Taiwan Cooperative Bank, Ltd.
Financial Statements for the Years Ended December 31, 2005 and 2004 and Independent Auditors’ Report INDEPENDENT AUDITORS’ REPORT
The Board of Directors and the Stockholders Taiwan Cooperative Bank, Ltd.
We have audited the accompanying balance sheets of Taiwan Cooperative Bank, Ltd. as of December 31, 2005 and 2004, and the related statements of income, changes in stockholders’ equity and cash flows for the years then ended. These financial statements are the responsibility of the Bank’s management. Our responsibility is to express an opinion on these financial statements based on our audits. However, we did not audit the financial statements as of and for the year ended December 31, 2004 of the Manila Branch and two equity-method investees, United Taiwan Bank S.A. and United Real Estate Management Co. The total assets as of December 31, 2004 and net income in 2004 of the Manila Branch were 0.5% (NT$10,209,754 thousand) and 10% (NT$83,629 thousand) of the Bank’s total assets and net income, respectively. The balances of the long-term equity investments in these investees were NT$1,197,322 thousand as of December 31, 2004, which were 0.06% of the Bank’s total assets. The Bank’s equity in the investees’ net income in 2004 was NT$41,812 thousand, which was 4% of the Bank’s income before income tax. The financial statements of the Manila Branch and investees were audited by other auditors whose reports have been furnished to us, and our opinion, insofar as it relate to the amounts included for the Branch and investees, was based solely on the reports of the another auditors.
We conducted our audits in accordance with the Rules Governing the Audit of Financial Statements of Financial Institutions by Certified Public Accountants and auditing standards generally accepted in the Republic of China. Those rules and standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits and the reports of the other auditors provide a reasonable basis for our opinion.
As stated in Notes 2 and 3, the financial statements of Taiwan Cooperative Bank, Ltd. become final only after being examined by the Ministry of Audit of the Control Yuan before privatization. The financial statements of Taiwan Cooperative Bank, Ltd. for the year ended December 31, 2004 have been examined by the Ministry of Audit. The 2004 financial statements were not restated because the adjustments were immaterial.
In our opinion, based on our audits and the reports of the other auditors, the financial statements referred to above present fairly, in all material respects, the financial position of Taiwan Cooperative Bank, Ltd. as of December 31, 2005 and 2004, and the results of its operations and its cash flows for the years then ended, in conformity with government regulations, Regulations Governing the Preparation of Financial Reports by Publicly Banks and accounting principles generally accepted in the Republic of China.
- 1 - As stated in Note 4, the Bank began applying ROC Statement of Financial Accounting Standards (SFAS) No. 35, “Accounting for Asset Impairment”on January 1, 2005.
As stated in Note 1, the Bank changed its Chinese name on February 10, 2006, but its English name remains unchanged.
We have also audited the consolidated financial statements of Taiwan Cooperative Bank, Ltd. and its subsidiary as of December 31, 2005 and 2004, and for the years then ended, on which we have issued a modified unqualified opinion thereon in our report dated February 23, 2006.
February 23, 2006
Notice to Readers
The accompanying financial statements are intended only to present the financial position, results of operations and cash flows in accordance with accounting principles and practices generally accepted in the Republic of China and not those of any other jurisdictions. The standards, procedures and practices to audit such financial statements are those generally accepted and applied in the Republic of China.
For the convenience of readers, the auditors’ report and the accompanying financial statements have been translated into English from the original Chinese version prepared and used in the Republic of China. If there is any conflict between the English version and the original Chinese version or any difference in the interpretation of the two versions, the Chinese-language auditors’ report and financial statements shall prevail.
- 2 - TAIWAN COOPERATIVE BANK, LTD.
BALANCE SHEETS DECEMBER 31, 2005 AND 2004 (In Thousands of New Taiwan Dollars, Except Par Value)
2004 (Audited by the 2004 (Audited by the 2005 MOA - Note 3) 2005 MOA - Note 3) ASSETS Amount % Amount % LIABILITIES AND STOCKHOLDERS’ EQUITY Amount % Amount %
CASH AND CASH EQUIVALENTS (Notes 5 and 26) $ 33,995,269 2 $ 29,035,441 2 LIABILITIES Due to the Central Bank and other banks (Notes 14 and 26) $ 249,060,945 13 $ 269,101,897 13 DUE FROM THE CENTRAL BANK AND OTHER BANKS (Notes 6 and 26) 360,330,229 18 349,718,619 17 Securities sold under repurchase agreements (Notes 2 and 15) 39,305,020 2 20,539,180 1 Payables (Note 16) 37,320,232 2 36,218,378 2 SECURITIES PURCHASED, NET (Notes 2, 7 and 27) 216,132,652 11 309,471,455 15 Advances 892,208 - 1,468,141 - Deposits and remittances (Notes 17 and 26) 1,533,042,886 78 1,582,927,974 78 RECEIVABLES, NET (Notes 2 and 8) 27,409,397 1 15,558,643 1 Bonds (Note 18) 30,951,000 2 30,998,000 1 Funds borrowed from the Central Bank 5,093,300 - 14,321,396 1 SECURITIES PURCHASED UNDER RESALE AGREEMENTS (Notes 2 and 9) 219,173 - 2,778,013 - Long-term liabilities (Notes 12 and 19) 4,907,948 - 10,769,761 1 Other liabilities (Notes 2 and 20) 1,440,218 - 2,002,999 - PREPAID EXPENSES 359,227 - 2,412,838 - Total liabilities 1,902,013,757 97 1,968,347,726 97 BILLS, DISCOUNTS AND LOANS, NET (Notes 2, 10 and 26) 1,274,672,030 65 1,253,938,099 62 STOCKHOLDERS’ EQUITY LONG-TERM INVESTMENTS (Notes 2, 11 and 27) Capital stock - $10 par value, authorized 4,500,000 thousand shares and issued: Long-term equity investments - equity method 1,145,541 - 1,204,406 - 2,539,830 thousand shares in 2005; authorized and issued 2,539,830 thousand Long-term equity investments - cost method 3,821,974 - 4,057,562 - shares in 2004 25,398,304 1 25,398,304 1 Bonds 9,304,420 1 19,753,618 1 Reserve for capitalization 2,539,830 - - - Others 2,290,000 - 2,000,000 - Capital surplus 27,721,432 1 29,274,539 2 Retained earnings Total long-term investments 16,561,935 1 27,015,586 1 Legal reserve 2,528,882 - 2,285,980 - Special reserve 2,993,505 1 2,588,668 - OTHER FINANCIAL ASSETS 20,000 - 20,000 - Unappropriated 2,654,336 - 926,599 - Cumulative translation adjustments 92,628 - 193,085 - PROPERTIES (Notes 2 and 12) Land (including revaluation increments) 17,772,844 1 10,658,069 1 Total stockholders’ equity 63,928,917 3 60,667,175 3 Buildings 10,068,517 1 9,983,990 - Machinery and equipment 4,223,103 - 4,195,104 - CONTINGENCIES AND COMMITMENTS (Notes 2 and 28) Transportation equipment 542,691 - 531,888 - Other equipment 1,146,867 - 1,142,812 - Leasehold improvements 418,650 - 390,076 - Cost and revaluation increments 34,172,672 2 26,901,939 1 Less: Accumulated depreciation 7,411,886 1 6,880,016 - Less: Accumulated impairment 74,332 - - - 26,686,454 1 20,021,923 1 Prepayments 4,217 - 79,504 -
Net properties 26,690,671 1 20,101,427 1
OTHER ASSETS, NET (Notes 2, 13 and 23) Nonoperating assets, net 3,326,471 1 11,085,811 1 Deferred income tax assets, net 1,906,421 - 1,892,796 - Collaterals assumed, net 3,127,180 - 4,457,389 - Refundable deposits 648,622 - 771,930 - Operating deposits 250,000 - 250,000 - Settlement funds 52,656 - 51,942 - Others 240,741 - 454,912 -
Total other assets, net 9,552,091 1 18,964,780 1
TOTAL $ 1,965,942,674 100 $ 2,029,014,901 100 TOTAL $ 1,965,942,674 100 $ 2,029,014,901 100
The accompanying notes are an integral part of the financial statements.
(With Deloitte & Touche audit report dated February 23, 2006)
- 3 - TAIWAN COOPERATIVE BANK, LTD.
STATEMENTS OF INCOME YEARS ENDED DECEMBER 31, 2005 AND 2004 (In Thousands of New Taiwan Dollars, Except Earnings Per Share)
2004 (Audited by 2005 the MOA - Note 3) Amount % Amount %
OPERATING REVENUES Interest (Notes 2 and 26) $ 43,184,286 87 $ 40,052,810 87 Service fees (Notes 2 and 26) 2,387,586 5 2,337,367 5 Income from securities, net (Note 2) 3,667,313 7 3,134,665 7 Income from long-term equity investments under the equity method, net (Note 2) - - 44,547 - Income from long-term equity investments, net (Note 2) 121,640 - 263,807 - Foreign exchange gain, net (Note 2) 450,133 1 283,603 1 Others 118,621 - 107,233 -
Total operating revenues 49,929,579 100 46,224,032 100
OPERATING COSTS Interest (Notes 2 and 26) 28,765,380 58 22,682,554 49 Service charges 647,523 1 572,805 1 Loss on long-term equity investments by equity method, net (Note 2) 131 - - - Provisions for reserve (Note 2) 1,316,394 3 5,216,437 12 Others 38,728 - 34,677 -
Total operating costs 30,768,156 62 28,506,473 62
GROSS PROFIT 19,161,423 38 17,717,559 38
OPERATING EXPENSES (Notes 21 and 22) Business operating expenses 15,785,771 31 15,353,723 33 General and administrative expenses 356,248 1 536,975 1 Others 35,872 - 35,698 -
Total operating expenses 16,177,891 32 15,926,396 34
OPERATING INCOME 2,983,532 6 1,791,163 4
NONOPERATING INCOME AND GAINS 1,839,278 3 1,034,809 2
NONOPERATING EXPENSES AND LOSSES (Notes 12 and 13) 2,018,945 4 1,791,645 4
INCOME BEFORE INCOME TAX 2,803,865 5 1,034,327 2
INCOME TAX (Notes 2 and 23) 169,514 - 224,653 -
NET INCOME $ 2,634,351 5 $ 809,674 2
(Continued) - 4 - 2004 (Audited by 2005 the MOA - Note 3) After After Pretax Tax Pretax Tax EARNINGS PER SHARE (Note 25) Basic $ 1.10 $ 1.04 $ 0.41 $ 0.32
The accompanying notes are an integral part of the financial statements.
(With Deloitte & Touche audit report dated February 23, 2006) (Concluded)
- 5 - TAIWAN COOPERATIVE BANK, LTD.
STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY YEARS ENDED DECEMBER 31, 2005 AND 2004 (In Thousands of New Taiwan Dollars)
Capital Surplus (Notes 2, 12 and 24) Revaluation Cumulative Capital Stock Reserve for Additional Increments Retained Earnings (Note 24) Translation Total Shares (in Capitalization Paid-in on Legal Special Adjustments Stockholders’ Thousands) Amount (Note 24) Capital Properties Total Reserve Reserve Unappropriated Total (Note 2) Equity
BALANCE, JANUARY 1, 2004 (AUDITED BY THE MOA) 2,208,548 $ 22,085,482 $ - $ 28,444,697 $ 3,118,134 $ 31,562,831 $ 1,544,101 $ 2,456,476 $ 2,544,383 $ 6,544,960 $ 198,646 $ 60,391,919
Appropriation of 2003 earnings Legal reserve ------741,879 - (741,879 ) - - - Special reserve ------1,236,466 (1,236,466 ) - - - Cash dividends ------(441,710 ) (441,710 ) - (441,710 ) Appropriation to farmers’ and fishermen’s associations ------(7,403 ) (7,403 ) - (7,403 ) Balance after appropriation 2,208,548 22,085,482 - 28,444,697 3,118,134 31,562,831 2,285,980 3,692,942 116,925 6,095,847 198,646 59,942,806 Capital surplus transferred to capital stock 331,282 3,312,822 - (2,208,548 ) - (2,208,548 ) - (1,104,274 ) - (1,104,274 ) - - Changes in revaluation increments on properties - - - - (79,744 ) (79,744 ) - - - - - (79,744 ) Net income in 2004 ------809,674 809,674 - 809,674 Cumulative translation adjustments ------(5,561 ) (5,561 )
BALANCE, DECEMBER 31, 2004 2,539,830 25,398,304 - 26,236,149 3,038,390 29,274,539 2,285,980 2,588,668 926,599 5,801,247 193,085 60,667,175
Appropriation of 2004 earnings (audited by the MOA - Note 3) Legal reserve ------242,902 - (242,902 ) - - - Special reserve ------404,837 (404,837 ) - - - Cash dividends ------(253,983 ) (253,983 ) - (253,983 ) Appropriation to farmers’ and fishermen’s associations ------(4,892 ) (4,892 ) - (4,892 ) Balance after appropriation 2,539,830 25,398,304 - 26,236,149 3,038,390 29,274,539 2,528,882 2,993,505 19,985 5,542,372 193,085 60,408,300 Capital surplus transferred to capital stock - - 2,539,830 (2,539,830 ) - (2,539,830 ) ------Net income in 2005 ------2,634,351 2,634,351 - 2,634,351 Changes in revaluation increments on properties - - - - 986,723 986,723 - - - - - 986,723 Cumulative translation adjustments ------(100,457 ) (100,457 )
BALANCE, DECEMBER 31, 2005 2,539,830 $ 25,398,304 $ 2,539,830 $ 23,696,319 $ 4,025,113 $ 27,721,432 $ 2,528,882 $ 2,993,505 $ 2,654,336 $ 8,176,723 $ 92,628 $ 63,928,917
The accompanying notes are an integral part of the financial statements.
