CHINATRUST COMMERCIAL BANK, LTD

Transcription

1 CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS ENDED DECEMBER 31, 2002 AND 2001 AND INDEPENDENT AUDITORS REPORT ADDRESS: NO.3 SUNG-SHOU ROAD, TAIPEI, TAIWAN, R.O.C. TELEPHONE:

2 CONSOLIDATED FINANCIAL STATEMENTS TABLE OF CONTENTS Contents Page. Cover Page 1. Table of Contents 2. Independent Auditors Report 3. Consolidated Balance Sheets 4. Consolidated Statements of Income 5. Consolidated Statements of Changes in Stockholders' Equity 6. Consolidated Statements of Cash Flows 7. Notes to Consolidated Financial Statements 1. Basis For Presentation Summary of Significant Accounting Policies Reasons for and Effects of Accounting Changes Summary of Major Accounts Related Party Transactions Pledged Assets Significant Commitments and Contingencies Significant Catastrophic Losses Significant Subsequent Events Others Business Segment Financial Information

3 Independent Auditors Report The Board of Directors Chinatrust Commercial Bank, Ltd.: We have audited the accompanying consolidated balance sheets of Chinatrust Commercial Bank, Ltd. and subsidiaries as of December 31, 2002 and 2001, and the related consolidated statements of income, changes in stockholders equity, and cash flows for the years then ended. These consolidated financial statements are the responsibility of the Bank s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We did not audit the financial statements of certain subsidiaries which statements reflect total assets constituting percent and percent and total operating revenues constituting percent and percent in 2002 and 2001, respectively, of the related consolidated totals. Those statements were audited by other auditors whose reports have been furnished to us, and our opinion, insofar as it relates to the amounts included for those subsidiaries, is based solely on the reports of the other auditors. We conducted our audits in accordance with the Rules Governing Certified Public Accountant s Examination and Certification of Financial Statements of Financial Institutions and generally accepted auditing standards in the Republic of China. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits and the reports of the other auditors provide a reasonable basis for our opinion. In our opinion, based on our audits and the reports of the other auditors, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Chinatrust Commercial Bank, Ltd. and subsidiaries as of December 31, 2002 and 2001, and the results of their operations and their cash flows for the years then ended in conformity with generally accepted accounting principles in Republic of China. Taipei, Taiwan, R.O.C. January 30, 2003 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 the Republic of China and not those of any other jurisdictions. The standards, procedures, and practices to audit such financial statements are those generally accepted and applied in the Republic of China

4 CONSOLIDATED BALANCE SHEETS December 31, 2002 AND 2001 (New Taiwan Dollars in Thousands, Except for Share Data) December 31, 2002 December 31, 2001 ASSETS Amount % Amount % Cash (Note 4.1) $ 10,453,696 1 $ 9,567,524 1 Call loan to and due from banks 21,169, ,518,262 1 Deposits with the Central Bank (Notes 4.2 and 6) 24,992, ,465,673 3 Marketable securities (Notes 2, 4.3 and 6) 144,321, ,225, Less:Allowance for market decline (95,406) - (388,535) - 144,226, ,836, Receivables (Notes 2 and 4.4) 87,622, ,004, Less:Allowance for credit losses (2,302,254) - (2,742,392) - 85,320, ,262, Loans (Notes 2, 4.5and5) 603,171, ,993, Less:Allowance for credit losses (9,874,157) (1) (8,433,487) (1) 593,297, ,559, Long-term investments (Notes 2 and 4.6) 3,639,803-7,374,107 1 Premises and property (Notes 2 and 4.7) Land and buildings, net 24,209, ,145,689 3 Equipments and other properties, net 3,479,645-3,016,924-27,689, ,162,613 3 Other assets (Notes 2, 4.8, and 6) 18,350, ,585,765 1 TOTAL ASSETS $ 929,139,814 $ 100 $ 891,332,393 $ 100 LIABILITIES AND STOCKHOLDERS' EQUITY Call loans from and due to banks (Note 4.9) $ 49,713,183 6 $ 46,001,395 5 Payables (Note 4.10) 20,949, ,470,814 3 Deposits at interest (Notes 4.11 and 5) 738,614, ,417, Borrowings and other financing (Note 4.12) 33,632, ,378,410 3 Other liabilities 6,291, ,094,843 - Total liabilities 849,201, ,363, Minority interests 44,167-43,874 - Stockholders' equity Common stock - par value $10 per share, authorized and issued 4,605,426,788 shares as of December 31, 2002 and 2001 (Note 4.14) 46,054, ,054,268 5 Preferred stock - par value $10 per share, 250,000,000 shares authorized and issued as of December 31, 2002 and 2001 dividend rate of 6.12%(Notes 4.13and14) 2,500,000-2,500,000 - Capital to be transferred - common stock Capital surplus Paid-in capital in excess of par - common stock 523, ,855 - Paid-in capital in excess of par - preferred stock 7,500, ,500,000 1 Other additional paid - in capital 35, ,630 - Retained earnings Legal reserve 15,508, ,179,712 1 Special reserve 1,816,240-1,489,550 - Undistributed earnings(notes 2 and 4.17) 12,604, ,868,101 1 Unrealized long-term equity investments market decline (1,270,188) - (1,620,966) - Cumulative translation adjustments (604,964) - (552,493) - Treasury stock (Notes 2 and 4.15) (4,774,086) (1) (3,149,478) - Total Stockholders' Equity 79,894, ,925,179 8 Commitments and Contingencies (Note 7) TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 929,139, $ 891,332, The accompanying notes are an integral part of the financial statements. Please refer to Independent Auditors' Report dated January 30,

