Bank SinoPac
Financial Statements for the Six Months Ended June 30, 2007 and 2006 and Independent Auditors’ Report INDEPENDENT AUDITORS’ REPORT
The Board of Directors and Stockholders Bank SinoPac
We have audited the accompanying balance sheets of Bank SinoPac as of June 30, 2007 and 2006, and the related statements of income, changes in stockholders’ equity and cash flows for the six months ended. These financial statements are the responsibility of the Bank SinoPac’s management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with the Rules Governing Auditing and Certification of Financial Statements of 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 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 Bank SinoPac as of June 30, 2007 and 2006, 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 Public Banks, requirements of the Business Accounting Law and Guidelines Governing Business Accounting relevant to financial accounting standards, and accounting principles generally accepted in the Republic of China.
As stated in Notes 1 and 29 to the accompanying financial statements, Bank SinoPac merged with International Bank of Taipei Co., Ltd., a wholly-owned subsidiary of SinoPac Financial Holding Company Limited, by means of share swap with Bank SinoPac as the surviving company. In accordance with Statement of Financial Accounting Standards Interpretation No. (91) 243 and 244 issued by the Accounting Research and Development Foundation of the Republic of China, the transaction is treated as reorganization and should be recorded at the book value of both entities’ assets and liabilities. Also in accordance with Statement of Financial Accounting Standards Interpretation No. (95) 141, the financial statements of Bank SinoPac should be retroactively restated assuming both entities to be merged.
- 1 - As stated in Note 3 to the accompanying financial statements, effective January 1, 2006, SinoPac Bank adopted the Statement of Financial Accounting Standards No. 34 “Accounting for Financial Instruments”, No. 36 “Disclosure and Presentation of Financial Instruments” and other standards amended for harmonising with those two standards.
We have also audited the consolidated financial statements of Bank SinoPac and subsidiaries as of and for the six months ended June 30, 2007, on which we have issued a modified unqualified opinion thereon.
July 24, 2007
Notice to Readers
The accompanying financial statements are intended only to present the financial position, results of operations and cash flows in accordance with accounting principles and practices generally accepted in the Republic of China and not those of any other jurisdictions. The standards, procedures and practices to audit such financial statements are those generally accepted and applied in the Republic of China.
For the convenience of readers, the auditors’ report and the accompanying financial statements have been translated into English from the original Chinese version prepared and used in the Republic of China. If there is any conflict between the English version and the original Chinese version or any difference in the interpretation of the two versions, the Chinese-language auditors’ report and financial statements shall prevail.
- 2 - BANK SINOPAC
BALANCE SHEETS JUNE 30, 2007 AND 2006 (In Thousands of New Taiwan Dollars, Except Par Value)
2006 2006 2007 (Restated, Note 29) 2007 (Restated, Note 29) ASSETS Amount Amount % LIABILITIES AND STOCKHOLDERS’ EQUITY Amount Amount %
CASH AND CASH EQUIVALENTS (Note 4) $ 25,964,724 $ 16,864,469 54 CALL LOANS AND DUE TO BANKS (Notes 16 and 31) $ 63,269,171 $ 58,861,174 7
DUE FROM THE CENTRAL BANK AND OTHER BANKS (Notes 5 and 27) 90,537,494 87,488,856 3 FINANCIAL LIABILITIES AT FAIR VALUE THROUGH PROFIT OR LOSS (Notes 2, 3, 6, 31 and 37) 6,880,631 3,941,979 75 FINANCIAL ASSETS AT FAIR VALUE THROUGH PROFIT OR LOSS (Notes 2, 3, 6, 27, 31 and 37) 109,609,091 28,248,477 288 SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE (Notes 2, 27 and 28) 9,646,995 29,756,670 (68 ) SECURITIES PURCHASED UNDER AGREEMENTS TO RESELL (Notes 2 and 28) 5,802,339 16,852,201 (66 ) ACCOUNTS, INTEREST AND OTHER PAYABLES (Notes 2, 17, 25 and 27) 23,744,252 20,918,032 14
ACCOUNTS, INTEREST AND OTHER RECEIVABLES, NET (Notes 2, 7, 25 DEPOSITS AND REMITTANCES (Notes 18 and 27) 763,540,891 733,606,841 4 and 27) 30,589,768 32,802,394 (7 ) BANK DEBENTURES (Notes 2, 31 and 37) 30,889,078 36,095,048 (14 ) DISCOUNTS AND LOANS, NET (Notes 2, 8, 27, 31 and 37) 597,238,459 602,756,503 (1 ) BONDS PAYABLE (Notes 2 and 19) 5,761,360 5,712,960 1 AVAILABLE-FOR-SALE FINANCIAL ASSETS (Notes 2, 3, 9, 10, 31 and 37) 78,322,878 143,203,956 (45 ) OTHER FINANCIAL LIABILITIES (Note 2) 780,804 882,127 (11 )
HELD-TO-MATURITY INVESTMENTS (Notes 2, 11, 27, 31 and 37) 2,637,202 2,140,155 23 OTHER LIABILITIES (Notes 2, 3, 20, 24 and 31) 2,226,824 3,147,685 (29 )
EQUITY INVESTMENTS - EQUITY METHOD (Notes 2, 12 and 31) 9,180,524 8,617,994 7 Total liabilities 906,740,006 892,922,516 2
OTHER FINANCIAL ASSETS, NET STOCKHOLDERS’ EQUITY (Notes 2, 3, 21, 29 and 31) Unquoted equity instruments (Notes 2, 13, 31 and 37) 721,707 722,259 - Capital stock, $10 par value 45,851,972 45,851,972 - Non-active market debt instruments (Notes 2, 13, 31 and 37) 5,391,012 2,161,867 149 Capital surplus Others (Notes 13 and 37) 737,043 809,589 (9 ) Additional paid-in capital 118,226 118,226 - Capital surplus from business combination 8,076,524 8,466,962 (5 ) Other financial assets, net 6,849,762 3,693,715 85 Other 178 178 - Total capital surplus 8,194,928 8,585,366 (5 ) PROPERTIES (Notes 2 and 14) Retained earnings Cost and revaluation increment Legal reserve 6,927,060 6,280,113 10 Land 4,845,483 5,134,132 (6 ) Special reserve 282,977 282,977 - Buildings 4,395,632 4,544,498 (3 ) Unappropriated 2,578,869 2,036,507 27 Computer and machinery equipment 4,468,939 4,546,950 (2 ) Total retained earnings 9,788,906 8,599,597 14 Transportation equipment 35,422 38,971 (9 ) Cumulative translation adjustments 11,769 (15,461 ) 176 Total cost 13,745,476 14,264,551 (4 ) Unrealized gains (losses) on financial instruments (200,989 ) 173,092 (216 ) Less: Accumulated depreciation 4,805,445 4,577,009 5 Net loss not recognized as pension cost (155,953 ) (221,269 ) (30 ) 8,940,031 9,687,542 (8 ) Unrealized revaluation increment on land 1,030,154 1,033,595 - Advances on acquisitions of equipment and construction in progress 151,513 82,815 83 Total stockholders’ equity 64,520,787 64,006,892 1
Net properties 9,091,544 9,770,357 (7 )
INTANGIBLE ASSETS 193,186 167,118 16
OTHER ASSETS (Notes 2, 3, 15 and 25) 5,243,822 4,323,213 21
TOTAL $ 971,260,793 $ 956,929,408 2 TOTAL $ 971,260,793 $ 956,929,408 2
The accompanying notes are an integral part of the financial statements.
(With Deloitte & Touche audit report dated July 24, 2007)
- 3 - BANK SINOPAC
STATEMENTS OF INCOME FOR THE SIX MONTHS ENDED JUNE 30, 2007 AND 2006 (In Thousands of New Taiwan Dollars, Except Earnings Per Share)
2006 (Restated, 2007 Note 29) Amount Amount %
INTEREST REVENUE (Notes 2, 27 and 31) $ 19,260,786 $ 17,184,807 12
INTEREST EXPENSE (Notes 27 and 31) 12,542,034 9,480,422 32
NET INTEREST 6,718,752 7,704,385 (13 )
NET REVENUES OTHER THAN INTEREST Commissions and fee revenues, net (Notes 2, 22 and 27) 2,126,148 1,582,028 34 Gains (losses) from financial assets and liabilities at fair value through profit or loss (Notes 2 and 6) (208,302 ) 1,027,065 (120 ) Realized gains from available-for-sale financial assets 20,460 7,433 175 Income from equity investments - equity method, net (Notes 2 and 12) 598,240 536,857 11 Foreign exchange gain (losses), net (Note 2) 1,146,737 (61,643 ) 1,960 Reversal of impairment (losses) (Note 2) (15,734 ) 20,852 (175 ) Gains from unquoted equity instruments (Note 2) 12,882 17,796 (28 ) Recovery of bad debts 502,893 108,197 365 Other net revenues 140,383 78,574 79
Total net revenues 11,042,459 11,021,544 -
PROVISION FOR LOAN LOSSES (Notes 2 and 8) 2,672,000 3,142,631 (15 )
OPERATING EXPENSES (Notes 2 and 23) Personnel expenses 3,283,121 2,945,792 11 Depreciation and amortization 321,053 384,297 (16 ) Others 1,570,189 1,650,880 (5 )
Total operating expenses 5,174,363 4,980,969 4
INCOME BEFORE INCOME TAX 3,196,096 2,897,944 10
INCOME TAX EXPENSE (Notes 2 and 25) 617,227 407,672 51
INCOME BEFORE CUMULATIVE EFFECT OF ACCOUNTING CHANGES 2,578,869 2,490,272 4
CUMULATIVE EFFECT OF ACCOUNTING CHANGES (NET OF TAX BENEFIT $8,542) (Note 3) - 294,839 (100 )
NET INCOME $ 2,578,869 $ 2,785,111 (7 ) (Continued)
- 4 - BANK SINOPAC
STATEMENTS OF INCOME FOR THE SIX MONTHS ENDED JUNE 30, 2007 AND 2006 (In Thousands of New Taiwan Dollars, Except Earnings Per Share)
2006 2007 (Restated, Note 29) After After Pretax Tax PretaxTax
EARNINGS PER SHARE (Note 26) Basic earnings per share $ 0.70 $ 0.56 $ 0.69 $ 0.61 Diluted earnings per share $ 0.65 $ 0.53 $ 0.65 $ 0.57
The accompanying notes are an integral part of the financial statements.
(With Deloitte & Touche audit report dated July 24, 2007) (Concluded)
- 5 - BANK SINOPAC
STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY FOR THE SIX MONTHS ENDED JUNE 30, 2007 AND 2006 (In Thousands of New Taiwan Dollars, Except Dividends Per Share)
Capital Surplus (Notes 2 and 21) Unrealized Capital Cumulative Gains or Losses Net Loss Not Unrealized Capital Stock Surplus from Translation on Financial Recognized as Revaluation on Total Shares in Amount Additional Business Retained Earnings (Note 21) Adjustments Instrument Pension Cost Increment Stockholders' Thousands (Note 21) Paid-in Capital Combination Others Total Legal Reserve Special Reserve Unappropriated Total (Note 2) (Note 2) (Note 2) Land Equity
BALANCE, JANUARY 1, 2007 4,585,197 $ 45,851,972 $ 118,226 $ 8,076,524 $ 178 $ 8,194,928 $ 6,280,113 $ 282,977 $ 2,156,490 $ 8,719,580 $ 1,890 $ 166,778 $ (155,953 ) $ 1,030,154 $ 63,809,349
Appropriation of 2006 earnings Legal reserve ------646,947 - (646,947 ) ------Remuneration to directors and supervisors ------(22,043 ) (22,043 ) - - - - (22,043 ) Bonus to employees ------(226 ) (226 ) - - - - (226 ) Cash dividends - $0.3243 per share ------(1,486,979 ) (1,486,979 ) - - - - (1,486,979 ) Bonus to shareholders ------(295 ) (295 ) - - - - (295 )
Net income for the six months ended June 30, 2007 ------2,578,869 2,578,869 - - - - 2,578,869
Unrealized gains or losses on available-for-sale financial assets ------(367,767 ) - - (367,767 )
Change in translation adjustment on equity investment - equity method ------9,879 - - - 9,879
BALANCE, JUNE 30, 2007 4,585,197 $ 45,851,972 $ 118,226 $ 8,076,524 $ 178 $ 8,194,928 $ 6,927,060 $ 282,977 $ 2,578,869 $ 9,788,906 $ 11,769 $ (200,989 ) $ (155,953 ) $ 1,030,154 $ 64,520,787
BALANCE, JANUARY 1, 2006 1,972,807 $ 19,728,068 $ 118,226 $ - $ 178 $ 118,404 $ 5,782,921 $ 282,977 $ 1,657,307 $ 7,723,205 $ 24,539 $ - $ - $ - $ 27,594,216
Retroactive adjustments for merger (Note 29) 2,612,390 26,123,904 - 7,718,358 - 7,718,358 - - - - 8,580 291,953 (221,269 ) 1,033,595 34,955,121
Appropriation of 2005 earnings Legal reserve ------497,192 - (497,192 ) ------Remuneration to directors and supervisors ------(32,000 ) (32,000 ) - - - - (32,000 ) Bonus to employees ------(11,601 ) (11,601 ) - - - - (11,601 ) Cash dividends - $0.57 per share ------(1,116,514 ) (1,116,514 ) - - - - (1,116,514 )
Net income for the six months ended June 30, 2006 - - - 748,604 - 748,604 - - 2,036,507 2,036,507 - - - - 2,785,111
Effect of accounting changes ------(165 ) - - (165 )
Unrealized gains or losses on available-for-sale financial assets ------(3,224 ) - - (3,224 )
Unrealized gains or losses on available-for-sale financial assets of subsidiaries ------(115,472 ) - - (115,472 )
Change in translation adjustment on equity investment - equity method ------(48,580 ) - - - (48,580 )
BALANCE, JUNE 30, 2006 4,585,197 $ 45,851,972 $ 118,226 $ 8,466,962 $ 178 $ 8,585,366 $ 6,280,113 $ 282,977 $ 2,036,507 $ 8,599,597 $ (15,461 ) $ 173,092 $ (221,269 ) $ 1,033,595 $ 64,006,892
The accompanying notes are an integral part of the financial statements.
(With Deloitte & Touche audit report dated July 24, 2007)
- 6 - BANK SINOPAC
STATEMENTS OF CASH FLOWS FOR THE SIX MONTHS ENDED JUNE 30, 2007 AND 2006 (In Thousands of New Taiwan Dollars)
2006 (Restated, 2007 Note 29)
CASH FLOWS FROM OPERATING ACTIVITIES Net income $ 2,578,869 $ 2,785,111 Cumulative effect of accounting changes - (294,839 ) Adjustments to reconcile net income to net cash provided by operating activities Depreciation and amortization 331,553 382,264 Amortization on discount (premium) of held-to-maturity financial assets (1,006 ) 2,334 Provision for credit and trading losses 2,673,193 3,144,880 Asset impairment (reversal of asset impairment) 15,734 (20,852 ) Impairment of unquoted equity investment - 5,532 Unrealized losses (gains) on financial assets and liabilities at fair value through profit or loss 131,248 (430,754 ) Accrued pension cost 4,230 12,554 Income from equity investments - equity method (598,240 ) (536,857 ) Losses on disposal of properties and idle assets, net 7,564 5,407 Gain on disposal of unquoted equity instruments (12,882 ) (25,597 ) Losses (gains) on disposal of collateral assumed, net (1,120 ) 542 Provision for collaterals accepted - 83 Deferred income tax 39,785 225,315 (Increase) decrease in held for trading financial assets (81,514,530 ) 10,092,711 Decrease in held for trading financial liabilities 3,021,840 2,276,847 Foreign exchange losses (gains) on bond payable 24,464 (70,400 ) Decrease in accounts, interest and other receivables 6,160,266 4,870,822 Decrease in accounts, interest and other payables (2,732,749 ) (7,538,471 ) Cash dividend received from equity invesstments 118,048 -
Net cash (used in) provided by operating activities (69,753,733 ) 14,886,632
CASH FLOWS FROM INVESTING ACTIVITIES Decrease in due from the Central Bank and other banks 8,636,415 12,931,792 Increase in securities purchased under agreements to resell (1,021,216 ) (7,121,821 ) Increase in financial assets designated at fair value through profit or loss (2,176,878 ) - Decrease in financial assets designated at fair value through profit or loss 656,402 1,131,535 Increase in non-active market debt instruments (2,834,441 ) (857,712 ) Decrease in non-active market debt instruments 878,719 - Increase (decrease) in discounts and loans (10,471,870 ) 2,605,249 Acquisition of properties (212,496 ) (321,333 ) Proceeds from sale of properties 4,557 153 Increase in available-for-sale financial assets (25,265,821 ) (28,792,773 ) Decrease in available-for-sale financial assets 117,092,855 - Acquisition of held-to-maturity financial assets (756,499 ) (714,914 ) (Continued)
- 7 - BANK SINOPAC
STATEMENTS OF CASH FLOWS FOR THE SIX MONTHS ENDED JUNE 30, 2007 AND 2006 (In Thousands of New Taiwan Dollars)
2006 (Restated, 2007 Note 29)
Proceeds from held-to-maturity financial assets matured $ 457,487 $ 1,876,028 Acquisition of unquoted equity instruments - (164 ) Proceeds from sale of unquoted equity instruments 13,434 125,597 Proceeds from sale of equity investments - equity method 188,321 - Acquisition of collateral assumed (99,213 ) (2,769 ) Proceeds from sale of collateral assumed 25,938 61,333 Increase in other financial assets (38,191 ) (86,503 ) Decrease (increase) in other assets (203,252 ) 434,679
Net cash provided by (used in) investing activities 84,874,251 (18,731,623 )
CASH FLOWS FROM FINANCING ACTIVITIES Decrease in call loans and due to banks (13,866,393 ) (15,736,972 ) Increase (decrease) in securities sold under agreements to repurchase (5,006,866 ) 3,640,786 Increase in deposits and remittances 7,076,552 14,052,876 Decrease in bonds payable - (65,720 ) Increase (decrease) in other financial liabilities (30,347 ) 33,719 Decrease in other liabilities (199,202 ) (489,195 ) Remuneration to directors and supervisors and bonus to employees (22,269 ) (43,601 ) Cash dividend (1,487,274 ) - Retroactive adjustment for merger - (250,123 )
Net cash (used in) provided by financing activities (13,535,799 ) 1,141,770
EFFECTS OF CHANGES IN EXCHANGE RATE 1,400 (3,589 )
DECREASE (INCREASE) IN CASH AND CASH EQUIVALENTS 1,586,119 (2,706,810 )
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 24,378,605 19,571,279
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 25,964,724 $ 16,864,469
SUPPLEMENTAL INFORMATION Interest paid $ 12,284,223 $ 9,187,125 Income tax paid $ 385,047 $ 272,738
NONCASH FINANCING ACTIVITIES Cash dividend payable $ - $ 2,739,531
The accompanying notes are an integral part of the financial statements.
(With Deloitte & Touche audit report dated July 24, 2007) (Concluded)
- 8 - BANK SINOPAC
NOTES TO FINANCIAL STATEMENTS FOR THE SIX MONTHS ENDED JUNE 30, 2007 AND 2006 (FOR THE SIX MONTHS ENDED JUNE 30, 2006 WAS RESTATED - PLEASE REFER TO Note 29) (In Thousands of New Taiwan Dollars, Unless Otherwise Stated)
1. ORGANIZATION AND OPERATIONS
Bank SinoPac (the “Bank”) obtained government approval to incorporate on August 8, 1991 and started operations on January 28, 1992. The Bank engages in commercial banking, trust, and established International Division and Offshore Banking Unit (OBU) to manage foreign exchange operations as allowed under the Banking Law.
As of June 30, 2007 and 2006, the Bank had a total of 4,813 and 4,793 employees, respectively.
As of June 30, 2007, the Bank’s operating units included Banking, Trust, International Division of the Head Office, an Offshore Banking Unit (OBU), 128 domestic branches, 3 overseas branches, 2 overseas sub-branches and 1 overseas representative office.
The operations of the Bank’s Trust Department consist of planning, managing and operating of trust business and affiliated business. These operations are governed by the Banking Law and the Trust Law.
Under the Financial Holding Company Act, the Bank, SinoPac Securities Corporation and SinoPac Securities Co., Ltd. (the “SPS”) established SinoPac Financial Holdings Company Limited (the “SPH”), a financial holding company. The parties established the holding company to maximize the benefit of their combined capital, pool their business channels, fully harness the synergy of their diversified business operations and establish one of the most competitive organizations in the Pacific Rim. Since May 9, 2002, the effective date of the shares swap, the Bank has become an unlisted wholly owned subsidiary of SPH.
On July 21, 2006, the boards of directors of the Bank resolved a merger with International Bank of Taipei Co., Ltd. (IBT) in order to boost the operating performance through cross selling of pooling business channels, as well as harnessing the synergy of integration of diversified business operations. Under this merger, the Bank acquired the assets and liabilities of IBT through a share swap at ratio of 1.175 shares of the Bank to swap for 1 share of IBT, on which the Bank was the surviving entity and IBT was the company ceasing to exist. The preliminary effective date of the share swap and merger’s recording date was November 13, 2006.
