COSMOS BANK, TAIWAN Interim Financial Statements June 30, 2014 and 2013 (With Auditors Report Thereon)

Transcription

1 Interim Financial Statements 2014 and (With Auditors Report Thereon)

2 Independent Auditors Report Cosmos Bank, Taiwan: We have audited the accompanying statements of financial position of Cosmos Bank, Taiwan as of 2014 and, and the related statements of comprehensive income from April 1 to 2014 and, and from January 1 to 2014 and, statements of changes in equity, and statements of cash flows for the six-month periods ended 2014 and. The preparation and fair presentation of these interim financial statements are the responsibility of the Bank s management. Our responsibility is to express an opinion on these interim financial statements based on our audits. We conducted our audits in accordance with the Regulations Governing Auditing and Attestation of Financial Statements of Financial Institutions by Certified Public Accountants and generally accepted auditing standards in the Republic of China. Those standards and regulations require that we plan and perform the audit to obtain reasonable assurance about whether the interim financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the interim financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall interim financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the interim financial statements referred to above present fairly, in all material respects, and the financial position of Cosmos Bank, Taiwan as of 2014 and, the financial performance of Cosmos Bank, Taiwan from April 1 to 2014 and, and from January 1 to 2014 and and cash flows for the six-month periods ended 2014 and are in conformity with the Regulations Governing the Preparation of Financial Reports by Public Banks, Regulations Governing the Preparation of Financial Reports by Securities Issuers and the International Accounting Standard 34 Interim Financial Reporting, endorsed by the Financial Supervisory Commission of the Republic of China. KPMG Mei, Yuan-Chen CPA: Gau, Wey-Chuan Taipei, Taiwan, R.O.C. August 11, 2014 Note to Readers The accompanying financial statements are intended only to present the financial position, results of operations, and cash flows in accordance with the accounting principles and practices generally accepted in Taiwan, 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 Taiwan, the Republic of China. The auditors report and the accompanying financial statements are the English translation of the Chinese version prepared and used in the Republic of China. If there is any conflict between, or any difference in the interpretation of, the English and Chinese language auditors report and financial statements, the Chinese version shall prevail.

3 Statements of Financial Position 2014, and December 31 and (expressed in thousands of New Taiwan dollars) Assets Amount % Amount % Amount % Cash and cash equivalents (note 6(a)) $ 2,887, ,291, ,307,127 2 Due from the Central Bank and call loans to banks (note 6(b)) 9,571, ,965, ,668,589 7 Financial assets at fair value through profit or loss (note 6(c)) 243,538-72, ,717 - Receivables, net (note 6(e)) 9,271, ,393, ,092,106 4 Current tax assets (note 6(w)) 73,079-75,401-56,972 - Discounts and loans, net (note 6(f)) 99,620, ,768, ,010, Available-for-sale financial assets, net (note 6(d)) 10,457, ,143, ,096,660 9 Held-to-maturity financial assets, net (note 6(g)) 19,700, ,200, ,000, Investments under the equity method, net (note 6(h)) 42,706-63,354-40,061 - Other financial assets, net (note 6(i)) 4,288, ,487, ,318 1 Property and equipment, net (note 6(j)) 6,165, ,195, ,441,970 4 Investment property, net (note 6(k)) 19,564-19,729-19,893 - Intangible assets, net (note 6(l)) 136, , ,225 - Deferred tax assets (note 6(w)) 5,365, ,645, ,326,881 4 Other assets, net (note 6(m)) 609, , ,622 - Total assets $ 168,451, ,076, ,897, Liabilities and Equity Amount % Amount % Amount % Deposits from the central bank and banks (note 6(n)) $ 1,562, ,584, ,122,116 1 Financial liabilities at fair value through profit or loss (note 6(c)) Notes and bonds issued under repurchase agreements (note 6(o)) 2,970, ,793, ,619,864 2 Payables (note 6(p)) 3,286, ,488, ,160,846 2 Current tax liabilities (note 6(w)) 11, Deposits and remittances (note 6(q)) 141,760, ,034, ,695, Other financial liabilities (note 6(r)) 14,173-10,176-12,465 - Provisions (note 6(s)) 157, , ,305 - Deferred income tax liabilities (note 6(w)) 65,978-66,499-69,827 - Other liabilities (note 6(t)) 796, , ,291 - Total liabilities 150,626, ,757, ,399, Capital Common stock (note 6(x)) 15,262, ,256, ,255,976 9 Advance receipts for capital stock (note 6(x)) 7,629-1, Total capital stock 15,269, ,257, ,255,976 9 Capital surplus Additional paid-in capital (note 6 (x)) 5, Other capital surpluses (note 6(x)) 147, , ,675 - Total capital surplus 153, , ,675 - Retained earnings Legal reserve (note 6(x)) 915, Special reserve (note 6(x)) 142, Accumulated earnings (notes 6(w) and (x)) 1,364, ,059, ,140,508 1 Total retained earnings 2,423, ,059, ,140,508 1 Other equity (note 6 (x)) (22,486) - (142,987) - (33,858) - Total equity 17,824, ,318, ,497, Total liabilities and equity $ 168,451, ,076, ,897, See accompanying notes to financial statements.

