UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 6-K

 

REPORT OF FOREIGN ISSUER

PURSUANT TO RULE 13a-16 OR 15d-16 OF

THE SECURITIES EXCHANGE ACT OF 1934

 

For the month of December 2022

 

Commission file number: 001-38726

 

CNFinance Holdings Limited

(Exact Name of Registrant as Specified in Its Charter)

 

44/F, Tower G, No. 16 Zhujiang Dong Road

Tianhe District, Guangzhou City, Guangdong Province 510620

People’s Republic of China

+86-201-62316688

(Address of Principal Executive Offices)

 

Indicate by check mark whether the registrant files or will file annual reports under cover Form 20-F or Form 40-F.

 

Form 20-F  ☒          Form 40-F  ☐

 

Indicate by check mark if the registrant is submitting the Form 6-K in paper as permitted by Regulation S-T Rule 101(b)(1): ☐

 

Indicate by check mark if the registrant is submitting the Form 6-K in paper as permitted by Regulation S-T Rule 101(b)(7): ☐

 

 

 

 

 

EXHIBIT INDEX

 

Exhibit No.   Description
99.1   Management Discussion and Analysis of Financial Condition and Results of Operations
99.2   Unaudited Interim Condensed Consolidated Financial Statements
101.INS   Inline XBRL Instance Document—the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document
101.SCH   Inline XBRL Taxonomy Extension Schema Document
101.CAL   Inline XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF   Inline XBRL Taxonomy Extension Definition Linkbase Document
101.LAB   Inline XBRL Taxonomy Extension Labels Linkbase Document
101.PRE   Inline XBRL Taxonomy Extension Presentation Linkbase Document
104   Cover Page Interactive Data File (embedded within the Inline XBRL document)

 

1

 

 

Signatures

 

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

 

  CNFINANCE HOLDINGS LIMITED
   
Date: December 2, 2022 By: /s/ Bin Zhai
    Name: Bin Zhai
    Title: Chief Executive Officer and Chairman

 

 

2

 

Exhibit 99.1

 

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

Summary Consolidated Financial Data

 

The following tables summarize our unaudited consolidated statements of comprehensive income data for the nine months ended September 30, 2021 and 2022, and unaudited consolidated balance sheet data as of December 31, 2021 and September 30, 2022, which have been prepared and presented in accordance with U.S. GAAP. This information should be read together with our consolidated financial statements and related notes in Exhibit 99.2 to this report on Form 6-K. The operating results in any period are not necessarily indicative of results that may be expected for any future period. Unless otherwise stated, all translations of Renminbi into U.S. dollars in this document were made at the rate at RMB7.1135 to US$1.00, the exchange rate as set forth in the H.10 statistical release of the Board of Governors of the Federal Reserve System in effect as of September 30, 2022. 

 

Summary statements of comprehensive income data

 

   For the Nine Months Ended September 30, 
   2021   2022 
   RMB   RMB   US$ 
Interest and fees income            
Interest and financing service fees on loans   1,325,657,014    1,180,106,666    165,896,769 
Interest on deposits with banks   7,906,514    8,755,924    1,230,888 
Total interest and fees income   1,333,563,528    1,188,862,590    167,127,657 
Interest and fees expenses               
Interest expenses on interest-bearing borrowings   (570,366,896)   (583,589,934)   (82,039,774)
Total interest and fees expenses   (570,366,896)   (583,589,934)   (82,039,774)
Net interest and fees income   763,196,632    605,272,656    85,087,883 
Interest income charged to sales partners   22,259,910    89,501,328    12,581,898 
Collaboration cost for sales partners   (306,281,841)   (241,162,974)   (33,902,155)
Net interest and fees income after collaboration cost   479,174,701    453,611,010    63,767,626 
Provision for credit losses (net of increase in guaranteed recoverable assets of RMB285,613,359 and RMB544,712,308 for period ended September 2021 and 2022, respectively)   (30,054,231)   (154,240,697)   (21,682,814)
Net interest and fees income after collaboration cost and provision for credit losses   449,120,470    299,370,313    42,084,812 
Realized gains on sales of investments, net   10,053,417    16,933,615    2,380,490 
Net gains on sales of loans   17,878,084    51,040,366    7,175,141 
Other gains, net   11,624,150    29,606,528    4,162,020 
Total non-interest income   39,555,651    97,580,509    13,717,651 
Operating expenses               
Employee compensation and benefits   (148,752,761)   (141,421,960)   (19,880,784)
Share-based compensation expenses   (14,074,776)   (4,330,701)   (608,800)
Taxes and surcharges   (25,658,316)   (24,822,600)   (3,489,506)
Operating lease cost   (11,537,679)   (10,764,863)   (1,513,300)
Other expenses   (74,584,462)   (73,029,230)   (10,266,287)
Total operating expenses   (274,607,994)   (254,369,354)   (35,758,677)
Income before income tax expense   214,068,127    142,581,468    20,043,786 
Income tax expense   (44,212,239)   (35,367,175)   (4,971,839)
Net income   169,855,888    107,214,293    15,071,947 
Earnings per share               
Basic   0.12    0.08    0.011 
Diluted   0.11    0.07    0.010 
Other comprehensive (losses)/income               
Foreign currency translation adjustment   (1,618,941)   18,747,600    2,635,496 
Comprehensive income   168,236,947    125,961,893    17,707,443 

 

1

 

 

Summary consolidated balance sheet data

 

   As of
December 31,
2021
   As of September 30, 2022 
   RMB   RMB   US$ 
Cash, cash equivalents and restricted cash   2,231,437,361    1,373,242,766    193,047,412 
Loans principal, interest and financing service fee receivables (net of allowance for credit losses)   8,436,866,515    8,527,545,722    1,198,783,401 
Loans held-for-sale   733,975,352    1,016,173,196    142,851,367 
Other assets(1)   2,983,892,119    3,034,197,839    426,540,780 
Total assets   14,386,171,347    13,951,159,523    1,961,222,960 
Interest-bearing borrowings(2)   8,087,142,080    7,600,291,065    1,068,432,005 
Other liabilities(3)   2,480,741,527    2,470,378,034    347,280,247 
Total liabilities   10,567,883,607    10,070,669,099    1,415,712,252 
Total shareholders’ equity   3,818,287,740    3,880,490,424    545,510,709 

 

 

Notes:

(1)Represents the sum of (i) investment securities, (ii) property and equipment, (iii) intangible assets and goodwill, (iv) deferred tax assets, (v) deposits, (vi) guaranteed assets, (vii) right-of-use assets, and (viii) other assets, as presented in our consolidated balance sheet in Exhibit 99.2 to this report on Form 6-K.

(2)Represents the sum of (i) borrowings under agreements to repurchase, and (ii) other borrowings, as presented in our consolidated balance sheet in Exhibit 99.2 to this report on Form 6-K.

(3)Represents the sum of (i) accrued employee benefits, (ii) income taxes payable, (iii) deferred tax liabilities, (iv) lease liabilities, (v) credit risk mitigation position, and (vi) other liabilities, as presented in our consolidated balance sheet in Exhibit 99.2 to this report on Form 6-K.

 

2

 

 

Non-GAAP Financial Measure

 

We use adjusted net income, a non-GAAP financial measure, in evaluating our operating results and for financial and operational decision-making purposes. We believe that adjusted net income helps identify underlying trends in our business by excluding the impact of share-based compensation expenses, which are non-cash charges. We believe that adjusted net income provides useful information about our operating results, enhances the overall understanding of our past performance and future prospects and allows for greater visibility with respect to key metrics used by our management in its financial and operational decision-making.

 

Adjusted net income is not defined under U.S. GAAP and is not presented in accordance with U.S. GAAP. This non-GAAP financial measure should not be considered in isolation from, or as a substitute for its most directly comparable financial measure prepared in accordance with U.S. GAAP. A reconciliation of the historical non-GAAP financial measure to its most directly comparable GAAP measure has been provided in the table included below. Investors are encouraged to review the reconciliation of the historical non-GAAP financial measure to its most directly comparable GAAP financial measure. As adjusted net income has material limitations as an analytical metric and may not be calculated in the same manner by all companies, it may not be comparable to other similarly titled measures used by other companies. In light of the foregoing limitations, you should not consider adjusted net income as a substitute for, or superior to, net income prepared in accordance with U.S. GAAP. We encourage investors and others to review our financial information in its entirety and not rely on a single financial measure.

 

The following table reconciles our adjusted net income for the periods presented to the most directly comparable financial measure calculated and presented in accordance with U.S. GAAP, which is net income.

 

   For the Nine Months Ended September 30, 
   2021   2022 
   RMB   RMB   US$ 
Net income   169,855,888    107,214,293    15,071,947 
Add: share-based compensation expenses   14,074,776    4,330,701    608,800 
Adjusted net income   183,930,664    111,544,994    15,680,747 

 

Results of Operations

 

Total operating income

 

Our total operating income represents the sum of (i) net interest and fees income after collaboration cost and (ii) total non-interest income. Net interest and fees income after collaboration cost represents (i) total interest and fees income and (ii) interest income charged to sales partners, netting of total interest and fees expenses and collaboration cost for sales partners. For the nine months ended September 30, 2021 and 2022, we generated net interest and fees income after collaboration cost of RMB479.2 million and RMB453.6 million (US$63.8 million), respectively. Total non-interest income comprises net gains on sales of loans, net realized gains on sales of investments and net other gains. For the nine months ended September 30, 2021 and 2022, we generated total non-interest income of RMB39.6 million and RMB97.6 million (US$13.7 million), respectively.

 

Under the contractual arrangements with our trust company partners, we subscribe to subordinated units of the trust plans and also provide services to trust plans. As a result, we are entitled to (i) the investment return payable to us as subordinated holder and (ii) a performance-based service fee of up to 5% per annum of the size of trust plans payable to us for our services provided to trust plans. As subordinated unit holder, we are exposed to variability of returns from activities of trust plans and are therefore required to consolidate the financial results of trust plans. Therefore, the service fee charged to trust plans is considered inter-company transaction and is eliminated together with service expenses of trust plans for accounting purposes. As a result, the total payments to us under our trust lending model, together with the interest spread under our small loan direct lending model and certain non-interest income, is reflected on our consolidated financial statements as total operating income.

 

3

 

 

The following table sets forth a breakdown of our total operating income for the periods indicated.

