Taiwan Cooperative Bank, Ltd.
Financial Statements for the Years Ended December 31, 2008 and 2007 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, 2008 and 2007, 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.
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 provide a reasonable basis for our opinion.
In our opinion, based on our audits, the financial statements referred to above present fairly, in all material respects, the financial position of Taiwan Cooperative Bank, Ltd. as of December 31, 2008 and 2007, and the results of its operations and its cash flows for the years then ended, in conformity with the Guidelines Governing the Preparation of Financial Reports by Public Banks, Guidelines Governing the Preparation of Financial Reports by Futures Commission Merchants, requirements of the Business Accounting Law and Guidelines Governing Business Accounting relevant to financial accounting standards, and accounting principles generally accepted in the Republic of China.
As stated in Note 3 to the financial statements, under an explanation issued by the Accounting Research and Development Foundation of the Republic of China, Taiwan Cooperative Bank, Ltd. should recognize bonus to employees and remuneration to directors and supervisors as compensation expenses effective January 1, 2008. These bonus and remuneration were previously recorded as appropriations from earnings.
As stated in Notes 3 and 32 to the financial statements, Taiwan Cooperative Bank, Ltd. reclassified its financial assets in accordance with the newly amended Statement of Financial Accounting Standards No. 34 - “Financial Instruments: Recognition and Measurement”.
- 1 - We have also audited the consolidated financial statements of Taiwan Cooperative Bank, Ltd. and its subsidiaries as of and for the years ended December 31, 2008 and 2007, on which we have issued a modified unqualified opinion and an unqualified opinion thereon, respectively, in our report dated March 2, 2009 (not presented herewith).
March 2, 2009
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, 2008 AND 2007 (In Thousands of New Taiwan Dollars, Except Par Value)
Percentage Percentage Increase Increase 2008 2007 (Decrease) 2008 2007 (Decrease) ASSETS Amount Amount % LIABILITIES AND STOCKHOLDERS’ EQUITY Amount Amount %
CASH AND CASH EQUIVALENTS (Notes 4 and 28) $ 40,592,528 $ 32,500,510 25 DUE TO THE CENTRAL BANK AND OTHER BANKS (Notes 16 and 28) $ 202,656,838 $ 254,816,364 (20 )
DUE FROM THE CENTRAL BANK AND CALL LOANS TO OTHER FINANCIAL LIABILITIES AT FAIR VALUE THROUGH PROFIT OR LOSS BANKS (Notes 5, 28 and 29) 383,763,115 424,359,794 (10 ) (Notes 2, 6 and 20) 4,525,836 2,650,154 71
FINANCIAL ASSETS AT FAIR VALUE THROUGH PROFIT OR LOSS SECURITIES SOLD UNDER REPURCHASE AGREEMENTS (Notes 2, 6, 9, (Notes 2, 3, 6 and 32) 31,259,237 41,748,515 (25 ) 12 and 17) 55,961,852 43,247,160 29
RECEIVABLES, NET (Notes 2, 7 and 28) 20,385,892 27,872,714 (27 ) PAYABLES (Note 18) 45,943,097 39,115,542 17
DISCOUNTS AND LOANS, NET (Notes 2, 8 and 28) 1,832,644,545 1,729,746,205 6 DEPOSITS AND REMITTANCES (Notes 19 and 28) 1,983,480,938 1,885,247,837 5
AVAILABLE-FOR-SALE FINANCIAL ASSETS (Notes 2, 3, 9 and 32) 64,785,297 60,247,280 8 BANK DEBENTURES (Note 20) 77,771,000 84,321,000 (8 )
HELD-TO-MATURITY FINANCIAL ASSETS (Notes 2 and 10) 8,171,079 7,527,062 9 ACCRUED PENSION COST (Notes 2 and 23) 1,763,570 1,645,063 7
EQUITY INVESTMENTS UNDER THE EQUITY METHOD (Notes 2 and 11) 5,628,867 5,776,283 (3 ) OTHER FINANCIAL LIABILITIES (Notes 21 and 28) 4,554,131 4,608,630 (1 )
OTHER FINANCIAL ASSETS, NET (Notes 2 and 12) 56,149,881 47,387,263 18 OTHER LIABILITIES (Notes 2, 13, 22, 25 and 28) 3,272,227 3,454,168 (5 )
PROPERTIES (Notes 2 and 13) Total liabilities 2,379,929,489 2,319,105,918 3 Land (including revaluation increments) 22,481,984 22,211,380 1 Buildings 13,098,990 13,017,330 1 STOCKHOLDERS' EQUITY Machinery and equipment 5,208,396 4,768,094 9 Capital Transportation equipment 687,117 687,891 - Common stock - NT$10.00 par value; authorized 6,000,000 Other equipment 1,299,766 1,280,397 2 thousand shares; issued and outstanding 5,485,500 thousand Leasehold improvements 641,208 565,913 13 shares in 2008 and 4,770,000 thousand shares in 2007 54,855,000 47,700,000 15 43,417,461 42,531,005 2 Capital surplus - additional paid-in capital from share Less: Accumulated depreciation 9,428,473 8,689,285 9 issuance in excess of par value 32,207,944 32,207,944 - Less: Accumulated impairment 1,114 86,215 (99 ) Retained earnings 33,987,874 33,755,505 1 Legal reserve 8,993,862 6,071,750 48 Construction in progress 24,476 42,545 (42 ) Unappropriated earnings 7,592,988 12,660,965 (40 ) Prepayment for land and buildings - 54,664 (100 ) Total retained earnings 16,586,850 18,732,715 (11 ) Prepayment for equipment 18,118 13,760 32 Other equity Unrealized revaluation increments 4,420,439 4,419,580 - Properties, net 34,030,468 33,866,474 - Cumulative translation adjustments 162,980 274,568 (41 ) Unrealized gain (loss) on financial instruments 867,133 (896,081 ) 197 INTANGIBLE ASSETS (Notes 2, 3 and 14) 3,624,616 3,434,078 6 Treasury stock - 100,000 thousand shares (1,898,154 ) - - Total other equity 3,552,398 3,798,067 (6 ) OTHER ASSETS, NET (Notes 2, 15, 25 and 30) Nonoperating assets, net 3,834,123 3,961,244 (3 ) Total stockholders' equity 107,202,192 102,438,726 5 Refundable deposits 994,879 1,094,801 (9 ) Collaterals assumed, net 741,948 985,947 (25 ) CONTINGENCIES AND COMMITMENTS (Notes 2 and 30) Operating deposits and settlement funds 96,832 96,806 - Deferred income tax assets, net - 694,462 (100 ) Others 428,374 245,206 75
Other assets, net 6,096,156 7,078,466 (14 )
TOTAL $ 2,487,131,681 $ 2,421,544,644 3 TOTAL $ 2,487,131,681 $ 2,421,544,644 3
The accompanying notes are an integral part of the financial statements.
(With Deloitte & Touche audit report dated March 2, 2009)
- 3 - TAIWAN COOPERATIVE BANK, LTD.
STATEMENTS OF INCOME YEARS ENDED DECEMBER 31, 2008 AND 2007 (In Thousands of New Taiwan Dollars, Except Per Share Amounts)
Percentage Increase 2008 2007 (Decrease) Amount Amount %
INTEREST REVENUE (Notes 2, 28 and 32) $ 71,779,904 $ 66,367,211 8
INTEREST EXPENSE (Notes 2, 28 and 32) (44,423,797 ) (42,017,527 ) 6
NET INTEREST 27,356,107 24,349,684 12
NET REVENUE AND GAIN (LOSS) OTHER THAN INTEREST Service fee income, net (Notes 2, 28 and 32) 3,467,406 3,332,734 4 Loss on financial assets and liabilities at fair value through profit or loss (Notes 2 and 32) (4,689,947 ) (148,847 ) 3,051 Realized gain on available-for-sale financial assets (Notes 2 and 32) 156,358 667,864 (77 ) Realized loss on held-to-maturity financial assets (Note 2) (140,354 ) - - Income (loss) from equity investments under the equity method (Notes 2 and 11) (96,152 ) 341,711 (128 ) Foreign exchange gain, net (Note 2) 5,314,865 579,098 818 Impairment loss on assets (Notes 2, 12 and 15) (686,006 ) (439,680 ) 56 Gain on financial assets carried at cost (Note 2) 411,939 617,887 (33 ) Gain on disposal of properties and nonoperating assets (Note 2) 298,495 1,120,181 (73 ) Recovery of bad debts written off and overdue accounts 2,537,842 3,599,636 (29 ) Other noninterest gain, net (Notes 2 and 28) 338,527 544,023 (38 )
Total net revenue and gain (loss) other than interest 6,912,973 10,214,607 (32 )
TOTAL NET REVENUE 34,269,080 34,564,291 (1 )
ALLOWANCE FOR BAD-DEBT EXPENSES (Notes 2 and 8) (6,248,668 ) (4,678,962 ) 34
OPERATING EXPENSES Personnel (Notes 2, 3 and 24) (12,338,982 ) (11,842,537 ) 4 Depreciation and amortization (Notes 2 and 24) (1,105,344 ) (1,103,517 ) - General and administrative (5,068,211 ) (4,997,861 ) 1
Total operating expenses (18,512,537 ) (17,943,915 ) 3
(Continued)
- 4 - TAIWAN COOPERATIVE BANK, LTD.
STATEMENTS OF INCOME YEARS ENDED DECEMBER 31, 2008 AND 2007 (In Thousands of New Taiwan Dollars, Except Per Share Amounts)
Percentage Increase 2008 2007 (Decrease) Amount Amount %
INCOME BEFORE INCOME TAX $ 9,507,875 $ 11,941,414 (20 )
INCOME TAX EXPENSE (Notes 2 and 25) (1,977,097 ) (2,201,041 ) (10 )
NET INCOME $ 7,530,778 $ 9,740,373 (23 )
2008 2007 Before After Before After Income Income Income Income Tax Tax Tax Tax EARNINGS PER SHARE (Note 27) Basic earnings per share $ 1.74 $ 1.38 $ 2.18 $ 1.78 Diluted earnings per share $ 1.73 $ 1.37 $ 2.18 $ 1.78
The accompanying notes are an integral part of the financial statements.
(With Deloitte & Touche audit report dated March 2, 2009) (Concluded)
- 5 - TAIWAN COOPERATIVE BANK, LTD.
STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY YEARS ENDED DECEMBER 31, 2008 AND 2007 (In Thousands of New Taiwan Dollars)
Other Equity Unrealized Issued and Outstanding Capital Stock Revaluation Cumulative Unrealized Gain (Note 26) Retained Earnings (Notes 2 and 26) Increments Translation (Loss) on Financial Total Shares Capital Surplus Unappropriated (Notes 2, 13, 15 Adjustments Instruments Treasury Stock Stockholders’ (in Thousands) Common Stock (Notes 2 and 26) Legal Reserve Earnings and 26) (Note 2) (Note 2) (Notes 2 and 26) Equity
BALANCE, JANUARY 1, 2007 4,500,000 $ 45,000,000 $ 34,907,944 $ 3,319,187 $ 9,401,193 $ 4,024,155 $ 177,176 $ 902,595 $ - $ 97,732,250
Appropriation of the 2006 earnings Legal reserve - - - 2,752,563 (2,752,563 ) - - - - - Cash dividends - - - - (3,150,000 ) - - - - (3,150,000 ) Remuneration to directors and supervisors - - - - (64,226 ) - - - - (64,226 ) Bonus to employees - - - - (513,812 ) - - - - (513,812 )
Balance after appropriation 4,500,000 45,000,000 34,907,944 6,071,750 2,920,592 4,024,155 177,176 902,595 - 94,004,212
Capital surplus transferred to capital stock in August 2007 270,000 2,700,000 (2,700,000 ) ------
Net income in 2007 - - - - 9,740,373 - - - - 9,740,373
Change in unrealized revaluation increments - - - - - 395,425 - - - 395,425
Change in cumulative translation adjustments ------97,392 - - 97,392
Change in unrealized loss on financial instruments ------(1,798,676 ) - (1,798,676 )
BALANCE, DECEMBER 31, 2007 4,770,000 47,700,000 32,207,944 6,071,750 12,660,965 4,419,580 274,568 (896,081 ) - 102,438,726
Appropriation of the 2007 earnings Legal reserve - - - 2,922,112 (2,922,112 ) - - - - - Cash dividends - - - - (1,908,000 ) - - - - (1,908,000 ) Stock dividends 715,500 7,155,000 - - (7,155,000 ) - - - - - Remuneration to directors and supervisors - - - - (68,182 ) - - - - (68,182 ) Bonus to employees - - - - (545,461 ) - - - - (545,461 )
Balance after appropriation 5,485,500 54,855,000 32,207,944 8,993,862 62,210 4,419,580 274,568 (896,081 ) - 99,917,083
Net income in 2008 - - - - 7,530,778 - - - - 7,530,778
Change in unrealized revaluation increments - - - - - 859 - - - 859
Change in cumulative translation adjustments ------(111,588 ) - - (111,588 )
Change in unrealized gain on financial instruments ------1,763,214 - 1,763,214
Acquisition of treasury stock - 100,000 thousand shares ------(1,898,154 ) (1,898,154 )
BALANCE, DECEMBER 31, 2008 5,485,500 $ 54,855,000 $ 32,207,944 $ 8,993,862 $ 7,592,988 $ 4,420,439 $ 162,980 $ 867,133 $ (1,898,154 ) $ 107,202,192
The accompanying notes are an integral part of the financial statements.
(With Deloitte & Touche audit report dated March 2, 2009)
- 6 - TAIWAN COOPERATIVE BANK, LTD.
STATEMENTS OF CASH FLOWS YEARS ENDED DECEMBER 31, 2008 AND 2007 (In Thousands of New Taiwan Dollars)
2008 2007
CASH FLOWS FROM OPERATING ACTIVITIES Net income $ 7,530,778 $ 9,740,373 Loss (gain) on valuation of financial instruments (824,507 ) 339,077 Gain on the sale of available-for-sale financial assets (156,358 ) (578,873 ) Loss (income) from equity investments under the equity method, net of cash dividends received 136,363 (199,182 ) Impairment loss on assets 686,006 439,680 Depreciation and amortization 1,105,344 1,103,517 Gain on disposal of properties, nonoperating assets and collaterals assumed, net (382,485 ) (1,190,465 ) Allowance for bad-debt expenses 6,248,668 4,678,962 Other provisions 27,274 9,059 Amortization of premium or discount on bonds 645,401 735,296 Provision for pension costs 118,507 351,910 Deferred income tax 1,021,161 1,333,830 Loss on the sale of held-to-maturity financial assets 140,354 - Gain on the sale of financial assets carried at cost (173,599 ) (273,380 ) Others 29,668 (15,526 ) Net changes in operating assets and liabilities Held-for-trading financial assets 10,809,207 7,444,082 Receivables 1,036,064 241,617 Other assets (183,491 ) 11,381 Held-for-trading financial liabilities (930,668 ) (2,492,428 ) Payables 6,812,759 (9,164,188 ) Other liabilities (279,268 ) (143,196 )
Net cash provided by operating activities 33,417,178 12,371,546
CASH FLOWS FROM INVESTING ACTIVITIES Decrease (increase) in due from the Central Bank and call loans to other banks 40,596,679 (43,086,326 ) Acquisition of financial assets designated at fair value through profit or loss (182,581 ) (1,470,751 ) Proceeds of the sale of financial assets designated at fair value through profit or loss 2,148,775 1,148,257 Increase in discounts and loans (111,839,726 ) (30,562,426 ) Acquisition of available-for-sale financial assets (79,841,482 ) (75,893,498 ) Proceeds of the sale of available-for-sale financial assets 77,612,595 75,722,340 Acquisition of held-to-maturity financial assets (6,051,969 ) (4,365,905 ) Proceeds of the sale of and return of principal on held-to-maturity financial assets 5,526,187 - Acquisition of debt instruments with no active market (19,043,506 ) (15,184,077 ) Proceeds of the sale of and return of principal on debt instruments with no active market 9,148,657 8,361,762 Proceeds of the sale of financial assets carried at cost 385,684 336,484 Increase in other financial assets (365,033 ) (439,175 ) (Continued)
- 7 - TAIWAN COOPERATIVE BANK, LTD.