(With Deloitte & Touche audit report dated February 23, 2006)
- 6 - TAIWAN COOPERATIVE BANK, LTD.
STATEMENTS OF CASH FLOWS YEARS ENDED DECEMBER 31, 2005 AND 2004 (In Thousands of New Taiwan Dollars)
2004 (Audited by the MOA - 2005 Note 3)
CASH FLOWS FROM OPERATING ACTIVITIES Net income $ 2,634,351 $ 809,674 Provision for reserves and bad debt 1,316,394 5,216,437 Provision (reversal) of allowance for decline in market value of securities purchased (437,120 ) 437,120 Increase in deferred income tax (13,625 ) (99,541 ) Depreciation and amortization 903,275 801,021 Provision for asset impairment loss 228,147 - Amortization of bond premium 659,414 487,824 Recovery of written-off credits 4,036,717 5,589,203 Provision (disbursement) for pension costs (4,123,045 ) 2,642,337 Loss (gain) from long-term equity investments by equity method 131 (43,969 ) Permanent value decline of long-term equity investments 230,682 - Gain on disposal of properties and nonoperating assets, net (1,377,840 ) (395,690 ) Loss (gain) on sale of long-term equity investments 1,986 (10,529 ) Provision (reversal) of allowance for unrealized loss on market value decline of foreclosed collaterals 435,011 (45,876 ) Decrease in securities purchased for trading purposes 2,386,359 3,343,319 Decrease (increase) in receivables and prepayments (2,740,594 ) 8,286,487 Increase in payables and advance 523,594 560,413
Net cash provided by operating activities 4,663,837 27,578,230
CASH FLOWS FROM INVESTING ACTIVITIES Decrease (increase) in due from the Central Bank and other banks (10,611,610 ) 70,850,070 Decrease (increase) in securities purchased for investing purposes 110,978,025 (77,477,224 ) Decrease (increase) in securities purchased under resale agreements 2,558,840 (1,278,013 ) Increase in bills, discounts and loans (35,259,242 ) (43,518,283 ) Acquisition of other financial assets - (20,000 ) Proceeds from sales of long-term investments 4,268 20,214 Acquisition of long-term investments (10,145,024 ) (14,296,235 ) Acquisition of properties (385,076 ) (494,713 ) Proceeds from disposal of properties and nonoperating assets 2,054,802 1,374,469 Proceeds from sales of nonperforming loans 1,826,652 - Decrease in other assets 155,512 229,732
Net cash provided by (used in) investing activities 61,177,147 (64,609,983 )
(Continued)
- 7 - 2004 (Audited by the MOA - 2005 Note 3)
CASH FLOWS FROM FINANCING ACTIVITIES Increase (decrease) in due to the Central Bank and other banks $ (20,040,952 ) $ 18,770,012 Increase in securities sold under repurchase agreements 18,765,840 3,990,322 Increase (decrease) in deposits and remittances (49,885,088 ) 34,390,128 Issuance of bonds - 15,200,000 Repayment of bonds (47,000 ) (21,922,000 ) Decrease in funds borrowed from the Central Bank (9,228,096 ) (14,440,912 ) Decrease in long-term liabilities (281,326 ) (53,251 ) Increase (decrease) in other liabilities 72,513 (5,040 ) Cash dividends and payments to farmers’ and fishermen’s associations (256,548 ) (447,415 )
Net cash provided by (used in) financing activities (60,900,657 ) 35,481,844
EFFECT OF CHANGES IN EXCHANGE RATE 19,501 (36,708 )
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 4,959,828 (1,586,617 )
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR 29,035,441 30,622,058
CASH AND CASH EQUIVALENTS, END OF YEAR $ 33,995,269 $ 29,035,441
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION Interest paid $ 28,655,238 $ 24,114,037 Income tax paid $ 482,917 $ 348,351
PART-CASH INVESTING ACTIVITIES Sales amount of nonperforming loans $ 9,133,261 $ - Receivable from sale of nonperforming loans (7,306,609 ) - Proceeds from sale of nonperforming loans $ 1,826,652 $ -
NONCASH INVESTING ACTIVITIES Reclassification of long-term bonds as securities purchased $ 20,048,089 $ - Reclassification of securities purchased as long-term bonds $ - $ 5,685,072
The accompanying notes are an integral part of the financial statements.
(With Deloitte & Touche audit report dated February 23, 2006) (Concluded)
- 8 - TAIWAN COOPERATIVE BANK, LTD.
NOTES TO FINANCIAL STATEMENTS YEARS ENDED DECEMBER 31, 2005 AND 2004 (In Thousands of New Taiwan Dollars, Unless Stated Otherwise)
1. ORGANIZATION AND OPERATIONS
Taiwan Cooperative Bank, Ltd. (the “Bank”) was officially inaugurated on October 5, 1946 to regulate the supply and demand of funds for cooperative organizations by accepting their surplus funds as deposits and extending working funds to them. On February 10, 2006, the Bank changed its Chinese name upon approval by the Ministry of Economic Affairs. However the Bank’s English name remains unchanged. The Bank became a legal entity in 1985 in accordance with the Banking Law. At the start of 2001, the Bank was converted into a corporate entity engaged in (a) all commercial banking operations allowed under the Banking Law; (b) international banking operations; (c) overseas branch operations as authorized by the respective foreign governments; and (d) other operations as authorized by the central competent authority-in-charge.
The Bank has its Head Office in Taipei. It had a Business, International Banking, Finance and Trust Departments as well as 172 domestic branches, 6 securities brokerage branches, an offshore banking unit (OBU), an overseas branch and 12 representative offices as of December 31, 2005.
The operations of the Bank’s Trust Department are (1) planning, managing and operating the trust business; and (2) custodianship of nondiscretionary trust fund in domestic and overseas securities and mutual funds. These operations are regulated under the Banking Law and Trust Law.
As of December 31, 2005 and 2004, the Bank had 6,228 and 6,650 employees, respectively.
The Bank’s shares have been listed on the Taiwan Stock Exchange since November 17, 2004.
The Executive Yuan approved the Bank’s “Taiwan Cooperative Bank Privatization Plan” on January 24, 2005. Under the plan, the Executive Yuan Government-owned Company Privatization Fund released 305,000 thousand Bank shares to lower the government-owned share ratio to 46.74%. This plan had been completed on April 4, 2005.
For the Bank’s increased competitiveness and expansion of operating scope, the stockholders resolved in their special meeting on December 28, 2005 to merge the Bank with the Farmers Bank of China, with the Bank as the survivor entity and its authorized capital increased to $45,000,000 thousand. Based on the merger contract, 2.45 common shares of the Farmers Bank of China will be exchanged for one common share of the Bank, and the Bank’s capital is expected to increase by $8,163,265 thousand through its issuance of 816,327 thousand common shares to allow the Farmers Bank’s stockholders to convert their shares to the Bank’s. This issuance number is subject to adjustment as may be required by certain regulations or the merger contract. As of February 23, 2006 (the date of the accompanying auditors’ report), Bank intended to transfer capital surplus to capital stocks on February 27, 2006. With this transfer, the Bank has to increase its capital for the merger by $8,968,610 thousand through the issuance of 896,861 thousand shares.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The accompanying financial statements include the accounts of the Head Office, all domestic and overseas operating departments, branches and representative offices. All interoffice account balances and transactions have been eliminated. - 9 - The Bank’s financial statements have been prepared in conformity with the government regulations, Regulations Governing the Preparation of Financial Reports by Public Banks and accounting principles generally accepted in the Republic of China (ROC). In preparing financial statements in conformity with these guidelines and principles, the Bank is required to make certain estimates and assumptions that could affect amounts of the allowance for credit losses, reserve for losses on guarantees, depreciation, pension, assets impairment, income tax, contingent liabilities, etc. Actual results could differ from these estimates. Also, since the length of the operating cycle in the banking industry could not be reasonably identified, accounts included in the Bank’s financial statements were not classified as current or noncurrent. Nevertheless, accounts were properly categorized according to the nature of each account, and sequenced by their liquidity. The maturity analysis of the Bank’s assets and liabilities is shown in Note 31.
For the convenience of readers, the accompanying financial statements have been translated into English from the original Chinese version prepared and used in the Republic of China. If there is any conflict between the English version and the original Chinese version or any difference in the interpretation of the two versions, the Chinese-language financial statements shall prevail.
The Bank’s significant accounting policies are summarized as follows:
General Accounting Practice
Before privatization, the Bank is majority-owned by the Ministry of Finance. Its accounting practices mainly follow the Budget Law, Account Settlement Law and Uniform Regulations of Accounting System for Banks Governed by the Ministry of Finance. The Bank’s annual financial statements are examined by the Ministry of Audit (MOA) of the Control Yuan. The examinations are primarily aimed at determining the extent to which the Bank meets its budget as approved by the Legislative Yuan and the reasonableness of any deviation from this budget. The Bank’s financial statements are finalized on the basis of the result of these examinations. The MOA’s adjustments should be reflected in the financial statements audited by independent CPAs. The next year’s opening balance of the Bank’s accounts book is based on the balance after adjustments of the MOA’s audit. The examination of the Bank’s financial statements as of and for the fiscal year ended December 31, 2004 by MOA had already been completed.
Securities Purchased
Securities purchased, compared by each investment portfolio (such as short-term bills, foreign securities, and local securities which included bonds, stocks, securitized financial instruments and beneficiary certificates), are stated at the lower of aggregate cost or market price on the balance sheet date.
The cost of sold short-term bills and foreign securities in offshore banking unit (OBU) and overseas branch is determined by the specific identification method. The cost of stocks, beneficiary certificates, bonds and other securities is based on the moving-average method.
Securities Purchased/Sold Under Resale/Repurchase Agreements
Sales of securities under repurchase agreements are treated as liabilities, while purchases of securities under resale agreements are recorded as assets, and both transactions are valued by the cost method. The difference between the original purchase cost (or selling price) and the contracted resale (or repurchase) amount is recognized as interest income (or interest expense). Please refer to Note 4 for additional information.
Overdue Loans
Loans and other credits (including accrued interest) that are overdue for at least six months are classified as overdue loans in accordance with the guideline issued by the Ministry of Finance.
- 10 - Allowance for Credit Losses and Reserve for Losses on Guarantees
In determining the allowance for credit losses and reserve for losses on guarantees, the Bank evaluates the losses on particular loans and overall credit portfolio, considering the balances of bills, discounts, loans, receivables, and overdue loans as well as guarantees as of the balance sheet dates.
Under “The Rules for Bank Asset Evaluation, Loss Reserve Provision, and Disposal of Overdue Loans and Bad Debts” (the “Rules”) issued by the Ministry of Finance (MOF), the Bank evaluates credit losses on the basis of its borrowers’/clients’ financial condition, delinquency record on payment of the interest and principal and collateral provided to estimate level of collectibility. The Rules provide that the minimum amount of provision for credit losses should be equal to 50% of the aggregate doubtful credits and 100% of the uncollectible credits. In July 2005, the Rules amended the classification of loan assets, such that loan assets are now classified as credits under observation, credits likely to be paid in full, credits on which receipt of full payment will be difficult, and credits on which there is no hope of payment, and the minimum allowance for credit losses and provision for losses on guarantees for these classifications are 2%, 10%, 50% and 100% of outstanding credits, respectively. The amendment on the classification of loan assets had no significant impact on the Bank’s financial statements.
Under the MOF guidelines, write-offs of specific loans are offset against the recorded allowance for loan losses, as approved by the board of directors.
Long-term Investments
Long-term equity investments are accounted for by the equity method if the Bank has significant influence over an investee; otherwise, the Bank uses the cost method.
Investments accounted for by the equity method are stated at cost plus (or minus) a proportionate share in the investees’ net earnings (losses) or changes in net worth. Shares in net earnings (net losses) are recognized as investment income (loss), and cash dividends received are accounted for as a reduction of the carrying value of the investments. If there is evidence suggesting that the investment value had been impaired and there is remote chance of recovery, the loss will be charge to the current income. If net income on an investment becomes negative, the maximum investment loss the Bank is allowed to recognize will be limited to the extent that the original carrying amount of the investment plus any advances given to the investee are equal to zero, unless the Bank decides to support the investee or there are adequate evidences suggesting the loss is temporary and the investee will become profitable again in the near future.
Investments accounted for by the cost method are carried at cost. Investments in stocks with no quoted market price are accounted for at cost. The carrying amount of the investment is reduced to reflect an other than temporary decline in the value of the investments, with the related losses charged to current income. Investment in stock with a quoted market price is stated at the lower of aggregate cost or market price. The reduction of an investment to reflect a lower market value and its write-up due to the subsequent recovery in market value are charged or credited to stockholders’ equity. Cash dividends received from a year after investment acquisition are recognized as investment income.