 

   For the Nine Months Ended September 30, 
   2021   2022 
   RMB   RMB   US$ 
Interest and fees income            
Interest and financing service fees on loans   1,325,657,014    1,180,106,666    165,896,769 
Interest on deposits with banks   7,906,514    8,755,924    1,230,888 
Total interest and fees income   1,333,563,528    1,188,862,590    167,127,657 
                
Interest and fees expenses               
Interest expenses on interest-bearing borrowings   (570,366,896)   (583,589,934)   (82,039,774)
Total interest and fees expenses   (570,366,896)   (583,589,934)   (82,039,774)
                
Net interest and fees income   763,196,632    605,272,656    85,087,883 
Interest income charged to sales partners   22,259,910    89,501,328    12,581,898 
Collaboration cost for sales partners   (306,281,841)   (241,162,974)   (33,902,155)
Net interest and fees income after collaboration cost   479,174,701    453,611,010    63,767,626 
                
Non-interest income               
Realized gains on sales of investments, net   10,053,417    16,933,615    2,380,490 
Net gains on sales of loans   17,878,084    51,040,366    7,175,141 
Other gains, net   11,624,150    29,606,528    4,162,020 
Total non-interest income   39,555,651    97,580,509    13,717,651 
Total operating income   518,730,352    551,191,519    77,485,277 

 

Interest and fees income

 

Interest and financing service fees on loans

 

Our interest and financing service fees on loans represent interest payment from borrowers under our trust lending model and direct lending model, and historical financing service fee charged on borrowers for the loan services we provide. Financing service fee is deferred and amortized over the average life of the related loans using the effective interest method. Due to regulatory changes, we ceased charging such financing service fee starting from August 2017.

 

Interest on deposits with banks

 

Our interest on deposits with banks represents interest generated from our cash deposits with banks.

 

Interest and fees expenses

 

Interest expenses on interest-bearing borrowings

 

Interest expenses on interest-bearing borrowings consist primarily of financing costs payable to (i) senior unit holders, and (ii) third parties to whom we transferred certain rights to earnings in loans principal, interest and financing service fee receivables with a repurchase arrangement.

 

4

 

 

Interest income charged to sales partners

 

Interest income charged to sales partners represents fee charged to sales partners who choose to repurchase default loans in installments.

 

Collaboration cost for sales partners

 

Collaboration cost for sales partners represents sales incentives paid to sales partners.

 

Provision for credit losses

 

Provision for credit losses represents the impairment losses of the home equity loans, corporate loans and debt securities.

 

Non-interest income

 

Realized gains on sales of investments, net

 

Realized gains on sales of investments represent realized gains and losses from the disposal of investment securities, presented on a net basis.

 

Net gains on sales of loans

 

Net gains on sales of loans represent realized gains from the disposal of loans, presented on a net basis.

 

Other gains, net

 

Net other gains mainly consist of gains on confiscated credit risk mitigation positions (“CRMP”) and expected credit losses of guarantee in relation to certain financial guarantee arrangements we entered into with a third-party guarantor under the commercial bank partnership.

 

Operating expenses

 

Our operating expenses consist of employee compensation and benefits, share-based compensation expenses, taxes and surcharges, operating lease cost and other expenses. The following table sets forth our operating expenses, in absolute amounts and as percentages of total operating income, for the periods indicated.

 

   For the Nine Months Ended September 30, 
   2021   2022 
   RMB   %   RMB   US$   % 
Operating expenses                    
Employee compensation and benefits   (148,752,761)   28.7    (141,421,960)   (19,880,784)   25.7 
Share-based compensation expenses   (14,074,776)   2.7    (4,330,701)   (608,800)   0.8 
Taxes and surcharges   (25,658,316)   4.9    (24,822,600)   (3,489,506)   4.5 
Operating lease cost   (11,537,679)   2.2    (10,764,863)   (1,513,300)   2.0 
Other expenses   (74,584,462)   14.4    (73,029,230)   (10,266,287)   13.2 
Total operating expenses   (274,607,994)   52.9    (254,369,354)   (35,758,677)   46.2 

 

Other expenses primarily consist of (i) advertising and promotion expenses; (ii) litigation and attorney fees; (iii) consulting fees; (iv) entertainment and traveling expenses; (v) office and commute expenses, which mainly include expenses relating to office renovation, office facility expansion and daily commute; (vi) directors and officers liability insurance; (vii) depreciation and amortization; (viii) communication expenses; and (ix) research and development expenses. The following table sets forth breakdown of other expenses in absolute amounts and as percentages of total operating income, for the periods indicated.

 

5

 

 

   For the Nine Months Ended September 30, 
   2021   2022 
   RMB   %   RMB   US$   % 
Other expenses                    
Advertising and promotion expenses   22,645,530    4.4    29,003,981    4,077,314    5.3 
Litigation and attorney fees   14,292,490    2.8    12,776,243    1,796,056    2.3 
Consulting fees   7,082,325    1.4    7,953,685    1,118,111    1.4 
Entertainment and traveling expenses   7,136,849    1.4    6,837,373    961,183    1.2 
Office and commute expenses   6,767,838    1.3    5,531,007    777,537    1.0 
Directors and officers liability insurance   2,664,241    0.5    2,382,305    334,899    0.4 
Depreciation and amortization   3,095,009    0.6    1,800,560    253,119    0.3 
Communication expenses   3,249,141    0.6    1,721,714    242,035    0.3 
Research and development expenses   1,233,165    0.2    415,703    58,439    0.1 
Others   6,417,874    1.2    4,606,659    647,594    0.8 
Total other expenses   74,584,462    14.4    73,029,230    10,266,287    13.1 

 

Taxation

 

We are subject to various rates of income tax under different jurisdictions. The following summarizes major factors affecting our applicable tax rates in the Cayman Islands, British Virgin Islands, Hong Kong and the PRC.

 

Cayman Islands

 

We are incorporated in the Cayman Islands. Under the current law of the Cayman Islands, we are not subject to income or capital gains tax. In addition, dividend payments are not subject to withholding tax in the Cayman Islands.

 

British Virgin Islands

 

Under the current laws of the British Virgin Islands, our company is not subject to tax on income or capital gains. In addition, upon payments of dividends by our British Virgin Islands subsidiaries to their shareholders, no British Virgin Islands withholding tax will be imposed.

 

Hong Kong

 

Our wholly owned subsidiary, China Financial Services Group Limited, is subject to Hong Kong profits tax on their activities conducted in Hong Kong at a uniform tax rate of 16.5%. Payments of dividends by our subsidiaries to us are not subject to withholding tax in Hong Kong.

 

PRC

 

Our subsidiaries and their subsidiaries in China are companies incorporated under PRC law and, as such, are subject to PRC enterprise income tax on their taxable income in accordance with the relevant PRC income tax laws. Pursuant to the PRC Enterprise Income Tax Law (the “EIT Law”), which became effective on January 1, 2008, and most recently amended on December 29, 2018, a uniform 25% enterprise income tax rate is generally applicable to both foreign-invested enterprises and domestic enterprises, except where a special preferential rate applies. For example, enterprises qualified as “High and New Technology Enterprises” are entitled to a 15% enterprise income tax rate rather than the 25% uniform statutory tax rate. The enterprise income tax is calculated based on the entity’s global income as determined under PRC tax laws and accounting standards.

 

6

 

 

According to the Notice of the Ministry of Finance and the SAT on Implementing the Pilot Program of Replacing Business Tax with Value-Added Tax in an All-round Manner, which became effective on May 1, 2016, and was subsequently amended on March 20, 2019, entities and individuals engaged in the sale of services, intangible assets or fixed assets within the PRC territory are required to pay value-added tax instead of business tax. Following the implementation of the Pilot Plan for Imposition of Value-Added Tax to Replace Business Tax, or the VAT Pilot Plan, most of our PRC subsidiaries and affiliates have been subject to value-added tax (“VAT”), at a rate of 1% (pursuant to the regulatory development in 2020 in response to the COVID-19 pandemic), 3% or 6%, instead of business tax.

 

As a Cayman Islands holding company, we may receive dividends from our PRC subsidiaries through China Financial Services Group Limited. The PRC EIT Law and its implementing rules provide that dividends paid by a PRC entity to a nonresident enterprise for income tax purposes is subject to PRC withholding tax at a rate of 10%, subject to reduction by an applicable tax treaty with China. Pursuant to the Arrangement between Mainland China and the Hong Kong Special Administrative Region for the Avoidance of Double Taxation and Tax Evasion on Income, or the Hong Kong Tax Treaty, the withholding tax rate in respect to the payment of dividends by a PRC enterprise to a Hong Kong enterprise may be reduced to 5% from a standard rate of 10% if the Hong Kong enterprise directly holds at least 25% of the PRC enterprise. Pursuant to the Notice of the State Administration of Taxation on the Issues concerning the Application of the Dividend Clauses of Tax Agreements, or SAT Circular 81, a Hong Kong resident enterprise must meet the following conditions, among others, in order to apply the reduced withholding tax rate: (i) it must be a company; (ii) it must directly own the required percentage of equity interests and voting rights in the PRC resident enterprise; and (iii) it must have directly owned such required percentage in the PRC resident enterprise throughout the 12 months prior to receiving the dividends. The Announcement on Certain Issues Concerning the Beneficial Owner in a Tax Agreement, or Circular 9, was promulgated by the SAT promulgated on February 3, 2018 and became effective from April 1, 2018. Circular 9 provides guidance for determining whether a resident of a tax treaty country is the “beneficial owner” of income under China’s tax treaties and similar arrangements.

 

On January 1, 2020, the State Administration of Taxation issued the Announcement of the State Taxation Administration on Issuing the Administrative Measures for Entitlement to Treaty Benefits for Non-resident Taxpayers, which replaced the Administrative Measures for Nonresident Taxpayers to Enjoy Treatment under Tax Treaties, or SAT Circular 60. The Announcement changed the reporting requirement into collecting, gathering and retaining relevant materials for future reference in accordance with the provisions of these Measures in order to accept the follow-up administration of tax authorities. At the same time, the Announcement adjusts the definition of non-resident taxpayer to make it more accurate, which refers to taxpayers who shall be tax residents of the other contracting party in accordance with the provisions of the clauses on residents of the tax treaties.

 

China Financial Services Group Limited may be able to benefit from the 5% withholding tax rate for the dividends it receives from our PRC subsidiaries if it satisfies the conditions prescribed under SAT Circular 81 and other relevant tax rules and regulations. However, according to SAT Circular 81, if the relevant tax authorities consider the transactions or arrangements we have are for the primary purpose of enjoying a favorable tax treatment, the relevant tax authorities may adjust the favorable withholding tax in the future. In addition, according to Circular 9, a beneficial owner shall generally engage in substantial business activities, and an agent shall not be considered a beneficial owner and, therefore, shall not qualify for those benefits. It is possible, however, under Circular 9, China Financial Services Group Limited would not be considered the “beneficial owner” of any such dividends, and that such dividends would as a result be subject to withholding tax at the rate of 10% rather than the favorable 5% rate applicable under the Hong Kong Tax Treaty.

 

If our holding company in the Cayman Islands or any of our subsidiaries outside China were deemed to be a “resident enterprise” under the PRC EIT Law, it would be subject to enterprise income tax on its worldwide income at a rate of 25%. See “Item 3. Key Information—D. Risk Factors—Risks Related to Doing Business in China—If we are classified as a PRC resident enterprise for PRC enterprise income tax purposes, such classification could result in unfavorable tax consequences to us and our non-PRC shareholders and ADS holders” in our annual report on Form 20-F for the year ended December 31, 2021.

