China Development Industrial Bank

Transcription

1 China Development Industrial Bank Financial Statements for the Nine Months Ended September 30, 2012 and 2011 and Independent Accountants Review Report

2 INDEPENDENT ACCOUNTANTS REVIEW REPORT The Board of Directors and Stockholders China Development Industrial Bank We have reviewed the accompanying balance sheets of China Development Industrial Bank (the Bank ) as of September 30, 2012 and 2011 and the related statements of income and cash flows for the nine months then ended. These financial statements are the responsibility of the Bank s management. Our responsibility is to issue a report on these financial statements based on our reviews. We conducted our reviews in accordance with Statement of Auditing Standards No Engagements to Review Financial Statements of the Republic of China. A review of financial statements consists primarily of applying analytical procedures to financial data and making inquiries of person responsible for financial and accounting matters. It is substantially less in scope than an audit in accordance with generally accepted auditing standards, the objective of which is the expression of an opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an opinion. Based on our reviews, we are not aware of any material modifications that should be made to the financial statements of China Industrial Development Bank referred to above for them to be in conformity with the Regulations Governing the Preparation of Financial Reports by Public Banks, requirements of the Business Accounting Act and Guidelines Governing Business Accounting relevant to financial accounting standards, and accounting principles generally accepted in the Republic of China. October 29, 2012 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 review such financial statements are those generally accepted and applied in the Republic of China. For the convenience of readers, the accountants review 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 accountants review report and financial statements shall prevail

3 CHINA DEVELOPMENT INDUSTRIAL BANK BALANCE SHEETS SEPTEMBER 30, 2012 AND 2011 (In Thousands of New Taiwan Dollars, Except Par Value) (Reviewed, Not Audited) Percentage Percentage Increase Increase (Decrease) (Decrease) ASSETS Amount Amount % LIABILITIES AND STOCKHOLDERS EQUITY Amount Amount % CASH AND CASH EQUIVALENTS (Notes 4 and 24) $ 460,285 $ 818,573 (44) LIABILITIES Call loans from banks (Note 14) $ 2,273,654 $ 4,869,768 (53) DUE FROM THE CENTRAL BANK AND OTHER BANKS (Note 5) 44,566,934 36,708, Securities sold under repurchase agreements (Notes 2, 6, 9, 24 and 25) 26,207,396 22,223, FINANCIAL ASSETS AT FAIR VALUE THROUGH PROFIT OR Financial liabilities at fair value through profit or loss (Notes 2, LOSS (Notes 2, 6 and 24) 12,179,673 31,806,897 (62) 6 and 24) 11,270,031 21,508,886 (48) Payables (Notes 2, 15, 20 and 24) 2,113,876 2,605,400 (19) SECURITIES PURCHASED UNDER RESELL AGREEMENTS Deposits and remittances (Notes 16 and 24) 94,395,218 73,272, (Notes 2 and 25) 4,978, , Bank debentures payable (Note 17) 16,978,454 27,906,390 (39) Other financial liabilities (Notes 2, 6 and 18) RECEIVABLES, NET (Notes 2, 3, 7 and 24) 9,337,308 3,948, Structured products - host contracts 21,773,680 24,911,012 (13) Other 351, ,396 (4) DISCOUNTS AND LOANS, NET (Notes 2, 3, 8 and 24) 83,006,457 90,834,111 (9) Total other financial liabilities 22,125,133 25,276,408 (12) Other liabilities (Notes 2 and 19) 954, , AVAILABLE-FOR-SALE FINANCIAL ASSETS (Notes 2 and 9) 71,701,877 61,331, Total liabilities 176,317, ,448,311 (1) INVESTMENTS UNDER THE EQUITY METHOD (Notes 2 and 10) 40,444,075 45,400,032 (11) STOCKHOLDERS EQUITY (Notes 2 and 21) FINANCIAL ASSETS CARRIED AT COST (Notes 2 and 11) 15,717,842 19,034,844 (17) Capital stock - NT$10 par value; 9,266,851 shares authorized DEBT INSTRUMENTS WITH NO ACTIVE MARKET (Note 2) 1,218,026 1,218,026 - Common stock - issued and outstanding - 6,160,400 shares in 2012 and 7,760,400 shares in ,603,994 77,603,994 (21) PROPERTIES (Notes 2 and 12) Capital surplus Cost Issue of shares in excess of par value 28,593,956 28,485,538 - Land 361, ,237 9 Donated capital Buildings and facilities 1,093,036 1,299,760 (16) From equity-method investments 114, ,831 (5) Computer equipment 100, ,022 (68) Total capital surplus 28,708,729 28,606,389 - Transportation equipment (66) Retained earnings Other equipment 74, ,743 (41) Legal reserve 16,819,854 15,588,953 8 Total cost 1,629,456 2,073,085 (21) Special reserve 3,072, ,000 1,436 Revaluation increment 829, Unappropriated earnings 3,718,296 3,635,274 2 Accumulated depreciation (612,690) (1,077,162) (43) Total retained earnings 23,610,253 19,424, Accumulated impairment (28,390) - - Unrealized revaluation increment 588, ,818, , Cumulative translation adjustments (2,366,463) (1,388,774) 70 Prepayments for properties 63,709 56, Unrealized loss on financial instruments (1,669,360) (4,834,511) (65) Unrealized gain on cash flow hedge 40,014 43,638 (8) Net properties 1,881,924 1,052, Net loss not recognized as pension cost (83,035) (40,222) 106 OTHER ASSETS, NET (Notes 2, 13 and 20) 1,257,081 4,809,936 (74) Total stockholders equity 110,432, ,414,741 (8) TOTAL $ 286,750,216 $ 297,863,052 (4) TOTAL $ 286,750,216 $ 297,863,052 (4) The accompanying notes are an integral part of the financial statements

