TAIPEI FUBON COMMERCIAL BANK Co., Ltd. Financial Statements for the Six Months Ended, 2010 and 2009 and Independent Auditors Report
INDEPENDENT AUDITORS REPORT The Board of Directors and Stockholders TAIPEI FUBON COMMERCIAL BANK Co., Ltd. We have audited the accompanying balance sheets of TAIPEI FUBON COMMERCIAL BANK Co., Ltd. (the Bank ), as of, 2010 and 2009, 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 the Bank s management. Our responsibility is to express an opinion on these statements based on our audits. We conducted our audits in accordance with the Rules Governing the Audit and Certification of Financial Statements of Financial Institutions by Certified Public Accountants and auditing standards generally accepted in the Republic of China. Those rules and standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of TAIPEI FUBON COMMERCIAL BANK Co., Ltd. as of, 2010 and 2009, and the results of its operations and its cash flows for the six months then ended, in conformity with the Criteria Governing the Preparation of Financial Reports by Public Banks, Criteria Governing the Preparation of Financial Reports by Futures Commission Merchants, requirements of the Business Accounting Law and Guidelines Governing Business Accounting relevant to financial accounting standards, and accounting principles generally accepted in the Republic of China. We have also audited the consolidated financial statements of the Bank and its subsidiaries as of and for the six months ended, 2010 and 2009, on which we have issued an unqualified opinion thereon. August 2, 2010 Notice to Readers The accompanying financial statements are intended only to present the financial position, results of operations and cash flows in accordance with accounting principles and practices generally accepted in the Republic of China and not those of any other jurisdictions. The standards, procedures and practices to audit such financial statements are those generally accepted and applied in the Republic of China. For the convenience of readers, the auditors report and the accompanying financial statements have been translated into English from the original Chinese version prepared and used in the Republic of China. If there is any conflict between the English version and the original Chinese version or any difference in the interpretation of the two versions, the Chinese-language auditors report and financial statements shall prevail. - 1 -
TAIPEI FUBON COMMERCIAL BANK CO., LTD. BALANCE SHEETS JUNE 30, 2010 AND 2009 (In Thousands of New Taiwan Dollars, Except Par Value) ASSETS Amount Amount % LIABILITIES AND STOCKHOLDERS EQUITY Amount Amount % CASH AND CASH EQUIVALENTS (Note 4) $ 30,612,536 $ 20,351,035 50 DUE TO THE CENTRAL BANK OF CHINA AND OTHER BANKS (Notes 19 and 32) $ 67,591,809 $ 98,861,763 (32) DUE FROM THE CENTRAL BANK OF CHINA AND OTHER BANKS (Notes 5, 32 and 33) 92,109,369 275,768,803 (67) FINANCIAL LIABILITIES AT FAIR VALUE THROUGH PROFIT OR LOSS (Notes 2, 6 and 32) 23,002,287 19,460,879 18 FINANCIAL ASSETS AT FAIR VALUE THROUGH PROFIT OR LOSS (Notes 2, 6, 32 and 34) 35,120,273 29,157,817 20 SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE (Notes 2, 32 and 34) 17,646,111 5,991,002 195 SECURITIES PURCHASED UNDER AGREEMENTS TO RESELL (Notes 2 and 32) - 6,621,045 (100) PAYABLES (Notes 2, 20, 28 and 32) 33,155,243 21,997,458 51 RECEIVABLES, NET (Notes 2, 7, 15 and 32) 78,463,832 50,699,317 55 DEPOSITS AND REMITTANCES (Notes 21 and 32) 1,137,547,938 1,009,687,860 13 DISCOUNTS AND LOANS, NET (Notes 2, 8, 15 and 32) 857,232,878 806,459,182 6 BANK DEBENTURES (Note 22) 52,280,683 39,578,186 32 AVAILABLE-FOR-SALE FINANCIAL ASSETS, NET (Notes 2, 9, 33 OTHER FINANCIAL LIABILITIES (Notes 2, 23 and 32) 1,589,867 1,684,761 (6) and 34) 41,004,597 50,861,304 (19) OTHER LIABILITIES (Notes 2, 24 and 28) 3,443,232 2,484,556 39 HELD-TO-MATURITY INVESTMENTS (Notes 2, 10 and 33) 254,276,678 6,433,651 3,852 Total liabilities 1,336,257,170 1,199,746,465 11 EQUITY INVESTMENTS - EQUITY METHOD (Notes 2 and 11) 333,236 521,434 (36) STOCKHOLDERS' EQUITY OTHER FINANCIAL ASSETS, NET (Note 2) Capital stock, NT$10 par value Unquoted equity instruments (Note 12) 1,252,235 1,259,093 (1) Authorized: 4,899,287 thousand shares as of, 2010; Debt instruments with no active market (Note 13) 11,750,615 14,194,199 (17) 4,794,887 thousand shares as of, 2009 Others (Notes 14, 15 and 32) 1,643,617 1,664,550 (1) Issued: 4,794,887 thousand shares as of, 2010; 4,358,988 thousand shares as of, 2009 47,948,871 43,589,883 10 Other financial assets, net 14,646,467 17,117,842 (14) Reserve for capital increase 1,044,000 4,358,988 (76) Capital surplus PROPERTIES (Notes 2 and 16) Others 13,613,508 13,613,508 - Cost Retained earnings Land 6,998,443 6,998,443 - Legal reserve 12,149,310 11,627,111 4 Buildings 5,409,207 5,409,207 - Special reserve 1,285,676 1,285,676 - Machinery and computer equipment 3,409,273 3,519,864 (3) Unappropriated 4,544,326 2,654,825 71 Transportation equipment 247,704 209,092 18 Total retained earnings 17,979,312 15,567,612 15 Office and other equipment 2,018,552 2,029,176 (1) Other equity Total cost 18,083,179 18,165,782 - Cumulative translation adjustments 84,567 68,235 24 Less: Accumulated depreciation 6,065,513 5,724,227 6 Unrealized gains on available-for-sale financial assets 1,645,741 1,135,780 45 12,017,666 12,441,555 (3) Unrealized gains on cash-flow hedge 9,359 105,330 (91) Construction in progress and prepayment for equipment 135,644 180,959 (25) Total other equity 1,739,667 1,309,345 33 Net properties 12,153,310 12,622,514 (4) Total stockholders' equity 82,325,358 78,439,336 5 INTANGIBLE ASSETS (Notes 2, 17 and 35) 2,060,582 741,072 178 OTHER ASSETS (Notes 2, 18 and 28) 568,770 830,785 (32) TOTAL $ 1,418,582,528 $ 1,278,185,801 11 TOTAL $ 1,418,582,528 $ 1,278,185,801 11 The accompanying notes are an integral part of the financial statements. - 2 -