STATEMENTS OF CASH FLOWS YEARS ENDED DECEMBER 31, 2008 AND 2007 (In Thousands of New Taiwan Dollars)
2008 2007
Acquisition of properties, intangible assets and nonoperating assets $ (1,518,547 ) $ (1,339,393 ) Proceeds of the sale of properties, nonoperating assets and collaterals assumed 952,515 1,984,626 Decrease (increase) in other assets (157,590 ) 58,946 Proceeds of the sale of nonperforming loans 9,364,024 8,645,318
Net cash used in investing activities (73,265,318 ) (76,083,818 )
CASH FLOWS FROM FINANCING ACTIVITIES Decrease in due to the Central Bank and other banks (52,159,526 ) (13,307,939 ) Increase (decrease) in securities sold under repurchase agreements 12,714,692 (13,910,411 ) Increase in deposits and remittances 98,233,101 61,874,798 Repayment of bank debentures (16,540,000 ) - Issuance of bank debentures 10,000,000 20,170,000 Bonus to employees and remuneration to directors and supervisors (613,643 ) (576,979 ) Decrease in other financial liabilities (54,499 ) (333,545 ) Cash dividends (1,903,204 ) (3,135,216 ) Acquisition of treasury stock (1,898,154 ) - Decrease in other liabilities (41,992 ) (4,335 )
Net cash provided by financing activities 47,736,775 50,776,373
EFFECTS OF EXCHANGE RATE CHANGES 203,383 (564,228 )
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 8,092,018 (13,500,127 )
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR 32,500,510 46,000,637
CASH AND CASH EQUIVALENTS, END OF YEAR $ 40,592,528 $ 32,500,510
SUPPLEMENTAL CASH FLOW INFORMATION Interest paid $ 44,750,799 $ 40,898,578 Income tax paid $ 1,354,397 $ 725,022
PART-CASH INVESTING ACTIVITIES Sale of nonperforming loans - current year $ 3,103,990 $ 10,929,032 Receivables from the sale of nonperforming loans (2,483,192 ) (8,743,226 ) Proceeds of the sale of nonperforming loans - previous year 8,743,226 6,459,512 Proceeds of the sale of nonperforming loans $ 9,364,024 $ 8,645,318
NON-CASH INVESTING ACTIVITIES Acquisition of Taiwan Cooperative Bills Finance Corporation by using the Bank's creditor's rights converted to stockholder's rights (Note 11), resulting in a decrease in receivables and an increase in equity-method investments $ - $ 529,516
The accompanying notes are an integral part of the financial statements. (With Deloitte & Touche audit report dated March 2, 2009) (Concluded)
- 8 - TAIWAN COOPERATIVE BANK, LTD.
NOTES TO FINANCIAL STATEMENTS YEARS ENDED DECEMBER 31, 2008 AND 2007 (In Thousands of New Taiwan Dollars, Unless Stated Otherwise)
1. ORGANIZATION AND OPERATIONS
Taiwan Cooperative Bank, Ltd. (the “Bank”) was officially established on October 5, 1946 to regulate the supply of and demand for 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; (d) futures trading assistance; and (e) other operations as authorized by the central authority-in-charge.
The Bank merged with the Farmers Bank of China (FBC) on May 1, 2006, with the Bank as the survivor entity.
The Bank has its Head Office in Taipei. It had a Business, International Banking, Finance, Security and Trust Departments as well as 299 domestic branches, 10 securities brokerage branches, an offshore banking unit (OBU), 4 overseas branches and 1 representative offices as of December 31, 2008.
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 of the Republic of China (ROC).
As of December 31, 2008 and 2007, the Bank had 8,892 and 8,792 employees, respectively.
The Bank’s shares have been listed on the Taiwan Stock Exchange since November 17, 2004.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The Bank’s financial statements have been prepared in conformity with the Guidelines Governing the Preparation of Financial Reports by Public Banks, Guidelines Governing the Preparation of Financial Reports by Futures Commission Merchants, Business Accounting Law and Guidelines Governing Business Accounting, and accounting principles generally accepted in the ROC. In preparing financial statements in conformity with these guidelines, law 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, amortization, pension, assets impairment, the valuation of financial instruments, bonus to employees, remuneration to directors and supervisors, income tax, accrued litigation loss, etc. Actual results may differ from these estimates. Also, since the operating cycle in the banking industry cannot be reasonably identified, accounts included in the Bank’s financial statements are not classified as current or noncurrent. Nevertheless, these accounts are properly categorized according to the nature of each account and are sequenced by their liquidity. The maturity analysis of the Bank’s assets and liabilities is shown in Note 32.
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 -
For the convenience of readers, the accompanying financial statements have been translated into English from the original Chinese version prepared and used in the ROC. 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:
Regular Way Purchase or Sale of a Financial Asset
The Bank uses settlement date accounting when recording transactions, except those on beneficiary certificates, for which trade date accounting is used. The Bank recognizes gain or loss on the sale of financial assets on the settlement date. The changes in fair values between the trade date and the settlement date for purchase of financial assets are recognized by the following methods: a) financial assets at fair value through profit or loss - credited or charged to current income; b) available-for-sale financial assets - credited or charged to stockholders’ equity.
Basis of Fair Value
Fair values are determined as follows: (a) short-term bills - at reference prices published by Reuters; (b) listed securities and GreTai Securities Market (GTSM) securities - at closing prices as of the balance sheet date; (c) beneficiary certificates (open-end funds) - at net asset values as of the balance sheet date; (d) bonds-domestic - at period-end reference prices published by the GTSM; (e) securities that are not listed or not traded in the GTSM but have quoted market prices or trading records - at quoted market prices or trading prices; and (f) financial instruments with no active markets - at fair value estimates based on valuation techniques.
Financial Instruments at Fair Value Through Profit or Loss
Financial instruments at fair value through profit or loss are financial assets or liabilities that are designated on initial recognition as those to be measured at fair values, with fair value changes in profit or loss or financial assets or liabilities classified as held for trading. These instruments are required to be recognized at fair value and to be measured at fair value through profit or loss on the balance sheet date.
Financial instruments used in derivative transactions that do not qualify for hedge accounting are classified as financial assets or liabilities held for trading. If the fair value of a derivative is a positive number, the derivative is carried as an asset, and if the fair value is a negative number, the derivative is carried as a liability.
Applying the fair value option eliminates accounting measurement mismatch for items that naturally offset each other or eliminates the burden of separating embedded derivatives that are not considered to be closely related to the host contract pertaining to a hybrid instrument. The Bank does not adopt hedge accounting in 2008 and 2007, respectively. If the hedged items are not designated as financial assets or liabilities at fair value through profit or loss (FVTPL), accounting measurement mismatches on these items will occur as a result of differences in measurement attributes. Thus, the Bank designated debt instruments and bank debentures issued as financial assets and liabilities at FVTPL. Moreover, the Bank designated hybrid instruments as financial assets and liabilities at FVTPL because embedded derivatives are not separated from the host contract in a hybrid instrument.
Securities Purchased/Sold Under Resale/Repurchase Agreements
Securities purchased under resell agreements and securities sold under repurchase agreements are generally treated as collateralized financing transactions. Interest earned on resell agreements or interest incurred on repurchase agreements is recognized as interest revenue or interest expense over the life of each agreement.
- 10 - 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 (MOF).
Overdue loans (except other credits) are classified as discounts and loans, and the remaining are classified as other financial assets.
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 date.
Under “The Regulations Governing the Procedures for Banking Institutions to Evaluate Assets and Deal with Nonperforming/Non-accrual Loans” (the “Regulations”) issued by the 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 collaterals provided to estimate level of collectibility. The Regulations amended the classification of loan assets, such that loan assets are classified as special mention, substandard, with highly doubtful collectibility and deemed uncollectible, 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.
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.
Available-for-sale Financial Assets
Available-for-sale financial assets are initially recognized at fair value plus transaction costs that are directly attributable to the asset acquisition. Any difference between the initial carrying amount of a debt security and its amount on maturity is amortized using the effective interest method. However, the straight-line method is used for amortization if there was a minor difference between the amortizations using the effective interest method and the straight-line method. When assets are subsequently measured at fair value, the changes in fair value are excluded from earnings and reported as a separate component of stockholders’ equity. The accumulated gains or losses are recognized as earnings when the financial asset is de-recognized from the balance sheet.
Cash dividends received within a year of asset acquisition are recognized as a reduction of the original investment cost and are subsequently recognized as investment income up on the stockholders’ resolution. Stock dividends received are recorded as an increase in the number of shares held and do not affect investment income. The cost per share is recalculated on the basis of the new number of shares held.
Held-to-maturity Financial Assets
Held-to-maturity financial assets are carried at amortized cost using the effective interest method. However, the straight-line method is used for amortization if there was a minor difference between the amortizations using the effective interest method and the straight-line method. These financial assets are initially recognized at fair value plus transaction costs that are directly attributable to the asset acquisition. Gains or losses are recognized at the time of de-recognition, impairment or amortization.
- 11 - Equity Investments under the Equity Method
Investments in shares of companies in which the Bank exercises significant influence on their operating and financial policy decisions are accounted for by the equity method. Under the equity method, the investments are carried at cost on the acquisition date and subsequently adjusted for the Bank’s proportionate share in the net income or loss of the investees. The proportionate share in the net income or loss is recognized as current income or loss, and any cash dividends received are reflected as a reduction of the carrying values of the investments. 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.
Stock dividends received are recognized only as increases in the number of shares held and not as income. Cost of equity investments sold is determined by the weighted-average method.
Other Financial Assets
Financial assets carried at cost are those investments in equity instruments (including unlisted stocks and emerging stocks) with no quoted market prices in an active market and with fair values that cannot be reliably measured are measured at their original cost. The accounting treatment of dividends is similar to that for available-for-sale financial assets.
Debt instruments with no active market are those with no quoted market prices in an active market and with predetermined amounts. The accounting treatment for these debt instruments is similar to that for held-to-maturity financial assets, except for the absence of restriction on the timing of the disposal of held-to-maturity financial assets.
Properties and Nonoperating Assets
Properties and nonoperating assets are stated at cost, or cost plus revaluation increments and less accumulated depreciation and accumulated impairment. Major renewals, additions and improvements are capitalized; while costs of repairs and maintenance are expensed as incurred.
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 7 years; transportation equipment, 3 to 10 years; other equipment, 2 to 10 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 retirement or disposal of properties and nonoperating assets, their cost (including revaluation increments), related accumulated depreciation, accumulated impairment and any unrealized revaluation increments of an item of property and nonoperating asset are removed from the accounts. Any resulting gain or loss is credited or charged to current income.
Intangible Assets
Goodwill is stated at cost less accumulated impairment.
Computer software is recorded at acquisition cost and amortized by the straight-line method over five years.
- 12 - Asset Impairment a. Available-for-sale financial assets
If an available-for-sale financial asset is determined to be impaired, a loss is recognized. If the impairment loss on equity securities decreases, this loss is reversed to the extent of the decrease and recorded as an adjustment to stockholders’ equity; for debt securities, this loss is recognized as earnings. b. Held-to-maturity financial assets and debt instruments with no active market
If a held-to-maturity financial asset or debt instrument with no active market is determined to be impaired, a loss is recognized. If the impairment loss decreases, the previously recognized impairment loss is reversed. However, the reversal should not result in the carrying amount of financial assets exceeding the amortized cost that would have been determined had no impairment loss been recognized. c. Financial assets carried at cost
If there is objective evidence that a financial asset carried at cost is impaired, an impairment loss is recognized. However, impairment loss reversal is prohibited. d. Equity investments under the equity method
If there is objective evidence that an equity-method investment is impaired, an impairment loss is recognized. The Bank tests equity investments on which the Bank has significant influence but over which the Bank has no control on the basis of the individual carrying amounts of the investments. e. Properties, intangible assets, and other assets
The Bank tests assets (mainly properties, nonoperating assets, goodwill and computer software) and cash-generating units (CGUs) for impairment on each balance sheet date. If impairment is determined, the Bank estimates the recoverable amounts of assets or CGUs. An impairment loss should be recognized whenever the recoverable amount of the assets or the CGU is below the carrying amount.
If asset impairment loss (excluding goodwill) is reversed, the increase in the carrying amount resulting from reversal is credited to current income. However, loss reversal should not be more than the carrying amount (net of depreciation or amortization) had the impairment loss not been recognized.
For the unrealized revaluation increments recognized upon revaluation required by law, the impairment loss is recognized as a reduction of the reported revaluation increments. If the impairment loss exceeds the reported revaluation increments, the excess is recognized as current loss. If this impairment loss is reversed, this 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 increments.
Goodwill is tested for impairment annually, or more frequently if events indicate goodwill impairment. An impairment loss is recorded if the book value exceeds the value in use. No recording of a subsequent recovery of fair value of goodwill is allowed.
Collaterals Assumed
Collaterals assumed are recorded at cost and revalued at the lower of cost or net fair value as of the balance sheet date. If cost exceeds net fair value, an impairment loss is recognized. If the impairment loss is reversed, this reversal is recognized as current income. If collaterals assumed are not disposed within the statutory period, relevant regulations require that the Bank should either apply for the extension of the disposal period or increase their provision for possible losses.
- 13 - Pension Costs
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 expenses throughout the employees’ service periods.
Trading Loss Reserve
Reserve for losses on the sale of bonds is computed at 10% of the net gain on the sale of bonds until the balance of the reserve reaches $200,000 thousand. This reserve should be used only to offset actual losses on the sale of the bonds.
Under the Regulations Governing Futures Commission Merchants, the futures commission merchant engaging in proprietary futures trading should set aside 10% of each month’s realized net profit as trading loss reserve, i.e., this reserve should not be used for purposes other than covering trading losses in excess of trading profits. When the accumulated trading loss reserve reaches the legally required level of working capital, no additional trading loss reserve is required to be set aside.
Treasury Stock
Issued shares reacquired as treasury stock are carried at cost and presented as a deduction to arrive at stockholders’ equity. When the treasury shares are reissued to the employees, the difference between the reissue price and acquisition cost will be credited or debited to “capital surplus - treasury stock.” If this capital surplus is not enough for debiting purposes, the shortfall is charged to unappropriated retained earnings.
Interest Revenue and Service Fees
Interest revenue on loans and financial instruments are 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.
Unpaid interest on rescheduled loans is recorded as deferred revenue (part of other liabilities), and paid interest is recognized as interest revenue.
Service fees are recorded as income upon receipt or upon substantial completion of the earnings process based on the nature of the transaction.
Income Tax
Inter-period and intra-period income tax allocations are used, by which tax effects of loss carryforwards, unused investment tax credits, deductible temporary differences and debits of stockholders’ equity adjustments are recognized as deferred income tax assets, and those of taxable temporary differences and credits of stockholders’ equity adjustments 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 expenditures for personnel training and stock investments are recognized in the current period.
Any adjustments of prior years’ tax liabilities are included in the current year’s income tax expense.
Income tax on interest in short-term negotiable investments or special-purpose trust beneficiary securities, which is levied separately, is included in the current year’s income tax expense.
- 14 - According to the Income Tax Law, income taxes (10%) on undistributed earnings generated annually since 1998 are recorded as expenses in the year when the stockholders resolve to retain the earnings.
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 the Republic of China (CBC). On the balance sheet date, monetary financial assets and liabilities are translated into New Taiwan dollars at the CBC closing rates, and exchange differences are recognized in the income statement.
Unrealized exchange differences on nonmonetary financial assets (investments in equity instruments) are a component of the change in their entire fair value. For nonmonetary financial assets and liabilities classified as financial instruments measured at fair value through profit or loss, unrealized exchange differences are recognized in the income statement. For nonmonetary financial instruments that are classified as available-for-sale, unrealized exchange differences are recorded directly under stockholders’ equity until the asset is sold or becomes impaired. Nonmonetary financial instruments that are classified as carried at cost are recognized at the exchange rates on the transaction dates. The Bank translates overseas branches’ and the equity-method investees’ financial statements at the following rates: Assets and liabilities - the CBC closing exchange rates on the balance sheet date; and income and expenses - the average exchange rate in the year. Translation differences net of income tax are recorded as “cumulative translation adjustments” under stockholders’ equity and will be recognized as gain or loss if overseas branches and equity-method investments are sold or liquidated.
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 2007 had been reclassified to be consistent with the 2008 financial statement presentation.
3. ACCOUNTING CHANGES
Effective January 1, 2008, under an explanation issued by the Accounting Research and Development Foundation of the ROC, the Bank should recognize bonus to employees and remuneration to directors and supervisors as compensation expenses. These bonus and remuneration were previously recorded as appropriations from earnings. This accounting change decreased the Bank’s net income in the year ended December 31, 2008 by $391,021 thousand and basic earnings per share after income tax by NT$0.07.
Under the newly amended Statement of Financial Accounting Standards (“Statement” or SFAS) No. 34 - “Financial Instruments: Recognition and Measurement,” the Bank reclassified a part of the held-for-trading financial assets into available-for-sale financial assets. Related information is shown in Note 32.
Effective January 1, 2007, the Bank adopted the newly released ROC SFAS No. 37 - “Intangible Assets” and related revisions of previously released Statements. The Bank’s management believes this change had no significant effect on the financial statements.
- 15 - 4. CASH AND CASH EQUIVALENTS
2008 2007
Cash on hand $ 21,821,074 $ 21,523,928 Notes and checks in clearing 17,583,970 8,389,336 Due from banks 1,187,484 2,587,246
$ 40,592,528 $ 32,500,510
5. DUE FROM THE CENTRAL BANK AND CALL LOANS TO OTHER BANKS
2008 2007
Deposit reserve - account A $ 22,350,891 $ 12,001,428 Deposit reserve - account B 50,994,290 48,721,366 Reserves for deposits - community financial institutions 35,914,162 35,790,446 Reserves for deposits - foreign-currency deposits 140,506 4,280,900 Deposits in the Central Bank 49,700,000 49,700,000 Negotiable certificates of deposit in the Central Bank 186,105,000 229,945,000 Due from the Central Bank - others 3,357,342 3,228,867 Call loans to banks 35,200,924 40,691,787
$ 383,763,115 $ 424,359,794
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 deposit reserve - account A and foreign-currency deposit reserves may be withdrawn anytime and are noninterest earning.