The boards of directors of IBT resolved to transfer credit card business and related assets and liabilities to SinoPac Card Corporation (formerly named AnShin Card Services) on May 8, 2006. The transaction has been approved by the authorities on June 22, 2006 and the assets have been transferred using the book value of $5,171,080 on August 4, 2006. Related information regarding net asset value of this transfer please refer to Note 27.
- 9 - 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The Bank’s financial statements were prepared in conformity with Criteria Governing the Preparation of Financial Reports by Public Banks, requirement of the Business Accounting Law, Guidelines Governing Business Accounting and accounting principles generally accepted in the Republic of China (ROC). In determining the fair value of certain financial instruments, allowance for credit losses, depreciation, assets impairment, pension, income tax, losses upon suspended lawsuit and provision for losses on guarantees, the Bank needs to make estimates based on judgment and available information. The estimates were usually made under uncertain conditions, actual results could differ from those estimates. Since the operating cycle could not be reasonably identified in the banking industry, accounts included in the Bank’s financial statements were not classified as current or non-current. Nevertheless, accounts were properly categorized according to the nature of each account, and sequenced by their liquidity. Please refer to Note 31 for maturity analysis of assets and liabilities. Significant accounting policies of the Bank are summarized below:
Basis of Financial Statement Preparation
The accompanying financial statements include the accounts of the Head Office, OBU, all branches and the representative office. All interoffice transactions and balances have been eliminated.
Fair Value Determination
Fair value are determined as follows: (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 dates; (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 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. Those instruments are required to be recognized at fair value and to be measured at fair value through profit or loss on the balance sheet date. The Bank uses trade date accounting when recording transaction.
Derivative instruments transaction which do not meet the specified criteria to obtain hedge accounting treatment are classified as financial assets or liabilities held for trading when the fair value of a derivative is positive, it is carried as an asset and where negative as a 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. Besides, the set of financial assets, financial liabilities or combined by both of them managed according to the Bank’s risk management policies and investment strategies will be designated as financial instruments at fair value through profit or loss.
Repurchase and Reverse Repurchase Transactions
Securities purchased under agreement 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 and interest incurred on repurchase agreements is recognized as interest income or interest expense over the life of each agreement.
- 10 - Available-for-sale Financial Assets
Available-for-sale financial assets are carried at fair value. Unrealized gains or losses on available-for-sale financial assets are reported in equity attribute to the Bank’s shareholders. On disposal of an available-for-sale financial asset, the accumulated, unrealized gain or loss in equity attributable to the Bank’s shareholders is transferred to net profit and loss for the period. The Bank uses trade date accounting when recording available-for-sale portfolio transactions.
Dividend income from equity securities is recognized on ex-dividend dates. Cash dividends received a year after investment acquisition 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.
If an available-for-sale financial asset is determined to be impaired, the accumulative unrealized loss previously recognized in equity attributable to the Bank shareholders is recognized as impairment loss and reported in income statement. For equity investments, loss reversal is adjusted to the equity attributable to the Bank shareholders. For debt investments, loss reversal is credited to current income.
Nonperforming Loans
Under guidelines issued by the Banking Bureau of Financial Supervisory Commission (the Banking Bureau), the balance of loans and other credits extended by the Bank and the related accrued interest thereon are classified as nonperforming when the loan is overdue and shall be authorized by a resolution passed by the board of directors.
Nonperforming loans reclassified from loans are classified as discounts and loans; otherwise, are classified as other financial assets.
Allowance for Credit Losses and Provision for Losses on Guarantees
In determining the allowance for credit losses and provision for losses on guarantees, the Bank assesses the collectibility on the balances of discounts and loans, accounts receivables, interest receivables, other receivables, nonperforming loans, and other financial assets, as well as guarantees and acceptances as of the balance sheet dates.
Pursuant to “Regulations Governing the Procedures for Banking Institutions to Evaluate Assets and Deal with Non-performing/Non-accrual Loans” (the “Regulations”) issued by the Banking Bureau, the Bank evaluates credit losses on the basis of the estimated collectibility. In accordance with the Regulations stated above, the loan assets 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.
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 which writes off on the current year is recorded as reverse of allowance whereas recovery of loans wrote off on the previous years is recorded as other revenue.
Held-to-maturity Investments
Held-to-maturity investments are carried at amortized cost, which are valued by interest method, otherwise use the straight line method if there is no significant difference. At initial recognition, the costs of the financial assets are valued at fair value of the financial assets together with acquire or issue costs. The net profit and loss of the held-to-maturity investments for the period are reported in to income statement when on disposal, impairment or amortization. The Bank uses trade date accounting when recording transaction.
- 11 - If a held-to-maturity financial asset is determined to be impaired, the impairment loss is recognized and reported in income statement. Loss reversal is credited to current income and should not be more than the carrying amount had the impairment 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 net earnings (losses) or changes in net worth of the investees. Goodwill is not amortized but test annually for impairment since January 1, 2006. Until December 31, 2005, any difference between the acquisition cost and the equity in the investee is amortized over 15 years. Stock dividends result only in an increase in number of shares and are not recognized as investment income.
In accordance with Statement of Financial Accounting Standards Interpretation No. (91) 33 dated March 8, 2002 issued by the Accounting Research and Development Foundation of the Republic of China (ARDF of ROC), the SPH commences reorganization and the Bank transferred the investment at book value.
Financial Asset Securitization
Under the “Regulations for Financial Asset Securitization”, the Bank securitized part of its enterprise loans and entrusted those loans to the commissioned organization for the issuance of the related beneficiary certificates. Thus, the Bank derecognizes the loans and records gain or loss because the control of contractual rights - except for subordinated retained interests for credit enhancement, which were reclassified as available-for-sale financial assets - on the loans has been surrendered and transferred to a special purpose trustee.
The gain or loss on the sale of the loans is the difference between the proceeds and carrying amount of the loans. The previous carrying amount of the loans should be allocated by applying the ratios of the retained subordinated beneficiary certificates and the part sold to their fair values on the date of sale. Because quotes are not available for loans and retained subordinated beneficiary certificates, the Bank estimates fair value at the present value of expected future cash flows, using management’s key assumptions on credit losses and discount rates commensurate to the risks involved.
Subordinated beneficiary certificates - retained interest of securitization are accounted for as available-for-sale financial assets. Interest revenue is recorded when received. The Bank evaluates retained interests by estimating present value of expected future cash flows, the difference will be recognized under stockholders’ equity. If the substantive period the impairment is obviously related to the subject occurred after the recognition of impairment, the difference will be reversed and recognized as current income or loss. However, the book value with the reversal amount must not exceed the amortized cost without recognizing the loss.
Properties and Non-operating Assets
Properties and non-operating assets are stated at cost revaluation increment less accumulated depreciation and accumulated impairment. Major renewals and betterments are capitalized, while repairs and maintenance are expensed as incurred.
Upon sale or disposal of properties and non-operating assets, their cost, revaluation increment and related accumulated depreciation and accumulated impairment are removed from the accounts. Any resulting gain (loss) is credited (charged) to current income.
Depreciation is calculated by the straight-line method on the basis of service lives initially estimated as follows: buildings, 5 to 60 years; computer equipment, 3 to 5 years; transportation equipment, 5 years; and office and other equipment, 3 to 15 years. Depreciation on revalued property is computed on the basis of their remaining useful lives at the time of the revaluation. For assets still in use beyond their original estimated service lives, further depreciation is calculated on the basis of any remaining salvage value and the estimated additional service lives. - 12 -
Collaterals Assumed
Collaterals assumed are recorded at cost (included in other assets) and revalued at the lower of cost or net fair value on the balance sheet dates, and resulting loss is charged to current income.
Other Financial Assets
Non-active market debt instruments are those which do not have a quoted market price in an active market, and whose fair value cannot be reliably measured. Non-active market debt instruments are carried at amortized cost. The accounting treatment of non-active market debt instruments is similar to the one of held-to maturity investments but there’s no prohibition on sale of non-active market debt instruments.
Investments in equity instruments that do not have a quoted market price in an active market, and whose fair value cannot be reliably measure, are measured at cost. If there is objective evidence that a financial asset is impaired, an impairment loss is recognized and reversal of impairment loss is prohibited.
Amortization of Bond Issuance Cost
The direct and necessary costs (included in other assets) related to the Euro-convertible bonds issued before December 31, 2005 are amortized using the straight-line method and recognized as issuance expenses over the period from its issuance date to the expiration date of the put option.
Bonds Payable
The Euro-convertible bonds issued before December 31, 2005 were recognized as liabilities by its issued price. Under the book value method applied for the conversion of Euro-convertible bonds, the carrying value, interest premium and the related issuance costs were converted into capital stocks in the amount of face value, while the remaining amount were recorded into capital surplus on the conversion date.
Upon repurchase of the Euro-convertible bonds, the face amount plus the premium and bond issuance expense accrued to the date of repurchase are removed from the accounts, and any resulting gain or loss is credited or charged to income.
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 the Bank’s currency positions, are recorded at the contracted forward rates. Gains or losses arising from the differences between the contracted forward rates and spot rates on settlement are credited or charged to current income. Contracts outstanding on the balance sheet dates 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 the Bank’s 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. On balance sheet dates, outstanding contracts are measured at fair value through profit or loss.
- 13 - c. Currency swaps
Foreign-currency spot-position assets or liabilities arising from currency swaps, which are mainly for accommodating customers’ needs or managing the Bank’s currency 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 netted against the related payables. The interest part of swap points is amortized during the contract period. On balance sheet dates, outstanding contracts are measured at fair value through profit or loss. d. Cross-currency swaps
Cross-currency swaps, which are for the purposes of accommodating customers’ needs or managing the Bank’s exposures, are marked to market on the balance sheet dates. The interest received or paid at each settlement date is recognized as interest income or expense, which is credited or charged to current income. On balance sheet dates, outstanding contracts are measured at fair value through profit or loss. e. Options
Options bought and/or held and options written, which are mainly for accommodating customers’ needs or managing the Bank’s currency positions, are recorded as assets and liabilities when the transactions occur. These instruments are marked to market as of the balance sheet dates. The carrying amounts of the instruments, which are recorded either as assets or liabilities, are charged to income when they are not exercised. Gains or losses on the exercise of options are also included in current income.
f. Interest rate swaps
Interest rate swaps, which do not involve exchanges of the notional principals, are not recognized as either assets and/or liabilities on the contract dates. The swaps are entered into for accommodating customers’ needs or managing the Bank’s interest rate positions. The interest received or paid at each settlement date is recognized as interest income or expense. These instruments are marked to market on the balance sheet dates. g. Asset swaps
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. Net interest on each settlement is recorded as current income or expense. On balance sheet dates, outstanding contracts are measured at fair value through profit or loss. h. Futures
Margin deposits paid by the Bank for interest rate futures contracts entered into for trading purpose are recognized as assets. Gains or losses resulting from marking 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.
i. Credit default swaps
Credit default swaps involve taking credit the risk of denominated bonds and notes. Such transactions are recorded by memorandum entries at the contract dates. The premium received by the Bank for a credit default swap contract on each settlement is recorded as current income by the accrual method. On balance sheet dates, outstanding contracts are measured at fair value through profit or loss.
- 14 - j. Commodity - linked interest rate swaps, equity - linked swap, and credit - linked swaps (miscellaneous swap contracts)
Commodity - linked and equity - linked interest rate swaps and credit - linked swaps, which do not involve exchanges of notional principals, 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. On balance sheet dates, outstanding contracts are measured at fair value through profit or loss.
Recognition of 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 those loans/credits is recognized upon collection.
Under the Ministry of Finance (MOF) regulations, the interest revenue on credits in which agreements have been reached to extend their maturities is recognized upon collection.
Service fees are recorded as revenue upon receipt or substantial completion of activities involved in the earnings process.
Pension
Pension expense under defined benefit pension plan is determined on the basis of actuarial calculations. Pension under defined contribution pension plan is expensed during the period when the employees rendered their services.
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 income tax assets that are not certain to be realized.
Tax credits for acquisitions of equipment or technology, research and development expenditures, personnel training expenditures and acquisition of equity investments are recognized as reduction of current income tax.
Interest income from short-term bills has been taxed separately and recorded as tax expenses. The adjustment of prior year’s income tax was included in the current income tax.
Income tax (10%) on unappropriated earnings after January 1, 1998 is recorded as income tax in the year when the stockholders resolve the appropriation of the earnings.
SPH adopted the linked-tax system for income tax filings with its qualified subsidiaries, including the Bank. The different amounts between tax expense and deferred tax liabilities and assets based on consolidation and SPH with its qualified subsidiaries are adjusted on SPH, related amounts are recognized as accounts receivable or accounts payable.
“Income Basic Tax Act” shall come into force on January 1, 2006. The amount of basic income of a profit-seeking enterprise shall be the sum of the taxable income as calculated in accordance with the Income Tax Act and income exempted due to suspension of income tax and other relevant laws, and then multiplied by the tax rate (10%) prescribed by the Executive Yuan. The affect of which higher between regular income tax and basic tax had been considered in current income tax.
- 15 - Asset Impairment
SFAS No. 35 requires the impairment review on long-term investments accounted for by the equity method and properties to be made on each balance sheet date. If assets or CGUs are deemed impaired, then the Bank must calculate their recoverable amounts. An impairment loss should be recognized whenever the recoverable amount of the assets or the CGU is below the carrying amount, and this impairment loss either is charged to accumulated impairment or reduces the carrying amount of the assets or CGUs directly. After the recognition of an impairment loss, the depreciation (amortization) should be adjusted in future periods by the revised asset/CGUs carrying amount (net of accumulated impairment), less its salvage value, on a systematic basis over its remaining service life. If asset impairment loss (excluding goodwill) 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 not been recognized. An impairment loss on a revalued asset is recognized directly against capital surplus from revaluation for the asset to the same asset. A reversal of an impairment loss on a revalued asset is credited directly to capital surplus from revaluation under the heading capital surplus from revaluation. However, to the extent that an impairment loss on the same revalued asset was previously recognized as profit or loss, a reversal of that impairment loss is also recognized as profit or loss.
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, reversal of impairment loss on goodwill is prohibited.
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 financial statements.
Foreign-currency Translations
Foreign currency transactions are recorded at the rate of exchange on the date of the transaction. At the balance sheet date, monetary assets and liabilities denominated in foreign currencies are translated into New Taiwan dollars equivalents using the closing exchange rate. Exchange differences arising on the settlement of transactions at rates different from those at the date of the transaction, as well as unrealized foreign exchange differences on unsettled foreign currency monetary assets and liabilities, are recognized in the income statement.
Unrealized exchange differences on non-monetary financial assets (investments in equity instruments) are a component of the change in their entire fair value. For a non-monetary financial asset classified as held for trading, unrealized exchange differences are recognized in the income statement. For non-monetary financial investments, which are classified as available-for-sale, unrealized exchange differences are recorded directly in equity until the asset is sold or becomes impaired. Except for the initial investment cost, gains or losses resulting from restatement at period-end of foreign-currency denominated equity investments accounted for by the equity method are credited or charged to “cumulative translation adjustment” under stockholders’ equity.
Hedge Accounting
Non-trading derivatives, which are used primarily as a risk management tool for hedging interest rate risk arising on on-balance sheet liabilities, are accounted for on the same basis as the underlying items being hedged.
- 16 - In order to qualify as a hedge, a derivative must effectively reduce any risk inherent in the hedged item from potential movements 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 underlying hedged item over the life of the hedged contract. At the inception of the hedge, there must be 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 entity will assess the hedging instrument’s effectiveness.
A fair value hedge that meets all the hedge accounting criteria is accounted for as follows:
a. The gain or loss from re-measuring the hedging instrument at fair value (for a derivative hedging instrument) or the foreign currency component of its carrying amount (for a non-derivative hedging instrument) is recognised immediately in profit 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.
3. ACCOUNTING CHANGES
a. The amount of the cumulative effect resulting from the change to new accounting principles
Effective January 1, 2007, the Bank adopted the Statement of Financial Accounting Standard No. 37 “Accounting for Intangible Assets” and other standards amended for harmonising with this standard. The Bank revaluated the service lives or amortization method on recognized intangible asset.
Effective January 1, 2006, the Bank adopted the Statement of Financial Accounting Standard No. 34 “Accounting for Financial Instruments”, No. 36 “Disclosure and Presentation of Financial Instruments” and other standards amended for harmonising with those two standards.
The Bank properly reclassifies the financial assets and financial liabilities when adopting aforementioned new accounting standards and related amendments to existing standards. The effects of the financial assets and liabilities at fair value through profit or loss and derivative of fair value hedge are included in cumulative effect of accounting changes. The effects of the fair value change of available-for-sale financial assets are included in stockholders’ equity adjustments.
The cumulative effect of accounting changes are as follows:
Cumulative Effect of Stockholders’ Accounting Equity Changes, Adjustments, After Tax After Tax
Financial assets at fair value through profit or loss $ 745,447 $ - Available-for-sale financial assets - 348,270 Financial liabilities at fair value through profit or loss (450,608 ) -
$ 294,839 $ 348,270
b. Future application of accounting standards and interpretation
In accordance with Statement of Financial Accounting Standards Interpretation No. (96) 052 issued by ARDF of ROC bonus to employees and remuneration to directors and supervisors should be recognized as expense rather than recognized as distribution of retained earnings. This interpretation is effective on January 1, 2008.
- 17 -
4. CASH AND CASH EQUIVALENTS
June 30 2007 2006
Due from other banks $ 13,556,858 $ 8,377,311 Notes and checks in clearing 6,813,002 2,522,153 Cash on hand 5,594,864 5,965,005
$ 25,964,724 $ 16,864,469
5. DUE FROM THE CENTRAL BANK AND OTHER BANKS
June 30 2007 2006
Call loans to banks $ 63,715,671 $ 65,903,565 Due from the Central Bank 26,821,823 21,585,291
$ 90,537,494 $ 87,488,856
Due from the Central Bank consists mainly of New Taiwan Dollar (NTD) and foreign currency deposit reserves.
Under a directive issued by the Central Bank of the ROC, NTD-denominated deposit reserves are determined monthly at prescribed rates on average balances of customers’ NTD-denominated deposits. These reserves included $17,705,224 and $17,558,117 as of June 30, 2007 and 2006, respectively, which are subject to withdrawal restrictions.
In addition, the foreign-currency deposit reserves are determined at prescribed rates on balances of additional foreign-currency deposits. These reserve may be withdrawn momentarily and are noninterest earning. As of June 30, 2007 and 2006, the balances of foreign-currency deposit reserves were $3,915,106 and $100,474, respectively.
6. FINANCIAL INSTRUMENTS AT FAIR VALUE THROUGH PROFIT OR LOSS
Related information regarding financial instruments at fair value through profit or loss please refer to Table 7-1.
The financial assets at fair value through profit or loss amounting to $988 as of June 30, 2006 had been provided to GTSM as bond payment settlement reserves for electronic bond trading system.
Held-for-trading financial assets as of June 30, 2007 and 2006 were sold at amount of $5,918,573 and $6,006,813, respectively, under agreement to repurchase.
The Bank engages in derivative transactions mainly for accommodating customers’ needs and managing its exposure positions. The Bank’s strategy is to hedge most of the market risk exposures using hedging instruments with market value changes that have a highly negative correlation with the changes in the market of the exposures being hedged.
The contract amounts (or notional amounts) of outstanding derivative transactions for accommodating customers’ needs and managing its exposure positions, please refer to Table 7-2.
- 18 - The loss on held for trading financial assets and liabilities for the six months ended June 30, 2007 was $210,428 and the gain for the six months ended June 30, 2006 was $1,002,206. The gain on financial assets designated at fair value through profit or loss for the six months ended June 30, 2007 and 2006 were $2,126 and $24,859, respectively. The loss on derivative transactions for the six months ended June 30, 2007 was $757,449 and the gain for the six months ended June 30, 2006 was $684,273.
7. ACCOUNTS, INTEREST AND OTHER RECEIVABLES, NET
June 30 2007 2006
Accounts receivable - factoring $ 17,665,457 $ 20,274,838 Interest receivable 4,569,028 2,890,353 Receivable from related parties 3,871,374 160,235 Acceptances 3,640,223 3,659,470 Accounts receivable 776,467 283,282 Credit card receivables - 5,348,788 Others 276,291 841,438 30,798,840 33,458,404 Less - allowance for credit losses 209,072 656,010
$ 30,589,768 $ 32,802,394
As of June 30, 2007, receivables from related parties included receivables of transfer of IBT credit card business to SinoPac Card Corp., receivables from link-tax system, dividend receivables from related parties, and other receivables were $3,309,492, $395,632, $154,282 and $11,968, respectively. As of June 30, 2006, receivables from related parties included $160,235 representing receivable from linked-tax system.
