Far Eastern International Bank Financial Statements for the Years Ended, 2006 and 2007 and Independent Auditors Report
INDEPENDENT AUDITORS REPORT The Board of Directors and Shareholders Far Eastern International Bank We have audited the accompanying balance sheets of the Far Eastern International Bank (the Bank ) as of, 2006 and 2007, and the related statements of income, changes in shareholders equity and cash flows for the years then ended. These financial statements are the responsibility of the Bank s management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with the Rules Governing the Audit of Financial Statements of Financial Institutions by Certified Public Accountants and auditing standards generally accepted in the Republic of China. Those rules and standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of the Bank as of, 2006 and 2007, and the results of its operations and its cash flows for the years then ended, in conformity with the Regulations Governing the Preparation of Financial Reports by Public Banks, requirements of the Business Accounting Law and Guidelines Governing Business Accounting relevant to financial accounting standards and accounting principles generally accepted in the Republic of China. As stated in Note 3 to the financial statements, effective January 1, 2006, the Bank adopted the newly released Statements of Financial Accounting Standards ( Standards ) No. 34 - Accounting for Financial Instruments and No. 36 - Disclosure and Presentation of Financial Instruments as well as the revisions of previously released Standards. As stated in Note 2 to the financial statements, our audits also comprehended the translation of the 2007 New Taiwan dollar amounts into U.S. dollar amounts at the rate of NT$32.443 to US$1.00, the average of the buying and selling exchange rates quoted by the Bank of Taiwan on December 31, 2007. Such U.S. dollar amounts are presented solely for the convenience of readers. - 1 -
Under Regulations Governing the Preparation of Financial Reports by Public Banks, we have also audited the consolidated financial statements of the Bank as of and for the years ended December 31, 2006 and 2007, on which we have issued a modified unqualified opinion and an unqualified opinion respectively, in our report dated March 10, 2008. March 10, 2008 Notice to Readers The accompanying financial statements are intended only to present the financial position, results of operations and cash flows in accordance with accounting principles and practices generally accepted in the Republic of China and not those of any other jurisdictions. The standards, procedures and practices to audit such financial statements are those generally accepted and applied in the Republic of China. For the convenience of readers, the auditors report and the accompanying financial statements have been translated into English from the original Chinese version prepared and used in the Republic of China. If there is any conflict between the English version and the original Chinese version or any difference in the interpretation of the two versions, the Chinese-language auditors report and financial statements shall prevail. - 2 -
FAR EASTERN INTERNATIONAL BANK BALANCE SHEETS DECEMBER 31, 2006 AND 2007 (In Thousands of New Taiwan or U.S. Dollars, Except Par Value) ASSETS Notes LIABILITIES AND SHAREHOLDERS EQUITY Notes CASH AND CASH EQUIVALENTS 4 $ 5,006,818 $ 2,496,964 $ 76,965 LIABILITIES Due to banks and the Central Bank 16 $ 9,812,863 $ 17,775,322 $ 547,894 DUE FROM BANKS AND THE CENTRAL BANK 5, 26, 27 57,540,831 73,725,173 2,272,452 Financial liabilities measured at fair value through profit or loss 2, 3, 6,26, 29 3,130,876 2,666,625 82,194 FINANCIAL ASSETS MEASURED AT FAIR VALUE Bonds sold under repurchase agreements 2, 28 5,118,156 1,726,186 53,207 THROUGH PROFIT OR LOSS 2, 3, 6, 26, 29 10,593,247 10,780,933 332,304 Payables 2, 17, 26 7,214,974 5,188,249 159,919 Deposits and remittances 18, 26 266,312,727 281,370,449 8,672,763 RECEIVABLES, NET 2, 7, 8, 22, 26 23,561,750 21,373,741 658,809 Bank debentures 2, 19, 29 31,587,701 31,436,230 968,968 Other financial liabilities 20, 29 280,629 185,169 5,707 LOANS AND DISCOUNTS, NET 2, 8, 26 223,152,864 223,085,628 6,876,233 Other liabilities 21 745,827 734,761 22,648 AVAILABLE-FOR-SALE FINANCIAL ASSETS 2, 3, 9, 26, 27, 29 12,625,273 6,961,599 214,579 Total liabilities 324,203,753 341,082,991 10,513,300 HELD-TO-MATURITY FINANCIAL ASSETS 2, 10, 27, 29 305,878 - - SHAREHOLDERS EQUITY 2, 3, 19, 23 Capital stock, NT$10.00 dollar par value, INVESTMENTS ACCOUNTED FOR BY THE Authorized - 2,000,000 thousand shares in 2006 EQUITY METHOD 2, 7, 11 4,252,059 3,239,789 99,861 and 2,500,000 thousand shares in 2007 Issued and outstanding - 1,878,053 thousand DEBT INSTRUMENT INVESTMENT WITH NO ACTIVE shares in 2006 and 1,879,780 thousand shares in MARKET 2, 12, 29 923,289 9,914,841 305,608 2007 18,780,526 18,797,803 579,410 Capital surplus OTHER FINANCIAL ASSETS 2, 8, 13, 29 432,489 182,295 5,619 Additional paid-in capital in excess of par 913,793 922,760 28,442 Treasury stock transaction 101,531 101,531 3,130 PROPERTIES 2, 14 Total capital surplus 1,015,324 1,024,291 31,572 Cost Accumulated deficit Land 1,151,904 1,151,904 35,505 Legal reserve 1,596,516 1,596,516 49,210 Buildings and improvements 958,271 963,951 29,712 Accumulated deficit (1,617,625) (2,397,716) (73,906) Computer equipment 903,338 1,081,835 33,346 Total accumulated deficit (21,109) (801,200) (24,696) Transportation equipment 24,470 22,009 678 Others Miscellaneous equipment 1,177,369 1,197,945 36,925 Cumulative translation adjustments 12,640 11,947 368 Total cost 4,215,352 4,417,644 136,166 Unrealized valuation loss on available-for-sale Less: Accumulated depreciation 1,744,416 1,943,320 59,899 financial assets (25,919) (213,365) (6,576) 2,470,936 2,474,324 76,267 Total others (13,279) (201,418) (6,208) Prepayments for properties 38,822 19,826 611 Total shareholders equity 19,761,462 18,819,476 580,078 Net properties 2,509,758 2,494,150 76,878 CONTINGENT LIABILITIES AND COMMITMENTS 2, 26, 28, 29 OTHER ASSETS 2, 15, 22, 26, 28 3,060,959 5,647,354 174,070 TOTAL $ 343,965,215 $ 359,902,467 $ 11,093,378 TOTAL $ 343,965,215 $ 359,902,467 $ 11,093,378 The accompanying notes are an integral part of the financial statements. (With Deloitte & Touche audit report dated March 10, 2008) - 3 -