TAIPEI FUBON COMMERCIAL BANK CO., LTD. STATEMENTS OF INCOME SIX MONTHS ENDED JUNE 30, 2010 AND 2009 (In Thousands of New Taiwan Dollars, Except Earnings Per Share) Amount Amount % NET INTEREST (Notes 2 and 32) Interest revenues $ 9,419,328 $ 11,007,497 (14) Interest expenses 3,332,380 5,049,419 (34) Total net interest 6,086,948 5,958,078 2 NET REVENUES OTHER THAN INTEREST (Note 2) Commission and fee revenues, net (Notes 26 and 32) 3,191,684 1,976,054 62 Gains on financial assets and liabilities at fair value through profit or loss (Notes 6, 27 and 32) 1,960,478 1,242,122 58 Realized gains on available-for-sale financial assets (Note 36) 133,268 488,458 (73) Income from equity investments - equity method 201,703 401,925 (50) Foreign exchange (losses) gains, net (489,834) 843,405 (158) Reversal of impairment losses (impairment losses) on assets (Notes 9 and 12) 1,553 (333,970) 100 Reserve for compensation (4,024) (302,376) (99) Other noninterest net revenues (Notes 32 and 34) 92,342 243,932 (62) Total net revenues other than interest 5,087,170 4,559,550 12 TOTAL NET REVENUES 11,174,118 10,517,628 6 PROVISION FOR BAD DEBTS (Notes 2 and 15) 195,859 1,582,664 (88) OPERATING EXPENSES (Notes 2, 3, 29, 31 and 32) Personnel expenses 3,084,180 2,908,203 6 Depreciation and amortization 495,622 527,051 (6) Others 2,465,043 2,467,507 - Total operating expenses 6,044,845 5,902,761 2 INCOME BEFORE INCOME TAX 4,933,414 3,032,203 63 INCOME TAX EXPENSE (Notes 2 and 28) 389,208 377,707 3 NET INCOME $ 4,544,206 $ 2,654,496 71 Before Income Tax After Before Income Tax Income Tax After Income Tax EARNINGS PER SHARE (Note 30) Basic $ 1.03 $ 0.95 $ 0.63 $ 0.55 The accompanying notes are an integral part of the financial statements. - 3 -
TAIPEI FUBON COMMERCIAL BANK CO., LTD. STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY SIX MONTHS ENDED JUNE 30, 2010 AND 2009 (In Thousands of New Taiwan Dollars, Except Dividends) Other Equity (Notes 2 and 11) Unrealized Capital Surplus (Notes 2 and 25) Gains or Losses Issued and Outstanding Reserve for Additional on Available- Unrealized Capital Stock Capital Paid-in Capital Retained Earnings (Notes 2 and 25) Cumulative for-sale Gains or Losses Total Shares Increase in Excess of Unappropriated Translation Financial on Cash-flow Stockholders (Thousands) Amount (Note 25) Par Value Donation Others Total Legal Reserve Special Reserve Earnings Total Adjustments Assets Hedge Equity BALANCE, JANUARY 1, 2010 4,794,887 $ 47,948,871 $ - $ - $ - $ 13,613,508 $ 13,613,508 $ 11,627,111 $ 1,285,676 $ 5,222,319 $ 18,135,106 $ 20,099 $ 1,640,196 $ 39,238 $ 81,397,018 Appropriation of the 2009 earnings: Legal reserve - - - - - - - 522,199 - (522,199) - - - - - Cash dividends - NT$0.76 per share - - - - - - - - - (3,656,000) (3,656,000) - - - (3,656,000) Stock dividends - NT$0.22 per share - - 1,044,000 - - - - - - (1,044,000) (1,044,000) - - - - Changes in unrealized gains or losses on available-for-sale financial assets - - - - - - - - - - - - 5,545-5,545 Changes in unrealized gains or losses on cash-flow hedge - - - - - - - - - - - - - (29,879) (29,879) Changes in cumulative translation adjustments - - - - - - - - - - - 64,468 - - 64,468 Net income for the six months ended, 2010 - - - - - - - - - 4,544,206 4,544,206 - - - 4,544,206 BALANCE, JUNE 30, 2010 4,794,887 $ 47,948,871 $ 1,044,000 $ - $ - $ 13,613,508 $ 13,613,508 $ 12,149,310 $ 1,285,676 $ 4,544,326 $ 17,979,312 $ 84,567 $ 1,645,741 $ 9,359 $ 82,325,358 BALANCE, JANUARY 1, 2009 4,358,988 $ 43,589,883 $ - $ 23,367 $ 305 $ 17,948,824 $ 17,972,496 $ 9,820,883 $ 1,285,676 $ 6,021,557 $ 17,128,116 $ 173,040 $ 430,388 $ 127,997 $ 79,421,920 Appropriation of the 2008 earnings: Legal reserve - - - - - - - 1,806,228 - (1,806,228) - - - - - Cash dividends - NT$0.97 per share - - - - - - - - - (4,215,000) (4,215,000) - - - (4,215,000) Capital surplus transferred to common stock - - 4,358,988 (23,367 ) (305 ) (4,335,316 ) (4,358,988 ) - - - - - - - - Changes in unrealized gains or losses on available-for-sale financial assets - - - - - - - - - - - - 705,392-705,392 Changes in unrealized gains or losses on cash-flow hedge - - - - - - - - - - - - - (22,667) (22,667) Changes in cumulative translation adjustments - - - - - - - - - - - (104,805 ) - - (104,805 ) Net income for the six months ended, 2009 - - - - - - - - - 2,654,496 2,654,496 - - - 2,654,496 BALANCE, JUNE 30, 2009 4,358,988 $ 43,589,883 $ 4,358,988 $ - $ - $ 13,613,508 $ 13,613,508 $ 11,627,111 $ 1,285,676 $ 2,654,825 $ 15,567,612 $ 68,235 $ 1,135,780 $ 105,330 $ 78,439,336 The accompanying notes are an integral part of the financial statements. - 4 -
TAIPEI FUBON COMMERCIAL BANK CO., LTD. STATEMENTS OF CASH FLOWS SIX MONTHS ENDED JUNE 30, 2010 AND 2009 (In Thousands of New Taiwan Dollars) CASH FLOWS FROM OPERATING ACTIVITIES Net income $ 4,544,206 $ 2,654,496 Adjustments to reconcile net income to net cash (used in) provided by operating activities Provision for bad debts 195,859 1,582,664 Collection of loans and receivables written off in prior years 778,351 868,164 Depreciation and amortization 495,622 527,051 Provision for credit and trading losses 19,061 334,037 Losses (gains) on financial assets designated as at fair value through profit or loss 23,262 (5,623) Losses on disposal and retirement of nonperforming loans 87,907 - Losses on disposal of properties and equipment 545 10,075 (Reversal of impairment losses) impairment losses on assets (1,553) 333,970 Income from equity investments - equity method (201,703) (401,925) Cash dividends received on equity investments - equity method 893,762 726,219 Equity shares received from credit card organization - (31,155) Realized gains on available-for-sale financial assets (106,871) (473,223) Deferred income tax (57,507) 142,886 Gain on redemption of held-to-maturity investments (763) - Amortization on premium and discount of financial assets 35,645 138,331 Prepaid pension 36,678 22,153 Gains on disposal of debt instruments with no active market - (699) Net changes in operating assets and liabilities Held-for-trading financial assets (488,636) 13,676,114 Receivables (24,799,539) 8,078,570 Payables 10,614,736 (3,477,350) Held-for-trading financial liabilities 2,437,690 (11,584,435) Net cash (used in) provided by operating activities (5,493,248) 13,120,320 CASH FLOWS FROM INVESTING ACTIVITIES Decrease (increase) in financial assets designated as at fair value through profit or loss 160,641 (878,272) Increase in securities purchased under agreements to resell - (6,621,045) Acquisition of available-for-sale financial assets (11,091,644) (21,348,366) Proceeds of available-for-sale financial assets 12,429,189 30,735,594 Acquisition of held-to-maturity financial assets (249,137,834) (3,450,947) Proceeds received on the maturity of held-to-maturity investments 2,404,958 5,467,412 Net increase in discounts and loans (27,329,905) (54,184,825) Decrease (increase) in due from the Central Bank of China and other banks 242,652,921 (29,669,323) Acquisition of properties (158,015) (586,373) Proceeds of the disposal of properties 1,420 203 Proceeds of the sale of nonperforming loans 157,400 - Proceeds of the liquidation of equity-method investees - 400,000 (Continued) - 5 -