5 CONSOLIDATED STATEMENTS OF INCOME FOR THE YEARS ENDED DECEMBER 31, 2002 AND 2001 (New Taiwan Dollars in Thousands, Except for Share Data) ear Ended December 31, Amount Amount Operating Revenues : Interest income $ 49,769, $ 57,911, Commission and handling fees 9,377, ,042, Gain on marketable securities, net 3,594, ,080,776 7 Gain on long-term equity investments, net 157, ,031 1 Exchange gain, net 1,199, Rental revenue 163, ,403 - Gain on financial derivatives, net - - 2,093,584 3 Other operating revenues 32,373-70,687 - Total Operating Revenues 64,293, ,974, Operating Costs: Interest expense (Note 4.21) 16,273, ,664, Commission and handling fees paid 1,064, ,216 1 Exchange loss, net ,988 - Provisions for allowances and reserves 10,422, ,103, Loss on financial derivatives, net 491, Other operating costs 106,576-68,485 - Total Operating Costs 28,357, ,995, Gross Margin 35,935, ,978, Operating Expenses 19,219, ,716, Taxes 1,114, ,189,316 1 Operating Income 15,601, ,072, Non-Operating Revenues 282, ,530 - Non-Operating Expenses 122, ,823 - Income before income tax 15,761, ,254, Income Tax Expense (Notes 2 and 4.18) (3,712,676) (5) (2,220,848) (3) Combined Net Income 12,048, ,034, Less: Minority interest income (17,003) - (124,150) - Income before merger and acquisition - - (247,321) - Consolidated Net Income $ 12,031, $ 7,662, Basic EPS (Notes 2 and 4.22) during the period 4,405,273,000 shares in ,373,767,000 shares in 2001 $ 2.59 $ 1.61 The accompanying notes are an integral part of the financial statements. Please refer to Independent Auditors' Report dated January 30,

6 CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY FOR THE YEARS ENDED DECEMBER 31, 2002 AND 2001 (Expressed in Thousands of New Taiwan Dollars) Retained Earnings Common stock Preferred stock Capital surplus Legal reserve Special reserve Undistributed earnings Unrealized loss on long-term equity investments due to market decline Cumulative translation adjustments Treasury stock Total Beginning Balance - January 1, 2001 $ 39,502,021 $ 2,500,000 $ 9,865,681 $ 11,014,136 $ 373,633 $ 7,567,242 $ (1,250,138) $ (875,789) $ (449,541) $ 68,247,245 Appropriation of 2000 earnings - Legal reserve ,165,576 - (2,165,576) Special reserve ,115,917 (1,115,917) Remuneration to directors and supervisors (163,075) (163,075) Employee bonuses (163,075) (163,075) Dividends - common stock (3,521,649) (3,521,649) Dividends - preferred stock (229,082) (229,082) Net income for ,662, ,662,627 Capitalization of capital surplus 1,760,825 - (1,760,825) After-tax gain on disposal of premisses and property transferred to capital surplus - - 3, (3,394) Unrealized loss on long-term equity investments due to market decline (370,828) - - (370,828) Recognition of unrealized loss on long-term equity investments of - - subsidiaries due to market decline Translation adjustment , ,296 Paraguay branch assets revaluation appreciation - - 2, ,254 Acquisition of treasury stock (2,699,937) (2,699,937) Capital increase and issuance premium from merger with China Trust Holding N.V. 4,791,422-45, ,837,403 Ending Balance - December 31, 2001 $ 46,054,268 $ 2,500,000 $ 8,156,485 $ 13,179,712 $ 1,489,550 $ 7,868,101 $ (1,620,966) $ (552,493) $ (3,149,478) $ 73,925,179 Beginning Balance - January 1, 2002 $ 46,054,268 $ 2,500,000 $ 8,156,485 $ 13,179,712 $ 1,489,550 $ 7,868,101 $ (1,620,966) $ (552,493) $ (3,149,478) $ 73,925,179 Appropriation of 2001 earnings - - Legal reserve ,328,912 - (2,328,912) Special reserve ,690 (326,690) Remuneration to directors and supervisors (188,172) (188,172) Employee bonuses (188,172) (188,172) Dividends - common stock (3,996,652) (3,996,652) Dividends - preferred stock (612,000) (612,000) Net income for ,031, ,031,880 Gain on disposition of property for prior years transferred from capital surplus to retained earnings - - (103,808) , Effect of restructuring on long-term investments , ,280 Reversal of unrealized loss on long-term equity investments due to market decline , ,778 Recognition of capital surplus of subsidiaries - - 2, ,783 Liquidation of long-term investment - - (189) (189) Translation adjustment (52,471) - (52,471) Acquisition of treasury stock (1,624,608) (1,624,608) Paraguay branch assets revaluation appreciation - - 4, ,364 Ending Balance - December 31, 2002 $ 46,054,268 $ 2,500,000 $ 8,059,635 $ 15,508,624 $ 1,816,240 $ 12,604,471 $ (1,270,188) $ (604,964) $ (4,774,086) $ 79,894,000 The accompanying notes are an integral part of the financial statements. Please refer to Independent Auditors' Report dated January 30,