6. FINANCIAL INSTRUMENTS AT FAIR VALUE THROUGH PROFIT OR LOSS
2008 2007 Held-for-trading financial assets
Commercial paper $ 17,214,263 $ 11,011,430 Beneficiary securities under securitization 1,313,221 2,495,659 Government bonds 195,650 12,324,111 Corporate bonds 193,115 33,998 Listed stocks - domestic 126,947 2,592,763 Beneficiary certificates - 1,190,132 Bank acceptances - 3,133 Currency swap contracts 2,743,243 506,445 Forward contracts 804,015 214,094 Non-deliverable forward contracts 142,484 8,848 Interest rate swap contracts 97,579 22,098 Futures exchange margins 33,219 - Foreign-currency margin contracts 20,628 279,675 Currency option contracts - buy 5,400 14,073 Commodity option contracts - buy 1,467 - Cross-currency swap contracts - 77,609 22,891,231 30,774,068 (Continued)
- 16 - 2008 2007 Financial assets designated at fair value through profit or loss
Government bonds $ 3,839,958 $ 5,007,906 Bank debentures 3,777,965 5,019,831 Corporate bonds 750,083 926,910 Structured deposits - 19,800 8,368,006 10,974,447
$ 31,259,237 $ 41,748,515 Held-for-trading financial liabilities
Currency swap contracts $ 1,313,850 $ 393,720 Interest rate swap contracts 543,482 442,582 Cross-currency swap contracts 393,177 1,536 Forward contracts 259,840 29,144 Non-deliverable forward contracts 134,072 3,932 Currency option contracts - sell 5,400 14,008 Foreign-currency margin contracts 1,762 519 Commodity option contracts - sell 1,579 - 2,653,162 885,441 Financial liabilities designated at fair value through profit or loss
Bank debentures (Note 20) 1,872,674 1,764,713
$ 4,525,836 $ 2,650,154 (Concluded)
As of December 31, 2008 and 2007, some securities, with face values of $12,069,300 thousand and $11,865,753 thousand, respectively, had been sold under repurchase agreements.
The Bank enters into derivative transactions mainly to accommodate customers’ needs and to manage its exposure to adverse changes in exchange rates and interest rates. The Bank’s strategy for hedging against risk is to avoid most of the market price risk or cash flow risk. In addition, the Bank does futures trading. The Bank uses index futures and option contracts for trading purposes, specifically to diversify investments, aggressively develop various services and increase working capital efficiency.
As of December 31, 2008 and 2007, the contract (notional) amounts of derivative transactions were as follows:
2008 2007
Forward contracts $ 25,467,154 $ 22,396,038 Non-deliverable forward contracts 5,861,856 1,220,241 Currency swap contracts 182,373,064 157,464,814 Foreign-currency margin contracts 105,243 4,094,398 Currency option contracts - buy 537,059 6,912,619 Currency option contracts - sell 537,059 6,912,619 Commodity option contracts - buy 3,151 - Commodity option contracts - sell 3,151 - Interest rate swap contracts 10,742,231 11,380,680 Cross-currency swap contracts 820,103 1,478,897
- 17 -
Contract Amount or Premium Paid Transaction Outstanding Positions (Received) Fair Value Items Type Long/Short Volume (Note 1) (Note 2)
December 31, 2008
Futures contracts TAIEX Futures Short 45 $(40,947) $(40,932)
Note 1: Contract amount on the transaction date.
Note 2: Closing price published by the Taiwan Futures Exchange on December 31, 2008.
7. RECEIVABLES, NET
2008 2007
Accrued interest $ 7,946,166 $ 8,287,064 Acceptances 3,298,033 4,097,438 Credit cards 2,562,035 2,784,250 Receivable from the sale of nonperforming loans 2,483,192 8,743,226 Factored accounts receivable without recourse 1,777,453 1,434,713 Credits receivable 609,247 867,701 Refundable deposits receivable in leasehold agreements 496,412 543,893 Tax refundable 491,255 612,592 Accounts receivable 442,169 431,524 Others 932,850 899,619 21,038,812 28,702,020 Less: Allowance for credit losses 652,920 829,306
$ 20,385,892 $ 27,872,714
Credits receivable due to the merger with the Farmers Bank of China on May 1, 2006 were recognized at fair value of credits written off by the Farmers Bank of China in the past. The fair values were evaluated by PricewaterhouseCoopers Financial Advisory Service Co., Ltd.
- 18 - To speed up the disposal of nonperforming loans (NPLs) and strengthen the Bank’s financial structure, the Bank sold - through public bidding - NPLs (including a portion of credits written off) and related credits amounting to (a) $15,819,616 thousand on December 2, 2008 to Fubon Asset Management Co., Ltd. and (b) $39,645,824 thousand on December 10, 2007 to Co-operative Assets Management Co., Ltd.. Contract terms were as follows:
Date of NPL Sale December 2, 2008 December 10, 2007
a. Contract signing date December 5, 2008 December 13, 2007 b. Cutoff date September 15, 2008 August 31, 2007 c. Settlement date By March 11, 2009 By April 11, 2008 d. Put-back provision If a buyer identifies any defective If a buyer identifies any defective asset, the Bank should repurchase asset, the Bank should repurchase the asset between the settlement the asset between the settlement date and the end of the 12th month date and the end of the 15th month from the settlement date. from the settlement date.
The outstanding receivables on the foregoing transactions amounted to $2,483,192 thousand (Fubon Asset Management Co, Ltd.) and $8,743,226 thousand (Co-operative Assets Management Co., Ltd.) as of December 31, 2008 and 2007, respectively.
8. DISCOUNTS AND LOANS, NET
2008 2007
Bills discounted $ 1,669,462 $ 1,775,063 Overdraft Unsecured 836,189 2,254,495 Secured 2,010,990 1,203,408 Import and export negotiations 690,490 1,252,678 Short-term loans Unsecured 262,209,725 242,192,244 Accounts receivable financing 74,827 - Secured 90,161,311 75,064,313 Receivable from securities financing 546,447 1,284,019 Medium-term loans Unsecured 358,478,199 317,331,617 Secured 269,990,760 277,121,529 Long-term loans Unsecured 99,769,646 107,143,353 Secured 737,460,057 692,746,978 Overdue loans 24,940,140 26,321,325 1,848,838,243 1,745,691,022 Less: Allowance for credit losses 16,193,698 15,944,817
$ 1,832,644,545 $ 1,729,746,205
Accrual of interest on the above overdue loans had stopped. Thus, the unrecognized interest revenue was $933,235 thousand in 2008 and $1,115,108 thousand in 2007 based on the average loan interest rates for those years.
In 2008 and 2007, the Bank had written off credits only after completing the required legal procedures.
- 19 - The details and changes in allowance for credit losses of discounts and loans are summarized below:
2008 Specific Risk General Risk Total
Balance, January 1 $ 5,726,296 $ 10,218,521 $ 15,944,817 Provisions (reversal) 7,225,852 (1,153,645 ) 6,072,207 Write-offs (5,831,092 ) - (5,831,092 ) Effects of exchange rate changes - 7,766 7,766
Balance, December 31 $ 7,121,056 $ 9,072,642 $ 16,193,698
2007 Specific Risk General Risk Total
Balance, January 1 $ 6,783,839 $ 13,928,459 $ 20,712,298 Provisions (reversal) 8,197,480 (3,709,337 ) 4,488,143 Write-offs (9,255,023 ) - (9,255,023 ) Effects of exchange rate changes - (601 ) (601 )
Balance, December 31 $ 5,726,296 $ 10,218,521 $ 15,944,817
The details of the allowance for bad-debt expenses in 2008 and 2007 were as follows:
2008 2007
Provision for possible losses on discounts and loans $ 6,072,207 $ 4,488,143 Reversal of provision for possible losses on receivables (55,425 ) (85,706 ) Provision for possible losses on overdue receivables 230,325 284,529 Provision (reversal of provision) for reserve for guarantees 1,561 (8,004 )
$ 6,248,668 $ 4,678,962
9. AVAILABLE-FOR-SALE FINANCIAL ASSETS
2008 2007
Government bonds $ 57,565,569 $ 53,898,624 Bank debentures 5,235,285 5,917,014 Listed stocks - domestic 1,261,693 164,905 Beneficiary certificates 486,892 - Corporate bonds 235,858 266,737
$ 64,785,297 $ 60,247,280
As of December 31, 2008 and 2007, available-for-sale financial assets with face values of $34,488,700 thousand and $26,224,600 thousand, respectively, had been sold under repurchase agreements.
- 20 - 10. HELD-TO-MATURITY FINANCIAL ASSETS
2008 2007
Bank debentures $ 5,007,618 $ - Preferred stocks 2,320,000 2,320,000 Corporate bonds 559,566 400,149 Time deposits (par value: US$7,100 thousand in 2008 and US$12,000 thousand in 2007) 232,695 389,808 Government bonds 51,200 51,200 Treasury bills - 4,365,905
$ 8,171,079 $ 7,527,062
11. EQUITY INVESTMENTS UNDER THE EQUITY METHOD
Equity investments under the equity method are summarized as follows:
2008 2007 % of % of Amount Ownership Amount Ownership
United Taiwan Bank S.A. $ 933,492 70.00 $ 1,376,916 70.00 United Real Estate Management Co., Ltd. 76,596 30.00 69,306 30.00 Co-operative Assets Management Co., Ltd. 3,937,209 100.00 3,746,144 100.00 Cooperative Insurance Brokers Co., Ltd. 66,614 100.00 45,999 100.00 Taiwan Cooperative Bills Finance Corporation 614,956 50.56 537,918 50.56 Agricultural Education Film Co., Ltd. - 45.00 - 45.00
$ 5,628,867 $ 5,776,283
The investees’ financial statements as of and for the years ended December 31, 2008 and 2007, which were used as basis for calculating the carrying amount of and income from the equity-method investments had all been audited. On these investments, there was a net loss of $96,152 thousand in 2008 and a net gain of $341,711 thousand in 2007.
On October 2, 2007, the Bank’s Board of Directors resolved to transform its creditor’s right to Great Chinese Bills Finance Corporation (GCBFC) amounting to $529,516 thousand into stockholder’s right. The related acquisition took effect on December 4, 2007, and the Bank became a 50.56% owner of GCBFC. On December 19, 2007, GCBFC changed its name to Taiwan Cooperative Bills Finance Corporation.
The Bank had provided consolidated financial statements including over 50% share holding subsidiaries as of and for the years ended December 31, 2008 and 2007.
- 21 - 12. OTHER FINANCIAL ASSETS, NET
2008 2007
Overdue receivables $ 528,437 $ 372,484 Less: Allowance for credit losses 143,142 121,899 Overdue receivables, net 385,295 250,585 Debt instruments with no active market, net 51,540,028 42,729,448 Financial assets carried at cost, net 4,224,558 4,407,230
$ 56,149,881 $ 47,387,263
Financial assets carried at cost are summarized as follows:
2008 2007 % of % of Amount Ownership Amount Ownership
Taiwan Asset Management Co., Ltd. $ 3,120,934 17.03 $ 3,120,934 17.03 Taiwan Power Company 631,153 0.24 631,153 0.24 Financial Information Service Co., Ltd 135,405 2.89 135,405 2.89 Taiwan Financial Asset Service Co., Ltd. 101,125 5.88 101,125 5.88 TWTC International Trade Building Co., Ltd. - - 212,085 12.50 Others 235,941 206,528
$ 4,224,558 $ 4,407,230
The above equity investments, which had no quoted prices in an active market and had fair values that could not be reliably measured, were carried at cost.
Debt instruments with no active market are summarized as follows:
2008 2007
Corporate bonds $ 34,991,833 $ 24,247,399 Bank debentures 13,281,459 14,974,269 Government bonds - domestic 1,389,369 1,347,037 Beneficiary securities under securitization 767,526 1,048,626 Government bonds - overseas 1,109,841 1,112,117
$ 51,540,028 $ 42,729,448
As of December 31, 2008 and 2007, debt instruments with no active market and with face values of $5,750,000 thousand and $2,020,000 thousand, respectively, had been sold under repurchase agreements.
The impairment losses recognized on debt instruments with no active market were $571,995 thousand in 2008 and $312,594 thousand in 2007.
- 22 - 13. PROPERTIES
2008 2007 Land Cost $ 16,532,082 $ 16,207,622 Revaluation increments 5,949,902 6,003,758
$ 22,481,984 $ 22,211,380
Accumulated depreciation Buildings $ 3,701,230 $ 3,437,340 Machinery and equipment 3,720,181 3,372,120 Transportation equipment 477,578 440,490 Other equipment 1,076,756 1,046,329 Leasehold improvements 452,728 393,006
$ 9,428,473 $ 8,689,285
Accumulated impairment Land $ 1,114 $ 86,215
The Bank revalued its properties three times in 1979, 1998 and 2007. As of December 31, 2008, the revaluation increments on properties and nonoperating assets amounted to $6,066,689 thousand and the reserve for land revaluation increment tax (part of other liabilities) amounted to $2,001,286 thousand (including $125,196 thousand arising from the merger with the Farmers Bank of China). The revaluation increments net of tax were included in other stockholders’ equity - unrealized revaluation increments.
In testing assets for impairment, the Bank defined each operating unit as a cash-generating unit (CGU). The recoverable amount of a CGU was determined at its value in use. The discount rates for the CGUs’ value in use were 12.27% and 12.79% as of December 31, 2008 and 2007, respectively.
14. INTANGIBLE ASSETS
2008 2007
Goodwill $ 3,170,005 $ 3,170,005 Computer software 454,611 264,073
$ 3,624,616 $ 3,434,078
Goodwill resulting from the Bank’s merger with the Farmers Bank of China was allocated to operating units (cash-generating units with allocated goodwill). There was no impairment loss on goodwill as of December 31, 2008 and 2007.
- 23 - 15. OTHER ASSETS, NET
2008 2007
Nonoperating assets, net $ 3,834,123 $ 3,961,244 Refundable deposits 994,879 1,094,801 Collaterals assumed, net 741,948 985,947 Prepaid expenses 426,511 243,020 Operating deposits and settlement funds 96,832 96,806 Deferred income tax assets, net - 694,462 Others 1,863 2,186
$ 6,096,156 $ 7,078,466
Nonoperating assets as of December 31, 2008 and 2007 were as follows:
2008 2007 Land Cost $ 2,531,333 $ 2,601,027 Revaluation increments 116,787 130,219 2,648,120 2,731,246 Buildings - cost 1,529,451 1,580,043 Total cost and revaluation increments 4,177,571 4,311,289 Less: Accumulated depreciation 305,126 287,019 Less: Accumulated impairment 38,322 63,026
$ 3,834,123 $ 3,961,244
Part of the buildings and the land included in nonoperating assets had been leased to third parties.
If there are no indications that the value in use of nonoperating assets significantly exceeded net fair value, the net fair value should be used as the recoverable amount. Thus, to determine the fair value of its nonoperating assets, the Bank designated real estate appraisers to valuate these assets. After asset valuation, the Bank recognized impairment loss $13,260 thousand in 2007.
The Bank also recognized impairment losses on collaterals assumed of $114,011 thousand and $113,826 thousand in 2008 and 2007, respectively.
16. DUE TO THE CENTRAL BANK AND OTHER BANKS
2008 2007
Due to banks $ 161,162,527 $ 208,520,746 Call loans from banks 39,945,297 44,748,818 Bank overdraft 683,614 947,130 Due to the Central Bank 865,400 599,670
$ 202,656,838 $ 254,816,364
17. SECURITIES SOLD UNDER REPURCHASE AGREEMENTS
Under repurchase agreements, securities sold for $55,961,852 thousand as of December 31, 2008 will be purchased for $56,055,663 thousand by June 29, 2009, and securities sold for $43,247,160 thousand as of December 31, 2007 had been purchased for $43,336,056 thousand by June 25, 2008.