4 CHINA DEVELOPMENT INDUSTRIAL BANK STATEMENTS OF INCOME NINE MONTHS ENDED SEPTEMBER 30, 2012 AND 2011 (In Thousands of New Taiwan Dollars, Except Earnings Per Share) (Reviewed, Not Audited) Percentage Increase (Decrease) Amount Amount % INTEREST REVENUE (Notes 2, 24 and 26) $ 2,591,972 $ 2,073, INTEREST EXPENSE (Notes 2, 24 and 26) (1,288,752) (1,008,509) 28 INTEREST PROFIT, NET 1,303,220 1,064, NONINTEREST PROFITS AND GAINS, NET Service fee, net (Notes 2, 24 and 26) 148,539 63, Loss on financial assets and liabilities at fair value through profit or loss, net (Notes 2, 6, 24 and 26) (127,062) (770,095) (84) Realized gain on available-for-sale financial assets, net (Note 2) 1,229,048 2,744,738 (55) Gain on financial assets carried at cost, net (Note 2) 738,111 1,002,924 (26) Investment income recognized under the equity method, net (Notes 2 and 10) 1,071, , Foreign exchange gain (loss), net (Note 2) 51,439 (108,125) 148 Loss on asset impairment (Note 2) (91,720) (95,363) (4) Others (Notes 2 and 24) 198, , Total noninterest profits and gains, net 3,218,799 3,770,835 (15) NET PROFIT 4,522,019 4,835,703 (6) REVERSAL OF ALLOWANCE (ALLOWANCE) FOR BAD DEBTS AND LOSSES ON GUARANTEES, NET (Notes 2, 3, 7 and 8) 353,520 (219,191) 261 OPERATING EXPENSES Personnel expenses (Note 22) (826,903) (872,407) (5) Depreciation and amortization (Note 22) (59,083) (63,521) (7) Other operating and administrative expenses (Note 24) (281,163) (267,711) 5 Total operating expenses (1,167,149) (1,203,639) (3) INCOME BEFORE INCOME TAX 3,708,390 3,412,873 9 INCOME TAX BENEFIT (Notes 2 and 20) 9, ,401 (96) NET INCOME $ 3,718,296 $ 3,635,274 2 (Continued) - 3 -

5 CHINA DEVELOPMENT INDUSTRIAL BANK STATEMENTS OF INCOME NINE MONTHS ENDED SEPTEMBER 30, 2012 AND 2011 (In Thousands of New Taiwan Dollars, Except Earnings Per Share) (Reviewed, Not Audited) Before Income Tax After Before Income Income Tax Tax After Income Tax EARNINGS PER SHARE - COMMON STOCK (NEW TAIWAN DOLLARS; Note 23) Basic $ 0.53 $ 0.53 $ 0.44 $ 0.47 The accompanying notes are an integral part of the financial statements. (Concluded) - 4 -

6 CHINA DEVELOPMENT INDUSTRIAL BANK STATEMENTS OF CASH FLOWS NINE MONTHS ENDED SEPTEMBER 30, 2012 AND 2011 (In Thousands of New Taiwan Dollars) (Reviewed, Not Audited) CASH FLOWS FROM OPERATING ACTIVITIES Net income $ 3,718,296 $ 3,635,274 Adjustments to reconcile net income to net cash provided by (used in) operating activities Cash dividends received from equity-method investees 1,753, ,273 Investment income recognized under the equity method, net (1,066,225) (771,617) Realized gain on available-for-sale financial assets, net (701,083) (2,026,802) Allowance (reversal of allowance) for bad debts and losses on guarantees, net (353,520) 219,191 Gain on financial assets carried at cost, net (248,104) (348,240) Loss on asset impairment 91,720 95,363 Depreciation and amortization 59,083 63,521 Changes in deferred income taxes (55,913) 58,077 Amortization of bond discount 53,950 53,753 Pension benefit payments charged against reserve (35,802) (31,671) Allowance for pension expenses 39,576 37,783 Compensation cost of the parent company's treasury stocks transferred to employees - 117,677 Others (26,559) 1,246 Net changes in operating assets Financial assets for trading purposes 10,869,349 (6,697,580) Receivables, net (2,162,272) (273,711) Net changes in operating liabilities Financial liabilities for trading purposes (3,739,866) 5,058,030 Payables (752,832) (1,593,357) Net cash provided by (used in) operating activities 7,443,594 (2,255,790) CASH FLOWS FROM INVESTING ACTIVITIES Proceeds from disposal of available-for-sale financial assets 44,290,094 26,417,588 Acquisition of available-for-sale financial assets (37,221,358) (39,053,619) Decrease (increase) in due from the Central Bank and other banks (18,306,895) 21,301,861 Increase in securities purchased under resell agreements (4,978,734) (92,790) Decrease (increase) in other assets 2,832,170 (3,516,625) Proceeds from disposal of financial assets carried at cost 1,268,270 1,737,471 Decrease (increase) in discounts and loans 1,114,387 (20,492,793) Acquisition of financial assets carried at cost (453,693) (1,926,460) Acquisition of investments under the equity method (300,000) (2,703,685) Proceeds from capital return on equity-method investments 177,400 38,378 Proceeds from capital return on financial assets carried at cost 105,410 71,615 Proceeds from disposal of investments under the equity method 44,306 6,828 Acquisition of properties (24,433) (36,210) Proceeds from disposal of properties Acquisition of debt instruments with no active market - (218,034) Net cash used in investing activities (11,452,793) (18,466,475) (Continued)