4 Statements of Comprehensive Income April 1 to 2014 and and January 1 to 2014 and (expressed in thousands of New Taiwan dollars, except earnings per share, which are expressed in New Taiwan dollars) ~.4.1~ ~.1.1~.6.30 Amount % Amount % Amount % Amount % Interest revenue $ 1,552, ,607, ,103, ,005, Less: interest expense (392,986) (26) (368,351) (23) (782,362) (26) (720,252) (24) Net interest (note 6(aa)) 1,159, ,239, ,321, ,285, Net revenues other than interest Service fee income, net (note 6(ab)) 320, , , , Gains on financial assets or liabilities measured at fair value through profit or loss (notes 6(c) and (ac)) 2,006-5,165-33, ,633 - Realized (losses) gains on available-forsale financial assets (note 6(ad)) (5,419) - (280) - (35,042) (1) 12,979 - Foreign exchange gains, net 15, , , ,019 2 Share of profit of associates and joint ventures accounted for using equity method (note 6(h)) 6,921-7,377-12,073-12,942 1 Other non-interest income, net (note 6(m)) 10, , , ,918 1 Total net revenues other than interest 350, , , , Total net revenue 1,509, ,581, ,026, ,993, Reversal of bad debt expense and guarantee liability provision (note 6(f)) 274, , , ,676 8 Operating expenses Employee benefit expense (note 12(a)) (479,222) (32) (488,894) (31) (971,064) (32) (1,015,197) (34) Depreciation and amortization expense (note 12(a)) (45,862) (3) (51,082) (3) (92,294) (3) (100,984) (3) Other general and administrative expense (note 6(ae)) (380,635) (25) (402,213) (25) (742,712) (25) (781,916) (26) Total operating expenses (905,719) (60) (942,189) (59) (1,806,070) (60) (1,898,097) (63) Income from continuing operations before income tax 878, , ,683, ,348, Tax expense (note 6(w)) (181,101) (12) (114,784) (7) (319,439) (11) (212,530) (7) Net income 697, , ,364, ,136, Other comprehensive income: Exchange differences on translation of foreign financial statements (1,353) (2,260) Unrealized gains (losses) on availablefor-sale financial statements 20,672 1 (46,730) (3) 122,761 4 (154,351) (5) Other comprehensive income, net of tax 19,319 1 (46,038) (3) 120,501 4 (153,357) (5) Total comprehensive income, net of tax $ 716, , ,484, , Basic earnings per share (notes 6(x) and (z)) $ Diluted earnings per share (notes 6(x) and (z)) $ See accompanying notes to financial statements.

5 Statements of Changes in Equity For the six-month periods ended 2014 and (expressed in thousands of New Taiwan dollars) Capital Retained earnings Other equity Common stock Advance receipts for capital stock Capital surplus Legal reserve Special reserve Accumulated earnings (deficit) Exchange differences on translation of foreign financial statements Unrealized gains (losses) on availablefor-sale financial assets Total Balance at January 1, $ 15,255, , (613,926) - 119,499 15,498,280 Net income for the six-month periods ended ,136, ,136,214 Other comprehensive income (154,351) (153,357) Total comprehensive income ,136, (154,351) 982,857 Offsetting of accumulated deficit against capital surplus - - (618,220) , Share-based payments , ,164 Balance at $ 15,255, , ,140, (34,852) 16,497,301 Balance at January 1, 2014 $ 15,256,136 1, , ,059,655 1,111 (144,098) 18,318,194 Net income for the six-month periods ended ,364, ,364,450 Other comprehensive income (2,260) 122, ,501 Total comprehensive income ,364,450 (2,260) 122,761 1,484,951 Appropriation and distribution of retained earnings: Legal reserve appropriated ,755 - (915,755) Special reserve appropriated ,987 (142,987) Cash dividend of common stock (2,000,913) - - (2,000,913) Share-based payments 6,113 6,085 10, ,296 Balance at 2014 $ 15,262,249 7, , , ,987 1,364,450 (1,149) (21,337) 17,824,528 See accompanying notes to financial statements.

6 Statements of Cash Flows For the six-month periods ended 2014 and (expressed in thousands of New Taiwan dollars) 2014 Cash flows from operating activities: Income before income tax $ 1,683,889 1,348,744 Adjustments: Adjustments to reconcile profit (loss) Depreciation expense 50,947 51,158 Amortization expense 41,347 49,826 Provision for bad debt expense 266, ,533 Interest expense 782, ,252 Interest income (3,103,833) (3,005,829) Dividends income (7,426) (7,471) Net change in provisions for guarantee liabilities 6,862 3,176 Net change in other provisions 4 4 Share-based payments 21,305 16,065 Share of profit of associates and joint ventures accounted for using equity method (12,073) (12,942) Gain on disposal of property and equipment (4) (455) Others (29,098) (98) Total adjustments to reconcile profit (loss) (1,982,902) (1,657,781) Changes in operating assets and liabilities: Changes in operating assets: Decrease in due from the Central Bank and call loans to banks 141, ,431 Increase in financial assets at fair value through profit or loss (170,642) (248,076) Increase in receivables (808,734) (1,702,998) Increase in discounts and loans (1,145,530) (10,267,853) Decrease in available-for-sale financial assets 1,808,308 2,837,836 Increase in held-to-maturity financial assets (1,500,000) (2,400,000) Increase in other financial assets (2,831,453) (1,516) Decrease (increase) in prepayments 3,714 (28,471) Changes in operating liabilities: (Decrease) increase in deposits from the Central Bank and banks (2,021,540) 815,266 Increase in financial liabilities at fair value through profit or loss Increase (decrease) in notes and bonds issued under repurchase agreements 1,177,060 (5,592,844) Decrease in payables (206,445) (179,968) Increase in deposits and remittances 726,010 12,186,721 Decrease in provisions for employee benefits (4,335) - Increase in other liabilities 171, ,847 Cash outflow generated from operations (4,959,742) (4,045,469) Interest received 3,093,077 3,034,312 Dividend income 40,068 42,359 Interest paid (791,590) (726,871) Income taxes refund 2,322 54,118 Net cash flows used in operating activities (2,615,865) (1,641,551) Cash flows from (used in) investing activities: Acquisition of property and equipment (20,752) (15,681) Proceeds from disposal of property and equipment 4 1,330 Decrease in operation guarantee 16,903 4,526 Decrease in refundable deposits 2,122 7,402 Acquisition of intangible assets (37,895) (12,840) Increase in deferred assets (17,350) (16,826) Net cash flows used in investing activities (56,968) (32,089) Cash flows from (used in) financing activities : Increase (decrease) in lease payable 3,997 (1,578) Exercise of employee share options 14,451 - Net cash flows from (used in) financing activities 18,448 (1,578) Effect of exchange rate changes on cash and cash equivalents (2,260) 994 Net decrease in cash and cash equivalents (2,656,645) (1,674,224) Cash and cash equivalents at beginning of period 11,520,403 12,121,783 Cash and cash equivalents at end of period $ 8,863,758 10,447,559 Components of cash and cash equivalents: Cash and cash equivalents reported in the statement of financial position $ 2,887,775 3,307,127 Due from the central bank and call loans to banks qualifying as cash and cash equivalents under the definition of IAS 7 5,975,983 7,140,432 Cash and cash equivalents at end of period $ 8,863,758 10,447,559 See accompanying notes to financial statements.