FAR EASTERN INTERNATIONAL BANK STATEMENTS OF INCOME YEARS ENDED DECEMBER 31, 2006 AND 2007 (In Thousands of New Taiwan or U.S. Dollars, Except Loss Per Share) Notes INTEREST INCOME 2, 26, 29 $ 11,421,698 $ 11,569,231 $ 356,602 INTEREST COST 26, 29 6,294,510 7,255,976 223,653 NET INTEREST INCOME 5,127,188 4,313,255 132,949 OTHER NONINTEREST NET INCOME Service fees income 2 2,245,079 2,264,502 69,799 Service charges 26 493,288 524,756 16,175 Net service fees income 1,751,791 1,739,746 53,624 Net gain on financial assets and liabilities measured at fair value through profit or loss 2, 6, 26, 29 1,259,512 1,481,217 45,656 Net gain on available-for-sale financial assets 2 16,015 7,583 234 Net gain on held-to-maturity financial assets 2 153,874 - - Investment income accounted for by the equity method 2,11 63,757 518,322 15,976 Foreign exchange loss 2 (274,266) (128,596 ) (3,964) Loss on asset impairment 2, 12, 13, 15 (36,022) (86,461) (2,665) Others 103,042 53,746 1,657 Total other noninterest net income 3,037,703 3,585,557 110,518 NET PROFIT 8,164,891 7,898,812 243,467 PROVISION FOR POSSIBLE LOSSES 2, 8 6,173,857 4,746,094 146,290 OPERATING EXPENSES 2, 21, 24, 26 Personnel expense 2,135,496 2,105,708 64,905 Depreciation and amortization 242,379 240,747 7,421 Others 1,821,537 1,977,220 60,944 Total operating expenses 4,199,412 4,323,675 133,270 NET LOSS BEFORE INCOME TAX AND CUMULATIVE EFFECT OF CHANGES IN ACCOUNTING PRINCIPLES (2,208,378) (1,170,957 ) (36,093) INCOME TAX BENEFIT 2, 22 496,144 390,866 12,048 NET LOSS BEFORE CUMULATIVE EFFECT OF CHANGES IN ACCOUNTING PRINCIPLES (1,712,234) (780,091 ) (24,045) CUMULATIVE EFFECT OF CHANGES IN ACCOUNTING PRINCIPLES (NET OF APPLICABLE INCOME TAX BENEFIT OF NT$571 THOUSAND) 2, 3, 22 41,775 - - NET LOSS $ (1,670,459 ) $ (780,091 ) $ (24,045 ) (Continued) - 4 -
FAR EASTERN INTERNATIONAL BANK STATEMENTS OF INCOME YEARS ENDED DECEMBER 31, 2006 AND 2007 (In Thousands of New Taiwan or U.S. Dollars, Except Loss Per Share) 2006 (NT$) 2007 (NT$) 2007 (US$) Loss Loss Loss Before Before Before Income Net Income Net Income Net Notes Tax Loss Tax Loss Tax Loss BASIC LOSS PER SHARE 25 Net loss before cumulative effect of changes in accounting principles $ (1.17 ) $ (0.91 ) $ (0.62 ) $ (0.42 ) $ (0.02 ) $ (0.01 ) Cumulative effect of changes in accounting principles 0.02 0.02 - - - - Total basic loss per share $ (1.15 ) $ (0.89 ) $ (0.62) $ (0.42 ) $ (0.02 ) $ (0.01) The accompanying notes are an integral part of the financial statements. (With Deloitte & Touche audit report dated March 10, 2008) (Concluded) - 5 -
FAR EASTERN INTERNATIONAL BANK STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY YEARS ENDED DECEMBER 31, 2006 AND 2007 (In Thousands of New Taiwan Dollars, Except Par Value and Dividend Per Share) Retained Earnings (Accumulated Deficit) Other Equity (Note 23) Unrealized Unappropriated Cumulative Valuation Loss on Capital Stock (NT$10 Par Value) (Notes 19 and 23) Capital Surplus (Notes 19 and 23) Earnings Translation Available-for-sale Total Authorized Issued and Outstanding Additional Treasury Stock (Accumulated Adjustments Financial Assets Shareholders' Shares Shares Amount Paid-in Capital Transaction Legal Reserve Deficit) (Note 2) (Notes 2 and 3 ) Equity BALANCE, JANUARY 1, 2006 2,000,000,000 1,791,249,890 $ 17,912,499 $ 1,095,783 $101,531 $ 1,174,310 $ 1,470,289 $ 10,106 $ - $ 21,764,518 Appropriation of prior year's earnings Legal reserve - - - - - 422,206 (422,206) - - - Bonus to employees - cash - - - - - - (17,914) - - (17,914) Bonus to employees - stock - 4,180,047 41,801 - - - (41,801) - - - Remuneration to directors and supervisors - - - - - - (19,905) - - (19,905) Cash dividends - NT$0.1533 per share - - - - - - (274,689) - - (274,689) Stock dividends - NT$0.3578 per share - 64,094,041 640,940 - - - (640,940) - - - Balance after the appropriations 2,000,000,000 1,859,523,978 18,595,240 1,095,783 101,531 1,596,516 52,834 10,106-21,452,010 Capital surplus transferred to common stock - NT$0.1022 per share - 18,312,584 183,126 (183,126) - - - - - - Conversion of bonds into common stock - 215,969 2,160 1,136 - - - - - 3,296 Translation adjustments on offshore banking unit and oversea branch - - - - - - - 2,577-2,577 Translation adjustments on foreign-currency long-term equity investments - - - - - - - (43) - (43) Change in unrealized valuation gain or loss on available-for-sale financial assets - - - - - - - - (26,745) (26,745) Change in unrealized valuation gain or loss on available-for-sale financial assets from equity investments recognized by the equity method - - - - - - - - 826 826 Net loss in 2006 - - - - - - (1,670,459 ) - - (1,670,459 ) BALANCE, DECEMBER 31, 2006 2,000,000,000 1,878,052,531 18,780,526 913,793 101,531 1,596,516 (1,617,625 ) 12,640 (25,919 ) 19,761,462 Increase in authorized common stock 500,000,000 - - - - - - - - - Conversion of bonds into common stock - 1,727,756 17,277 8,967 - - - - - 26,244 Translation adjustments on offshore banking unit and oversea branch - - - - - - - (660) - (660) Translation adjustments on foreign-currency long-term equity investments - - - - - - - (33) - (33) Change in unrealized valuation gain or loss on available-for-sale financial assets - - - - - - - - (147,172) (147,172) Change in unrealized valuation gain or loss on available-for-sale financial assets from equity investments recognized by the equity method - - - - - - - - (40,274) (40,274) Net loss in 2007 - - - - - - (780,091 ) - - (780,091 ) BALANCE, DECEMBER 31, 2007 2,500,000,000 1,879,780,287 $ 18,797,803 $ 922,760 $101,531 $ 1,596,516 $ (2,397,716 ) $ 11,947 $ (213,365 ) $ 18,819,476 The accompanying notes are an integral part of the financial statements. (With Deloitte & Touche audit report dated March 10, 2008) - 6 -