7 CHINA DEVELOPMENT INDUSTRIAL BANK STATEMENTS OF CASH FLOWS NINE MONTHS ENDED SEPTEMBER 30, 2012 AND 2011 (In Thousands of New Taiwan Dollars) (Reviewed, Not Audited) CASH FLOWS FROM FINANCING ACTIVITIES Increase in deposits and remittances $ 22,100,334 $ 24,597,944 Capital reduction - common stock (16,000,000) - Decrease in bank debentures payable (7,900,000) - Increase (decrease) in other financial liabilities 7,706,525 (2,631,074) Decrease in call loans from banks (2,762,893) (1,304,864) Increase in securities sold under repurchase agreements 226,663 7,806,381 Increase (decrease) in other liabilities (17,820) 544,888 Decrease in financial liabilities designated as at fair value through profit or loss - (1,500,000) Payment of cash dividends - (6,789,238) Decrease in long-term loans - (15,830) Net cash provided by financing activities 3,352,809 20,708,207 DECREASE IN CASH AND CASH EQUIVALENTS (656,390) (14,058) CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 1,116, ,631 CASH AND CASH EQUIVALENTS, END OF PERIOD $ 460,285 $ 818,573 SUPPLEMENTAL CASH FLOW INFORMATION Interest paid $ 1,442,909 $ 1,008,509 Income tax paid $ 154,108 $ 102,680 The accompanying notes are an integral part of the financial statements. (Concluded) - 6 -

8 CHINA DEVELOPMENT INDUSTRIAL BANK NOTES TO FINANCIAL STATEMENTS NINE MONTHS ENDED SEPTEMBER 30, 2012 AND 2011 (In Thousands of New Taiwan Dollars, Unless Stated Otherwise) (Reviewed, Not Audited) 1. ORGANIZATION AND OPERATIONS China Development Industrial Bank (the Bank ) was incorporated under the Company Act and relevant regulations and started operations on May 14, Effective January 1, 1999, the Bank was converted from a trust corporation into an industrial bank under government approval. As of September 30, 2012, the Bank had three local branches in Taichung, Kaohsiung, Taoyuan and an offshore banking unit (OBU). As of September 30, 2012 and 2011, the Bank had 539 and 594 employees, respectively. Under the Banking Act and relevant regulations, the Bank engages in industrial banking operations - certain deposit-taking, lending, investment, bank debentures issuing, securities underwriting, domestic exchange, guarantees, letter of credit issuing, receivables acquisition, government bonds purchasing, trust operations, offshore banking, derivative financial instruments and other activities under the authority approval. The Bank receives deposits and conducts foreign-currency transactions only with its investees, debtors, insurance companies, juridical persons and government institutions. The Bank s Trust Department engages in (1) trust business planning, managing and operating; and (2) custodianship of nondiscretionary trust funds in overseas securities and mutual funds. These operations are regulated under the Banking Act and the Trust Enterprises Act. On December 28, 2001, the Bank s stockholders exchanged their Bank stockholdings for shares in China Development Financial Holding Corporation (CDFH; the Bank s parent company) at a 1:1 ratio, which was approved by the Ministry of Finance (MOF). As required by the Financial Holding Company Act, CDFH s shares were listed on the Taiwan Stock Exchange after the exchange and the Bank became a 100% subsidiary of CDFH. 2. SIGNIFICANT ACCOUNTING POLICIES Basis of Presentation The accompanying financial statements have been prepared in conformity with the Regulations Governing the Preparation of Financial Reports by Public Banks, Business Accounting Act, and Guidelines Governing Business Accounting and accounting principles generally accepted in the Republic of China (ROC GAAP). The Bank s significant accounting policies are summarized as follows: Basis of Financial Statement Preparation The accompanying financial statements include the accounts of the Head Office, OBU and all branches. All interoffice transactions and balances have been eliminated. In addition, since the operating cycle cannot be reasonably identified in the banking industry, accounts included in the financial statements were not classified as current or noncurrent. Nevertheless, accounts were properly categorized according to the nature of each account and sequenced according to their liquidity. Please refer to Note 26 for the maturity analysis of assets and liabilities

9 Foreign-currency Transactions Foreign-currency transactions are recorded in the respective currencies in which they are denominated. Foreign-currency gains or losses are recorded in New Taiwan dollars using rates in effect at the time of the transactions. On the balance sheet date, foreign-currency monetary assets and liabilities are reported using the prevailing rates, and realized or unrealized exchange differences are recognized in the income statement. Foreign-currency nonmonetary assets and liabilities based on the fair value method are stated at the prevailing rates. The resulting differences are recognized as adjustments to stockholders equity if fair value changes are included in stockholders equity or are recognized as current income or loss if fair value changes are included in current income or loss. The investments carried at cost are stated at historical rates on the trade date. For the restatement of the financial statements of foreign equity-method investees into New Taiwan dollars, assets and liabilities are stated at the prevailing rates, and revenues and expenses are stated at the average rates of the current period. The resulting exchange gains or losses are recognized as cumulative translation adjustments under stockholders equity in proportion to the Bank s holding percentage. Accounting Estimate In preparing financial statements in conformity with these criteria, guidelines and principles, the Bank is required to make certain estimates and assumptions that could affect the amounts of the allowance for credit losses, reserve for losses on guarantees, depreciation of fixed assets, asset impairment, pension, litigation for income tax returns, bonuses to employees and evaluation of financial instruments. Actual results could differ from these estimates. Financial Instruments at Fair Value through Profit or Loss Financial instruments at fair value through profit or loss are mainly financial assets and financial liabilities used for trading purposes or designated as at fair value through profit or loss. A financial asset or liability is recognized when the entity becomes a party to the contractual provisions of the instrument. A previously recognized financial asset is derecognized when the entity losses controls over the contractual right. A financial liability is derecognized when it is extinguished, canceled or expired. These instruments are recorded at fair value on acquisition and any fair value changes are recognized as current income or loss on subsequent evaluation. Cash dividend received after investment (including those received in the year the investment was made) is recognized as income. On derecognition of a financial asset or a financial liability, the difference between its carrying amount and the sum of the consideration received or receivable or consideration paid or payable is recognized in profit or loss. The acquisition or sale of financial assets is recorded on the trade date. Derivatives not subject to hedge accounting are classified as financial assets or financial liabilities for trading purposes according to their fair values. Financial liabilities designated as at fair value through profit or loss are evaluated at fair value in order to eliminate or significantly reduce accounting inconsistency. Unrealized gains (losses) are recognized in the current period. Some derivative financial instruments used in the nine months ended September 30, 2012 and 2011 did not qualify for hedge accounting. To prevent accounting measurement mismatches between the hedged items and hedging instruments due to differences in measurement attributes, the Bank designated the bank debentures issued as financial assets and liabilities at fair value through profit or loss

