ENTIE COMMERCIAL BANK CO., LTD. FINANCIAL STATEMENTS June 30, 2012 and 2011 AND INDEPENDENT AUDITORS REPORT

Transcription

1 (English Translation of Financial Report Originally Issued in Chinese) ENTIE COMMERCIAL BANK CO., LTD. FINANCIAL STATEMENTS June 30, 2012 and 2011 AND INDEPENDENT AUDITORS REPORT The reader is advised that these financial statements have been prepared originally in Chinese. In the event of a conflict between these financial statements and the original Chinese version or difference in interpretation between the two versions, the Chinese language financial statements shall prevail. ADDRESS:40F., No.7, Sec. 5, Xinyi Rd., Xinyi Dist., Taipei, Taiwan, R.O.C. TELEPHONE NUMBER:(02)

2 FINANCIAL STATEMENTS TABLE OF CONTENTS Contents Page Cover Page 1 Table of Contents 2 Independent Auditors Report 3 Balance Sheets 4 Statements of Income 5 Statements of Changes in Stockholders Equity 6 Statements of Cash Flows 7 Notes to Financial Statements 1. Overview of EnTie Commercial Bank 8 2. Summary of significant accounting policies 8~18 3. Reasons for and effect of accounting changes 18~19 4. Summary of major accounts 19~53 5. Related-party transactions 53~55 6. Pledged assets Significant commitments and contingencies 56~58 8. Significant catastrophic losses Significant subsequent events Others 59~ Disclosure required (A)Related information on significant transactions 71~72 (B)Related information on investee companies 72~ Business segment financial information 73~74-2 -

3 (English Translation) Independent Auditors Report EnTie Commercial Bank Co., Ltd. We have audited the accompanying balance sheets of EnTie Commercial Bank Co., Ltd. as of June 30, 2012 and 2011, and the related statements of income, changes in stockholders equity, and cash flows for the six months then ended. These financial statements are the responsibility of EnTie Commercial Bank Co., Ltd. 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 Auditing and Certification of Financial Statements of Financial Institutions by Certified Public Accountants and generally accepted auditing standards 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 EnTie Commercial Bank Co., Ltd. as of June 30, 2012 and 2011, and the results of its operations and cash flows for the six months then ended, in conformity with the Regulations Governing the Preparation of Financial Reports by Publicly Held Banks and generally accepted accounting principles in the Republic of China. As stated in Note 3 of the financial statements, effective from January 1, 2011, EnTie Commercial Bank Co., Ltd. adopted the third amendment of SFAS No. 34 Financial Instrument: Recognition and Measurement

4 EnTie Commercial Bank Co., Ltd. has additionally prepared consolidated financial statements as of and for the six months ended June 30, 2012 and 2011, on which we have expressed an unqualified opinion and a modified unqualified opinion with an added explanatory paragraph for reference, respectively. KPMG Taipei, Taiwan, R.O.C. August 30, 2012 Notice to Readers The accompanying financial statements are intended only to present the financial position, results of operations and cash flows in accordance with the accounting principles and practices generally accepted in the Republic of China and not those of any other jurisdictions. The standards, procedures, and practices to audit such financial statements are those generally accepted and applied in the Republic of China. The auditors report and the accompanying financial statements are the English translation of the Chinese version prepared and used in the Republic of China. If there is any conflict between, or any difference in the interpretation of, the English and Chinese language auditors report and financial statements, the Chinese version shall prevail

5 (English Translation of Financial Report Originally Issued in Chinese) ENTIE COMMERCIAL BANK CO., LTD. BALANCE SHEETS AS OF JUNE 30, 2012 AND 2011 (Expressed in Thousands of New Taiwan Dollars) June 30, Change % ASSETS Cash (Note 4(A)) $ 3,837,397 5,146,076 (25) Due from Central Bank and call loans to banks (Notes 4(B) and 6) 75,174,664 76,413,507 (2) Financial assets measured at fair value through profit or loss net (Notes 2, 4(C) 11,532,800 5,958, and (M)) Securities purchased under resell agreements (Note 2) 1,359,811 3,658,007 (63) Receivables net (Notes 2, 4(D), 5 and 7) 11,281,772 8,608, Discounts and loans net (Notes 2, 4(E) and 5) 201,648, ,424,318 1 Available-for-sale financial assets net (Notes 2, 4(F), (M), and 6) 61,172,202 53,616, Investments under equity method net (Notes 2 and 4(G)) 92,173 36, Other financial assets net (Notes 2, 4(H) and 6) 1,693,301 3,309,915 (49) Fixed assets net (Notes 2, 4(I) and 11(A)) 1,433,520 2,124,647 (33) Intangible assets (Notes 2 and 4(J)) 260, , Other assets net (Notes 2 and 4(K)) 52, ,457 (60) Deferred income tax assets net (Notes 2 and 4(U)) 4,162,782 4,500,862 (8) TOTAL ASSETS $ 373,702, ,144,875 3 LIABILITIES AND STOCKHOLDERS EQUITY Liabilities Deposits from Central Bank and other banks (Note 4(L)) $ 3,239,461 5,761,700 (44) Financial liabilities measured at fair value through profit or loss (Notes 2 and 4(C)) 10,693,214 17,143,985 (38) Securities sold under repurchase agreements (Notes 2 and 4(M)) 9,187,911 34,677,819 (74) Payables (Notes 4(N) and (Y)) 8,697,579 5,042, Deposits and remittances (Notes 4(O) and 5) 306,865, ,389, Financial debentures (Note 4(P)) 11,190,000 11,240,000 - Liability component of preferred stock (Notes 2 and 4(Q)) 1,414,865 1,414,865 - Other financial liabilities (Notes 2 and 4(R)) 253,704 1,839,065 (86) Other liabilities (Notes 2 and 4(S)) 269, ,504 (36) Total Liabilities 351,811, ,933,857 2 Stockholders Equity Common stock (Note 4(W)) 16,796,775 16,796,775 - Capital surplus (Note 4(W)) 1,461,505 1,461,505 - Retained earnings: Legal reserve (Note 4(X)) 1,284, , Special reserve (Note 2) 125,598 14, Accumulated earnings (Note 4(X)) 2,370,502 1,651, Other adjustments to stockholders equity: Unrealized losses on financial instruments (Notes 2 and 4(AA)) (93,428) (336,040) (72) Net loss not recognized as pension cost (Note 2) (54,667) - - Total Stockholders Equity 21,890,477 20,211,018 8 Commitments and Contingencies (Notes 2 and 7) TOTAL LIABILITIES AND STOCKHOLDERS EQUITY $ 373,702, ,144,875 3 The accompanying notes are an integral part of the financial statements

