To our Sharechlders
Market Analysis
Our Goals for 2002
Organization Chart
tr>
NOTES TO FINANCIAL STATEMENTS
(Amounts in Thousands of New Taiwan Dollars, Unless Otherwise Stated)
ORGANIZATION AND OPERATION
In 1978, the Taipei Regional Mutual Loans and Savings Company was converted into the Taipei Business Bank. In May 1998, the Bank's conversion into a commercial bank was approved by the Ministry of Finance, and the Bank changed its name to the International Bank of Taipei on May 14, 1998. As a commercial bank, the Bank is engaged in the following: (a) businesses prescribed by the Banking Law and Trust Law; (b) operations of an offshore banking unit; and (c) other businesses authorized by the Ministry of Finance. The Bank's stock is traded on the Taiwan Stock Exchange.
The operations of the Bank's Trust Department consist of planning, managing and operating of trust business. The foregoing operations are regulated under the Banking Law and Trust Law.
SIGNIFICANT ACCOUNTING POLICIES
Basis of financial statement preparation
ˇ@ˇ@The accompanying financial statements include the accounts of Head Office, OBU, all branches and representative offices. All inter-office transactions and balances have been eliminated.
Securities purchased
ˇ@ˇ@Securities purchased are carried at cost less allowance for decline in value.
ˇ@ˇ@Costs of equity securities sold are determined using the weighted-average method and those of other securities are by the specific identification method.
ˇ@ˇ@Sales and purchases of bonds and short-term bills under agreements to repurchase or resell are treated as outright sales and purchases.
Non-performing loans
ˇ@ˇ@The balance of overdue loans and other credits extended by the Bank and the related accrued interest are classified as non-performing loans in accordance with the guidelines issued by the Ministry of Finance.
Allowance for possible losses
ˇ@ˇ@Allowances for possible losses on loans, discounts, bills purchased, receivables and non-performing loans are provided based on an evaluation of their collectibility.
ˇ@ˇ@The balances of uncollectible accounts are written-off against allowance for possible losses upon approval of such write-offs by the board of directors.
Long-term equity investments
ˇ@ˇ@Long-term equity investments accounted for by the equity method are initially stated at cost and subsequently adjusted for the Bank's proportionate share in the net income or net loss of the investees. Cash dividends received are accounted for as reduction in the carrying values of the investments. When the financial statements of less than majority owned equity-accounted investees are not available on time, the investment income or loss for the current is based on the net income or loss of investees in the preceding year using the equity interest as of the end of the current year.
ˇ@ˇ@Long-term equity investments accounted for using the cost method are carried at cost plus stock dividends received before 1984. The carrying values of those investments are reduce to reflect an other than temporary decline in value of unlisted stocks with the related impairment losses charged to current income. Cash dividends received are recognized as investment income. Stock dividends received after 1984 are accounted for only as increases in the number of shares held, rather as income. Costs of stocks sold are determined using the moving-weighted-average method.
Property and equipment
ˇ@ˇ@Properties are stated at cost or cost plus appreciation. The cost of renewals and betterment which extend the useful life of property and equipment is capitalized. The cost of maintenance and repairs is charged to expense as incurred.
ˇ@ˇ@Depreciation is computed using the straight-line method over estimated service lives which range as follows: Buildings and improvements, 15 to 60 years; transportation equipment, 5 years; miscellaneous equipment, 3 to 15 years. Depreciation on revalued property is provided based on their remaining useful lives at the time of the revaluation. The carrying value of property and equipment, which were fully depreciated using the foregoing service lives, but are still being used by the Bank are depreciated over their remaining estimated service lives.
ˇ@ˇ@Upon the sale or disposal of items of properties, the related cost, appreciation and accumulated depreciation are removed from the accounts and any gain or loss resulted is credited or charged to income. Prior to 2000, any such gain, less applicable income tax, are reclassified to capital surplus in the same year.
Foreclosed collateral
ˇ@ˇ@Foreclosed collaterals are recorded at cost (included in other assets) and revalued using the lower of cost or net realizable value as of the balance sheet dates.
Reserve for losses on guarantees
ˇ@ˇ@Reserve for losses on guarantees (included in other liabilities) is provided for probable losses attributable to defaults by third parties on their contractual obligations, on bills of acceptance and on commercial paper issued by third parties.
Pension costs
ˇ@ˇ@Provisions for pension costs are based on actuarial calculations. The unrecognized benefit obligation at transition is amortized over 7 years while unrecognized net actuarial loss is amortized over the average remaining service lives of the plan members.
Recognition of interest revenue and service fees
ˇ@ˇ@Interest revenue on loans is recorded at accrual basis. No interest revenue is recognized in the accompanying financial statements on loans and other credits extended by the Bank that are classified as non-performing loans. The interest revenue on those loans is recognized upon collection.
ˇ@ˇ@Service fees are recorded as income upon receipt and substantial completion of activities involved in the earnings process.
Income tax
ˇ@ˇ@Deferred income taxes are recognized for the tax effects of temporary differences, unused tax credits, and operating loss carryforwards. Valuation allowance is provided for deferred tax assets that are not certain to be realized.
ˇ@ˇ@Income tax on interest derived from short-term negotiable instruments, which is levied separately, and any adjustment of income taxes of prior years are added to or deducted from the current year's tax provision.
ˇ@ˇ@Income tax (10%) on unappropriated earnings is recorded as income tax in the year when the shareholders resolve that the earnings shall be retained.
