This English version annual report is a summary translation of the Chinese version and is not an official document of the shareholders’ meeting. If there is any discrepancy between the English version and Chinese version, the Chinese version shall prevail.
Disclaimer: This shareholder report cannot be expected to provide as full understanding of the financial performance, financial position, operating, financing and investment activities of the First Financial Group as the 2009 FFHC annual report in Chinese and the full annual financial statements. This publication contains certain forward-looking statements and future expectations. These expectations are based on management’s current views and assumptions and involve known and unknown risks and uncertainties. Actual results, performance or events may differ materially from those expressed or implied in such statements. There can be no assurance that actual outcomes will not differ materially from these statements. FFHC assumes no obligation to update any forward-looking information contained in this report. First Financial Holding Co., Ltd. First Financial Holding Co., Ltd. First Financial Holding Co., Ltd. First Financial Holding Co., Ltd. First Financial Holding Co., Ltd. First Financial Holding Co., Ltd. First Financial Holding Co., Ltd. First Financial Holding Co., Ltd. First Financial Holding Co., Ltd. First Financial Holding Co., Ltd. First Financial Holding Co., Ltd. First Financial Holding Co., Ltd. First Financial Holding Co., Ltd. First Financial Holding Co., Ltd. First Financial Holding Co., Ltd. First Financial Holding Co., Ltd. First Financial Holding Co., Ltd. First Financial Holding Co., Ltd. First Financial Holding Co., Ltd. First Financial Holding Co., Ltd. First Financial Holding Co., Ltd. First Financial Holding Co., Ltd. First Financial Holding Co., Ltd. First Financial Holding Co., Ltd. First Financial Holding Co., Ltd. First Financial Holding Co., Ltd. First Financial Holding Co., Ltd. First Financial Holding Co., Ltd. First Financial Holding Co., Ltd. First Financial Holding Co., Ltd. First Financial Holding Co., Ltd. First Financial Holding Co., Ltd. First Financial Holding Co., Ltd. First Financial Holding Co., Ltd. First Financial Holding Co., Ltd. First Financial Holding Co., Ltd. First Financial Holding Co., Ltd. First Financial Holding Co., Ltd. First Financial Holding Co., Ltd. First Financial Holding Co., Ltd. First Financial Holding Co., Ltd. First Financial Holding Co., Ltd. First Financial Holding Co., Ltd. First Financial Holding Co., Ltd. First Financial Holding Co., Ltd. First Financial Holding Co., Ltd. First Financial Holding Co., Ltd. First Financial Holding Co., Ltd. First Financial Holding Co., Ltd. First Financial Holding Co., Ltd. First Financial Holding Co., Ltd. First Financial Holding Co., Ltd. First Financial Holding Co., Ltd. First Financial Holding Co., Ltd. First Financial Holding Co., Ltd. First Financial Holding Co., Ltd. First Financial Holding Co., Ltd. First Financial Holding Co., Ltd. First Financial Holding Co., Ltd. First Financial Holding Contents
Letter to Shareholders 02
Company Profile 07
Financial Highlights 08
Corporate Governance 12
Capital Overview 28
Subsidiaries Overview 32
Corporate Social Responsibilities 42
Financial Information 44
General Information 155 Letter to Shareholders
Dear Shareholders,
Looking back in 2009, thanks to stimulus actions taken by governments around the world, the economy progressively stabilized. Nevertheless, the recent Dubai standstill and sovereign debt crisis of the Southern Europe countries showed that the risks of a relapse were high. Excess liquidity triggered fears over inflation and asset bubble, while capital injections into the financial systems widened budget deficit and threatened to undermine the still fragile economy. Unemployment rates remained high, leaving central banks around the world in a dilemma over when to unwind their stimulus measures, fiscal- and monetary-wise.
In Taiwan, starting from the third quarter 2009, the capital market regained momentum and the GDP growth turned positive in the fourth quarter at an estimated 9.22%, as Government’s economic stimulus actions fueled trade activities and capital inflows from overseas. Increased export demand drove up capacity utilization rates at major technology and electronics manufacture facilities, triggering a new wave of capital raising plans in the private sector. On the domestic front, consumer confidence firmed up and brought forth the growth of private consumption back to positive territory at an estimated 1.48%. Benefiting from export volumes arising from strong bounce-back in Emerging-Asia economies, Taiwan’s GDP was expected to shrink by 1.87% for 2009, better than the previous forecast of -2.53%, according to Directorate-General of Budget, Accounting and Statistic. Statistics also indicated positive signs of recovery in financial and insurance sector, with a 2.8% growth projected for the fourth quarter of 2009, versus double-digit contraction seen in the first and second quarter of 2009. Uncertainty Lays Still Ahead While signs of a global recovery were observed in 2009, we remain cautious about the high level of uncertainty in a number of respects. The financial crisis has not only helped materialize the rise of world’s new economic power, the change in global business structure, but further addressed the power of emerging economic entities, such as China and India, will impact the global economy. In the wake of the financial crisis, the “jobless” recovery in developed economies appears inevitable. Capital injections into the global financial system have accelerated the expansion of debt at an alarming rate. Increasing liquidity that resulted from “loose” monetary and fiscal policy now risks new wave of asset bubbles. Growing needs for raw materials such as petros and minerals from developing economies are heightening inflationary pressure. While the “imbalances” described above might worsen or even cause further fluctuations in the global economic cycles, the key to stabilize and sustain the economy can not be short-lived fiscal or monetary initiatives alone, but continued innovation and governmental incentives that encourage investments and consumption.
Operating Strategy: from Stable to Strong In the backdrop of an economic upturn and thawing relations between Taiwan and China, First Financial Holdings gradually climbed out of the trough in 2008. Thanks to a combination of sound risk oversight, improving margin expansion, earnings recovery for the banking business and subsidiaries profit growth aided by market rebounds and revived investor optimism, the group reported consolidated net revenue of NT$29,573 million. Net Income was NT$2,689 million, of which NT$2,779 million was attributable to equity holders of parent company and a loss of NT$90 million to minority shareholders. Post-tax EPS was NT$0.44. In light of the adoption of SFAS Article 34 (which requires a general provision to be made against all outstanding loans), First Financial Holdings moved to further set aside provisions for its bank subsidiary to lower NPL ratio and improve Bad-Debt Coverage. Although undertaking such precaution delivered an adverse impact on bottom-line, it was understood by institutional investors at home and abroad that such action was taken for a necessary cause in order to strengthen the group’s financial soundness as well as China deployment plan.
The 2009 operating performance of group subsidiaries is described separately below:
In 2009, First Bank benefited from a rebound in Net Interest Margin and steady recovery of Net Interest Income, started from the third quarter. Though Fee Income contracted due to financial crisis and structured note compensation during the first half of 2009, fee momentum resumed in the second half of the year and still accounted for as much as 15% of net
2 2009 Annual Report Letter to Shareholders
Yuh-Chang Chen Chairman, First Financial
revenue for the full year. Increased Bad-Debt Provision in response to new regulations governing banks’ financial viability led to a 77.09% decrease in net income to NT$2,054 million, or NT$0.42 per share, meeting just 26.84% of First Bank’s budget goal. However, with delinquency rate cut down to 1.32% and coverage ratio raised to 84.75%, First Bank’s restored financial strength has laid the ground work for its China expansion and profit growth plans.
Riding on a wave of liquidity momentum and stock market rallies, Taiwan stock market saw brokerage volumes grow by 38.47% to NT$1,226,107 million in 2009. The brokerage market share of First Securities jumped to 1.723% from 1.465% a year earlier. In addition, it was ranked No.1 in broking volumes on the Emerging Board. During 2009, First Securities actively explored the new business of advising Taiwanese corporations that operate overseas for local listings, and advanced strongly in the competition for IPO and SPO underwriting – with 7 cases acting as a lead underwriter and 27 cases as a co-manager, doubling its record of the prior year. Its bottom-line performance underscored the result of its optimization of risk management and modular portfolios to maximize proprietary trading profit: 2009 net income was NT$912 million or NT$1.55 per share, exceeding its budget goal by 51.05%.
3 Letter to Shareholders
With investor optimism surging back in the second quarter, combined with Government’s stimulus actions, First Securities Investment Trust’s Asset Under Management increased to NT$106.8 billion for 2009. Public-offering fund assets increased by NT$14.6 billion to NT$99.6 billion, with stock funds registering the strongest growth rate of 112.5% to NT$22.1 billion. As of end of 2009, the account of First Securities Investment Trust’s investors grew by 3.7% to 55,064, while the size of regular investor plans grew by 35.8% to 13,386 from the prior year. The company’s profit returned to the historical baseline, with net income of NT$152 million, or NT$2.53 per share, beating its budget goal by 26.25%.
In 2009, First-Aviva shifted its product focus to traditional life policies and retirement-plan programs, steering away from investment-linked and interest-sensitive annuity insurance products against an unfavorable interest rate environment. By leveraging cross-sell efforts on mortgage insurance and accident insurance through First Bank’s branch networks, First- Aviva achieved first-year premium of NT$3.34 billion. The company was ranked the 16th insurer in terms of bancassurance with a 0.56% market share. Improved investment returns and stringent cost control helped narrow 2009 net loss to NT$184 million, or -NT$0.82 per share, easing the pressure for re-capitalization.
As for other subsidiaries with smaller-scale operations, First AMC, First Consulting and First P & C Insurance Agency met earnings targets on the back of cost-cutting measures and upward volume and price movement in markets– except for First Venture Capital, which dragged by impairment losses on its equity portfolio under volatile market conditions. For 2009, First AMC reported net income of NT$43.58 million, exceeding its budget goal by 1.29%; First Venture Capital reported NT$25.98 million, short of its budget goal by 35.74%; First Consulting reported net income of NT$8.97 million, exceeding its budget goal by 24.22%; First P & C Insurance Agency reported net income of NT$6.51 million, exceeding its budget goal by 29.07%. China Reach, Taiwan Experience We see 2010 as a year of new opportunities given a turnaround in the economy at home and abroad, and gradually tie-up between Taiwan and China. A number of focal points are identified to guide our business strategy and forward- looking initiatives in the coming year; implement joint-marketing and resources integration across group subsidiaries; pioneer overseas expansion; establish a group-wide financial products and services platform to enhance one-stop shopping for customers; reinforce the compliance regime and strengthen risk management practices; optimize processes and procedures to manage the group’s asset and liability profile; target to act as a benchmark for best corporate citizen. To conclude, our vision is firmly rooted in our bank franchise, through which we will continue to promote joint marketing, integrate resources, innovate on customer services, sustain profitability and maximize value for the group and shareholders.
To ensure compliance with changing legal and financial regulations, we will continue to educate employees, management and directors about the latest reforms via periodical training to enhance corporate governance. We have put into place an IFRS (International Financial Reporting Standards) task force responsible for the implementation and personnel training relating to IFRS. Yet another dedicated team was established to be responsible for the origination, review and monitoring of China business plans for the group’s subsidiaries, while devising strategies through our in-house policy research into the financial Memorandum of Understanding (MOU) and Economic Cooperation Framework Agreement(ECFA) between Taiwan and China.
To lead the race of human capital, we will accelerate the development of talent for core businesses important to sustain our competitive advantages for the future. In addition, we will proactively recruit, train and deploy management associates, equipping them with certificates applicable to financial professions in China, Hong Kong and Macau to support China expansion strategy.
For risk management, we will incorporate risk monitoring from subsidiaries’ ALM (Asset and Liability Management)
4 2009 Annual Report Letter to Shareholders
Ming-Ren Chien President, First Financial
commissions into the group’s risk management regime. A regular review and update of our internal control processes and procedures will be in place to ensure the validity and effectiveness of such controls. We will also continue to strengthen internal control at subsidiary levels and on-going employee training to raise awareness of ethical behavior as part of the group-wide efforts to reinforce risk management.
In light of the signing of the financial MOU and negotiations over the “early harvest list” of industries under the ECFA framework between Taiwan and China, we have set forth the priority of establishing a bank branch in Shanghai, followed by a securities brokerage representative office, as early preparatory steps to build a financial service platform for Taiwanese businesses that operate overseas. As we are positive on the potentials of emerging markets in the Asia-Pacific region, our goal for the next stage of China business development will be incorporating a subsidiary company in China after the Shanghai branch’s operation gets on track.
With regard to marketing, core banking business shall continue to act as the foundation from which to tap into stock broking, asset management and insurance, so as to solidify primary profit sources such as corporate banking, retail banking, foreign exchange and wealth management. To help our customers meet their financial goals as well as to
5 discover cross-sell opportunities for the group, we will continue promoting our unique “Financial Services Integration System”, which integrates a wide range of financial products alongside a sales referral platform in a bid to boost business volume.
Meanwhile, to fortify corporate image and fulfill social responsibilities, we will adhere to our centennial corporate tradition and virtue by gaining clients trust through persistent quality financial services and products, which better safeguard the First Financial brand. Based on existing ample resources and business franchise, we manage to integrate group sales and upgrade brand awareness by consolidating subsidiaries business and CSR campaign as a whole. We believe our brand re-engineering efforts will pay off and bring to the attention of our customers, shareholders and employees the compelling advantages that keep First Financial ahead in the financial industry.
Last year, we received favorable ratings from various rating agencies. All their credit reports pointed to First Financial Holding’s enduring market standing, a large customer base, solid asset quality, adequate financial structure and sound risk management practice. A detailed review and outlook for First Financial Holding and its principal subsidiaries are set out in the table below:
The ratings of various rating agencies in 2009 are as follows: First Financial Holding First Bank First Securities ST LT Outlook ST LT Outlook ST LT Outlook Taiwan ratings ------twA-1+ twAA- Stable ------S&P ------A-2 BBB+ Stable ------Moody’s ------P-1 A3 Stable ------Fitch F2 BBB+ Stable F2 BBB+ Stable ------Fitch(Local) F1(twn) AA-(twn) Stable F1(twn) AA-(twn) Stable F1(twn) A+(twn) Stable
A New Stage for 2010 We thank all of our shareholders for their guidance and support in leading us through the unprecedented financial challenges in 2009 that could hinder growth in the financial sector. As we enter the new stage of China market expansion starting from 2010, with our well-preparation in capital structure and asset quality, we will continue to target ourselves becoming one of the regional leading financial institutions by expanding our Greater China business, enlarging business scale and enhancing operating results.
Yuh-Chang Chen Chairman, First Financial
Ming-Ren Chien President, First Financial
6 2009 Annual Report Company Profile Company Profile First Financial Holding Co., Ltd. was incorporated on January 2, 2003 with First Commercial Bank as its flagship entity. It is listed on Taiwan Stock Exchange under the stock code 2892.
Founded in 1899, First Bank was one of the three government-affiliated banks with the mission to allocate credit to underserved industrial and commercial businesses, finance national infrastructure, and serve as an underlying force of Taiwan’s great economic advancement. In 1998, First Bank became the largest private-owned bank on the island after privatization. Since then it has been able to secure leadership positions in such selected areas as the corporate banking, SME business, home mortgages, mutual-fund distribution, trade finance, deposit and lending. It currently owns 190 branches at home along with 26 overseas branches and representative offices including the U.S. subsidiary of First Commercial Bank (USA).
With the historical groundwork well laid by First Bank, First Financial Holding Co. further diversified its business portfolio into securities trading, property and casualty insurance and asset management on July 31, 2003, by acquiring First Taisec Securities Co., Ltd., Mingtai Fire & Marine Insurance Co., Ltd. and National Investment Trust Co., Ltd. On July 28, 2003, it successfully raised the equivalent of NT$17.3 billion via a global depository receipt program, the first ever issued by a Taiwanese financial institution, which significantly shored up capital bases of the group and its subsidiaries. From May through September of 2004, in its second round of penetrating into new markets to deliver full product range and high quality services, First Financial Holding Co. established First Financial Asset Management Co., Ltd., First Venture Capital Co., Ltd., First Financial Management Consulting Co., Ltd., and First P&C Insurance Agency Co., Ltd.
First Financial Holding, in an aim to capture growth in wealth management, expand product offerings, retain clients and address personal retirement planning needs, sought to form a joint venture with U.K’s largest insurer Aviva in 2007. First- Aviva Life, a 51:49 joint-venture between the two companies, was incorporated on December 11, 2007.
In order to solidify group image, raise popular awareness of its subsidiaries and promote employee loyalty, First Financial Holding rebranded subsidiaries First Taisec Securities, National Securities Investment Trust and First Taisec Capital Management under the names “First Securities”, “First Securities Investment Trust” and “First Capital Management” on December 31, 2008. And in September of 2009, First-Aviva’s Chinese brand was successfully renamed.
With NT$1.96 trillion in assets, over five million customer accounts and strong client relationships, First Financial Holding operates across multiple financial sectors. The holding company enhances efficiency via economies of scale and allows for effective joint marketing, resource sharing and personnel assignment within the group. First Financial Holding will continue to leverage its diversified scope to create greater value for clients, shareholders and employees, with the goal of becoming the most competitive financial institution in Taiwan and across the Asian-Pacific region.
7 Financial Highlights
FFHC at a Glance Consolidated basis, data as of December 31, 2007, 2008 and 2009
2009 2008 2007 Income statements (in NT$ mn) Net Revenue 29,573 44,424 39,693 Expenses (26,568) (35,268) (23,022) Income before tax 3,005 9,156 16,671 Net income 2,689 7,077 12,485 EPS (in NT$) 0.44 1.20 2.06 Adjusted EPS (in NT$)1 0.44 1.17 2.04
Balance sheet (in NT$ mn) Total assets 1,960,570 1,800,114 1,682,097 Total liability 1,858,700 1,700,017 1,575,993 Total shareholders’ equity 101,870 100,097 106,104 Shares issued (in mn shares) 6,319 6,165 6,092
Dividends (in NT$) Cash dividends2 0.50 0.50 1.70 Stock dividends2 0.25 0.25 0.12 Total dividends2 0.75 0.75 1.82
Ratios (%) ROAE 2.66 6.86 12.05 ROAA 0.14 0.41 0.76 Double Leverage Ratio3 102.43 102.47 98.43 Group CAR 119.69 120.19 109.54
Credit Ratings Fitch BBB+/F2/Stable Fitch(Local) AA-(twn)/F1(twn)/Stable
1. EPS is adjusted retroactively for stock dividends. 2. 2009’s dividend proposal is subject to final approval at 2010 annual shareholders’ meeting on June 23, 2010. 3. Double Leverage Ratio = Long-term equity investment/Shareholders’ equity
8 2009 Annual Report Financial Highlights 2009 Net Income Breakdown by Subsidiaries in NT$ mn
Net Income % of Group1 First Bank 2,054 76.4% First Securities 912 33.9% FSITC 152 5.7% First-Aviva2 (184) -3.5% Others3 85 3.2% 1.Estimated by sum-of-the-parts method. 2.FFHC claims 51% of First-Aviva operating results, a net loss of NT$ 94 mn was recognized in 2009. 3.Including subsidiary First Financial AMC, First Venture Capital, First Consulting & First P&C Insurance Agency . Net Revenue Consolidated basis and in NT$ mn 2009 29,573 2008 44,424 2007 39,693 Net Income Consolidated basis, in NT$ mn 2009 2,689 2008 7,077 2007 12,485 EPS Consolidated basis, in NT$ 2009 0.44 2008 1.17 2007 2.04 ROAE Consolidated basis, in % 2009 2.66 2008 6.86 2007 12.05 ROAA Consolidated basis, in % 2009 0.14 2008 0.41 2007 0.76
9 Our Businesses FFHC currently owns eight subsidiaries. Based on our banking channels, we are committed to providing clients with a comprehensive suite of products and services.
First Bank was founded in 1899 under the name of “Savings Bank of Taiwan”. Later Net Income in the period of 1912 to 1923, three local banks merged with the then First Bank in NT$ mn to become the foundations of the present company. In 1945, the bank became 2009 2,054 government-owned after Taiwan’s restoration from Japan’s rule. It was renamed 2008 8,965 “First Commercial Bank” in 1976, commonly known as First Bank. On January 22, 1998, First Bank became the largest private-owned bank in Taiwan after privatization. Five years later, it formed the backbone of newly-established First Financial Holding on January 2, 2003 through a share swap. First Bank has secured leadership positions in selected areas as the SME business, mortgages, mutual- fund distribution, trade finance, deposit and lending. It now owns 190 branches at home and 26 overseas branches and representative offices including the U.S. subsidiary of First Commercial Bank (USA).
First Securities, formerly known as First Taisec Securities, was established on Net Income August 15, 1988 as a retail brokerage firm. Over the years, it has expanded its in NT$ mn services to include proprietary trading, underwriting and research, investment 2009 912 advisory, margin trading, options and futures. On July 31, 2003, Taisec Securities 2008 (637) merged with the stock-brokerage unit of First Bank and altogether they became the security arm of First Financial Holding operating through 25 branches and 19 counters domestically. Effective from December 31, 2008, in order to integrate external image of First as a compacted group, intensify the corporate identity of each subsidiary, and further converge employees’ consensus, First Taisec Securities was renamed as First Securities.
First Securities Investment Trust, formerly known as National Investment Trust, Net Income was incorporated on February 15, 1986. Currently, FSITC manages a total of in NT$ mn 25 funds and is one of Taiwan’s largest asset managers in terms of asset under 2009 152 management. FSITC has been consistently recognized for its superior investment 2008 167 performance with its strong research team and 24 wins of “Taiwan Fund Performance Awards”. Through a share swap on July 31, 2003, FSITC became a wholly owned subsidiary of First Financial Holding. To integrate external image of First as a compacted group, intensify the corporate identity of each subsidiary, and further converge employees’ consensus, National Investment Trust was renamed as First Securities Investment Trust effective from December 31, 2008.
10 2009 Annual Report Financial Highlights
On December 11, 2007, First Financial Holding and Aviva, the UK’s largest Net Income insurance services provider, jointly established First-Aviva in Taiwan, the first joint in NT$ mn venture of a local financial holding company and a leading foreign insurance 2009 (184) group. First Financial Holding owns 51%, while Aviva owns 49% of the company. 2008 (641) Mainly focusing on life insurance business, First-Aviva initiated its operating activities on January 2, 2008. Through First Bank’s 190 domestic branches, First- Aviva exclusively offers our customers specially-designed retirement plans and comprehensive insurance products. Leveraging Aviva Group’s experiences in global bancassurance and First Group’s extensive local channels, First-Aviva will continue to focus on insurance service and ultimately to develop comprehensive products that satisfy different customers’ needs.
First Financial AMC Founded on May 31, 2004, First Financial AMC is a wholly owned subsidiary of First Financial Holding that engages in the acquisition and management of non- performing loans for financial institutions. Currently, it serves mainly as a debt collector for First Bank and gradually expands its businesses to acquire and manage non-performing loans for other financial institutions.
First Venture Capital Founded on June 2, 2004, First Venture Capital is a wholly owned subsidiary of First Financial Holding. It targets distressed companies to initiate restructuring processes designed to engineer successful corporate turnaround and invests in expanding or mature companies to capitalize the growth and development potentials. Up to end of 2009, First Venture Capital engaged in 28 cases with a total of NT$618 million in its investment portfolios.
First Consulting Founded on June 10, 2004, First Financial Management Consulting is a 100%- owned subsidiary of First Financial Holding. It provides consulting and management services to venture capital funds that invest equity capital in distressed businesses and potentially undervalued companies.
First P&C Insurance Agency Founded on September 16, 2004, First P&C Insurance Agency is a wholly owned subsidiary of First Financial Holding. It acts as a broker to sell and distribute property & casualty insurance products.
11 Corporate Governance
Group Structure FFHC Subsidiaries & Affiliates Data as of March 1, 2010
First Financial Holding Co., Ltd.
First Commercial Bank First Commercial Bank (U.S.A.) 100% owned 100% owned FCB Leasing Co., Ltd. FCBL Capital Int’l (B.V.I.) Ltd. 100% owned 100% owned First Insurance Agency Co., Ltd. 100% owned East-Asia Real Estate Management Co., Ltd. 30% owned
First Securities Inc. First Capital Management Inc. 100% owned 100% owned FSC Asia Investment Limited First Worldsec Securities Limited 100% owned 100% owned
First Securities Investment Trust Co., Ltd. 100% owned
First-Aviva Life Insurance Co., Ltd. 51% owned
First Financial Asset Management Co., Ltd. 100% owned
First Property & Casualty Insurance Agency Co., Ltd. 100% owned
First Venture Capital Co., Ltd. 100% owned
First Financial Management Consulting Co., Ltd. 100% owned
12 2009 Annual Report Corporate Governance FFHC Operational Structure Data as of March 1, 2010
Shareholders’ Meeting
Supervisors
Board of Directors Chief Auditor Auditing Department
Chairman & Directors Strategic Development Committee
Risk Management Committee
President Business Decisions Committee
Marketing Integration Committee
IT Development Committee
Executive Vice President
Administration Information Risk Business Strategy Management Dept. Technology Dept. Management Dept. Development Dept. Planning Dept.
Board Structure and Composition The board of First Financial Holding is comprised of 3 independent directors, 12 directors and 5 supervisors. They serve for a three-year term and are eligible for re-election. Of the incumbent board, 9 directors and 4 supervisors represent the Taiwan government’s shareholding. Selected by the Governmental Share Ownership Management Committee of the Ministry of Finance (MOF), these delegates are high-level officials and professors of national universities who have proven expertise in their respective fields of banking, insurance, securities, auditing and information technology, and achieve prominence in their professional activities. A regular review on their ability to adequately discharge duties and exercise independent judgment is conducted by Governmental Share Ownership Management Committee.
13 Board of Directors and Supervisors Data as of March 31, 2010
Shareholding Current Spouse & Minor Shareholding On Term Date by Nominee Title Name board First When Elected Shareholding Shareholding Arrangement Date (until) Elected Shares % Shares % Shares % Shares % Yuh-Chang Chen 2009 2012 2008 Chairman (Delegate of MOF) 05/22 05/21 07/10 919,028,473 14.91% 942,004,184 14.91% 184,500 0.00% 0 0.00% Director & Ming-Ren Chien 2009 2012 2008 President (Delegate of MOF) 05/22 05/21 07/10 919,028,473 14.91% 942,004,184 14.91% 151,650 0.00% 0 0.00% Hsien-Feng Lee 2009 2012 2006 Director (Delegate of MOF) 05/22 05/21 01/02 919,028,473 14.91% 942,004,184 14.91% 0 0.00% 0 0.00% Yi-Hsin Wang 2009 2012 2008 Director (Delegate of MOF) 05/22 05/21 09/26 919,028,473 14.91% 942,004,184 14.91% 0 0.00% 0 0.00% Wen-Cheng Yao 2009 2012 2008 Director (Delegate of MOF) 05/22 05/21 10/29 919,028,473 14.91% 942,004,184 14.91% 0 0.00% 0 0.00% Li-Ling Jennifer Wang 2009 2012 2008 Director (Delegate of MOF) 05/22 05/21 11/03 919,028,473 14.91% 942,004,184 14.91% 0 0.00% 0 0.00% Hsin-Ginn Huang 2009 2012 2004 Director (Delegate of MOF) 05/22 05/21 01/29 919,028,473 14.91% 942,004,184 14.91% 0 0.00% 0 0.00% Shang-Wu Yu 2009 2012 2009 Director (Delegate of MOF) 07/23 05/21 07/23 919,028,473 14.91% 942,004,184 14.91% 0 0.00% 0 0.00% Hsien-Heng Lee 2009 2012 2009 Director (Delegate of MOF) 09/23 05/21 09/23 919,028,473 14.91% 942,004,184 14.91% 0 0.00% 0 0.00%
Tien-Yuan Chen 2009 2012 2003 Director (Delegate of Golden Garden 1,666,470 0.03% 1,708,131 0.03% 421,258 0.01% 0 0.00% Investment Co.,) 05/22 05/21 01/02 2009 2012 2006 Director Chi-Hsun Chang 05/22 05/21 01/02 929,016 0.02% 952,241 0.02% 952,241 0.02% 0 0.00%
An-Fu Chen 2009 2012 2009 Director (Delegate of Global 3,067,000 0.05% 3,143,675 0.05% 6,408,409 0.10% 0 0.00% Investment Co., Ltd) 05/22 05/21 05/22 Independent 2009 2012 2009 Director Tsun-Siou Lee 05/22 05/21 05/22 0 0.00% 0 0.00% 0 0.00% 0 0.00% Independent 2009 2012 2009 Director Yophy Huang 05/22 05/21 05/22 0 0.00% 0 0.00% 9,225 0.00% 0 0.00% Independent 2009 2012 2009 Director Day-Yang Liu 05/22 05/21 05/22 0 0.00% 0 0.00% 0 0.00% 0 0.00% 2009 2012 2006 Supervisor Teng-Lung Hsieh 488,947,248 7.93% 501,170,929 7.93% 0 0.00% 0 0.00% (Delegate of Bank of Taiwan) 05/22 05/21 06/20 2009 2012 2006 Supervisor Kao-Chen Chuang 488,947,248 7.93% 501,170,929 7.93% 0 0.00% 0 0.0%% (Delegate of Bank of Taiwan) 05/22 05/21 08/14 2009 2012 2009 Supervisor Hsien-Yi Kung 488,947,248 7.93% 501,170,929 7.93% 0 0.00% 0 0.00% (Delegate of Bank of Taiwan) 07/27 05/21 07/27 2009 2012 2008 Supervisor Li-Jen Lin 488,947,248 7.93% 501,170,929 7.93% 0 0.00% 0 0.00% (Delegate of Bank of Taiwan) 05/22 05/21 07/25 2009 2012 2006 Supervisor Chun-Chung Lin 05/22 05/21 01/02 23,552,304 0.38% 24,141,111 0.38% 26,235,198 0.42% 0 0.00%
to be continued
14 2009 Annual Report Corporate Governance
Executives, Directors and Supervisors who are spouses Title Name Education and Career Background Other Current Positions or within two degrees of kinship Title Name Relation MBA, National Taiwan University.
CPA; Managing Director, The International Chairman, First Commercial Yuh-Chang Chen Commercial Bank of China(currently named Mega); Chairman Bank; Supervisor, Taiwan Stock ------(Delegate of MOF) Chairman, First Commercial Bank (USA); Secretary Exchange Corp. General, Deputy Mayor, Taipei City Government; Chairman, EasyCard Corporation; Director, Taiwan Asset Management Corp.. M.S., International Finance, National Taipei Managing Director, FCB; University. Chairman, First-Aviva Life Director & Ming-Ren Chien Insurance Co., Ltd.; Director, ------President (Delegate of MOF) Chairman & President, First Financial Asset Taiwan Asset Management Management Co., Ltd; President, FCB Leasing Co., Corp. Ltd; EVP, FCB. Ph. D., Economics, Bielefeld University, Germany. Managing Director, FCB; Hsien-Feng Lee Associate Professor, Dept. of Director Advisory Committee Consultant of Council for ------(Delegate of MOF) Economics, National Taiwan Economic Planning and Development, Executive University. Yuan; Director, Farmers Bank of China. Ph. D., Accounting, University of Kentucky. Professor, National Taipei Yi-Hsin Wang Director Dean of Library, National Taipei University; University; Vice President, The ------(Delegate of MOF) Professor, Dept of Accounting, National Chung Institute of Internal Auditors. Hsing University. Ph. D., Political Science, Chinese Culture University. Wen-Cheng Yao Director Chairman, Chiu-Pin Law Firm. ------(Delegate of MOF) Adjunct Assistant Professor, Dept. of Banking and Finance, Chinese Culture University. Ph. D., Risk Management and Insurance, Temple Director, First-Aviva Life Li-Ling Jennifer University. Insurance Co., Ltd; Professor Director Wang and Chairman, Dept. of Risk ------(Delegate of MOF) Vice Chairman, Center for Insurance Research and Management & Insurance, Education , National Chengchi University. National Chengchi University. Ph. D., MIS, University of Texas at Arlington. Professor, Dept. of Information Hsin-Ginn Huang Director and Finance Mgt., National ------(Delegate of MOF) Adjunct Professor, Dept. of Information Mgt., Chiao Tung University. National Chung Cheng University. Director, FCB; Independent Ph. D., Finance, University of Birmingham, U.K. Director, TXC Corporation; Shang-Wu Yu Professor, Dept. of Information Director VP, Dean of College of Mgt., Tungnan University; ------(Delegate of MOF) Management, National Taiwan Chief Secretary for Chairperson, Fair Trade University of Science and Commission, Executive Yuan. Technology Director, FCB; Chairman, Ph. D., Civil Engineering, University of Texas at Taiwan Construction Research Austin. Institute; Professor, Dept. of Hsien-Heng Lee Director Construction Engineering, ------(Delegate of MOF) Division Head, National Center for Research on National Taiwan University of Earthquake Engineering; Dean, Dept. of Civil Science and Technology. Engineering, National Chi Nan University.
15 Executives, Directors and Supervisors who are spouses Title Name Education and Career Background Other Current Positions or within two degrees of kinship Title Name Relation Tien-Yuan Chen B.A., Foreign Languages and Literature, Tamkang Managing Director, FCB; (Delegate of Golden University. Chairman, Golden Garden Director ------Garden Investment Investment Co & Golden Gate Co.,) Chairman, Taiwan Coca-Cola Co. Motor Co. B.S., International Trade, Tamkang University. Chairman and President, Director Chi-Hsun Chang ------Magna Central Company. Supervisor, Optimum Care International Tech. Inc. B.S., Pharmacy, Taipei Medical University. An-Fu Chen Chairman, Global Investment Director (Delegate of Global EVP, Transamerica Occidental Life Insurance Co; EVP, Co., Ltd. ------Investment Co., Ltd) TransGlobe Life Insurance Inc., Director, Mintai Fire & Marine Insurance Company. Ph. D., Finance, University of California, Berkeley. Professor, Dept. of Finance, National Taiwan University; Independent Chair Professor, Hitotsubashi University, Japan; Independent Director, Tsun-Siou Lee ------Director Director, Taiwan Securities and Futures Information Agricultural Bank; Center; Chief Editor, Journal of Financial Studies Director, Taiwan Future (TSSCI); Chair, Center for Corp. Governance. Exchange. Independent Managing Ph. D., Economics, Indiana University. Director, FCB; Associate Independent Professor, Dept. of Yophy Huang Supervisor, Taipei Fubon Bank; Research Fellow, ------Director Public Finance and Tax Taxation Tariff Committee, MOF; Member, Taxation Administration, National Taipei Revolution Committee, Executive Yuan. College of Business. Director, SolidWizard Co., Ltd; Ph. D., Economics, Tulane University. Dean & Professor, Graduate Independent Day-Yang Liu Institute of Finance, National ------Director Chair, Taiwan Lotto Research Center; Supervisor, Taiwan University of Science Taipei Fubon Bank Charity Foundation. and Technology. Teng-Lung Hsieh B.S., National Taichung Institute of Commerce. Supervisor (Delegate of Bank of EVP, Bank of Taiwan. ------Taiwan) Chief Auditor, Bank of Taiwan. B.A., National Chengchi University. Kao-Chen Chuang EVP & Chief Secretary of the Supervisor (Delegate of Bank of ------Supervisor, FCB; Manager, Sung Chiang Branch; Board, Bank of Taiwan. Taiwan) Hsin Chuang Branch, Bank of Taiwan. B.A., Soochow University. Hsien-Yi Kung Managing Director, Dept. of Supervisor (Delegate of Bank of ------Manager, Lotung Branch & Sungchiang Branch, Business, Bank of Taiwan. Taiwan) Bank of Taiwan. M.S., Statistics, National Chengchi University.
Li-Jen Lin Section Chief, Dept. of Statistics, Ministry of Supervisor, FCB; Director Supervisor (Delegate of Bank of Economic Affairs; Deputy Director-General, Dept. General, Dept. of Statistics, ------Taiwan) of Statistics, Ministry of Economic Affairs; Director- MOF. General, Department of Statistics, Council of Labor Affairs, Executive Yuan. B.A., English, TamKang College. Senior Advisor, Mingtai Fire & Marine Insurance Company; Supervisor Chun-Chung Lin ------Director, Mingtai Fire & Marine Insurance Company; Director, Taiwan Red Cross Director, Chang Hwa Bank. Society, Taichung.
16 2009 Annual Report Corporate Governance Professional Qualification and Independence Analysis of Directors and Supervisors Data as of March 31, 2010
Meet one of the Following Professional Qualification requirements, Together with at Least Independence Criteria five Years Work Experience (Note) A judge, public An instructor of Have work Criteria prosecutor, attorney, Number of higher position in a experience certified public Other Public dept. of Commerce, in the accountant or other Co., in which Law, Finance, areas of Name professional or the Individual is Accounting or Commerce, technical specialist Concurrently other Academic Law, who has passed Serving as an Dept. related to the Finance or 1 2 3 4 5 6 7 8 9 10 a national exam. Independent business needs of Accounting And been awarded Director the Co., in a public or otherwise a certificate in or private junior necessary for a professional college, college or the business necessary for the university. of the Co. business of the Co. Yuh-Chang Chen ˇ ˇ ˇ ˇ ˇ ˇ ˇ ˇ ˇ ˇ Ming-Ren Chien ˇ ˇ ˇ ˇ ˇ ˇ ˇ Hsien-Feng Lee ˇ ˇ ˇ ˇ ˇ ˇ ˇ ˇ ˇ Yi-Hsin Wang ˇ ˇ ˇ ˇ ˇ ˇ ˇ ˇ ˇ ˇ ˇ Wen-Cheng Yao ˇ ˇ ˇ ˇ ˇ ˇ ˇ ˇ ˇ ˇ ˇ Li-Ling Jennifer Wang ˇ ˇ ˇ ˇ ˇ ˇ ˇ ˇ ˇ Hsin-Ginn Huang ˇ ˇ ˇ ˇ ˇ ˇ ˇ ˇ ˇ Shang-Wu Yu ˇ ˇ ˇ ˇ ˇ ˇ ˇ ˇ ˇ 1 Hsien-Heng Lee ˇ ˇ ˇ ˇ ˇ ˇ ˇ ˇ ˇ Tien-Yuan Chen ˇ ˇ ˇ ˇ ˇ ˇ ˇ Chi-Hsun Chang ˇ ˇ ˇ ˇ ˇ ˇ ˇ ˇ ˇ ˇ An-Fu Chen ˇ ˇ ˇ ˇ ˇ ˇ ˇ ˇ Tsun-Siou Lee ˇ ˇ ˇ ˇ ˇ ˇ ˇ ˇ ˇ ˇ ˇ 1 Yophy Huang ˇ ˇ ˇ ˇ ˇ ˇ ˇ ˇ ˇ ˇ ˇ Day-Yang Liu ˇ ˇ ˇ ˇ ˇ ˇ ˇ ˇ ˇ ˇ Teng-Lung Hsieh ˇ ˇ ˇ ˇ ˇ ˇ ˇ ˇ Kao-Chen Chuang ˇ ˇ ˇ ˇ ˇ ˇ ˇ ˇ Hsien-Yi Kung ˇ ˇ ˇ ˇ ˇ ˇ ˇ ˇ Li-Jen Lin ˇ ˇ ˇ ˇ ˇ ˇ ˇ ˇ Chun-Chung Lin ˇ ˇ ˇ ˇ ˇ ˇ ˇ ˇ ˇ ˇ
Note: Please tick the corresponding boxes if directors or supervisors have been any of the following during the two years prior to being elected or during the term of office. 1. Not an employee of the Company or any of its affiliates. 2. Not a director or supervisor of the Company or any of its affiliates. The same does not apply, however, in cases where the person is an independent director of the Company, its parent company, or any subsidiary in which the Company holds, directly or indirectly, more than 50% of the voting shares. 3. Not a natural-person shareholder who holds shares, together with those held by the person’s spouse, minor children, or held by the person under others’ names, in an aggregate amount of 1% or more of the total number of outstanding shares of the Company or ranking in the top 10 in holdings. 4. Not a spouse, relative within the second degree of kinship, or lineal relative within the fifth degree of kinship, of any of the persons in the preceding three subparagraphs. 5. Not a director, supervisor, or employee of a corporate shareholder that directly holds 5% or more of the total number of outstanding shares of the Company or that holds shares ranking in the top five in holdings. 6. Not a director, supervisor, officer, or shareholder holding 5% or more of the share, of a specified company or institution that has a financial or business relationship with the Company. 7. Not a professional individual who, or an owner, partner, director, supervisor, or officer of a sole proprietorship, partnership, company, or institution that, provides commercial, legal, financial, accounting services or consultation to the Company or to any affiliate of the Company, or a spouse thereof. 8. Not having a marital relationship, or a relative within the second degree of kinship to any other director of the Company. 9. Not been a person of any conditions defined in Article 30 of the Company Law. 10. Not a governmental, juridical person or its representative as defined in Article 27 of the Company Law.
17 Board Meeting The board of directors convenes every month to approve financial and other reporting, discuss the management’s performance, monitor the internal compliance and control system, and review the development of corporate strategies and performance objectives, which reflect changes in the competitive environment. All board members receive written material on the proposals in advance and meetings of the board of directors shall be convened by the chairman of the board of directors. Unless otherwise provided for in the Company Charter, resolutions of the board of directors shall be passed by one-half of the directors at a meeting attended by one-half of the directors.
Attendance at Board Meetings
During 2009, there were 13 board of director meetings held. The number of meetings attended by each Director and Supervisor was as follows:
Attendance Attendance Attendance Rate (%) Name Notes in Person (B) by Proxy (B/A) Yuh-Chang Chen, Chairman Delegate of Ministry of 13 0 100 Renominated on May 22, 2009. Finance Ming-Ren Chien, Director Delegate of Ministry of 12 1 92.31 Renominated on May 22, 2009. Finance Hsien-Feng Lee, Director Delegate of Ministry of 12 1 92.31 Renominated on May 22, 2009. Finance Yi-Hsin Wang, Director Delegate of Ministry of 11 2 84.62 Renominated on May 22, 2009. Finance Wen-Cheng Yao, Director Delegate of Ministry of 13 0 100 Renominated on May 22, 2009. Finance Li-Ling Jennifer Wang, Director Newly assigned on May 22, 2009, 7 1 87.5 Delegate of Ministry of total 8 meetings were held. (A) Finance Hsin-Ginn Huang, Director Delegate of Ministry of 10 3 76.92 Renominated on May 22, 2009. Finance Shang-Wu Yu, Director Newly assigned on July 23, 2009, total Delegate of Ministry of 5 0 100 5 meetings were held. (A) Finance Hsien-Heng Lee, Director Newly assigned on Sep. 23, 2009, Delegate of Ministry of 4 0 100 total 4 meetings were held. (A) Finance Tien-Yuan Chen, Director Delegate of Golden Garden 12 1 92.31 Renominated on May 22, 2009. Investment Co. Chi-Hsun Chang, Director 13 0 100 Renominated on May 22, 2009.
18 2009 Annual Report Corporate Governance
Attendance Attendance Attendance Rate (%) Name Notes in Person (B) by Proxy (B/A) An-Fu Chen, Director Newly assigned on May 22, 2009, Delegate of Global Investment 7 1 87.5 total 8 meetings were held. (A) Co., Ltd Tsun-Siou Lee, Independent Newly assigned on May 22, 2009, 8 0 100 Director total 8 meetings were held. (A) Yophy Huang, Independent Newly assigned on May 22, 2009, 8 0 100 Director total 8 meetings were held. (A) Day-Yang Liu, Independent Newly assigned on May 22, 2009, 6 2 75 Director total 8 meetings were held. (A) Jung-Hui Liang, Director Before the discharge date of June 29, Delegate of Ministry of 7 0 100 2009, total 7 meetings were held. (A) Finance Raymond C. H. Tu, Director Before the discharge date of May 22, Delegate of Ministry of 5 0 100 2009, total 5 meetings were held. (A) Finance Su-Chen Hsieh, Director Before the discharge date of Sep. 23, Delegate of Ministry of 9 0 100 2009, total 9 meetings were held. (A) Finance Te-Fu Lu, Director Before the discharge date of May 22, Delegate of Ministry of 5 0 100 2009, total 5 meetings were held. (A) Finance Teng-Lung Hsieh, Director Before the discharge date of May 22, 5 0 100 Delegate of Bank of Taiwan 2009, total 5 meetings were held. (A) Li-Ling Jennifer Wang, Before the discharge date of May 22, Director 5 0 100 2009, total 5 meetings were held. (A) Delegate of Bank of Taiwan Shiang-Chung Chen, Director Before the discharge date of May 22, Delegate of Mercuries Jeantex 4 1 80 2009, total 5 meetings were held. (A) Ltd. Teng-Lung Hsieh, Supervisor Newly assigned on May 22, 2009, 7 -- 87.5 Delegate of Bank of Taiwan total 8 meetings were held. (A) Kao-Chen Chuang, Supervisor 12 -- 92.31 Renominated on May 22, 2009. Delegate of Bank of Taiwan Hsien-Yi Kung, Supervisor Newly assigned on July 27, 2009, total 5 -- 100 Delegate of Bank of Taiwan 5 meetings were held. (A) Li-Jen Lin, Supervisor Newly assigned on May 22, 2009, 8 -- 100 Delegate of Bank of Taiwan total 8 meetings were held. (A) Chun-Chung Lin, Supervisor 12 -- 92.31 Renominated on May 22, 2009. Li-Jen Lin, Supervisor Newly assigned on May 22, 2009, Delegate of Ministry of 5 -- 100 total 5 meetings were held. (A) Finance Wang-Ching Chen, Supervisor Newly assigned on May 22, 2009, Delegate of Ministry of 5 -- 100 total 5 meetings were held. (A) Finance
19 Attendance Attendance Attendance Rate (%) Name Notes in Person (B) by Proxy (B/A) Te-Fu Lu, Supervisor Before the discharge date of July 27, 3 -- 100 Delegate of Bank of Taiwan 2009, total 3 meetings were held. (A) Chih-Hua Wang, Supervisor, Newly assigned on May 22, 2009, 3 -- 60 Delegate of Mercuries Jeantex total 5 meetings were held. (A) Note: 1.Any circumstances referred to in Article in Article 14-3 of Securities and Exchange Act and resolutions of the directors’ meetings objected to by Independent Directors or subject to qualified opinion and recorded or declared in writing, the dates of meetings, sessions, contents of motions, all independents’ opinion and the Company’s response to independent directors’ opinion should be specified: None. 2.Any Directors’ avoidance of motions in conflict of interest, the Directors’ names, contents of motions, causes for avoidance and voting should be specified: Director name: Director & President: Ming-Ren Chien Contents of motions: discharge the limit of non-competition clauses related to Ming-Ren Chien, also appointed as Chairman of First-Aviva. Causes for avoidance and voting: Ming-Ren Chien, exclusive of motion discussion and voting. 3.Measures taken to strengthen the functionality of the Board: Newly appointed 3 independent board of directors with Financial, Taxation and Economics expertise respectively and will assist the Board in carrying out its various duties and strengthen corporate governance.