6 (English Translation of Financial Report Originally Issued in Chinese) ENTIE COMMERCIAL BANK CO., LTD. STATEMENTS OF INCOME FOR THE SIX MONTHS ENDED JUNE 30, 2012 AND 2011 (Expressed in Thousands of New Taiwan Dollars, Except for EPS) For the six months ended June 30, Change % Interest income $ 3,833,937 3,376, Less: Interest expenses (including preferred stock interest expense for the six months ended June 30, 2012 and 2011 amounting to $199,393, please refer to Note 4(Q)) (2,073,708) (1,740,875) 19 Net interest income 1,760,229 1,635,892 8 Non-interest income Service fee and commission income 1,119, , Gains on financial assets or liabilities measured at fair value through profit or loss (Note 4(C)) 344, , Realized gains on available-for-sale financial assets (Note 4(AA)) 215, , Realized gains on held-to-maturity financial assets (Note 4(F)) - 207,635 (100) Gains from investments under equity method (Note 4(G)) 40,590 25, Foreign exchange losses (10,449) (71,276) (85) Reversal of impairment loss on assets (Notes 2, 4(H), (J) and (K)) - 2,488 (100) Other net non-interest income (Notes 4(H) and 7) (3,761) 61,923 (106) Net gains on disposal of properties (Note 4(I)) 362, ,888 Net Revenue 3,829,607 3,117, Bad debt expenses (Notes 2, 4(D), (E), and 7) (269,834) (9,329) 2,792 Operating expenses (Notes 4(Y) and 10(A)) Personnel expenses (1,237,016) (1,088,250) 14 Depreciation and amortization expenses (72,195) (76,698) (6) Other general and administrative expenses (552,953) (546,527) 1 Net Income Before Tax 1,697,609 1,396, Income tax expenses (Notes 2 and 4(U)) (196,315) (190,223) 3 Net income from continuing operations before cumulative effect of changes in accounting principle 1,501,294 1,205, Cumulative effect of changes in accounting principles (Note 3) (179) - - Net Income $ 1,501,115 1,205, Basic Earnings per Share (dollar) (Notes 2 and 4(Z)) Before income tax After income tax Before income tax After income tax Income from continuing operations $ Cumulative effect of changes in accounting principles Net Income $ Diluted Earnings per Share (dollar) $ The accompanying notes are an integral part of the financial statements

7 (English Translation of Financial Report Originally Issued in Chinese) ENTIE COMMERCIAL BANK CO., LTD. STATEMENTS OF CHANGES IN STOCKHOLDERS EQUITY FOR THE SIX MONTHS ENDED JUNE 30, 2012 AND 2011 (Expressed in Thousands of New Taiwan Dollars) Capital Retained earnings Other adjustments to stockholders equity Net loss not recognized as pension cost Unrealized (losses) or gains on financial instruments Common stock Capital surplus Legal reserve Special reserve Accumulated earnings Subtotal Total Beginning balance January 1, 2011 $ 16,796,775 1,461,505 22,063-2,054,389 2,076,452 - (19,699) 20,315,033 Earnings appropriation and distribution (Note): Provision for legal reserve ,873 - (600,873) Cash dividends common stock (1,007,807) (1,007,807) - - (1,007,807) Net income for the six months ended June 30, ,205,982 1,205, ,205,982 Recognition of unrealized losses on available-for-sale financial assets (316,341) (316,341) Trading losses reserve reclassified as special reserve ,151-14, ,151 Ending balance June 30, 2011 $ 16,796,775 1,461, ,936 14,151 1,651,691 2,288,778 - (336,040) 20,211,018 Beginning balance January 1, 2012 $ 16,796,775 1,461, ,936 14,151 2,649,897 3,286,984 (54,667) (56,779) 21,433,818 Earnings appropriation and distribution (Note): Provision for legal reserve ,256 - (661,256) Provision for special reserve ,447 (111,447) Cash dividends common stock (1,007,807) (1,007,807) - - (1,007,807) Net income for the six months ended June 30, ,501,115 1,501, ,501,115 Recognition of unrealized losses on available-for-sale financial assets (36,649) (36,649) Ending balance June 30, 2012 $ 16,796,775 1,461,505 1,284, ,598 2,370,502 3,780,292 (54,667) (93,428) 21,890,477 Note: The Bank s employee bonuses and directors and supervisors remuneration were recognized as operating expense through profit or loss, and not recognized as distribution of earnings. Please refer to Note 4(X). The accompanying notes are an integral part of the financial statements