TAIPEI FUBON COMMERCIAL BANK CO., LTD. STATEMENTS OF CASH FLOWS SIX MONTHS ENDED JUNE 30, 2010 AND 2009 (In Thousands of New Taiwan Dollars) Proceeds of decrease in capital of financial assets carried at cost $ 6,478 $ 8,400 Acquisition of debt instruments with no active market (4,841,805) (10,529,625) Disposal of debt instruments with no active market 5,694,632 16,972,434 (Increase) decrease in other financial assets (692,460) 439,277 Increase in intangible assets (1,540,776) (64,428) Decrease (increase) in other assets 141,442 (224,044) Net cash used in investing activities (31,143,358) (73,533,928) CASH FLOWS FROM FINANCING ACTIVITIES (Decrease) increase in due to the Central bank of China and other banks (332,217) 42,101,883 Decrease in securities sold under agreements to repurchase (1,053,548) (10,688,412) Increase in deposits and remittances 40,680,733 41,509,878 Proceeds of bank debentures issuance 16,800,000 - Repayment of bank debentures on maturity (8,200,000) (6,800,000) (Decrease) increase in other financial liabilities (199,377) 28,129 (Decrease) increase in other liabilities (212,186) 57,135 Cash dividends paid (3,656,000) (4,215,000) Net cash provided by financing activities 43,827,405 61,993,613 EFFECTS OF EXCHANGE RATE CHANGES 7,069 85,213 NET INCREASE IN CASH AND CASH EQUIVALENTS 7,197,868 1,665,218 CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 23,414,668 18,685,817 CASH AND CASH EQUIVALENTS, END OF PERIOD $ 30,612,536 $ 20,351,035 SUPPLEMENTAL CASH FLOW INFORMATION Interest paid $ 3,534,072 $ 6,516,939 Income tax paid $ 229,492 $ 1,191,706 The Bank bided for the Hanoi branch and Ho Chi Minh City sub-branch of Chinfon Bank, the fair value of assets and liabilities on March 6, 2010 were as follows: Cash $ 35,586 Loans 3,451,903 Other assets 553,538 Intangible assets 1,516,323 Total liabilities (2,535,082) Total purchase price $ 3,022,268 The accompanying notes are an integral part of the financial statements. (Concluded) - 6 -
TAIPEI FUBON COMMERCIAL BANK CO., LTD. NOTES TO FINANCIAL STATEMENTS SIX MONTHS ENDED JUNE 30, 2010 AND 2009 (In Thousands of New Taiwan Dollars, Unless Stated Otherwise) 1. ORGANIZATION AND OPERATIONS TAIPEI FUBON COMMERCIAL BANK Co., Ltd. (the Bank ) started as a financial institution under the Taipei City Government (TCG) in 1969. On July 1, 1984, it was reorganized into a limited liability corporation and was renamed City Bank of Taipei Co., Ltd. On January 1, 1993, the Bank was renamed TAIPEIBANK Co., Ltd. (TAIPEIBANK). On November 30, 1999, the Bank was privatized through the sale of its shares to the public, with TCG s holdings of the TCG reduced to less than 50% of the Bank s outstanding capital stock. In their special meeting on October 4, 2002, the stockholders approved a share swap, which resulted in the Bank s becoming a wholly owned subsidiary of the Fubon Financial Holdings Company (FFH). The board of directors designated December 23, 2002 as the effective date of the share swap and of the delisting of the Bank s stock from the Taiwan Stock Exchange. To fully harness the synergy of two diversified business operations and reduce operating costs, the boards of directors of the Bank and Fubon Bank Co., Ltd. ( Fubon Bank, a wholly owned subsidiary of FFH) decided on January 1, 2005 to combine these two entities. On January 1, 2005, the Bank acquired the assets and liabilities of Fubon Bank through a share swap and had its name changed to Taipei Fubon Commercial Bank Co., Ltd. On September 20, 2006, the boards of directors of the Bank and Fubon Bills Finance Co., Ltd. (FBFC) decided to merge the Bank and FBFC to strengthen their operating synergy and lower operating costs, with the Bank as the survivor entity. The Bank set December 25, 2006 as the effective merger date. Pursuant to the terms and conditions set out in the Sale and Assumption Agreement signed by the Bank, Chinfon Commercial Bank Co., Ltd. ( Chinfon Bank henceforth), Central Deposit Insurance Corp. and the Executive Yuan s Financial Reconstruction Trust Corporation on October 30, 2009, effective midnight, March 6, 2010, the Bank assumes the assets, liabilities and businesses of the Hanoi branch and Ho Chi Minh City sub-branch of Chinfon Bank under the conditions that the acquirer has obtained the competent authority s approval and completed the settlement procedure. The Bank engages in the following: (a) act for the municipal treasures of Taipei City; (b) management of municipal treasury bills of Taipei City; (c) all commercial banking operations authorized under the Banking Law; (d) trust operations; (e) lottery operations; (f) futures trading assistance; and (g) other authorized operations. The Bank has its head office in Taipei City, and as of, 2010, had 4 major operating departments - Banking, Trust, Lottery, and Public Treasury departments - with 130 branches (including one offshore banking unit (OBU), 4 overseas branches and 1 overseas subbranch). The operations of the Bank s Trust Department are (1) planning, managing and operating a trust business; and (2) custodianship of nondiscretionary trust funds in domestic and overseas securities and mutual funds. These operations are regulated under the Banking Law. The Bank was granted the right to run the Taiwan Sports Lottery from 2008 to 2013 by the Ministry of Finance. As of, 2010 and 2009, the Bank had 6,151 and 6,222 employees, respectively. - 7 -
