SinoPac Financial Holdings Company Limited and Subsidiaries Consolidated Financial Statements for the Six Months Ended June 30, 2008 and 2007 and Independent Auditors Report
INDEPENDENT AUDITORS REPORT The Board of Directors and the Stockholders SinoPac Financial Holdings Company Limited We have audited the accompanying consolidated balance sheets of SinoPac Financial Holdings Company Limited and its subsidiaries as of June 30, 2008 and 2007, and the related consolidated statements of income, changes in stockholders equity and cash flows for the six months then ended. These consolidated financial statements are the responsibility of the Company s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with the Rules Governing Auditing and Certification of Financial Statements by Certified Public Accountants, Rules Governing Auditing and Certification of Financial Statements of the Financial Industry by Certified Public Accountants and auditing standards generally accepted in the Republic of China. Those rules and standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatements. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated financial statements. An audit also includes assessing the accounting principles used and significant estimates made by the Company s management, as well as evaluating the overall consolidated financial statements presentation. We believe that our audits provide a reasonable basis for our opinion. - 1 -
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of SinoPac Financial Holdings Company Limited and subsidiaries as of June 30, 2008 and 2007, and the results of its operations and its cash flows for the six months then ended, in conformity with Criteria Governing the Preparation of Financial Reports by Financial Holding Companies, Guidelines Governing the Preparation of Financial Reports by Public Banks, Criteria Governing the Preparation of Financial Reports by Securities Issuers, Criteria Governing the Preparation of Financial Reports by Securities Firms, Criteria Governing the Preparation of Financial Reports by Futures Commission Merchants, and accounting principles generally accepted in the Republic of China. July 28, 2008 Notice to Readers The accompanying consolidated financial statements are intended only to present the financial position, results of operations and cash flows in accordance with accounting principles and practices generally accepted in the Republic of China and not those of any other jurisdictions. The standards, procedures and practices to audit such consolidated financial statements are those generally accepted and applied in the Republic of China. For the convenience of readers, the auditors report and the accompanying consolidated financial statements have been translated into English from the original Chinese version prepared and used in the Republic of China. If there is any conflict between the English version and the original Chinese version or any difference in the interpretation of the two versions, the Chinese-language auditors report and consolidated financial statements shall prevail. - 2 -
SINOPAC FINANCIAL HOLDINGS COMPANY LIMITED AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS JUNE 30, 2008 AND 2007 (In Thousands of New Taiwan Dollars, Except Par Value) 2008 2007 2008 2007 ASSETS Amount Amount % LIABILITIES AND STOCKHOLDERS EQUITY Amount Amount % CASH AND CASH EQUIVALENTS (Notes 2 and 4) $ 17,138,924 $ 29,091,765 (41 ) CALL LOANS AND DUE TO BANKS (Note 19) $ 65,429,291 $ 67,259,860 (3 ) DUE FROM THE CENTRAL BANK AND OTHER BANKS (Note 5) 95,472,471 91,530,810 4 COMMERCIAL PAPER PAYABLE, NET (Notes 2 and 20) 15,106,458 13,503,018 12 FINANCIAL ASSETS AT FAIR VALUE THROUGH PROFIT OR LOSS (Notes 2, 6, FINANCIAL LIABILITIES AT FAIR VALUE THROUGH PROFIT OR LOSS (Notes 2 12, 35 and 36) 47,299,042 137,740,190 (66 ) and 6) 11,278,992 7,906,168 43 SECURITIES PURCHASED UNDER AGREEMENTS TO RESELL (Notes 2 and 7) 8,233,213 12,304,645 (33 ) SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE (Notes 2, 7 and 35) 15,377,655 25,919,319 (41 ) RECEIVABLES, NET (Notes 2, 8, 9 and 35) 71,792,776 70,356,557 2 PAYABLES (Notes 2, 21, 34 and 35) 29,166,275 34,883,605 (16 ) DISCOUNTS AND LOANS, NET (Notes 2, 10 and 35) 671,168,715 642,254,985 5 DEPOSITS AND REMITTANCES (Notes 23 and 35) 830,694,501 807,409,007 3 AVAILABLE-FOR-SALE FINANCIAL ASSETS (Notes 2, 11, 12, 35 and 36) 95,675,911 85,166,410 12 BANK DEBENTURES (Notes 2 and 24) 34,845,765 31,330,068 11 HELD-TO-MATURITY INVESTMENTS (Notes 2, 13 and 36) 73,013,389 4,861,000 1,402 SHORT-TERM BORROWINGS (Note 22) 8,112,256 15,258,878 (47 ) EQUITY INVESTMENTS - EQUITY METHOD (Notes 2 and 14) 53,895 223,844 (76 ) LONG-TERM BORROWINGS (Note 25) 5,375,000 4,487,305 20 OTHER FINANCIAL ASSETS, NET (Notes 2, 15 and 36) EURO-CONVERTIBLE BONDS (Notes 2 and 26) 5,342,304 5,849,675 (9 ) Unquoted equity instruments 4,291,113 4,863,066 (12 ) Non-active market debt instruments 852,402 5,391,012 (84 ) BONDS PAYABLE (Note 27) 2,650,000 1,500,000 77 Others 15,638,612 13,248,514 18 OTHER FINANCIAL LIABILITIES (Notes 2 and 28) 17,246,913 14,413,559 20 Other financial assets, net 20,782,127 23,502,592 (12 ) OTHER LIABILITIES (Notes 2, 29, 33 and 34) 4,094,357 3,991,982 3 PROPERTIES, NET (Notes 2, 16 and 36) Land plus appreciation 6,287,639 6,173,720 2 Total liabilities 1,044,719,767 1,033,712,444 1 Buildings 5,335,355 5,184,116 3 Computer equipment 7,896,222 7,793,405 1 STOCKHOLDERS EQUITY OF PARENT COMPANY (Notes 2 and 30) Transportation equipment 53,037 79,632 (33 ) Capital stock 19,572,253 19,230,873 2 Common shares NT$10 par value, authorized 10,000,000 thousand Less: Accumulated depreciation 7,939,412 7,480,769 6 shares; issued 7,103,467 thousand shares in 2008 and 7,086,413 11,632,841 11,750,104 (1 ) thousand shares in 2007 71,034,671 70,864,127 - Advances on acquisitions of equipment and construction in progress 232,628 160,171 45 Capital surplus Additional paid-in capital 1,754,727 1,745,396 1 Net properties 11,865,469 11,910,275 - Treasury stock transactions 51,449 36,237 42 Others 3,609 3,609 - INTANGIBLE ASSETS (Notes 2 and 17) 2,350,924 1,864,045 26 Total capital surplus 1,809,785 1,785,242 1 Retained earnings 13,437,290 17,506,829 (23 ) OTHER ASSETS, NET (Notes 2, 3, 18, 34 and 36) 13,561,878 11,585,284 17 Other items on stockholders equity Revaluation increment on land 1,030,154 1,030,154 - Cumulative translation adjustment (513,793 ) (38,042 ) 1,251 Unrealized losses on financial instruments (224,685 ) (78,880 ) 185 Treasury stock (2,292,706 ) (2,292,706 ) - Net loss not recognized as pension cost (648,249 ) (155,953 ) 316 Total other items on stockholders equity (2,649,279 ) (1,535,427 ) 73-3 - Total stockholders equity of parent company 83,632,467 88,620,771 (6 ) MINORITY INTEREST 56,500 59,187 (5 ) TOTAL $ 1,128,408,734 $ 1,122,392,402 1 TOTAL $ 1,128,408,734 $1,122,392,402 1 The accompanying notes are an integral part of the consolidated financial statements.