8 (English Translation of Financial Report Originally Issued in Chinese) ENTIE COMMERCIAL BANK CO., LTD. STATEMENTS OF CASH FLOWS FOR THE SIX MONTHS ENDED JUNE 30, 2012 AND 2011 (Expressed in Thousands of New Taiwan Dollars) For the six months ended June 30, Cash Flows from Operating Activities: Net Income $ 1,501,115 1,205,982 Adjustments to Reconcile Net Income to Net Cash Used in Operating Activities: Cumulative effect of changes in accounting principles Depreciation 53,708 61,455 Amortization 18,487 15,243 Provision for bad debt expenses 269,834 9,329 Investment gains accounted for under equity method (40,590) (25,131) Losses on disposal and retirement of fixed assets 2, Losses on disposal and retirement of intangible assets 19 - Gains on disposal of assets held for sale (362,986) - Gains on disposal of investments - (222,107) Unrealized losses (gains) on valuation of financial assets and liabilities 10,095 (55,186) Reversal of impairment losses on non-financial assets - (2,488) Losses on disposal of foreclosed collaterals Net Changes in Assets and Liabilities by Operating Activities: Net Changes in Assets by Operating Activities: Increase in financial assets held for trading (1,518,128) (3,137,604) Increase in receivables (3,837,459) (487,435) Decrease in deferred income tax assets 125, ,736 Net Changes in Liabilities by Operating Activities: Decrease in financial liabilities held for trading (3,128,045) (1,772,629) Increase in payables 3,607, ,731 Net Cash Used in Operating Activities (3,297,988) (3,867,403) Cash Flows from Investing Activities: Purchase of available-for-sale financial assets (65,598,049) (30,887,850) Proceeds from disposal of available-for-sale financial assets 57,029,739 14,331,209 Purchase of held-to-maturity financial assets - (20,527,611) Proceeds from disposal of held-to-maturity financial assets - 11,251,901 Proceeds from disposal of investment in financial assets carried at cost - 40,560 Proceeds from capital reduction of financial assets carried at cost - 3,044 Proceeds from disposal of assets held for sale 998,777 - Purchase of fixed assets (77,728) (26,070) Proceeds from disposal of fixed assets Purchase of intangible assets (32,994) (16,327) Proceeds from disposal of foreclosed collaterals - 4,800 Decrease in due from Central Bank and call loans to banks 11,789,732 12,856,213 Increase in discounts and loans (4,076,471) (3,466,115) Increase in securities purchased under resell agreements (1,159,899) (2,972,610) Decrease in other financial assets 246,294 2,284,071 Decrease in other assets 1,640 22,565 Net Cash Used in Investing Activities (878,940) (17,101,910) Cash Flows from Financing Activities: Increase in securities sold under repurchase agreements 1,608,660 26,052,208 Increase in other financial liabilities 81,530 1,382,685 Decrease in other liabilities (23,075) (6,341) (Decrease) increase in deposits from Central Bank and other banks (3,865,159) 1,318,128 Increase (decrease) in deposits and remittances 5,640,863 (5,981,221) Net Cash Provided by Financing Activities 3,442,819 22,765,459 Exchange Rate Effect 1,636 (496) Net (Decrease) Increase in Cash (732,473) 1,795,650 Cash, at the Beginning of the Period 4,569,870 3,350,426 Cash, at the End of the Period $ 3,837,397 5,146,076 Supplemental Disclosures of Cash Flow Information: Interest $ 1,743,592 1,420,599 Income tax $ 99,617 43,363 Investing and Financing Activities Not Affecting Cash Flows: Unrealized losses on valuation of financial instruments $ 36, ,341 Cash dividends payable $ 1,007,807 1,007,807 Held-to-maturity financial assets reclassified as available-for-sale financial assets $ - 9,483,345 The accompanying notes are an integral part of the financial statements