- 24 -
18. PAYABLES
2008 2007
Checks for clearing $ 17,583,970 $ 8,389,336 Accrued interest 7,475,512 7,802,514 Collections of notes and checks for various financial institutions in other cities 5,731,387 1,794,891 Collections payable 4,443,001 3,695,114 Acceptances 3,328,205 4,140,919 Accrued expenses 3,257,494 3,132,522 Payables on notes and checks collected for others 1,213,476 4,340,284 Taxes payable 525,828 409,785 Dividend payable 167,120 164,716 Collections payable on the sale of nonperforming loans 162,483 221,438 Factoring account payable 86,135 151,482 Payables on notes and checks collected for community financial institutions 83,135 2,989,086 Others 1,885,351 1,883,455
$ 45,943,097 $ 39,115,542
19. DEPOSITS AND REMITTANCES
2008 2007 Deposits Checking $ 34,280,554 $ 31,578,506 Demand 235,840,604 192,849,945 Savings - demand 397,219,237 394,840,184 Time 484,669,002 473,564,340 Negotiable certificates of deposit 4,446,400 4,746,500 Savings - time 767,867,957 731,322,131 Treasury 58,852,347 55,988,334 Remittances 304,837 357,897
$ 1,983,480,938 $ 1,885,247,837
20. BANK DEBENTURES
2008 2007
Subordinated bonds in 2000: Floating interest rate for 1-year time deposit plus 0.5% amounting to $19,469,000 thousand, and fixed rate of 6.15% amounting to $2,501,000 thousand; maturity - July 14, 2009 $ 1,000 $ 1,000 Subordinated bonds in 2001: Floating interest rate for 1-year time deposit plus 0.6% amounting to $8,100,000 thousand, and fixed rate of 3.3% amounting to $1,900,000 thousand; maturity - November 28, 2008 - 10,000,000 (Continued)
- 25 -
2008 2007
First subordinated bonds in 2002: Floating interest rate for 2-year time deposit plus 0.7% amounting to $1,500,000 thousand, and fixed rate of 3.3% amounting to $5,050,000 thousand; maturity - April 21, 2008 $ - $ 6,550,000 Second subordinated bonds in 2002: Floating interest rate for 2-year time deposit plus 0.275%; maturity - February 11, 2009 1,450,000 1,450,000 Subordinated bonds in 2003: Floating interest rate for 1-year time deposit plus 0.25%; maturity - May 8, 2010 5,750,000 5,750,000 Subordinated bonds in 2004: Floating interest rate for 1-year time deposit plus 0.375%; maturity - February 23, 2010 15,200,000 15,200,000 First subordinated bonds in 2006: Floating interest rate for 1-year time deposit plus 0.25% amounting to $15,000,000 thousand, and fixed rate of 2.24% amounting to $3,200,000 thousand; maturity - April 24, 2013 18,200,000 18,200,000 Second subordinated bonds in 2006: Reuters’ fixed rate for 90 days’ New Taiwan dollar commercial paper plus 0.235%; maturity - December 8, 2013 7,000,000 7,000,000 First cumulative subordinated bonds in 2007: Reuters’ fixed rate for 90 days’ New Taiwan dollar commercial paper plus 0.7% in first five years; Reuters’ fixed rate for 90 days’ New Taiwan dollar commercial paper plus 1.7% if the Bank fails to redeem the bank debenture after five years from the issuance date; no maturity date 13,000,000 13,000,000 Second subordinated bonds in 2007, Type A: Reuters’ fixed rate for 90 days’ New Taiwan dollar commercial paper plus 0.34%; maturity - September 28, 2014 1,360,000 1,360,000 Second cumulative subordinated bonds in 2007, Type B: Reuters’ fixed rate for 90 days’ New Taiwan dollar commercial paper plus 0.85% in first five years; Reuters’ fixed rate for 90 days’ New Taiwan dollar commercial paper plus 1.85% if the Bank fails to redeem the bank debenture after five years from the issuance date; no maturity date 5,810,000 5,810,000 First subordinated bonds in 2008, Type A: Reuters’ fixed rate for 90 day’s New Taiwan dollar commercial paper plus 0.43%; maturity-May 28, 2015 1,000,000 - First subordinated bonds in 2008, Type B: Fixed rate of 3.0%; maturity- May 28, 2015 4,500,000 - First cumulative subordinated bonds in 2008, Type C: Reuters’ fixed rate for 90 day’s New Taiwan dollar commercial paper plus 0.95% in first six years; Reuters’ fixed rate for 90 days’ New Taiwan dollar commercial paper plus 1.95% if the Bank fails to redeem the bank debenture after six years from the issuance date; no maturity date 4,500,000 -
$ 77,771,000 $ 84,321,000 (Concluded)
For the above subordinated bonds in 2000, the Bank had the option to redeem the bonds, regardless of any objection from the bondholders, between June 15, 2004 and June 30, 2004. If the bonds had not been redeemed between those dates, the rates were changed to 7.15% for the fixed rate bonds from July 14, 2004, 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, 2008.
- 26 - The details of bank debentures designated at fair value through profit or loss are summarized below:
2008 2007
First subordinated bonds in 2006: Fixed rate of 2.24%, maturity - April 24, 2013 $ 1,800,000 $ 1,800,000 Valuation adjustment 72,674 (35,287 )
$ 1,872,674 $ 1,764,713
To increase its capital adequacy ratio and raise medium-term or long-term capital, the Bank proposed the issuance of domestic subordinated bank debentures with aggregate face value of $20,000,000 thousand. This issuance was approved by the Financial Supervisory Commission on January 19, 2009. As of March 2, 2009, the date of the accompanying auditors’ report, none of the bank debentures had been issued.
21. OTHER FINANCIAL LIABILITIES
2008 2007
Appropriation for loans $ 3,183,059 $ 3,148,331 Guarantee deposits received 1,371,072 1,460,299
$ 4,554,131 $ 4,608,630
22. OTHER LIABILITIES
2008 2007
Reserve for land revaluation increment tax $ 2,001,286 $ 2,037,278 Advance receipts 656,077 936,467 Reserve for losses on guarantees 339,825 338,264 Deferred income tax liabilities 150,047 - Reserve for losses on breach of purchase commitment 81,311 74,937 Others 43,681 67,222
$ 3,272,227 $ 3,454,168
23. PENSION PLANS
The Bank has defined benefit pension plans for all regular employees. Under these plans, the Bank makes monthly contributions equal to 8% (changed to 15% in May 2007) of salaries and wages. The funds is deposited in the Bank of Taiwan (the Central Trust of China, the government - designated custodian of pension funds, merged with the Bank of Taiwan in July 2007, with the Bank of Taiwan as the survivor entity). The Bank recognizes pension expenses based on actuarial calculations.
The pension plan under the Labor Pension Act (the “Act”) is a defined contribution plan. Based on the Act, the rate of the Bank’s monthly contributions to employees’ individual pension accounts is at 6% of monthly salaries and wages. These contributions, recognized as pension costs, were $77,368 thousand and $63,839 thousand in 2008 and 2007, respectively.
- 27 - Other information in 2008 and 2007 on the defined benefit plan is as follows:
2008 2007 a. Net pension cost
Service cost $ 892,513 $ 871,366 Interest cost 118,296 73,757 Actual return on plan assets (84,634 ) (49,352 ) Amortization 9,918 7,905 Net pension cost $ 936,093 $ 903,676 b. The reconciliation of plan funded status to balance sheet amounts:
Benefit obligation Vested benefit obligation $ 2,371,222 $ 1,699,496 Non-vested benefit obligation 1,331,817 1,105,034 Accumulated benefit obligation 3,703,039 2,804,530 Additional benefits based on future salaries 1,117,553 1,152,406 Projected benefit obligation 4,820,592 3,956,936 Fair value of plan assets (3,019,847 ) (2,177,008 ) Funded status 1,800,745 1,779,928 Unamortized prior service cost (8,577 ) (9,649 ) Unamortized net pension gains or losses (28,598 ) (125,216 )
Accrued pension cost $ 1,763,570 $ 1,645,063 c. Vested benefit $ 3,040,718 $ 2,290,769 d. Actuarial assumptions
Discount rate 2.50% 3.00% Rate of increase in compensation 2.00% 2.50% Expected long-term rate of return on plan assets 2.50% 3.00%
The changes in the pension fund are summarized below:
2008 2007
Balance, January 1 $ 2,177,008 $ 1,603,286 Contributions 806,265 551,765 Interest income 84,634 49,352 Benefits paid (48,060 ) (27,395 )
Balance, December 31 $ 3,019,847 $ 2,177,008
- 28 - 24. PERSONNEL, DEPRECIATION AND AMORTIZATION EXPENSES
2008 2007 Personnel expenses Salaries $ 6,821,168 $ 6,074,144 Bonus 2,512,489 2,859,386 Pension and compensation 1,023,109 990,279 Overtime 703,252 677,260 Others 1,278,964 1,241,468 Depreciation and amortization 1,105,344 1,103,517
25. INCOME TAX
Reconciliation of income tax (statutory rate) on pretax income to income tax currently payable is as follows:
2008 2007
Tax on pretax income at statutory rate (25%) $ 2,376,968 $ 2,985,354 Tax-exempt income 179,377 (588,072 ) Permanent differences (653,907 ) (413,599 ) Temporary differences (947,674 ) (1,240,053 ) Income tax expenses - current 954,764 743,630 Change in deferred income tax 1,021,161 1,333,830 Tax adjustment from previous year 1,172 (145,986 ) Tax on unappropriated earnings (10%) - 269,567
Income tax expense $ 1,977,097 $ 2,201,041
Deferred income tax assets (liabilities - part of other liabilities) as of December 31, 2008 and 2007 are summarized as follows:
2008 2007 Deferred income tax assets (liabilities) Loss carryforwards $ 434,359 $ 1,020,611 Pension 317,133 287,507 Valuation adjustment on available-for-sale financial assets 179,290 39,834 Provision for losses on unrealized asset impairment and market price decline 137,275 143,175 Income from equity investments under the equity method 44,202 (44,981 ) Deferred losses on the sale of nonperforming loans 17,667 79,767 Tax credit - 10,840 Cumulative translation adjustments (54,326 ) (91,523 ) Unrealized gain or loss on financial instruments (389,810 ) (45,079 ) Goodwill (422,667 ) (264,167 ) Others 11,110 9,640 274,233 1,145,624 Less: Allowance for valuation of deferred income tax assets 424,280 451,162
$ (150,047 ) $ 694,462
The loss carryforwards not yet expired as of December 31, 2008 are as follows:
Expiry Year Amount
2016 $ 1,737,437
- 29 -
Imputed tax credits are summarized as follows:
2008 2007
Balances of stockholders’ imputed tax credit $ 723,104 $ 1,251,884
The actual creditable tax ratios for distributing the 2007 and 2006 earnings were 13.15% and 11.50%, respectively. The Bank estimated the creditable tax ratio for distributing the 2008 earnings at 7.85%.
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 generated until December 31, 1997 were included in the unappropriated retained earnings as of December 31, 2008 and 2007, respectively.
The Bank’s income tax returns through 2004 had been examined by the tax authorities.
26. STOCKHOLDERS’ EQUITY
a. Capital stock
The Bank’s stockholders resolved to use the 2007 unappropriated earnings of $7,155,000 thousand as stock dividends representing 715,500 thousand shares. This issuance was approved by the Financial Supervisory Commission (FSC) and the Ministry of Economic Affairs (MOEA). As of December 31, 2008, the Bank’s authorized capital stock amounted to $60,000,000 thousand, and issued and outstanding capital stock amounted to $54,855,000 thousand.
b. Capital surplus
Under a directive of the MOEA, 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, $2,208,548 thousand in 2004, and $2,539,830 thousand in 2006.
Under related regulations, capital surplus may only be used to offset a deficit. However, the capital surplus from the issuance of shares in excess of par value (including additional paid-in capital from the issuance of common shares and capital surplus from mergers and treasury stock transactions) and donations may be capitalized only once a year and within a certain percentage of the Bank’s paid-in capital.
The Bank issued 896,861 common shares because of its merger with the Farmers Bank of China on May 1, 2006. The capital surplus increased by $7,029,173 thousand. On June 15, 2007, the stockholders resolved to issue stock dividends amounting to $2,700,000 thousand, the amount of the capital surplus from the merger with the Farmers Bank of China. This stock dividend issuance, which resulted in an increase of common shares by 270,000 thousand shares, was approved by the FSC and the MOEA.
Capital surplus from equity investments under equity method cannot be distributed for any purpose.
- 30 - c. Unrealized revaluation increments
To increase its capital adequacy ratio and present reasonably the fair value of its land, the Bank’s Board of Directors resolved to revalue its land on December 7, 2007. The revaluation increment of $561,145 thousand was included in other stockholders’ equity - unrealized revaluation increments. d. Treasury stock
The Bank’s Board of Directors resolved on August 4, 2008 to buy back its shares in accordance with the Securities Exchange Law and Regulations Governing Share Repurchase by Exchange-Listed and OTC-Listed Company. The Bank completed this buyback on October 3, 2008. As of December 31, 2008, the Bank had 100,000 thousand treasure shares.
The Securities and Exchange Law provides for the following:
1) The total number of shares that can be held in treasury stock is limited to 10% of the number of total outstanding shares;
2) The maximum cost of reacquiring treasury stock is limited to the sum of the balances of the retained earnings, paid-in capital from share issuance in excess of par value and realized capital surplus;
3) Using treasury stock to secure any obligations or commitment of the Bank is prohibited;
4) The Bank is prohibited from exercising the rights of the stockholder with respect to the treasury stock. e. Appropriation of earnings
1) Before the revision of the Bank’s Articles of Incorporation on June 13, 2008
From the annual net income less any deficit should be appropriated 30% as legal reserve and a certain amount as special reserve depending on regulations and operating needs. The appropriation of the remaining net income and any other retained earnings, which should be approved by the stockholders, will be as follows:
a) Dividends b) 1% as remuneration to directors and supervisors c) Bonus to employees ranging from 1% to 8%, determined annually by the board of directors d) Other appropriations, in compliance with relevant regulations
2) After the revision of the Bank’s Articles of Incorporation on June 13, 2008
From the annual net income less any deficit should be appropriated 30% as legal reserve and a certain amount, depending on regulations and operating needs, as special reserve. The appropriations from the remaining net income plus compensation expenses for bonus to employees and remuneration to directors and supervisors, and the unappropriated earnings of prior years, which should be approved by stockholders, are as follows:
a) Dividends. b) Other appropriations, in compliance with relevant regulations.
In addition, the following appropriations may be made from annual income net of the legal reserve and/or special reserve:
a) 1% as remuneration to directors and supervisors. b) Bonus to employees ranging from 1% to 8%, determined annually by the board of directors.
- 31 -
The Bank’s policy indicates that cash dividends must be 50% or above of the total dividends and bonus distributed. But if the legal reserve does not reach the paid-in capital or if the capital adequacy ratio does not meet the minimum requirement, the maximum cash distribution should be within the limit set under the Banking Law and related regulations.
For 2008, the bonus to employees of $463,433 thousand and the remuneration to directors and supervisors of $57,929 thousand, which were 8% and 1%, respectively, of earnings, were estimates based on past experience. If the actual amounts resolved by the stockholders differ from the proposed amounts, the differences are recorded in the year of stockholders’ resolution as a change in accounting estimate. If bonus shares are resolved to be distributed to employees, the number of shares is determined by dividing the amount of bonus by the closing price (after considering the effect of cash and stock dividends) of the eve of the stockholders’ meeting.
Based on a directive issued by the Securities and Futures Bureau, an amount equal to the net debit balance of certain stockholders’ equity accounts (including unrealized revaluation increment, unrealized gain or loss on financial instruments, net loss not recognized as pension cost, and cumulative translation adjustments) should be transferred from unappropriated earnings to a special reserve. Any special reserve appropriated may be reversed to the extent of the decrease in the net debit balance.
Under the Company Law, legal reserve should be appropriated until the reserve equals the Bank’s paid-in capital. This reserve should only be used to offset a deficit. When the reserve exceeds 50% of the Bank’s paid-in capital, the excess may be distributed as follows: (a) if the Bank has no earnings, the excess may be declared as dividends or bonus; and (b) if the Bank has no deficit, only the excess portion that is over 25% of the Bank’s paid-in capital may be declared as stock dividends.
Appropriations of earnings should be resolved by the stockholders in, and reflected in the financial statements of, the year following the year of earnings generation.
Under the Integrated Income Tax System, certain stockholders are allowed a tax credit for the income tax paid by the Bank on earnings generated since January 1, 1998.
The appropriation of the 2007 earnings as proposed by the board of directors on March 18, 2008 and approved by the stockholders on June 13, 2008 was as follows:
Legal reserve $ 2,922,112 Cash dividend - NT$0.4 per share 1,908,000 Stock dividend - NT$1.5 per share 7,155,000 Remuneration to directors and supervisors 68,182 Bonus to employees 545,461
$ 12,598,755
Had the remuneration to directors and supervisors and bonus to employees been recognized as expenses, the basic earnings per share (after income tax) for 2007 would have decreased from NT$1.78 to NT$1.70.
- 32 - The appropriation of the 2006 earnings as approved by the board of directors on March 23, 2007 and by the stockholders on June 15, 2007 was as follows:
Legal reserve $ 2,752,563 Cash dividend - NT$0.7 per share 3,150,000 Remuneration to directors and supervisors 64,226 Bonus to employees 513,812
$ 6,480,601
As of March 2, 2009, the date of accompanying auditors’ report, the board of directors had not resolved the appropriation of the 2008 earnings.
Information on the appropriation of earnings or deficit offsetting can be accessed through the Web site of the Taiwan Stock Exchange (http://emops.tse.com.tw).