Director and Supervisor Remuneration The table below describes each element of directors’ and supervisors’compensation
Items Delivery Policy Base ● Cash ● Each director and supervisor of First Financial Holding receives a monthly Compensation ● Monthly cash retainer of NT$20,000. The FHC’s chairman receives a cash retainer 1.25 times that paid to the president. ● Traditionally, chairman of First Financial Holding acts as chairman of subsidiary First Bank. As is the common practice, the chairman receives compensation for his/her service at First Bank, but waives receipt of the monthly cash retainer for his/her service as chairman of First Financial Holding. ● Total monthly cash paid to directors and supervisors is capped at NT$ 2,400,000. ● Effective from May 22, 2009, 3 independent directors receive a monthly cash retainer of NT$50,000. Bonus ● Cash ● Directors and supervisors also receive annual incentives based on First ● Annually and Financial Holding’s profit performance. subject to ● Where First Financial Holding reports earnings at the end of the shareholders’ operating year, after paying all applicable taxes, offsetting losses of approval previous year, setting aside a legal reserve and special reserve, First Financial Holding shall be in compliance with Article 34 of the Company Charter to appropriate no more than 1% of the balance for the bonus of directors and supervisors. Benefits in kind ● Severance pay ● First Financial Holding reimburses its directors for transportation ● Reimbursed as per expenses incurred in attending board meetings and health check fees of actual no more than NT$35,000 per person. ● First Financial Holding provides expenses allowance for directors and supervisors for their performing other services in their capacities as directors or supervisors.
Directors who are senior executives of First Financial Holding, in addition to director’s compensation, also receive base salary, etc. for management. As some directors and supervisors also act as directors, supervisors, or senior executives of First Financial Holding’s subsidiaries, their compensation comprises a component awarded exclusively by the parent company, First Financial holding, and a component awarded by the consolidated group. The following tables summarize the directors’ annual remuneration at First Financial Holding alone and at First Group.
20 2009 Annual Report
Directors’ Annual Remuneration at First Financial Holding and Group Data as of Dec. 31, 2009, in NT$ and %
Remuneration Ratio of Corporate Governance Base Severance (A+B+C+D) to net Bonus(C) Reimbursed Pay(D) Title Name Compensation(A) Pay(B) income (%) FHC FHC FHC FHC FHC FHC FHC FHC FHC FHC Group Group Group Group Group Director MOF Yuh-Chang Chen Chairman (Delegate of MOF) Ming-Ren Chien Director (Delegate of MOF) Hsien-Feng Lee Director (Delegate of MOF) Yi-Hsin Wang Director (Delegate of MOF) Wen-Cheng Yao Director (Delegate of MOF) Li-Ling Jennifer Wang Director (Delegate of MOF) Shang-Wu Yu Director (Delegate of MOF) Jung-Hui Liang Director (Delegate of MOF) Hsien-Heng Lee Director (Delegate of MOF) Su-Chen Hsieh Director (Delegate of MOF) Hsin-Ginn Huang Director (Delegate of MOF) 4,999,984 11,482,889 0 0 18,775,375 18,775,375 135,208 135,208 0.8604% 1.1303% Independent Tsun-Siou Lee Director Independent Yophy Huang Director Independent Day-Yang Liu Director Golden Garden Director Investment Co.,(Delegate: Tien-Yuan Chen) Director Chi-Hsun Chang Global Investment Co.,Ltd Director (Delegate: An-Fu Chen) Bank of Taiwan(Delegate: Director Li-Ling Jennifer Wang, Teng-Lung Hsieh) Raymond C. H. Tu Director (Delegate of MOF) Te-Fu Lu Director (Delegate of MOF) Mercuries Jeantex Ltd. Director (Delegate: Shiang-Chung Chen)
to be continued
21 Relevant remuneration received by directors who are also Ratio of Compensation employees (A+B+C+D+ paid to Salary, Bonus and Severance Profit-sharing from Stock E+F+G) to net directors from Title Name Allowance(E) Pay(F) Employee Bonus(G) Option(H) income (%) invested co., FHC FHC FHC FHC FHC FHC other than FHC FHC Group FHC FHC Group Group Group Group group Cash Stock cash Stock Director MOF Yuh-Chang Chen Director (Delegate of MOF) Ming-Ren Chien Director (Delegate of MOF) Hsien-Feng Lee Director (Delegate of MOF) Yi-Hsin Wang Director (Delegate of MOF) Wen-Cheng Yao Director (Delegate of MOF) Li-Ling Jennifer Wang Director (Delegate of MOF) Shang-Wu Yu Director (Delegate of MOF) Jung-Hui Liang Director (Delegate of MOF) Hsien-Heng Lee Director (Delegate of MOF) Su-Chen Hsieh Director (Delegate of MOF) Hsin-Ginn Huang Director (Delegate of MOF) Independent Tsun-Siou Lee Director Independent 4,548,000 4,548,000 0 0 0 0 0 0 0 0 1.0241% 1.2995% Yes Yophy Huang Director Independent Day-Yang Liu Director Golden Garden Investment Co., Director (Delegate: Tien- Yuan Chen) Director Chi-Hsun Chang Global Investment Co.,Ltd Director (Delegate: An-Fu Chen) Bank of Taiwan (Delegate: Li-Ling Director Jennifer Wang, Teng-Lung Hsieh) Raymond C. H. Tu Director (Delegate of MOF) Te-Fu Lu Director (Delegate of MOF) Mercuries Jeantex Ltd. (Delegate: Director Shiang-Chung Chen)
22 2009 Annual Report Corporate Governance
Name of Directors Bracket Total of (A+B+C+D) Total of (A+B+C+D+E+F+G) FHC FHC Group FHC FHC Group Bank of Taiwan, Bank of Taiwan, Bank of Taiwan, Bank of Taiwan, Mercuries Jeantex Mercuries Jeantex Mercuries Jeantex Mercuries Jeantex Ltd, Golden Garden Ltd, Golden Garden Ltd, Golden Garden Ltd, Golden Garden Investment Co, Global Investment Co, Global Investment Co, Global Investment Co, Global Investment Co.,Ltd, Investment Co.,Ltd, Investment Co.,Ltd, Investment Co.,Ltd, Yi-Hsin Wang, Wen- Ming-Ren Chien, Yi-Hsin Wang, Wen- Hsien-Feng Lee, Cheng Yao, Li-Ling Hsien-Feng Lee, Cheng Yao, Li-Ling Yi-Hsin Wang, Wen- Jennifer Wang, Shang- Yi-Hsin Wang, Wen- Jennifer Wang, Shang- Cheng Yao, Li-Ling Wu Yu, Hsien-Heng Cheng Yao, Li-Ling Wu Yu, Hsien-Heng Jennifer Wang, Shang- Under 2,000,000 Lee, Hsin-Ginn Huang, Jennifer Wang, Shang- Lee, Hsin-Ginn Huang, Wu Yu, Hsien-Heng Tsun-Siou Lee, Yophy Wu Yu, Hsien-Heng Tsun-Siou Lee, Yophy Lee, Hsin-Ginn Huang, Huang, Day-Yang Lee, Hsin-Ginn Huang, Huang, Day-Yang Tsun-Siou Lee, Yophy Liu, Chi-Hsun Chang, Tsun-Siou Lee, Yophy Liu, Chi-Hsun Chang, Huang, Day-Yang Liu, Jung-Hui Liang, Huang, Day-Yang Liu, Jung-Hui Liang, Tien-Yuan Chen, Chi- Raymond C. H. Tu, Tien-Yuan Chen, Chi- Raymond C. H. Tu, Hsun Chang, Jung- Su-Chen Hsieh, Te-Fu Hsun Chang, Jung- Su-Chen Hsieh, Te-Fu Hui Liang, Raymond C. Lu Hui Liang, Raymond C. Lu H. Tu, Su-Chen Hsieh, H. Tu, Su-Chen Hsieh, Te-Fu Lu Te-Fu Lu Yuh-Chang Chen, 2,000,000 ~ 5,000,000 — Yuh-Chang Chen Ming-Ren Chien Ming-Ren Chien 5,000,000 ~ 10,000,000 — — — 10,000,000 ~ 15,000,000 — — — — 15,000,000 ~ 30,000,000 MOF MOF MOF MOF 30,000,000 ~ 50,000,000 — — — — 50,000,000 ~ 100,000,000 — — — — Over 100,000,000 — — — — Total 19 23 20 23
23 Supervisors’ Annual Remuneration at First Financial Holding and Group Data as of Dec. 31, 2009, in NT$ and %
Remuneration of Supervisors Ratio of Compens (A+B+C+D) ation Base Severance Reimbursed paid Profit-Sharing(C) to net Compensation(A) Pay(B) Pay(D) to income (%) directors Title Name from invested FHC FHC FHC FHC FHC FHC FHC FHC FHC FHC co., Group Group Group Group Group other than group Supervisor MOF
Supervisor Bank of Taiwan Bank of Taiwan Supervisor (Delegate:Teng- Lung Hsieh) Bank of Taiwan Supervisor (Delegate:Kao- Chen Chuang) Bank of Taiwan Supervisor (Delegate:Hsien- Yi Kung,Te-Fu Lu) Bank of Taiwan Supervisor (Delegate:Li-Jen 1,200,000 1,200,000 0 0 6,234,970 6,234,970 14,500 14,500 0.2681% 0.2770% — Lin) Supervisor Chun-Chung Lin MOF Supervisor (Delegate:Li-Jen Lin) MOF Supervisor (Delegate: Wang- Ching Chen) Mercuries Jeantex Ltd. Supervisor (Delegate: Chih- Hua Wang)
24 2009 Annual Report Corporate Governance
Name of Supervisors Bracket Total of (A+B+C+D) FHC FHC Group Li-Jen Lin, Wang-Ching Chen, MOF, Chun- Li-Jen Lin, Wang-Ching Chen, MOF, Chun- Under 2,000,000 Chung Lin, Mercuries Jeantex Ltd. Chung Lin, Mercuries Jeantex Ltd. 2,000,000 ~ 5,000,000 Bank of Taiwan Bank of Taiwan 5,000,000 ~ 10,000,000 — — 10,000,000 ~ 15,000,000 — — 15,000,000 ~ 30,000,000 — — 30,000,000 ~ 50,000,000 — — 50,000,000 ~ 100,000,000 — — Over 100,000,000 — — Total 6 6
Comparison of Remuneration for Directors and Supervisors in the Most Recent Two Fiscal Years and Remuneration Policy in NT$ and %
Total remuneration paid to directors and Ratio of total remuneration paid to directors and Year supervisors supervisors to net income (%) FHC FHC Group FHC FHC Group 2008 75,062,134 83,823,615 1.0156% 1.1844% 2009 35,908,037 42,390,942 1.2922% 1.5765%
For 2009, First Financial Holding alone awarded to its directors and supervisors a total compensation of NT$35,908,037, about 1.2922% of the net income of parent company (NT$2,778,927,188). The compensation awarded to First Financial Holding’s directors and supervisors on the group basis is NT$42,390,942, around 1.5765% of the net income of the consolidated group results (NT$2,688,862,650). Compared to 2008, total compensation awarded dropped by 52.16% and 49.43% respectively in line with decreased profit margin.
25 Management Team Data as of March 1, 2010 Shareholding Managers who are Spouse & Minor Shareholding by Nominee spouses or within 2 Title Name Date Effective Shareholding Education & Experience Other Position Arrangement degrees of kinship Shares % Shares % Shares % Title Name Relation M.S. International finance, National Taipei University; Managing Director, FCB; Chairman, First Aviva Life President Ming-Ren Chien 2008.7.10 151,650 0% 0 0% 0 0% President, FCB Leasing Co.; EVP, FCB; Chairman & - - - Insurance Co., Ltd; Director, TWN Asset Mgt. Corp. President, First Financial Asset Mgt. Co., Ltd. B.S., International Trade, National Taiwan University; EVP Hsin-Shih Hung 2007.6.25 56,938 0% 0 0% 0 0% Chairman, FSITC Co., Ltd. - - - EVP, Financial Markets BU of FCB; Director, FS Inc. EVP, FCB; Chairman, First Venture Capital and First M.S., Banking and Finance, Tam Kang University; EVP Jin-Der Chiang 2009.7.1 294 0% 847 0% 0 0% Financial Mgt. Consulting Co.; Supervisor, FS Inc; - - - Head of IT Center of FCB; Director of FSITC. Director, TWN Financial Asset Service Corp. LL.B., Soochow University; Chief Auditor of FCB; AVP Supervisor, FS Inc., First Venture Capital and First Chief Auditor Wen-Chang Tu 2009.10.1 57,792 0% 186 0% 0 0% - - - & Manager, Credit Approval Division of FCB. Financial Mgt. Consulting Co. VP & Acting Head of B.S., Economics, Soochow University; Head of Ding-Ming Liao 2009.10.1 33,349 0% 0 0% 0 0% Head of Auditing Dept, FCB. - - - Auditing Dept. Taichung Regional Center of FCB. EVP, General Admin. Center of FCB; Supervisor, Advisor & Head of B.S., Accounting, National Cheng Kung University; Po-Chiao Chou 2008.1.2 54,248 0% 159 0% 0 0% FSITC Co. and Tang Eng Iron Works; Director, TWN - - - Admin. Mgt. Dept. SAVP & Manager, General Affair Division of FCB. Asset Mgt. Corp. VP & Acting Head of B.A., National Taiwan University; Senior Manager, Business Development Irene Chen 2008.12.30 48,039 0% 0 0% 0 0% Marketing Integration Unit, Business Development Director of FSITC Co. - - - Dept. Dept. and Admin. & Planning Dept. B.S., International trade, Feng Chia College of Advisor & Head of Risk Jeff Chen 2008.1.2 0 0% 0 0% 0 0% Engineering and Business; SVP, Credit Approval EVP, Risk Mgt. Center of FCB. - - - Mgt. Dept. Division and Credit Analysis Division of FCB Advisor & Head of IT M.S., Computer Science, George Washington Jason Ko 2004.10.14 31,119 0% 0 0% 0 0% EVP, IT Center of FCB. - - - Dept. University; SVP, IT Division of FCB Executives’ Annual Remuneration The executive management of First Financial Holding includes the president, vice president and chief auditor. Because senior executives also act as president, vice president and chief auditor of subsidiaries, the total compensation to the executive officers comprises a component awarded exclusively by the parent company, First Financial Holding, and a component awarded by the consolidated group. The following tables summarize the executive’s annual remuneration at First Financial Holding alone and at First Group. Executives’ Annual Remuneration at First Financial Holding and Group Data as of Dec. 31, 2009, in NT$ and % Bonus and Profit-sharing Employee Salary(A) Severance Pay(B) Allowance(C) Bonus(D) Title Name FHC FHC FHC FHC FHC Group FHC FHC FHC Group Group Group Cash Stock Cash Stock President Ming-Ren Chien EVP Hsien-Chung Tsai1 EVP Hsin-Shih Hung 8,052,121 14,610,363 1,901,738 9,914,150 2,375,011 3,206,255 61,195 0 306,978 0 EVP Jin-Der Chiang Chief Auditor Ding-Yuan Yeh1 Chief Auditor Wen-Chang Tu
Ratio of (A+B+C+D) to Exercisable Employee Any compensation from Title Name net income(%) Stock Option an invested Co. other than FHC FHC Group FHC FHC Group group President Ming-Ren Chien EVP Hsien-Chung Tsai1 EVP Hsin-Shih Hung 0.4459% 1.0427% 0 0 Yes EVP Jin-Der Chiang Chief Auditor Ding-Yuan Yeh1 Chief Auditor Wen-Chang Tu 1. Hsien-Chung Tsai and Ding-Yuan Yeh retired on July1, 2009 and Oct. 1, 2009.
26 2009 Annual Report
Shareholding Managers who are Spouse & Minor Shareholding by Nominee spouses or within 2 Title Name Date Effective Shareholding Education & Experience Other Position Arrangement degrees of kinship Shares % Shares % Shares % Title Name Relation
M.S. International finance, National Taipei University; Corporate Governance Managing Director, FCB; Chairman, First Aviva Life President Ming-Ren Chien 2008.7.10 151,650 0% 0 0% 0 0% President, FCB Leasing Co.; EVP, FCB; Chairman & - - - Insurance Co., Ltd; Director, TWN Asset Mgt. Corp. President, First Financial Asset Mgt. Co., Ltd. B.S., International Trade, National Taiwan University; EVP Hsin-Shih Hung 2007.6.25 56,938 0% 0 0% 0 0% Chairman, FSITC Co., Ltd. - - - EVP, Financial Markets BU of FCB; Director, FS Inc. EVP, FCB; Chairman, First Venture Capital and First M.S., Banking and Finance, Tam Kang University; EVP Jin-Der Chiang 2009.7.1 294 0% 847 0% 0 0% Financial Mgt. Consulting Co.; Supervisor, FS Inc; - - - Head of IT Center of FCB; Director of FSITC. Director, TWN Financial Asset Service Corp. LL.B., Soochow University; Chief Auditor of FCB; AVP Supervisor, FS Inc., First Venture Capital and First Chief Auditor Wen-Chang Tu 2009.10.1 57,792 0% 186 0% 0 0% - - - & Manager, Credit Approval Division of FCB. Financial Mgt. Consulting Co. VP & Acting Head of B.S., Economics, Soochow University; Head of Ding-Ming Liao 2009.10.1 33,349 0% 0 0% 0 0% Head of Auditing Dept, FCB. - - - Auditing Dept. Taichung Regional Center of FCB. EVP, General Admin. Center of FCB; Supervisor, Advisor & Head of B.S., Accounting, National Cheng Kung University; Po-Chiao Chou 2008.1.2 54,248 0% 159 0% 0 0% FSITC Co. and Tang Eng Iron Works; Director, TWN - - - Admin. Mgt. Dept. SAVP & Manager, General Affair Division of FCB. Asset Mgt. Corp. VP & Acting Head of B.A., National Taiwan University; Senior Manager, Business Development Irene Chen 2008.12.30 48,039 0% 0 0% 0 0% Marketing Integration Unit, Business Development Director of FSITC Co. - - - Dept. Dept. and Admin. & Planning Dept. B.S., International trade, Feng Chia College of Advisor & Head of Risk Jeff Chen 2008.1.2 0 0% 0 0% 0 0% Engineering and Business; SVP, Credit Approval EVP, Risk Mgt. Center of FCB. - - - Mgt. Dept. Division and Credit Analysis Division of FCB Advisor & Head of IT M.S., Computer Science, George Washington Jason Ko 2004.10.14 31,119 0% 0 0% 0 0% EVP, IT Center of FCB. - - - Dept. University; SVP, IT Division of FCB
Name of President and Executive Officers Bracket FHC FHC Group Under 2,000,000 Jin-Der Chiang, Wen-Chang Tu Ming-Ren Chien, Hsin-Shih Hung, Hsien- Ming-Ren Chien, Hsin-Shih Hung, Jin-Der 2,000,000 ~ 5,000,000 Chung Tsai, Ding-Yuan Yeh Chiang, Wen-Chang Tu 5,000,000 ~ 10,000,000 — Hsieh-Chung Tsai, Ding-Yuan Yeh 10,000,000 ~ 15,000,000 — — 15,000,000 ~ 30,000,000 — — 30,000,000 ~ 50,000,000 — — 50,000,000 ~ 100,000,000 — — Over 100,000,000 — —
Comparison of Remuneration for Executives in the Most Recent Two Fiscal Years and Remuneration Policy in NT$ and % Ratio of Total Remuneration paid to executives Total remuneration paid to executives Year to net income (%) FHC FHC Group FHC FHC Group 2008 12,803,745 16,323,798 0.1732% 0.2307% 2009 12,390,065 28,037,746 0.4459% 1.0427% For 2009, First Financial Holding alone awarded its executives a total compensation of NT$12,390,065, about 0.4459% of the net income of parent company (NT$2,778,927,188). The compensation awarded to First Financial Holding’s executives on the group basis is NT$28,037,746, around 1.0427% of the net income of the consolidated group results (NT$2,688,862,650).
27 Capital Overview
Share Capital As of April 25, 2010, First Financial Holding’s paid-in capital totaled NT$63,188,537,990 with 6,318,853,799 shares outstanding issued at a par value of NT$10. For the year of 2009, NT$1,541,183,850 of 2008 earnings were capitalized simultaneously with the issue of 154,118,385 common shares. As of December 31, 2008, First Financial Holding’s paid-in capital totaled NT$61,647,354,140, with 6,164,735,414 shares outstanding. FFHC Ownership Structure First Financial Holding continues to monitor the development of its ownership structure based on the share register as of record date, monthly filing of ownership reports by corporate insiders and major shareholders as well as reports of changes in ownership of shareholders who have more than 10%, 25%, 50% and 75% of outstanding common stock. As of April 25, 2010, shareholders having more than 1 percent of the share capital at First Financial Holding are listed below.
Shareholders Breakdown by Owners Type Data as of April 25, 2010
Shareholders Number Share-held Holding % Government Agencies 5 1,172,855,734 18.56% Financial Institutions 22 1,168,296,128 18.49% Other Institutions 616 358,322,157 5.67% Individuals 215,059 2,411,717,620 38.17% Foreign Institutions & Foreigners 424 1,207,662,160 19.11% Total Shares 216,126 6,318,853,799 100.00%
Major Shareholders Shareholders having more than 1% of the share capital at First Financial Holding Data as of April 25, 2010
Shareholders Share-held Holding % Ministry of Finance 942,004,184 14.91% Bank of Taiwan 501,170,929 7.93% Hua Nan Bank 187,692,841 2.97% Shin Kong Life Insurance 125,859,938 1.99% Civil Servants’ Retirement Fund 123,663,140 1.96% Custodian, J.P. Morgan Chase Bank N.A. Taipei 96,206,000 1.52% for Saudi Arabian Monetary Agency Cathay Life insurance 95,673,812 1.51% China Life Insurance 87,210,435 1.38% Fubon Life Insurance 85,077,510 1.35% Bureau of Labor Insurance 74,677,768 1.18%
28 2009 Annual Report Capital Overview Share Price Information First Financial Holding was incorporated on January 2, 2003 and became the holding company of First Bank through a share-for-share swap. On the same date, First Financial Holding’s common shares were listed on the Taiwan Stock Exchange under the ticker 2892, the common stocks of First Bank (ticker: 2802) were delisted from the Taiwan Stock Exchange. On August 1, 2003, First Financial Holding’s global depositary receipts were listed on the Luxemburg Stock Exchange (now the “Euro MTF market of the Luxembourg Stock Exchange”) with each GDR unit equivalent to 20 common shares. As of March 1, 2010, there were 377,208 GDRs outstanding, representing 7,544,160 of those common shares or 0.12% of total outstanding shares.
Share Price Information on Taiwan Stock Exchange Data as of February 28, 2010 and in NT$ $40
$35
$30
$25
$20
$15
$10 2005 2006 2007 2008 2009 2010 High 27.60 26.35 27.00 38.80 22.40 20.20 Low 21.90 20.90 20.25 12.35 12.20 16.20 Period-end 23.50 24.75 23.95 17.25 19.85 17.25 Average 24.92 23.49 23.55 26.50 18.03 18.20
GDR Price Information on the Luxembourg Stock Exchange Data as of March 1, 2010 and in US$ $30
$25
$20
$15
$10
$5 2005 2006 2007 2008 2009 2010 High 17.54 16.67 16.50 26.00 13.56 12.65 Low 12.40 12.34 12.44 7.91 7.13 10.13 Average 15.54 14.44 14.32 16.93 11.04 11.26
29 Dividend First Financial Holding’s board of directors has the right to propose an annual dividend, which becomes effective after being approved by the shareholders’ meeting. The dividend scheme takes into account the operating and investment requirements of the company, the profit performance of the current year, cost of capital, taxation, the overall financial industry development and the movement of the money market, and shareholders’ interests.
To finance new capital investments, enhance earnings capacity and comply with local regulations, First Financial Holding uses the residual dividend policy. If First Financial Holding reports a net income at the end of the operating year, the net income shall be used to pay relevant taxes, offset cumulative losses of previous years (if any), and set aside a legal reserve and special capital reserve as required by local regulations. After the distribution of the aforementioned items, the balance shall be appropriated as follows:
(1) 0.02%~0.16% for bonuses to employees; (2) no more than 1% for compensation for directors and supervisors;
The remainder after deducting employee bonuses and directors’ compensation, plus cumulative undistributed earnings of the previous year, make up the total amount available for the distribution of shareholder dividends. The board has the discretion to propose shareholder dividends equivalent to 30%-100% of that available amount, pending the approval of shareholders’ meeting. Subjects eligible to participate in the employee stock bonus plan may include employees of First Financial Holding’s affiliated companies, with the stock bonus plan set forth by the board.
According to First Financial Holding’s operating scheme, the amount of cash dividend must exceed 10% of the total amount available for the distribution of shareholder dividends. A cash dividend of less than NT$0.1 per share need not be distributed unless otherwise provided for in the resolution of the shareholder’s meeting.
For the fiscal year 2007 and 2008, First Financial Holding’s dividend payout ratio was 88.35% and 62.50%, respectively. Retroactively adjusted for cash dividend payout ratio would be 82.52% and 41.67%.
30 2009 Annual Report Capital Overview
Dividend Payout History in NT$ or %
EPS $6 180% Total dividend $5 150% Dividend payout ratio $4 120%
$3 90%
$2 60%
$1 30%
$0 0%
$-1 -30%
$-2 -60%
$-3 -90%
2005 2006 2007 2008 2009* EPS 2.43 1.79 2.06 1.20 0.44 Cash dividend 1.25 1.00 1.70 0.50 0.50 Stock dividend 0.25 0.20 0.12 0.25 0.25 Total dividend 1.50 1.20 1.82 0.75 0.75 Cash dividend payout ratio 51.44% 55.87% 82.52% 41.67% 113.64% Dividend payout ratio 61.73% 67.04% 88.35% 62.50% 170.45% * 2009 dividend proposal is subject to shareholders’ final approval at the 2010 annual shareholders’ meeting on June 23, 2010.
31 Subsidiaries Overview
First Bank Overview* Despite a bleak financial environment and spread compression, First Bank remained dedicated to its customer-centric approach and secured leading position in financing urban renewal schemes as the premier player for the project of Shanghua Ren-ai Building. It saw a decline in net income to NT$2,054 million, due primarily to increased provisions aimed at lowering delinquency rates and improving bad-debt coverage to meet Financial Supervision Commission’s qualification criterion for expansion in China.
2009 Net Revenue Breakdown in NT$ mn Net interest income Net fee income Other income 16,011 4,071 6,361 60.55% 15.40% 24.05%
Financial Highlights First Bank Non-consolidated basis, data as of December 31, 2007, 2008 and 2009
2009 2008 2007 Income statements (in NT$ mn) Net interest income 16,011 23,952 21,941 Net fee income 4,071 5,041 6,884 Other income 6,361 3,586 7,109 Net revenue 26,443 32,579 35,934 Provision expenses (10,621) (7,130) (6,062) Operating expenses (13,807) (14,438) (14,200) Income before tax 2,015 11,011 15,672 Income tax expenses 38 (2,046) (3,646) Cumulative effect of change in 0 0 0 accounting principles Net income 2,054 8,965 12,026
Balance sheet (in NT$ mn) Total assets 1,921,430 1,765,541 1,653,984 Total liabilities 1,831,518 1,676,084 1,564,242 Total shareholders’ equity 89,913 89,457 89,742
Ratios (%) ROE 2.29 10.01 13.60 ROA 0.11 0.52 0.75 Tier-1 ratio 7.45 7.10 7.30 Capital adequacy ratio 11.01 10.88 10.80
* There are currently eight subsidiaries under the First Financial Holding umbrella. In this section, only four primary subsidiaries are introduced as their combined net income for 2009 constituting the major portion of the First Group’s profits. **Figures may not match due to rounding.
32 2009 Annual Report Subsidiaries Overview
Credit Ratings Taiwan Ratings twAA-/twA-1+/Stable Standard & Poor’s BBB+/A-2/Stable Moody’s A3/P-1/Stable Fitch BBB+/F2/Stable Fitch(Local) AA-(twn)/F1(twn)/Stable
During the first half of 2009, the economy at home and abroad was going through unsettled times, with interest rates dropping to exceptionally low levels. Although positive signs of recovery emerged in the second half of the year, First Bank saw net revenue down 18.83% for the full year. An increased bad-debt provisions that meet both purposes for China plan and new accounting rule of Article 34 led to a 77.09% decrease in net income to NT$2,054 million, or NT$0.42 per share. Average return on equity and assets was 2.29% and 0.11%, respectively.
The year of 2009 was characterized by Central Bank’s rate cuts to historically low levels in hopes of stimulating domestic demand and restoring growth to the economy. However, conservative corporate investment mood crimped financing needs, while consumers cut back on taking out loans. In fact, the only bright spot for consumer lending was home mortgage, which was supported by Government’s subsidized loans. With the market turmoil and structured note debacle continuing to hammer investor confidence, the environment poised a significant challenge for the wealth management business.
To address unfavorable macroeconomic conditions, First Bank’s management set out the strategic goal of “Integrated Marketing & Innovative Services” and the priority for "Stabilizing of the Base and Deepening of Services”. The bank also moved to implement stringent risk oversight and a number of new business initiatives including ”UU one Co-branded EasyCard”, ”Effective Mutual Fund Investment Program”, “Renmibi Exchange Settlement at the Hong Kong Branch” and “Urban Regeneration”, laying a strong foundation for growth as the expected signing of ECFA would open a new phase of market liberalization between Taiwan and China.
First Bank also took action to restructure the organization, including: the set-up of “Urban Regeneration Department” under the Corporate Banking Business Administration Division to capture a rising wave of urban renewal opportunities in Taiwan; the addition of local branch in Jiangzicui; the opening of Fremont branch in California, U.S.A., Phnom Penh sub- branch in Cambodia, and Brisbane branch in Australia. In addition, it sought to scale up banking innovations with the revamp of telephone banking system and roll out on-line service suites with unique functionalities such as “Corporate e-Banking”, ”Personal e-Banking”, ”eATM Service”, “FEDI Funds Transfer” and “Transnational e-Banking Platform” – all of which supplement First Bank’s widespread branches with a safe, easy-to-use Internet banking platform that help promote a variety of products.
33 First Bank Business Units & Functional Centers Data as of March, 2010 First Bank President Corporate Banking Business Administration Division Corporate Banking BU Corporate Banking Business Marketing Division
International Banking Division International Business BU Overseas Business Admin. Division
Consumer Banking Business Administration Division Credit Card Division Personal Banking BU Trust Division Personal Banking Business Administration Division
Operation Planning & Administration Division Operation Management BU Electronic Banking Division
Trading Division Financial Markets BU Treasury Division Financial Markets Business Administration Division
Regional Center Risk Management Division Risk Management Center Credit Approval Division Credit Analysis Division Special Asset Management Division
Accounting Division General Administration General Affair Division Center Human Resource Division Public Relations Office
Information Technology IT Operation Division Center IT Application Division
On the front of risk management, First Bank was awarded “2009 The 2nd Information Security Awards” and “Enterprise PMP Benchmarking Awards” in recognition of its sound risk oversight. It also attained ISO 27001 recertification over three year certificate cycle. It moved to review the internal control practices and operational risk processes, so as to optimize risk control over asset and liability that appropriately reflects changes in the financial and economic environment and enhances risk-adjusted profitability. As of end of 2009, First Bank recorded NPL ratio of 1.32%, coverage ratio of 84.75% and capital adequacy ratio of 11.01%.
34 2009 Annual Report Subsidiaries Overview
First Bank Capital Adequacy Data as of December 31, 2007, 2008 and 2009; in NT$ mn or %
2009 2008 2007 Tier-1 capital 75,512 73,940 76,139 Tier-2 capital 36,056 39,397 36,485 Total capital 111,568 113,337 112,624 Total risk-weighted assets 1,013,336 1,041,892 1,043,279 Tier-1 capital ratio 7.45 7.10 7.30 Capital adequacy ratio 11.01 10.88 10.80
Enabled by a bedrock of solid risk management, First Bank made meaningful progresses in 2009 as follows:
Deposit and lending: the average outstanding balance of deposit was NT$1,442,237 million and the average outstanding balance of loans was NT$1,100,936 million, representing an increase of 12.14 % and 1.03% from year-ago levels, separately.
Custodian business: as of end of 2009, assets under custody totaled NT$324,779 million, a 26.31% increase over the prior year. Assets under custody for discretionary management totaled NT$140,341 million, a 130.36% increase over the prior year.
Cross-strait financial service: First Bank launched “Trade Finance for Taiwanese Businesses”, “International Factoring”, ”Supply Chain Finance” and ”Corporate Syndicated Loan” to serve the needs for Taiwanese businesses that operate in China.
Corporate citizenship: First Bank, First Financial Holdings and First Bank Foundation together mobilized a donation to victims of Morakot Typhoon in 2009, building the corporate image and setting an example for community engagement.
First Bank now embarks on a recovery path amid signs of improvement in the domestic and global economy. The bank will continue to strengthen its core franchise, while enhancing added value within and across its principal lines of business. With an MOU on banking supervision signed in November 2009, a milestone in the history of cross-strait financial cooperation, First Bank will respond actively to new opportunities with an objective of upgrading the Shanghai Representative Office to branch status. China, as a new realm from the overly competitive and saturated Taiwan market, is of primary importance to the integrity of First Bank’s global operations.
Looking Ahead Going into 2010, First bank expects to strive for important strategic initiatives, including: integrate marketing with other subsidiaries of First Financial Holdings to offer one-stop shopping of services; continue to optimize risk management system and improve risk oversight; maintain its "Customer First, Service Foremost” customer-centric focus to become the most proficient financial player in the Greater China region.
35 First Securities Overview Benefiting from an upbeat stock market and sound operations, First Securities experienced marked growth in broking commissions and proprietary trading gains over 2009. Its bottom-line performance was a stellar NT$912 million, or NT$1.55 per share.
2009 Net Revenue Breakdown in NT$ mn
Net brokerage commissions Net principle transaction gains Net interest income Other income 986 1,008 305 31
Financial Highlights First Securities Consolidated basis, data as of December 31, 2007, 2008 and 2009
2009 2008 2007 Income statement (in NT$mn) Net brokerage commissions 986 731 1,166 Net interest income 305 451 559 Net underwriting commissions 31 24 76 Net principle transaction gains 1,008 (632) 932 Other net operating income 31 248 209 Operating income 2,361 822 2,942 Operating expenses (1,443) (1,290) (1,680) Net non-operating income 87 (92) (70) Income before tax 1,005 (560) 1,192 Income tax expenses (93) (77) (92) Cumulative effect of change in 0 0 0 accounting principles Net income 912 (637) 1,100
Balance sheet (in NT$ mn) Total assets 17,564 14,283 18,173 Total liabilities 10,402 8,014 11,263 Total shareholders’ equity 7,162 6,269 6,910
Ratios (%) ROE 13.58 (9.67) 17.28 ROA 5.73 (3.93) 5.99
Credit Ratings Fitch(Local) A+(twn)/F1(twn)/Stable *Figures may not match due to rounding.
36 2009 Annual Report Subsidiaries Overview
Taiwan’s GDP stumbled into negative territory, contracting by a record-low 9.06% in the first quarter of 2009. The economy hit bottom and stabilized in the mid-year, aided by China stimulus package, then recovered following export growth. The capital market also staged a strong surge: after falling below 4,000 in early 2009, the TAIEX, thereafter, rebounded and rallied to a high of 8,188 at the year-end, up 78.35%, or 3,597 points, from the beginning of the year. Although capital inflows and the ultra-low interest rate environment sparked fears of bubble in capital markets, fluctuations in New Taiwan Dollar was relatively mild compared with Asian countries, thanks to Central Bank’s move to curb excess liquidity.
Buoyed by Taiwan’s stock market rallies, combined with management’s endeavor, First Securities was able to expand its market share in retail broking to 1.723% in 2009, up 17.6% from 1.465% a year earlier. The addition of five branches and five broking service points at First Bank’s branches helped drive a 34.9% increase in broking commissions and 52.4% increase in proprietary trading volumes. Profitability improved significantly, with net income of NT$912 million compared with net loss of NT$637 million in 2008. The average return on equity and assets resumed to positive territory at 13.58% and 5.73%, compared with -9.67% and -3.93% in the prior year.
First Securities originated and executed several underwriting in 2009, including six cases of capital raising (Cub ElecParts Inc., for instance), signing of management contract for two primary listings and two secondary listings on over-the- counter market for Taiwanese businesses that operate overseas.
With respect to bond transactions, bond yield saw sharp moves downward amid a recession in the first half of the year, before firming up as investors cashed out of bonds into stocks in the second half of the year. For the full year of 2009, First Securities completed repurchase of NT$187,158 million and outright purchases and sales of NT$29,985 million.
Meanwhile, First Securities demonstrated its strength in in-house research, proprietary trading and derivative products. The combination of enhanced hedging techniques and a shrewd selection of 200 stocks that comprised 70% of the proprietary trading portfolio contributed to marked performance improvement. First Securities also turned active in warrant issues, having offered a total of 36 call warrants with premium income of NT$261 million during 2009. Warrants will likely become a key earnings driver if demand persists.
Looking Ahead 2010 is a year of rapid, dramatic changes in the economic, financial and regulatory environment. First Securities will capitalize on the newly liberalized cross-strait relation to expand business in mainland China, firstly with the set-up of a representative office in Shanghai. It will sustain its superb management quality, extensive product mix and advantageous geographic extension to concentrate on several priorities, including: advise on the local listings of Taiwanese businesses that operate overseas; introduce China QDII funds into Taiwan; set up a futures subsidiary; align further with First Bank to maximize synergies, boost revenues and enhance efficiency via enlarged economies of scale. First Securities remains committed to its goal of being a full-function broker with comprehensive capital market services, personal financial solutions and trading platforms.
37 First Securities Investment Trust Overview Benefiting from revived investor confidence, a buoyant stock market, favorable regulatory changes and successful fund launches (including one on the “China theme” stock investments), First Securities Investment Trust reported net income of NT$152 million, or NT$2.53 per share, for 2009.
Financial Highlights First Securities Investment Trust Non-consolidated basis, data as of December 31, 2007, 2008 and 2009
2009 2008 2007 Income statement (in NT$ mn) Management fee 433 444 600 Sales service fee 2 4 13 Operating income 435 448 613 Operating expenses (288) (276) (328) Net non-operating income 6 (38) 22 Income before tax 153 134 307 Income tax expenses (1) 33 (73) Cumulative effect of change in 0 0 0 accounting principles Net income 152 167 234
Balance sheet (in NT$ mn) Total assets 1,109 1,053 1,185 Total liabilities 127 82 183 Total shareholders’ equity 982 972 1,003
Ratios (%) ROE 15.51 16.95 23.58 ROA 14.02 14.95 19.89
Asset under management AUM(in NT$ mn) 106,850 91,238 100,565 AUM rank 8 7 12 *Figures may not match due to rounding.
38 2009 Annual Report Subsidiaries Overview During 2009, assets under management in public-offering funds increased by 25.7% to NT$1,975 billion, driven primarily by stock funds, which grew by 69.4% to NT$735 billion. Key factors contributing to the AUM upswing included stimulative monetary actions that fostered positive investment sentiment, restored market momentum and massive capital inflows following the announcement of a series of tax regime reforms. TAIEX’s new recovery high of 8,000-point mark, in particular, prompted investors to move fixed-income assets to stock funds. However, the total size of fund investor accounts slipped by 1.1%, reflecting volatile market conditions in 2009.
Moving past the gloomy first quarter, First Securities Investment Trust successfully raised nearly NT$4 billion for the launch of FSITC Global High Yield Bond Fund, and another NT$5.4 billion for FSITC China Century Fund in the third quarter. Continued promotion of Smart Periodic Purchase Plan, NT$800-million in new assets under discretionary management for institutions and the addition of distribution channels signaled that the market upturn finally arrived. Despite a modest 2.9% decrease in management and sales fees, First Securities Investment Trust achieved pre-tax income of NT$153 million, up 14.18% from the prior year. Net income was NT$152 million. Average return on equity and assets dropped to 15.51% and 14.02% from 16.95% and 14.95% in 2008, separately. Overall, First Securities Investment Trust demonstrated its resilience amid highly turbulent markets.
For 2009, First Securities Investment Trust’s total assets under management increased by 17.11%, from NT$91.2 billion, to NT$106.8 billion. Strong and broad-based growth was observed except for bond funds, which showed only a modest growth. Total assets by type of funds were as follows: NT$22.1 billion in stock funds, a 112.5% advance year-over-year; NT$77.5 billion in bond funds, a 3.89% growth year-over-year; NT$6.8 billion in discretionary managed funds, a 13.33% increase year-over-year; NT$400 million in private-equity funds, a 100% jump year-over-year. As of end of 2009, the number of fund investors totaled 55,064, up 3.7%, or 1,976 accounts, from a year earlier. The number of regular investor plans totaled 13,386, up 35.8%, or 3,532, from a year earlier.
Domestic Mutual Fund Market In NT$100 mn and % Type 2009 2008 Change Equity funds1 7,350 4,893 50.21% Bond funds 9,821 9,576 2.56% Others2 2,579 1,245 107.15% Total public-offering funds 19,750 15,714 25.68% Private-placement funds 260 267 -2.62% Funds under discretionary management 6,580 7,308 -9.96% 1. Including balanced funds 2. Including fund of funds, index funds and securitization funds
First Securities Investment Trust’s Asset under Management in NT$100 mn and % Type 2009 2008 Change Equity funds1 221 104 112.50% Bond funds 775 746 3.89% Total public-offering funds 996 850 17.18% Private-placement funds 4 2 100.00% Funds under discretionary management 68 60 13.33% Total asset under management 1,068 912 17.11% 1. Including balanced funds
39 A review for 2009 shows First Securities Investment Trust delivered excellent performance across several fund categories:
● Its OTC Fund posted a one-year return of 106.24%, taking the 10th spot in the ranking of 181 local equity funds and the second place among seven OTC funds. ● Greater China Balanced Fund scored a three-year total return of 15.5%, winning the 13th place among 28 local balanced funds. Its five-year total return of 69.82% earned the third spot among 24 funds. ● FSITC Flagship Fund posted a one-year total return of 76.77% to rank fourth among 117 cross-border funds and second among 33 Asian regional funds. ● Global Trends Fund posted a one-year total return of 67.06%, ranking 11th among 117 cross-border funds and topping all 58 global growth funds. ● Global Taiwan Enterprise Fund recorded a one-year total return of 59.27%, ranking 21st among 117 cross-border funds and second among 58 global growth funds.
Looking Ahead First Securities Investment Trust has set forth three goals for the coming year: product innovation, enhancement of selling capabilities and synergy creation with other group subsidiaries. It plans to launch Asian Emerging Market Fund in the first quarter, following by two more funds in the second and forth quarter. Promotional and marketing ramp-up will target existing top-performing funds, such as two quasi-money market funds that have long recorded favorable returns and already received fund ratings. First Securities Investment Trust shall stick to the goal to bring clients strong investment returns, a comprehensive product universe, and ease-access via First Bank’s bank extensive networks with an aim to position itself as a leading and trustworthy financial planner in the Greater China region First-Aviva Life Insurance Overview First-Aviva Life Insurance, a joint venture between First Financial Holding and Aviva International Holdings Limited, was incorporated on January 2, 2008. It re-branded its Chinese name in 2009 in a bid to consolidate First Financial Holdings’ group image. As the second year since inception, First-Aviva reported net loss of NT$184 million, a significant improvement from the prior year, thanks to strict risk control and a shift in product focus. First Financial Holdings recognized investment loss of NT$94 million based on its 51% stake in First-Aviva.
Financial Highlights First-Aviva Life Insurance Non-consolidated basis, data as of December 31, 2008 and 2009 2009 2008 Income statement (in NT$ mn) Premium income 4,475 11,607 Other insurance income 13 26 Net investment income 440 17 Operating Cost (4,800) (11,930) Gross Revenue 128 (280) Operating Expense (314) (361) Net non-operating income 2 0 Income before tax (184) (641) Income tax expenses 0 0 Cumulative effect of change in accounting 0 0 principles Net income (184) (641)
40 2009 Annual Report Subsidiaries Overview Balance sheet (in NT$ mn) Total assets 17,127 13,208 Total liabilities 15,480 11,882 Total shareholders’ equity 1,647 1,326
Ratios (%) ROE (12.36) (37.20) ROA (1.21) (8.25) *Figures may not match due to rounding.