SINOPAC FINANCIAL HOLDINGS COMPANY LIMITED AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME FOR THE SIX MONTHS ENDED JUNE 30, 2008 AND 2007 (In Thousands of New Taiwan Dollars, Except Earnings (Losses) Per Share) 2008 2007 Amount Amount % INTEREST REVENUE (Notes 2 and 35) $27,557,744 $23,697,462 16 INTEREST EXPENSE (Notes 2 and 35) (18,858,103 ) (14,510,375 ) 30 NET INTEREST 8,699,641 9,187,087 (5 ) NET REVENUES OTHER THAN INTEREST Commissions and fee revenues, net (Notes 2, 31 and 35) 4,715,144 4,723,350 - (Losses) gains from financial assets and liabilities at fair value through profit or loss (Note 2) (3,468,340 ) 2,004,295 (273 ) Realized gains from available-for-sale financial assets (Notes 2 and 35) 57,807 54,730 6 Income from equity investments - equity method, net (Notes 2 and 14) 1,297 29,718 (96 ) Impairment losses on assets (Note 2) (1,790,532 ) (32,119 ) 5,475 Foreign exchange gains, net 392,623 1,121,489 (65 ) Realized gains from unquoted equity instruments (Note 2) 86,885 625,173 (86 ) Gains on warrants issued 149,010 94,016 58 Recovery of bad debt 326,443 165,096 98 Rental revenue 255,358 278,057 (8 ) Other revenues, net (Notes 2 and 35) 182,428 261,196 (30 ) Total net revenues 9,607,764 18,512,088 (48 ) BAD DEBT EXPENSES (Notes 2, 8 and 10) 2,945,331 3,514,413 (16 ) OPERATING EXPENSES (Notes 2, 32 and 35) Personnel expenses 5,385,892 5,885,867 (8 ) Depreciation and amortization 609,953 700,726 (13 ) Others 2,835,905 2,864,022 (1 ) Total operating expenses 8,831,750 9,450,615 (7 ) (LOSS)INCOME BEFORE INCOME TAX (2,169,317 ) 5,547,060 (139 ) INCOME TAX BENEFIT (EXPENSE) (Notes 2 and 34) 944,463 (1,151,746 ) 182 CONSOLIDATED (LOSS) INCOME $ (1,224,854 ) $ 4,395,314 (128 ) - 4 - (Continued)
SINOPAC FINANCIAL HOLDINGS COMPANY LIMITED AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME FOR THE SIX MONTHS ENDED JUNE 30, 2008 AND 2007 (In Thousands of New Taiwan Dollars, Except Earnings (Losses) Per Share) 2008 2007 Amount Amount % ATTRIBUTABLE TO Stockholders of the parent company $ (1,226,837 ) $ 4,400,607 (128 ) Minority interests 1,983 (5,293 ) 137 $ (1,224,854 ) $ 4,395,314 (128 ) 2008 2007 After After Pretax Tax Pretax Tax (LOSSES) EARNINGS PER SHARE (Note 30) Basic $ (0.31 ) $ (0.18 ) $ 0.80 $ 0.63 Diluted $ - $ - $ 0.74 $ 0.59 The accompanying notes are an integral part of the consolidated financial statements. (Concluded) - 5 -
SINOPAC FINANCIAL HOLDINGS COMPANY LIMITED AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY FOR THE SIX MONTHS ENDED JUNE 30, 2008 AND 2007 (In Thousands of New Taiwan Dollars, Except Cash Dividends) Capital Surplus (Notes 2 and 30) Revaluation Unrealized (Losses) Gains on Net Loss Not Capital Stock (Note 30) Additional Retained Earnings (Notes 2 and 30) Increment on Cumulative Financial Treasury Recognized as Total Shares in Paid-in Treasury Legal Special Unappropriated Land Translation Instruments Stock Pension Cost Minority Stockholders' Thousands Amount Capital Stock Others Total Reserve Reserve Earnings Total (Note 2) Adjustment (Notes 2 and 3) (Notes 2 and 30) (Note 2) Interest Equity BALANCE, JANUARY 1, 2008 7,102,061 $71,020,615 $1,754,781 $36,241 $3,609 $1,794,631 $12,742,090 $ 362,898 $ 2,500,049 $15,605,037 $1,030,154 $ (119,126) $ (70,061) $ (2,292,706) $ (648,249) $55,198 $86,375,493 Appropriation of 2007 earnings Legal reserve - - - - - - 249,881 - (249,881) - - - - - - - - Special reserve - - - - - - - 1,308,868 (1,308,868) - - - - - - - - Remuneration to directors and supervisors - - - - - - - - (31,500) (31,500) - - - - - - (31,500) Bonus to employees - cash - - - - - - - - (9,401) (9,401) - - - - - - (9,401) Cash dividends - $0.1267 per share - - - - - - - - (900,009) (900,009) - - - - - - (900,009) Consolidated loss for the six months ended June 30, 2008 - - - - - - - - (1,226,837) (1,226,837) - - - - - 1,983 (1,224,854) Stock warrants converted into common stocks 1,406 14,056 (54 ) - - (54 ) - - - - - - - - - - 14,002 Unrealized gains or losses of subsidiaries' cash flow hedge - - - - - - - - - - - - 7,585 - - - 7,585 Unrealized revaluation gains or losses on financial instruments recognized from subsidiaries - - - - - - - - - - - - (162,209) - - - (162,209) Change in cumulative translation adjustment on equity investments - equity method recognized from subsidiaries - - - - - - - - - - - (394,667) - - - - (394,667) Change in minority interest - - - - - - - - - - - - - - - (681) (681) Cash dividend adjustment - - - 15,208-15,208 - - - - - - - - - - 15,208 BALANCE, JUNE 30, 2008 7,103,467 $71,034,671 $1,754,727 $51,449 $3,609 $1,809,785 $12,991,971 $1,671,766 $ (1,226,447) $13,437,290 $1,030,154 $ (513,793) $ (224,685) $ (2,292,706) $ (648,249) $56,500 $83,688,967 BALANCE, JANUARY 1, 2007 7,102,271 $71,022,715 $1,451,369 $46,617 $3,609 $1,501,595 $12,471,196 $ 591,982 $ 2,709,447 $15,772,625 $1,030,154 $ (65,673) $ 56,893 $ (3,511,880) $ (155,953) $82,022 $85,732,498 Appropriation of 2006 earnings Legal reserve - - - - - - 270,894 - (270,894) - - - - - - - - Special reserve - - - - - - - (229,084) 229,084 - - - - - - - - Remuneration to directors and supervisors - - - - - - - - (66,000) (66,000) - - - - - - (66,000) Bonus to employees - cash - - - - - - - - (26,671) (26,671) - - - - - - (26,671) Cash dividends - $0.3042 per share - - - - - - - - (2,139,772) (2,139,772) - - - - - - (2,139,772) Consolidated income for the six months ended June 30, 2007 - - - - - - - - 4,400,607 4,400,607 - - - - - (5,293) 4,395,314 Cash dividend adjustment - - - 36,237-36,237 - - - - - - - - - - 36,237 Stock warrants converted into common stocks 7,342 73,415 10,913 - - 10,913 - - - - - - - - - - 84,328 Treasury stock transactions (72,295) (722,950) (15,647) (46,617) - (62,264) - - (433,960) (433,960) - - - 1,219,174 - - - Unrealized revaluation gains or losses on financial instruments recognized from subsidiaries - - - - - - - - - - - - (136,041) - - - (136,041) Euro-convertible bonds converted into common stock 49,095 490,947 298,761 - - 298,761 - - - - - - - - - - 789,708 Unrealized gains or losses of subsidiaries' cash flow hedge - - - - - - - - - - - - 268 - - - 268 Change in minority interest - - - - - - - - - - - - - - - (17,542) (17,542) Change in cumulative translation adjustment on equity investments - equity method recognized from subsidiaries - - - - - - - - - - - 27,631 - - - - 27,631 BALANCE, JUNE 30, 2007 7,086,413 $70,864,127 $1,745,396 $36,237 $3,609 $1,785,242 $12,742,090 $ 362,898 $ 4,401,841 $17,506,829 $1,030,154 $ (38,042) $ (78,880) $ (2,292,706) $ (155,953) $59,187 $88,679,958 The accompanying notes are an integral part of the consolidated financial statements. - 6 -