27. EARNINGS PER SHARE
The numerators and denominators used in computing earnings per share (EPS) are summarized as follows:
EPS (NT$) Amount (Numerator) Shares Before After Before After (Denominator Income Income Income Tax Income Tax in Thousands) Tax Tax 2008
Basic EPS $ 9,507,875 $ 7,530,778 $ 5,459,613 $ 1.74 $ 1.38 Effect of dilutive common stock: Bonus to employees - - 27,918
Diluted EPS $ 9,507,875 $ 7,530,778 5,487,531 $ 1.73 $ 1.37
2007
Basic and diluted EPS $ 11,941,414 $ 9,740,373 5,485,500 $ 2.18 $ 1.78
Effective January 1, 2008, under an explanation issued by the Accounting Research and Development Foundation of the ROC, the Bank should recognize bonus to employees and remuneration to directors and supervisors as compensation expenses. These bonus and remuneration were previously recorded as appropriations from earnings. If bonus to employees in the form of cash or shares, the Bank should presume that the entire amount of the bonus will be settled in shares and the resulting potential shares should be included in the weighted average number of shares outstanding used in the calculation of diluted EPS if the shares have a dilutive effect. The number of shares is estimated by dividing the entire amount of the bonus by the closing price of the shares on the balance sheet date. The dilutive effect of the potential shares needs to be included in the calculation of diluted EPS until the stockholders resolve the number of shares to be distributed to employees in the following year.
The number of shares outstanding was retroactively adjusted to reflect the effects of the stock dividends distributed in the year following earnings generation. As a result of this adjustment, the basic EPS before and after income tax for the year ended December 31, 2007 decreased from NT$2.50 to NT$2.18 and from NT$2.04 to NT$1.78, respectively.
- 33 - 28. RELATED-PARTY TRANSACTIONS
In addition to those mentioned in other notes, the related-party transactions are summarized as follows:
a. Related parties
Related Party Relationship with the Bank
United Taiwan Bank S.A. Equity-method investee United Real Estate Management Equity-method investee Co., Ltd. Co-operative Assets Management Equity-method investee Co., Ltd. Cooperative Insurance Brokers Equity-method investee Co., Ltd. Taiwan Cooperative Bills Finance Equity-method investee Corporation Agricultural Education Film Co., Equity-method investee Ltd. Cooperative I Asset Management Affiliate Co., Ltd. Deng-Cheng Liu Chairman (Ministry of Finance (MOF) representative) Teh-Nan Hsu Chairman (MOF representative) till July 11, 2008 T. Lin Managing director (MOF representative) and president An-Hsiung Chen Managing director (MOF representative) and president till July 11, 2008 C. C. Liu Managing director (representative of the Farmers’ Associations of Taiwan) T. C. Huang Managing director (representative of Credit Cooperative Associations of the R.O.C.) X. N. Gui Managing director (MOF representative) Q. N. Tsai Managing director (MOF representative) till August 17, 2007 R. B. Chen Director (MOF representative), vice president till April 1, 2007 K. T. Chen Director (MOF representative) B. W. Lee Director (MOF representative) C. H. Huang Director (MOF representative) C. H. Chang Director (MOF representative) Y. S. Tsai Director (MOF representative) F. X. Hu Director (MOF representative) T. Z. Zhan Director (MOF representative) D. M. Fan Director (MOF representative) J. C. Su Director (representative of Farmers’ Associations of Pingtung County) C.F. Wang Director (representative of Farmers’ Associations of Penghu County) S. L. Lin Director (representative of Labor Union of Taiwan Cooperative Bank) C. C. Lian Director (representative of Labor Union of Taiwan Cooperative Bank) D. T. Hsieh Director (MOF representative) till September 30, 2008 S. K. Lee Director (MOF representative) till August 22, 2008 J. Q. Lee Director (MOF representative) till June 16, 2008 G. J. Chen Director (MOF representative) till May 1, 2008 (Continued)
- 34 -
Related Party Relationship with the Bank
S. W. Chang Director (MOF representative) till July 31, 2007 Y. J. Han Director (MOF representative) till March 28, 2007 W. C. Chen Director (MOF representative) till January 16, 2007 X. Z. Lin Resident supervisor (MOF representative) C. C. Lai Resident supervisor (MOF representative) till August 2, 2007 F. D. Hsieh Resident supervisor (MOF representative) till March 28, 2007 L. I. Chen Supervisor (MOF representative) L. Y. Chuang Supervisor (representative of farmers’ Association of Taipei City) C. Y. Cheng Supervisor (representative of Credit Cooperative Association of Taiwan) Robert K. Su Supervisor (MOF representative) till December 26, 2008 S. C. Chou Vice president C.D. Hsieh Vice president C.Y. Tu Vice president K. H. Hu Vice president Q. R. Tsai Vice president Q. J. Fang Vice president till December 20, 2007 C. L. Liu Vice president till June 15, 2007 National Treasury Agency Subordinate agency of MOF C. C. Lin Relative of the Bank’s chairman till July 11, 2008 USB Interior Design Co., Ltd. The chairman of the Company is a relative of the Bank’s president till July 11, 2008 Others Managers, relatives up to the second degree of the Bank’s chairman and president (Concluded) b. Significant transactions between the Bank and related parties:
2008 2007 Amount % Amount %
1) Due from banks $ 18,561 - $ 8,797 -
2) Call loans to banks
Highest Ending Interest Interest Rate Balance Balance % Revenue (%)
2008 $ 11,663,280 $ 8,477,943 2 $ 289,816 0.09-5.72 2007 $ 8,977,980 $ 8,630,010 2 $ 335,196 0.09-5.81
2008 2007 Interest Interest Amount % Expense Amount % Expense
3) Due to banks $ 633,614 - $ 11,790 $ 629,225 - $ 16,097
- 35 - 4) Call loans from banks
Highest Ending Interest Interest Rate Balance Balance % Expense (%)
2008 $ 569,672 $ - - $ 507 0.5-4.4 2007 $ 319,594 $ - - $ 393 0.83-5.30
5) Loans
Highest Ending Interest Interest Rate Balance Balance % Revenue (%)
2008 $ 75,878,964 $ 48,851,387 3 $ 1,230,347 1.59-3.635 2007 $ 114,193,648 $ 74,858,845 4 $ 1,712,321 1.4-6.755
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 (%)
2008 $ 2,735,191 - $ 61,817 0-13 2007 $ 2,163,664 - $ 39,015 0-13
2008 2007 Amount % Amount %
7) Receivable from the sale of nonperforming loans (part of receivables) $ - - $ 8,743,226 31
8) Accrued income (part of receivables) $ 17,057 - $ 26,510 -
9) Accrued interest (part of receivables) $ 40,953 - $ 21,327 -
10) Guarantee deposits received (part of other financial liabilities) $ 3,337 - $ 1,105 -
11) Unearned rental income (part of other liabilities) $ 110 - $ 110 -
12) Service fee (part of service fee income, net)
Cooperative Insurance Brokers Co., Ltd. $ 414,111 12 $ 176,297 5 Other 11,372 - 3,150 -
$ 425,483 12 $ 179,447 5
13) Rental income (part of other noninterest gain, net) $ 11,312 3 $ 5,589 1
- 36 - 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. The Bank has operating lease contracts with related parties, which cover certain office spaces within the Bank’s building. The monthly rentals were based on rentals for buildings near the Bank. In addition, the Bank entered into a contract with Cooperative Insurance Brokers Co., Ltd. (CIB). Under this contract, CIB should pay the Bank 50% to 100% of the commission revenue received by CIB from insurance companies as commission.
14) Purchases and sales of securities
2008 Purchases Sales Under Under Repurchase Repurchase Related Party Purchases Sales Agreements Agreements
Taiwan Cooperative Bills Finance Corporation $2,561,754 $201,919 $ - $395,696
15) Loans
December 31, 2008 Differences in Terms of Transaction Highest Compared Balance in the Loan Classification with Those Year Ended Nonper- for Account Volume or December 31, Ending forming Unrelated Type Name 2008 (Note) Balance Normal Loans Loans Collaterals Parties
Consumer loans 18 $ 35,169 $ 34,965 $ 34,965 $ - Land and None for employees buildings Self-used housing 9 149,793 14,795 14,795 - Land and None mortgage loans buildings Other loans K. T. Chen 1,728 1,627 1,627 - Land and None buildings Other loans C. C. Lin 102,000 - - - Land and None buildings Other loans National Treasury 75,700,000 48,800,000 48,800,000 - None None Agency Other loans Cooperative I Asset 5,000 - - - Certificates of None Management Co., Ltd. deposit Other loans Farmers’ Association of 50,000 - - - Certificates of None Penghu County deposit
December 31, 2007 Differences in Terms of Transaction Highest Compared Balance in the Loan Classification with Those Year Ended Nonper- for Account Volume or December 31, Ending forming Unrelated Type Name 2007 (Note) Balance Normal Loans Loans Collaterals Parties
Consumer loans 13 $ 35,347 $ 25,324 $ 25,324 $ - Land and None for employees buildings Self-used housing 8 36,964 29,793 29,793 - Land and None mortgage loans buildings Other loans K. T. Chen 1,827 1,728 1,728 - Land and None buildings Other loans C. C. Lin 129,000 102,000 102,000 - Land and None buildings Other loans National Treasury 114,000,000 74,700,000 74,700,000 - None None Agency Other loans USB Interior Design Co., 2,000 - - - None None Ltd.
- 37 -
Note: The highest balance is the largest sum in the year of all daily accounts for each type.
16) Sale of nonperforming loans
Counterparty: Co-operative Assets Management Co., Ltd.
Transaction date: December 10, 2007
(In Thousands of New Taiwan Dollars)
Amount of Book Value Allocation of Content of Nonperforming Loans Nonperforming (Note 2) Price (Note 3) Loans (Note 1) Secured $ 9,288,443 $ 7,138,335 $ 4,247,806 Enterprise Unsecured 13,822,941 2,421,053 1,037,559 Housing mortgage 4,136,982 3,745,440 3,130,778 Secured Automobile loans - - - Others 3,868,005 1,744,867 1,781,463 Credit cards - - - Personnel Cash cards - - - Unsecured Small-scale credit 722,891 385,402 77,136 loans (Note 4) Others 7,806,562 394,225 654,290 Total 39,645,824 15,829,322 10,929,032
Note 1: The amount of nonperforming loans indicates the amount that a buyer of nonperforming loans can request from the original borrower, including book value (without net of the allowance for credit losses) and written-off amount.
Note 2: Book value includes credits receivable and overdue loans without net of the allowance for credit losses.
Note 3: Allocation of price is the total sale price based on the recoverable value estimated using the counter-party’s bid price on each nonperforming loan.
Note 4: Based on the Banking Bureau’s letter dated December 19, 2005 (Ref. No. 09440010950), small scale credit loans are unsecured, involve small amounts and exclude credit cards and cash cards. c. Compensation of directors, supervisors and management personnel
2008 2007
Salaries $ 35,004 $ 30,900 Incentives 19,252 10,913 Bonus 59,227 69,939
$ 113,483 $ 111,752
The compensation of directors, supervisors and management personnel for 2007 included the bonus and remuneration appropriated from the 2007 earnings, which were approved by stockholders on June 13, 2008.
- 38 - 29. PLEDGED ASSETS
The face values of the pledged bonds and certificates of deposit as of December 31, 2008 and 2007 are summarized as follows:
2008 2007
Collaterals for day-term overdraft $ 30,000,000 $ 30,000,000 Guarantee deposits for provisional collateral seizure for loan defaults and others 1,936,300 2,348,400 Overseas branches’ capital adequate reserve (US$7,100 thousand in 2008 and US$12,000 thousand in 2007) 232,695 389,808 Guarantee deposits for securities operations 305,000 290,000 Guarantee deposits for the trust business compensation reserve 50,000 50,000 Guarantee deposits for bills finance business 50,000 50,000 Others 1,400 1,400
$ 32,575,395 $ 33,129,608
To comply with the Central Bank’s clearing system for real-time gross settlement (RTGS), the Bank provided certificates of deposit as collateral for day-term overdraft (part of due from the Central Bank and call loans to other banks). The pledged amount may be adjusted anytime, and the unused overdraft amount at the end of a day can also be treated as the Bank’s liquidity reserve.
30. COMMITMENTS AND CONTINGENT LIABILITIES
In addition to those mentioned in Note 32, the contingencies and commitments as of December 31, 2008 were as follows:
a. The Bank has operating lease agreements covering its office premises being rented from third parties. As of December 31, 2008, refundable deposits on these leases amounted to $798,998 thousand. Minimum rentals payable in the next five years are as follows:
Year Amount
2009 $ 588,909 2010 488,568 2011 361,049 2012 250,376 \ 2013 98,074
b. The Bank’s outstanding major construction and procurement contracts amounted to $240,365 thousand, of which $195,634 thousand 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 Chang 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. The Bank had already recognized the payments as expense. As of December 31, 2008, the Bank had made installment payments of $1,739,021 thousand to the four community financial institutions in Taichung City and $74,994 thousand to the Fourth Community Institution of Chang Hwa City.
- 39 - 31. CAPITAL ADEQUACY RATIO
(Unit: In Thousands of New Taiwan Dollars, %)
Year December 31, 2008 Items Standalone Consolidated
Eligible
capital Tier 1 capital $ 92,716,704 $ 96,424,565 Tier 2 capital 58,930,832 61,641,992 Tier 3 capital - -
Eligible capital 151,647,536 158,066,557 Standardized approach 1,355,305,980 1,380,071,628
weighted assets Credit risk Internal ratings-based approach - - Securitization 1,102,787 1,102,787
Risk Basic indicator approach 54,386,484 55,161,949 Operational Standardized approach/Alternative
- risk standardized approach - - Advanced measurement approach - -
Standardized approach 21,455,710 26,777,659 Market risk Internal model approach - - Risk-weighted assets 1,432,250,961 1,463,114,023 Capital adequacy ratio 10.59 10.80 Ratio of tier 1 capital to risk-weighted assets 6.47 6.59 Ratio of tier 2 capital to risk-weighted assets 4.12 4.21 Ratio of tier 3 capital to risk-weighted assets - - Ratio of common stock to total assets 2.21 2.19
Year December 31, 2007 Items Standalone Consolidated
Eligible
capital Tier 1 capital $ 89,189,356 $ 93,089,316 Tier 2 capital 61,531,310 64,335,034 Tier 3 capital - -
Eligible capital 150,720,666 157,424,350 Standardized approach 1,257,980,716 1,285,932,474
weighted assets Credit risk Internal ratings-based approach - - Securitization 1,235,102 1,235,102
Risk Basic indicator approach 52,397,893 52,833,268 Operational Standardized approach/Alternative
- risk standardized approach - - Advanced measurement approach - -
Standardized approach 46,944,104 49,372,688 Market risk Internal model approach - - Risk-weighted assets 1,358,557,815 1,389,373,532 Capital adequacy ratio 11.09 11.33 Ratio of tier 1 capital to risk-weighted assets 6.56 6.70 Ratio of tier 2 capital to risk-weighted assets 4.53 4.63 Ratio of tier 3 capital to risk-weighted assets - - Ratio of common stock to total assets 1.97 1.96
Note 1: Eligible capital and risk-weighted assets are calculated under the “Regulations Governing the Capital Adequacy Ratio of Banks” and “Explanation of Methods for Calculating the Eligible Capital and Risk-Weighted Assets of Banks.”
- 40 - Note 2: Formulas used were as follows:
1) Eligible capital = Tier 1 capital + Tier 2 capital + Tier 3 capital.
2) Risk-weighted assets = Risk-weighted asset for credit risk + Capital requirements for operational risk and market risk x 12.5.
3) Capital adequacy ratio (CAR) = Eligible capital ÷ Risk-weighted assets.
4) Ratio of tier 1 capital to risk-weighted assets = Tier 1 capital ÷ Risk-weighted assets.
5) Ratio of tier 2 capital to risk-weighted assets = Tier 2 capital ÷ Risk-weighted assets.
6) Ratio of tier 3 capital to risk-weighted assets = Tier 3 capital ÷ Risk-weighted assets.
7) Ratio of common stock to total assets = Common stock ÷ Total assets.
The Banking Law and related regulations require that the Bank maintain its unconsolidated and consolidated CARs at a minimum of 8%. In addition, if the Bank’s CAR falls below 8%, the authorities may impose certain restrictions on the amount of cash dividends that the Bank can declare or, in certain conditions, totally prohibit the Bank from declaring cash dividends.