Contingencies
ˇ@ˇ@A loss is recognized if it is probable that an asset has been impaired or a liability has been incurred and if the amount of loss can be reasonably estimated. If the amount of loss cannot be reasonably estimated and the loss is possible and remote, the loss is disclosed in the financial statements.
Foreign-currency transactions
ˇ@ˇ@The Bank maintains its accounts in the respective currencies in which the transactions are denominated. All foreign-currency revenues and expenses are recorded in New Taiwan dollars at the rates of exchange in effect when the transactions occur. Foreign-currency assets and liabilities, except those arising from forward and swap contracts, are translated into New Taiwan dollars at the prevailing exchange rates, and resulting gains or losses are credited or charged to income.
ˇ@ˇ@The Bank records foreign-currency denominated transactions in the respective currencies in which these are denominated. Foreign-currency denominated income and expenses are translated into New Taiwan dollars at month end based on spot exchange rates. Foreign-currency denominated assets and liabilities are translated into New Taiwan dollars at closing rates at the balance sheet date. Realized and unrealized foreign exchange gains or losses are credited or charged to current income. Gains or losses resulting from the restatement of the balance of the foreign-currency denominated long-term equity investments accounted for using the equity method as of the balance sheet dates are credited or charged to "cumulative translation adjustment" under stockholders' equity.
Derivative transactions
a. Foreign exchange forward contracts
ˇ@ˇ@The foreign current amounts of foreign exchange forward contracts that are entered into for trading purposes are recorded in New Taiwan dollars at the contracted forward rates. The gains or losses arising from the difference between the contracted forward rates and the spot rates on maturity date are included in income in the period the contracts are settled. The foreign currency amounts of open contracts as of the balance sheet dates are restated using the rates applicable for the remaining term of the contracts with the resulting gain or loss recognized in income in the current year. Receivables and payables arising from the trade contracts are netted at year-end and the resulting balance is accounted for as either current asset or liability.
b. Interest rate swaps
ˇ@ˇ@The notional amounts in interest rate swap contacts are not recognized as either assets or liabilities since there are no obligation to exchange those amounts. However, a memorandum entry is made to note the transaction. The net amounts paid or received under the contracts determined as of the settlement date and on the balance-sheet dates are recognized as interest income or expense.
c. Currency swap contracts
ˇ@ˇ@Foreign-currency spot-position assets or liabilities arising from currency swap contracts, which are mainly to accommodate customers' needs or to manage the Bank's own currency positions, are recorded at the spot rates when the transactions occur, while the corresponding forward-position assets or liabilities are recorded at the contracted forward rates; with receivables netted against the related payables.
ˇ@ˇ@The related discount or premium is amortized using the straight-line method over the contract period.
d. Cross currency swap
ˇ@ˇ@The foreign currency amount of cross currency swap contracts, which are intended for hedging purpose, are recorded at spot rates at the contract dates. The net interest receivable or payable at each settlement is recorded as adjustment to the revenue or expense associated with the item being hedged.
e. Currency options
ˇ@ˇ@The amounts paid on options bought and/or held and amounts received on options written, which are mainly to accommodate customers' needs, are recorded as assets and liabilities when the transactions occur. These instruments are markedto market as of the balance sheet dates. The carrying values of the instruments, which are recorded either as assets or liabilities, are charged to income when they are not exercised. Gains or losses on the date the options are exercised are also included in income.
Reclassifications in statement of cash flows
ˇ@ˇ@According to a pronouncement issued by Accounting Research and Development Foundation, cash flow changes in due from banks and due from Central Bank of 2000 have been presented as part of investing activities to conform to 2001 classification whereas previously they were included as component of cash and due from banks and Central Bank.
CASH DECEMBER 31
2001 2000
Cash on hand $ 3,324,787 $ 3,473,257
Checks for clearing 1,840,462 5,646,738
$ 5,165,249 $ 9,119,995
DUE FROM BANKS DECEMBER 31
2001 2000
Call loans to banks $ 6,247,528 $ 7,771,647
Due from banks 469,772 599,453
$ 6,717,330 $ 8,371,100
DUE FROM CENTRAL BANK DECEMBER 31
2001 2000
Reserve for $ 11,086,547 $ 3,473,257
New Taiwan dollar deposits Reserver for foreign 297,560 296,928
Checks for clearing 2,874,000 5,646,738
$ 14,258,107 $ 11,825,139
ˇ@ˇ@The reserve accounts represent deposits required by the Central Bank. The required deposit reserves on New Taiwan dollar - denominated deposits are determined at the end of each month using prescribed rates on the balances of various types of New Taiwan dollar - denominated deposits. The actual required reserves were only $6,301,078 and $8,762,187 as of December 31, 2001 and 2000, respectively. The required reserve is subject to withdrawal restrictions.
ˇ@ˇ@The required deposit reserves on foreign-currency-denominated deposits starting December 8, 2000. The reserve is determined using prescribed rates. These reserves, however, may be withdrawn and are non-interest earning.
SECURITIES PURCHASED - NET DECEMBER 31
2001 2000
Time deposits $ 20,323,445 $ 8,851,423
Commercial paper 16,754,853 23,084,311
Bonds 15,754,853 23,084,311
Mutual funds beneficiary 4,850,791 2,330,011
Treasury bills 3,415,185 -
Listed and over-the-counter stocks 376,034 1,695,626
Bank acceptances 11,488 411,087
61,706,939 62,400,327
Less - allowance for decline in value 74,529 447,347
$ 61,635,410 $ 61,592,980
ˇ@ˇ@As of December 31, 2001 and 2000, the aggregate market value of bonds, stocks and mutual fund beneficiary certificates were $21,853,898 and $29,657,649, respectively.
