KUMAMOTO FAMILY BANK, LTD.

Financial Statements 2006

Message from the President

Kazuyuki Kawaguchi
President

FINANCIAL AND ECONOMIC ENVIRONMENT
During the term ended March 2006, the Japanese economy
entered into a phase of steady recovery, with continued
increases in exports and capital investment and increasing firmness in consumer spending. The consumer price index began torise year-on-year into the second half, and we expect steady
growth in consumer prices to continue going forward. Under
these circumstances, the Bank of Japan ended its monetary easing policies in March 2006. However, despite moderate growth
overall in the prefectural economy with improvements in economic sentiment and corporate earnings, intensifying competition among small and medium-sized enterprises, the Bank’s
main customers, continued to exacerbate the division of sectors
and companies into “winners” and “losers,” and land prices fellby even steeper margins. Due to these factors, regional financial
institutions continued to face a very difficult operating environment. Turning to finance, long-term and medium-term interest
rates have factored in the ending of the BoJ’s quantitative easing
policies and have been rising. The Nikkei stock average climbed
from ¥11,668 at the end of March 2005 to ¥17,059 at the end of
March 2006, driven by steady recovery in the Japanese economy. Meanwhile, the dollar strengthened against the yen against
a backdrop of rising US interest rates, from ¥106 at the end of
March 2005 to ¥117 at the end of March 2006.
REVIEW OF OPERATIONS (on a consolidated basis)
In this financial environment, the Bank aggressively pursued
various policies aimed at changing the mindset of directors
and other employees, so they are better equipped to makeon-the-spot decisions and deal with all eventualities with adue sense of crisis, along with various measures to rationalize
and streamline management and strengthen profitability.
As a result of these efforts, ordinary income increased¥100 million year-on-year to ¥5.4 billion (US$46 million) during the term. Despite a fall in interest on loans and bills discounted and an increase in expenses from disposal of
non-performing debt, the Bank posted increases in interestand dividends on securities and fees and commissions, aswell as gains on sales of securities and other instruments. Net
income declined ¥1.6 billion year-on-year to ¥3.4 billion(US$29 million), partly reflecting impairment losses posted onreal estate assets. The (consolidated) capital ratio rose 1.27
point year-on-year to 9.28%, with an issue of subordinatedbonds supplementing the net income. Total assets at the endof the term under review (on a consolidated basis) rose ¥20.0
billion to ¥1,317.4 billion (US$11,215 million) and shareholders’ equity grew ¥1.3 billion to ¥67.4 billion (US$574 million)
from the previous term-end. Deposits rose ¥11.7 billion toend the term at ¥1,205.3 billion (US$10,260 million), with animportant contribution coming from increased time deposits(medium and small-lot) held by individuals. Meanwhile,loans and bills discounted rose ¥9.5 billion to end the term at¥1,009.3 billion (US$8,592 million), due chiefly to an increasein housing loans. The balance of securities rose ¥33.9 billion
during the term to ¥180.0 billion (US$1,532 million), reflecting systematic efforts to enhance interest income throughmeasures such as credit purchasing.
MEDIUM-TERM BUSINESS STRATEGY AND PRIORITY
MANAGEMENT TASKS
We had a considerable measure of success in achieving theobjectives of the fifth medium-term management plan in
2005, restoring public trust through resolute reform on various fronts, including changing mindsets and posting a Vshaped recovery in earnings, enabling us to pay a dividend
again. However, the operating environment faced by regional
financial institutions remains difficult as the financial industry
continues its rapid evolution, generating not only intensifiedcompetition with other banks but also challenges such as privatization of Japan Post and the use of outsourcing by banks.
The Bank must strengthen its management capabilities toaddress the creation of effective internal control systems andthe new capital ratio requirements introduced under Basel II.
It also needs to take due measures to deal with the increasing sophistication of risk management.
Against this background, we launched our sixth mediumterm management plan. Through basic policies such as
strengthening profitability and expanding at business share,completing disposal of non-performing debt, promoting CSR,
ensuring rigid legal and regulatory compliance, further
strengthening risk management, and upgrading personnel
training bringing new vigor to the workplace, we aim torebuild public trust in our operations, enabling us to become
the bank that makes the main contribution to the regional
economy and provides the most satisfaction to the customer.