 

7

 

 

Nine Months Ended September 30, 2022 Compared to Nine Months Ended September 30, 2021

 

Interest and fees income 

 

Our interest and fees income decreased by 10.9% to RMB1,188.9 million (US$167.1 million) for the nine months ended September 30, 2022 from RMB1,333.6 million for the same period of 2021, primarily attributable to a decrease in our interest and financing service fees on loans, which was partially offset by an increase in our interest on deposits with banks.

 

Interest and financing service fees on loans 

 

Our interest and financing service fees on loans decreased by 11.0% to RMB1,180.1 million (US$165.9 million) for the nine months ended September 30, 2022 from RMB1,325.7 million for the same period of 2021, primarily attributable to a decrease in the balance of average daily outstanding loan principal, mainly as a result of the Company’s transferal of loans under the traditional facilitation model to third parties in bulk during the fourth quarter of 2021, which was partially offset by an increase in the total outstanding loan principal under the collaboration model.

 

Interest on deposits with banks 

 

Our interest on deposits with banks increased by 11.4% to RMB8.8 million (US$1.2 million) for the nine months ended September 30, 2022 from RMB7.9 million for the same period of 2021, primarily attributable to the higher daily average amount of time deposits.

 

Interest and fees expenses 

 

Our interest and fees expenses increased by 2.3% to RMB583.6 million (US$82.0 million) for the nine months ended September 30, 2022 from RMB570.4 million in the same period of 2021, primarily due to an increase in the average daily outstanding balance of other borrowings.

 

Interest income charged to sales partners

 

In the event of a loan defaults and the sales partner chooses to repurchase such loan in installments, we charge certain percentage of the loan as the interest income charged to sales partners. The interest income charged to sales partners increased significantly to RMB89.5 million (US$12.6 million) for the nine months ended September 30, 2022 from RMB22.3 million for the same period of 2021, primarily attributable to an increase in the delinquent loans that were repurchased by the sales partners in installments.

 

Collaboration cost for sales partners 

 

Our collaboration cost for sales partners decreased by 21.3% to RMB241.2 million (US$33.9 million) for the nine months ended September 30, 2022 from RMB306.3 million for the same period of 2021, primarily attributable to a lower average fee rate we paid to sales partners in the nine months ended September 30, 2022. The fee rate under collaboration model varies based on different collaboration model types and the terms of the loan.

 

Net interest and fees income after collaboration cost

 

As a result of the foregoing, our net interest and fees income after collaboration cost decreased by 5.3% to RMB453.6 million (US$63.8 million) for the nine months ended September 30, 2022 from RMB479.2 million for the same period of 2021.

 

Provision for credit losses 

 

Our provision for credit losses increased significantly to RMB154.2 million (US$21.7 million) for the nine months ended September 30, 2022 from RMB30.1 million for the same period of 2021, primarily attributable to the heightened economic uncertainty caused by COVID-19 pandemic and the relevant prevention and control measures, as well as the downward pressure faced by China’s real estate market during the third quarter of 2022.

 

8

 

 

Total non-interest income

 

Our total non-interest income increased by 146.2% to RMB97.6 million (US$13.8 million) for the nine months ended September 30, 2022 from RMB39.6 million for the same period of 2021.

 

Realized gains on sales of investments, net

 

Our realized gains on sales of investments increased by 67.3% to RMB16.9 million (US$2.4 million) for the nine months ended September 30, 2022 from RMB10.1 million for the same period of 2021, primarily attributable to an increase in gains from wealth management products.

 

Net gains on sales of loans 

 

Our net gains on sales of loans increased by 184.9% to RMB51.0 million (US$7.2 million) for the nine months ended September 30, 2022 from RMB17.9 million for the same period of 2021, primarily attributable to an increase in the repayment by sales partners of delinquent loans they agreed to repurchase by installments.

 

Other gains, net 

 

Our net other gains increased by 155.2% to RMB29.6 million (US$4.2 million) for the nine months ended September 30, 2022 from RMB11.6 million for the same period of 2021, primarily attributable to an increase in gains on confiscated CRMP.

 

Total operating expenses 

 

Our total operating expenses decreased by 7.4% to RMB254.3 million (US$35.8 million) for the nine months ended September 30, 2022 from RMB274.6 million for the same period of 2021, primarily attributable to decreases in share-based compensation expenses and employee compensation and benefits.

 

Employee compensation and benefits 

 

Our employee compensation and benefits decreased by 5.0% to RMB141.4 million (US$19.9 million) for the nine months ended September 30, 2022 from RMB148.8 million for the same period in 2021, primarily attributable to a decrease in incentives granted to sales personnel, resulting from a lower loan origination volume in the nine months ended September 30, 2022 as comparted to the same period of 2021.

 

Share-based compensation expenses 

 

Our share-based compensation expenses decreased by 69.5% to RMB4.3 million (US$0.6 million) for the nine months ended September 30, 2022 from RMB14.1 million for the same period of 2021. According to the share option plan adopted on December 31, 2019, approximately 50%, 30% and 20% of the option granted will be vested on December 31, 2020, 2021 and 2022, respectively. Related compensation cost of the option grants will be recognized over the requisite period.

 

Taxes and surcharges 

 

Our taxes and surcharges decreased by 3.5% to RMB24.8 million (US$3.5 million) for the nine months ended September 30, 2022 from RMB25.7 million for the same period of 2021, primarily attributable to a decrease in the non-deductible VAT. Certain amounts in our business operations are characterized as “service fees charged to trust plans,” which are non-deductible items. According to applicable PRC tax regulations, “service fees charged to trust plans” are subject to a 6% VAT on the subsidiary level, but are not recorded as an input VAT on a consolidated trust plan level. “Service fees charged to trust plans” decreased in the nine months ended September 30, 2022 as compared to the same period of 2021, due to maturity of certain trust plans.

 

9

 

 

Operating lease cost 

 

Our operating lease cost decreased by 6.1% to RMB10.8 million (US$1.5 million) for the nine months ended September 30, 2022 from RMB11.5 million for the same period of 2021, primarily attributable to the continued development of the collaboration model, which allowed us to further reduce the office leasing costs associated with our lease of offices to accommodate sales staff.

 

Other expenses 

 

Our other expenses decreased by 2.1% to RMB73.0 million (US$10.3 million) for the nine months ended September 30, 2022 from RMB74.6 million for the same period of 2020, primarily due to a decrease in attorney fees associated with legal proceedings, mainly as a result of our switch from the traditional facilitation model to the collaboration model, under which relevant attorney fees are borne by sales partners.

 

Income tax expense

 

Our income tax expense decreased by 19.9% to RMB35.4 million (US$5.0 million) for the nine months ended September 30, 2022 from RMB44.2 million for the same period of 2021, primarily attributable to a decrease in our taxable income. Effective tax rate increased to 24.8% for the nine months ended September 30, 2022 from 20.7% for the same period of 2021, primarily due to a decrease in the tax-free investment income.

 

Net income

 

As a result of the foregoing, our net income decreased by 36.9% to RMB107.2 million (US$15.1 million) for the nine months ended September 30, 2022 from RMB169.9 million for the same period of 2021.

 

Liquidity and Capital Resources

 

Cash Flows and Working Capital

 

Our principal sources of liquidity have been cash generated from operating activities. We had cash, cash equivalents and restricted cash of RMB1.4 billion (US$0.2 billion) as of September 30, 2022, substantially all of which were held by our PRC subsidiaries. Our cash and cash equivalents consist primarily of bank deposits and are primarily denominated in Renminbi. We believe that our current cash and anticipated cash flow from financing activities will be sufficient to meet our anticipated cash needs, including our cash needs for working capital and capital expenditures for at least the next 12 months.

 

We intend to finance our future working capital requirements and capital expenditures from funds provided by operating activities and raised from financing activities. We may, however, require additional cash due to changing business conditions or other future developments, including any investments or acquisitions we may decide to pursue. If our existing cash is insufficient to meet our requirements, we may seek to issue debt or equity securities or obtain additional credit facilities. Financing may be unavailable in the amounts we need or on terms acceptable to us, if at all. Issuance of additional equity securities, including convertible debt securities, would dilute our earnings per share. The incurrence of debt would divert cash for working capital and capital expenditures to service debt obligations and could result in operating and financial covenants that restrict our operations and our ability to pay dividends to our shareholders. If we are unable to obtain additional equity or debt financing as required, our business operations and prospects may suffer.

 

10

 

 

As a holding company with no material operations of our own, we conduct our operations primarily through our PRC subsidiaries in China. We are permitted under PRC laws and regulations to provide funding to our PRC subsidiaries in China through capital contributions or loans, subject to the approval of government authorities and limits on the amount of capital contributions and loans. The ability of our subsidiaries in China to make dividends or other cash payments to us is subject to various restrictions under PRC laws and regulations. Deterioration in the financial condition, earnings or cash flow of our subsidiaries for any reason, as well as any changes in Chinese laws or regulations, could limit or impair their ability to pay such distributions.

 

The following table sets forth a summary of our cash flows for the periods indicated.

 

   For the Nine Months Ended September 30, 
   2021   2022 
   RMB   RMB   US$ 
Net cash provided by operating activities   672,409,552    963,776,664    135,485,579 
Net cash used in investing activities   (3,161,532,617)   (1,279,865,040)   (179,920,579)
Net cash provided by/(used in) financing activities   2,492,596,106    (553,286,878)   (77,779,838)
Net increase/(decrease) in cash, cash equivalents and restricted cash   3,473,041    (869,375,254)   (122,214,839)
Cash, cash equivalents and restricted cash at beginning of the period   1,960,922,758    2,231,437,361    313,690,498 
Effect of exchange rate change on cash, cash equivalents and restricted cash   (253,222)   11,180,659    1,571,752 
Cash, cash equivalents and restricted cash at end of the period   1,964,142,577    1,373,242,766    193,047,412 

 

Operating Activities

 

Net cash provided by operating activities was RMB963.8 million (US$135.5 million) in the nine months ended September 30, 2022 due to net income of RMB107.2 million (US$15.1 million), mainly adjusted for (i) provision for credit losses of RMB154.2 million (US$21.7 million), (ii) share-based compensation expenses of RMB4.3 million (US$0.6 million), (iii) depreciation and amortization of RMB1.8 million (US$0.3 million), (iv) deferred tax benefit of RMB86.0 million(US$12.1 million), (v) gains on sale of loans of RMB51.0 million (US$7.2 million), (vi) loans held-for-sale for originations and purchase of RMB197.1 million (US$27.7 million), and (vii) proceeds from sales and paydowns of loans originally classified as held for sale of RMB1,127.7 million (US$158.5 million). Changes in operating assets and liabilities consisted of (i) a decrease in other operating liabilities of RMB43.9 million (US$6.2 million), (ii) an increase in other operating assets of RMB78.1 million (US$11.0 million), (iii) a decrease in deposits of RMB21.7 million (US$3.1 million), and (iv) an increase of CRMP of RMB13.5 million (US$1.9 million).    