10 The bases of fair values are as follows: (a) listed and GreTai securities market (the over-the-counter, or OTC, securities exchange of the Republic of China) (OTC) stocks - closing prices on the balance sheet date; (b) open-end mutual funds - net asset values on the balance sheet date; (c) domestic bonds - reference price published by the OTC exchange on the balance sheet date; (d) financial instruments with no active market - estimates resulting from evaluation. Securities Purchased and Sold Under Resell and Repurchase Agreements For securities purchased under resell agreements, the payment to a counter-party is treated as a financing transaction. For securities sold under repurchase agreements, the payment by a counter-party and the related interest revenue or interest expense is recognized on the accrual basis. Receivables To determine the allowance for credit losses, the Bank evaluate the losses considering the balances of accounts, interest and other receivables, etc. as of the balance sheet date. Discounts and Loans Under the Regulations of the Procedures for Banking Institutions to Evaluate Assets and Deal with Nonperforming/Nonaccrual Loans issued by the Financial Supervisory Commission, loans and other credits extended by the Bank and the related accrued interest approved by the board of directors are classified as nonperforming under discount and loans when the loan is overdue. To determine the allowance for credit losses, the Bank evaluates its losses considering the balances of discounts and loans, as of the balance sheet date. On January 1, 2011, the Bank adopted the third-time revised Statement of Financial Accounting Standards (SFAS) No Financial Instruments: Recognition and Measurement. One of the main revisions is that the impairment of loans and receivables originated by the Bank should be covered by SFAS No. 34. Discounts and loans are assessed for impairment at the end of each reporting period and considered to be impaired when there is objective evidence that, as a result of one or more events that occurred after the initial recognition of the above credit losses, the estimated future cash flows of the asset have been affected. Loans and receivables that are assessed as not impaired individually are further assessed for impairment on a collective basis. The impairment loss recognized is the difference between the asset carrying amount and the present value of estimated future cash flows, after taking into account the related collaterals, discounted at the receivable s original effective interest rate. Based on the regulations issued by the Ministry of Finance (MOF), credit assets classified as special mention, substandard, with doubtful collectibility and uncollectible or loss incurring are evaluated on the basis of the borrowers /clients financial condition and delinquency record on interest payments, and these assets have allowances at 2%, 10%, 50% and 100%, respectively, of outstanding credit. The minimum allowance for doubtful accounts and guarantees is equal to the book value of the above listed nonperforming credit assets plus 0.5% of the normal credit balance (this balance should be net of the balance of borrowing by ROC government agencies from the Bank). Credit deemed uncollectible may be written off under the approval of the board of directors. Collections of bad debts written off were recognized as reduction of bad debts

11 Available-for-sale Financial Assets Available-for-sale financial assets are carried at fair value. Unrealized gains or losses on available-for-sale financial assets are reported in equity attributed to the Bank s stockholders. On the disposal of or on the recognition of impairment loss on an available-for-sale financial asset, the accumulated, unrealized gain or loss in equity attributable to the Bank s stockholders is transferred to net profit and loss for the period. The Bank uses trade date accounting in recording available-for-sale portfolio transactions. The basis for recognition, derecognition and fair value measurement of available-for-sale financial assets is the same as that of financial instruments at fair value through profit or loss. Cash dividends are recognized on the ex-dividend date, except for dividends distributed from the pre-acquisition profit, which are treated as a reduction of investment cost. Stock dividends are not recognized as investment income but are recorded as an increase in the number of shares. The total number of shares subsequent to the increase is used for recalculation of cost per share. The difference between the initial cost of a debt instrument and its maturity amount is amortized using the effective interest method, with the amortized interest recognized in profit or loss. If an available-for-sale financial asset is determined to be impaired, the accumulative unrealized loss previously recognized in equity attributable to the Bank s stockholders is recognized as impairment loss and reported in the income statement. For equity investments, loss reversal is adjusted to the equity attributable to the Bank s stockholders. For debt investments, loss reversal is credited to current income. The bases of fair values are as follows: (a) listed and GreTai securities market (OTC) stocks - closing prices on the balance sheet date; (b) domestic bonds - reference price published by the OTC exchange on the balance sheet date; (c) overseas bonds - Bloomberg reference prices on the balance sheet date; and (d) financial instruments with no active market - estimates resulting from evaluation. Hedge Accounting Derivatives designated as hedging instruments are measured at their fair values, and changes in fair values are recognized as either income (loss) for the current period or stockholders equity adjustment, depending on the nature of the risks being hedged. The Bank uses derivatives instruments primarily as cash flow hedge, i.e., as risk management tools for hedging interest rate and foreign exchange rate fluctuations as well as any credit risk arising on on-balance sheet liabilities. To qualify as a hedge, a derivative must effectively reduce any risk inherent in the hedged item from adverse fluctuations of interest and exchange rates and of market values. Changes in the fair value of the derivative must highly correlate with changes in the fair value of the hedged item over the life of the hedging contract. At the start of the hedge, there must be formal designation and documentation of the hedging relationship, goals of risk management, strategy for undertaking the hedge, the hedging instrument, the hedged items, overall risk management objectives and strategies and a description of how the Bank will assess the hedging instrument effectiveness. A cash flow value hedge that meets all of the hedge accounting criteria is accounted for as follows: a. The portion of the gains or losses from remeasuring the hedging instrument is charged to stockholders equity. The amount recognized under stockholders equity is recognized as gain or loss in the same period or periods during which the hedged forecast transaction or an asset or liability arising from the hedged forecast transaction affects gain or loss. However, if all or a portion of a loss recognized under stockholders equity is not expected to be recovered in the future, the amount that is not expected to be recovered is reclassified to current loss