FAR EASTERN INTERNATIONAL BANK STATEMENTS OF CASH FLOWS YEARS ENDED DECEMBER 31, 2006 AND 2007 (In Thousands of New Taiwan or U.S. Dollars) CASH FLOWS FROM OPERATING ACTIVITIES Net loss before cumulative effect of changes in accounting principles $ (1,712,234 ) $ (780,091 ) $ (24,045 ) Adjustment Provision for possible losses 6,173,857 4,746,094 146,290 Recovery of written-off credits 1,625,927 686,523 21,161 Depreciation and amortization 242,379 240,747 7,421 Amortization of premium on bond investments 136,626 126,220 3,891 Net valuation gain on financial assets and liabilities measured at fair value through profit or loss (412,711 ) (204,564 ) (6,305 ) Investment income accounted for by the equity method (63,757 ) (518,322 ) (15,976 ) Cash dividends received from investments accounted for by the equity method 123,549 94,992 2,928 Net loss (gain) on disposal of properties 373 (292 ) (9 ) Net loss on disposal of collaterals assumed 27,191 8,734 269 Loss on asset impairment 36,022 86,461 2,665 Provision for retirement benefits 25,791 25,025 771 Pension payment (4,001 ) (14,180 ) (437 ) Increase in financial assets measured at fair value through profit or loss (2,120,623 ) (955,336 ) (29,447 ) Decrease in receivables 1,503,758 425,827 13,125 Increase in deferred income tax assets (527,073 ) (404,789 ) (12,477 ) Increase in financial liabilities measured at fair value through profit or loss 741,246 507,963 15,657 Increase (decrease) in payables 1,170,154 (1,205,256 ) (37,150 ) Net cash provided by operating activities 6,966,474 2,865,756 88,332 CASH FLOWS FROM INVESTING ACTIVITIES Increase in due from banks and the Central Bank (39,778,114 ) (16,116,411 ) (496,761 ) Increase in loans and discounts (13,880,150 ) (2,905,594 ) (89,560 ) Decrease (increase) in available-for-sale financial assets (3,770,345 ) 5,394,218 166,268 Decrease in held-to-maturity financial assets 16,182,782 300,488 9,262 Proceeds of the disposal of investments accounted for by the equity method - 45,293 1,396 Increase in debt instrument investments with no active market (391,039 ) (9,169,974 ) (282,649 ) Decrease in other financial assets 506,846 39,630 1,222 Acquisition of properties (121,695 ) (223,258 ) (6,882 ) Proceeds of the disposal of properties 684 378 12 (Continued) - 7 -
FAR EASTERN INTERNATIONAL BANK STATEMENTS OF CASH FLOWS YEARS ENDED DECEMBER 31, 2006 AND 2007 (In Thousands of New Taiwan or U.S. Dollars) Proceeds of the disposal of collaterals assumed $ 726,419 $ 47,206 $ 1,455 Increase in other assets (643,716 ) (2,455,443 ) (75,685 ) Net cash used in investing activities (41,168,328 ) (25,043,467 ) (771,922 ) CASH FLOWS FROM FINANCING ACTIVITIES Increase (decrease) in due to banks and the Central Bank (7,041,712 ) 7,962,459 245,429 Increase (decrease) in bonds sold under repurchase agreements 2,703,638 (3,391,970 ) (104,552 ) Increase in deposits and remittances 38,259,849 15,057,722 464,129 Issuance of bank debentures 2,000,000 5,000,000 154,116 Repayment of bank debentures - (5,000,000 ) (154,116 ) Decrease in other financial liabilities (9,493 ) (7,594 ) (234 ) Increase (decrease) in other liabilities (29,873 ) 25,209 777 Bonus to employees and remuneration to directors and supervisors (37,819 ) - - Cash dividends (274,689 ) - - Net cash provided by financing activities 35,569,901 19,645,826 605,549 EFFECTS OF EXCHANGE RATE CHANGES (18,937 ) 22,031 679 NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 1,349,110 (2,509,854 ) (77,362 ) CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR 3,657,708 5,006,818 154,327 CASH AND CASH EQUIVALENTS, END OF YEAR $ 5,006,818 $ 2,496,964 $ 76,965 SUPPLEMENTAL CASH FLOW INFORMATION Interest paid $ 6,073,893 $ 7,019,512 $ 216,364 Income tax paid $ 86,730 $ 99,272 $ 3,060 NONCASH INVESTING AND FINANCING ACTIVITIES Conversion of bonds into common stock $ 3,296 $ 26,244 $ 809 Receivable from capital return of equity investment (Note 11) $ - $ 1,350,000 $ 41,611 The accompanying notes are an integral part of the financial statements. (With Deloitte & Touche audit report dated March 10, 2008) (Concluded) - 8 -
FAR EASTERN INTERNATIONAL BANK NOTES TO FINANCIAL STATEMENTS YEARS ENDED DECEMBER 31, 2006 AND 2007 (In Thousands of New Taiwan Dollars, Unless Stated Otherwise) 1. ORGANIZATION AND OPERATIONS Far Eastern International Bank ( the Bank ) obtained its license on January 11, 1992 and commenced business on April 11, 1992. The Bank engages in (a) accepting deposits and extending loans and guarantees; (b) issuing letters of credit, handling domestic and foreign remittances and accepting commercial drafts; (c) investing in securities and acting as an agent for trading government bonds, corporate bonds and bank debentures; (d) conducting other relevant businesses which authorized by the Central Competent Authority. The operations of the Bank s Trust Department include pecuniary trust, securities trust, real estate trust, creditor s right of money or guarantee trust, movable property trust and ground right trust and related operations. These operations are regulated under the Banking Act and Trust Enterprise Act. As of, 2007, the Bank s operating units include Business Department, International Banking Department, Trust Department, Credit Card Department, Offshore Banking Unit (OBU), and 35 domestic branches, as well as an overseas branch in Hong Kong. The Bank s shares have been listed on the Taiwan Stock Exchange. As of, 2006 and 2007, the Bank had 2,312 and 2,327 employees, respectively. 2. SIGNIFICANT ACCOUNTING POLICIES The Bank s financial statements have been prepared in conformity with the Regulations Governing the Preparation of Financial Reports by Public Banks, Business Accounting Law, Guidelines Governing Business Accounting, and accounting principles generally accepted in the Republic of China. Under these regulations, law and principles, certain estimates and assumptions have been used to determine fair value of certain financial instruments, allowance for possible losses, depreciation, impairment and pension. Actual results may differ from these estimates. Since the operating cycle could not be reasonably identified in the banking industry, accounts included in the Bank s financial statements were not classified as current or non-current. Nevertheless, accounts were properly categorized according to the nature of each account and sequenced by their liquidity. Please refer to Note 29 for maturity analysis of assets and liabilities. For readers convenience, the accompanying financial statements have been translated into English from the original Chinese version prepared and used in the Republic of China. If there is any conflict between the English version and the original Chinese version or any difference in the interpretation of the two versions, the Chinese-language financial statements shall prevail. The translation of the 2007 New Taiwan dollar amounts into U.S. dollar amounts is at the rate of NT$32.443 to US$1.00, the average of the buying and selling exchange rates quoted by the Bank of Taiwan on, 2007. - 9 -