 

Investing Activities

 

Net cash used in investing activities was RMB1,279.9 million (US$179.9 million) in the nine months ended September 30, 2022, which was attributable to (i) purchase of investment securities of RMB6,707.9 million (US$943.0 million), (ii) loans originated, net of principal collected of RMB2,274.6 million (US$319.8 million) and (iii) purchases of property, equipment and intangible assets of RMB1.5 million (US$0.2 million), offset by (i) proceeds from sales of investment securities of RMB6,824.6 million (US$959.4 million), (ii) proceeds from sales of loans of RMB879.3 million (US$123.6 million) and (iii) proceeds from disposal of property and equipment and intangible assets of RMB0.2 million (US$0.1 million).

 

Financing Activities

 

Net cash used in financing activities was RMB553.3 million (US$77.8 million) in the nine months ended September 30, 2022, which was attributable to (i) repayment of interest-bearing borrowings of RMB1,816.0 million (US$255.3 million) and (ii) repurchase of ordinary shares of RMB68.1 million (US$9.6 million), offset by proceeds from interest-bearing borrowings of RMB1,330.8 million (US$187.1 million).

 

11

 

 

Capital Expenditures

 

Our capital expenditures represent purchases of property, equipment and intangible assets necessary to support our operations. Our capital expenditures were RMB2.8 million and RMB1.5 million (US$0.2 million) for the nine months ended September 30, 2021 and 2022, respectively.

 

Off-Balance Sheet Commitments and Arrangements

 

We launched in 2021 a new funding model in cooperation with commercial banks, under which our commercial bank partners are responsible for reviewing and approving the loan while we charge a service fee for our loan facilitation services. For loans funded by the proceeds from third-party commercial banks as our commercial bank partners, each underlying loan and borrower has to be approved by the third-party commercial banks individually. Once the loan is approved by and originated by the third-party commercial bank, the fund is provided by the third-party commercial bank to the borrower and a lending relationship between the borrower and the third-party commercial bank is established through a loan agreement. Effectively, we offer loan facilitation and matching services to the borrowers who have credit needs and the commercial banks who originate loans directly to borrowers referred by us. We continue to provide post-origination services to the borrowers over the term of the loan agreement. As we are not the legal lender or borrower in the loan origination and repayment process, we do not record loans principal, interest and financing service fee receivables arising from these loans nor interest-bearing borrowings to the third-party commercial banks.

 

Apart from the above, we have not entered into any derivative contracts that are indexed to our shares and classified as shareholders’ equity, or that are not reflected in our consolidated financial statements. Furthermore, we do not have any retained or contingent interest in assets transferred to an unconsolidated entity that serves as credit, liquidity or market risk support to such entity. Moreover, we do not have any variable interest in any unconsolidated entity that provides financing, liquidity, market risk or credit support to us or engages in leasing, hedging or product development services with us.

 

Contractual Obligations

 

We lease multiple office spaces which are contracted under various non-cancelable operating leases, most of which provide extension or early termination options and are generally expired in one to four years. We do not enter into any finance leases or leases where our group is a lessor. Moreover, the existing operating lease agreements do not contain any residual value guarantees or material restrictive covenants.

 

Management determines if an arrangement is a lease at inception and records the leases in the financial statements upon lease commencement, which is the date when the underlying office space is made available for use by the lessor. The incremental borrowing rates determined for computing the lease liabilities are based on the People’s Bank of China Benchmark Rates for terms of loans ranging from zero (exclusive) to five years and above.

 

 

12

 

 

Exhibit 99.2

 

CNFINANCE HOLDINGS LIMITED

 

Index to Unaudited Condensed Consolidated Financial Statements
 

Contents   Pages
Condensed Consolidated Balance Sheets as of December 31, 2021 and September 30, 2022 (Unaudited)   2
Unaudited Condensed Consolidated Statements of Comprehensive Income for the Nine Months Ended September 30, 2021 and 2022   3
Unaudited Condensed Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2021 and 2022   5
Unaudited Condensed Consolidated Statements of Changes in Shareholders’ Equity for the Nine Months Ended September 30, 2021 and 2022   7
Notes to the Unaudited Condensed Consolidated Financial Statements   8

 

 

 

 

CNFINANCE HOLDINGS LIMITED

 

Condensed consolidated balance sheets as of December 31, 2021 and September 30, 2022(unaudited)

 

   Note  December 31,
2021
   September 30,
2022
 
      RMB   RMB 
Assets           
            
Cash, cash equivalents and restricted cash     2,231,437,361   1,373,242,766 
Loans principal, interest and financing service fee receivables  4   9,412,717,366    9,544,625,067 
Allowance for credit losses      975,850,851    1,017,079,345 
              
Net loans principal, interest and financing service fee receivables      8,436,866,515    8,527,545,722 
Loans held-for-sale (include RMB24,696,075 and RMB11,694,198 measured at fair value as of December 31, 2021 and September 30, 2022, respectively)      733,975,352    1,016,173,196 
Investment securities  5   1,088,044,211    962,415,052 
Property and equipment      3,041,946    2,890,796 
Intangible assets and goodwill  6   4,009,372    3,615,006 
Deferred tax assets      21,068,094    23,813,730 
Deposits      156,954,100    135,245,374 
Guaranteed assets      1,289,751,459    1,508,770,981 
Right-of-use assets      16,196,806    15,545,649 
Other assets      404,826,131    381,901,251 
              
Total assets      14,386,171,347    13,951,159,523 
              
Liabilities and shareholders’ equity             
              
Interest-bearing borrowings  7   
 
    
 
 
Borrowings under agreements to repurchase      45,250,000    5,965,976 
Other borrowings      8,041,892,080    7,594,325,089 
Accrued employee benefits      24,223,752    23,011,380 
Income taxes payable      154,957,182    170,245,184 
Deferred tax liabilities      151,828,860    68,524,985 
Lease liabilities      15,521,022    14,830,454 
Credit risk mitigation position  8   1,348,449,426    1,361,971,614 
Other liabilities      785,761,285    831,794,417 
              
Total liabilities      10,567,883,607    10,070,669,099 
              
Ordinary shares      916,743    916,743 
Treasury stock      
-
    (68,089,911)
Additional paid-in capital      1,018,429,249    1,022,759,950 
Retained earnings      2,824,335,263    2,931,549,556 
Accumulated other comprehensive losses  9   (25,393,515)   (6,645,914)
              
Total shareholders’ equity      3,818,287,740    3,880,490,424 
              
Total liabilities and shareholders’ equity      14,386,171,347    13,951,159,523 

 

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

 

2

 

 

CNFINANCE HOLDINGS LIMITED

 

Unaudited condensed consolidated statements of comprehensive income for the nine months ended September 30, 2021 and 2022

 

      Nine months ended
September 30,
 
   Note  2021   2022 
      RMB   RMB 
            
Interest and fees income           
Interest and financing service fees on loans  10  1,325,657,014   1,180,106,666 
Interest on deposits with banks     7,906,514   8,755,924 
              
Total interest and fees income      1,333,563,528    1,188,862,590 
              
Interest and fees expenses             
Interest expenses on interest-bearing borrowings      (570,366,896)   (583,589,934)
              
Total interest and fees expenses      (570,366,896)   (583,589,934)
              
Net interest and fees income      763,196,632    605,272,656 
Interest income charged to sales partners  11   22,259,910    89,501,328 
Collaboration cost for sales partners  12   (306,281,841)   (241,162,974)
              
Net interest and fees income after collaboration cost      479,174,701    453,611,010 
              

Provision for credit losses (net of increase in guaranteed recoverable assets of RMB285,613,359 and RMB544,712,308 for period ended September 30, 2021 and 2022, respectively)

      (30,054,230)   (154,240,697)
              
Net interest and fees income after collaboration cost and provision for credit losses      449,120,471    299,370,313 
              
Realized gains on sales of investments, net      10,053,417    16,933,615 
Net gains on sales of loans  13   17,878,084    51,040,366 
Other gains, net      11,624,150    29,606,528 
              
Total non-interest incomes      39,555,651    97,580,509 
              
Operating expenses             
Employee compensation and benefits      (148,752,761)   (141,421,960)
Share-based compensation expenses  17   (14,074,776)   (4,330,701)
Taxes and surcharges      (25,658,316)   (24,822,600)
Operating lease cost  19   (11,537,679)   (10,764,863)
Other expenses  14   (74,584,462)   (73,029,230)
              
Total operating expenses      (274,607,994)   (254,369,354)

 

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

 

3

 

 

CNFINANCE HOLDINGS LIMITED

 

Unaudited condensed consolidated statements of comprehensive income for the nine months ended September 30, 2021 and 2022

 

      Nine months ended
September 30,
 
   Note  2021   2022 
      RMB   RMB 
            
Income before income tax expense     214,068,127   142,581,468 
Income tax expense  15   (44,212,239)   (35,367,175)
              
Net income      169,855,888    107,214,293 
              
Earnings per share  16          
Basic      0.12    0.08 
Diluted      0.11    0.07 
              
Other comprehensive (losses)/income             
Net unrealized income on investment securities      -    - 
Foreign currency translation adjustment      (1,618,941)   18,747,600 
              
Comprehensive income      168,236,947    125,961,893 

 

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

 

4

 

 

CNFINANCE HOLDINGS LIMITED

 

Unaudited condensed consolidated statements of cash flows for the nine months ended September 30, 2021 and 2022

 

    Nine months ended
September 30,
 
    2021     2022  
    RMB     RMB  
             
Cash flows from operating activities:            
             
Net income     169,855,888       107,214,293  
                 
Adjustments to reconcile net income to net cash provided by operating activities:                
                 
Provision for credit losses     30,054,231       154,240,697  
Depreciation and amortization     3,095,009       1,800,560  
Share-based compensation expenses     14,074,776       4,330,701  
Net losses/(gains) on disposal of property and equipment     (8 )     21,816  
Foreign exchange gains     (681,053 )     (11,112,960 )
Deferred tax benefit     (116,124,224 )     (86,048,732 )
Gains on sale of loans     (17,878,084 )     (51,040,366 )
Profit and loss arising from fair value changes     (4,969,838 )     497,931  
                 
Loans held-for-sale:                
Originations and purchases     (141,704,162 )     (197,060,281 )
Proceeds from sales and paydowns of loans originally classified as held for sale     692,112,844       1,127,746,992  
                 
Changes in operating assets and liabilities:                
Deposits     (43,591,028 )     21,708,726  
Credit risk mitigation position     197,441,382       13,522,188  
Other operating assets     (90,535,173 )     (78,139,569 )
Other operating liabilities     (18,741,008 )     (43,905,332 )
                 