12 b. The Bank engages in cash flow hedge mainly to hedge the risk of cash flow losses resulting from fluctuation of interest rate or foreign exchange rate. Investments under the Equity Method Equity investments are accounted for by the equity method if the Bank has significant influence over the investees. The carrying value of the investment under the equity method includes the investment cost, a proportionate share in the investees net income or loss and changes in the net worth during the same reporting year as that of the Bank, and a reduction of the carrying value of the investment when cash dividend is received. The acquisition cost is allocated to the assets acquired and liabilities assumed on the basis of their fair values at the date of acquisition, and the acquisition cost in excess of the fair value of the identifiable net assets acquired is recognized as goodwill. Goodwill is not being amortized. When the Bank subscribes for additional shares of stock issued by an equity-method investee at a percentage not equal to the Bank s current equity, the increase in the Bank s equity in the investee s net assets is credited to capital surplus. If the additional subscription results in a decrease in the Bank s equity in the investee s net assets, the decrease is debited to capital surplus. If capital surplus is not enough for debiting purposes, the difference is debited to unappropriated retained earnings. Stock dividends received from investees are accounted for as an increase in the number of shares held and not as income. Cost per share was recomputed based on the new number of shares. The Bank uses the moving-average method in calculating the purchase cost of investment shares it wants to sell. The impairment loss is recognized if there is sufficient objective of asset impairment. Goodwill is tested for impairment annually regardless of whether there is any indication of impairment. Financial Assets Carried at Cost Financial assets carried at cost are mainly equity instruments with fair value that cannot be reliably measured. These include unlisted stocks, emerging stocks, restricted stock and overseas partnership funds, etc., which are recognized at their original cost. The basis for recognition, derecognition and dividend income measurement is the same as available-for-sale financial assets. The impairment loss is recognized if there is sufficient objective evidence of asset impairment. In addition, this impairment loss cannot be reversed. Debt Instruments with No Active Market Debt instruments with no active market are those with no quoted market price in an active market and with fair values that cannot be reliably measured. These debt instruments received in fixed or determined amounts and are carried at amortized cost. On initial bond recognition, these assets are stated at their fair values together with the acquisition or issue costs. The disposal, impairment or amortization of the debt instruments is recognized as net gain or loss in the income statement. Properties and Nonoperating Assets Properties and non-operating assets are stated at cost plus revaluation increment less accumulated depreciation and accumulated impairment. Major renewals and betterments are capitalized; maintenance and repairs are expensed currently. Upon sale or other disposal of properties, their cost (including revaluation increment) and related accumulated depreciation, accumulated impairment and unrealized revaluation increment are removed from the accounts. Any resulting gain or loss is credited or charged to current revenue and income or expense and loss. Depreciation is calculated using the straight-line method over service lives initially estimated as follows: buildings and facilities, 3 to 50 years; computer equipment, 3 years; transportation equipment, 3 to 5 years; and other equipment, 5 to 10 years. If assets are still being used beyond their initially estimated service lives, further depreciation is calculated using newly estimated service lives

13 Collaterals Assumed Collaterals assumed (included in other assets) are recorded at cost, which includes the price and the expenditure that place the collateral in a position to be sold, and are evaluated at their fair value as of the end of the period. An impairment loss is recognized when the cost of collaterals exceeds the fair value. Deferred Expenses Computer software is recorded at acquisition cost. Computer software is amortized by the straight-line method over its service life estimated at 3 to 6 years. Non-financial Asset Impairment The Bank evaluates the possibility of impairment loss on nonfinancial assets as of the balance sheet date, if there is sufficient objective evidence of asset impairment, the Bank should recognize an impairment loss whenever the recoverable amount of the asset or the cash-generating unit is below the carrying amount of an asset, and this impairment loss either is charged to accumulated impairment or reduces the carrying amount of an asset directly. After the recognition of an impairment loss, the depreciation (amortization) charged to the assets should be adjusted in future years at the revised asset carrying amount (net of accumulated impairment), less its salvage value, on a systematic basis over its remaining service life. If asset impairment loss (excluding goodwill) is reversed, the increase in the carrying amount resulting from reversal is credited to current income and debited to accumulated impairment or is used to increase the carrying amount of the asset. However, loss reversal should not be more than the carrying amount (net of depreciation) had the impairment not been recognized. If an asset has been revaluated under related rules, the impairment loss on this asset should be deducted from unrealized revaluation increment under stockholders equity and the impairment loss exceeds the unrealized revaluation increment, the excess amount is recognized as a loss. If the recoverable amount increases in the period, the amount previously recognized as impairment loss could be reversed and recognized as a gain, with the remaining credited to unrealized revaluation increment. Pension Under the defined benefit plan, pension expense is determined on the basis of actuarial calculations. Under the defined contribution pension plan based on the Labor Pension Act, the Bank s monthly contributions to the employee s individual pension accounts are recorded as pension expense in the current period. Income Tax The inter-period income tax allocation is used, in which tax effects of loss carryforwards, deductible temporary differences, unused investment tax credits and credit to adjustments to stockholders equity on credit account are recognized as deferred income tax assets and those of taxable temporary differences and debit to adjustment to stockholders equity on debit account are recognized as deferred income tax liabilities. A valuation allowance is provided for deferred income tax assets that are not certain to be realized. Tax credits for certain research and development expenditure, personnel training expenditure and equity investments acquisition are accounted for by the flow-through method. Adjustments of prior years tax liabilities are added to or deducted from the current year s tax provision. Income tax (10%) on unappropriated earnings, based on Income Tax Act, generated since 1998 is recorded as income tax in the year when the board of directors resolves the distribution of the earnings. Since 2003, CDFH has used the linked-tax system for income tax filings with its qualified subsidiaries, including the Bank. The accounting treatment on income tax applied by the Bank is to adjust the