Disclosure of Claims in Accordance with the Stipulations of the Financial Reconstruction Law
TypeRehabilitated and corresponding claims
High-risk claims
Claims requiring supervision
Subtotal
Normal claims
Total

Amount (Billions of yen) Coverage rate (%)
33.5
27.7
17.1
78.5
948.7
1,027.2

100.0
89.9
49.1
85.2

Profile
Kumamoto Prefecture, the main operating base of Kumamoto
Family Bank, is blessed with a moderate, warm climate and beautiful natural scenery, represented by Mount Aso and the Amakusa
Islands. In the industrial sector, by making effective use of theplentiful supply of water and abundant land, diverse primaryindustries have developed.
Under the Kumamoto Technopolis Scheme, now entering its
third stage, urban development which unites industry, education,and government is proceeding, with high-tech industries at thecore of this strategy.
In transportation, the development of expressways, and theconstruction of harbor facilities and airports is continuing, and thedevelopment of a surface, sea, and air transportation network,
including the future opening of a new shinkansen (bullet train)
link, is progressing at a fast pace.
The Kumamoto Family Bank was established in April 1992
through a merger between the Kumamoto Bank, Ltd. and the Higo
Family Bank, Ltd., and while striving to fulfill its role as a leadingbank in the region, it has achieved steady growth.
As of the end of March 2006, consolidated total deposits stoodat ¥1,205,345 million (US$10,261 million), while paid-in capitalamounted to ¥34,262 million (US$292 million). The Bank had
1,121 employees, and operated 77 branches.

Financial Highlights
THE KUMAMOTO FAMILY BANK, LTD. and subsidiaries Years ended March 31

Thousands of
U.S. Dollars

Millions of Yen

Consolidated
For the Year Ended
Total income
Total expenses
Income before income taxes
Net income
At Year End
Total assets
Deposits
Loans and bills discounted
Securities
Reserve for possible loan losses
Capital stock
Total shareholders’ equity

2006¥

42,721
37,2303,646
3,499¥1,317,438
1,205,345
1,009,363
180,069(21,830)
34,262
67,412

2005¥

38,82533,5184,958
5,110¥1,297,437
1,193,549
999,796
146,144(25,504)
34,262
66,031

2006$

363,676
316,932
31,03829,786$11,215,102
10,260,875
8,592,517
1,532,894(185,835)
291,666
573,866

Note: Figures stated in U.S. dollars are translated from Japanese yen, solely for convenience, at the rate of ¥117.47=US$1.00, theapproximate exchange rate prevailing at March 31, 2006.

Operational and Capital Alliance with The Bank of Fukuoka, Ltd.
On May 12, 2006, the Bank signed a basic agreement with The
Bank of Fukuoka, Ltd. to create an operational and capitalalliance, and begin discussions for future management integration
with establishment of a joint holding company. Through this operational and capital alliance, and possible management integration,

both banks aim to enhance customer services by expanding theiroperating networks, contribute to regional society, achieve sustained growth in enterprise value, and enhance workforce morale
on both sides.

DETAILS OF OPERATIONAL ALLIANCE
Area of collaboration
Measures
Support for corporate rehabilitation
Joint support for turning around ailing customer businesses of both banks and restoringthem to soundness
Mutual use of ATMs without charge
Customers of one bank will be able to use ATMs of the other without charge
Joint provision of business loans
Joint development of small-lot corporate finance business using automated credit rating
Joint provision of corporate solutions
Joint development of syndicated loans, non-recourse loans and merger and acquisitionbusiness, tailored to customer business categories
Alliance on products for individuals
Joint marketing of asset management products and individual loan products
Alliance to raise operational efficiency
Joint outsourcing, branch interior design and purchase of equipment

Consolidated Balance Sheets
THE KUMAMOTO FAMILY BANK, LTD. and subsidiaries
March 31, 2006 and 2005

Thousands of
U.S. Dollars

Millions of Yen
2006

ASSETSCash and due from banks
Commercial paper and other debt purchased
Money held in trust
Securities
Loans and bills discounted
Foreign exchange
Other assets
Premises and equipment, net
Deferred tax assets
Customers’ liabilities for acceptances and guarantees
Reserve for possible loan losses
Reserve for possible losses on investments

2006

77,06590
3,986
180,069
1,009,363
460
8,079
19,56021,89918,768(21,830)(75)¥¥1,317,438¥1,297,437$11,215,102

LIABILITIES, MINORITY INTERESTS AND SHAREHOLDERS’ EQUITY
Liabilities
Deposits¥1,205,345
Foreign exchange
17
Bonds
10,000
Other liabilities
7,499
Accrued bonuses
429
Reserve for retirement benefits
5,749
Reserve for contingency
55
Reserve for impairment loss on fixed assets
11
Deferred tax liabilities resulting from land revaluation
2,139
Acceptances and guarantees
18,768¥1,193,549
4
—
7,189
443
5,077
539
—
2,276
22,311$10,260,875
145
85,12863,838
3,652
48,940468
94
18,209159,768

1,250,017

1,231,392

10,641,159

9

13

77

34,262
23,164
8,539
871
700
(125)