7 CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED DECEMBER 31, 2002 AND 2001 Cash flows from operating activities: Year Ended December 31, 2002 Year Ended December 31, 2001 Consolidated net income $ 12,031,880 $ 7,662,627 Adjustments to reconcile net income to net cash provided by operating activities: Minority interest income 17, ,150 Income before merger and acquisition - 247,321 Depreciation and amortization 1,684,439 1,408,615 Gain on investment recognized under the equity method over cash dividends received (160,669) (522,116) Loss (gain) on disposition of long-term equity investments 34,927 (2,396) Loss on reclassification of investments 3,668 - Gain from liquidation of long-term investment - (2,918) Amortization of bonds premium Loss on disposition of premises and property and collaterals 154,939 45,093 Loss on scrapping of premises and property 17, ,344 Provision for allowance for credit losses 11,751,101 15,284,030 Provision for (reversal of) allowance for market decline in marketable securities 10,215 (806,835) Provision for (reversal of) guarantee reserve (91,657) 737,562 Provision for securities trading loss reserve (7,392) 161,543 Provision for market decline in collaterals received 212, ,158 Exchange loss (gain) 35,783 (114,166) Others 12,609 (9,142) Changes in operating assets and liabilities: Receivables 179, ,040 Marketable securities (17,856,715) (15,705,641) Payables (2,358,184) (832,140) Trading financial derivatives, net 215,023 (72,871) Non-trading financial derivatives, net (74,421) 5,269 Net cash provided by operating activities 5,812,307 8,882,527 Cash flows from investing activities: Increase in loans (46,628,315) (41,321,863) Increase in long-term equity investments (105,447) (540,488) Increase in receivables (2,880,352) (20,272,933) Proceeds from disposition of long-term equity investments 4,486, ,410 Proceeds from corporate bonds 72,000 - Proceeds from disposition of premises and property and collaterals 1,335, ,440 Purchase of premises and property (1,815,925) (1,690,914) Decrease (increase) in deposits with the Central Bank (excluding cash equivalents) (795,101) 3,546,419 Iincrease in deposits with others banks (excluding cash equivalents) (4,644,433) (5,752,097) Iincrease in other assets (5,848,812) (3,056,943) Net cash used in investing activities (56,824,111) (68,159,969) Cash flows from financing activities: Increase in call loans from banks 3,820,052 18,852,164 Increase in borrowings and other financing 1,884,357 13,723,246 Increase (decrease) in payables 1,647,232 (180,993) Increase in deposits 25,163,169 64,296,507 Increase in other liabilities 1,091, ,603 Remuneration to directors and supervisors and employees bonus (389,281) (326,150) Repurchase of treasury stock (1,630,548) (2,699,937) Preferred stock dividends (612,000) (230,800) Common stock cash dividends (3,996,652) (3,546,520) Minority interest - (1,297,400) Net cash provided by financing activities 26,977,430 89,027,720 Exchange rate effects (42,819) 221,050 Net increase (decrease) in cash and cash equivalents (24,077,193) 29,971,328 Cash and cash equivalents, beginning of the year 81,084,567 51,113,239 Cash and cash equivalents, end of the year $ 57,007,374 $ 81,084,567 Cash and cash equivalents(note 2) Cash $ 10,453,696 $ 9,567,524 Deposits with other banks 9,482,960 4,482,946 Deposits with the Central Bank 10,446,229 10,727,525 Bank acceptances - 24,647 Commercial paper 8,588,173 23,951,058 Negotiable certificate of time deposits purchased 18,036,316 32,330,867 $ 57,007,374 $ 81,084,567 Supplemental disclosures of cash flow information: Cash paid during the year for: Interest $ 19,149,896 $ 41,417,218 Guaranteed interest on trust funds $ 129,741 $ 232,519 Income taxes $ 1,572,851 $ 1,876,704 Non-cash financing activities: Current portion of long-term debt $ - $ 533,600 Increase in assets from merger with China Trust Holding N.V. $ - $ 4,837,403 Increase in liabilities and stockholder's equity from merger with China Trust Holding N.V. $ - $ 4,837,403 The accompanying notes are an integral part of the financial statements. Please refer to Independent Auditors' Report dated January 30,

8 1. Basis of Presentation In July 1992, China Trust Company was approved to operate as a commercial bank and changed its name to Chinatrust Commercial Bank, Ltd. (the Bank ). As of December 31, 2002, issued capital of the Bank s investee, Chinatrust (Philippines) Commercial Bank Corporation was Philippines pesos 1,875,000,000, representing 187,500,000 common shares with par value of 10 Philippines pesos per share. As of December 31, 2002, the Bank held 186,386,255 shares, equal to 99.41% ownership. Primary business scope is commercial banking and financing business. As of December 31, 2002, issued capital of the Bank s investee, Chinatrust Bills Finance Corp. amounted to $3,725,000, representing 372,500,000 common shares with par value of $10 per share. As of December 31, 2002, the Bank held 372,494,000 shares, equal to % ownership. It primarily engages in proprietary trading and brokerage of short-term bills and the underwriting, certification, guarantee and endorsement of commercial paper. As of December 31, 2002, issued capital of the Bank s investee, PT Bank Chinatrust Indonesia amounted to Rupiah 150,000,000,000, representing 1,500 common shares with par value of Rupiah 100,000,000 per share. As of December 31, 2002, the Bank held 1,485 shares, equal to 99.00% ownership. Its primary business scope is commercial banking and financing business. As of December 31, 2002, issued capital of the Bank s investee, CTC Bank of Canada amounted to CAD 15,000,000, representing 1,500,000 common shares with par value of CAD10 per share. As of December 31, 2002, the Bank held 1,500,000 shares, 100% ownership. Its primary business scope is commercial banking and financing business. As of December 31, 2002, issued capital of the Bank s investee, China Trust Capital AS, amounted to US$79,321, representing 600 common shares with par value of US$132 per share. As of December 31, 2002, the Bank held all its 600 shares. It primarily engages in the business of securities investment. As of December 31, 2002, issued capital of the Bank s investee, China Trust Holding Corp., amounted to US$1,336 representing 1,336 common shares with par value of US$1 per share. As of December 31, 2002, the Bank held 890 shares, equal to 66.62% ownership. It primarily engages in securities investment