RECEIVABLES - NET DECEMBER 31
2001 2000
Accrued interest $ 1,893,785 $ 2,323,472
Credit cards 899,974 962,225
Acceptance receivable 862,519 714,308
Other 255,715 399,232
3,911,933 4,399,237
Checks for clearing 2,874,000 5,646,738
$ 14,258,107 $ 11,825,139
LOANS, DISCOUNTS AND BILLS PURCHASED - NET DECEMBER 31
2001 2000
Bills purchased and discounts $ 1,172,853 $ 1,068,231
Short - term unscured loans and overdrafts 48,985,451 52,772,340
Short-trem secured loans and overdrafts 33,197,933 45,597,131
Medium-term unsecured loans 32,909,191 24,746,208
Medium-term secured loans 27,527,859 26,640,518
Long-term unsecured loans 10,979,986 10,590,948
Long-term secured loans 52,242,020 46,407,742
Non-performing loans 11,785,052 9,064,008
218,800,345 216,887,126
Less - allowance for posible losses 3,024,902 2,520,642
$ 215,775,443 $ 214,366,484
ˇ@ˇ@The balance of loans as of December 31, 2001 and 2000, where accrual of interest revenues were discontinued, amounted to $11,686,165 and $9,003,310, respectively. The unrecognized interest revenue on these loans amounted to $1,406,596 and $1,144,106 for the years ended December 31, 2001 and 2000, respectively.
ˇ@ˇ@For the years ended December 31, 2001 and 2000, the Bank had not written off credits without initiating legal proceedings.
ˇ@ˇ@Details of the changes in the allowance for possible losses of loans, discounts and bills purchased are summarized below:
For the Year Ended December 31, 2001
Specific Risk General Risk Total
Balance,January1 $ 1,248,6000 $ 1,,272,042 $ 2,520,642
Provision 2,650,039 7,364 2,657,403
Write-off (2,153,143) - (2,153,143)
Balance,December 31 $ 1,745,496 $ 1,,279,406 $ 3,024,902
For the Year Ended December 31, 2000
Specific Risk General Risk Total
Balance,January1 $ 1,320,497 $ 1,186,815 $ 2,507,312
Provision 1,548,739 85,227 1,633,966
Write-off (1,620,636) - (1,620,636)
Balance,December 31 $ 1,248,600 $ 1,272,024 $ 2,520,642
LONG-TERM EQUITY INVESTMENTS DECEMBER 31
2001 2000
Amount Share-holding% Amount Share-holding%
Equity method
Unlisted stocks:
Transcend Trust Co., Ltd $ 45,673 20.00 $ 52,493 20.00
IBT Property Insurance Agent Co., Ltd. 3,750 99.99 - -
IBT Lift Insurance Agent Co., Ltd. 3,386 99.99 - -
52,809 52,493
Cost method
Unlisted stocks:
Huan Hwa Securities Finance 173,496 2.63 173,496 2.63
Taiwan Financial Asset Service Corp. 50,000 2.94 - -
Financial Information Service Co., Ltd. 45,500 1.14 45,500 1.14
Taiwan SME Development 29,000 4.84 29,000 4.84
Taiwan Television 20,983 4.84 20,983 4.84
China technology Venture Management Co,. Ltd. 16,700 4.99 - -
Taiwan Futures Exchange Corp. 12,500 0.63 12,500 0.63
Taipei Forex Inc. 6,000 3.03 6,000 3.03
Lien An Co. 1,250 5.00 1,250 5.00
SWIFT 764 - 764 -
356,193 289,493
$ 409,002 $ 341,986
ˇ@ˇ@The carrying value of equity-accounted investments and the related income are determined based on audited financial statements except for IBT Property Insurance Agent Co., Ltd. and IBT Life Insurance Agent Co., Ltd. Management believes that the effect of adjustments, if any, arising from the audit of the accounts of IBT Property Insurance Agent Co., Ltd. and IBT Life Insurance Agent Co., Ltd. are not expected to be significant. The individual and combined total assets and operating revenues of the majority owned subsidiaries are individually less than 10% and 30%, respectively, of those of the Bank. Accordingly, the Bank did not prepare consolidated financial statements.
PROPERTY AND EQUIPMENT DECEMBER 31
2001 2000
Cost and appreciation $ 6,184,047 $ 4,851,553
Accumulated depreciation:
Buildings and improvements 500,440 436,199
Transportation equipment 3,176 3,045
Miscellaneous equipment 820,058 784,437
1,323,674 1,223,681
4,860,373 3,627,827
Construction in progress and advances related to acquisitions of equipment 52,848 15,621
$ 14,913,221 $ 3,643,493
ˇ@ˇ@The Bank has revalued its properties in accordance with government regulations as follows: Land in 1961, 1964, 1967, 1974 and 2001; other properties in 1961.
ˇ@ˇ@Depreciation expenses were $210,378 in 2001 and $213,011 in 2000.
ˇ@ˇ@Insurance coverage on properties as of December 31, 2001 amounts to $2,505,015.
