking activities. historical rate. Income statement items are translated at the average In accordance with CRB Standard 89-01, currency instruments are rate for the period. Differences arising on translation are recorded as classified as either hedged transactions or position-management a separate component of shareholders’ equity under “Cumulative transactions. This categorization determines the applicable accounting translation adjustments.” treatment for the related gains and losses.
2007 Annual Report / DEXIA CREDIT LOCAL 193 FINANCIAL STATEMENTS 5 Notes to the financial statements
Cost of risk Corporate income tax The cost of risk includes movements in allowances for losses on The standard French corporate income tax rate for both current and interbank and customer loans, fixed-income securities held to maturity deferred taxes is 34.43%. (in the case of recognized risk of default by the issuer) and off-balance The income of foreign subsidiaries is taxed at the rates prevailing in sheet items (other than off-balance sheet derivatives), as well as loan the countries in which they operate. losses, recoveries of loans written off in prior years, and movements in other allowances and reserves for credit risks and contingencies Tax consolidation relating to these items. Dexia Credit Local has adopted the tax consolidation method.
Non-recurring items The Dexia SA Établissement Stable in France became head of the tax Non-recurring income and expenses result from events or transactions consolidation group in 2002. that do not relate to the ordinary business operations or routine Only the Établissement Stable is liable for the payment of corporate management of the assets and liabilities of the Company. income taxes and the annual fixed taxes paid each year by the Group They represent material items of income and expense that do as a whole. In its individual financial statements, Dexia Credit Local not depend on decisions made in connection with the routine recognizes its income tax expense on a standalone basis. management of the business or of the Company’s assets and liabilities, The Dexia SA Établissement Stable records the benefits achieved but which result from external events that are exceptional in terms of through tax consolidation. their infrequency and their impact on net income.
194 DEXIA CREDIT LOCAL / 2007 Annual Report FINANCIAL STATEMENTS Notes to the financial statements 5
( 2. NOTES ON THE ASSETS
2.0 CASH, CENTRAL BANKS AND POSTAL CHECKING ACCOUNTS a. Accrued interest
0 b. Detailed analysis, excluding accrued interest
(EUR millions) At December 31, 2007
Cash 0
Cash with delegated agents 0
Mandatory reserve deposits with central banks or issuing institutions 685
Deposits with central banks or issuing institutions 0
Deposits with postal checking accounts 0
TOTAL 685
2.1 GOVERNMENT SECURITIES ELIGIBLE FOR CENTRAL BANK REFINANCING (ITEM II - ASSETS) a. Accrued interest
85 b. Analysis by term to maturity, excluding accrued interest
Less than 3 3 months 1 to 5 years Over 5 years No fixed maturity At December 31, 2007 (EUR millions) months to 1 year or not analyzed FINANCIAL STATEMENTS 0 109 107 3,306 0 3,522
2007 Annual Report / DEXIA CREDIT LOCAL 195 FINANCIAL STATEMENTS 5 Notes to the financial statements
c. Analysis by type of portfolio and movements for the year, excluding accrued interest
Banking activity and other Total
Held for trading Available for sale Held to maturity (EUR millions)
Cost at December 31, 2006 53 4,313 194 4,560
Movements for the year:
- acquisitions 103 267 0 370
- disposals and redemptions (53) (1,347) 0 (1,400)
- transfers 0 0 0 0
- translation adjustments 0 0 (6) (6)
- other movements 0 0 0 0
Cost at December 31, 2007 103 3,233 188 3,524
Impairment at December 31, 2006 0 0 0 0
Movements for the year:
- charges 0 (2) 0 (2)
- recoveries 0 0 0 0
- reversals 0 0 0 0
- transfers 0 0 0 0
- translation adjustments 0 0 0 0
- other movements 0 0 0 0
Impairment at December 31, 2007 0 (2) 0 (2)
Carrying amount at December 31, 2007 103 3,231 188 3,522
d. Transfers between portfolios
(EUR millions) At December 31, 2007 Impact on income
From held for trading to available for sale 00
From held for trading to held to maturity 00
From available for sale to held for trading 00
From available for sale to held to maturity 00
From held to maturity to available for sale 00
196 DEXIA CREDIT LOCAL / 2007 Annual Report FINANCIAL STATEMENTS Notes to the financial statements 5
e. Listed and unlisted securities, excluding accrued interest
Carrying amount at Market value at Net unrealized loss at (EUR millions) December 31, 2007 December 31, 2007 December 31, 2007
Listed securities 3,518 3,397 (121)
Unlisted securities 4
TOTAL 3,522 f. Unrealized gains (losses) on securities
(EUR millions) Available for sale Held to maturity
Unrealized gains (losses) (122) 1
2.2 INTERBANK LOANS AND ADVANCES: TIME (ITEM III.B - ASSETS) a. Accrued interest
116 b. Analysis by term to maturity, excluding accrued interest
Less than 3 3 months 1 to 5 years Over 5 years No fixed maturity At December 31, 2007 (EUR millions) months to 1 year or not analyzed
13,286 2,325 6,227 5,550 0 27,388 c. Analysis by counterparty, excluding accrued interest
(EUR millions) At December 31, 2006 At December 31, 2007
Interbank loans and advances to Dexia Group related parties 5,482 5,857 FINANCIAL STATEMENTS
Interbank loans and advances to other related parties 13,308 20,937
Interbank loans and advances to unrelated parties 3,148 594
TOTAL 21,938 27,388
2007 Annual Report / DEXIA CREDIT LOCAL 197 FINANCIAL STATEMENTS 5 Notes to the financial statements
d. Analysis of non-performing loans, excluding accrued interest
At December 31, 2006 At December 31, 2007
Valuation of risk Total Non-performing loans Doubtful non- Total (EUR millions) under collection performing loans
Gross non-performing loans 0 0 0 0
Accumulated impairment 0 0 0 0
NET NON-PERFORMING LOANS 0 0 0 0
e. Breakdown between subordinated and other loans, excluding accrued interest
(EUR millions) At December 31, 2006 At December 31, 2007
Subordinated interbank loans and advances 114 524
Non-subordinated interbank loans and advances 21,824 26,864
TOTAL 21,938 27,388
f. Movements for the year on subordinated loans, excluding accrued interest
Investments in Other companies Total associates or fully- (EUR millions) consolidated companies
Cost at December 31, 2006 114 0 114
Movements for the year:
- acquisitions 410 0 410
- disposals and redemptions 0 0 0
- transfers 000
- translation adjustments 000
- other movements 000
Cost at December 31, 2007 524 0 524
Impairment at December 31, 2006 0 0 0
Movements for the year:
- charges 000
- recoveries 000
- reversals 000
- transfers 000
- translation adjustments 000
- other movements 000
Impairment at December 31, 2007 0 0 0
CARRYING AMOUNT AT DECEMBER 31, 2007 524 0 524
198 DEXIA CREDIT LOCAL / 2007 Annual Report FINANCIAL STATEMENTS Notes to the financial statements 5
2.3 CUSTOMER LOANS (ITEM IV - ASSETS) a. Accrued interest
426 b. Analysis by term to maturity, excluding accrued interest
Less than 3 3 months 1 to 5 years Over 5 years No fixed maturity At December 31, 2007 (EUR millions) months to 1 year or not analyzed
2,305 2,244 9,534 27,018 230 41,331 c. Analysis by type of borrower, excluding accrued interest
At December 31, 2006 At December 31, 2007
(EUR millions) Total Public sector Other sectors Total
Performing loans 34,068 19,720 21,531 41,251
Restructured performing loans 0 0 0 0
Non-performing loans under collection 0 6 66 72
Doubtful non-performing loans 176 1 7 8
TOTAL 34,244 19,727 21,604 41,331
d. Analysis of non-performing loans, excluding accrued interest
Valuation of risk (EUR millions) At December 31, 2006 At December 31, 2007
Gross non-performing loans under collection 18 84
Accumulated impairment (18) (12)
Net non-performing loans under collection 072FINANCIAL STATEMENTS
Gross doubtful non-performing loans 244 39
Accumulated impairment (68) (31)
NET DOUBTFUL NON-PERFORMING LOANS 176 8 e. Analysis by counterparty, excluding accrued interest
(EUR millions) At December 31, 2006 At December 31, 2007
Loans to Dexia Group related parties 00
Loans to other related parties 175 175
Loans to unrelated parties 34,069 41,156
TOTAL 34,244 41,331
2007 Annual Report / DEXIA CREDIT LOCAL 199 FINANCIAL STATEMENTS 5 Notes to the financial statements
f. Breakdown between subordinated and other loans, excluding accrued interest
(EUR millions) At December 31, 2006 At December 31, 2007
Subordinated customer loans 58
Non-subordinated customer loans 34,239 41,323
TOTAL 34,244 41,331
2.4 BONDS AND OTHER FIXED INCOME SECURITIES (ITEM V - ASSETS)
a. Accrued interest
634
b. Analysis by term to maturity, excluding accrued interest
Less than 3 months 1 to 5 years Over 5 years No fixed maturity At December 31, 2007 (EUR millions) 3 months to 1 year or not analyzed
18,759 2,442 16,184 71,784 15 109,184
c. Analysis by type of issuer, excluding accrued interest
(EUR millions) At December 31, 2006 At December 31, 2007
Public issuers 16,954 40,745
Other issuers 40,593 68,439
TOTAL 57,547 109,184
EUR 36 billion of the sharp increase in the securities portfolio is attributable to borrowings of securities.
d. Listed and unlisted securities, excluding accrued interest
Carrying amount at Market value at Unrealized net gain at (EUR millions) December 31, 2007 December 31, 2007 December 31, 2007
Listed securities 100,098 100,229 131
Unlisted securities 9,086
TOTAL 109,184
Analysis by type of portfolio Total Held for trading Available for sale Held to maturity
Listed securities 100,098 50,546 49,387 165
Unlisted securities 9,086 2,097 5,683 1,306
TOTAL 109,184 52,643 55,070 1,471
200 DEXIA CREDIT LOCAL / 2007 Annual Report FINANCIAL STATEMENTS Notes to the financial statements 5
e. Analysis by type of portfolio and movements for the year, excluding accrued interest
Banking activity and other Total
(EUR millions) Held for trading Available for sale Held to maturity
Cost at December 31, 2006 8,228 47,901 1,473 57,602
Movements for the year:
- acquisitions 45,225 20,210 325 65,760
- disposals and redemptions (6,104) (4,267) (258) (10,629)
- transfers 5,766 (5,766) 0 0
- translation adjustments (472) (2,260) (69) (2,801)
- other movements 0 0 0 0
Cost at December 31, 2007 52,643 55,818 1,471 109,932
Impairment at December 31, 2006 0 (55) 0 (55)
Movements for the year:
- charges 0 (749) 0 (749)
- recoveries 0 21 0 21
- reversals 0 0 0 0
- transfers 0 0 0 0
- translation adjustments 0 35 0 35
- other movements 0 0 0 0
Impairment at December 31, 2007 0 (748) 0 (748) CARRYING AMOUNT AT DECEMBER 31, 2007 52,643 55,070 1,471 109,184 f. Analysis by counterparty, excluding accrued interest
(EUR millions) At December 31, 2006 At December 31, 2007 FINANCIAL STATEMENTS Bonds and other fixed income securities issued by Dexia Group related parties 0 0
Bonds and other fixed income securities issued by other related parties 170 200
Bonds and other fixed income securities issued by unrelated parties 57,377 108,984
TOTAL 57,547 109,184
2007 Annual Report / DEXIA CREDIT LOCAL 201 FINANCIAL STATEMENTS 5 Notes to the financial statements
g. Breakdown between subordinated and other bonds, excluding accrued interest
(EUR millions) At December 31, 2006 At December 31, 2007
Subordinated bonds and other fixed income securities issued by credit institutions 34 200
Subordinated bonds and other fixed income securities issued by other companies 326 0
Non subordinated bonds and other fixed income securities 57,187 108,984
TOTAL 57,547 109,184
of which: listed subordinated bonds and other fixed income securities 0 0
h. Transfers between portfolios
(EUR millions) At December 31, 2007 Impact on income
From held for trading to available for sale 00
From held for trading to held to maturity 00
From available for sale to held for trading(1) 5,766 0
From available for sale to held to maturity 00
From held to maturity to available for sale 00
(1) In 2007, Dexia Credit Local reclassified all securities perfectly hedged by CDSs (negative basis trade) out of the available-for- sale portfolio into the held-for- trading portfolio.
i. Held for trading portfolio, excluding accrued interest
(EUR millions) At December 31, 2006 At December 31, 2007
Mark-to-market gains 48 945
j. Available for sale and held to maturity portfolios, excluding accrued interest
(EUR millions) At December 31, 2006 At December 31, 2007
Unrealized gains (redemption value higher than carrying amount) 24 28
Unrealized losses (redemption value lower than carrying amount) 44 19
202 DEXIA CREDIT LOCAL / 2007 Annual Report FINANCIAL STATEMENTS Notes to the financial statements 5
k. Movements for the year on subordinated bonds, excluding accrued interest
Companies accounted Other companies Total for by the equity (EUR millions) method
Cost at December 31, 2006 0 364 364
Movements for the year:
- acquisitions 0 200 200
- disposals and redemptions 0 (364) (364)
- transfers 000
- translation adjustments 000
- other movements 000
Cost at December 31, 2007 0 200 200
Impairment at December 31, 2006 0 (4) (4)
Movements for the year:
- charges 000
- recoveries 044
- reversals 000
- transfers 000
- translation adjustments 000
- other movements 000
Impairment at December 31, 2007 0 0 0
CARRYING AMOUNT AT DECEMBER 31, 2007 0 200 200 FINANCIAL STATEMENTS
2007 Annual Report / DEXIA CREDIT LOCAL 203 FINANCIAL STATEMENTS 5 Notes to the financial statements
2.5 EQUITIES AND OTHER VARIABLE INCOME SECURITIES (ITEM VI - ASSETS)
a. Analysis by type of portfolio and movements for the year
Banking activity and other Total
(EUR millions) Held for trading Available for sale
Cost at December 31, 2006 0 328 328
Movements for the year:
- acquisitions 0 307 307
- disposals and redemptions 0 (299) (299)
- transfers 000
- translation adjustments 0 (8) (8)
- other movements 000
Cost at December 31, 2007 0 328 328
Impairment at December 31, 2006 0 (50) (50)
Movements for the year:
- charges 0 (5) (5)
- recoveries 044
- reversals 000
- transfers 000
- translation adjustments 033
- other movements 000
Impairment at December 31, 2007 0 (48) (48)
CARRYING AMOUNT AT DECEMBER 31, 2007 0 280 280
b. Transfers between portfolios
(EUR millions) Impact on income At December 31, 2007
From held for trading to available for sale 00
From held for trading to held to maturity 00
From available for sale to held for trading 00
From available for sale to held to maturity 00
204 DEXIA CREDIT LOCAL / 2007 Annual Report FINANCIAL STATEMENTS Notes to the financial statements 5
c. Analysis of issuers by geographical region
(EUR millions) At December 31, 2006 At December 31, 2007
Belgium 64
France 00
Other countries 272 276
TOTAL 278 280 d. Listed and unlisted securities
Carrying amount at Market value at Unrealized net gain at (EUR millions) December 31, 2007 December 31, 2007 December 31, 2007
Listed securities 164 183 19
Unlisted securities 116
TOTAL 280 FINANCIAL STATEMENTS
2007 Annual Report / DEXIA CREDIT LOCAL 205 FINANCIAL STATEMENTS 5 Notes to the financial statements
2.6 LONG-TERM EQUITY INVESTMENTS (ITEM VII - ASSETS)
a. Accrued interest
0
b. Analysis by type of issuer and movements for the year
Dexia Group related parties Other long-term equity investments Total (subsidiaries and investments in associates)
(EUR millions) Credit institutions Other Credit institutions Other
Cost at December 31, 2006 4,424 197 397 49 5,067
Movements for the year:
- acquisitions (1) 194 3 35 3 235
- disposals and redemptions (2) 0 0 (10) (22) (32)
- transfers 1 2 (3) 0 0
- translation adjustments (3) (96) 0 1 1 (94)
- other movements 0 0 0 0 0
Cost at December 31, 2007 4,523 202 420 31 5,176
Impairment at December 31, 2006 (17) 0 0 (8) (25)
Movements for the year:
- charges (1) 0 0 (1) (2)
- recoveries 0 0 0 2 2
- reversals 0 0 0 0 0
- transfers 1 (1) 0 0 0
- translation adjustments 0 0 0 0 0
- other movements 0 0 0 0 0
Impairment at December 31, 2007 (17) (1) 0 (7) (25) CARRYING AMOUNT AT DECEMBER 31, 2007 4,506 201 420 24 5,151 (1) In 2007, the acquisitions heading primarily included Dexia Epargne Pension and the capital increases of Dexia Credit Local Asia Pacific Pty Ltd., Dexia Sabadell , Dexia Municipal Agency, Dexia Flobail and Domiserve. (2) The disposals concern primarily CLF Patrimoniale and Dexia Kommunalkredit Bank Polska. (3) The translation adjustments concern Dexia Holdings Inc.