14 current/deferred income tax assets (liabilities) and income tax payable (receivable) and income tax expense (profit) on a systematic and consistent basis. Related payables and receivables are recorded in each book of the Bank s qualified subsidiaries. Since 2006, based on the Basic Income Tax Act, if the basic income tax is greater than the amount of regular income tax, the income tax payable should be the basic income tax. The incremental tax payable is recorded as current income tax expense. Reserve for Losses on Guarantees To determine the reserve for losses on guarantees, the Bank evaluates the loss, considering the balances of guarantees and acceptances as of the balance sheet date. Interest and Service Fee Revenue Recognition Interest revenue is calculated at the effective interest rate for loans and receivables net of cost and service fee. Service fees are recognized as income upon receipt or when a major part of the earnings process is completed. Interest revenue on loans and credits extended by the Bank is recorded using the accrual method. For nonperforming loans and other credits extended by the Bank, interest revenue is recognized upon collection. 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 only possible loss is involved, this loss is not recorded but a footnote disclosure of the circumstances giving rise to the possible loss is made. Reclassifications Certain accounts in the financial statements as of and for the nine months ended September 30, 2011 have been reclassified to consistent with the presentation of the financial statements as of and for the nine months ended September 30, EFFECTS OF CHANGES IN ACCOUNTING PRINCIPLES Financial Instruments On January 1, 2011, the Bank adopted the third-time revised Statement of Financial Accounting Standards (SFAS) No. 34, Financial Instruments: Recognition and Measurement. The main revisions include (1) finance lease receivables are now covered by SFAS No. 34; (2) the scope of the applicability of SFAS No. 34 to insurance contracts is amended; (3) loans and receivables originated by the Bank are now covered by SFAS No. 34; (4) additional guidelines on impairment testing of financial assets carried at amortized cost if the asset issuer or debtor has financial difficulties and the terms of obligations have been modified; and (5) the accounting treatment by a debtor for modifications in the terms of its obligations. Operating Segments On January 1, 2011, the Bank adopted the newly issued SFAS No Operating Segments. The statement requires that segment information be disclosed on the basis of the information on the components of the Bank that the chief operating decision maker uses to make decisions about operating matters. SFAS No. 41 requires at the identification of operating segments on the basis of internal reports that are regularly reviewed by the Bank s chief operating decision maker in order to allocate resources to the segments and assess their performance. This statement supersedes SFAS No Segment Reporting

15 4. CASH AND CASH EQUIVALENTS September Due from other banks $ 435,071 $ 807,533 Notes and checks in clearing 17,227 3,722 Cash on hand 7,987 7,318 $ 460,285 $ 818, DUE FROM THE CENTRAL BANK AND OTHER BANKS September Due from the Central Bank $ 35,909,313 $ 32,495,607 Call loans to banks 8,657,621 4,212,890 $ 44,566,934 $ 36,708,497 Statutory deposit reserves placed in the Central Bank of the ROC are determined at prescribed rates based on the monthly average balances should be reserves of customers New Taiwan dollar deposits. As of September 30, 2012 and 2011, these reserves included $2,160,969 and $2,059,344, respectively, which were subject to withdrawal restrictions. To comply with the Central Bank s clearing system requirements for real-time gross settlement (RTGS), the Bank pledged negotiable certificates of deposit aggregating $10,500,000 and $10,000,000 as of September 30, 2012 and 2011, respectively, as collateral for day-term overdraft. The pledged amounts may be adjusted anytime. In addition, under a directive issued by the Central Bank of the ROC, separate foreign-currency deposit reserves are determined at prescribed rates based on balances of foreign-currency deposits. These reserves may be withdrawn anytime and are noninterest earning. The balances of foreign-currency deposit reserves were $35,210 and $36,607 as of September 30, 2012 and 2011, respectively. 6. FINANCIAL ASSETS AND LIABILITIES AT FAIR VALUE THROUGH PROFIT OR LOSS Financial assets September Financial assets for trading purposes Interest rate swap contracts $ 5,125,506 $ 4,810,390 Government bonds 3,612,890 12,808,723 Currency swap contracts 1,716,115 9,592,877 Premium paid on option contracts 698, ,781 Cross-currency swap contracts 294,568 1,353,434 Convertible (exchangeable) corporate bonds 237, ,017 Futures contracts 171, ,836 (Continued)