OTHER ASSETS - NET DECEMBER 31
2001 2000
Idle and properties leased to others - net $ 1,501,110 $ 1,519,743
Refundable deposits 284,060 322,413
Deferred income taxes 292,390 150,112
Deferred pension cost 260,200 103,737
Foreclosed collateral 175,106 84,324
Miscellaneous 29,795 38,902
$ 2,542,661 $ 2,219,231
DUE TO BANKS DECEMBER 31
2001 2000
Call loans from banks $ 1,510,042 $ 7,139,150
Bank overdrafts 179,719 198,423
Due to Central Bank 37,382 19,680
Due to banks 29,610 16,092
$ 1,756,753 $ 7,373,345
PAYABLES DECEMBER 31
2001 2000
Checks for clearing $ 1,840,462 $ 5,646,738
Accrued interest 1,742,234 2,370,594
Acceptances 871,737 733,748
Accrued expenses 238,130 275,942
Other 1,468,237 825,102
$ 6,160,800 $ 9,852,124
DEPOSITS AND REMITTANCES DECEMBER 31
2001 2000
Deposits:
Checking $ 5,133,720 $ 7,461,754
Demand 25,581,331 24,038,627
Time 63,783,585 Savings 173,856,075 166,445,727
Negotiable certificates of deposit 5,878,600 7,082,800
Remittances 294,086 99,666
$ 274,527,397 $ 268,353,445
STOCKHOLDERS' EQUITY DECEMBER 31
ˇ@ˇ@According to the Company Law, all components of capital surplus can only be used to offset a deficit but only the component arising from the issuance of shares in excess of par value and donation can be distributed as stock dividend subject to the approval of stockholders.
ˇ@ˇ@The Bank's Articles of Incorporation provide that the annual net income, less any accumulated losses in prior years, shall be appropriated as follows:
ˇ@ˇ@a. 30% as legal reserve;
ˇ@ˇ@b. Special reserve, if needed;
ˇ@ˇ@c. Dividends, in the year with earnings, at least 6% of the aggregate par value of the Bank's outstanding capital stock;
ˇ@ˇ@d. The remainder: Dividends to stockholders - 80%; bonus to directors and supervisors - 5%, and bonus to employees - 15%.
ˇ@ˇ@The aforementioned appropriation as special reserve needs to be approved by the stockholders.
ˇ@ˇ@Under the Banking Law, cash dividends cannot exceed 15% of the aggregate par value of the Bank's outstanding capital stock until the legal reserve equals the aggregate par value of the outstanding capital stock of the Bank.
ˇ@ˇ@On April 19, 2001, the stockholders amended the Bank's dividend policy. The new policy provides that dividends are paid only in the form of stocks (stock dividends). This policy will be reviewed in the future and after taking into account the Bank's development plan approximately 10% to 50% of the total dividends may be in cash.
ˇ@ˇ@On December 28, 2001, the Board of Directors (BOD) proposed an amendment to dividend policy that needs to be approved by the Stockholders in 2002. The amendment proposes that at least 20% of the total dividends should be in cash.
Under the Company Law, the appropriation for legal reserve shall be made until the reserve equals the aggregate par value of the Bank's outstanding capital stock. Such reserve can only be used to offset a deficit or, when reaching 50% of the aggregate par value of the Bank's outstanding capital stock, up to 50% thereof can be transferred to capital as stock dividend.
Under the Integrated Income Tax System non-corporate and ROC-resident shareholders are allowed tax credits for the income tax paid by the Bank on earnings generated in 1998 and onwards.
INCOME TAX DECEMBER 31
2001 2000
Income tax expense - current $ 410,407 $ 542,987
Income tax expense (benefit) - deferred (142,278) 20,499
Prior year's adjustment 139,585 -
Tax on unappropriated retained - 30,581
$ 407,714 $ 594,067
The components of net deferred income tax assets are as follows:
DECEMBER 31
2001 2000
Allowance for possible losses $ 188,595 $ 72,220
Accrued pension cost in excess of amount deductible for income tax purposes 103,795 72,120
Other - 5,772
$ 292,390 $ 150,112
As of December 31, 2001 and 2000, the balances of the ICA aggregated to $247,824 and $242,043, respectively.
The 2001 projected and 2000 actual ratios of imputed tax credit to earnings are as follows:
2001 2000
Cash dividend 11.50% 21.11%
Stock Dividend 11.50% 27.81%
ˇ@ˇ@The tax credits allocated to stockholders are based on the balance of Imputation Credit Account (ICA) on the dividend distribution date. Accordingly, 2001 projected tax credit ratio may change since the actual tax credit may differ from the projected tax credit.
ˇ@ˇ@Among the unappropriated earnings as of December 31, 2001 and 2000, the remaining balances generated before January 1, 1998 amounted to $67,680 and $204,996, respectively.
ˇ@ˇ@The effective tax rate for 2001 and 2000 were 25%.
ˇ@ˇ@Income tax returns had been examined by the tax authorities through 1998. As a result of those examination, in the income tax returns for 1995, 1997 and 1998, the tax authoriies had denied the creditability of 10% withholding tax on interest income on bonds totaling $77,069 that is attributable to period those bonds were held by other investors. The income tax returns for 1996, 1999 and 2000 also reflected reduction in income tax obligations totaling $86,697 attributable to similar type of withholding taxes; which returns were not yet examined by the tax authorities.
ˇ@ˇ@The Bank has appealed the decision of the tax authorities to deny the creditability of such type of withholding taxes. However, the Bank has accrued liabilities and has written off any assets recognized related to the foregoing withholding taxes as part of income tax expense in 2001.
PENSION PLAN DECEMBER 31
ˇ@ˇ@The Bank has a pension plan covering all regular employees. The benefits under the plan are based on service years and monthly average basic pay at the time of retirement.