9 The Bank invested in Chinatrust Bank (U.S.A.) through its holdings of China Trust Capital AS and China Trust Holdings Corp. As of December 31, 2002, issued capital amounted to preferred stock of US$500,000 and common stock of US$99,693. As of December 31, 2002 ownership by the Bank was 100%, and it primarily engages in commercial banking. According to the requirements set forth in the Statement of Financial Accounting Standards No.7, Consolidated Financial Statements, the Bank compiles consolidated financial statements to include accounts of the investee companies where the ownership by the Bank exceeds 50%. These companies include Chinatrust (Philippines) Commercial Bank Corp., Chinatrust Bills Finance Corp., CTC Bank of Canada, PT Bank Chinatrust Indonesia, China Trust Capital AS and China Trust Holding Corp. Detailed information on unconsolidated investee companies are shown below: Name of Investee Company Primary business scope Ownership Reasons for non-consolidation Chinatrust Securities Investment Consultancy Co., Ltd. Securities investment and consultancy services 99.40% Total assets and total operating income do not exceed 10% of the Bank s respective accounts. Also, total assets and total operating income of all such investee companies do not exceed 30% of the Bank s respective accounts. Chinatrust Forex Corp. Foreign exchange brokerage All shares were held by the Bank and Chinatrust (Philippines) Commercial Bank Corp. In July to August 2002,the bank sold 348,045,000 shares of common stock of Chinatrust Securities Corp., Ltd to Chinatrust Financial Holding Company, Ltd,and according to SFAS No 7,reclassified 2001 consolidated financial statements

10 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES a. Compilation of Statements of Cash Flows Compilation of statements of cash flows is based upon cash and cash equivalents. Cash equivalents are defined as short-term and highly liquid investments that are readily convertible to known amounts of cash and will mature with short notice. Accordingly, interest rate fluctuations have little effect on their values. b. Accounts Receivable Consumer loans to credit cardholders are carried at the principal amounts outstanding, net of unearned income and amounts charged-off. Interest is accrued on credit card loans by the interest method until the date of charge-off, which generally occurs when principal or interest is 180 days past due, and the loans are reclassified as accounts receivable-non-accrual account. Interest subsequently collected is included in earnings only to the extent of cash actually received. The Bank engages in factoring and management of accounts receivable. The interest and transaction fee from the factoring and management of such accounts are treated as current income. An allowance for credit losses is provided by reviewing the balance of accounts at year-end. Unpaid accounts receivables purchased from the companies which sell the respective receivables are reflected under payables. c. Loans Loans are carried at principal amounts outstanding, net of unearned income and amounts charged-off. Interest is accrued on loans by the interest method until the date of chargeoff, when either of the following conditions occurs: (1) When there is doubt regarding the ultimate collection of principal or accrued interest; (2) Principal or interest accrued is 180 days past due, or the underlying collateral received is insufficient to cover unpaid principal and accrued interest. Interest subsequently collected is included in earnings only to the extent of cash actually received

11 d. Allowance for Credit Losses The allowance for credit losses is a significant estimate regularly evaluated by the management for adequacy and is established through a charge to the provision for credit losses. This evaluation considers quality of the overall portfolio, which comprises of loans, accounts receivable and receivable-non-accrual account outstanding guarantees, and review of specific delinquent claims. Risk of specific delinquent claims refers to the default likelihood and is subject to review under internal risk ratings. Risk of overall claims is reviewed based on past experiences. Accounts receivable-non-accrual account deemed as uncollectible are written off upon approval of the Board of Directors. e. Marketable Securities Under Article 74-1 of the Banking Law, marketable securities, either listed or OTC stocks, are valued at the lower of total cost or market, a practice commonly adopted in the banking industry. Per Securities & Futures Commissions ( SFC ) regulations, market values are determined by the average closing prices of the last month of a fiscal year, except for underwritten securities, which are valued by the closing prices on the balance sheet date. Government bonds and corporate bonds are valued at the lower of total cost or market if market quotes are available; otherwise they are carried at par and adjusted by accumulated unamortization of discount or premium. Financial debentures, bank acceptances, commercial paper, Treasury bills and negotiable certificates of time deposits purchased are carried at cost. Overseas debt securities are valued at the lower of total cost or market, and the redeemable value is used if it is lower than market prices. Loss due to market decline or gain on recovery of marketable securities which are valued at the lower of total cost or market are stated under gain on marketable securities as unrealized gain or loss. Gain on short-term notes transactions is stated under interest revenue. f. Long-Term Equity and Real Estate Investments Long-term equity investments are carried at cost. Investments in listed companies with less than 20% ownership are valued at the lower of total cost or market value, and unrealized loss of market decline below cost is charged against stockholders equity. Investments in non- listed companies are carried at cost. If impairment in value is other than temporary such that recovery of carrying amount is deemed unlikely, loss on investment is recognized currently