The Bank s significant accounting policies are summarized as follows: Financial Instruments Measured at Fair Value Through Profit or Loss Financial instruments at fair value through profit or loss (FVTPL) are financial assets and liabilities that are held for trading or those that are designated on initial recognition as measured at fair value through profit or loss (FVTPL). On each balance sheet date after the initial recognition, financial assets and liabilities at FVTPL are remeasured at fair value, with changes in fair value recognized as gain or loss in the year these changes arising. Acquisition and disposal of financial assets are recognized and derecognized on a trade date basis, except government bonds, for which the settlement date basis is used. Costs directly attributable to the acquisition of financial assets or financial liabilities at FVTPL are recognized immediately as expense. A derivative instrument that does not meet the criteria for hedge accounting is classified as a financial asset or a financial liability held for trading. If the fair value of the derivative is positive, the derivative is recognized as a financial asset; otherwise, the derivative is recognized as a financial liability. Fair values of financial assets and financial liabilities at the balance sheet date are determined as follows: Publicly traded stocks - at closing prices; open-end mutual funds - at net asset values; bonds - at prices quoted by the Taiwan GreTai Securities Market. Securities Purchased/Sold Under Resell/Repurchase Agreements Securities purchased under resell agreements and securities sold under repurchase agreements are generally treated as collateralized financing transactions. Available-for-sale Financial Assets Available-for-sale financial assets are initially measured at fair value plus transaction costs that are directly attributable to the acquisition. The difference between the initial cost of a debt instrument and its maturity amount is amortized using the effective interest method. At each balance sheet date subsequent to initial recognition, available-for-sale financial assets are remeasured at fair value, with changes in fair value recognized under equity until the financial assets are disposed of, at which time, the cumulative gain or loss previously recognized in equity is included in profit or loss for the year. Purchases or sales of financial assets are recognized and derecognized on a settlement date basis. Any subsequent decrease in impairment loss on an equity instrument classified as available for sale is recognized directly under equity. If the fair value of a debt instrument classified as available-for-sale subsequently increases as a result of an event that occurred after the impairment loss was recognized, the decrease in impairment loss is recognized as gain. Non-accrual Loans Under the Regulations Governing the Procedures for Banking Institutions to Evaluate Assets and Deal with Nonperforming/Non-accrued Loans issued by the Banking Bureau in the Financial Supervisory Commission of the Executive Yuan, overdue loans and other credits extended by the Bank and the related accrued interest are classified as non-accrual loans upon approval by the Board of Managing Directors. Non-accrual loans arising from loans are classified as loans and discounts; and the ones arising from guarantees, acceptances, accounts receivable - factoring and credit card receivables are classified as other financial assets. - 10 -
Allowance for Possible Losses In determining the allowance for possible losses, the Bank evaluates the risks on particular loans and overall credit portfolio and considers the balances and general collectibility of loans, discounts, receivables and other financial assets as of the balance sheet date. The Bank evaluates possible losses on the basis of borrowers financial situation, ability to pay principal and interest and the values of collaterals in accordance with Regulations Governing the Procedures for Banking Institutions to Evaluate Assets and Deal with Nonperforming/Non-accrual Loans (the Regulations ). The Regulations require that loans be classified according to levels of collectibility and that provisions be made for outstanding credits at specific percentages. The Bank writes off uncollectible loans and receivables upon the approvals of the Bank s Board of Directors or Managing Directors. The subsequent collections of written-off loans are recorded as the increase of allowance for possible losses. Held-to-maturity Financial Assets Held-to-maturity financial assets are initially measured at fair value plus transaction costs that are directly attributable to the acquisition. At each balance sheet date, held-to-maturity financial assets are measured at amortized cost using the effective interest method. Profit or loss is recognized when the financial assets are impaired, or amortized. The acquisition and disposal of financial assets are accounted for on a settlement date basis. The impairment loss is reversed if an increase in the investment s recoverable amount is due to an event that occurred after the impairment loss was recognized; however, the adjusted carrying amount of the investment may not exceed the carrying amount that would have been determined had no impairment loss been recognized for the investment in prior years. Investments Accounted for by the Equity Method Investments in which the Bank holds 20 percent or more of the investees voting shares are accounted for by the equity method. The investments are stated at cost plus (or minus) a proportionate share in net earnings (losses) of the investee. For the investment discount arising from acquisitions before January 1, 2006, the unamortized amount continues to be amortized over 5 years. Cash dividends received are treated as a reduction of carrying amounts. Stock dividends are recorded as an increase in the number of shares. The cost per share will be recalculated on the basis of the new number of shares held. Cost of shares sold are calculated at moving-average cost. Financial Assets Carried at Cost Investments in equity instruments with no quoted market prices in an active market and with fair value that cannot be reliably measured, such as non-publicly traded stocks, are carried at their original cost. An impairment loss is recognized when there is objective evidence that the asset is impaired. A reversal of this impairment loss is not allowed under any circumstances. Debt Instrument Investments with No Active Market These instruments are carried at amortized cost. The accounting treatment for such debt instrument investments is similar to that for held-to-maturity financial assets, except for the absence of restriction on the timing of their disposal. An impairment loss is recognized when there is objective evidence that the investment is impaired. - 11 -