Net cash provided by operating activities     672,409,552       963,776,664  
                 
Cash flows from investing activities:                
                 
Loans originated, net of principal collected     (2,374,649,478 )     (2,274,556,277 )
Proceeds from sales of investment securities     6,384,280,000       6,824,586,146  
Cash received from disposal of investment in equity securities     10,000,000       -  
Proceeds from disposal of property and equipment and intangible assets     756,502       240,650  
Proceeds from sales of loans     233,211,700       879,272,084  
Purchases of investment securities     (7,412,337,000 )     (6,707,890,132 )
Purchases of property, equipment and intangible assets     (2,794,341 )     (1,517,511 )
                 
Net cash used in investing activities     (3,161,532,617 )     (1,279,865,040 )

  

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

 

5

 

 

CNFINANCE HOLDINGS LIMITED

 

Unaudited condensed consolidated statements of cash flows for the nine months ended September 30, 2021 and 2022

 

   Nine months ended
September 30,
 
   2021   2022 
   RMB   RMB 
         
Cash flows from financing activities:        
         
Proceeds from interest-bearing borrowings  5,188,650,357   1,330,828,813 
Repurchase of ordinary shares   
-
    (68,089,911)
Repayment of interest-bearing borrowings   (2,696,054,251)   (1,816,025,780)
           
Net cash provided by/(used in) financing activities   2,492,596,106    (553,286,878)
           
Net increase/(decrease) in cash, cash equivalents and restricted cash   3,473,041    (869,375,254)
           
Cash, cash equivalents and restricted cash at the beginning of the period   1,960,922,758    2,231,437,361 
           
Effect of exchange rate change on cash, cash equivalents and restricted cash   (253,222)   11,180,659 
           
Cash, cash equivalents and restricted cash at the end of the period   1,964,142,577    1,373,242,766 
           
Supplemental disclosures of cash flow information:          
Income taxes paid   93,793,810    89,711,389 
Interest expense paid   629,718,004    585,620,291 

 

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

 

6

 

 

CNFINANCE HOLDINGS LIMITED

 

Unaudited condensed consolidated statements of changes in shareholders’ equity for the nine months ended September 30, 2021 and 2022

 

   Note 

Ordinary

Shares

  

Treasury

Stock

   Additional
paid-in
capital
  

Accumulated
other
comprehensive

income/(losses)

  

Retained

earnings

   Total
equity
 
      RMB   RMB   RMB   RMB   RMB   RMB 
                            
Balance as of January 1, 2021     916,743  
-
   999,662,882   (18,456,546)  2,759,127,799   3,741,250,878 
Net income      
-
    
-
    
-
    
-
    169,855,888    169,855,888 
Foreign currency translation adjustment      
-
    
-
    
-
    (1,618,941)   
-
    (1,618,941) 
Share-based compensation  17   
-
    
-
    14,074,776    
-
    
-
    14,074,776 
                                  
Balance as of September 30, 2021      916,743    
-
    1,013,737,658    (20,075,487)   2,928,983,687    3,923,562,601 
                                  
Balance as of January 1, 2022      916,743    
-
    1,018,429,249    (25,393,515)   2,824,335,263    3,818,287,740 
Repurchase of ordinary shares           (68,089,911)   
-
    
-
    
-
    (68,089,911)
Net income      
-
    
-
    
-
    
-
    107,214,293    107,214,293 
Foreign currency translation adjustment      
-
    
-
    
-
    18,747,601    
-
    18,747,601 
Share-based compensation  17   
-
    
-
    4,330,701    
-
    
-
    4,330,701 
                                  
Balance as of September 30, 2022      916,743    (68,089,911)   1,022,759,950    (6,645,914)   2,931,549,556    3,880,490,424 

 

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

 

7

 

 

CNFINANCE HOLDINGS LIMITED

 

Notes to the unaudited condensed consolidated financial statements

 

(Expressed in Renminbi unless otherwise stated)

 

1.BASIC OF PRESENTATION

 

Basis of preparation

 

The accompanying unaudited interim condensed consolidated balance sheet as of September 30, 2022, the unaudited interim condensed consolidated statements of comprehensive loss for the nine months ended September 30, 2021 and 2022, the cashflows for the nine months ended September 30, 2021 and 2022, and the related footnote disclosures are unaudited. These unaudited interim condensed consolidated financial statements of the Company have been prepared in accordance with U.S. Generally Accepted Accounting Principles (“U.S. GAAP”) for interim financial information using accounting policies that are consistent with those used in the preparation of the Company’s audited consolidated financial statements for the year ended December 31, 2021. Accordingly, these unaudited interim condensed consolidated financial statements do not include all of the information and footnotes required by U.S. GAAP for annual financial statements.

 

In the opinion of management, the accompanying unaudited interim condensed consolidated financial statements contain all normal recurring adjustments necessary to present fairly the financial position, operating results and cash flows of the Company for each of the periods presented. The results of operations for the nine months ended September 30, 2022 are not necessarily indicative of results to be expected for any other interim period or for the full year of 2022. The consolidated balance sheet as of December 31, 2021 was derived from the audited consolidated financial statements at that date but does not include all of the disclosures required by U.S. GAAP for annual financial statements. These unaudited interim condensed consolidated financial statements should be read in conjunction with the Company’s consolidated financial statements for the year ended December 31, 2021.

 

Variable interest entities (“VIEs”)

 

Structured funds

 

The Group grants loans to customers through structured funds set up by trust companies. The assets of the structured funds can only be used to settle obligations of consolidated VIEs. The Group is general partner of the funds, promising the expected returns for limited partners, and providing credit enhancement on the loans to customers under the funds. The Group is also the manager of the funds, making decisions in the loan origination process. The Group is the primary beneficiary of the funds as it has the power to direct the activities that most significantly impact the economic performance of the funds and it has obligation to absorb losses of the funds that could potentially be significant to the funds or the right to receive benefits from the funds that could potentially be significant to the funds. The Group consolidates the structured funds as it is the primary beneficiary of the funds as of September 30, 2022.

 

8

 

 

CNFINANCE HOLDINGS LIMITED

 

Notes to the unaudited condensed consolidated financial statements

 

(Expressed in Renminbi unless otherwise stated)

 

2.SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

 

(a)Recently issued accounting standards

 

ASU 2022-02 - Financial Instruments - Credit Losses (Topic 326): Troubled Debt Restructurings and Vintage Disclosures

 

The ASU 2022-02 is to be adopted on a prospective basis and will be effective for the Group on January 1, 2023, although early adoption is permitted. Adoption of the accounting standard is not expected to have an impact on the Group’s operating results or financial position.

 

ASU 2022-03 -Accounting Standards Update No. 2022-03—Fair Value Measurement (Topic 820): Fair Value Measurement of Equity Securities Subject to Contractual Sale Restrictions

 

The ASU 2022-03 is to be adopted on a prospective basis and will be effective for the Group on January 1, 2024, although early adoption is permitted. Adoption of the accounting standard is not expected to have an impact on the Group’s operating results or financial position, as the Company excludes such restrictions when valuing equity securities.

 

(b)Principles of consolidation

 

The accompanying unaudited condensed consolidated financial statements include the unaudited condensed financial statements of the Group, its subsidiaries and consolidated VIEs. All intercompany transactions and balances have been eliminated in consolidation. The Group accounts for investments over which it has significant influence but not a controlling financial interest using the equity method of accounting.

 

(c)Currency translation for financial statements presentation

 

The Group uses Renminbi (“RMB”) as its reporting currency. The United States Dollar (“USD”) is the functional currency of the Company incorporated in Cayman and the Group’s subsidiary Sincere Fame incorporated in British Virgin Islands, and the Hong Kong Dollar (“HKD”) is the functional currency of the Group’s subsidiary China Financial Services Group Limited incorporated in Hong Kong and the RMB is the functional currency of the Group’s PRC subsidiaries.

 

The financial statements of the Group are translated from the functional currency to the reporting currency, RMB. Assets and liabilities of the subsidiaries are translated into RMB using the exchange rate in effect at each balance sheet date. Income and expenses items are generally translated at the average exchange rates prevailing during the period. Foreign currency translation adjustments arising from these are accumulated as a separate component of shareholders’ deficit on the unaudited condensed consolidated financial statements. The resulting exchange differences are recorded in the unaudited condensed consolidated statements of comprehensive income.

 

(d)Use of estimates

 

The preparation of unaudited condensed consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the unaudited condensed consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Significant items subject to such estimates and assumptions include, allowance for loans principal, interest and financing service fee receivables, guarantee assets, the valuation allowance for deferred tax assets, unrecognized tax benefits, the indefinite reinvestment assertion, guarantee liabilities, the fair value of investment securities and the fair value of share-based compensation.

 

9

 

 

CNFINANCE HOLDINGS LIMITED

 

Notes to the unaudited condensed consolidated financial statements

 

(Expressed in Renminbi unless otherwise stated)

 

2.SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

 

(e)Revenue recognition

 

Interest and financing service fees on loans which are amortized over the contractual life of the related loans are recognized in unaudited condensed consolidated statements of comprehensive income in accordance with ASC 310 using the effective interest method.

 

Service fees under commercial bank partnership is recognized in accordance with ASC 606 when following conditions are met: (i) identify the contract(s) with a customer, (ii) identify the performance obligations in the contract, (iii) determine the transaction price, (iv) allocate the transaction price to the performance obligations in the contract and (v) recognize revenue when (or as) the entity satisfies a performance obligation.

 

The criteria of revenue recognition as they relate to each of the following major revenue generating activities are described below:

 

(i)Interest and financing service fees on loans

 

Interest and financing service fees on loans, which include financing service fees on loans, are collected from borrowers for loans and related services.

 

Interest and financing service fees on loans include the amortization of any discount or premium or differences between the initial carrying amount of an interest-bearing asset and its amount at maturity calculated using the effective interest basis.

 

The effective interest method is a method of calculating the amortized cost of a financial asset and of allocating the interest and financing service fees on loans over the years. The effective interest rate is the rate that exactly discounts estimated future cash payments or receipts through the expected life of the financial instrument. When calculating the effective interest rate, the Group estimates cash flows considering all contractual terms of the financial instrument but does not consider future credit losses. Interest on the impaired assets is recognized using the rate of interest used to discount future cash flows.

 

(ii)Service fees under commercial bank partnership

 

The Group charges certain percentage of the loan granted under the commercial bank partnership as service fees for its loan introduction service, guarantee service, post-loan service provided to the commercial banks. The loan introduction service fees are recognized at the point of time when the loan agreements between commercial banks and the borrowers are effective, and the post-loan service fees and the guarantee service fees are recognized over the period of the loan terms and guarantee terms, respectively.

 

(iii)Interest income charged to sales partners

 

In the event of a loan defaults and the sales partner chooses to repurchase such loan in installments, the Group charges certain percentage of the loan as the interest income charged to sales partners.