For both equity-method and cost-method investments, stock dividends received result only in an increase in the number of shares held but are not recognized as investment income.
Cost of investments sold is determined by the weighted-average method.
Long-term bonds investments are stated at cost. Premiums/discounts are amortized (as a charge or credit to interest income) over the remaining terms of the bond. Cost of sold or mature bonds is determined by the weighted-average method.
Other long-term investments are valued using the cost method. Cost of investments sold is determined by the specific identification method.
- 11 - Properties and Nonoperating Assets
Properties and nonoperating assets are stated at cost, or cost plus revaluation increments, less accumulated depreciation. Major renewals, additions and improvements are capitalized; repairs and maintenance are expensed as incurred.
From 2005 onwards, properties and nonoperating assets will be reviewed by the Bank for any indication that the assets may be impaired on each balance sheet date. An impairment loss should be recognized on the balance sheet date if the recoverable amount of the assets or the cash generating unit is below the carrying amount. If impairment loss is reversed, the increase in the carrying amount from the reversal will be credited to current income, but this loss reversal should not be more than the carrying amount (net of depreciation) had the impairment not been recognized. For the unrealized revaluation increment recognized upon revaluation required by law, the impairment loss is recognized as reduction of the reported revaluation increment. If the impairment loss exceeds the reported revaluation increment, the excess is recognized as current loss. Subsequent to the incurrence of loss, if this impairment loss is reversed, such loss reversal is recognized as current income to the extent of the loss previously recognized and any reversal exceeding the amount of previously recognized loss is reported as unrealized revaluation increment.
Depreciation of properties and nonoperating assets is computed on the straight-line basis over useful lives estimated as follows: buildings, 10 to 50 years; machinery and equipment, 3 to 6 years; transportation equipment, 5 to 8 years; other equipment, 5 years; and leasehold improvements, 5 to 10 years. Assets still being used after they have reached their full depreciation value are depreciated over newly estimated service lives.
Upon sale or disposal of properties, their cost and related accumulated depreciation are removed from the accounts. Any resulting gain or loss is credited or charged to nonoperating income.
Collaterals Assumed
Collaterals assumed are recorded at cost (included in other assets) and revalued at the lower of cost or net realizable value as of the balance sheet date. If cost is lower than net realizable value, impairment loss is recognized. If collaterals are not disposed of within the statutory period, relevant regulations require that the Bank should either apply for the extension of disposal period or increase its provision for possible losses.
Pension Cost
The Bank has two pension plans: defined benefit and defined contribution.
Under the defined benefit plan, pension cost is determined actuarially. Under the defined contribution plan, the Bank’s pension fund contributions are recognized as current expense throughout the employees’ service periods. Before the Bank’s privatization on April 4, 2005, the unamortized prior service cost was amortized over the average remaining service years of employees and the unrecognized net transition obligation was amortized using the straight-line method over 15 years. These unamortized prior service cost and unrecognized net transition obligation were settled during the privatization.
Recognition of Interest Revenue and Service Fees
Interest revenue on loans and financial instruments is recorded on the accrual basis. Interest revenue on loans and other credits extended by the Bank that are classified as overdue loans is recognized only upon collection.
The unpaid interest on rescheduled loans should be recorded as deferred revenue (part of other liabilities), and the paid interest is recognized as interest revenue.
- 12 - Service fees are recorded as income upon receipt or upon substantial completion of the earnings process based on the nature of the transaction.
Foreign-currency Transactions
The Bank records foreign-currency transactions (except derivative transactions) in the respective currencies in which these are denominated. Every month-end, foreign-currency income and expenses are translated into New Taiwan dollars at the exchange rates announced by the Central Bank of China (CBC). On the balance sheet date, foreign-currency assets and liabilities, except those resulting from forward contract transactions, are translated into New Taiwan dollars at the CBC closing rates. Realized and unrealized foreign exchange gains or losses resulting from these translations are charged or credited to current income. Translation difference resulting from restating of balance sheet items using period-end exchange rate from Central Bank of China and income statements using average exchange rate of that period for both overseas branches and foreign-currency long-term equity investments are recorded as “cumulative translation adjustments” under stockholders’ equity.
Derivative Financial Instruments a. Forward contracts
Foreign-currency assets and liabilities on forward contracts, which are used mainly to accommodate customers’ needs or to manage the Bank’s currency positions, are recorded at the contracted forward rates on the contract starting dates. Gains or losses arising from the differences between the contracted forward rates and spot rates at settlement are credited or charged to current income. For contracts outstanding as of the balance sheet date, the gains or losses arising from the differences between the contracted forward rates and the forward rates available for the remaining maturities of the contracts are credited or charged to current income. Receivables and payables on forward contracts as of the balance sheet date are netted out. The net amount is presented as an asset or a liability.
Non-deliverable forward contracts, which are used for trading purposes, do not involve exchanges of principals upon settlement. The gains or losses arising from the differences between the contracted forward rate and the spot rate on the settlement date are recognized as foreign exchange gain or loss. For contracts outstanding as of the balance sheet date, the gains or losses arising from the differences between the contracted forward rates and the forward rates available for the remaining maturities of the contracts are credited or charged to current income. b. Interest rate swaps
Interest rate swaps do not involve exchanges of notional principals. These transactions are recorded through memorandum entries on the contract date. For swaps entered into for nontrading purposes, the net interest upon each settlement is recorded as an adjustment to interest revenue or expense associated with the hedged item. c. Asset swaps
Asset swaps involve exchanging the fixed rate interest and stock conversion rights of convertible bonds for floating rate interest or fixed rate interest. These transactions are recorded as memorandum entries on the contract date since no actual exchange of contract (notional) principals is involved. Asset swaps are used to hedge interest rate exposure of convertible bonds denominated in foreign currency. Net interest on each settlement date/balance sheet date is recorded as an adjustment to interest revenue associated with the hedged bonds.
- 13 - d. Currency swap contracts
Foreign-currency spot-position assets or liabilities arising from currency swap contracts are recorded at spot rates when the transactions occur, and the corresponding forward-position assets or liabilities are recorded at the contracted forward rates. The difference between the spot rate on the contract starting date and the contracted forward rate is amortized using the straight-line method over the term of the contract and recorded as interest income or expense. Receivables and payables on outstanding contracts as of the balance sheet date are netted out. The net amount is presented as an asset or a liability. e. Currency options
For currency option contracts, which are for trading purposes, the premiums paid or received are recorded as assets or liabilities. Gain or loss on the exercise of options is credited or charged to current income. Options are marked to market every month-end, and the resulting gains or losses are recognized either as income or expenses. If not exercised at maturity date, the carrying amounts of the options are credited or charged to current income or loss. f. Foreign-currency margin
For foreign-currency margin contracts, which are for trading purposes, margins paid or received are recorded as assets or liabilities. The Bank calculates daily the unrealized gain or loss at spot rates. Gains or losses on the settlement date are credited or charged to interest income or expense.
Income Tax
Inter-period income tax allocation is used, by which tax effects of loss carryforwards, deductible temporary differences and unused investment tax credits are recognized as deferred income tax assets, and those of taxable temporary differences are recognized as deferred income tax liabilities. A valuation allowance is provided for deferred income tax assets that are not certain to be realized.
Tax credits for certain technology or equipment purchases, expenditures for research and development, employee training and stock investments are recognized in the current period.
Any adjustments of prior years’ tax liabilities are included in the current year’s tax expense.
Interest income from short-term bills is subjected to withholding tax and included in tax expenses.
Income tax (10%) on unappropriated earnings is recorded as income tax in the year when the stockholders resolve to retain the earnings.
Contingencies
A loss is recognized when it is probable that an asset has been impaired or a liability has been incurred and the amount of loss can be reasonably estimated. If loss is possible but cannot be reasonably estimated, information on the circumstances that might give rise to the possible loss is disclosed in the notes to the financial statements. Reclassification
Certain accounts for 2004 had been reclassified to be consistent with the 2005 financial statement presentation.
- 14 - 3. GOVERNMENT AUDIT ADJUSTMENTS FOR FISCAL YEAR ENDED DECEMBER 31, 2004
The Bank’s accounting records as of and for the year ended December 31, 2004 had been examined by the Ministry of Audit (MOA), and resulting adjustments are summarized as follows:
Adjustments - As Previously Increase As Audited by Reported (Decrease) the MOA (Note 3) 2004
Due from the Central Bank $ 337,597,954 $ 50,000 $ 337,647,954 Securities purchased, net 309,471,455 (50,000 ) 309,421,455 Receivables, net 16,103,115 (544,472 ) 15,558,643 Prepaid expenses 216,921 2,195,917 2,412,838 Bills, discounts and loans 1,253,938,099 (39,184,879 ) 1,214,753,220 Other assets, net 18,848,734 39,300,925 58,149,659 Payables 34,481,911 1,736,467 36,218,378 Stockholders’ equity 60,636,151 31,024 60,667,175 Operating costs 29,551,507 (1,045,034 ) 28,506,473 Operating expenses 15,252,382 674,014 15,926,396 Nonoperating income and gains 876,652 158,157 1,034,809 Nonoperating expenses and losses 1,280,696 510,949 1,791,645 Income before income tax 1,016,099 18,228 1,034,327 Income tax 237,449 (12,796 ) 224,653 Net income 778,650 31,024 809,674
Under Article 6 of the Securities and Exchange Law Enforcement Rules, because the 2004 net income difference between the amount audited by the MOA and that audited by the CPA was less than 1% of operating revenue and 5% of outstanding shares, the 2004 financial statements need not be restated.
Note: In the preparation of the 2005 financial statements, the above amounts, which were audited by the MOA, were reclassified according to the Regulations Governing the Preparation of Financial Reports by Publicly Held Banks effective January 1, 2004.
4. ACCOUNTING CHANGE
Under a directive issued by the Ministry of Finance, sales and purchases of short-term bills under repurchase or resell agreements were treated as outright sales or purchases until 2003. However, under the Guidelines Governing the Preparation of Financial Reports by Public Banks effective January 1, 2004, the repurchase/resell transactions are treated as financing. This accounting change decreased the Bank’s net income for the year ended December 31, 2004 by $8,494 thousand.
Since the volume of the Bank’s repurchase/resell transactions is huge and the accounting systems had been revised several times such that historical trading data are hard to trace, calculating the cumulative effect of the change in accounting principle was difficult. Thus, the Bank cannot calculate the cumulative effect of the change in accounting principle, and the pro forma information cannot be disclosed either.
- 15 - The Bank began applying ROC Statement of Financial Accounting Standards (SFAS) No. 35, “Accounting for Asset Impairment,”on January 1, 2005. SFAS No. 35 requires that properties and other assets, including cash-generating units (CGUs), be reviewed to determine on the balance sheet date if usable value is larger than fair value. If usable value is larger than fair value, the usable value will be the recoverable amount. Under this requirement, each branch is considered a cash-generating unit, and the present value of its future cash flow should be calculated. This accounting change caused the Bank’s properties to decrease by $74,332 thousand and its nonoperating assets by $206,084 thousand as of December 31, 2005. The Bank made a provision for impairment loss of $228,147 thousand and decreased unrealized revaluation increments on nonoperating assets by $52,269 thousand as of December 31, 2005.
5. CASH AND CASH EQUIVALENTS
2004 (Audited by the MOA - 2005 Note 3)
Cash on hand $ 14,496,415 $ 14,731,134 Notes and checks in clearing 18,037,495 7,810,090 Due from banks 1,461,359 6,494,217
$ 33,995,269 $ 29,035,441
6. DUE FROM THE CENTRAL BANK AND OTHER BANKS
2004 (Audited by the MOA - 2005 Note 3)
Deposit reserve - account A $ 9,564,101 $ 18,046,905 Deposit reserve - account B 39,124,853 40,096,510 Reserves for deposits - community financial institutions 34,641,725 34,018,085 Reserves for deposits - foreign-currency deposits 56,676 58,685 Deposits in the Central Bank 233,500,000 243,200,000 Due from the Central Banks - others 2,148,467 2,177,769 Call loans to banks 41,294,407 12,120,665
$ 360,330,229 $ 349,718,619
The deposit reserves are determined monthly at prescribed rates based on the average balances of customers’ New Taiwan dollar deposits. The deposit reserve is subject to withdrawal restrictions, but reserve - account A and foreign-currency deposit reserves may be withdrawn anytime and are noninterest earning.
- 16 - 7. SECURITIES PURCHASED, NET
2004 (Audited by the MOA - 2005 Note 3)
Bonds $ 23,558,121 $ 9,774,870 Commercial paper 6,182,893 4,128,927 Securities - dealing 39,670,298 32,064,968 Foreign securities 22,882,864 20,861,303 Domestic stock, beneficiary certificates and others 3,938,476 8,907,310 Negotiable certificates of deposit 119,900,000 234,171,197 216,132,652 309,908,575 Less - allowance for decline in market value - (437,120 )
$ 216,132,652 $ 309,471,455
As of December 31, 2005 and 2004, some of securities - dealing and commercial paper, which amounted to $37,129,600 thousand and $20,406,900 thousand (face value), respectively, had been sold under repurchase agreements.