16 September Forward exchange contracts $ 81,736 $ 495,876 Non-deliverable forward contracts 42, ,292 Others 198, ,671 Financial liabilities $ 12,179,673 $ 31,806,897 Financial liabilities designated as at fair value through profit or loss - bank debentures payable $ 2,616,920 $ 2,648,282 Financial liabilities for trading purposes Interest rate swap contracts 5,129,700 4,513,038 Currency swap contracts 1,697,092 9,716,445 Premium received on option contracts 1,263,369 1,490,500 Cross-currency swap contracts 308,695 1,636,463 Forward exchange contracts 94, ,261 Non-deliverable forward contracts 41, ,838 Others 118, ,059 $ 11,270,031 $ 21,508,886 (Concluded) As of September 30, 2012 and 2011, bank debentures designated as at fair value through profit or loss and issued by the Bank were as follows: Bank Debenture September 30 Method of Paying Interest Number Issuance Period Principals and Interests Rate No $ 1,500,000 $ 1,500,000 May 17, May 17, 2013 Principal due on maturity; interest payable annually No ,050,000 1,050,000 May 18, May 18, 2016 Principal due on maturity; interest payable annually 2,550,000 2,550,000 Valuation adjustments 66,920 98, % 2.15% $ 2,616,920 $ 2,648,282 The contract (nominal) amounts of the Bank s outstanding derivative financial instruments as of September 30, 2012 and 2011 were summarized as follows: Contract Amount September Interest rate swap contracts $ 429,014,456 $ 464,185,841 Currency swap contracts 236,929, ,789,813 Interest rate swap option contracts 60,649,500 99,995,600 Currency option contracts 46,576,555 2,298,603 Cross-currency swap contracts 17,740,384 49,920,053 Forward exchange contracts 15,576,977 21,349,913 Non-deliverable forward contracts 6,327,203 27,251,473 Bond option contracts 854,700 1,996,800 (Continued)

17 Contract Amount September Commodity swap contracts $ 333,879 $ 737,850 Interest rate futures contracts 325,279 3,022,912 Credit default swap contracts 221, ,962 Asset swap contracts 200,000 - Asset swap option contracts 200,000 - Commodity option contracts 102, ,395 Stock index futures contracts 51,297 - Interest rate option contracts - 16,176,000 Interest rate futures option contracts - 7,942,720 Stock index futures option contracts - 633,600 (Concluded) For the nine months ended September 30, 2012 and 2011, the Bank s net gains on the financial assets for trading purposes were $13,420,737 and $29,305,649, respectively; the net losses on the financial liabilities for trading purposes were $13,573,942 and $30,070,903, respectively; and the net gains and losses on the financial liabilities designated as at fair value through profit or loss were $26,143 and $4,841, respectively. As of September 30, 2012 and 2011, the financial assets for trading purposes, with aggregate carrying values of $300,948 and $2,159,398, respectively, had been sold under repurchase agreements (recognized as securities sold under repurchase agreements). On July 15, 2010, the Bank commenced an action against Morgan Stanley & Co. International PLC ( Morgan Stanley ), et al., to recover losses the Bank suffered as a result of its investment in a Morgan Stanley s credit default swap product (CDS) that was tied to a synthetic collateralized debt obligation on residential mortgage-backed securities as the representations made to the Bank by Morgan Stanley during the solicitation process were materially false and misleading and therefore caused significant financial losses to the Bank. As of December 31, 2010, the underlying asset pools on the aforementioned CDS had been liquidated, and the Bank had recognized all gains and losses from the transaction. The remaining balance of US$11,977,825 ($351,453 based on the exchange rate of September 30, 2012) was reclassified as other financial liabilities. In addition, Morgan Stanley overlooked the Bank s efforts and terminated other CDS contracts (nominal principal amount: JPY586,510 ) and interest rate swap (IRS) contracts (nominal principal amount: KRW24,000,000 ), the Bank reserves the right of legal proceedings. As of September 30, 2012, the IRS contract (nominal principal amount of KRW10,000,000 ) had expired, and the Bank had recognized such IRS contract payable and a loss of $4, RECEIVABLES September Receivables buyout $ 4,869,892 $ 1,312,743 Receivables from affiliates 1,364,258 1,257,670 Receivables on securities sold 1,220,128 18,802 Accounts receivables - forfaiting 822,361 - Interest receivables 585, ,091 (Continued)

18 September Interest receivables on interest rate swap contracts $ 238,107 $ 264,854 Acceptance bill receivables 110, ,930 Trust property receivables - 214,253 Others 243, ,703 9,453,797 4,247,046 Less: Allowance for bad debts (116,489) (299,014) $ 9,337,308 $ 3,948,032 (Concluded) For the information on movements and statements of allowance for bad debts, please refer to Tables 6 and 7 (attached). 8. DISCOUNTS AND LOANS September Short-term unsecured loans $ 4,710,642 $ 12,351,635 Short-term secured loans 4,030, ,826 Medium-term unsecured loans 40,690,820 42,629,530 Medium-term secured loans 16,147,919 24,197,524 Long-term unsecured loans 8,591,267 9,668,682 Long-term secured loans 8,714,486 2,686,747 Loans reclassified to nonperforming loans 156, ,942 Export negotiations 1,171,137 13,415 84,212,921 92,194,301 Less: Allowance for bad debts (1,104,006) (1,349,642) Less: Discounts on loans (102,458) (10,548) $ 83,006,457 $ 90,834,111 The nonperforming loans extended by the Bank were no longer generating interest revenue. For the nine months ended September 30, 2012 and 2011, the unrecorded interest revenues accrued on average lending rate from nonperforming loans were $4,985 and $13,354, respectively. For the nine months ended September 30, 2012 and 2011, the Bank carried out legal procedures required before writing off certain credits. For the information on movements and statements of the allowance for losses on loans, please refer to Tables 6 and 7 (attached)