32. FINANCIAL INSTRUMENTS
a. Fair values of financial instruments
2008 2007 Carrying Estimated Carrying Estimated Amount Fair Value Amount Fair Value Financial assets
Financial assets - with fair value approximating carrying amounts Financial assets at fair value through profit or loss $ 31,259,237 $ 31,259,237 $ 41,748,515 $ 41,748,515 Available-for-sale financial assets 64,785,297 64,785,297 60,247,280 60,247,280 Other short-term financial assets 444,250,280 444,250,280 485,119,335 485,119,335 Discounts and loans 1,832,644,545 1,832,644,545 1,729,746,205 1,729,746,205 Other financial assets - overdue receivables 385,295 385,295 250,585 250,585 Refundable deposits, operating deposits and settlement funds 1,091,711 1,091,711 1,191,607 1,191,607 Held-to-maturity financial assets 8,171,079 7,840,766 7,527,062 7,520,452 Other financial assets - debt instruments with no active market 51,540,028 50,900,182 42,729,448 41,767,713
Financial liabilities
Financial liabilities - with fair value approximating carrying amounts Financial liabilities at fair value through profit or loss 4,525,836 4,525,836 2,650,154 2,650,154 Other short-term financial liabilities 304,035,959 304,035,959 337,768,190 337,768,190 Deposits and remittances 1,983,480,938 1,983,480,938 1,885,247,837 1,885,247,837 Other financial liabilities 4,554,131 4,554,131 4,608,630 4,608,630 Bank debentures 77,771,000 78,673,618 84,321,000 84,479,405
- 41 - b. Methods and assumptions applied in estimating the fair values of financial instruments are as follows:
1) For financial instruments at fair value through profit or loss, available-for-sale financial assets, held-to-maturity financial assets and bank debentures, fair value is best determined on the basis of quoted market prices. However, in many instances where there are no quoted market prices for the Bank’s various financial instruments, fair values are based on estimates using other financial data and appropriate valuation methodologies. Fair values of forward contracts, currency swap contracts, foreign-currency margin contracts, cross-currency swap contracts and interest rate swap contracts are calculated using the discounted cash flow method, unless the fair values are provided by counter-parties. Fair values of option contracts are based on estimates using the Black Scholes model.
The Bank estimates the fair value of each forward contract on the basis of the swap points quoted by Reuters on each settlement date. Fair values of interest rate swap contracts and cross-currency swap contracts are calculated using the Bloomberg information system, unless the fair values are provided by counter-parties. Fair values of option contracts are calculated using the parameters quoted by Reuters.
2) The carrying amounts of short-term financial instruments approximate their fair values because of the short maturities of these instruments. Other short-term financial assets are cash and cash equivalents, due from the Central Bank and call loans to other banks and receivables (except tax refundable). Other short-term financial liabilities are due to the Central Bank and other banks, payables (except tax payable) and securities sold under repurchase agreements.
3) Discounts and loans, and deposits are interest-earning assets and interest-bearing liabilities. Thus, their carrying amounts represent fair value. The fair value of overdue loans and overdue receivable is based on their carrying amount, net of allowance for credit losses.
4) For other financial assets, if there are theoretical prices from GreTai Securities Market (an over-the-counter securities exchange) on the balance sheet date, they are used as the basis for valuating the fair value of debt instruments with no active market. Otherwise, the latest trade prices and quoted prices by major markets are used.
5) Other financial liabilities include appropriations for loans and guarantee deposits received. They are items that can be transferred to other banks at any time depending on the business situation or withdrawn by providers. The carrying amounts of these liabilities represent their fair values.
6) If equity investments under the equity method and financial assets carried at cost both consist of unlisted stocks, these investments have no quoted market prices in an active market and their fair value cannot be reliably measured. Thus, the Bank does not disclose their fair value.
7) The fair value of refundable deposits, operating deposits and settlement funds is based on their carrying amounts because they do not have specific maturity dates.
- 42 - c. As of December 31, 2008 and 2007, fair values of financial assets and liabilities determined using quoted market prices or market prices estimated on the basis of valuation method were as follows:
Quoted Market Prices Estimated Market Prices 2008 2007 2008 2007 Financial assets
Financial assets at fair value through profit or loss $ 8,025,953 $ 13,857,865 $ 23,233,284 $ 27,890,650 Available-for-sale financial assets 10,223,410 8,339,192 54,561,887 51,908,088 Held-to-maturity financial assets 4,831,385 - 3,009,381 7,520,452 Other financial assets - debt instruments with no active market 19,641,952 22,259,788 31,258,230 19,507,925
Financial liabilities
Financial liabilities at fair value through profit or loss - - 4,525,836 2,650,154 Bank debentures - - 78,673,618 84,479,405 d. Current income and valuation adjustments
1) The net gain (loss) on financial instruments at fair value through profit or loss in 2008 and 2007 are summarized as follows:
2008 Interest Gains (Losses) Revenue Gains (Losses) from Cash (Expense) from Disposal Valuation Dividends Total
Held-for-trading financial assets $ 725,527 $ 7,976,814 $ 4,197,925 $ 73,651 $ 12,973,917 Financial assets designated at fair value through profit or loss 437,036 - (567,067 ) - (130,031 ) Held-for-trading financial liabilities - (13,564,919 ) (2,698,390 ) - (16,263,309 ) Financial liabilities designated at fair value through profit or loss (40,320 ) - (107,961 ) - (148,281 )
$ 1,122,243 $ (5,588,105 ) $ 824,507 $ 73,651 $ (3,567,704 )
2007 Interest Gains (Losses) Revenue Gains (Losses) from Cash (Expense) from Disposal Valuation Dividends Total
Held-for-trading financial assets $ 858,891 $ 5,835,703 $ 1,506,460 $ 98,175 $ 8,299,229 Financial assets designated at fair value through profit or loss 593,257 - (106,237 ) - 487,020 Held-for-trading financial liabilities - (5,743,648 ) (1,809,948 ) - (7,553,596 ) Financial liabilities designated at fair value through profit or loss (40,320 ) - 70,648 - 30,328
$ 1,411,828 $ 92,055 $ (339,077 ) $ 98,175 $ 1,262,981
Financial instrument valuation resulted in a net gain of $824,507 thousand in 2008 and a net loss of $339,077 thousand in 2007, of which the results of the valuation at estimated market prices were a net gain of $1,481,224 thousand and a net loss of $259,234 thousand, respectively.
- 43 - 2) In 2008 and 2007, for the Bank’s financial instruments not measured at fair value through profit or loss, the total interest revenue and the total interest expense were as follows:
2008 2007
Interest revenue $ 70,617,341 $ 64,915,063 Interest expense (44,383,477 ) (41,977,207 )
$ 26,233,864 $ 22,937,856
3) The adjustments of stockholders’ equity recognized directly from available-for-sale financial assets were a credit of $1,919,572 thousand in 2008 and a debit of $1,219,803 thousand in 2007, and the gain recognized and deducted from the adjustments of stockholders’ equity were $156,358 thousand and $578,873 thousand, respectively.
4) The net service fee incomes in 2008 and 2007 were as follows:
2008 2007
Service fee $ 3,914,597 $ 3,807,699 Service charge (447,191 ) (474,965 )
$ 3,467,406 $ 3,332,734 e. Financial risk information
1) Risk control and hedge strategy
The Bank has set up a Risk Management Committee in charge of bank-wide risk control tasks. Under this committee, there is a Risk Management Division devoted to carrying out resolutions adopted by the Committee and performing other duties with regard to risk management. Currently, risk management operating procedures call for the business departments and offices in the Head Office to implement routine risk review and control in accordance with business management regulations and risk policies. The Risk Management Division regularly reports risk exposure items with regard to liquidity, interest rates, industry, and securities to the Risk Management Committee and Board of Directors in accordance with risk limit regulations.
The Bank’s risk policy seeks to effectively identify, measure, manage, and monitor various types of risk and to incorporate risk factors in management decision-making, establishing risk limits, determining trading or authorization limits, regularly checking and assessing risk exposures, and establishing risk indicators and early warning mechanisms. In addition, to effectively control capital adequacy and ensure that the Bank meets the minimum statutory requirements, the Bank incorporates all risks within the scope of capital assessment work in accordance with the authorities’ capital adequacy management regulations. In consideration of overall risk exposure, the characteristics of equity capital and liabilities are taken into consideration in asset allocation.
2) Market risks
For securities investments, loans and related financial instruments held by the Bank, their fair values will change because of interest rate and exchange rate fluctuations as of the balance sheet date.
- 44 - a) The net positions of the Bank’s foreign-currency transactions are summarized as follows:
Unit: In Thousands of Dollars
Items December 31, 2008 December 31, 2007 Currency NT$ Currency NT$ Net positions of USD (52,180 ) $ (1,710,132 ) USD (14,476 ) $ (470,225 ) foreign-currency JPY 1,314,452 467,489 EUR (2,753 ) (131,779 ) transactions (market CNY (36,737 ) (176,185 ) AUD (3,749 ) (107,035 ) risk) NZD 3,322 62,819 JPY (263,818 ) (76,481 ) CAD (1,220 ) (32,789 ) SGD (3,226 ) (72,553 )
Note: The foreign currencies represent the top five currencies in the Bank’s basket of international currencies. b) 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.
2008 2007 Average Average Average Average Balance Rate (%) Balance Rate (%) Interest-earning assets
Due from banks $ 2,131,126 1.59 $ 2,467,284 2.81 Due from the Central Bank 340,269,603 1.90 291,070,252 1.71 Call loans to banks 42,820,784 4.96 43,291,019 4.83 Held-for-trading financial assets 25,079,179 2.89 29,798,003 2.88 Financial assets designated at fair value through profit or loss 9,367,934 4.67 10,115,997 5.88 Securities purchased under resell agreements 333,763 1.21 231,442 1.56 Discounts and loans 1,741,499,502 3.28 1,724,865,239 3.05 Available-for-sale financial assets 61,471,924 2.37 64,300,833 2.46 Held-to-maturity financial assets 10,191,030 3.62 3,248,776 4.57 Debt instruments with no active market 43,806,477 3.11 38,742,899 3.66
Interest-bearing liabilities
Due to the Central Bank and other banks 245,184,594 1.89 243,489,732 2.01 Financial liabilities designated at fair value through profit or loss 1,800,000 2.24 1,800,000 2.24 Securities sold under repurchase agreements 54,757,733 1.77 56,495,077 1.67 Demand deposits 198,158,044 0.31 182,572,768 0.46 Savings - demand deposits 391,179,668 1.09 409,083,859 1.16 Time deposits 483,988,212 2.49 399,098,324 2.62 Time savings deposits 725,951,271 2.52 743,088,851 2.27 Treasury deposits 53,090,287 1.55 54,645,306 1.42 Negotiable certificates of deposit 4,366,830 1.65 20,843,625 1.75 Bank debentures 84,785,727 2.89 75,954,151 2.72
- 45 - c) Interest rate sensitivity information
Interest Rate Sensitivity (New Taiwan Dollars) December 31, 2008 (In Thousands of New Taiwan Dollars, %)
181 Days to Items 1 to 90 Days 91 to 180 Days Over One Year Total One Year Interest rate-sensitive assets $ 1,845,200,058 $ 120,456,093 $ 81,056,615 $ 81,220,264 $ 2,127,933,030 Interest rate-sensitive liabilities 1,140,898,114 699,670,682 183,847,911 31,447,676 2,055,864,383 Interest rate sensitivity gap 704,301,944 (579,214,589 ) (102,791,296 ) 49,772,588 72,068,647 Net worth 106,358,491 Ratio of interest rate-sensitive assets to liabilities 103.51 Ratio of interest rate sensitivity gap to net worth 67.76
Interest Rate Sensitivity (New Taiwan Dollars) December 31, 2007 (In Thousands of New Taiwan Dollars, %)
181 Days to Items 1 to 90 Days 91 to 180 Days Over One Year Total One Year Interest rate-sensitive assets $ 1,801,570,953 $ 144,562,858 $ 73,991,736 $ 60,713,143 $ 2,080,838,690 Interest rate-sensitive liabilities 1,234,986,491 624,881,244 89,994,128 24,660,033 1,974,521,896 Interest rate sensitivity gap 566,584,462 (480,318,386 ) (16,002,392 ) 36,053,110 106,316,794 Net worth 100,660,877 Ratio of interest rate-sensitive assets to liabilities 105.38 Ratio of interest rate sensitivity gap to net worth 105.62
Note 1: The above amounts included only New Taiwan dollar amounts held by the head office and branches of the Bank (i.e., excluding foreign currency).
Note 2: 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 3: Interest rate sensitivity gap = Interest rate-sensitive assets - Interest rate-sensitive liabilities.
Note 4: Ratio of interest rate-sensitive assets to liabilities = Interest rate-sensitive assets/Interest rate-sensitive liabilities (in New Taiwan dollars).
Interest Rate Sensitivity (U.S. Dollars) December 31, 2008
(In Thousands of U.S. Dollars, %)
181 Days to Items 1 to 90 Days 91 to 180 Days Over One Year Total One Year Interest rate-sensitive assets $ 4,958,557 $ 796,691 $ 51,879 $ 54,470 $ 5,861,597 Interest rate-sensitive liabilities 5,510,572 652,021 67,825 - 6,230,418 Interest rate sensitivity gap (552,015 ) 144,670 (15,946 ) 54,470 (368,821 ) Net worth 25,743 Ratio of interest rate-sensitive assets to liabilities 94.08 Ratio of interest rate sensitivity gap to net worth (1,432.70 )
- 46 - Interest Rate Sensitivity (U.S. Dollars) December 31, 2007
(In Thousands of U.S. Dollars, %)
181 Days to Items 1 to 90 Days 91 to 180 Days Over One Year Total One Year Interest rate-sensitive assets $ 3,957,397 $ 1,075,901 $ 51,832 $ 126,380 $ 5,211,510 Interest rate-sensitive liabilities 3,999,351 739,169 83,446 - 4,821,966 Interest rate sensitivity gap (41,954 ) 336,732 (31,614 ) 126,380 389,544 Net worth 54,730 Ratio of interest rate-sensitive assets to liabilities 108.08 Ratio of interest rate sensitivity gap to net worth 711.76
Note 1: The above amounts included only U.S. dollar amounts held by the head office, domestic branches, OBU and overseas branches of the Bank and excluded contingent assets and contingent liabilities.
Note 2: 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 3: Interest rate sensitivity gap = Interest rate-sensitive assets - Interest rate-sensitive liabilities.
Note 4: Ratio of interest rate-sensitive assets to liabilities = Interest rate-sensitive assets/Interest rate-sensitive liabilities (in U.S. dollars).
d) Market risk of futures proprietary trading business
The guarantee deposits or the premiums on futures and option contracts have been paid or received, and additional margin will be paid if the balance of the trading margin account becomes lower than the maintenance margin. The working capital is enough to make payments. Market risk pertains to the potential adverse effects of the fluctuation of market prices of futures and option contracts. To protect itself, the Bank has set up appropriate risk control management and an acceptable loss limit to monitor price fluctuations and holding positions. If the balance of the trading margin account of futures and option contracts becomes lower than the maintenance margin, the Bank will recognize the loss by either settling the deal or putting in deposits in addition to the initial margin.
The Bank measures market risk on futures and option contracts at an income percentage. This percentage is calculated by dividing the sum of realized and unrealized income and related transaction cost of each month by the authorized margin of each month.
3) Credit risk
The Bank is exposed to credit risk from counter-parties’ default on financial instruments. When providing loans, acceptances and guarantees, the Bank conducts cautionary credit evaluations. As of December 31, 2008 and 2007, about 61% of total loans had been secured by collaterals. The percentage of collaterals collected for guarantees and letters of credit issued ranged from 5.53% to 23.29% as of December 31, 2008 and from 9.63% to 19.21% as of December 31, 2007, respectively, with an average of 17.81% and 15.72%, respectively. Collaterals were mostly in the form of cash, inventory, liquid securities and other assets. If the customers break a contract, the Bank will execute its right on the collaterals and decrease its credit risk. However, the Bank discloses the maximum credit exposure without consideration of collateral fair value.
The maximum credit exposure of financial assets is the carrying amount of financial assets on the balance sheet date; please refer to related notes to the financial statements for more information.
- 47 - The amounts of financial contracts with off-balance-sheet credit risks as of December 31, 2008 and 2007 were as follows:
2008 2007
Credit card commitments $ 40,080,350 $ 50,943,570 Guarantees and letters of credit issued 73,109,255 77,145,645 Irrevocable loan commitments 79,176,146 75,152,825
The concentration of credit risk exists when counter-parties to financial transactions are individuals or groups engaged in similar activities or activities in the same region, which would cause their ability to meet contractual obligations to be similarly affected by changes in economic or other conditions. Groups or industries with outstanding loans amounting to 10% or more of total outstanding loans were as follows:
2008 2007 Amount % Amount % Domestic Natural person $ 760,544,842 40 $ 749,169,385 42 Manufacturing 336,336,575 18 296,502,965 16 Government institutions 215,793,695 11 243,683,956 14
(In Thousands of New Taiwan Dollars, %)
December 31, 2008 December 31, 2007 Total Amount Total Amount of Credit Percentage of Credit Percentage Rank Group Enterprise Name Endorsement of the Group Enterprise Name Endorsement of the (Note 1) (Note 2) or Other Bank’s (Note 2) or Other Bank’s Transactions Equity Transactions Equity (Note 3) (Note 3) 1 Formosa Plastic Group Co., Ltd. $45,446,814 42.39 Continental Engineering Co., $35,924,232 35.07 Ltd. 2 Continental Engineering Co., 34,601,154 32.28 Formosa Plastic Group Co., Ltd. 29,755,935 29.05 Ltd. 3 China Steel Corporation Co., 17,159,899 16.01 Far Eastern Textile Ltd. 15,256,153 14.89 Ltd. 4 Chi Mei Optoelectronics 16,467,385 15.36 Chi Mei Optoelectronics 10,903,823 10.64 5 Far Eastern Textile Ltd. 13,859,318 12.93 China Steel Corporation Co., 9,943,736 9.71 Ltd. 6 Evergreen Group 9,044,796 8.44 Qisda Co., Ltd. 9,300,968 9.08 7 Auo Co., Ltd. 8,485,565 7.92 Tatung Company 9,225,603 9.01 8 Chunghwa Pictures Tubes, Ltd. 8,255,536 7.70 ProMOS Technologies Inc. 8,102,390 7.91 9 ProMOS Technologies Inc. 8,150,372 7.60 Highwealth Construction 7,043,302 6.88 10 Highwealth Construction 7,652,562 7.14 Evergreen Group 6,958,461 6.79
Note 1: Ranked by the total amount of credit, endorsement or other transactions; list excludes government-owned or state-run enterprises.