12 Twenty-to-fifty-percent-owned affiliates are accounted for under the equity method. For majority-owned affiliates, per relevant Statement of Financial Accounting Standards (SFAS) and SFC rulings, consolidated financial statements are required at year-end. However, if total assets and operating revenues of a subsidiary (excluding subsidiary banks and those required by MOF) do not exceed 10% of the Bank s respective accounts, and if the combined assets or operating revenues of all such subsidiaries do not each exceed 30% of the Bank's respective accounts, consolidated statements are not required. Accordign to Standard governing for compiling financial statements of financial holding campanies, band subsidiaries are required to compile annual and inerim consolidated statements. Upon sale of long-term equity investments at cost, the moving-average method is used to compute cost, with gains or losses included in current revenue. Real estate investments are carried at cost. If value impairment is other than temporary and the recovery of the carrying amount is unlikely, investment loss is recognized currently. g. Premises, Equipment, and Depreciation Premises and equipment are stated at cost or cost plus revaluation appreciation. Land is revalued by the government announced prices to adjust the carrying values. Major additions, improvement, and replacement are capitalized, while maintenance and repairs are charged to current earnings. Interests incurred in the acquisition of premises and equipment until their ready use are capitalized as part of the acquisition costs. Pursuant to the regulations set forth by the Paraguay government, the local branch revalues its assets annually per the government announced revaluation ratio, effective the second year of the branch s operation. Depreciation of premises and equipment is provided by the straight-line method over the useful lives of the related assets as prescribed by the government. Premises and equipment still in use after full depreciation are depreciated by their estimated remaining useful lives. Useful lives of major premises and equipment are the following: Buildings and premises Transportation equipment Miscellaneous equipment 10 to 56 years 3 to 6 years 3 to 10 years h. Amortization Software expenses are amortized over a period of 5 to 10 years

13 i. Collateral Collaterals received are stated by the estimated net realizable value, and the discrepancies from the original claims nominal values are stated as credit losses. On the balance sheet date, if a collateral is still not disposed of, its net realizable value should be reassessed. Should there exists sufficient evidence indicating that the market value is lower than the book value, the difference is accounted for as current loss. Disposal of collateral is reflected under provisions for allowances and reserves as recovery of doubtful accounts. j. Retirement Plan The Bank and the investee company, Chinatrust Bill Finance Co., Ltd. sponsor a retirement plan covering all regular employees. Annual contributions to the Bank s interest-bearing pension fund are within 15% of gross salaries paid. Pension fund is not reflected in the financial statements. k. Guarantee Reserve For the Bank, a guarantee reserve is provided for by evaluating the possibility of doubtful accounts occurring after reviewing the balances of guarantees issued and acceptances receivable at year-end. l. Securities Trading Loss Reserve In compliance with regulations governing security houses, the Bank is required to provide securities trading loss reserve at a rate of 10% of net gain on dealership of operating securities when net gain exceeds loss. The reserve is reversed in the month when the loss was realized and an allowance is provided to unrealized gain or loss reflected under gain to marketable securities. An allowance is made until the balance of the reserve reaches $200,000. m. Financial Derivatives (1) Foreign Exchange Forward Contracts Foreign-denominated assets and liabilities of foreign exchange forward contracts are recorded in New Taiwan Dollars and translated by exchange rates in effect as transactions occur. Gains or losses of exchange rate discrepancies at maturity are charged to current earnings. On the balance sheet date, unsettled positions are adjusted by the forward exchange rate for the remaining contract period, with differences caused thereby stated as current exchange gains or losses

14 Accounts receivables and payables arising from forward contracts offset one another on the balance sheet date with the balance reflected as asset or liability. (2) Non-Delivery Forward (NDF) Contracts Since there is no physical transfer of principals in non-delivery forward transactions, only memorandum entries of notional principals are made on the contract date. On settlement, gains or losses due to differences between the spot and contract rates are included in current earnings. Unsettled positions on the balance sheet date are adjusted by the forward rates for the remaining contract period, with differences stated as exchange gain or loss. (3) Foreign Currency Swaps Memo entries of notional principals are made on the contract date for foreign currency swaps. On the balance sheet date, forward accounts receivables offset payables with difference reflected as an asset or a liability. Interest is accrued on the duration of contracts as receivable or payable for trading swaps. Gains and losses on settlement due to differences from the prevailing rate are included in current earnings. Gains and losses of unsettled positions are computed by differences between the contract and forward rates for the remaining contract periods. Interest is accrued on non-trading currency swaps over the duration of contracts. Receivables or payables accrued and the hedged positions are reported as current interest revenue or expense. (4) Cross Currency Swaps Memorandum entries of notional principals are made on the contract date for cross currency swaps. Forward accounts receivables offset payables on the balance sheet date with the difference reflected as other assets. For trading swaps, exchange gains or losses are the differences in present market value of principal and interests, denominated in New Taiwan dollars. Interest is accrued per contract terms and principal repayment of non-trading swaps, with receivables or payables resulted thereby and the hedged positions reported as current interest revenue or expense. (5) Interest Rate Swaps Since there is no physical transfer of principals in interest rate swaps, only memorandum entries of notional principals are made. For trading swaps, differences in present market value of interest receivables or payables are reported as exchange gains or losses. For non- trading swaps, interest receivables or payables on settlement or the balance sheet date and the hedged positions are reported as current interest revenue or expense

15 (6) Options Only memorandum entries of notional principal are made on the contract date for options. Premium collected or paid is reported as interest revenue or expense. Differences in the market values of premium at year-end are reported as exchange gains or losses. (7) Forward Interest Rate Agreements (FRA) Only memorandum entries of notional principals are made on the contract date for forward interest rate agreements. For trading FRA, differences in the present value of interest revenue or expense on the balance sheet date are reported as exchange gains or losses. For non-trading FRA, interest receivables or payables accrued per contract rates and the hedged positions are reported as current interest revenue or expense. (8) Asset-Backed Swaps Convertible bonds are the underlying assets of asset-backed swaps. The Bank swaps the fixed interest rate and difference in redeeming value of the bonds for floating rates at market with counter-parties. Interest computed by the floating rate at market is reported as interest revenue. n. Translation of Foreign Currency Foreign currency transactions are recorded in the functional currency. Foreign exchange gain and loss on settlement of foreign-denominated assets and liabilities and adjustments to such assets and liabilities by spot rates on the balance sheet date are included in current earnings. Foreign-denominated assets and liabilities of overseas subsidiaries are translated at the spot rate of the balance sheets date; stockholders equity is translated by historical rate except for the beginning balance of retained earnings, where the spot rate at the beginning of the year is used. Income statement accounts are translated at the weighted-average rate of the year, with difference reflected as translation adjustments to stockholders equity. o. Commitments and Contingencies Should losses from commitments and contingencies be deemed highly likely and the amount can be reasonably estimated, such loss is recognized currently; otherwise only the nature of commitments and contingencies is disclosed in the notes to financial statements