In 2009, volatilities in the underlying economy had a profound impact on the insurance industry. In light of brightening global economic outlook, Australian Central Bank’s rate hikes and China’s policy tightening to avert overheating, local insurers began to raise guaranteed yield in the 4th quarter of 2009, making interest-sensitive annuity products the biggest contributor to first-year premium (41.43%). Meanwhile, the bancassurance model continued to expand and thrive as banks, in their aim to compensate for the falling interest revenue with commissions and fees, eagerly pump up insurance and other investment products to customers. In 2009, 63.15% of first-year premium was generated through the bank channels, also known as “bancassurance,” outpaced 33.13% by agents. To this day, bancassurance has become an essential force reshaping the insurance industry as well as a key to success.
During 2009, First-Aviva’s strategies concentrated on the profit-driver traditional life products, supplemented by a solid product offering that boosted bank channel sales. The newly established Telephone Marketing Unit in September provides an alternative but bank counters for distributing protection products. The trend of employing insurance broker as a key intermediary between clients and insurance companies prompted First-Aviva to establish the Insurance Broking Department so as to broaden non-First Bank’s clientele base. With the expanded scope and channels, subsidiaries under First Financial Holding shall be able to grow their businesses. The least but not the last, a renaming ceremony held in 2009 effectively raised brand awareness through advertising campaigns and “Policyholder’s Day Fair” at Taipei Zoo.
Looking Ahead As 2010 progresses, demand for investment-linked policies should firm up as economic outlook brightens. In fact, investment products accounted for 31.37% of the full-year premium in the last single quarter of 2009, and shall continue its trend: The social and demographical changes, such as increasing aging population and historically low levels of birth rates, which spark the concern over retirement planning, should fuel demand for pension and annuity programs. First- Aviva shall roll out action plans including: target the middle class beyond the affluent clientele; develop new investment- linked products with a principle guarantee for pre-retirees; and partner with asset managers to explore advisory service for people approaching retirement. First-Aviva will continue to build on the strengths of its parent companies — Aviva’s global expertise and First Financial’s well-established franchise — to deliver quality products and services commensurate with the two institutions’ leading positions. It is First-Aviva’s uncompromising mandate to create wealth along with protection of personal and financial well-being.
41 Corporate Social Responsibilities
First Financial Holding pursues corporate profits with strict compliance with the laws, regulations and rules. Moreover, we put people first to ensure sustainable growth. We provide employees with the opportunities to realize their potential, a safe workplace to work in, and a culture that values integrity and superior products and services to customers. We also take an active role in the communities we operate in and champion charitable causes for the disadvantaged groups. Our Employees Training and Welfare We continue to focus on employee training and talent development programs. We include product research, development and marketing courses into our internal training programs for subsidiaries. We also provide education programs for many key certificate examinations of financial professionals. Moreover, to strengthen our staffs’ knowledge and perception to better adopt the business expansion, we deliver external training projects for their overall development. In 2009, we conducted a total of 367 internal training sessions with 29,207 participants. A total cost for NT$6,569,909 was charged in 2009 to support our external training initiatives, where 5,991 employees participated.
It is our responsibility to provide a safe and sound working environment for our employees. We provide regular health checks or reimburse health examination fee, hold sports, fitness programs and recreational events to ensure the physical well-being of employees. Meanwhile, to provide a secure and friendly environment for customers and staffs, subsidiary First Bank held carbon oxide tests in premises every six months. Subsidiary First Bank, First Securities and First Securities Investment Trust each has its own “Employee Welfare Committee” that supports, sponsors and organizes various events and programs for the benefit of its employees. In our workplaces, a good, central-controlled ventilation ensuring a supply of fresh air and lighting is sufficient and enables people to stay safely; regular training programs for fire prevention are conducted through company’s fire drills. Finally, our Personnel Committee also reviews matters involving personnel policies that affect employees, including against sexual-harassment policy that communicates a zero-tolerance approach and takes every action to correct any sexual harassment behavior within the workplace.
Number of Employees Data as of March 1, 2010 2010 2009 2008 2007 First Financial Holding 60 61 65 63 First Bank 7,032 7,038 7,156 7,087 First Securities 837 831 772 773 First Securities Investment Trust 151 153 154 152 First-Aviva Life Insurance 127 128 124 - Other Subsidiaries 84 84 84 84 First Group 8,291 8,295 8,355 8,159
Our Customers First Financial Holding’s subsidiaries continue to conduct training, via written programs or verbal communication, to emphasize to all employees the importance of confidentiality of customer information. Every employee within the group has the obligation to safeguard customer information. Contracts between the group and clients must ensure compliance with the law in recognition of customers’ legitimate interest. All subsidiaries have telephone complaint service systems in place to handle any complaints and answer inquiries.
42 2009 Annual Report Corporate Social Responsibilities
Our CSR Activities The First Commercial Bank Foundation To fulfill corporate social responsibilities, First Financial Holding Company carried out the CSR activities based on the value of “what is obtained from the society is used in the interest of the society.” In addition to participating in various charity events and donating to social welfare organizations, we also have been operating a non-profit foundation to actively involve in different programs to provide cultural, educational and emotional support- The First Commercial Bank Foundation, founded in 1999 and its primary purposes are to improve quality of life for people in Taiwan and foster a harmonious society. By holding a series of activities, First Commercial Bank Foundation promotes educational and charitable programs with special focuses on supporting disadvantaged groups, musical events, children caring, and upholding the mind of modern Taiwan.
What We have Achieved in 2009 First Financial Holding believes a key aspect of corporate citizenship is community engagement. The group and its subsidiaries took an active role in 2009 with events summarized below:
First Financial Holding: ● donated NT$ 20 million and conducted “Employee Salary Donation” in support of “Philanthropy for Typhoon Morakot”, which flooded southern Taiwan on Aug. 8, 2009. ● mobilized “Energy-saving and Carbon emission-reducing” across the group offices by adopting water-saving faucets & toilets, recycling and promoting self-prepared dishware. ● sponsored ” Welcoming Twilight of the New Year” at Fulong Beach with co-host Northeast and Yilan Coast National Scenic Area Administration and subsidiaries on January 1, 2010. ● sponsored “Walking through Financial Turmoil Seminar” held by National Chengchi University, Dept. of Economics to assist domestic academic research toward financial crisis.
First Bank ● donated “Ministry of Education” in support of 49 schools, 89 cases of children for education and life-improving. ● sponsored “2009 Wan-li Marathon”, “2009 Hengchun Marathon Swimming” and “2009 Yi-Lan International Marathon” in support of domestic sports activities and promoting tourism. ● FB Foundation hosted “Let’s be Braver” charity concert in support of community hospitals and invited disabled people for participation.
Other subsidiaries: ● Sponsored Movie-“ The Reader” co-hosting with “Happy Gifts of Social Service Association” in support of children with reading-obstruction. ● Awarded in 2008 & 2009 by FSC, Executive Yuan for promoting “Better Protection Life Insurance Project” in attracting society’s attention to insurance protection.
43 Financial Information
Report of Independent Accountants
To: First Financial Holding Co., Ltd.
We have audited the accompanying consolidated balance sheets of First Financial Holding Co., Ltd. (the “Company”) and its subsidiaries (collectively the “First Group”) as of December 31, 2009 and 2008, and the related consolidated statements of income, of changes in stockholders’ equity and of cash flows for the years then ended. These consolidated financial statements are the responsibility of the First Group’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with the “Regulations Governing Auditing and Certification of Financial Statements by Certified Public Accountants”, ”Regulations Governing Auditing and Certification of Financial Statements of Financial Institutions by Certified Public Accountants” and generally accepted auditing standards in the Republic of China. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free from 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 consolidated financial statements referred to above present fairly, in all material respects, the financial position of First Financial Holding Co., Ltd. and its subsidiaries as of December 31, 2009 and 2008, and the results of their operations and their cash flows for the years then ended in conformity with the “Regulations Governing the Preparation of Financial Reports by Financial Holding Companies”, “Regulations Governing the Preparation of Financial Reports by Securities Issuers”, “Regulations Governing the Preparation of Financial Reports by Public Banks”, “Regulations Governing the Preparation of Financial Reports by Securities Firms”, “Regulations Governing the Preparation of Financial Reports by Life Insurance Companies”, “Regulations Governing the Preparation of Financial Reports by Futures Commission Merchants”, “Business Accounting Act”, “Regulation on Business Entity Accounting Handling”, and generally accepted accounting principles in the Republic of China.
March 22, 2010
The accompanying consolidated financial statements are not intended to present the financial position and results of operations and of cash flows in accordance with accounting principles generally accepted in countries and jurisdictions other than the Republic of China. The standards, procedures and practices in the Republic of China governing the audit of such financial statements may differ from those generally accepted in countries and jurisdictions other than the Republic of China. Accordingly, the accompanying consolidated financial statements and report of independent accountants are not intended for use by those who are not informed about the accounting principles or auditing standards generally accepted in the Republic of China, and their applications in practice.
44 2009 Annual Report Financial Information First Financial Holding Co., Ltd. and its Subsidiaries Consolidated Statements of Income For the years ended December 31, 2009 and 2008 (Expressed In Thousands of New Taiwan Dollars, Except Consolidated Earnings Per Share)
For the years ended December 31 Change 2009 2008 Percentage Amount Amount % Interest income (Note 5) $28,876,024 $50,080,253 (42) Less: interest expense (Note 5) (11,935,514) (25,350,710) (53) Net interest income 16,940,510 24,729,543 (31) Net non-interest income and losses Net service fee and commission income (Note 5) 5,528,818 6,216,628 (11) Net premiums from insurance business (Note 5) (207,630) 10,695,899 (102) Gains or losses on financial assets and financial 4,039,439 (989,994) - liabilities at fair value through profit or loss (Note 4(3)) Realized gains or losses on available-for-sale 516,771 682,063 (24) financial assets Realized gains or losses on held-to-maturity (20,073) 7,345 (373) financial assets Income from equity investments accounted for 106,205 5,213 1937 under the equity method (Note 4(9)) Foreign exchange gains or losses (566,799) 971,815 (158) Asset impairment losses (Note 4(30)) (170,609) (1,356,524) (87) Bad debts and overdue accounts recovered 2,655,842 2,517,722 5 Other non-interest income (Note 5) 750,139 944,071 (21) Net revenues 29,572,613 44,423,781 (33) Provisions for credit losses (10,620,806) (7,129,966) 49 (Provision for) insurance reserve recovered 36,813 (11,026,688) - Operating expenses Personnel expenses (Note 4(31)) (10,339,487) (11,259,424) (8) Depreciation and amortization (Note 4(31)) (1,099,013) (1,116,266) (2) Business and administrative expenses (Note 5) (4,545,386) (4,735,113) (4) Consolidated income from continuing operations before 3,004,734 9,156,324 (67) income tax Income tax expense (Note 4(29)) (315,871) (2,079,069) (85) Total consolidated net income $2,688,863 $7,077,255 (62)
Total Consolidated Net Income Attributable to: Stockholders of the parent $2,778,927 $7,391,146 Minority interests (90,064) (313,891) $2,688,863 $7,077,255
Before After Before After Earnings Per Share (Notes 4(27) and (32)) Taxes Taxes Taxes Taxes Basic Consolidated Earnings Per Share $0.49 $0.44 $1.50 $1.17
The accompanying notes are an integral part of these consolidated financial statements.
45 First Financial Holding Co., Ltd. and its Subsidiaries Consolidated Balance Sheets December 31, 2009 and 2008 (Expressed In Thousands of New Taiwan Dollars)
Change December 31, 2009 December 31, 2008 Percentage ASSETS Amount Amount % Cash and cash equivalents (Notes 4(1) and 5) $23,941,293 $27,786,949 (14) Due from the Central Bank and call loans to other banks 205,138,294 155,603,264 32 (Notes 4(2) and 5) Financial assets at fair value through profit or loss – net 34,100,990 58,448,875 (42) (Notes 4(3), 5 and 6) Investments in bills and bonds under resale agreements 3,734,802 6,130,334 (39) (Note 4(4)) Receivables – net (Notes 4(5) and 5) 49,471,220 44,911,685 10 Bills discounted and loans– net (Notes 4(6) and 5) 1,096,033,636 1,160,544,079 (6) Available-for-sale financial assets – net (Notes 4(7), 5 and 6) 74,728,061 61,065,319 22 Held-to-maturity financial assets – net (Note 4(8)) 419,430,881 229,985,592 82 Equity investments accounted for under the equity method 3,619,008 3,573,642 1 – net (Note 4(9)) Other financial assets – net (Note 4(10)) 12,454,942 13,546,913 (8) Property, plant, and equipment – net (Notes 4(11) and 6) 23,648,339 24,068,802 (2) Intangible assets – net 368,482 539,655 (32) Other assets – net (Notes 4(12), (29) and 6) 13,900,508 13,908,570 -
TOTAL ASSETS $1,960,570,456 $1,800,113,679 9
46 2009 Annual Report Financial Information
Change December 31,2009 December 31, 2008 Percentage Amount Amount % LIABILITIES AND STOCKHOLDERS’ EQUITY Due to the Central Bank and other banks (Notes 4(13) and 5) $169,399,153 $117,270,987 44 Funds borrowed from the Central Bank and other banks 72,296 45,067 60 Commercial paper payable – net (Note 4(14)) 2,504,643 - - Financial liabilities at fair value through profit or loss – net (Notes 4(15) and 5) 55,205,000 75,438,158 (27) Bills and bonds payable under repurchase agreements (Notes 4(16) and 5) 13,189,209 18,531,762 (29) Payables (Notes 4(17) and 5) 58,935,667 62,661,289 (6) Deposits and remittances (Notes 4(18) and 5) 1,515,785,596 1,383,600,013 10 Bonds payable (Note 4(19)) 18,400,000 19,900,000 (8) Accrued pension liabilities (Note 4(20)) 1,884,656 1,766,216 7 Other financial liabilities (Note 4(21)) 3,493,647 1,199,998 191 Reserves for operation and liabilities (Note 4(22)) 11,806,569 11,728,255 1 Other liabilities (Note 4(23)) 8,023,987 7,874,781 2 TOTAL LIABILITIES 1,858,700,423 1,700,016,526 9
EQUITY ATTRIBUTABLE TO STOCKHOLDERS OF THEPARENT Common stock (Note 4(24)) 63,188,538 61,647,354 3 Additional paid-in capital (Note 4(25)) 9,943,476 9,943,476 - Retained earnings Legal reserve (Note 4(26)) 5,507,532 4,768,418 16 Unappropriated earnings (Note 4(27)) 13,325,009 15,908,748 (16) Other stockholders’ equity Unrealized revaluation increments (Note 4(28)) 5,059,317 5,183,916 (2) Cumulative translation adjustments 27,936 49,915 (44) Unrealized gain or loss on financial instruments (Note 4(7)) 4,011,199 1,945,376 106 Equity attributable to stockholders of the parent 101,063,007 99,447,203 2 Minority interests 807,026 649,950 24 TOTAL STOCKHOLDERS’ EQUITY 101,870,033 100,097,153 2 TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY $1,960,570,456 $1,800,113,679 9
47 First Financial Holding Co., Ltd. and its Subsidiaries Consolidated Statements of Changes In Stockholders’ Equity For the year ended December 31, 2008 (Expressed In Thousands of New Taiwan Dollars)
Equity Attributable to Stockholders of the parent Capital Additional Retained earnings stock paid-in capital
Paid-in capital Common Unappropriated For The Year Ended December 31, 2008 in excess of par Legal reserve stock earnings value Balance, January 1, 2008 $60,916,358 $9,943,476 $3,513,450 $20,979,410 Earnings distribution for 2007 Stock dividends 730,996 - - (730,996) Legal reserve appropriated - - 1,254,968 (1,254,968) Bonus to employees - - - (7,116) Bonus to directors and supervisors - - - (112,947) Cash dividends paid - - - (10,355,781) Adjustments of unrealized revaluation increment from equity - - - - investments accounted for under the equity method Adjustments of unrealized gain or loss on available-for-sale financial assets from equity investments accounted for under - - - - the equity method Adjustments of cumulative translation adjustments from equity - - - - investments accounted for under the equity method Adjustments of net loss not recognized as pension cost from - - - - equity investments accounted for under the equity method Adjustments of unrealized gain or loss on cash flow hedges - - - - Adjustments of minority interest - - - - Consolidated net income for the year ended December 31, 2008 - - - 7,391,146 Balance, December 31, 2008 $61,647,354 $9,943,476 $4,768,418 $15,908,748
For The Year Ended December 31, 2009 Balance, January 1, 2009 $61,647,354 $9,943,476 $4,768,418 $15,908,748 Earnings distribution for 2008 Stock dividends 1,541,184 - - (1,541,184) Legal reserve appropriated - - 739,114 (739,114) Cash dividends paid - - - (3,082,368) Adjustments of unrealized revaluation increment from equity - - - - investments accounted for under the equity method Adjustments of unrealized gain or loss on available-for-sale financial assets from equity investments accounted for under - - - - the equity method Adjustments of cumulative translation adjustments from equity - - - - investments accounted for under the equity method Adjustments of unrealized gain or loss on cash flow hedges - - - - Adjustments of minority interest - - - - Consolidated net income for the year ended December 31, 2009 - - - 2,778,927 Balance, December 31, 2009 $63,188,538 $9,943,476 $5,507,532 $13,325,009
48 2009 Annual Report
Equity Attributable to Stockholders of the parent Financial Information Other stockholders’ equity
Unrealized gain or loss on financial instruments Unrealized gain or loss Unrealized gain or Cumulative Net loss not Unrealized Minority on available-for-sale loss on cash translation recognized revaluation Total Interest financial assets flow hedges adjustments as pension cost increment $3,974,236 $174,151 $276,274 ($9,258) $5,298,124 $1,037,541 $106,103,762
------(7,116) ------(112,947) ------(10,355,781)
- - - - (114,208) - (114,208)
(1,995,084) - - - - - (1,995,084)
- - (226,359) - - - (226,359)
- - - 9,258 - - 9,258
- (207,927) - - - - (207,927) - - - - (73,700) (73,700) - - - - - (313,891) 7,077,255 $1,979,152 ($33,776) $49,915 $- $5,183,916 $649,950 $100,097,153
$1,979,152 ($33,776) $49,915 $- $5,183,916 $649,950 $100,097,153
------(3,082,368)
- - - - (124,599) - (124,599)
2,131,142 - - - - - 2,131,142
- - (21,979) - - - (21,979)
- (65,319) - - - - (65,319) - - - - - 247,140 247,140 - - - - - (90,064) 2,688,863 $4,110,294 ($99,095) $27,936 $- $5,059,317 $807,026 $101,870,033
49 First Financial Holding Co., Ltd. and its Subsidiaries Consolidated Statements of Cash Flows For the years ended December 31, 2009 and 2008 (Expressed In Thousands of New Taiwan Dollars)
2009 2008 Cash Flows From Operating Activities Consolidated net income attributed to stockholders of the parent $2,778,927 $7,391,146 Consolidated net loss attributed to minority interests (90,064) (313,891) Adjustments to reconcile consolidated net income (loss) to net cash provided - by operating activities: Depreciation (including depreciation of non-operating assets) 826,453 883,711 Amortization 299,454 259,806 Provision for credit losses 10,620,806 7,129,966 Discount amortization on other borrowings - 1,259 Asset impairment losses 170,609 1,356,524 Loss on disposal and abandonment of property, plant, and equipment 1,852 25,036 Gain on sale of non-operating assets (315,148) (316,590) Loss on sale of foreclosed assets - 16,283 Income from equity method investments recognized (in excess of) less than (21,566) 142,506 cash dividends received from the equity method investments Reserve for operations and liabilities and other provisions 113,088 22,989 (Recovery of) provision for insurance reserve recovered (36,558) 11,026,694 Changes in assets and liabilities Decrease (increase) in financial assets at fair value through profit or loss – net 24,347,885 (15,795,144) Decrease (increase) in investments in bills and bonds under resale 2,395,532 (3,179,500) agreements (Increase) decrease in receivables (5,027,848) 14,622,266 Decrease in bills purchased 15,598 26,494 Decrease in other assets 247,011 1,484,777 (Increase) decrease in deferred income tax assets (518,069) 1,215,366 Decrease in payables (3,725,622) (6,885,276) (Decrease) increase in financial liabilities at fair value through profit or loss (20,233,158) 24,056,845 Increase in accrued pension liabilities 118,440 142,948 Increase (decrease) in reserve for operations and liabilities 66 (99,830) Increase in other liabilities 351,781 350,457 Net cash provided by operating activities 12,319,469 43,564,842
50 2009 Annual Report Financial Information
2009 2008 Cash Flows From Investing Activities Increase in due from the Central Bank and call loans to other banks ($49,535,030) ($10,384,817) Decrease (increase) in bills discounted and loans 54,342,093 (96,480,500) Increase in available-for-sale financial assets (11,404,906) (2,653,321) Increase in held-to-maturity financial assets (189,540,960) (12,796,683) Decrease in equity investments accounted for under the equity method 17,164 - Decrease in other financial assets 3,434,273 2,596,361 Acquisition of property, plant, equipment, and non-operating assets (441,402) (613,554) Proceeds from sale of property, plant, equipment, and non-operating assets 388,332 177 Purchase of intangible assets (113,185) (324,470) Proceeds from sale of foreclosed assets - 15,301 Decrease (increase) in refundable deposits 185,305 (268,373) (Increase) decrease in other assets (14,448) 28,155 Net cash used in investing activities (192,682,764) (120,881,724) Cash Flows From Financing Activities Increase (decrease) in due to the Central Bank and other banks 52,128,166 (23,044,860) Increase (decrease) in funds borrowed from the Central Bank and other banks 27,229 (81,594) Increase (decrease) in commercial paper payable 2,504,643 (2,353,691) (Decrease) increase in bills and bonds payable under repurchase agreements (5,342,553) 2,845,250 Increase in deposits and remittances 132,185,583 127,883,957 Decrease in bonds payable (1,500,000) (7,900,000) Decrease in other borrowings - (2,262,000) Decrease in appropriated loan fund (33,179) (57,916) (Decrease) increase in other financial liabilities (105,313) 140,453 (Decrease) increase in deposits received (270,859) 77,289 Bonus to directors, supervisors and employees - (120,063) Cash dividends paid (3,082,368) (10,355,781) Net cash provided by financing activities 176,511,349 84,771,044 Net effect of foreign exchange rate changes on cash and cash equivalents 6,290 2,190 Net (decrease) increase in cash and cash equivalents (3,845,656) 7,456,352 Cash and cash equivalents at beginning of year 27,786,949 20,330,597 Cash and cash equivalents at end of year $23,941,293 $27,786,949 Supplemental Disclosures of Cash Flow Information Cash paid during the year for interest $15,475,506 $26,597,408 Cash paid during the year for income tax $800,530 $1,284,888
51 First Financial Holding Co., Ltd. and its Subsidiaries Notes to the Consolidated Financial Statements For the years ended December 31, 2009 and 2008 (Expressed in Thousands of New Taiwan Dollars, Unless Otherwise Indicated)
1.Organization and business 1) First Financial Holding Co., Ltd. (the “Company” or “FFHC”) commenced the preparation for its incorporation on November 27, 2001. On January 2, 2003, the Company was established through a share swap with First Commercial Bank Co., Ltd. (“FCB”) in accordance with the Financial Holding Company Act and other related regulations, whereby FCB has become its wholly-owned subsidiary, and with the approval from the Securities and Futures Commission (“SFC”), renamed as the Securities and Futures Bureau, Financial Supervisory Commission, Executive Yuan, R.O.C. (“SFB”) from July 1, 2004, the Company was listed on the Taiwan Stock Exchange (“TSE”) on the same date. On July 31, 2003, the Company acquired First Securities Inc. (“FS”), Mingtai Fire & Marine Insurance Co., Ltd. (“MFMI”) and First Securities Investment Trust Co., Ltd. (FSIT), as wholly owned subsidiaries. On May 31, June 2, June 10, September 16, 2004 and November 19, 2007, the Company established subsidiaries named First Financial Asset Management Co., Ltd., (“FFAM”), First Venture Capital Co., Ltd., (“FVC”), First Financial Management Consulting Co., Ltd. (“FFMC”), First P&C Insurance Agency Co., Ltd. (“FPCIA”) and First-Aviva Life Insurance Co., Ltd. (“FALI”), respectively. The Company engages mainly in the investment and management of financial institutions as approved by the authorities. As of December 31, 2009 and 2008, the Company and its subsidiaries had 8,485 and 8,355 employees, respectively.
2) On September 2, 2005, the Company completed the sale of all its common stocks of Mingtai Fire & Marine Insurance Co., Ltd. to Mitsui Sumitomo Insurance Co., Ltd.
3) The following directly and indirectly owned subsidiaries have been included in the consolidated financial statements.
Percentage Investor Subsidiary name Major business activities of holding shares (%) name 2009/12/31 2008/12/31 FFHC FCB Note (1) 100 100 FFHC FS Note (2) 100 100 FFHC FSIT Note (3) 100 100 FFHC FALI Note (4) 51 51 FS First Capital Management Inc. (“FCMI”) Securities investment consulting service 100 100 First Taisec Securities (Asia) Limited FS Securities investment holding 100 100 (“FTSL”) First Worldsec Securities Limited Marketable securities brokerage and FTSL 100 100 (‘FWSL”) investment consulting service Note (1): FCB was established in 1899 and had been a listed company since February 9, 1962. It was privatized on January 22, 1998. On January 2, 2003, FCB became the subsidiary of First Financial Holding Co., Ltd. through a share swap and was de-listed from the TSE to become a public company in accordance with the related regulations set forth by the SFB. As of December 31, 2009, FCB comprises various Divisions, including Operation Division, Trust Division, International Business Division, Offshore Banking Unit, domestic and overseas branches, and representative offices. FCB engages mainly in the following business activities: 1) Business activities provided by the Banking Law; 2) Trust business as authorized by the authorities; 3) Establishing overseas branches to engage in those business activities as approved by the respective local governments; 4) Other business activities approved by the authorities. Note (2): FS was established in August 1988 and became a subsidiary of FFHC on July 31, 2003. FS is authorized to engage in the following business activities: 1) Brokerage and proprietary trading of marketable securities at the securities exchange markets; 2) Underwriting of marketable securities; 3) Registration and transfer agency service for securities;
52 2009 Annual Report
4) Margin and stock loans of marketable securities trading; 5) Futures introducing broker business; 6) Brokerage of futures business; and 7) Other securities-related businesses as approved by the competent authorities. Due to prospective business expansion, FS transferred its futures brokerage business to First Futures Inc. (the Financial Information wholly-owned subsidiary of FS) in November 2003. FFI had been under liquidation since the end of 2007 which had been completed in May 2009. FS founded futures dealing department to perform future business in September 2005. As FCB and FS are both wholly-owned subsidiaries of the Company, the Board of Directors of FS resolved to acquire securities brokerage business of FCB at book value to leverage the synergies of the First Group, effective on December 1, 2003. Note (3): FSIT became the wholly-owned subsidiary of the Company through a share swap on July 31, 2003. FSIT engages mainly in the management of securities investment trust funds and private funds business. Note (4): First-Aviva Life Insurance Co., Ltd. (“FALI”), which commenced the preparation for its incorporation on July 1, 2007 and was established under the relevant regulations on November 19, 2007, is a joint venture between the Company and Aviva International Holdings Limited with a holding ownership of 51% and 49%, respectively. FALI obtained its Insurance License issued by the FSC in December 2007. FALI commenced its business activities mainly engaged in the life insurance business effective from January 2, 2008. 4) Movement of consolidated entities: None. 5) Unconsolidated entities:
Percentage of the Company’s direct/ Investor Subsidiary name indirect holding ownership (%) Note name 2009/12/31 2008/12/31 FFHC FFAM 100 100 Note 1
FFHC FVC 100 100 ” FFHC FFMC 100 100 ” FFHC FPCIA 100 100 ” FCB FCB Leasing Co., Ltd. (“FCBL”) 100 100 ” FCB First Insurance Agency Co., Ltd. 100 100 ” FCB First Commercial Bank (USA) 100 100 ” FSIT NITC (Cayman Islands) Ltd. (“NITC (Cayman)”) 100 100 Notes 1&2 Note 1: As the individual and consolidated total assets or net revenues of the aforesaid investee companies held over 50% ownership by the Company or its subsidiaries are less than 1% of total consolidated assets and total consolidated net revenues, respectively, the Company deems that excluding such investee companies from the consolidated financial statements will not materially affect the overall consolidated financial statement presentation. Note 2: After NITC (Cayman Islands) Ltd. achieved its long-term goal, disposed its investment business, and in consideration of having no investment plans for the near-term and the reduction of business and operating costs, FSIT’s Board of Directors and the Stockholders’ Meeting on October 14, 2008, resolved to cease the operations of FSIT (Cayman Islands) Ltd., effective from December 31, 2008. The remaining properties and capital have been remitted back to FSIT on April 23, 2009. 6) Adjustment on different accounting periods of the subsidiaries: None. 7) Specific operation risk of the foreign subsidiaries: None. 8) Information with respect to the subsidiaries’ significant restriction to transfer its funds to the parent company: None. 9) Information with respect to the subsidiaries’ holding of the securities issued by the parent company: None. 10) Information with respect to the subsidiaries’ issuance of the convertible bonds and new shares: In order to enhance capital structure and strengthen its self-owned capital of FCB, FCB’s Board of Directors (acting on behalf of the stockholders) resolved to increase cash capital by $3,000,000, consisting of 120 million common shares at the price $25 per share at a premium via private placement on June 26, 2009. The capital increase was effective from August 26, 2009 and the registration of change in capital was completed. The capital increase was approved by the Explanatory Letter Kong-Zhi No. 09800336190 of the Financial Supervisory Commission. After the capital increase, the total issued and approved capital amounted to $49,490,000, consisting of 4,949,000 thousand shares at the price $10 per share as of December 31, 2009.
53 2.Summary of significant accounting policies The consolidated financial statements are prepared in conformity with the “Regulations Governing the Preparation of Financial Reports by Financial Holding Companies”, “Regulations Governing the Preparation of Financial Reports by Securities Issuers”, “Regulations Governing the Preparation of Financial Reports by Public Banks”, “Regulations Governing the Preparation of Financial Reports by Securities Firms”, “Regulations Governing the Preparation of Financial Reports by Life Insurance Companies”, “Regulations Governing the Preparation of Financial Reports by Futures Commission Merchants”, “Business Entity Accounting Act”, “Regulation on Business Entity Accounting Handling” and generally accepted accounting principles in the Republic of China. The significant accounting policies of the First Group are summarized below: 1) Basis for preparation of the consolidated financial statements A. Since the first quarter of 2006, in accordance with the amended “Regulations Governing the Preparation of Financial Reports by Financial Holding Companies”, the Company has prepared consolidated financial statements only. In addition to the bank subsidiary, insurance subsidiary, and securities subsidiary, which have been included in the consolidated financial statements, in accordance with the amended Statement of Financial Accounting Standards (SFAS) No. 7 “Consolidated Financial Statements” in the Republic of China, the investees whose voting stock interests are more than 50% directly or indirectly held by the Company are included in the consolidated financial statements except for those whose total assets and operating revenues are considered to be immaterial to the Company. Under the amended SFAS No. 7, the prior year consolidated financial statements are not required to be restated to consolidate the previously unconsolidated subsidiaries. B. Accounting treatment for obtaining or losing control over subsidiaries during the year is in accordance with SFAS No. 7, and accordingly, the Company shall include the subsidiaries’ revenues and expenses in the consolidated financial statements from the date of obtaining the control or shall exclude the subsidiaries’ revenues and expense in the consolidated financial statements from the date of losing the control. C. In accordance with the “Guidelines Governing the Preparation of Financial Reports by Financial Holding Companies”, the Company prepares the consolidated financial statements by aggregating the Company’s and its subsidiaries’ assets, liabilities, revenues, and expenses and the accounts on the accompanying financial statements are not classified into current and non-current items. Inter-company transactions and balances, as well as investment in subsidiaries versus subsidiaries’ stockholders’ equity, have been eliminated during the consolidation. D. Under Article 4 of the Financial Holding Company Act, a controlling interest is established if a financial holding company holds more than twenty-five percent of voting interests or capital stock of a bank, insurance company or securities house, or has directly or indirectly designated the majority of the directors of a bank, insurance company or securities firm. E. The financial statements of FCB include head office accounts, branch office accounts, and offshore banking branch accounts. All significant inter-office accounts and transactions have been eliminated in the consolidated financial statements.
2) Cash and cash equivalents Cash includes cash on hand, demand deposits, checking deposits, checks for clearing and cancelable time deposits. Cash equivalents are short-term investments that are readily convertible to known amounts of cash and are so near the maturity date that such investments present insignificant risk of value arising from changes in interest rates. The consolidated statements of cash flows were prepared based on cash and cash equivalents basis.
3) Financial assets and financial liabilities at fair value through profit or loss A. Equity securities, beneficiary certificates and derivative instruments are accounted for using trade date accounting and debt securities are accounted for using settlement date accounting. Financial instruments are initially recognized at their fair values. B. Financial assets and liabilities at fair value through profit or loss shall be measured at fair value with changes in fair value recognized as gains or losses in the current period. For stocks listed on Taiwan Stock Exchange (TSE) or Over-the-Counter (OTC) and closed-end funds, fair value is determined based on the closing price at the balance sheet date. For open-end funds, fair value is determined based on the net asset value of the given fund at the balance sheet date. For beneficiary securities, fair value is determined based on the discounted value of expected future cash flows at the balance sheet date or the market price provided by Bloomberg, Reuters or counterparties. For bonds listed on TSE or OTC, fair value is determined based on the latest transaction price of Automatic Order Matching and Execution System in OTC or the “fair value of bonds” bulletined in OTC. For those bonds which are not listed on the TSE or OTC, fair value is determined based on the discounted value of expected future cash flows at the balance sheet date or the market price provided by Bloomberg, Reuters or counterparties. For derivative
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financial instruments held for trading purpose, fair value is determined based on a quoted market price in an active market at the balance sheet date. If a quoted market price in an active market is not available, fair value is determined by applying other valuation techniques, such as discounted cash flow analysis or option pricing models. C. Criteria to designate financial assets and financial liabilities as at fair value through profit or loss are as follows: A) Hybrid (combined) instruments; Financial Information B) The designation can eliminate or significantly reduce a measurement or recognition inconsistency; or C) The designation is in compliance with a documented risk management or investment strategy of the First Group to evaluate the performance of assets and liabilities based on a fair value.
4) Bills and bonds under repurchase or resale agreements Bills and bonds under repurchase or resale agreements are accounted for under the financing method. Bills and bonds sold under repurchase agreements are recorded as “Bills and bonds payable under repurchase agreements” at the sale date. Bills and bonds invested under resale agreements are recorded as “Investments in bills and bonds under resale agreements” at the purchase date. The difference between the cost and the repurchase price is recorded as interest expense over the period between the sale date and the purchase date. The difference between the cost and the resale price is recorded as interest income over the period between the purchase date and the sell date.
5) Margin loans, stock loans and refinancing A. FS conducts margin loan business to provide funds to its customers to purchase securities. The margin loans given to customers are recorded as “margin loans receivable” and are collateralized by the securities that the customers purchase. The collateral securities are recorded through memorandum accounts and are returned to customers when the loans are repaid. B. FS conducts stock loan business to lend securities to its customers to sell short. The deposits received from customers are recorded as “deposits received on securities lending”. Proceeds from sales of securities lent to customers less any securities exchange taxes, dealer’s commissions, and financing charges are used as the collateral for securities lent and are recorded under “collateralized proceeds payable from securities lending”. The securities lent to customers to sell short are recorded through memorandum accounts. When the customers return the securities, FS gives the deposits received and the proceeds from securities sold back to customers. C. The “refinancing of margin loans” refers to refinancing to borrow funds from securities finance companies when there are insufficient funds to conduct margin loan business. The refinancing of margin loans is recorded as “refinancing borrowing” and is collateralized by the securities purchased by customers on margin loans. D. The “refinancing of stock loans” refers to refinancing to borrow securities from securities finance companies when there are insufficient securities to conduct securities lending business. The deposits or collateral given to securities finance companies by FS are recorded as “refinancing margin deposits”. The proceeds from securities lent to customer to sell short are given to the securities finance companies as the collateral and are recorded as “collateralized proceeds payable from securities lending” and “refinancing deposits receivable”, respectively.
6) Bills discounted and loans A. Bills discounted and loans (including non-accrual loans) are recorded at the amounts of principal outstanding. Interest income is recognized on an accrual basis except for interest on non-accrual loans. B. For all bills discounted and loans under which there is no principal payment after the lapse of six months, lawsuits are filed against the borrowers and guarantors or the collaterals are executed. Such non-performing loans are transferred to the non-accrual loans account. Interest shall cease to be accrued for non-performing loans that are transferred to the non-accrual loans account. Such interest receivable will be recognized after cash is received. C. When there is postponement or modification of the credit terms for the debtors, and the Bank agrees to receive partial interest, the remaining interest will cease to be accrued and will be recognized after cash is received. D. Loans from FALI include insurance premium loans and automatic premium loans (APL). Insurance premium loans are loans pledged by insurance policy; automatic premium loans, pursuant to insurance contracts, are advance premiums when premiums are not paid on time and there is sufficient cash value in the policy, the APL feature will automatically use the cash value of the policy to pay for the outstanding premiums.
7) Available-for-sale financial assets A. Equity securities are accounted for using trade date accounting; Debt securities are accounted for using settlement date accounting. Such financial instruments are initially recognized at fair value plus the acquisition or issuance cost.
55 B. Available-for-sale financial assets are measured at fair value with changes in fair value recognized as an adjustment account in the stockholders’ equity. When the financial asset is derecognized, the cumulative unrealized gain or loss that was previously recognized in equity is recognized in profit or loss in the statement of income. For stocks listed on the TSE or OTC and closed-end funds, fair value is determined based on the closing price at the balance sheet date. For open-end funds, fair value is determined based on the net asset value of the given fund at the balance sheet date. For beneficiary securities, fair value is determined based on the discounted value of expected future cash flows at the balance sheet date or the market price provided by Bloomberg or Reuters. For bonds listed on TSE or OTC, fair value is determined based on the fair value of bonds bulletined in OTC. For those bonds not listed on the TSE and OTC, fair value is determined based on discounted value of expected future cash flows at the balance sheet date or the market price provided by Bloomberg or Reuters. C. An impairment loss is recognized when there is an objective evidence of impairment. In the subsequent period, if the amount of the impairment loss decreases due to an event occurring after the impairment was originally recognized, for equity instruments, the decrease shall be recognized as an adjustment account in the stockholders’ equity; and for debt instruments, the previously recognized impairment loss is reversed through profit or loss.
8) Held-to-maturity financial assets A. Held-to-maturity financial assets are accounted for using settlement date accounting and are initially recognized at fair value plus the acquisition or issuance cost. Gains or losses are recognized in the statement of income when the investments are derecognized. B. Held-to-maturity financial assets are measured at amortized cost using the interest method at the balance sheet date. C. An impairment loss is recognized when there is an objective evidence of impairment. In the subsequent period, if the amount of the impairment loss decreases due to an event occurring after the impairment was originally recognized, the previously recognized impairment loss is reversed through profit and loss to the extent that the carrying amounts do not exceed the amortized cost that would have been determined had no impairment loss been recognized in prior years.
9)Equity investments accounted for under the equity method A. The Company was formed by FCB pursuant to the Explanatory Note (90) No. 182 of the Accounting Research and Development Foundation of the R.O.C. dated October 29, 2001. Capital expenditure incurred by the Company to acquire equity interest in a financial institution through share swap is stated at the book value of the respective financial institution’s assets less the book value of liabilities. The par value of the new shares issued is recorded as common stock, and the amount in excess of the par value is recorded as capital surplus. Subsequently, the Explanatory Note (96) No. 0000000344 dated December 12, 2007 replaced the aforesaid Explanatory Note (90) No. 182 with respect to the recognition of capital expenditure incurred by the Company to acquire equity interest in a financial institution. In accordance with Explanatory Note (90) No. 182, capital surplus recognized due to share swap whose asset and liability accounts included in FCB’s stockholders’ equity were reclassified to adjustment account in the stockholders’ equity, effective from the released date of the Explanatory Note (96) No. 0000000344. B. Long-term equity investments in which the First Group owns at least 20% of the investees’ voting stock interests or can exercise significant influence over the investees are accounted for under the equity method. The carrying amount of such equity investments are evaluated pursuant to the investment costs plus or minus the net income or loss and changes in stockholders’ equity of the investee recognized in proportion to the percentage of the investee’s ownership held by the First Group. The cash dividends received from investees are recorded as deduction from the investment cost. For the stock dividends received from investees, the investment amount is not increased and the investment income is not recognized. A memorandum entry is made to record the additional shares received. When there is sufficient evidence to indicate that the fair value of the investment is impaired and the probability of the recovery is remote, the loss on investments is recognized in the current period. If such equity investments are disposed of, the cost is calculated under the weighted average method. C. Effective from January 1, 2006, for an investee company accounted for under the equity method, if the First Group does not have control interests but can exercise significant influence over the investee, investment losses are recognized to the extent that the balance of the investment plus advances to the investee is reduced to zero, unless the First Group guarantees the debts of investee company or has a commitment or intention to provide financial support to the investee company. In such cases, the investment loss is recognized in proportion to the investee company’s ownership held by the First Group. However, if the First Group has control interests over the investee company, the investment losses in excess of the investee’s stockholders equity’s balance shall be fully recognized, unless other stockholders of the investee company have the obligation and ability to provide
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additional capital to take the losses. When the investee company begins to make a profit in the subsequent periods, the earnings are attributed to the First Group until the originally recognized excess losses are fully recovered. D. For unrealized gain or loss from the downstream transactions between the Company and an investee accounted for under the equity method, if the Company has control interests over the investee, unrealized gain or loss shall be fully eliminated; if the Company does not have control interests over the investee, unrealized gain or loss shall Financial Information be eliminated in proportion of the investee’s ownership held by the Company at the year end. For the unrealized gain or loss on transactions between investees accounted for under the equity method, if the Company has control interest over both the investees, unrealized gain or loss is eliminated in proportion of the ownership held by the Company in the investee generating the unrealized gain or loss, otherwise, it shall be eliminated according to the proportion of each investee’s ownership held by the Company. Unrealized gain or loss is not recognized until it is realized. E. The cumulative translation adjustment resulting from translation of the financial statements of foreign equity investments accounted for under the equity method is recognized proportionally in the stockholders’ equity account based on the percentage of the investees’ ownership held by the First Group.
10) Other financial assets and financial liabilities A. Financial assets measured at cost A) Long-term investments in equity securities, which are not listed on the TSE or OTC, are accounted for using trade date accounting. Such financial instruments are initially recognized at fair value plus the acquisition or issuance cost and are subsequently carried at cost at the balance sheet date. B) For financial assets measured at cost, an impairment loss shall be recognized if there is an objective evidence of impairment. The impairment loss shall not be reversed. B. Bond investments with no active market A) Bond investments with no active market are accounted for using settlement date accounting. Such financial instruments are initially recognized at fair value plus acquisition or issuance cost. Gains or losses are recognized in the income statement when the investments are derecognized. B) Bond investments with no active market shall be subsequently measured at amortized cost using the interest method. C) An impairment loss is recognized when there is an objective evidence of impairment. In the subsequent period, if the amount of the impairment loss decreases due to an event occurring after the impairment loss was originally recognized, the previously recognized impairment loss is reversed through profit or loss to the extent that the carrying amounts shall not exceed the amortized cost that would have been determined had no impairment loss been recognized in prior years. C. Derivative financial assets and financial liabilities held for hedging Derivative financial assets and financial liabilities held for hedging are those derivative financial assets and financial liabilities that are designated as effective hedging instruments under hedge accounting and are measured at fair value.
11) Hedge accounting A. Fair value hedge When all the criteria of fair value hedge accounting are met, it recognizes the offsetting effects on gains or losses of changes in the fair values of the hedging instrument and the hedged item. Any gain or loss from remeasuring the hedging instrument at fair value or the foreign currency component of its carrying amount shall be recognized immediately in the statement of income. Any gain or loss attributable to the hedged risk shall be adjusted in the carrying amount of the hedged item and be recognized immediately in the statement of income. B. Cash flow hedge A) When all the criteria of cash flow hedge accounting are met, the effective hedge portion of the gain or loss on the hedging instrument shall be recognized directly in the stockholders’ equity, and the ineffective hedge portion of the gain or loss on the hedging instrument shall be recognized in the statement of income. B) The accounting treatment for a forecast transaction is as follows: a. If a hedge of a forecast transaction subsequently results in the recognition of a financial asset or a financial liability, the related gains or losses that were originally recognized directly in the stockholders’ equity shall be reclassified into the statement of income in the same period or periods during which the asset acquired or liability assumed affects profit or loss. However, if it is expected that all or a portion of a loss recognized directly in stockholders’ equity will not be recovered in one or more future periods, the amount that is not expected to be recovered shall be reclassified into the statement of income immediately.
57 b. If a hedge of a forecast transaction subsequently results in the recognition of a non-financial asset or a non- financial liability, or if a forecast transaction for a non-financial asset or non-financial liability becomes a firm commitment for which fair value hedge accounting is applied, then the associated gains and losses that were originally recognized in stockholders’ equity can either be reclassified into the statement of income in the same period or in the periods during which the asset acquired or liability assumed affects profit or loss or can be adjusted to the initial cost or other carrying amount of the asset or liability. Once the policy has been adopted, the accounting treatment shall be applied consistently.