Note 2: Group enterprise refers to a group of corporate entities as defined by Article 6 of “Supplementary Provisions to the Taiwan Stock Exchange Corporation Rules for Review of Securities Listings.”
Note 3: The total amount of credit, endorsement or other transactions is the sum of various loans (including import and export negotiations, bills discounted, overdrafts, unsecured and secured short-term loans, margin loans receivable, unsecured and secured medium - term loans, unsecured and secured long-term loans and overdue loans), exchange bills negotiated, factored accounts receivable without recourse, acceptances and guarantees.
- 48 - 4) Liquidity risk
In December 2008 and 2007, the Bank’s liquidity reserve ratios were 13.14% and 15.58%, respectively. The Bank has sufficient equity capital and working capital to execute all contract obligations and thus has no liquidity risk. The possibility that future contracts cannot be sold at reasonable price is low; hence, the liquidity risk is insignificant.
The Bank manages the currency requirements for assets and liabilities that have various maturity dates. However, because of uncertainties as well as the great variety of transactions, exchange rates on asset and liability maturity dates can result in either gain or loss. To minimize its liquidity risk, the Bank, applies appropriate ways to group assets and liabilities by maturity. The maturity analysis of assets and liabilities is shown as follows:
a) Maturity analysis of financial assets and liabilities
December 31, 2008 Due after One Due after Three Due after Six Due in Month up to Months up to Months up to Due after One Month Three Months Six Months One Year One Year Total Assets
Cash and cash equivalents $ 40,592,528 $ - $ - $ - $ - $ 40,592,528 Due from the Central Bank and call loans to other banks 182,879,433 84,341,179 92,753,921 23,788,582 - 383,763,115 Financial assets at fair value through profit or loss 22,891,231 344,596 1,250,438 1,573,158 5,199,814 31,259,237 Receivables 10,516,057 3,038,464 2,438,636 3,098,508 1,947,147 21,038,812 Discounts and loans 68,297,116 112,032,055 106,605,018 228,832,466 1,333,071,588 1,848,838,243 Available-for-sale financial assets 2,218,701 - 214,713 3,952,932 58,398,951 64,785,297 Held-to-maturity financial assets - - 68,825 - 8,102,254 8,171,079 Other financial assets (excluding financial assets carried at cost) 1,020,135 557,366 2,355,799 6,795,490 41,339,675 52,068,465
$ 328,415,201 $ 200,313,660 $ 205,687,350 $ 268,041,136 $ 1,448,059,429 $ 2,450,516,776
Liabilities
Due to the Central Bank and other banks $ 31,855,745 $ 88,624,606 $ 29,300,520 $ 52,875,834 $ 133 $ 202,656,838 Financial liabilities at fair value through profit or loss 2,653,162 - - - 1,872,674 4,525,836 Securities sold under repurchase agreements 38,732,725 11,131,385 6,097,742 - - 55,961,852 Payables 24,372,951 2,404,723 4,581,182 8,435,097 6,149,144 45,943,097 Deposits and remittances 308,315,101 340,274,682 304,614,111 565,229,605 465,047,439 1,983,480,938 Bank debentures - 1,450,000 - 1,000 76,320,000 77,771,000 Other financial liabilities 1,423,824 61,738 160,285 252,892 2,655,392 4,554,131
$ 407,353,508 $ 443,947,134 $ 344,753,840 $ 626,794,428 $ 552,044,782 $ 2,374,893,692
December 31, 2007 Due after One Due after Three Due after Six Due in Month up to Months up to Months up to Due after One Month Three Months Six Months One Year One Year Total Assets Cash and cash equivalents $ 32,500,510 $ - $ - $ - $ - $ 32,500,510 Due from the Central Bank and call loans to other banks 171,665,661 73,695,606 119,206,971 59,791,556 - 424,359,794 Financial assets at fair value through profit or loss 29,389,829 1,117,264 1,248,768 600,297 9,392,357 41,748,515 Receivables 5,654,962 5,158,026 10,645,433 3,064,703 4,178,896 28,702,020 Discounts and loans 97,138,005 81,025,145 102,500,649 200,867,410 1,264,159,813 1,745,691,022 Available-for-sale financial assets 3,940,705 - - 7,922,398 48,384,177 60,247,280 Held-to-maturity financial assets - - - 4,365,905 3,161,157 7,527,062 Other financial assets (excluding financial assets carried at cost) 697,328 822,291 482,139 1,944,081 39,156,093 43,101,932
$ 340,987,000 $ 161,818,332 $ 234,083,960 $ 278,556,350 $ 1,368,432,493 $ 2,383,878,135
Liabilities
Due to the Central Bank and other banks $ 78,919,767 $ 57,141,238 $ 40,879,002 $ 75,041,079 $ 2,835,278 $ 254,816,364 Financial liabilities at fair value through profit or loss 885,441 - - - 1,764,713 2,650,154 Securities sold under repurchase agreements 33,603,728 4,710,847 4,932,585 - - 43,247,160 Payables 32,885,517 234,340 1,698,227 1,985,497 2,311,961 39,115,542 Deposits and remittances 339,444,957 302,377,914 276,838,845 434,621,689 531,964,432 1,885,247,837 Bank debentures - - 6,550,000 10,000,000 67,771,000 84,321,000 Other financial liabilities 1,470,930 12,000 16,000 30,000 3,079,700 4,608,630
$ 487,210,340 $ 364,476,339 $ 330,914,659 $ 521,678,265 $ 609,727,084 $ 2,314,006,687
- 49 - b) Maturity analysis of assets and liabilities
Maturity Analysis of Assets and Liabilities (New Taiwan Dollars) December 31, 2008
(In Thousands of New Taiwan Dollars)
Remaining Period to Maturity Total 181 Days to 1 to 30 Days 31 to 90 Days 91 to 180 Days Over One Year One Year Main capital inflow on maturity $ 2,376,493,486 $ 387,323,964 $ 172,724,272 $ 229,933,544 $ 369,177,689 $ 1,217,334,017 Main capital outflow on maturity 2,876,293,652 390,788,967 420,401,612 414,661,065 783,684,812 866,757,196 Gap (499,800,166 ) (3,465,003 ) (247,677,340 ) (184,727,521 ) (414,507,123 ) 350,576,821
Maturity Analysis of Assets and Liabilities (New Taiwan Dollars) December 31, 2007
(In Thousands of New Taiwan Dollars)
Remaining Period to Maturity Total 181 Days to 1 to 30 Days 31 to 90 Days 91 to 180 Days Over One Year One Year Main capital inflow on maturity $ 2,350,726,910 $ 392,432,707 $ 139,538,476 $ 196,196,107 $ 276,491,495 $ 1,346,068,125 Main capital outflow on maturity 2,398,020,342 446,736,298 332,388,491 311,610,996 543,824,956 763,459,601 Gap (47,293,432 ) (54,303,591 ) (192,850,015) (115,414,889) (267,333,461) 582,608,524
Note: The above amounts included only New Taiwan dollar amounts held by the head office and domestic branches of the Bank (i.e., excluding foreign currency).
Maturity Analysis of Assets and Liabilities (U.S. Dollars) December 31, 2008
(In Thousands of U.S. Dollars)
Remaining Period to Maturity Total 181 Days to 1 to 30 Days 31 to 90 Days 91 to 180 Days Over One Year One Year Main capital inflow on maturity $ 8,085,182 $ 3,388,929 $ 2,029,279 $ 1,127,630 $ 384,079 $ 1,155,265 Main capital outflow on maturity 8,085,182 4,951,993 2,066,822 823,904 263,065 (20,602 ) Gap - (1,563,064 ) (37,543 ) 303,726 121,014 1,175,867
Maturity Analysis of Assets and Liabilities (U.S. Dollars) December 31, 2007 (In Thousands of U.S. Dollars)
Remaining Period to Maturity Total 181 Days to 1 to 30 Days 31 to 90 Days 91 to 180 Days Over One Year One Year Main capital inflow on maturity $ 7,200,544 $ 2,211,083 $ 1,399,450 $ 1,205,524 $ 1,235,082 $ 1,149,405 Main capital outflow on maturity 7,200,544 4,710,266 1,259,355 796,380 442,751 (8,208 ) Gap - (2,499,183 ) 140,095 409,144 792,331 1,157,613
Note: The above amounts included only U.S. dollar amounts held by the head office, domestic branches and OBU of the Bank.
- 50 - f. Financial asset reclassification
In October 2008, the Bank reclassified some of its financial assets in accordance with the newly amended Statement of Financial Accounting Standards No. 34 - “Financial Instruments: Recognition and Measurement”. The fair values on the reclassification date were as follows:
Before After Reclassification Reclassification
Held-for-trading financial assets $ 1,271,555 $ - Available-for-sale financial assets - 1,271,555
$ 1,271,555 $ 1,271,555
In the second half of 2008, a global financial crisis caused the value of financial assets to collapse. The Bank thus decided not to sell some of the held-for-trading financial assets in the near term and reclassified them into available-for-sale financial assets.
The carrying amount and fair value of the reclassified financial assets as of December 31, 2008 were as follows:
Carrying Fair Amount Value
Available-for-sale financial assets $ 1,006,327 $ 1,006,327
The changes in fair value of the reclassified financial assets recognized as gain or loss or under stockholders’ equity were as follows:
2008 Before Reclassification After Reclassification 2007 Recognized in Recognized in Recognized in Recognized as Stockholders’ Recognized as Stockholders’ Recognized as Stockholders’ Gain or Loss Equity Gain or Loss Equity Gain or Loss Equity
Held-for-trading financial assets $ (44,494 ) $ - $ - $ - $ 16,971 $ - Available-for-sale financial assets - - 386 (240,937 ) - -
The changes in fair value recognized as gain or loss or under stockholders’ equity from the reclassification date to December 31, 2008 and pro forma information assuming no reclassifications were made, are as follows:
Pro Forma Information Carrying Amount Assuming No Recognized in Reclassification Recognized as Stockholders’ Recognized as Gain or Loss Equity Gain or Loss
Available-for-sale financial assets $ 386 $ (240,937 ) $ (240,551 )
- 51 - 33. ASSET QUALITY, PROFITABILITY AND RELEVANT INFORMATION
a. Asset quality
Table 1 (attached).
b. Profitability
Unit: %
December 31, December 31, Items 2008 2007 Before income tax 0.39 0.50 Return on total assets After income tax 0.31 0.41 Before income tax 9.07 11.93 Return on equity After income tax 7.18 9.73 Net income ratio 21.98 28.18
Note 1: Return on total assets = Income before (after) income tax ÷ Average total assets
Note 2: Return on equity = Income before (after) income tax ÷ Average stockholders’ equity
Note 3: Net income ratio = Income after income tax ÷ Total net revenue
Note 4: Income before (after) income tax represents income in 2008 and 2007.
Note 5: The above profitability ratios are expressed annually.
- 52 - c. Operation and legal risk
Matters Requiring Special Notation
(In Thousands of New Taiwan Dollars)
Summary and Amount Causes December 31, 2008 December 31, 2007 Within the past year, a On January 15, 2008, an employee None responsible person or working in the creditors’ rights professional employee management center in violated the law in the course Kaohsiung and Pintung was of business, resulting in an charged with treachery by the indictment by a prosecutor Kaohsiung District Prosecutors Office; this case involved consumer loans granted to public officers and teachers in 2004. On October 8, 2008, Kaohsiung District Court declared the employee not guilty. Within the past year, a fine was None None levied on the Bank for violations of the laws and regulations Within the past year, misconduct None None occurred, resulting in the Financial Supervisory Commission’s imposing strict corrective measures on the Bank Within the past year, the None None individual loss or total loss from employee fraud, accidental and material events, or failure to abide by the “Guidelines for Maintenance of Soundness of Financial Institutions” exceeded NT$50 million Other None 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 laws and regulations” means a fine levied by the Banking Bureau, Securities and Futures Bureau, Insurance Bureau or Examination Bureau.
- 53 - 34. TRUST BUSINESS UNDER THE TRUST LAW
a. Trust-related items are those shown in the following balance sheets, statements of income and trust property list
These items were managed by the Bank’s Trust Department. However, these items were not included in the Bank’s financial statements.
Balance Sheets of Trust Accounts December 31, 2008 and 2007
Trust Assets 2008 2007 Trust Liabilities 2008 2007
Cash in banks $ 363,785 $ 367,741 Payables Management fees $ 1,163 $ 1,094 Short-term investments Others 5,714 1,663 Mutual funds 75,962,410 94,671,268 6,877 2,757 Stocks 173,722 436,359 Bonds 4,137,624 4,523,986 Accounts payable on securities 80,273,756 99,631,613 under custody 53,252,779 -
Receivables 1,730 29,192 Trust capital Cash 80,451,548 99,588,832 Real estate Real estate 29,049,652 25,922,105 Land 23,330,349 18,716,235 Securities 261,356 315,648 Construction in progress 5,753,533 7,262,144 Others 48,575 66,945 Buildings 5,625 5,687 109,811,131 125,893,530 29,089,507 25,984,066 Reserves and retained earnings Securities under custody 53,252,779 - Net income (loss) (91,806 ) 126,198 Appropriation (3,604 ) (11,405 ) Retained earnings 6,180 1,532 (89,230 ) 116,325
Total $ 162,981,557 $ 126,012,612 Total $ 162,981,557 $ 126,012,612
Trust Property List December 31, 2008 and 2007
Investment Items 2008 2007
Cash in banks $ 363,785 $ 367,741 Short-term investments Mutual fund 75,962,410 94,671,268 Stocks 173,722 436,359 Bonds 4,137,624 4,523,986 Receivables Accrued interest 1,730 1,292 Mutual funds - 27,900 Real estate Land 23,330,349 18,716,235 Construction in progress 5,753,533 7,262,144 Buildings 5,625 5,687 Securities under custody 53,252,779 -
Total $ 162,981,557 $ 126,012,612
Note: Based on instructions of the Trust Association of R.O.C. dated April 7, 2008 (Ref. No. 0970000249), the securities under custody and related payables should be disclosed effective January 1, 2008.
- 54 - Statements of Income on Trust Accounts Years Ended December 31, 2008 and 2007
2008 2007 Revenue
Interest revenue $ 3,976 $ 2,311 Cash dividend 4,967 12,237 Realized gain on investment - stock - 437 Unrealized gain on investment - stock 4 205,150 Realized gain on investment - mutual funds 506 - Unrealized gain on investment - mutual funds 163 593 Others 1 1 Total revenue 9,617 220,729
Expenses
Management fees 770 375 Taxes 230 215 Insurance fees 4 - Service charge 190 325 Postage 5 5 Unrealized loss on investment - stock 87,645 91,919 Realized loss on investment - mutual funds 7,610 - Unrealized loss on investment - mutual funds 4,532 1,663 Others 437 29 Total expenses 101,423 94,531 Income (loss) before income tax (91,806 ) 126,198 Income tax expense - -
Net income (loss) $ (91,806 ) $ 126,198
b. Nature of trust business operations under the Trust Law: Note 1.
35. RISK FOR FUTURES PROPRIETARY TRADING
When the Bank enters into futures contracts, it has to deposit an initial margin at a percentage of the amount of transaction. The Bank calculates and monitors daily the balance of the margin and premium deposits based on the settlement prices of unsettled futures contracts. If the balance of the trading margin account of futures and options becomes lower than the maintenance margin, the Bank will recognize the loss by either settling the deal or adding deposits to the initial margin.
As of December 31, 2008, the Bank had 45 futures contracts outstanding. Margin deposits paid were $3,645 thousand, and the excess margin was $29,574 thousand.
36. OTHER SIGNIFICANT TRANSACTIONS
a. To expand the Bank’s operating scope, enhance its operating effectiveness, and strengthen its competitiveness, the Bank’s board of directors authorized the Bank’s chairman on January 12, 2009 to sign a joint venture agreement with BNP Paribas Assurance to set up BNP Paribas Assurance TCB Life Insurance Co., Ltd. in Taiwan. The new company’s capital stock will be $2,000,000 thousand. The Bank will invest $1,020,000 thousand, which is 51% of ownership. As of March 2, 2009, the date of the accompanying auditors’ report, the related transaction had not been approved by the authorities.
- 55 - b. To increase Taiwan Cooperative Bills Finance Corporation’s working capital, strengthen its financial structure, and meet the minimum capital requirement for bills finance business, Taiwan Cooperative Bills Finance Corporation (TCBF), a subsidiary of the Bank, will increase its capital by $1,500,000 thousand. On January 12, 2009, the Bank’s board of directors resolved to subscribe for all the new shares to be issued by TCBF.