Properties Properties are stated at cost less accumulated depreciation and accumulated impairment losses. Major additions and improvements to properties are capitalized, while cost of repairs and maintenance are expensed currently. Depreciation is provided on a straight-line basis over estimated useful lives as follows: buildings and improvements, 5 to 55 years; computer equipment, 3 to 7 years; transportation equipment, 3 to 7 years; and miscellaneous equipment, 3 to 20 years. Properties still in use beyond their original estimated useful lives are further depreciated over their newly estimated useful lives. Upon disposal of properties, the related cost, accumulated depreciation and accumulated impairment losses of an item of properties are derecognized. Any gain or loss is included in net profit in the year of disposal. The reversal of an impairment loss is recognized under earnings. However, the adjusted carrying amount may not exceed the carrying amount that would have been determined had no impairment loss been recognized for the properties in prior years. Collaterals Assumed Collaterals assumed are carried at cost and evaluated at the recoverable amount. If the recoverable amount of collaterals assumed is estimated less than its carrying amount, an impairment loss is recognized and charged to earnings. The reversal of an impairment loss is recognized under earnings. However, the adjusted carrying amount may not exceed the carrying amount that would have been determined had no impairment loss been recognized for the asset in prior years. Bank Debentures Issuance costs of convertible bonds are recorded as deferred charges and are amortized over the issuance period. The conversion of bonds into common shares is accounted for using the book value method, whereby the difference between the book value of the bonds (net of any unamortized issuance costs) and the par value of the common shares issued is recorded as capital surplus. Pension Cost Pension cost under the defined benefit plan is determined by actuarial valuations. Unrecognized net transition obligations and unrecognized prior service cost are amortized over 26 and 23 years, respectively. Under the defined contribution plan, the Bank makes monthly contributions to employees individual pension accounts at a specific percentage of salaries and wages. Such payments are recognized as pension costs. Income Tax The Bank applies intra-year and inter-year allocations for its income tax, whereby deferred income tax assets and liabilities are recognized for the tax effects of temporary differences, unused loss carryforward and unused tax credits. Valuation allowances are provided to the extent, if any, that it is more likely than not that deferred income tax assets will not be realized. Adjustments of prior years tax liabilities are added to or deducted from the current year s tax provision. An additional tax at 10% of unappropriated earnings is provided for as income tax in the year the shareholders approve to retain the earnings. - 12 -
Income tax credits for research and development expenditures, and personnel training expenditures are recognized when the expenses occurred. The ROC government enacted the Alternative Minimum Tax Act ( AMT Act ), which became effect on January 1, 2006. The Bank has considered the impact of the AMT Act in the determination of its tax liabilities. Foreign-currency Transactions The functional currencies of the overseas branches and offshore business units are local currencies and U.S. dollars, respectively. The assets and liabilities are recorded in their respective currencies. Gains and losses resulting from the settlement of foreign-currency transactions at prevailing rates are translated into the functional currency of the unit. The values of the net assets are recalculated into New Taiwan Dollars at the end of each month at prevailing exchange rates. Exchange differences arising from the translation are recognized as cumulative translation adjustment in shareholders equity. The Bank s other business units maintains their accounts at the currencies in which transactions are denominated. Foreign-currency income and expenses are converted into New Taiwan dollars (NT dollars) at the prevailing exchange rates. Exchange differences arising from the settlement of foreign-currency assets and liabilities are recognized as gain or loss. At the balance sheet date, forward exchange contracts used for trading purposes, the foreign-currency amounts of the contracts multiplied by the difference between the forward contract rates and the forward rates available until the maturity of the contracts are recognized under income. Other foreign-currency assets and liabilities are revalued at prevailing exchange rates, and the exchange differences are recognized as gain or loss. If the functional currency of an equity-method investee is a foreign currency, the translation adjustments of the investee s financial statements into the reporting currency of the Bank are reported as a separate component of shareholders equity. Hedge Accounting The Bank uses derivatives primarily as a risk management tool for hedging against risks to financial assets and liabilities due to adverse market changes in interest and exchange rates. Changes in the fair value of the derivative must be highly correlated with changes in the fair value of the underlying hedged item over the life of the derivative contract. At the start of the hedge, there must be a formal designation and documentation of the hedging relationship between the hedging instrument and the hedged item, the risk management objective and strategy for undertaking the hedge, and how the entity will assess the hedging instrument s effectiveness. If the hedges qualify as fair value hedges, the effect of changes in fair value of hedged items will be offset by the gain or loss recognized from remeasuring the hedging instrument at fair value (for a derivative hedging instrument), and the carrying amount of the hedged item is adjusted through the corresponding gain or loss on the hedging instrument. Interest Income and Service Fees Income Interest income on discounts and loans are recorded on the accrual basis. For non-accrual loans, interest income is recognized only when collection on these obligations is made. Under the regulations of the Banking Bureau under the Financial Supervisory Commission governed by the Executive Yuan, the interest income on credits covered by agreements that extend their maturity is recorded as deferred income and recognized upon collection. Service fees income are recognized as cash receipts and the related services have been substantially completed. - 13 -