16 p. Income Taxes The Bank adopted the SFAS No. 22, Accounting for Income Taxes to make inter- and intra-period income tax allocation. Deferred income taxes reflect net tax effects of temporary differences between the carrying amounts of assets and liabilities for the financial reporting purposes and the amounts used for income tax purposes. Tax effects of deductible temporary differences, unused investment tax credits, and operating loss carryforwards are treated as deferred tax assets, whereas those of taxable temporary differences are accounted for as deferred tax liabilities. A valuation allowance is provided for deferred tax assets by assessing whether it is more likely than not such assets will realize. Adjustments to prior years income taxes are reflected as current income taxes. Investment tax credits are recognized currently. Income taxes separately levied on interest revenues from short-term bills are reported as current income tax expense. The 10% surtax on undistributed earnings is recorded as current expense on the date of the Stockholder s Meeting to declare earnings distribution. q. Treasury Stock The Bank adopted SFAS No. 30 Accounting for Treasury Stock to account for repurchase of its outstanding shares, carried at cost. Upon disposition, the excess of sales price over book value is recorded as capital surplus treasury stock. Should sales price be lower than the book value, the difference is charged against capital surplus from treasury stock in the same category, and any deficit is debited to retained earnings. The book value of treasury stock is separately computed by reasons of purchase and the weighted-average method is adopted. Upon retirement, capital surplus premium on stock issuance and capital stock shall be debited on a pro rata basis. If the book value exceeds premium on stock issuance and capital stock, the difference will offset capital surplus treasury stock in the same category, and any deficit will charge against retained earnings. If the book value is lower than total of capital stock and premium on stock issuance, the difference will be credited to capital surplus treasury stock in the same category

17 On May 17, 2002, Chinatrust Financial Holding Company, Ltd. received shares of treasury stock originally held by the Bank then shares of the Bank were delisted. Chinatrust Financial Holding Company, Ltd. became the Bank s parent company with 100% ownership. According to SFC Letter Ruling No.(6)111467, financial institutions which purchase their own stock shares to be treasury stock pursuant to Article 28-2, Paragraph 1 of Securities Trading Law, are converted to a subsidiary of a financial holding company, so that these treasury stock should be converted to the stock of the financial holding company by Article 31 of Financial Holding Company Law, then the financial institutions still consider these stock shares to be treasury stock and deducted from stockholders equity, and the financial holding company also should treat those stock shares as treasury stock. r. Earnings per Share Earnings per share is calculated by dividing net income after tax by the weighted-average number of shares outstanding in each period, net of preferred stock dividends. In the event of capitalization of retained earnings, capital surplus, or employee bonus, the number of shares outstanding is retroactively adjusted upon approval of the Ministry of Economic Affairs (MOEA), regardless of the outstanding period of such incremental shares. s. Consolidated Debits (Credits) For the amortization of the differences between original investment and equity net worth, if it is not plausible to analyze the underlying causes, upon consolidation these differences are reflected as consolidated debits (credits) and amortized equally over twenty years. 3. REASONS FOR AND EFFECTS OF ACCOUNTING CHANGES: NONE

18 4. SUMMARY OF MAJOR ACCOUNTS (1) Cash December 31, 2002 December 31, 2001 Cash on hand $ 4,511,659 $ 4,615,695 Petty cash and revolving fund 9,486 7,549 Checks awaiting clearance 2,517,729 2,366,360 Bank deposits 2,890,131 2,408,943 Cash in transit 524, ,977 Total $ 10,453,696 $ 9,567,524 (2) Deposits with the Central Bank December 31, 2002 December 31, 2001 Deposits reserve - Account A $ 7,197,864 $ 4,794,504 Deposits reserve - Account B 14,083,452 13,401,906 Deposits reserve - Foreign currency 25,874 - Deposits with the Central Bank 3,685,453 6,269,263 Total $ 24,992,643 $ 24,465,673 By applying the required reserve ratio on the average monthly balances of various deposits, the Bank appropriates funds and deposits them with the Central Bank of China. Deposits in Required reserve Account A are interest-free and can be withdrawn at any time; interest accrues on Required reserve Account B, which however cannot be withdrawn except for monthly adjustment to the required reserve

19 (3) Marketable Securities December 31, 2002 December 31, 2001 Commercial paper $ 11,241,148 $ 51,055,413 Negotiable certificates of time deposits purchased 63,830,106 31,896,471 Treasury bills 2,206, ,943 Governments bonds 16,259,779 8,117,296 Corporate bonds 12,333,506 24,778,225 Financial debentures 509,100 1,009,100 Convertible bonds 4,584, ,103 Other bonds 14,164,622 15,037,040 Debt securities 125,129, ,943,591 Listed securities 4,478,321 8,897,294 Beneficiary certificates 950, ,055 Foreign currency funds 13,764,130 13,873,369 Subtotal 144,321, ,225,309 Less: Allowance for market decline (95,406) (388,535) Total $ 144,226,465 $ 155,836,774 As of December 31, 2002 and 2001, negotiable certificates of time deposits purchased, government and corporate bonds, financial debentures, and other bonds provided by the Bank as deposits to National Credit Card Center of R.O.C. and to the courts for provincial seizures and cross currency swaps transactions and overdraft amounted to $11,548,404 and $3,087,984 respectively. According to the Banking Law and Trust Law, the Bank sets aside 15% to 20% of the average daily balance of the trust funds and deposits it with the Central Bank of China as reserve for damage reimbursement, should violation of regulations or breach of fiduciary interest occur. As of December 31, 2002 and 2001, government and corporate bonds provided by the Bank as reserve were $880,000 and $925,000, respectively