37. 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 - Table 2 (attached).
4) Marketable securities acquired and disposed of at costs or prices of at least NT$300 million or 10% of the paid-in capital (the Bank disclosed its investments acquired or disposed of): Table 3 (attached).
5) Acquisition of individual real estate at costs of at least NT$300 million or 10% of the paid-in capital: None.
6) Disposal of individual real estates at costs of at least NT$300 million or 10% of the paid-in capital: None.
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: None.
9) Sale of nonperforming loans: Table 4 (attached).
10) Financial asset securitization: None.
11) Other significant transactions which may affect the decisions of users of financial reports: Note 36 to the financial statements.
12) Percentage share in investees and related information: Table 5 (attached).
13) Derivative transactions: The Bank - Notes 6 and 32 to the financial statements; investee company - None.
b. Investment in Mainland China: None.
38. SEGMENT INFORMATION
The Bank engages only in banking activities as prescribed by the Banking Law in the Republic of China. As of December 31, 2008 and 2007, no customers or overseas units individually represented 10% or more of the Bank’s total revenues or total assets. Thus, no segment and geographic information is required to be disclosed.
- 56 - TABLE 1
TAIWAN COOPERATIVE BANK, LTD.
ASSET QUALITY - NONPERFORMING LOANS AND RECEIVABLES DECEMBER 31, 2008 AND 2007 (In Thousands of New Taiwan Dollars, %)
Period December 31, 2008 December 31, 2007 Nonperforming Ratio of Nonperforming Ratio of Allowance for Coverage Ratio Allowance for Coverage Ratio Items Loans Loans Nonperforming Loans Loans Nonperforming Credit Losses (Note 3) Credit Losses (Note 3) (Note 1) Loans (Note 2) (Note 1) Loans (Note 2) Corporate Secured $ 8,272,185 $ 438,375,249 1.89 $ 2,694,182 32.57 $ 8,237,876 $ 411,500,023 2.00 $ 2,437,166 29.58 Banking Unsecured 6,752,533 683,171,206 0.99 9,059,708 134.17 5,334,159 621,699,250 0.86 8,344,523 156.44 Housing mortgage (Note 4) 9,160,319 574,451,306 1.59 2,727,183 29.77 9,776,082 554,759,321 1.76 2,971,968 30.40 Cash card ------Consumer Small-scale credit loans (Note 5) 855,321 33,341,576 2.57 754,245 88.18 1,014,003 42,371,170 2.39 985,147 97.15 Banking Secured 2,763,406 109,702,397 2.52 649,080 23.49 4,054,167 103,938,389 3.90 815,882 20.12 Other (Note 6) Unsecured 360,120 9,796,509 3.68 309,300 85.89 676,257 11,422,869 5.92 390,131 57.69 Loan 28,163,884 1,848,838,243 1.52 16,193,698 57.50 29,092,544 1,745,691,022 1.67 15,944,817 54.81 Ratio of Ratio of Nonperforming Nonperforming Nonperforming Allowance for Coverage Ratio Nonperforming Allowance for Coverage Ratio Receivables Receivables Receivables Receivables Receivables Credit Losses (Note 3) Receivables Credit Losses (Note 3) (Note 1) (Note 1) (Note 2) (Note 2) Credit cards 30,354 2,584,364 1.17 75,679 249.32 45,662 2,828,677 1.61 58,398 127.89 Accounts receivable factored without recourse 218,992 1,996,445 10.97 6,051 2.76 - 1,434,713 - 1,349 - (Note 7) Amounts of executed contracts on negotiated debts 22,419 25,397 not reported as nonperforming loans (Note 8) Amounts of executed contracts on negotiated debts 145,867 204,846 not reported as nonperforming receivables (Note 8) Amounts of executed debt-restructuring projects not 4,835 - reported as nonperforming loans (Note 9) Amounts of executed debt-restructuring projects not 31,611 - reported as nonperforming receivables (Note 9)
Note 1: Nonperforming loans are reported to the authorities and disclosed to the public, as required by the “Regulations Governing the Procedures for Banking Institutions to Evaluate Assets and Deal with Nonperforming/ Non-accrued Loans.” Nonperforming credit card receivables are reported to the authorities and disclosed to the public, as required by the Banking Bureau’s letter dated July 6, 2005 (Ref. No. 0944000378). Note 2: Ratio of nonperforming loans: Nonperforming loans ÷ Outstanding loan balance. Ratio of nonperforming receivables: Nonperforming receivables ÷ Outstanding receivable balance. Note 3: Coverage ratio of loans: Allowance for credit losses for loans ÷ Nonperforming loans. Coverage ratio of receivables: Allowance for credit losses for receivables ÷ Nonperforming receivables. Note 4: The mortgage loan is for house purchase or renovation and is fully secured by housing that is purchased (owned) by the borrower, the spouse or the minor children of the borrowers. Note 5: Based on the Banking Bureau’s letter dated December 19, 2005 (Ref. No. 09440010950), small-scale credit loans are unsecured, involve small amounts and exclude credit cards and cash cards. Note 6: Other consumers banking loans refer to secured or unsecured loans that exclude housing mortgage, cash and credit card, and small-scale credit loans. Note 7: As required by the Banking Bureau in its letter dated July 19, 2005 (Ref. No. 0945000494), accounts receivable factored without recourse are reported as nonperforming receivables within three months after the factors or insurance companies refuse to indemnify banks for any liabilities on these accounts. Note 8: Amounts of executed contracts on negotiated debts that are not reported as nonperforming loans or receivables are disclosed to the public in accordance with the Banking Bureau’s letter dated April 25, 2006 (Ref. No. 09510001270). Note 9: Amounts of executed of debt-restructuring projects not reported as nonperforming loans or receivables are disclosed to the public in accordance with Banking Bureau’s letter dated September 15, 2008 (Ref. No. 09700318940).
- 57 - TABLE 2
TAIWAN COOPERATIVE BANK, LTD.
MARKETABLE SECURITIES HELD DECEMBER 31, 2008 (In Thousands of New Taiwan Dollars)
December 31, 2008 Relationship with the Market Value Holding Company Name Marketable Securities Type and Issuer Financial Statement Account Shares Percentage of Note Holding Company Carrying Value or Net Asset (Thousands) Ownership Value
Co-operative Assets Management Stock Co., Ltd. Cooperative I Asset Management Co., Ltd. Subsidiary Equity investments under the 50,000 $ 505,433 100 $ 505,433 equity method
- 58 - TABLE 3
TAIWAN COOPERATIVE BANK, LTD.
MARKETABLE SECURITIES ACQUIRED AND DISPOSED OF AT COSTS OR PRICES OF AT LEAST NT$300 MILLION OR 10% OF THE PAID-IN CAPITAL (THE BANK DISCLOSED ITS INVESTMENTS ACQUIRED OR DISPOSED OF) YEAR ENDED DECEMBER 31, 2008 (In Thousands of Shares or New Taiwan Dollars)
Beginning Balance Acquisition Disposal Ending Balance Marketable Securities Type Financial Statement Company Name Counter-party Nature of Relationship Carrying Gain (Loss) on and Issuer Account Shares Amount Shares Amount Shares Price Shares Amount Value Disposal
Taiwan Cooperative Stock - TWTC International Financial assets a. Taiwan External None 11,250 $ 212,085 - $ - 11,250 $387,567 $ 212,085 $ 173,599 - $ - Bank, Ltd. Trade Building Co., Ltd. carried at cost Trade (including Development securities Council transaction tax and b. Yangmingshan related investment expenses of corporation $1,883 thousand)
- 59 - TABLE 4
TAIWAN COOPERATIVE BANK, LTD.
SALE OF NONPERFORMING LOANS YEAR ENDED DECEMBER 31, 2008 (In Thousands of New Taiwan Dollars)
1. Sale of nonperforming loans
a. Taiwan Cooperative Bank, Ltd.
Relationship Form of Book Value Between the Trade Date Counterparty Selling Price Gain (Loss) Terms Nonperforming Loan (Note 1) Counterparty and the Bank
2008.12.02 Fubon Asset Secured or unsecured $ 3,103,990 $ 3,103,990 $ - As shown None Management Co, loans of enterprise in the Ltd. and personnel sales (including housing contract mortgage)
b. Co-operative Asset Management Co., Ltd.
Relationship Form of Book Value Between the Trade Date Counterparty Selling Price Gain (Loss) Terms Nonperforming Loan (Note 2) Counterparty and the Bank
2008.12.17 F. C. Chen, Y. J Mortgage on land $ 11,760 $ 15,000 $ 3,240 None None Cheng 2008.12.15 Bright LED Mortgage on factory 143,708 135,000 (8,708 ) None None Electronic Co. building 2008.12.04 S. H. Chen Mortgage on land 6,363 6,400 37 None None 2008.10.16 Y. L. Lin Mortgage on land and 55 200 145 None None buildings 2008.10.06 M. C. Wang Mortgage on - 450 450 None None agricultural land 2008.10.06 M. C. Wang Mortgage on 3,253 7,000 3,747 None None agricultural land 2008.10.06 M. C. Wang Mortgage on - 1,200 1,200 None None agricultural land 2008.09.16 Y. T. Wang Mortgage on land and 1,029 1,800 771 None None buildings 2008.09.09 C. P. Huang Mortgage on land 5,577 6,300 723 None None 2008.09.09 W. C. Chiang Mortgage on land and 3,892 6,000 2,108 None None buildings 2008.09.01 Unistar Asset Mortgage on vehicle - 8,000 8,000 None None Management Co. 2008.08.20 C. P. Chiu Mortgage on land and 954 1,300 346 None None buildings 2008.08.12 Y. L. Fang Mortgage on land and 545 1300 755 None None buildings 2008.08.11 S. Y. Lee Cheng Mortgage on land 14,442 17,250 2,808 None None 2008.08.01 F. C. Hsu Mortgage on land 1,087 1,613 526 None None 2008.06.11 S. F. Lin Mortgage on land 1,349 2,000 651 None None 2008.06.04 T. H. Kao Mortgage on 26,195 33,500 7,305 None None agricultural land 2008.06.04 T. H. Kao Mortgage on 5,361 6,000 639 None None agricultural land 2008.05.30 C. M. Hsiao Mortgage on land 243 300 57 None None 2008.05.28 C. Y. Chiu Mortgage on land and 6,125 10,500 4,375 None None buildings 2008.05.15 HuaKai Asset Mortgage on factory 433,181 552,580 119,399 None None Management Co. building 2008.04.23 Y. T. Tan Mortgage on land 15,586 18,000 2,414 None None 2008.04.08 P. Y. Lu Mortgage on land 2,935 4,000 1,065 None None (Continued)
- 60 -
Note 1: Book value includes overdue loans amounting to $5,994,795 thousand, credits at the book value of $190,220 thousand (recorded as credits receivable) written off by the Farmers Bank of China before the merger (Note 1 to the financial statements) less an allowance of $3,081,025 thousand for credit losses.
Note 2: Book value equals the original purchase price.
2. The sale of a batch of nonperforming loans totaling over NT$1 billion (excluding those sold to related parties):
Counterparty: Fubon Asset Management Co., Ltd
Transaction date: December 2, 2008
(In Thousands of New Taiwan Dollars)
Amount of Book Value Price Allocation Nature of Nonperforming Loans Nonperforming (Note 2) (Note 3) Loans (Note 1) Secured $ 3,257,052 $ 2,168,879 $ 788,866 Enterprise Unsecured 4,255,208 108,878 30,834 Housing mortgage 3,342,140 3,090,233 1,800,527 Secured Automobile loans - - - Others 1,333,454 640,104 372,053 Credit cards - - - Personnel Cash cards - - - Unsecured Small-scale credit loans 346,471 47,273 16,604 (Note 4) Others 3,285,291 129,648 95,106 Total 15,819,616 6,185,015 3,103,990
Note 1: The amount of nonperforming loans is the amount that a buyer of nonperforming loans can request from the original borrower, including book value (from which the allowance for credit losses has not yet been deducted) and written-off amount.
Note 2: Book value, from which the allowance for credit loss has not yet been deducted, includes credits receivable and overdue loans.
Note 3: Price allocation is the total selling price based on the recoverable value estimated using the counter-party’s bid price for each nonperforming loan.
Note 4: Based on the Banking Bureau’s letter dated December 19, 2005 (Ref. No. 09440010950), small-scale credit loans are unsecured, involve small amounts and exclude credit cards and cash cards.
(Concluded)
- 61 - TABLE 5
TAIWAN COOPERATIVE BANK, LTD.
PERCENTAGE SHARE IN INVESTEES AND RELATED INFORMATION YEAR ENDED DECEMBER 31, 2008 (In Thousands of New Taiwan Dollars)
Percentage Share of the Bank and its Affiliates in Investees (Note 1) Percentage Investment Gain Total Investee Company Location Main Businesses and Products of Carrying Value Pro Forma Note (Loss) Percentage Ownership Shares Shares Shares of (Note 2) Ownership
Finance-related business United Taiwan Bank S.A. Belgium Banking 70.00% $ 933,492 $ (397,134 ) 1,023,750 - 1,023,750 70.00% Co-operative Assets Management Co., Ltd. Taipei City Acquisition of delinquent loans 100.00% 3,937,209 208,565 350,000,000 - 350,000,000 100.00% Cooperative Insurance Brokers Co., Ltd. Taipei City Life and property insurance agent 100.00% 66,614 40,401 1,000,000 - 1,000,000 100.00% Taiwan Cooperative Bills Finance Corporation Taipei City Bills finance dealer 50.56% 614,956 41,901 52,951,572 - 52,951,572 50.56% Taiwan Futures Exchange Co., Ltd. Taipei City Futures clearing 1.75% 53,468 3,850 4,107,950 - 4,107,950 1.75% Taipei Forex Inc. Taipei City Foreign exchange brokering 7.06% 19,198 4,458 1,400,000 - 1,400,000 7.06% Chinfon Commercial Bank Taipei City Banking 0.26% - - 1,495,100 - 1,495,100 0.26% Taiwan Asset Management Co., Ltd. Taipei City Acquisition of delinquent loans 17.03% 3,120,934 201,480 300,000,000 - 300,000,000 17.03% Taiwan Financial Asset Service Co., Ltd. Taipei City Property auction 5.88% 101,125 - 10,000,000 - 10,000,000 5.88% Financial Information Service Co., Ltd Taipei City Information service 2.89% 135,405 19,681 11,577,000 - 11,577,000 2.89% Financial eSolution Co., Ltd. Taipei City Office machine wholesaling 12.37% 48,768 - 4,267,094 - 4,267,094 12.37% Taiwan Integrated Shareholder Service Taipei City Proxy processing and rendering 0.53% 1,600 - 160,000 - 160,000 0.53% Company electronic-voting service Taiwan Depository & Clearing Co., Ltd. Taipei City Custody of securities and short-term bills 0.84% 60,694 3,044 2,496,061 494,852 2,990,913 1.00% Central Deposit Insurance Co., Ltd. Taipei City Deposit insurance - 10 - 1,000 - 1,000 - Sunny Asset Management Co., Ltd. Taipei City Acquisition of delinquent loans 0.72% 431 12 43,088 - 43,088 0.72%
Non-finance related business United Real Estate Management Co., Ltd. Taipei City Real estate appraisal 30.00% 76,596 10,115 6,142,500 - 6,142,500 30.00% Agricultural Education Film Co., Ltd. Taipei City (Operation terminated) 45.00% - - 9,000 - 9,000 45.00% Taiwan Power Company Taipei City Power development and supply 0.24% 631,153 - 78,754,764 - 78,754,764 0.24% China Daily News Tainan City Newspaper publishing 0.04% 52 - 16,768 - 16,768 0.04% Taiwan Sugar Company Tainan City Sugar manufacturing 0.08% 14,599 5,292 5,880,212 - 5,880,212 0.08% Tai-Hsin Enterprise Co., Ltd. Taipei County Printing industry 16.33% 2,058 - 343,000 - 343,000 16.33% Lieu-An Service Co., Ltd. Taipei City Leasing 5.00% 1,250 125 125,000 - 125,000 5.00% Taipei Rapid Transit Co., Ltd. Taipei City Public transportation - 139 5 13,363 - 13,363 -
Note 1: Shares or pro forma shares held by the Bank, directors, supervisors, president, vice president and affiliates in accordance with the Company Law have been included.
Note 2: a. Pro forma shares are shares that are assumed to be obtained through buying equity-based securities or entering into equity-linked derivative contracts for purposes defined in Article 74 of the Banking Law. b. Equity-based securities, such as convertible bonds and warrants, are covered by Article 11 of the “Securities and Exchange Law Enforcement Rules.” c. Derivative contracts are those conforming to the definition of derivatives in Statement of Financial Accounting Standards No. 34 - “Accounting for Financial Instruments,” such as stock options.
Note 3: The shares of Waterland Financial Holding Corp., Taiwan Development Co., Ltd. and TWTC International Trade Building Co., Ltd. were sold in 2008, resulting in a gain of $221,200 thousand.
- 62 -