SINOPAC FINANCIAL HOLDINGS COMPANY LIMITED AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE SIX MONTHS ENDED JUNE 30, 2008 AND 2007 (In Thousands of New Taiwan Dollars) 2008 2007 CASH FLOWS FROM OPERATING ACTIVITIES Consolidated (loss) income $ (1,224,854 ) $ 4,395,314 Adjustments to reconcile consolidated income (loss) to net cash provided by operating activities Depreciation and amortization 624,368 705,250 Impairment loss 1,790,532 32,119 Accrued interest premium on Euro-convertible bonds - 54,189 Amortization of premium or discount on financial assets (7,447 ) 1,837 Amortization of discount on bank debentures 133 - Loss on disposal assets 5,089 142 Cash dividends received from investments under the equity method - 5,306 Unrealized losses (gains) on financial assets and liabilities at fair value through profit or loss 3,567,050 (337 ) Provision for credit, trading and other losses 2,952,923 3,521,479 Foreign exchange gains on Euro-convertible bonds (367,664 ) (12,992 ) Income from equity investments - equity method, net (1,297 ) (29,718 ) (Gains) losses on disposal of properties and leased assets, net (4,474 ) 12,762 Gains on disposal of collaterals assumed, net (7,876 ) (1,120 ) Gains on warrants issued, net (149,010 ) (94,016 ) Change in deferred income taxes (1,701,369 ) 34,039 Accrued pension cost 20,018 173,947 Gains on sale of unquoted equity investment (159,678 ) (55,761 ) (Gains) losses on sale of available-for-sale financial assets (42,586 ) 17,351 Net change of operating assets and liabilities Held for trading financial assets (2,752,968 ) (82,468,387 ) Held for trading financial liabilities 914,133 3,229,563 Securities brokerage accounts, net (450 ) (60,322 ) Customer margin account (1,038,680 ) (534,446 ) Future trader's equity 1,039,160 544,685 Receivables (4,883,022 ) (8,551,820 ) Payables (2,436,149 ) (4,470,763 ) Securitization of credit card receivable 6,851,641 7,383,653 Net cash provided by (used in) operating activities 2,987,523 (76,168,046 ) CASH FLOWS FROM INVESTING ACTIVITIES Decrease in due from the Central Bank and other banks 52,976,868 8,144,302 Acquisition of financial assets designated at fair value through profit or loss (152,025 ) (2,126,486 ) Decrease in financial assets designated at fair value through profit or loss 534,587 682,357 Decrease (increase) in securities purchased under agreements to resell 108,066 (1,123,912 ) Increase in discounts and loans (27,088,456 ) (14,660,367 ) - 7 - (Continued)
SINOPAC FINANCIAL HOLDINGS COMPANY LIMITED AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE SIX MONTHS ENDED JUNE 30, 2008 AND 2007 (In Thousands of New Taiwan Dollars) 2008 2007 Increase in equity investments under equity method $ - $ (32,520 ) Increase in unquoted equity instruments (351,072 ) (1,276,049 ) Decrease in unquoted equity instruments 466,391 163,563 Acquisition of held-to-maturity investment (69,353,678 ) (910,486 ) Proceeds from held-to-maturity investment matured 562,145 832,876 Acquisition of available-for-sale financial assets (243,434,256 ) (3,584,936 ) Proceeds from sale of available-for-sale financial assets 270,698,904 98,266,225 Acquisition of non-active market debt instruments - (2,834,441 ) Proceeds from sale of non-active market debt instruments 1,065,698 878,719 Acquisition of properties (336,116 ) (315,641 ) Proceeds from sale of properties 2,764 12,067 Acquisition of leased assets (137,207 ) (471,594 ) Proceeds from sale of leased assets 222,673 38,828 Proceeds from sale of collaterals assumed 185,608 25,938 Decrease (increase) in long-term lease and installment receivables 343,122 (462,075 ) Decrease (increase) in other financial assets 811,734 (704,028 ) (Increase) decrease in other assets (209,582 ) 92,244 Net cash (used in) provided by investing activities (13,083,832 ) 80,634,584 CASH FLOWS FROM FINANCING ACTIVITIES (Decrease) increase in short-term borrowings (9,531,594 ) 12,372 Increase in commercial paper payable 2,843,037 574,504 Decrease in securities sold under agreements to repurchase (4,749,102 ) (3,463,961 ) Increase (decrease) in call loans and due to the Central Bank and other banks 17,591,915 (14,435,479 ) (Decrease) increase in deposits and remittances (6,215,098 ) 11,485,448 Redemption of convertible bonds - (2,249,836 ) Increase in long-term borrowings 5,787,302 267,260 Issuance of bank debentures 6,396,485 - Bank debenture matured (3,000,000 ) - (Decrease) increase in other financial liabilities (625,808 ) 7,168,806 Increase (decrease) in other liabilities 28,158 (4,380,683 ) Remuneration to directors and supervisors and bonus to employees (39,245 ) (22,216 ) Minority interest (681 ) (17,542 ) Cash received from employees by exercising stock options 14,002 84,329 Net cash provided by (used in) financing activities 8,499,371 (4,976,998 ) EFFECTS OF EXCHANGE RATE CHANGES (30,928 ) 2,314-8 - (Continued)
SINOPAC FINANCIAL HOLDINGS COMPANY LIMITED AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE SIX MONTHS ENDED JUNE 30, 2008 AND 2007 (In Thousands of New Taiwan Dollars) 2008 2007 DECREASE IN CASH AND CASH EQUIVALENTS $ (1,627,866 ) $ (508,146 ) CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 18,766,790 29,599,911 CASH AND CASH EQUIVALENTS, END OF PERIOD $ 17,138,924 $ 29,091,765 SUPPLEMENTAL INFORMATION Interest paid $ 16,285,592 $ 14,211,236 Income tax paid $ 546,932 $ 678,123 NONCASH INVESTING AND FINANCING ACTIVITIES Cash dividend payable $ 901,665 $ 2,144,227 Remuneration to directors and supervisors payable $ - $ 66,000 Cancellation of treasury stock $ - $ 885,202 Euro-convertible bonds converted to common stock $ - $ 789,708 The accompanying notes are an integral part of the consolidated financial statements. (Concluded) - 9 -