ˇ@ˇ@The Bank makes monthly contributions to a pension fund (the "Fund I") administered by the employees pension fund committee and deposited in the committee's name in the Bank. Since June 1999, the Bank has established another pension fund (the "Fund II"), to which it makes monthly contributions equal to 2% of salaries. Fund II is administered by the workers fund administration committee and deposited in its name in the Central Trust of China.
ˇ@ˇ@Certain pension information is as follows:
2001 2000
a.Components of pension cost:
ˇ@Service cost $ 42,450 $ 36,654
ˇ@Interest cost 70,884 68,137
ˇ@Expected return on plan assets (49,996) (46,156)
ˇ@Amortization 99,494 96,068
162,832 154,703
b.Reconciliation between the funded status of the plan and accrued pension cost:
ˇ@Benefit obligation
ˇ@ˇ@Vested benefit obligation $ 478,843 $ 523,391
ˇ@ˇ@Non-vested benefit obligation 526,961 351,023
ˇ@ˇ@Accumulated benefit obligation 1,005,804 874,414
ˇ@ˇ@Additional benefits based on future salaries 385,075 325,819
ˇ@ˇ@Projected benefit obligation 1,390,879 1,200,233
ˇ@Plan assets at fair value (745,603) (770,677)
ˇ@Funded status 645,276 429,556
ˇ@Unrecognized net transition obligation (74,935) (149,867)
ˇ@Unrecognized prior service cost (327,485) (352,047)
ˇ@Unrecognized net loss 260,200 103,737
ˇ@Additional minimum liability 260,200 103,737
ˇ@Accrued pension cost (Note 11) $ 260,200 $ 103,737
c.Vested benefits - undiscounted $ 699,284 $ 822,800
d.Assumptions used in computing the present value of accumulated and projected benefit obligations
ˇ@Weighted average discount rate 5.25% 6.0%
ˇ@ˇ@Rate of future increase in salaries 2.50% 2.5%
ˇ@ˇ@Rate of return on plan assets 5.00% 6.0%
e.Status of the plan:
ˇ@Contributions $ 162,832 $ 154,703
Benefit payments $ 227,631 $ 69,763
RELATED PARTY TRANSACTIONS DECEMBER 31
ˇ@ˇ@The transactions with related parties such as the Bank's directors, supervisors and managers as well as their relatives are summarized as follows:
December 31,2001
Amount % of Account Interest Rates (%)
Balance,January1 $ 1,053,853 0.38 0-13
Provision $ 940,864 0.44 4.72-8.25
December 31,2000
Amount % of Account Interest Rates (%)
Balance,January1 $ 1,661,665 0.62 0-13
Provision $ 753,574 0.37 6.5-8.34
ˇ@ˇ@As of December 31, 2001 and 2000, the bonds and short-term bills under agreements to repurchase with the related parties were $561,724 and $538,211, respectively.
ˇ@ˇ@The aforementioned interest rates shown above are similar to, or approximate, those offered to non-related parties.
ˇ@ˇ@In compliance with Banking Law, except for consumer loans and government loans, credits extended by the Bank to any related party should be 100% secured, and the terms of those credits should be similar to those extended to non-related parties.
ASSETSPLEDGED OR MORTGAGED DECEMBER 31
The following assets have been pledged or mortgaged as collateral for formal collection lawsuits filed by the Bank to recover overdue loans.
December 31
2001 2000
Securities purchased $ 814,800 $ 650,113
Checks for clearing 1,000 1,000
$ 815,800 $ 651,113
CAPITAL ADEQUACY RATIO DECEMBER 31
ˇ@ˇ@The Banking Law and related regulations require that the Bank maintains a capital adequacy ratio of at least 8%. Pursuant to such law and regulations, if the Bank's capital adequacy ratio falls below 8%, the Ministry of Finance may impose certain restrictions on the level of the cash dividends that the Bank can declare or, in certain conditions, totally prohibit the Bank from declaring cash dividends. The capital adequacy ratio of the Bank were 13.18% and 11.56% as of December 31, 2001 and 2000, respectively.
AVERAGE AMOUNT AND AVERAGE INTEREST RATE OF INTEREST-EARNING ASSETS AND INTEREST-BEARING LIABILITIES
ˇ@ˇ@The average balance is calculated using the daily average balance of interest earning assets and interest bearing liabilities.
DECEMBER 31
2001 2000
verage Balance Average Rate(%) Average Balance Average Rate(%)
Interest earning assets
Due from banks $ 10,084,496 3.48 $ 9,635,798 5.21
Due from central bank of China 8,110,088 3.95 8,823,952 3.58
Securities purchased 56,736,712 9.35 61,720,182 5.54
Loans, discounts and bills purchased 202,615,187 6.82 197,210,836 7.64
Interest Bearing liabilities
Due to banks 4,248,126 3.54 3,987,817 5.54
Demand 22,553,288 1.40 20,877,177 1.83
Savings 45,248,532 3.34 43,487,956 3.97
Time 62,266,767 4.02 60,983,572 4.90
Time-savings 123,184,364 4.55 119,596,902 5.11
Negotiable certificates of deposit 6,684,970 4.09 7,442,573 4.37
Due to Central Bank and other banks 5,186,762 2.22 9,408,226 4.36
Other liabilities - appropriated loan funds 160,334 3.38 135,632 3.12
MATURITY ANALYSIS OF ASSETS AND LIABILITIES
ˇ@ˇ@The maturity of assets and liabilities of the Bank is based on the remaining period from balance sheet dates. The remaining term to maturity is based on maturity dates specified under agreements, and, in cases where there is no specified maturity dates, based on expected dates of collection.