c. Listed and unlisted securities
Carrying amount at Market value at Unrealized gain at (EUR millions) December 31, 2007 December 31, 2007 December 31, 2007
Listed securities 68 137 69
Unlisted securities 5,083
TOTAL 5,151
206 DEXIA CREDIT LOCAL / 2007 Annual Report FINANCIAL STATEMENTS Notes to the financial statements 5
d. Significant investments
Cost at Impairment at Carrying amount at (EUR millions) December 31, 2007 December 31, 2007 December 31, 2007
Listed securities 68 0 68
Société Générale 68 0 68
Unlisted securities 5,108 (25) 5,083
Includes primarily
Dexia Holdings Inc. 2,108 0 2,108
Dexia Municipal Agency 876 0 876
Dexia Crediop 581 0 581
SISL 354 0 354
Dexia Kommunalbank Deutschland 253 0 253
Crédit du Nord 184 0 184
Kommunalkredit Austria 124 0 124
CBX.IA 2 100 0 100
Dexia Sabadell 88 0 88
Dexia Sofaxis 50 0 50
Dexia Kommunalkredit Bank AG 48 0 48
Dexia Israel (Public Finance) Ltd. (1) 56 0 43
CBX.IA 1 40 0 40
Dexia Epargne Pension 35 0 35
Dexia Flobail 34 0 34
Dexia Credit Local Asia Pacific Pty Ltd. 32 0 32
Floral 23 0 23
Dexia CLF Immo 34 (17) 17
TOTAL 5,176 (25) 5,151 FINANCIAL STATEMENTS (1) The carrying amount includes a EUR 13 million translation adjustment.
2007 Annual Report / DEXIA CREDIT LOCAL 207 FINANCIAL STATEMENTS 5 Notes to the financial statements
e. Principal interests in long-term equity investments
Interest in shareholders’ Interest in shareholders’ Last balance sheet date At December 31, 2007 equity (%) equity (EUR millions)
Dexia Kommunalbank Deutschland 100.00 295 Dec. 31, 2007
CBX.IA I 100.00 2 Dec. 31, 2007
Dexia Municipal Agency 100.00 1,095 Dec. 31, 2007
Dexia Credit Local Asia Pacific Pty Ltd. 100.00 42 Dec. 31, 2007
SISL 100.00 776 Dec. 31, 2007
Floral 100.00 57 Dec. 31, 2007
Dexia CLF Immo 100.00 16 Dec. 31, 2007
Dexia Flobail 100.00 134 Dec. 31, 2007
Dexia Sofaxis 99.98 61 Dec. 31, 2007
Dexia Holdings Inc. 90.00 2,109 Dec. 31, 2007
CBX.IA 2 70.85 65 Dec. 31, 2007
Dexia Crediop 70.00 690 Dec. 31, 2007
Dexia Israel (Public Finance) Ltd. 65.31 51 Dec. 31, 2007
Dexia Sabadell 60.00 124 Dec. 31, 2007
Dexia Kommunalkredit Bank 50.84 66 Dec. 31, 2007
Kommunalkredit Austria 49.00 157 Dec. 31, 2007
Dexia Epargne Pension 25.35 31 Dec. 31, 2007
Crédit du Nord 10.00 153 Dec. 31, 2007
2.7 ANALYSIS OF ASSETS BY TERM TO MATURITY, EXCLUDING ACCRUED INTEREST (SUMMARY)
At Government Interbank loans Customer loans Bonds and At December 31, 2007 December 31, securities and advances other fixed 2006 eligible for income central bank securities (EUR millions) refinancing
Less than 3 months 7,855 0 13,286 2,305 18,759 34,350
3 months to 1 year 12,008 109 2,325 2,244 2,442 7,120
1 to 5 years 21,389 107 6,227 9,534 16,184 32,052
Over 5 years 77,037 3,306 5,550 27,018 71,784 107,658
No fixed maturity or not analyzed 0 0 0 230 15 245
TOTAL 118,289 3,522 27,388 41,331 109,184 181,425
208 DEXIA CREDIT LOCAL / 2007 Annual Report FINANCIAL STATEMENTS Notes to the financial statements 5
2.8 INTANGIBLE ASSETS (ITEM VIII - ASSETS)
Detailed analysis and movements for the year
(EUR millions) Start-up costs Other inangible assets Total
Cost at December 31, 2006 0 184 184
Movements for the year:
- increases 03232
- decreases 000
- translation adjustments 0 (1) (1)
- other 000
Cost at December 31, 2007 0 215 215
Amortization and impairment at December 31, 2006 0 (136) (136)
Movements for the year:
- increases 0 (24) (24)
- decreases 000
- translation adjustments 011
- other 000
Amortization and impairment at December 31, 2007 0 (159) (159)
CARRYING AMOUNT AT DECEMBER 31, 2007 0 56 56
Intangible assets include primarily purchased software and capitalized in-house software development. FINANCIAL STATEMENTS
2007 Annual Report / DEXIA CREDIT LOCAL 209 FINANCIAL STATEMENTS 5 Notes to the financial statements
2.9 TANGIBLE FIXED ASSETS (ITEM IX - ASSETS)
Land and Fixtures, Assets held Other property Assets under Total buildings equipment, under finance and equipment construction furniture and leases and (EUR millions) vehicles prepayments
Cost at December 31, 2006 1 39 0 29 5 74
Movements for the year:
- acquisitions (and capitalized production) 050308
- disposals and retirements (-) 0 (2) 0 (14) 0 (16)
- reclassifications (+/-) 0401(5)0
- translation adjustments 0 0 0 (1) 0 (1)
- other movements 000000
Cost at December 31, 2007 1 46 0 18 0 65
Gains at December 31, 2007 000000 Depreciation and impairment at December 31, 2006 0 (35) 0 (22) 0 (57)
Movements for the year:
- charges 0 (2) 0 (2) 0 (4)
- recoveries of surplus amounts (-) 0 00000
- reversals (-) 0 2 0 14 0 16
- reclassifications (+/-) 0 1 0 (1) 0 0
- translation adjustments 0 00000
- other movements 0 00000 Depreciation and impairment at December 31, 2007 0 (34) 0 (11) 0 (45) CARRYING AMOUNT AT DECEMBER 31, 2007 1 1207020
210 DEXIA CREDIT LOCAL / 2007 Annual Report FINANCIAL STATEMENTS Notes to the financial statements 5
2.10 ACCRUALS AND OTHER ASSETS (ITEM XIV - ASSETS) a. Detailed analysis
(EUR millions) At December 31, 2006 At December 31, 2007
Premiums and deferred charges on borrowings 366 344
Redemption premiums and other deferred charges on loans 600 107
Premiums and deferred charges on hedging transations 1,049 1,069
Accrued income on hedging transactions 5,068 5,693
Accrued income on trading transactions 950 2,543
Unrealized translation losses 342 749
Other accrued income 58 467
Deferred commissions on securities 087
TOTAL 8,433 11,059 b. Analysis of premiums and deferred charges on hedging transactions
(EUR millions) At December 31, 2006 At December 31, 2007
Securities transactions 00
Foreign currency transactions 19 45
Other financial instruments
- interest rate instruments 1,026 1,014
- other forward purchases and sales 410
TOTAL 1,049 1,069 c. Analysis of accrued income on hedging transactions FINANCIAL STATEMENTS (EUR millions) At December 31, 2006 At December 31, 2007
Securities transactions 00
Foreign currency transactions 370 345
Other financial instruments
- interest rate instruments 4,698 5,348
- other forward purchases and sales 00
TOTAL 5,068 5,693
2007 Annual Report / DEXIA CREDIT LOCAL 211 FINANCIAL STATEMENTS 5 Notes to the financial statements
d. Analysis of accrued income on trading transactions
(EUR millions) At December 31, 2006 At December 31, 2007
Securities transactions 00
Foreign currency transactions 013
Other financial instruments
- interest rate instruments 950 2,530
- other forward purchases and sales 00
TOTAL 950 2,543
2.11 OTHER ASSETS (ITEM XIII - ASSETS)
Detailed analysis
(EUR millions) At December 31, 2006 At December 31, 2007
Miscellaneous assets, including:
- tax receivables 30 2
- premiums paid on swaptions written 13
- other assets 40 29
- guarantee deposits paid (1) 4,856 3,761
- pension funds 00
- premiums paid on options 35 79
- provisions for coupons 00
- assets receivable in the short term 00
- deferred tax assets 75 308
- other non-current financial assets 10
TOTAL 5,038 4,182 (1) Guarantee deposits paid consist nearly entirely of collateral deposited under contracts with the primary counterparties trading on derivatives markets.
212 DEXIA CREDIT LOCAL / 2007 Annual Report FINANCIAL STATEMENTS Notes to the financial statements 5
( 3. NOTES ON THE LIABILITIES
3.1 INTERBANK BORROWINGS AND DEPOSITS: TIME (ITEM I.B - LIABILITIES) a. Accrued interest
277 b. Analysis by term to maturity, excluding accrued interest
Less than 3 3 months 1 to 5 years Over 5 years No fixed maturity At December 31, 2007 (EUR millions) months to 1 year or not analyzed
68,067 7,575 11,076 5,940 16 92,674 c. Analysis by counterparty, excluding accrued interest
(EUR millions) At December 31, 2006 At December 31, 2007
Interbank borrowings and deposits from Dexia Group related parties 36,109 56,580
Interbank borrowings and deposits from other related parties 13,259 25,005
Interbank borrowings and deposits from unrelated parties 12,851 11,089
TOTAL 62,219 92,674 d. Analysis by geographical region, excluding accrued interest
(EUR millions) At December 31, 2006 At December 31, 2007
Belgium 19,611 45,740
France 8,789 1,877
Other EU countries 18,357 12,769
Other non EU countries 15,462 32,288 FINANCIAL STATEMENTS
TOTAL 62,219 92,674
2007 Annual Report / DEXIA CREDIT LOCAL 213 FINANCIAL STATEMENTS 5 Notes to the financial statements
3.2 CUSTOMER DEPOSITS (ITEM II - LIABILITIES)
a. Accrued interest
30
b. Analysis by term to maturity excluding accrued interest
Less than 3 months 1 to 5 years Over 5 years No fixed maturity At December 31, 2007 (EUR millions) 3 months to 1 year or not analyzed
2,245 555 84 1,637 0 4,521
c. Analysis by counterparty, excluding accrued interest
(EUR millions) At December 31, 2006 At December 31, 2007
Deposits from Dexia Group related parties 00
Deposits from other related parties 00
Deposits from unrelated parties 5,287 4,521
TOTAL 5,287 4,521
d. Analysis by type of customer, excluding accrued interest
(EUR millions) At December 31, 2006 At December 31, 2007
Public sector 2,872 601
Other sectors 2,415 3,920
TOTAL 5,287 4,521
e. Analysis by geographical region, excluding accrued interest
(EUR millions) At December 31, 2006 At December 31, 2007
Belgium 00
France 79 6
Other EU countries 450 462
Other non EU countries 4,758 4,053
TOTAL 5,287 4,521
214 DEXIA CREDIT LOCAL / 2007 Annual Report FINANCIAL STATEMENTS Notes to the financial statements 5
3.3 DEBT SECURITIES (ITEM III - LIABILITIES) a. Accrued interest
499 b. Analysis by term to maturity, excluding accrued interest
Less than 3 3 months 1 to 5 years Over 5 years No fixed maturity At December 31, 2007 (EUR millions) months to 1 year or not analyzed
28,603 5,054 10,246 12,867 0 56,770 c. Analysis by type of security and movements for the year, excluding accrued interest
Bonds Certificates of deposit, Total negotiable debt securities and similar (EUR millions) instruments
At December 31, 2006 6,928 41,220 48,148
Movements for the year:
- new issues 8,909 21,929 30,838
- disposals and redemptions (5,592) (14,677) (20,269)
- transfers 000
- translation adjustments (637) (1,310) (1,947)
- other variations 000
AT DECEMBER 31, 2007 9,608 47,162 56,770 d. Analysis by counterparty excluding accrued interest
(EUR millions) At December 31, 2006 At December 31, 2007
Debt securities held by Dexia Group related parties 4,017 4,060 FINANCIAL STATEMENTS
Debt securities held by other related parties 418 3,730
Debt securities held by unrelated parties 43,713 48,980
TOTAL 48,148 56,770
2007 Annual Report / DEXIA CREDIT LOCAL 215 FINANCIAL STATEMENTS 5 Notes to the financial statements
3.4. ACCRUALS AND OTHER LIABILITIES (ITEM V - LIABILITIES)
a. Detailed analysis
(EUR millions) At December 31, 2006 At December 31, 2007
Premiums and deferred income on borrowings 00
Deferred income on loans 109 84
Deferred income on hedging transactions 1,307 1,163
Accrued charges on hedging transactions 5,074 6,058
Accrued charges on trading transactions 967 2,449
Unrealized translation gains 867 537
Prepaid rental revenues 00
Other deferred incom 347 334
Other accrued charges 204 297
Other 00
TOTAL 8,875 10,922
b. Analysis of deferred income on hedging transactions
(EUR millions) At December 31, 2006 At December 31, 2007
Securities transactions 00
Foreign currency transactions 50 48
Other financial instruments
- interest rate instruments 1,253 1,114
- other forward purchases and sales 41
TOTAL 1,307 1,163
c. Analysis of accrued charges on hedging transactions
(EUR millions) At December 31, 2006 At December 31, 2007
Securities transactions 00
Foreign currency transactions 300 340
Other financial instruments
- interest rate instruments 4,774 5,718
- other forward purchases and sales 00
TOTAL 5,074 6,058
216 DEXIA CREDIT LOCAL / 2007 Annual Report FINANCIAL STATEMENTS Notes to the financial statements 5
d. Analysis of accrued charges on trading transactions
(EUR millions) At December 31, 2006 At December 31, 2007
Securities transactions 00
Foreign currency transactions 512
Other financial instruments
- interest rate instruments 962 2,437
- other forward purchases and sales 00
TOTAL 967 2,449
3.5 PROVISIONS FOR RISKS AND CHARGES (ITEM VI.A - LIABILITIES)
Pensions Financing Positions Other risks and Provisions for Total Provisions for: and similar commitments (2) in foreign expenses (2) country risk (2) commitments (1) currencies, securities and other financial (EUR millions) instruments
At December 31, 2006 8 112 49 199 1 369
Movements for the year:
- charges 2 58 111 36 0 207
- recoveries and reversals (2) (16) 0 (52) (1) (71)
- transfers 0 0 0 0 0 0
- translation adjustments 0 (5) (3) (8) 0 (16)
- other movements (3) 0 0 0 (27) 0 (27)
AT DECEMBER 31, 2007 8 149 157 148 0 462 (1) Provisions for termination benefits and service awards amounted to EUR 8 million. (2) An analysis of the principal changes is provided in note 5.5. (3) The other movements concern the amortization of disposal gains generated on transfers of loans to Dexia Municipal Agency. FINANCIAL STATEMENTS
2007 Annual Report / DEXIA CREDIT LOCAL 217 FINANCIAL STATEMENTS 5 Notes to the financial statements
3.6 DEFERRED TAXES (ITEM VI.B - LIABILITIES)
(EUR millions) Total
At December 31, 2006 137
Movements for the year:
- charges 61
- recoveries and reversals (24)
- transfers 0
- translation adjustments 0
- other movements 0
AT DECEMBER 31, 2007 174
3.7 REGULATED RESERVES (ITEM VI.C - LIABILITIES)
Provisions for Provisions Provisions Total medium- and for accelerated for investment (EUR millions) long-term loans depreciation
At December 31, 2006 301 27 12 340
Movements for the year:
- charges 9 12 1 22
- recoveries and reversals 0 (14) (6) (20)
- transfers 0 0 0 0
- translation adjustments 0 0 0 0
- other movements 0 0 0 0
AT DECEMBER 31, 2007 310 25 7 342
3.8 GENERAL BANKING RISKS RESERVE (ITEM VII - LIABILITIES)
(EUR millions) Total
At December 31, 2006 478
Movements for the year(1) (478)
AT DECEMBER 31, 2007 0 (1) In accordance with French Banking Regulations Committee (CRB) Standard 90-02, a reserve fund for general banking risks (FRBG) was created on January 1, 1990 by transferring EUR 478 million from retained earnings. This fund was taken back through profit during the year.