9 NOTES TO FINANCIAL STATEMENTS June 30, 2012 and 2011 (Expressed in Thousands of New Taiwan Dollars, Unless Otherwise Stated) 1. OVERVIEW OF ENTIE COMMERCIAL BANK EnTie Commercial Bank (the Bank ) started operations on April 15, It engages in banking activities under the Banking Act of the Republic of China. As of June 30, 2012, the Bank had four major Groups: the Corporate Banking Group, Consumer Finance Group, Wealth Management Group and Financial Markets Group. Each Group has its own Chief Office. In addition, the Corporate Banking Products, Corporate Credit Management, Trust, Product Operations (International Department/OBU), Business Financial Center and 12 Corporate Banking Regional Centers are under Corporate Banking Group; the Consumer Finance Products, Consumer Credit Management and six Consumer Banking Regional Centers are under Consumer Finance Group; the Wealth Management, Retail Banking Operations, Operating Department and 52 Retail Banking Branches are under Wealth Management Group; the Treasury and Treasury Marketing are under Financial Markets Group. Each Group is responsible for planning, managing and marketing for Corporate Banking, Consumer Finance, Wealth Management and Financial Markets. Trust Department is responsible for planning, managing and operating trust investment, and executing trust business for investment in foreign marketable securities and funds under Banking Act and Trust Enterprise Act of the Republic of China. The Bank s stock has been listed on the Taiwan Stock Exchange since September As of June 30, 2012 and 2011, the Bank had 1,910 and 2,013 employees, respectively. 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES The financial statements are the English translation of the Chinese version prepared and used in the Republic of China. If there is any conflict between, or any difference in the interpretation of, the English and Chinese language financial statements, the Chinese version shall prevail. The Bank s financial statements were prepared in accordance with the Regulations Governing the Preparation of Financial Reports by Publicly Held Banks and generally accepted accounting principles of the Republic of China. The significant accounting policies and basis of measurement adopted in preparing these financial statements are summarized as follows: (A) Statement of financial accounting standards The accompanying financial statements include the accounts of the Head Office, the OBU and all branches. All inter-office transactions and balances have been eliminated in preparing the financial statements

10 (B) Foreign currency transactions and translation of foreign currency financial statements The Bank records foreign currency transactions in the respective currencies denominated in these transactions. At the end of every month, foreign currency income and expenses are translated into New Taiwan dollars at the closing exchange rates announced by Taipei Forex Inc.; monetary assets and liabilities denominated in foreign currencies are restated at the closing exchange rates of Taipei Forex Inc. and exchange differences are recognized in the income statement. (C) Use of estimates The preparation of the accompanying financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosures of contingent assets and liabilities at the date of the financial statements, and reported amounts of revenues and expenses during the reporting periods. Economic conditions and events could cause actual results to differ significantly from these estimates. (D) Financial assets and liabilities measured at fair value through profit or loss (FVTPL) Financial assets and liabilities are classified as held for trading if they have been acquired principally for the purpose of selling or repurchasing in the near term. The derivative financial instruments held by the Bank, except for those designated as hedging instruments, are classified under these accounts. At each balance sheet date, the fair value is re-measured and the resulting gain or loss from such re-measurement is recognized in current profit or loss. Prior to January 1, 2012, the purchase or sale of financial assets such as bonds was recorded on settlement date, while those of other financial products was recorded on trading date. Commencing from January 1, 2012, the purchase or sale of bonds and other financial products is recorded on trading date. The financial instruments are initially recognized at fair value and the transaction cost is recognized as current expense. Upon disposition, the cost of sale of equity and debt securities is determined by the moving-average method. To eliminate or significantly reduce a measurement or recognition inconsistency that would otherwise arise from measuring assets or liabilities or recognizing the gains and losses on different bases of them. Upon initial recognition, a financial asset or liability may be designated at FVTPL. Thus, financial debentures, which are covered by interest rate swaps (IRS) to hedge against market price risks on interest rate changes, are designated as financial liabilities measured as at FVTPL although the Bank did not use hedge accounting for these bonds. Had the financial debentures not been designated as at FVTPL, there would have been accounting measurement mismatches between the financial debentures and IRS because of differences in measurement attributes. Fair value of listed or OTC securities is determined based on the market closing price on the balance sheet date, fair value for open-end fund investment is the net worth on the balance sheet date, and fair value for government bond is determined based on the reference price on the balance sheet date on the Gre Tai Securities Market. Fair value of derivative financial instruments is determined by the market value on the balance sheet date or the pricing model adopted by the Bank

11 (E) Available-for-sale financial assets At each balance sheet date, the fair value is re-measured; and the resulting gain or loss from such re-measurement is recognized directly in equity. Interest on a debt instrument classified as available-for-sale is accrued; the relevant premium/discount is amortized by using the effective-interest-rate method (or the straight-line method if the difference is not significant.) If there is objective evidence that an available-for-sale financial asset is impaired, the carrying amount of the asset is reduced, and impairment loss is recognized. If impairment loss is reversed, the reversal is recognized as an adjustment to stockholders equity for equity securities, and for debt securities, as earning, in a subsequent period, the amount of the impairment loss of an available-for-sale debt instrument decreases and the decrease can be related objectively to an event occurring after the impairment was recognized, the previously recognized impairment loss is reversed through profit or loss. A gain or loss on available-forsale financial assets is recognized directly in equity, except for impairment losses and foreign exchange gains or losses arising from monetary financial assets, until the financial assets are derecognized, at which time the cumulative gain or loss previously recognized in equity is charged to profit or loss. Prior to January 1, 2012, the purchase or sale of available-for-sale debt securities such as bonds was recorded on settlement date, while those of available for sale equity securities and commercial paper was recorded on trading date. Commencing from January 1, 2012, the purchase or sale of available-for-sale debt and equity securities and commercial paper is recorded on trading date. The financial instruments are initially recognized at fair value plus transaction costs. Upon disposition, the cost of sale of equity and debt securities is determined by the moving-average method. Fair value of listed or OTC securities is determined based on the market closing price on the balance sheet date, fair value for open-end fund investment is the net worth on the balance sheet date, and fair value for government bond is determined based on the reference price on the balance sheet date on the Gre Tai Securities Market. (F) Held-to-maturity financial assets The amortized cost and interest income of held-to-maturity financial assets are determined by using the effective-interest-rate method (or the straight-line method if the difference is not significant.) If there is objective evidence that a held-to-maturity financial asset is impaired, the carrying amount of the asset is reduced, and impairment loss is recognized. If, in a subsequent period, the amount of the impairment loss decreases and the decrease can be related objectively to an event occurring after the impairment was recognized, the previously recognized impairment loss is reversed through profit or loss. The book value after the reversal should not exceed the recoverable amount or the depreciated or amortized balance of the assets assuming no impairment loss was recognized. The transactions of held-to-maturity financial assets are recorded on the trading date. The financial instruments are initially recognized at fair value plus transaction costs. Upon disposition, the cost of sale of debt securities is determined by the moving-average method