December 31 ,2001
6,160,800
Due in one year Due between One Year and Sever Years Due after Seven Years Total
Assets
Cash $ 5,165,249 $ - $ - $ 5,165,249
Due from bank 6,717,300 - - 6,717,300
Due from central bank 14,258,107 - - 14,,258,107
Securities purchased 61,706,939 - - 61,706,939
Receivables 3,911,993 - - 3,911,993
Loans, discounts and bills purchased 104,132,744 59,018,247 55,649,354 218,800,345
$ 195,892,332 $ 59,018,247 $ 55,649,354 $ 310,559,933
Liabilities
Due to banks $ 37,382 $ - $ - $ 37,382
Due to central bank 1,719,371 - - 1,719,371
Payables 6,160,800 - -
Deposits and remittances 269,465,053 5,062,344 - 274,527,397
Due to Central Bank and other banks 1,867,387 700,140 - 2,257,527
$ 279,249,993 $ 5,762,484 $ - $ 285,012,477
December 31 ,2000
td width="69">
Due in one year Due between One Year and Sever Years Due after Seven Years Total
Assets
Cash $ 9,119,995 $ - $ - $ 9,119,995
Due from bank 8,371,100 - - 8,371,100
Due from central bank 11,825,139 - - 11,825,139
Securities purchased 62,400,327 - - 62,400,327
Receivables 4,399,237 - - 4,399,237
Loans, discounts and bills purchased 117,487,962 50,376,962 49,022,202 216,887,126
$ 213,603,760 $ 50,376,962 $ 49,022,202 $ 313,002,924
Liabilities
Due to banks $ 7,353,665 $ - $ - $ 7,353,665
Due to central bank 19,680 - - 19,680
Payables 9,852,124 - - 9,852,124
Deposits and remittances 265,540,582 2,812,863 - 268,353,445
Due to Central Bank and other banks 3,307,120 - - 3,307,120
$ 286,073,171 $ 2,812,863 $ - $ 288,886,034
FINANCIAL INSTRUMENTS
a. Derivative financial instruments
ˇ@ˇ@The Bank is uses foreign currency exchange forwards, options and swaps that enables customers to transfer, modify or reduce their foreign exchange rate risks. It also uses interest rate swaps and cross currency swaps, as an end-user in connection with its risk management activities, primarily to hedge the effects of foreign exchange or interest rate fluctuations on its foreign-currency-denominated net assets. The Bank's strategy is to hedge most of its market risk. The Bank hedges its market risk using instruments whose changes in market value have a highly negative correlation with those of the hedged items. The Bank also assesses hedge effectiveness of the instruments periodically.
ˇ@ˇ@The Bank is exposed to credit risk in the event of nonperformance of the counterparties to the contracts. The Bank enters into contacts with customers that have satisfied the credit approval process and have provided the necessary collateral. The transactions are then made within each customer's credit limits and guarantees deposit may be required, depending on the customers' credit standing. Transactions with other banks are made within the trading limit set for each bank based on the bank's credit rating and its worldwide ranking. The associated credit risk has been considered in the evaluation of provision for credit losses.
ˇ@ˇ@As of December 31, 2001 and 2000, contract or notional amounts, fair values, and credit risks of outstanding derivative financial instruments were as follows:
December 31,2001
Contract or Notional Amounts Credit Risk Fair Value
Hedging purposes
Interest rate swap contracts $ 3,185,637 $ 11,867 ($ 417,635)
Crosscurrency swap contracts 133,147 - -
For meeting clients' needs
Foreign exchange forward contracts 3,067,149 14,743 (15,203)
Foreign currency swap contracts 1,038,475 4,892 (2,899)
Purchase options 281,148 1,426 370
Written options 281,148 - (297)
December 31,2000
Contract or Notional Amounts Credit Risk Fair Value
Hedging purposes
Interest rate swap contracts $ 3,233,216 $ 33,375 ($ 170,261)
Crosscurrency swap contracts 208,905 - (7,313)
For meeting clients' needs
Foreign exchange forward contracts 1,578,899 9,580 (17,682)
Foreign currency swap contracts 25,124 - 210
Purchase options - - -
Written options - - -
The fair value of each contract is determined using the quotation from Reuters or Telerate Information System.
The notional amounts of many derivatives entered into by the Bank are for the purpose of calculating the net amounts to be settled upon maturity and do not represent the Bank's cash requirements. Consequently, the Bank does not expect significant cash requirements when the derivatives mature.
The net gains or losses on derivative transactions for 2001 and 2000 are as follows:
2001 2000
Hedging purposes
Interest rate swap contrats (under interest revenue) $ 149,7930 $ 198,567
Cross currency swap contracts (under interest revenue) 10,623 7,866
For meeting clients' needs
Foreign currency contracts (Under interest revenue and foreign exchange gain) 6,626 7,183
Option contracts 1,430 -
$ 168,472 $ 213,616
b. Fair value of non-derivative financial instruments
December 31,2001 December 31,2000
Carrying Amount Fair Value Carrying Amount Fair Value
Assets
With fair value approximating carrying amount $ 246,096,204 $ 246,096,204 $ 248,388,046 $ 248,388,046
Securities purchased 61,632,410 62,358,869 61,952,980 62,004,470
Long-term stock investments 409,002 671,672 341,986 636,627
Liabilities
With fair value approximating carrying amount 285,320,231 285,320,231 289,184,077 289,184,077
ˇ@ˇ@Methods and assumptions applied in estimating the fair value of non-derivative financial instruments are a follows:
ˇ@ˇ@1) The carrying values of cash, due from banks, due from Central Bank of China, receivables, due to banks, payables, deposits and remittances and due to central bank and other banks approximate their fair values because of the short maturity of these instruments. The carrying values of other assets and other liabilities also approximate the expected cash inflows or outflows at settlements dates. Accordingly, their carrying values also approximate their fair values.