7 2014 and (expressed in thousands of New Taiwan dollars unless otherwise specified) 1 Organization and Operations Cosmos Bank, Taiwan (the Bank ) engages in banking activities permitted by the Banking Act of the Republic of China (the Banking Act). The shares of the Bank have been traded on the Taiwan Stock Exchange (TSE) since June 29, As of 2014, the Bank had a main office, an offshore banking unit (OBU), and 48 domestic branches. The business of the Bank s Trust Department includes planning, managing and operating trust business regulated under the Banking Act and Trust Business Regulations of the Republic of China (ROC). In regard to the approval of the private placement by the extraordinary shareholders meeting held on November 23, 2012, the board meeting held on April 12,, agreed to issue shares through a private placement, with an initial share price of NT$13.93 and submitted an application to the Financial Supervisory Commission (FSC) in relation to the issuance of 34,677 thousand common shares with a capital increase of $483,055 on April 25,. The Bank received approval letter Jin Guan Yin Guo No on May 17,. According to the approval letter Jin Guan Yin Guo No dated on August 16,, the Bank had to complete the private placement approved in the extraordinary shareholders meeting before November 23,. According to resolution of the extraordinary board meeting held on November 21,, the private placement failed to be accomplished within the time limit and therefore, the application was terminated. According to the resolution of the extraordinary board meeting held on February 10, 2014, the Bank has agreed to execute a share-swap scheme with China Development Financial Holding Co., (CDFH) to optimize business development, strengthen services in financial instruments, and diversify its sales channels. Under the Share Swap Agreement, the share consideration was temporary set as NT$13.4 and 0.2 common share of CDFH for one common share of the Bank. Upon the completion of share swap, the Bank became 100% owned by the CDFH, and the trading of shares should be terminated after the procedures are completed. The abovementioned scheme was approved by the resolution of the extraordinary shareholders meeting held on April 8, 2014, and by Jin Guan Yin Kong No on July 29, The conversion date is set on September 15, 2014, through the resolution of the board meeting held on August 11, 2014.

8 2 2 Approval Date and Procedures of Financial Statements The interim financial statements were authorized for issuance by the Board on August 11, New Standards, Amendments and Interpretations Not Yet Adopted (a) The effect on the version of International Financial Reporting Standards (IFRS) endorsed by the FSC but not yet adopted In accordance with the FSC Jin Guan Zheng Shen No on April 3, 2014, publicly listed companies, OTC and emerging companies should adopt the version of IFRS endorsed by the FSC (not including IFRS 9 Financial Instruments)starting January 1, A summary of the new standards and amendments were as follows: New standards and amendments Effective date Announced by IASB Amendment to IFRS 7 Disclosures-Transfers of Financial Assets Amendment to IFRS 7 Disclosures-Offsetting Financial Assets and.1.1 Financial Liabilities IFRS 10 Consolidated Financial Statements.1.1 (investment entities effective on ) IFRS 11 Joint Arrangements.1.1 IFRS 12 Disclosure of Interests in Other Entities.1.1 IFRS 13 Fair Value Measurement.1.1 Amendment to IAS 1 Presentation of Items of Other Comprehensive Income Amendment to IAS 12 Deferred Tax: Recovery of Underlying Assets Amendment to IAS 19 Employee Benefits.1.1 Amendment to IAS 32 Offsetting Financial Assets and Financial Liabilities The Bank assess that the adoption of IFRS version will not cause any significant effect on this interim financial statement except for the following items: i) IAS 1 Presentation of Financial Statements The amendment to IAS 1 requires items of other comprehensive income to be grouped into to those items that (1) will not be reclassified subsequently to profit or loss; and (2) will be classified subsequently to profit or loss. Income taxes on the related items of other comprehensive income are grouped on the same basis. Accordingly, the Bank will apply the

9 3 above amendments in presenting the statement of comprehensive income. ii) IFRS 13 Fair Value Measurement This standard defines the fair value, set out a framework for measuring fair value, and requires disclosures about fair value measurements. The Bank will disclose additional information about the fair value measurement accordingly. (b) New standards and amendments have been issued but not yet endorsed by the FSC A summary of the new standards and amendments issued by the International Accounting Standards Board (IASB) but not yet included in the IFRS version endorsed by the FSC: New standards and amendments Effective date Announced by IASB IFRS 9 Financial Instruments Amendment to IAS 19 Defined Benefit Plans-Employee Contributions Amendment to IAS 36 Recoverable Amount Disclosures for Non Financial Assets Amendment to IAS 39 Novation of Derivatives and Continuation of Hedge Accounting IFRIC 21 Levies The Bank is in the process of assessing the financial impact at the time of adoption, and will disclose when the assessment is completed. 4 Summary of Significant Accounting Policies (a) Statement of Compliance These interim financial statements have been prepared in accordance with the Regulations Governing the Preparation of Financial Reports by Public Banks, the Regulations Governing the Preparation of Financial Reports by Securities Issuers, and the guidelines of IAS 34 Interim Financial Reporting endorsed by the FSC. These interim financial statements do not include all of the disclosure information required by the Regulations and by International Financial Reporting Standards, International Accounting Standards, IFRIC Interpretations and SIC Interpretations endorsed by the FSC (IFRSs endorsed by the FSC) in a complete set of annual financial statements.