SINOPAC FINANCIAL HOLDINGS COMPANY LIMITED AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE SIX MONTHS ENDED JUNE 30, 2008 AND 2007 (In Thousands of New Taiwan Dollars, Unless Stated Otherwise) 1. ORGANIZATION AND OPERATIONS May 9, 2002 August 26, 2005 December 26, 2005 June 2006 July 2006 Following the incorporation, SinoPac Financial Holdings Co., Ltd. (the Company/SPH) issued stocks to swap for the shares of Bank SinoPac (BSP), National Securities Corporation (NSC), and SinoPac Securities Co., Ltd. (SPS), resulting in all three companies becoming wholly owned subsidiaries of SPH. SPH convened the provisional shareholders meeting and reached the decision of share swap with International Bank of Taipei (IBT). As to the share swap between SPH and IBT, both parties agree that IBT will become a wholly owned subsidiary of SPH through share swap in accordance with Financial Holding Company Act. Through a swap at ratios of 1.3646 (with 1 representing the SPH s share) IBT became a wholly owned subsidiary of SPH. The shares of IBT ceased trading on the Taiwan Securities Exchange (TSE). SPH convened the shareholders meeting and reached the decision of renaming SPH s Chinese name. Registration of SPH s Chinese name. SPH engages in the business of investing and managing of the financial related institution. Please refer to Table 9 for related consolidated entities organization and operations. As of June 30, 2008 and 2007, SPH and its consolidated subsidiaries had 8,355 and 8,075 employees, respectively. 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Consolidation The consolidated financial statements include the accounts of the (1) SPH; (2) Bank SinoPac, as consolidated with SinoPac Bancorp and its subsidiaries SinoPac Financial Services (USA) Ltd. (completed liquidation in the year end 2007 and stop operating) and FENB alone with its subsidiaries, Far East Capital Corp., SinoPac Leasing Corporation consolidated with Grand Capital International Limited (SinoPac Leasing and its subsidiary, thereafter), SinoPac Capital Limited consolidated with SinoPac Capital (B.V.I.) Ltd., SinoPac Insurance Brokers Ltd., Shanghai International Asset Management (Hong Kong) Co., Ltd., Pinnacle Investment Management Ltd., and RSP Information Service Company Limited (SinoPac Capital Limited and its subsidiaries, thereafter), SinoPac Life Insurance Agent Co., Ltd. and SinoPac Property Insurance Agent Co., Ltd. Bank SinoPac and its subsidiaries thereafter refers to Bank SinoPac as consolidated with SinoPac Bancorp and its subsidiaries, SinoPac Leasing and its subsidiary, SinoPac Capital Limited and its subsidiaries, SinoPac Life Insurance Agent Co., Ltd. and SinoPac Property Insurance Agent Co., Ltd.; (3) SinoPac Securities and its subsidiaries SinoPac Futures consolidated with SinoPac Managed Futures Corporation (completed liquidation in June 2008), SinoPac Capital Management Corporation, SinoPac Securities (Cayman) consolidated with SinoPac Capital (Asia), SinoPac Futures (Asia) Ltd., - 10 -
SinoPac Securities (Europe) Ltd., SinoPac Securities (Asia) Ltd. and its subsidiaries - SinoPac Securities (Asia) Nominess Ltd. and SinoPac (Asia) Nominess Ltd., SinoPac Asia Limited, and SinoPac Asset Management (Asia) Ltd. and its subsidiary - SPS Asset Management Limited; (4) SinoPac Card Services; (5) SinoPac Venture and its subsidiaries consolidated with Wal Tech International Corporation, Intellisys Corp. and Allstar Venture Ltd. (B.V.I.); (6) SinoPac Asset Management; (7) SinoPac Call Center; (8) SinoPac Securities Investment Trust Co., Ltd. (formerly Grand Cathay Securities Investment Trust Co., Ltd. and renamed as SinoPac Securities Investment Trust in January 2008) (the Company and its subsidiaries, thereafter) All significant inter-company transactions and balances have been eliminated for consolidation purposes. Information about subsidiaries included in the consolidated financial statements refers to Table 9. Information about subsidiaries excluded from the consolidated financial statements refers to Table 10. The accompanying consolidated financial statements have been prepared in conformity with the Criteria Governing the Preparation of Financial Reports by Financial Holding Companies, Criteria Governing the Preparation of Financial Reports by Public Banks, Guidelines Governing the Preparation of Financial Reports by Securities Issuers, Criteria Governing the Preparation of Financial Reports of Securities Firms, Criteria Governing the Preparation of Financial Reports by Futures Commission Merchants and accounting principles generally accepted in the Republic of China (ROC). In determining fair value of certain financial instruments, credit losses, depreciation for fixed assets, idle assets and assets held for leasing, impairments, pension, income taxes, amortization of deferred charges, losses on suspended lawsuit and provision for losses on guarantees and employee bonus and directors remuneration, the Company and its subsidiaries need to make estimates based on judgment and available information. Actual results could differ from those estimates based on judgment at available information. The significant accounting policies of SPH and consolidated subsidiaries are summarized as follows: Current and Non-current Assets and Liabilities Since the operating cycle in the banking industry cannot be reasonably identified, accounts included in the consolidated financial statements of Bank SinoPac and FENB are not classified as current or non-current. Nevertheless, these accounts are properly categorized according to the nature of each account and sequenced by their liquidity. Please refer to Note 43 for maturity analysis of assets and liabilities. In addition to cash equivalents mentioned in the next section, assets to be converted or consumed within one year are classified as current. Obligations to be liquidated or settled within one year are classified as current. All other assets and liabilities are classified as non-current. As the banking industry accounts for a large proportion in the consolidation, accounts in the consolidated financial statements are categorized according to the nature of each account and sequenced by their liquidity rather than classified as current or non-current assets/liabilities. Financial Value Determination Fair value are determined as folows: (a) listed stocks and GreTai Securities Market (the GTSM ) stocks - closing prices as of the balance sheet date; (b) beneficiary certificates (open-end fund) - net asset values as of the balance sheet date; (c) bonds - period-end reference prices published by the GTSM or Bloomberg; and (d) for the financial instruments without active markets, fair value is determined by the price provided by counterparty or using valuation techniques. Financial Instruments at Fair Value Through Profit or Loss Financial instruments at fair value through profit or loss consist of any financial asset and liability that is designated on initial recognition as one to be measured at fair value with fair value changes in profit or loss and financial assets and liabilities which should be classified as held for trading. The Company recognizes a financial asset or a financial liability on its balance sheet when the Company becomes a party to the contractual provisions of the financial instrument. A financial asset is derecognized when the Company has lost control of its contractual rights over the financial asset. A financial liability is derecognized when the obligation specified in the relevant contract is discharged, cancelled or expire. Financial instruments at FVTPL are initially measured at fair value. At each balance sheet date subsequent - 11 -