ˇ@ˇ@2) If market prices for securities purchased and long-term stock investment are available, the fair value of these financial instruments are based on the abovementioned market price. If such market prices are unavailable, estimate should be based upon financial data or other relevant data source.
ˇ@ˇ@3) Loans, discounts and bills purchased, and deposits are financial assets and liabilities mostly bearing floating interests. Thus, their carrying value amounts represent current fair value.
ˇ@ˇ@4) Fair values of guarantee deposits are estimated at their carrying amounts since such deposits do not have specific due dates.
ˇ@ˇ@Certain financial instruments and all nonfinancial instruments are excluded from disclosure of fair value. Accordingly, the aggregate fair value presented does not represent the underlying value of the Bank.
c. Financial instruments with off-balance-sheet credit risks
ˇ@ˇ@The Bank has significant credit commitments related to loans it extended and from its issuance of credit cards. Most of the credit commitments are for one year. For the years ended December 31, 2001 and 2000, the interest rates of loans range from 2.75% to 16% and 4.75% to 15%, respectively, and the interest rates of credit card loans can be as high as 18.25%. The Bank also issues financial guarantees and standby letters of credit to guarantee the performance of a client to a third party. The terms of these guarantees are usually one year, and their maturity dates are not concentrated in any particular period.
ˇ@ˇ@The contract amounts for financial contracts with off-balance-sheet credit risks are as follows:
DECEMBER 31
2001 2000
Noncancelable load commitments $ 11,421,998 $ 11,586,663
Accrued pension cost in excess of amount deductible for income tax purposes 17,993,149 16,758,243
Guarantees and issuance of letters of credit 13,146,452 13,309,369
ˇ@ˇ@Since many of the commitments are expected to expire without being drawn upon, the total committed amounts do not necessarily represent future cash requirements. The Bank's maximum credit risk relative to these commitments is the amount of the commitment assuming that the customer has utilized the full amount of the commitment and that collateral and other security proves to be of no value to the Bank
ˇ@ˇ@The Bank makes credit commitments and issues financial guarantees and standby letters of credit only after careful evaluation of customers' creditworthiness. Based on the result of the credit evaluation, the Bank may require collateral before the credit facilities are drawn upon. As of December 31, 2001 and 2000, secured loans amounted to about 57.49% and 60.34% of the total loans, respectively. Collateral held varies but generally includes cash, inventories, marketable securities, and other property. When the customers default, the Bank will, as the case may be, foreclose the collateral or execute other rights arising out of the guarantees given.
ˇ@ˇ@The Bank does not require collateral for credit card commitments. However, the creditworthiness of card holders is reviewed periodically and the commitments are revised if deemed necessary.
INFORMATION ON CONCENTRATIONS OF RISK
ˇ@ˇ@Credit risk concentrations exist when the counterparties in financial instrument transactions are individuals or groups who are engaged in similar activities, which would cause their ability to meet contractual obligations to be subject to the same changes in economic or other conditions. The Bank has no credit risk concentration arising from any individual counterparty or groups of counterparties engaged in similar business activities. Industries that account for 10% or more of the outstanding loans as of December 31, 2000 are listed below for reference:
DECEMBER 31
2001 2000
Domestic
ˇ@Corporate customers
ˇ@ˇ@Trading $ 26,294,077 $ 40,488,941
ˇ@ˇ@Manufacturing 37,788,261 39,045,105
ˇ@ˇ@Service industry 3,949,361 25,613,439
ˇ@ˇ@Natural person 86,259,440 51,140,642
ˇ@ˇ@Other 53,773,482 52,580,975
208,064,621 208,869,102
Foreign - other 10,735,724 8,018,024
13,146,452 13,309,369
The net position on foreign-currency transactions as of December 31, 2001 is not significant.
ALLOWANCE FOR POSSIBLE LOSSES AND RESERVE FOR LOSSES ON GUARANTEES
ˇ@ˇ@Since the third quarter of 2000, the economic and financial environment has been beset by many economic and noneconomic difficulties from inside and outside Taiwan. Thus, the country's economic growth has decelerated, investment is reduced, unemployment has risen, the stock market is bearish, and the New Taiwan dollar devaluated. Certain businesses enterprises, including conglomerates and listed companies, failed to meet their obligations when these obligations became due. To stabilize the situation, the government has taken various economy-boosting measures.
ˇ@ˇ@Against this background, the Bank's financial statements for the year ended December 31, 2001 and 2000 include provisions for possible losses and guarantee losses based on information available to the Bank, including defaults to the extent they can be determined or estimated. However, these estimates do not include any adjustments that might be required when related contingent liabilities become probable or determinable in the future.