34,262
23,164
5,668
1,038
2,012
(114)

291,666
197,191
72,691
7,415
5,959(1,064)67,412

66,031

573,866¥1,317,438¥1,297,437$11,215,102

Total assets

Total liabilities
Minority interests
Shareholders’ equity
Capital stock
Capital surplus
Retained earnings
Land revaluation excess
Unrealized gain on available-for-sale securities
Treasury stock
Total shareholders’ equity
Total liabilities, minority interests and shareholders’ equity

¥

2005

98,94377
3,996
146,144
999,796
422
7,775
22,301
21,24722,311(25,504)(75)$

656,040766
33,932
1,532,894
8,592,517
3,916
68,775
166,511
186,422
159,768(185,835)(638)

Consolidated Statements of Income
THE KUMAMOTO FAMILY BANK, LTD. and subsidiaries
Years ended March 31, 2006 and 2005

IncomeInterest income:Interest on loans and bills discounted
Interest and dividends on securities
Interest on due from banks
Interest on interest-rate swaps
Other interest received
Fees and commissions
Other operating income
Other income
Expenses
Interest expenses:
Interest on deposits
Negotiable certificates of deposit
Interest on call money and bills soldInterest on borrowed money
Interest on bonds
Other interest paid
Fees and commissions
Other operating expenses
General and administrative expenses
Other expenses:
Provision for possible loan losses
OthersOrdinary income
Extraordinary income
Gains on sale of properties and premises
Gains on collection of loan assets
Other extraordinary income
Extraordinary losses
Losses on sale of premises and equipment
Impairment loss on fixed assets
Other extraordinary losses
Income before income taxes
Income taxes
Current
Deferred
Minority interests
Net income

Millions of Yen
2006
2005
¥42,721¥38,825
31,196
31,37428,52130,399
1,729
905
0
0
103
—
842
68
4,042
3,620
1,119
2,644
6,363
1,186
37,23033,518
2,766
2,109
2,669
2,046
—
0
0
4
1
0
21
—
73
56
2,407
2,449
1,758
1,825
16,147
16,27614,15010,857
12,964
9,013
1,184
1,841
5,491
5,306
495
51
—
0
5
27
490
22
2,339
399
14
395
2,324
—
0
4
3,646
4,958
50
100
(3)
¥ 3,499

38
(202)
12
¥ 5,110

Thousands of
U.S. Dollars
2006$363,676
265,566
242,794
14,7190877
7,168
34,4099,526
54,167
316,932
23,546
22,721
—
0
9
179
621
20,49014,966
137,456
120,456
110,360
10,07946,744
4,214
—
43
4,171
19,911
119
19,7840
31,038426851(26)$ 29,786

Consolidated Statements of Retained Earnings
THE KUMAMOTO FAMILY BANK, LTD. and subsidiaries
Years ended March 31, 2006 and 2005

Millions of Yen
2006
2005
Capital surplus
Balance at beginning of year
Decrease during year:
Transfer to retained earnings
Balance at end of year
Retained earnings
Balance at beginning of year
Increase during year:
Transfer from capital surplus
Net income
Reversal of land revaluation excess
Decrease during year:
Cash dividend
Losses on disposal of treasury stock
Balance at end of year

Thousands of
U.S. Dollars
2006¥23,164——¥23,164¥31,097
7,933
7,933¥23,164$197,191——$197,191¥ 5,668
3,667
—
3,499
167
796
796
0
¥ 8,539¥ (7,421)
13,090
7,933
5,110
46
0
—
0
¥ 5,668$ 48,251
31,216—29,786
1,422
6,776
6,776
0
$ 72,691

Consolidated Statements of Cash Flows
THE KUMAMOTO FAMILY BANK, LTD. and subsidiaries
Years ended March 31, 2006 and 2005

Thousands of
U.S. Dollars

Millions of Yen
2006

2005

2006

3,646
781
2,324
7,632
—
(13)
672
(483)
(31,196)
2,766(5,985)
(290)
(44)
14
(20,452)
11,795
—
—
1,925
(13)
(37)
12
31,123(2,389)(299)¥ 4,958
789
—
77
(27)
3
612
490
(31,374)
2,109
(554)
(56)
(38)
394
21,332
1,436(2,000)(2)(1,384)(77)33
031,629(2,864)131$ 31,038
6,649
19,78464,970
—
(111)
5,721
(4,112)(265,566)
23,546(50,949)(2,469)(375)
119(174,104)
100,409——
16,387
(111)
(315)
102
264,944(20,337)(2,545)

Subtotal

1,490

25,618

12,684

Income taxes paid

(34)

(218)

(289)