218 DEXIA CREDIT LOCAL / 2007 Annual Report FINANCIAL STATEMENTS Notes to the financial statements 5
3.9 SUBORDINATED DEBT (ITEM VIII - LIABILITIES) a. Accrued interest
(EUR millions) 64 b. Analysis by term to maturity, excluding accrued interest
Less than 3 3 months 1 to 5 years Over 5 years No fixed maturity At December 31, 2007 (EUR millions) months to 1 year or not analyzed
0 0 742 2,690 1,877 5,309 c. Movements for the year, excluding accrued interest
(EUR millions) TOTAL
At December 31, 2006 4,718
Movements for the year:
- new issues 1,100
- maturities and redemptions (266)
- transfers 0
- translation adjustments (243)
- other movements 0
AT DECEMBER 31, 2007 5,309 d. Analysis of expenses on subordinated debt
(EUR millions) At December 31, 2006 At December 31, 2007
Interest expense, fees and commissions 227 263 FINANCIAL STATEMENTS e. Analysis by counterparty, excluding accrued interest
(EUR millions) At December 31, 2006 At December 31, 2007
Subordinated debt held by Dexia Group related parties 3,273 3,370
Subordinated debt held by other related parties 00
Subordinated debt held by unrelated parties 1,445 1,939
TOTAL 4,718 5,309
2007 Annual Report / DEXIA CREDIT LOCAL 219 FINANCIAL STATEMENTS 5 Notes to the financial statements
f. Detailed information regarding subordinated borrowings
Currency Due Amount a) Early repayment conditions Interest rate (in millions) b) Subordination conditions ( %) c) Convertibility conditions USD No fixed maturity 250.0 a) Early repayment impossible during first 10 years without the approval of Libor USD 3M + 1.1 the General Secretariat of the Banking Commission and unless replaced by shareholders’equity of equivalent or better quality. Repayment possible at each due date for interest payments beginning 10/01/2012 with the approval of the General Secretariat of the Banking Commission b) Repayment at par value, after all creditors but preferred ranking over From 10/02/2012, Libor subordinated profit-sharing loans and preference shares USD 3M + 1.85 c) No conversion USD No fixed maturity 1,190.0 a) Early repayment impossible during first 10 years without the approval of Libor USD 3M + 0.39 the General Secretariat of the Banking Commission and unless replaced by shareholders’equity of equivalent or better quality. Repayment possible at each due date for interest payments beginning 04/05/2015 with the approval of the General Secretariat of the Banking Commission b) Repayment at par value, after all creditors but preferred ranking over From 04/06/2015, Libor subordinated profit-sharing loans and preference shares USD 3M + 1.14 c) No conversion EUR No fixed maturity 200.0 a) Early repayment impossible during first 10 years without the approval of Euribor 3M + 0.79 the General Secretariat of the Banking Commission and unless replaced by shareholders’equity of equivalent or better quality. Repayment possible at each due date for interest payments beginning 07/01/2015 with the approval of the General Secretariat of the Banking Commission b) Repayment at par value, after all creditors but preferred ranking over From July 2015 through subordinated profit-sharing loans and preference shares July 2020, Euribor 3M + 1.40, then Euribor 3M +2.15 c) No conversion EUR 12/01 /2014 100.0 a) Repayment possible at each due date for interest payments beginning 93.25% * CMS 12/22/2004, subject to prior approval of the General Secretariat of the Banking Commission b) No specific conditions From 12/01/2005 through 12/01/2006, 3.49 c) No conversion EUR 02/12 /2019 300.0 a) Repayment possible at each due date for interest payments beginning 4,375 02/12/2014 with the approval of the General Secretariat of the Banking Commission. b) Repayment at par value, after all creditors but preferred ranking over From 02/12/14 subordinated profit-sharing loans and preference shares 4.412 c) No conversion EUR 07/09 /2017 500.0 a) Repayment possible at each due date for interest payments beginning Euribor 3M + 0.15 07/09/2012 with the approval of the General Secretariat of the Banking Commission. b) Repayment at par value, after all creditors but preferred ranking over From 07/09/2012, Euribor subordinated profit-sharing loans and preference shares 3M + 0.65 c) No conversion USD 06/27 /2013 200.0 a) Repayment possible at each due date for interest payments beginning Libor USD 3M + 0.35 06/27/2008 with the approval of the General Secretariat of the Banking Commission. b) Repayment at par value, after all creditors but preferred ranking over From 06/27/2008, Libor subordinated profit-sharing loans and preference shares USD 3M + 0.85 c) No conversion USD 09/30 /2013 300.0 a) Repayment possible at each due date for interest payments beginning Libor USD 3M + 0.35 09/30/2008 with the approval of the General Secretariat of the Banking Commission. b) Repayment at par value, after all creditors but preferred ranking over From 09/30/2008, Libor subordinated profit-sharing loans and preference shares USD 3M + 0.85 c) No conversion
220 DEXIA CREDIT LOCAL / 2007 Annual Report FINANCIAL STATEMENTS Notes to the financial statements 5
Currency Due Amount a) Early repayment conditions Interest rate (in millions) b) Subordination conditions ( %) c) Convertibility conditions EUR 06/10 /2009 13.0 a) Repayment possible at each due date for interest payments, subject to Euribor 3M + 0.35 prior approval of the General Secretariat of the Banking Commission b) No specific conditions c) No conversion EUR 06/10 /2009 48.6 a) Repayment possible at each due date for interest payments, subject to Euribor 3M + 0.35 prior approval of the General Secretariat of the Banking Commission b) No specific conditions c) No conversion EUR 06/27 /2011 640.0 a) No early repayment possible. Euribor 3M + 0.58 b) Repayment at par value, after all creditors but preferred ranking over subordinated profit-sharing loans and preference shares c) No conversion EUR 01/01/2015 450.0 a) Repayment possible at each due date for interest payments beginning Euribor 3M + 0.32 01/01/2010 subject to the prior approval of the General Secretariat of the Banking Commission b) Repayment at par value, after all creditors but preferred ranking over subordinated profit-sharing loans and preference shares c) No conversion EUR 12/28/2017 300.0 a) Repayment possible at each due date for interest payments beginning Euribor 3M + 1.45 12/28/2012 subject to the prior approval of the General Secretariat of through 12/28/2012, the Banking Commission then Euribor 3M + 1.95 b) Repayment at par value, after all creditors but preferred ranking over subordinated profit-sharing loans and preference shares c) No conversion USD 009/27 /2012 60.0 a) Repayment possible at each due date for interest payments beginning Libor USD 3M + 0.5925 10/01/2007 subject to the prior approval of the General Secretariat of the Banking Commission b) Repayment at par value, after all creditors but preferred ranking over subordinated profit-sharing loans and preference shares c) No conversion USD 04/01 /2013 130.0 a) Repayment possible at each due date for interest payments beginning Libor USD 3M + 0.5475 04/01/2008 subject to the prior approval of the General Secretariat of the Banking Commission b) Repayment at par value, after all creditors but preferred ranking over subordinated profit-sharing loans and preference shares
c) No conversion FINANCIAL STATEMENTS USD 04/01 /2013 200.0 a) Repayment possible at each due date for interest payments beginning Libor USD 3M + 0.4975 04/01/2008 subject to the prior approval of the General Secretariat of the Banking Commission b) Repayment at par value, after all creditors but preferred ranking over subordinated profit-sharing loans and preference shares c) No conversion USD 10/01 /2013 200.0 a) Repayment possible at each due date for interest payments beginning Libor USD 3M + 0.4625 10/01/2008 subject to the prior approval of the General Secretariat of the Banking Commission b) Repayment at par value, after all creditors but preferred ranking over subordinated profit-sharing loans and preference shares c) No conversion USD 01/02 /2014 100.0 a) Repayment possible at each due date for interest payments beginning Libor USD 3M + 0.485 01/01/2009 subject to the prior approval of the General Secretariat of the Banking Commission b) Repayment at par value, after all creditors but preferred ranking over subordinated profit-sharing loans and preference shares c) No conversion
2007 Annual Report / DEXIA CREDIT LOCAL 221 FINANCIAL STATEMENTS 5 Notes to the financial statements
Currency Due Amount a) Early repayment conditions Interest rate (in millions) b) Subordination conditions ( %) c) Convertibility conditions USD 07/01 /2014 135.0 a) Repayment possible at each due date for interest payments beginning Libor USD 3M + 0.43 07/01/2009 subject to the prior approval of the General Secretariat of the Banking Commission b) Repayment at par value, after all creditors but preferred ranking over subordinated profit-sharing loans and preference shares c) No conversion USD 10/01 /2014 265.0 a) Repayment possible at each due date for interest payments beginning Libor USD 3M + 0.33 10/01/2009 subject to the prior approval of the General Secretariat of the Banking Commission b) Repayment at par value, after all creditors but preferred ranking over subordinated profit-sharing loans and preference shares c) No conversion EUR No fixed maturity 700,0 a) Repayment only possible with prior approval of the General Secretariat Euribor 3M + 0. 73 of the Banking Commission and replacement by equity or equivalent of Super s ubordonated better quality perpetual note b) Repayment at par value, after all creditors but preferred ranking over From 11/18 /2015, subordinated profit-sharing loans and preference shares Euribor 3M + 1. 73 c) No conversion
3.10 ANALYSIS BY TERM TO MATURITY, EXCLUDING ACCRUED INTEREST (SUMMARY)
At Interbank loans Customer deposits Debt securities Subordinated At December 31, 2007 (EUR millions) December 31, 2006 and deposits debt
Less than 3 months 57,334 68,067 2,245 28,603 0 98,915
3 months to 1 year 16,493 7,575 555 5,054 0 13,184
1 to 5 years 22,343 11,076 84 10,246 742 22,148
Over 5 years 22,209 5,940 1,637 12,867 2,690 23,134 No fixed maturity or not analyzed 1,993 16 0 0 1,877 1,893
TOTAL 120,372 92,674 4,521 56,770 5,309 159,274
222 DEXIA CREDIT LOCAL / 2007 Annual Report FINANCIAL STATEMENTS Notes to the financial statements 5
3.11 SHAREHOLDERS’ EQUITY
Detailed analysis of shareholders’ equity
(EUR millions) Total At December 31, 2006 Capital stock 1,327 Additional paid-in capital 1,087 Commitments to increase capital stock and APIC 0 Reserves and retained earnings 339 Cumulative translation adjustments (42) Net income for the year 473 Interim dividends 0 SHAREHOLDERS’ EQUITY AT DECEMBER 31, 2006 3,184 Movements for the year: Capital stock 0 Additional paid-in capital 0 Commitments to increase capital stock and APIC 0 Reserves and retained earnings 0 Cumulative translation adjustments (51) Dividends paid (-) (300) Net income for the year 319 Other movements 0 At December 31, 2007: Capital stock (1) 1,327 Additional paid-in capital 1,087 Commitments to increase capital stock and APIC 0 Reserves and retained earnings 512 Cumulative translation adjustments (93) Net income for the year (2) 319 SHAREHOLDERS’ EQUITY AT DECEMBER 31, 2007 (A) 3,152 General banking risks reserve at December 31, 2006 478
(Reversal) of the general banking risks reserve (478) FINANCIAL STATEMENTS General banking risks reserve at December 31, 2007 (B) 0 SHAREHOLDERS’ EQUITY PLUS QUASI-EQUITY AT DECEMBER 31, 2007 (A) + (B) 3,152 (1) The capital stock of Dexia Credit Local amounts to EUR 1,327,004,846, divided into 87,045,757 shares. (2) It is proposed to the Shareholders’ Meeting that an annual dividend of EUR 396,058,194.35 be paid out of the EUR 319,477,197.41 in net income from the year, and by appropriating EUR 76,580,996.94 from “general reserves”,thereby reducing the latter to EUR 302,445,347.96. This corresponds to a dividend of EUR 4.55 per share. The dividend will be paid on May 20, 2008. The dividend paid in respect of 2006 was EUR 3.45 per share. The Extraordinary Shareholders’ Meeting of September 4, 2006 approved the payment of an additional, extraordinary dividend of EUR 1.04 per share. The dividend paid in respect of 2005 was EUR 2.88 per share. The dividend paid in respect of 2004 was EUR 6.66 per share. The Extraordinary Shareholders’ Meeting of November 9, 2004 approved the payment of an extraordinary dividend of EUR 1.95 per share.
2007 Annual Report / DEXIA CREDIT LOCAL 223 FINANCIAL STATEMENTS 5 Notes to the financial statements
3.12 ANALYSIS OF ASSETS AND LIABILITIES BY CURRENCY
By accounting currency EUR Other EU Other Total at (EUR millions) currencies currencies December 31, 2007
Total assets 116,508 28,288 68,067 212,863
Total liabilities and shareholders’ equity 119,129 16,676 77,058 212,863
These amounts do not include the impact of any hedging transactions.
3.13 OTHER LIABILITIES (ITEM IV - LIABILITIES)
Detailed analysis
(EUR millions) At December 31, 2006 At December 31, 2007
Accrued taxes and payroll costs 00
Income tax 10
- taxes payable 10
- estimated tax liabilities 00
Other liabilities 614 36,623
Including:
- guarantee deposits received (1) 498 481
- employee pension funds 00
- tax and payroll liabilities 22 21
- trade payables 10
- premiums received on swaptions written 115
- premiums received on options sold 67 154
- other liabilities (2) 25 35,952
TOTAL 615 36,623 (1) Guarantee deposits consist primarily of collateral received under contracts with the principal counterparties trading on derivative markets. (2) Other liabilities consist of borrowed securities.
224 DEXIA CREDIT LOCAL / 2007 Annual Report FINANCIAL STATEMENTS Notes to the financial statements 5
( 4. NOTES ON OFF-BALANCE SHEET ITEMS
4.1 CONTINGENT LIABILITIES (ITEM I - OFF-BALANCE SHEET)
This item consists of guarantees given a. Analysis by type of beneficiary
(EUR millions) At December 31, 2006 At December 31, 2007
Guarantees given to credit institutions 19,143 26,120
Guarantees given to customers 41,140 40,237
TOTAL 60,283 66,357 b. Analysis by counterparty
(EUR millions) At December 31, 2006 At December 31, 2007
Guarantees given to Dexia Group related parties 318 0
Guarantees given to other related parties 9,331 35,048
Guarantees given to unrelated parties 50,634 31,309
TOTAL 60,283 66,357 c. Analysis by type of transaction
(EUR millions) At December 31, 2006 At December 31, 2007
Guarante es 59,923 66,357
Endorsements 360 0
Liens on assets 00
TOTAL 60,283 66,357 FINANCIAL STATEMENTS d. Contingent liabilities, risks and losses that could not be quantified at the time the financial statements were prepared
There were no contingent liabilities, risks or losses that could not be quantified at the time the financial statements were prepared.