The details of and changes in allowance for receivables for the six months ended June 30, 2007 and 2006, respectively, were summarized bellow:
June 30 2007 2006
Balance, January 1 $ 544,149 $ 817,752 Provision (reverse) 9,305 (27,010 ) Write-off (26,992 ) (38,849 ) Recovery of written-off credit (323,797 ) 2,489 Reclassifications 2,004 (79,336 ) Result from change of foreign exchange rate 4,403 (12,036 ) Others - (7,000 )
Balance, June 30 $ 209,072 $ 656,010
- 19 - 8. DISCOUNTS AND LOANS
June 30 2007 2006
Import and export negotiations $ 1,697,112 $ 3,344,679 Overdrafts 1,085,455 1,314,884 Accounts receivable - financing 3,594,935 3,471,404 Short-term loans 147,651,630 148,853,860 Medium-term loans 128,673,924 151,737,861 Long-term loans 307,803,341 288,535,742 Nonperforming loans transferred from loans 12,472,590 9,844,875 602,978,987 607,103,305 Less - allowance for credit losses 5,740,528 4,346,802
$ 597,238,459 $ 602,756,503
As of June 30, 2007 and 2006, the balances of nonaccrual interest loans were $13,231,483 and $10,152,468, respectively. The unrecognized interest revenues on nonaccrual interest loans amounted to $349,061 and $186,091 for the six months ended June 30, 2007 and 2006, respectively.
For the six months ended June 30, 2007 and 2006, the Bank had not written off credits for which legal proceedings had not been initiated.
The details of and changes in allowance for credit losses of loans, discounts and loans for the six months ended June 30, 2007 and 2006, respectively, were summarized below:
For the Six Months Ended June 30, 2007 Specific General Reserve Reserve Total
Balance, January 1 $ 3,916,746 $ 1,788,618 $ 5,705,364 Provision 1,940,372 706,323 2,646,695 Write-off (2,628,329 ) - (2,628,329 ) Recovery of written-off credits 28,522 - 28,522 Reclassifications 376,380 (390,468 ) (14,088 ) Result from change of foreign exchange rate 2,364 - 2,364
Balance, June 30 $ 3,636,055 $ 2,104,473 $ 5,740,528
For the Six Months Ended June 30, 2006 Specific General Reserve Reserve Total
Balance, January 1 $ 2,036,800 $ 1,910,498 $ 3,947,298 Provision 1,833,689 289,955 2,123,644 Write-off (1,778,486 ) - (1,778,486 ) Recovery of written-off credits 56,239 - 56,239 Reclassifications 177,113 (176,541 ) 572 Result from change of foreign exchange rate (1,901 ) - (1,901 ) Others (564 ) - (564 )
Balance, June 30 $ 2,322,890 $ 2,023,912 $ 4,346,802
- 20 - As of June 30, 2007 and 2006, in addition to aforementioned provisions for loan losses, bad debt expenses still include provisions (reversal) for doubt account receivables were $9,305 and ($27,010), respectively, provisions for acceptance and guarantees were $16,000 and $75, respectively, and provisions for nonperforming receivables other than loans were $0 and $1,045,924, respectively.
As of June 30, 2007 and 2006, allowances for credit losses and provisions for losses on guarantees of the Bank were $6,076,161 and $5,088,907, respectively.
9. AVAILABLE-FOR-SALE FINANCIAL ASSETS
Related information regarding available-for-sale financial assets please refer to Table 7-3.
As of June 30, 2007 and 2006, the Bank both held 120,031 thousand shares of SPH, with carrying amount of $1,968,508 and market value of $1,884,487 and $1,962,507, based on the closing prices as of June 30, 2007 and 2006. The different amount of $84,021 and $6,001 were recorded as unrealized gain (loss) of financial instruments under stockholders’ equity.
The available-for-sale financial assets amounting to $15,576,240 and $22,089,638 as of June 30, 2007 and 2006 had been provided to GTSM as bond payment settlement reserves for electronic bond trading system and to court for provisional seizure.
The available-for-sale financial assets amounting $3,132,023 and $23,749,857 as of June 30, 2007 and 2006, respectively, had been sold under agreements to repurchase.
10. SECURITIZATION
a. Characteristic, gain (loss) recognized and key economic assumptions used in measuring retained interests
In August 2004, the Bank sold part of its enterprise loans under securitization transactions. The Bank entrusted these loans to Fuhwa Bank for issuing beneficiary certificates. The terms and key economic assumptions used in measuring retained interests were as follows:
Enterprise Loans under Terms Securitization
Date of issuance August 3, 2004 Carrying amount of enterprise loans $ 4,900,000 Gain (loss) on securitization -
- 21 - June 30, 2007
Senior Subordinated First Second Third Fourth Fifth Series of Certificates Tranche Tranche Tranche Tranche Tranche
Principal amount $ 988,100 $ 534,100 $ 441,000 $ 122,500 $ 1,014,300 Annual interest Floating Floating Floating Floating - interest rate interest rate interest rate interest rate plus 0.4% plus 0.6% plus 1.0% plus 1.2% (Note) (Note) (Note) (Note)
Key assumptions used in measuring retained interests
Expected weighted- 3 average life (in years) Expected credit losses - (annual rate) Discounted rate for 1.79% residual cash flows
June 30, 2006
Senior Subordinated First Second Third Fourth Fifth Series of Certificates Tranche Tranche Tranche Tranche Tranche
Principal amount $ 1,188,100 $ 534,100 $ 441,000 $ 122,500 $ 1,014,300 Annual interest Floating Floating Floating Floating - interest rate interest rate interest rate interest rate plus 0.4% plus 0.6% plus 1.0% plus 1.2% (Note) (Note) (Note) (Note)
Key assumptions used in measuring retained interests
Expected weighted- 3 average life (in years) Expected credit losses - (annual rate) Discounted rate for 1.563% residual cash flows
Note: Floating rate is the average rate of the 90-day short-term bills in the secondary market of Telerate Information Inc., at 11:00 a.m. of Taipei time two working days prior to the first day of interest period of financial assets (shown on page 6165).
The investors of the subordinated certificates have a right over any remaining interest paid after fixed interest has been paid to the holders of the senior certificates in accordance with the principal amount. Any prepayment of principal shall be paid to the tranche in the order mentioned above. When the debtors fail to pay on schedule, the investors and Fuhwa Bank have no recourse to the other assets of the Bank. The Bank has a right over the subordinated certificates. The value of the subordinated certificates is subject to credit and interest rate risks on the transferred financial assets.
- 22 - b. Sensitivity analysis
As of June 30, 2007 and 2006, key economic assumptions and the sensitivity of the current fair value of residual cash flows to immediate 10 percent and 20 percent adverse changes in these assumptions were as follows:
Enterprise Loans June 30 2007 2006
Carrying amount of retained interest $ 1,013,916 $ 1,014,240 Weighted-average life (in years) 3 3 Discount rate of residual cash flows (annual rate) 1.79% 1.563% Impact on fair value of 10% adverse change 217 (87 ) Impact on fair value of 20% adverse change 41 (241 )
c. Due to the loans for securitized having no actual credit losses, the rate of expected static group loss equals to that of expected credit loss. The expected credit losses for the six months ended June 30, 2007 and 2006 are $384 and $60, respectively.
d. Cash flows
For the six months ended June 30, 2007, the prepayments of principal before due date resulted in the cash inflow amounted to $200,000.
11. HELD-TO-MATURITY FINANCIAL ASSETS
Related information regarding held-to-maturity financial assets please refer to Table 7-4.
To comply with Hong Kong branch’s clearing system of real-time gross settlement, government bonds included in held-to-maturity financial assets had been provided as collaterals as of June 30, 2007 and 2006 amounting $206,237 and $203,611, respectively.
The held-to-maturity financial assets as of June 30, 2007 amounting $108,353 had been sold under agreement to repurchase.
12. EQUITY INVESTMENTS - EQUITY METHOD
June 30 2007 2006
SinoPac Bancorp $ 6,639,205 $ 5,956,969 SinoPac Leasing Corporation 1,245,170 1,181,370 SinoPac Capital Limited (H.K.) 1,114,409 962,265 Grand Cathay Securities Investment Trust Co. - 178,587 SinoPac Life Insurance Agent Co., Ltd. 162,074 318,105 SinoPac Property Insurance Agent Co., Ltd. 17,387 18,322 SinoPac Financial Consulting Co., Ltd. 2,279 2,376
$ 9,180,524 $ 8,617,994
- 23 - Income from equity investments for the six months ended June 30, 2007 and 2006, respectively, were summarized as follows:
For the Six Months Ended June 30 2007 2006 Equity method
SinoPac Bancorp $ 296,689 $ 281,119 SinoPac Leasing Corporation 78,927 82,270 SinoPac Capital Limited (H.K.) 101,642 91,399 Grand Cathay Securities Investment Trust Co. 4,370 9,502 SinoPac Life Insurance Agent Co., Ltd. 105,350 68,511 SinoPac Property Insurance Agent Co., Ltd. 11,178 3,935 SinoPac Financial Consulting Co., Ltd. 84 121
$ 598,240 $ 536,857
The net income of SinoPac Bancorp for the six months ended June 30, 2007 amounted to $317,828 was translated into NTD at the average exchange rate for the respective periods. The difference between the translated net income of SinoPac Bancorp and the one recognized by the Bank was generated from some different accounting treatments between ROC GAAP and US GAAP. Please refer to Table 6.
The aforementioned income from equity investments under the equity method were recognized on the basis of investees’ audited financial statements for the same period, except for the investment income of SinoPac Financial Consulting Co., Ltd. and that of Grand Cathay Securities Investment Trust Corporation which were based on the unaudited statements for the same period. The Bank believes that the adjustment is immaterial to the investment and investment income if such financial statements for the six months ended June 30, 2007 and 2006 had been audited.
To comply with the reorganization of SPH, the long-term equity investment, Grand Cathay Securities Investment Trust Corporation as of June 30, 2007 held by the Bank amount to $188,321 had transferred to SPH at book value.
In order to reorganize the operations of life and property insurance agent, IBT Life Insurance Agent Co., Ltd. (“IBT Life Insurance Agent”) and IBT Property Insurance Agent Co., Ltd. (“IBT Property Insurance Agent”), the investee companies of IBT under the equity method, merged with SinoPac Life Insurance Agent Co., Ltd. (“SinoPac Life Insurance Agent”) and SinoPac Property Insurance Agent Co., Ltd. (“SinoPac Property Insurance Agent”), respectively, with IBT Life Insurance Agent and IBT Property Insurance Agent as surviving entities. The merged entities are renamed, as SinoPac Life Insurance Agent and SinoPac Property Insurance Agent, respectively. The effective date is on November 13, 2006.
13. OTHER FINANCIAL ASSETS
Related information regarding other financial assets please refer to Table 7-5.
Investments in equity and debt instruments that do not have a quoted market price in an active market, and whose fair value cannot be reliably measured are measured at cost.
Non-active market debt instrument as of June 30, 2007 were sold at the amount of $488,046 under agreement to repurchase.
- 24 - 14. PROPERTIES
June 30 2007 2006
Cost and appreciation $ 13,745,476 $ 14,264,551 Accumulated depreciation Buildings 1,504,110 1,469,641 Computer and machinery equipment 3,271,703 3,075,060 Transportation equipment 29,632 32,308 4,805,445 4,577,009 Advances on acquisitions of equipment and construction in progress 151,513 82,815
$ 9,091,544 $ 9,770,357
Under government regulations, the Bank revalued its properties, in the following years: Land in 1961, 1964, 1967, 1974 and 2001; and properties other than land in 1961.
The Bank merged with IBT on November 13, 2006. Under interpretation (91) 128, 243 and 244 issued by ARDF of ROC, the merger should be treated as a reorganization because the Bank and IBT are both 100% owned subsidiaries of SPH. The Bank should recognize all the assets and liabilities of IBT at book value (if the impairment occurs, the impairment loss should be recognized). Under the Financial Institutions Merger Act and interpretation (94) 349 issued by the ARDF of ROC, the Bank did not book the land value increment tax reserve amounted to $555,910 since the land was not revalued when both banks merged.
15. OTHER ASSETS
June 30 2007 2006
Rental properties, net $ 1,369,143 $ 534,151 Guarantee deposits 1,090,821 915,876 Collateral assumed, net of accumulated impairment $35,339 as of 2007 and 2006, respectively 699,000 616,403 Land value increment tax 530,985 - Idle assets, net 441,809 939,397 Temporary payment 336,103 36,511 Deferred tax asset 278,225 226,475 Prepayment 259,938 774,202 Deferred pension cost 207,052 229,237 Other deferred assets 18,148 22,247 Others 12,598 28,714
$ 5,243,822 $ 4,323,213
- 25 - 16. CALL LOANS AND DUE TO BANKS
June 30 2007 2006
Call loans $ 52,187,101 $ 45,106,462 Redeposits from the directorate general of postal remittance 11,012,179 13,519,540 Due to banks 23,892 80,176 Due to the Central Bank 45,999 53,037 Overdrafts of bank - 101,959
$ 63,269,171 $ 58,861,174
17. ACCOUNTS, INTEREST AND OTHER PAYABLES
June 30 2007 2006
Notes and checks in clearing $ 6,813,002 $ 2,522,153 Accounts payable - factoring 6,563,115 6,115,478 Interest payable 3,790,616 2,986,922 Acceptance payable 3,640,223 3,659,470 Accrued expenses 1,385,036 1,165,146 Tax payable 608,467 111,681 Accounts payable 261,953 275,962 Temporary payments 169,856 109,543 Dividend payable - 2,739,531 Others 511,984 1,232,146
$ 23,744,252 $ 20,918,032
18. DEPOSITS AND REMITTANCES
June 30 2007 2006
Checking $ 12,768,308 $ 12,649,906 Demand 109,052,749 103,080,408 Savings - demand 171,093,364 151,360,535 Time 238,895,840 225,757,809 Negotiable certificates of deposit 29,456,300 44,816,400 Savings - time 201,218,760 194,752,728 Inward remittances 797,232 1,094,612 Outward remittances 258,338 94,443
$ 763,540,891 $ 733,606,841
- 26 - 19. BONDS PAYABLE
The Bank (formerly IBT) issued US$180,000 thousand in zero coupon Euro convertible bonds with par of US$1,000 on December 22, 2004. The terms of the bonds are as follows:
a. Redemption method
The Bank will redeem the bonds on the maturity date at a price equal to 99.95% of the outstanding principal amount unless the bonds have been previously redeemed, repurchased and canceled, or converted.
1) Redemption at the Bank’s option
a) In the period of December 22, 2006 to 2009, the Bank may redeem all or parts of the bonds if the average closing price over 130% of the conversion price of the shares at least 20 consecutive trading days.
b) The Bank may redeem all the bonds at any time if at least 90% of the principal of the bonds has already been redeemed, repurchased and canceled, or converted.
c) The Bank may redeem all the bonds at any time if any changes in ROC taxation would require the Bank to gross up the payment of interest or premium.
2) Redemption at the holders’ option
a) Each bondholder has the right to require the Bank to redeem all or parts of the bonds only on December 22, 2006 at 99.98% of the principal unless the bonds had been previously redeemed, repurchased and canceled, or converted.
b) Each holder has the right to require the Bank to buy all of the holder’s bonds at 100% of the principal amount if the shares cease to be listed or admitted for trading on the TSE for at least five consecutive trading days.
c) Each holder has the right to require the Bank to buy all or a portion of the holder’s bonds at 100% of the principal amount if there is change of control over the Bank.
d) On December 26, 2005, the Bank became a wholly owned subsidiary of the Company. This development constitutes a change of control, on which the bond indenture has certain provisions. Thus, under the indenture, each holder has the right to require IBT to repurchase all or a portion of his/her bond holdings. In addition, IBT set February 22, 2006 as the change of control date and the change of put price at 100% of the unpaid principal of the bonds.
b. Maturity date
The maturity period is five years after bond issuance. Since the bonds were issued on December 22, 2004, the maturity date is on December 22, 2009.
c. Pledged: None.
- 27 - d. Conversion period and object
The bondholders can convert the bonds to IBT’s stock between January 21, 2005 and December 12, 2009. They, however, will not be able to effect conversions during the closed period. A closed period is (i) 60 days before any general stockholders’ meetings; (ii) 30 days before any special stockholders’ meetings; (iii) 5 days before the declaration of dividends or other benefits; (iv) the period from the date following the third trading day before the date of IBT’s notification to the Taiwan Stock Exchange of the record date for the determination of stockholders entitled to the receipt of dividends, subscription for new shares due to capital increase, or appropriation of other benefits and bonuses; and (v) such other periods during which IBT should suspend the trading of its stocks, as required by ROC laws and regulations. e. Conversion price
1) The conversion price on issuance is NT$26.26 per share. The conversion price in U.S. dollars is based on the exchange rate of US$1=NT$32.49. The conversion price is subject to adjustment based on certain terms of the related indenture. (Effective July 8, 2005, the conversion price for distributing cash dividends was adjusted from NT$26.26 to NT$25.22.)
2) If the average closing price of the shares for any 30 consecutive trading days immediately before December 22, 2005, December 22, 2006, December 24, 2007 and December 22, 2008 (the ‘‘special reset dates’’), converted into U.S. dollars at the prevailing rate on the special reset dates, is less than the conversion price then in effect converted into U.S. dollars at the fixed exchange rate, the conversion price may be decreased up to 80% of original conversion price. Effective December 22, 2005, the conversion price was reset from NT$25.22 to NT$22.99. Effective June 30, 2006, the conversion price was reset from NT$22.99 to NT$22.25. Effective November 13, 2006, the conversion price was reset at NT$18.94. When converting to SPH’s shares, the conversion price was $16.31 which was reset at a share swap ratio 1.3646. Effective June 28, 2007, the conversion price was reset from NT$18.94 to NT$18.58 because of distribution of cash dividend. When converting to SPH’s shares, the conversion price was NT$16.00 which was reset at a share swap ratio 1.1614, which according to second augment contract of November 13, 2006. f. Settlement option
Instead of delivering to the holders some or all of the shares required for the valid exercise of a conversion right, IBT may elect to make a cash payment for all or any portion of a holder’s bonds deposited for conversion. g. Supplemental agreements
On December 26, 2005, IBT became a wholly owned subsidiary of the Company and IBT’s common shares were ceased to be traded on the TSE. In the interest of the bondholders, IBT granted to the bondholders outside the United States the additional rights, after converting the bonds into common shares of IBT, and further exchanging IBT’s common shares for the Company’s shares at a certain ratio. If the bondholders do not choose to convert into the Company’s common shares, their bonds still can be converted into IBT’s common shares.
As of June 30, 2007 and 2006, bonds both with par value of US$176,000 thousand, were still outstanding.
- 28 - 20. OTHER LIABILITIES
June 30 2007 2006
Accrued pension liabilities $ 756,952 $ 588,881 Reserve of land value increment tax 458,362 623,422 Guarantee deposit received 360,612 329,476 Temporary receipt 242,640 538,808 Deferred tax liabilities 234,730 835,575 Advanced receipt 122,997 171,406 Others 50,531 60,117
$ 2,226,824 $ 3,147,685
21. STOCKHOLDERS’ EQUITY
a. Capital stock
The capital stock was $19,728,068 on January 1, 2006. The Bank increased its authorized capital to $80,000,000 to accommodate the need of mergering with IBT and issued 26,123,904 shares for the merger with IBT on November 13, 2006. The capital stock after merger was $45,851,972.
b. Capital surplus
Under related regulations, capital surplus may only be used to offset a deficit. However, capital surplus arising from issuance of shares in excess of par value (including issuance in excess of common stock par value, issuance of shares for combinations and treasury stock transactions) and donations may be transferred to common stock on the basis of the percentage of shares held by the stockholders. Any capital surplus transferred to common stock should be within a certain percentage prescribed by law.
c. Retained earnings and dividend policy
The Bank’s Articles of Incorporation provide that the Bank may declare dividends or make other distributions from earnings after it has:
1) Deducted any deficit of prior years;
2) Paid all outstanding taxes;
3) Set aside 30% of remaining earnings as legal reserve;
4) Set aside any special reserve or retained earnings allocated at its option;
5) Allocated Stockholders’ dividends
6) Allocated at least 1% of the remaining earnings which allocated stockholders’ dividends as employee bonus.
To comply with the Bank’s globalization strategy, strengthen its market position, integrate its diversified business operation and be a major local bank, the Bank has adopted the “Balanced Dividend Policy”. Under this policy, dividends available for distribution are determined by referring to its capital adequacy ratio (CAR). Cash dividends may be declared if the Bank’s CAR is above 10% and stock dividends may be declared if the CAR is equal to or less than 10%. However, the Bank may make a discretionary cash distribution even if the CAR is below 10%, if approved at the stockholders’ meeting, for the purpose of maintaining the cash dividends at a certain level in any given year. - 29 -
Cash dividends and cash bonus are paid when approved by the stockholders, while the distribution of stock dividends requires the additional approval of the authorities.