12 If the Bank has sold or reclassified its held-to-maturity financial assets more than an insignificant amount in relation to the total amount of held-to-maturity financial assets before maturity, any remaining held-to-maturity financial assets shall be reclassified as available-forsale financial assets. On such reclassification, the difference between their carrying amount and fair value shall be recognized as an adjustment to stockholders equity. Any financial assets shall not be classified as held-to-maturity financial assets during the current financial year or in the following two financial years. (G) Financial assets carried at cost Equity instruments with no quoted market price and whose fair value cannot be reliably measured are stated at cost. If there is objective evidence that financial assets carried at cost are impaired, the carrying amount of the assets is reduced, and impairment loss is recognized. However, the impairment losses may not be reversed subsequently. The transactions of financial assets carried at cost are recorded on the trading date. The financial instruments are initially recognized at fair value plus transaction costs. The cost of sale of equity securities is determined by the moving-average method. (H) Debts investment without active market The amortized cost and interest income of debts investment without an active market are determined by using the effective-interest-rate method (or the straight-line method if the difference is not significant.) If there is objective evidence that a debt investment without an active market is impaired, the carrying amount of the asset is reduced, and impairment loss is recognized. If, in a subsequent period, the amount of the impairment loss decreases and the decrease can be related objectively to an event occurring after the impairment was recognized, the previously recognized impairment loss is reversed through profit or loss. The book value after the reversal should not exceed the recoverable amount or the depreciated or amortized balance of the assets assuming no impairment loss was recognized. The transactions of debts investment without active market are recorded on trading date. The financial instruments are initially recognized at fair value plus transaction costs. The cost of sale of debt securities is determined by the moving-average method. (I) Notes receivable, accounts receivable and other receivables Consumer loans to credit card holders are reflected in the amounts reported by merchants, excluding unearned interest. Interest thereon is recognized on an accrual basis using the interest method. A credit card loan, accrued interest, and other related advances that are over three months past due are reclassified as a non-accrual account without accruing interest. Interest collected while accruing of interest has suspended is included in earnings only to the extent of cash actually received

13 The Bank engages in factoring and management of accounts receivable. The interest and transaction fees from factoring and management of such accounts are treated as current income. An allowance for bad debts is provided by reviewing the balance of factoring of accounts receivable at period-end. As regards the factoring accounts, those sold by the account-selling companies which have not yet been paid for are accounted for under payables. (J) Loans Loans are initially recognized at fair value plus incremental direct transaction costs, and the subsequent measurement is recognized as interest revenues through effective interest method (or through straight-line method if the difference is not significant), which is carried at amortized cost less impairment losses. Loans are reclassified as a non-accrual account if either of the following conditions is met: (a) Collection of payment of principal or interest accrued is considered highly unlikely; or (b) Payment of principal or interest accrued is over 3 or 6 months past due. Non-accrual loans According to the Regulations Governing the Procedures for Banking Institutions to Evaluate Assets and Deal with Non-performing and Non-Accrued Loans, the balances of outstanding loans and other credits that has reached the three month settlement period, and is deemed uncollectable, will be reclassified in the non-accrual account including the related accrued interest. Non-accrual loans reclassified from loans are accounted for under discounts and loans, and other non-accrual loans reclassified from guarantees, acceptances, factoring accounts receivable, and receivables-other credit card are accounted for under other financial assets. Allowances for bad debts Adequate allowance for bad debts is provided by assessing the balance, under the definition of loans and receivables in SFAS No. 34, in accordance with SFAS No. 34, the Regulations Governing the Procedures for Banking Institutions to Evaluate Assets and Deal with Non- Performing and Non-Accrued Loans, and the Regulations Governing Institutions Engaging in Credit Card Business. The third amendment of SFAS No. 34 was effective from January 1, 2011; the carrying value of loans and receivables within applicable scope as of the end of prior year should be measured at amortized cost in which SFAS No. 34 was initially applied. Under the definition of loans and receivables in SFAS No. 34, the objective evidence should be identified first to reveal impairment existing for financial assets that are individually significant, and individually or collectively for financial assets that are not individually significant. If no