10 4 The basis of preparation and the significant accounting policies for these interim financial statements are identical to those of the financial statements as of December 31,, except for the following items. Please refer to note 4 in the financial statements as of December 31, for the relevant information. (b) Employee benefits Defined benefit plans for an interim period is calculated on a year-to-date basis by using the actuarially determined pension cost rate at the end of the prior fiscal year adjusted for significant market fluctuations since that time and for significant reimbursement, settlements, or other significant one-time events. (c) Income Taxes The Bank provides measurement and disclosure based on the guidelines of IAS 34 Interim Financial Reporting paragraph B12. Income tax expense for interim period is based on the pretax income for an interim period, multiplied by, the best estimated average annual effective tax rate by the management, and fully recognize as current tax expense. The tax related to items which is recognized in other comprehensive income shall be directly recognized under other comprehensive income, and it is recognized for temporary differences between the carrying amounts of assets and liabilities in the statement of financial position and its tax base, and measured at the tax rates that are expected to apply to the period when the asset is realized or the liability is settled. 5 Major Sources of Accounting Assumptions, Judgments and Estimation Uncertainty The preparation of the interim financial statements in conformity with IAS 34 Interim financial reporting endorsed by the FSC requires management to make judgments, estimates and assumptions that affect the application of the accounting policies and the reported amount of assets, liabilities, income and expenses. Actual results may differ from these estimates. In the preparation of the interim financial statements, the major uncertainties of accounting assumptions, judgments and estimation uncertainty are in consistent with note 5 in the financial statements as of December 31,.

11 5 6 Summary of Major Accounts (a) Cash and cash equivalents 2014 December 31, Cash on hand $ 1,154,901 1,172,662 1,080,637 Due from banks 1,562,032 1,902,909 1,393,413 Checks for clearing 170, , ,077 $ 2,887,775 3,291,892 3,307,127 The cash and cash equivalents presented in the cash flow statement had the following components, please refer to note 6(b) December 31, Cash and cash equivalents in the statement of financial position $ 2,887,775 3,291,892 3,307,127 Due from Central Bank and call loans to banks qualifying as cash and cash equivalents as defined by IAS 7 5,975,983 8,228,511 7,140,432 Cash and cash equivalents in the cash flow statement $ 8,863,758 11,520,403 10,447,559 (b) Due from Central Bank and call loans to banks 2014 December 31, Call loans to banks $ 2,851,317 3,054,325 2,378,644 Deposit in Central Bank 2,300,000 3,500,000 3,700,000 Reserves for deposits in Central Bank a/c B 3,411,573 3,556,318 3,347,389 Reserves for deposits in Central Bank a/c A 824,666 1,674,186 1,061,788 Due from the Central Bank interbank settlement funds 183, , ,768 $ 9,571,540 11,965,289 10,668,589

12 6 As required by law, the reserves for deposits in the Central Bank are calculated by applying the prescribed rates to the average monthly balances of various types of deposit accounts. The use of reserves for deposits - a/c B is restricted by the Central Bank. Due from the Central Bank and call loans to banks, as defined by IAS 7, comprised call loans to banks, deposits in the Central Bank, and reserves for deposits in the Central Bank a/c A, and have a maturity of three months or less from the date of acquisition. To qualify as a cash equivalent, an asset must be readily convertible to known amounts of cash and be subject a to an insignificant risk of changes in value. Details are as follows: 2014 December 31, Call loans to banks $ 2,851,317 3,054,325 2,378,644 Deposits in Central Bank 2,300,000 3,500,000 3,700,000 Reserves for deposits in Central Bank a/c A 824,666 1,674,186 1,061,788 $ 5,975,983 8,228,511 7,140,432 (c) Financial assets and liabilities at fair value through profit or loss (FVTPL) 2014 December 31, Held-for-trading financial assets Listed companies stocks $ 238,276 72, ,430 Beneficiary certificates 2, Foreign exchange call option Forward exchange contracts Foreign-currency swap contracts 2, $ 243,538 72, ,717 Held-for-trading financial liabilities Forward exchange contracts $ Foreign-currency swap contracts Foreign exchange put option $ Held-for-trading financial assets have not been pledged as collateral or as guarantee. Outstanding derivative contracts of the Bank were as follows:

13 December 31, Foreign-currency swap contracts $ 784,415 1,125, ,534 Forward exchange contracts - 2,737 8,836 Foreign exchange option 1,225, The Bank does not adopt the hedge accounting. The net gains (losses) on financial assets held for trading were as follows: ~.4.1~ ~.1.1~.6.30 Net gains (losses) on financial assets held for trading $ 7,577 5,720 45,520 6,901 Net gains (losses) on financial liabilities held for trading $ (5,571) (555) (11,928) (1,268) (d) Available-for-sale financial assets 2014 December 31, Stocks $ 5,221 5,518 4,629 Bonds Government bonds 5,710,416 7,609,690 9,561,616 Financial debentures 576, , ,725 Corporate bonds 3,915,116 3,901,307 3,920,690 Commercial paper 249,928 49,996 - $ 10,457,567 12,143,114 14,096,660 Please refer to note 6(o) for the use of available-for-sale financial assets in repurchase agreements. The amount of available-for-sale financial assets pledged is disclosed in note 8.