Under a directive issued by the SFB, whenever the components of stockholders’ equity excluding treasury stock - have debit balances, a special reserve equal to the total debit balance should be appropriated from retained earnings according to the percentage of ownership, the unrealized loss on long-term equity investments of combination can appropriated no special reserve earnings as well as the investee company. The special reserve so appropriated, except the portion that is reversible because of the reduction of the total debit balance, is not available for appropriation.
Under the Company Law, the appropriation for legal reserve is made until the reserve equals the aggregate par value of the outstanding capital stock of the Bank. This reserve is only used to offset a deficit. When its balance reaches 50% of aggregate par value of the outstanding capital stock of the Bank, and the Bank have no earnings, the legal reserve over 50% can be distributed as stock dividend or bonus, or, the Bank have no deficit, the Bank can retain the legal reserve up to 15% of the outstanding capital and transferred the remaining legal reserve to common stock. In addition, the Banking Law provides that, before the balance of the reserve reaches the aggregate par value of the outstanding capital stock, annual cash dividends, remuneration to directors and supervisors and bonus to employees should not exceed 15% of aggregate par value of the outstanding capital stock of the Bank.
Under the Financial Holding Company Act, the board of directors is empowered to execute the authority in stockholders’ meeting, which is under no jurisdiction in the related regulations in the Company Law.
On June 22, 2007 and June 2, 2006, the board of directors which execute rights and functions of stockholders’ meeting resolved the appropriation of 2006 and 2005 earnings, respectively, as follows:
Dividends Per Share Earnings Appropriation (New Taiwan Dollars) 2006 2005 2006 2005
Legal reserve $ 646,947 $ 497,192 Remuneration to directors and supervisors 22,043 32,000 Bonus to employees - cash 226 11,601 Cash dividends 1,486,979 1,116,514 $0.3243 $0.5700 Stock dividend 295 -
$ 2,156,490 $ 1,657,307
On March 21, 2006, IBT’s stockholders’ meeting resolved the appropriation of 2005 earnings as follows:
Dividends Per Share Earnings (New Taiwan Appropriation Dollars) 2005 2005
Legal reserve $ 735,310 Remuneration to directors and supervisors 62,531 Cash dividends 1,623,017 $0.73 Bonus to employees - cash 187,592
$ 2,608,450
- 30 - 22. COMMISSIONS AND FEE REVENUES, NET
For the Six Months Ended June 30 2007 2006 Commissions and fees revenues Mutual funds $ 1,433,681 $ 713,680 Loan 315,376 301,145 Foreign exchange 209,572 231,660 Custody 158,202 138,761 Factoring and financing 141,377 138,981 Remittance expenses 39,582 33,163 Automatic equipment service fees 37,267 38,270 Guarantee and acceptance 26,079 37,104 Credit card 1,424 109,589 Others 36,159 80,132 2,398,719 1,822,485 Commissions and fees expenses Mutual funds 97,093 86,315 Financial transaction 50,105 18,886 Automatic equipment service fees 48,398 38,474 Loan 28,531 35,388 Custody 17,572 4,393 Foreign exchange 2,323 1,313 Remittance expenses 2,243 3,648 Credit card - 18,539 Others 26,306 33,501 272,571 240,457
$ 2,126,148 $ 1,582,028
23. PERSONNEL EXPENSE, DEPRECIATION AND AMORTIZATION
For the Six Months Ended June 30 2007 2006 Personnel expenses Salaries and wages $ 2,757,593 $ 2,492,165 Pension 233,312 196,156 Labor insurance and national health insurance 140,216 151,943 Others 152,000 105,528 3,283,121 2,945,792 Depreciation 283,135 321,095 Amortization 37,918 63,202 Others 1,570,189 1,650,880
$ 5,174,363 $ 4,980,969
24. PENSION
The Labor Pension Act took effect on July 1, 2005, and the Bank’s employees, who were on service before July 1, 2005, could choose the pension mechanism either under the Labor Standard Law or under this Act. For those employees who choose the pension mechanism regulated by the Labor Standard law, their seniority prior to the enforcement of Labor Pension Act shall be maintained. The newly hired employees, who were hired after July 1, 2005, could only be regulated by the Labor Pension Act. - 31 -
Since July 1, 2005, for those employees who still choose to be subjected to the Labor Standard Law, the Bank makes monthly contributions, equal to 4% of employee salaries, to the severance payment fund. If the employees quit willingly, they still can receive the severance payment based on the severance payment criteria. On November 13, 2006, for those employees who joined the Bank owning to the merger and still choose to be subjected to the Labor Standard Law, the Bank made monthly contributions, equal to 4% of employee salaries, to the severance payment fund excluding those who are eligible for promoted or enforced retirement project. If the employees quit willingly, they still can receive the severance payment based on the severance payment criteria.
For those employees who choose to be subjected to the Labor Pension Act, the Bank ceases to contribute into severance payment fund. The cumulated contributions generated before applying Labor Pension Act is summed up in the balance at that month and retained in the severance payment fund. The employees will receive severance payments according to severance payment criteria when they quit willingly.
For the Bank’s employees choose the pension mechanism regulated by the Labor Standard Law, the retirement payments shall be paid to employees on the basis of the following standard: (i) a lump sum payment of retirement payments equal to two base units shall be paid for each year of service (ii) provided that each year of service exceeding fifteen years shall be entitled to only one base unit of wage (iii) and that the maximum payment shall be forty-five base units. Any fraction of a year which is equal to or more than year shall be counted as one year of service, and any fraction of a year which is less than year shall be counted as half a year of service.
The Bank’s employees contribute a compulsory amount equivalent to 4% of their salaries to the employees’ pension fund, and the Bank also makes monthly contributions to the severance payment fund. The Labor Pension Act took effect on July 1, 2005, therefore the aforementioned employees’ pension fund ceased to contribute, and the employees received their cumulative contributions and related interest thereon.
The Bank applied defined contribution plan regulated by Labor Pension Act after July 1, 2005. Under this Act, the Bank contributed 6% of the employee salaries to the Labor Insurance Administration (according to this Act, the contribution rate by the employer to the Labor Pension Fund per month shall not be less than 6% of the employee’s monthly wages). For the six months ended June 30, 2007 and 2006, the pension expense amounted to $62,895 and $60,193, respectively, which were contributed to personal pension accounts.
Information related to defined benefit pension plan of the Bank is disclosed as follows:
a. The changes in the pension fund were summarized below:
For the Six Months Ended June 30 2007 2006 SinoPac IBT
Balance, January 1 $ 1,581,140 $ 851,701 $ 996,492 Contributions 218,277 49,453 85,673 Benefits paid (83,578 ) (24,222 ) (202,188 ) Interest revenue 15,813 7,831 7,574
Balance, June 30 $ 1,731,652 $ 884,763 $ 887,551
The aforementioned pension funds were contributed by the Bank.
- 32 - b. The changes in the accrued pension cost (included in other liabilities) were summarized below:
For the Six Months Ended June 30 2007 2006 SinoPac IBT
Balance, January 1 $ 752,722 $ 125,821 $ 450,506 Provision under defined benefit plans 163,099 43,941 88,602 Provision under defined contribution plans 62,895 40,578 - Contributions (221,780 ) (71,965 ) (88,602 ) Receive from leave employee 16 - -
Balance, June 30 $ 756,952 $ 138,375 $ 450,506
The Bank recognized pension costs (including overseas branches) for the six months ended June 30, 2007 and 2006 were $233,312 and $196,156, respectively.
25. INCOME TAX
Under a directive issued by the MOF, a financial holding company and its domestic subsidiaries which over 90% of shares issued was held by the financial holding company for 12 months within the same tax year, may choose to adopt the linked tax system for income tax filings. SPH adopted the linked-tax system for income tax filings with its qualified subsidiaries since 2003.
The accounting treatment applied by the Group to the income tax is to adjust in SPH’s book the difference between the combined current/deferred taxes and the total of each Group member’s current/deferred. Related payables and receivables were recorded in each of the Group members’ books.
a. The components of income tax were as follows:
For the Six Months Ended June 30 2007 2006
Current income tax payable(Deductible loss carryforward) $ (33,993 ) $ (48,681 ) Separate taxes on short-term bills interest revenue 324,040 228,039 Change in deferred income taxes 16,344 232,168 Overseas income taxes over limitation 194,546 - The minimum income tax 113,932 - Prior year adjustments 2,358 (3,854 )
$ 617,227 $ 407,672
Income tax was based on taxable income from all sources. Foreign income taxes paid can be used as credits against the domestic income tax obligations to the extent of domestic income tax applicable to the foreign-source income.
- 33 - b. Reconciliation of tax on pretax income at statutory rate and current income tax payable:
For the Six Months Ended June 30 2007 2006
Tax on pretax income at 25% statutory rate $ 799,024 $ 738,102 Add (deduct) tax effects of: Tax-exempt income (127,071 ) (89,375 ) Permanent difference (699,781 ) (478,023 ) Temporary difference (6,165 ) (218,035 ) Investment tax credit - (1,350 )
Current income tax payable (deductible loss carryforward) $ (33,993 ) $ (48,681 )
c. Deferred income tax assets consisted of the tax effects of the following:
June 30 2007 2006
Deferred pension cost $ 238,906 $ 222,190 Loss carryforward 185,236 - Effect upon adoption of the linked - tax system (150,844 ) - Others 4,927 4,285
Deferred income tax assets, net $ 278,225 $ 226,475
Deferred income tax liabilities consisted of the tax effects of the following:
June 30 2007 2006
Investment income under the equity method $ (974,480 ) $ (769,916 ) Deferred pension cost 91,649 31,499 Unrealized foreign exchange gain and unrealized revaluation gains on derivative from financial instruments 119,984 (67,835 ) Loss carryforward 558,220 49,020 Effect upon adoption of the linked - tax system - (49,020 ) Asset retirement losses 5,245 - Cumulative effect of accounting changes - 17,232 Others (35,348 ) (46,555 )
Deferred income tax liabilities, net $ (234,730 ) $ (835,575 )
The last year of deductible loss carryforward is 2011.
d. The estimated receivables and payables from adopting the linked tax system of income tax filing was as follows:
June 30 2007 2006
Receivable from related party $ 395,632 $ 160,235 Payable from related party $ 58,355 $ -
- 34 - e. The related information under the Integrated Income Tax System was as follows:
June 30 2007 2006
Balances of imputed tax credit account $ 1,320,536 $ 61
The balances of imputed tax credit account of IBT was $169 as of June 30, 2006.
The actual creditable tax ratio used for distributing earnings generated in 2006 was 20.94%. The actual creditable tax ratio of Bank SinoPac used for distributing earnings generated in 2005 was 16.35%. The actual creditable tax ratio of IBT used for distributing earnings generated in 2005 was 27.15%. f. The unappropriated earnings generated before January 1, 1997 as of June 30, 2007 was $8,758, which was recorded as capital surplus owing to merger of IBT.
Regulated by the law of income tax, when distributing the unappropriated earnings generated after January 1, 1997, stockholders will get imputation credit which counted by imputed tax credit ratio as of dividend declared date; as to unappropriated earnings generated before January 1, 1997, no imputation credit will allocate to stockholders. g. For Bank SinoPac, income tax returns through 2002, except those for 1996, had been examined by the tax authorities. On the income tax returns for the aforementioned years, the tax authorities denied the creditability of 10% withholding tax on interest income on bonds pertaining to the period when those bonds were held by other investors. Bank SinoPac appealed the decision of the tax authorities. Nevertheless, on the basis of conservative principles, Bank SinoPac recognized $111,209 as part of income tax expenses to reflect accrued liabilities and any assets written off in relation to the foregoing withholding taxes. In January 2004, Bank SinoPac reached an agreement with the Taipei National Tax Administration (TNTA) on the above appealing cases, in which TNTA would refund 65% of the withholding tax denied on the interest income on bonds to Bank SinoPac. The income tax return for 2002 had been examined by the tax authorities according to the aforementioned refund percentage. Consequently, IBT accrued 35% of the withholding tax denied on the interest income on bonds as income tax expenses for 2003 to 2006, which were not refunded by tax authorities. h. For IBT, income tax returns through 2004 had been examined by the tax authorities. For the income tax returns for 1995 to 2001, the tax authorities denied the creditability of 10% withholding tax on interest income on bonds amounting to $173,382 in 2001, which pertained to the period those bonds were held by other investors. IBT accrued this liability and appealed the decision of the tax authorities. In 2003, IBT reached an agreement with the Taipei National Tax Administration (TNTA) on the above appealing cases, in which TNTA would refund 65% of the withholding tax denied on the interest income on bonds to IBT. The income tax return for 2002 to 2004 had been examined by the tax authorities according to the aforementioned refund percentage. Consequently, IBT accrued 35% of the withholding tax denied on the interest income on bonds as income tax expenses for 2005 to 2006, which were not refunded by tax authorities.
- 35 - 26. EARNINGS PER SHARE
The numerators and denominators used in computing earnings per shares (EPS) were summarized as follows:
Denominator EPS (NT$) Numerator (Amounts) (Shares in After Pretax After Tax Thousands) Pretax Tax For the six months ended June 30, 2007
Basic EPS Net income to common stockholders $ 3,196,096 $ 2,578,869 4,585,197 $ 0.70 $ 0.56 Influence on diluted common shares Bond payable - - 361,622
Diluted EPS $ 3,196,096 $ 2,578,869 4,946,819 $ 0.65 $ 0.53
For the six months ended June 30, 2006
Basic EPS Income before cumulative effect of accounting changes $ 2,897,944 $ 2,490,272 4,585,197 $ 0.63 $ 0.54 Cumulative effect of accounting change 286,297 294,839 0.06 0.07 Net income to common stockholders 3,184,241 2,785,111 $ 0.69 $ 0.61 Influence on diluted common shares Bond payable 12,326 9,245 301,974
Diluted EPS $ 3,196,567 $ 2,794,356 4,887,171 $ 0.65 $ 0.57
27. RELATED-PARTY TRANSACTIONS
In addition to the disclosure in other footnotes, relationship with the Bank and significant transactions between the Bank and related parties were summarized as follows:
a. Related parties
Name Relationship with the Bank
SinoPac Financial Holdings Company Limited (SPH) Parent company SinoPac Securities Corporation (SinoPac Securities) Subsidiary of SPH SinoPac Marketing Consulting Co., Ltd. (SinoPac Subsidiary of SPH (was merged with SinoPac Marketing Consulting) Call Center Co., Ltd. at January 1, 2007) SinoPac Call Center Co., Ltd. (SinoPac Call Center) Subsidiary of SPH SinoPac Venture Capital Co., Ltd. (SinoPac Venture Subsidiary of SPH Capital) SinoPac Asset Management International (SinoPac Subsidiary of SPH Asset Management) SinoPac Life Insurance Agent Co., Ltd. (SPLIA) Subsidiary of the Bank SinoPac Property Insurance Agent Co., Ltd. (SPPIA) Subsidiary of the Bank
(Continued)
- 36 - Name Relationship with the Bank
SinoPac Card Services Co., Ltd. (SinoPac Card Subsidiary of SPH Services, formerly known as Anshin Card Services Company, Ltd.) SinoPac Investment Trust Corp. Subsidiary of SPH. All its managed funds have been transferred to Grand Cathay Securities Investment Trust Corporation now in the process of liquidation Grand Cathay Securities Investment Trust Investee company under the equity method (has Corporation been transferred to SPH using the book value for the six months ended June 30, 2007) Far East National Bank (FENB) Overseas affiliate of the Bank SinoPac Leasing Corporation (SPL) Subsidiary of the Bank RSP Information Service Company Limited (RSP Investee of the Bank’s subsidiary Information) SinoPac Capital Ltd. (Hong Kong) Overseas affiliate of the Bank Grand Capital International Limited (Grand Capital) Subsidiary of SPL Fortune Investment Co., Ltd. (Fortune Investment) Affiliate Ruentex Development Co., Ltd. (Ruentex Affiliate Development) Wal Tech International Corporation (Wal Tech Affiliate International) Ming Shan Investment Co., Ltd. Affiliate of IBT Chuan Construction Co., Ltd. Affiliate of IBT Shinkong Synthetic Fibers Corporation Affiliate of IBT Yi Feng Storage Services Co., Ltd. Affiliate of IBT Yuen Foong Industrial Co., Ltd. Affiliate of IBT Linkou Golf & Country Club Affiliate of IBT Formosa Plastics Corporation Affiliate of IBT Grand Cathay Columbus Fund Managed by Grand Cathay Securities Investment Trust Co., Ltd. Grand Cathay New Century Fund Managed by Grand Cathay Securities Investment Trust Co., Ltd. Grand Cathay Small & Medium Capital Fund Managed by Grand Cathay Securities Investment Trust Co., Ltd. Grand Cathay Fund Managed by Grand Cathay Securities Investment Trust Co., Ltd. SinoPac Securities (Asia) Limited Subsidiary of SinoPac Securities SinoPac Futures Corporation (SinoPac Futures) Subsidiary of SinoPac Securities SinoPac Managed Futures Co., Ltd. (SinoPac Subsidiary of SinoPac Securities Managed Futures) SinoPac Securities (Cayman) Holding Subsidiary of SinoPac Securities Rung-Tzung Investment Corp. Affiliate TaiGen Biotechnology Company Ltd. Affiliate BoardTek Electronics Corp. Affiliate Yung An Leasing Corporation Affiliate business of He, Shei Chuan Liu, Shiou Fong Manager of SPH Chen Hsu, Yu Rong Affiliate Other The Bank’s directors, supervisors, managers and their relatives, department chiefs, the investees accounted for by the equity method and their subsidiaries, and the investees of SPH’s other subsidiaries, etc. Other Related parties under the control of the Bank but without transactions, please refer to Table 6 (Concluded) - 37 -
b. Significant transactions between the Bank and related parties
1) Loans
For the Six Months Ended June 30, 2007 Is the Transaction at Arm’s Length Account Volume or Highest Ending Commercial Category Name of Related Party Balance Balance Normal Overdue Type of Collaterals Term
Employees 5 $ 1,174 $ 950 V None Yes consuming loan Households 55 416,848 402,582 V Real estate Yes mortgages Others: SinoPac Leasing 877,000 877,000 V Real estate Yes Corporation BoardTek Electronics 351,000 311,000 V Real estate Yes Corp. Rung-Tzung Investment 246,671 246,671 V Real estate Yes Corp. Leasing Corporation 197,600 197,600 V Real estate Yes SinoPac Securities 70,000 70,000 V Marketable securities Yes and certificate of deposit Fortune Investment 72,000 72,000 V Real estate and listed Yes stock Liu, Shiou Fong 1,858 1,823 V Buildings Yes Chen Hsu, Yu Rong 6,476 6,476 V Buildings Yes Sub-total 1,822,605 1,782,570
Total $ 2,240,627 $ 2,186,102
For the Six Months Ended June 30, 2006 Is the Transaction at Arm’s Length Account Volume or Highest Ending Commercial Category Name of Related Party Balance Balance Normal Overdue Type of Collaterals Term
Employees 7 $ 2,836 $ 2,275 V None Yes consuming loan Households 39 362,166 358,224 V Real estate Yes mortgages Others: Ming Shan Investment 35,000 35,000 V Real estate Yes Co., Ltd. Chuan Construction Co., 59,000 48,500 V Real estate Yes Ltd. Shinkong Synthetic 46,154 30,769 V Real estate Yes Fibers Corporation Yi Feng Storage Services 48,700 48,700 V Listed stock Yes Co., Ltd. Yuen Foong Industrial 35,000 35,000 V Listed stock Yes Co., Ltd. BoardTek Electronics 359,000 359,000 V Real estate Yes Corp. Linkou Golf & Country 40,000 40,000 V Real estate Yes Club Rung-Tzung Investment 246,671 246,671 V Real estate Yes Corp. Grand Capital 519,360 519,360 V None (Related party Yes after merger) SinoPac Capital 194,760 194,760 V None (related party Yes after merger) Formosa Plastics Group 101,252 90,920 V None Yes SPL 394,000 394,000 V Real estate Yes (Continued)
- 38 -
For the Six Months Ended June 30, 2006 Is the Transaction at Arm’s Length Account Volume or Highest Ending Commercial Category Name of Related Party Balance Balance Normal Overdue Type of Collaterals Term
SinoPac Securities $ 700,000 $ 700,000 V Real estate and Yes certificate of deposit Wal Tech International 20,000 20,000 V Real estate Yes Corporation Fortune Investment 72,000 72,000 V Real estate and Yes marketable securities Liu, Shiou Fong 8,933 8,933 V Building Yes Sub-total 2,879,830 2,843,613
Total $ 3,244,832 $ 3,204,112 (Concluded)
2) Deposits
Ending % of Interest % of Balance Total Interest Rate Expense Total For the six months ended June 30, 2007
SinoPac Futures $ 1,121,298 0.15% 0.1-2.395 $ 8,798 0.07% SinoPac Securities 1,513,413 0.20% 0-8.875 12,882 0.10% SinoPac Securities (Asia) Limited 731,151 0.10% 0-5.23 25,360 0.20% TaiGen Biotechnology 376,249 0.05% 0.1-2.25 3,854 0.03% SinoPac Venture Capital 367,838 0.05% 0.1-2.25 3,209 0.03% Others 4,108,869 0.54% 0 -13.085 38,672 0.31%
For the six months ended June 30, 2006
SPH 2,152,689 0.29% 0.3-8.13 57,847 0.61% SinoPac Securities 1,711,236 0.23% 0-5 11,146 0.12% SinoPac Securities (Asia) Limited 1,019,183 0.14% 0.1-5 2,177 0.02% SinoPac Card Services 812,920 0.11% 0.3-2.15 111 - TaiGen Biotechnology 417,950 0.06% 1.5-2.06 2,298 0.02% Others 11,386,245 1.55% 0-13 98,678 1.04%
3) Due from banks
Ending Balance % of Total June 30 June 30 2007 2006 2007 2006
Due from banks - FENB $ 65,973 $ 19,172 0.49% 0.23%
- 39 - 4) Financial assets at fair value through profit or loss
Ending Balance % of Total June 30 June 30 2007 2006 2007 2006
Mutual fund - Grand Cathay Small & Medium Fund $ 75,628 $ - 0.07% - Mutual fund - Grand Cathay New Century Fund 73,409 61,023 0.07% 0.22% Mutual fund - Grand Cathay Fund 23,175 - 0.02% - Mutual fund - Grand Cathay Columbus Fund - 53,141 - 0.19%
5) Guarantees
The Highest Balance in Current Ending Related Party Period Balance Provision Rates Type of Collaterals
SinoPac Securities $ 38,000 $ 38,000 $ - 0.30% Real estate and certificate of deposit TaiGen Biotechnology Company Ltd. 18,340 18,340 - 0.45% certificate of deposit
Note 1: Related party should be disclosed alphabetically
Note 2: Collaterals should be categorized by real estate, short-term notes, government bonds, secured corporate bond, unsecured corporate bond, listed stock, unlisted equity investments and other properties. Please specify other properties.