8. RECEIVABLES, NET
2004 (Audited by the MOA - 2005 Note 3)
Interest receivable $ 6,595,111 $ 5,615,791 Accrued revenue 478,157 1,551,485 Acceptances 3,578,985 3,137,074 Credit cards 2,928,058 3,023,182 Refundable compensation from advance insurance 3,298,306 - Accounts receivable 635,898 657,930 Tax refundable 741,001 - Foreign exchange contract receivables 280,329 97,109 Receivable from sale of nonperforming loans 7,306,609 - Others 2,191,901 2,042,218 28,034,355 16,124,789 Less - allowance for credit losses (624,958 ) (566,146 )
$ 27,409,397 $ 15,558,643
On December 12, 2005, the Bank sold booked overdue loans of $12,288,574 thousand (which did not include a portion of credits written off) by inviting public bidding on three packages: A, B and C. Package A and C, amounting to $8,642,935 thousand, were sold to Taiwan Cooperative Asset Management Company (subsidiary of the Bank) , on which a loss of $2,510,341 thousand was recognized. Package B, amounting to $3,645,639 thousand, was sold to Taiwan Asset Management Corporation, on which a loss of $644,972 thousand was recognized. As of December 31, 2005, the Bank had received $1,826,652 thousand of the payments on the packages sold.
On June 29, 2004, the Bank sold booked overdue loans of $2,832,432 thousand (which did not include a portion of credits written off) to Colony Capital Asia Pacific Pte. Ltd. (CCAP) for $3,152,422 thousand and recognized a gain of $319,990 thousand. On October 7, 2004, the Bank received CCAP’s full payment.
- 17 - 9. SECURITIES PURCHASED UNDER RESALE AGREEMENTS
As of December 31, 2005 and 2004, securities acquired for $219,173 thousand and $2,778,013 thousand under resale agreements will be sold for $219,357 thousand before January 19, 2006 and were sold for $2,779,306 thousand before January 18, 2005, respectively.
10. BILLS, DISCOUNTS AND LOANS, NET
2004 (Audited by the MOA - 2005 Note 3)
Bills discounted $ 1,155,702 $ 1,052,074 Overdraft Unsecured 14,709,723 26,455,254 Secured 1,124,306 1,506,752 Bills, import and export negotiations 711,712 621,074 Short-term loans Unsecured 177,527,906 185,816,416 Secured 43,605,283 42,269,020 Receivable from securities financing 401,165 464,441 Mid-term loans Unsecured 309,430,233 328,428,852 Secured 194,744,919 155,931,856 Long-term loans Unsecured 87,762,267 84,804,607 Secured 427,223,497 393,655,295 Overdue loans 28,314,435 50,204,946 1,286,711,148 1,271,210,587 Less - allowance for credit losses (12,039,118 ) (17,272,488 )
$ 1,274,672,030 $ 1,253,938,099
Accrual of interest on the above overdue loans had stopped. Thus, the unrecognized interest revenue was $1,201,691 thousand in 2005 and $1,595,105 thousand in 2004 based on the average loan interest rates for those years.
In 2005 and 2004, the Bank had written off credit only after completing required legal procedures. As of December 31, 2005, the Board of Directors had resolved to write off credits amounting to $59,414,943 thousand which still not sold.
The details and changes in allowance for credit losses of bills, discounts and loans are summarized below:
2005 Specific Risk General Risk Total
Balance, January 1, 2005 (audited by the MOA) $ 11,281,245 $ 5,991,243 $ 17,272,488 Provisions 1,168,374 184,819 1,353,193 Write-offs (10,625,419 ) - (10,625,419 ) Recovery of written-off credits 4,036,717 - 4,036,717 Effects of exchange rate changes - 2,139 2,139
Balance, December 31, 2005 $ 5,860,917 $ 6,178,201 $ 12,039,118
- 18 - 2004 (Audited by the MOA - Note 3) Specific Risk General Risk Total
Balance, January 1, 2004 $ 11,032,125 $ 5,744,184 $ 16,776,309 Provisions 4,960,785 248,912 5,209,697 Write-offs (10,294,599 ) - (10,294,599 ) Recovery of written-off credits 5,589,203 - 5,589,203 Effects of exchange rate changes (6,269 ) (1,853 ) (8,122 )
Balance, December 31, 2004 $ 11,281,245 $ 5,991,243 $ 17,272,488
11. LONG-TERM INVESTMENTS
2004 (Audited by the MOA - 2005 Note 3)
Long-term equity investments $ 4,967,515 $ 5,261,968 Long-term bonds - local government bonds 9,304,420 19,753,618 Other long-term investments - preferred stock 2,290,000 2,000,000
$ 16,561,935 $ 27,015,586
Long-term equity investments are summarized as follows:
2004 (Audited by the 2005 MOA - Note 3 % of % of Amount Ownership Amount Ownership Equity method Companies with no quoted market prices United Taiwan Bank S.A. $ 1,038,305 70.00 $ 1,138,585 70.00 United Real Estate Management Co., Ltd. 62,074 30.00 58,737 30.00 Cooperative Assets Management Co., Ltd. 35,971 100.00 - - Cooperative Insurance Brokers Co., Ltd. 9,191 100.00 - - Cooperative Bank Insurance Broker - - 7,084 40.00 1,145,541 1,204,406 Cost method Listed and over-the-counter companies Waterland International Bills 433,872 4.08 433,872 4.08 Taiwan Development & Trust Co. 252,300 8.41 255,450 8.52 Bank of Overseas Chinese 13,747 0.13 28,082 0.28 699,919 717,404 Companies with no quoted market prices Taiwan Asset Management Corporation 2,000,000 11.35 2,000,000 11.35 Taiwan Power Co., Ltd. 631,153 0.24 631,153 0.24 Tang Eng Iron Works Co., Ltd. 218,078 6.23 436,156 6.23 Financial Information Service Co., Ltd. 70,727 1.76 69,380 1.73 Taiwan Financial Asset Service Co. 50,000 2.94 50,000 2.94 Others 152,097 - 153,469 - 3,122,055 3,340,158 3,821,974 4,057,562
$ 4,967,515 $ 5,261,968
- 19 - The aggregate market values of both the listed and over-the-counter stocks, based on the average closing prices in December of 2005 and 2004, were $1,130,887 thousand and $1,178,714 thousand, respectively.
The investees’ financial statements used as basis for calculating the carrying amounts of the equity-method investments as of December 31, 2005 and 2004 and the related investment income for the years then ended had all been audited, except those of the Cooperative Insurance Brokers Co., Ltd. (CICB). The Bank believes that had CICB’s financial statements been audited, the effects on the Bank’s financial statements would have been immaterial. The Bank’s equity-method investments resulted in a loss of $131 thousand in 2005 and a gain of $44,547 thousand in 2004.
The Bank had provided consolidated financial statements including over 50% share holding subsidiaries for years ended 2005 and 2004.
In the third quarter of 2005, the investment carrying value of Cooperative Bank Insurance Broker, an equity-method investee, became negative. Since the Bank did not commit to support this investee financially nor was there any evidence of the investee’s return to profitable operations, the Bank decided to stop recognizing any more investment loss.
Other long-term investments were (a) convertible accumulated preferred stocks of Taiwan High Speed Rail Corporation amounting to $2,000,000 thousand, which will mature in six years after the issue date of January 31, 2003 (stocks were purchased at a par value of NT$10 dollars, with an annual cash dividend rate of 5%; the ratio of transfer from preferred stock to common stock is 1:1); and (b) preferred stocks of Bank of Panshin amounting to $290,000 thousand, with invested amount to be wholly returned on maturity in six years, with 4.5% annual dividend rate; par value is NT$10 dollars.
12. PROPERTIES
2004 (Audited by the MOA - 2005 Note 3) Land Cost $ 12,720,913 $ 4,739,366 Revaluation increments 5,051,931 5,918,703
$ 17,772,844 $ 10,658,069
Accumulated depreciation Buildings $ 2,814,785 $ 2,616,892 Machinery and equipments 2,914,969 2,664,977 Transportation equipments 412,085 401,448 Other equipments 941,769 897,540 Leasehold improvements 328,278 299,159
$ 7,411,886 $ 6,880,016
Accumulated impairment Land $ 11,030 $ - Buildings 63,302 -
$ 74,332 $ -
The Bank revalued its properties twice in prior years. As of December 31, 2005, the revaluation increments on properties and nonoperating assets amounted to $6,128,013 thousand. The reserve of $2,230,234 thousand for land value increment tax (included in long-term liabilities) net of tax was included in capital surplus.
- 20 - The Board of Directors of the Bank had resolved in early 2005 to build the head office on Zhong Lun Land, and as the construction of Zhong Lun Building went underway, the Bank had reclassified this land from nonoperating assets to properties in early 2005.
The Bank reviews assets for impairment, in which each branch is treated as a cash-generating unit. The branch carrying amount is the recoverable amount, and the return rate on the future value of the branch is 13%. As of December 31, 2005, the Bank recognized an impairment loss of $74,332 thousand on all branches, which was credited to nonoperating expenses and losses because two branches’ future cash inflows were smaller than their carrying amounts.
13. OTHER ASSETS
2004 (Audited by the MOA - 2005 Note 3)
Nonoperating assets, net $ 3,326,471 $ 11,085,811 Collaterals assumed, net 3,127,180 4,457,389 Deferred income tax assets, net (Note 23) 1,906,421 1,892,796 Refundable deposits 648,622 771,930 Operating deposits 250,000 250,000 Settlement fund 52,656 51,942 Other assets to be settled 43,491 177,249 Others 197,250 277,663
$ 9,552,091 $ 18,964,780
Nonoperating assets as of December 31, 2005 and 2004 were as follows:
2004 (Audited 2005 by the MOA) Land Cost $ 1,426,006 $ 9,440,751 Revaluation increments 1,076,082 627,758 2,502,088 10,068,509 Buildings - cost 1,459,121 1,404,863 Total cost and revaluation increments 3,961,209 11,473,372 Less accumulated depreciations (428,654 ) (387,561 ) Less accumulated impairment (206,084 ) -
$ 3,326,471 $ 11,085,811
Part of the buildings and the land included in nonoperating assets had been leased to third parties.
As of December 31, 2005, there was no evidence that the recoverable amount of the Bank’s nonoperating assets were significantly larger than the fair values. Thus, property assessment companies were asked to review these assets and determine their fair values. Based on this assessment, an impairment loss of $206,084 thousand was recognized, of which $153,815 thousand was credited to impairment loss (credited to nonoperating expenses and losses) and $52,269 thousand was deducted from unrealized revaluation increments on properties in capital surplus.
- 21 - Of the collaterals assumed, the land in Taipei City Zhongzhen District and buildings mentioned above (amounting to $363,431 thousand) were put on auction on December 21, 2005, and the Bank’s affiliate, Cooperative-I Asset Management Co., Ltd. (100% subsidiary of Cooperative Asset Management Co., Ltd.), acquired these properties for $329,003 thousand. As of December 31, 2005, the legal procedures for ownership transfer had not been completed.
14. DUE TO THE CENTRAL BANK AND OTHER BANKS
2004 (Audited by the MOA - 2005 Note 3)
Due to banks $ 172,743,681 $ 202,803,428 Call loans from banks 74,056,339 63,149,931 Overdraft 1,876,393 2,749,728 Due to the Central Bank 384,532 398,810
$ 249,060,945 $ 269,101,897
15. SECURITIES SOLD UNDER REPURCHASE AGREEMENTS
Securities sold for $39,305,020 thousand and $20,539,180 thousand under repurchase agreements as of December 31, 2005 will be purchased for $39,363,923 thousand by June 28, 2006 and were purchased for $20,575,881 thousand as of June 28, 2005.
16. PAYABLES
2004 (Audited by the MOA - 2005 Note 3)
Checks for clearing $ 18,037,495 $ 7,809,940 Collections for others 2,432,525 2,278,102 Collections of notes for others 302,288 1,171,461 Interest payable 4,474,160 4,184,208 Payable for notes and checks collected for others 818,953 2,784,141 Acceptances 3,618,241 3,202,645 Accrued expenses 2,382,579 2,093,265 Tax payable 222,933 1,914,695 Foreign exchange payable 124,136 1,417,542 Others 4,906,922 9,362,379
$ 37,320,232 $ 36,218,378
- 22 - 17. DEPOSITS AND REMITTANCES
2004 (Audited by the MOA - 2005 Note 3)
Savings $ 1,079,753,948 $ 1,132,569,929 Time 267,217,145 277,804,695 Demand 130,820,090 121,780,653 Checking 29,195,045 25,141,502 Treasury 22,892,936 23,225,215 Negotiable certificates of deposit 2,638,700 1,843,500 Remittances 525,022 562,480
$ 1,533,042,886 $ 1,582,927,974
18. BONDS
2004 (Audited by the MOA - 2005 Note 3)
Subordinated bonds in 2000: Floating interest rate of 1-year time deposit rate plus 0.5% amounting to $19,469,000 thousand, and fixed rate 6.15% amounting to $2,501,000 thousand; maturity - July 14, 2009 $ 1,000 $ 48,000 Subordinated bonds in 2001: Floating interest rate of 1-year time deposit rate plus 0.6% amounting to $8,100,000 thousand, and fixed rate 3.3% amounting to $1,900,000 thousand; maturity - November 28, 2008 10,000,000 10,000,000 Subordinated bonds in 2003: Floating interest rate of 1-year time deposit rate plus 0.25%; maturity - May 8, 2010 5,750,000 5,750,000 Subordinated bonds in 2004: Floating interest rate of 1-year time deposit rate plus 0.375%; maturity - February 23, 2010 15,200,000 15,200,000
$ 30,951,000 $ 30,998,000
For the above subordinated bonds in 2000, the Bank has the option to redeem the bonds, regardless of any objection from the bondholders, between June 15 and June 30, 2004. If the bonds are not redeemed during those dates, the rates will be changed to 7.15% for the fixed rate bonds from July 14, 2003, together with floating interest rate for one-year time deposit plus 2% for the floating rate bonds. The Bank announced a bond redemption on June 22, 2004; bonds redeemed amounted to $21,969,000 as of December 31, 2005.