2007 Annual Report / DEXIA CREDIT LOCAL 225 FINANCIAL STATEMENTS 5 Notes to the financial statements
4.2 FINANCING COMMITMENTS (ITEM II - OFF-BALANCE SHEET)
This item includes financing commitments given and commitments given on securities and on loaned foreign currencies. Financing commitments on loans and lines of credit include loans granted but not disbursed at December 31, 2007.
a. Analysis by type of beneficiary
(EUR millions) At December 31, 2006 At December 31, 2007
Commitments to credit institutions 7,379 6,816
Commitments to customers 11,065 15,026
Commitments given on securities 245 224
TOTAL 18,689 22,066
b. Analysis by counterparty
(EUR millions) At December 31, 2006 At December 31, 2007
Financing commitments to Dexia Group related parties 13 0
Financing commitments to other related parties 7,235 6,546
Financing commitments to unrelated parties 11,441 15,520
TOTAL 18,689 22,066
4.3 ASSETS HELD ON BEHALF OF THIRD PARTIES (ITEM III - OFF-BALANCE SHEET)
(EUR millions) At December 31, 2006 At December 31, 2007
Assets held in trust capacity 00
Open deposits 00
TOTAL 00
226 DEXIA CREDIT LOCAL / 2007 Annual Report FINANCIAL STATEMENTS Notes to the financial statements 5
4.4 OFF-BALANCE SHEET FINANCIAL INSTRUMENTS a. Analysis by purpose and instrument
At At Hedging Trading Fair value at December 31, December 31, December 31, 2006 2007 Micro- Macro- Isolated open Specialized 2007 Type of instrument hedging hedging position portfolio (EUR millions) management
Foreign currency instruments (a) 59,533 52,271 20,916 29,177 467 1,711 (882)
- forward currency purchases and sales 33,772 20,502 6,115 12,209 467 1,711 0
- currency and interest rate swaps 25,267 31,769 14,801 16,968 0 0 (882)
- currency futures 0 0 0 0 0 0 0
- currency options 0 0 0 0 0 0 0
- forward currency agreements 494 0 0 0 0 0 0
Other financial instruments 665,119 831,549 206,612 479,149 7,771 138,017 (1,762)
Interest rate instruments (b)
- interest rate swaps 641,107 780,238 196,130 464,032 1,356 118,720 (1,861)
- futures 1,345 575 0 7 31 537 0
- forward rate agreements 1,000 15,775 96 15,109 0 570 1
- interest rate options 9,846 19,934 2,122 1 136 17,675 (15)
Other forward purchases and sales (c)
- other options 11,240 15,027 8,264 0 6,248 515 113
- other futures 0 0 0 0 0 0 0
- other forward purchases and sales 581 0 0 0 0 0 0
TOTAL 724,652 883,820 227,528 508,326 8,238 139,728 (2,644) (a) Amount to be delivered. (b) Face value/notional amount. (c) Purchase/selling price agreed between the parties. FINANCIAL STATEMENTS b. Analysis by market
Type of instrument Over-the-counter Organized market Total at (EUR millions) market December 31, 2007
Foreign currency instruments 51,317 954 52,271
Other financial instruments
- interest rate instruments 807,322 9,200 816,522
- other forward purchases and sales 14,971 56 15,027
TOTAL 873,610 10,210 883,820
2007 Annual Report / DEXIA CREDIT LOCAL 227 FINANCIAL STATEMENTS 5 Notes to the financial statements
c. Analysis of forward contracts and options
Type of instrument Forward contracts Options Total at (EUR millions) December 31, 2007
Foreign currency instruments 51,317 954 52,271
Other financial instruments
- interest rate instruments 685,010 131,512 816,522
- other forward purchases and sales 11,214 3,813 15,027
TOTAL 747,541 136,279 883,820
d. Analysis by term to maturity
Type of instrument Less than 1 year 1 to 5 years Over 5 years No fixed maturity Total at (EUR millions) or not analyzed December 31, 2007
Foreign currency instruments 16,402 6,648 29,221 0 52,271
Other financial instruments
- interest rate instruments 402,204 148,269 266,049 0 816,522
- other forward purchases and sales 288 2,196 12,543 0 15,027
TOTAL 418,894 157,113 307,813 0 883,820
e. Isolated open positions
Unrealized gain on isolated open positions 0
f. Off-balance sheet financial instruments Instruments meeting this definition consist primarily of swaps acquired as micro hedges of primary issues, bonds in the available-for- sale Commitments related to interest rate derivatives are recorded in or held- to-maturity portfolios, and customer loans. The hedging compliance with CRB Standards 88-02 and 90-15: instruments have the effect of creating synthetic variable- or • forward contracts are carried at the nominal value of the adjustable-rate assets or liabilities, which are immunized against contracts; interest rate risk.
• options are carried at the par value of the underlying instrument. Foreign currency swaps are also classified as hedges when they are used to transform sources of funding in one currency into the currency Dexia Credit Local uses forward financial instruments as part of the used in the transactions they finance in the goal of reducing currency three following strategies: risk.
ASSET-LIABILITY MANAGEMENT POSITION MANAGEMENT This includes all transactions intended to cover and manage the total The position management strategy includes three types of interest rate exposure of the Company. ALM is carried out primarily activities: through the use of swaps and futures contracts. − specialist trading portfolio management; SPECIFIC HEDGING − position-taking; Hedges are used to cover interest rate risks on a specific item or a group of items with similar characteristics, identified at the outset. − credit derivatives.
228 DEXIA CREDIT LOCAL / 2007 Annual Report FINANCIAL STATEMENTS Notes to the financial statements 5
The specialist trading portfolio management activity includes movements in interest rates or exchange rates. These transactions all transactions entered into with local governments and the include primarily interest rate swaps and forward foreign exchange symmetrical transactions executed with banking counterparties. transactions. These transactions include primarily interest rate swaps. Specialized Dexia Credit Local uses two types of credit derivatives, credit sensitivity management is employed for the transactions included default swaps and credit spread options, as part of its investment in this activity. management strategy. Derivatives held in the position-taking portfolio are intended to keep isolated positions open in order to take advantage of any favorable
4.5 ASSETS PLEDGED AS COLLATERAL
Mortgages (1) Pledges on goodwill (2) Pledges on other Pledges on future (EUR millions) assets (3) assets (4)
As collateral for debts and commitments of the Company 0 0 0 0
Balance sheet liabilities 0 0 0 0
Off-balance sheet items 0 0 7,989 0 (1) Stated at the lower of the mortgage value and the carrying amount of the mortgaged real estate. (2) Value of the pledge. (3) Carrying amount of the assets pledged. This amount includes EUR 6.6 billion and EUR 1.3 billion in loans given as collateral for borrowings from international financial institutions and from Dexia LDG Banque SA, respectively. (4) Value of future assets concerned.
4.6 COMMITMENTS GIVEN AND RECEIVED NOT REFLECTED IN THE FINANCIAL STATEMENTS
None.
4.7 FINANCING AND GUARANTEE COMMITMENTS RECEIVED
This line includes all financing and guarantee commitments received from credit institutions, commitments received on securities and on foreign currency borrowings. FINANCIAL STATEMENTS
2007 Annual Report / DEXIA CREDIT LOCAL 229 FINANCIAL STATEMENTS 5 Notes to the financial statements
4.8 SECURITIES TRANSACTIONS (ITEM VIII - OFF-BALANCE SHEET)
a. Analysis by type of transaction
(EUR millions) At December 31, 2006 At December 31, 2007
Purchases
- spot 690 399
- forward 00
Sales
- spot 690 399
- forward 00
TOTAL 1,380 798
b. Analysis of forward purchases and sales by transaction
None.
c. Analysis of forward purchases and sales by market
None.
d. Analysis of forward purchases and sales by term to maturity
None.
e. Isolated open positions
Unrealized gain on isolated open positions 0
4.9 FOREIGN CURRENCY TRANSACTIONS (ITEM VI - OFF-BALANCE SHEET)
Spot and forward foreign currency transactions are presented at their value in their accounting currency, translated at the closing foreign exchange rate at the end of the year.
The lines “foreign currencies to be received” and “foreign currencies to be delivered” were both equal to EUR 54 billion at December 31, 2007.
They are composed primarily of long currency swaps with interim payments corresponding to hedging transactions.
230 DEXIA CREDIT LOCAL / 2007 Annual Report FINANCIAL STATEMENTS Notes to the financial statements 5
4.10 ANALYSIS OF OFF-BALANCE SHEET ITEMS BY CURRENCY
By accounting currency EUR Other EU currencies Other currencies Total at (EUR millions) December 31, 2007
Contingent liabilities 19,410 336 46,611 66,357
Financing commitments 14,325 4,067 3,674 22,066
Commitments received 15,566 473 5,363 21,402
Foreign currency transactions 46,402 6,414 54,644 107,460
Forward financial instruments 571,877 87,112 172,560 831,549
Securities transactions 734 64 0 798
Other commitments given 44,759 5,031 9,611 59,401
( 5. NOTES ON THE INCOME STATEMENT
a. Interest income on customer loans b. Interest income on bonds and other fixed income (Item I.B - Income statement) securities (Item I.C - Income statement)
This heading includes respectively EUR 1,670 million and EUR 35 The heading includes EUR 1,657 million in accrued interest on bonds million in accrued interest and early repayment penalties on customer and other fixed income securities, amortization of discounts and loans . premiums on securities held to maturity and securities available for sale, and the related hedging gains and losses on these securities For both accounting and tax purposes, all early repayment penalties on loans recognized up to December 31, 2004 will continue to be amortized over the remaining life of the related loans in proportion c. Interest expense on bonds and other fixed income securities (Item II.C - Income statement) to the outstanding interest that would have had to be paid. At EUR 1,155 million, interest expense on bonds and other fixed- As from January 1, 2005, early repayment penalties on loans are taken income securities remains the chief component of Dexia Credit Local’s into income at the repayment date. total interest expense. This heading also includes EUR 96 million in income from financing In addition to interest expense on bonds and other fixed-income commitments and guarantees. securities, the heading also includes interest rate hedging gains FINANCIAL STATEMENTS Income on instruments acquired as macro hedges came to and losses on specifically-identified money market, bond, and EUR 18,753 million. Expenses on macro hedges came to subordinated debt issues EUR 18,729 million and are reported under the heading “Interest This heading includes EUR 9 million on the amortization of deferred expense on customer loans”. additional paid-in capital credits on debt securities
2007 Annual Report / DEXIA CREDIT LOCAL 231 FINANCIAL STATEMENTS 5 Notes to the financial statements
5.1 ANALYSIS OF INCOME FROM VARIABLE INCOME SECURITIES (ITEM III - INCOME STATEMENT)
(EUR millions) At December 31, 2006 At December 31, 2007
Dexia Group related parties 181 202
Other related parties 00
Other long-term investments 811
TOTAL 189 213
5.2 ANALYSIS OF COMMISSIONS (ITEMS IV AND V - INCOME STATEMENT)
a. Detailed analysis of commission income (Item IV - Income statement)
(EUR millions) At December 31, 2006 At December 31, 2007
Lending 12 15
Other financial services 12
TOTAL 13 17
b. Detailed analysis of commission expense (Item V - Income statement)
(EUR millions) At December 31, 2006 At December 31, 2007
Lending (2) (4)
Financial instrument transactions (3) (2)
Other financial services (7) (12)
TOTAL (12) (18)
232 DEXIA CREDIT LOCAL / 2007 Annual Report FINANCIAL STATEMENTS Notes to the financial statements 5
5.3 ANALYSIS OF GAINS (LOSSES) ON SECURITIES PORTFOLIOS (ITEM VI - INCOME STATEMENT)
(EUR millions) At December 31, 2006 At December 31, 2007
Gain (losses) on
- securities hold for trading 481 780
- securities available for sale (1) (29) (806)
- foreign exchange transactions 39 54
- other financial instruments 00
Impairment 00
TOTAL 491 28 (1) This line includes all gain and losses on disposals and charges to recoveries from provisions on the portfolios concerned and all gains and losses on the portfolio securities activity.
Gains and losses on disposal and changes in provisions for impairment on securities available for sale were as follows:
(EUR millions) At December 31, 2006 At December 31, 2007
- charges to provisons (61) (839)
- recoveries of provisions 533
Subtotal (56) (806)
- disposal losses (6) (49)
- disposal gains 33 49
Subtotal 27 0
TOTAL (29) (806)
5.4 GENERAL OPERATING EXPENSES (ITEM VIII - INCOME STATEMENT) a. Detailed analysis FINANCIAL STATEMENTS
(EUR millions) At December 31, 2006 At December 31, 2007
Payroll costs 175 192
Salaries and wages 118 129
Social security 57 63
Other administrative expenses 54 56
Taxes and duties 23 21
Other administrative expenses 31 35
TOTAL 229 248
In 2007, amounts paid under French legal employee profit-sharing and discretionary profit-sharing came to EUR 8.8 million and EUR 4.4 million, respectively.
2007 Annual Report / DEXIA CREDIT LOCAL 233 FINANCIAL STATEMENTS 5 Notes to the financial statements
b. Employee information
At December 31, 2006 At December 31, 2007
Total employees at December 31 1,472 1,612
- executive 42 159
- other management 1,026 1,019
- administrative 404 434
Payroll cost (EUR millions) 173 192
- salaries and benefits 116 129
- payroll taxes 40 38
- employer contribution to discretionary benefit plans 00
- other payroll costs 16 24
- pension cost 11
Provisions for pensions (EUR millions) 20
- charges (+) 22
- recoveries (-) 0 (2)
TOTAL 175 192
5.5 COST OF RISK (ITEM XI - INCOME STATEMENT)
(EUR millions) Charges and losses Reversals and recoveries A t December 31, 2007
Provisions for impairment and losses on loans (16) 48 32
Provisions on securities held to maturity and financial instruments 0 0 0
Provisions and losses on off-balance sheet commitments 0 0 0
Provisions and losses on money market and interbank transactions 0 0 0
Provisions on financing commitments (58) 16 (42)
Other provisions 000
Provisions for country risk 0 1 1
Regulated reserves (10) 6 (4)
TOTAL (84) 71 (13)
The cost of risk remained low due to the good quality of the assets.
234 DEXIA CREDIT LOCAL / 2007 Annual Report FINANCIAL STATEMENTS Notes to the financial statements 5
5.6 GAINS (LOSSES) ON LONG-TERM EQUITY INVESTMENTS (ITEM XII - INCOME STATEMENT) a. Détail
2006 2007
(EUR millions) Related parties Other Total Related parties Other Total
Provisions for impairment (16) (1) (17) (1) (1) (2)
Recoveries of impairment 0 11022
Subtotal (16) 0 (16) (1) 1 0
Disposal losses 0000(1)(1)
Disposal gains 0 16 16 15 18 33
Subtotal 0 16 16 15 17 32
TOTAL (16) 16 0 14 18 32 b. Analysis by type of security
(EUR millions) At December 31, 2006 At December 31, 2007
Investments in associates 16 18
Investments in related parties (16) 14
Other long-term investments 00
Securities held to maturity 00
Building 00
TOTAL 032
5.7 OTHER BANKING INCOME AND EXPENSE
a. Other banking income (Item VII - Income statement) FINANCIAL STATEMENTS
(EUR millions) At December 31, 2006 At December 31, 2007
Other net income from other companies 00
Other banking income 12
TOTAL 12 b. Other banking expense (Item X - Income statement)
(EUR millions) At December 31, 2006 At December 31, 2007
Other net expense from other companies 00
Other banking expense (3) (1)
TOTAL (3) (1)
2007 Annual Report / DEXIA CREDIT LOCAL 235 FINANCIAL STATEMENTS 5 Notes to the financial statements
5.8 NON-RECURRING ITEMS (ITEM XV - INCOME STATEMENT)
(EUR millions) At December 31, 2006 At December 31, 2007
Non-recurring income 00
Non-recurring expense 00
5.9 CORPORATE INCOME TAX (ITEM XVII - INCOME STATEMENT)
a. Analysis of tax expense
(EUR millions) At December 31, 2006 At December 31, 2007
Income tax
- other taxes (106) (32)
Subtotal (106) (32)
Deferred taxes
- charges 185 139
- recoveries (137) 0
Subtotal 48 139
TOTAL (58) 107
In 2007, the tax rate used for France amounted to 34.43%.