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES The Bank s financial statements were prepared in conformity with the Criteria Governing the Preparation of Financial Reports by Public Banks, Criteria Governing the Preparation of Financial Reports by Futures Commission Merchants, Business Accounting Law, Guidelines Governing Business Accounting and accounting principles generally accepted in the Republic of China (ROC). In determining allowance for credit losses, depreciation, asset impairment, pension, income tax, possible losses from lawsuits, provision for losses on guarantees, bonuses paid to employees, directors and supervisors and the fair value of certain financial instruments, the Bank needs to make estimates and assumptions based on judgment and available information. Actual results could differ from those estimates. Since the operating cycle in the banking industry cannot be reasonably identified, accounts included in Bank s financial statements were not classified as current or non-current. Nevertheless, accounts were properly categorized in accordance with the nature of each account and sequenced by their liquidity. Please refer to Note 36 for the maturity analysis of assets and liabilities. The Bank s significant accounting policies are summarized as follows: Basis of Financial Statement Preparation The accompanying financial statements include the accounts of the head office, the OBU and all branches and representative offices. All interoffice balances and transactions have been eliminated. Translation of Foreign-currency Financial Statements The financial statements of foreign branches and the OBU are translated into New Taiwan dollars at the following exchange rates: a. Assets and liabilities - at exchange rates prevailing on the balance sheet date; b. Stockholders equity - at historical exchange rates; c. Retained earnings at the beginning balance not yet remitted to the Bank - at the translated beginning balance; and d. Income and expenses - at average exchange rates for the year. Exchange differences arising from the translation of the financial statements of foreign operations are recognized as a separate component of stockholders equity. Foreign-currency Transactions Nonderivative foreign-currency transactions are recorded in New Taiwan dollars at the rates of exchange in effect when the transactions occur. Exchange differences arising from the settlement of foreign-currency assets and liabilities are recognized as gain or loss. At the balance sheet date, foreign-currency monetary assets and liabilities are revalued at prevailing exchange rates, and the exchange differences are recognized as gain or loss. At the balance sheet date, foreign-currency nonmonetary assets (such as equity instruments) and liabilities that are measured at fair value are revalued at prevailing exchange rates, with the exchange differences treated as follows: a. Recognized in stockholders equity if the changes in fair value are recognized in stockholders equity; b. Recognized as gain or loss if the changes in fair value are recognized as gain or loss. - 8 -
Foreign-currency nonmonetary assets and liabilities that are carried at cost continue to be stated at the exchange rates of the trade dates. Fair Value Determination Fair values are determined as follows: (a) listed stocks and GreTai Securities Market (GTSM, the over-the-counter securities exchange) stocks - closing prices as of the balance sheet date; (b) beneficiary certificates (open-end funds) - net asset values as of the balance sheet date; (c) bonds - period-end reference prices published by the GTSM or Bloomberg; (d) investments with no active market - based on information provided by the counter-parties. Financial Instruments at Fair Value Through Profit or Loss Financial instruments classified as financial assets or financial liabilities at fair value through profit or loss (FVTPL) include financial assets or financial liabilities held for trading and those designated as at FVTPL on initial recognition. The Bank recognizes a financial asset or a financial liability on its balance sheet when the Bank becomes a party to a financial instrument contract. A financial asset is derecognized when the Bank lose its contractual rights to the financial asset. A financial liability is derecognized when the obligation specified in the relevant contract is discharged or canceled or expires. Financial instruments at FVTPL are initially measured at fair value. At each balance sheet date after initial recognition, financial assets or financial liabilities at FVTPL are remeasured at fair value, with changes in fair value recognized directly as gain or loss in the year in which they arise. On the derecognition of a financial asset or a financial liability, the difference between its carrying amount and the sum of the consideration received or receivable or consideration paid or payable is recognized as gain or loss. The Bank uses trade date accounting when recording related transactions, except for bond, for which settlement date accounting is used. 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 Bank 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 Bank designated debt instruments financial assets as financial assets at fair value through profit or loss. Moreover, the Bank 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 Bank s risk management policies and investment strategies will be designated as financial instruments at fair value through profit or loss. Repurchase and Resell Transactions Securities purchased under resell agreements and securities sold under repurchase agreements are generally treated as collateralized financing transactions. Interest earned on resell agreements and interest incurred on repurchase agreements is recognized as interest income or interest expense over the life of each agreement. - 9 -