14 objective evidence of impairment exists for an individually assessed financial asset, it should be further included in a set of financial assets with similar credit risk characteristics and collectively assesses them for impairment. Assets that are individually assessed for impairment are not required to collectively assessed because an impairment is or continued to be recognized. If there is an objective evidence that an impairment loss on financial assets has been incurred, the amount of the loss is recognized and measured as the difference between the asset s carrying amount and the present value of estimated future cash flows discounted at the financial asset s original effective interest rate; the amount of the loss should be recognized as bad debt expenses in profit or loss in the current period. The estimation of future cash flows includes the recoverable amount of collateral and related insurance when determining the amount of the loss. The aforesaid object evidences include: (1) Significant financial difficulty of the issuer or obligor; (2) A breach of contract, such as a default or delinquency in interest or principal payments; (3) The lender, for economic or legal reasons relating to the borrower s financial difficulty, granting to the borrower a concession that the lender would not otherwise consider; (4) It becoming probable that the borrower will enter bankruptcy or other financial reorganization; (5) The disappearance of an active market for that financial asset because of the issuer s financial difficulties; (6) Adverse changes in the payment status of the borrowers; and (7) Changes in national or local economic conditions that correlate with defaults on the assets. In accordance with the Regulations Governing the Procedures for Banking Institutions to Evaluate Assets and Deal with Non-Performing and Non-Accrued Loans issued by Ministry of Finance (the MOF ) commencing on January 1, 2011, the allowance for bad debts are determined by the sum of 0.5% of the balance of Category One credit assets, 2% of the balance of Category Two credit assets, 10% of the balance of Category Three credit assets, 50% of the balance of Category Four credit assets, and 100% of the balance of Category Five credit assets. The minimum provision for bad debts of Category One credit assets shall be allocated sufficiently within three years since January 1, The evaluation results of allowance for bad debts based on SFAS No. 34 should not be less than the provisions for bad debts under the Regulations Governing the Procedures for Banking Institutions to Evaluate Assets and Deal with Non-Performing and Non-Accrued Loans

15 The Bank provides reserve for guarantee liabilities for off-balance-sheet non-loan assets in accordance with the Regulations Governing the Procedures for Banking Institutions to Evaluate Assets and Deal with Non-Performing and Non-Accrued Loans issued by MOF. Credits deemed as uncollectible are written off upon approval of the board of directors. (K) Securities under repurchase/resell agreements Securities sold/purchased with a commitment to repurchase/resell at a predetermined price are treated as financing transactions. The difference between the cost and the repurchase/resell price is treated as interest expense/revenue and recognized over the term of the agreement. On the selling/purchasing date, these agreements are recognized as securities sold under repurchase agreements or securities purchased under resell agreements. (L) Non-financial asset impairment In accordance with SFAS No. 35 Impairment of Assets, the Bank evaluated if there is any impairment on investments under equity method, fixed assets, intangible assets and other assets. The Bank tests if there is any indication that an asset may be impaired on the balance sheet date. If so, the Bank must calculate the recoverable amount of the asset or cash generating units (CGUs). However, goodwill is tested for impairment annually regardless of whether there is any indication of impairment. An impairment loss should be recognized whenever the recoverable amount of the asset or CGUs is below the carrying amount, and the impairment loss is charged to accumulated impairment. After the recognition of an impairment loss, the calculation of depreciation or amortization should use the adjusted book value of assets to reduce residual value based on a reasonable and systematic method. If the estimated recovery of the asset s book value (except for goodwill) after recognizing impairment loss changing causes the expected recovery to increase, an impairment loss should be reversed and recognized as reversal of impairment loss on assets of the current period subject to the amount of original impairment loss. Meanwhile, the asset s book value (except for goodwill) should be increased and adjusted to the recoverable amount through debit to accumulated impairment. The book value after the reversal should not exceed the recoverable amount or the depreciated or amortized balance of the assets assuming no impairment loss was recognized in prior periods. (M) Assets held for sale Non-current assets held for sale, or disposal group, are those that are available for immediate sale in its present condition, subject only to terms that are usual and customary for sales of such assets, and its sale in less than one year must be highly probable. The assets classified under non-current assets held for sale, or disposal group, are to be measured at the lower of carrying amount and fair value less costs to sell, and depreciation on such assets shall cease

16 (N) Investments under equity method Investees in which the Bank, directly or indirectly, holds more than 20% of the outstanding voting stock, or holds less than 20% but is able to exercise significant influence over the investees, are accounted for under the equity method. Gain or loss on disposal of equity investment is calculated based on the difference between the selling price and book value of investment at the disposal date. The remaining capital surplus arising from an equity investment is adjusted to profit or loss proportionate to sales proceeds. The Bank prepares consolidated financial statements that include the accounts of its majorityowned affiliates in accordance with the related regulations. (O) Fixed assets, assets lent or rented out and idle assets Fixed assets are stated at cost less accumulated depreciation. Major improvements and renewals are capitalized, while repairs and maintenance are charged current expenses. Depreciation is computed using the straight-line method over service lives estimated as follows: buildings and premises, 10 to 55 years; machinery and equipment, 3 to 8 years; and transportation equipment and miscellaneous equipment, 3 to 10 years. Fixed assets still in use beyond their initially estimated service life are depreciated on the basis of their re-estimated service life. Upon retirement or disposal of fixed assets, the related cost and accumulated depreciation are deducted from the respective accounts, and the related gain or loss is recognized as other noninterest income or loss. (P) Intangible assets Computer software is recorded on the basis of the actual cost of acquisition and amortized using the straight-line method over 5 years. (Q) Goodwill Prior to January 1, 2006, goodwill of the Bank was amortized over 20 years. In accordance with the amended SAFS No. 25 Conceptual Framework for Financial Accounting and Preparation of Financial Statements, goodwill previously recognized is no longer amortized and is tested for impairment periodically commencing from January 1, (Please refer to the accounting principle for non-financial asset impairment.) (R) Deferred charges (deferred assets) Deferred charges are amortized equally over 5 years