 

10

 

 

CNFINANCE HOLDINGS LIMITED

 

Notes to the unaudited condensed consolidated financial statements

 

(Expressed in Renminbi unless otherwise stated)

 

2.SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

 

(iv)Realized gains/(losses) on sales of investments

 

Realized gains/(losses) consist of realized gains and losses from the sale of investment securities, presented on a net basis.

 

(v)Net gains/(losses) on sales of loans

 

Net gains/(losses) on sales of loans refer to any gains and losses from the disposal of loans which is accounted for as a sale under ASC 860.

 

(vi)Gains on confiscation of credit risk mitigation positions (or “CRMPs”)

 

Gains on confiscation of credit risk mitigation positions are recognized to the extent confiscated CRMPs exceed previously recognized allowance for loan losses and guarantee asset when sales partners surrender the CRMPs and the obligation of refunding the CRMPs is released.

 

(f)Loans

 

(i)On-balance sheet loans

 

Loans are reported at their outstanding principal balances net of any unearned income and unamortized deferred fees and costs. Loan origination fees and certain direct origination costs are generally deferred and recognized as adjustments to income over the lives of the related loans.

 

The Group facilitates credit to borrowers through structured funds which are considered as consolidated VIEs and the Group evaluated VIEs for consolidation in accordance with ASC 810. Providing credit strengthening arrangement since March 2018 for the loans to customers under the funds is one of the key factors to determine that the Group should consolidate the structured funds as it is the primary beneficiary of the funds. As a result, the loan principal remains on the Group’s unaudited condensed consolidated balance sheets, whilst the funds received from senior tranches holders are recorded as Other Borrowings in the Group’s unaudited condensed consolidated balance sheets as disclosed in Note 7(b).

 

Non-accrual policies

 

Loans principal, interest and financing service fee receivables are placed on non-accrual status when payments are 90 days contractually past due. When a loan principal, interest and financing service fee receivable is placed on non-accrual status, interest and financing service fees accrual cease. If the loan is non-accrual, the cost recovery method is used and cash collected is applied to first reduce the carrying value of the loan. Otherwise, interest income may be recognized to the extent cash is received. Loans principal, interest and financing service fee receivables may be returned to accrual status when all of the borrower’s delinquent balances of loans principal, interest and financing service fee have been settled and the borrower continue to perform in accordance with the loan terms for a period of at least six months.

 

11

 

 

CNFINANCE HOLDINGS LIMITED

 

Notes to the unaudited condensed consolidated financial statements

 

(Expressed in Renminbi unless otherwise stated)

 

2.SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

 

Charge-off policies

 

For the year ended December 31, 2019, in order to align the Group’s charge-off policies with ASC 326-20-35-8 (superseded ASC 310-10-35-41), the Group revised its charge-off policies as follows:

 

Loans principal, interest and financing service fee receivables are charged down to net realizable value (fair value of collaterals, less estimated costs to sell) when the Group has determined the remaining balance is uncollectable after exhausting all collection efforts. In order to comply with ASC 310 and ASC 326, the Group considers loans principal, interest and financing service fee receivables meeting any of the following conditions as uncollectable and charged-off: (i) death of the borrower; (ii) identification of fraud, and the fraud is officially reported to and filed with relevant law enforcement departments; (iii) sales of loans to third parties; (iv) settlement with the borrower, where the Group releases irrecoverable loans through private negotiations with the borrower where the borrower cannot repay the loan in full through self-funding or voluntary sale of the collateral; (v) disposal through legal proceedings, including but not limited to online arbitrations, judicial auctions and court enforcements; or (vi) loans are 180 days past due unless both well-secured and in the process of collection.

 

Allowance for credit losses

 

Allowance for credit losses represents management’s best estimate of probable losses inherent in the portfolio.

 

Commencing January 1, 2020, CNFinance adopted ASC 326, “Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments”, which replaced the incurred loss methodology for determining the provision for credit losses and allowance for credit losses (“ACL”) with an expected loss methodology that is referred to as the current expected credit loss (“CECL”) model. ASC 326 defines the ACL as a valuation account that is deducted from the amortized cost of a financial asset to present the net amount that management expects to collect on the financial asset over its expected life. All financial assets carried at amortized cost are in the scope of ASC 326, while assets measured at fair value are excluded. The allowance for credit losses is adjusted each period for changes in expected lifetime credit losses.

 

12

 

 

CNFINANCE HOLDINGS LIMITED

 

Notes to the unaudited condensed consolidated financial statements

 

(Expressed in Renminbi unless otherwise stated)

 

2.SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

 

The allowance for credit losses includes an asset-specific component and a statistically based component. The Group aggregates loans sharing similar risk characteristics into pools for purposes of measuring expected credit losses. Pools are reassessed periodically to confirm that all loans within each pool continue to share similar risk characteristics. Expected credit losses for loans that do not share similar risk characteristics with other financial assets are measured individually.

 

Estimation of CECLs requires CNFinance to make assumptions regarding the likelihood and severity of credit loss events and their impact on expected cash flows, which drive the probability of default (PD), loss given default (LGD) and exposure at default (EAD) models. In its loss forecasting framework, ECL is determined primarily by utilizing models for the borrowers’ PD, LGD and EAD and the Group incorporates forward-looking information through the use of macroeconomic scenarios applied over the forecasted life of the assets. These macroeconomic scenarios include variables that have historically been key drivers of increases and decreases in credit losses. These variables include, but are not limited to, gross-domestic product rates, interest rates and consumer price indexes.

 

The ACL for financial assets held at amortized cost is a valuation account that is deducted from, or added to, the amortized cost basis of the financial assets to present the net amount expected to be collected. When credit expectations change, the valuation account is adjusted with changes reported in provision for credit losses. If amounts previously charged off are subsequently expected to be collected, the Group may recognize a negative allowance, which is limited to the amount that was previously charged off.

 

The asset-specific component is calculated under ASC 310-10-35, on an individual basis for the loans whose payments are contractually past due more than 90 days or which are considered impaired. A financial asset is collateral-dependent when the borrower is experiencing financial difficulty and repayment is expected to be provided substantially through the sale or operation of the collateral. When a collateral-dependent financial asset is probable of foreclosure, the Group will measure the ACL based on the fair value of the collateral and we will measure the ACL based on the collateral’s net realizable value (fair value of collateral, less estimated costs to sell).

 

Under the collaboration model, when the Group grants a loan through a trust plan, the loan is with the borrower and guarantee is entered into with a separate counterparty (the sales partner). As such, under the definition of ASC 326-20-20, the guarantee arrangement and lending arrangement would be considered freestanding arrangements. As sale partners will provide guarantee of the entire loan to the Group, collection for loss is probable and estimable when a loss on an insured loan is incurred and recognized. In this case, the Group will recognize guarantee loss recoverable asset in the amount that the Group determines is probable to receive from the guarantor with an offsetting entry to “provision for credit losses” when the Group concludes that the loss recovery is collectible. However, potential recovery that exceeds the recognized loss, if any, (gain contingency) will not be recognized until cash is received. Therefore, the amounts estimated to be recoverable from the proceeds of guarantees will be reported as a separate asset (guarantee asset) in the balance sheet. The increase in guaranteed recoverable assets are included in the income statement as a reduction of the “provision for credit losses”, separate disclosure of the increase in guaranteed recoverable assets will be included in the rollforward of the “allowance for credit losses”. The income statement caption will be modified as “provision for credit losses, net of increase in increase in guaranteed recoverable assets.

 

13

 

 

CNFINANCE HOLDINGS LIMITED

 

Notes to the unaudited condensed consolidated financial statements

 

(Expressed in Renminbi unless otherwise stated)

 

2.SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

 

Loans held-for-sale

 

Loans held-for-sale are measured at the lower of cost or fair value, with valuation changes recorded in noninterest revenue. The valuation is performed on an individual loan basis. Loan origination fees or costs and purchase price discounts or premiums are deferred in a contra loan account until the related loan is sold. The deferred fees or costs and discounts or premiums are adjustments to the basis of the loan and therefore are included in the periodic determination of the lower of cost or fair value adjustments.

 

The loan is derecognized if the Group does not retain any risk and rewards after transferring the loan. Such transfer would be recorded as sales according to ASC 860-10-40-5. At the time of derecognition, any related loan loss allowance is released. Gains and losses on loans transfer as a sale are recognized in the noninterest income.

 

(ii)Off-balance sheet loans

 

For loans funded by the proceeds from third-party commercial banks, each underlying loan and borrower has to be approved by the third-party commercial banks individually. Once the loan is approved by and originated by the third-party commercial bank, the fund is provided by the third-party commercial bank to the borrower and a lending relationship between the borrower and the third-party commercial bank is established through a loan agreement. Effectively, the Group offers loan facilitation and matching services to the borrowers who have credit needs and the commercial banks who originate loans directly to borrowers referred by the Group. The Group continues to provide post-origination services to the borrowers over the term of the loan agreement. Under this scenario, the Group determines that it is not the legal lender or borrower in the loan origination and repayment process. Accordingly, the Group does not record loans principal, interest and financing service fee receivables arising from these loans nor interest-bearing borrowings to the third-party commercial banks.

 

(g)Income tax

 

Income taxes are accounted for under the asset and liability method. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and for operating loss and tax credit carry forwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. The Group recognizes the effect of income tax positions only if those positions are more likely than not of being sustained. Recognized income tax positions are measured at the largest amount that is greater than 50 percent likely of being realized. Changes in recognition or measurement are reflected in the period in which the change in judgment occurs. The Group classifies interest and penalties related to the liability for unrecognized tax benefits as income tax expense.

 

14

 

 

CNFINANCE HOLDINGS LIMITED

 

Notes to the unaudited condensed consolidated financial statements

 

(Expressed in Renminbi unless otherwise stated)

 

2.SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

 

(h)Share-based compensation

 

The Group measures the cost of employee services received in exchange for an award of equity instruments based on the grant-date fair value of the award and recognizes the cost over the period the employee is required to provide service in exchange for the award, which generally is the vesting period. The Group recognizes compensation cost using a front-loading approach for an award with only service conditions that have a graded vesting schedule over the requisite service period for the entire award, net of estimated forfeitures, provided that the cumulative amount of compensation cost recognized at any date at least equals the portion of the grant-date value of such award that is vested at that date. Forfeiture rates are estimated based on historical and future expectations of employee turnover rates.

 

(p)Guarantee liabilities

 

The estimated fair value of the guarantee liabilities at inception of the loans is determined based on a discounted cash flow model, but with reference to estimates of expected loss rates using CECL lifetime methodology. Subsequent to initial recognition, the guarantee liabilities continue to be reduced by recording a credit to net income as the guarantor is released from the guaranteed risk over the terms of the underlying loans, as “other gains, net” in the consolidated statements of comprehensive income.