- 23 - 19. LONG-TERM LIABILITIES
2004 (Audited by the MOA - 2005 Note 3)
Reserve for land value increment tax (Note 12) $ 2,230,234 $ 3,714,165 Funds received for sub-loans 2,385,700 2,640,537 Accrued pension costs 292,014 4,415,059
$ 4,907,948 $ 10,769,761
20. OTHER LIABILITIES
2004 (Audited by the MOA - 2005 Note 3)
Deposits received $ 1,048,569 $ 970,573 Reserve for losses on guarantees 150,697 597,012 Reserve for securities trading losses 200,000 200,000 Others 40,952 235,414
$ 1,440,218 $ 2,002,999
21. PENSION
Before the promulgation of the Labor Pension Act on July 1, 2005, the Bank has had two pension plans for all employees. The Bank contributes amounts equal to 8% of office employees’ salaries and wages to an office employee pension fund, which is administered by the employees’ pension fund committee and deposited in the Central Trust of China the committee’s name. Another pension benefit is calculated in accordance with the Labor Standards Law. The Bank contributes monthly an amount equal to 8% of workers’ salaries and wages to a labor pension fund, which has been approved by the government and deposited in the Central Trust of China. The Bank recognizes pension cost based on actuarial calculations. Under a regulation issued by the Ministry of Finance, a government-owned enterprise that is going to privatize should ensure that, before privatization, it has sufficient funds to meet pension fund requirements; thus, the Bank recognized increases in its pension cost of $1,100,000 thousand in 2005 and $2,260,000 thousand in 2004, respectively, which were included in the 2005 and 2004 budgets approved by the Legislation Yuan.
On July 1, 2005, the Labor Pension Act (the “Act”), which provides for a defined contribution plan, took effect. The Bank’s employees already under the Labor Standards Law before the enforcement of the Act may choose to continue being subject to the Labor Standards Law or to be subject instead to the Act, with their service years until June 30, 2005 to be retained. Based on the Act, the Bank’s monthly contributions to the Labor Pension Fund at 6% of employees’monthly salaries amounted to $14,489 thousand as of December 31, 2005.
The Bank completed its privatization plan on April 4, 2005, and, based on regulations issued by the Ministry of Finance, $11,624,560 thousand in salary and severance pay had to be paid. After making payments from the pension fund and settling other pension payables, the Bank had $2,513,260 thousand short and recognized this shortfall as expense as of June 30, 2005. As of December 31, 2005, the Bank had fully paid this expense.
- 24 - The Bank’s pension and severance expenses were $4,424,072 thousand in 2005 and $3,092,195 thousand in 2004. a. Net pension costs in 2005 and 2004 are summarized below:
2005 (for the Period from April 4, 2005 to 2004 (Audited December 31, by the MOA - 2005) Note 3)
Service cost $ 664,061 $ 658,147 Interest cost 4,647 157,885 Actual return on plan assets (4,162 ) (34,562 ) Amortization (1,968 ) 35,028
Net pension cost $ 662,578 $ 816,498 b. The reconciliation of the funded status of the plan and accrued pension cost as of December 31, 2005 and 2004 is as follows:
2004 (Audited by the MOA - 2005 Note 3) Benefit obligation: Vested benefit obligation $ 95,849 $ 2,306,096 Non-vested benefit obligation 325,046 2,049,486 Accumulated benefit obligation 420,895 4,355,582 Additional benefits based on future salaries 236,018 1,415,253 Projected benefit obligation 656,913 5,770,835 Fair value of plan assets (371,505 ) (2,260,101 ) Funded status 285,408 3,510,734 Unamortized prior service cost - (161,061 ) Unrecognized net transition obligation - (458,876 ) Unamortized pension loss 6,606 1,524,262
Accrued pension cost $ 292,014 $ 4,415,059 c. Vested benefits - undiscounted $ 120,528 $ 3,197,086 d. Actuarial assumptions
Discount rate 2.50% 3.00% Future salary increase rate 2.00% 2.00% Expected long-term rate of return on plan assets 2.50% 3.00%
- 25 - The changes in the pension fund are summarized below:
2004 (Audited by the MOA - 2005 Note 3)
Balance, January 1 $ 2,260,101 $ 2,124,301 Contributions 547,109 424,526 Interest income 14,086 37,457 Benefits paid (2,449,791 ) (326,183 )
Balance, December 31 $ 371,505 $ 2,260,101
22. PERSONNEL EXPENSES, DEPRECIATION AND AMORTIZATION
2004 (Audited by the 2005 MOA - Note 3) Included in Included in Included in General and Included in General and Operating Administrative Operating Administrative Expenses Expenses Expenses Expenses Personnel expenses Salaries $ 4,198,578 $ 216,896 $ 4,715,591 $ 270,217 Bonus 1,763,313 79,975 1,741,603 96,323 Pension 4,420,197 7,360 3,073,716 18,479 Overtime 533,505 36,746 626,874 29,963 Others 571,916 13,875 1,019,019 20,192 Depreciation and amortization 902,474 502 800,450 271
The aforementioned expenses are operating expenses.
23. INCOME TAX
Reconciliation of income tax (statutory rate) on pretax income to income tax currently payable is as follows:
2004 (Audited by the MOA - 2005 Note 3)
Tax on pretax income at statutory rate (25%) $ 700,966 $ 258,582 Tax-exempt income (914,712 ) (363,412 ) Permanent differences 163,265 18,389 Temporary differences 68,794 132,068 Income tax expenses - current 18,313 45,627 Change in deferred income tax (13,625 ) (99,541 ) Tax adjustment from previous year (225,401 ) - Additional tax on unappropriated earnings (10%) 390,227 278,567
Income tax expense $ 169,514 $ 224,653
- 26 - Deferred income tax assets (included in other assets) as of December 31, 2005 and 2004 are summarized as follows:
2004 (Audited by the MOA - 2005 Note 3)
Deferred income tax assets Loss carryforwards $ 2,639,945 $ 1,972,493 Provision for bad debts and losses on guarantees - 1,365,359 Pension cost 76,874 1,105,515 Provision for unrealized asset impairment and market price decline 362,051 107,725 Others (2,391 ) 454 3,076,479 4,551,546 Less - allowance for valuation of deferred income tax assets 1,170,058 2,658,750
$ 1,906,421 $ 1,892,796
Under the Financial Institution Merger Act, the aforementioned loss carryforwards from deferred income tax assets had been recalculated based on the proportion of shares in the surviving entity held by the shareholders of the Bank due to merger, and such amount can be deducted from the taxable income of the next five years.
The loss carryforwards as of December 31, 2005 can be used to reduce the Bank’s taxable income up to 2010.
The balances of the imputation credit account (ICA) as of December 31, 2005 and 2004 were $665,556 thousand and $533,829 thousand 2004 (audited by the MOA), respectively.
The tax credits allocated to stockholders are based on the ICA balance on the dividend distribution date. The actual creditable tax ratio for cash dividend distribution of the 2004 earnings is 37.71%, estimated creditable tax ratio for stock divided on February 27, 2006 is 28.01%. The actual creditable tax ratio for special reserve transferred to capital stock in 2004 was 44.14%. The estimated creditable tax ratio for the distribution of the 2005 earnings is 28.20%.
The actual creditable tax ratio may differ from the estimated creditable tax ratio since this ratio is computed on the date the dividend is actually paid or distributed.
Under the Income Tax Law, the unappropriated retained earnings of $19,985 thousand and $65,298 thousand generated until December 31, 1997 were included in the unappropriated retained earnings as of December 31, 2005 and 2004, respectively.
The Bank’s income tax returns through 2003 (except for 2001) had been examined by the tax authorities.
24. STOCKHOLDERS’ EQUITY
a. Capital surplus
Under a directive of the Ministry of Economic Affairs, retained earnings of $29,694,819 thousand, which was the amount of the net assets in excess of shares issued, were transferred to capital surplus when the Bank became a corporate entity on January 1, 2001. From the capital surplus, stock dividends were issued, amounting to $1,250,122 thousand in 2002 and $2,208,548 thousand in 2004.
- 27 - Legislative Yuan passed the bill of “Revision of Land Tax Law No. 33” on January 21, 2005, and permanent adjustment of land revaluation increments tax rate went into effect on February 1, 2005. The Bank increased its capital surplus in the amount of $1,302,175 thousand and decrease its reserve for land value increment tax in the same amount to conform with the bill.
Under related regulations, capital surplus may only be used to offset deficit. However, under the regulations of the Securities and Futures Bureau, capital surplus from the issuance of shares in excess of par value (including capital surplus from mergers and treasury stock transactions) and donations may be distributed as stock dividends transferred to common stock on the basis of the percentage of shares held by the stockholders. This distribution can be made only once a year and within other specified limits.
In the Bank’s special meeting on December 28, 2005, the stockholders resolved to transfer $2,539,830 thousand of capital surplus to capital stock and issue 253,983 thousand shares, for an increase in total paid-in capital to $27,938,134 thousand. This increase, already approved by the authorities, will take effect on February 27, 2006. b. Appropriation of earnings
1) Before the revision of the Bank’s Articles of Incorporation on June 28, 2005
The Articles of Incorporation stipulate that 30% and 50% of annual net income less any deficit should be appropriated as legal reserve and special reserve, respectively. Appropriation of any remainder should be approved by the stockholders and be in compliance with relevant regulations.
If the legal reserve does not reach the paid-in capital or the capital adequacy ratio does not meet the Ministry of Finance’s minimum requirement, the maximum cash distribution should be within the limit set under the Banking law and related regulations.
2) After the revision of the Bank’s Articles of Incorporation on June 28, 2005
30% and 20% of annual net income less any deficit should be appropriated as legal reserve and special reserve, respectively. Appropriation of any remainder will be as follows:
a) Dividends to shareholders are approved by the stockholders
b) 1% as remuneration to directors and supervisors
c) Bonus to employees ranging from 1% to 8%, determined yearly by the board of directors
d) In compliance with other relevant regulations
3) Revision of the Bank’s Articles of Incorporation during stockholders’special meeting on December 28, 5005
From the annual net income less any deficit should be appropriated 30% as legal reserve and an appropriate certain amount as special reserve depending on regulations and operating needs. The appropriation of the remaining net income and any other retained earnings will be as follows:
a) Dividends to shareholders are approved by the stockholders
b) 1% as remuneration to directors and supervisors
c) Bonus to employees ranging from 1% to 8%, determined yearly by the board of directors
d) In compliance with relevant regulations
- 28 - The Bank’s policy indicates that cash dividends must consist of 50% or above the total dividends (including dividends and bonus) distributed, but if the legal reserve does not reach the paid-in capital or the capital adequacy ratio does not meet the Ministry of Finance’s minimum requirement, the maximum cash distribution should be within the limit set under the Banking Law and related regulations.
Under the Company Law, legal reserve should be appropriated until the reserve equals the Bank’s paid-in capital. This reserve may be used only to offset a deficit. When the reserve exceeds 50% of the Bank’s paid-in capital, (a) the excess may be declared as dividends or bonus if the Bank has no earnings; or (b) the portion of the excess that is over 25% of the Bank’s paid-in capital may be declared as stock dividends if the Bank has no deficit.
The details of the appropriation of earnings as audited by the Ministry of Audit for 2004 and 2003 are as follows:
2004 (Audited by the MOA - 2003 (Audited Note 3) by the MOA)
1) Legal reserve $ 242,902 $ 741,879 2) Special reserve 404,837 1,236,466 3) Cash dividend 253,983 441,710 4) Appropriation to farmers’ and fishermen’s associations 4,892 7,403
$ 906,614 $ 2,427,458
Under the Integrated Income Tax System, noncorporate and ROC-resident stockholders are allowed a tax credit for the income tax paid by the Bank on earnings generated since January 1, 1998.
The Bank transferred $1,104,274 thousand from special reserve to capital stocks on December 28, 2004.
As of February 23, 2006, the date of the accompanying auditors’ report, the board of directors had not resolved the appropriation of the 2005 earnings. Information on earnings appropriation or deficit offsetting can be accessed through the Web site of the Taiwan Stock Exchange.