17 (S) Foreclosed collateral Foreclosed collateral received is stated at the related cost, and evaluated by fair value on the balance sheet date. If the cost is higher than the fair value, an impairment loss is recognized. If the net realizable value of impaired assets increases, the increase in the carrying amount resulting from the reversal is recognized as current income. In compliance with the regulation of the former Financial Supervisory Commission (FSC), the Bank should increase the allowance for loss and asset impairment losses if the Bank cannot dispose of the foreclosed collateral within the related deadlines, except those for which a disposal period extension had been approved. Gain or loss on disposal of foreclosed collateral is accounted for under other non-interest income. (T) Reserve for operating liabilities In compliance with the Regulations Governing Securities Firms, the securities trading loss reserve is provided in the amount of 10% of the net gain per month from proprietary trading of securities when gain exceeds loss. Effective from January 11, 2011, the former Financial Supervisory Commission revoked the rules regarding provision for trading losses reserve for securities firms contained in the Regulations Governing Securities Firms according to FSC Jin-Kuan-Cheng-Chuan No As of December 31, 2010, the amount of default losses reserve which securities firms and futures commission merchants had made provision for should be reclassified as special reserve. The special reserve can only be used to offset a deficit or when special reserve reaches 50% of total paid-in capital, of which 50% can be capitalized. (U) Pension costs Under the defined benefit pension plan, the Bank recognizes pension costs on the basis of actuarial calculations. Unrecognized net transition assets are amortized over 25 years. Under the defined contribution pension plan, the Bank recognizes the amounts contributed to the employees individual pension accounts during the employees service periods as pension costs. (V) Income Tax The Bank adopted inter and intra-period income tax allocation. Accordingly, the income tax effects arising from adjustment directly credited to stockholders equity and taxable temporary differences are recognized as deferred income tax liabilities, while deductible temporary differences, unused prior-years loss carry forward benefits, investment tax credits, and adjustment directly debited to stockholders equity are recognized as deferred income tax assets. An allowance for evaluation is recognized for deferred income tax assets subject to management s judgment as to whether the realization is more likely or not

18 Income tax credits from personnel training and equity investments are recognized in the current year. Prior-year income tax adjustments are recognized as current income tax expenses of the adjustment period. The 10% surtax on undistributed earnings is recorded as expense in the year when the stockholders resolve to retain the earnings. (W) Share-based payment transactions The Bank engages in cash-settled share-based payment transactions, a liability equal to the portion of the services received is recognized at its current fair value determined at each balance sheet date and at the date of settlement. The Bank recognizes expenses and liabilities by using a straight-line basis over the vesting period. At the vesting period, any changes in the fair value would be recognized as profit or loss of the period. Effective January 1, 2008, the Bank adopted SFAS No. 39 Share-based Payment and applies it to the Bank s share-based payment transactions for options that were granted after January 1, The Bank need not apply SFAS No. 39 retroactively to the options under share-based payments agreements that were granted before January 1, 2008; the pro-forma net income and EPS information shall be disclosed based on the measurement principles for share-based payments ruled by SFAS No. 39. (X) Employee bonuses and directors and supervisors remuneration Commencing from January 1, 2008, the Bank estimates the amount of employee bonuses and directors and supervisors remuneration according to Interpretation (96) No. 052 issued by the Accounting Research and Development Foundation and recognizes it as personnel expenses. If later the actual distribution amount pursuant to a resolution of a stockholders meeting is different from the estimated amount recognized in the financial statements, the difference is accounted for as changes in accounting estimates and recognized as profit or loss of the current period. (Y) Liability component of preferred stock The Bank issues preferred stock liabilities which is allocated in proportion to the equity component (capital surplus the right of preferred stock converts into common stock). After the total issue price minus the amount of liability component measured individual. When the bond/preferred stock holders execute the conversion right, the Bank should adjust the liability component to its book value in advance. The issue of common stock, which is converted by bond/preferred stock holders, is recognized by book value of the liability component plus the book value of the equity component

19 (Z) Revenue recognition Please refer to accounting policies of accounts receivable and loans for information with regard to interest revenues on accouns receivable and loans. Service fees are recognized on an accrual basis. (AA) Contingencies A loss is recognized when it is probable that an asset has been impaired or a liability has been incurred. The amount of loss can be reasonably estimated when loss is possible and cannot be reasonably estimated, a footnote of loss should be made. (AB) Operating segments An operating segment is a component of the Bank that engages in business activities from which it may earn revenues and incur expenses (including revenues and expenses relating to transactions with other components of the Bank). The segment s operating results are reviewed regularly by the Bank s chief operating decision maker to make decisions pertaining to the allocation of the resources to the segment and to assess its performance for which discrete financial information is available. The chief operating decision maker of the Bank is the board of directors. 3. REASONS FOR AND EFFECT OF ACCOUNTING CHANGES Effective from January 1, 2011, the Bank adopted the third amendment of SFAS No. 34 Financial Instrument: Recognition and Measurement. In accordance with SFAS No. 34, loans and receivables should apply to the regulations of recognition, subsequent evaluation, and impairment in SFAS No. 34. The troubled debt restructuring and negotiated debt instruments with new contracts and modification of terms were also in accordance with the third amendment of SFAS No. 34 effective from January 1, For the six months ended June 30, 2011, net income and basic EPS after tax decreased amounted to $187,553 and $0.11 (dollar), respectively, due to such changes in accounting principle. Effective from January 1, 2011, the Bank adopted SFAS No. 41 Operating Segments. In accordance with SFAS No. 41, an entity shall disclose information to enable users of its financial statements to evaluate the nature and financial effects of the business activities in which it engages and the economic environments in which it operates. The Bank determines and presents operating segments based on the information that internally is provided to the chief operating decision maker. The Standard also supersedes SFAS No. 20 Segment Reporting. For the six months ended June 30, 2011, such changes in accounting principle did not have impact on net income of the Bank s financial statements