to issue of initial recognition, financial assets or financial liabilities at FVTPL are remeasured at fair value, with changes in fair value recognized directly in profit or loss in the year in which they arise. On derecognition of a financial asset or a financial liability, the difference between its carrying amount and the sum of the consideration received and receivable or consideration paid and payable is recognized in profit or loss. The Company and its subsidiaries use trade date accounting when recording transaction, except for operating securities - bonds used settlement day accounting. A derivative that does not meet the criteria for hedge accounting is classified as a financial asset or a financial liability held for trading. If the fair value of the derivative is positive, the derivative is recognized as a financial asset; otherwise, the derivative is recognized as a financial liability. Any financial asset and any financial liability may be designated as financial instruments at fair value through profit or loss to eliminate measurement anomalies for items that provide a natural offset of each other. Applying the fair value option eliminates accounting measurement mismatch for items that naturally offset each other or eliminates the burden of separating embedded derivatives that are not considered to be closely related to the host contract pertaining to a hybrid instrument. If the Company does not adopt hedge accounting and the hedged items are not designated as financial assets or liabilities at fair value through profit or loss, accounting measurement mismatches on these items will occur as a result of differences in measurement attributes. Thus, the Company designated debt instruments and bank debentures issued as financial assets and liabilities at financial assets or liabilities at fair value through profit or loss. Moreover, the Company designated hybrid instruments as financial assets and liabilities at financial assets or liabilities at fair value through profit or loss because embedded derivatives are not separated from the host contract in a hybrid instrument. Besides, the set of financial assets, financial liabilities or the combination of both managed by the Company and its subsidiaries risk management policies and investment strategies will be designated as financial instruments at fair value through profit or loss. Securities Purchased Under Agreement to Resell - Short Sales The proceeds from sale of government bonds which purchased under resale agreements by the Company and its subsidiaries for trading purpose are accounted for as bonds purchased under resel agreements - short sales. Bonds purchased under resel agreement - short sales are stated at fair value. The fair value is based on the reference price on the balance sheet date published by the GTSM. Gains or losses from valuation on the balance sheet date are recognized in the curent period as gains (or loses) from securities transaction - RS short covering. When bonds are repurchased, the diference between the covering cost and carying value are accounted for as gain (or los) from securities transactions - RS short covering. The cost of bonds is determined by the moving-average method. Securities Lending and Borrowing The proceeds from the sale of bonds (or stocks) borrowed by the SinoPac Securities and its subsidiaries for trading purposes are accounted for as borowed securities payable - non-hedging. They are caried at fair value. The fair value is based on the reference price or closing price on the balance sheet date. Gains or losses from valuation on the balance sheet date are recognized as gains (or losses) from valuation of securities lending and borrowing. When securities are returned, the difference between the covering cost and the carrying value are accounted for as gain (or loss) from short covering. - 12 -
Derivative Financial Instruments a. Foreign exchange forward Foreign-currency assets and liabilities arising from forward exchange contracts, which are mainly for accommodating customers needs or managing curency positions, are recorded at the contracted forward rates. Gains or losses arising from the differences between the contracted forward rates and spot rates upon settlement are credited or charged to current income. As of the balance sheet date, outstanding contracts are measured at fair value through profit or loss. b. Forward rate agreements Forward rate agreements, which are mainly for accommodating customers needs or managing interest rate positions, are recorded by memorandum entries at the contract dates. Gains or losses arising from the differences between the contracted interest rates and actual interest rates upon settlement are credited or charged to current income. As of the balance sheet date, outstanding contracts are measured at fair value through profit or loss. c. Currency swaps Foreign-currency spot-position assets or liabilities arising from currency swaps, which are mainly for accommodating customers needs or managing curency positions, are recorded at spot rates when the transactions occur; while corresponding forward-position assets or liabilities are recorded at the contracted forward rates, with receivables net of the related payables. The interest part of swap points is amortized during the contract period. As of the balance sheet date, outstanding contracts are measured at fair value through profit or loss. d. Cross-currency swaps Cross-currency swaps, which are mainly for accommodating customers needs or managing currency positions, are marked to market as of the balance sheet date. The interest received or paid at each settlement date is recognized as interest income or expense, which is credited or charged to current income. As of the balance sheet date, outstanding contracts are measured at fair value through profit or loss. e. Options For Bank SinoPac and its subsidiaries options bought and/or held and options written, which are mainly for accommodating customers needs or managing curency positions, are recorded as assets and liabilities when the transactions occur. These instruments are marked to market as of the balance sheet date. The carrying amounts of the instruments, which are recorded either as assets or liabilities, are credited or charged to current income when they are not exercised. Gains or losses on the exercise of options are also included in current income. For SinoPac Securities and its subsidiaries, premiums received from short options or paid for long options, which are used for trading purposes, are recognized as liabilities and assets, respectively. The margin deposited for short options is recognized as margin deposits - options. Gains or losses arising from daily marking to market of the carrying amounts of the options, from taking opposite trade positions, and from settlement of options are included in the current income. The fair value of options is based on the closing price on the balance sheet date. For SinoPac Securities and its subsidiaries, the notional amount of the bond option for trading purposes is recognized through a memo entry on the transaction date. Premiums received from short options or paid for long options are recognized as liabilities and assets, respectively, and marked to market. Gains or losses from changes in fair value are recognized in the current period. - 13 -