12) Allowance for doubtful accounts and credit losses A. FCB classifies on and off balance sheet credit assets and determines the allowance for credit losses by evaluating the recoverability of the outstanding balances of various loans at the balance sheet date according to “Guidance for Credit Assets Risk Assessment”. For non-credit assets, FCB evaluates the possible risks based on the characteristics of the assets in accordance with “Guidance for Non-Credit Assets Risk Assessment” and generally accepted accounting principles in the Republic of China. According to the amended “Regulations Governing the Procedures for Banking Institutions to Evaluate Assets and Deal with Non-performing / Non-accrual Loans” of the Ministry of Finance (MOF) and “Guidance for Credit Assets Risk Assessment” of the Bank, loans are classified into five categories: (1) normal (2) special attention (3) substandard (4) doubtful and (5) unrecoverable. Except for the normal loans classified under category 1, the abnormal loans shall be evaluated based on the status of the loan collateral and the length of time overdue. The allowance for credit losses for abnormal loans is provided at 2%, 10%, 50%, and 100% on loans classified under categories 2, 3, 4, and 5, respectively. Furthermore, an additional reserve is provided for specific loans as needed if the aforementioned allowance is insufficient according to the recoverability. Upon the approval of the Board of Directors and the notice to the supervisors of FCB, the overdue loans are written-off in accordance with the guidelines of the “Regulations Governing the Procedures for Banking Institutions to Evaluate Assets and Deal with Non-performing / Non-accrual Loans”. B. Allowance for doubtful accounts of FS is evaluated based on the collectibility of the notes and accounts receivable at the period-end. Securities dealing department’s allowance for bad debts is evaluated based on the Explanatory Letter Tai-Tsai-Jen (2) No. 82416 dated September 29, 1999 of the Securities and Futures Commission. (1) Margin trading: (a) When the Margin Ratio of a margin loan receivable is lower than the regulated minimum ratio and the balance of the margin loan receivable has not been partially collected to the extent that the margin ratio reaches the minimum ratio by the scheduled time, the related receivable should be transferred to and recorded as “overdue receivables”. The allowance for doubtful debts should be at least 50% and action should be taken to collect the receivable within 6 months. Additional allowance for bad debts within 6 months may need to be provided based on facts and circumstances if the receivable cannot be collected. (b) If the marketable securities in customers’ margin trading account are not disposable, the balance of the related margin loan receivable should be transferred to and recorded as “other receivables” immediately and 100% allowance for doubtful debts should be provided. Action should be taken to collect the receivable and review the appropriateness of its classification. Receivables not collected after further action has been taken should be transferred to and recorded as “overdue receivables”. (c) For those margin loan receivables, for which an agreement has been reached with customers and the customers have fulfilled the obligation according to the agreement, no allowance for doubtful debts needs to be provided. However, if there is any default on the subsequent payments, additional allowance for doubtful debts should be provided according to the above (a) or (b). (2) Normal trading part: The receivables generated from contracts breached by customers, should be transferred to and recorded as “other receivables” and a 100% allowance for doubtful debts should be provided. Actions should be taken to collect the receivable and review the appropriateness of its classification. Receivables not collected after further actions should be transferred to “overdue receivables”. In accordance with the Value-added and Non-value-added Business Tax Law (the “Business Tax Law”), the business tax rate was adjusted from 5% to 2%, effective from July 1, 1999. The 3% tax reduction shall be set aside as additional allowance for doubtful accounts or be used to write-off overdue accounts within four years, starting from July 1, 1999. If a company does not follow the above regulations, the tax authorities will impose 3% business taxes on the sales violating the “Business Tax Law”. According to the Explanatory Letter Tai-Tsai-Jen Ruling (2) No.0920002964 of the MOF dated July 17, 2003, effective from July 1, 2003, the aforementioned regulation is no longer applicable to securities firms.
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However, if there is an outstanding balance of the aforesaid allowance for doubtful accounts on June 30, 2003, securities firms should comply with the Explanatory Letter Tai-Tsai-Jen (2) No.82416 dated September 29, 1999 to retain such a balance to write-off overdue accounts in the future. (3) FALI’s allowance for doubtful accounts are determined based on the “Guidelines for Handling Assessment of Assets, Loans Overdue, Delinquent Accounts Receivable on Demand by Insurance enterprises” issued by the Insurance Bureau of Financial Supervisory Commission, Executive Yuan and are recorded and evaluated based Financial Information on the collectibility of accounts receivable and delinquent accounts receivable.
13) Property, plant and equipment/ non-operating assets ( including leased or idle assets ) A. Property, plant and equipment / non-operating assets are stated at cost except for appraisal increment as permitted under the relevant regulations. Provision for depreciation of non-operating assets is recorded under “other non-interest income or loss” and at the balance sheet date, the non-operating assets are valued at the lower of carrying amount or net realizable value. Depreciation is provided on a straight-line basis over the estimated service lives of the assets plus an additional year as salvage value. The service lives of major properties and equipment are as follows:
Land and improvements 3 ~ 30 years Buildings 5 ~ 60 years Transportation equipment 3 ~15 years Miscellaneous assets 3 ~17 years Leasehold improvements are depreciated over the lease terms of the lease agreements or 2~5 years.
B. Major renewals and improvements, which are incurred to increase the future economic benefits of the assets, are capitalized and depreciated. Routine maintenance and repairs are charged to expense as incurred. C. When property, plant and equipment, and non-operating assets are sold or abandoned, the cost and accumulated depreciation are deducted from the respective accounts and the related gain or loss is recorded as ”other non-interest income or loss”. D. The residual value of property and equipment that is still in use at the end of its original estimated useful life is depreciated using the straight-line method over its revised estimated useful life.
14) Other assets Other assets mainly comprise of non-operating assets, foreclosed assets, refundable deposits, operating guarantee deposits and settlement clearing funds, restricted assets, prepayments, temporary payments and suspense accounts, and other assets to be adjusted. Foreclosed assets are recorded at acquisition costs and are revalued at the lower of carrying amount or recoverable amount as of the balance sheet date. If the foreclosed assets are impaired, an impairment loss is recognized in the current period. In the subsequent period, if the recoverable amount increases, the previously recognized impairment loss is reversed to the extent that the carrying amounts, after the reversal, shall not exceed the carrying amounts that would have been determined had no impairment loss been recognized in the prior years.
15) Intangible assets Intangible assets, mainly comprising of computer software costs, are initially recorded at cost and are amortized over 3 to 5 years under the straight-line method.
16) Reserve for guarantees Reserves for guarantees of FCB are determined based on the estimated losses arising from possible default of bills accepted receivable, guarantees receivable and letters of credit receivable, net of the margin deposits received from customers as at the balance sheet date.
17) Reserve for default As required by Article 12 of the “Rules Governing Securities Firms”, FS should allocate 0.0028% of the amounts of monthly securities consignment trading as the reserves for losses from default, and such reserves are recorded under reserve for operation and liabilities. The reserves should only be used for recovering the losses caused by default on such consignment trading or for other purposes as approved by the SFB. When the accumulated reserve balances reach $200,000, no further reserve provision is required.
59 18) Reserve for securities trading losses As required by the “Regulations Governing Securities Firms”, a securities firm should set aside 10% of the excess of monthly gains over losses from “trading securities – proprietary trading” and “ issuance of call (put) warrants” as the reserves for securities trading losses while engaging in proprietary trading business. Such reserves can only be used to offset losses over gains arising from the aforesaid securities trading. The reserves must be provided until the accumulated reserve balances reach $200,000. Futures commission merchants should set aside 10% of monthly net realized gains from trading futures as the reserve for futures trading losses while engaging in proprietary trading business. The reserve must be provided until the accumulated reserve reaches the regulated minimum issued capital stock, working capital or operating capital. Such reserve can only be used to offset losses over gains arising from the aforesaid futures trading.
19) Reserves for operations and liabilities Reserves for operations and liabilities of FALI, includes reserve for insurance liabilities, reserve for unearned premiums, reserve for catastrophic losses and reserve for outstanding losses, and are provided for in accordance with the Insurance Act and relevant regulations as well as based on an actuarial report.
20) Retirement plan and pension cost A. In compliance with the Statement of Financial Accounting Standards No.18, “Accounting for Pensions”, if the retirement plan is a defined benefit pension plan, the First Group recognizes the difference as the minimum pension liability when the accumulated benefit obligation exceeds the fair value of plan assets. For interim financial statements, minimum pension liability is adjusted for the difference between the net periodic pension costs and the appropriated funds. The net periodic pension costs, which include the service cost, interest cost, expected return on plan assets, amortization of unrecognized net transition asset or obligation, amortization of pension gains or losses, and amortization of prior period service cost, are recognized based on an actuarial report. B. If the retirement plan is a defined contribution pension plan, the contributions are based on an accrual basis and are recognized as pension costs in the current period. Effective from July 1, 2005, the contributions made pursuant to the Labor Pension Act are under the defined contribution pension plan. Such contributions are made monthly based on not less than 6% of the employees’ salaries and are deposited in the employee’s individual pension fund account at the Bureau of Labor Insurance.
21) Foreign currency transactions and translations of foreign currency financial statements The First Group’s foreign currency transactions are recorded in New Taiwan dollars at the spot rates of the transaction dates. Differences between actual payments or receipts and recorded transaction amounts are recognized as foreign exchange gains or losses in the current period. The revaluation of the foreign currency assets and liabilities at the balance sheet date is as follows: A. Except that a cash flow hedge or a hedge of a net investment in a foreign operation is accounted for under the hedge accounting, monetary assets and liabilities denominated in foreign currencies are revalued using the spot foreign exchange rates at the balance sheet date, and the resulting foreign exchange gain or loss on the revaluation is included in current income. B. Non-monetary assets and non-monetary liabilities denominated in foreign currencies that are financial assets or financial liabilities at fair value through profit or loss are revalued using the spot foreign exchange rates at the balance sheet date, and the related foreign exchange gains or losses are recorded as gains or losses in the current period. Available-for-sale financial assets are revalued using the spot foreign exchange rates at the balance sheet date, and the related foreign exchange gains or losses are recorded in the stockholders’ equity. Financial assets or financial liabilities carried at cost are stated using the historical foreign exchange rates of the transaction dates. C. For equity investments accounted for under the equity method whose functional currency is foreign currency, the translation differences arising from the foreign currency financial statements translated into domestic currency financial statements are recognized proportionally as the cumulative translation adjustment in the stockholders’ equity based on the percentage of the investees’ ownership held by the First Group. D. When the financial statements of a foreign operation are translated into domestic currency financial statements, all asset and liability accounts are translated using the spot foreign exchange rate at the balance sheet date, and the stockholders’ equity accounts are translated at the historical foreign exchange rate except that the beginning retained earnings are stated at the translated carrying amount of the ending retained earnings in the prior year and the profit and loss accounts are translated at the average foreign exchange rate in the reporting period. The final translation differences are recorded as the cumulative translation adjustments in the stockholders’ equity.
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22) Revenue and expense recognition A. Revenues are recognized in accordance with the provisions of Statement of Financial Accounting Standards No. 32 “Accounting for Revenue Recognition”. B. Interest income on loans of FCB is recognized on an accrual basis. However, interest income arising from loans which meet any of the following criteria is recognized on a cash basis when the interest income is received: A) Reclassified as non- accrual loans. Financial Information B) Interest from restructured loans whose maturities have been extended is not recognized as interest income but recorded on the memo accounts. C. Handling fees are recognized when cash is received, or the earning process is substantially completed. D. Under the respective securities investment trust contracts, FSIT earns annual management fees on the average daily net asset value of each of the managed mutual funds. It also earns sale service fees according to various percentages of the transaction value of the beneficiary certificates issued and reissued by the managed mutual funds. E. Revenue and expense recognition principles of FS are as follows: A) Brokerage commission, gains (losses) on sale of securities, and related handling fee expenses are recognized on the transaction date. B) Interest income and interest expenses attributable to margin loan business, stock loan business, and bills and bonds under repurchase or resale agreements are recognized on an accrual basis during the transaction periods. C) Underwriting commission income or expenses: Subscription handling fees are recognized when the amounts are received and underwriting commission income and related commission expenses are recognized at the completion of such underwriting contracts. D) Service fee income from providing registration and transfer agency service for securities are recognized monthly according to the contracts. E) Management fee income: revenues are recognized when the earning process is substantially completed and is realized or realizable. F. Insurance premium income and expenses: Direct premiums are recorded as income at the time of insurance policy issuance. Related expenses (commissions, brokerage fees, etc.) are accrued at the same time. Reinsurance premiums and reinsurance commission expenses are recognized upon the assumption of reinsurance. Claim expenses for assumed reinsurance policies are recognized upon notification that claim payments are due. Adjustments are made at year-end based on past experience. G. Cost and expenses are recognized as incurred.
23) Income taxes A. According to the Statement of Financial Accounting Standards No. 22 “Accounting for Income Taxes” of the R.O.C., the Company is required to apply the inter-period and intra-period income tax allocations. Under the inter-period income tax allocation, the income tax effects of deductible temporary differences, loss carry forwards, and income tax credits are recognized as deferred income tax assets, and the income tax effects of taxable temporary differences are recorded as deferred income tax liabilities. Valuation allowance is provided against deferred income tax assets if it is more likely than not that the deferred income tax assets will not be realized. Deferred income tax assets or liabilities are classified as current items or non-current items according to the related asset and liability classifications or the expected realization period of temporary differences. The adjustment for over-provision or under-provision of previous years’ income taxes is included in the current year’s income taxes. Under the intra-period income tax allocation, the income tax expenses (benefits) should be allocated to continuing operations, discontinued operations, extraordinary gains or losses, cumulative effect of a change in accounting principle, and prior period adjustments of retained earnings. B. In accordance with the Statement of Financial Accounting Standards No. 12, “Accounting for Income Tax Credits”, income tax credits resulting from purchase of equipment, research and development expenditures, employee trainings, and investments in equity stocks are recognized as incurred. C. Pursuant to the Explanatory Letter Tai-Tsai-Shui No.0910458039 of the MOF dated February 12, 2003 to promulgate the “Criteria for Profit-seeking Enterprises in Filing Consolidated Profit-seeking Enterprise Income Tax Returns” and according to Article 49 of the Financial Holding Company Act and Article 40 of the Business Mergers and Acquisitions Law, if a financial holding company holds at least 90% of the issued capital stock of its domestic subsidiaries for twelve months in a fiscal taxable year, starting from such a fiscal taxable year, the financial holding company may elect to have itself as the taxpayer to file the consolidated profit-seeking enterprise’s income tax returns and to file the profit-seeking enterprise’s income tax returns of the 10% surtax
61 on undistributed earnings, whereas other tax affairs should be handled separately by the financial holding company and its domestic subsidiaries. The 10% surtax on undistributed current earnings calculated pursuant to the Income Tax Act of the R.O.C is recorded as income tax expense in the resolution year when the earnings distribution is approved in the Stockholders’ Meeting. D. Effective on January 1, 2006, in accordance with the Alternative Minimum Tax Act, the Company calculates the alternative minimum tax in addition to the regular income tax. If the regular income tax is lower than the alternative minimum tax, the difference is accrued as an income tax adjustment. E. The accounting treatment of the Company in instances where it holds more than 90% of outstanding shares of its subsidiaries allowing it to adopt the consolidated income tax return system to file the consolidated income tax returns is in compliance with the Explanatory Note (92) No. 239 and No. 240 of the Accounting Research and Development Foundation of the R.O.C. dated October 3, 2003. The Company and its subsidiaries separately apply the Statement of Financial Accounting Standards No. 22, “Accounting for Income Taxes” to cope with the income taxes according to their respective income tax returns. However, settlements received or paid within the affiliated group arising from filing consolidated income tax returns results in adjustments to the deferred income tax assets / liabilities or income taxes payable / refundable in the current period based on a reasonable, consistent, and systematic method. Furthermore, when estimating the provision for income taxes in the financial statements, the Company records such settlements receivable from subsidiaries or payable to subsidiaries as “other receivable from / other payable to subsidiaries for consolidated income tax return system”. F. When a change in the tax laws is enacted, the deferred tax liability or asset should be recomputed accordingly in the period of change. The difference between the new amount and the original amount, that is, the effect of changes in the deferred tax liability or asset, should be recognized as an adjustment to income tax expense (benefit) for income from continuing operations in the current period.
24) Employees’ bonuses and directors’ and supervisors’ remuneration Effective from January 1, 2008, pursuant to EITF96-052 “Accounting for Employees’ Bonus and Directors’ and Supervisors’ Remuneration”, prescribed by the R.O.C. Accounting Research and Development Foundation, the costs of employees’ bonus and directors’ and supervisors’ remuneration are accounted for as expenses and liabilities, provided that such a recognition is required under legal obligation or constructive obligation and those amounts can be estimated reasonably. If any changes are made in the following year’s stockholders meeting, the difference shall be treated as changes of accounting estimate and recognized as profit or loss in the following year.
25) Investment-linked insurance products Accounting treatments for investment-linked insurance products are in conformity with“Regulations Governing Investment-linked Products” and “Criteria Governing Accounting Treatments of Life Insurance Industry Selling Investment-linked Insurance Products” and other related regulations.
26) Asset impairment loss An impairment loss shall be recognized when a change in circumstances or events indicate that an asset’s recoverable amount is less than its carrying amount. The recoverable amount of an asset is the higher of its fair value, net of selling expenses, and its value in use. The fair value, net of selling expenses, is the amount obtainable from the sale of an asset in an arm’s length transaction between knowledgeable, willing parties, less the costs of disposal. The value in use is the present value of the future cash flows expected to be derived from an asset. If there is an indication that an impairment loss recognized in the prior periods for an asset may no longer exist or may have decreased, the impairment loss recognized could be reversed, and such a reversal shall not exceed the impairment loss recognized in the prior periods. However, impairment loss of goodwill and financial assets carried at costs is not recoverable.
27) Use of estimates In preparing the consolidated financial statements in conformity with generally accepted accounting principles in the R.O.C., the management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities as of the date of the consolidated financial statements, and the reported amounts of revenues, costs of revenues, and expenses during the reporting period. Therefore, actual results could differ from those estimates.
28) Contingent losses If at the balance sheet date, due to the development of events, it is probably confirmed that assets have been
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impaired or liabilities have been incurred and the amount of losses could be reasonably estimated, the amount should be recognized as loss for the current year. If at the balance sheet date, due to the development of events, it is probably confirmed that assets have been impaired or liabilities have been incurred, but the amount of losses could not be reasonably estimated, it should be disclosed in the consolidated financial statements. Financial Information 3.Changes in accounting principles Effective from January 1, 2008, the First Group adopted the newly issued SFAS No. 39 “Accounting for Share-based Payments” and EITF96-052 “Accounting for Employees’ Bonuses and Directors’ and Supervisors’ Remuneration”, as prescribed by the R.O.C. Accounting Research and Development Foundation. As a result of the adoption of the new accounting principles, consolidated net income decreased by $439,795 and earnings per share decreased by $0.07 (dollars) for the year ended December 31, 2008.
4.Summary of significant accounts 1) Cash and cash equivalents December 31, 2009 2008 Cash on hand $9,873,961 $10,356,352 Checks for clearance 8,345,457 14,027,955 Short-term bills 244,837 794,187 Due from other banks 5,477,038 2,608,455 Total $23,941,293 $27,786,949
2) Due from the Central Bank and call loans to other banks December 31, 2009 2008 Reserve for deposits - account A $37,218,630 $31,142,014 Reserve for deposits - account B 37,964,738 33,299,483 Central Bank deposits 8,500,000 1,100,000 Inter-Bank clearing fund 2,215,010 2,532,143 Deposits of overseas branches with foreign Central Banks 3,011,855 906,628 Deposits of national treasury account 258,428 1,007,833 Reserve for deposits- foreign currency 182,406 208,082 Call loans and overdrafts to other banks 115,787,227 85,407,081 Total $205,138,294 $155,603,264 The FCB’s reserve for deposits is required by the Banking Law and is determined by applying the reserve ratios set by the Central Bank to the monthly average balance of each type of deposit. The reserve amount is deposited in the reserve deposit account at the Central Bank. According to the regulations, such reserve for deposits - account B can not be withdrawn except for monthly adjustments of the reserve for deposits.
63 3) Financial assets at fair value through profit or loss-net December 31, 2009 2008 Financial assets for held for trading purpose Short-term bills $29,727 $- Stocks 1,529,895 189,780 Bonds (government, financial and corporate bonds) 2,330,977 4,483,927 Beneficiary securities 489,528 513,361 Other marketable securities 384,744 431,437 Derivative financial instruments 10,712,062 27,436,692 Valuation adjustment for financial assets for trading purpose - 230,587 (26,231) non-derivative instruments Subtotal 15,707,520 33,028,966
Financial assets designated as at fair value through profit or loss Bonds $17,578,675 $24,627,739 Valuation adjustment for designated financial assets at fair 814,795 792,170 value through profit or loss Subtotal 18,393,470 25,419,909 Total $34,100,990 $58,448,875 A. For the years ended December 31, 2009 and 2008, the net gain and loss on financial assets and liabilities for held for trading purpose and the net realized and unrealized gains (losses) on designated financial assets and liabilities at fair value through profit or loss amounted to $4,039,439 and ($989,994), respectively. B. Financial assets designated at fair value through profit or loss is to eliminate or significantly reduce a measurement or recognition inconsistency and to evaluate the performance of assets on a fair value basis. C. As of December 31, 2009 and 2008, the above financial assets for trading purposes undertaken for repurchase agreements were $1,159,561 and $2,696,371, respectively. D. Please refer to Note 6 for details of the above financial assets at fair value through profit or loss pledged as collateral as of December 31, 2009 and 2008. E. Types of derivative financial instruments held for trading purpose and related contract information were as follows: December 31, 2009 December 31, 2008 Contract amount Contract amount Financial Instruments Credit Risk Credit Risk (Notional principal) (Notional principal) Trading Purpose: Foreign exchange contracts $152,809,306 $717,919 $151,690,918 $2,640,562 (FX swaps and forwards) FX margin trading 5,233,764 477,917 5,099,388 562,434 Non-delivery FX forwards 4,909,642 25,234 21,311,296 328,991 FX options written 22,197,383 - 26,985,157 - Interest rate swap options written 35,965,280 - 41,983,220 - Bond options written 804,400 - - - Commodity options written 27,482,004 - 52,897,236 - FX options held 22,850,512 594,281 23,905,954 1,607,936 Interest rate swap options held 17,565,280 137,322 22,583,220 268,136 Commodity options held 27,482,004 1,404,023 52,897,236 10,644,022 Cross currency swap contracts 34,118,130 57,295 18,321,330 449,388
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December 31, 2009 December 31, 2008 Contract amount Contract amount Financial Instruments Credit Risk Credit Risk (Notional principal) (Notional principal)
Interest rate swap contracts 559,675,029 6,797,358 542,633,552 10,448,524 Financial Information Futures trading (Note) 258,127 372,364 10,293 367,229 Futures options purchased - - 607 535 Asset swap options purchased 415,870 128,349 515,400 118,935 Future options sold - - 587 - Asset swap options sold 455,402 - 515,404 - Note: As of December 31, 2009 and 2008, futures margin deposits include the excess margin deposits of $307,420 and $366,730, respectively.
4) Investments in bills and bonds under resale agreements December 31, 2009 2008 Government bonds $3,728,708 $6,075,339 Credit-linked bonds 6,094 54,995 $3,734,802 $6,130,334 As of December 31, 2009 and 2008, the First Group is obliged to sell the above bonds at purchase price plus a mark- up based on the resale agreement, and such resale amounts were $3,735,075 and $6,134,816, respectively. As of December 31, 2009 and 2008, the bonds dealing segment is obliged to make investment in bills and bonds to fulfill resale agreements with the price of $2,282,651 and $2,945,312, respectively.
5) Receivables - net December 31, 2009 2008 Spot exchange receivable $24,546,066 $23,787,238 Interest receivable 3,668,766 5,193,921 Acceptances receivable 6,576,253 4,648,381 Margin loans receivable 6,700,235 3,054,988 Credit card account receivable 3,515,474 3,319,843 Income tax refundable 1,111,052 2,067,319 Factoring receivable 1,970,102 1,723,175 Other receivables 2,033,760 1,464,486 Sub-total 50,121,708 45,259,351 Less: allowance for doubtful accounts (650,488) (347,666) Net amount $49,471,220 $44,911,685 As of December 31, 2009 and 2008, FCB’s reserves for guarantees, including guarantees for acceptances receivable were $300,518 for both years, and such reserves were recorded under ”reserves for operation and liabilities.”
65 6) Bills discounted and loans – net December 31, 2009 2008 Bills discounted $7,765,756 $5,715,848 Overdrafts 1,274,725 2,443,247 Short-term loans 317,132,837 351,188,234 Medium-term loans 311,829,248 353,056,915 Long-term loans 452,879,776 438,174,299 Import-export negotiations 2,364,350 1,853,165 Loans transfer to non-accrual loan 15,150,105 17,474,404 Insurance policy loans 23,352 2,492 Sub-total 1,108,420,149 1,169,908,604 Less: allowance for credit losses (12,386,513) (9,364,525) Net amount $1,096,033,636 $1,160,544,079 A. As of December 31, 2009 and 2008, gains from hedge evaluation were $266,665 and $371,980, respectively. The fair values of fixed-rate loans held by overseas branches may fluctuate with changes in interest rates. FCB assessed that the risk might be significant, so it has hedged such risk by engaging in interest rate swap contracts. Please refer to Note 10 1) J for details of relevant hedge information. B. As of December 31, 2009 and 2008, non-accrual loans and other credit extensions where interest accruals had been ceased were $15,062,602 and $17,351,254, respectively. For the years ended December 31, 2009 and 2008, interests not accrued amounted to $347,196 and $570,960, respectively. C. Proper execution of claims against debtors has been made before writing off any credit extensions and loans for the years ended December 31, 2009 and 2008. D. The bank business segment had revalued the allowance for doubtful receivables, remittances purchased, bills discounted and loans and non-accrual loans (including loans reclassification and non-accrual loans reclassification) by considering unrecoverable risks for the specific loans and inherent risks for the overall loan portfolio. Movements in allowance for credit losses of doubtful receivables, remittances purchased, bills discounted and loans and non-accrual loans (including loans reclassification and non-accrual loans reclassification) for the years ended December 31, 2009 and 2008 were as follows: For the year ended December 31, 2009 Unrecoverable Inherent risks risks for the for the overall Total specific loans loan portfolio Beginning balance $8,326,757 $2,747,796 $11,074,553 Provision 7,705,806 2,915,000 10,620,806 Write-off (7,375,828) - (7,375,828) Foreign exchange translation difference and others (1,338,112) 1,325,739 (12,373) Ending balance $7,318,623 $6,988,535 $14,307,158
For the year ended December 31, 2008 Unrecoverable Inherent risks risks for the for the overall Total specific loans loan portfolio Beginning balance $4,460,024 $4,580,626 $9,040,650 Provision 7,129,966 - 7,129,966 Write-off (6,049,984) - (6,049,984) Foreign exchange translation difference and others 2,786,751 (1,832,830) 953,921 Ending balance $8,326,757 $2,747,796 $11,074,553
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7) Available-for-sale financial assets - net December 31, 2009 2008 Stocks $4,896,749 $3,921,700 Financial Information Short-term bills 455,414 887,955 Bonds 64,914,358 54,052,820 Beneficiary securities 554,889 600,429 Valuation adjustment for available-for-sale financial assets 4,250,815 1,945,857 Less: refundable deposits (344,164) (343,442) Total $74,728,061 $61,065,319 Please refer to Note 6 for details of the above available-for-sale financial assets pledged as collateral as of December 31, 2009 and 2008.
8) Held-to-maturity financial assets - net December 31, 2009 2008 Certificates of deposits purchased $378,500,000 $192,480,000 Bonds 38,113,796 34,204,824 Preferred stocks of Taiwan High Speed Rail Corporation 2,000,000 2,000,000 Beneficiary securities 477,906 737,079 Short-term bills 183,288 243,583 Others 638,406 716,604 Sub-total 419,913,396 230,382,090 Less: Accumulated impairment (482,515) (396,498) Total $419,430,881 $229,985,592
9) Equity investments accounted for under the equity method - net A. Long-term investments at equity: December 31, 2009 2008 Percentage Percentage Amount of ownership Amount of ownership (%) (%) First Commercial Bank (USA) $1,555,928 100.00 $1,561,952 30.00 FCB Leasing Co., Ltd. 622,812 100.00 624,675 100.00 First Insurance Agency Co., Ltd. 115,763 100.00 140,718 100.00 East Asia Real Estate Management Co., Ltd. 10,784 30.00 11,350 30.00 First Financial Asset Management Co., Ltd. 304,718 100.00 300,538 100.00 First Venture Capital Co., Ltd. 968,405 100.00 888,717 100.00 First Financial Management Consulting Co., Ltd. 29,336 100.00 23,657 100.00 First P&C Insurance Agency Co., Ltd. 11,262 100.00 10,633 100.00 NITC (Cayman Islands) Ltd. - - 11,402 100.00 (Please refer to 1 5) B for details) $3,619,008 $3,573,642
67 B. Investment income (loss) from equity investments accounted for under the equity method for the years ended December 31, 2009 and 2008 were as follows: 2009 2008 Investment income $106,771 $97,818 Investment loss (566) (92,605) C. The investment income or loss from the above equity investments accounted for under the equity method was recognized based on the investees’ audited financial statements for the years ended December 31, 2009 and 2008.
10) Other financial assets - net December 31, 2009 2008 Derivative financial assets held for hedging $- $27,003 Financial assets carried at cost 7,126,237 6,731,292 Bond investments with no active market 2,211,168 6,002,827 Bills purchased 16,286 31,884 Separate account products assets 2,908,693 514,868 Non-accrual loans transferred from other subjects (excluding 1,490,566 1,625,441 loans) Others - 2 Subtotal 13,752,950 14,933,317 Less: allowance for doubtful account - non-accrual loans (1,276,461) (1,364,857) transferred from other subjects (excluding loans) Accumulated impairment - financial assets carried at cost (21,547) (21,547) $12,454,942 $13,546,913 A. As the Company’s investments in unlisted stocks or stocks are not actively traded in the market and due to lack of quoted marked price in which the fair value cannot be measured reliably; those financial assets are accounted for at cost. B. Please refer to Note 10 (1) B I) for methods and assumptions used by the First Group to measure the fair value of bond investments with no active market. C. Derivative financial assets held for hedging and related information were as follows: Cash flow hedge Future cash flows of floating rate bonds issued by the Company may fluctuate due to changes in interest rates. Thus, those bonds may expose the Company to the cash flow risk. The Company has entered into the interest rate swap contract to hedge such risk, as the potential risk may be significant. Designated hedging instruments Designated hedging Fair value Hedged item instruments December 31, 2009 December 31, 2008 NT dollar-denominated corporate Interest rate swap $- $27,003 bonds payable contracts
D. Nature of derivative financial assets held for hedging and related contract information were as follows: December 31, 2009 December 31, 2008 Contract amount Contract amount Financial instruments Credit risk Credit risk (Notional principal) (Notional principal) Interest rate swap contracts $ 7,312,170 $- $ 7,753,182 $27,003
E. Please refer to Note 10 1) J. for details of relevant hedge information.
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11) Property, plant and equipment - net December 31, 2009 Appraisal Accumulated Accumulated Net Cost Increments Depreciation Impairment Book Value
Land and improvements $7,711,485 $9,166,560 ($2,872) $- $16,875,173 Financial Information Buildings 9,138,677 56,806 (3,868,045) (4,000) 5,323,438 Machinery and equipment 3,189,984 - (2,567,500) - 622,484 Transportation equipment 877,053 - (690,280) - 186,773 Other equipment 1,759,844 - (1,522,519) - 237,325 Leasehold improvements 932,266 - (729,134) - 203,132 Construction in process and 200,014 - - - 200,014 prepayments for equipment $23,809,323 $9,223,366 ($9,380,350) ($4,000) $23,648,339
December 31, 2008 Appraisal Accumulated Accumulated Net Cost Increments Depreciation Impairment Book Value Land and improvements $7,711,461 $9,167,694 ($2,803) $- $16,876,352 Buildings 9,131,676 56,648 (3,649,104) (4,000) 5,535,220 Machinery and equipment 3,481,886 - (2,695,833) - 786,053 Transportation equipment 909,211 - (670,860) - 238,351 Other equipment 1,840,404 - (1,566,803) - 273,601 Leasehold improvements 892,271 - (678,061) - 214,210 Construction in process and 145,015 - - - 145,015 prepayments for equipment $24,111,924 $9,224,342 ($9,263,464) ($4,000) $24,068,802 A. FCB revalued its assets in accordance with the relevant regulations. As of December 31, 2009 and 2008, the balances of the revaluation increments (including those for non-operating assets) amounted to $15,316,142 and $15,519,500, respectively, and the relevant reserves for land appraisal increment taxes recorded as other liabilities, were $5,369,272 and $5,447,962, respectively. The difference was recorded under the FCB’s other stockholders’ equity. B. There was no interest capitalized on property, plant and equipment purchased for the years ended December 31, 2009 and 2008. C. Please refer to Note 6 for details of the property, plant and equipment pledged as collateral as of December 31, 2009 and 2008.
69 12) Other assets - net December 31, 2009 2008 Non-operating assets Cost Land $406,543 $410,051 Buildings 1,430,004 1,353,179 Others 19,617 19,603 Sub-total 1,856,164 1,782,833 Revaluation increments 6,092,776 6,295,158 Total cost and revaluation increments 7,948,940 8,077,991 Less: accumulated depreciation (511,171) (466,290) accumulated impairment loss (25,000) (25,000) Net non-operating assets 7,412,769 7,586,701 Other assets Foreclosed assets Cost 152,358 152,358 Less: Accumulated impairment loss (144,750) (144,750) Net foreclosed assets 7,608 7,608 Refundable deposits 470,485 655,790 Operating guarantee deposits and settlement clearing funds 1,176,601 1,079,909 Prepayments 774,663 914,926 Restricted assets 14,000 113,400 Debit items for securities consignment trading 6,499 33,789 Deferred income tax assets - net 4,006,937 3,488,868 Others 30,946 27,579 Other assets – net 6,480,131 6,314,261 Total $13,900,508 $13,908,570 A. Please refer to Note 6 for details of other assets pledged as collateral as of December 31, 2009 and 2008.
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B. The debit (credit) items for securities consignment trading were as follows: December 31, 2009 2008
Debits Financial Information Bank deposits for settlements $14,241 $609 Proceeds receivable from securities purchased for customers 4,999,265 1,190,591 Notes receivable for settlements 44,383 - Accounts receivable for settlements - 485,498 Net exchange clearing receivable - 263,456 Margin trading - 349 5,057,889 1,940,503 Credits Proceeds payable from securities sold for customers - (1,133,960) Accounts payable for settlements ( 4,872,851) (772,754) Net exchange clearing payable (177,656) - Margin trading (883) - (5,051,390) (1,906,714) $6,499 $33,789
13) Due to the Central Bank and other banks December 31, 2009 2008 Call loans from other banks $141,746,298 88,389,500 Transfer deposits form Chunghwa Post Co. 25,666,454 26,451,361 Overdrafts from other banks 1,311,556 1,786,475 Due to other banks 431,735 469,437 Due to the Central Bank 243,110 174,214 Total $169,399,153 $117,270,987
14) Commercial paper payable - net December 31, 2009 2008 Commercial paper payable $2,505,000 $- Less: discount on commercial paper payable (357) - Net commercial paper payable $2,504,643 $-
Guarantor Issue Amount Interest Rate (%) China Bills Finance Corporation $600,000,000 0.20% Taching Bills Finance Ltd. 500,000,000 0.35%~0.45% Taishin Bills Finance Corporation 350,000,000 0.18%~0.25% Taiwan Finance Corporation 85,000,000 0.35% Mega Bills Finance Co., Ltd. 500,000,000 0.27%~0.30%
71 Taiwan Cooperative Bills Finance Corporation 50,000,000 0.25% International Bills Finance Corporation 300,000,000 0.20%~0.45% Grand Bills Finance Corp. 120,000,000 0.30% $2,505,000,000
15) Financial liabilities at fair value through profit or loss December 31, 2009 2008 Financial liabilities for trading purpose - derivative $11,273,492 $25,561,667 instruments Financial liabilities designated at fair value through profit or 42,800,000 47,800,000 loss Valuation adjustment for designated financial liabilities at fair 1,131,508 2,076,491 value through profit or loss Total $55,205,000 $75,438,158 A. The financial instruments were designated at fair value through profit or loss in order to eliminate or significantly reduce measurement or recognition inconsistency as well as to evaluate the performance of liabilities on a fair value basis. B. Please refer to Note 4(3) for details of types of derivative financial instruments held for trading purpose and related contract information.
16) Bills and bonds payable under repurchase agreements December 31, 2009 2008 Bond investments under repurchase agreements $13,189,209 $18,531,762 The Group is obliged to repurchase the above bills and bonds at original sale price plus a mark-up pursuant to the repurchase agreement. The repurchase agreement amounts for such bonds were $13,190,962 and $18,575,903 as of December 31, 2009 and 2008, respectively.
17) Payables December 31, 2009 2008 Spot exchange payable $24,554,026 $23,791,849 Accounts payable 16,341,360 20,982,028 Bank acceptances 6,798,752 4,849,396 Interest payable 1,945,948 4,422,877 Accrued expenses 2,557,645 3,827,662 Deposits received on securities lending 631,163 232,456 Collateralized proceeds payable from securities lending 717,866 260,898 Collections payable for customers 399,534 502,457 Payables on imports 1,531,766 1,327,987 Offshore trust funds payable 658,881 84,446 Other payables 2,798,726 2,379,233 Total $58,935,667 $62,661,289
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18)Deposits and remittances December 31, 2009 2008 Checking accounts $33,512,274 $31,782,739 Financial Information Demand deposits 323,717,594 248,551,448 Time deposits 331,637,103 371,807,204 Negotiable certificates of deposits 11,285,600 12,810,900 Savings deposits 813,306,031 717,789,966 Outward remittances 38,880 54,896 Inward remittances 2,288,114 802,860 Total $1,515,785,596 $1,383,600,013
19) Bonds payable A. Corporate bonds payable In order to improve the Company’s financial position, strengthen its capital adequacy ratio, and raise funds to invest related financial institutions, the Company’s Board of Directors resolved to issue unsecured and subordinated corporate bonds of $5,000,000 on March 18, 2004, which had been approved by the MOF. The holders of the subordinated corporate bonds shall take precedence over shareholders but would rank below other creditors in the event of liquidation. The detailed terms of issuance are as follows: First issue, 2004 (Expressed in New Taiwan dollars ) Issue date June 23, 2004 Issue amount NT $5 billion Issue price At par Floating rates; and the minimum yield rate is 0%. Interest rate Coupon rate indexes are USD 6M LIBOR or 90-day commercial paper rates. Interest is paid quarterly or semi-annually. The principal is paid Interest and repayment terms pursuant to face value at maturity. Maturity period 7 years As of December 31, 2009 and 2008, interest rates of the above corporate bonds were 0.431% ~ 3.8% and 1.845% ~ 4.745%, respectively.
B. Financial bonds payable On November 14, 2003, June 24, 2005, August 18, 2006, February 29, 2008 and February 27, 2009, the Board of Directors of FCB resolved to issue senior and subordinated financial bonds with the quota of $20, $20, $20, $20, $8 billion New Taiwan dollars, respectively, to strengthen FCB’s capital adequacy ratio and to finance long- term operating capital. The issuances of the financial bonds had been approved by the MOF and Financial Supervisory Commission. The holders of subordinated financial bonds shall take precedence over shareholders but would rank below other creditors in the event of liquidation. The detailed terms of each issuance are as follows:
73 First to Ninth issues, 2003 January 20, February 25, May 2, September 10, October 27 and Issue date November 13, 2003 Issue amount NT $24.8 billion (NT$9.3 billion dollars have been paid back) Issue price At par Part of interest rate is fixed (2.9%); the rest is either at floating rate or inverse floating rate with the minimum yield rate of 0%. Coupon rate Interest rate indexes are USD 6M LIBOR, 90-day commercial paper rates, or IRS rates. For the fixed rate bonds, interest is paid annually. For the floating Interest and repayment terms rate bonds, interest is paid either quarterly or semi-annually. The principal is to be paid pursuant to face value at maturity. Maturity period 4 to 8 years
First issue, 2004
Issue date May 25, 2004 Issue amount NT $4 billion Issue price At par Part of interest rate is fixed rate of 4%, and the rest is floating rate Coupon rate with the minimum yield rate of 0%. Interest rate index is USD 6M LIBOR. Interest is paid semi-annually. The principal is to be paid Interest and repayment terms pursuant to face value at maturity. Maturity period 7 years
First to Third issues, 2006
Issue date April 24, July 27 and December 4, 2006 Issue amount NT $14 billion Issue price At par Coupon rate 2.24%~2.75% Interest is paid annually. The principal is to be paid pursuant to Interest and repayment terms face value at maturity. Maturity period 5 years and 6 months to 10 years
First to Third issues, 2007
Issue date March 9, June 25 and December 24, 2007 Issue amount NT $14 billion Issue price At par Partial interest rate is fixed (2.4%~3.16%) and partial is floating Coupon rate rate. Interest rate index is average interest rate of NTD 90-day commercial paper in secondary market provided by Reuters. Floating rate: Interest is accrued quarterly and paid annually. The principal is to be paid pursuant to face value at maturity. Interest and repayment terms Fixed rate: Interest is paid annually. The principal is to be paid pursuant to face value at maturity. Maturity period 7~10 years
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First to Third issues, 2008
Issue date June 23, October 21, December 24, 2008 Issue amount NT $8.7 billion
Issue price At par Financial Information Partial is fixed interest rate (3.0%~3.10%) and partial is floating Coupon rate rate. Interest rate index is average interest rate of NTD 90-day commercial paper in secondary market provided by Reuters. Floating rate: Interest is accrued quarterly and paid annually. The principal is to be paid pursuant to face value at maturity. Interest and repayment terms Fixed rate: Interest is paid annually. The principal is to be paid pursuant to face value at maturity. Maturity period 7 years As of December 31, 2009 and 2008, interest rates of the above financial bonds both ranged from 0%~4.718% and 0.798% to 4%, respectively. As of December 31, 2009 and 2008, the balance payable of the above mentioned financial bonds amounted to $56.2 billion and $62.7 billion, respectively. In addition, among the above financial bonds, interest rate risk associating with the senior financial bonds with face value of $19.5 and $19.5 billion, respectively, and the subordinated financial bonds with face value of $23.3 and $28.3 billion, respectively, were hedged by interest rate swap contracts. As such interest rate swap contracts were valued at fair value with changes in fair value recognized as a profit or loss, the financial bonds stated above were designated as financial liabilities at fair value through profit or loss in order to eliminate or significantly reduce a measurement or recognition inconsistency.
20) Accrued pension liabilities Relevant pension information of the First Group is as follows: A.The First Group has a defined benefit pension plan set up in accordance with the Labor Standards Law of the R.O.C., covering all regular employees for their services prior to the implementation of the Labor Pension Act on July 1, 2005 and those employees who choose continuously to be applicable to the Labor Standards Law for the services after the implementation of the Labor Pension Act. The payment of pension benefits is based on the length of the service period and average monthly compensation in the last six months prior to retirement. Under the defined benefit plan, employees are granted two points for each year of service for the first 15 years and are granted one point for each additional year of service from the 16th year, but is subject to a maximum of 45 points. Starting September 2005, monthly contributions made by the Company to the pension fund that are deposited in the designated pension account at the Bank of Taiwan have been reduced from 10% to 6% of the total monthly salaries and wages; monthly contributions made by FCB to the pension fund were based on 10% of the total monthly salaries and wages; monthly contributions made by overseas subsidiaries of FS were pursuant to the local regulations; FSIT contributes to the pension fund based on 2% of monthly salaries in accordance with the approval of Bei Shih Lao (2) NO. 09432136500 of the Department of Labor, Taipei City Government (8% prior to May 2001 and 6% from May 2001 to April 2005). Such pension funds are deposited in the designated pension account at the Bank of Taiwan under the names of the respective companies’ independent retirement fund committees. As of December 31, 2009 and 2008, the balances of the pension fund deposited in the Bank of Taiwan are as follows: 2009 December 31, 2009 Pension fund Company name Accrued pension Pension cost deposited in the Liabilities Bank of Taiwan First Financial Holding Co., Ltd. (FFHC) $3,789 $21,520 $6,872 First Commercial Bank 677,964 4,626,398 1,803,944 First Securities Inc. (FS) and its subsidiaries 10,042 56,027 50,946 First Securities Investment Trust Co., Ltd. (FSIT) 447 44,066 22,894 $692,242 $4,748,011 $1,884,656
75 2008 December 31, 2008 Pension fund Accrued pension Company name Pension cost deposited in the Liabilities Bank of Taiwan First Financial Holding Co., Ltd. (FFHC) $ 3,853 $19,221 $7,086 First Commercial Bank 653,754 4,320,752 1,687,722 First Securities Inc. (FS) and its subsidiaries 14,512 49,308 47,769 First Securities Investment Trust Co., Ltd. (FSIT) 1,010 42,837 23,639 $673,129 $4,432,118 $1,766,216 B. Effective from July 1, 2005, the First Group has established a defined contribution plan pursuant to the Labor Pension Act, which covers the employees with R.O.C. nationality and who choose to or are required to follow the Labor Pension Act. The contributions are made monthly based on not less than 6% of the employee's salaries and are deposited in the employee’s individual pension fund account at the Bureau of Labor Insurance. The payment of pension benefits is based on the employee’s individual pension fund accounts and the cumulative profit in such accounts, and the employees can choose to receive such pension benefits monthly or in lump sum. As of December 31, 2009 and 2008, the pension costs of the First Group under the defined contribution plan were $142,618 and $127,371, respectively. C. FSIT has established an employee retirement and resignation plan covering all full-time employees hired prior to May 11, 1996. The employees who have worked for more than five years since May 11, 1996 can apply for the plan. Upon retirement or resignation, the payment of pension benefits is based on the length of the service period and average monthly compensation in the last six months prior to retirement or resignation. D. FTSL did not establish a pension plan and the laws and regulations do not stipulate it to do so.