Available-for-sale Financial Assets Available-for-sale financial assets are carried at fair value plus transaction costs that are directly attributed to the acquisition. Unrealized gains or losses on available-for-sale financial assets are reported in equity attributed to the Bank s stockholders. On disposal of an available-for-sale financial asset, the accumulated, unrealized gain or loss in equity attributable to the Bank s stockholders is transferred to net profit and loss for the period. The Bank uses trade date accounting when recording related transactions, except for bonds, for which settlement date accounting is used. The recognition, derecognition and the fair value bases of available-for-sale financial assets are similar to those of financial assets at fair value through profit or loss. Cash dividend income from equity securities is recognized on ex-dividend dates. Cash dividends received within a year after investment acquisition are recognized as a reduction of the carrying value of the investments and are subsequently recognized as income. Stock dividends received are accounted for only as increases in the number of the shares and are not recognized as income. The difference between the maturity amount of a debt instrument and its acquisition price is calculated and amortized. For amortization, the effective interest method and the straight-line method are used and compared. If there is no significant difference in the use of these two methods, the straight-line method is used; otherwise, the effective interest method is used. If an available-for-sale financial asset is determined to be impaired, the accumulated unrealized loss previously recognized in equity attributable to the Bank s stockholders is recognized as impairment loss and reported in the income statement. For equity investments, loss reversal is adjusted to the equity attributable to the Bank stockholders. For debt investments, loss reversal is credited to current income. Nonperforming Loans Under the Regulations Governing the Procedures for Banking Institutions to Evaluate Assets and Deal with Nonperforming/Non-accrual Loans issued by the Ministry of Finance, the balances of loans and other credits extended by the Bank and the related accrued interest are classified as nonperforming when the loan is overdue, but this classification should have prior approval under a resolution passed by the board of directors. Nonperforming loans reclassified from loans are recognized as discounts and loans, and other credits are reclassified as other financial assets. Allowance for Possible Losses and Reserve for Losses on Guarantees In determining the allowance for credit losses and provision for losses on guarantees, the Bank assesses the collectibility of discounts and loans, bills purchased, accounts receivable, interest receivables, acceptances and other receivables, and nonperforming loans as well as guarantees as of the balance sheet dates. Under the Regulations Governing the Procedures for Banking Institutions to Evaluate Assets and Deal with Nonperforming/Non-accrual Loans (the Regulations ) issued by the Ministry of Finance, the Bank evaluates the collectibility of its loan portfolio on the basis of its clients financial position, their payment histories and timeliness of repayments of principals and interests. The Bank evaluates credit losses on the basis of the estimated collectability of receivables. Based on the Regulations mentioned above, loan assets should be classified as requiring special mention, substandard, with doubtful collectibility, and uncollectible, and the minimum allowance for credit losses and provision for losses on guarantees for these loan assets are 2%, 10%, 50% and 100%, respectively, of the outstanding credit amounts. - 10 -
Certain loans as defined under Banking Bureau guidelines and approved by the board of directors for write-off are offset against the allowance for credit losses. The repayments of loans written off are recorded as a reversal of this allowance. Held-to-maturity Financial Assets Held-to-maturity financial assets are carried at amortized cost, which are valued by the effective interest method. On initial recognition, the costs of the financial assets are valued at their fair value plus the acquisition costs. The net gain or loss on held-to-maturity financial assets is derecognized upon asset disposal, impairment or amortization. For debt commodities, the Bank uses settlement date accounting in recording related transactions. If a held-to-maturity financial asset is determined to be impaired, an impairment loss is recognized and reported in the income statement. Loss reversal is credited to current income and should not be more than the carrying amount had the impairment loss not been recognized. Equity Investments - Equity Method Equity investments are accounted for by the equity method if the Bank has significant influence over the investees. Under this method, investments are stated at cost plus (or minus) a proportionate share in the investees net earnings (losses) or changes in net worth. Cash dividends received are accounted for as a reduction of the carrying values of the investments. Stock dividends received are accounted for only as increases in the number of shares held and are not recognized as income. Costs of investments sold are determined using the moving-average method. Intangible Assets a. Goodwill Goodwill arising on biding for the Hanoi branch and Ho Chi Minh City sub-branch of Chinfon Bank from the Financial Restructuring Fund. Goodwill is not amortized and tested for impairment at least once a year and whenever events or changes in circumstances indicate the need for an impairment. b. Customer relationships Customer relationships arising on biding for the Hanoi branch and Ho Chi Minh City sub-branch of Chinfon Bank from the Financial Restructuring Fund. Customer relationship is amortized on a straight-line basis over 7 years. c. License License arising on biding for the Hanoi branch and Ho Chi Minh City sub-branch of Chinfon Bank from the Financial Restructuring Fund. License is amortized on a straight-line basis over 97 years. d. Core deposit intangible Core deposit intangible arising on biding for the Hanoi branch and Ho Chi Minh City sub-branch of Chinfon Bank from the Financial Restructuring Fund. Core deposit intangible is amortized on a straight-line basis over 10 years. e. Computer software Computer software is amortized on a straight-line basis over 5 years. - 11 -