6) Held-to-maturity financial assets
The Bank purchased beneficiary certificates - credit card receivables from SinoPac Card Services. The maturity and fixed interest rate of the beneficiary certificates are February 20, 2009 and 3%, respectively, and the principal was as follows:
June 30 2007 2006
Beneficiary certificates - credit card receivables $ 80,000 $ 80,000
7) Revenues and expenses
% of Total Amount For the For the Six Months Ended Six Months Ended June 30 June 30 2007 2006 2007 2006
Service fees $ 5,094 $ 8,336 0.21% 0.46% Project popularizing expense 517 131 0.03% 0.01%
- 40 - 8) Securities sold under agreements to repurchase
Face Amount Cost June 30 June 30 2007 2006 2007 2006
SPH $ - $ 71,900 $ - $ 80,000 Others 278,004 561,572 308,710 590,138
9) Lease
a) The Bank as a lessee
The Bank had leased certain office premises from related parties under several contracts for various periods ranging from 1 to 15 years, with rentals paid monthly. The related information was summarized as follows:
Rental Expenses For the Six Months Ended June 30 Lessor 2007 2006 Lease Term Payment Frequency
SPL $ 46,693 $ 35,490 February 2020 Rentals paid monthly Ruentex Development 2,100 1,800 September 2010 Rentals paid monthly
b) The Bank as a lessor
Rental Income For the Six Months Ended June 30 Lessee 2007 2006 Lease Term Payment Frequency
SinoPac Card Services $ 11,952 $ 122 September 2011 Rentals received monthly SinoPac Securities 6,166 1,234 November 2011 Rentals received monthly SPL 2,976 3,054 July 2011 Rentals received monthly SinoPac Call Center 1,440 1,296 October 2007 Rentals received monthly SinoPac Life Insurance 938 - January 2012 Rentals received monthly Agent SinoPac Asset Management 242 363 June 2010 Rentals received monthly SinoPac Property Insurance 165 - January 2012 Rentals received monthly Agent WalTech International 30 30 June 2011 Rentals received monthly SinoPac Venture Capital 5 5 June 2010 Rentals received monthly SPH - 2,214 November 2006 Rentals received monthly SinoPac Marketing - 899 December 2006 Rentals received monthly Consulting
10) Professional advisory charges
The Bank had entered into several professional advisory contracts with its investees. The professional advisory charges paid for the six months ended June 30, 2007 and 2006 amounted to $43,322 and $47,575, respectively.
11) Due from/to affiliates
- 41 - As of June 30, 2007 and 2006, the Bank’s receivables from SinoPac Card Services amounted to $47,207 and $33,733, respectively.
As of June 30, 2007 and 2006, the other receivables from related parties amounted to $11,968 and $3,982, respectively.
In order to provide the customer-leading products and services, pursue the growth of market share and profit, SinoPac Card Services acquired IBT credit card business segment and its net assets at book value.
Items Amount
Receivables $ 5,545,530 Allowance for credit losses (330,323 ) Other assets 297 Payables (14,447 ) Other liabilities (29,977 )
$ 5,171,080
As of June 30, 2007, the Bank’s receivable from sale of credit card business at book value to SinoPac Card Services amounted to $3,309,492. Interest on the aforementioned receivable has been received using the short-term bills secondary market rate for thirty days plus 0.3%. The related interest revenues and interest receivable as of and for the year ended June 30, 2007 were $37,943 and $6,490, respectively.
As of June 30, 2007 and 2006, the Bank’s estimated receivables resulting from the adoption of the linked-tax system as of June 30, 2007 and 2006 amounted to $395,632 and $160,235, respectively.
The Bank’s estimated payables resulting from the adoption of the linked-tax system as of June 30, 2007 amounted to $58,355.
12) Derivative financial instruments
June 30, 2007 Contract (Notional) Balance Sheet Amount Balance Sheet Date Fair Value Account Balance
Currency swap contracts Grand Capital $ 42,706 August 31, 2006- $ 15 Financial assets at fair value $ 15 February 14, 2008 through profit or loss Interest rate swap contracts SinoPac Securities 600,000 September 7, 2006- (9,020 ) Financial liabilities at fair (9,020 ) January 3, 2012 value through profit or loss Forward contracts Grand Capital 327,350 January 5, 2007- (188 ) Financial liabilities at fair (188 ) October 4, 2007 value through profit or loss
June 30, 2006 Contract (Notional) Balance Sheet Amount Balance Sheet Date Fair Value Account Balance
Interest rate swap contracts FENB $ 32,399 July 5, 2005- $ (81 ) Financial liabilities at fair $ (81 ) July 21, 2006 value through profit or loss SPL 80,000 January 29, 2002- (1,081 ) Financial liabilities at fair (1,081 ) February 5, 2007 value through profit or loss
Transactions between the Bank and related parties are at arms length commercial terms except for the preferential interest rates offered to employees for savings and loans up to prescribed limits.
- 42 - Under the Banking Law, except for government and consumer loans, credit extended by the Bank to any related party should be fully secured, and the credit terms for related parties should be similar to those for unrelated parties.
28. SIGNIFICANT CONTINGENCIES AND COMMITMENTS
In addition to those disclosed in Note 31, financial instruments, significant contingencies and commitments of the Bank, are summarized as follows:
a. Lease contract
The Bank leased certain office premises under several contracts for various periods ranging from one to fifteen years, with rentals paid monthly, quarterly or semiannually. Rentals for the next five years are as follows:
Year Amount
July 1 to December 31, 2007 $ 176,888 2008 294,949 2009 249,323 2010 170,817 2011 123,701
Rentals for the years beyond 2012 amount to $616,457, the present value of which is about $503,885 as discounted at the Bank’s one-year time deposit rate of 2.45% on June 30, 2007.
b. Equipment purchase contract
The Bank had entered into contracts to buy computer equipment and office equipment for $264,802, of which $86,694 had already been paid as of June 30, 2007.
c. Interior decoration contract
The Bank had entered into interior decoration contracts for $99,158, of which $64,819 has already been paid as of June 30, 2007.
d. Bills and bonds sold under agreements to repurchase
Bills and bonds with a total face amount of $9,013,797 were sold under agreements to repurchase at $9,670,553 between July 2007 and October 2007.
e. Bills and bonds purchased under agreements to resell
Bills and bonds with a total face amount of $5,587,100 were purchased under agreements to resell at $5,814,541 between July 2007 and September 2007.
f. The Securities and Futures Investors Protection Center (SFIPC) is believed by investors to be filing a lawsuit against the Bank in the ground that Procomp Informatics Ltd. provided deposit US$10,000,000 with the Bank’s Shisung Branch (formally Sungshan Branch) and limited the usage as a condition for short-term loan to Addie International Limited granted by SPL and for helping Yeh, Sue-Fei and Procomp Informatics Ltd. window-dressing its financial statements. The SFIPC filed additional lawsuit against the Bank, SPL and all other parties related to Procomp Informatics Ltd. The Bank has entered a plea on such charges and the case is under trying in the court.
- 43 - g. The SFIPC is believed by investors to be filing a lawsuit against the Bank in the ground that National Aerospace Fasteners Corporation provided an accounts receivable - factoring with the Bank’s Tunpei Branch and recorded the substantially loan transaction as an accounts receivable financing activity to window-dress its financial position which the investors made their investing decision based on. The SFIPC files lawsuit against the Bank and all other parties for compensation. The Bank has entered a plea on such charges and the case is under trying in the count of first instance.
h. The FSC imposed a disciplinary, FSC (6) 09480115211, at December 23, 2005 for restraining the Bank from developing new clients of accounts receivable factoring activities (except for authorized limit of original clients) in the period of January to June 2006, due to believing the Bank accommodated client to increase bank deposit falsely for window dressing the clients’ financial reports, and not sufficiently disclosed the restricted deposit for CPA confirmation.
Not willing to accept the aforementioned disciplinary as final, the bank has been appealed to Executive Yuan, but it was rejected at July 17, 2006. For aforementioned disciplinary and appeal decision, the Bank filed an administrative lawsuit, but the Taipei High Administrative Court determined the Bank lost on July 5, 2007. Now it is planning appeal to the higher court.
29. RESTATEMENT OF FINANCIAL STATEMENT
The Bank mergered with IBT on November 13, 2006. Under interpretation (91) 243 and 244 issued by the ARDF of ROC, the merger should be treated as a recognization and should be recorded at the book value of both entities’ assets and liabilities because of the Bank and IBT are both 100% owned subsidiaries of SPH. In accordance with the interpretation No. (95) 141, the financial statements of Bank SinoPac should be retroactively restated assuming the assets and liabilities of IBT have been included at book value. The Bank acquired net assets, amounted to $35,181,212 of IBT through a share swap at ratio of 1.175 shares and issued 2,612,390 thousand shares. Related information regarding net asset value please refer to Table 7-7.
The aforementioned assets are used for operating purpose. The Bank does not have the plan to dispose any significant assets. The net income of Bank SinoPac for the six months ended June 30, 2006 included the net income of IBT for the six months ended June 30, 2006.
30. AVERAGE AMOUNT AND AVERAGE INTEREST RATE OF INTEREST-EARNING ASSETS AND INTEREST-BEARING LIABILITIES
Average balances were calculated by the daily average balances of interest-earning assets and interest-bearing liabilities.
For the Six Months Ended June 30 2007 2006 Average AverageAverage Average Balance Rate (%) Balance Rate (%) Interest-earning assets
Due from Central Bank and other banks $ 22,646,472 2.57 $ 27,186,204 1.94 Call loans to bank 57,041,490 4.78 55,877,549 3.29 Financial assets at fair value through profit or loss 98,221,723 2.37 37,571,508 2.09 Available-for-sale financial assets 111,865,943 1.99 134,359,471 1.58 Discounts and loans 586,099,392 3.61 595,107,082 3.73 Accounts receivable - factoring 12,060,605 5.41 8,842,922 5.16 Held-to-maturity investments 2,568,661 6.31 3,393,876 3.90 Securities purchased under agreement to resell 7,432,018 1.61 21,094,388 1.43
(Continued)
- 44 - For the Six Months Ended June 30 2007 2006 Average AverageAverage Average Balance Rate (%) Balance Rate (%)
Other financial assets $ 4,809,195 6.68 $ 1,796,081 4.90 Accounts receivable - revolving credit for credit card - - 3,081,343 18.88
Interest-bearing liabilities
Due to the Central Bank and other banks 10,482,399 2.27 35,255,555 2.02 Call loans 55,383,846 3.60 30,076,171 3.81 Demand deposits 105,370,399 1.42 100,784,030 1.21 Savings - demand deposits 166,729,112 0.58 157,395,570 0.55 Time deposits 236,649,603 2.94 215,257,840 2.41 Savings - time deposits 204,303,980 2.16 190,997,533 1.91 Negotiable certificates of deposit 36,879,392 1.77 50,897,611 1.47 Securities sold under agreement to repurchase 13,062,798 2.18 30,851,537 1.67 Bank debentures 30,811,988 1.02 35,819,776 1.32 Other liabilities - appropriated loan fund 509,675 0.99 371,878 0.58 Bonds payable 5,808,678 - 5,781,020 - (Concluded)
31. FINANCIAL INSTRUMENTS
a. Fair value of financial instruments
June 30 2007 2006 Carrying Estimated Carrying Estimated Amount Fair Value Amount Fair Value Assets
Financial assets - with fair values approximating carrying amounts $ 152,482,032 $ 152,482,032 $ 153,841,763 $ 153,841,763 Financial assets at fair value through profit or loss 109,609,091 109,609,091 28,248,477 28,248,477 Discounts and loans 597,238,459 597,238,459 602,756,503 602,756,503 Available-for-sale financial assets 78,322,878 78,322,878 143,203,956 143,203,956 Held-to-maturity financial assets 2,637,202 2,772,084 2,140,155 2,126,262 Equity investment-equity method 9,180,524 9,180,524 8,617,994 8,544,091 Unquoted equity instruments 721,701 - 722,259 - Non-active market debt instruments 5,391,012 5,391,012 2,161,867 2,161,867
Liabilities
Financial liabilities - with fair values approximating carrying amounts 859,534,487 859,534,487 843,031,036 843,031,036 Financial liabilities at fair value through profit or loss 6,880,631 6,880,631 3,941,979 3,941,979 Bonds payable 5,761,360 6,020,621 5,712,960 6,029,801 Other financial liabilities 780,804 780,804 882,127 882,127 Other liabilities 2,226,824 2,226,824 3,147,685 3,147,685
Effective on January 1, 2006, the Bank adopted the Statement of Financial Accounting Standard No. 34 “Accounting for Financial Instruments”, No. 36 “Disclosure and Presentation of Financial Instruments” and other standards amended for harmonising with those two standards. The amount of the cumulative effect resulting from the change to new accounting principles refers to Note 3.
The gains (losses) on derivative financial instruments for the six months ended June 30, 2007 and 2006 refer to Tables 7-8. - 45 -
b. Methods and assumptions applied in estimating the fair values disclosures for financial instruments are as follows:
1) The carrying amounts of cash and cash equivalent, due from the Central Bank and other banks, securities purchased under agreements to resell, receivable, call loans and due to banks, payables, securities sold under agreements to repurchase, deposits, and remittances approximate their fair values because of the short maturities of these instruments.
2) For financial assets at fair value through profit or loss, available-for-sale financial assets, held-to-maturity investments and hedged derivative financial instruments, fair value is best determined based upon quoted market prices. However, in many instances, there are no quoted market prices for the Bank’s various financial instruments. In cases where quoted market prices are not available, fair values are based on estimates using available indirect data and appropriate valuation methodologies.
Forward contracts’ and interest rate swap contracts’ fair values are based on estimates using present value techniques. Options’ fair value are based on estimates using Black Scholes model.
Fair value of forward contracts are estimated based on the forward rates provided by Reuters or the Associated Press.
Fair value of structured instruments are provided by the counter parties. All outstanding contracts are based on match basis and market risks will be offset.
Fair value of interest rate swap contracts and cross currency swap contracts are estimated based on the market quotation provided by Reuters.
3) Discounts and loans, and deposits are interest-earning assets and interest-bearing liabilities. Thus, their carrying amounts represent fair values. Fair value of nonperforming loans is based on the carrying amount, which is net of allowance for credit losses.
4) When unquoted equity instruments which the Bank does not have significant influence over the investees do not have a quoted market price in an active market and whose fair value cannot be reliably measured, are measured at cost. There are no quoted market prices for equity investment-equity method and non-active market debt instrument, thus their carrying amounts represent fair values.
5) Fair value of bonds payables are estimated at present value of expected cash flow, the discount rate bases on the available interest rates with similar terms.
c. Interest revenue of financial assets and liabilities other than those at fair value through profit or loss amounted to $15,989,633 and $15,695,456, respectively, for the six months ended June 30, 2007 and 2006. Interest expense of financial assets and liabilities other than those at fair value through profit or loss amounted to $10,033,566 and $9,057,303, respectively, for the six months ended June 30, 2007 and 2006. Unrealized gains or losses on available-for-sale financial assets amounted to ($367,767) and $173,092 were charged to stockholders’ equity for the six months ended June 30, 2007 and 2006, respectively.
d. Financial risk information
1) Market risk
The Bank sets up risk managing indicators according to the characters of the products to achieve the goal of risk management. The Bank evaluates market risk exposure limits approved by the board of directors and informs related units when over the limits timely.
- 46 - Fair value of financial assets and financial liabilities determined based upon quoted market prices or estimates summarized as follows:
Quoted Market Prices Fair Value Based on Estimates June 30 June 30 2007 2006 2007 2006 Financial assets
Financial assets at fair value through profit or loss $ 99,991,072 $ 20,406,610 $ 9,618,019 $ 7,841,867 Available-for-sale financial assets 77,308,962 142,189,716 1,013,916 1,014,240 Held-to-maturity investments 1,907,400 2,055,162 864,684 80,000 Other financial assets- non-active market debt instruments - - 5,391,012 2,161,867
Financial liabilities
Financial liabilities at fair value through profit or loss 5,501,104 2,827,121 1,379,527 1,114,858
The Bank set up independent risk management team to control the market risk, and to carrying the market risk management policy out, including organization frame, responsibility and management process; also set clear market risk regulation and limited. Each sub-risk management team reviews limits on monitoring and managing risk exposures under the respective supervision and reports to head office management team timely.
Market risk reports which include the monitor of outstanding position limitation of loss and quantitative measures of risk indicators (ex: Position, Delta, vega, BPV and etc.) are provided to risk management sector to manage risk exposure, risk premium and capital allocation. The indicators are calculated by the valuation models. The Bank uses the value-at-risk approach and Monte Carlo simulation method to derive quantitative measures for the trading book market risks under normal condition.
The Bank formally document in writing its intention to apply hedge accounting and follow the requirement of related accounting standards. Risk management sector should assess the effectiveness of the hedge relationship periodically.
2) Credit risk
The Bank is exposed to credit risk in the event of default on contracts by counter-parties. The Bank makes credit commitments and issues financial guarantees and standby letters of credit only after careful evaluation of customers’ credit worthiness. On the basis of the result of the credit evaluation, the Bank may require collateral before drawings are made against the credit facilities. As of June 30, 2007 and 2006, ratios of secured loans to total loans were 63.6% and 63.1%, respectively. Ratio of secured financial guarantees and standby letters of credits were from 18.7% to 20.4%. Collaterals held vary but may include cash, inventories, marketable securities, and other properties. When the customers default, the Bank will, as required by circumstances, foreclose the collaterals or execute other rights arising out of the guarantees given. Since most of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash demands. The maximum potential amount of future payments represents the notional amounts that could be lost under the guarantees if there were a total default by the guaranteed parties, without consideration of possible recoveries under recourse provisions or from collateral held or pledged.
- 47 - The maximum credit exposure of the financial instruments held by the Bank equaled the book value except which analyzed as follows:
June 30 2007 2006 Carrying Maximum Carrying Maximum Items Amount Credit Exposure Amount Credit Exposure
Off-balance-sheet credit risk Financial guarantees and standby letter of credit $ - $ 23,647,546 $ - $ 24,920,260 Undrawn loan commitments - 8,207,304 - 19,524,919 Credit card commitments for credit card - - - 46,012,724
Effective on January 1, 2006, the Bank adopted the Statement of Financial Standard No. 34 “Accounting for financial Instruments.” The amount of the cumulative offset resulting from the change to new accounting principles refer to Note 3.