14 8 (e) Receivables, net 2014 December 31, Accounts receivable and acceptances forfaiting $ 5,057,941 4,074,237 2,220,179 Credit cards 2,845,041 2,585,959 3,016,044 Accounts receivable - no recourse 125,267 93,867 89,275 Accrued interest 374, , ,264 Acceptances 23,894 32,490 24,655 Accrued income 71,272 91,253 56,569 Rental deposits 536, , ,216 PEM receivable 871, , ,687 Receivable on securities sold - 393, ,224 Others 403, , ,203 10,309,520 9,490,450 8,186,316 Less: Allowance for possible losses (1,038,415) (1,097,171) (1,094,210) $ 9,271,105 8,393,279 7,092,106 As of 2014, and December 31 and, the rental deposits receivable amounting to $536,767, $589,152 and $539,216, respectively, resulted from the relocation to Bank-owned property, of which, deposits from Prince Motors and Cosmos Construction Management Corporation amounted to $101,901, $146,161 and $88,261, respectively and the provision for possible losses on these deposits was $44,001, $88,261 and $88,261, respectively. As the Dun Nan building of Prince Motors collateral was already sold through auction by the court on September 27, As of December 31, 2012, Prince Motors disagreed with the amounts allocated by the court on the Dun Nan buildings, with a disagreed amount of $163,682, after deducting an allocation received amounting to $1,808,039. The Bank has won the lawsuit in the third quarter of and received the disagreed amount in the fourth quarter of. However, a third party regarded the property rights of the Dun Nan building as fraudulently infringing upon the rights of the creditors. Although the Bank lost its lawsuit in the first trial, in the judgment of the Bank s lawyers, the Bank has a high possibility of winning the lawsuit if the Bank continues to appeal. The lawyers have also judged that the abovementioned appeal has no impact on the loans received by the Bank. Please refer to note 9(d) for details. From May 2007 to February 2008, the Bank sold structured notes, which were issued by GVEC Resource Inc. (GVEC), amounting to USD 48,920 through a specific trust fund. PEM Group, which GVEC was subordinate to, was found to have committed fraud by the U.S. Securities and Exchange Commission (SEC). In view of its social responsibility, the Bank s board of directors decided to buy back the structured notes and ask for compensation from PEM Group before March 31, 2010.

15 9 PEM Group had invested in life insurance policy products, etc. In order to recover it s creditor s rights effectively and to protect shareholders equity, the Bank s board of directors adopted a resolution on December 21, 2010, to take over all the insurance policies and hold these policies in the form of trust. The Bank completed the transfer of the life insurance policies from PEM Group on March 7, The Bank measured the policies cost based on an actuarial report less administration fees, and then recognized the cost amounting to $218,386 (USD 7,423). At the same time, the Bank wrote off the initial cost and provision for life insurance policies amounting to $433,061 (USD 14,721). As of 2014, the PEM receivable amounting to $871,175 (USD29,122) was measured as the abovementioned PEM receivable plus premiums paid thereon, less any recovery amount. After assessing the possibility of recovery based on the latest information provided by the receiver of PEM Group and the trust entity, the balance of the PEM receivable and its allowance for possible losses was as follows: (in thousands of USD/TWD) 2014 USD TWD Life insurance policies $ 12, ,468 Non-life insurance policies 16, ,707 29, ,175 Less: Allowance for possible losses (16,803) (502,648) $ 12, ,527 December 31, USD TWD Life insurance policies $ 12, ,317 Non-life insurance policies 17, ,556 29, ,873 Less: Allowance for possible losses (17,197) (515,043) $ 12, ,830 USD TWD Life insurance policies $ 11, ,210 Non-life insurance policies 17, ,477 28, ,687 Less: Allowance for possible losses (16,872) (508,195) $ 11, ,492

16 10 Please refer to note 6(ag) for the assessment of allowance for possible losses on receivables. The changes in allowance for possible losses on receivables were as follows: ~.1.1~.6.30 Balance, beginning of year $ 1,097,171 1,084,127 Reversal (58,257) (6,409) Effects of exchange rate changes (499) 16,492 Ending balance $ 1,038,415 1,094,210 A summary of the (reversal of provision) provision for receivables, discounts, and loans is disclosed in note 6(f). (f) Discounts and loans, net 2014 December 31, Bills negotiated $ 3,780 10,274 28,796 Short-term loans 28,461,380 30,226,760 31,637,493 Medium-term loans 33,353,611 30,609,583 27,223,880 Long-term loans 38,807,946 38,877,725 37,042,677 Overdue loans 355, , , ,982, ,125,050 96,382,103 Less: Allowance for possible losses (1,361,745) (1,356,430) (1,372,034) $ 99,620,463 98,768,620 95,010,069 The amount of allowance for possible losses on discounts and loans is disclosed in note 6(ag). The changes in allowance for possible losses on discounts and loans were as follows: ~.1.1~.6.30 Balance, beginning of year $ 1,356,430 1,226,346 Reversal of bad debt expenses (370,387) (208,356) Recovery of written-off credits 664, ,629 Write-offs (272,182) (328,757) Reduction and exemption (15,844) (18,563) Effects of exchange rate changes (346) 735 Ending balance $ 1,361,745 1,372,034

17 11 In order to protect its creditor s rights, the Bank has been actively trying to manage Prince Motors overdue debts. As a result, the court sold the Tucheng plant at auction and distributed $3,935,303 to the Bank in After deducting the dispute amount, the Bank received $3,897,202, and then wrote off the remaining bad debt of $1,281,091 on September 27, As of 2014 the total written-off liabilities that remained unrecovered amounted to $605,385. Please refer to note 9(d). A summary of the (reversal of provision) provision for receivables, discounts, and loans is as follows: ~.4.1~ ~.1.1~.6.30 Reversal of provision for possible losses on discounts and loans $ (254,828) (77,370) (370,387) (208,356) Provision (reversal of provision) for possible losses on receivables 2,538 (5,981) (58,257) (6,409) Reversal of provision for overdue credits (21,716) (18,342) (41,906) (42,087) Provision (reversal of provision) for possible losses on guarantee liabilities (737) 1,034 6,862 3,176 $ (274,743) (100,659) (463,688) (253,676) (g) Held-to-maturity financial assets 2014 December 31, Negotiable certificates of deposit of Central Bank $ 19,700,000 18,200,000 18,000,000 The held-to-maturity financial assets have not been pledged as collateral or as a guarantee.