21) Other financial liabilities December 31, 2009 2008 Separate account products liabilities $2,908,694 $514,867 Appropriated loan funds 219,193 252,372 Derivative financial liabilities for hedging 365,760 432,759 $3,493,647 $1,199,998 A. Derivative financial assets held for hedging and related information were as follows:
Cash flow hedge Future cash flows of floating rate bonds issued by the Company may fluctuate due to changes in interest rates. Thus, those bonds may expose the Company to the cash flow risk. The Company has entered into the interest rate swap contract to hedge such risk, as the potential risk may be significant. Designated hedging instruments
Designated hedging Fair value Hedged item instruments December 31, 2009 December 31, 2008 NT dollar-denominated corporate bonds Interest rate swap ($99,095) ($60,779) payable contracts
Fair value hedge Fair values of fixed-rate loans held by overseas branches of FCB may fluctuate with changes in interest rates. FCB had assessed that the risk may be significant, so FCB hedged such risk by interest rate swap contracts.
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Designated hedging instruments
Designated hedging Fair value Hedged item
instruments December 31, 2009 December 31, 2008 Financial Information Interest rate swap Fixed-rate loans ($266,665) ($371,980) contracts
B. Nature of derivative financial assets held for hedging and related contract information were as follows: December 31, 2009 December 31, 2008 Contract amount Contract amount Financial instruments Credit risk Credit risk (Notional principal) (Notional principal) Interest rate swap contracts $ 7,312,170 $- $ 7,753,182 $-
22)Reserves for operation and liabilities December 31, 2009 2008 Reserve for insurance liabilities (Note) $10,625,836 $10,667,545 Insufficient premium reserve (Note) 342,459 359,042 Other reserves for insurance company (Note) 21,841 107 Reserve for guarantees 300,518 300,518 Reserve for securities trading losses 284,756 201,785 Reserve for default 200,000 168,165 Others 31,159 31,093 Total $11,806,569 $11,728,255 Note: The reserves are calculated in accordance with regulations of the Insurance Act. The relevant actuarial report has been validated by the actuaries.
23) Other liabilities December 31, 2009 2008 Accrued liabilities for land tax revaluation increment $5,369,272 $5,447,962 Guarantee deposit-in and margin deposits 947,433 1,218,292 Other collections in advance 1,632,993 1,153,434 Temporary receipt and payments to be settled 74,289 55,093 Total $8,023,987 $7,874,781
24) Common stock A. As of January 1, 2008, the approved and issued capital stock was $100,000,000 and $60,916,358, respectively. Total issued and outstanding shares were both 6,091,636 thousand shares with par value of $10 New Taiwan dollars per share. B. After the consent of the Board of Directors on April 24, 2008, a resolution was adopted at the stockholders’ meeting on June 13, 2008, to convert the Company’s unappropriated earnings amounting to $730,996 to increase its capital stock, effective on August 18, 2008. The capital increase was approved by Explanatory Letter Jin-Guan-Jen (1) No. 0970033787 of the FSC. After the capital increase, the approved and issued capital stock amounted to $100,000,000 and $61,647,354, respectively, which consists of 6,164,735 thousand outstanding shares with par value of $10 per share. C. After the consent of the Board of Directors on April 9, 2009, a resolution was adopted at the stockholders’
77 meeting on May 22, 2009, to convert the Company’s unappropriated earnings amounting to $1,541,184 to increase its capital stock, effective on July 13, 2009. The capital increase was approved by Explanatory Letter Jin-Guan-Jen (Fa) No. 0980028027 of the FSC. After the capital increase, the approved and issued capital stock amounted to $100,000,000 and $63,188,538, respectively, which consists of 6,318,854 thousand outstanding shares with par value of $10 per share.
25) Additional paid-in capital A. In accordance with Article 47 of the Financial Holding Company Act and the Explanatory Letter Tai-Tsai-Jen (6) No.0910003413 of the SFC in 2002, if a financial institution coverts into a financial holding company, the retained earnings of the financial institution is recorded as capital reserves, namely additional paid-in capital, in the financial holding company’s book after such conversion. Such capital reserves may be distributed by the financial holding company as cash dividends, and the restrictions under Article 241, Paragraph 1 of the Company Law shall not be applicable to such distribution of capital reserves. In addition, such capital reserves may be also converted into capital stock during the year of conversion, and the ratio of conversion into capital stock is not subject to the restrictions of capitalized ratios prescribed in Article 41, Paragraph 2 of the Securities and Exchange Act and Article 8 of the Securities and Exchange Act Enforcement Rules. According to the Explanatory Letter Tai-Tsai-Jung (1) No.0910016280 of the Bureau of Monetary Affairs in 2002, as the aforementioned capital reserves are not generated from the business operation results of the financial holding company, such capital reserves cannot be used for the distribution of remuneration to Directors and Supervisors or bonuses to employees. B. The “Regulations Governing the Offering and Issuance of Securities by Securities Issuers” and the Company Law of the R.O.C. require that capital reserves, namely additional paid-in capital, resulting from price received in excess of par value of the issuance of capital stock and donation income received should be used only to recover losses or to increase the capital stock of a company pursuant to a maximum limit of 10% of the issued capital stock per year while the company has no accumulated deficits. The capital reserves cannot be used to recover losses unless the special and legal reserves are insufficient to recover the accumulated deficits. C. As of December 31, 2009, while the Company converted from a financial institution into a financial holding company, the Company recognized less capital reserves, namely additional paid-in capital, as a result of absorbing the accumulated deficits of the financial institution before such conversion. On June 20, 2003, the Board of Directors of FCB decided, based on the resolution adopted at the Stockholders’ Meeting of FCB, to use the legal reserve of $15,268,422, special reserve of $3,695,364, and capital reserve of $4,075,242, to recover its accumulated deficits. After the FCB’s accumulated deficits were recovered, the Company’s additional paid- in capital, other than those generated from the additional paid-in capital of the original financial institution, consisted of only the FCB’s cumulative translation adjustment of $247,091. At the end of 2007, the aforesaid capital reserve - cumulative translation adjustment was transferred to other stockholders’ equity - cumulative translation adjustment in accordance with Ji-Mi-Zhi (96) No.000000344 of Accounting Research and Development Foundation.
26) Legal reserve and special reserve A. Legal reserve According to the Company Law of the R.O.C., legal reserve can be used only to recover accumulated deficits or to increase capital stock and shall not be used for any other purposes. However, it is permitted that the legal reserve be used to increase capital stock if the balance of the legal reserve has reached fifty percent of the issued capital stock, and only half of the legal reserve can be capitalized. B. Special reserve In compliance with the Explanatory Letter Tai-Tsai-Jen (1) No.100116 of the former SFC in 2000 and the Explanatory Letter Jin-Guan-Jen (1) No. 0950000507 of the FSC dated 27 January, 2006, except for appropriating legal reserve in accordance with the law, if the current year-end contra accounts in the stockholders’ equity, such as unrealized loss on available-for-sale financial assets, unrealized loss on cash flow, net loss not recognized as pension cost and cumulative translation adjustment, have negative / debit balances, listed or OTC companies are required to appropriate a special reserve equaling such negative / debit balances before distributing the undistributed earnings. Such appropriation of the special reserve should be subject to the following restrictions in accordance with the aforesaid regulations. (a) If the amounts of the contra accounts in the stockholders’ equity result from the current year, the amount of the special reserve to be set aside should not exceed the current net income after income taxes plus the accumulated undistributed earnings of the prior years. (b) If the amounts of the contra accounts in the stockholders’ equity result from the prior years, the amount of the special
78 2009 Annual Report
reserve to be set aside should not exceed the accumulated undistributed earnings of the prior years less those undistributed earnings that have been set aside in the above (a). In the subsequent years, if there is a reversal
of special reserve due to reduction in the negative / debit balances of the contra accounts in the stockholders’ Financial Information equity, the portion of the reversal of the special reserve can be used for earnings distribution. Moreover, in compliance with the Explanatory Letter Tai-Tsai-Jen (1) No.170010 of the SFC in 2002, if the market values of a parent company’s shares held by its subsidiaries fall below the book values at the period-end, the parent company should set aside a special reserve for the differences between the book values and the market values according to the percentage of subsidiaries’ voting stock interests held by the parent company. In the subsequent revaluation, if the market values recover, the parent company can reverse the aforementioned special reserve that equals to the portion of the market value recovery according to the percentage of subsidiaries’ voting stock interests held by the parent company.
27) Unappropriated earnings A. As stipulated in the Company’s Articles of Incorporation, the annual net income after income taxes should be first used to recover accumulated deficit, and the remaining amount should then be set aside as legal reserve and special reserve in accordance with provisions under the applicable laws and regulations. The remaining earnings are then distributed as follows: (1) 0.02% to 0.16% as bonuses to employees (2) not more than 1% as remuneration to Directors and Supervisors, and (3) the remaining earnings plus prior year’s accumulated unappropriated earnings as the distributable amount for stockholder dividends, among which 30% to 100% of the distributable amount is subject to the Board of Directors’ decision to propose a distribution plan and to be submitted to the stockholders during the regular stockholders’ meeting for approval. It may also distribute employee stock bonuses to subsidiaries’ employees if there are employee stock bonuses distributed. B. In order to ensure that there is adequate working capital available for the expansion of the Company’s operations and so as to increase its profitability, dividends may be distributed in a combination of cash and shares. However, the cash dividend should not be less than 10% of the current year’s distributable amount for stockholder dividend, and the remainder will be the share dividend. C. If the cash dividend is less than $0.1 New Taiwan dollar per share, it should not be distributed unless approval is obtained during the Ordinary Stockholders’ Meeting. D. The appropriation of 2008 and 2007 earnings had been approved by the Board of Directors on May 22, 2009 and June 13, 2008, respectively. Details of the appropriation of 2008 and 2007 earnings are summarized as follows: Dividend per share Earnings distribution (NT dollar) 2008 2007 2008 2007 Legal reserve $739,114 $1,254,968 $- $ - Cash dividends on common stock 3,082,368 10,355,781 0.50 1.70 Stock dividends on common stock 1,541,184 730,996 0.25 0.12 Remuneration to Directors and Supervisors - 112,947 - - Employee bonuses - 7,116 - - $5,362,666 $12,461,808 $0.75 $1.82 E. FFHC and its subsidiaries’ estimated employees’ bonus and supervisors’ and directors’ remunerations amounting to $135,104 and $439,795 were recognized as operating expense for the years ended December 31, 2009 and 2008, respectively. After taking into account the legal reserve and other factors, the amount was arrived at by multiplying the net income after tax with the percentage stipulated in the Articles of Incorporation of the FFHC and its subsidiaries. F. The employees’ bonus and supervisors’ and directors’ remunerations approved by the Board of Directors and resolved at the stockholders’ meeting amounted to $69,913 for the year ended December 31, 2008. The difference of $134 between the accrued amounts and the actual distributed amounts resolved by the stockholders at their annual stockholders’ meeting subsequently shall be recognized as gain or loss in the current period. Information on the appropriation of the Company’s earnings as resolved by the Board of Directors will be posted in the “Market Observation Post System” at the website of the Taiwan Stock Exchange.
79 28)Unrealized revaluation increments As stipulated in the Explanatory Note (96) No. 0000000344 and (90) No.182 of the Accounting Research and Development Foundation, a capital surplus recognized during share swaps related to FCB’s reserve for land revaluation increments and a capital surplus related to the recognition of FCB’s capital surplus arising from the decrease of land valuation increment tax rate in 2005, were transferred to other stockholders’ equity-unrealized revaluation increments.
29) Income tax A. The Company’s operating revenues mainly consisted of long-term investment income or loss recognized under the equity method. The investment income stated above should not be included in the taxable amount under the income tax imputation system based on Article 42 of the Income Tax Act of the R.O.C. Additionally, in order to reduce the First Group’s tax exposure, the Company and its subsidiaries, FCB, FS, FSIT and MFMI have adopted the consolidated income tax return system pursuant to Article 49 of the Financial Holding Company Act and have chosen the Company as the taxpayer to file the profit-seeking enterprise income tax return for the fiscal year 2004 and the profit-seeking enterprise income tax return of the 10% surtax on undistributed earnings for the fiscal year 2003. In addition, the Company and its subsidiaries, FCB, FS, FSIT, FFAM, FVC, FFMC and FPCIA (MFMI is excluded) have adopted the consolidated income tax return system and have chosen the Company as the taxpayer to file the profit-seeking enterprise income tax return for the fiscal year 2005 and the profit-seeking enterprise income tax return of the 10% surtax on undistributed earnings for the fiscal year 2004. Effective January 1, 2006, in accordance with the Alternative Minimum Tax Act, the Company should calculate the alternative minimum tax in addition to the regular income tax.
B. The details of income tax related information for the First Group are as follows: A) Income tax expense December 31, 2009 2008 Income tax payable $ 201,992 $252,653 Net changes in deferred income tax assets (518,069) 1,752,859 Income tax levied separately 5,899 8,576 Income tax of overseas branches and adjustments for under 423,201 56,100 provisions of prior years’ income tax expenses 10% surtax levied on unappropriated earnings 202,848 8,881 Income tax expense $315,871 $2,079,069
B) Deferred income tax assets: As of December 31, 2009 and 2008, deferred income tax assets and liabilities resulting from income tax effects of temporary differences, investment tax credits, and loss carryforwards were as follows: December 31, 2009 Amount Income tax effects Temporary differences Allowance for doubtful accounts in excess of tax law limits $2,383,987 $476,797 Loss carryforwards 15,116,816 3,023,363 Allowance for impairment losses on foreclosed assets 144,750 28,950 Provision for trading loss and default reserve 229,607 45,921 Pension expenses in excess of tax law limits 1,310,305 262,060 Others 202,356 40,473 $19,387,821 3,877,564 Investment tax credits 5,831
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Overseas branches 671,820 Allowance for deferred income tax assets (548,278) Deferred income tax assets – net $4,006,937 Financial Information December 31, 2008 Amount Income tax effects Temporary differences Allowance for doubtful accounts in excess of tax law limits $2,783,987 $695,997 Loss carryforwards 9,793,748 2,448,437 Allowance for impairment losses on foreclosed assets 144,750 36,188 Provision for trading loss and default reserve 397,772 99,443 Pension expenses in excess of tax law limits 1,167,080 291,770 Others 272,819 68,206 $14,560,156 3,640,041 Investment tax credits 2,951 Overseas branches 649,429 Allowance for deferred income tax assets (803,553) Deferred income tax assets – net $3,488,868
C) The Company is eligible for investment tax credits under the Income Tax Act and the Statute for Upgrading Industry. Details of tax credits as of December 31, 2009 were as follows: Items for tax credits Company name Amount Available period (year) Personnel training costs FCB $5,635 2009~2013 FSIT 196 2009~2013 D) As of December 31, 2009, losses available to be carried forward were as follows: Year of loss Unused amount Year of expiration Assessed by tax authorities 2003 $13,341,693 2013 Assessed 2007 122,530 2017 Filed 2008 642,988 2018 Filed 2009 1,009,605 2019 Estimated $15,116,816 E) Imputation credit account for shareholders and its related information 2009 2008 Balances of the imputation credit account for shareholders $1,383,879 $630,326 Estimated and actual imputation credit ratio for earnings distribution were 5.56% and 6.68% for the years ended December 31, 2008 and 2007, respectively.
F) The balance of undistributed earnings are as follows: December 31, 2009 2008 Unappropriated earnings generated on and after January $13,325,009 $15,908,748 1,1998
81 G) As of December 31, 2009, information on the First Group’ income tax returns assessed by the tax authorities is as follows: a.With respect to the income tax returns of the Company for the fiscal years 2004 and 2005, the Company disagreed with the assessments related to the interest expense and operating expenses and had filed for administrative litigation. The Company had recognized the income tax expense relating to the increase in income tax payable. b. For FCB’s annual income tax return for 2005, FCB disagreed with the assessments related to the previous trader taxes and had filed for administrative litigation. c.With respect to the income tax returns of FS for the fiscal years 2004 and 2005, the tax authorities assessed to increase income tax payable by $17,839. However, FS disagreed with the assessments related to income from maturity of warrants and entertainment expense in excess of tax law limits, and had filed for administrative litigation according to Article No. 35 of Tax Collection Act. The case is under administrative litigation. For conservatism purposes, FS had recognized the income tax expense relating to the increase in income tax payable. d. The tax authority has assessed FCMI’s income tax returns through 2007. e. The tax authority has assessed FSIT’s income tax returns through 2005. With respect to the income tax return for 2000, unpaid losses of $72,321 which resulted from FSIT taking the troubled corporate bond invested by mutual funds managed under FSIT were disallowed by the tax authority, which assessed to increase tax payable to $13,389. For conservatism purposes, FSIT had recognized the income tax expense relating to the above increase in tax payable and made payment in July 2009. However, FSIT disagreed with the assessments and had filed for re-examination, petition, and administrative litigation. On September 14, 2006, the Taipei High Administrative Court decided that FSIT won the lawsuit against the tax authorities. However, Taipei National Tax Administration disagreed with the judgment and had filed an appeal to the Supreme Administrative Court. The Supreme Administrative Court overturned the original assessment and returned the trial back to the Taipei High Administrative Court on November 20, 2008. The Taipei High Administrative Court dismissed the petition on May 6, 2009; FSIT disagreed with the assessments and had filed an appeal to the Supreme Administrative Court.
30) Asset impairment loss For the years ended December 31, 2009 2008 Available-for-sale financial assets $66,016 $675,417 Other financial assets 8,922 - Held-to-maturity financial assets 95,671 708,690 Property, plant and equipment - 4,000 Foreclosed assets (recovery gain) - (31,583) $170,609 $1,356,524
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31) Personnel, depreciation, and amortization expenses Personnel, depreciation, and amortization expenses incurred for the years ended December 31, 2009 and 2008 were summarized as follows: For the years ended December 31,
2009 2008 Financial Information Personnel expenses $10,339,487 $11,259,424 Salaries 8,818,089 9,456,774 Employee bonuses and remunerations to directors and 135,104 439,795 supervisors Labor and health insurance expense 412,419 378,658 Pension expense 834,860 800,500 Others 139,015 183,697 Depreciation 799,559 856,460 Amortization 299,454 259,806
32) Earnings per common share For the years ended December 31, 2009 2008 Before tax After tax Before tax After tax Total consolidated net income attributed to stockholders of the parent Net income from continuing operations $3,094,605 $2,778,927 $9,470,144 $7,391,146 Net income $3,094,605 $2,778,927 $9,470,144 $7,391,146 Weighted average outstanding common shares 6,318,854 6,318,854 6,318,854 6,318,854 (thousands of shares) Earnings per share (in dollars) Net income from continuing operations $0.49 $0.44 $1.50 $1.17 Net income $0.49 $0.44 $1.50 $1.17
33) Capital adequacy ratio A. Pursuant to the “Financial Holding Company Act” and “Management Provision for Combined Capital Adequacy Ratio of Financial Holding Companies”, the minimum financial holding company’s group capital adequacy ratio is 100%. If the said ratio is less than the prescribed ratio, the Company’s ability to distribute earnings may be restricted by the governing authority. The authority may also impose other penalties or restrictions. The minimum capital adequacy ratio, a measure of the adequacy of a bank’s capital expressed as a percentage of its risk weighted credit exposures, is 8% for the Company’s bank subsidiary, FCB, is required by the Banking Law and other relevant rules and regulations in order to ensure a sound financial standing for banks. If the said ratio is less than the prescribed ratio, the bank’s ability to distribute earnings may be restricted by the governing authority. B. The capital adequacy ratio of FFHC’s Group was 119.69% and 120.19% as of December 31, 2009 and 2008, respectively. Please refer to Note 10 2) for details. C. The capital adequacy ratio of FCB was 11.01% and 10.88% as of December 31, 2009 and 2008, respectively. Please refer to Note 10 11) FCB H. Capital adequacy ratio for details.
83 5.Related party transactions 1) Details of the related parties Names of related parties Nature of relationship The Ministry of Finance, R.O.C. Director and supervisor of the Company (Note 1) Bank of Taiwan Director and supervisor of the Company (Note 2) Golden Garden Investment Company Director of the Company Global Investments Co., Ltd. Director of the Company Mercuries Jeantex Ltd. Director and supervisor of the Company (Note 3) Investment company (FALI) accounted for under Aviva International Holdings Limited (AIH) the equity method Investment company’s affiliate (FALI) accounted Aviva Taiwan for under the equity method First Financial Asset Management Co., Ltd. (“FFAM”) Subsidiary of the Company First Financial Management Consulting Co., Ltd. (“FFMC”) Subsidiary of the Company First Venture Capital Co., Ltd. (“FVC”) Subsidiary of the Company First P&C Insurance Agency Co., Ltd. (“FPCIA) Subsidiary of the Company First Commercial Bank (USA) Subsidiary of FCB FCB Leasing Co., Ltd. (“FCBL”) Subsidiary of FCB First Insurance Agency Co., Ltd. (“FIA”) Subsidiary of FCB FCB’s investee accounted for under the equity East-Asia Real Estate Management Co., Ltd. (“EAREM”) method NITC (Cayman Islands) Ltd. Subsidiary of FSIT Mutual Funds managed by First Securities Investment Trust Mutual funds managed by MF - a subsidiary of the Co., Ltd. (“MF”) Company. More than one-third of total fund was donated by First Commercial Bank Education Foundation (“ FCBEF”) FCB Spouses of the First Group’s directors, supervisors, managers, chairman and president, and relatives Others within second degree of kinship of the Bank’s chairman and president. Note 1: After re-election at the stockholders’ meeting on May 22, 2009, the Ministry of Finance, R.O.C. solely acts as the Company’s director. Note 2: After re-election at the stockholders’ meeting on May 22, 2009, Bank of Taiwan solely acts as the Company’s supervisor. Note 3:After re-election at the stockholders’ meeting on May 22, 2009, Mercuries Jeantex Ltd. was no longer the Company’s director and supervisor.
2) Major transactions with related parties: A. Call loans to other banks As of and for the year ended December 31, 2009 Highest Ending Interest Annual balance balance income interest rate (%) Bank of Taiwan $ 8,000,000 $- $ 666 0.096~0.5
As of and for the year ended December 31, 2008 Highest Ending Interest Annual balance balance income interest rate (%) Bank of Taiwan $ 2,500,000 $- $ 2,750 0.55~2.18 Terms and conditions of the related party transactions are not significantly different from those of transactions with third parties.
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B. Call loans from other banks As of and for the year ended December 31, 2009 Highest Ending Interest Annual balance balance income interest rate (%)
Bank of Taiwan $2,000,000 $- $49 0.098~0.1 Financial Information
As of and for the year ended December 31, 2008 Highest Ending Interest Annual balance balance income interest rate (%) Bank of Taiwan $2,000,000 $2,000,000 $693 0.75~2.22 Terms and conditions of the related party transactions are not significantly different from those of transactions with third parties.
C. Deposits December 31, 2009 2008 Percentage Percentage Ending balance Ending balance (Note 1) (Note 1) FIA $98,575 0.01 $122,759 0.01 FVC 304,789 0.02 310,244 0.02 Others(Note 2) 1,025,809 0.06 683,673 0.05 $1,429,173 0.09 $1,116,676 0.08 The interest expense paid to the above related parties for the years ended December 31, 2009 and 2008 were $2,542 and $6,961, respectively. Note 1: Represents percentage accounted for of deposits and remittances. Note 2: Staff savings accounts are provided to the directors, supervisors and managers with interest rate of 13% p.a. and limited to a balance of $480. Deposits exceeding $480 is calculated at demand savings deposit rate. Interest rates for others are the same as those offered to other customers.
D. Loans December 31, 2009 (Expressed in thousands of New Taiwan Dollars) Difference Number Maximum Status of performance with or name balance Items Ending balance Non- Collateral transaction of related for current Performing performing terms for third party period loans loans parties Consumer loans 24 $10,697 $10,170 $10,170 $- None None Residential 95 347,720 328,412 328,412 - Real estate None mortgage loans Bills of Other loans FCBL 2,646,000 1,450,000 1,450,000 - None exchange Certificates Other loans 5 3,794 3,440 3,440 - of deposits None (Note) of FCB
85 December 31, 2008 (Expressed in thousands of New Taiwan Dollars) Difference Number Maximum Status of performance with or name balance Items Ending balance Non- Collateral transaction of related for current Performing performing terms for party period loans loans third parties Consumer loans 19 $9,275 $8,582 $8,582 $ - None None Residential 89 315,413 297,275 297,275 - Real estate None mortgage loans Aircrafts Other loans FCBL 3,143,000 2,326,500 2,326,500 - and bills of None exchange Certificates Other loans 5 9,621 6,421 6,421 - of deposits None (Note) of FCB The interest income received from the above related parties for the years ended December 31, 2009 and 2008 were $23,521 and $77,788, respectively. Note: None of the ending balances of individual borrowers exceeded 1% of the total ending balance. Hence, the transactions are not listed individually in details.
E. Guarantees December 31, 2009 (Expressed in thousands of New Taiwan Dollars) Name of related Maximum balance Reserve for Ending balance Fee rate Collateral party for current period guarantees FCBL $2,050,000 $2,050,000 $820 0.50% Aircrafts
December 31, 2008 (Expressed in thousands of New Taiwan Dollars) Maximum balance Reserve for Name of related party Ending balance Fee rate Collateral for current period guarantees FCBL $1,225,000 $1,225,000 $490 0.22% Aircrafts
F. Derivative instrument transactions December 31, 2009 (Expressed in thousands of New Taiwan Dollars) Title of Gain (loss) on Period-end balance Name of related derivative Nominal Contract period valuation for party instrument principal current period Item Balance contract Valuation adjustment for trading Bank of Taiwan Swap contracts 2009/1/23~2010/10/21 $2,895,840 $21,841 $21,841 liabilities – currency exchange rate
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December 31, 2008 (Expressed in thousands of New Taiwan Dollars) Title of Period-end balance Gain (loss) on Name of related derivative Nominal Contract period valuation for party instrument principal Item Balance current period Financial Information contract Valuation adjustment for trading Bank of Taiwan Swap contracts 2008/11/25~2009/11/25 $327,740 ($1,609) liabilities ($1,609) – currency exchange rate Note 1: Gain (loss) on valuation for current period is based on the fair value evaluation of derivative instruments up to which quarter end of the current year. Note 2: The period-end balance is the ending balance of financial assets and liabilities at fair value through profit or loss, and derivative financial assets and liabilities for hedging.
G. Financial assets at fair value through profit or loss December 31, 2009 2008 Percentage Percentage Ending balance Ending balance (Note) (Note) Mutual funds managed by FSIT $209,000 0.61 $- - Note: Represents amount / financial assets at fair value through profit or loss – net.
H. Available-for-sale financial assets December 31, 2009 2008 Percentage Percentage Ending balance Ending balance (Note) (Note) Mutual funds managed by FSIT $193,000 0.26 $119,943 0.20 Valuation adjustments 9,828 0.01 1,120 - $202,828 0.27 $121,063 0.20 Note: Represents amount / available-for-sale financial assets – net.
I. Management fee and marketing service fee receivable December 31, 2009 2008 Percentage Percentage Ending balance Ending balance (Note) (Note) Mutual funds managed by FSIT $44,317 0.09 $24,736 0.06 Note: Represents amount / receivables – net. J. Other receivables December 31, 2009 2008 Percentage Percentage Ending balance Ending balance (Note) (Note) Aviva Taiwan $132 - $8,407 0.02 Note: Represents amount / receivables – net.
87 K. Bonds payable under repurchase agreement December 31, 2009 2008 Percentage Percentage Ending balance Ending balance (Note) (Note) Mutual funds managed by FSIT $- - $100,006 0.54 Note: Represents amount / bills and bonds payable under repurchase agreement.
L. Accrued expenses December 31, 2009 2008 Percentage Percentage Ending balance Ending balance (Note) (Note) FIA $- - $20,701 0.03 Note: Represents amount / payables.
M. Commissions payable December 31, 2009 2008 Percentage Percentage Ending balance Ending balance (Note) (Note) FIA $17,728 0.03 $33,780 0.05 Note: Represents amount / payables.
N. Other payables December 31, 2009 2008 Percentage Percentage Ending balance Ending balance (Note) (Note) Aviva Taiwan (note) $4,166 0.01 $14,124 0.02 Note: Represents amount / payables.
O. Handling charges income and other income For the years ended December 31, 2009 2008 AIH $- $561,780 Mutual funds managed by FSIT (Note) 440,610 451,400 FIA 80,291 172,687 Others 43,106 46,288 $564,007 $1,232,155 Note: The above amounts represent income from management charges and trust handling charges. The above amounts are collected based on the contracts signed among the related parties.
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P. Commission expenses For the years ended December 31, 2009 2008 FIA $59,293 $128,214 Financial Information The above amounts are paid based on the contract signed with the related party.
Q. Rent expenses and other expenses For the years ended December 31, 2009 2008 FFAM $138,231 $134,725 FCBL 14,651 20,563 Other 9,431 37,619 $162,313 $192,907 The above amounts are paid based on the contracts signed with the related parties.
R. Information on remunerations for the Bank’s directors, supervisors, presidents and executive vice presidents: For the years ended December 31, 2009 2009 Salaries $85,142 $101,204 Bonus 12,330 25,984 Business expenses 15,074 14,928 Earnings distribution 26,547 70,392 Total $139,093 $212,508 (A) Salaries represent salary, extra pay for duty, pension and severance pay. (B) Bonus represents bonus and reward. (C) Business expenses represent transportation expense and extraneous charges. (D) Earnings distribution represents estimated bonus to be paid to employees in 2009.
89 6. Pledged assets December 31, Items 2009 2008 Purpose of Pledge Financial assets held for trading $10,670 $- Bid bond for bid of government bonds purpose – government bonds Guarantees deposited with the court for Available-for-sale financial assets – 1,361,800 2,078,700 the provisional seizure and guarantees of bonds trust business reserves Guarantees deposited with the court for Refundable deposits 427,960 68,161 the provisional seizure and deposits for the building leasing. Operating guarantees of offshore mutual Refundable deposits 48,900 60,500 funds and discretionary business, and the administrative litigation for taxation. Collateral for short-term borrowings and deposits for the office building lease. Restricted assets – time deposits 14,000 113,400 There was no short-term borrowing as of December 31, 2009 and 2008. Operating guarantee deposits and Operating guarantee deposits 993,164 918,442 insurance business guarantee deposits Property, plant, and equipment Land 92,072 92,072 Overdraft loan guarantee. There was no overdraft loan as of Buildings 46,318 33,060 December 31, 2009 and 2008. $2,994,884 $3,364,335
7. Commitments and contingent liabilities 1) The Company rented the office spaces from FCB under operating leases. As of December 31, 2009, the estimated future minimum lease commitments are as follows: Period Amount 2010 $11,349 2011 10,772 2012 and thereafter 2,716 Total $24,837 2) Subsidiaries: A. FCB FCB has the following commitments and contingent liabilities as of December 31, 2009 and 2008: A) Major commitments and contingent liabilities December 31, 2009 2008 Unused loan commitments $48,281,000 $48,079,585 Unused credit commitments for credit cards 37,905,401 31,471,984 Unused letters of credit issued 33,408,729 18,747,205 Guarantees 36,867,866 26,083,268 Collections receivable for customers 127,394,437 132,923,529 Collections payable for customers 26,688,971 7,889,273 Travelers’ checks consignment-in 510,369 466,632 Guaranteed notes payable 21,593,977 12,993,361
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December 31, 2009 2008 Trust assets 644,002,160 559,444,207
Customer’s securities under custody 264,528,600 204,034,881 Financial Information Book-entry for government bonds under management 91,598,250 138,624,950 Depository for short-term marketable securities under 58,430,282 37,125,296 management
B) The Trust Division of FCB engages in planning, managing and operating trust business under the Banking Law and the Trust Business Law. In addition, it provides customers with money trust, trust of securities, trust of real estate and custodian business. As of December 31, 2009 and 2008, the balance sheet and property list of trust accounts were disclosed as required by the Article 17 of Enforcement Rules of the Trust Enterprise Act as follows: (Expressed in thousands of New Taiwan Dollars) Balance Sheet of Trust Accounts December 31, 2009 Trust assets Trust liabilities Bank deposits $3,807,567 Borrowings $-
Bonds 60,517,181 Payables - Stocks 33,398,672 Payables - Mutual funds 212,623,107 Customers’ Beneficiary certificates 380,180 securities under Real estate 6,992,808 custody 324,778,546 Net assets under collective Other liabilities - investment management accounts 1,499,053 Net assets under individual 5,046 Trust capital 319,051,276 investment management accounts Customers’ securities under custody 324,778,546 Accumulated profit and loss 172,338 Total $644,002,160 Total $644,002,160
Property List of Trust Accounts Investment Items Bank deposits $3,807,567 Bonds 60,517,181 Stocks 33,398,672 Mutual funds 212,623,107 Beneficiary certificates 380,180 Real estate 6,992,808 Net assets under collective investment management accounts 1,499,053 Net assets under individual investment management accounts 5,046 Customers’ securities under custody 324,778,546 Total $644,002,160
91 (Expressed In Thousands Of New Taiwan Dollars) Income Statement of Trust Accounts For the year ended December 31, 2009 Trust Revenue Interest income $28,277 Realized investment income- bonds 213,634 Realized investment income- stocks 12,060 Realized investment income- mutual funds 4,366,633 Total Trust Revenue 4,620,604
Trust Expense Management fee - Tax expense 97 Interest expense - Handling charge (service charge) - Realized investment loss-bonds 57,058 Realized investment income- stocks 1,399 Realized investment loss-mutual funds 4,401,506 Other expenses 508 Total Trust Expenses 4,460,568 Net income before tax (Net investment income) 160,036 Income tax expense (41) Net income after tax $159,995
(Expressed In Thousands Of New Taiwan Dollars) Balance Sheet of Trust Accounts December 31, 2008 Trust assets Trust liabilities $ Bank deposits $7,499,319 Borrowings -
Bonds 48,697,060 Payables - Stocks 44,042,698 Payables - Mutual funds 196,763,859 Customers’ Beneficiary certificates 390,180 securities under Real estate 3,752,333 custody 257,125,049 Net assets under collective Other liabilities - investment management accounts 1,173,709 Net assets under individual - Trust capital 302,189,350 investment management accounts Customers’ securities under custody 257,125,049 Accumulated profit and loss 129,808 Total $559,444,207 Total $559,444,207
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Property List of Trust Accounts Investment Items Bank deposits $7,499,319 Financial Information Bonds 48,697,060 Stocks 44,042,698 Mutual funds 196,763,859 Beneficiary certificates 390,180 Real estate 3,752,333 Net assets under collective investment management accounts 1,173,709 Net assets under individual investment management accounts - Customers’ securities under custody 257,125,049 Total $559,444,207
(Expressed In Thousands Of New Taiwan Dollars) Income Statement of Trust Accounts For the year ended December 31, 2008 Trust Revenue Interest income $42,776 Realized investment income- bonds 578,699 Realized investment income-mutual funds 4,716,271 Realized investment income-beneficiary certificates 883 Total Trust Revenue 5,338,629
Trust Expense Management fee - Tax expense 742 Interest expense - Handling charge (service charge) - Custody charge - Realized investment loss-bonds 285,657 Realized investment loss-mutual funds 20,965,197 Other expenses 224 Total Trust Expenses 21,251,820 Net loss before tax (Net investment income) (15,913,191) Income tax expense (250) Net loss after tax ($15,913,441)
93 C) Due to the collapse of the Tung Xin building caused by an earthquake disaster on September 21, 1999, the residents filed a legal claim for loss of personal properties against Hong Cheng Building Co., Ltd., Hong Ku Construction Co., Ltd., (including its Directors and Supervisors), Dah Lin Architect Office, and FCB. As of the audit report date, in accordance with Criminal Sentence (92) Su-Zhi No. 2039 of the Taipei District Court, the Bank prevailed in the case because there was no evidence found between the cause of the collapse and the Bank’s maintenance construction work. In addition, the relevant staff of the Bank was also found to be innocent. With respect to civil responsibility, the Bank’s surveyor believed that there was no evidence found between the cause of the aforesaid event and the Bank. The Bank is not liable for compensation. Accordingly, no provision is made for the contingent liabilities in the Bank’s financial statements.
D) FCB has rented office spaces under operating leases. As of December 31, 2009, the estimated future minimum lease commitments for FCB are as follows: Period Amount 2010 $485,661 2011 475,900 2012 396,406 2013 264,522 2014 and thereafter 575,146 $2,197,635
E) Others As of December 31, 2009, FCB had entered into the construction contracts amounting to $140,000, $120,498 of which had been paid and recorded in the “construction in process and prepayments for equipment” account. According to the joint venture agreement signed between FFHC and Aviva International Holdings Limited, the Bank and First-Aviva Life Insurance Co., Ltd. entered into an exclusive distribution agreement on 2 January 2008 and the Bank is entitled to collect the relevant charges in accordance with the contract.
B. FS A) As of December 31, 2009, FS had rented branch office spaces under operating leases, and the estimated future minimum lease commitments for FS are as follows: Period Amount 2010 $90,639 2011 89,282 2012 73,704 2013 43,129 2014 and thereafter 330 $297,084
B) As of December 31, 2009 and 2008, FS had entered into an agreement to purchase properties and equipment amounting to $18,560 and $0, respectively, and had paid $4,920 and $0, respectively.
C) As of December 31, 2009 and 2008, there were 406,691 thousand and 280,705 thousand shares, respectively, of clients’ stocks under the custody of FS as a result of margin loan and stock loan activities. FS had also lent 17,062 thousand and 9,110 thousand shares, respectively, to its clients as a result of securities lending activities and has received sufficient guarantee deposits for such activities.
D) Taipei National Tax Administration, Ministry of Financial (NTA) had determined that the warrant issued by the FS in 2003 was not in compliance with the “Rules of the Securities Transactions Tax”. Accordingly, additional income tax of $ 1,019 and a fine of $ 20,316 were assessed by NTA. However, FS disagreed with the assessments of the penalty and filed administrative litigations within the statutory deadline. The original
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decree had been revoked by the High Administrative Court. NTA disagreed and had filed tax appeals; the Supreme Administrative Court assessed and returned the case back to High Administrative Court for review. For conservatism purpose, the related tax and penalties have been accrued in the financial statements.
C. FSIT FSIT had rented office spaces and cars under operating leases. As of December 31, 2009, the estimated future Financial Information minimum lease commitments are as follows: Period Amount 2010 $949 2011 565 2012 and thereafter 518 Total $2,032
D. FALI FALI had entered into a lease contract for its operation office and the lease term will be terminated at the end of September 2011. The total minimum lease commitment was $28,008 as of December 31, 2009. FALI and FIA entered into a distribution agreement for marketing and distribution of FALI’s insurance products through the FCB’s network within the territory.
8. Significant losses from disasters 1) The Company: None. 2)Subsidiaries: None
9. Significant subsequent events 1) The Company: None. 2) Subsidiaries: None.
10. Others 1) Disclosure of financial instruments A. Fair value of financial instruments December 31, 2009 December 31, 2008 Non-derivative financial instruments Book value Fair value Book value Fair value Assets Financial assets with book value equal to fair value $283,963,003 $283,963,003 $236,291,953 $236,261,979 Financial assets at fair value through profit or loss 23,388,928 23,388,928 31,012,183 31,012,183 Bills discounted and loans 1,096,033,636 1,096,033,636 1,160,544,079 1,160,544,079 Available-for-sale financial assets 74,728,061 74,728,061 61,065,319 61,065,319 Held-to-maturity financial assets 419,430,881 420,006,449 229,985,592 230,790,909 Other financial assets - bond investments with no 2,211,168 2,069,869 6,002,827 5,361,740 active market
Liabilities Financial liabilities with book value equal to fair value 2,485,048,401 2,485,048,401 210,769,956 210,769,956 Financial liabilities at fair value through profit or loss 43,931,508 43,931,508 49,876,491 49,876,491 Deposits and remittances 1,515,785,596 1,515,785,596 1,383,600,013 1,383,600,013 Bonds payable 18,400,000 18,400,000 19,900,000 19,900,000
95 December 31, 2009 December 31, 2008 Derivative financial instruments Book value Fair value Book value Fair value Assets Non-hedge FX contracts (swaps and forwards) $717,919 $717,919 $2,640,562 $2,640,562 FX margin trading 477,917 477,917 562,434 562,434 Non-delivery forwards 25,234 25,234 328,991 328,991 FX options held 594,281 594,281 1,607,936 1,607,936 Interest rate swap options held 137,322 137,322 268,136 268,136 Commodity options held 1,404,023 1,404,023 10,644,022 10,644,022 Cross currency swap contracts (excluding the 57,295 57,295 449,388 449,388 notional principal) Interest rate related contracts (interest rate swaps 6,797,358 6,797,358 10,448,524 10,448,524 and asset swaps excluding the principal of bonds) Futures option purchased - - 535 535 Futures trading 372,364 372,364 367,229 367,229 Asset swap options purchased 128,349 128,349 118,935 118,935 Hedge Interest rate related contracts (interest rate swaps - - 27,003 27,003 and asset swaps excluding the principal of bonds) Liabilities Non-hedge FX contracts (swaps and forwards) 1,258,191 1,258,191 2,446,400 2,446,400 FX margin trading 2,057 2,057 29,136 29,136 Non-delivery forwards 30,109 30,109 74,615 74,615 FX options written 520,672 520,672 1,958,516 1,958,516 Interest rate swap options written 261,340 261,340 456,376 456,376 Bond options written 5,472 5,472 - - Commodity options written 1,404,023 1,404,023 10,644,022 10,644,022 Cross currency swaps (excluding the notional 1,157,575 1,157,575 366,864 366,864 principal) Interest rate related contracts (interest rate swaps 6,414,283 6,414,283 9,466,434 9,466,434 and asset swaps excluding the principal of bonds) Futures options sold - - 369 369 Asset swap options sold 214,258 214,258 118,935 118,935 Liabilities for issuance of call warrants 358,100 358,100 - - Repurchases of issued call warrants (352,588) (352,588) - - Hedge Interest rate related contracts (interest rate swaps 365,760 365,760 432,759 432,759 and asset swaps excluding the principal of bonds)
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B. Methods and assumptions used by the First Group to measure the fair value of financial instruments are summarized as follows: A) The fair values of financial instruments listed below are estimated at carrying amounts at balance sheet date, as the maturity date is near the balance sheet date or the future receivable or payable amount is close to the carrying amounts: Cash and cash equivalents, cash – prepaid underwriting stock value, cash – prepaid performance guarantees, Financial Information investment in bills and bonds under resale agreements, due from the Central Bank and call loans to other banks, restricted assets – pledged time deposits, receivables, remittance purchased, due to the Central Bank and other banks, bills and bonds payable under repurchase agreements, funds borrowed from the Central Bank and other banks, commercial paper payable, short-term bank deposits, payables, refundable deposits, and so on. B) For refundable deposits, operating guarantee deposits and settlement clearing funds, if there is a quoted market price available in an active market, the fair value is determined using the quoted market price. When there is no quoted market price for reference, an assessment of fair value based on the consideration of the carrying amount is deemed reasonable. C) When there is a quoted market price available in an active market for financial assets at fair value through profit or loss, available-for-sale financial assets and held-to-maturity financial assets, the fair value is determined using the quoted market price. If there is no quoted market price for reference, a valuation technique will be adopted to measure the fair value. The estimation and assumption of the valuation technique used by the First Group is consistent with those used by the market participants for financial instrument pricing. The discount rate used is consistent with the expected return rate of the financial instruments that have the same conditions and characteristics. Such conditions and characteristics include the debtor’s credit rating, the remaining period of the fixed interest rate contracts, the remaining period for principal repayment, the payment currency, etc. D) Bills discounted and loans (including non-performing loans): Considering the nature of the financial service industry, which is the market rate (market price) maker, the effective interest rates of loans are generally based on the basic interest rate or the interest rate index plus (minus) certain adjustment (point) (equivalent to floating rate) to reflect the market rate. As a result, it is reasonable to assume that book value, after adjustments of reserves based on estimated recoverability, approximates fair values. Fair values for mid-term and long-term loans with fixed rates shall be estimated using their discounted values of expected future cash flows. However, as such loans account for only a small portion of all loans, book value was used to estimate the fair value. E) The fair values of derivative financial instruments are estimated based on the amounts expected to receive or pay under the given situation that the derivative contracts are terminated pursuant to contract terms at the balance sheet date. In general, such an amount includes unrealized gains or losses on outstanding derivative contracts. If there is no quoted market price for reference, the Company and its subsidiaries adopts the valuation model that is commonly used among other financial institutions to determine the fair values of derivative financial instruments. F) Deposits and remittances: Considering the nature of the financial service industry, which is the market rate (market price) maker, and that deposit transactions usually mature within one year, a book value is a reasonable basis to estimate the fair value. Fair values for long-term fixed rate deposits shall be estimated using discounted values of expected future cash flows. However, as these deposits account for only a small portion of all deposits and as their maturities are less than three years, book value was used to estimate the fair value. G) Bonds payable: Since the coupon rates of the senior and subordinated corporate bonds and financial bonds issued by the First Group approximate the market rates, the fair value based on the discounted value of expected future cash flows approximates the book value. H) The fair values of long-term borrowings are estimated based on the amount discounted at coupon rates, and the coupon rate approximates the market interest rate as the long-term borrowings are the short-term commercial paper issued with long-term credit commitments. I ) Other financial assets - bond investments with no active market: If there is an actual transaction price or a quoted market price for bond investments with no active market, the fair value of such bond investments will be determined by the latest actual transaction price or quoted market price. Moreover, if there is no quoted market price for reference, a valuation technique will be adopted to measure the fair value, and the valuation technique is the discounted values of expected future cash flows.