20 Commencing from January 1, 2012, bonds transactions are recorded on trading date instead of settlement date. For the six months ended June 30, 2012, this change had no significant impact on net income of the Banks financial statements. The cumulative effect of changes in accounting principles and unrealized losses on financial instruments (adjustments to stockholders equity) amounted to $ (179) and $ (205), respectively, after being reclassified and revalued. 4. SUMMARY OF MAJOR ACCOUNTS (A) Cash June 30, 2012 June 30, 2011 Cash on hand $ 1,288,613 1,225,959 Checks for clearance 1,184, ,414 Due from other banks 1,364,520 3,562,703 Total $ 3,837,397 5,146,076 (B) Due from Central Bank and call loans to banks June 30, 2012 June 30, 2011 Required reserve Account A $ 3,963,016 3,934,989 Required reserve Account B 7,740,980 6,823,997 Required reserve Foreign Currency 45,225 42,438 Deposits transferred to Central Bank 62,100,000 59,800,000 Call loans to banks 1,025,319 5,510,800 Checking and settlements accounts 300, ,283 Total $ 75,174,664 76,413,507 The reserves for deposits are calculated at prescribed rates, using the average monthly balances of various deposit accounts and are appropriated and deposited in the reserve account of the Central Bank of the Republic of China (Taiwan). Deposits in Required reserve-account A are interest-free and can be withdrawn at any time; deposits in Required reserve-account B are interest-bearing and cannot be withdrawn except for the monthly adjustment to the required reserve permitted by relevant regulations. Please refer to Note 6 for information with regard to the restrictions conditions on deposits transferred to Central Bank shown above

21 (C) Financial instruments measured at fair value through profit or loss-net As of June 30, 2012 and 2011, the financial assets held for trading were as follows: June 30, 2012 June 30, 2011 Government bonds $ 4,388,946 - Corporate bonds 5,961,467 4,199,367 Financial debentures - 900,306 Listed and OTC securities 290,943 48,583 Beneficiary certificates 108,427 - Derivative financial instruments 783, ,614 Total $ 11,532,800 5,958,870 Please refer to Note 4(M) for information with regard to repurchase conditions on financial assets held for trading shown above. There was no financial asset designated on initial recognition as one to be measured at fair value, with changes in fair value recognized in profit or loss. As of June 30, 2012 and 2011, the financial liabilities measured at fair value through profit or loss were as follows: June 30, 2012 June 30, 2011 Financial liabilities held for trading purposes: Borrowed government bonds $ 150,475 - Derivative financial instruments 739, ,177 Financial liabilities designated as at FVTPL: Financial debentures 9,803,735 16,407,808 Total $ 10,693,214 17,143,985 For preceding financial debentures, the Bank entered into the IRS contract to hedge the market price risks on interest rate fluctuation but the Bank did not use hedge accounting for those financial debentures. Had the financial debentures not been designated as at FVTPL but as the amortized cost approach, there would have been accounting measurement mismatches between the financial debentures and IRS as a result of differences on measurement attributes. Thus, the Bank designated financial debentures as financial liabilities at FVTPL

22 For the six months ended June 30, 2012 and 2011, gains or losses on financial instruments measured at FVTPL were as follows: For the six months ended June 30, Financial assets held for trading purpose: Realized gains (losses) $ 280,730 (66,351) Unrealized gains (losses) 102,371 (89,486) Financial liabilities held for trading purpose: Realized gains 74, ,616 Unrealized (losses) gains (211,387) 54,436 Revaluation gains on financial liabilities 98,921 90,236 designated at FVTPL Total $ 344, ,451 (D) Receivables-net June 30, 2012 June 30, 2011 Credit cards receivable $ 1,597,235 2,017,570 Notes receivable - 48,800 Accounts receivable 66,355 33,052 Accounts receivable-factoring 2,514,857 3,509,969 Interest receivable 343, ,163 Acceptances receivable 881, ,306 Accrued income 421, ,260 Tax refund receivable 210, ,937 PEMG compensation receivable 1,492,372 1,690,107 Proceeds from sale of bonds receivable 4,728,001 - Other receivables 132, ,851 Subtotal 12,387,908 9,442,015 Less: Allowance for bad debts (1,106,136) (833,153) Total $ 11,281,772 8,608,862 The credit cards receivable shown above included the receivables from credit card holders who were involved in debt repayment negotiation with the Bank. Please refer to Note 7(C) for information with regard to the redemption of PEM Group s structure notes