Net cash provided by operating activities

1,456

25,40012,395

Cash flows from investing activities
Purchases of securities
Proceeds from sale of securities
Proceeds from redemption of bonds
Increase in money held in trust
Decrease in money held in trust
Purchase of premises and equipment
Proceeds from sale of premises and equipment(113,916)
59,15024,422
—
—
(208)
23

(66,481)
53,566
8,690
(500)
536
(564)
273

(969,745)
503,533
207,900——(1,771)
196

Net cash used in investing activities(30,528)(4,478)(259,879)

Cash flows from financing activities
Proceeds from issuance of bonds
Cash dividends paid
Acquisition of Company shares
Proceeds from sale of shares in treasury

9,915
(796)
(11)
0

—
—
(14)
0

84,405(6,776)
(94)
0

9,107

(14)

77,52611

8

94

Net increase (decrease) in cash and cash equivalents
Cash and cash equivalents at beginning of year

(19,953)
96,69920,91575,784(169,856)
823,180

Cash and cash equivalents at end of year

¥ 76,746¥96,699$653,324

Cash flows from operating activities
Income before income taxes and minority interests
Depreciation
Impairment loss on fixed assets
Increase in reserve for possible loan losses
Decrease in reserve for possible losses on investments
Increase (decrease) in accrued bonuses
Increase in reserve for retirement benefits
Increase (decrease) in reserve for contingent liabilities
Interest income
Interest expenses
Gains on sale and valuation of securities, net
Gains on money held in trust
Gains on foreign exchange
Losses on sale of premises and equipment
Net decrease (increase) in loans and bills discounted
Net increase in deposits
Net decrease in negotiable certificates of deposit
Net decrease in collateral money deposited
Net decrease (increase) in due from banks (excluding that from Bank of Japan)
Net decrease in call loans and others
Net decrease (increase) in foreign exchange (assets)
Net increase in foreign exchange (liabilities)
Proceeds from fund operations
Expenditure for fund procurement
OthersNet cash provided by (used in) financing activities
Effect of exchange rate change on cash and cash equivalents¥

Board of Directors, Corporate Auditors and Executive Officers
President
Kazuyuki Kawaguchi

Managing Director
Masaharu Koba

Senior Managing Director
Takayuki Nagatani

Directors
Ei Takeshita
Kiyokazu Kishimoto
Masaharu Takano

Auditors
Toshihiko Wakisaka
Kazuharu Yoshida
Yoshihiro Furushoh
Hironao Nishiyama

Executive Officers
Shigehiro Uemura
Shuitsu Teramoto
Noritaka Murayama
Toru Higashi
Ichiro Sakai
Takashi Nomura(As of June 29, 2006)

Organization
General Meeting of Shareholders
Corporate Auditors

Planning
Corporate Administration Div.

Board of Corporate Auditors

Treasury & International Div.

Board of Directors

Tokyo Liaison Office

Corporate Inquiry Committee

Personnel & General Affairs
Personnel & General Affairs Div.

Executive Committee
MarketingBusiness Management Div.
Branch Administration Div.
Corporate Banking Div.
Corporate Promotion Div.
Private Banking Div.
Kumamoto Institution of Economic and Management Research
CreditCredit Supervision Div. I
Credit Supervision Div. II
Administration
Business Management Div.
Operational Administration
Systems Administration
Auditing
Auditing Div.

(As of June 13, 2006)

Corporate Directory
Corporate Data
Established: January 1929

Major Shareholders

Paid-in Capital: ¥34,262 million
Head Office:29-20, Suizenji 6-chome, Kumamoto 862-8601, Japan
Telephone: +81-96-385-1111
Number of Domestic Offices: 77
Number of Employees: 1,121
Issued and Outstanding Shares: 182,134,000
Number of Shareholders: 4,577

Mizuho Corporate Bank, Ltd.
Tokio Marine & Nichido Fire Insurance Co., Ltd.
Nippon Life Insurance Company
Aozora Bank, Ltd.
The Nishi-Nippon City Bank, Ltd.
Japan Trustee Services Bank, Ltd. (trust account 4)
Kumamoto Family Bank Employees’
Shareholdings Association
Jono Printing Co., Ltd.
Japan Trustee Services Bank, Ltd. (trust account)
Higo Bank, Ltd.

Thousandsof Shares

Percentage ofTotal Shareholdings

7,855
4,107
2,926
2,832
2,795
2,439

6.39%
3.34%
2.38%
2.30%
2.27%
1.98%

2,303
2,284
2,241
2,134

1.87%
1.85%
1.82%
1.73%
(As of March 31, 2006)

29-20, Suizenji 6-chome,
Kumamoto 862-8601, Japan

Printed in Japan