 

The expected credit losses of the guarantee are accounted for in addition to and separately from the guarantee liability accounted for under ASC 460. The contingent guarantee liabilities are determined using CECL lifetime methodology and recognized in full amount at loan inceptions. At each reporting date, the Group measures the contingent guarantee liabilities of the underlying loans, on a portfolio basis, and the relevant credit losses of guarantee are recorded as “other gains, net” in the consolidated statements of comprehensive income.

 

(i)Fair value measurements

 

The Group uses valuation approaches that maximize the use of observable inputs and minimize the use of unobservable inputs to the extent possible. The Group determines fair value based on assumptions that market participants would use in pricing an asset or liability in the principal or most advantageous market. When considering market participant assumptions in fair value measurements, the following fair value hierarchy distinguishes between observable and unobservable inputs, which are categorized in one of the following levels in accordance with ASU 2011-04 (see Note 3 to the unaudited condensed consolidated financial statements):

 

Level 1 Inputs: Unadjusted quoted prices in active markets for identical assets or liabilities accessible to the reporting entity at the measurement date.

 

Level 2 Inputs: Other than quoted prices included in Level 1 inputs that are observable for the asset or liability, either directly or indirectly, for substantially the full term of the asset or liability.

 

Level 3 Inputs: Unobservable inputs for the asset or liability used to measure fair value to the extent that observable inputs are not available, thereby allowing for situations in which there is little, if any, market activity for the asset or liability at measurement date.

 

15

 

 

CNFINANCE HOLDINGS LIMITED

 

Notes to the unaudited condensed consolidated financial statements

 

(Expressed in Renminbi unless otherwise stated)

 

3Fair value measurements

 

The level in the fair value hierarchy within which a fair value measurement in its entirety falls is based on the lowest level input that is significant to the fair value measurement in its entirety. In situations where there is little, if any, market activity for the asset or liability at the measurement date, the fair value measurement reflects management’s own judgments about the assumptions that market participants would use in pricing the asset or liability. Those judgments are developed by management based on the best information available in the circumstances.

 

Fair Value Hierarchy

 

Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. A fair value measurement assumes that the transaction to sell the asset or transfer the liability occurs in the principal market for the asset or liability or, in the absence of a principal market, the most advantageous market. Valuation techniques that are consistent with the market, income or cost approach, are used to measure fair value.

 

Assets recorded at fair value on a recurring basis mainly include marketable securities. Additionally, from time to time, the Group records fair value adjustments on a nonrecurring basis. These nonrecurring adjustments typically involve application of LOCOM (the lower of cost or fair value) accounting, write-downs of individual assets or application of the measurement alternative for nonmarketable equity securities.

 

Fair Value Measurements

 

A description of the valuation techniques applied to the Group’s major categories of assets and liabilities measured at fair value is as follows.

 

The Group determines fair value primarily based on pricing sources with reasonable levels of price transparency. Where quoted prices are available in an active market, the Group classifies the assets and liabilities within Level 1 of the valuation hierarchy. If quoted market prices are not available, fair value is primarily determined using pricing models using observable trade data, market data, quoted prices of securities with similar characteristics or discounted cash flows. Such instruments would generally be classified within Level 2 of the valuation hierarchy.

 

The following table presents the Group’s fair value hierarchy for those assets measured at fair value on a recurring basis as of December 31, 2021 and September 30, 2022.

 

   September 30, 2022 
   Fair value   Level 1   Level 2   Level 3 
   RMB   RMB   RMB   RMB 
                 
Wealth management products   584,738,005    302,608,884    282,129,121    
-
 
                     
Total   584,738,005    302,608,884    282,129,121    
     -
 

 

16

 

 

CNFINANCE HOLDINGS LIMITED

 

Notes to the unaudited condensed consolidated financial statements

 

(Expressed in Renminbi unless otherwise stated)

 

3Fair value measurements (continued)

 

   December 31, 2021 
   Fair value   Level 1   Level 2   Level 3 
   RMB   RMB   RMB   RMB 
                 
Wealth management products   847,047,295    729,255,924    117,791,371    
-
 
                     
Total   847,047,295    729,255,924    117,791,371    
    -
 

 

The following table presents the Group’s fair value hierarchy for those assets measured at fair value on a non-recurring basis as of December 31, 2021 and September 30, 2022.

 

   September 30, 2022 
   Fair value   Level 1   Level 2   Level 3 
   RMB   RMB   RMB   RMB 
                 
Loans(1)   657,992,453    
    -
    657,992,453    
-
 
Loans held-for-sale(2)   11,694,198    
-
    11,694,198    
-
 
Equity securities(3)   24,010,000    
-
    24,010,000    
-
 
                         
Total   693,696,651    
-
    693,696,651    
-
 

 

   December 31, 2021 
   Fair value   Level 1   Level 2   Level 3 
   RMB   RMB   RMB   RMB 
                 
Loans(1)   368,997,898    
    -
    368,997,898    
-
 
Loans held-for-sale(2)   24,696,075    
-
    24,696,075    
-
 
Equity securities(3)   24,010,000    
-
    24,010,000    
-
 
                     
Total   417,703,973    
-
    417,703,973    
    -
 

 

(1)The Group records nonrecurring fair value adjustments to reflect partial write-downs that are based on the observable market price of the loan or current appraised value of the collateral.

 

(2)Loans held for sale are held at LOCOM which may be written down to fair value on a nonrecurring basis.

 

(3)Nonmarketable equity securities are accounted for using the measurement alternative and can be subject to nonrecurring fair value adjustments to record impairment.

 

During the year ended December 31, 2021 and nine months ended September 30, 2022, there were no transfers between instruments in Level 1 and Level 2. The Group does not have level 3 instruments as of December 31, 2021 and September 30, 2022.

 

17

 

 

CNFINANCE HOLDINGS LIMITED

 

Notes to the unaudited condensed consolidated financial statements

 

(Expressed in Renminbi unless otherwise stated)

 

4Loans principal, interest and financing service fee receivables

 

   Note  December 31,
2021
   September 30,
2022
 
      RMB   RMB 
Home equity loan:  (i)        
Loans principal, interest and financing service fee receivables      9,412,717,366    9,259,642,529 
              
Less: allowance for credit losses  (a)          
- Individually assessed      (61,479,897)   (45,635,286)
- Collectively assessed      (914,370,954)   (965,307,764)
              
Subtotal      (975,850,851)   (1,010,943,050)
              
Net loans principal, interest and financing service fee receivables of home equity loan      8,436,866,515    8,248,699,479 
              
Corporate loan:  (ii)          
Loans principal, interest and financing service fee receivables      
-
    284,982,538 
              
Less: allowance for credit losses      
-
    (6,136,295)
              
Net loans principal, interest and financing service fee receivables of corporate loan      
-
    278,846,243 
              
Net loans principal, interest and financing service fee receivables      8,436,866,515    8,527,545,722 

 

18

 

 

CNFINANCE HOLDINGS LIMITED

 

Notes to the unaudited condensed consolidated financial statements

 

(Expressed in Renminbi unless otherwise stated)

 

4Loans principal, interest and financing service fee receivables (continued)

 

(i)Home equity loan

 

(a)Allowance for credit losses

 

The table below presents the components of allowances for loans principal, interest and financing service fee receivables by impairment methodology with the recorded investment as of September 30, 2021 and September 30, 2022.

 

   Nine months ended September 30, 2022 
   Allowance for
loans which are
collectively
assessed
   Allowance for
loans which are
individually
assessed
   Total 
   RMB   RMB   RMB 
             
As of January 1   914,370,954    61,479,897    975,850,851 
Provision for credit losses   39,674,709    173,064,064    212,738,773 
Charge-offs(1)   (193,168,795)   (242,947,778)   (436,116,573)
Increase in guaranteed recoverable assets   204,430,896    25,223,738    229,654,634 
Recoveries   
-
    28,815,365    28,815,365 
                
As of September 30   965,307,764    45,635,286    1,010,943,050 
                
Net loans principal, interest and financing service fee receivables   8,154,672,302    94,027,177    8,248,699,479 
                
Recorded investment   9,119,980,066    139,662,463    9,259,642,529 

 

19

 

 

CNFINANCE HOLDINGS LIMITED

 

Notes to the unaudited condensed consolidated financial statements

 

(Expressed in Renminbi unless otherwise stated)

 

4Loans principal, interest and financing service fee receivables (continued)

 

   Nine months ended September 30, 2021 
   Allowance for
loans which are
collectively
assessed
   Allowance for
loans which are
individually
assessed
   Total 
   Subtotal   Subtotal   RMB 
   RMB   RMB     
             
As of January 1   535,967,177    71,998,321    607,965,498 
Provision for credit losses   (116,550,594)   128,060,127    11,509,533 
Charge-offs(1)   (1,198,134)   (243,302,896)   (244,501,030)
Increase in guaranteed recoverable assets   81,609,992    155,066,460    236,676,452 
Recoveries   
-
    23,577,905    23,577,905 
                
As of September 30   499,828,441    135,399,917    635,228,358 
                
Net loans principal, interest and financing service fee receivables   9,758,829,979    251,002,604    10,009,832,583 
                
Recorded investment   10,258,658,420    386,402,521    10,645,060,941 

 

(1)In 2020, the Group revised its charge-off policy so that loans that are 180 days past due are charged down to net realizable value (fair value of collateral, less estimated costs to sell) unless the loans are both well-secured and in the process of collection.

 

20

 

 

CNFINANCE HOLDINGS LIMITED

 

Notes to the unaudited condensed consolidated financial statements

 

(Expressed in Renminbi unless otherwise stated)

 

4Loans principal, interest and financing service fee receivables (continued)

 

The Group charges off loans principal, interest and financing service fee receivables if the remaining balance is considered uncollectable. Recovery of loans principal, interest and financing service fee receivables previously charged off would be recorded when received.

 

For the description of the Group’s related accounting policies of allowance for credit losses, see Note 2(f) Loans.

 

The following tables present the aging of allowance for credit losses as of September 30, 2022.

 

   Total
current
   1 - 30 days
past due
   31 - 90 days
past due
   91 - 180 days
past due
   Total
loans
 
   RMB   RMB   RMB   RMB   RMB 
The collaboration model                    
First lien   237,910,121    77,116,334    55,178,321    8,899,717    379,104,493 
Second lien   413,700,563    101,187,722    79,975,921    36,735,569    631,599,775 
                          
Subtotal   651,610,684    178,304,056    135,154,242    45,635,286    1,010,704,268 
                          
The traditional facilitation model                         
First lien   5,703    
-
    149,955    
-
    155,658 
Second lien   83,124    
-
    
-
    
-
    83,124 
                          
Subtotal   88,827    
-
    149,955    
-
    238,782 
                          
Allowance for credit losses   651,699,511    178,304,056    135,304,197    45,635,286    1,010,943,050 

 

21

 

 

CNFINANCE HOLDINGS LIMITED

 

Notes to the unaudited condensed consolidated financial statements

 

(Expressed in Renminbi unless otherwise stated)

 

4Loans principal, interest and financing service fee receivables (continued)

 

The following tables present the aging of allowance for credit losses as of December 31,2021.