For SinoPac Securities and its subsidiaries, when the options are exercised or matured, the related assets and liabilities will be written off. If the option is exercised, SinoPac Securities and its subsidiaries acquire or deliver the underlying bond operating securities and recognize the operating securities - bonds or proceeds from sale of securities according to the fair value of the underlying bond. Gains or losses on the exercise of option are recognized in the current period. The fair value of bonds options is based on the theoretical price on the balance sheet date. f. Interest rate swaps For Bank SinoPac and its subsidiaries, interest rate swaps which do not involve the exchange of notional amounts, are not recognized as either assets and/or liabilities on the contract dates. The interest received or paid at each settlement date on the swaps, which are mainly for accommodating customers needs or managing the interest rate positions is recognized as interest income or expense. These instruments are marked to market as of the balance sheet date. For SinoPac Securities and its subsidiaries, interest rate swap contracts used for trading purpose are recognized through memo entries on the contract date. The fair value of the contracts is presented as financial assets and liabilities at fair value through profit or loss and is written off on the settlement date. On balance sheet date, outstanding contracts are marked to market, and the change in fair value is recognized as gain or loss from financial assets and liabilities at fair value through profit or loss. The fair value of interest rate swap contracts is based on the theoretical price. g. Asset swaps and convertible bond swap transactions Bank SinoPac and its subsidiaries enter into asset swaps involve exchanging the fixed interest of convertible bonds or fixed rate notes for floating interest. In addition, asset swaps involve exchanging the fixed or floating interest of credit link notes for floating or fixed interest. These transactions are recorded by memorandum entries at the contract dates. As of the balance sheet date, outstanding contracts are measured at fair value through profit or loss. For SinoPac Securities and its subsidiaries, the convertible bond swap transactions have three types: Fixed income, short call options and combination of both types. In a fixed income transaction, instruments used are a convertible bond sold (or purchased) outright plus an interest rate swap contract and a long (or short) call option on the convertible bond. The notional amount of the swap contract is recognized through a memo entry. The accounting treatment for a convertible bond sold (or purchased) outright is the same as that for operating securities. The fair value of the interest rate swap contract and the premium paid (or received) for a long (or short) call option are both recognized as derivative financial assets (or liabilities) and marked to market. Gains or losses from changes in fair value are recognized in the current period. For short call options, the notional amount is recognized through a memo entry on the transaction date, and the premium received is recognized as derivative financial liabilities. On the balance sheet date, outstanding option contracts are marked to market, and the resulting gains or losses are recognized in the current period. h. Futures For Bank SinoPac and its subsidiaries, margin deposits paid for interest rate futures contracts are recognized as assets. Gains or losses resulting from the market to market and from the settlement of the interest rate futures contracts are classified as realized or unrealized gains or losses depending on whether the gains or losses had been realized. The gains and losses are included in current income. - 14 -
For SinoPac Securities and its subsidiaries, initial margin on futures contracts and margin deposits maintained to reflect the fluctuation of market price of futures contracts are recognized as margin deposits - futures. Gains or losses from daily marking to market of the carrying amounts of the futures contracts, from taking opposite trade positions, and from settlement of futures contracts are included in the current period. Futures contracts are classified as held for trading hedge and held for trading non-hedge and gains or losses are classified as realized or unrealized gains or losses depending on whether the gains or losses had been realized. The fair value of futures contracts is based on the closing price on the balance sheet date. i. Credit default swaps Credit default swaps involve taking the credit risk of the denominated bonds and notes. Such transactions are recorded by memorandum entries at the contract dates. For Bank SinoPac and its subsidiaries, the premium received for a credit default swap contract on each settlement or balance sheet date is recorded as current income by the accrual method. As of balance sheet date, outstanding contacts are measured at fair value through profit or loss. j. Commodity - linked interest rate swaps, equity - linked swaps and credit - linked swaps (miscellaneous swap contracts) Commodity - linked interest rate swaps, equity - linked swaps and credit - linked swaps, which do not involve the exchange of notional amounts, are recorded by memorandum entries at the contract dates. The gains and losses resulting from the swapped-in and swapped-out are included in current income on the settlement dates. As of balance sheet date, outstanding contracts are measured at fair value through profit or loss. k. Structured note transactions and operating securities - hedging There are