25. EARNINGS PER SHARE
The numerators and denominators used in computing earnings per share (EPS) are summarized as follows:
Denominator EPS (NT$) Numerator (Amounts) (Shares in After Pretax After Tax Thousands) Pretax Tax 2005
Basic EPS $ 2,803,865 $ 2,634,351 2,539,830 $ 1.10 $ 1.04
2004
Basic EPS (audited by the MOA) $ 1,034,327 $ 809,674 2,539,830 $ 0.41 $ 0.32
In the Bank’s special meeting on December 28, 2005, the stockholders resolved to transfer $2,539,830 thousand of capital surplus to capital stock on February 27, 2006, before the estimating report release date. Thus, the pretax and after tax earnings per share for 2005 were adjusted from NT$1.10 to NT$1.00 and from NT$1.04 to NT$0.95, respectively, and for 2004, from NT$0.41 to NT$0.37 and from NT$0.32 to NT$0.29, respectively.
- 29 - 26. RELATED-PARTY TRANSACTIONS
a. Related parties and relationships (those not included on other notes)
Related Party Relationship with the Bank
United Taiwan Bank S.A. Equity-method investee United Real Estate Management Equity-method investee Co., Ltd. Cooperative Assets Management Equity-method investee Co., Ltd. Cooperative Insurance Brokers Equity-method investee Co., Ltd. Cooperative Bank Insurance Broker Equity-method investee Cooperative-I Asset Management Affiliate Co., Ltd. Sean C. Chen Chairman (MOF representative) Patrick C.J. Liang Chairman (MOF representative) till July 16, 2004 Jin-Fong Soo Director (MOF representative) and president William M.C. Tseng Director (MOF representative) and president till July 16, 2004 C. N. Wang Director (MOF representative) till May 16, 2005, and executive vice president till March 30, 2005 B. S. Liu Executive vice president till March 30, 2005 T. S. Lin Executive vice president till March 30, 2005 A. H. Chen Executive vice president C. L. Liu Executive vice president T. Lin Executive vice president S. Chen Director (MOF representative) T. C. Lin Director (MOF representative) Y. C. Ku Director (representative of the Farmers’ Associations of Taiwan) till April 26, 2005 C. C. Liu Director (representative of the Farmers’ Associations of Taiwan) T. C. Huang Director (representative of Credit Cooperative Associations of the R.O.C.) W. Y. Wang Director (MOF representative) till June 25, 2004 D. T. Hsieh Director (MOF representative) T. P. Lee Director (MOF representative) K. T. Chen Director (MOF representative) B. W. Lee Director (MOF representative) H. N. Kuei Director (MOF representative) C. H. Huang Director (MOF representative) C. H. Ju Director (MOF representative) H. H. Chang Director (representative of Farmers’ Associations of Hua Lien County) till April 5, 2005 C. Y. Tu Director (representative of Farmers’ Associations of Hua Lien County) M. S. Lin Director (representative of Farmers’ Associations of Tai-Nan City) till March 21, 2005 T. S. Chiang Director (representative of Farmers’ Associations of Tai-Nan City) C. H. Hu Director (representative of Farmers’ Associations of Tai-Tong County) till April 7, 2005 S. H. Tien Director (representative of Farmers’ Associations of Tai-Tong County)
(Continued)
- 30 - Related Party Relationship with the Bank
C. T. Liao Director (representative of COTA Commercial Bank Co., Ltd.) J. C. Lee Resident supervisor (MOF representative) till July 16, 2004 C. W. Yao Resident supervisor T. F. Wu Supervisor (MOF representative) till July 13, 2004 L. I. Chen Supervisor (MOF representative) C. P. Chen Supervisor till November 29, 2004 (representative of Farmers’ Associations of Miao-Li County) Robert K. Su Supervisor (MOF representative) J. T. Chou Supervisor (representative of Cooperative Association of Taipei City) Others Relatives of the Bank’s chairman, president, directors, supervisors, managers b. In addition to disclosure in other notes, significant transactions with related parties were as follow:
For the Years Ended December 31 2004 (Audited by 2005 the MOA) Amount % Amount %
1) Due from banks $ 8,011 - $ 1,973 -
2) Call loans to banks - United Taiwan Bank S.A.
Highest Ending Interest Interest Rate Balance Balance % Income (%)
2005 $ 6,106,779 $ 5,599,468 14 $ 135,994 0.09-4.60 2004 (audited by the MOA) $ 5,575,797 $ 3,862,692 32 $ 75,272 0.05-2.58
For the Years Ended December 31 2005 2004 (Audited by the MOA) Interest Interest Amount % Expense Amount % Expense
3) Due to banks $ 4,607,574 3 $ 44,315 $ 3,728,637 2 $ 35,625
4) Call loans from banks
Highest Ending Interest Interest Rate Balance Balance % Expense (%)
2005 $ 216,316 $ - - $ 324 2.08-3.80 2004 (audited by the MOA) $ 346,271 $ - - $ 600 1.13-2.08
- 31 - 5) Loans and advances:
Ending Interest Interest Rate Balance % Income (%)
2005 $ 66,408,336 5 $ 1,297,602 1.00-14.60 2004 (audited by the MOA) $ 106,250,055 8 $ 1,242,394 1.00-14.25
Under the Banking Law, except for customer loans and government loans, credits extended by the Bank to any related party should be 100% secured, and the terms of credits extended to related parties should be similar to those for third parties.
6) Deposits:
Ending Interest Interest Balance % Expense Rate (%)
2005 $ 1,562,668 - $ 21,527 0-13 2004 (audited by the MOA) $ 1,731,637 - $ 20,118 0-13
7) Service fees
2004 (Audited by 2005 the MOA) Amount % Amount %
Service fees $ 33,461 1 $ 182,496 8
Terms of other transactions with related parties were similar to those for third parties, except for the more favorable interest rate for managers’ savings within a prescribed limit.
27. PLEDGED ASSETS
The details of pledged bonds and negotiable certificates of deposit (face value, included in securities purchased) as of December 31, 2005 and 2004 are as follows:
2004 (Audited 2005 by the MOA)
Collateral for day-term overdraft $ 30,000,000 $ 30,000,000 Guarantee deposit for provisional collateral seizure for loan defaults and others 2,350,400 2,563,500 Guarantee deposit for trust business compensation reserve 50,000 50,000 Guarantee deposit for bills finance business 50,000 50,000 Guarantee deposit for obtaining the right to provide cash prizes to the winners of raffle on government-required business invoices - 807,000 Others 1,200 1,200
$ 32,451,600 $ 33,471,700
To comply with the Central Bank’s clearing system for Real-time Gross Settlement (RTGS), the Bank provided negotiable certificates of deposit as collateral for day-term overdraft. The pledged amount may be adjusted anytime.
- 32 - 28. COMMITMENTS AND CONTINGENT LIABILITIES
In addition to those mentioned in Note 32, the contingencies and commitments as of December 31, 2005 were as follows:
a. The Bank has operating lease agreements covering its office premises. As of December 31, 2005, total rental deposits amounted to $584,742. Minimum rentals payable in the next five years are as follows:
Year Amount
2006 $ 317,990 2007 225,917 2008 160,274 2009 97,658 2010 39,119
b. The Bank’s outstanding major construction and procurement contracts amounted to $97,102, of which $55,236 was still unpaid.
c. Under a resolution of the Legislative Yuan, the Bank is required to pay the paid-in capital of four community financial institutions in Taichung City and The Fourth Community Institution of Chung Hwa City. Payments should be made in five semiannual installments from December 2003. These payments were approved in the Bank stockholders’ meeting and approved by the Ministry of Finance. For this obligation, the Bank accrued an expense of $840,000 thousand in 2005 to the Taichung City community financial institutions. As of December 31, 2005, the Bank had made installment payments of $1,653,338.
29. CAPITAL ADEQUACY RATIO
Unit: %
December 31, December 31, Items 2004 (Audited by 2005 the MOA) Capital adequacy ratio (Note) 8.46 9.64 Ratios of debt to net worth 2,975 3,245
Note: Capital adequacy ratio = Eligible capital/Risk-based assets. Under the Banking Law and related regulations, the capital adequacy ratio (CAR) should be computed at the end of June and December.
The Banking Law and related regulations require that the Bank maintain a capital adequacy ratio (CAR) of at least 8%. Thus, if the Bank’s CAR falls below 8%, the Ministry of Finance may impose certain restrictions on the level of cash dividends that the Bank may declare or, in certain conditions, totally prohibit the Bank from declaring cash dividends.
The consolidated capital adequacy ratios were 8.57% and 9.81% as of December 31, 2005 and 2004, respectively.
- 33 - 30. AVERAGE AMOUNT AND AVERAGE INTEREST RATE OF INTEREST-EARNING ASSETS AND INTEREST-BEARING LIABILITIES
Average balance is calculated by the daily average balances of interest-earning assets and interest-bearing liabilities.
2005 Average Average Balance Rate (%) Interest-earning assets
Due from banks $ 5,098,280 1.13 Call loans to banks 48,823,993 1.84 Due from the Central Bank 318,540,161 1.41 Securities purchased 242,187,245 1.63 Securities purchased under resale agreements 1,428,952 1.34 Bills, discounts and loans 1,213,963,067 2.64 Long-term bond investments 11,298,149 2.58
Interest-bearing liabilities
Due to the Central Bank and other banks 293,146,193 1.30 Securities sold under repurchase agreements 31,675,758 1.09 Demand 114,080,878 0.29 Savings 291,098,399 1.31 Time 270,912,376 1.69 Time-savings 824,735,619 1.64 Negotiable certificates of deposit 2,108,281 0.71 Funds borrowed from the Central Bank 11,727,746 3.21 Bonds 30,963,458 2.18
2004 (Audited by the MOA - Note 3) Average Average Balance Rate (%) Interest-earning assets
Due from banks $ 7,617,957 1.08 Call loans to banks 57,923,328 1.63 Due from the Central Bank 352,321,434 1.14 Securities purchased 250,125,207 1.59 Securities purchased under resale agreements 1,191,636 1.27 Bills, discounts and loans 1,185,090,276 2.60 Long-term bond investments 15,609,034 2.82
Interest-bearing liabilities
Due to the Central Bank and other banks 196,949,951 1.06 Securities sold under repurchase agreements 26,134,262 0.80 Demand 107,088,632 0.14 Savings 264,255,728 1.21 Time 267,587,634 1.29 Time-savings 865,352,153 1.42 Negotiable certificates of deposit 2,630,227 0.71 Funds borrowed from the Central Bank 25,167,033 1.34 Bonds 32,877,202 2.12
- 34 - 31. MATURITY ANALYSIS OF ASSETS AND LIABILITIES
The maturity analysis of the Bank’s assets and liabilities is based on the remaining period from balance sheet date. The remaining period to maturity is based on maturity dates specified under agreements, and, if there are no specified maturity dates, on expected dates of collection.
December 31, 2005 Due in Due After One Year One Year Total Assets
Cash and cash equivalents $ 33,995,269 $ - $ 33,995,269 Due from the Central Bank and other banks 360,330,229 - 360,330,229 Securities purchased 134,649,635 81,483,017 216,132,652 Securities purchased under resale agreements 219,173 - 219,173 Receivables 22,255,587 5,778,768 28,034,355 Bills, discounts and loans 336,765,371 949,945,777 1,286,711,148 Long-term bond investments - 9,304,420 9,304,420 Other financial assets - 20,000 20,000
$ 888,215,264 $ 1,046,531,982 $ 1,934,747,246
Due to the Central Bank and other banks $ 190,270,945 $ 58,790,000 $ 249,060,945 Securities sold under repurchase agreements 39,305,020 - 39,305,020 Payables 34,640,208 2,680,024 37,320,232 Deposits and remittances 1,146,357,126 386,685,760 1,533,042,886 Bonds 1,000 30,950,000 30,951,000 Funds borrowed from the Central Bank 5,093,300 - 5,093,300
$ 1,415,667,599 $ 479,105,784 $ 1,894,773,383
December 31, 2004 (Audited by the MOA - Note 3) Due in Due After One Year One Year Total Assets
Cash and cash equivalents $ 29,035,441 $ - $ 29,035,441 Due from the Central Bank and other banks 349,718,619 - 349,718,619 Securities purchased 253,230,771 56,677,804 309,908,575 Securities purchased under resale agreements 2,778,013 - 2,778,013 Receivables 13,071,774 3,053,015 16,124,789 Bills, discounts and loans 359,346,738 911,863,849 1,271,210,587 Long-term bond investments - 19,753,618 19,753,618 Other financial assets - 20,000 20,000
$ 1,007,181,356 $ 991,368,286 $ 1,998,549,642 Liabilities
Due to the Central Bank and other banks $ 210,952,897 $ 58,149,000 $ 269,101,897 Securities sold under repurchase agreements 20,539,180 - 20,539,180 Payables 33,687,378 2,531,000 36,218,378 Deposits and remittances 1,184,593,974 398,334,000 1,582,927,974 Bonds - 30,998,000 30,998,000 Funds borrowed from the Central Bank 14,321,396 - 14,321,396
$ 1,464,094,825 $ 490,012,000 $ 1,954,106,825
- 35 - 32. DISCLOSURE OF FINANCIAL INSTRUMENTS
a. Derivative financial instruments
The Bank enters into forward contracts, currency swap, currency options and foreign exchange margin transactions mainly to accommodate customers’ needs and to manage its exposures. The interest rate swaps (IRS) and asset swaps (AS), which are for nontrading purposes, are aimed at hedging the effects of adverse changes in interest rates for foreign-currency assets or liabilities. The Bank’s strategy is to hedge market risk, which mainly refers to floating-rate U.S. dollar borrowings and (a) fixed-rate U.S. dollar lendings or (b) fixed-income securities denominated in foreign currencies. These IRS and AS agreements serve to hedge the Bank’s interest rates and foreign currency exposures so the yields on the loans or investments can be stabilized (“locked in”).