97 J) There is no quoted market price in an active market for equity investments accounted for under the equity method and the unlisted stocks under the financial asset carried at cost, and their variability in the range of reasonable fair value estimates is not insignificant and the probability of the various estimates within the range cannot be reasonably assessed, so the fair value is not reliably measurable. As a result, information of the book value and the fair value with respect to these financial assets is not disclosed.
C. Fair value of the First Group’s financial assets and financial liabilities determined by quotations in an active market and estimated using a valuation technique are as follows: Quotations in an active Estimated using a valuation market technique December 31, December 31, December 31, December 31, Non-derivative financial instruments 2009 2008 2009 2008 Assets Financial assets with book value equal to fair value $119,978 $29,974 $283,843,025 $236,261,979 Financial assets at fair value through profit or loss 6,078,156 7,418,053 17,310,772 23,594,130 Bills discounted and loans - - 1,096,033,636 1,160,544,079 Available-for-sale financial assets 23,977,449 19,821,157 50,750,612 41,244,162 Held-to-maturity financial assets 1,460,266 21,076,290 418,546,183 209,714,619 Other financial assets - bond investments with no - - 2,069,869 5,361,740 active market
Liabilities Financial liabilities with book value equal to fair - - 245,048,401 210,769,956 value Financial liabilities at fair value through profit or - - 43,931,508 49,876,491 loss Deposits and remittances - - 1,515,785,596 1,383,600,013 Bonds payable - - 18,400,000 19,900,000
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Quotations in an active Estimated using a valuation market technique December 31, December 31, December 31, December 31, Derivative financial instruments 2009 2008 2009 2008
Assets Financial Information Non-hedge FX contracts (swaps and forwards) $ - $- $717,919 $2,640,562 FX margin trading - - 477,917 562,434 Non-delivery forwards - - 25,234 328,991 FX options held - - 594,281 1,607,936 Interest rate swap options held - - 137,322 268,136 Commodity options held - - 1,404,023 10,644,022 Cross currency swap contracts (excluding the notional - - 57,295 449,388 principal) Interest rate related contracts (interest rate swaps and - - 6,797,358 10,448,524 asset swaps excluding the principal of bonds) Futures option purchased - 535 - - Futures trading 112,556 56,085 259,808 311,144 Asset swap options purchased - - 128,349 118,935 Hedge Interest rate related contracts (interest rate swaps and - - - 27,003 asset swaps excluding the principal of bonds) Liabilities Non-hedge FX contracts (swaps and forwards) - - 1,258,191 2,446,400 FX margin trading - - 2,057 29,136 Non-delivery forwards - - 30,109 74,615 FX options written - - 520,672 1,958,516 Interest rate swap options written - - 261,340 456,376 Bond options written - - 5,472 - Commodity options written - - 1,404,023 10,644,022 Cross currency swaps (excluding the notional principal) - - 1,157,575 366,864 Interest rate related contracts (interest rate swaps and - - 6,414,283 9,466,434 asset swaps excluding the principal of bonds) Futures options sold - 369 - - Asset swap options sold - - 214,258 118,935 Liabilities for issuance of call warrants 358,100 - - - Repurchases of issued call warrants (352,588) - - - Hedge Interest rate related contracts (interest rate swaps and - - 365,760 432,759 asset swaps excluding the principal of bonds)
99 D. The First Group has recognized $72,914 and $1,118,913, respectively, of current net loss on changes in fair value arising from valuation techniques for the years ended December 31, 2009 and 2008.
E. As of December 31, 2009 and 2008, the First Group has financial assets with fair value risk arising from interest rate changes amounting to $76,182,301 and $72,042,291, respectively.
F. As of December 31, 2009 and 2008, the First Group has financial assets with cash flow risk arising from interest rate changes amounting to $13,378,540 and $15,673,404, respectively.
G. For the years ended December 31, 2009 and 2008, the First Group has recognized interest income from the financial assets or financial liabilities not at fair value through profit or loss amounting to $28,876,024 and $50,080,253, respectively, and interest expense from the financial assets or financial liabilities not at fair value through profit or loss amounting to $11,935,514 and $25,350,710, respectively. The First Group has recognized the change in fair value of available-for-sale financial assets and has recorded an adjustment account in the stockholders’ equity amounting to $4,110,294 and $1,979,152, respectively, and the amount of gain on fair value change reclassified from the stockholders’ equity into the statement of income was $516,771 and $682,063, respectively, for the years ended December 31, 2009 and 2008.
H. Risk management and hedging strategy (including financial hedge) The Company A) The Company established written risk management policies and guidelines which are approved by the Board of Directors, in order to identify, measure, monitor and control credit risk, market risk, liquidity risk, interest rate risk and operational risk. The Company’s Board of Directors has the ultimate approval right in risk management. Major risk management includes risk tolerance limit and authority which must be approved by the Board of Directors. Under the Board of Directors, there is a risk management committee, which is responsible to set up risk management system, policies and monitoring indicators. B) The Company’s Board of Directors has the ultimate approval right in risk management. Under the Board of Directors, there is a risk management committee which is responsible to sets up group-wide risk management system, including risk authorized limits, risk tolerance limits, monitoring indicators and excessive indicators, as well as coordinates and monitors risk management events associated with subsidiaries in compliance with risk management policies and guidelines approved by the Board of Directors. C) The Audit Department should audit risk management procedures and internal controls on a regular basis, in order to ensure that risk management mechanism and control procedures function effectively. D) In addition to complying with the relevant laws and regulations, the hedging strategies adopted by the Company must be approved by the Board of Directors. The floating rate corporate bonds issued by the Company may fluctuate due to changes in interest rates. Thus, those bonds may expose the Company to cash flow risk. The Company has entered into interest rate swap contracts with counterparties to hedge such risk. FCB A) FCB engages in risk management and hedge under the principles of not only serving customers but also conforming to the bank operational goal, overall risk tolerance limits, and legal compliance to achieve risk diversification, risk transfer, and risk avoidance, and to maximize the benefits of customers, shareholders, and employees. FCB is mainly exposed to credit risk, market risk (including the interest rate, foreign exchange rate, equity securities, and instrument risks), operation risk, and liquidity risk regardless whether they are on or off balance sheets. B) FCB’s Board of Directors has the ultimate approval right in risk management. Major management risk items that include the company-wide risk management policy, risk tolerance limit, and authority must be approved by the Board of Directors. Under the Board of Directors, there is a risk management committee, which is responsible to review, supervise, report, and coordinate company-wide risk management. Besides, Risk Management Center, which is independent from business units, is comprised of Regional Center, Risk Management Division, Credit Approval Division and Loan Management Division, and is responsible for implementing the risk management strategy of FCB. C) The goal of market risk management of FCB is to achieve optimal risk position, maintain proper liquidity position, and manage all market risk centralized by considering the economic environment, competition condition, market value risk, and impact on net interest income. In order to achieve this goal, FCB’s hedging activities concentrate on risk transfer and risk management of net interest income and market value risk.
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FCB has set the strategy of fair value hedge of interest rate exposure according to the fund transfer pricing principle. FCB primarily uses interest rate swaps to hedge fair value changes, and FCB also hedges the interest rate exposure of partial fixed-rate loans and fixed-rate liabilities.
FS and subsidiaries A) Financial risk control Financial Information Enterprise Information System and daily risk management report monitor FS’s risk. FS also establishes timely, accurate, effective risk management indicators to identify, measure, and monitor various business and company-wide risks of FS and its subsidiaries, and to cope with market changes. Therefore, it enables management to control risk effectively, and can be used as the operation basis for capital allocation. FS established a Risk Management Committee to implement the overall monitoring, preventing, and controlling by setting risk limits. In addition, FS established a risk management system, composed of risk control personnel from the chairman’s office and each business unit, to assure effective control. FS’s Risk Management Committee has an executive secretary, appointed by the Board of Directors, to take charge of all risk management strategies. The primary responsibilities of this committee are as follows: a. Setting up the risk management policies and procedures, operating standards, and risk management indicators; b. Setting up the evaluation, management and schemes of capital adequacy of FS; c. Review each risk limit, model analyses and evaluation methods, and risk management control steps and organization structures; d. Monitoring various risks of FS, operating processes, and the compliance with related laws. The committee quarterly reports the result to the Chairman of the Board of Directors; e. Other affairs related to the risk management of FS. Except for the aforementioned matters, the executive secretary shall also assist the Board of Directors to designate appropriate business units to manage together the unquantifiable risks; including making an emergency contingency plan. In accordance with FS’s “Risk Management Procedures and Execution Standards”, FS and its subsidiaries plan and execute the risk management procedures as follows: a. Complying with FS’s “Risk Management Procedures and Execution Standards” to establish a comprehensive risk management procedures with detailed requirements for each business unit; b. Complying with the related laws and regulations issued by competent authority, internal control system, and risk management policies and procedures of each business unit, while conducting business; c. Taking related risk factors into consideration and establishing the transaction limit or authorization limit and risk tolerance limit. In order to apply and monitor the control of such limits, FS and its subsidiaries directly control the transaction limit of traders through the online trading system. In addition, FS and its subsidiaries quantify the market risk and estimate potential losses for each position by using Value-at-Risk (VaR) taken as the risk management information; d. All open positions are mark-to-market on a daily basis unless otherwise stipulated by the related regulations; e. Establishing the qualification condition and credit limit of the counterparty and granting different credit limits by referring to information from domestic and foreign credit rating institutions or by establishing its own rating system; f. Avoiding the concentration risk, that is, through limiting the amount of financing to or investing in a single customer, single industry, single conglomerate, single stock, or related parties; g. Evaluating the liquidity risk related to the market, instruments, or funds, and focusing on the size and liquidity of specific market or specific instruments to set the liquidity risk limit. h. Making significant changes on techniques, model and assumptions of risk management and controlling procedures, both Risk Management Committee and Internal Auditing Committee shall take part in it. i. Developing new products and new business projects, Risk Management Committee and Internal Auditing Committee shall involve in related authorization and approval procedures. Furthermore, in accordance with the different requirements from department heads, President, Chairman, or the Board of Directors, to present daily, weekly, monthly, or quarterly risk management reports and to provide timely warning report based on periodic monitoring. B) Hedging strategy (financial hedge) a. Warrants FS sets its hedging strategy based on the conservation principle after taking into consideration the market risk, liquidity risk of underlying securities, liquidity risk of funds, current regulations, and trading
101 system. In order to hedge the warrants issued, FS mainly uses the Delta dynamic hedging principle supplemented by strict risk control system. Such hedging strategy enables FS to earn reasonable returns under the limited risk.
1. Dynamic hedging principle i. Delta hedging strategy When the underlying securities prices fluctuate FS buys or sells the securities to offset the profit or loss from warrants with the loss or profit from the underlying securities. Hence, changes in stock price will not have significant impact on the hedging portfolio. When the price of underlying securities rise, Delta value increases and FS shall buy more stocks; and when the price of underlying securities fall, Delta value decreases and FS shall sell more stocks. Based on the aforementioned strategy, FS maintains a Delta neutral position. The hedging instruments are mainly the underlying securities and are supplemented by the certificates of entitlement to new shares of the underlying securities. ii. In order to maintain a Delta neutral position, FS’s hedging operators dynamically adjust the hedge position within authorized limit when the price of underlying securities fluctuates. Expected changes in hedge position when future stock price fluctuates between -50% ~ 50% with volatility rate between -2% ~ 2% are stated as follows: Unit: thousand shares Volatility / Stock price fluctuation -2.00% -1.00% 0.00% 1.00% 2.00% -50% 364 410 458 510 565 -40% 1,115 1,208 1,303 1,401 1,502 -30% 2,455 2,591 2,727 2,864 3,002 -20% 4,349 4,506 4,662 4,816 4,969 -10% 6,632 6,785 6,935 7,082 7,226 0% 9,094 9,221 9,344 9,464 9,582 10% 11,542 11,629 11,714 11,798 11,880 20% 13,832 13,877 13,921 13,965 14,009 30% 15,880 15,886 15,893 15,902 15,911 40% 17,650 17,624 17,601 17,580 17,560 50% 19,138 19,090 19,044 19,001 18,960
Holding volumes listed above are just stated for reference, and may differ from the actual holding position. Factors that affect the holding position include the fluctuation volatility, interest rate, and time to maturity. In addition, hedging operators can decide actual holding position within authorized scope by weighing the effects that the adjusting frequency of hedge positions may have on the hedging cost and risk.
2. Gamma hedging strategy Effects of price changes in underlying securities on Delta value can be estimated by Gamma value. Gamma risk directly influences the adjusting frequency of hedge positions. In order to achieve a Gamma neutral position, other warrants with the same underlying securities shall be traded as hedging instruments, as the Gamma value for underlying securities is zero. The profit and loss and risk changes of convertible bonds of the underlying securities are equivalent to those of the warrants of the same underlying securities. Thus, these convertible bonds can be used to offset the Gamma risk. However, after considering the liquidity of domestic convertible corporate bonds and time to maturity of warrants, the hedging instruments for the Gamma risk are mainly the warrants listed in domestic market with the same underlying securities (including the warrants issued by FS) and are supplemented by the convertible corporate bonds issued by the companies of the underlying securities. 3. Hedging frequency In order to achieve risk neutral, the dynamic hedging requires issuer to adjust holding position with changes in stock price of the underlying securities. However, in practice, the hedge operators cannot
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immediately adjust the position because the stock price might abruptly rise or fall. In order to react to the aforementioned deficiency, FS set upper and lower limits for value at risk; that is, risk management officers timely monitor whether Delta value fluctuates within certain percentage range. Traders can adjust the positions within their authorities according to their judgments on the trend of the market and the underlying securities. b. Options Financial Information FS engages in bond options hedge transactions, which primarily consist of delta-neutral transactions.
FSIT In order to integrate the operation mechanism of FSIT’s risk management practice, FSIT has established a Risk Management Committee. In accordance with the risk management policies and guidelines set by the Board of Directors, the committee established risk management procedures, valuation method, and management indicators. In addition, the committee monitors the quality of risk management procedures and the risk exposure to assure the effectiveness of implementing risk management and control policy. The Chairman of Board of Directors of FSIT acts as the Chairman of the committee, and President, Executive Vice President, Vice President of each department, and Chief Auditor act as committee members. The committee calls an ordinary quarterly meeting and, if needed, a special meeting. Missions and responsibilities of the committee are as follows: A) Setting up the risk management policies and procedures, operating standards, and risk management indicators; B) Setting up the schemes of asset and liability management and capital adequacy of FSIT; C) Review each risk limit, model analyses and evaluation methods, and risk management control steps and organization structures; D) Monitoring various risks of FSIT, operating processes, and the compliance with relevant laws. The committee quarterly reports the results to the Chairman of the Board of Directors; E) Other affairs related to the risk management of FSIT. All business units under FSIT comply with laws issued by the authorities, related management rules for subsidiaries set by the Company, and FSIT’s internal control system and operation regulations. When establishing the internal control system, FSIT had taken into consideration the possible risks (including the market risk, credit risk, liquidity risk, and operation risk) to frame the practical compliance procedures and management steps. In addition, FSIT draws up the trading authority and risk tolerance limit to be a basis of implementation. In compliance with the related risk management regulations, operation departments regularly or irregularly present related statements to FSIT’s management, the Company, and the authorities. Risk control officers regularly trace the related risk indicators and, if necessary, present a warning report to assure timely and appropriate treatment.
FALI The primary risks for financial instruments held by FALI are cash flow risk arising from changes in interest rates, foreign exchange risk, fair value risk arising from changes in interest rates, credit risk and liquidity risk. Authorized and approved risk management policies are as follows: A) Cash flow risk arising from changes in interest rates FALI mainly engages in life insurance services, and its main liabilities derives from long-term policy reserves, the reserve provision is calculated by an actuary in accordance with the fixed shadow interest stated in the insurance regulations and the related provisions. The future cash flow does not fluctuate due to volatility of the market interest rates. Most of FALI’s bond investments are stated in fixed interest rate, thus the risk of volatile future cash flow is limited. B) Foreign exchange risk As a result of significant investment operations with foreign currency risk, FALI’s balance sheets can be affected significantly by movements in the currency exchange rate. FALI seeks to mitigate the effect of its structural currency exposure by using forward currency contracts. All investments denominated in foreign currencies held by FALI are hedged; thus, the foreign currency risk is insignificant. C) Fair value risk arising from changes in interest rates The fixed interest rate debentures and other equity investments could fluctuate in value due to change in government currency policy, institution credit rating, economic conditions, industry business cycles, operating status of the offering institution, or public market information; loss could be generated during the
103 change. FALI seeks stability and consistency in profit as their priority; the investment department diversified its portfolios among various industries with different backgrounds and properties, and observes closely on both domestic and foreign significant economic events as indicator for adjustment and effectively separate and maintain risk. D) Credit risk Credit risk that arises from bond investments exists for individuals or groups of counterparties when they fail to meet contractual obligations. FALI has complied with Article 146 of Insurance Act, related regulations and the Company’s internal control policies. In addition, individuals or group of counterparties of FALI are all with good credit rating or well-known financial institutions, so liquidity risk of FALI is low. E) Liquidity risk FALI mainly engages in life insurance services, and its main liabilities are derived from long-term policy reserves, current liabilities are relatively low. As a result, value of cash and financial instruments with active market are sufficient to pay off short-term liabilities with one year maturity; liquidity risk is insignificant.
I. Financial risk information The Company A) Credit risk Financial instruments held by the Company may incur losses if its counterparties are not able to fulfill their obligations at the maturity date. In order to control credit risk of the underlying investments, the Company established control procedures, authorization criteria, assessments, control measures and credit management. B) Cash flow risk arising from changes in interest rates Corporate bonds payable with floating interest rate expose the Company to cash flow risk arising from changes in interest rates. The Company entered into the swap contracts to hedge such risk. C) Liquidity risk The Company has sufficient operating capital to meet all contract obligations. Therefore, liquidity risk is considered low.
FCB A) Market risk FCB sets the specific trade period, position limit, and stop loss limit for its investments in marketable securities according to different degrees of risk for each specific product. FCB monitors those limitations by various risk indicators such as value at risk and DV01. In addition, FCB periodically conducts the risk sensitivity analysis of company-wide positions. Each derivative financial instrument transaction undertaken by FCB has set Greeks, the open aggregate position limit and maximum loss tolerance amount to control the market risk of derivative financial instruments. In addition, the profit or loss arising from fluctuations in the market interest rate or foreign exchange rate will be substantially offset by the profit and loss from hedged items, and thus those instruments would not expose FCB to significant market risk. FCB calculates the capital requirements of financial instruments in compliance with the Standardized Approach, and the estimated values of the risk-weighted assets are stated as follows: Type of market risk December 31, 2009 December 31, 2008 Interest rate risk $1,084,096 $1,122,196 Equity securities risk 427,988 105,248 Foreign exchange risk 36,390 453,527
B) Credit risk Financial instruments held by FCB may incur losses if counterparties are not able to fulfill their obligations at the maturity date. In order to prevent investments from significant credit risk concentration, FCB sets up the upper credit tolerance limits for investment in stocks by industries and conglomerates. Bond investments are primarily composed of government bonds, financial bonds, and investment-grade corporate bonds. Each corporate bond is reviewed individually to control the credit risk. Counterparties in FCB’s derivative financial instrument transactions are all financial institutions with good credit ratings. FCB controls credit exposures of its counterparties by giving different risk limits to different counterparties based on their credit ratings. The credit risk amounts stated below are for those with positive fair values as of the balance sheet date and
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those contracts with off-balance sheet commitments and guarantees.
For all financial instruments held by FCB, the maximum credit exposures are as follows: December 31, 2009
Maximum credit Financial Information Items Book value exposure Non-derivative financial instruments Financial assets for trading purpose Bonds $478,915 $478,915 Short-term bills 29,786 29,786 Other marketable securities 329,553 329,553 Financial assets designated for trading purpose Bonds 17,916,144 17,916,144 Bills discounted and loans 1,096,010,284 1,096,010,284 Available-for-sale financial assets Bonds 56,098,070 56,098,070 Short-term bills 449,475 449,475 Held-to-maturity financial assets 419,430,881 419,430,881 Debt instruments in non-active markets Bonds 1,723,815 1,723,815 Beneficiary securities 287,353 287,353 Derivative financial instruments Non-hedging purpose FX contracts (swaps and forwards) 702,216 702,216 FX margin trading 477,917 477,917 Non-delivery forwards 25,234 25,234 FX options held 594,281 594,281 Interest rate swap options held 137,322 137,322 Commodity options held 1,404,023 1,404,023 Cross currency swap contracts (excluding the notional 57,295 57,295 principal) Interest rate related contracts (interest rate swap and asset swaps excluding the principal of 6,797,358 6,797,358 bonds) Futures trading 112,556 112,556 Hedging purpose Interest rate related contracts (interest rate swaps and asset swaps excluding the principal - - of bonds) Letter of credit and guarantees - 70,276,595 Note:The maximum credit exposures of derivative instruments stated is for those with positive fair values.
105 December 31, 2008 Maximum credit Items Book value exposure Non-derivative financial instruments Financial assets for trading purpose Bonds $954,942 $954,942 Other marketable securities 436,703 436,703 Financial assets designated for trading purpose Bonds 24,906,561 24,906,561 Bills discounted and loans 1,160,541,587 1,160,541,587 Available-for-sale financial assets Bonds 45,244,071 45,244,071 Short-term bills 863,881 863,881 Held-to-maturity financial assets 229,985,592 229,985,592 Debt instruments in non-active markets Bonds 3,385,380 3,385,380 Beneficiary securities 2,617,447 2,617,447 Derivative financial instruments Non-hedging purpose FX contracts (swaps and forwards) 2,640,562 2,640,562 FX margin trading 562,434 562,434 Non-delivery forwards 328,991 328,991 FX options held 1,607,936 1,607,936 Interest rate swap options held 268,136 268,136 Commodity options held 10,644,022 10,644,022 Cross currency swap contracts (excluding the notional 449,388 449,388 principal) Interest rate related contracts (interest rate swap and asset swaps excluding the principal of 10,448,524 10,448,524 bonds) Futures trading 56,085 56,085 Hedging purpose Interest rate related contracts (interest rate swaps and asset swaps excluding the principal - - of bonds) Letter of credit and guarantees - 44,830,473 Note:The maximum credit exposures of derivative instruments stated is for those with positive fair values.
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The credit exposure amounts stated above are for those with positive fair value as of the balance sheet date and those contracts with off-balance sheet commitments and guarantees. There will be a significant concentration of credit risk when the counterparty of the financial instruments is highly concentrated in a single customer or a group of counterparties who engage mostly in similar business activities with similar economic nature, and such business activities make their abilities to fulfill the contractual obligations influenced similarly by the economic affairs or other situations. FCB does not engage in transactions that are Financial Information concentrated significantly in a single customer or counterparty. However, the information on concentrations of credit risks, which represents up to 5% of FCB’s loans, bills discounted, and non-accrual loans is classified below by counterparties and regions: Contract amounts of significant credit risk concentration for bills discounted and loans are as follows: December 31, 2009 Maximum Book value credit exposure Loans by industries Private enterprises $492,281,833 $492,281,833 State-owned enterprises 33,911,943 33,911,943 Government institutions 58,599,839 58,599,839 Non-profit organizations 3,487,445 3,487,445 Private individual 368,614,642 368,614,642 Social insurance and pensions 8,800,000 8,800,000 Securities finance companies 20,000 20,000 Offshore loans 142,681,095 142,681,095 Total $1,108,396,797 $1,108,396,797
Loans by regions Asia $1,041,078,557 $1,041,078,557 Europe 13,858,167 13,858,167 North America 49,812,036 49,812,036 Central America 144,218 144,218 Oceania 3,503,819 3,503,819 Total $1,108,396,797 $1,108,396,797
107 December 31, 2008 Maximum Book value credit exposure Loans by industries Private enterprises $491,137,622 $491,137,622 State-owned enterprises 55,200,403 55,200,403 Government institutions 75,010,825 75,010,825 Non-profit organizations 3,852,877 3,852,877 Private individual 356,763,789 356,763,789 Social insurance and pensions 10,000,000 10,000,000 Deposit insurance companies 8,960,000 8,960,000 Offshore loans 168,980,596 168,980,596 Total $1,169,906,112 $1,169,906,112
Loans by regions Asia $1,079,837,511 $1,079,837,511 Europe 21,483,318 21,483,318 North America 64,685,437 64,685,437 Central America 176,607 176,607 Oceania 3,723,239 3,723,239 Total $1,169,906,112 $1,169,906,112
C) Liquidity risk Stocks traded by FCB are all listed on the Taiwan Stock Exchange or the OTC Securities Market. Thus, these stocks have high liquidity and are expected to be sold at fair value promptly when needed. Bonds that FCB hold are primary government bonds and their liquidity is within an acceptable range. As a result, FCB does not have the significant liquidity risk. For the derivative financial instruments held by FCB, all positions have an active market and high liquidity (except for those financial bonds issued by the Bank and structured with interest rate swap contracts, which have no need for further swaps). Thus, there is no significant concern for liquidity risk. The liquid reserve ratio for FCB was 36.57%. In addition, FCB’s capital and working capital were sufficient to fulfill all obligations. Thus, there was no material liquidity risk that FCB may fail to meet the obligation. Analyses for time to maturity of FCB’s assets and liabilities are as follows:
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December 31, 2009 Financial instruments 1~30 days 31~90 days 91 days~1 year 1~3 years 3~5 years Over 5 years Total Assets Non-derivative financial
instruments Financial Information Due from Central Bank $46,238,615 $11,359,722 $11,430,206 $20,322,524 $- $- $89,351,067 Call loans from and due from 73,599,160 34,666,784 10,215,643 - - - 118,481,587 other banks Financial assets for trading purpose Short-term bills - 29,786 - - - - 29,786 Stocks - - 693,446 - - - 693,446 Bonds 42,641 - - 138,366 160,025 137,883 478,915 Other marketable securities - - - 329,553 - - 329,553 Financial assets designated for 15,277,577 - 1,536,143 378,134 474,979 249,311 17,916,144 trading purpose - bonds Bills discounted and loans (excluding non-performing 160,352,001 133,603,559 231,341,664 80,834,592 63,496,522 423,618,354 1,093,246,692 loans and allowance for doubtful accounts) Available-for-sale financial assets Stocks - - - 2,348,519 - 6,099,708 8,448,227 Bonds 793,370 671,023 7,254,261 26,641,710 13,025,402 7,712,304 56,098,070 Short-term bills 214,060 - 80,440 154,975 - - 449,475 Held-to-maturity financial assets 250,563,664 103,978,588 34,459,637 17,509,603 8,922,784 3,996,605 419,430,881 Debt instruments in non-active market Bonds - - - - - 1,723,815 1,723,815 Beneficiary securities - - - 287,353 - - 287,353 Derivative financial instruments Non-hedging purpose FX contracts 310,448 - - - 375,344 16,424 702,216 FX margin trading 460,885 - - - 17,032 - 477,917 Non-delivery forwards 11,391 - - - 13,843 - 25,234 FX options held 162,968 221,161 206,424 3,728 - - 594,281 Interest rate swap options held - - - 137,322 - - 137,322 Commodity options held 35,453 3,027 1,365,543 - - - 1,404,023 Cross currency swap contracts (excluding the notional - - - 56,090 1,205 - 57,295 principal) Interest rate related contracts (interest rate swaps and asset 39,470 56,279 675,293 3,693,575 1,834,556 498,185 6,797,358 swaps excluding the principal of bonds) Futures trading - 112,556 - - - - 112,556 Hedging Interest rate related contracts (interest rate swaps and asset ------swaps excluding the principal of bonds) Total assets $548,101,703 $284,702,485 $299,258,700 $152,836,044 $88,321,692 $444,052,589 $1,817,273,213 Note: The above amounts are recoverable amount or repayment amount.
109 December 31, 2009 Financial instruments 1~30 days 31~90 days 91 days~1 year 1~3 years 3~5 years Over 5 years Total Liabilities Non-derivative financial instruments Due to Central Bank $243,110 $- $- $ - $- $- $243,110 Call loans to and due to other 88,206,971 54,348,249 26,600,823 - - - 169,156,043 banks Funds borrowed to Central Bank 72,296 - - - - - 72,296 and other banks Financial liabilities designated for 2,848,825 1,017,438 8,648,224 8,546,480 7,630,786 14,854,596 43,546,349 trading purpose Bills and bonds payable under 7,199,492 1,850,758 632,488 - - - 9,682,738 repurchase agreements Deposits and remittances 246,625,948 211,179,614 392,936,579 434,799,213 232,405,317 2,002,015 1,519,948,686 Financial bonds payable - - - - 8,800,000 4,600,000 13,400,000 Derivative financial instruments Non-hedging FX contracts (swaps and 682,893 - - - 569,560 5,738 1,258,191 forwards) FX margin trading 2,052 - - - 5 - 2,057 Non-delivery forwards 585 - - - 29,524 - 30,109 FX options written 161,810 191,711 167,151 - - - 520,672 Interest rate swap options - - - 235,068 26,272 - 261,340 written Bond options written 647 4,825 - - - - 5,472 Commodity options written 35,470 3,028 1,365,525 - - - 1,404,023 Cross currency swap contracts - - 505,880 463,727 187,968 - 1,157,575 (excluding the notional principal) Interest rate related contracts (interest rate swaps and asset 40,155 58,649 665,747 3,828,087 1,732,860 88,785 6,414,283 swap excluding the principal of bonds) Hedging Interest rate related contracts (interest rate swaps and asset - - 1,318 - 265,347 - 266,665 swaps excluding the principal of bonds) Total liabilities $346,120,254 $268,654,272 $431,523,735 $447,872,575 $251,647,639 $21,551,134 $1,767,369,609
Net liquidity gap $201,981,449 $16,048,213 ($132,265,035) ($295,036,531) ($163,325,947) $422,501,455 $49,903,604 Note: The above amounts are recoverable amount or repayment amount.
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December 31, 2008 Financial instruments 1~30 days 31~90 days 91 days~1 year 1~3 years 3~5 years Over 5 years Total Assets Non-derivative financial
instruments Financial Information Due from Central Bank $39,046,730 $3,516,425 $11,476,119 $16,156,909 $- $- $70,196,183 Call loans from and due from 54,039,865 26,714,824 6,146,363 47,739 - - 86,948,791 other banks Financial assets for trading purpose Stocks ------Bonds 276,940 - - - - 678,002 954,942 Beneficiary certificates ------Other marketable securities - - - 436,703 - - 436,703 Financial assets designated for 21,540,054 163,751 657,267 1,667,255 609,715 268,519 24,906,561 trading purpose - bonds Bills discounted and loans (excluding non-performing 178,648,645 175,405,693 216,846,940 120,618,207 71,340,461 389,571,762 1,152,431,708 loans and allowance for doubtful accounts) Available-for-sale financial assets Stocks - - - 703,512 - 5,173,543 5,877,055 Bonds 191,969 770,316 9,173,441 15,441,772 18,116,985 1,549,588 45,244,071 Short-term bills 268,403 29,645 - 420,399 145,434 - 863,881 Held-to-maturity financial assets 77,175,304 77,029,209 48,472,196 11,718,356 12,308,070 3,282,457 229,985,592 Debt instruments in non-active market Bonds - - 185,000 - - 3,200,380 3,385,380 Beneficiary securities - - - 2,488,714 34,333 94,400 2,617,447 Derivative financial instruments Non-hedging purpose FX contracts 644,889 1,230,856 764,817 - - - 2,640,562 FX margin trading 406,975 144,327 11,132 - - - 562,434 Non-delivery forwards 169,898 134,344 24,749 - - - 328,991 FX options held 806,532 484,383 317,021 - - - 1,607,936 Interest rate swap options held - - 31,867 42,288 193,981 - 268,136 Commodity options held - - - 10,644,022 - - 10,644,022 Cross currency swap contracts - 93,336 306,731 44,574 4,747 - 449,388 (excluding the notional principal) Interest rate related contracts (interest rate swaps and asset - - 171,189 3,545,569 5,440,401 1,291,365 10,448,524 swaps excluding the principal of bonds) Futures trading - 56,085 - - - - 56,085 Hedging Interest rate related contracts (interest rate swaps and asset ------swaps excluding the principal of bonds) Total assets $373,216,204 $285,773,194 $294,584,832 $183,976,019 $108,194,127 $405,110,016 $1,650,854,392 Note: The above amounts are recoverable amount or repayment amount.
111 December 31, 2008 Financial instruments 1~30 days 31~90 days 91 days~1 year 1~3 years 3~5 years Over 5 years Total Liabilities Non-derivative financial instruments Due to Central Bank $174,214 $ - $- $ - $- $- $174,214 Call loans to and due to other 53,310,566 42,060,010 21,676,289 49,908 - - 117,096,773 banks Funds borrowed to Central Bank 45,067 - - - - - 45,067 and other banks Financial liabilities designated for 5,179,133 - - 20,198,617 7,250,786 16,883,972 49,512,508 trading purpose Bills and bonds payable under 7,327,247 4,724,425 707,873 - - - 12,759,545 repurchase agreements Deposits and remittances 193,338,662 175,567,080 477,503,029 346,262,799 190,881,136 1,200,851 1,384,753,557 Financial bonds payable 1,500,000 - - - - 13,400,000 14,900,000 Derivative financial instruments Non-hedging FX contracts (swaps and 768,436 1,151,191 467,561 14,762 - - 2,401,950 forwards) FX margin trading 29,136 - - - - - 29,136 Non-delivery forwards 21,229 38,543 14,843 - - - 74,615 FX options written 924,493 741,935 292,088 - - - 1,958,516 Interest rate swap options - - 17,426 52,086 386,864 - 456,376 written Bond options written ------Commodity options written - - - 10,644,022 - - 10,644,022 Cross currency swap contracts - 14,768 - 200,600 151,496 - 366,864 (excluding the notional principal) Interest rate related contracts (interest rate swaps and asset - - 242,654 3,574,527 5,489,778 159,475 9,466,434 swap excluding the principal of bonds) Hedging Interest rate related contracts (interest rate swaps and asset - - - 5,218 - 366,762 371,980 swaps excluding the principal of bonds) Total liabilities $262,618,183 $224,297,952 $500,921,763 $381,002,539 $204,160,060 $32,011,060 $1,605,011,557
Net liquidity gap $110,598,021 $61,475,242 ($206,336,931) ($197,026,520) ($95,965,933) $373,098,956 $45,842,835 Note: The above amounts are recoverable amount or repayment amount.
D) Cash flow risk and fair value risk arising from changes in interest rates In order to stabilize the long-term profitability and maintain the business growth, FCB sets a certain interval for each interest-rate-sensitivity indicator. a. Expected repricing date or expected maturity date As of December 31, 2009 and 2008, the expected repricing date or expected maturity date was not affected by the contract date. The following table, showing the interest rate risk of FCB, is presented by the book value of financial assets and financial liabilities and classified by the earlier of the expected repricing date or expected maturity date:
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December 31, 2009 Financial instruments 1~30 days 31~90 days 91 days~1 year 1~3 years 3~5 years Over 5 years Total Assets
Non-derivative financial Financial Information instruments Due from Central Bank $46,238,615 $11,359,722 $11,430,206 $20,322,524 $- $- $89,351,067 Call loans from and due from 73,599,160 34,666,784 10,215,643 - - - 118,481,587 other banks Financial assets designated for trading purpose Short-term bills - 29,786 - - - - 29,786 Bonds 42,641 - - 138,366 160,025 137,883 478,915 Financial assets designated for 15,277,577 1,502,537 381,760 171,554 333,405 249,311 17,916,144 trading purpose - bonds Bills discounted and loans (excluding non-performing 478,712,043 485,673,743 94,320,322 4,695,895 7,959,991 21,884,698 1,093,246,692 loans and allowance for doubtful accounts) Available-for-sale financial assets Bonds 3,198,005 5,565,424 5,869,138 21,173,593 12,579,606 7,712,304 56,098,070 Short-term bills 214,060 154,975 80,440 - - - 449,475 Held-to-maturity financial 261,347,959 115,271,101 32,736,651 7,430,072 2,238,188 406,910 419,430,881 assets Debt instruments in non-active 1,723,815 - - - - - 1,723,815 market – bonds Derivative financial instruments Interest rate swap option held - - - 137,322 - - 137,322 Cross currency swap contracts (excluding the notional - - 9,997 47,298 - - 57,295 principal) Interest rate related contracts (interest rate swaps and asset 2,752,683 3,664,936 172,592 15,519 139,605 52,023 6,797,358 swaps excluding the principal of bonds) Futures trading - 112,556 - - - - 112,556 Hedging ------Interest rate related contracts Total assets $883,106,558 $658,001,564 $155,216,749 $54,132,143 $23,410,820 $30,443,129 $1,804,310,963
113 December 31, 2009 Financial instruments 1~30 days 31~90 days 91 days~1 year 1~3 years 3~5 years Over 5 years Total Liabilities Non-derivative financial instruments Due to Central Bank $243,110 $- $- $- $- $- $243,110 Call loans to and due to other 88,206,971 54,348,249 26,600,823 - - - 169,156,043 banks Funds borrowed from Central 72,296 - - - - - 72,296 Bank and other banks Financial liabilities designated for 2,848,825 24,723,745 8,648,225 7,325,554 - - 43,546,349 trading purpose Bills and bonds payable under 7,199,492 1,850,758 632,488 - - - 9,682,738 repurchase agreements Deposits and remittances 417,785,968 166,399,733 924,739,999 10,018,025 626,371 378,590 1,519,948,686 Financial bonds payable - 13,400,000 - - - - 13,400,000 Derivative financial instruments Interest rate swap options written - - - 235,068 26,272 - 261,340 Bond options written 647 4,825 - - - - 5,472 Cross currency swap contracts - - 505,880 463,727 187,968 - 1,157,575 (excluding the notional principal) Interest rate related contracts (interest rate swaps and asset 2,728,891 3,361,746 250,107 6,264 3,467 63,808 6,414,283 swaps excluding the principal of bonds) Hedging Interest rate related contracts - - 1,318 - 265,347 - 266,665 (asset swaps excluding the principal of bonds) Total liabilities $519,086,200 $264,089,056 $961,378,840 $18,048,638 $1,109,425 $442,398 $1,764,154,557 Interest-rate-sensitivity gap $364,020,358 $393,912,508 ($806,162,091) $36,083,505 $22,301,395 $30,000,731 $40,156,406
114 2009 Annual Report
December 31, 2008 Financial instruments 1~30 days 31~90 days 91 days~1 year 1~3 years 3~5 years Over 5 years Total Assets Non-derivative financial Financial Information instruments Due from Central Bank $39,046,730 $3,516,425 $11,476,119 $16,156,909 $- $- $70,196,183 Call loans from and due from 54,039,865 26,714,824 6,146,363 47,739 - - 86,948,791 other banks Financial assets for trading 276,940 - - - - 678,002 954,942 purpose - bonds Financial assets designated for 21,540,054 780,885 657,267 1,179,168 480,668 268,519 24,906,561 trading purpose - bonds Bills discounted and loans (excluding non-performing 798,102,227 237,847,527 88,838,992 8,829,260 10,758,440 8,055,262 1,152,431,708 loans and allowance for doubtful accounts) Available-for-sale financial assets Bonds 2,933,531 7,402,805 7,877,006 10,206,036 15,501,998 1,322,695 45,244,071 Short-term bills 834,236 29,645 - - - - 863,881 Held-to-maturity financial assets 86,437,251 80,574,940 48,013,316 9,097,104 5,582,927 280,054 229,985,592 Debt instruments in non-active 3,200,380 - 185,000 - - - 3,385,380 market – bonds Derivative financial instruments Interest rate swap option held - - 31,867 42,288 193,981 - 268,136 Cross currency swap contracts 240,912 185,311 1,362 21,803 - - 449,388 (excluding the notional principal) Interest rate related contracts (interest rate swaps and asset 856,688 819,285 8,670,731 1,748 50,523 49,549 10,448,524 swaps excluding the principal of bonds) Futures trading - 56,085 - - - - 56,085 Hedging ------Interest rate related contracts Total assets $1,007,508,814 $357,927,732 $171,898,023 $45,582,055 $32,568,537 $10,654,081 $1,626,139,242
115 December 31, 2008 Financial instruments 1~30 days 31~90 days 91 days~1 year 1~3 years 3~5 years Over 5 years Total Liabilities Non-derivative financial instruments Due to Central Bank $174,214 $- $- $- $- $- $174,214 Call loans to and due to 53,310,566 42,060,010 21,676,289 49,908 - - 117,096,773 other banks Funds borrowed from Central Bank and other 45,067 - - - - - 45,067 banks Financial liabilities designated for trading 5,179,133 24,134,758 - 20,198,617 - - 49,512,508 purpose Bills and bonds payable under repurchase 7,327,247 4,724,425 707,873 - - - 12,759,545 agreements Deposits and remittances 356,586,362 140,896,684 876,265,296 10,985,497 18,843 875 1,384,753,557 Financial bonds payable 1,500,000 13,400,000 - - - - 14,900,000 Derivative financial instruments Interest rate swap - - 17,426 52,086 386,864 - 456,376 options written Cross currency swap contracts (excluding the - 14,768 - 200,600 151,496 - 366,864 notional principal) Interest rate related contracts (interest rate swaps and asset swaps 995,157 876,897 7,589,587 4,794 - - 9,466,435 excluding the principal of bonds) Hedging Interest rate related contracts (asset swaps - - - 5,218 - 366,762 371,980 excluding the principal of bonds) Total liabilities $425,117,746 $226,107,542 $906,256,471 $31,496,720 $557,203 $367,637 $1,589,903,319 Interest-rate-sensitivity $582,391,068 $131,820,190 ($734,358,448) $14,085,335 $32,011,334 $10,286,444 $36,235,923 gap
116 2009 Annual Report
b. Effective interest rates (except financial assets at fair value through profit or loss) As of December 31, 2009 and 2008, the effective interest rates for financial instruments held or issued by FCB were as follows: December 31, 2009
Financial instruments NTD USD GBP SGD CAD JPY EUR AUD Financial Information Available-for-sale financial assets Government bonds 1.68% 3.26% 4.32% - - - - - Financial bonds - 1.19% - - 0.88% 1.05% 1.05% 4.63% Corporate bonds 1.80% 0.96% ------Short-term bills - - - - 0.93% - - - Held-to-maturity financial assets Government bonds 1.18% 1.60% ------Financial bonds 2.53% 0.66% - - - - 1.28% 4.90% Corporate bonds 2.07% 0.25% ------Short-term bills - - - 0.54% - - - - Loans and advances Short-term loans 1.84% 3.02% ------Mid-term loans 1.73% 2.29% ------Long-term loans 1.91% 2.96% ------Financial bonds payable 2.30% ------Deposits 0.73% 0.69% ------
December 31, 2008 Financial instruments NTD USD HKD SGD CAD JPY EUR AUD Available-for-sale financial assets Government bonds 2.44% 2.60% 3.11% - - - - - Financial bonds 1.88% 3.03% 2.43% - - 0.72% 5.64% 5.63% Corporate bonds 2.01% 2.39% - 2.22% - - - - Short-term bills 2.92% - - - 2.79% - - - Held-to-maturity financial assets Government bonds 2.18% 4.77% ------Financial bonds 2.61% 2.75% - - - - 5.50% - Corporate bonds 2.33% 1.44% ------Short-term bills - - - 1.40% - - - - Loans and advances Short-term loans 3.29% 4.27% ------Mid-term loans 3.11% 3.98% ------Long-term loans 3.43% 4.24% ------Financial bonds payable 2.36% ------Deposits 1.40% 2.27% ------
117 FS and its subsidiaries A) Credit risk Financial instruments held by FS and its subsidiaries may be exposed to losses if counterparties are not able to fulfill their obligations at the maturity date. FS deposits its cash in different financial institutions to control risk. Financial assets at fair value through profit or loss such as bond investments held by FS are purchase of government bonds and OTC corporate bonds with a good credit rating. The maximum exposure risk of the financial assets is for those with the positive fair value at the balance sheet date. FS and its subsidiaries always pre-evaluate the counterparty’s credit and updates periodically. It predetermines the credit limit of each counterparty to control credit limit. Thus, no significant credit risk is expected. Besides, FS does not offer any financial guarantees. B) Market risk a. FS holds a short position after issuing warrants. Such a position has the potential market risk that warrant holders may exercise such warrants before maturity arising from changes in fair value of the underlying securities. Based on the conservatism principle, FS reduces such risk by hedging strategies. b. FS undertake bond option transactions. Premium for the bond options are collected/paid from/to counterparties on contract date; interests for the bond options are collected/paid from/to counterparties or settled by substance on settlement date or maturity date. The return at maturity may fluctuate based on changes in interest rates. The purpose is to earn price spread arising from fluctuations of interest rates. c. FS and its subsidiaries undertake futures transactions of index options and stock index options in the domestic futures market. Prices of those futures fluctuate with the stock market. FS has set and complied with a stop-loss point, so it does not expect significant market risk. d. FS undertakes bond option transactions, and its main risk is change in values of options arising from change in market interest rate. The Company hedges options and set up a stop-loss point to control the risk; loss is controlled under the predetermined limit, so it does not expect significant market risk. e. Financial assets held by FS and its subsidiaries for trading purposes are stocks listed on the Taiwan Stock Exchange or the GreTai Securities Market, open-end funds, convertible corporate bonds, government bonds, OTC corporate bonds and financial bonds. Values of those assets fluctuate with the market interest rate and stock price. FS controls the market risk by position limit management, an investment review, and a stop- loss mechanism. C) Cash flow risk arising from changes in interest rates FS’s borrowings are renewable loans or short-term commercial paper. Future cash flows of those borrowings may fluctuate with the market interest rate, and thus it exposes FS to the cash flow risk arising from change in interest rates. D) Liquidity risk FS and its subsidiaries have no liquidity risk arising from insolvency due to its sufficient working capital. There is no active market or limited trade volume for certain financial instruments such as unlisted stocks, corporate bonds and financial bonds held by FS, which result in liquidity risk of FS. However, FS and its subsidiaries do not expect to dispose such investments in short-term and have sufficient working capital; there is no significant cash flow risk.