20 (4) Receivables December 31, 2002 December 31, 2001 Notes receivable $ 18,315 $ 28,811 Accounts receivable 77,704,217 78,890,658 Interest receivable 3,705,556 4,124,285 Acceptances receivable 2,483,644 1,959,063 Non-operating revenues receivable 478, ,499 Tax refund receivable 496, ,424 Other receivables 1,737,371 3,076,987 Accounts receivable - non-accrual account 997,968 1,433,772 Subtotal 87,622,275 90,004,499 Less: Allowance for doubtful accounts (2,302,254) (2,742,392) Total $ 85,320,021 $ 87,262,107 As of December 31, 2002 and 2001, accounts receivable which includes accounts receivable factoring amounted to $8,578,917 and $13,959,860, respectively. Changes in allowance for doubtful accounts are the following: Year ended Inherent risk Default risk of December 31, 2002 of overall claims specific claims Total Beginning balance $ 1,715,741 $ 1,026,651 $ 2,742,392 Current provisions 198,162 3,046,609 3,244,771 Current charge-offs (542,050) (3,402,777) (3,944,827) Exchange rate effects 259, ,918 Ending balance $ 1,631,771 $ 670,483 $ 2,302,254 Year ended Inherent risk Default risk of December 31, 200 of overall claims specific claims Total Beginning balance $ 1,639,782 $ 698,369 $ 2,338,151 Current provisions 717,700 3,137,377 3,855,077 Current charge-offs (668,346) (2,809,095) (3,477,441) Exchange rate effects 26,605-26,605 Ending balance $ 1,715,741 $ 1,026,651 $ 2,742,

21 (5) Loans December 31, 2002 December 31, 2001 Corporate loans $ 216,990,160 $ 218,870,744 Mortgage loans 180,866, ,636,854 Automobile loans 8,208,904 7,545,198 Consumer loans 53,700,781 55,365,766 Other loans 2,475,981 2,760,492 NT dollar loans 462,242, ,179,054 Foreign currency loans 127,687, ,752,410 Non-accrual loans 13,242,514 11,061,591 Subtotal 603,171, ,993,055 Less: Allowance for doubtful accounts (9,874,157) (8,433,487) Total $ 593,297,766 $ 554,559,568 Please refer to Note 4.23 for information by industry. As of December 31, 2002 and 2001, non-performing loans were $13,510,514 and $14,919,049 respectively. As of December 31, 2002 and 2001, interest accrual has been suspended for non-accrual account was $742,768 and $537,294. As of December 31, 2002 and 2001, there were no loans charged-off without prior recourse. Changes in allowances for doubtful accounts for the year ended December 31, 2002 and 2001 are as follows: Potential risk Default risk of Year ended December 31, 2002 of all claims specific claims Total Beginning balance $ 6,704,057 $ 1,729,430 $ 8,433,487 Current provisions 329,115 8,632,452 8,961,567 Current charge-offs (601,255) (6,890,312) (7,491,567) Exchange rate effects (23,012) (6,318) (29,330) Ending balance $ 6,408,905 $ 3,465,252 $ 9,874,157 Potential risk Default risk of Year ended December 31, 2001 of all claims specific claims Total Beginning balance $ 3,842,393 $ 1,639,412 $ 5,481,805 Current provisions 3,167,848 8,663,617 11,831,465 Current charge-offs (318,682) (8,578,537) (8,897,219) Exchange rate effects 12,498 4,938 17,436 Ending balance $ 6,704,057 $ 1,729,430 $ 8,433,

22 (6) Long-Term Equity and Real Estate Investments December 31, 2002 December 31, 2001 % Book value % Book value Corporate bonds $ 155,000 $ 227,000 Add:unamortized premium 3,125 6,032 Subtotal 158, ,032 Long-Term Equity Investments Accounted for under the cost method Listed securities (Market value at $996,277 and 663,258 as of December 31, 2002 and 2001, respectively) 2,266,463 2,284,222 Less: Allowance for market decline (1,270,186) (1,620,964) 996, ,258 Taipei Forex Inc , ,000 Asian Finance and Investment Corp , ,037 Taiwan Aerospace Corp , ,113 Pacific Venture Corp , ,000 Taiwan Futures Exchange Corp , ,750 Union Service Corp , ,250 Jupiter Venture Capital Co., Ltd , ,000 Venus Venture Capital Co., Ltd , ,000 Mercury Venture Capital Co., Ltd , ,000 Fu Yu Venture Capital Investment Corp , ,000 Financial Information Service Co., Ltd , ,500 Taipei Financial Center Corp , ,438 KGEx. Com. Corp., Ltd , ,000 KG Ventures Corp , ,000 Overseas Investment & Development Corp , ,074 Taipei Smart Card Corp , ,256 Banc Net Incorporated , ,727 Philippine Clearing House Corp , ,405 Accounted for under the equity method (all in thousands) KGI Futures Corp., Ltd. (original investment at$0 and $140,400 as of December 31,2002 and 2001,respectively ) ,774 Chinatrust Insurance Brokers Co.,Ltd. (original investment at$0 and $1,994 as of December 31,2002 and 2001,respectively ) ,947 Chinatrust Forex Corp. (original investment at PHP 51,045) , ,521 Chinatrust Securities Investment Consultancy Co.,Ltd (original investment at 9,940) , ,587 Chinatrust Securities Co.,Ltd (original investment at$0 and $3,552,983 as of December 31,2002 and 2001,respectively ) ,756,071 KGI Securities Investment Trust Corp., Ltd. (original investment at $120,000) , ,238 Prepaid stock Chinatrust Forex Corp ,027 B.A.P. Consulting Inc Subtotal 3,473,576 7,132,973 Real Estate-Land to be Levied by the Government 8,102 8,102 Total $ 3,639,803 $ 7,374,