The tax rate applicable to foreign branches is generally lower.
b. Exceptions to the general valuation principles, as provided for by tax law
(EUR millions) At December 31, 2006 At December 31, 2007
Regulated reserves 16 4
- Provisions for medium- and long-term loan losses 15 9
- Provisions for investment 1 (5)
Accelerated depreciation 32
c. Tax consolidation
The Dexia SA Etablissement Stable in France became head of the tax consolidation group in 2002. Dexia Credit Local is part of that group.
236 DEXIA CREDIT LOCAL / 2007 Annual Report FINANCIAL STATEMENTS Notes to the financial statements 5
5.10 COMPENSATION PAID TO THE MEMBERS OF THE MANAGEMENT BOARD AND THE BOARD OF DIRECTORS
(EUR millions)
Compensation paid to the members of the Management Board and the Board of Directors of the Company in respect of their functions within the Company and its subsidiaries and affiliated companies, including pension expenses allocated for the same reasons to former members of Management bodies
Management Board 5
Board of Directors 0
TOTAL 5
Outstanding amounts owed, contingent liabilities in their favor and other material commitments from which they benefit
Management Board 1
Board of Directors 0
TOTAL 1
All advances and loans granted during the year were extended under the conditions traditionally applied to members of management bodies.
5.11 ANALYSIS BY GEOGRAPHICAL REGION AND LINE OF BUSINESS a. Analysis by geographical region
Net banking Gross operating income Net income (EUR millions) income
Belgium 000
France 312 108 635
Luxembourg 000
Other countries (324) (393) (316)
TOTAL (12) (285) 319 b. Analysis by line of business FINANCIAL STATEMENTS
Net banking income Gross operating income Net income
At December At December At December At December At December At December (EUR millions) 31, 2006 31, 2007 31, 2006 31, 2007 31, 2006 31, 2007
Public/ Project Finance 735 336 552 142 402 102
Personal Financial Services 808050
Asset Management 000000
Treasury and Financial Markets 151 (354) 120 (394) 93 (317)
Unallocated shareholders’ equity (89) 6 (131) (33) (27) 534
TOTAL 805 (12) 549 (285) 473 319
2007 Annual Report / DEXIA CREDIT LOCAL 237 FINANCIAL STATEMENTS 5 Notes to the financial statements
( 6. NOTES ON THE LONG- TERM EQUI TY INVESTMENTS
Capital stock Additional 2007 revenues 2007 Interest in paid-in capital, or net banking net income shareholders’ reserves and income (loss) equity Company (EUR) retained earnings (%)
1 - Details concerning the subsidiaries and associates whose carrying amount exceeds 1% of Dexia Credit Local’s capital stock
A - Subsidiaries (50% to 100% owned) Dexia CLF Immo 1 Passerelle des Reflets - Tour Dexia La Défense 2 - 92913 La Défense 2,364,700 13,244,652 100,503 5,544 100.00 Dexia Credit Local Asia Pacific Pty. Ltd. Level 23, 207 Kent Street, Sydney, NSW, 2000 31,847,077 6,836,857 35,613,880 3,652,311 100.00 Dexia Sabadell (*) Paseo de las Doce Estrallas 4 - E - 28042 Madrid 146,061,000 41,069,256 40,371,547 19,455,752 60.00 Dexia Crediop (*) Via Venti settembre N. 30 - I00187 Rome 450,210,000 449,081,430 141,863,023 86,193,928 70.00 Dexia Holdings Inc. (*) 31 West 52nd Street - NY 10019 USA 1,793,767,917 449,651,834 108,647,106 99,975,933 90.00 Dexia Kommunalbank Deutschland Charlottenstr. 82 - D - 10969 Berlin 162,500,000 122,368,353 65,438,091 10,200,000 100.00 Dexia Municipal Agency 1 Passerelle des Reflets - Tour Dexia La Défense 2 - 92913 La Défense 876,000,000 21,002,085 329,988,096 153,475,146 100.00 Floral 1 Passerelle des Reflets - Tour Dexia La Défense 2 - 92913 La Défense 22,867,353 32,577,620 3,023,406 1,900,933 100.00 Dexia Israel (Public Finance) Ltd. 19 Ha’arbaha Str. - Hatihon Building - POB 709 - 61200 Tel Aviv Israel 31,111,580 38,297,967 16,774,121 8,086,892 65.31 SISL 180, rue des A ubépines L 1145 - Luxembourg 337,650,000 242,626,479 231,200,720 195,576,192 100.00 Dexia Sofaxis Route de Creton - 18110 Vasselay 613,020 46,295,107 23,262,315 13,824,314 100.00 CBX. IA 1 1 Passerelle des Reflets - Tour Dexia La Défense 2 - 92913 La Défense 3,923,625 (866,521) 0 (949,742) 100.00 CBX. IA 2 1 Passerelle des Reflets - Tour Dexia La Défense 2 - 92913 La Défense 141,140,624 (48,089,679) 14,796,500 (1,775,390) 70.85 Dexia Flobail 1 Passerelle des Reflets - Tour Dexia La Défense 2 - 92913 La Défense 56,100,175 (43,351,476) 6,653,541 (26,689,838) 100.00 Dexia Kommunalkredit Bank Türkenstrasse 9 - A - 1092 Vienna 100,000,000 16,465,926 17,918,161 12,457,092 50.84
B - Associates (10% to 50% owned) Crédit du Nord 28, Place Rihour - 59800 Lille 740,263,248 455,687,000 1,062,358,000 336,109,000 10.00 Dexia Epargne Pension 76 rue de la Victoire - 75009 Paris 93,562,500 20,669,619 1,405,709,013 7,660,326 25.35 Kommunalkredit Austria Türkenstrasse 9 - A - 1092 Vienna 18,530,850 276,349,193 38,667,111 24,608,386 49.00 (*) Companies that produce financial statements in IFRS only.
2 - General information
A - Other companies not included in section 1-A
- French companies
- Foreign companies
B - Other companies not included in section 1-B and other long-term investments in companies less than 10% owned
- French companies
- Foreign companies
238 DEXIA CREDIT LOCAL / 2007 Annual Report FINANCIAL STATEMENTS Notes to the financial statements 5
Carrying amount of securities held Dividend received Loans and Guarantees Activity by Dexia Credit Local advances given by during the year granted by Dexia Credit Local Gross Net Dexia Credit Local
33,691,141 16,612,452 150,162,282 Real estate financing
31,847,077 31,847,077 913,198,553 Bank, credit institution
87,636,600 87,636,600 3,426,399,989 3,881,020,781 Bank, credit institution
581,223,585 581,223,585 35,423,500 2,066,651,241 5,534,117,634 Bank, credit institution
2,107,620,842 2,107,620,842 Credit enhancement
253,339,375 253,339,375 11,400,000 1,073,000,000 Bank, credit institution
875,999,909 875,999,909 116,280,000 2,900,000,000 4,684,360,196 Société de crédit foncier Capital markets financing on behalf 23,080,690 23,080,690 of the parent company
56,002,387 56,002,387 473,165 175,446,541 Bank, credit institution
353,514,002 353,514,002 882,277,499 Management of equity interests Holding company for investments in 50,054,782 50,054,782 12,764,976 insurance brokerages Acquisition of land, buildings 40,314,880 40,314,880 23,705,028 1,294,972 and real property rights
100,000,058 100,000,058 175,481,051 94,518,950 Real estate lease financing
34,110,986 34,110,986 624,945,001 1,156,502,082 Real estate lease financing
48,376,299 48,376,299 2,495,893,880 Holding company FINANCIAL STATEMENTS
184,463,311 184,463,311 17,586,630 Bank, credit institution Capital engineering, life insurance 34,776,000 34,776,000 and other insurance
123,513,379 123,513,379 2,996,301 Bank, credit institution
1,762,265,327 11,174,359,252
22,185,525,168 129,130,832
97,644,676 93,741,274 7,429,182 464,826,040 103,706,536
29,947,811 25,721,197 825,918
2007 Annual Report / DEXIA CREDIT LOCAL 239 FINANCIAL STATEMENTS 5 Notes to the financial statements
( 7. DEXIA CREDIT LOCAL S ECURITIES PORTFOLIOS
a. Available- for-sale portfolio
(EUR millions) Market value Portfolio value Unrealized gains Unrealized losses Carrying amount
Bonds and other fixed income securities
French bonds 1,707 1,693 16 0 1,691
• Public bodies 824 817 7 0 817
Central governments 00000
Local authorities 824 817 7 0 817
• Other issuers 883 876 9 0 874
Credit institutions 883 876 9 0 874
Other private companies 00000
Super-subordinated perpetual notes 00000
Foreign bonds 53,905 54,102 526 0 53,379
• Public bodies 20,329 20,147 241 0 20,088
Central governments 4,902 4,913 18 0 4,884
Local authorities 15,427 15,234 223 0 15,204
• Other issuers 33,576 33,955 285 0 33,291
Credit institutions 20,240 20,244 221 0 20,019
Other private companies 13,336 13,711 64 0 13,272
Super-subordinated perpetual notes 00000 TOTAL BONDS AND OTHER FIXED INCOME SECURITIES 55,612 55,795 542 0 55,070
Equities and other variable income securities
• Mutual funds 147 146 1 0 146
• Equities 178 134 48 4 134 TOTAL EQUITIES AND OTHER VARIABLE INCOME SECURITIES 325 280 49 4 280
Government securities
• Public bodies 3,109 3,231 3 125 3,231
Central governments 2,949 3,074 0 125 3,074
Local authorities 160 157 3 0 157
TOTAL GOVERNMENT SECURITIES 3,109 3,231 3 125 3,231
TOTAL 59,046 59,306 594 129 58,581
240 DEXIA CREDIT LOCAL / 2007 Annual Report FINANCIAL STATEMENTS Notes to the financial statements 5
b Held-to- maturity portfolio
Redemption value Premium (discount) Provisions for Carrying amount (EUR millions) impairment
Bonds and other fixed income securities
French bonds 110 0 0 110
• Public bodies 0000
Central governments 0 0 0 0
Local authorities 0 0 0 0
• Other issuers 110 0 0 110
Credit institutions 35 0 0 35
Other private companies 75 0 0 75
Super-subordinated perpetual notes
Foreign bonds 1,360 1 0 1,361
• Public bodies 1,073 1 0 1,074
Central governments 251 0 0 251
Local authorities 822 1 0 823
• Other issuers 287 0 0 287
Credit institutions 102 0 0 102
Other private companies 185 0 0 185
Super-subordinated perpetual notes
TOTAL BONDS AND OTHER FIXED INCOME SECURITIES 1,470 1 0 1,471
Government securities FINANCIAL STATEMENTS • Public bodies 188 0 0 188
Central governments 145 0 0 145
Local authorities 43 0 0 43
TOTAL GOVERNMENT SECURITIES 188 0 0 188
TOTAL 1,658 1 0 1,659
2007 Annual Report / DEXIA CREDIT LOCAL 241 FINANCIAL STATEMENTS 5 Notes to the financial statements
c. Held- for-trading portfolio
(1) (1) (EUR millions) Cost Market value
Bonds and other fixed income securities
French bonds 323 325
• Public bodies 00
Central governments 00
Local authorities 00
• Other issuers 323 325
Credit institutions 248 249
Other private companies 75 76
Foreign bonds 51,375 52,318
• Public bodies 18,783 18,764
Central governments 15,372 15,378
Local authorities 3,411 3,386
• Other issuers 32,592 33,554
Credit institutions 8,818 11,224
Other private companies 23,774 22,330
TOTAL BONDS AND OTHER FIXED INCOME SECURITIES 51,698 52,643
Government securities
• Public bodies 102 103
Central governments 102 103
Local authorities 00
TOTAL GOVERNMENT SECURITIES 102 103
TOTAL 51,800 52,746 (1) Cost and market value both include accrued interest
242 DEXIA CREDIT LOCAL / 2007 Annual Report FINANCIAL STATEMENTS Statutory Auditors’ general report 5
Statutory Auditors’ general report
This is a free translation into English of the Statutory Auditors’ report issued in the French language and is provided solely for the convenience of English-speaking readers. This Statutory Auditors’ report includes information specifically required by French law and this is presented after the Opinion on the financial statements. This information includes an explanatory paragraph discussing the auditors’ assessment of certain significant accounting matters. These assessments were made for the purpose of issuing an opinion on the financial statements taken as a whole and not to provide separate assurance on individual account captions or on information taken outside of the financial statements. The report also includes information relating to the specific verification of information in the management report. This report together with the Statutory Auditors’ report addressing financial and accounting information in the Chairman’s report on internal control, should be read in conjunction with French law and professional auditing standards applicable in France.
To the shareholders,
In accordance with the assignment entrusted to us by your Shareholders’ Meeting, we hereby report to you, for the year ended December 31, 2007, on:
• The audit of the accompanying financial statements of Dexia Credit Local;
• The basis of our opinion;
• The specific verifications and information required by law.
The financial statements have been approved by the Board of Directors. Our responsibility is to express an opinion on these financial statements based on our audit.
1 OPINION ON THE FINANCIAL STATEMENTS
We performed our audit in accordance with professional standards applicable in France. Those standards require that we plan and perform the audit so as to obtain reasonable assurance about whether the financial statements are free from any 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 audit provides a reasonable basis for our opinion.
In our opinion, the financial statements present fairly the Company’s assets and liabilities at December 31, 2007 and the results of its operations and its cash flows for the year then ended in accordance with accounting principles generally accepted in France. FINANCIAL STATEMENTS
2 BASIS OF OUR OPINION
In accordance with the provisions of Article L. 823-9 of the French Commercial Code regarding the basis of our opinion, we call to your attention the following points:
As discussed in note 1.2.b of the notes to the financial statements:
• Concerning impairment and provisions for credit risks inherent to its activities: the Company records both specific provisions and general reserves, as specified respectively in the sections on “Customer loans,” “Provisions” and “Position management - Credit derivatives;”
• Concerning provisions for impairment of securities available for sale, the Company calculates any impairment of its securities based on their market value, net of any micro-hedges, as described in the section on “Securities transactions - Securities available for sale.”
• Concerning provisions for impairment of portfolio securities, subsidiaries, associates, participating interests and other long-term investments, the Company calculates any impairment of its investments on the basis of their going-concern value or their value in use, as described in the
2007 Annual Report / DEXIA CREDIT LOCAL 243 FINANCIAL STATEMENTS 5 Statutory Auditors’ general report
sections on “Securities transactions - Portfolio securities,” and “Securities transactions – Subsidiaries, associates, participating interests and other long-term investments;”
• Concerning provisions for retirement and other post-employment benefits, the Company calculates provisions in accordance with local regulations, by entity, as discussed in the section on “Provisions and reserves.”
As part of our evaluation of significant estimates applied in preparing the financial statements, we examined the internal controls relating to the identification and monitoring of these risks, evaluated the information provided, the parameters used and the assumptions on which these estimates were based, and verified the consistent application of the documented methods described in the notes to the financial statements.
Note 1.1 of the financial statements presents the impact of the financial crisis and the provisions and impairment resulting from the measurements and testing performed by your Company at December 31, 2007. We examined the methods your Company used to identify these exposures and the internal controls established over their measurement, along with the appropriateness of the information provided in the aforementioned note.
We evaluated the reasonableness of these estimates.
The assessments we made of these items register within the framework of our audit approach which relates to the financial statements as a whole and contributed to the unqualified opinion we expressed in the first part of this report.
3 SPECIFIC VERIFICATIONS AND INFORMATION
We also performed the specific verifications required by law, in accordance with professional standards applicable in France.
We have no comments to make regarding:
• The accuracy and consistency with the financial statements of the information provided in the management report of the Board of Directors and in the documents issued to the shareholders with respect to the Company’s financial position and financial statements;
• The accuracy of the information provided in the management report regarding the compensation and benefits paid to the directors and officers of the Company and any commitments made in their favor at the time they assumed, ceased, or changed their functions, or any time thereafter.
In accordance with French law, we have ensured that the required information concerning the acquisition of holdings and controlling interests has been properly disclosed in the management report.