FSIT A) Market risk FSIT engages in beneficiary certificate transactions, whose primary market risk comes from price changes in those instruments. FSIT has no significant market risk, as each mutual fund has set up a stop-loss point and its changes in the fair value are controlled under the predetermined limit. B) Credit risk All counterparties of FSIT are mutual funds managed by FSIT. The possibility of those counterparties to default is insignificant, as those funds have offer prices in an open market. Book value of financial assets with credit risk held by FSIT can reflect credit exposures after deducting a proper valuation allowance, and thus the credit exposure information is not separately disclosed. FSIT does not provide financial guarantees for anyone. C) Liquidity risk FSIT has no liquidity risk arising from insolvency due to its sufficient working capital. There is an active market for open-end beneficiary certificates held by FSIT, so those certificates can be sold at fair value promptly. D) Cash flow risk arising from changes in interest rates FSIT has no cash flow risk arising from changes in interest rates, since it does not hold any interest-rate-linked products.
118 2009 Annual Report
First-Aviva Life Insurance (1) Interest rate risk The following table summarizes the maturities of FALI’s financial instruments at December 31, 2009: (In Thousands of New Taiwan Dollars)
December 31, 2009 Financial Information Less than one Due in 1~5 Due in 5~10 Over 10 years Total year years years Fixed interest rate Available-for-sale financial assets – $754,723 $3,130,135 $4,561,867 $701,119 $9,147,844 non-current Bond investments with no - 200,000 - - 200,000 active market – non-current $754,723 $3,330,135 $4,561,867 $701,119 $9,347,844 Floating interest rate Cash and cash equivalent $3,399,474 $- $- $- $3,399,474 Financial assets at fair value through profit or loss – non- 118 - - - 118 current Total $3,399,592 $- $- $- $3,399,592
December 31, 2008 Less than one Due in 1~5 Due in 5~10 Over 10 years Total year years years Fixed interest rate Available-for-sale financial assets – $100,775 $2,654,068 $5,185,722 $649,731 $8,590,296 non-current Floating interest rate Cash and cash equivalent $3,095,906 $- $- $ $3,095,906 Financial assets at fair value through profit or loss – non- 27 - - 27 current Total $3,095,933 $- $- $- $3,095,933
(2) Credit risk FALI has complied with Article 146 of Insurance Act and related internal control policy to deal with financial instruments and does not have material concentrations of credit risk with respect to any individual customer or counterparty. (3) Market price risk FALI is engaged in forward FX transactions to avoid foreign exchange risk of partial assets denominated in foreign currency, and accordingly, gain or loss arising from foreign exchange fluctuation will be offset by gain or loss arising from hedged items. As a result, the market price risk is not significant. (4) Liquidity risk, cash flow risk and future cash requirements Notional principals of forward swap contracts held by FALI are generally used as a basis to calculate receivables, payables, rather than actual payment or cash requirements. Actual settlement amounts generally do not exceed notional principals.
119 J. Fair value hedge and cash flow hedge A) Fair value hedge Fair values of fixed-rate loans held by overseas branches of FCB may fluctuate with changes in interest rates. FCB had assessed that the risk may be significant, so FCB hedged such risk by interest rate swap contracts. Designated hedging instruments Designated hedging Fair value Hedged item instruments December 31, 2009 December 31, 2008 Interest rate swap Fixed-rate loans ($266,665) ($371,980) contracts
B) Cash flow hedge Future cash flows of floating rate bonds issued by the Company may fluctuate due to changes in interest rates. Thus, those bonds may expose the Company to the cash flow risk. The Company has entered into interest rate swap contracts to hedge such risk, as the potential risk may be significant.
Designated hedging Expected period instruments for related Expected profit and loss Hedged item Designated Fair value period recognized in hedging December 31, for cash flows statement instruments 2009 of income Assets (Liabilities) Interest NT dollar-denominated corporate rate swap ($99,095) 2009~2011 2009~2011 bonds payable contracts
Designated hedging Expected period instruments for related Expected profit and loss Hedged item Designated Fair value period recognized in hedging December 31, for cash flows statement instruments 2008 of income Assets (Liabilities) Interest NT dollar-denominated corporate rate swap $27,003 2009~2011 2009~2011 bonds payable contracts Interest NT dollar-denominated corporate rate swap (60,779) 2009~2011 2009~2011 bonds payable contracts ($33,776) $99,095 and $33,776 were recognized directly in the stockholders’ equity as of the years ended December 31, 2009 and 2008, respectively.
120 2009 Annual Report
2) Capital adequacy ratio: A. Capital adequacy ratio of the First Group December 31, 2009 (In Thousands of New Taiwan Dollars) Items Ownership Minimum paid-in Financial Information percentage by the Eligible capital capital of the First Financial Holding of the First Group Group Company Company First Financial Holding Co., Ltd 100.00 $102,061,676 $103,546,344 Bank subsidiary 100.00 111,568,223 81,066,852 Securities subsidiary 100.00 5,635,829 2,417,984 Insurance subsidiary 51.00 659,896 151,087 Investment trust subsidiary 100.00 981,696 554,432 Venture capital subsidiary 100.00 968,405 482,265 Other subsidiaries 100.00 345,316 216,010 Deductible items (115,891,396) (99,598,001) Subtotal 106,329,645 88,836,973 Capital adequacy ratio of the First 119.69% Group Note 1: Capital adequacy ratio of the First Group = Net eligible capital / minimum paid-in capital
December 31, 2008 (In Thousands of New Taiwan Dollars) Items Ownership Minimum paid-in percentage by the Eligible capital capital of the First Financial Holding of the First Group Group Company Company First Financial Holding Co., Ltd 100.00 $101,447,203 $101,981,254 Bank subsidiary 100.00 113,336,980 83,351,350 Securities subsidiary 100.00 4,772,116 1,445,559 Insurance subsidiary 51.00 700,084 274,054 Investment trust subsidiary 100.00 971,656 510,099 Venture capital subsidiary 100.00 888,717 443,730 Other subsidiaries 100.00 334,827 195,978 Deductible items (114,023,511) (97,985,303) Subtotal 108,428,072 90,216,721 Capital adequacy ratio of the First Group 120.19% Note 1: Capital adequacy ratio of the First Group = Net eligible capital / minimum paid-in capital
121 B. As of December 31, 2009, the Company’s net eligible capital: (In Thousands of New Taiwan Dollars) Item Amount Common stocks $63,188,538 Unaccumulated permanent preferred stocks which meet tier 1 capital requirement - and unaccumulated subordinated debts with no maturity date Other preferred stocks and subordinated debts 1,000,000 Capital collected in advance (stock dividends to be distributed) - Additional paid-in capital 9,943,476 Legal reserve 5,507,532 Special reserve - Accumulated earnings 13,325,009 Equity adjustment number 9,098,452 Less: goodwill - deferred assets (1,331) treasury stocks - Total net eligible capital $102,061,676
As of December 31, 2008, the Company’s net eligible capital Item Amount Common stocks $61,647,354 Unaccumulated permanent preferred stocks which meet tier 1 capital requirement - and unaccumulated subordinated debts with no maturity date Other preferred stocks and subordinated debts 2,000,000 Capital collected in advance - Additional paid-in capital 9,943,476 Legal reserve 4,768,418 Special reserve - Accumulated earnings 15,908,748 Equity adjustment number 7,179,207 Less: goodwill - Deferred assets - treasury stocks - Total net eligible capital $101,447,203
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3) Disclosures of total amounts or ratios with respect to credit extensions, endorsements, or other transactions undertaken by a financial holding company and its subsidiaries for the same individual, the same related individual, or the same affiliated enterprises in accordance with Article 46 of the "Financial Holding Company Act": (Expressed in Million of New Taiwan Dollars) December 31, 2009 Financial Information Total amounts of Percentage to the credit extensions, Counterparties Company’s equity endorsements, or (%) (Note 3) other transactions 1. Same individual: National Treasury Agency $72,219 71.48 Taiwan power company 29,642 29.34 Taiwan High Speed Rail Corporation 24,861 24.60 General Political Warfare Bureau, M.N.D . 22,700 22.47 CHINA AIRLINES 11,569 11.45 Southern Taiwan Science Park 10,550 10.44 Chi Mei Corporation Co., Ltd. 9,299 9.20 Bureau of National Health Insurance 8,800 8.71 AU Optronics Co., Ltd. 8,612 8.52 CPC Corporation, Taiwan 8,000 7.92 Nan Ya Plastics Corporation 7,954 7.87 EVA Airways Corp. 6,428 6.36 Far Eastern Textile Ltd. 5,914 5.85 Formosa Chemicals & Fiber Corporation 5,912 5.85 Dragon Steel Corp. 5,650 5.59 Formosa Petrochemical Corporation 5,647 5.59 Urban Development Bureau, Kaohsiung City Government 5,000 4.95 Taipei County Government 4,000 3.96 Inotera Memories 3,980 3.94 Powertech Technology Inc. 3,539 3.50 US GOV BOND 3,334 3.30 Shang Cheng Steel Corp. 3,135 3.10 Powerchip Semiconductor Corp. 3,133 3.10 MELCO CROWN GAMING (MACAU) LIMITED 3,100 3.07 Windond Electronics Corp. 3,073 3.04 Total $276,051 273.20 2. Same group: Formosa Plastics Group $37,816 37.43 Continental Engineering Corporation 26,490 26.22 CHINA AIRLINES 15,536 15.38 Chi Mei Corporation 13,541 13.40 AUO Group 12,734 12.60 Far Eastern Group 11,176 11.06 China Steel Group 10,558 10.45 Evergreen Group 9,913 9.81 Walsin Lihwa Group 6,418 6.35 Yulon Group 6,007 5.95 Shilin Paper Industry. 5,590 5.53 TKG Group 5,578 5.52 PSC Group 5,164 5.11 Kingston Technology Group 4,698 4.65 Uni-President Group 4,670 4.62
123 December 31, 2009 Total amounts of Percentage to the credit extensions, Counterparties Company’s equity endorsements, or (%) (Note 3) other transactions UMC Group 4,074 4.03 Shang Shing Steel Group 3,724 3.69 Tatung Group 3,703 3.66 Foxconn Technology Group 3,406 3.37 Cheng Shin Tire Group 3,184 3.15 $193,980 191.98 Note 1:In accordance with Tai-Zhi-Zong (92) 0921000195, the financial holding company's subsidiaries' provision of business credit or endorsements to, or other transactions with, the same individual, the same related parties, or the same affiliated companies may be grouped into same individual, same related parties and same affiliated companies. Same related parties and same affiliated companies can be disclosed under the representative individual, company or group. Note 2:Disclosure of the same related parties in the above table is summarized by representative individual (representative person of institutional investor). Note 3:On December 31, 2009, the net book value in the above table totals to $101,040 million.
4) Significant impact arising from changes in government laws and regulations: None.
5) Information for discontinued operations: None.
6) Major operating assets or liabilities transferred from (or to) other financial institutions: None.
7) Allocation of expenses between the Company and its subsidiaries and among subsidiaries:
A. Transactions between the Company and its subsidiaries Please refer to Notes 5 and 11 9). B. Joint promotion of businesses In order to create synergies within the group and provide customers financial services in all aspects, the Company has continuously established other financial service desks (including banking service, securities trading service, and insurance service desks) in its banks and securities subsidiaries to provide customers one- stop-shopping services. C. Sharing of information The Company has established “Measures for Protection of Customers’ Information for First Financial Holding Co., Ltd and its Subsidiaries” in accordance with the “Financial Holding Company Act”, “Computer-Process Personal Data Protection Law” and the related regulations stipulated by the Financial Supervisory Commission and the Company is required to publish its “Measures for Protection of Customers’ Information” at its website. Customers also reserve the right to have their information withdrawn from the information sharing mechanism. D. Sharing of operating facilities or premises The Company’s subsidiaries have set up 233 cross-selling service desks, among which 190 of FCB branches have established insurance service desks, 19 of FCB branches have instituted securities trading service desks and 24 of banking service desks are installed in brokerage department of FS and Yuanlin Branch. E. Apportionment of revenues, costs, expenses, gains and losses Revenues, costs, expenses, gains and losses arising from the mutual use of business facilities and cross-sales between the Company’s subsidiaries are directly attributed to subsidiaries by nature of services.
8) Information for private placement securities: None.
124 2009 Annual Report
9) Financial information by business segments Information by business segments for the year ended December 31, 2009 was as follow: (In Thousands of New Taiwan Dollars) Investment Banking Securities Insurance Other Items trust Consolidated business business business business Financial Information business Net interest income $16,460,710 $341,806 $382 $277,653 ($140,041) $16,940,510 Net non-interest income 9,862,757 2,130,708 440,618 (133,356) 331,376 12,632,103 Net revenues 26,323,467 2,472,514 441,000 144,297 191,335 29,572,613 Provision for credit losses (10,620,806) - - - - (10,620,806) Provision for premiums - - - 36,813 - 36,813 reserve Operating expenses (13,798,109) (1,441,543) (267,061) (310,176) (166,997) (15,983,886) Net income from continuing operations 1,904,552 1,030,971 173,939 (129,066) 24,338 3,004,734 before income taxes Income tax benefit 38,428 (94,004) (1,097) (395) (258,803) (315,871) (expense) Net income (loss) from continuing operations $1,942,980 $936,967 $172,842 ($129,461) ($234,465) $2,688,863 after income taxes
125 Information by business segments for the year ended December 31, 2008 was as follow: (In Thousands of New Taiwan Dollars) Investment Banking Securities Insurance Other Items trust Consolidated business business business business business Net interest income $24,268,229 $418,459 $4,424 $143,793 ($105,362) $24,729,543 Net non-interest income 8,189,272 223,807 405,362 10,709,989 165,808 19,694,238 Net revenues 32,457,501 642,266 409,786 10,853,782 60,446 44,423,781 Provision for credit losses (7,129,966) - - - - (7,129,966) Provision for premiums - - - (11,026,688) - (11,026,688) reserve Operating expenses (15,103,253) (1,191,944) (260,643) (359,803) (195,160) (17,110,803) Net income from continuing operations 10,224,282 (549,678) 149,143 (532,709) (134,714) 9,156,324 before income taxes Income tax (expense) (2,045,667) (76,830) 33,161 (144) 10,411 (2,079,069) benefit Net income (loss) from continuing operations $8,178,615 ($626,508) $182,304 ($532,853) ($124,303) $7,077,255 after income taxes Note: Based on the classification of specific company’s business units, financial information by business segments should be listed individually.
10) Condensed financial statements of the Company and its subsidiaries: A. First Financial Holding Co., Ltd. First Financial Holding Co., Ltd. Condensed Balance Sheets December 31, 2009 and 2008 (Expressed In Thousands of New Taiwan Dollars) December 31, Assets 2009 2008 Cash and cash equivalents $2,830,919 $758,548 Investments in bills and bonds under resale agreements - 500,000 Receivables - net 1,055,990 1,889,123 Equity investments accounted for under the equity method – net 99,598,001 97,985,303 Other financial assets-net 3,918,105 3,945,110 Property, plant, and equipment – net 11,166 15,806 Intangible assets - net 18,067 28,813 Other assets - net 2,212 3,937 Total assets $107,434,460 $105,126,640
December 31, Liabilities And Stockholders’ Equity 2009 2008 Liabilities Payables $1,263,117 $608,633
126 2009 Annual Report
Corporate bonds payable 5,000,000 5,000,000 Accrued pension liabilities 6,872 7,085
Other financial liabilities 99,095 60,779 Financial Information Other liabilities 2,369 2,940 Total liabilities 6,371,453 5,679,437 Stockholders’ Equity Common stock 63,188,538 61,647,354 Additional paid-in capital 9,943,476 9,943,476 Retained earnings Legal reserve 5,507,532 4,768,418 Unappropriated earnings 13,325,009 15,908,748 Other stockholders’ equity Unrealized revaluation increments 5,059,317 5,183,916 Cumulative translation adjustments 27,936 49,915 Unrealized gain or loss on financial instruments 4,011,199 1,945,376 Total stockholders’ equity 101,063,007 99,447,203 Total liabilities and stockholders’ equity $107,434,460 $105,126,640
First Financial Holding Co., Ltd. Condensed Statements of Income For the years ended December 31, 2009 and 2008 (Expressed In Thousands of New Taiwan Dollars) Accounts 2009 2008 Revenues Investment income accounted for under the equity method $3,201,995 $8,512,707 Other revenues 258,325 279,534 Net revenues 3,460,320 8,792,241 Expenses and losses Investment losses accounted for under the equity method (93,741) (1,056,551) Operating expenses (187,994) (213,981) Other expenses and losses (140,854) (140,973) Total expenses and losses (422,589) (1,411,505) Income from continuing operations before income taxes 3,037,731 7,380,736 Income tax (expense) benefit (258,804) 10,410 Income from continuing operations after income taxes 2,778,927 7,391,146 Net income $2,778,927 $7,391,146
Earnings Per Share (in NT dollars) Continuing operations (Before Taxes) $0.48 $1.17 Continuing operations (After Taxes) $0.44 $1.17 Net income (After Taxes) $0.44 $1.17 127 First Financial Holding Co., Ltd. Condensed Statements of Changes In Stockholders’ Equity For The Year Ended December 31, 2008 (Expressed In Thousands of New Taiwan Dollars) Additional Capital stock Retained earnings Other stockholders’ equity paid-in capital Unrealized gain or loss on financial instruments Paid-in capital Unrealized gain or loss on Unrealized gain Cumulative Net loss not Unrealized Common Unappropriated For Year Ended December 31, 2008 in excess of Legal reserve available-for-sale financial or loss on cash flow translation recognized revaluation Total stock earnings par value assets hedges adjustments as pension cost increment Balance, January 1, 2008 $60,916,358 $9,943,476 $3,513,450 $20,979,410 $3,974,236 $174,151 $276,274 ($9,258) $5,298,124 $105,066,221 Earnings distribution for 2007 Stock dividends 730,996 - - (730,996) ------Legal reserve appropriated - - 1,254,968 (1,254,968) ------Bonus to employees - - - (7,116) - - - - - (7,116) Bonus to directors and supervisors - - - (112,947) - - - - - (112,947) Cash dividends paid - - - (10,355,781) - - - - - (10,355,781) Adjustments of unrealized revaluation increment from equity ------(114,208) (114,208) investments accounted for under the equity method Adjustments of unrealized gain or loss on available-for-sale financial - - - - (1,995,084) - - - - (1,995,084) assets from equity investments accounted for under the equity method Adjustments of cumulative translation adjustments from - - - (226,359) - - (226,359) equity investments accounted for under the equity method - - - Adjustments of net loss not recognized as pension cost from ------9,258 - 9,258 equity investments accounted for under the equity method Adjustments of unrealized gain or loss on cash flow hedges - - - - - (207,927) - - - (207,927) Net income for the year ended December 31, 2008 - - - 7,391,146 - - - - - 7,391,146 Balance, December 31, 2008 $61,647,354 $9,943,476 $4,768,418 $15,908,748 $1,979,152 ($33,776) $49,915 $- $5,183,916 $99,447,203
First Financial Holding Co., Ltd. Condensed Statements of Changes In Stockholders’ Equity For The Year Ended December 31, 2009 (Expressed In Thousands of New Taiwan Dollars) Additional Capital stock Retained earnings Other stockholders’ equity paid-in capital Unrealized gain or loss on financial instruments Paid-in capital Unrealizedgain or loss on Unrealized gain Cumulative Net loss not Unrealized Unappropriated For The Year Ended December 31, 2009 Common Stock in excess of par Legal reserve available-for-sale financial or loss on cash flow translation recognized revaluation Total earnings value assets hedges adjustments as pension cost increment Balance, January 1, 2009 $61,647,354 $9,943,476 $4,768,418 $15,908,748 $1,979,152 ($33,776) $49,915 $- $5,183,916 $99,447,203 Earnings distribution for 2008 Stock dividends 1,541,184 - - (1,541,184) ------Legal reserve appropriated - - 739,114 (739,114) ------Cash dividends paid - - - (3,082,368) - - - - - (3,082,368) Adjustments of unrealized revaluation increment from equity ------(124,599) (124,599) investments accounted for under the equity method Adjustments of unrealized gain or loss on available-for-sale financial assets - - - - 2,131,142 - - - - 2,131,142 from equity investments accounted for under the equity method Adjustments of cumulative translation adjustments from equity ------(21,979) - - (21,979) investments accounted for under the equity method Adjustments of unrealized gain or loss on cash flow hedges - - - - - (65,319) - - - (65,319) Net income for the year ended December 31, 2009 - - - 2,778,927 - - - - - 2,778,927 Balance, December 31, 2009 $63,188,538 $9,943,476 $5,507,532 $13,325,009 $4,110,294 ($99,095) $27,936 $- $5,059,317 $101,063,007
128 2009 Annual Report
First Financial Holding Co., Ltd. Condensed Statements of Changes In Stockholders’ Equity For The Year Ended December 31, 2008 (Expressed In Thousands of New Taiwan Dollars) Additional Capital stock Retained earnings Other stockholders’ equity
paid-in capital Financial Information Unrealized gain or loss on financial instruments Paid-in capital Unrealized gain or loss on Unrealized gain Cumulative Net loss not Unrealized Common Unappropriated For Year Ended December 31, 2008 in excess of Legal reserve available-for-sale financial or loss on cash flow translation recognized revaluation Total stock earnings par value assets hedges adjustments as pension cost increment Balance, January 1, 2008 $60,916,358 $9,943,476 $3,513,450 $20,979,410 $3,974,236 $174,151 $276,274 ($9,258) $5,298,124 $105,066,221 Earnings distribution for 2007 Stock dividends 730,996 - - (730,996) ------Legal reserve appropriated - - 1,254,968 (1,254,968) ------Bonus to employees - - - (7,116) - - - - - (7,116) Bonus to directors and supervisors - - - (112,947) - - - - - (112,947) Cash dividends paid - - - (10,355,781) - - - - - (10,355,781) Adjustments of unrealized revaluation increment from equity ------(114,208) (114,208) investments accounted for under the equity method Adjustments of unrealized gain or loss on available-for-sale financial - - - - (1,995,084) - - - - (1,995,084) assets from equity investments accounted for under the equity method Adjustments of cumulative translation adjustments from - - - (226,359) - - (226,359) equity investments accounted for under the equity method - - - Adjustments of net loss not recognized as pension cost from ------9,258 - 9,258 equity investments accounted for under the equity method Adjustments of unrealized gain or loss on cash flow hedges - - - - - (207,927) - - - (207,927) Net income for the year ended December 31, 2008 - - - 7,391,146 - - - - - 7,391,146 Balance, December 31, 2008 $61,647,354 $9,943,476 $4,768,418 $15,908,748 $1,979,152 ($33,776) $49,915 $- $5,183,916 $99,447,203
First Financial Holding Co., Ltd. Condensed Statements of Changes In Stockholders’ Equity For The Year Ended December 31, 2009 (Expressed In Thousands of New Taiwan Dollars) Additional Capital stock Retained earnings Other stockholders’ equity paid-in capital Unrealized gain or loss on financial instruments Paid-in capital Unrealizedgain or loss on Unrealized gain Cumulative Net loss not Unrealized Unappropriated For The Year Ended December 31, 2009 Common Stock in excess of par Legal reserve available-for-sale financial or loss on cash flow translation recognized revaluation Total earnings value assets hedges adjustments as pension cost increment Balance, January 1, 2009 $61,647,354 $9,943,476 $4,768,418 $15,908,748 $1,979,152 ($33,776) $49,915 $- $5,183,916 $99,447,203 Earnings distribution for 2008 Stock dividends 1,541,184 - - (1,541,184) ------Legal reserve appropriated - - 739,114 (739,114) ------Cash dividends paid - - - (3,082,368) - - - - - (3,082,368) Adjustments of unrealized revaluation increment from equity ------(124,599) (124,599) investments accounted for under the equity method Adjustments of unrealized gain or loss on available-for-sale financial assets - - - - 2,131,142 - - - - 2,131,142 from equity investments accounted for under the equity method Adjustments of cumulative translation adjustments from equity ------(21,979) - - (21,979) investments accounted for under the equity method Adjustments of unrealized gain or loss on cash flow hedges - - - - - (65,319) - - - (65,319) Net income for the year ended December 31, 2009 - - - 2,778,927 - - - - - 2,778,927 Balance, December 31, 2009 $63,188,538 $9,943,476 $5,507,532 $13,325,009 $4,110,294 ($99,095) $27,936 $- $5,059,317 $101,063,007
129 First Financial Holding Co., Ltd. Condensed Statements of Cash Flows For the years ended December 31, 2009 and 2008 (Expressed In Thousands of New Taiwan Dollars) Accounts 2009 2008 Cash Flows From Operating Activities Net income $2,778,927 $7,391,146 Adjustments to reconcile net income to net cash provided by operating activities: Other adjustments not affecting cash flows Depreciation and other amortization expenses 16,485 9,897 Loss on abandonment of property, plant, and equipment - 120 Income from equity method investments recognized less than (in excess 3,371,866 (809,497) of) cash dividends received from the equity method investments Changes in assets and liabilities Decrease in investments in bills and bonds under resale agreements 500,000 2,350,000 Decrease (increase) in receivables 833,133 (307,307) Decrease (increase) in other assets and other financial assets 1,488 (844) Increase in payables 654,484 204,918 (Decrease) increase in accrued pension liabilities (213) 1,906 Net cash provided by operating activities 8,156,170 8,840,339 Cash Flows From Investing Activities Increase in equity investments accounted for under the equity method (3,000,000) - Acquisition of property, plant and equipment (860) (13,959) Purchase of intangible assets - (19,154) Net cash used in investing activities (3,000,860) (33,113) Cash Flows From Financing Activities Cash dividends paid (3,082,368) (10,355,781) Bonus to employees and directors and supervisors - (120,063) (Decrease) increase in other liabilities (571) 1,746 Net cash used in financing activities (3,082,939) (10,474,098) Net decrease in cash and cash equivalents 2,072,371 (1,666,872) Cash and cash equivalents at beginning of year 758,548 2,425,420 Cash and cash equivalents at end of year $2,830,919 $758,548 Supplemental Disclosures of Cash Flow Information Cash paid during the year for interest $140,841 $140,859 Cash paid during the year for income tax $1,605 $173,697
130 2009 Annual Report
B. FCB FCB Condensed Balance Sheets December 31, 2009 and 2008
(Expressed In Thousands of New Taiwan Dollars) Financial Information December 31, Assets 2009 2008 Cash and cash equivalents $20,912,258 $25,924,642 Due from the Central Bank and call loans to other banks 205,138,294 155,603,264 Financial assets at fair value through profit or loss – net 29,756,046 53,304,284 Receivables – net 42,188,668 40,514,459 Bills discounted and loans – net 1,096,010,284 1,160,541,587 Available-for-sale financial assets – net 64,995,772 51,985,007 Held-to-maturity financial assets – net 419,430,881 229,985,592 Equity investments accounted for under the 2,305,287 2,338,695 equity method – net 5,207,910 9,311,714 Other financial assets – net 22,793,664 23,208,338 Property, plant and equipment – net 328,778 480,176 Intangible assets – net 12,362,613 12,343,169 Other assets – net Total assets $1,921,430,455 $1,765,540,927 Liabilities December 31, And Stockholders’ Equity 2009 2008 Liabilities Due to the Central Bank and other banks $169,399,153 $117,270,987 Funds borrowed from Central Bank and other banks 72,296 45,067 Financial liabilities at fair value through profit or loss 54,600,071 74,910,421 Bills and bonds payable under repurchase agreements 9,682,738 12,759,545 Payables 54,562,291 60,912,403 Deposits and remittances 1,519,948,686 1,384,753,557 Financial bonds payable 13,400,000 14,900,000 Accrued pension liabilities 1,803,944 1,687,722 Other financial liabilities 485,858 624,352 Other liabilities 7,562,529 8,219,983 Total liabilities 1,831,517,566 1,676,084,037 Stockholders’ Equity Common stock 49,490,000 48,290,000 Additional paid-in capital 10,460,326 8,660,326 Retained earnings Legal reserve 15,628,365 12,938,828 Unappropriated earnings 5,314,482 12,225,947 Other stockholders’ equity Unrealized revaluation increments 5,059,317 5,183,916 Cumulative translation adjustments 73,372 82,347 Unrecognized gain or loss on financial instruments 3,887,027 2,075,526 Total stockholders’ equity 89,912,889 89,456,890 Total liabilities and stockholders’ equity $1,921,430,455 $1,765,540,927
131 FCB Condensed Statements Of Income For the years ended December 31, 2009 and 2008 (Expressed In Thousands of New Taiwan Dollars) Accounts 2009 2008 Net interest income $ 16,010,760 $23,951,493 Net non-interest income 10,431,915 8,627,925 Net revenues 26,442,675 32,579,418 Prevision for credit losses (10,620,806) (7,129,966) Operating expenses (13,806,639) (14,438,662) Income from continuing operations before income taxes 2,015,230 11,010,790 Income tax benefit (expense) 38,428 (2,045,667) Income from continuing operations after income taxes 2,053,658 8,965,123 Net income $2,053,658 $8,965,123 Earnings per share (in NT dollars) $0.41 $2.28 Continuing operations (before taxes) Continuing operations (after taxes) $0.42 $1.86 Net income(after taxes) $0.42 $1.86
C. FS and its subsidiaries FS And Its Subsidiaries Condensed Consolidated Balance Sheets December 31, 2009 and 2008 (Expressed In Thousands of New Taiwan Dollars) December 31, Assets 2009 2008 Current assets $16,283,565 $13,097,204 Mutual funds and investments 6,267 7,746 Property, plant and equipment - net 294,997 278,317 Intangible assets – net 720 48 Other assets – net 971,740 865,795 Debit items for securities consignment trading – net 6,499 33,789 Total assets $17,563,788 $14,282,899 Liabilities And December 31, Stockholders’ Equity 2009 2008 Liabilities Current liabilities $10,036,749 $7,766,839 Other liabilities 365,308 247,326 Total liabilities 10,402,057 8,014,165 Stockholders’ Equity Common stock 5,900,000 5,900,000 Additional paid-in capital 5,600 5,600 Retained earnings 1,301,567 389,805 Other stockholders’ equity (45,436) (26,671) Total stockholders’ equity 7,161,731 6,268,734 Total liabilities and stockholders’ equity $17,563,788 $14,282,899
132 2009 Annual Report
FS And Its Subsidiaries Condensed Consolidated Statements of Income For the years ended December 31, 2009 and 2008
(Expressed In Thousands of New Taiwan Dollars) Financial Information Accounts 2009 2008 Revenues $2,829,299 $2,206,478 Expenses (1,823,533) (2,766,814) Income (loss) from continuing operations before 1,005,766 (560,336) income taxes Income tax expenses (94,004) (76,830) Income (loss) from continuing operations after income taxes 911,762 (637,166) Net income (loss) $911,762 ($637,166)
Earnings per share (in NT dollars) $1.70 ($0.95) Continuing operations (before taxes) Continuing operations (after taxes) $1.55 ($1.08) Net income (loss) (after taxes) $1.55 ($1.08)
D. FSIT FSIT Condensed Balance Sheets December 31, 2009 and 2008 (Expressed In Thousands of New Taiwan Dollars) December 31, 2009 2008 Assets Current assets $386,623 $303,659 Equity investments accounted for under the equity method - 11,402 Property, plant and equipment – net 518,254 522,261 Other assets 203,987 215,842 Total assets $1,108,864 $1,053,164 Liabilities And December 31, Stockholders’ Equity 2009 2008 Liabilities Current liabilities $102,984 $56,125 Other liabilities 24,184 25,383 Total liabilities 127,168 81,508 Stockholders’ Equity Common stock 600,000 600,000 Retained earnings 371,868 376,297 Other stockholders’ equity 9,828 (4,641) Total stockholders’ equity 981,696 971,656 Total liabilities and $1,108,864 $1,053,164 stockholders’ equity
133 FSIT Condensed Statements of Income For The Years December 31, 2009 and 2008 (Expressed In Thousands of New Taiwan Dollars) Account 2009 2008 Operating revenues $435,191 $448,192 Operating expenses (288,373) (275,593) Operating income 146,818 172,599 Non-operating income and gain 15,226 12,252 Non-operating expenses and losses (9,418) (50,658) Income from continuing operations before income taxes 152,626 134,193 Income tax expenses (1,097) 33,161 Income from continuing operations after income taxes 151,529 167,354 Net income $151,529 $167,354 Earnings per share (in NT dollars) Continuing operations( $2.54 $2.24 before taxes) Continuing operations (after taxes) $2.53 $2.79 Net income (after taxes) $2.53 $2.79 E. First-Aviva Life Insurance Co., Ltd. FALI Condensed Balance Sheets December 31, 2009 and 2008 (Expressed In Thousands of New Taiwan Dollars) December 31, 2009 2008 Current assets $ 4,371,954 $3,675,453 Loans 23,352 2,493 Mutual funds and investments 9,387,383 8,574,655 Property, plant and equipment – net 30,259 44,080 Intangible assets 20,917 30,618 Other assets 3,293,599 880,765 Total assets $17,127,464 $13,208,064
134 2009 Annual Report
December 31, 2009 2008 Current liabilities $1,581,642 $340,072
Reserves 10,990,136 11,026,694 Financial Information Other liabilities 2,908,695 514,868 Total liabilities 15,480,473 11,881,634 Common stock 2,250,000 2,250,000 Retained earnings (956,969) (773,163) Other stockholders’ equity 353,960 (150,407) Total stockholders’ equity 1,646,991 1,326,430 Total liabilities and $17,127,464 $13,208,064 stockholders’ equity
FALI Condensed Statements of Income For the years ended December 31, 2009 and 2008 (Expressed In Thousands of New Taiwan Dollars) Account 2009 2008 Operating revenues $7,350,519 $12,181,725 Operating costs (7,221,816) (12,461,462) Operating gross margin 128,703 (279,737) Operating expense (314,579) (361,579) Net operating loss (185,876) (641,316) Non-operating income and gain 2,466 866 Loss from continuing operations before income taxes (183,410) (640,450) Income tax expense (395) (144) Loss from continuing operations after income taxes (183,805) (640,594) Net loss ($183,805) ($640,594) Loss per share (In NT dollar) Continuing operations (before taxes) ($0.82) ($2.85) Continuing operations (after taxes) ($0.82) ($2.85) Net loss (after tax) ($0.82) ($2.85)
135 11) Profitability, asset quality, management information, and liquidity and market risk sensitivity of subsidiaries: FFHC: December 31, 2009 2008 Before taxes 2.86 6.85 Return on total assets (%) After taxes 2.61 6.86 Before taxes 3.03 7.22 Return on stockholders’ equity (%) After taxes 2.77 7.23 Net profit margin ratio (%) 86.15 84.06 Note 1: Return on total assets = Income before (after) income taxes / average total assets. Note 2: Return on stockholders’ equity = Income before (after) income taxes / average stockholders’ equity. Note 3: Net profit margin ratio = Income after income taxes / net revenues. Note 4: The term “Income before (after) income taxes” means net income from January 1 to the balance sheet date of the reporting period.
Consolidated: December 31, 2009 2008 Before taxes 0.16 0.53 Return on total assets (%) After taxes 0.14 0.41 Before taxes 2.98 8.88 Return on stockholders’ equity (%) After taxes 2.66 6.86 Net profit margin ratio (%) 9.09 15.93 Note 1:Return on total assets = Income before (after) income taxes / average total assets. Note 2:Return on stockholders’ equity = Income before (after) income taxes / average stockholders’ equity. Note 3:Net profit margin ratio = Income after income taxes / net revenues. Note 4:The term “Income before (after) income taxes” means net income from January 1 to the balance sheet date of the reporting period.
FCB: A.Profitability December 31, 2009 2008 Before taxes 0.11 0.64 Return on total assets (%) After taxes 0.11 0.52 Before taxes 2.25 12.29 Return on stockholders’ equity (%) After taxes 2.29 10.01 Net profit margin ratio (%) 7.77 27.52 Note 1: Return on total assets = Income before (after) income taxes / average total assets. Note 2: Return on stockholders’ equity = Income before (after) income taxes / average stockholders’ equity. Note 3: Net profit margin ratio = Income after income taxes / net revenues. Note 4: The term “Income before (after) income taxes” means net income from January 1 to the balance sheet date of the reporting period.
136 2009 Annual Report
B. Asset quality (A) Non-performing loans and assets quality (Expressed in thousands of New Taiwan Dollars; %) December 31, 2009
Non- Financial Information Non- Allowance Coverage performing Business\Items performing Gross loans for doubtful ratio loan ratio loans(Note 1) accounts (Note 3) (%) (Note 2) Corporate Secured loans $5,211,477 $310,833,291 1.68% $4,148,375 79.60% Banking Unsecured loans 5,771,773 465,201,727 1.24% 5,771,773 100.00% Residential mortgage 3,437,861 325,395,361 1.06% 2,274,375 66.16% loans(Note 4) Cash card services 57 53,047 0.11% 535 938.60% Small amount of credit Consumer 163,424 3,314,328 4.93% 163,424 100.00% Banking loans(Note 5) Secured 10,271 3,218,871 0.32% 7,736 75.32% Others loans (Note 6) Unsecured 20,296 380,172 5.34% 20,295 100.00% loans Gross loan business 14,615,159 1,108,396,797 1.32% 12,386,513 84.75% Non- Non- Balance of Allowance performing Coverage performing accounts for doubtful loans ratio ratio loans receivable accounts (%) Credit card services 3,373 3,515,475 0.10% 10,529 312.16% Without recourse factoring (Note 7) - 1,970,103 - 788 -
December 31, 2008 Non- Non- Allowance Coverage performing Business\Items performing Gross loans for doubtful ratio loan ratio loans(Note 1) accounts (Note 3) (%) (Note 2) Corporate Secured loans $5,974,038 $293,077,604 2.04% $1,828,995 30.62% Banking Unsecured loans 6,566,270 551,289,506 1.19% 6,566,270 100.00% Residential mortgage 4,103,700 316,689,273 1.30% 704,589 17.17% loans(Note 4) Cash card services 340 90,208 0.38% 700 205.88% Small amount of credit Consumer 228,464 4,292,039 5.32% 228,464 100.00% Banking loans(Note 5) Secured 10,563 3,951,133 0.27% 2,947 27.90% Others loans (Note 6) Unsecured 32,560 516,349 6.31% 32,560 100.00% loans Gross loan business 16,915,935 1,169,906,112 1.45% 9,364,525 55.36% Non- Non- Balance of Allowance performing Coverage performing accounts for doubtful loans ratio ratio loans receivable accounts (%) Credit card services $17,350 $3,319,844 0.52% $23,065 132.94% Without recourse factoring (Note 7) - 1,723,175 - 1,098 -
137 (A-1) Non-performing loans and overdue receivables exempted from reporting to the competent authority December 31, 2009 December 31, 2008 Total amount Total amount Total amount of Total amount of of overdue of overdue non-performing non-performing receivables receivables loans exempted loans exempted exempted from exempted from from reporting to from reporting to reporting to reporting to the competent the competent the competent the competent authority authority authority authority Amounts exempted from reporting to the competent 26,511 193,571 28,619 251,761 authority under debt negotiation and the contract(Note 8) Perform in accordance with debt liquidation program and 31,842 82,178 190 12,407 restructuring program (Note 9) Total 58,353 275,749 28,809 264,168 Note 1: The amount recognized as non-performing loans is in compliance with the “Regulations Governing the Procedures for Banking Institutions to Evaluate Assets and Deal with Non-performing/Non-accrual Loans”. The amount included in overdue accounts for credit cards is in compliance with the Banking Bureau (4) Letter No. 0944000378 dated July 6, 2005. Note 2: Non-performing loan ratio=non-performing loans/gross loans. Non-performing loan ratio of credit cards=Non-performing loan ratio of credit cards /balance of accounts receivable. Note 3: Coverage ratio for loans=allowance for doubtful accounts of loans/non-performing loans. Coverage ratio for accounts receivable of credit cards=allowance for doubtful accounts for accounts receivable of credit cards/ Non-performing loan ratio of credit cards. Note 4: For residential mortgage loans, the borrower provides his/her (or spouse’s or minor child’s) house as collateral in full and mortgages it to the financial institution for the purpose of obtaining funds to purchase or add improvements to own house. Note 5: Small amount of credit loans apply to the norms of the Banking Bureau (4) Letter No. 09440010950 dated December 19, 2005, excluding credit card and cash card services. Note 6: Other consumer banking is specified as secured or unsecured consumer loans other than residential mortgage loans, cash card services and small amount of credit loans, and excluding credit card services. Note 7: Pursuant to the Banking Bureau (5) Letter No. 094000494 dated July 19, 2005, the amount of without recourse factoring will be recognized as overdue accounts within three months after the factor or insurance company resolves not to compensate the loss. Note 8: The Bank disclosed the total amount of non- performing loans and overdue receivables exempted from reporting to the competent authority as debt negotiation in accordance with the Explanatory Letter Jin- Guan-Yin (1) No. 09510001270 of the FSC dated April 25, 2006. Note 9: The Bank disclosed the total amount of non- performing loans and overdue receivables exempted from reporting to the competent authority as debt liquidation program and restructuring program in accordance with the Explanatory Letter Jin-Guan-Yin (1) No. 09700318940 of the FSC dated September 15, 2008.
138 2009 Annual Report
C. Profile of concentration of credit risk and credit extensions December 31, 2009 (In Thousands of New Taiwan Dollars) Total Total Name of enterprise outstanding Ranking outstanding Financial Information group Code Type of industry loan amount/ (Note 1) loan amount (Note 2) net worth of the (Note 3) current year (%) Plastic Sheets, Pipes and Tubes 1 Formosa Plastics Group 2201 $30,893,488 35.85% Manufacturing 2 China Airlines 5101 Civil Air Transportation 13,625,016 15.81% Liquid Crystal Panel and 3 CHIMEI Group 2641 13,528,050 15.70% Components Manufacturing Liquid Crystal Panel and 4 AU Optronics Corp. 2641 12,175,625 14.13% Components Manufacturing 5 China Steel 2411 Iron and Steel Smelting 10,111,672 11.73% 6 Far Eastern Group 1111 Yarn Spinning Mills, Cotton 9,820,090 11.39% 7 Evergreen Group 5101 Civil Air Transportation 8,837,453 10.25% 8 Walsin Lihwa 2611 Integrated Circuits Manufacturing 6,416,960 7.45% 9 Yulon Motors Group 6496 Private Finance 5,964,064 6.92% Wholesale of Other Household 10 SHIHLIN Paper Group 4569 5,937,589 6.89% Appliance and Supplies
December 31, 2008 (In Thousands of New Taiwan Dollars) Total Total outstanding Ranking Name of enterprise outstanding Code Type of industry loan amount/ (Note 1) group (Note 2) loan amount net worth of the (Note 3) current year (%) Plastic Sheets, Pipes and Tubes 1 Formosa Plastics Group 2201 $25,881,688 31.29% Manufacturing Liquid Crystal Panel and 2 CHIMEI Group 2641 15,382,982 18.60% Components Manufacturing 3 China Airlines 5101 Civil Air Transportation 13,907,033 16.82% 4 China Steel 2411 Iron and Steel Smelting 11,531,781 13.94% Liquid Crystal Panel and 5 AU Optronics Corp. 2641 11,132,956 13.46% Components Manufacturing 6 Far Eastern Group 1111 Yarn Spinning Mills, Cotton 9,443,429 11.42% Powerchip 7 Semiconductor 2611 Integrated Circuits Manufacturing 7,248,234 8.76% Corporation 8 Walsin Lihwa 2611 Integrated Circuits Manufacturing 6,223,467 7.52% 9 Evergreen Group 5101 Civil Air Transportation 6,197,691 7.49% 10 Yulon Motors Group 6496 Private Finance 4,421,763 5.35% Note 1: Ranking the top ten enterprise groups other than government and government enterprise according to their total outstanding of loan amount. Note 2: Definition of enterprise group is based on the Article 6 of Supplementary Provisions to the Taiwan Stock Exchange Corporation Rules for Review of Securities Listings. Note 3: Total outstanding of loan amount is the sum of balances of all types of loans (including import negotiation, export negotiation, bills discounted, overdraft, short-term unsecured loan, short-term secured loan, margin loans receivable, medium-term unsecured loan, medium-term secured loan, long-term unsecured loan, long-term secured loan and overdue loan), purchases in remittances, without recourse factoring, acceptance receivable and guarantees.
139 D. Structure analysis of time to maturity A) Structure analysis of NTD time to maturity December 31, 2009 (Expressed In Thousands of New Taiwan Dollars) Total 1~30 days 31~90 days 91~180 days 181 days~1 year Over 1 year Primary capital inflow upon $1,589,999,000 $483,666,000 $197,164,000 $119,827,000 $139,395,000 $649,947,000 maturity Primary capital outflow upon 1,790,333,000 207,966,000 193,223,000 157,198,000 277,472,000 954,474,000 maturity Gap ($200,334,000) $275,700,000 $3,941,000 ($37,371,000) ($138,077,000) ($304,527,000)
December 31, 2008 (Expressed In Thousands of New Taiwan Dollars) Total 1~30 days 31~90 days 91~180 days 181 days~1 year Over 1 year Primary capital inflow upon $1,441,013,000 $339,602,000 $170,471,000 $116,344,000 $131,002,000 $683,594,000 maturity Primary capital outflow upon 1,588,078,000 211,866,000 182,362,000 148,814,000 257,106,000 787,930,000 maturity Gap ($147,065,000) $127,736,000 ($11,891,000) ($32,470,000) ($126,104,000) ($104,336,000) Note: The amounts listed above represent the funds denominated in New Taiwan dollars only (i.e., excluding foreign currency) for both head office and domestic branches.