19 9. AVAILABLE-FOR-SALE FINANCIAL ASSETS September Government bonds $ 44,906,903 $ 29,789,686 Listed and OTC stocks 14,588,841 15,676,803 Bank debentures 4,779, ,774 Corporate bonds 4,487,547 7,560,697 Listed and OTC private stocks 1,922,772 1,249,902 Beneficiary certificates 1,016,207 2,370,695 Negotiable certificates of deposit - 4,398,658 $ 71,701,877 $ 61,331,215 As of September 30, 2012, government bonds held by the Bank, which had been provided as a deposit for business operations and as indemnity reserves, had aggregate values of $109,604 and $51,217, respectively, and unit face values of $107,000 and $50,000, respectively. As of September 30, 2011, government bonds held by the Bank, which had been provided as a deposit for business operations and as indemnity reserves, had aggregate values of $111,476 and $52,092, respectively, and unit face values of $107,000 and $50,000, respectively. As of September 30, 2012, some available-for-sale financial assets held by the Bank, for which the underlying asset pools of beneficiary certificates were linked to the CDO of subprime mortgage loans had been liquidated in March As of September 30, 2011, the beneficiary certificates, which had an original cost of $88,968, had a fair value of $88,021, thus, the Bank had recognized a valuation loss of $947. As of September 30, 2012 and 2011, the available-for-sale financial assets with an aggregate carrying value of $25,340,177 and $19,913,802, respectively, had been sold under repurchase agreements (recognized as securities sold under repurchase agreements). 10. INVESTMENTS UNDER THE EQUITY METHOD As of September 30, 2012 and 2011, investments under the equity method amounted to $40,444,075 and $45,400,032, respectively. The investment incomes recognized under the equity method amounted were $1,071,992 and $777,988 for the nine months ended September 30, 2012 and 2011, respectively. These amounts were based on the unreviewed financial statements as of September 30, 2012 and 2011 of CDIB Bioscience Venture I, Inc., United Development Corporation, CDIB Bioscience Venture Management (BVI), Inc., Sogotec Enterprise Co., Ltd., and Star Buck Power Corporation. Management believes that had the financial statements of these investees been reviewed, there would have been no significant effect on the Bank s financial statements. As of September 30, 2012, government registrations of CDIB Biotech USA Investment Co., Ltd., and CDIB Capital Investment III Limited, in which the Bank had equity-method investments, had been canceled, and these investees were undergoing liquidation. As of September 30, 2012, Internet Venture Investment Corporation and R.O.C. Venture Company Ltd., in which the Bank had equity-method investments had been liquidated

20 11. FINANCIAL ASSETS CARRIED AT COST September Unlisted stocks - common stock $ 9,069,626 $ 9,792,407 Emerging stocks - common stock 4,147,138 6,377,847 Unlisted overseas partnership funds 2,243,734 2,353,142 Restricted stocks 89, ,613 Others 167, ,835 $ 15,717,842 $ 19,034,844 The Bank s investments in the above financial assets were accounted for by the cost method because of the lack of active market prices and reliable evaluation of their fair values. As of September 30, 2012 and 2011, the Bank had provided financial assets carried at cost, with book values of $295,572, as collaterals for the borrowings of Eastern Power and Electric Co., Ltd. 12. PROPERTIES September Cost $ 1,629,456 $ 2,073,085 Revaluation increment 829,839 - Less: Accumulated depreciation Buildings and facilities 484, ,205 Computer equipment 69, ,673 Transportation equipment Other equipment 58, , ,690 1,077,162 1,846, ,923 Less: Accumulated impairment 28,390-1,818, ,923 Prepayments for acquisition of properties 63,709 56,696 Properties, net $ 1,881,924 $ 1,052,619 Under related rules, the Bank revalued the land under properties, which resulted in total revaluation increments of $829,839. The net revaluation amount of $588,284 after deducting the reserve for land value increment tax of $241,555 was credited to equity as unrealized revaluation increment. Some sections of the main office building were for the Bank s own use; some were leased to third parties under an operating lease (Note 13). 13. OTHER ASSETS September Refundable deposits $ 517,064 $ 4,002,572 Restricted assets 404, ,877 (Continued)

21 September Land and buildings leased $ 72,998 $ 68,152 Deferred tax assets, net (Note 20) 141, ,885 Derivative financial assets for hedging purposes - IRS contracts (Note 26) 40,014 $ 43,638 Land and buildings not in use, net of accumulated impairment losses of $23,792 for decline in value - 29,153 Others 81,163 90,659 $ 1,257,081 $ 4,809,936 (Concluded) After the filing of a certain complaint against Morgan Stanley (Note 25), the Bank was unable to access the following funds in connection with transactions made with Morgan Stanley because of its unauthorized disposition: Deposits of $16,547, cash security of $221,877 on CDS contracts, available-for-sale stock investments with carrying amount of $149,392 and the related revenue receivable of $16,605 as of September 30, Due to the inaccessibility of aforementioned funds, these financial assets have been reclassified as restricted assets. Compare to those as of September 30, 2011, the financial assets which were reclassified as restricted assets as a result from the unauthorized disposition by Morgan Stanley were: Deposits of $16,680, cash security of $232,962 on CDS contracts, available-for-sale stock investments with carrying amount of $149,392 and the related revenue receivable of $10, CALL LOANS FROM BANKS The balances as of September 30, 2012 and 2011 were due in December 2012 and November 2011, respectively. The annual interest rates for these loans were 2.90% and from 0.35% to 1.74% as of September 30, 2012 and 2011, respectively. 15. PAYABLES September Accounts payable - factoring $ 468,661 $ 214,075 Interest payable 417, ,119 Accrued expenses 261, ,892 Interest payable on interest rate swap contracts 247, ,599 Income tax payable 210, ,089 Payables to affiliates 206, ,295 Collections for others 134,772 44,047 Acceptance bills 110, ,930 Payables for securities purchased ,057 Others 57, ,297 $ 2,113,876 $ 2,605,