The credit risk amounts of counterparties presented above were off-balance sheet credit risk contracts with positive amounts on the balance sheet. Concentrations of credit risk exist when changes in economic, industry or geographic factors similarly affect groups of counterparties whose aggregate credit exposure is material in relation to the Bank’s total credit exposure. The Bank maintains a diversified portfolio, limits its exposure to any one geographic region, country or individual creditor and monitors the exposure on a continuous basis. The Bank’s most significant concentrations of credit risk were summarized as follows:
June 30 2007 2006 Carrying Maximum Carrying Maximum Credit Risk Profile by Counterparty Amount Credit Exposure Amount Credit Exposure
Private sector $ 344,807,500 $ 344,807,500 $ 350,420,388 $ 350,420,388 Consumer 227,748,363 227,748,363 216,177,104 216,177,104 Government 30,602,366 30,602,366 34,702,108 34,702,108
$ 603,158,229 $ 603,158,229 $ 601,299,600 $ 601,299,600
June 30 2007 2006 Carrying Maximum Carrying Maximum Credit Risk Profile by Industry Sector Amount Credit Exposure Amount Credit Exposure
Electricity industry $ 41,884,041 $ 41,884,041 $ 55,518,152 $ 55,518,152 Insurance and real estate activities 15,665,192 15,665,192 13,221,099 13,221,099 Wholesale trade 11,976,700 11,976,700 29,083,556 29,083,556
$ 69,525,933 $ 69,525,933 $ 97,822,807 $ 97,822,807
June 30 2007 2006 Carrying Maximum Carrying Maximum Credit Risk Profile by Region Amount Credit Exposure Amount Credit Exposure
Domestic area $ 567,852,627 $ 567,852,627 $ 607,158,105 $ 607,158,105 Asia 15,869,633 15,869,633 10,782,647 10,782,647 North America 6,736,307 6,736,307 3,998,069 3,998,069
$ 590,458,567 $ 590,458,567 $ 621,938,821 $ 621,938,821
- 48 - 3) Liquidity risk
As of June 30, 2007 and 2006, the liquidity reserve ratio was 24.94% and 25.81%, respectively. The Bank has sufficient capital and working capital to execute all the obligation of contract and had no liquidity risk. The possibility of the derivative financial instruments held by the Bank fail to liquidate quickly with minimal loss in value is low.
The management policy of the Bank is to match in the contractual maturity profile and interest rate of its assets and liabilities. As a result of the uncertainty, the maturities and interest rates of assets and liabilities usually didn’t fully match. The gap may arise potential gain or loss.
The Bank applied appropriate way to group assets and liabilities. The maturity analysis of assets and liabilities was as follows:
June 30, 2007 Due Between Due Between Due Between Due Between Due in One Month and Three Months Six Months and One Year and Due After One Month Three Months and Six Months One Year Seven Years Seven Years Total Assets
Cash and cash equivalents $ 25,964,724 $ - $ - $ - $ - $ - $ 25,964,724 Due from the Central Bank and other banks 80,631,685 3,621,106 5,400,917 883,786 - - 90,537,494 Financial assets at fair value through profit or loss 107,642,283 241,959 936,031 583,878 204,940 - 109,609,091 Securities purchased under agreements to resell 4,351,710 1,450,629 - - - - 5,802,339 Accounts, interest and other receivables 10,490,658 11,062,587 4,726,268 883,985 3,635,342 - 30,798,840 Available-for-sale financial assets 26,300,089 16,716,135 24,103,278 3,278,784 7,493,608 430,984 78,322,878 Discounts and loans 53,662,264 58,236,553 44,952,771 29,556,886 116,704,747 299,865,766 602,978,987 Non-active market debt instruments - - 65,275 36,319 2,184,037 3,105,381 5,391,012 Held-to-maturity investments - - 327,481 - 1,602,037 707,684 2,637,202 Hedged derivative financial assets - - - - 332,523 - 332,523 309,043,413 91,328,969 80,512,021 35,223,638 132,157,234 304,109,815 952,375,090 Liabilities
Call loans and due to banks 46,503,738 7,780,383 5,016,310 2,968,740 1,000,000 - 63,269,171 Financial liabilities at fair value through profit or loss 5,176,560 206,122 192,458 1,305,491 - - 6,880,631 Securities sold under agreements to repurchase 7,280,730 2,234,646 131,619 - - - 9,646,995 Payables 12,309,029 5,639,566 2,528,602 1,388,917 1,878,138 - 23,744,252 Deposits and remittance 167,854,036 134,335,892 189,094,428 182,426,079 89,830,456 - 763,540,891 Bank debentures - - - 3,000,000 27,889,078 - 30,889,078 Corporate bonds - - - - 5,761,360 - 5,761,360 Hedge derivative financial liabilities - - - - 243,445 - 243,445 239,124,093 150,196,609 196,963,417 191,089,227 126,602,477 - 903,975,823
Net liquidity gap $ 69,919,320 $ (58,867,640 ) $ (116,451,396 ) $ (155,865,589 ) $ 5,554,757 $ 304,109,815 $ 48,399,267
June 30, 2006 Due Between Due in One Year and Due After One Year Seven Years Seven Years Total Assets
Cash and cash equivalent $ 16,864,469 $ - $ - $ 16,864,469 Due from the Central Bank and other banks 87,488,856 - - 87,488,856 Financial assets at fair value through profit or loss 25,314,424 2,595,745 338,308 28,248,477 Non-active market debt instruments - 1,167,800 994,067 2,161,867 Available-for-sale financial assets 135,417,186 6,491,462 1,295,308 143,203,956 Held-to-maturity investments 166,845 1,649,326 323,984 2,140,155 Receivables 33,394,764 63,640 - 33,458,404
(Continued)
- 49 -
June 30, 2006 Due Between Due in One Year and Due After One Year Seven Years Seven Years Total
Securities purchased under agreements to resell $ 16,852,201 $ - $ - $ 16,852,201 Loans, discounts and bills purchased (excluding nonperforming loans) 192,084,982 134,887,153 280,131,170 607,103,305 507,583,727 146,855,126 283,082,837 937,521,690 Liabilities
Call loans and due to banks 58,861,174 - - 58,861,174 Financial liabilities at fair value through profit or loss 3,941,979 - - 3,941,979 Securities sold under agreements to repurchase 29,756,670 - - 29,756,670 Payables 20,780,590 137,442 - 20,918,032 Deposits and remittances 687,095,369 46,511,472 - 733,606,841 Bank debentures 5,000,000 31,095,048 - 36,095,048 Corporate bonds - 5,712,960 - 5,712,960 Hedged derivative financial liabilities - 295,048 - 295,048 805,435,782 83,751,970 - 889,187,752
Net liquidity gap $ (297,852,055 ) $ 63,103,156 $ 283,082,837 $ 48,333,938 (Concluded)
4) Cash flow risk and fair value risk arising from interest rate fluctuations
Interest rate risk is the risk to earnings and value of financial instruments caused by fluctuations in interest risk. The risk is considered to be material to the Bank, and the Bank enters into interest rate swap contracts to manage the risk.
h. Fair value hedge
The Bank enters into interest rate swap contracts and cross currency swap contracts to hedge the risk the interest rate fluctuation of the bank debenture.
June 30 2007 2006 Hedged Items Hedging Instruments Notion Amount Fair Value Notion Amount Fair Value
Bank debentures Interest rate swap $ 11,200,000 $ (145,127 ) $ 11,200,000 $ (208,097 ) Cross currency swap 14,300,000 234,205 14,300,000 503,145
32. MARKET RISK CONTROL AND HEDGE STRATEGY
The Bank documents the risk management policies, including overall operating strategies and risks control philosophy. The Bank’s overall risk management policies are to minimize the possibility of potential unfavorable factors. The board of directors approves the documentation of overall risk management policies and specific risk management policies; including exchange rate risk, interest rate risk, credit risk, derivative instruments transactions and managements. The board of directors review the policies regularly, and review the operation to make sure the Bank’s policies are executed properly.
- 50 - 33. ASSET QUALITY, CONCENTRATION OF CREDIT EXTENSIONS, INTEREST RATE SENSITIVITY, PROFITABILITY AND MATURITY ANALYSIS OF ASSETS AND LIABILITIES
a. Asset quality
The overdue loans and receivables information please refer to Table 8.
b. Concentration of credit extensions
June 30, 2007
(In Thousands of New Taiwan Dollars, %)
Total Credit Percentage of Rank Group Name (Note 2) Consists of Net Worth (%) (Note 1) Loans (Note 3) (Note 4) 1 BenQ Corporation, Ltd. 5,860,935 9.41% 2 CHIMEI Optoelectronics 5,408,022 8.68% 3 China Airlines 4,922,300 7.90% 4 Formosa Plastics Group 4,451,542 7.15% 5 Foxconn 4,408,344 7.08% 6 Far East Group 3,940,710 6.33% 7 China Metal Products Group 3,749,793 6.02% 8 Quanta Computer 3,299,520 5.30% 9 Dell Inc. 3,011,177 4.83% 10 Taiwan High Speed Rail 2,921,631 4.69%
June 30, 2006
BSP
(In Thousands of New Taiwan Dollars, %)
Total Credit Percentage of Rank Group Name (Note 2) Consists of Net Worth (%) (Note 1) Loans (Note 3) (Note 4) 1 Dell Inc. 5,469,475 19.82% 2 Lone Star 4,715,635 17.09% 3 China Metal Products Group 3,364,746 12.19% 4 BenQ Corporation, Ltd. 2,758,729 10.00% 5 Foxconn 2,723,927 9.87% 6 China Airlines 2,083,720 7.55% 7 Cullinan 1,684,748 6.11% 8 Far East Group 1,493,000 5.41% 9 Formosa Plastics Group 1,454,947 5.27% 10 TPV 1,389,762 5.04%
- 51 - IBT
(In Thousands of New Taiwan Dollars, %)
Total Credit Percentage of Rank Group Name (Note 2) Consists of Net Worth (%) (Note 1) Loans (Note 3) (Note 4) 1 Formosa Plastics Group 6,608,700 18.09% 2 Quanta Computer 3,732,840 10.22% 3 Taiwan High Speed Rail 2,740,440 7.50% 4 Far East Group 2,666,400 7.30% 5 BenQ Corporation, Ltd. 2,660,620 7.28% 6 Fuhwa Financial Holding Co., Ltd. 2,600,000 7.12% 7 China Airlines 2,592,000 7.09% 8 China Trust Securities 2,369,790 6.49% 9 HoTai Motor 2,062,710 5.65% 10 Uni-President Group 1,738,510 4.76%
Note 1: Ranking top ten groups (excluded the government or state - owned utilities) accounting to total credit consists of loans.
Note 2: Groups were regulated in the Banking Law Article 33-3.
Note 3: Total credit consists of loans were totalized each credit (included import bill negotiated, export bill negotiated discounted, overdrafts, short-term loans, short-term secured loans, marginal receivables, medium-term loans, medium-term secured loans, long-term loans, long-term secured loans, and overdue receivables), exchange bills negotiated, accounts receivable - without recourse factoring, acceptances receivable, and grantees issued.
Note 4: Net worth of previous year end. c. Interest rate sensitivity information
Interest Rate Sensitivity (New Taiwan Dollars) June 30, 2007
(In Thousands of New Taiwan Dollars, %)
1 to 90 Days 91 to 180 Days 181 Days to One Items Over One Year Total (Included) (Included) Year (Included) Interest-rate sensitive assets $ 445,940,315 $ 117,394,461 $ 85,303,880 $ 63,533,017 $ 712,171,673 Interest-rate sensitive liabilities 199,473,282 273,521,547 115,257,761 68,522,260 656,774,850 Interest-rate-sensitive gap 246,467,033 (156,127,086 ) (29,953,881 ) (4,989,243 ) 55,396,823 Net worth 64,036,635 Ratio of interest-rate sensitive assets to liabilities 108.43% Ratio of interest-rate sensitive gap to net worth 86.51%
- 52 - June 30, 2006
Bank SinoPac
(In Millions of New Taiwan Dollars, %)
1 to 90 Days 91 to 180 Days 181 Days to One Items Over One Year Total (Included) (Included) Year (Included) Interest-rate sensitive assets $ 350,882 $ 16,195 $ 9,439 $ 17,117 $ 393,633 Interest-rate sensitive liabilities 160,287 132,415 49,531 15,406 357,639 Interest-rate-sensitive gap 190,595 (116,220 ) (40,092 ) 1,711 35,994 Net worth 28,059 Ratio of interest-rate sensitive assets to liabilities 110.06% Ratio of interest-rate sensitive gap to net worth 128.28%
IBT
(In Thousands of New Taiwan Dollars, %)
1 to 90 Days 91 to 180 Days 181 Days to One Items Over One Year Total (Included) (Included) Year (Included) Interest-rate sensitive assets $ 223,045,471 $ 46,052,821 $ 23,922,062 $ 61,588,743 $ 354,609,097 Interest-rate sensitive liabilities 177,410,594 125,313,924 28,616,000 3,615,972 334,956,490 Interest-rate-sensitive gap 45,634,877 (79,261,103 ) (4,693,938 ) 57,972,771 19,652,607 Net worth 34,454,205 Ratio of interest-rate sensitive assets to liabilities 105.87% Ratio of interest-rate sensitive gap to net worth 57.04%
Note 1: The above amounts included only New Taiwan dollar amounts held by the onshore branches of the Bank (i.e., excluding foreign currency).
Note 2: Interest-rate sensitive assets and liabilities mean the revenues or costs of interest-earnings assets and interest-bearing liabilities are affected by interest-rate changes.
Note 3: Interest-rate sensitive gap = Interest-rate sensitive assets － Interest-rate sensitive liabilities.
Note 4: Ratio of interest-rate sensitive assets to liabilities = Interest-rate sensitive assets/Interest-rate sensitive liabilities (in New Taiwan dollars).
Interest Rate Sensitivity (USD) June 30, 2007
(In Thousands of U.S. Dollars, %)
1 to 90 Days 91 to 180 Days 181 Days to One Items Over One Year Total (Included) (Included) Year (Included) Interest-rate sensitive assets $ 3,122,039 $ 1,154,025 $ 352,782 $ 348,933 $ 4,977,779 Interest-rate sensitive liabilities 3,453,898 1,862,616 128,751 97,052 5,542,317 Interest-rate-sensitive gap (331,859 ) (708,591 ) 224,031 251,881 (564,538 ) Net worth 24,352 Ratio of interest-rate sensitive assets to liabilities 89.81% Ratio of interest-rate sensitive gap to net worth (2,318.24% )
- 53 - June 30, 2006
Bank SinoPac
(In Thousands of U.S. Dollars, %)
1 to 90 Days 91 to 180 Days 181 Days to One Items Over One Year Total (Included) (Included) Year (Included) Interest-rate sensitive assets $ 2,328,050 $ 175,018 $ 73,914 $ 147,707 $ 2,724,689 Interest-rate sensitive liabilities 1,655,715 1,251,640 147,273 721 3,055,349 Interest-rate-sensitive gap 672,335 (1,076,622 ) (73,359 ) 146,986 (330,660 ) Net worth 3,947 Ratio of interest-rate sensitive assets to liabilities 89.18% Ratio of interest-rate sensitive gap to net worth (8,377.5% )
IBT
(In Thousands of U.S. Dollars, %)
1 to 90 Days 91 to 180 Days 181 Days to One Items Over One Year Total (Included) (Included) Year (Included) Interest-rate sensitive assets $ 618,837 $ 299,364 $ - $ 9,000 $ 927,201 Interest-rate sensitive liabilities 825,307 44,992 45,888 14 916,201 Interest-rate-sensitive gap (206,470 ) 254,372 (45,888 ) 8,986 11,000 Net worth (102,703 ) Ratio of interest-rate sensitive assets to liabilities 101.20% Ratio of interest-rate sensitive gap to net worth (10.71% )
Note 1: The above amounts include only USD amounts held by the onshore branches, OBU and offshore branches of the Bank, excludes contingent assets and contingent liabilities.
Note 2: Interest-rate sensitive assets and liabilities mean the revenues or costs of interest-earnings assets and interest-bearing liabilities are affected by interest-rate changes.
Note 3: Interest-rate sensitive gap = Interest-rate sensitive assets － Interest-rate sensitive liabilities.
Note 4: Ratio of interest-rate sensitive assets to liabilities = Interest-rate sensitive assets/Interest-rate sensitive liabilities (in U.S. dollars) d. Profitability
(%)
For the Six For the Six Items Months Ended Months Ended June 30, 2007 June 30, 2006 Before income tax 0.33 0.30 Return on total assets After income tax 0.26 0.29 Before income tax 4.98 4.52 Return on net worth After income tax 4.02 4.35 Profit margin 23.35 25.27
Note 1: Return on total assets = Income before (after) income tax/Average total assets
Note 2: Return on net worth = Income before (after) income tax/Average net worth
Note 3: Profit margin = Income after income tax/Total operating revenues
- 54 - Note 4: Income before (after) income tax represents income for the six months ended June 30, 2007 and 2006.
e. Maturity analysis of asset and liabilities
Maturity Analysis of Assets and Liabilities (In New Taiwan Dollars) June 30, 2007
(In Thousands of New Taiwan Dollars)
The Amount of Remaining Period to Maturity Total 1-30 Days 31-90 Days 91-180 Days 181-365 Days Over 1 Year Main capital inflow on maturity $ 874,763,390 $ 252,741,288 $ 79,189,858 $ 61,919,277 $ 46,942,466 $ 433,970,501 Main capital outflow on maturity 882,697,893 166,993,271 130,327,034 103,920,849 136,288,549 345,168,190 Gap (7,934,503 ) 85,748,017 (51,137,176 ) (42,001,572 ) (89,346,083 ) 88,802,311
Note: The above amounts included only New Taiwan dollar amounts held in the onshore branches of the Bank (i.e. excludes foreign currency).
Maturity Analysis of Assets and Liabilities (In U.S. Dollars) June 30, 2007
(In Thousands of U.S. Dollars)
The Amount of Remaining Period to Maturity Total 1-30 Days 31-90 Days 91-180 Days 181-365 Days Over 1 Year Main capital inflow on maturity $ 8,832,367 $ 2,837,018 $ 2,237,588 $ 1,990,656 $ 1,276,813 $ 490,292 Main capital outflow on maturity 9,037,012 4,087,469 1,732,720 900,295 1,221,340 1,095,188 Gap (204,645 ) (1,250,451 ) 504,868 1,090,361 55,473 (604,896 )
Note 1: The above amounts are book value held by the onshore branches and offshore banking unit of the Bank in U.S. dollars, without off-balance amounts (for example, the issuance of negotiable certificate of deposits, bonds or stocks).
Note 2: If the overseas assets amounting to at least 10% of the total assets, there should be additional disclosures.
Maturity Analysis of Assets and Liabilities (In New Taiwan Dollars) June 30, 2006
Bank SinoPac
(In Millions of New Taiwan Dollars)
The Amount of Remaining Period to Maturity Total 1-30 Days 31-90 Days 91-180 Days 181-365 Days Over 1 Year Main capital inflow on maturity $ 509,017 $ 165,628 $ 32,468 $ 46,108 $ 36,467 $ 228,346 Main capital outflow on maturity 512,933 98,931 99,270 86,806 118,165 109,761 Gap (3,916 ) 66,697 (66,802 ) (40,698 ) (81,698 ) 118,585
IBT
(In Thousands of New Taiwan Dollars)
The Amount of Remaining Period to Maturity Total 1-30 Days 31-90 Days 91-180 Days 181-365 Days Over 1 Year Main capital inflow on maturity $ 408,625,371 $ 97,800,666 $ 41,494,601 $ 54,997,929 $ 31,298,694 $ 183,033,481 Main capital outflow on maturity 423,883,633 80,300,219 52,661,490 46,268,523 68,085,880 176,567,521 Gap (15,258,262 ) 17,500,447 (11,166,889 ) 8,729,406 (36,787,186 ) 6,465,960
- 55 -
Maturity Analysis of Assets and Liabilities (In U.S. Dollars) June 30, 2006
Bank SinoPac
(In Thousands of U.S. Dollars)
The Amount of Remaining Period to Maturity Total 1-30 Days 31-90 Days 91-180 Days 181-365 Days Over 1 Year Main capital inflow on maturity $ 7,268,813 $ 2,326,548 $ 2,034,407 $ 1,109,524 $ 1,682,174 $ 116,160 Main capital outflow on maturity 7,358,129 2,813,900 1,618,646 1,613,277 1,306,570 5,736 Gap (89,316 ) (487,352 ) 415,761 (503,753 ) 375,604 110,424
IBT
(In Thousands of U.S. Dollars)
The Amount of Remaining Period to Maturity Total 1-30 Days 31-90 Days 91-180 Days 181-365 Days Over 1 Year Main capital inflow on maturity $ 1,642,602 $ 386,739 $ 224,707 $ 219,816 $ 71,217 $ 740,123 Main capital outflow on maturity 1,600,027 390,365 333,625 178,301 48,109 649,627 Gap 42,575 (3,626 ) (108,918 ) 41,515 23,108 90,496
Note 1: The above amounts are book value held by the onshore branches and offshore banking unit of the Bank in U.S. dollars, without off-balance amounts (for example, the issuance of negotiable certificate of deposits, bonds or stocks).
Note 2: If the overseas assets amounting to at least 10% of the total assets, there should be additional disclosures.