18 12 (h) Investments under the equity method, net 2014 December 31, % of % of Ownership Carrying Owner Carrying Value - ship Value Carrying Value % of Owner -ship Cosmos Insurance Brokers Co. Ltd. $ 42, , , Cosmos Insurance Brokers Co., Ltd. (hereinafter referred to as Cosmos Insurance) is an insurance brokerage company and is 100% owned by the Bank. The Bank adopts the equity method for valuation of the investee company. The profits accounted for using the equity method are calculated based on audited financial statements. The financial information and as percentages of the totals Bank financial statements is as follows: ~.4.1~ ~.1.1~.6.30 Profits accounted for using equity method $ 6,921 7,377 12,073 $ 12,942 As Cosmos Insurance does not make derivative transactions and the respective assets and profits of Cosmos Insurance represents less than 2% of the Bank, the investee company is considered as an insignificant subsidiary. Therefore, the Bank is exempted from preparing consolidated financial statements. The financial information is as follows: 2014 Amount % Amount % Total assets $ 54, , ~ Amount % Amount % Operating revenue $ 20, , Net income 6, , ~.1.1~.6.30 Amount % Amount % Operating revenue $ 36, , Net income 11, ,

19 13 Investments under the equity method have not been pledged as collateral or as a guarantee. (i) Other financial assets, net 2014 December 31, Financial assets carried at cost, net $ 716, , ,819 Pledged certificates of deposit (Note 8) - 30,376 30,473 Margin on futures and options 14,206 18,893 - Overdue credits 21,391 18,663 20,521 Provision for possible losses on overdue credits (21,391) (18,663) (20,495) Due from banks not belong to cash and cashequivalent 3,556, ,735 - $ 4,288,001 $ 1,487,823 $ 772,318 Financial assets carried at cost were as follows: 2014 December 31, Carrying Value % of Ownership Carrying Value % of Ownership Carrying Value % of Ownership Unlisted equity instrument with no quoted market price: CDIB & Partners Investment Holding Ltd. $ 500, $ 500, $ 500, Taiwan Asset Management Corporation 75, , , Euroc II Venture Capital Corporation 19, , , Financial Information Service Co., Ltd. 49, , , Reliance Securities Investment Trust Corporation, Ltd. (RSIT) 46, , , Euroc III Venture Capital Corp. 10, , , Taiwan Future Exchange 10, , , Yang-Kuan Asset Management Corporation 3, , , Lien-An Service Co. 1, , , Taipei Forex Inc Cosmos Construction Management Corporation (CCMC) $ 716,819 $ 716,819 $ 741,819 The financial assets carried at cost are equity investments held by the Bank. As there is no quoted price in an active market and the fair value cannot be reliably measured, the financial assets are carried at cost. Taiwan Asset Management Corporation reduced its capital by 25% in July. The Bank wrote off the original cost of investment amounting to $25,000.

20 14 (j) Property and equipment, net The cost, depreciation, and impairment of property and equipment were as follows: Land Buildings Machinery and equipment Transportation and communication equipment Miscellaneous Leased assets Total Cost: Balance, January 1, 2014 $ 4,153,044 2,657,102 1,067, , ,755 18,099 8,342,028 Additions , ,084 20,752 Disposals - - (75,296) (15,145) (12,365) - (102,806) Balance, 2014 $ 4,153,044 2,657,102 1,003, , ,303 26,183 8,259,974 Balance, January 1, $ 4,311,001 2,725,979 1,258, , ,532 15,216 8,786,260 Additions , ,528 2,231 17,561 Disposals - - (12,003) (12,524) (2,057) - (26,584) Balance, $ 4,311,001 2,725,979 1,258, , ,003 17,447 8,777,237 Depreciation and Amortization: Balance, January 1, 2014 $ (4,257) (701,815) (1,018,849) (140,369) (276,873) (4,759) (2,146,922) Depreciation - (28,408) (13,608) (2,685) (3,458) (2,623) (50,782) Disposals ,296 15,145 12, ,806 Balance, 2014 $ (4,257) (730,223) (957,161) (127,909) (267,966) (7,382) (2,094,898) Balance, January 1, $ (4,257) (662,329) (1,198,437) (157,451) (285,066) (562) (2,308,102) Depreciation - (28,914) (14,378) (2,657) (3,054) (1,990) (50,993) Disposals ,123 11,649 2,056-23,828 Balance, $ (4,257) (691,243) (1,202,692) (148,459) (286,064) (2,552) (2,335,267) Book Value: January 1, 2014 $ 4,148,787 1,955,287 48,614 14,196 14,882 13,340 6,195, $ 4,148,787 1,926,879 46,461 11,811 12,337 18,801 6,165,076 January 1, $ 4,306,744 2,063,650 60,374 18,270 14,466 14,654 6,478,158 $ 4,306,744 2,034,736 56,298 15,358 13,939 14,895 6,441,970 The Bank defines each product line as a cash-generating unit (CGU). When it tests the assets (including property and equipment, deferred charges, and intangible assets) for impairment, it considers the internally practical management and the product lines or business lines as the CGUs. The recoverable amount of a CGU is its value in use, and the key assumptions on the economic conditions that will occur over the remaining useful life of the CGU, such as estimated future cash flows, are based on each CGU s operations or objective data on its business cycle. Under the assumption of sustainable operations, the Bank estimated each CGU s net cash flow for future years. Property and equipment have not been pledged as collateral or as guarantee.