Properties Properties are stated at cost less accumulated depreciation. Major renewals, additions and improvements are capitalized, while repairs and maintenance are expensed as incurred. Depreciation is calculated using the straight-line method over service lives estimated as follows: buildings and improvements, 5 to 60 years; computers and peripheral equipment, 3 to 15 years; transportation and communications equipment, 3 to 10 years; and miscellaneous equipment, 3 to 20 years. For assets still in use beyond their original estimated service lives, further depreciation is calculated on the basis of newly estimated salvage value. The cost and accumulated depreciation are removed from the accounts when property is disposed of, and any gain or loss is credited or charged to other noninterest net revenues. Other Financial Assets Investments in equity instruments with no quoted market prices in an active market and with fair values that cannot be reliably measured, are measured at cost. If there is objective evidence that a financial asset is impaired, an impairment loss is recognized, but impairment loss reversal is prohibited. Debt instruments with no quoted market prices in an active market and with fair values that cannot be reliably measured are carried at amortized cost. The accounting treatment for these instruments is similar to that for held-to-maturity investments, except for the absence of any prohibition on the sale these debt instruments. Operating Leases The Bank has operating lease agreements on the office spaces used by its branches. The imputed interest on lease deposits (included in other financial assets), computed using the interest rate on one-year time deposits, is charged to business expenses - rent and credited to interest income. Unrealized Sale and Leaseback Gain or Loss Sale and leaseback happens when the Bank sells an asset and then leases it back. The related unrealized gains or losses are deferred and amortized over the lease period. Reserve for Losses on Defaults and Trading Loss Reserve The reserve for trading losses should be used only to cover the trading loss in excess of the trading profit. When the accumulated trading loss reserve reaches $200,000 thousand, no additional reserve for trading loss is required to be set aside. Under the regulations of the Securities and Futures Bureau, the Bank should recognize monthly a trading loss reserve at 10% of net gain on sales of securities and record this reserve as a liability account. Under the Rules Governing Futures Commission Merchants, a futures commission merchant engaging in futures proprietary business should set aside 10% of the net profit realized each month as reserve for trading losses. The reserve for trading losses referred to in the preceding paragraph should not be used for purposes other than covering the trading loss in excess of the trading profit. When the accumulated trading loss reserve reaches the amount of required minimum working capital, no additional reserve for trading loss is required to be set aside. - 12 -
Interest Revenue and Service Fees Interest revenue on loans is recorded by the accrual method. No interest revenue is recognized in the accompanying financial statements on loans and other credits extended by the Bank that are classified as nonperforming loans. The interest revenue on these loans/credits is recognized upon collection. Under the Ministry of Finance s regulations, the interest revenue on credits covered by agreements that extend their repayment periods is recorded as deferred revenue (included in other liabilities) and is recognized as revenue upon collection. Service fees are recorded as revenue upon receipt and substantial completion of activities involved in the earnings process. Pension The Bank has two types of pension plans: Defined benefit and defined contribution. Pension expense under the defined benefit pension plan is determined on the basis of actuarial calculations. Unrecognized net transition obligation is amortized over the average remaining service years of employees. Under the defined contribution pension plan, which is based on the Labor Pension Act, the Bank s required monthly contributions to the employees individual pension accounts are expensed during the employees service periods. Income Tax Inter-period income tax allocation is applied, in which tax effects of deductible temporary differences unused loss carryforward and unused investment tax credits are recognized as deferred income tax assets, and those of taxable temporary differences are recognized as deferred income tax liabilities. Valuation allowance is provided for deferred tax assets that are not certain to be realized. Income tax credits for certain acquisitions of equipment, personnel training expenditures and equity investments are recognized as reduction of current income. The adjustment of prior year s income tax was included in the current income tax. An additional 10% income tax on unappropriated earnings is recorded as income tax in the year when the stockholders resolve to retain these earnings. The Bank, FFH and its subsidiaries have used the linked-tax system for income tax filings since 2003. Under the related rules, the required accounting procedures should be applied systematically and consistently. The related contributions or payments are accrued as receivables or payables, respectively. Hedge Accounting To qualify as a hedge, a derivative must effectively reduce any risk that is inherent in the hedged item and may result from changes in interest rates, exchange rates and market values. Changes in the fair value of the derivative must be highly correlated with changes in the fair value of the hedged item over the life of the hedge contract. At the start of the hedge, there must be a formal designation and documentation of the hedging relationship, the Bank s risk management objective and strategy for undertaking the hedge, the hedging instrument, the hedged items, overall risk management objectives and strategies and how the Bank will assess the hedging instrument s effectiveness. - 13 -