Paris - April 2, 2008
Statutory Auditors
CADERAS MARTIN MAZARS & GUERARD Daniel Butelot Olivier Avril Guillaume Potel Anne Veaute Partner Partner Partner Partner
244 DEXIA CREDIT LOCAL / 2007 Annual Report SHAREHOLDERS’ MEETING Summary 6
Shareholders’ 6 Meeting
Statutory Auditors’ special report Resolutions proposed to the on regulated agreements and Shareholders’ Meeting of May 16, commitments 246 2008 248
20072007 ANNUAL Annual Report REPORT / DEXIA/ DEXIA CREDIT CREDIT LOCALLOCAL 245 SHAREHOLDERS’ MEETING 6 Statutory Auditors’ special report on regulated agreements and commitments
Statutory Auditors’ special report on regulated agreements and commitments
This is a free translation into English of the Statutory Auditors’ report issued in the French language and is provided solely for the convenience of English-speaking readers. This report should be read in conjunction with, and construed in accordance with, French law and professional auditing standards applicable in France.
To the shareholders,
In our capacity as the Statutory Auditors of Dexia Credit Local, we hereby present to you our report on regulated agreements and commitments.
We are not responsible for ascertaining whether any agreements and commitments exist but for informing you, based on the information provided us, of the terms and conditions of those of which we were notified. It is not our role to determine whether they are beneficial or appropriate. It is your responsibility, under the terms of Article R.225-31 of the French Commercial Code, to assess the benefits arising from these agreements prior to their approval.
We performed our work in accordance with professional standards applicable in France. Those standards require that we plan and perform all procedures deemed necessary to verify that the information provided to us is consistent with the underlying documents from which it was extracted.
Agreements and commitments authorized during the year
In accordance with Article L.225-40 of the French Commercial Code, we have been notified of one agreement that has been authorized by the Board of Directors.
Supplemental pension commitment
Gérard Bayol joined Dexia SA as its Chief Executive Officer, with effect from January 1, 2007, as part of a board of managers of the Dexia Group who are eligible to receive a supplemental pension annuity that is equal to 75% of his average fixed compensation during the two years preceding his retirement, less any amounts he may receive in respect of the legal pension.
This commitment was presented to and approved by the Board of Directors at its February 22, 2008 meeting.
Continuing agreements and commitments entered into in prior years
Moreover, in accordance with Article R.225-30 of the French Commercial Code, we have been advised that the execution of the following agreements and commitments, approved during previous years, has been carried over into the past year.
Tax group agreement
On November 19, 2002, the Supervisory Board authorized Dexia Credit Local to enter into a new tax group agreement. Effective January 1, 2002 and for a period of five years (renewable), the head of the French tax group has been Dexia Établissement Stable. This entity holds 95% of the share capital of Dexia Credit Local following restructuring operations (unwinding of cross-shareholdings between Dexia Credit Local and CCB and merger of Dexia France) and a capital increase, both carried out in 2000. In accordance with the applicable tax regulations, the agreement provides that the new head of the tax group benefits from any related tax savings instead of Dexia Credit Local. The change of the head of the tax group does not affect Dexia Credit Local subsidiaries.
246 DEXIA CREDIT LOCAL / 2007 Annual Report SHAREHOLDERS’ MEETING Statutory Auditors’ special report on regulated agreements and commitments 6
Dexia Municipal Agency
The “declaration of support” agreement of September 16, 1999 between Dexia Credit Local and Dexia Municipal Agency, which was approved by the Combined Shareholders’ Meeting of January 10, 2000, benefits the holders of bonds issued by Dexia Municipal Agency. This agreement stipulates that Dexia Credit Local will hold over 95% of the share capital of Dexia Municipal Agency on a long-term basis. In addition, Dexia Credit Local will ensure that Dexia Municipal Agency develops its activity in compliance with the provisions of Articles L. 515-13 through L. 515-33 of the French Financial and Monetary Code concerning “s ociété de crédit foncier” mortgage credit companies and has the financial resources it needs to meet its obligations. Paris - April 2, 2008 Statutory Auditors
CADERAS MARTIN MAZARS & GUERARD Daniel Butelot Olivier Avril Guillaume Potel Anne Veaute Partner Partner Partner Partner SHAREHOLDERS’ MEETING
2007 Annual Report / DEXIA CREDIT LOCAL 247 SHAREHOLDERS’ MEETING 6 Resolutions proposed to the Shareholders’ Meeting of May 16, 2008
Resolutions proposed to the Shareholders’ Meeting of May 16, 2008
FIRST RESOLUTION: APPROVAL OF THE FINANCIAL STATEMENTS
The Shareholders’ Meeting, having heard the reports of the Board of Directors, the Chairman of the Board of Directors, and the Statutory Auditors, approves the information contained in the management report and the financial statements at December 31, 2007 as presented, as well as all the transactions set out in these financial statements or mentioned in the reports, showing, after recovery of the general banking risks reserve, net income of EUR 319,477,197.41.
SECOND RESOLUTION: APPROVAL OF THE CONSOLIDATED FINANCIAL STATEMENTS
The Shareholders’ Meeting, having heard the reports of the Board of Directors, the Chairman, of the Board of Directors and the Statutory Auditors, approves the information contained in the management report and the consolidated financial statements at December 31, 2007 as presented, as well as all the transactions set out in these consolidated financial statements or mentioned in the reports, showing net income- Group share of EUR 990,914,560
THIRD RESOLUTION: APPROVAL OF ANY REGULATED AGREEMENTS AND COMMITMENTS
The Shareholders’ Meeting, having heard the Statutory Auditors’ special report on regulated agreements and commitments governed by Article L. 225-38 of the French Commercial Code, approves, pursuant to Article L. 225-40 of the Commercial Code, all regulated agreements and commitments mentioned therein.
FOURTH RESOLUTION: DISCHARGE FOR MEMBERS OF THE MANAGEMENT BODIES
By virtue of the adoption of the preceding resolutions, the Shareholders’ Meeting gives full and unconditional discharge to the members of management bodies for the performance of their duties during the year ended December 31, 2007.
248 DEXIA CREDIT LOCAL / 2007 Annual Report SHAREHOLDERS’ MEETING Resolutions proposed to the Shareholders’ Meeting of May 16, 2008 6
FIFTH RESOLUTION: APPROPRIATION OF NET INCOME AND DIVIDENDS
The Shareholders’ Meeting resolves to appropriate the sums of EUR 396,058,194.35 from the net income for the year and EUR 76,580,996.94 from retained earnings, bringing the latter to a total of EUR 302,445,347.96.
The dividend per share will amount to EUR 4.55, and shall be paid as from May 20, 2008. This dividend is eligible for the 40% allowance provided for by Article 158.3-2 of the French General Tax Code.
Pursuant to Article 243 bis of the French General Tax Code, the Shareholders’ Meeting recalls the dividends paid in respect of the three previous years:
(in euros) 2004 2005 2006
Net dividend per share 8.61 (1) 2.88 4.49 (2)
Amount per share eligible for the tax credit 1.95 (3) -- Amount per share eligible for the allowance (Article 158.3-2 of the General Tax Code) 6.66 (3) 2.88 (4) 4.49 (4)
Total amount eligible for the tax credit 169,739,226.15 (3) --
Total amount eligible for the allowance (Article 158.3-2 of the General Tax Code) 579,724,741.62 (3) 250,691,780.16 (4) 390,835,448.93 (4) (1) Including EUR 1.95 under the terms of the Extraordinary Shareholders’ Meeting held November 9, 2004. (2) Including EUR 1.04 under the terms of the Extraordinary Shareholders’ Meeting held September 4, 2006. (3) At a rate of 50%. (4) At a rate of 40%.
SIXTH RESOLUTION: CERTIFICATION OF THE FINANCIAL STATEMENTS
Pursuant to Article L. 822-14 of the French Commercial Code, the Shareholders’ Meeting acknowledges that the financial statements and consolidated financial statements for the year ended December 31, 2007 are certified, for the sixth consecutive year, by the Statutory Auditors:
• Guillaume Potel and Anne Veaute, partners, representing the firm Mazars & Guérard ; and
• Daniel Butelot and Olivier Avril, partners, representing the firm Caderas Martin.
SEVENTH RESOLUTION: RATIFICATION OF THE REPLACEMENT OF A DIRECTOR
The Shareholders’ Meeting ratifies the November 6, 2007 decision of the Board of Directors to appoint Christophe Béchu as director, to replace Loïc Le Masne de Chermont, who has resigned, for the remainder of the latter’s term of office, i.e. through the Shareholders’ Meeting held to approve the financial statements for the year ending December 31, 2010. SHAREHOLDERS’ MEETING
2007 Annual Report / DEXIA CREDIT LOCAL 249 SHAREHOLDERS’ MEETING 6 Resolutions proposed to the Shareholders’ Meeting of May 16, 2008
EIGHTH RESOLUTION: APPOINTMENT OF THE STATUTORY AUDITORS
As the terms of the principal and substitute Statutory Auditors will expire at the end of the present Shareholders’ Meeting, the Shareholders’ Meeting decides:
• in light of the Group’s policy to increase the uniformity of the audit of the financial statements, not to renew:
− the appointment of Caderas Martin as principal Statutory Auditor,
− the appointments of Benoît Desauw and Yves Robin as substitute Statutory Auditors;
• to renew the appointment of Mazars & Guérard as principal Statutory Auditor, for a term of six years expiring at the end of the Shareholders’ Meeting held to approve the financial statements for the year ending December 31, 2013;
• to appoint, for a term of six years expiring at the end of the Shareholders’ Meeting held to approve the financial statements for the year ending December 31, 2013:
− Deloitte & Associés as principal Statutory Auditor;
− Charles de Boisriou and BEAS as substitute Statutory Auditors.
The Statutory Auditors have already informed the Company that they would accept these appointments.
NINTH RESOLUTION: POWERS TO CARRY OUT FORMALITIES
The Shareholders’ Meeting gives full powers to the bearer of the original, a copy or an excerpt of the minutes of the Meeting to perform all legal filing and publication formalities.
250 DEXIA CREDIT LOCAL / 2007 Annual Report ADDITIONAL INFORMATION Summary 7
Additional 7 information
Additional legal and List of information published administrative information 252 or released during the previous twelve months 1. General information concerning Dexia Credit Local ...... 252 (prepared March 21, 2008) 257
2. Outlook ...... 254
Cross-reference table 261 Statutory Auditors 255
Statement of the person responsible for the Registration document (document de référence) 256
2007 Annual Report / DEXIA CREDIT LOCAL 251 ADDITIONAL INFORMATION 7 Additional legal and administrative information
Additional legal and administrative information
( 1. GENERAL INFORMATION CONCERNING DEXIA CREDIT LOCAL
Background Dexia Credit Local is one of the three principal entities of the Dexia Group, the Franco-Belgian group created in 1996 through the merger of Crédit Local de France and Crédit Communal de Belgique, two credit institutions specialized in the financing of local governments and participants in local economies.
Legal name As specified in its by-laws, the Company’s legal name is Dexia Credit Local. The Company uses the trade name Trade name Dexia Public Finance Bank – DPFB.
Country of origin The Company’s country of origin is France. It was incorporated in Paris on August 28, 1989 for a term of 99 years. Incorporation date and term
Registration It is registered with the Clerk of the Commercial Court of Nanterre under B 351 804 042, APE business identifier code is 6492Z .
Registered office Effective March 1, 2007, the Company’s registered office and chief place of business is: La Défense (92913) - Tour Dexia La Défense 2-1, passerelle des Reflets (telephone: +33 1 58 58 77 77).
Business structure Dexia Credit Local is a French corporation (société anonyme) with a Board of Directors, as governed by Articles L. 225-17 et Applicable legislation seq. of the French Commercial Code and Article L. 511-1 of the French Monetary and Financial Code. The Company was formerly a société anonyme with an Executive Board and a Supervisory Board; in order to standardize the organization of the various entities comprising the Dexia Group, the Extraordinary Shareholders’ Meeting of January 24, 2007 voted to adopt the structure of a société anonyme with a Board of Directors.
Business purpose The purposes for which the Company is established are: - to conduct in France and abroad any and all credit operations promoting local development and, in particular, local amenities, mainly for the benefit of local authorities and public corporations, local authority-backed agencies, local semi-public companies, concessionary public service companies and, more generally, agencies carrying out development or housing schemes, or which have entered into an agreement with a local authority for the construction or management of local amenities; - to carry out, for the benefit of the above parties, insurance brokerage activities and any consulting and assistance work in matters of financial management, financial engineering and, more generally, to offer any and all services to facilitate their financial management subject to the legislative provisions relating to the exercise of certain regulated professions; - to receive cash deposits from local authorities and local public corporations in accordance with the regulations applicable to such bodies; - to hold the funds lent to customers, pending their use; - to issue debt securities in France and abroad in order to fund the Company’s lending operations. For this purpose, the Company may: - create subsidiaries; - hold interests in companies whose business is likely to contribute to the Company’s business purpose; - establish and manage reserve funds securing loans granted to the agencies mentioned in the first paragraph of this Article. The Company may also carry out any and all transactions falling within the scope of its business purpose on behalf of and on the instructions of agencies and institutions set up to serve the public interest.
Financial year The Company’s financial year begins January 1 and ends December 31.
252 DEXIA CREDIT LOCAL / 2007 Annual Report ADDITIONAL INFORMATION Additional legal and administrative information 7
Appropriation of net income Net income for the year, less any prior-year losses and the appropriations provided for in Article 37 of the by-laws, (5% for the legal reserve prescribed by law) plus any retained earnings, is available for distribution to shareholders. The Shareholders’ Meeting determines the fraction of income available for distribution to be paid out to shareholders in the form of dividends, based on the recommendations made by the Board of Directors. The balance of income available for distribution, if any, is allocated either to unappropriated retained earnings or to one or more reserves, by decision of the Shareholders’ Meeting, which also decides on the use to be made of said reserves. The Shareholders’ Meeting may also decide to pay dividends to shareholders out of distributable reserves, but only after the year’s income available for distribution has been distributed in full. In this case, the related resolution must clearly indicate the reserves against which the dividends are to be charged. The terms and conditions of payment of the dividend will be decided by the Shareholders’ Meeting or, failing that, by the Board of Directors, but dividends must be paid within nine months of the fiscal year-end, unless this period is extended by order of the French Commercial Court ruling on an application by the Board of Directors. Notwithstanding the foregoing and in the cases provided for by applicable legislation, the Board of Directors is authorized to pay interim dividends to be deducted from the total dividends for the year just ended or the current year, prior to the approval of the related financial statements by the Shareholders’ Meeting. The amounts and payment dates of such interim dividends will be decided by the Board of Directors. At the time of determination of the final dividend, the Shareholders’ Meeting will be responsible for verifying that the provisions of the above-mentioned paragraph have been fully complied with in respect of the total dividend (including any interim dividend).
Shareholders’ Meetings Notice of Shareholders’ Meetings Shareholders’ Meetings are called in accordance with applicable regulations. They are conducted at the Company’s registered office or any other location mentioned in the notice of meeting. All shareholders are entitled to obtain copies of the documents they need to be able to make informed decisions about the matters put to the vote at Shareholders’ Meetings and to assess the management and control of the Company. The types of documents concerned and the rules governing their transmission to or consultation by shareholders are prescribed by law and the applicable regulations. Right to attend Shareholders’ Meetings All shareholders are entitled to attend Shareholders’ Meetings upon presentation of a proof of identity, provided that they have settled all capital calls relating to their shares. Shareholders may choose to be represented by another shareholder. Proxies should be filed at the registered office at least five days before the Shareholders’ Meeting. Voting rights Shares carry voting rights based on the proportion of capital represented, with each share being entitled to one vote. Each person present at the Shareholders’ Meeting is entitled to exercise one vote for each share held and each share for which he or she holds a proxy.
Place where the Company’s legal All documents and information concerning the Company may be consulted at its registered office. Please address documents may be consulted any requests to: Responsibility for information Didier Casas, Secretary General and member of the Management Board (+33 1 58 58 58 70), Jean Le Naour, Chief Financial Officer and member of the Management Board (+33 1 58 58 58 50). ADDITIONAL INFORMATION
2007 Annual Report / DEXIA CREDIT LOCAL 253 ADDITIONAL INFORMATION 7 Additional legal and administrative information
( 2. OUTLOOK
Recent events The Company has not recorded any recent material event regarding the assessment of its capital adequacy.