Contingencies A loss should be 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 the loss is possible, but the amount of loss cannot be reasonably estimated, the related information should be disclosed in the financial statements. Impairment of Assets If the recoverable amount of an asset (mainly properties, collaterals assumed, and investments accounted for by the equity method) is estimated less than its carrying amount, an impairment loss is charged to earnings. If an impairment loss subsequently reserves, the carrying amount of the asset is increased accordingly, however the adjusted carrying amount may not exceed the carrying amount that would have been determined had no impairment loss been recognized for the asset in prior years. 3. EFFECTS OF CHANGES IN ACCOUNTING PRINCIPLES Adoption of New and Revised Standards SFAS No. 37 - Accounting for Intangible Assets and SFAS No. 38 - Accounting for Noncurrent Assets Held for Sale and Discontinued Operations On January 1, 2007, the Bank adopted the newly released Statements of Financial Accounting Standards ( Standards or SFAS) No. 37 - Accounting for Intangible Assets and No. 38 - Accounting for Noncurrent Assets Held for Sale and Discontinued Operations and related amendments of previously released Standards. These accounting changes had no effect on the Bank s financial statements for 2007. SFAS No. 34 - Financial Instruments: Recognition and Measurement and SFAS No. 36 - Financial Instruments: Disclosure and Presentation On January 1, 2006, the Bank adopted the newly released SFAS No. 34 - Financial Instruments: Recognition and Measurement and SFAS No. 36 - Financial Instruments: Disclosure and Presentation and related amendments of previously released standards. The Bank categorized its financial assets and financial liabilities upon initial adoption of these newly released SFASs. The adjustments arised from the carrying amounts of the financial instruments categorized as financial assets or financial liabilities at fair value through profit or loss and derivatives designated for fair value hedges were included in the cumulative effect of changes in accounting principles, and the adjustments arised from the carrying amounts of those categorized as available-for-sale financial assets were recognized as adjustments to shareholders equity. The effects of the above accounting changes were summarized as follows: Cumulative Effect of Changes in Accounting Principles (Net of Income Tax) Shareholders Equity Adjustments (Net of Income Tax) Financial assets measured at fair value through profit or loss $ 414,991 $ - Available-for-sale financial assets - 4,362 Financial liabilities at fair value through profit or loss (373,216 ) - $ 41,775 $ 4,362-14 -
Recent Accounting Pronouncements In March 2007, the Accounting Research and Development Foundation issued an interpretation that requires companies to recognize the bonuses paid to employees and the remuneration to directors and supervisors as compensation expenses beginning January 1, 2008. These bonuses are currently recorded as appropriations from earnings. 4. CASH AND CASH EQUIVALENTS Cash on hand $ 1,523,797 $ 1,492,997 $ 46,019 Notes and checks in clearing 1,834,183 327,545 10,096 Deposits due from other banks 1,648,838 676,422 20,850 $ 5,006,818 $ 2,496,964 $ 76,965 5. DUE FROM BANKS AND THE CENTRAL BANK Due from the Central Bank - certificates of deposit (Note 27) $ 30,000,000 $ 43,200,000 $ 1,331,566 Call loans to banks 18,853,965 17,862,867 550,592 New Taiwan dollar deposit reserve - Type A 2,790,875 5,290,180 163,061 New Taiwan dollar deposit reserve - Type B 5,665,294 5,902,122 181,923 Financial Information Service Co., Ltd. account 203,968 204,664 6,308 Foreign-currency deposit reserve 26,729 1,265,340 39,002 $ 57,540,831 $ 73,725,173 $ 2,272,452 The deposit reserves are required by law and determined at a prescribed percentage of the average of deposit balances within a month. The Type B reserve cannot be withdrawn and is adjusted on the basis of monthly recomputations of the reserve. The Type A and foreign-currency deposit reserves can be withdrawn but earn no interest. 6. FINANCIAL INSTRUMENTS AT FAIR VALUE THROUGH PROFIT OR LOSS Financial assets held for trading Convertible corporate bonds $ 7,385,459 $ 8,762,024 $ 270,074 Convertible bond option contracts 1,200,742 556,975 17,168 Listed and OTC stocks 510,227 448,291 13,818 (Continued) - 15 -
Currency option contracts $ 518,644 $ 225,425 $ 6,948 Mutual funds 239,820 194,297 5,989 Foreign currency swap contracts 176,673 185,365 5,714 Credit default swap contracts - 185,105 5,706 Convertible bonds asset swap contracts 5 92,091 2,839 Forward exchange contracts 82,367 30,125 928 Government bonds 444,247 - - Others 35,063 101,235 3,120 Financial liabilities held for trading $ 10,593,247 $ 10,780,933 $ 332,304 Convertible bond option contracts $ 2,515,786 $ 2,010,051 $ 61,956 Currency option contracts 495,850 225,425 6,948 Foreign currency swap contracts 64,202 170,070 5,242 Credit default swap contracts - 161,694 4,984 Convertible bonds asset swap contracts 39,938 39,255 1,210 Others 15,100 60,130 1,854 $ 3,130,876 $ 2,666,625 $ 82,194 (Concluded) The Bank entered into derivative transactions mainly to accommodate customers needs, and manage exposures due to exchange rate and interest rate fluctuations. The Bank s strategy is to hedge most of the market risk exposures by utilizing the offsetting effects on profit or loss of changes in the fair values of the hedging instrument and the hedged item. Net valuation gain on financial assets and liabilities at fair value through profit or loss for the years ended, 2006 and 2007 were NT$412,711 thousand and NT$204,564 thousand, respectively. Net disposal gains on financial assets and liabilities at fair value through profit or loss for the years ended, 2006 and 2007 were NT$846,801 thousand and NT$1,276,653 thousand, respectively. Outstanding derivative contract (nominal) amounts as of, 2006 and 2007 were as follows: Foreign currency swap contracts $ 25,595,550 $ 43,241,821 $ 1,332,855 Convertible bond option contracts 16,648,300 23,503,700 724,461 Credit default swap contracts 3,731,074 17,296,552 533,137 Convertible bonds asset swap contracts 10,905,369 16,387,558 505,118 Currency option contracts 22,404,740 13,837,001 426,502 Interest rate swap contracts 26,800,000 8,300,000 255,833 Interest rate option contracts - 5,000,000 154,116 Forward exchange contracts 6,198,753 3,218,112 99,193 Cross-currency swap contracts 3,139,788 3,124,915 96,320 Non-delivery forward - 1,949,090 60,077 Bond option contracts 900,000 - - Government bond futures contracts 60,000 - - - 16 -
