## NOTESTO CONSOLIDATED FINANCIAL STATEMENTS 

(Dollar Amounts in Thousands) 

## NOTE 1— Statement of Accounting Policies (continued) 

## New Accounting Pronouncements (continued) 

interest expense on the subordinated debentures no longer being eliminated in consolidation and the interest expense on the capital securities no longer being included in the Consolidated Statement of Income. 

As part of its community reinvestment initiatives, the Corporation invests in qualified affordable housing projects as a limited partner. The Corporation receives federal affordable housing tax credits for these limited partnership investments. The Corporation’s maximum potential exposure to these partnerships is $3,556, consisting of the limited partnership investments plus unfunded commitments as of December 31, 2003. The Corporation’s preliminary determination is that these investments will not be consolidated but continue to be accounted for under the equity method whereby the Corporation’s portion of partnership losses are recognized as incurred. The adoption of FIN 46 is not expected to have a material impact on the Corporation’s financial condition or results of operations. 

In April 2003, the FASB issued Statement No. 149 “Amendment of Statement 133 on Derivative Instruments and Hedging Activities” (“FAS No. 149”). FAS No. 149 amends and clarifies accounting for derivative instruments, including certain derivative instruments embedded in other contracts, and for hedging activities under FAS No. 133. In particular, FAS No. 149 clarifies under what circumstances a contract with an initial net investment meets the characteristic of a derivative and when a derivative contains a financing component that warrants special reporting in the statement of cash flows. This statement is effective for contracts entered into or modified after June 30, 2003 and for hedging relationships designated after June 30, 2003. The adoption of FAS No. 149 did not have a material impact on the Corporation’s financial condition or results of operations. 

In May 2003, the FASB issued Statement No. 150 “Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity” (“FAS No. 150”). FAS No. 150 represents the first phase of the FASB’s broader project on (1) distinguishing between liability and equity instruments and (2) accounting for instruments that have characteristics of both liabilities and equity. 

This statement requires issuers to classify as liabilities the following three types of freestanding financial instruments: 

(1) mandatorily redeemable financial instruments, 

(2) obligations to repurchase the issuer’s equity shares by transferring assets and (3) certain obligations to issue a variable number of shares. A freestanding financial instrument is one that is entered into separately and apart from any of the entity’s other financial instruments or equity transactions or is entered in conjunction with some other transaction but can be legally detached and exercised on a separate basis. 

FAS No. 150 is relatively narrow in scope as it specifies only that certain instruments must be classified as liabilities but does not include additional guidance on the concept of what constitutes either a “liability” or “equity.” Entities will continue to apply existing guidance on determining the balance sheet classification of instruments that do not specifically fall within the scope of FAS No. 150. FAS No. 150 applied immediately to financial instruments entered into or modified after May 31, 2003. For all other instruments that exist, this statement went into effect at the beginning of the first interim period beginning after June 15, 2003. Adoption of FAS No. 150 did not have a material impact on the Corporation’s financial condition or results of operations. 

On May 15, 2003, the Securities and Exchange Commission issued Staff Interpretation Topic D-107, which indicated that unless lease residuals were individually insured, no related amount should be considered in minimum lease payments. 

This interpretation is more restrictive than criteria previously utilized by many financial services companies in determining whether leases qualified for financing lease treatment. A majority of the Corporation’s automobile leases have residual insurance coverage that includes a deductible and/or cap on maximum coverage for each year of lease originations. 

Interpretations of Topic D-107 have concluded that residual insurance policies with deductibles and caps calculated on a group basis do not meet the definition of “individually insured” even though: (1) individual lease losses are covered after consideration of the deductible in place and (2) the caps on loss coverage included in the policies are unlikely to be exceeded. Consequently, a majority of the Corporation’s automobile leases outstanding at December 31, 2003 would not qualify as financing leases. Management has determined that the impact of changing from financing lease treatment to operating lease treatment is not material to the Corporation’s financial condition or results of operations and is not anticipated to be material to future results of operations or financial condition; therefore, no restatement of previously issued financial statements is required. The Corporation had discontinued automobile leasing in April of 2003. 