21 15 (k) Investment property, net Land Buildings Total Book Value: January 1, 2014 $ 6,774 12,955 19, $ 6,774 12,790 19,564 January 1, $ 6,774 13,284 20,058 $ 6,774 13,119 19,893 Details of rental income and depreciation expense incurred from investment property were as follows: ~.4.1~ ~.1.1~.6.30 Investment Property: Rental Revenue $ Depreciation Expense $ The fair value of the investment property was based on the valuation of the external real estate appraiser, which is a party independent party of the Bank using the comparative and income approaches. The comparative approach adjusts the valuation based on the price of comparable transactions, and the income approach is based on the estimated income and capitalization rate. As of 2014, and December 31 and, the fair values of investment property were $35,902, $35,902 and $28,843, respectively. Investment property has not been pledged as collateral or as guarantee. (m) Intangible assets Computer Software Balance, January 1, 2014 $ 123,345 Additions 37,895 Amortization (25,131) Balance, 2014 $ 136,109 Balance, January 1, $ 150,271 Additions 12,840 Amortization (27,886) Balance, $ 135,225

22 16 For the six-month periods ended 2014 and, there was no significant disposal, impairment, or reversal in intangible assets. (m) Other Assets 2014 December 31, Prepayments $ 100, ,550 91,214 Prepaid pension costs (note 6(v)) 268, , ,102 Deferred charges 78,878 89,794 91,761 Refundable deposits 94,919 97,041 98,975 Others 65,951 79,638 83,570 $ 609, , ,622 The amortization expenses were as follows: ~.4.1~ ~.1.1~.6.30 Amortization expenses $ 8,052 11,552 16,216 21,940 Foreclosed collateral, net 2014 December 31, Foreclosed collateral $ 46,135 46,135 85,442 Less: Accumulated impairment (46,135) (46,135) (85,442) $ In the fourth quarter of, the Bank received gains on settlement dividends and stock returns from its foreclosed collateral amounting to $85,876 recognized as other non-interest income. (n) Deposits from the Central Bank and banks 2014 December 31, Call loans to banks $ 1,039,320 1,749, ,600 Due to other banks - 1,290, ,000 Due to Chunghwa Post Co., Ltd. 523, , ,516 $ 1,562,718 3,584,258 2,122,116

23 17 (o) Notes and bonds issued under repurchase agreements Securities sold under repurchase agreements and their buyback amounts using determined price were as follows: Assets: Bond Face Value Sold Amount (attributed to securities sold under repurchase agreements) 2014 Agreed Repurchase Price Agreed Repurchase Date Government Bond $ 2,970,000 2,970,694 2,972,364 Repurchase gradually before Augest 6, 2014 Assets: Bond Face Value December 31, Sold Amount (attributed to securities sold under repurchase agreements) Agreed Repurchase Price Agreed Repurchase Date Government Bond $ 1,400,000 1,400,000 1,401,855 Repurchase gradually before February 27, 2014 U.S. Treasury Bond 389, , ,701 Repurchase gradually before February 7, 2014 $ 1,789,350 1,793,634 1,795,556 Assets: Bond Face Value Sold Amount (attributed to securities sold under repurchase agreements) Agreed Repurchase Price Agreed Repurchase Date Corporate Bond $ 250, , ,857 Repurchase gradually before August 14, Government Bond 2,388,000 2,377,364 2,379,884 Repurchase gradually before September 17, $ 2,638,000 2,619,864 2,622,741 Securities sold under repurchase agreements are classified as available-for-sale financial assets.

24 18 (p) Payables 2014 December 31, Accounts payable $ 9,979 2,329 - Accrued expenses 343, , ,603 Accrued interest 205, , ,134 Dividends payable 2,000, Funds for clearing 271, , ,429 Checks for clearing 170, , ,077 Collections payable 25,666 16,794 21,347 Acceptance 23,895 32,490 24,655 Others 234, , ,601 $ 3,286,855 1,488,155 2,160,846 (q) Deposits and remittances 2014 December 31, Checking $ 877,664 1,052,221 1,118,948 Demand 14,836,747 13,964,161 12,707,171 Time 37,238,106 33,627,419 31,966,924 Savings 88,718,511 92,289,563 92,253,235 Negotiable certificates of deposit 20,400 54, ,200 Remittances 69,432 46,586 16,495 $ 141,760, ,034, ,695,973 (r) Other financial liabilities December 31, 2014 Lease payable -computer $ 14,173 10,176 12,465 (s) Provisions 2014 December 31, Provisions for guarantee liabilities $ 17,668 10,806 5,168 Provisions for employee benefits (note 6(v)) 134, , ,910 Other provisions 5,234 5,230 5,227 Total $ 157, , ,305

25 19 Provisions for guarantee liabilities Balance, January 1, 2014 $ 10,806 Provision 6,862 Balance, 2014 $ 17,668 Balance, January 1, $ 1,992 Provision 3,176 Balance, $ 5,168 (t) Other liabilities 2014 December 31, Advance receipts $ 115, ,568 98,534 Temporary receipts and suspense accounts 307, ,274 91,675 Delay payment to creditors 106,955 89,002 98,378 Deferred revenue 81,042 87,954 85,142 Guarantee deposits received 185, , ,562 Total $ 796, , ,291 (u) Operating lease (i) Leases-lessee The Bank leases several office buildings and ALM spots under operating leases. The leases typically run for a period of 1 to 5 years, with an option to renew the lease after that date. Lease payments are increased every two to five years to reflect market rentals. Please refer to note 6(ag) for maturity analysis. (ii) Leases-lessor The Bank leases out a few investment properties and self-owned properties under operating lease. The rental revenue is listed as follows: ~.4.1~ ~.1.1~.6.30 Real estate rental revenue $ 3,797 3,791 7,600 7,548