Trends No significant deterioration has taken place in the Company’s outlook since the most recent audited financial statements were published. No known trend, uncertainty, request, commitment or event is reasonably likely to materially influence the Company’s outlook.
Control To the best of the Company’s knowledge, no agreement exists whose implementation could, at a later date, bring about a change in its control.
Legal proceedings and arbitration For at least the last twelve months, the Company was not involved in any governmental or legal proceedings or arbitration (including any proceeding of which the Company is aware that is currently in suspense or that has been threatened) that could have or has recently had a material impact on the Company’s financial position or profitability. Among the subsidiaries, it should be noted that, like other financial institutions, FSA is the subject of an investigation by U.S. authorities into the marketing of guaranteed investment contracts (GICs).
Material changes No material change has taken place in the Company’s situation since the most recent audited financial statements were published.
Major contracts The Company has not entered into any major contracts (other than those entered into in the normal course of business) that could confer upon any member of the Group a right or an obligation that could have a material impact upon its capacity to carry out its obligations to the holders of the securities it has issued.
254 DEXIA CREDIT LOCAL / 2007 Annual Report ADDITIONAL INFORMATION Statutory Auditors 7
Statutory Auditors
The principal and substitute Statutory Auditors of Dexia Credit Local were appointed by the Shareholders’ Meeting of June 29, 1996 and renewed by the Combined Shareholders’ Meeting of May 21, 2002, for a term of six years. Their appointment was confirmed by the Shareholders’ Meeting of January 24, 2007.
Principal Statutory Auditors Substitute Statutory Auditors
• Mazars & Guérard • Yves Robin
Represented by Guillaume Potel and Anne Veaute, partners Exaltis - 61, rue Henri Regnault - 92075 La Défense Cedex
Exaltis - 61, rue Henri Regnault - 92075 La Défense Cedex • Benoît Desauw
• Caderas Martin 26, rue de Mogador – 75009 Paris
Represented by Daniel Butelot and Olivier Avril, partners
76, rue de Monceau – 75008 Paris
As the terms of the principal and substitute Statutory Auditors will the appointment of Caderas Martin as principal Statutory Auditor expire at the end of the Shareholders’ Meeting held to approve the or the appointments of Benoît Desauw and Yves Robin as substitute financial statements for the year ending December 31, 2007, and Statutory Auditors; to renew the appointment of Mazars & Guérard in line with the Dexia Group’s policy of increasing the uniformity of as principal Statutory Auditor; and to appoint Deloitte & Associés the audits of financial statements performed within the Group, the as principal Statutory Auditor and Charles de Boisriou and BEAS as Shareholders’ Meeting of May 16, 2008 is requested: not to renew substitute Statutory Auditors.
ANALYSIS OF FEES PAID TO THE STATUTORY AUDITORS
2006 2007
Mazars % Caderas % Mazars % Caderas % (EUR thousands) Martin Martin
Audit Statutory audit, certification, examination of company and consolidated financial statements 2,749 98.57% 973 100.00% 2,808 97.26 % 920 100.00%
Other assignments 40 1.43% 0 0.00% 79 2.74 % 0 0.00%
Subtotal 2,789 100.00% 973 100.00% 2,887 100.00% 920 100.00%
Other services Legal, tax and human resources advisory services 0 0.00% 0 0.00% 0 0.00% 0 0.00%
Internal audit 0 0.00% 0 0.00% 0 0.00% 0 0.00% Other (disclosure required when >10% of audit fees) 0 0.00% 0 0.00% 0 0.00% 0 0.00%
Subtotal 0 0.00% 0 0.00% 0 0.00% 0 0.00%
TOTAL 2,789 100.00% 973 100.00% 2,887 100.00% 920 100.00% ADDITIONAL INFORMATION
2007 Annual Report / DEXIA CREDIT LOCAL 255 ADDITIONAL INFORMATION 7 Statement of the person responsible for the Registration document (document de réfé rence)
Statement of the person responsible for the Registration document (document de ré fé rence)
This free translation of the “Statement of the person responsible for the Registration document ” issued in the French language is provided solely for the conveniance of the English-speaking readers.
The person responsible for the Dexia Credit Local Registration document is Gérard Bayol, Chief Executive Officer of Dexia Credit Local.
STATEMENT OF THE PERSON RESPONSIBLE FOR THE REGISTRATION DOCUMENT
I the undersigned, Gérard Bayol, Chief Executive Officer of Dexia Credit Local,
Hereby declare, after have taken all reasonable measures to this end, that, to the best of my knowledge, the information contained in the present Registration document is accurate and contain no omission that would alter its meaning.
Hereby declare, to the best of my knowledge, that the financial statements have been prepared in accordance with all applicable accounting standards and present a true and fair view of the assets, financial position and earnings of the Company and of all the companies included in the scope of consolidation, and that the management report on page 13 of the present document presents a true and fair view of changes in the revenues, earnings and financial position of the Company and of all the companies included in the scope of consolidation and a description of the main risks and uncertainties to which they are exposed.
I have obtained an audit opinion from the Statutory Auditors in which they state that they have verified the information concerning the financial position and the accounts provided in the present document and have reviewed the entire document.
The historical financial data for financial year 2006 presented in the 2006 Registration document filed with the French Financial Markets Authority (Autorité des Marchés Financiers, or AMF) on April 3, 2007 under no. D.07-0265 was the subject of the reports of the Statutory Auditors provided on pages 174 and 233 of said document, which contained no observations and no qualifications.
La Défense, April 3, 2008
Gérard Bayol
Chief Executive Officer
256 DEXIA CREDIT LOCAL / 2007 Annual Report ADDITIONAL INFORMATION List of information published or released during the previous twelve months (prepared March 21, 2008) 7
List of information published or released during the previous twelve months (prepared March 21, 2008)
Type of information Publication media and date
I - Revenues and earnings
Revenues for Q4 2007 BALO: March 12, 2008
Revenues for Q3 2007 BALO: December 5, 2007
June 30, 2007 interim financial statements BALO: October 5, 2007
Revenues for Q2 2007 BALO: August 31, 2007
Revenues for Q1 2007 BALO: June 8, 2007
Approval of the financial statements BALO: June 20, 2007
2006 financial statements BALO: April 20, 2007
II – Corporate events
Creation of the New Business Development department Information note: March 10, 2008 Appointments within Dexia Credit Local Sales and Financial Engineering-France department Information note: March 10, 2008 Appointments within Dexia Credit Local Network-France Information note: March 13, 2008 Resignation of directors Nomination of a director Les Petites Affiches: January 17, 2008 Didier Casas named Secretary General, EVP-Tax & Legal and member of the Management Board of Dexia Credit Local Press release: January 10, 2008 Appointments within Dexia Credit Local: General Secretariat Network France Information note: January 2, 2008 Appointments within Dexia Credit Local: Accounting Functions department Structured Finance department Information note: December 3, 2007 Appointments within Dexia Credit Local: Financial Engineering department Research department Network France Information note: November 7, 2007 Christophe Béchu, Chairman of the General Council of Maine-et-Loire, appointed to the Board of Directors of Dexia Credit Local Press release: November 6, 2007 Appointment within Dexia Credit Local: IT department Information note: September 27, 2007 Appointment within Dexia Credit Local: Network France Information note: September 14, 2007 Appointment within Dexia Credit Local: Institutional Customers-France department Information note: August 31, 2007 Appointment within Dexia Credit Local: Operational Risks, Information Systems Security and Permanent Control department Information note: August 28, 2007
Organization Information note: July 17, 2007 ADDITIONAL INFORMATION
2007 Annual Report / DEXIA CREDIT LOCAL 257 ADDITIONAL INFORMATION 7 List of information published or released during the previous twelve months (prepared March 21, 2008)
Type of information Publication media and date Appointments within Dexia Credit Local: Risk Management and Permanent Control department Tax & Legal department Human Resources department Financial Markets department Accounting department Appointment within Dexia Credit Local Dublin Branch Information note: July 12, 2007
Notice convening the Combined Shareholders’ Meeting of May 15, 2007 BALO: April 6, 2007
III – Other information Dexia Foundation asks youth in disadvantaged neighborhoods to provide suggestions for the coming municipal elections Press release: March 6, 2008 Dexia innovates with a loan that allows local public sector borrowers to offset the impacts on their budgets of changes in energy prices Press release: March 5, 2008 Dexia establishes the first loan that allows local authorities to offset their C02 emissions (for the city of Saumur) Press release: March 5, 2008 In response to an urgent ecological need, the “Rubans” sustainable development awards go to a new level in 2008 Press release: March 3, 2008
Dexia partner in the “Municipales 2008” transaction Press release: February 1, 2008
Dexia reinforces its partnership with Energies-Cités Press release: January 31, 2008
Accessibility of public buildings to disabled persons: local authorities to invest EUR 15 billion by 2015 Press release: January 22, 2008
Dexia Sabadell structures financing of 106 trains for the Madrid subway system Press release: December 21, 2007 As municipal elections draw nearer, the Dexia Foundation launches an appeal for projects for young people in their local mainstreaming centers Press release: December 13, 2007
Fifth annual “Mayor’s Advancement” of projects for young people in their local mainstreaming centers Press release: December 12, 2007 Dexia and Promodul create a partnership to help local authorities with thermal renovation and energy efficiency of buildings Press release: December 6, 2007
2008 “Rubans” public building awards Press release: November 26, 2007
Launch of the 2008 “Rubans” sustainable development awards Press release: November 20, 2007
The finances of urban communities remain healthy Press release: October 24, 2007
Dexia and Fédération des SEM unite their efforts in favor of sustainable development Press release: October 11, 2007
Fédération des SEM and Dexia Credit Local create an “SEM and PPP contracts” club Press release: October 10, 2007
Dexia and Trivalis create a partnership Press release: October 5, 2007
Dexia Credit Local provides assistance to local authorities in the French Antilles hard hit by Hurricane Dean Press release: October 4, 2007
Twenty years of social assistance in the French departments Press release: October 3, 2007
Citizenship school for young people in troubled urban sectors Press release: September 28, 2007 Dexia teams up with the “France Public housing” program (memorandum of understanding signed by Dexia Credit Local and the EIB on September 18, 2007) Press release: September 21, 2007 Signature of a EUR 15 million long-term agreement between the OPH (public housing agency) Alcéane of the City of Le Havre and Dexia Credit Local Press release: September 19, 2007 Signature of a EUR 30 million long-term agreement in the Nord-Pas-de-Calais region between the public housing corporation Habitat 62/59 and Dexia Credit Local Press release: September 19, 2007
Fifth annual “Rubans” sustainable development awards Press release: September 13, 2007 Local authority investment exceeds 50 billion EUR in 2007. The social taxation rate records lowest increase in the past six years Press release: September 11, 2007
Dexia arranges EUR 1.5 billion in structured finance for SANEF Press release: July 27, 2007
258 DEXIA CREDIT LOCAL / 2007 Annual Report ADDITIONAL INFORMATION List of information published or released during the previous twelve months (prepared March 21, 2008) 7
Type of information Publication media and date
Refinancing of the Millau Viaduct is arranged Press release: July 24, 2007
2007-2008 edition of “Memento – the financial resources guide for local authorities” Press release: July 24, 2007
Innovative partnership between Dexia and the Doubs department Press release: July 6, 2007
Signature of the second round of funds for South Europe Infrastructure Equity Finance Press release: July 5, 2007
Dexia Credit Local and the UNAPEI rally around the creation of structures for welcoming disabled person Press release: June 4, 2007
Seventh edition of the Focus report Press release: May 29, 2007
FNOCOFOR and Dexia Credit Local sign a partnership agreement Press release: May 10, 2007 The General Council of the Dordogne region and Dexia innovate by signing the first partnership agreement for promoting access of disabled persons to public areas Press release: April 26, 2007
Renewal of the partnership between FFB and Dexia Credit Local on April 19 Press release: April 19, 2007
Dexia commits to urban renewal in Mulhouse Press release: April 13, 2007
Dexia Credit Local report on the financial position of public hospitals Press release: March 27, 2007
CSSF provides certificate of approval for the basic prospectus dated November 29, 2007 AMF: December 10, 2007
CSSF provides certificate of approval on September 14, 2007 for the fifth supplement to the prospectus AMF: September 14, 2007
CSSF provides certificate of approval on September 4, 2007 for the fourth supplement to the prospectus AMF: September 4, 2007
Third supplement dated May 21, 2007 to the basic prospectus AMF: May 23, 2007
CSSF provides certificate of approval on May 21, 2007 for the third supplement to the prospectus AMF: May 21, 2007
Second supplement dated April 16, 2007 to the basic prospectus AMF: April 20, 2007
CSSF provides certificate of approval on April 16, 2007 for the second supplement to the prospectus AMF: April 16, 2007
Interim financial report is filed with the AMF Hugin (1): August 31, 2007
Bond issues Dexia Credit Local – EMTN 736 TR 1 Hugin: March 18, 2008 EUR 7 ,5 00,000 maturing June 2010 Dexia Credit Local – EMTN 715 TR 3 Hugin: March 13, 2008 EUR 44,000,000 maturing June 2009 Dexia Credit Local – EMTN 731 TR 1 EUR 5,000,000,000 maturing March 2013 Hugin: February 28, 2008 Dexia Credit Local – EMTN 734 TR 1 EUR 20,000,000 maturing August 2009 Hugin: February 19, 2008 Dexia Credit Local – EMTN 732 TR 1 EUR 100,000,000 maturing August 2009 Hugin: February 14, 2008 Dexia Credit Local – EMTN 720 TR 1 EUR 18,000,000 maturing May 2009 Hugin: February 13, 2008 Dexia Credit Local – EMTN 728 TR 1 USD 80,000,000 maturing August 2009 Hugin: February 4, 2008 Dexia Credit Local – EMTN 726 TR 1 EUR 20,000,000 maturing July 2009 Hugin: January 23, 2008 Dexia Credit Local – EMTN 725 TR 1 EUR 30,000,000 maturing July 2009 Hugin: January 21, 2008 Dexia Credit Local – EMTN 724 TR 1 JPY 9,000,000,000 maturing July 2009 Hugin: January 21, 2008 Dexia Credit Local – EMTN 722 TR 2 EUR 25,000,000 maturing July 2009 Hugin: January 17, 2008 Dexia Credit Local – EMTN 723 TR 1 EUR 105,000,000 maturing January 2010 Hugin: January 17, 2008 Dexia Credit Local – EMTN 721 TR 1 EUR 10,000,000 maturing January 2028 Hugin: January 16, 2008
Hugin: AMF-certified distributor of regulated financial news releases. ADDITIONAL INFORMATION
2007 Annual Report / DEXIA CREDIT LOCAL 259 ADDITIONAL INFORMATION 7 List of information published or released during the previous twelve months (prepared March 21, 2008)
Type of information Publication media and date Dexia Credit Local – EMTN 722 TR 1 EUR 85,000,000 maturing July 2009 Hugin: January 15, 2008 Dexia Credit Local – EMTN 719 TR 1 EUR 6,800,000 maturing November 2009 Hugin: December 28, 2007 Dexia Credit Local – EMTN 715 TR 2 EUR 40,000,000 maturing June 2009 Hugin: December 20, 2007 Dexia Credit Local – EMTN 713 TR 1 GBP 38,000,000 maturing June 2009 Hugin: December 18, 2007 Dexia Credit Local – EMTN 711 TR 1 EUR 10,500,000 maturing March 2011 Hugin: December 14, 2007 Dexia Credit Local – EMTN 715 TR 1 EUR 416,000,000 maturing June 2009 Hugin: December 13, 2007 Dexia Credit Local – EMTN 718 TR 1 EUR 140,000,000 maturing December 2009 Hugin: December 13, 2007 Dexia Credit Local – EMTN 710 TR 1 EUR 5,485,000 maturing December 2010 Hugin: December 5, 2007 Dexia Credit Local – EMTN 687 TR 1 EUR 15,000,000 maturing December 2015 Hugin: November 23, 2007 Dexia Credit Local – EMTN 708 TR 1 EUR 15,000,000 maturing November 2022 Hugin: November 22, 2007 Dexia Credit Local – EMTN 707 TR 1 EUR 40,000,000 maturing November 2010 Hugin: November 15, 2007 Dexia Credit Local – EMTN 709 TR 1 EUR 35,000,000 maturing May 2009 Hugin: November 15, 2007 Dexia Credit Local – EMTN 701 TR 1 EUR 50,000,000 maturing November 2009 Hugin: November 8, 2007 Dexia Credit Local – EMTN 706 TR 1 GBP 125,000,000 maturing May 2009 Hugin: November 7, 2007 Dexia Credit Local – EMTN 704 TR 1 USD 18,000,000 maturing November 2009 Hugin: November 7, 2007 Dexia Credit Local – EMTN 703 TR 1 USD 100,000,000 maturing May 2009 Hugin: November 6, 2007 Dexia Credit Local – EMTN 702 TR 1 EUR 180,000,000 maturing May 2009 Hugin: November 6, 2007 Dexia Credit Local – EMTN 697 TR 1 EUR 5,000,000 maturing September 2017 Hugin: September 27, 2007 Dexia Credit Local – EMTN 696 TR 1 EUR 10,000,000 maturing March 2010 Hugin: September 21, 2007 Dexia Credit Local – EMTN 690 TR 2 CZK 280,000,000 maturing August 2009 Hugin: August 28, 2007 Dexia Credit Local – EMTN 694 TR 1 JPY 10,000,000,000 maturing September 2010 Hugin: August 9, 2007 Dexia Credit Local – EMTN 693 TR 1 EUR 23,600,000 maturing August 2010 Hugin: August 9, 2007 Dexia Credit Local – EMTN 692 TR 1 JPY 2,000,000,000 maturing August 2009 Hugin: August 8, 2007 Dexia Credit Local – EMTN 690 TR 1 CZK 850,000,000 maturing August 2009 Hugin: August 3, 2007 Dexia Credit Local – EMTN 448 TR 2 EUR 10,000,000 maturing July 2019 Hugin: August 1, 2007 Dexia Credit Local – EMTN 689 TR 1 EUR 10,000,000 maturing July 2009 Hugin: July 18, 2007 Dexia Credit Local – EMTN 688 TR 1 JPY 12,000,000,000 maturing July 2009 Hugin: July 16, 2007 Dexia Credit Local – EMTN 685 TR 1 EUR 500,000,000 maturing July 2017 Hugin: July 5, 2007 Dexia Credit Local – EMTN 686 TR 1 JPY 7,500,000,000 maturing July 2009 Hugin: July 2, 2007
Hugin: AMF-certified distributor of regulated financial news releases.