CONTINGENCIES AND COMMITMENTS
ˇ@ˇ@Except for those disclosed in Notes 23, financial instruments, contingencies and commitments of the Bank are summarized as follows:
ˇ@ˇ@a. As of December 31, 2001, contingencies and commitments in the ordinary course of business are as follows:
Short-term bills and bonds sold under agreements to repurchase $ 8277,969
Shart-term bills purchased under agreements to resell 5,259,876
b. Lease contract
ˇ@ˇ@The Bank has lease agreements on premises occupied by its branches that will expire on various dates prior to December 2010. Refundable deposits on these leases totalled to $175,861 and rentals were $160,395 in 2001. Future rentals are summarized as follows:
Year Amount
2002 $ 95,677
2003 73,006
2004 47,787
2005 32,923
2006 9,834
ˇ@ˇ@Rentals for the years beyond 2007 amount to $11,771, the present value of which is about $10,664 as discounted at the Bank's one-year time deposit rate of 2.5% on December 31, 2001.
ADDITIONAL DISCLOSURES
ˇ@ˇ@Following are the additional disclosures required by the Securities and Futures Commission:
ˇ@ˇ@a. Marketable securities held [please see Table 1 (attached)];
ˇ@ˇ@b. Acquisition of individual real estates at prices of at least NT$100 million or 20% of the paid-in capital [please see Table 2 (attached)];
ˇ@ˇ@c. Names, locations, and related information of investees on which the Company exercises significant influence [please see Table 3 (attached)];
SEGMENT AND GEOGRAPHIC INFORMATION
ˇ@ˇ@The Bank is engaged in operations which all belong to one business segment, namely, banking. Also, all overseas units individually represent less than 10% of the bank's operating revenues and 10% of it total assets. Accordingly, no segment and geographic information is required to be disclosed.
TABLE 1.MARKETABLE SECURITIES HELD
Held Company Name Marketable Securities Type and Name Relationship with the company Financial Statement Account December 31 ,2001
Shares ( In Thousands) Carrying Value Percentage of Ownership Market Value or Ner Asset Value ( Note)
International Bank of Taipei Common Stock Transcend Securities Investment Trust Co., Ltd. Equity - accounted investee. Long-term equity investments 6,000 $45,673 20.00
IBT Property Insurance Agent Co., Ltd. Equity - accounted investee. Long-term equity investments 2,000 3,750 99.99
IBT Life Insurance Agent Co., Ltd. Equity - accounted investee. Long-term equity investments 2,000 3,386 99.99
Huan Hwa Securities Finance - Long-term equity investments 19,712 173,496 2.63 $211,665
Taiwan Financial Asset Service Corp. - Long-term equity investments 5,000 50,000 2.94 50,449
Financial Information Service Co., Ltd. - Long-term equity investments 4,550 45,500 1.14 63,413
Taiwan SME Development - Long-term equity investments 3,417 29,000 4.84 37,415
Taiwan Television - Long-term equity investments 13,573 20,983 4.84 216,318
China Technology Venture Managment Co., Ltd. - Long-term equity investments 1,670 16,700 4.99 16,547
Taiwan Futures Exchange Corp. - Long-term equity investments 1,250 12,500 0.63 13,491
Taipei Forex Inc. - Long-term equity investments 600 6,000 3.03 8,169
Lien an Co. - Long-term equity investments 125 1,250 5.00 1,396
SWIFT - Long-term equity investments 0.018 764 - -
Bonds Central Government Bonds - 88 - 3 - - 671 - 671
Bonds Central Government Bonds - 88 - 3 - - 671 - 671
Note:The net asses value is adopted as fair value if quoted market value is not valilable;the market values of bonds are reference prices quoted from ROC Over-the-Counter as of the end of year 2001.
TABLE 2.ACQUISITION OF INDIVIDUAL REAL ESTATE AT PRICES OF AT LEAST NT$100 MILLION OR 20% OF THE PAID-IN CAPITAL
Company Name Types of properties Transaction Date Transaction Amount Payment Terms Counter-party Nature of Relationship Prior Transaction of Ralated Counter-Party Price Referance Purpose of Acquisition Other Terms
Owner Relationship Transfer Date Amount
International Bank of Taipei Loand and buildings (included in other assets) Feb. 23 , 2001 $137,280 - Court-foreclosed collaterals - - - - - Court aution price Foreclosed Collaterals None
TABLE 1.NAMES,LOCATIONS,AND OTHER INFORMATION OF INVESTEES ON WHICH THE COMPANY EXERCISES SIGNIFICANT INFLUENCE
Investor Company Investee Company Location Main Businesses and products Original Investment Amount Balance as December 31 , 2001 Net Income (Loss) of the Investee Investment Gain (Loss) Note
Dec. 31, 2001 Dec. 31, 2000 Shares (In Thousands) Percentage of Ownership Carrying Value
Interational Bank of Taipei Transcend Securities Investment Trust Co., Ltd. 3 Fl,.36, Naking E. Road, Sec. 3, Tapiei, Taiwan R.O.C Investmetn, Securities and Trust $60,000 $60,000 6,000 20 $45,673 ($34,097) () 1
IBT Property Insurance Agent Co., Ltd. 10 Fl,.36, Naking E. Road, Sec. 3, Tapiei, Taiwan R.O.C Property Insurance agency 2,000 - 200 99.99 3,750 1,750 1,750 2
IBT Life Insurance Agent Co., Ltd. 3 Fl,.36, Naking E. Road, Sec. 3, Tapiei, Taiwan R.O.C Life insurance agency 2,000 - 200 99.99 3,386 1,386 1,386 3
Note1:Ther investment gain in basd on the audited financial statements for the year ended December 31,2000.
Note2:The investment gain in based on the unaudited financial statements for the year ended December 31, 2001.