26 20 For the maturity analysis of lease contract, please refer to note 6 (ag). (v) Employee benefit Without great market fluctuations, significant reduction, clear-off or other one-off situation after the end day of last fiscal year, the Bank adopted calculated retirement pension cost measurement at December 31, and 2012 and uncovered interim period pension cost December 31, Other Asset Prepaid pension cost $ 268, , ,102 Provisions Provisions for employee benefits $ 134, , ,910 (i) Defined Contribution Plan The Labor Pension Act, which took effect on July 1, 2005, provides for a new defined contribution pension plan. Bank employees subject to the earlier-promulgated Labor Standards Act were allowed to choose between the pension mechanism under the Labor Standards Act or the mechanism under the Labor Pension Act. For those employees who chose to be subject to the pension mechanism under the Labor Pension Act, their service years before the enforcement of the Labor Pension Act will be retained. However, those hired on or after July 1, 2005, automatically become subject to the Labor Pension Act. According to the Labor Pension Act, the rate of the Bank s required monthly contributions to the employees individual pension accounts that are based on the Table of Monthly Contribution for Labor Pension. The amounts of pension cost were as follows: ~.4.1~ ~.1.1~.6.30 Pension cost $ 19,656 19,981 39,911 40,031 (ii) Defined Benefit Plan Reconciliation of assets and liabilities of the present value of the defined benefit obligation and the fair value of plan assets were as follows: December 31, December 31, 2012 Present value of defined benefit obligation $ (543,726) (562,258)

27 21 Less: fair value of defined benefit plan assets 803, ,828 Recognized defined benefit assets (Recognized as other assets - prepaid pension costs) $ 259, ,570 1) Composition of planned assets A. The Labor Standards Act For the Bank s employees who chose to continue to be subject to the Labor Standards Act, benefit payments are based on length of service and average monthly salary upon retirement. The Bank has two funds under its defined benefit plan: one for management and the other for non-management employees ( employees ). The Bank will make monthly contributions to the employees pension fund, which is managed by the Employee Pension Fund Committee and is deposited in the employees pension account with Bank of Taiwan. The pension fund for management is managed by the Management Pension Fund Committee and is deposited in Zhonghe branch under the name of the committee. As of 2014, the labor pension reserve and Employee Retirement Fund Management Committee were $431,119 and $385,445, respectively. B. Early Retirement Plan (ERP) On December 6, 2007, the Bank signed with the Bank s labor union an Employee benefit Proposal-Early Retirement Plan (ERP), under which the Bank would carry out the pension plan in stages. The board of directors approved the ERP on December 11, 2007, and January 15, As of 2014 and December 31,, liabilities of employee benefits are as follows: 2014 December 31, Provisions for employee benefits $ 134, , ,910 2) Reversals of pension cost in accordance with the actuarial valuation report are as follows: ~.4.1~ ~.1.1~.6.30 Reversals of pension cost $ , ) Please refer to the financial statements as of December 31, for the movements in the present value of defined benefit obligation and planned assets, actuarial gains or

28 22 losses transferred to retained earnings, main actuarial assumption, historical information and sensitivity analysis according to actuarial report. (iii) As mentioned above, the pension expenses contributed by the Bank were as follows: ~.4.1~ ~.1.1~.6.30 Pension expense $ 19,020 19,531 38,639 39,131 (iv) Preferential interest on employees deposit The Bank provides their current employees preferential interest deposits. The difference between the preferential interest rate and market rate (recognized as employee benefits expense) is as follows: ~.4.1~ ~.1.1~.6.30 (w) Income tax Employee benefits expense $ 5,347 5,819 10,731 11,657 (i) Income tax expense for interim period is based on the pretax income for an interim period, multiplied by, the best estimated average annual effective tax rate by the management. (ii) Income tax expense (benefit) recognized in comprehensive income statement were as follows: ~.4.1~ ~.1.1~.6.30 Current tax $ 38,797-40, Deferred tax: Decrease on loss carryforwards 116, , , ,893 Amortization of goodwill Decrease in allowance for possible losses on loans and receivables 29,834 2,055 39,284 6,896 Loss on the transfer of foreclosed collateral to Bank-owned property Provision of various losses (736) (2,244) (736) (2,244)

29 ~.4.1~ ~.1.1~.6.30 Pension costs ,239 1,450 Unrealized foreign exchange (loss) gain (869) 1,396 (2,649) 11,952 Decrease in investment tax credits ,890 Unrealized valuation (loss) gain on financial instruments (3,595) 2,857 1, Total 142, , , ,433 Tax expense $ 181, , , ,530 (iii) In accordance with the amendment to the Income Tax Act, taxable losses from the past ten years as assessed by the authorities may be used to reduce net income in the current year. As of 2014, loss carryforwards were as follows: Accrued Year Total Credits Granted Total Tax Credits Granted Expiry Year 2007 (assessed) $ 10,132,631 1,722, (assessed) 13,762,127 2,339, (assessed) 10,187,530 1,731, (assessed) 2,624, , (assessed) 1,240, , $ 37,947,289 6,451,039 (iv) Imputed tax credits are summarized as follows: 2014 December 31, Accumulated earnings (accumulated deficit) after (and including) 1998 $ 1,364,450 3,059,655 1,140,508 Ending balance of imputation credit account $ 1,041,559 1,010,838 1,003,474 (actual) 2012(actual) Tax deduction ratio for earnings distribution to ROC residents 20.48% - % The abovementioned, information was prepared in accordance with the information letter No announced by Ministry of Finance of R.O.C. on October 17,. (v) The ROC tax authority has examined the Bank s income tax returns up to 2011.