two types of structured note transactions: equity-linked note transactions. Principal-guaranteed note transactions and For the principal-guaranteed note transactions, the SinoPac Securities and its subsidiaries receive the contract price from the investors. The SinoPac Securities and its subsidiaries guarantee that the investors will get a fixed income from their investment and gives the investors the right to share in the profits on the underlying assets. The contract price is recognized as follows: (a) principal-guaranteed note liabilities - fixed income instruments (accounts for financial liabilities at fair value through profit or loss), for which SinoPac Securities and its subsidiaries amortize the principal and recognize the implied-interest expenses using the straight-line method and present the interest expense as losses from principal-guaranteed note transactions, and (b) principal-guaranteed note liabilities - options (accounts for financial assets and liabilities at fair value through profit or loss), for which the related price is marked to market, and gains (losses) from valuation are presented as gains (losses) from valuation of principal-guaranteed notes (account for (losses on) gains form financial assets and liabilities at fair value through profit or loss). For the equity-linked note transactions, SinoPac Securities and its subsidiaries receive the contract price from the investors. The SinoPac Securities and its subsidiaries simultaneously invest the investors funds in fixed-income instruments and in long put options on underlying assets. The contract price received is recognized as follows: (a) equity-linked note liabilities - fixed income instruments (accounts for financial liabilities at fair value through profit or loss), for which the SinoPac Securities and its subsidiaries amortize the principal and recognize the implied interest expenses using the straight-line method and present the interest expense as loss from equity-linked note transactions (account for (losses on) gains form financial assets and liabilities at fair value through profit or loss), and (b) equity-linked note liabilities - premiums (accounts for financial assets at fair value through profit or loss), which will be written off when the options are exercised or expired at maturity. The options acquired from the investors are recognized as equity-linked note assets - options and marked to market. Gains (losses) from valuation are presented as gains (losses) from valuation of equity-linked - 15 -
notes (account for (losses on) gains form financial assets and liabilities at fair value through profit or loss). All assets (liabilities) of the structured note transactions are presented as financial assets and liabilities at fair value through profit or loss and all gains or losses are recognized as gains (losses) from financial assets and liabilities at fair value through profit or loss. The securities invested in by SinoPac Securities and its subsidiaries for hedging purposes are stated at purchase cost, presented as operating securities - hedging, and revaluated at the fair value based on the related contract. The loss on decline in market value of these securities is charged to income. The cost of securities sold is determined by the moving-average method. l. Interest rate option The notional amount of the interest rate (swap) option for trading purposes is recognized through a memo entry on the transaction date. Premiums paid for long options or received from short option are recognized as assets and liabilities, respectively, and marked to market. Gains or losses from change in fair value are recognized in the current period. The related assets and liabilities will be written off on the settlement date. The fair value of interest rate option is based on the theoretical price on the balance sheet date. m. Bond forward transactions SinoPac Securities engages in bond forward transactions for trading purpose. The amounts of the sale or purchase of bonds are recognized through memo entries on the transaction date. The fair value of the contracts is presented as derivative financial assets - OTC. Gains or losses from change in fair value are recognized as gain (los) from derivative transactions - OTC (account for (loses on) gains form financial assets and liabilities at fair value through profit or loss). On the settlement date, the Company recognizes the operating securities - bonds or proceeds of the sale of securities according to the fair value of the underlying bond. The fair value of bond forward is based on the theoretical price on the balance sheet date. Repurchase and Reverse Repurchase Transactions Securities purchased under agreements to resell (reverse repurchase) agreements and securities sold under agreements to repurchase are generally treated as collateralized financing transactions. Interest earned on reverse repurchase agreements or interest incurred on repurchase agreements is recognized as interest income or interest expense over the life of each agreement. Margin Loans and Stock Loans Margin loans pertain to the provision of funds to customers for them to buy securities. Margin loans receivable represents the amount given to customers. The securities bought by customers are used to secure these loans and are recorded through memo entries as collateral securities. The collateral securities are returned when the loans are repaid. The refinancing of margin loans with securities finance companies is recorded as refinancing borrowings, which are collateralized by securities bought by customers. - 16 -
The collateral securities are disposed of by SinoPac Securities when their market value fall below a pre-agreed level and the customer fails to maintain to this level. If the proceeds from the disposal of collateral security cannot cover the balance of the loan and the customer cannot timely settle the deficiency, then the balance of the margin loan is reclassified to overdue receivables. If a collateral security cannot be sold in the market, the balance of the loan is reclassified to other receivables or overdue receivables. Stock loans represent securities lent to customers for short sales. The deposits received from customers on securities lent out are credited to deposits on short sales. The securities sold short are recorded through memo entries as stock loans. The proceeds from sales of securities lent to customers les any dealer s commission, financing charges and securities exchange tax are recorded under short sales proceeds payable. When the customers return the stock certificates to SinoPac Securities, SinoPac