34. STATEMENT OF CAPITAL ADEQUACY
Capital Adequacy
June 30, 2007 Tier 1 capital $ 58,339,206 Tier 2 capital 2,770,964 Eligible Capital Tier 3 capital - Eligible Capital 61,110,170 Standardized approach 505,760,674 Credit risk Internal rating - based approach N/A Securitization 3,612,354 Basic indicator approach 38,097,163 Risk-weighted Operational Standardized approach/Alternative standardized approach N/A assets risk Advanced measurement approach N/A Standardized approach 38,500,575 Market risk Internal models approach N/A Total risk - weighted assets 585,970,766 Capital adequacy rate 10.43% Tier 1 risk - based capital ratio 9.96% Tier 2 risk - based capital ratio 0.47% Tier 3 risk - based capital ratio - Ratios of common stockholders’ equity to total assets 4.72%
- 56 - Consolidated Capital Adequacy
June 30, 2007 Tier 1 capital $ 61,344,922 Tier 2 capital 7,446,880 Eligible Capital Tier 3 capital - Eligible Capital 68,791,802 Standardized approach 560,089,404 Credit risk Internal rating - based approach N/A Securitization 3,612,354 Basic indicator approach 43,264,359 Risk-weighted Operational Standardized approach/Alternative standardized approach N/A assets risk Advanced measurement approach N/A Standardized approach 42,528,925 Market risk Internal models approach N/A Total risk - weighted assets 649,495,042 Capital adequacy rate 10.59% Tier 1 risk - based capital ratio 9.44% Tier 2 risk - based capital ratio 1.15% Tier 3 risk - based capital ratio - Ratios of common stockholders’ equity to total assets 4.41%
If consolidated financial statements are prepared, the consolidated capital adequacy should be disclosed.
Note 1: These tables were filled according to “Regulations Governing the Capital Adequacy Ratio of Banks” and related calculation tables.
Note 2: The bank shall disclose the capital adequacy ratio for the current and previous period in annual financial reports. For semiannual financial report, the Bank shall disclose the capital adequacy ratio for the current period, previous period, and previous year end.
Note 3: The formula:
1) Eligible capital = Tier 1 capital + Tier 2 capital + Tier 3 capital.
2) Total risk - weighted asset = Risk-weighted assets for credit risk + (Capital requirements for operational risk + Capital requirement for market risk) x 12.5.
3) Ratio of capital adequacy = Eligible capital/Total risk - weighted assets.
4) Tier 1 risk - based capital ratio = Tier 1 capital/Risk - weighted assets.
5) Tier 2 risk - based capital ratio = Tier 2 capital/Risk - weighted assets.
6) Tier 3 risk - based capital ratio = Tier 3 capital/Risk - weighted assets.
7) Ratios of common stockholders’ equity to total assets = Common stock/Total assets.
- 57 - (In Thousands of New Taiwan Dollars; %)
December 31, June 30, 2006
2006 BSP IBT Net eligible capital $ 70,412,031 $ 37,562,670 $ 34,220,668 Total risk-weighted assets 568,543,823 293,844,100 285,958,992 Capital adequacy ratios 12.38 12.78 11.97 Ratios of tier 1 capital to risk-weighted assets 11.00 9.63 12.03 Ratios of tier 2 capital to risk-weighted assets 1.59 3.24 0.48 Ratios of tier 3 capital to risk-weighted assets - - - Ratios of the deduction from capital to risk-weighted assets (0.21 ) (0.09 ) - Ratios of common stockholders’ equity to total assets 6.49 5.39 8.27
Note: Capital adequacy ratio = Eligible capital/Risk-weighted assets, which is pursuant to the Banking Law and related regulations.
35. INFORMATION REGARDING THE TRUST BUSINESS UNDER THE TRUST LAW
a. Balance sheets and trust properties of trust accounts
Balance Sheets of Trust Accounts June 30, 2007 and 2006
Trust Assets 2007 2006 Trust Liabilities 2007 2006
Bank deposits $ 3,004,799 $ 1,535,113 Payables $ 5,119 $ 1,365 Short-term investments 138,506,757 116,793,821 Unearned revenue 16,926 - Receivables 74,890 59,274 Other liabilities 26,776 - Prepayments 8,278 95 Trust capital 162,963,425 136,921,553 Long-term investment 9,778,031 9,623,867 Reverses and cumulative Real estate 13,959,045 9,973,825 earnings 2,407,551 1,427,250 Other assets 87,997 - Net asset value of collective investment trust fund - 364,173
Total trust assets $ 165,419,797 $ 138,350,168 Total trust liabilities $ 165,419,797 $ 138,350,168
Trust Properties of Trust Accounts June 30, 2007 and 2006
Investment Portfolio 2007 2006
Short-term investments Bonds $ 46,092,497 $ 38,130,148 Common stock 4,176,300 4,893,785 Funds 88,237,960 73,744,955 Beneficiary Certificate - 24,933 138,506,757 116,793,821 Long-term investment Investment on bond 9,778,031 9,623,867 Real estate 13,959,045 9,973,825 Net asset value of collective investment trust fund - 364,173
Total $ 162,243,833 $ 136,755,686
- 58 - Trust Income Statement For the Six Months Ended June 30, 2007
Trust income Interest income $ 125,441 Rental income 105,193 Cash dividends 13,200 Realized investment income 174,778 Others 591 Total trust income 419,203 Trust expense Trust administrative expenses 9,641 Maintenance expenses 1,276 Insurance expenses 804 Tax expenses 13,261 Interest expenses 122,938 OTC expenses 1,000 Marketing expenses 1,000 Realized investment loss 3,739 Others 1,566 Total trust expenses 155,225 Net income before income tax 263,978 Income tax expenses -
Net income after income tax $ 263,978
b. The contents of operations of the trust business under the Trust Law refers to Note 1.
36. CROSS SELLING INFORMATION
For the six months ended June 30, 2007 and 2006, the Bank charged SinoPac Securities for $1,694 and $333, respectively, as marketing and opening accounts and paid SinoPac Securities $72 and $121, respectively, as commission of promoting real estate loan financing under cross selling business.
For the year ended June 30, 2007 and 2006, the Bank shared the operating equipment and building with SinoPac Securities under cross selling business. Related expense allocation was as follow:
Account The Bank SinoPac Securities Total Allocation Method
2006
Rentals $990 $990 $1,980 Allocated by the actual usage of floor square
In February 2003, the Bank had contracts with SPLIA and SPPIA, respectively, for cross selling business. The contracts refer to the rules of promoting cross selling business and how to allocate the related expenses to sites, personnel, and equipments and how to calculate the related compensation. For the six months ended June 30, 2007, the Bank charged SPLIA for $3,096 as incentive rewards under cross selling business. For the six months ended June 30, 2006, the Bank charged SPPIA and SPLIA for $1,331 and $2,889, respectively, as incentive rewards and charged SPLIA for $2,712 as promoting rewards under cross selling business.
- 59 - 37. ADDITIONAL DISCLOSURES
a. Following are the additional disclosures required by the SFB for the Bank and investees:
1) Financing provided: Table 1;
2) Endorsement/guarantee provided: Table 2;
3) Marketable securities held: Table 3;
4) Marketable securities acquired and disposed of, at costs or prices of at least NT$300 million or 10% of the issued capital: None;
5) Acquired and disposed of investee investment at cost or prices of at least NT$300 million or 10% of the issued capital: None;
6) Acquisition of individual real estate at costs of at least NT$300 million or 10% of the issued capital: None;
7) Disposal of individual real estate at prices of at least NT$300 million or 10% of the issued capital: None;
8) Financial asset securitization: Please refer to Note 10;
9) Allowance for service fees to related-parties amounting to at least NT$5 million: None;
10) Receivables from related parties amounting to at least NT$300 million or 10% of the issued capital: Table 4;
11) Sale of nonperforming loans: Table 5;
12) The information of investees: Table 6;
13) Other significant transactions which may affect the decisions of users of financial reports: Table 7;
14) Derivative financial transactions: Except the disclosure in other footnotes, the derivative financial instruments of the Bank are disclosed in Notes 6 and 31, and the derivative financial instrument transactions of Far East National Bank (“FENB”, a wholly owned subsidiary of SinoPac Bancorp, which is a wholly owned subsidiary of the Bank) are summarized below:
FENB engages in derivative financial instrument transactions mainly for accommodating customers’ needs and managing its exposure positions.
FENB is exposed to credit risk if the counter-parties default on the contracts on maturity date. FENB enters into contracts with customers that have satisfied its credit approval process and have provided the necessary collateral. Transactions are made within each customer’s credit line; guarantee deposits may be required, depending on the customer’s credit standing. Transactions with other banks are made within the trading limit set for each bank based on the bank’s credit rating and its worldwide ranking. The associated credit risk has been considered in the evaluation of provision for credit losses.
- 60 - As of June 30, 2007 and 2006, the contract amounts (or notional amounts), credit risks and fair values of outstanding contracts were as follows:
June 30, 2007 Contract (Notional) Financial Instruments Amount Credit Risk Fair Value
For the purpose of accommodating customers’ needs or managing FENB’s exposures: Forward contracts - short position $ 84,741 $ 4,149 $ (84,643 )
June 30, 2006 Contract (Notional) Financial Instruments Amount Credit Risk Fair Value
For the purpose of accommodating customers’ needs or managing FENB’s exposures: Interest rate swap - long position $ 32,399 $ 810 $ (80 ) Interest rate swap - short position 32,399 810 81
The fair value of each contract is determined on the basis of quotations from Reuters or the Telerate Information System.
The notional amounts of derivative contracts are used solely for the purpose of calculating receivables and payables to all contract parties. Thus, the notional amounts do not represent the actual cash inflows or outflows. The possibility that derivative financial instruments held or issued by FENB cannot be sold at reasonable prices is remote; thus, no significant cash demand is expected.
b. Information related to investment in Mainland China: None.
- 61 - TABLE 1
BANK SINOPAC AND INVESTEES
FINANCING PROVIDED FOR THE SIX MONTHS ENDED JUNE 30, 2007 (In Thousands of New Taiwan Dollars)
Collateral Financing Financing Maximum Ending Limit for Company’s Financial Statement Balance for Interest Rate Financing Transaction Financing Allowance for No. Financing Name Counter-party Balance Each Financing Account the Period (%) Type Amount Reasons Bad Debt Item Value (Note 1) Borrowing Amount (Note 1) Company Limits
1 SinoPac Leasing Wal-Tech Other receivable - $179,000 $177,500 2.42%-3.838% Short-term $ - Repay of $1,775 - $ - $179,000 $930,198 Corporation International related parties financing borrowings (Note 1) (Note 2) Corporation
Note 1: According to the Operational Procedures for Making Loans to Others, the financing limit for the borrowing company is 30% of the audited net asset value $2,325,496 of SinoPac Leasing Corporation as of June 30, 2007. The maximum amount approved by the board of directors is $179,000 in May 2007.
Note 2: According to the Operational Procedures for Making Loans to Others, the financing company’s financing amount limits are 40% of the audited net asset value $2,325,496 of SinoPac Leasing Corporation as of June 30, 2007.
- 62 - TABLE 2
BANK SINOPAC AND INVESTEES
ENDORSEMENT/GUARANTEE PROVIDED FOR THE SIX MONTHS ENDED JUNE 30, 2007 (In Thousands of New Taiwan Dollars)
Counter-party Ratio of Accumulated Amount of Limits on Endorsement/ Maximum Endorsement/ Endorsement/Guarantee Individual Maximum Guarantee Amount Endorsement/ No. Nature of Ending Balance Guarantee to Net Asset Provider Name Endorsement/ Balance for the Period Collateralized by Guarantee Amounts Relationship Value of the Latest Guarantee Amounts Properties Allowable Financial Statement (Note 4)
1 SinoPac Leasing Corporation Grand Capital International Limited Subsidiary (Note 3) $ 7,691,905 $ 6,776,145 $ - 291.38% (Note 5)
Note 1: Foreign-currency amounts were translated to New Taiwan dollars at the closing exchange rate as of June 30, 2007.
Note 2: The audited net asset value of SinoPac Leasing Corporation as of June 30, 2007 is $2,325,496.
Note 3: The limit on individual endorsement or guarantee amounts is up to 200% of the net asset value of the Corporation. As of June 30, 2007, the limit was $4,650,992. But no limit applied on subsidiaries reinvested over 50% of the Corporation.
Note 4: The net asset value of SinoPac Leasing Corporation was based on its audited financial statements as of June 30, 2007.
Note 5: The maximum amount of endorsement or guarantee amounts is up to 500% of the net asset value of the Corporation. As of June 30, 2007, the limit was $11,627,480. But no limit applied on subsidiaries reinvested over 50% of the Corporation.
- 63 - TABLE 3
BANK SINOPAC AND INVESTEES
MARKETABLE SECURITIES HELD JUNE 30, 2007 (In Thousands of New Taiwan Dollars)
June 30, 2007 Shares/Units/ Carrying Market Value or Name of Holding Company Type and Name of Marketable Securities Relationship Financial Statement Account Percentage of Note Face Amount Amount Net Asset Value Ownership (In Thousand) (Note 1) (Note 1)
SinoPac Bancorp Stock Far East National Bank Subsidiary Equity investments - equity method 180 $ 6,794,758 100.00% $ 6,794,758 Note 4 SinoPac Financial Service (USA) Ltd. Subsidiary Equity investments - equity method 2.5 25,379 100.00% 25,379 Note 4
Far East Capital Corporation Stock (common stock) PCRS Capital Partners, LLC - Unquoted equity investments - 1,126 4.00% 1,126 Note 5 TVIA, Inc. - Unquoted equity investments 33 284 0.20% 284 Note 5 Metropolos Digital - Unquoted equity investments 1,257 - 8.00% - Note 5
Stock (preferred stock) AgraQuest, Inc. - Unquoted equity investments 100 882 0.80% 882 Note 5 Silicon Motion, Inc. - Unquoted equity investments 11 2,327 0.10% 2,327 Note 5 Zone Reactor, Inc. - Unquoted equity investments 23 33 1.50% 33 Note 5 iPhysician Net, Inc. - Unquoted equity investments 115 - 0.30% - Note 5 Softknot Corporation - Unquoted equity investments 250 - 2.00% - Note 5
SinoPac Leasing Corporation Stock Grand Capital International Limited Subsidiary Equity investments - equity method 29,900 687,872 100.00% 687,872 Note 4
Fund SinoPac Global Fixed Income Portfolio Fund Affiliate Trading financial assets - current 10,000 103,878 - 103,878 Note 6
SinoPac Capital Limited Stock SinoPac Capital (B.V.I.) Ltd. Subsidiary Equity investments - equity method 4,450 59,362 100.00% 59,362 Note 4 SinoPac Insurance Brokers Ltd. Subsidiary Equity investments - equity method 100 13,046 100.00% 13,046 Note 4 China-Metal - Trading financial assets 300 3,543 0.03% 3,543 Note 2 Wealthmark - Trading financial assets 15,327 44,636 4.62% 44,636 Note 2 Magna Chip - Unquoted equity investments 15.577663 42,213 - 42,213 Note 5 Bestfield Enterprises Ltd. - Financial assets designated at fair 37.5 52,196 - 52,196 Note 2 value through profit or loss FerroChina Ltd. - Trading financial assets 2,300 80,629 - 80,629 Note 2
Fund China Enterprise Capital - Unquoted equity investments 20 32,471 - 32,471 Note 5
(Continued)
- 64 -
June 30, 2007 Shares/Units/ Carrying Market Value or Name of Holding Company Type and Name of Marketable Securities Relationship Financial Statement Account Percentage of Note Face Amount Amount Net Asset Value Ownership (In Thousand) (Note 1) (Note 1)
SinoPac Capital (B.V.I.) Ltd. Stock Shanghai International Asset Management Subsidiary Equity investments - equity method 4,800 $ 18,602 60.00% $ 18,602 Note 4 (Hong Kong) Co., Ltd. Pinnacle Investment Management Ltd. Subsidiary Equity investments - equity method 200 3,577 100.00% 3,577 Note 4 RSP Information Service Company Limited Subsidiary Equity investments - equity method 1,000 2,988 100.00% 2,988 Note 4
SinoPac Property Insurance Agent Bond Government bond - Guarantee deposits 600 648 - 757 Pledge
SinoPac Life Insurance Agent Bond Government bond - Guarantee deposits 600 648 - 757 Pledge
Note 1: Foreign-currency amounts were translated to New Taiwan dollars at the exchange rate as of the balance sheet date.
Note 2: Market prices of listed and GreTai Securities Market stocks were determined by closing prices at June 30, 2007.
Note 3: Net asset values were based on the investees’ unaudited or unreviewed financial statements for latest period.
Note 4: Net asset values were based on the investees’ audited or reviewed financial statements for the latest period.
Note 5: Net asset values were based on the carrying amounts.
Note 6: Market prices were based on closing prices or net value of funds at June 30, 2007. (Concluded)
- 65 - TABLE 4
BANK SINOPAC AND INVESTEES
RECEIVABLES FROM RELATED PARTIES AMOUNTING TO AT LEAST NT$300 MILLION OR 10% OF THE ISSUED CAPITAL JUNE 30, 2007 (In Thousands of New Taiwan Dollars)
Overdue Amounts Received Ending Turnover Allowance for Bad Company Name Related Party Relationship in Subsequent Balance Rate Amount Action Taken Debts Period
Bank SinoPac SinoPac Card Services Subsidiary of SinoPac Financial $ 3,317,608 - $ - - $ - $ - Holdings Company Limited SinoPac Financial Holdings The parent company of the Bank 432,100 - - - - - Company Limited
- 66 - TABLE 5
BANK SINOPAC AND INVESTEES
TRADING INFORMATION - SELLING NONPERFORMING LOANS JUNE 30, 2007 (In Thousands of New Taiwan Dollars)
Carrying Amount Gain or Loss on Date Counter-parties Loans Selling Price Attachment Relation (Note) Disposal
May 16, 2007 Hong, Ming Hua, Hsieh, Jian Chih, Jiang, Han Tang, Hsu, Loans to enterprises $43,452 $64,000 $9,685 None None Ming Shun, and Peng, Yu Yen
Note: Carrying amount is the original credit amount deducted allowance for bad debt.
- 67 - TABLE 6
BANK SINOPAC AND INVESTEES
INFORMATION ON INVESTED ENTERPRISES FOR THE SIX MONTHS ENDED JUNE 30, 2007 (In Thousands of New Taiwan Dollars, Unless Otherwise Specified)
Consolidated Investment Balance as of June 30, 2007 Total Investee Company Location Main Businesses and Products Investment Shares Imitated Note Percentage of Carrying Amount Percentage of Gains (Loss) (Thousand) Shares Shares Ownership (%) (Note 1) Ownership (%) (Note 1)
SinoPac Bancorp California Holding company 100.00% $ 6,639,205 $ 296,689 20 - 20 100.00% Subsidiary
SinoPac Leasing Corporation Taipei Leasing and installment sales 99.7683% 1,245,170 78,927 177,100 - 177,100 100.00% Subsidiary
SinoPac Capital Limited Hong Kong Lending and financing 99.9991% 1,114,409 101,642 230,000 - 230,000 100.00% Subsidiary
SinoPac Financial Consulting Co., Ltd. Taipei Investment advisory and business management advisory 97% 2,279 84 200 - 200 100.00% Subsidiary
SinoPac Property Insurance Agent Taipei Property insurance agent 100.00% 17,387 11,178 300 - 300 100.00% Subsidiary
SinoPac Life Insurance Agent Taipei Life insurance agent 100.00% 162,074 105,350 300 - 300 100.00% Subsidiary
Global Securities Finance Corporation Taipei Securities financing 2.63% 173,496 - 19,712 - 19,712 2.63%
Taipei Foreign Exchange Inc. Taipei Foreign exchange market maker 3.43% 6,800 2,118 680 - 680 3.43%
Taiwan Futures Exchange Taipei Futures exchange and settlement 1.07% 21,490 - 3,769 - 3,769 1.88%
Fuh Hwa Securities Investment Trust Co. Taipei Securities investment trust and consultant 4.63% 15,000 7,200 1,500 - 1,500 4.63%
Financial Information Service Co., Ltd. Taipei Planning and developing the information system of across banking 2.28% 91,000 - 9,100 - 9,100 2.28% institution and managing the information web system
Taiwan Asset Management Corporation Taipei Evaluating, auctioning, and managing for financial institutions’ loan 0.28% 50,000 - 5,000 - 5,000 0.28%
Taiwan Financial Asset Service Co. Taipei Auction 5.88% 100,000 - 10,000 - 10,000 5.88%
Mondex Taiwan Inc. Taipei Information process services 6.69% 4,935 - 395 - 395 6.69%
Taiwan Television Enterprise, Ltd. Taipei Wireless television company 4.84% 20,983 - 13,573 - 13,573 4.84%
Taiwan Incubator Small & Medium Enterprises Taipei Institution of professional investing and assisting for small and 4.84% 29,000 - 3,417 - 3,417 4.84% Development Corp. medium enterprise
Lian An Services Co., Ltd. Taipei ATM repairing, trading, leasing, and installing service and 5.00% 1,250 - 125 - 125 5.00% surveillance equipment leasing service
China Technology Venture Capital Corp. Taipei Venture capital investment 4.99% 16,700 2,004 1,670 - 1,670 4.99%
Cathay Venture Capital Corp. Taipei Venture capital investment 5.00% 30,000 1,560 3,000 - 3,000 5.00%
VICTOR Taichung Machinery Works Co., Ltd. Taichung Electronic parts manufacturing - - 69 - 69
Boston Life Science Venture Co. Taipei Venture capital investment 5.00% 100,000 - 10,000 - 10,000 5.00%
(Continued)
- 68 -
Consolidated Investment Balance as of June 30, 2007 Total Investee Company Location Main Businesses and Products Investment Shares Imitated Note Percentage of Carrying Amount Percentage of Gains (Loss) (Thousand) Shares Shares Ownership (%) (Note 1) Ownership (%) (Note 1)
Taiwan Global BioFund Taipei Venture capital investment 5.00% $ 56,250 $ - 5,625 - 5,625 5.00%
Sunny Asset Management Corp. Taipei Purchasing for financial institutions’ loan assets 1.42% 164 - 85 - 85 1.42%
Taiwan Depository and Clearing Co. Taipei Securities custodian 0.08% 4,639 - 2,125 - 2,125 0.75%
Note 1: Foreign-currency amounts were translated at the exchange rate as of the balance sheet date, except for foreign-currency-denominated income and expenses, which were translated to New Taiwan dollars at the average exchange rate for the six months ended June 30, 2007.