23 For the years ended December 31, 2002 and 2001, investment income or loss recognized under the equity method based on unaudited financial statements prepared by investee companies were as follows: December 31, 2002 December 31, 2001 KGI Futures Corp., Ltd. $ 7,056 $ 7,148 Chinatrust International Securities Co., Ltd. - (5,289) Overseas Investment & Development Corp. - (874) Chinatrust Securities Corp., Ltd 60, ,708 Chinstrust Insurance Brokers Co.,Ltd. 103,915 58,136 Chinatrust Forex Corp. 1,832 1,181 Chinatrust Securities Investment Consultancy Co., Ltd KGI Securities Investment Trust Corp., Ltd. (10,369) (9,762) Total $ 163,547 $ 578,484 In January 2001, the Bank invested in KG Venture Corp. Its primary business is venture capital investment. In March 2001, the Bank invested in KGI Securities Investment Trust Corp., Ltd. Its primary business is trust services and securities investment. For effective use of operating funds and development of peripheral financial services, in May 2001 the Bank acquired 75,166,000 shares of Chinatrust Bills Finance Corp. for $922,292 from Chailease Finance Co., Ltd. and five other companies, resulting in an increase of shareholding ratio from 74.76% to %. In October 2001, the Bank invested in Taipei Smart Card Corp., which engages primarily in the issuance and R&D of IC cards and the business of computer software. Between July 2002 and August 2002, the Bank sold long-term investments of Chinatrust Securities Corp., Ltd. and Chinatrust Insurance Brokers Co.,Ltd. to Chinatrust Financial Holding Company, Ltd. for reorganization strategy. The Bank received cash from the shares sold to Chinatrust Financial Holding Company, Ltd. Due to the business reorganization, the difference between the payment of shares sold and their original book value is reflected under unappropriated earnings. The Bank sold shares of KGI Futures Corp., Ltd. for cash in December 2002 for the purpose of developing Chinatrust Securities Corp., Ltd. futures business. The shares were transferred to KGI Securities Co., Ltd

24 (7) Premises and Property Revaluation Accumulated Cost appreciation Total depreciation Net December 31, 2002 Land $ 14,160,418 $ 67,300 $ 14,227,718 $ - $ 14,227,718 Buildings 12,458,884 37,453 12,496,337 2,514,078 9,982,259 Transportation equipmen 90, ,497 56,810 34,687 Miscellaneous equipmen 6,938,829 7,874 6,946,703 3,700,458 3,246,245 Construction in progress 102, , ,518 Prepayment for equipme 96,195-96,195-96,195 Total $ 33,847,701 $ 113,267 $ 33,960,968 $ 6,271,346 $ 27,689,622 Revaluation Accumulated Cost appreciation Total depreciation Net December 31, 2001 Land $ 14,166,664 $ 66,477 $ 14,233,141 $ - $ 14,233,141 Buildings 12,107,911 35,920 12,143,831 2,231,283 9,912,548 Transportation equipmen 82, ,414 52,123 31,291 Miscellaneous equipmen 5,857,009 5,092 5,862,101 2,971,755 2,890,346 Construction in progress 88,286-88,286-88,286 Prepayment for equipme 7,001-7,001-7,001 Total $ 32,309,764 $ 108,010 $ 32,417,774 $ 5,255,161 $ 27,162,613 As of December 31, 2002 and 2001, insurance coverage of fixed assets referred to above amounted to $13,476,611 and $9,670,880, respectively. Depreciable assets were revalued on December 31, 1974 and 1980, resulting in total appreciation of $13,510 and $53,123, respectively. In addition, land was revalued on December 31, 1987 per government announced price, resulting in land appreciation of $77,519. Pursuant to the regulations set forth by the Paraguay government, the local branch revalues its assets annually per the government announced revaluation ratio, effective the second year of the branch s operation. As of December 31, 2002 and 2001, reserve for asset revaluation appreciation amounted to PYG2,593,728 and PYG1,520,744 (approximately $16,816 and $11,558), respectively

25 (8) Other Assets December 31, 2002 December 31, 2001 Foreign currency purchased $ 10,050 $ 10,072 Prepayments 1,679,940 1,262,484 Short-term advances 264, ,669 Refundable deposits 19,423,221 6,761,665 Securities serving as deposits paid (11,869,904) (3,079,492) Deferred charges 1,798,936 1,670,159 Collateral received 2,188,705 1,934,483 Allowance for collateral market decline (436,428) (224,158) Deferred income tax assets - non- current 599,023 1,028,166 Consolidated debits 206, ,898 Certificates of time deposits pledged 321, ,500 Others 4,164,291 3,465,319 Total $ 18,350,371 $ 13,585,765 Please refer to Note 4.18 for deferred income tax assets non-current. Certificates of time deposits above are used as guaranty for National Credit Card Center of R.O.C., bond dealers and underwriters. (9) Call loans from and due to banks December 31,2002 December 31,2001 Short term borrowing $ 8,110,000 $ 6,650,000 Call loans from and due to banks 41,603,183 39,351,395 Total $ 49,713,183 $ 46,001,395 Interest rate range 1.55%~1.95% 2.29%~5.1%