As of December 31, 2005 and 2004, the contract (notional) amounts, credit risk and fair values of open contracts were as follows:
December 31, 2005 Contract (Notional) Financial Instruments Amount Credit Risk Fair Value
For accommodating customers’ needs and managing the Bank’s exposures: Forward contracts $ 11,351,166 $ 293,361 $ 146,330 Currency swap contracts 101,733,152 709,455 (89,597 ) Foreign exchange margin 2,321,197 67,027 66,122 Currency option contracts Buy 131,717 - (126 ) Sell 131,716 - 126 For other nontrading purposes: Interest rate swaps 9,609,315 89,959 (328,819 ) Assets swaps 777,444 1,169 (45,678 )
December 31, 2004 (Audited by the MOA - Note 3) Contract (Notional) Financial Instruments Amount Credit Risk Fair Value
For accommodating customers’ needs and managing the Bank’s exposures: Forward contracts $ 11,489,257 $ 204,772 $ (196,425 ) Currency swap contracts 54,238,280 314,137 249,289 Foreign exchange margin 1,435,015 65,805 65,805 Currency option contracts Buy 368,509 219 (80 ) Sell 368,509 - 80 For other nontrading purposes: Interest rate swaps 7,689,935 43,845 (450,941 ) Assets swaps 3,277,346 105,786 (62,674 )
- 36 - The Bank is exposed to credit risk from counter-parties’ default on contracts. The Bank enters into forward contracts with customers that have passed its credit approval process and have provided the necessary collaterals. Transactions are made within each customer’s credit lines. All forward contracts and foreign-currency swap contracts the Bank entered into as of December 31, 2005 and 2004 were with customers engaging in imports and exports. Guarantee deposits based on the customers’ credit standing may be required. Transactions with other banks are made within the trading limit prescribed for each bank based on the bank’s credit rating and its worldwide ranking. Thus, no significant losses resulting from counter-parties’ defaults are anticipated. The forward positions have been offset by the opposite spot or forward positions, so no significant gains or losses would result from exposure in interest rates and foreign exchange rates, therefore there is no significant demand for cash.
All counter-parties to the IRS or AS agreements are banks with long-term credit rating of at least “A” by international credit rating organizations. Therefore, the associated credit risk is deemed very limited. Because the Bank enters into IRS and AS agreements for hedging purposes, no significant gains or losses would result from fluctuations in interest rates and there is no significant demand for cash.
Fair value of each forward exchange contract and currency swap contract is determined at the forward exchange rate for the remaining term quoted by the Central Bank. The Bank estimates the fair value of individual IRS contracts on the basis of quotations of the Bloomberg Information System.
The net gains on forward contracts in 2005 and 2004 were $178,888 thousand and $34,695 thousand (part of “foreign exchange gain - net”), respectively. The net gains on currency swap contracts were $212,303 thousand and $421,458 thousand (part of “interest income” and “interest expense”) in 2005 and 2004, respectively. The net gains (losses) on other derivative financial instruments were not material. b. Fair values of nonderivative financial instruments:
December 31 2004 2005 (Audited by the MOA - Note 3) Carrying Value Fair Value Carrying Value Fair Value Assets
Financial assets - fair values approximate carrying values $ 1,696,293,014 $ 1,696,293,014 $ 1,651,775,578 $ 1,651,775,578 Securities purchased 216,132,652 216,730,189 309,471,455 309,678,837 Long-term investments 16,561,935 17,097,243 27,015,586 28,124,648 Operating deposits 250,000 256,912 250,000 254,775
Liabilities
Financial liabilities - fair values approximate carrying values 1,897,792,965 1,897,792,965 1,954,385,698 1,954,385,698
Methods and assumptions applied in estimating the fair values of nonderivatives financial instruments are as follows:
1) The carrying amounts of cash and cash equivalents, due from the Central Bank and other banks, securities purchased/sold under resell/repurchase agreements, receivables, due to the Central Bank and other banks, payables and remittances approximate their fair values because of their short maturities.
2) The fair values of securities purchased, long-term investments, other financial assets and operating deposits are based on their market prices if available. Otherwise, their carrying values will represent current fair values.
- 37 - 3) Bills, discounts and loans are interest-bearing floating rate financial assets. Thus, their carrying amounts represent fair values. Fair value of overdue loans is based on the carrying amount, which is net of allowance for bad debts.
4) Deposits, funds borrowed from the Central Bank, bonds and funds received for sub-loans are interest-bearing liabilities. Thus, their carrying amounts represent fair values.
5) Refundable deposits and deposits received are estimated at their carrying values because they do not have specific maturity dates.
Part of financial and non-financial instruments were not required to list fair value, therefore the total of fair values listed above does not represent the Bank’s total fair value. c. Off-balance-sheet credit risks
The Bank has commitments to extend loans and issue credit cards. Most of these commitments exceed 10 years. The interest rates for the loans ranged from 0.97% to 14.50% in 2005 and from 0.41% to 14.50% in 2004. The highest interest rate for credit cards was 18.25% in both 2005 and 2004. The Bank also provided guarantees and letters of credit to cover customers’ obligations. The terms of these guarantees and letters of credit are usually one year, and their maturity dates are not concentrated in a particular period.
The amounts of financial contracts with off-balance-sheet credit risks as of December 31, 2005 and 2004 were as follows:
2004 (Audited 2005 by the MOA)
Credit commitments for credit cards $ 52,282,750 $ 46,950,085 Guarantees and issuance of letters of credit 68,661,564 70,086,359 Irrevocable loan commitments 73,392,851 97,743,759
Since most of the commitments are expected to expire without being fully drawn upon, the total commitment amounts do not necessarily represent future cash requirements. The total potential loss on any default by counter-parties is equal to the above contractual amounts, without considering the value of any collateral.
The Bank evaluates the creditworthiness of each credit application case by case, taking into account the applicant’s credit history, credit rating and financial condition. Collaterals, mostly in the form of real estate, cash, securities and other assets, may be required depending on the result of the evaluation. As of December 31, 2005 and 2004, about 53% and 54%, respectively, of total loans had been secured by collaterals. For credit card facilities, no collateral is required but the credit status of each credit cardholder is closely monitored. Appropriate measures are adopted depending on the results of the credit status monitoring, which include amending the credit limit and, if necessary, canceling the facility.
- 38 - 33. CONCENTRATION OF CREDIT RISK
The parties accounting for at least 10% of the outstanding loans are summarized as follows:
2004 (Audited by 2005 the MOA - Note 3) Amount % Amount % Domestic Individuals $ 473,589,443 37 $ 434,882,604 33 Government institutions 232,361,578 18 280,476,507 21 Manufacturing 203,982,351 16 181,873,592 14
The net positions of the Bank’s foreign-currency transactions as of December 31, 2005 and 2004 are summarized as follows:
Unit: In Thousands of Dollars
December 31, 2004 December 31, 2005 (Audited by the MOA - Note 3) Currency NT$ Currency NT$ EUR (7,551 ) $ (293,842 ) USD (40,278 ) $ (1,279,571 ) Net positions of foreign-currency JPY (1,007,197 ) (280,605 ) AUD (5,878 ) (145,541 ) transactions (market risk) NZD (5,785 ) (129,846 ) JPY 1,653,813 511,193 AUD (3,690 ) (88,691 ) HKD (16,675 ) (68,113 ) CAD (2,320 ) (65,425 ) GBP (1,015 ) (62,115 )
Note: Net positions refer to the top five absolute values of the amounts of foreign-currency transactions after converting them to New Taiwan dollars.
34. RISK MANAGEMENT POLICIES AND PARTIES INVOLVED IN CREDIT RISK, MARKET RISK, LIQUIDITY RISK, OPERATION RISK, LEGAL RISK AND MAJOR EXPOSURE
a. Credit risk
1) Asset quality Unit: In Thousand of Dollars
December 31, Items 2005 Nonperforming loans (Class A) $24,136,072 Nonperforming loans (Class B) 4,545,830 Nonperforming loans total 28,681,902 Overdue loans 28,314,435 Nonperforming loans ratio 2.23% Allowance for possible losses on loans and receivables 12,039,118
December 31, Items 2004 Nonperforming loans $42,836,259 Overdue loans 50,204,946 Nonperforming loans ratio 3.37% Surveillance loans 16,961,294 Surveillance loans/Total loans 1.33% Allowance for possible losses on loans and receivables 17,272,488
- 39 - Note 1: As of December 31, 2005, nonperforming loans represent the amounts of nonperforming loans, as required by the Regulations Governing the Procedures for Banking Institutions to Evaluate Assets and Deal with Non-performing/Non-accrual Loans effective on July 1, 2005. As of December 31, 2004, nonperforming loans represent the amounts of reported nonperforming loans, as required by the Ministry of Finance (MOF) rulings dated February 16, 1994 (Ref. No. Tai-Tsai-Zong-83229834) and December 1, 1997 (Ref. No. Tai-Tsai-Zong-86656564)
Note 2: Overdue loans as of December 31, 2004 include some surveillance loans that reach the standard but were authorized to be omitted from being classified as nonperforming loans.
Note 3: Nonperforming loans ratio = Nonperforming loans (including overdue loans)/(Outstanding loan balances + Overdue loans)
Note 4: Surveillance loans as of December 31, 2004
a) Midterm and long-term loans repayable in installments, with principal repayments overdue for more than three months but less than six months.
b) Other loans, with principal repayments overdue by less than three months and interest overdue by more than three months but less than six months.
c) Nonperforming loans exempted from reporting (including rescheduled loans with repayment terms meeting the criteria under relevant regulations; nonperforming loans which are to be repaid through a credit insurance fund and settlement fund; nonperforming loans with the same amount of certificates of time deposits as collaterals; and loans extended under other government-approved exemption programs).
Note 5: Definition of nonperforming loans (Class A) and (Class B) are stated in Banking Bureau rulings dated April 19, 2005 (Ref. No. 0941000251) regulations.
2) Concentrations of credit risk
Unit: In Thousand of Dollars
December 31, 2004 Items December 31, 2005 (Audited by the MOA - Note 3) Credit to interest party 79,664,240 111,910,501 Credit to interest party/ 6.19% 8.43% Total credit Credit with stock pledged/Total credit 0.73% 0.45% Type of Industry % Type of Industry % a. Individuals 36.81 a. Individuals 32.79 Loan concentration by industry b. Government institutions 18.06 b. Government institutions 21.15 c. Manufacturing 15.85 c. Manufacturing 13.71
Note: a) Total credit including bills, discounts and loans (including import and export negotiations), acceptances and guarantees.
b) Ratios of credit extensions to interest parties: Credit to interest parties ÷ Total credit.
c) Ratios of credit extensions secured by pledged stocks: Credit with stocks pledged ÷ Total credit.
d) The calculation of amounts of credit extensions to common-interest parties should be based on the Banking Law.
- 40 - 3) Accounting policies on allowance for credit losses: Note 2
4) Concentrations of risk: Note 33 b. Market risk
1) Average amount and average interest rate of interest-earning assets and interest-bearing liabilities: Note 30
2) Sensitivity ratios
Unit: %
Items December 31, 2005 December 31, 2004 Ratio of interest rate-sensitive assets to liabilities 99.3 102.1 Ratio of interest rate-sensitivity gap to stockholders’ Equity (19.2 ) 58.1
Note 1: Interest rate-sensitive assets and liabilities mean the revenues or costs of interest-earning assets and interest-bearing liabilities are affected by interest rate changes.
Note 2: Ratio of interest rate-sensitive assets to liabilities = Interest rate-sensitive assets ÷ Interest rate-sensitive liabilities. (Referring to interest rate-sensitive assets and liabilities in New Taiwan dollars within a year).
Note 3: Interest rate-sensitivity gap = Interest rate-sensitive assets － Interest rate-sensitive liabilities
3) Net positions of foreign-currency transactions: Note 33 c. Liquidity
1) Profitability Unit: %
2004 (Audited by Item 2005 the MOA - Note 3) Return on assets 0.14 0.05 Return on equity 4.50 1.71 Net income ratio 5.28 1.75
Note: a) Return on assets = Income before income tax/Average total assets
b) Return on equity = Income before income tax/Average equity
c) Net income ratio = Net income/Total operating revenues
d) Income before income tax or net income represents income in 2005 and 2004.
e) Profitability is expressed on annual basis.