A fair value hedge that meets all hedge accounting criteria is accounted for as follows: a. The gain or loss from remeasuring the hedging instrument at fair value (for a derivative hedging instrument) or the foreign-currency component of its carrying amount (for a nonderivative hedging instrument) is recognized immediately as gain or loss; and b. The carrying amount of the hedged item is adjusted through profit or loss for the corresponding gain or loss attributable to the hedged risk. A cash flow hedge that meets all hedge accounting criteria is accounted for as follows: The unrealized gain or loss on a hedging instrument is recognized as equity when the hedge takes effect. If a hedge of a forecast transaction results in the recognition of a financial asset or a financial liability, the associated gains or losses that were recognized as equity should be reclassified to gain or loss. The Bank uses the fair value hedge to hedge against the exposure to adverse changes in fair value of a recognized asset or liability or a previously unrecognized firm commitment to buy or sell an asset or liability at a fixed interest rate. The cash flow hedge is a hedge against the exposure to adverse cash flow changes that are attributable to the floating interest rate associated with a recognized asset or liability. Asset Impairment The Statement of Financial Accounting Standards (SFAS) No. 35 - Impairment of Assets requires the impairment review on equity investments - equity method, properties, intangible assets to be made on each balance sheet date. If an asset is deemed impaired, the Bank must calculate the recoverable amount of the asset or the cash-generating unit. An impairment loss should be recognized whenever the recoverable amount of the asset or the cash generating unit is below the carrying amount, and this impairment loss is charged to accumulated impairment. After the recognition of an impairment loss, the depreciation (amortization) charged to the asset should be adjusted in the future periods at the revised asset carrying amount (net of accumulated impairment), less its salvage value, on a systematic basis over its remaining service life. If asset impairment loss is reversed, the increase in the carrying amount resulting from reversal is credited to current income. However, loss reversal should not be more than the carrying amount (net of depreciation) had the impairment loss not been recognized. Goodwill is tested for impairment annually or more frequently if events or changes in circumstance indicate goodwill impairment. Impairment is recorded if the book value exceeds value in use. The increase in the recoverable amount of goodwill in the period following the recognition of an impairment loss is likely to be an increase in internally generated goodwill rather than the reversal of the impairment loss recognized for the acquired goodwill. Thus, a reversal of an impairment loss on goodwill is disallowed. Contingencies A loss is recognized when it is probable that an asset has been impaired or a liability has been incurred and the amount of loss can be reasonably estimated. If the amount of the loss cannot be reasonably estimated or the loss is possible, the related information is disclosed in the notes to the financial statements. Reclassifications Certain accounts in the financial statements as of and for the six months ended, 2009 have been reclassified to conform to the presentation of the financial statements as of and for the six months ended, 2010. - 14 -
3. ACCOUNTING CHANGES On March 2006, the Bank sold its Fubon Nei-hu building to Taiwan Land Bank Co., Ltd., the trust institution of Fubon No. 2 REITs, and then leased it back. The profit of $295,819 thousand on sale-leaseback by the Bank should be deferred and amortized over the three-year lease period. For the need of operations, the Bank expected to extend the lease period from 3 years to 10 years. According to the new rental contract, the unearned profit on sale-leaseback should be amortized over 124 months since January 1, 2009. The change in the estimate of the lease period was approved by Financial Supervisory Commission Interpretation No. 0986000835, resulted in decreases of $21,875 thousand in net income, and of $0.005 in after income tax earnings per share for the six months ended, 2010. 4. CASH AND CASH EQUIVALENTS Cash on hand $ 7,461,909 $ 7,275,042 Due from other banks 21,375,077 9,457,723 Notes and checks for clearing 1,775,550 3,618,270 $ 30,612,536 $ 20,351,035 5. DUE FROM THE CENTRAL BANK OF CHINA AND OTHER BANKS Call loans to banks $ 43,988,582 $ 56,899,512 Deposit reserve - checking account 17,095,522 9,144,711 Required deposit reserve 27,099,011 24,166,488 Deposit reserve - foreign-currency deposits 272,655 180,502 Time deposits in the Central Bank of China 3,000,000 184,690,000 Due from the Central Bank of China 10,517 30,375 Due from the Central Bank of China - cross settlement fund 643,082 657,215 $ 92,109,369 $ 275,768,803 Under a directive issued by the Central Bank of the ROC, New Taiwan dollar (NTD)-denominated deposit reserves are determined monthly at prescribed rates based on the average balances of customers NTD-denominated deposits. These required deposit reserves are subject to withdrawal restrictions. In addition, foreign-currency deposit reserves are determined at prescribed rates based on the balances of foreign-currency deposits. These reserves may be withdrawn anytime and are noninterest earning. - 15 -
6. FINANCIAL INSTRUMENTS AT FAIR VALUE THROUGH PROFIT OR LOSS Held-for-trading financial assets Commercial paper $ 5,084,196 $ 4,167,655 Treasury bills 2,392,893 398,920 Government bonds 1,639,079 1,203,028 Convertible bonds 1,243,621 2,385,879 Listed stocks and beneficiary certificates 285,347 620,040 Asset securitization 256,520 249,058 Others 297 2,973 10,901,953 9,027,553 Derivatives Interest rate swap contracts 12,290,242 14,091,245 Currency swap contracts 5,350,627 60,289 Forward contracts 2,277,295 1,344,441 Option contracts 1,215,304 1,029,941 Cross-currency swap contracts 855,125 89,507 Commodity swap contracts 68,066 1,569,692 Commodity forward contracts 62,979 45,269 Others 4,113 37,958 22,123,751 18,268,342 33,025,704 27,295,895 Financial assets designated as at fair value through profit or loss Credit-link notes 1,199,431 - Bank debentures 895,138 1,861,922 2,094,569 1,861,922 Held-for-trading financial liabilities $ 35,120,273 $ 29,157,817 Securities borrowings $ 86,007 $ - Securities purchased under resell agreements - securities financing - 838,880 86,007 838,880 Derivatives Interest rate swap contracts 12,048,903 13,710,017 Currency swap contracts 6,037,561 376,249 Forward contracts 2,262,521 1,325,517 Option contracts 1,653,406 1,438,077 Cross-currency swap contracts 757,770 149,337 Commodity swap contracts 68,001 1,569,692 Commodity forward contracts 61,224 40,597 Others 26,894 12,513 22,916,280 18,621,999 $ 23,002,287 $ 19,460,879 The Bank engages in derivative transactions mainly to accommodate customers needs, including the need for different currencies, to manage its exposure positions. - 16 -