260 DEXIA CREDIT LOCAL / 2007 Annual Report ADDITIONAL INFORMATION Cross-reference table 7
Cross-reference table
HEADINGS IN THE SCHEDULE DESCRIBED IN NOTE XI OF ARTICLE 14 OF COMMISSION REGULATION (CE) 809/2004
Page(s)
1. Responsibility
1.1. Identification of the persons responsible 256
1.2. Declaration of the persons responsible 256
2. Statutory auditors
2.1. Identification of the Statutory Auditors 255
2.2. Statutory Auditors during the period covered by the historical financial data 255
3. Risk factors
4. Information concerning the issuer
4.1. Background of the company
4.1.1. Legal name and trade name 252
4.1.2. Registration place and number 252
4.1.3. Incorporation date and term 252
Registered office, business structure, applicable legislation, country of origin, address, telephone number of 4.1.4. registered office 252
4.1.5. Recent events affecting the issuer and which could have a material impact on the evaluation of its solvency 254
5. Business review
5.1. Main activities
5.1.1. Main categories of services provided 1 / 14-24
5.1.2. New products and activities 14
5.1.3. Main markets 6 / 14- 24
5.1.4. Justification of the stated competitive positioning 5 / 14
6. Organization chart
6.1. Description the of Group and situation occupied therein by the issuer 10 / 252
6.2. Shareholding relationship with other Group entities 10 / 46, 47
7. Trend data
7.1. Declaration of lack of significant deterioration affecting the outlook since the date of the last financial statements 254
7.2. Item(s) reasonably likely to have a material impact on the outlook of the issuer, at least for the current year 254
8. Forecasts or estimates of net income None
9. Corporate governance ADDITIONAL INFORMATION
2007 Annual Report / DEXIA CREDIT LOCAL 261 ADDITIONAL INFORMATION 7 Cross-reference table
Page(s)
9.1. Name, address and function within the issuer company of the members of corporate governance bodies, and activities performed outside the company 55- 58
9.2. Declaration of no conflict of interest for the members of the Board of Directors 64
10. Primary shareholders
10.1. Identity of the primary direct and indirect shareholders -Type of control 10 / 46 -Steps taken to ensure that control is not exercised in an abusive manner None
10.2. Known agreements that could lead to a change of control 254
11. Financial information regarding the assets, financial position and earnings
11.1. Historical financial data 2006 reference document (1)
11.2. Financial reports
Consolidated financial statements 38- 43, 81 - 180
Company financial statements 43 / 44, 183- 242
11.3. Verification of the annual historical financial data
11.3.1. Report of the Statutory Auditors on the consolidated financial statements 181 / 256
Report of the Statutory Auditors on the company financial statements 243 / 256
11.3.2. Other information in the registration document verified by the Statutory Auditors 13- 62, 64- 79, 248- 250
11.3.3. Financial data in the registration document not taken from the audited financial statements None
11.4. Date of the most recent financial data
11.4.1. Last year for which the financial data were audited 181 / 243
11.5. Interim financial data None
11.5.1. Quarterly and six-month data
Verification of interim financial data
11.6. Legal proceedings and arbitration 254
11.7. Material changes in the financial position 254
12. Major contracts None
13. Information from third parties, declarations of specialists and declarations of interests
14. Documents available to the public
Place where documents may be consulted during the period of validity of the registration documents 253
(1) Pursuant to Article 28 of Commission Regulation 809-2004 (CE), this incorporates, by reference, the financial data for the year ended December 31, 2006, and the reports of the Statutory Auditors on the consolidated financial statements and the financial statements for that year, presented respectively on pages 174 and 233 of the 2006 reference document (filed with the French Financial Markets Authority (AMF) on April 3, 2007 under D. 07-0265).
262 DEXIA CREDIT LOCAL / 2007 Annual Report 2007 Annual Report / DEXIA CREDIT LOCAL 263 Graphie Design & production
Photography Cover : Marc Vanderslagmolen Pages 4 and 5: Stéphane de Bourgies
This annual report was printed by an ISO 9001 version 2000 certified printing house:
• on ISO 14001/EMAS and PEFC certified paper from sustainably-managed forest;
• with vegetable inks containing very little mineral oil .
264 DEXIA CREDIT LOCAL / 2007 Annual Report Subsidiaries and AFFILIATES Austria Crédit du Nord Dexia Kommunalkredit Bank affiliates in France 28, place Rihour – F-59800 Lille Türkenstrasse 9 Tel: +33 3 20 40 30 40 A - 1092 Vienna SUBSIDIARIES Federation of regional banks, second network of Tel: +43 1 31 6 31 the Société Générale group www.dexia-kom.com CBX.IA 2 Domiserve Bulgaria Tour Dexia La Défense 2 6 rue André Gide - F-92320 Châtillon 1, passerelle des Reflets - TSA 92202 Tel: +33 8 10 55 55 55 Dexia Kommunalkredit Bulgaria F-92919 La Défense Cedex www.cesu-domiserve.com Sofia 1000, 19 Karnigradska Tel: +33 1 58 58 58 50 Assistance for in-home services Tel: +359 897 886 761 Acquisition and administration of buildings www.dexia-kom.bg Dexia Bail OTHER DEXIA GROUP COMPANIES Spain Tour Dexia La Défense 2 IN FRANCE 1, passerelle des Reflets – TSA 92202 Dexia Sabadell F-92919 La Défense Cedex Dexia Asset Management Paseo de las Doce Estrellas, no.4 Tel: +33 1 40 69 28 40 Washington Plaza - 40, rue Washington Campo de las Naciones Equipment lease financing F-75408 Paris Cedex 08 E-28042 Madrid Dexia CLF Banque Tel: +33 1 53 93 40 00 Tel: +34 91 721 33 10 Tour Dexia La Défense 2 www.dexia-am.com www.dexiasabadell.es 1, passerelle des Reflets – TSA 92202 Management of mutual funds United States F-92919 La Défense Cedex Dexia Épargne Pension Tel: +33 1 58 58 88 02 76, rue de la Victoire - F-75009 Paris Astris Finance www.dexia-creditlocal.fr Tel: +33 1 56 60 50 23 1001 Connecticut Avenue. NW - Suite 905 Banking services for the local public sector Insurance company providing asset optimization Washington, D.C. 20036 Dexia CLF Regions Bail and social engineering services Tel: +1 202 223 9701 Tour Dexia La Défense 2 Dexia Habitat Dexia CAD Funding LLC 1, passerelle des Reflets – TSA 92202 Tour Dexia La Défense 2 445 Park Avenue F-92919 La Défense Cedex 1, passerelle des Reflets – TSA 92202 New York, NY 10022 Tel: +33 1 40 69 28 40 F-92919 La Défense Cedex Tel: +1 212 515 7000 Real estate lease financing, mainly for the local Tel: +33 1 43 92 81 64 Dexia Delaware LLC public sector Acquisition of holdings in public housing 445 Park Avenue Dexia Editions corporations New York NY 10022 Tour Dexia La Défense 2 Dexia Investor Services Bank France Tel: +1 212 515 7000 1, passerelle des Reflets – TSA 92202 105, rue Réaumur - F-75002 Paris Financial Security Assurance Inc. F-92919 La Défense Cedex Tel: +33 1 70 37 83 00 31 West 52nd Street Tel: +33 1 58 58 78 78 Administration of securities accounts, services for New York NY 10019 www.dexia-editions.com institutional investors and mutual funds Tel: +1 212 826 0100 Publication of specialized works on topics www.fsa.com concerning the local public sector Dexia Ingénierie Sociale 13, rue Croquechataigne BP 30064 Hungary Dexia Flobail F-45380 La Chapelle Saint Mesmin Tour Dexia La Défense 2 Tel: +33 2 36 56 00 00 1, passerelle des Reflets – TSA 92202 Dexia Kommunalkredit Hungary kft. Supplemental medical insurance for employees of Horvát u. 14-24 – 1027 Budapest F-92919 La Défense Cedex private and para-public companies Tel: +33 1 40 69 28 40 Tel: +36 1 224 76 50 Lease financing of local investments (notably India for energy conservation and environmental protection) Dexia Credit Local Research and Dexia Location Longue Durée International subsidiaries Development India Private Limited Tour Dexia La Défense 2 A/320, Defence Colony, New Delhi 110024 1, passerelle des Reflets – TSA 92202 and locations Tel: +91 9818097900 F-92919 La Défense Cedex Israel Tel: +33 1 57 69 55 55 SUBSIDIARIES Long-term leasing and management of public Dexia Israel Bank Ltd. sector vehicle fleets Germany 19, Ha’arbaha Str. – Hatihon Building – POB 709 Dexia Municipal Agency Tel Aviv 61 200 Tour Dexia La Défense 2 Dexia Kommunalbank Deutschland Tel: +972 3 764 76 00 1, passerelle des Reflets – TSA 92202 Charlottenstrasse 82 - D-10969 Berlin Italy F-92919 La Défense Cedex Tel: +49 30 25 59 80 Tel: +33 1 58 58 77 77 www.dexia.de Dexia Crediop www.dexia-ma.com Australia Via Venti Settembre, 30 - I-00187 Rome Dexia Credit Local’s société de crédit foncier Tel: +39 06 47 711 Dexia Sofaxis Dexia Credit Local Asia Pacific Pty Ltd. www.dexia-crediop.it Route de Créton - F-18100 Vasselay Level 23, Veritas House - 207 Kent Street Luxembourg Tel: +33 2 48 48 10 10 Sydney NSW 2000 www.dexia-sofaxis.com Tel: +612 92 47 56 39 SISL Employer risks insurance brokerage and 180, rue des Aubépines management advisory services for local L-1145 Luxembourg authorities and hospitals Tel: +352 45 90 3297 Mexico Cayman islands
Dexia Crédito Local México, SA de C.V. Dexia Credit Local Grand Cayman branch Torre Hemicor Insurgentes Sur 826 c/o CIBC Bank and Trust Company (Cayman) Piso 10 / Ala Sur Ltd CP 03100 Colonia Del Valle PO Box 694 GT Delegación Benito Juarez - Mexico D.F. 11 Dr Roy’s Drive Tel: +52 55 56 87 75 45 Grand Cayman Tel: +1 212 515 7000 Poland Ireland Dexia Kommunalkredit Polska UI. Sienna 39 - PL-00-121 Warsaw Dexia Credit Local Dublin branch Tel: +48 22 586 32 00 6 Georges Dock - IFSC Dublin 1 www.dexia-kom.pl IRL-Dublin Dexia Kommunalkredit Bank Polska Tel: +353 1 436 60 00 UI. Sienna 39 - PL-00-121 Warsaw Japan Tel: +48 22 586 32 00 www.dexia-kom.pl Dexia Credit Local Bank Tokyo branch Romania Meiji Seimei Kan 5 F 2-1-1 Marunouchi Chome Chiyoda-Ku Dexia Kommunalkredit Romania SRL Tokyo 100-0005 Japan 42 Dorobantilor Street, 1st District Tel: +81 3 6268 4000 010573 Bucharest Sweden Tel: +40 21 619 34 07 www.dexia-kom.ro Dexia Public Finance Norden Slovakia Box 7573 - Engelbrektsplan 2 S-103 93 Stockholm Dexia banka Slovensko Tel: +46 8 407 57 00 Hodzova 11 - 01011 Zilina Tel: +421 41 51 11 135 REPRESENTATIVE OFFICE www.dexia.sk Switzerland China
Dexia Public Finance Switzerland Dexia Credit Local Beijing Representative Rue de Jargonnant 2 Office CH 1207 Geneva B 603 Focus Place Tel: +41 22 718 01 20 No. 19 Jinrong Street – Xicheng District Beijing 1000 32 China Czech Republic Tel: +86 10 6657 58 58 Dexia Kommunalkredit Czech Republic a.s Karlova 27, 110 00 Prague 1 AFFILIATES Tel: +420 221 146 311 www.dexia-kom.cz South Africa
BRANCHES Infrastructure Finance Corporation (INCA) PO Box 1847 - Gallo Manor 2152 Canada Tel: +27 11 202 2200 Dexia Credit Local Canada branch Austria 800, Square Victoria - Bureau 1620 C.P. 201 Kommunalkredit Austria Montreal (Quebec) - Canada H4Z 1E3 Türkenstrasse 9 - A-1092 Vienna Tel: +1 514 868 1200 Tel: +43 1 31 6 31 www.kommunalkredit.at United States
Dexia Credit Local New York branch 445 Park Avenue - New York, NY 10022 Tel: +1 212 515 7000 www.dexia-americas.com United Kingdom
Dexia Public Finance Bank Shackleton House – 4 Battle Bridge Lane London SE1 2RB Tel: +44 20 7378 7757 www.dexia-creditlocal.fr Tél. :(+33) 15877 92913 LaDéfenseCedex Tour DexiaLaDéfense 2 1, passerelledesReflets Registered office Register underB351804042 in theNanterreTradeandCompanies with capitalstockofEUR1,327,004,846 French Corporation(Sociétéanonyme) Dexia CreditLocal
• 2007 ANNUAL REPORT www.dexia-creditlocal.fr Tél. :(+33) 15877 92913 LaDéfenseCedex Tour DexiaLaDéfense 2 1, passerelledesReflets Registered office Register underB351804042 in theNanterreTradeandCompanies with capitalstockofEUR1,327,004,846 French Corporation(Sociétéanonyme) Dexia CreditLocal
• 2007 ANNUAL REPORT