- 41 - 2) Liquidity analysis of assets and liabilities as of December 31, 2005
Unit: In Thousand of Dollars
Period Remaining until Due Date Total 181 Days to 0-30 Days 31-90 Days 91-180 Days Over 1 Year 1 Year Assets $ 1,922,250,000 $ 301,922,000 $ 122,538,000 $ 175,405,000 $ 274,099,000 $ 1,048,286,000 Liabilities 1,866,052,000 373,291,000 271,975,000 287,655,000 428,974,000 504,157,000 Gap 56,198,000 (71,369,000 ) (149,437,000 ) (112,250,000 ) (154,875,000 ) 544,129,000 Accumulated gap 56,198,000 (71,369,000 ) (220,806,000 ) (333,056,000 ) (487,931,000 ) 56,198,000
Liquidity analysis of assets and liabilities as of December 31, 2004 (audited by the MOA)
Period Remaining until Due Date Total 181 Days to 0-30 Days 31-90 Days 91-180 Days Over 1 Year 1 Year Assets $ 1,973,181,000 $ 274,787,000 $ 154,472,000 $ 257,209,000 $ 288,026,000 $ 998,687,000 Liabilities 1,964,526,000 318,996,000 301,781,000 299,650,000 471,809,000 572,290,000 Gap 8,655,000 (44,209,000 ) (147,309,000 ) (42,441,000 ) (183,783,000 ) 426,397,000 Accumulated gap 8,655,000 (44,209,000 ) (191,518,000 ) (233,959,000 ) (417,742,000 ) 8,655,000
Note: The above amounts refer to the head office and domestic branches and are expressed in thousands of New Taiwan dollars (i.e., excluding foreign-currency amounts). d. Operation and legal risk
Matters Requiring Special Notation December 31, 2005
Causes Summary and Amount Within the past year, a responsible person or professional None employee violated the law in the course of business, resulting in an indictment by a prosecutor Within the past year, a fine was levied on the Bank for violations None of the related laws and regulations Within the past year, misconduct occurred, resulting in the None Ministry of Finance’s imposing strict corrective measures on the Bank Within the past year, the individual or total loss due to employee None fraud, accidents and other mishaps at the workplace, or failure to abide by the “Guidelines for Maintenance of Soundness of Financial Institutions” exceeded NT$50 million dollars Other None
- 42 - Matters Requiring Special Notation December 31, 2004
Causes Summary and Amount Within the past year, a responsible person or professional Two Branch’s former employee employee violated the law in the course of business, resulting violated the law while conducting in an indictment by a prosecutor the Bank’s business and is now under indictment by public prosecutor. Within the past year, a fine was levied on the Bank for violations None of the related laws and regulations Within the past year, misconduct occurred, resulting in the None Ministry of Finance’s imposing strict corrective measures on the Bank Within the past year, the individual or total loss due to employee None fraud, accidents and other mishaps at the workplace, or failure to abide by the “Guidelines for Maintenance of Soundness of Financial Institutions” exceeded NT$50 million dollars Other None
Note 1: The term “within the past year” means one year before the balance sheet date.
Note 2: The term “a fine was levied on the Bank for violations of the related laws and regulations” means a fine levied by the Bureau of Monetary Affairs, Securities and Futures Bureau, Insurance Bureau or Examination Bureau.
35. INFORMATION ON BORROWERS, GUARANTORS AND COLLATERAL PROVIDERS AS INTEREST PARTIES
December 31, Possibility of Category Account Volume 2005 Loss Consumer loans (Note 1) 1,966 $ 810,893 $ 8 Loan for employees’ mortgage housing 3,212 6,904,695 9,830 Other loans (Note 2) 938 71,948,652 5,350 Guarantees 2,536 5,036,775 13,093 Collateral providers 599 1,755,749 5,049
December 31, Possibility of Category Account Volume 2004 Loss Consumer loans (Note 1) 2,646 $ 1,087,307 $ 1,049 Loan for employees’ mortgage housing 3,174 8,040,199 19,280 Other loans (Note 2) 1,562 102,782,995 48,315 Guarantees 2,890 4,407,313 37,410 Collateral providers 687 1,853,583 22,596
Note 1: Consumer loans are governed by Article 32 of the Banking Law in ROC.
Note 2: Loans other than consumer loans and loans for employees’ mortgage housing.
Note 3: The interest parties mentioned above are governed by Article 33-1 of the Banking Law in ROC.
- 43 - 36. TRUST BUSINESS UNDER THE TRUST LAW
a. Trust-related items are those shown in the following balance sheet and list of trust property:
Balance Sheet of Trust Accounts As of December 31, 2005 and 2004
Trust Assets 2005 2004 Trust Liabilities 2005 2004
Cash in banks $ 10,161 $ 3,411 Trust capital Short-term investments Capital trust $ 24,768,183 $ 16,510,181 Funds 22,332,278 15,337,106 Real estate trust 5,998,679 1,536,194 Structured bonds 2,425,744 1,172,875 24,758,022 16,509,981 Real estate Land 4,859,025 1,325,811 Construction in progress 1,139,654 207,172 5,998,679 1,532,983
Total $ 30,766,862 $ 18,046,375 Total $ 30,766,862 $ 18,046,375
List of Trust Property As of December 31, 2005 and 2004
Investment Items 2005 2004
Cash in banks $ 10,161 $ 3,411 Funds 22,332,278 15,337,106 Structured bonds 2,425,744 1,172,875 Land 4,859,025 1,325,811 Construction in progress 1,139,654 207,172
$ 30,766,862 $ 18,046,375
b. Nature of trust business operations under the Trust Law: Note 1.
37. SEGMENT INFORMATION
The Bank engages only in banking activities as prescribed by the Banking Law. As of December 31, 2005 and 2004, no customers or overseas unit accounted for at least 10% of the Bank’s total operating revenue or total assets. Thus, no segment geographic financial information has to be disclosed.
38. ADDITIONAL DISCLOSURES
a. Related information of significant transactions and investees:
1) Financing provided: The Bank - not applicable; investee company - none or not applicable
2) Endorsement/guarantee provided: The Bank - not applicable; investee company - none or not applicable
3) Marketable securities held: The Bank - not applicable; investee company - not applicable
4) Marketable securities acquired and disposed of at costs or prices of at least NT$300 million or 10% of the paid-in capital: None
5) Acquisition of individual real estates at costs of at least NT$300 million or 10% of the paid-in capital: None
- 44 - 6) Disposal of individual real estates at costs of at least NT$300 million or 10% of the paid-in capital: Table 1 (attached)
7) Allowance of service fees to related parties amounting to at least NT$5 million: None
8) Receivables from related parties amounting to at least NT$300 million or 10% of the paid-in capital: Table 2 (attached)
9) Sale of nonperforming loans amounting to at least NT$5 billion: Table 3 (attached)
10) Other significant transactions which may affect the decisions of users of financial reports: None.
11) Names, locations, and other information of investees on which the Bank exercises significant influence: Table 4 (attached)
12) Derivative transactions: The derivative financial instruments of the Bank are disclosed in Note 32, and the derivative transactions of United Taiwan Bank S.A. are summarized below:
United Taiwan Bank S.A. enters into derivative transactions mainly to hedge the effects of interest rate and foreign exchange rate fluctuations on foreign-currency assets.
Credit risk is the exposure to loss on counter-parties’ default on transactions. However, transactions are made within the trading limit set for each counter-party based on its credit rating and worldwide ranking. Thus, no significant losses resulting from counter-parties’ defaults are anticipated. United Taiwan Bank S.A. enters into interest rate swap agreements for hedging purposes. No significant gains or losses are expected from fluctuations in interest rates and foreign exchange rates, therefore is no significant demand for cash.
As of December 31, 2005 and 2004, the contract (notional) amounts, credit risk and fair value of open contracts for United Taiwan Bank S.A. were as follows:
December 31, 2005 Contract (Notional) Credit Fair Amount Risk Value For trading purposes
Sell options $ 93,391 $ - $ -
December 31, 2004 Contract (Notional) Credit Fair Amount Risk Value For nontrading purposes
Interest rate swaps $ 259,303 $ - $ (5,073 ) Asset swaps 308,265 8,781 8,781
The calculation of the fair values of derivative contracts is based on quotations from the Bloomberg Information System.
The gains or losses on derivative financial instruments in 2005 and 2004 were not material. b. Investment in Mainland China: None.
- 45 - TABLE 1
TAIWAN COOPERATIVE BANK, LTD.
DISPOSAL OF INDIVIDUAL REAL ESTATES AT COSTS OF AT LEAST NT$300 MILLION OR 10% OF THE PAID-IN CAPITAL YEAR ENDED DECEMBER 31, 2005 (In Thousands of New Taiwan Dollars)
Gain from Original Transaction Transaction Disposal (Less Nature of Purpose of Company Name Property Acquisition Book Value Condition of Payment Counter-party Price Reference Other Terms Date Amount Related Process Relationship Disposal Date Expenses)
Taiwan Cooperative Land: Lot 1110, 2005.03.24 1993.12.02 $112,984 $626,252 Received $513,268 Big Town - To comply with 1. Taichung Architect $ 437,253 Bank, Ltd. 1111, 1112, 1113, Construction Article 76 of the Association 1114, 1115, 1116, Company Banking Law 1117 Xin An 2. Jin Zhou Real Estate 426,904 Sec., Shi Tuen Appraisement Co., District, Taichung Ltd. City 3. Shin Kong Real 482,402 Estate Appraisement Co., Ltd.
4. Guo Lian Real 426,904 Estate Appraisement Co., Ltd.
Land and 2005.07.12 1985,04.19 6,736 432,088 Received 375,208 Ba Yi Kun - To reduce 1. Fan Mei 285,088 properties: #76 Construction nonoperating Appraisement Co., Ltd. Da An Road 2nd Company assets Districts, Taipei 2. Hua Xin Real Estate 255,542 City Appraisement Co., Ltd.
3. Tai Zhu Real Estate 213,090 Appraisement Co., Ltd.
Land and 2005.11.29 1983.01.01 4,899 383,800 $32,700 collected as of 328,209 Global Life - To reduce 1. Li Quan Asset 326,422 properties: #64 November 29, 2005; the rest Insurance nonoperating Appraisement Co., Ltd. Da An Road 2nd of $351,100 had been fully Company assets Districts, Taipei paid on January 2, 2006 2. Hong Ji Real Estate 287,816 City Appraisement Co., Ltd.
3. Fan Mei 270,377 Appraisement Co., Ltd.
- 46 - TABLE 2
TAIWAN COOPERATIVE BANK, LTD.
RECEIVABLE FROM RELATED PARTIES AMOUNTING TO AT LEAST NT$100 MILLION OR 20% OF PAID-IN CAPITAL (FROM BANKS OR INVESTEES: AT LEAST $300 MILLION OR 10% OF THE PAID-IN CAPITAL) YEAR ENDED DECEMBER 31, 2005 (In Thousands of New Taiwan Dollars)
Relationship with the Turnover Overdue Receivables Amount Received Allowance for Company Name Counter-party Receivable Company Rate Amount Action Subsequently Possible Losses
Taiwan Cooperative Bank, Ltd. Cooperative Assets Management Co., Ltd. Subsidiary $4,906,075 (Note) - $ - - $ - $ -
Note: Receivables on the Bank’s sale of nonperforming loans to its subsidiary.
- 47 - TABLE 3
TAIWAN COOPERATIVE BANK, LTD.
SALE OF NONPERFORMING LOANS AMOUNTING TO AT LEAST NT$5 BILLION YEAR ENDED DECEMBER 31, 2005 (In Thousands of New Taiwan Dollars)
Overdue Loan Gain or Loss Buying Parties Amount (Note)
A. and C. Cooperative Assets Management Co., Ltd. $ 8,642,935 $ (2,510,341 ) B. Taiwan Asset Management Corporation 3,645,639 (644,972 )
$ 12,288,574 $ (3,155,313 )
Note 1: The Bank recognized loss by making provision for possible losses.
Note 2: Sale of nonperforming loans includes the abovementioned overdue loan, as well as the written off credits.
- 48 - TABLE 4
TAIWAN COOPERATIVE BANK, LTD.
NAMES, LOCATIONS, AND OTHER INFORMATION OF INVESTEES ON WHICH THE COMPANY EXERCISES SIGNIFICANT INFLUENCE DECEMBER 31, 2005 (In Thousands of New Taiwan Dollars and Thousands of Shares, Unless Otherwise Specified)
Investment Amount Balance as of December 31, 2005 Percentage Distribution of Dividends of Net Income Main Businesses and Percentage Investment Investor Company Investee Company Location December December Carrying Ownership (Loss) of the Stock Cash Note Products Shares of Gains (Loss) 31, 2005 31, 2004 Value × Net Value Investee Dividends Dividends Ownership of Investee
Taiwan Cooperative United Real Estate Management Co. Taipei Real estate appraisal $ 55,500 $ 55,500 5,850 30.00 $ 62,074 $ 62,074 $ 11,124 $ 3,337 - - Bank, Ltd. United Taiwan Bank S.A. Belgium Financial institution 899,339 899,339 1,024 70.00 1,038,305 1,038,305 19,219 13,454 - - Cooperative Assets Management Co., Ltd. Taipei Asset management 45,000 - 4,500 100.00 35,971 35,971 (9,029) (9,029) - - Cooperative Insurance Brokers Co., Ltd. Taipei Life insurance gent 10,000 - 1,000 100.00 9,191 9,191 (809) (809) - - Cooperative Bank Insurance Broker Taipei Life insurance agent 2,000 2,000 444 40.00 - - (10,267) (7,084) - -
United Real Estate Her-Hong Construction Co., Ltd. Taipei Construction 60,000 60,000 6,000 60.00 68,157 68,157 65 39 - - Management Co.
Cooperative Assets Golden Vaulf Taipei Asset management 10,000 - 1,000 100.00 9,873 9,873 (127) (127) - - Management Co., Ltd.
- 49 -