Interest rate swap contracts, which are classified as trading-purpose derivatives, are used to offset most market and credit risks. To eliminate measurement mismatches between these contracts and the financial assets corresponding to these contracts, the Bank designates these financial assets as at fair value through profit or loss. The contract (notional) amounts of the Bank s outstanding derivative financial instruments as of, 2010 and 2009 are summarized as follows: Currency swap contracts $ 1,479,439,955 $ 624,760,771 Interest rate swap contracts 1,466,209,461 1,122,362,732 Option contracts 372,017,097 242,474,668 Forward contracts 291,134,664 158,892,530 Cross-currency swap contracts 69,590,342 58,840,018 Futures contracts 17,169,041 16,445,350 Commodity forward contracts 2,231,396 901,260 Commodity swap contracts 1,578,111 12,470,405 Credit default swaps 903,804 1,848,504 Stock price swap contract 338,461 670,931 Fixed rate commercial paper - interest rate swap - 1,800,000 Nondeliverable cross currency swap contracts - 164,091 Gains on financial assets and liabilities at fair value through profit or loss for the six months ended, 2010 and 2009 were as follows: Six Months Ended Net gain on held-for-trading financial assets and liabilities $ 1,983,740 $ 1,236,499 Net (loss) gain on financial assets designated as at fair value through profit or loss (23,262) 5,623 $ 1,960,478 $ 1,242,122 7. RECEIVABLES, NET Accounts receivable - factoring $ 47,779,417 $ 21,326,703 Credit card receivable 21,456,205 21,958,157 Acceptances 3,946,700 2,604,807 Interest receivable 2,296,737 2,436,172 Linked tax receivable 1,075,951 998,242 Accrued income 766,843 574,615 Accounts receivable 693,046 186,559 Accounts receivable - sport lottery related 450,837 3,285 Custodial collections receivable 420,504 829,686 Others 788,989 673,597 Less: Allowance for credit losses (Note 15) 79,675,229 51,591,823 1,211,397 892,506 $ 78,463,832 $ 50,699,317-17 -
8. DISCOUNTS AND LOANS, NET Discount and overdraft $ 2,282,834 $ 2,738,349 Short-term loans 188,137,293 143,567,600 Short-term secured loans 54,679,934 47,193,509 Medium-term loans 136,310,211 159,494,384 Medium-term secured loans 86,464,703 95,738,278 Long-term loans 55,153,500 59,930,712 Long-term secured loans 332,972,929 294,747,829 Import and export negotiation 2,940,673 2,184,576 Nonperforming loans transferred from loans 3,521,425 5,151,537 862,463,502 810,746,774 Less: Allowance for credit losses (Note 15) 5,230,624 4,287,592 $ 857,232,878 $ 806,459,182 The Bank has not accrued any interest on the entire balance of the nonperforming loans shown above. The unrecognized interest revenues on nonaccrual interest loans were $89,940 thousand and $99,993 thousand for the six months ended, 2010 and 2009, respectively. For the six months ended, 2010 and 2009, the Bank had not written off credits that had not been subjected to legal procedures. 9. AVAILABLE-FOR-SALE FINANCIAL ASSETS, NET Bond investments - financial bonds $ 12,989,278 $ 11,772,794 Bond investments - corporate bonds 10,923,873 17,717,034 Bond investments - government bonds 8,742,529 16,167,930 Asset securitization 4,217,937 1,534,575 Listed stocks and beneficiary certificates 4,130,980 3,688,575 41,004,597 50,880,908 Less: Allowance for credit losses - 19,604 $ 41,004,597 $ 50,861,304 10. HELD-TO-MATURITY FINANCIAL ASSETS, NET Negotiable certificates of deposits $ 246,166,013 $ 170,656 Corporate bonds 4,074,440 4,136,590 Government bonds 2,020,796 2,126,405 Bank debentures 2,015,429 - $ 254,276,678 $ 6,433,651-18 -
11. EQUITY INVESTMENTS - EQUITY METHOD Amount % Amount % Taipei Fubon Bank Life Insurance Agency Co., Ltd. $ 248,912 100.00 $ 445,520 100.00 Fubon Real Estate Management Co., Ltd. 73,450 30.00 64,953 30.00 Fubon Venture Capital Co., Ltd. 6,251 5.00 6,251 5.00 Fubon Insurance Agent Co., Ltd. 4,623 100.00 4,710 100.00 $ 333,236 $ 521,434 Income from equity investments for the six months ended, 2010 and 2009 is summarized as follows: Six Months Ended Taipei Fubon Bank Life Insurance Agency Co., Ltd. $ 197,276 $ 393,884 Fubon Real Estate Management Co., Ltd. 4,331 4,679 Fubon Insurance Agent Co., Ltd. 96 233 Fubon Leasing Co., Ltd. - 3,129 $ 201,703 $ 401,925 Fubon Venture Capital Co., Ltd. (FVCCL) was classified as an equity-method investment since the Bank, Fubon Life Insurance Co., Ltd. and Fubon Insurance Co., Ltd. had a 45% equity in FVCCL. FVCCL was under liquidation. To restructure the Bank s organization and investment structure, the stockholders resolved in their meeting on December 1, 2008 to liquidate Fubon Leasing Co., Ltd. (FLCL) and got the Ministry of Economic Affairs approval of this liquidation on December 11, 2008. FLCC cleared all its accounts on May 20, 2009. The board of director decided, by resolution, on April 19, 2010 to dissolve Fubon Insurance Agent Co., Ltd. and set the date of dissolution on April 30, 2010. Also, the liquidation process has begun since May 1, 2010. As of, 2010 and 2009, part of the unrealized (losses) gains on financial instruments, which amounted to $(1,513) thousand and $4,321 thousand (included in stockholders equity as adjustments), respectively, resulted from the valuation of available-for-sale financial assets held by an equity-method investee. Fubon Insurance Agent Co., Ltd. was excluded from the consolidated financial statements since the Bank considered it an immaterial subsidiary and it was under liquidation process. Except for the financial statements of those under liquidation, the investee s financial statements used as basis for calculating income from equity-method investments had all been audited. - 19 -