- 69 - TABLE 7-1
BANK SINOPAC
FINANCIAL INSTRUMENTS AT FAIR VALUE THROUGH PROFIT OR LOSS JUNE 30, 2007 AND 2006 (In Thousands of New Taiwan Dollars)
June 30 2007 2006 Held for trading financial assets
Negotiable certificates of deposit $ 79,282,841 $ 60,389 Corporate bonds 12,955,036 10,679,617 Bank debentures 3,268,312 2,973,819 Beneficiary certificates 3,184,194 4,728,010 Interest rate swap 2,366,837 1,346,563 Forward contracts 1,692,033 3,637,362 Premium paid on option contracts 1,483,825 248,889 Listed stock 1,388,828 982,305 Assets based securities 666,963 571,488 Structured instruments 314,826 648,345 Cross-currency swap contract 105,169 73,534 Government bonds 96,825 576,919 Others 5,828 177,823 106,811,517 26,705,063 Financial assets designated at fair value through profit or loss
Corporate bonds 2,207,036 378,048 Credit linked notes 590,538 161,606 Fixed rate loans - 1,003,760 2,797,574 1,543,414
Total of Financial assets at fair value through profit or loss $ 109,609,091 $ 28,248,477
Held for trading financial liabilities
Interest rate swap contracts $ 2,193,513 $ 1,167,998 Premium paid on option contract 1,768,265 669,819 Securities purchased under agreement to resell 1,647,971 - Forward contracts 976,933 2,004,679 Cross-currency swap contracts 27,300 65,732 Structured instruments 1,015 2,487 Currency swap contracts - 20,005 Others 265,634 11,259
$ 6,880,631 $ 3,941,979
- 70 - TABLE 7-2
BANK SINOPAC
THE CONTRACT AMOUNTS OF OUTSTANDING DERIVATIVE TRANSACTIONS JUNE 30, 2007 AND 2006 (In Thousands of New Taiwan Dollars)
June 30 2007 2006
Currency swap contracts $ 254,343,438 $ 248,543,135 Interest rate swap contracts 368,086,470 217,198,190 Options Long position 75,880,553 62,936,706 Short position 89,601,841 65,606,405 Forward contracts Long position 104,424,182 65,779,168 Short position 102,864,498 60,304,913 Cross-currency swap contracts 19,781,975 25,047,060 Assets swap contracts 2,635,168 2,581,323 Credit default swap contracts Long position 5,400,000 4,300,000 Short position 1,591,025 853,957 Commodity linked interest rate swap contracts 102,133 114,044 Equity linked swap contracts 2,368,628 - Futures Long position 24,424,403 - Short position 26,388,503 -
- 71 - TABLE 7-3
BANK SINOPAC
AVAILABLE-FOR-SALE FINANCIAL ASSETS JUNE 30, 2007 AND 2006 (In Thousands of New Taiwan Dollars)
June 30 2007 2006
Negotiable certificate of deposit $ 63,400,909 $ 118,888,163 Bank debentures 5,428,100 758,866 Government bonds 4,569,326 10,117,756 Listed stock 2,025,802 2,439,725 Corporate bonds 1,884,825 - Subordinated beneficiary certificates of securitization 1,013,916 1,014,240 Commercial papers - 5,026,430 Treasury bills - 4,944,742 Acceptance - 14,034
$ 78,322,878 $ 143,203,956
- 72 - TABLE 7-4
BANK SINOPAC
HELD-TO-MATURITY FINANCIAL ASSETS JUNE 30, 2007 AND 2006 (In Thousands of New Taiwan Dollars)
June 30 2007 2006
Beneficiary certificates $ 731,322 $ 80,000 Bank debentures 713,166 926,805 Corporate bonds 495,452 487,328 Floating rate notes 327,350 359,008 Government bonds 206,237 287,014 Negotiable certificate of deposit 163,675 -
$ 2,637,202 $ 2,140,155
- 73 - TABLE 7-5
BANK SINOPAC
OTHER FINANCIAL ASSETS JUNE 30, 2007 AND 2006 (In Thousands of New Taiwan Dollars)
June 30 2007 2006
Unquoted equity instruments Unlisted equity investments $ 721,707 $ 722,259 Non-active market debt instruments Corporate bonds 2,847,759 324,600 Floating rate notes 1,182,044 1,185,317 Bank debenture 654,700 - Assets based securities 706,509 651,950 5,391,012 2,161,867 Other financial assets Hedged derivative financial instruments 332,523 606,556 Short-term advancement 169,148 23,234 Excess margin 158,174 81,606 Nonperforming receivables transferred from other than loans 75,630 96,637 Bills purchased 1,568 1,556 737,043 809,589
$ 6,849,762 $ 3,693,715
- 74 - TABLE 7-6
BANK SINOPAC
BANK DEBENTURES JUNE 30, 2007 AND 2006 (In Thousands of New Taiwan Dollars)
June 30 2007 2006 Maturity Date Terms
First dominant bank $ - $ 5,000,000 2001.12.20-2006.12.20 Fixed interest rate of 3.08%. Interest debenture issued in 2001 Principal is repayable on is paid annually. maturity date. First subordinated bank 2,000,000 2,000,000 2002.12.23-2008.03.23 Floating interest rate except for the debenture issued in 2002 Principal is repayable on first two years fixed at 2.15%. maturity date. Interest is paid semiannually. First dominant bank 1,000,000 1,000,014 2003.02.14-2008.02.14 3.65% minus 6-month LIBOR. debenture issued in 2003 Principal is repayable on Interest is paid semiannually. maturity date. Second dominant bank 500,000 500,059 2003.03.19-2008.09.19 3.48% minus 6-month LIBOR. debenture issued in 2003 Principal is repayable on Interest is paid semiannually. maturity date. Third dominant bank 1,500,376 1,500,800 2003.05.09-2008.11.09 4.15% minus 6-month LIBOR except debenture issued in 2003 Principal is repayable on for the first year fixed at 2.50%. maturity date. Interest is paid semiannually. Fourth dominant bank 412,551 418,020 2003.05.09-2008.11.09 2% plus 180-day-NTD CP rate in debenture issued in 2003 Principal is repayable on secondary market and minus maturity date. 6-month LIBOR. Interest is paid semiannually. First subordinated bank 2,500,000 2,500,000 2003.06.18-2008.12.18 180-day CP rate in secondary market debenture issued in 2003 Principal is repayable on plus 0.3%. Interest is paid maturity date. semiannually. Fifth dominant bank 1,000,057 1,009,047 2003.08.11-2010.08.11 Floating rate. Interest is paid debenture issued in 2003 Principal is repayable on semiannually. maturity date. Sixth dominant bank 699,592 705,697 2003.08.20-2009.02.20 Floating rate. Interest is paid debenture issued in 2003 Principal is repayable on semiannually. maturity date. Seventh dominant bank 800,032 807,171 2003.09.16-2008.09.16 Floating rate. Interest is paid debenture issued in 2003 Principal is repayable on semiannually. maturity date. Eighth dominant bank 500,022 504,432 2003.09.16-2008.09.16 Floating rate. Interest is paid debenture issued in 2003 Principal is repayable on semiannually. maturity date. Ninth dominant bank 300,046 302,828 2003.09.22-2008.09.22 Coupon rate at 2.55% for the first debenture issued in 2003 Principal is repayable on year of the issuance and 5% minus maturity date. index rate for the years thereon. Tenth dominant bank 1,000,281 1,009,513 2003.11.05-2008.11.05 Floating rate. Interest is paid debenture issued in 2003 Principal is repayable on semiannually. maturity date. Eleventh dominant bank 999,725 1,008,658 2003.11.14-2008.11.14 Floating rate. Interest is paid debenture issued in 2003 Principal is repayable on semiannually. maturity date. Twelfth dominant bank 501,109 505,132 2003.11.21-2008.11.21 Floating rate. Interest is paid debenture issued in 2003 Principal is repayable on semiannually. maturity date. Thirteenth dominant bank 500,704 504,485 2003.11.28-2008.11.28 Floating rate except for the first year debenture issued in 2003 Principal is repayable on fixed at 4%. Interest is paid maturity date. semiannually. Fourteenth dominant bank 2,205,102 2,225,207 2003.12.02-2009.06.02 Floating rate. Interest is paid debenture issued in 2003 Principal is repayable on semiannually. maturity date.
(Continued)
- 75 -
June 30 2007 2006 Maturity Date Terms
Second subordinated bank $ 3,600,000 $ 3,600,000 2004.03.18-2009.09.18 Fixed interest rate of 2.3%, interest is debentures issued in 2003 Principal is repayable on paid semiannually. maturity date. First dominant bank 526,908 539,337 2004.04.26-2009.10.26 Floating rate. Interest is paid debentures issued in 2004 Principal is repayable on semiannually with simple interest maturity date. based on actual days. Second dominant bank 300,405 302,963 2004.04.28-2009.10.28 Floating rate. Interest is paid debentures issued in 2004 Principal is repayable on semiannually. maturity date. Third dominant bank 481,205 505,520 2004.04.29-2009.04.29 Floating rate. Interest is paid debentures issued in 2004 Principal is repayable on semiannually with simple interest maturity date. based on actual days. Fourth dominant bank 200,335 202,122 2004.05.14-2009.05.14 Floating rate. Interest is paid debentures issued in 2004 Principal is repayable on semiannually. maturity date. Fifth dominant bank 299,616 302,895 2004.05.17-2009.05.17 Floating rate. Interest is paid debentures issued in 2004 Principal is repayable on semiannually. maturity date. Sixth dominant bank 500,895 506,164 2004.05.17-2009.05.17 Floating rate. Interest is paid debentures issued in 2004 Principal is repayable on semiannually. maturity date. Seventh dominant bank 198,073 201,884 2004.05.21-2009.05.21 Floating rate. Interest is paid debentures issued in 2004 Principal is repayable on semiannually. maturity date. Eighth dominant bank 514,749 520,371 2004.05.21-2011.05.21 Floating rate. Interest is paid debentures issued in 2004 Principal is repayable on semiannually with simple interest maturity date. based on actual days. Ninth dominant bank 300,801 303,509 2004.06.03-2009.06.03 Floating rate. Interest is paid debentures issued in 2004 Principal is repayable on semiannually. maturity date. Tenth dominant bank 496,489 509,391 2004.06.07-2009.06.07 Floating rate. Interest is paid debentures issued in 2004 Principal is repayable on semiannually with simple interest maturity date. based on actual days. Eleventh dominant bank 200,782 203,220 2004.06.15-2009.06.15 Floating rate. Interest is paid debentures issued in 2004 Principal is repayable on semiannually with simple interest maturity date. based on actual days. Twelfth dominant bank 503,415 511,981 2004.06.15-2010.06.15 Floating rate. Interest is paid debentures issued in 2004 Principal is repayable on semiannually with simple interest maturity date. based on actual days. Thirteenth dominant bank 300,504 306,339 2004.06.30-2009.06.30 Floating rate. Interest is paid debentures issued in 2004 Principal is repayable on semiannually. maturity date. Fourteenth dominant bank 502,683 510,119 2004.07.09-2010.07.09 Floating rate. Interest is paid debentures issued in 2004 Principal is repayable on semiannually. maturity date. Fifteenth dominant bank 507,654 519,042 2004.07.13-2011.07.13 Floating rate. Interest is paid debentures issued in 2004 Principal is repayable on semiannually. maturity date. First subordinated bank 1,534,967 1,549,128 2004.09.14-2010.06.14 Floating rate. Interest is paid debentures issued in 2004 Principal is repayable on semiannually. maturity date. Second subordinated bank 500,000 500,000 2004.09.14-2010.06.14 Index rate plus 0.50%. Interest is debentures issued in 2004 Principal is repayable on reset semiannually since the maturity date. issuance date. Interest is paid semiannually. First subordinated 3,000,000 3,000,000 2005.12.13-2011.06.13 Index rate plus 0.35%. Interest is debentures issued in 2005 Principal is repayable on reset semiannually since the maturity date. issuance date. Interest is paid semiannually.
$ 30,889,078 $ 36,095,048 (Concluded)
- 76 - TABLE 7-7
BANK SINOPAC
THE NET ASSET OF IBT ON NOVEMBER 13, 2006 JUNE 30, 2007 AND 2006 (In Thousands of New Taiwan Dollars)
Item Amount
Cash and cash equivalents $ 6,342,189 Due from the central bank and other banks 15,714,110 Financial assets at fair value through profit or loss 6,063,884 Securities repurchased under agreement to resell 2,402,443 Available-for-sale financial assets 52,027,862 Accounts, interest and other receivables, net 18,419,324 Discounts and loans, net 280,008,538 Held-to-maturity investments 1,408,522 Equity investments - equity method 352,417 Properties, net 4,894,493 Other assets 2,934,318 Other financial assets 1,519,023 Call loans and due to banks (4,406,710 ) Accounts interest and other payables (4,850,796 ) Accrued pension liability (450,506 ) Other financial liability (394,356 ) Deposits and remittances (322,750,636 ) Due to the Central Bank and other banks (5,669,748 ) Convertible bond (5,776,144 ) Other liabilities (1,330,784 ) Securities sold under agreements to repurchase (11,064,014 ) Financial liabilities at fair value through profit or loss (212,217 ) Net assets 35,181,212 Cumulative translation adjustments (13,386 ) Unrealized gain (loss) on financial instruments (155,072 ) Unrecognized net loss as pension cost 221,269 Unrealized revaluation increment on land (1,033,595 ) Shares issued (26,123,904 )
Capital surplus due to merger $ 8,076,524
- 77 - TABLE 7-8
BANK SINOPAC
THE GAINS (LOSSES) ON DERIVATIVE FINANCIAL INSTRUMENTS FOR THE SIX MONTHS ENDED JUNE 30, 2007 AND 2006 (In Thousands of New Taiwan Dollars)
For the Six Months Ended June 30 Account 2007 2006 For hedging purposes: Cross-currency swap contracts - Realized Interest revenue $ 54,255 $ 65,663 Interest expense (381,445 ) (326,900 ) Foreign exchange gain (loss) 923 (592 ) Interest rate swap contracts - Realized Interest revenue 15,065 18,788 Interest expense (83,505 ) (78,622 ) Foreign exchange gain (loss) 4,099 (17,907 ) (390,608 ) (339,570 ) For the purposes of accommodating customers’ needs or managing the Bank’s exposures: Forward contracts - Realized Interest revenue 143,138 130,258 Interest expense (47,555 ) (42,292 ) - Realized Foreign exchange gain (loss) 121,097 (25,157 ) - Unrealized Income from (loss on) derivative 1,216 (19,249 ) financial instruments transactions - Unrealized Foreign exchange loss (56,350 ) (188,629 ) Currency swap contracts - Realized Interest revenue 1,924,419 1,558,279 Interest expense (1,382,967 ) (1,173,229 ) Loss on derivative financial (247,827 ) - instruments transactions - Unrealized Income from (loss on) derivative (11,074 ) 197,359 financial instruments transactions - Realized Foreign exchange gain (loss) 1,004,191 (313,450 ) Interest rate swap contracts - Realized Interest revenue 1,967,994 744,412 Interest expense (1,962,234 ) (737,581 ) - Realized Income from (loss on) derivative (35,154 ) 32,326 financial instruments transactions - Unrealized Income from derivative financial 11,214 122,379 instruments transactions Foreign-currency options contracts - Realized Loss on derivative financial (493,766 ) (22,860 ) instruments transactions Foreign exchange gain 772,403 145,031 - Unrealized Income from (loss on) derivative (340,217 ) 90,608 financial instruments transactions
(Continued) - 78 -
For the Six Months Ended June 30 Account 2007 2006 Interest rate futures contracts - Realized Income from (loss on) derivative $ (17,201 ) $ 19,559 financial instruments transactions Foreign exchange gain 608 573 - Unrealized Income from derivative financial 4,522 2,313 instruments transactions Cross-currency swap contracts - Realized Interest revenue 81,744 121,615 Interest expense (81,284 ) (121,219 ) Income from derivative financial 259,123 220,821 instruments transactions - Unrealized Loss on derivative financial (8,754 ) (140) instruments transactions Credit default swap contracts - Realized Loss on derivative financial (16,389) (10,021 ) instruments transactions - Unrealized Income from derivative financial 87,659 50,708 instruments transactions Miscellaneous swap contracts - exchange rate - Realized Income from (loss on) derivative (20 ) 755 financial instruments transactions Miscellaneous swap contracts - stock index - Realized Income from derivative financial 49,892 - instruments transactions Commodity linked interest rate swap contracts - Realized Loss on derivative financial (673 ) (285 ) instruments transactions 1,727,755 782,884
$ 1,337,147 $ 443,314
(Concluded)
- 79 - TABLE 8
BANK SINOPAC
OVERDUE LOANS AND RECEIVABLE JUNE 30, 2007 AND 2006 (In Thousands of New Taiwan Dollars, %)
June 30, 2007 June 30, 2006 Non-Performing Loan Loss Loan Loss NPL Ratio Coverage Ratio Non-Performing Items Loan (NPL) Total Loans Reserves Total Loans NPL Ratio Reserves Coverage Ratio (Note 2) (Note 3) Loan (NPL) (Note 1) (LLR) (LLR) Secured 2,848,742 75,819,401 3.76% 718,784 25.23% 2,670,271 85,328,293 3.13% 280,737 10.51% Corporate loan Non-secured 3,206,810 182,352,086 1.76% 2,351,081 73.32% 3,848,386 182,516,451 2.11% 2,275,816 59.14% Mortgage (Note 4) 5,343,703 316,939,697 1.69% 876,811 16.41% 2,345,045 297,398,642 0.79% 830,831 35.43% Cash card 38,107 325,899 11.69% 42,263 110.91% 24,122 1,004,681 2.40% 9,571 39.68% Consumer loan Micro credit (Note 5) 2,436,104 19,526,731 12.48% 1,716,673 70.47% 2,489,693 30,843,486 8.07% 910,428 36.57% Other Secured 72,534 8,015,173 0.90% 34,916 48.14% 112,989 10,011,752 1.13% 39,419 34.89% (Note 6) Non-secured Total 13,946,000 602,978,987 2.31% 5,740,528 41.16% 11,490,506 607,103,305 1.89% 4,346,802 37.83% Overdue Account Allowance for Overdue Account Allowance for Diliquency Ratio Coverage Ratio Diliquency Ratio Coverage Ratio Receivable Receivable Credit Losses Receivable Receivable Credit Losses Credit card - - - - - 97,189 5,345,344 1.82% 71,924 74.00% Account receivable - factoring with no recourse 2,184 11,110,745 0.02% 70,121 3,210.67% 5,908 14,063,966 0.04% 42,057 711.86% (Note 7)
Note 1: For Loan business: Overdue loans represent the amounts of reported overdue loans pursuant to “Regulations Governing the Procedures for Banking Institutions to Evaluate Assets and Deal with Non-performing/Non-accrual Loans” issued by the MOF. For Credit card business: Overdue receivables are regulated by the Banking Bureau dated July 6, 2005 (Ref. No. 0944000378).
Note 2: For Loan business: NPL Ratio = NPL/Total Loans. For Credit card business: Delinquency Ratio = Overdue Receivable/Account Receivable.
Note 3: For loan business: Coverage Ratio = LLR/NPL For credit card business: Coverage Ratio = Allowance for Credit Losses/Overdue Receivables.
Note 4: Household mortgage means the purpose of financing is to purchase, build, or fix up the dwelling and provides dwelling owned by the borrower, spouse, or children to fully secured the loan.
Note 5: Micro credit is regulated by the Banking Bureau dated December 19, 2005 (Ref. No. 09440010950).
Note 6: Others in consumer loans refers to secured or non-secured loans excluding mortgage, cash card, micro credit, and credit cards.
Note 7: Account receivable - factoring with no recourse as required by the Banking Bureau letter dated July 19, 2005 (Ref. No. 094000494), provision for bad debt are recognized once no compensation are made from factoring or insurance company.
- 80 -