Securities gives back to customers the deposits received and the proceeds from sales of securities. The margin deposited by securities firms to securities finance companies are recorded as loan from refinanced margin. The refinancing securities delivered to SinoPac Securities are recorded through memo entries as refinancing stock loans. A portion of the proceeds from the short-sale of securities borrowed from securities finance companies is retained by the securities finance companies as collateral and is recorded as refinancing deposits receivable. Sales of Accounts Receivable SinoPac Card Services has transferred its credit card receivables conforming to the following criteria and surrendered controls over the transferred assets and has recorded the transfer as sales of accounts receivable. a. Transferred accounts receivable have been isolated from SinoPac Card Services. SinoPac Card Services, along with its creditors, is unable to control the future economic benefits. b. The transferee has the right to pledge or transfer accounts receivable purchased, and there will be no condition constrains the transferee from its right to pledge or transfer. c. The transferee has no right to return the transferred accounts receivable purchased before their maturity. SinoPac Card Services is neither obligated nor entitled to repurchase or redeem such accounts receivable. Where a repurchase transaction has been entered into, the amount of the repurchase price shall be the fair value of accounts receivable at the time the transaction occurs. SinoPac Card Services derecognizes the credit card receivables sold at carrying value from its balance sheet on the transfer date. The difference between the amount of proceeds after deducting the estimated bad debt provision and the carrying value is recorded as income (loss) for the current period. Account Receivable Factoring Factoring receivables are account receivables purchased by them. Service fees are recorded as revenue upon receipt and interest income is recognized during the factoring period. Non-performing Loans Under guidelines issued by the Banking Bureau of Financial Supervisory Commission, the balance of loans and other credits extended by Bank SinoPac and the related accrued interest thereon are classified as non-performing when the loan is overdue and shall be authorized by a resolution passed by the board of directors. Non-performing loans reclassified from loans are classified as discounts and loans; otherwise, they are classified as other financial assets. - 17 -
Allowance for Credit Losses and Provision for Losses on Guarantees In determining the allowance for credit losses and provision for losses on guarantees, Bank SinoPac and its subsidiaries assess the collectibility on the balances of discounts and loans, accounts receivables, interest receivables, other receivables, lease receivables, non-performing loans, and other financial assets as well as guarantees and acceptances as of the balance sheet date. Pursuant to Regulations Governing the Procedures for Banking Institutions to Evaluate Assets and Deal with Non-performing/Non-accrual Loans (the Regulations ) isued by the Banking Bureau, Bank SinoPac evaluates credit losses on the basis of the estimated collectibility. In accordance with the Regulations stated above, the loan assets where divided into different classes subject to assets that require special mentioned, assets that are substandard, assets that are doubtful, and assets for which there is loss. The minimum allowance for credit losses and provision for losses on guarantees for the aforementioned classes should be 2%, 10%, 50% and 100% of outstanding credits, respectively. For Bank SinoPac and its subsidiaries, write-offs of loans falling under the Banking Bureau guidelines, upon approval by the board of directors, are offset against the recorded allowance for credit losses. Recovery of loans written off on the current year is recorded as reverse of allowance whereas recovery of loans written off on the previous years is recorded as other revenue. The allowance for doubtful accounts and non-performing accounts for SinoPac Card Services is recorded based on their collectability on the balance sheet date. Receivables past due transferred to non-performing accounts and receivables deemed to be uncollectible are written-off upon the approval of the board of directors. Recovery of written-off receivables is accounted for as allowance for doubtful accounts. For SinoPac Securities and SinoPac Futures, allowance for bad debts is provided on the basis of reviewing the collectibility of notes and accounts receivables, other receivables and non-performing loans. After providing this allowance, set aside an additional amount as bad-debt reserve and allowance for bad debts, to save 3% on the value-added tax before July 1, 2003. According to a directive of the authority, SinoPac Securities and SinoPac Futures stop providing the aforesaid reserve since July 1, 2003. Those reserves can only be used to write off non-performing loans. Ruled by Tai-Tsai-Zhen (4) 04310 of the MOF, SinoPac Securities Investment Trust set aside an additional amount as bad-debt reserve to save 3% on the value-added tax for four years since July 1, 1999. Under the ruling of Tai-Tsai-Zhen (4) 0920003199, SinoPac Securities Investment Trust ceased making provision for the aforementioned reserve since July 1, 2003. Until June 30, 2007, the remaining reserve is reversed because SinoPac Securities Investment Trust finished the liquidation process. Available-for-sale Financial Assets Available-for-sale financial assets are initially measured at fair value plus transactions that are directly attributable to the acquisition. Unrealized gains or losses on available-for-sale financial assets are reported in equity attribute to the shareholders. On disposal of an available-for-sale financial asset, the accumulated, unrealized gain or loss in equity attributable to the shareholders is transferred to net profit and loss for the period. All regular way purchase or sale of financial assets are accounted for on a trade date basis except for the SinoPac Securities and its subsidiaries investments in bonds which use the setlement date accounting. Cash dividends are recognized on the ex-dividend date. Cash dividends received a year after investment acquisitions are recognized as income, otherwise as a reduction of the carrying value of the investments. The effective interest rate method of amortization and accretion is used; the straight line method is used if there is no significant difference. - 18 -