B) Structure analysis of USD time to maturity December 31, 2009 (Expressed In Thousands of US Dollars) Total 1~30 days 31~90 days 91~180 days 181 days~1 year Over 1 year Primary capital inflow upon $10,230,221 $4,047,342 $2,851,908 $1,311,480 $595,750 $1,423,741 maturity Primary capital outflow upon 10,148,679 3,491,243 2,215,520 1,294,331 1,793,307 1,354,278 maturity Gap $81,542 $556,099 $636,388 $17,149 ($1,197,557) $69,463
December 31, 2008 (Expressed In Thousands of US Dollars) Total 1~30 days 31~90 days 91~180 days 181 days~1 year Over 1 year Primary capital inflow upon $10,152,520 $3,725,443 $3,282,196 $1,254,487 $630,671 $1,259,723 maturity Primary capital outflow upon 9,949,695 3,739,618 2,640,801 1,183,284 1,449,766 936,226 maturity Gap $202,825 ($14,175) $641,395 $71,203 ($ 819,095) $323,497 Note: The amounts listed above represent the items denominated in U.S. dollars for head office, domestic branches, Offshore Banking Units, and overseas branches, excluding contingent assets and contingent liabilities.
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E. Sensitivity analysis of interest rate for assets and liabilities Sensitivity analysis of interest rate for assets and liabilities (NTD) December 31, 2009 (Expressed In Thousands of New Taiwan Dollars,%)
Items 1~90 days 91~180 days 181 days~1 year Over 1 year Total Financial Information Interest-rate-sensitive assets $1,225,427,000 $69,035,000 $44,269,000 $82,008,000 $1,420,739,000 Interest-rate-sensitive 447,217,000 708,594,000 106,372,000 7,663,000 1,269,846,000 liabilities Interest-rate-sensitive gap 778,210,000 (639,559,000) (62,103,000) 74,345,000 150,893,000 Total stockholders’ equity 89,912,889 Ratio of interest-rate-sensitive assets to interest-rate-sensitive liabilities (%) 111.88% Ratio of interest-rate-sensitive gap to stockholders’ equity (%) 167.82% Note:The amounts listed above represent the items denominated in New Taiwan dollars only (i.e., excluding foreign currency) for both head office and overseas branches.
Sensitivity analysis of interest rate for assets and liabilities (USD) December 31, 2009 (Expressed In Thousands of US Dollars,%) Items 1~90 days 91~180 days 181 days~1 year Over 1 year Total Interest-rate-sensitive assets $6,769,148 $1,520,382 $759,019 $480,316 $9,528,865 Interest-rate-sensitive 4,069,810 3,903,263 1,327,427 50,000 9,350,500 liabilities Interest-rate-sensitive gap 2,699,338 (2,382,881) (568,408) 430,316 178,365 Total stockholders’ equity 2,794,409 Ratio of interest-rate-sensitive assets to interest-rate-sensitive liabilities (%) 101.91% Ratio of interest-rate-sensitive gap to stockholders’ equity (%) 6.38% Note: The amounts listed above represent the items denominated in U.S. dollars for head office, domestic branches, Offshore Banking Units, and overseas branches, excluding contingent assets and contingent liabilities.
Sensitivity analysis of interest rate for assets and liabilities (NTD) December 31, 2008 (Expressed In Thousands of New Taiwan Dollars,%) Items 1~90 days 91~180 days 181 days~1 year Over 1 year Total Interest-rate-sensitive assets $1,051,738,000 $78,831,000 $51,207,000 $71,789,000 $1,253,565,000 Interest-rate-sensitive 410,688,000 579,111,000 139,261,000 10,700,000 1,139,760,000 liabilities Interest-rate-sensitive gap 641,050,000 (500,280,000) (88,054,000) 61,089,000 113,805,000 Total stockholders’ equity 89,456,890 Ratio of interest-rate-sensitive assets to interest-rate-sensitive liabilities (%) 109.98% Ratio of interest-rate-sensitive gap to stockholders’ equity (%) 127.22% Note:The amounts listed above represent the items denominated in New Taiwan dollars only (i.e., excluding foreign currency) for both head office and overseas branches.
141 Sensitivity analysis of interest rate for assets and liabilities (USD) December 31, 2008 (Expressed In Thousands of US Dollars,%) Items 1~90 days 91~180 days 181 days~1 year Over 1 year Total Interest-rate-sensitive assets $10,353,607 $1,780,223 $659,118 $379,528 $13,172,476 Interest-rate-sensitive 8,515,891 2,982,459 1,180,449 42,000 12,720,799 liabilities Interest-rate-sensitive gap 1,837,716 (1,202,236) (521,331) 337,528 451,677 Total stockholders’ equity 2,729,508 Ratio of interest-rate-sensitive assets to interest-rate-sensitive liabilities (%) 103.55% Ratio of interest-rate-sensitive gap to stockholders’ equity (%) 16.55% Note: The amounts listed above represent the items denominated in U.S. dollars for head office, domestic branches, Offshore Banking Units, and overseas branches, excluding contingent assets and contingent liabilities. Note 1: Interest-rate-sensitive assets and liabilities are those interest earned assets and interest bearing liabilities, revenues and costs which are sensitive to changes in interest rates. Note 2: Ratio of interest-rate-sensitive assets to interest-rate-sensitive liabilities = Interest-rate-sensitive assets / interest-rate-sensitive liabilities (refer to NTD denominated interest-rate-sensitive assets and interest- rate-sensitive liabilities). Note 3: Interest-rate-sensitive gap = Interest-rate-sensitive assets—interest-rate-sensitive liabilities.
F. Average value and average interest rates of interest-earning assets and interest-bearing liabilities.
For the year ended December 31, 2009 Average rate of Interest-earning assets Average value return (%) Due from Central Bank $69,768,623 0.30 Due from other banks (Note) 102,866,064 1.56 Financial assets at fair value through profit or loss 25,168,095 2.55 Credit card revolving consumption loans 1,490,920 14.50 Bills discounted and loans 1,100,909,540 1.98 Available-for-sale financial assets 51,026,317 2.05 Held-to-maturity financial assets 334,622,786 0.95 Other financial assets 5,290,449 3.84
Interest-bearing liabilities Due to Central Bank $ 198,528 - Due to other banks 97,407,131 1.16 Funds borrowed from other banks 46,985 0.22 Financial bonds payable 56,413,699 2.30 Bills and bonds payable under repurchase agreements 10,329,137 0.22 Deposits 1,430,407,671 0.72 Negotiable certificates of deposit 11,829,136 1.15 Note : This represents due from other banks under “cash and cash equivalents”, and call loans to other banks and overdrafts to other banks under “due from the Central Bank and other banks and call loans to other banks”.
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For the year ended December 31, 2008
Average rate of Financial Information Interest-earning assets Average value return (%) Due from Central Bank $57,623,890 0.76 Due from other banks (Note) 86,850,867 4.16 Financial assets at fair value through profit or loss 27,168,864 2.66 Credit card revolving consumption loans 1,821,074 14.71 Bills discounted and loans 1,089,677,778 3.47 Available-for-sale financial assets 50,030,052 2.74 Held-to-maturity financial assets 221,134,403 2.45 Other financial assets 9,075,605 3.89
Interest-bearing liabilities Due to Central Bank $256,615 - Due to other banks 141,413,932 3.50 Funds borrowed from other banks 61,724 1.58 Financial bonds payable 62,345,082 2.36 Bills and bonds payable under repurchase agreements 11,740,727 1.58 Deposits 1,275,699,872 1.56 Negotiable certificates of deposit 10,429,525 2.07 Note : This represents due from other banks under “cash and cash equivalents”, and call loans to other banks and overdrafts to other banks under “due from the Central Bank and other banks and call loans to other banks”.
G. Net position for major foreign currency transactions December 31, 2009 December 31, 2008 Currency NTD Currency NTD (in thousands) (in thousands) (in thousands) (in thousands) USD $34,609 $1,113,581 USD $74,717 $2,448,763
Net position for major CAD 29,725 909,157 CAD 29,337 788,364 foreign currency AUD 19,929 575,380 JPY 981,605 355,832 transactions (Market Risk) HKD 107,788 447,212 GBP 6,181 292,479 GBP 5,858 303,068 SGD 10,115 230,327 Note 1: The major foreign currencies are the top 5 currencies by position, which is expressed in New Taiwan dollars after exchange rate conversion. Note 2: Net position represents an absolute value of each currency.
143 H. Capital adequacy ratio (expressed in thousands of New Taiwan Dollars, %) December 31, 2009 December 31, 2008 Tier 1 Capital $75,511,899 $73,940,040 Tier 2 Capital 36,056,324 39,396,940 Capital, Tier 3 Capital - - Deductible items - - Total eligible capital 111,568,223 113,336,980 Standardized approach 936,281,166 958,181,253 Credit risk Internal Ratings-Based approach - - Securitization 3,678,706 5,905,344 Basic indicator approach 54,019,849 56,793,132 Total risk - Operation Standardized approach / Alternative weighted - - risk Standardized approach assets Advanced measurement approaches - - Standardized approach 19,355,925 21,012,140 Market risk Internal models approach - - Total risk-weighted assets 1,013,335,646 1,041,891,869 Capital adequacy ratio 11.01% 10.88% Tier 1 Ratio 7.45% 7.10% Tier 2 Ratio 3.56% 3.78% Tier 3 Ratio - - Ratio of common stock to total assets 2.58% 2.74% Gearing ratio 4.11% 4.34% Note 1: Capital and risk-weighted assets in the table above are in accordance with the “Regulations Governing the Capital Adequacy Ratio of Banks” and “Calculation Methods and Columns of Bank’s Self-owned Capital And Risk-weighted Assets”. Note 2: The relevant formulas are listed follows: 1. Capital = Tier 1 + Tier 2 + Tier 3 + deductions 2. Total risk-weighted assets = credit risk-weighted assets + (capital requirements for operational risk + market risk) × 12.5 3. Capital adequacy ratio = Self-owned capital / Total risk-weighted assets 4. Tier 1 Ratio = Tier 1 capital / Total risk-weighted assets 5. Tier 2 Ratio = Tier 2 capital / Total risk-weighted assets 6. Tier 3 Ratio = Tier 3 capital / Total risk-weighted assets 7. Ratio of common stock to total assets = Common stock / Total assets 8. Gearing ratio = Tier 1 capital / averaged assets after adjustments (average assets – tier 1 capital –goodwill – unamortized loss on sale of non-performing loans and amounts that should be deducted from the tier 1 capital pursuant to “Calculation Method and Table of Self-owned Capital and Risk-weighted Assets”.
Information for FS and its subsidiaries is stated below: Profitability December 31, 2009 2008 Before taxes 6.32 (3.45) Return on total assets (%) After taxes 5.73 (3.93) Before taxes 14.98 (8.50) Return on stockholders’ equity (%) After taxes 13.58 (9.67) Net profit margin ratio (%) 36.23 (87.32) Note 1: Return on total assets = Income before (after) income taxes / average total assets. Note 2: Return on stockholders’ equity = Income before (after) income taxes / average stockholders’ equity. Note 3: Net profit margin ratio = Income after income taxes / total net revenues. Note 4: The term “Income before (after) income taxes” represents net income from January 1 to the balance sheet date of the reporting period.
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Information for FSIT is stated below: Profitability December 31, 2009 2008
Before taxes 14.12 11.99 Financial Information Return on total assets (%) After taxes 14.02 14.95 Before taxes 15.63 13.59 Return on stockholders’ equity (%) After taxes 15.51 16.95 Net profit margin ratio (%) 34.36 40.84 Note 1: Return on total assets = Income before (after) income taxes / average total assets. Note 2: Return on stockholders’ equity = Income before (after) income taxes / average stockholders’ equity. Note 3: Net profit margin ratio = Income after income taxes / total net revenues. Note 4: The term “Income before (after) income taxes” represents net income from January 1 to the balance sheet date of the reporting period.
Information for First-Aviva Life Insurance Co., Ltd. is stated below: Profitability December 31, 2009 2008 Before taxes (1.21) (8.25) Return on total assets (%) After taxes (1.21) (8.25) Before taxes (12.34) (37.19) Return on stockholders’ equity (%) After taxes (12.36) (37.20) Net profit margin ratio (%) (194.80) (5.26) Note 1:Return on total assets = Income before (after) income taxes / average total assets. Note 2:Return on stockholders’ equity = Income before (after) income taxes / average stockholders’ equity. Note 3:Net profit margin ratio = Income after income taxes / total net revenues. Note 4:The term “Income before (after) income taxes” represents net income from January 1 to the balance sheet date of the reporting period.
12) Information with respect to the subsidiary holding the capital stock of parent company: None
13) Presentation of financial statements Certain accounts of the consolidated financial statements for the year ended December 31, 2008 have been reclassified to conform to the presentation of the consolidated financial statements for the year ended December 31, 2009.
11.Supplementary disclosures Disclosures of investee companies are prepared based on the audited financial statements and the following transactions among subsidiaries are eliminated when preparing the consolidated financial statements. The following disclosures are for reference purpose. 1). Information regarding significant transactions A. Cumulative purchases or sales of the same investee’s capital stock over the amount of NT $300 million dollars or 10% of issued capital stock: None. B. Acquisition of real estate over the amount of NT $300 million dollars or 10% of issued capital stock: None. C. Disposal of real estate over the amount of NT $300 million dollars or 10% of issued capital stock: None. D. Handling fee discounts for transactions with related parties over the amount of NT $5 million dollars: None. E. Receivables from related parties over the amount of NT $300 million dollars or 10% of issued capital stock: None. F. Information regarding selling non-performing loans: (1) Summary of selling non-performing loans: Gain or Relationship Transaction date Contents of Carrying Attached Counterparty Sale price loss from with the (contract date) right of claim value conditions disposal Company Jing Li Asset Syndicated 2009.07.09 14,384 42,061 27,677 None None Management Co., Ltd. loan Mega Asset Syndicated 2009.10.27 - 505,284 505,284 None None Management Co., Ltd. loan Note: The original amount of right of claims was $680,371, $665,987 of which was written off.
145 (2 ) Sale of non-performing loans for which the amount exceeded NT$1 billion (excluding sale to related parties): None. G. Securitization products, including its related information, applied by subsidiaries in compliance with the “Financial Asset Securitization Act” or “Real Estate Securitization Act”: None. H. Other significant transactions that may affect the decisions made by financial statement users: None. 2) Supplementary disclosures regarding investee companies (Expressed in thousands of New Taiwan Dollars / US Dollars) The combined ownership of the investee company’s common shares held by the Company Investment income Percentage of and its related parties (Note 7) Name of investee Major operating Carrying value of (loss) recognized Address ownership (%) at the Number of owned Total Footnote company activities investment by the Company Number of pro forma end of current period shares Number of shares Percentage of for current period shares (Note 8) (in thousands) (in thousands) ownership (%) FCB 30, Chung-King S. Road, Sec. 1, Taipei, Taiwan Note 1 100 $89,300,889 $2,053,658 4,949,000 - 4,949,000 100 FS 6F, 27, An Ho Road, Sec. 1, Taipei, Taiwan Note 2 100 7,161,731 911,762 590,000 - 590,000 100 FSIT 7F, 6, Min Chuan E. Road Sec. 3, Taipei, Taiwan Note 2 100 981,696 151,529 60,000 - 60,000 100 FFAM 7F, 94, Chung Hsiao E. Road, Sec 2, Taipei, Taiwan Note 5 100 304,718 43,581 25,000 - 25,000 100 FVC 9F, 30, Chung-King S. Road, Sec. 1, Taipei, Taiwan Note 4 100 968,405 25,980 100,000 - 100,000 100 FFMC 9F, 30, Chung-King S. Road, Sec. 1, Taipei, Taiwan Note 5 100 29,336 8,971 2,000 - 2,000 100 FPCIA 9F, 30, Chung-King S. Road, Sec. 1, Taipei, Taiwan Note 3 100 11,262 6,513 300 - 300 100 FALI 13F, 456, Xin-Yi Road, Sec. 4, Taipei, Taiwan Note 3 51 839,966 (93,741) 114,750 - 114,750 51 First Commercial 200 East Main Street, Alhambra, CA 91801, USA Note 1 100 1,555,928 11,036 3,000 - 3,000 100 Bank (USA) FIA 9F, 30, Chung-King S. Road, Sec. 1, Taipei, Taiwan Note 3 100 115,763 6,906 5,000 - 5,000 100 FCBL 6F, 94, Chung Hsiao E. Road, Sec. 2, Taipei, Taiwan Note 5 100 622,812 3,783 50,000 - 50,000 100 EAREM 9F, 94, Chung Hsiao E. Road., Sec. 2, Taipei, Taiwan Note 6 30 10,784 (566) 1,500 - 1,500 30 FCBL Capital International 6F, 94, Chung Hsiao E. Road, Sec. 2, Taipei, Taiwan Note 5 100 78,618 299 50 - 50 100 (B.V.I) Ltd. FCMI 7F, 29, An Ho Road, Sec. 1, Taipei, Taiwan Note 5 100 111,530 3,053 10,000 - 10,000 100 FTSL P.O. Box 659, Road Town, Tortola, British Virgin Islands Note 5 100 736,744 15,050 1,000 - 1,000 100 FWSL Hong Kong Note 2 and 5 100 USD4,576,255 USD444,513 30,000 - 30,000 100 NITC (Cayman British Cayman Islands Note 2 - - 1 - - - - Note 9 Islands) Ltd. Note 1: Banking industry. Note 2: Securities and futures industry and Security investment trust industry. Note 3: Insurance industry. Note 4: Venture Capital industry. Note 5: Leasing, investment consulting, and business consulting industries and holding company. Note 6: Construction proposal consulting and contract certification. Note 7: All the owned shares and pro forma shares of investee company held by the Company, directors, supervisors, general manager, vice general manager, and its related parties defined under the R.O.C. Company Law shall be included. Note 8: (a) Pro forma shares are those shares obtained through a transfer, on the assumption of share transfer, from equity securities purchased or derivative instrument contracts signed linked to investee company’s equity based on agreed transaction terms and undertaking intention, and for the purpose of investing in company under the provisions of Article 74 of the R.O.C. Company Law. (b) The equity securities mentioned above are referred to as those securities under the provision of Article 11, Item 1 of the bylaws to the R.O.C. Securities and Exchange Law, for example, convertible bond and warrant. (c) The derivative instrument contracts mentioned above are specified as those derivative instruments defined by the R.O.C. SFAS No. 34, for example, stock option.
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(2 ) Sale of non-performing loans for which the amount exceeded NT$1 billion (excluding sale to related parties): None. G. Securitization products, including its related information, applied by subsidiaries in compliance with the “Financial Asset Securitization Act” or “Real Estate Securitization Act”: None. H. Other significant transactions that may affect the decisions made by financial statement users: None. 2) Supplementary disclosures regarding investee companies Financial Information (Expressed in thousands of New Taiwan Dollars / US Dollars) The combined ownership of the investee company’s common shares held by the Company Investment income Percentage of and its related parties (Note 7) Name of investee Major operating Carrying value of (loss) recognized Address ownership (%) at the Number of owned Total Footnote company activities investment by the Company Number of pro forma end of current period shares Number of shares Percentage of for current period shares (Note 8) (in thousands) (in thousands) ownership (%) FCB 30, Chung-King S. Road, Sec. 1, Taipei, Taiwan Note 1 100 $89,300,889 $2,053,658 4,949,000 - 4,949,000 100 FS 6F, 27, An Ho Road, Sec. 1, Taipei, Taiwan Note 2 100 7,161,731 911,762 590,000 - 590,000 100 FSIT 7F, 6, Min Chuan E. Road Sec. 3, Taipei, Taiwan Note 2 100 981,696 151,529 60,000 - 60,000 100 FFAM 7F, 94, Chung Hsiao E. Road, Sec 2, Taipei, Taiwan Note 5 100 304,718 43,581 25,000 - 25,000 100 FVC 9F, 30, Chung-King S. Road, Sec. 1, Taipei, Taiwan Note 4 100 968,405 25,980 100,000 - 100,000 100 FFMC 9F, 30, Chung-King S. Road, Sec. 1, Taipei, Taiwan Note 5 100 29,336 8,971 2,000 - 2,000 100 FPCIA 9F, 30, Chung-King S. Road, Sec. 1, Taipei, Taiwan Note 3 100 11,262 6,513 300 - 300 100 FALI 13F, 456, Xin-Yi Road, Sec. 4, Taipei, Taiwan Note 3 51 839,966 (93,741) 114,750 - 114,750 51 First Commercial 200 East Main Street, Alhambra, CA 91801, USA Note 1 100 1,555,928 11,036 3,000 - 3,000 100 Bank (USA) FIA 9F, 30, Chung-King S. Road, Sec. 1, Taipei, Taiwan Note 3 100 115,763 6,906 5,000 - 5,000 100 FCBL 6F, 94, Chung Hsiao E. Road, Sec. 2, Taipei, Taiwan Note 5 100 622,812 3,783 50,000 - 50,000 100 EAREM 9F, 94, Chung Hsiao E. Road., Sec. 2, Taipei, Taiwan Note 6 30 10,784 (566) 1,500 - 1,500 30 FCBL Capital International 6F, 94, Chung Hsiao E. Road, Sec. 2, Taipei, Taiwan Note 5 100 78,618 299 50 - 50 100 (B.V.I) Ltd. FCMI 7F, 29, An Ho Road, Sec. 1, Taipei, Taiwan Note 5 100 111,530 3,053 10,000 - 10,000 100 FTSL P.O. Box 659, Road Town, Tortola, British Virgin Islands Note 5 100 736,744 15,050 1,000 - 1,000 100 FWSL Hong Kong Note 2 and 5 100 USD4,576,255 USD444,513 30,000 - 30,000 100 NITC (Cayman British Cayman Islands Note 2 - - 1 - - - - Note 9 Islands) Ltd. Note 1: Banking industry. Note 9: On October 14, 2008, FSIT resolved to cease operations of NITC (Cayman Islands) Ltd., effective from Note 2: Securities and futures industry and Security investment trust industry. December 31, 2008. The residual funds were remitted back to FSIT on April 23, 2009. Note 3: Insurance industry. Note 10: The Board of Directors exercised the authority on behalf of the Stockholders’ Meeting and resolved to Note 4: Venture Capital industry. cease FFI’s operation in September 2007. The liquidation procedures of FFI were completed in May 2009. Note 5: Leasing, investment consulting, and business consulting industries and holding company. Note 6: Construction proposal consulting and contract certification. 3) Significant transactions regarding investee companies Note 7: All the owned shares and pro forma shares of investee company held by the Company, directors, A. Cumulative purchases or sales of the stocks for the same investee’s capital stock up to NT$300 million or over 10% supervisors, general manager, vice general manager, and its related parties defined under the R.O.C. of the issued capital stock: None. Company Law shall be included. B. Acquisition of real estate over the amount of NT $300 million dollars or 10% of issued capital stock: None Note 8: (a) Pro forma shares are those shares obtained through a transfer, on the assumption of share transfer, from C. Disposal of real estate over the amount of NT$300 million dollars or 10% of issued capital stock: None. equity securities purchased or derivative instrument contracts signed linked to investee company’s D. Handling fee discounts for transactions with related parties over the amount of NT $5 million dollars: None. equity based on agreed transaction terms and undertaking intention, and for the purpose of investing E. Receivables from related parties up to NT $300 million dollars or 10% of issued capital stock: None. in company under the provisions of Article 74 of the R.O.C. Company Law. F. Disposal of non-performing loans of subsidiaries: please refer to Note 11 (1) F for details. (b) The equity securities mentioned above are referred to as those securities under the provision of Article G. Securitization products and its related information that applied by subsidiaries in compliance with the “Financial 11, Item 1 of the bylaws to the R.O.C. Securities and Exchange Law, for example, convertible bond and Asset Securitization Act” or “Real Estate Securitization Act”: None. warrant. H. Other significant transactions that may affect the decisions made by financial statement users: None. (c) The derivative instrument contracts mentioned above are specified as those derivative instruments I. Funds lent to others: defined by the R.O.C. SFAS No. 34, for example, stock option. FCB engages in the loan and credit business regulated by the Banking Law and is classified as a financial service
147 industry. Thus, the disclosure requirement is not applicable. FALI is classified as insurance company; therefore, the disclosure requirement is not applicable. FS, classified as a securities firm, does not lend funds to others except ones that engage in the margin loan and stock loan business. FSIT, FFAM, FVC, FFMC, and FPCIA have no such situations. Indirect investee First Commercial Bank (USA) engages in the loan and credit business regulated by the Banking Law and is classified as a financial service industry, so the disclosure requirement is not applicable. Other indirect investees have no such situations. J. Endorsements and guarantees provided for others: FCB engages in guarantee business regulated by the Banking Law and is classified as a financial service industry, so the disclosure requirement is not applicable. FS, FSIT, FALI, FFAM, FVC, FFMC, and FPCIA have no such situations. Indirect investee First Commercial Bank (USA) engages in loan and credit business regulated by the Banking Law and is classified as a financial service industry, so the disclosure requirement is not applicable. Other indirect investees have no such situations. K. Securities held at the end of period: Related information is stated below. Subsidiaries FCB, FS, FALI and its indirect subsidiary First Commercial Bank (USA) are classified as financial, securities and insurance service industry, so the disclosure requirements are not applicable. Other subsidiaries and indirect investees not listed in this table have no such situations. (Expressed In Thousands of New Taiwan Dollars, Unless Otherwise Indicated) At Period-end Shares / Units Book Ownership Market Note Name Of Investee And Type Of Investor Relationship Account (In Thousands) Value Percentage (%) Value (Note 2) Securities Equity investments A subsidiary of accounted FFHC FCB Stocks 4,949,000 $89,300,889 100.00 Note 1 FFHC for under the equity method ” FS ” ” ” 590,000 7,161,731 100.00 ” ” FSIT ” ” ” 60,000 981,696 100.00 ” ” FFAM ” ” ” 25,000 304,718 100.00 ” ” FVC ” ” ” 100,000 968,405 100.00 ” ” FFMC ” ” ” 2,000 29,336 100.00 ” ” FPCIA ” ” ” 300 11,262 100.00 ” ” FALI ” ” ” 114,750 839,966 51.00 ” An investee Other Taiwan Depository & under ” ” financial 247 6,105 0.08 ” Cleaning Corporation the cost assets method Taipei Financial Center ” ” ” ” 30,000 300,000 2.04 ” Corp. Taiwan Asset ” Management ” ” ” 300,000 3,612,000 17.03 ” Corporation Equity An investee of investments FCBL Capital FCBL accounted FCBL ” 50 78,618 100.00 ” International (B.V.I) Ltd. under the for under equity method the equity method FSIT Stock Funds A mutual fund Available-for- FSITC Greater China Beneficiary ” managed by sale financial 3,030 30,147 0.56 30,147 Fund certificates FSIT assets ” FSITC Otc Fund ” ” ” 840 7,227 0.73 7,227 FSITC Global Trends ” ” ” ” 500 8,470 0.92 8,470 Fund FSITC Global High Yield ” ” ” ” 4,275 47,129 1.55 47,129 Bond Fund
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At Period-end Shares / Units Book Ownership Market Note Name Of Investee And Type Of Investor Relationship Account (In Thousands) Value Percentage (%) Value (Note 2) Securities FSITC Strategy ” ” ” ” 1,054 $9,341 4.42 $9,341 Financial Information Balanced Fund FSITC Europe Dynamic ” ” ” ” 528 5,276 1.98 5,276 Balanced Fund FSITC Taiwan Bond ” ” ” 2,741 40,015 0.15 40,015 Fund FSITC Bond Fund ” ” ” 235 40,037 0.08 40,037 FSITC Global REITs ” ” ” 907 5,186 0.86 5,186 Fund Overseas Financial KINKO OPTICAL convertible assets at fair FTSL None 100 99 - 99 Note 3 12/22/10 corporate value through bonds profit or loss UMC/Unimicron ” ” ” ” 500 528 - 528 - 12/02/14 PROMOS TECH INC ” ” ” ” 800 200 - 200 - 02/14/12 Convertible ” ASUSTEK COMP INC corporate ” ” 70 233 - 233 - bonds UNI-PRESIDENT ” ” ” ” 75 240 - 240 - ENTERPRISES ” GEMTECK TECK GROUP ” ” ” 363 1,927 1,927 OCEANUS GROUP LTD- Depository ” ” ” 6,000 1,901 - 1,901 - TDR Receipt GEN ELEC CAP CRP GE US dollar ” ” ” 2,000 1,860 - 1,860 - 6 02/02/46 bonds CHINATRUST COMM ” ” ” ” 1,500 1,290 - 1,290 - 5.625 03/17/15 CATHAY UNITED 5.5 ” ” ” ” 1,250 1,181 - 1,181 - 10/05/15 ” FUBON BANK HK 6.125 ” ” ” 1,500 1,496 - 1,496 - HUT WHA INT 4.625 ” ” ” ” 1,000 1,015 - 1,015 - 09/11/15 OPTUS FINANCE ” ” ” ” 1,000 948 - 948 - SINTEL 4.625 10/15/19 ” OCBC 4.25 11/18/19 ” ” ” 500 490 - 490 - PETRONAS SUKKUK ” ” ” ” 500 504 - 504 - 4.25 Credit- Lehman Brothers-Shin ” linked ” ” 1,000 300 - 300 Kong CLN 06/17/09 bonds 2 Year USD Note Structured ” Iinked-Lehman ” ” 15 - - - ” notes Brothers Treasury 10y NC3m Callable ” Range Accrual Note- ” ” ” 1,500 1,430 - 1,430 ” Nomura PGI 6% 36M ” Debentures Series ” ” ” 3,000 2,798 - 2,798 ” 2008 Class A Medical Provider ” Financial Crop. Secured ” ” ” 2,717 1,902 - 1,902 ” Notes Funds and ” I Share A50 Index Fund beneficiary ” ” 100 192 - 192 ” certificates ” Tracker ” ” ” 200 352 - 352 ”
149 Note 1: There is no readily available market price, as the stock is not listed on any public exchange. Note 2: Long-term investments in the above table remain free of pledge or guarantee. Note 3: Book value and market value are expressed in thousands of US dollars.
I. Cumulative purchases or sales of the marketable securities up to NT$300 million or over 10% of the issued capital stock: FCB, FALI and FS are classified as financial, insurance and securities service industry, so the disclosure requirements are not applicable. Indirect subsidiary First Commercial Bank (USA) is financial service industry, so the disclosure requirements are not applicable. Other subsidiaries and indirect investees have no such situations. M. Information of derivative instrument transactions: Please refer to Note 10 (1) for information of FCB, FS and its subsidiaries (including FTSL) and FALI. Other subsidiaries have no such transactions. 4) Investments in People’s Republic of China FVC’s investments in People’s Republic of China for the year ended December 31, 2009 were as follows: (Expressed In Thousands of New Taiwan Dollars) Accumulated Accumulated Accumulated Invetsment amount of Amount Amount Book value of amount of amount of Ownership income investment remitted to remitted investments Investee in remittance remittance held by the (loss) income Paid-in Investment Mainland back to in Mainland Mainland Main activities to Mainland to Mainland Company recognized remitted capital method China Taiwan China as of China China as of China as of (direct and by the back to during the during December January 1, December 31, indirect) Company Taiwan as of year the year 31, 2009 2009 2009 (Note 2) December 31, 2009 FoShan City Medical ShunDe equipment District and 2,387 2,387 2,387 PingAn appliances, HKD19,000 Note 1 - (USD 73 - (USD 73 2.71% - (USD 73 - Medical and ward thousand) thousand) thousand) Equipment facilities and Technology appliances Corp. Note 1: FVC invested in and held 4.93% of ownership over Ever Growing Group, Inc., and obtained 2.7115% of ownership over its investee company FoShan City ShunDe District PingAn Medical Equipment Technology Corp indirectly. Note 2: As FVC is classified as financial assets carried at cost, investment gain or loss was not recognized.
(Expressed In Thousands of New Taiwan Dollars) Accumulated amount of remittance Investment amount approved by Ceiling on investments in Mainland from Taiwan to Mainland China as of the Investment Commission of the China imposed by the Investment December 31, 2009 Ministry of Economic Affairs (MOEA) Commission of MOEA NT$2,387 NT$2,387 NT$581,043 (US$73 thousand) (US$73 thousand) Note: The above limitations on investments in Mainland China were based on 60% of FVC's net worth of $968,405.
5) Significant commitments or contingency of subsidiaries Please refer to Note 7. 6) Significant loss from disasters of subsidiaries Please refer to Note 8. 7) Significant subsequent events of subsidiaries Please refer to Note 9. 8) Related party transactions of subsidiaries over the amount of NT $100 million dollars Please refer to Note 5 for details.
150 2009 Annual Report
9) Significant transactions between parent company and subsidiaries Information for the year ended December 31, 2009: (Expressed In Thousands of New Taiwan Dollars) Details of transactions Percentage Financial Information No. Relationship (%) of total Company Counterparty consolidated (Note 1) (Note 2) Account Amount Conditions net revenues or assets (Note 3) No significant difference 0 FFHC FCB 1 Bank deposits $2,830,919 0.14% from general customers FCB 1 Interest income 2,651 ” 0.01% FCB 1 Interest receivables 88 ” 0.00% FCB 1 Administration expenses 8,274 ” 0.03% FCB 1 Administration expenses 1,761 ” 0.01% FCB 1 Administration expenses 10,963 ” 0.04% Income - Remunerations to FCB 1 8,529 ” 0.03% directors and supervisors Due to consolidated income FCB 1 931,634 ” 0.05% tax return system Due from consolidated FS 1 47,565 ” 0.00% income tax return system Due from consolidated FSIT 1 40,709 ” 0.00% income tax return system 1 FCB FFHC 2 Deposits and remittances 2,830,919 ” 0.14% FFHC 2 Interest expenses 2,651 ” 0.01% FFHC 2 Interests payable 88 ” 0.00% Stock related service fees FFHC 2 8,274 ” 0.03% income Other handling charges FFHC 2 1,761 ” 0.01% income FFHC 2 Rental income 10,963 ” 0.04% Remunerations to directors FFHC 2 8,529 ” 0.03% and supervisors Due from consolidated FFHC 2 931,634 ” 0.05% income tax return system FS 3 Deposits and remittances 34,445 ” 0.00% FS 3 Deposits and remittances 11,535 ” 0.00% No significant difference 1 FCB FS 3 Rental income 59,892 0.20% from general customers” FS 3 Business marketing expenses 44,175 ” 0.15% FS 3 Accrued expenses 13,193 ” 0.00% Other handling charges FS 3 7,389 ” 0.02% income FTSL 3 Deposits and remittances 21,128 ” 0.00% FTSL 3 Deposits and remittances 28,900 ” 0.00% Trust business commission FTSL 3 19,536 ” 0.07% revenues Other handling charges FTSL 3 758 ” 0.00% income FTSL 3 Rental income 1,018 ” 0.00%
151 Details of transactions Percentage No. Relationship (%) of total Company Counterparty consolidated (Note 1) (Note 2) Account Amount Conditions net revenues or assets (Note 3) FTSL 3 Accrued revenues $1,934 ” 0.00% FTSL 3 Deposits and remittances 156,500 ” 0.01% FCMI 3 Deposits and remittances 25,252 ” 0.00% FCMI 3 Rental income 2,099 ” 0.01% FALI 3 Deposits and remittances 1,054,412 ” 0.05% Other handling charges FALI 3 49,943 ” 0.17% income Other handling charges FALI 3 2,215 ” 0.01% income FALI 3 Rental income 1,097 ” 0.00% Other handling charges FALI 3 1,015 ” 0.00% income Other handling charges FALI 3 76 ” 0.00% income Other payables – related 2 FS FFHC 2 47,565 ” 0.00% parties FCB 3 Bank deposits 34,445 ” 0.00% FCB 3 Refundable deposits 11,535 ” 0.00% FCB 3 Rent expenses 59,892 ” 0.20% FCB 3 Other non-operating income 44,175 ” 0.15% No significant difference FCB 3 Other receivables 13,193 0.00% from general customers” FCB 3 Miscellaneous expenses 7,389 ” 0.02% 3 FSIT FFHC 2 Bank deposits 40,709 ” 0.00% FCB 3 Income tax payables 21,128 ” 0.00% FCB 3 Bank deposits 28,900 ” 0.00% FCB 3 Refundable deposits 19,536 ” 0.07% FCB 3 Commission expenses 758 ” 0.00% Other business and FCB 3 1,018 ” 0.00% administrative expenses Other business and FCB 3 1,934 ” 0.00% administrative expenses 4 FTSL FCB 3 Bank deposits 156,500 ” 0.01% 5 FCMI FCB 3 Bank deposits 25,252 ” 0.00% FCB 3 Rent expenses 2,099 ” 0.01% 6 FALI FCB 3 Bank deposits 1,054,412 ” 0.05% FCB 3 Commission expenses 49,943 ” 0.17% FCB 3 Other business expenses 2,215 ” 0.01% FCB 3 Other business expenses 1,097 ” 0.00% FCB 3 Bank service fees 1,015 ” 0.00% FCB 3 Professional fees 76 ” 0.00%
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The information for the year ended December 31, 2008: (Expressed In Thousands of New Taiwan Dollars) Details of transactions Percentage No. Relationship (%) of total (Note 1) Company Counterparty (Note 2) consolidated Financial Information Account Amount Conditions net revenues or assets (Note 3) No significant 0 FFHC FCB 1 Bank deposits $758,548 difference 0.04% from general customers FCB 1 Interest income 30,352 ” 0.07% FCB 1 Administrative expenses 7,271 ” 0.02% FCB 1 Administrative expenses 11,552 ” 0.03% Income - Remunerations to FCB 1 8,855 ” 0.02% directors and supervisors Due to consolidated income tax FCB 1 15,991 ” 0.00% return system Due from consolidated income FS 1 23,932 ” 0.00% tax return system Due from consolidated income FS 1 27,852 ” 0.00% tax return system Due to consolidated income tax FSIT 1 32,772 0.00% return system 1 FCB FFHC 2 Deposits and remittances 758,548 ” 0.04% FFHC 2 Interest expenses 30,352 ” 0.07% FFHC 2 Stock related service fees income 7,271 ” 0.02% FFHC 2 Rental income 11,552 ” 0.03% Remuneration of directors and FFHC 2 8,855 ” 0.02% supervisors FFHC 2 Refunded tax receivables 15,991 ” 0.00% FS 3 Deposits and remittances 14,178 ” 0.00% No significant FS 3 Deposits and remittances 10,436 difference 0.00% from general customers” FS 3 Rental income 44,945 ” 0.10% FS 3 Business marketing expenses 34,644 ” 0.08% Accrued expenses and interests FS 3 7,866 ” 0.00% payable 1 FCB FS 3 Other handling charges income 2,952 ” 0.01% FSIT 3 Deposits and remittances 65,732 ” 0.00% FSIT 3 Deposits and remittances 27,000 ” 0.00% Trust business commission FSIT 3 14,970 ” 0.03% revenues FTSL 3 Deposits and remittances 204,233 ” 0.01% FTSL 3 Interest expenses 2,518 ” 0.01% FCMI 3 Deposits and remittances 17,326 ” 0.00% FALI 3 Deposits and remittances 56,091 ” 0.00% FALI 3 Other handling charges income 105,964 ” 0.24% FALI 3 Rental income 1,777 ” 0.00% 2 FS FFHC 2 Other payables – related parties 23,932 ” 0.00% Other payables – income tax FFHC 2 27,852 ” 0.00% payables FCB 3 Bank deposits 14,178 ” 0.00% FCB 3 Restricted assets 10,436 ” 0.00%
153 Details of transactions Percentage No. Relationship (%) of total (Note 1) Company Counterparty (Note 2) consolidated Account Amount Conditions net revenues or assets (Note 3) No significant FCB 3 Rental expenses $44,945 difference 0.10% from general customers FCB 3 Other non-operating income 34,644 ” 0.08% FCB 3 Other receivables 7,866 ” 0.00% FCMI 3 Other payables – related parties 4,500 ” 0.00% Other receivables – related FCMI 3 188 ” 0.00% parties Service expenses - consulting FCMI 3 48,571 ” 0.11% fees FCB 3 Miscellaneous expenses 2,952 ” 0.01% 3 FSIT FFHC 2 Other receivables 32,772 ” 0.00% FCB 3 Bank deposits 65,732 ” 0.00% FCB 3 Refundable deposits 27,000 ” 0.00% 4 FTSL FCB 3 Commission expenses 14,970 ” 0.03% FCB 3 Bank deposits 204,233 ” 0.01% FCB 3 Financial income 2,518 ” 0.01% 5 FCMI FCB 3 Bank deposits 17,326 ” 0.00% Accounts receivable – related FS 3 4,500 ” 0.00% parties FS 3 Other payables – related parties 188 ” 0.00% FS 3 Consulting fees – related parties 48,571 ” 0.11% 6 FALI FCB 3 Bank deposits 56,091 ” 0.00% No significant FCB 3 Commission expenses 105,964 difference 0.24% from general customers FCB 3 Business expenses 1,777 ” 0.00% Note 1: The numbers in the No. column represents as follows: 1. 0 for the parent company. 2. According to the sequential order, subsidiaries are numbered from 1. Note 2: There are three types of relationships with the counterparties and they are labeled as follows: 1. Parent company to subsidiary. 2. Subsidiary to parent company. 3. Subsidiary to subsidiary. Note 3: The calculation basis of the trading amount accounting for the total consolidated net revenues or assets is that the account ending balance is divided by the total consolidated assets if it is attributed to the balance sheet accounts, and the accumulated trading amount of the reporting period is divided by the total consolidated net revenues if it is attributed to the profit or loss accounts.
12. Disclosure of financial information by segments (1)Financial information by business segments Please refer to Note 10(9) for details. (2)Financial information by geographic area The net revenue of the consolidated company’s overseas department is not over 10% of consolidated revenue for the year ended December 31, 2009. In addition, their identified assets are not over 10% of the consolidated total assets for the year ended December 31, 2009; as a result, it is not required to disclose financial information by geographic area. (3) Export sales by geographic area The Company is mainly engaged in financial service industry; hence it is not applicable. (4) Information on major customers The consolidated company does not have major customers contributing revenue more than 10% of the total consolidated revenues for the year ended December 31, 2009; hence it is not applicable.
154 2009 Annual Report General Information
Corporate Headquarters Shareholder Information
First Financial Holding Co., Ltd. Listing General Information 18F, 30, Sec. 1, Chung King S. Rd., The ordinary shares of First Financial Holding Co., Ltd. are Taipei 100, Taiwan listed on the Taiwan Stock Exchang under the ticker code Phone (886 2) 2311 1111 2892. The global deposit receipts (GDR) are listed on the Euro www.firstholding.com.tw MTF market of the Luxembourg Stock Exchange with ISIN No. and ISIN code US32021V1098 and 017339818 respectively. First Commercial Bank 30, Sec. 1, Chung King S. Rd., Ordinary Share Transfer Agent & Registrar Taipei 100, Taiwan First Bank Personal Banking Business Unit Phone (886 2) 2348 1111 Shareholder Service Department, Trust Division www.firstbank.com.tw 42 Yen Ping S. Rd., Taipei 100, Taiwan Phone (886 2) 2348 1137 First Securities Inc. 6F, 29, Sec. 1, Anhe Rd., GDR Depositary, Transfer Agent & Registrar Taipei 106, Taiwan Citibank, N.A. Phone (886 2) 2741 3434 388 Greenwich Street, 14th Floor www.ftsi.com.tw New York, NY 10013, U.S.A. Phone (1) 888 250 3985 First Securities Investment Trust Co., Ltd. wwss.citissb.com/adr/www 7F, 6, Sec. 3, Min Chuan E. Rd., Taipei 104, Taiwan Independent Auditor Phone (886 2) 2504 1000 PricewaterhouseCoopers, Taiwan www.fsitc.com.tw 27/F, International Trade Building, 333 Keelung Road, Sec.1, First-Aviva Life Insurance Co., Ltd. Taipei 110, Taiwan 13F, 456, Sec. 4, Xin Yi Rd., Phone (886 2) 2729 6666 Taipei 110, Taiwan Phone (886 2) 8758 1000 2009 Annual Financial Statements www.first-aviva.com.tw An annual financial statements in Englsih version is available on the FFHC website at www.ffhc.com.tw. First Financial Asset Management Co., Ltd. 7F, 94, Sec. 2, Jhong Siao E Rd., 2010 Annual Shareholders’ Meeting Taipei 100, Taiwan When: Wednesday, June 23, 2010 Phone (886 2) 3343 7000 Time: 9:00 a.m. Where: First Bank Headquarter First Venture Capital Co., Ltd. Address: Auditorium Level, 30 Chung King S. 9F, 30 Chung King S. Rd., Sec. 1 Rd., Sec.1, Taipei 100, Taiwan Taipei 100, Taiwan Phone (886 2) 2348 4981 Contact Information First Financial Management Consulting Co., Ltd. Spokesperson 9F, 30, Sec. 1, Chung King S. Rd., Hsin-Shih Hung / Executive Vice President Taipei 100, Taiwan Phone (886 2) 2311 1111 Phone (886 2) 2348 4982 [email protected]
First P&C Insurance Agency Co., Ltd. Deputy Spokesperson 9F, 30, Sec. 1, Chung King S. Rd., Po-Chiao Chou / Advisor & Head of Administration Taipei 100, Taiwan Management Dept. of FFHC Phone (886 2) 2348 4277 Phone (886 2) 2311 1111 [email protected]
Investor Relations Annie Lee / Deputy Head, Strategy Planning Dept. Phone (886 2) 2348 4956 2348 4975 [email protected] [email protected]
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