7. RECEIVABLES, NET Credit card $ 15,753,448 $ 13,473,844 $ 415,308 Factoring 3,997,851 3,491,245 107,612 Related parties (Notes 11 and 26) 704,944 1,350,000 41,612 Due from spot exchange trading 123,755 977,744 30,137 Interest 950,889 820,909 25,303 Acceptances 1,435,298 613,830 18,920 Proceeds from disposal of collaterals assumed - 297,317 9,164 Court to distribute 226,452 74,783 2,305 Proceeds from disposal of securities 315,413 54,102 1,668 Others 282,782 390,671 12,042 23,790,832 21,544,445 664,071 Less: Allowance for possible losses (Note 8) 229,082 170,704 5,262 $ 23,561,750 $ 21,373,741 $ 658,809 8. LOANS AND DISCOUNTS, NET Negotiations, discount and overdraft $ 826,348 $ 530,995 $ 16,367 Short-term loans 44,653,717 46,836,246 1,443,647 Medium-term loans 61,392,986 62,472,440 1,925,606 Long-term loans 115,338,012 111,522,207 3,437,482 Non-accrual loans 3,049,731 4,392,136 135,380 225,260,794 225,754,024 6,958,482 Less: Allowance for possible losses 2,107,930 2,668,396 82,249 $ 223,152,864 $ 223,085,628 $ 6,876,233 As of, 2006 and 2007, the balances of non-accrual loans were NT$3,049,731 thousand and NT$4,392,136 thousand, respectively. The unrecognized interest revenue on non-accrual loans amounted to NT$102,499 thousand and NT$102,062 thousand for the years ended, 2006 and 2007, respectively. - 17 -
Movements of allowances for possible losses on receivables, loans and discounts and other financial assets were as follows: NT$ Receivables and Other Financial Loans and Discounts Assets Specific Risk General Risk Total Balance, January 1, 2006 $ 1,561,713 $ 1,457,363 $ 528,711 $ 3,547,787 Provision (reversal of provision) for loan losses 4,517,091 1,782,809 (48,575 ) 6,251,325 Amounts written-off (6,618,990 ) (2,354,625 ) - (8,973,615 ) Amounts recovered 847,234 778,693-1,625,927 Amounts sold - (33,645 ) - (33,645 ) Effects of exchange rate change - - (2,801 ) (2,801 ) Balance,, 2006 307,048 1,630,595 477,335 2,414,978 Provision (reversal of provision) for loan losses 2,413,999 2,361,293 (29,198 ) 4,746,094 Amounts written-off (2,680,266 ) (2,229,522 ) - (4,909,788 ) Amounts recovered 173,549 512,974-686,523 Amounts sold (4,781 ) (55,235) - (60,016 ) Effects of exchange rate change - - 154 154 Balance,, 2007 $ 209,549 $ 2,220,105 $ 448,291 $ 2,877,945 In 2006 and 2007, the Bank had not written off credits for which legal proceeding had not been initiated. 9. AVAILABLE-FOR-SALE FINANCIAL ASSETS Ending Ending Ending Balance Interest Rate Maturity Date Balance Balance Interest Rate Maturity Date Government bond $ 12,625,273 1.75%-7.75% September 2008- September 2016 Related information of pledge is shown in Note 27. $ 6,961,599 $ 214,579 1.75%-7.75% September 2008- March 2017 10. HELD-TO-MATURITY FINANCIAL ASSETS Ending Ending Ending Balance Interest Rate Maturity Date Balance Balance Interest Rate Maturity Date Government bond $ 305,878 2.500%-6.375% January 2007 - October 2007 $ - $ - - - Related information of pledge is shown in Note 27. - 18 -
11. EQUITY INVESTMENTS RECOGNIZED BY THE EQUITY METHOD % of % of Owner- Owner- NT$ ship NT$ US$ ship Far Eastern Asset Management Co., Ltd. $ 2,699,658 100.00 $ 1,737,031 $ 53,541 100.00 Dah Chung Bills Finance Corp. 1,257,378 22.56 1,214,187 37,425 22.06 Far Eastern Life Insurance Agency Co., Ltd. 105,014 100.00 141,326 4,356 100.00 Far Eastern Alliance Asset Management Co., Ltd. 157,297 60.00 127,642 3,935 60.00 Far Eastern Property Insurance Agency Co., Ltd. 12,965 100.00 15,444 476 100.00 Far Eastern International Finance Corp. 4,192 100.00 4,159 128 100.00 Far Eastern Technical Consultants Co., Ltd. 15,555 30.00 - - - $ 4,252,059 $ 3,239,789 $ 99,861 In March 2007, the Bank sold 2,165 thousand shares of Dah Chung Bills Finance Corp. to Far Eastern Asset Management Co., Ltd. for NT$28,448 thousand. There was no gain or loss on this sale. In September 2007, the Bank sold 1,500 thousand shares of Far Eastern Technical Consultants Co., Ltd. to Yuan Ding Co., Ltd. for NT$16,845 thousand. There was no gain or loss on this sale. In December 2007, Far Eastern Asset Management Co., Ltd. made a capital return to the Bank. The Bank decreased its holding in Far Eastern Asset Management Co., Ltd. by 135,000 thousand shares and the refund had not been received as of, 2007. Investment income (loss) recognized by the equity method was as follows: Far Eastern Asset Management Co., Ltd. $ (55,764 ) $ 388,248 $ 11,967 Far Eastern Life Insurance Agency Co., Ltd. 63,254 93,478 2,881 Dah Chung Bills Finance Corp. 77,636 55,214 1,702 Far Eastern Property Insurance Agency Co., Ltd. 8,483 9,747 300 Far Eastern Technical Consultants Co., Ltd. 3,551 1,290 40 Far Eastern Alliance Asset Management Co., Ltd. (33,403 ) (29,655 ) (914 ) $ 63,757 $ 518,322 $ 15,976 The carrying value of the investments as of, 2006 and 2007 and investment income (loss) in the years then ended was based on their audited financial statements, except those of Far Eastern International Finance Corp. The Bank believes that, there is no material effect on the Bank s financial statements. All accounts of the subsidiaries were included in the consolidated financial statements for the years ended, 2006 and 2007. - 19 -
12. DEBT INSTRUMENT INVESTMENTS WITH NO ACTIVE MARKET Credit link note $ - $ 4,493,356 $ 138,500 Convertible bonds 754,964 3,872,451 119,361 Foreign government bonds - 1,592,783 49,095 Floating rate notes 330,350 221,065 6,814 1,085,314 10,179,655 313,770 Less: Accumulated impairment 162,025 264,814 8,162 $ 923,289 $ 9,914,841 $ 305,608 Since the assessment of recoverable values, the Bank recognized an impairment loss of NT$16,160 thousand and NT$153,369 thousand for the years ended, 2006 and 2007, respectively. 13. OTHER FINANCIAL ASSETS Non-accrual loans $ 155,933 $ 77,179 $ 2,379 Less: Allowance for possible losses (Note 8) 77,966 38,845 1,197 77,967 38,334 1,182 Financial assets carried at cost 103,846 103,846 3,201 Derivative instruments held for hedging 250,663 40,099 1,236 Remittance purchased 13 16 - Financial assets carried at cost were as follows: $ 432,489 $ 182,295 $ 5,619 % of % of Owner- Owner- NT$ ship NT$ US$ ship Domestic unquoted common stock ERA Communications Co., Ltd. $ 50,006 1.76 $ 50,006 $ 1,541 1.76 Financial Information Service Co., Ltd. 45,500 1.14 45,500 1,402 1.14 An Feng Enterprise Co., Ltd. 3,000 10.00 3,000 93 10.00 Mondex Taiwan Co., Ltd. 2,467 3.35 2,467 76 3.35 Sunshine Asset Management Co., Ltd. 2,073 3.46 2,073 64 3.46 Taipei Forex Inc. 800 0.40 800 25 0.40 $ 103,846 $ 103,846 $ 3,201 In May 2006, the Bank sold 49,708 thousand shares of Far Eastern International Leasing Corp. at NT$12.52 per share, resulting a gain of NT$96,974 thousand. In June 2006, the Bank sold 4,653 thousand shares of Cheng I Food Co., Ltd. at NT$12.50 per share, resulting a gain of NT$11,632 thousand. - 20 -
In June 2006, the Bank transferred its debt from ERA Communications Co., Ltd. into 501 thousand common shares of ERA Communications Co., Ltd. In May 2006, according to the requirement of Government, the Bank exchanged its NT$207 million nonperforming loan with 207 thousand common stock shares of Sunshine Asset Management Co., Ltd. In June 2006, Mondex Taiwan Co., Ltd. reduced its capital to offset its deficit, and the Bank recognized investment loss of NT$3,933 thousand. 14. PROPERTIES Accumulated depreciation were as follows: Buildings and improvements $ 315,033 $ 348,764 $ 10,750 Computer equipment 551,047 641,980 19,788 Transportation equipment 23,720 21,666 668 Miscellaneous equipment 854,616 930,910 28,693 $ 1,744,416 $ 1,943,320 $ 59,899 As of, 2006 and 2007, properties were insured for NT$1,912,717 thousand and NT$1,315,950 thousand, respectively. 15. OTHER ASSETS Collaterals assumed $ 464,961 $ 22,035 $ 679 Less: Accumulated impairment 171,335 1,700 52 293,626 20,335 627 Guarantee deposits for financial instruments agreement 781,071 3,091,493 95,290 Deferred income tax (Note 22) 1,137,012 1,543,256 47,568 Refundable deposits 505,252 682,317 21,031 Deferred charges 174,248 165,402 5,098 Prepaid expenses 117,003 134,581 4,148 Others 52,747 9,970 308 $ 3,060,959 $ 5,647,354 $ 174,070 In 2006 and 2007, the Bank recognized and reversed an impairment loss of NT$15,929 thousand and NT$66,908 thousand for other assets, respectively. - 21 -
16. DUE TO BANKS AND THE CENTRAL BANK Due to banks $ 5,496,749 $ 8,972,903 $ 276,574 Call loans from banks 4,214,351 8,665,605 267,103 Due to the Central Bank 56,372 95,136 2,932 Overdraft 45,391 41,678 1,285 $ 9,812,863 $ 17,775,322 $ 547,894 17. PAYABLES Accrued interest $ 1,465,784 $ 1,702,248 $ 52,469 Factoring 1,110,998 1,520,015 46,852 Acceptances 1,435,298 613,830 18,920 Accrued expenses 635,629 467,384 14,406 Checks for clearing 1,834,183 327,545 10,096 Collection on fund sold 190,231 133,395 4,112 Securities transaction 234,675 98,812 3,046 Others 308,176 325,020 10,018 $ 7,214,974 $ 5,188,249 $ 159,919 18. DEPOSITS AND REMITTANCES Checking deposit $ 3,408,850 $ 2,720,292 $ 83,848 Demand deposit 18,725,826 19,533,525 602,088 Demand savings 32,135,957 31,258,705 963,496 Time savings 83,926,722 82,308,014 2,537,004 Negotiable certificates of deposit 30,477,000 28,883,000 890,269 Time deposit 97,592,865 116,595,508 3,593,857 Remittances 45,507 71,405 2,201 $ 266,312,727 $ 281,370,449 $ 8,672,763-22 -
19. BANK DEBENTURES a. Bank debentures $ 30,987,120 $ 30,864,422 $ 951,343 b. Convertible bonds 600,581 571,808 17,625 a. Bank debentures $ 31,587,701 $ 31,436,230 $ 968,968 Item The Issuing Period Note Subordinated bank debentures - five year maturity; 1 st of first issue in 2002 Subordinated bank debentures - five year maturity; 2 nd of first issue in 2002 Senior bank debentures - five year maturity; first issue in 2003 Senior bank debentures - five year maturity; second issue in 2003 Senior bank debentures - five year maturity; third issue in 2003 Senior bank debentures - five year maturity; fourth issue in 2003 Senior bank debentures - five and half year maturity; fourth issue in 2003 Senior bank debentures - five year maturity; first issue in 2004 Senior bank debentures - five year maturity; second issue in 2004 Senior bank debentures - five year maturity; third issue in 2004 Senior bank debentures - five year maturity; fourth issue in 2004 2002.06.28-2007.06.28 Interest payable on June 28 each year; floating interest rate plus 1.75% with associated press 90 days in secondary market 2002.07.31-2007.07.31 Interest payable on January 31 and July 31 each year; floating interest rate 2003.02.11-2008.02.11 Interest payable on February 11 and August 11 each year; floating interest rate at 4.6% minus 6 months LIBOR 2003.07.18-2008.07.18 Interest payable on July 18 each year; fixed interest rate at 1.42% 2003.09.05-2008.09.05 Interest payable on March 5 and September 5 each year; floating interest rate 2003.10.17-2008.10.17 A.B.D.E.F. coupons: Interest payable quarterly; C.G.H.I. coupons: Interest payable on October 17 each year; fixed interest rate at 2.20%-2.25% 2003.10.17-2009.04.17 Interest payable on April 17 and October 17 each year; floating interest rate 2004.03.25-2009.03.25 A.B.C.D.E.F. coupons: Interest payable quarterly; G coupon: Interest payable half a year; floating interest rate 2004.05.14-2009.05.14 Interest payable on May 14 and November 14 each year; floating interest rate 2004.07.07-2009.07.07 A.B.C.D. coupons: Interest payable quarterly; floating interest rate; E.F.G.H.I.J.K. coupons: Interest payable quarterly; fixed interest rate at 2.50%-2.52% 2004.12.22-2009.12.22 Interest payable on December 22 each year; fixed interest rate at 2.25% Senior bank debentures - five year 2005.03.30-2010.03.30 Interest payable quarterly; fixed maturity; first issue in 2005 interest rate at 2.00%-2.05% Senior bank debentures - five year 2005.04.11-2010.04.11 Interest payable quarterly; fixed maturity; second issue in 2005 interest rate at 2.09%-2.10% Senior bank debentures - five year maturity; third issue in 2005 2005.05.05-2010.05.05 Interest payable on May 5 each year; fixed interest rate at 2.02% $ 2,000,000 $ - $ - 3,000,000 - - 2,000,000 2,000,000 61,647 1,500,000 1,500,000 46,235 700,000 700,000 21,575 2,100,000 2,100,000 64,728 700,000 700,000 21,576 1,800,000 1,800,000 55,482 1,200,000 1,200,000 36,988 3,000,000 3,000,000 92,470 3,000,000 3,000,000 92,470 2,000,000 2,000,000 61,647 1,000,000 1,000,000 30,823 2,000,000 2,000,000 61,647 (Continued) - 23 -