 

   Total
current
   1 - 30 days
past due
   31 - 90 days
past due
   91 - 180 days
past due
   Total
loans
 
   RMB   RMB   RMB   RMB   RMB 
The collaboration model                    
First lien   189,814,922    86,537,327    66,784,464    31,394,514    374,531,227 
Second lien   340,800,002    124,542,266    80,395,050    26,996,820    572,734,138 
                          
Subtotal   530,614,924    211,079,593    147,179,514    58,391,334    947,265,365 
                          
The traditional facilitation model                         
First lien   5,618,913    3,503,613    4,980,213    1,574,208    15,676,947 
Second lien   5,491,292    2,285,562    3,617,330    1,514,355    12,908,539 
                          
Subtotal   11,110,205    5,789,175    8,597,543    3,088,563    28,585,486 
                          
Allowance for credit losses   541,725,129    216,868,768    155,777,057    61,479,897    975,850,851 

 

22

 

 

CNFINANCE HOLDINGS LIMITED

 

Notes to the unaudited condensed consolidated financial statements

 

(Expressed in Renminbi unless otherwise stated)

 

4Loans principal, interest and financing service fee receivables (continued)

 

(b)Loan delinquency and non-accrual details

 

The following tables present the aging of past-due loan principal and financing service fee receivables as of September 30, 2022.

 

   Total
current
   1 - 30 days
past due
   31 - 90 days
past due
   91 - 180 days
past due
   181 - 270 days
past due
   271 - 360 days
past due
   over 360 days
past due
   Total
loans
   Total
non-accrual
 
   RMB   RMB   RMB   RMB   RMB   RMB   RMB   RMB   RMB 
The collaboration model                                    
First lien   3,031,554,612    276,591,737    190,294,075    16,290,631    6,932,328    5,243,293    18,862,267    3,545,768,943    47,328,519 
Second lien   4,981,904,634    362,675,696    275,220,859    60,098,879    10,763,925    6,698,897    13,297,348    5,710,660,238    90,859,049 
                                              
Subtotal   8,013,459,246    639,267,433    465,514,934    76,389,510    17,696,253    11,942,190    32,159,615    9,256,429,181    138,187,568 
                                              
The traditional facilitation model                                             
First lien   502,127    -    524,474    -    -    209,094    218,082    1,453,777    427,176 
Second lien   711,852    -    -    -    -    -    1,047,719    1,759,571    1,047,719 
                                              
Subtotal   1,213,979    -    524,474    -    -    209,094    1,265,801    3,213,348    1,474,895 
                                              
Loans principal, interest and financing service fee receivables   8,014,673,225    639,267,433    466,039,408    76,389,510    17,696,253    12,151,284    33,425,416    9,259,642,529    139,662,463 

 

23

 

 

CNFINANCE HOLDINGS LIMITED

 

Notes to the unaudited condensed consolidated financial statements

 

(Expressed in Renminbi unless otherwise stated)

 

4Loans principal, interest and financing service fee receivables (continued)

 

The following tables present the aging of past-due loan principal and financing service fee receivables as of December 31, 2021.

 

   Total
current
   1 - 30 days
past due
   31 - 90 days
past due
   91 - 180 days
past due
   181 - 270 days
past due
   271 - 360 days
past due
   over 360 days
past due
   Total loans   Total
non-accrual
 
   RMB   RMB   RMB   RMB   RMB   RMB   RMB   RMB   RMB 
The collaboration model                                    
First lien   2,814,226,880    325,090,831    230,622,938    65,080,342    6,979,995    5,972,352    24,768,894    3,472,742,232    102,801,583 
Second lien   5,030,913,080    467,836,400    276,784,712    52,043,750    7,455,656    6,468,134    17,308,803    5,858,810,535    83,276,343 
                                              
Subtotal   7,845,139,960    792,927,231    507,407,650    117,124,092    14,435,651    12,440,486    42,077,697    9,331,552,767    186,077,926 
                                              
The traditional facilitation model                                             
First lien   20,814,948    6,532,393    8,334,398    4,887,949    285,023    122,845    653,689    41,631,245    5,949,506 
Second lien   21,237,555    4,238,098    6,081,004    5,027,879    360,727    673,625    1,914,466    39,533,354    7,976,697 
                                              
Subtotal   42,052,503    10,770,491    14,415,402    9,915,828    645,750    796,470    2,568,155    81,164,599    13,926,203 
                                              
Loans principal, interest and financing service fee receivables   7,887,192,463    803,697,722    521,823,052    127,039,920    15,081,401    13,236,956    44,645,852    9,412,717,366    200,004,129 

 

Loans principal, interest and financing service fee receivables are placed on non-accrual status when payments are 90 days contractually past.

 

Any interest accrued on non-accrual loans is reversed at 90 days and charged against current earnings, and interest is thereafter included in earnings only to the extent actually received in cash. When there is doubt regarding the ultimate collectability of principal, all cash receipts are thereafter applied to reduce the recorded investment in the loan.

 

24

 

 

CNFINANCE HOLDINGS LIMITED

 

Notes to the unaudited condensed consolidated financial statements

 

(Expressed in Renminbi unless otherwise stated)

 

4Loans principal, interest and financing service fee receivables (continued)

 

(c)Impaired loans

 

(1)Impaired loans summary

 

   Recorded investment 
  

Unpaid
principal

balance

  

Impaired

loans

  

Impaired loans with related allowance for credit

losses

  

Impaired loans without related allowance for credit

losses

  

Related allowance for credit

losses

 
   RMB   RMB   RMB   RMB   RMB 
                     
First lien   43,112,851    47,755,694    13,977,803    33,777,892    8,899,717 
Second lien   89,049,877    91,906,769    57,305,289    34,601,479    36,735,569 
                          
As of September 30, 2022   132,162,728    139,662,463    71,283,092    68,379,371    45,635,286 
                          
First lien   102,914,225    108,751,090    64,871,825    43,879,265    32,968,721 
Second lien   88,073,367    91,253,039    50,995,087    40,257,952    28,511,176 
                          
As of December 31, 2021   190,987,592    200,004,129    115,866,912    84,137,217    61,479,897 

 

Impaired loans are those loans where the Group, based on current information and events, believes it is probable all amounts due according to the contractual terms of the loan will not be collected. All amounts due according to the contractual terms means that both the contractual interest payments and the contractual principal payments of a loan will be collected as scheduled in the loan agreement. Impaired loans without an allowance generally represent loans that the fair value of the underlying collateral meets or exceeds the loan’s amortized cost.

 

25

 

 

CNFINANCE HOLDINGS LIMITED

 

Notes to the unaudited condensed consolidated financial statements

 

(Expressed in Renminbi unless otherwise stated)

 

4Loans principal, interest and financing service fee receivables (continued)

 

(2)Average recorded investment in impaired loans

 

  

Nine months ended

September 30, 2021

  

Nine months ended

September 30, 2022

 
   Average recorded investment   Interest and fees income recognized   Average recorded investment   Interest and fees income recognized 
   RMB   RMB   RMB   RMB 
                 
First lien   209,780,721    40,805,772    64,281,802    59,959,073 
Second lien   204,379,990    42,672,917    86,125,497    63,190,093 
                     
Impaired loans   414,160,711    83,478,689    150,407,299    123,149,166 

 

(i)Average recorded investment represents ending balance for the last three quarters and does not include the related allowance for credit losses.

 

(ii)The interest and fees income recognized are those interest and financing service fees recognized related to impaired loans. All the amounts are recognized on cash basis.

 

No debt restructuring in which contractual terms of loans are modified, has occurred during the period from January 1 to September 30, 2021 and 2022.

 

26

 

 

CNFINANCE HOLDINGS LIMITED

 

Notes to the unaudited condensed consolidated financial statements

 

(Expressed in Renminbi unless otherwise stated)

 

4Loans principal, interest and financing service fee receivables (continued)

 

The Group transferred loans with carrying amounts of RMB939,112,508 and RMB1,896,205,225 to third party investors, including sales partners, and recorded the transfers as sales for the period from January 1 to September 30, 2021 and 2022, respectively. The Group recognized net gain of RMB17,878,084 and RMB51,040,366 from transfers accounted for as sales of loans for the period from January 1 to September 30, 2021 and 2022, respectively.

 

The Group carries out pre-approval, review and credit approval of loans by professionals for credit risk arising from micro credit business. During the post-transaction monitoring process, the Group conducts a visit of customers regularly after disbursement of loans, and conducts on-site inspection when the Group considers it is necessary. The review focuses on the status of the collateral. The Group delegates sales partners to assist in the aforementioned credit risk assessment activities.

 

The Group adopts a loan risk classification approach to manage the loan portfolio risk. Loans are classified as non-impaired and impaired based on the different risk level. When one or more event demonstrates there is objective evidence of impairment and causes losses, corresponding loans are considered to be classified as impaired. The allowance for credit losses on impaired loans are determined with an expected loss methodology that is referred to as the current expected credit loss (“CECL”) model.

 

The Group applies a series of criteria in determining the classification of loans. The loan classification criteria focus on a number of factors, including (i) the borrower’s ability to repay the loan; (ii) the borrower’s repayment history; (iii) the borrower’s willingness to repay; (iv) the net realizable value of any collateral; and (v) the prospect for the support from any financially responsible guarantor. The Group also takes into account the length of time for which payments of principal and interest on a loan are overdue.

 

(d)Loans held-for-sale

 

Loans held-for-sale are measured at the lower of cost or fair value, with valuation changes recorded in noninterest revenue. The valuation is performed on an individual loan basis. Loans transferred to held-for-sale category were RMB733,975,352 (including RMB24,696,075 measured at fair value) and RMB1,016,173,196 (including RMB11,694,198 measured at fair value) as of December 31, 2021 and September 30, 2022, respectively.

 

(ii)Corporate loan

 

Corporate loan represents loans granted to businesses to assist its funding of operating costs and capital expenditures, which are not collateralized. Net loans principal, interest and financing service fee receivables of corporate loan were nil and RMB278,846,243 as of December 31, 2021 and September 30, 2022.

 

27

 

 

CNFINANCE HOLDINGS LIMITED

 

Notes to the unaudited condensed consolidated financial statements

 

(Expressed in Renminbi unless otherwise stated)

 

5Investment securities

 

Investment securities consist of equity securities and debt securities.

 

(a)Equity securities

 

The carrying amount and fair value of the equity securities by major security type and class of security as of December 31, 2021 and September 30, 2022 was as follows:

 

    Aggregate
cost basis
    Profits and
losses from
fair value changes
    Aggregate
fair value
 
      RMB       RMB       RMB  
As of September 30, 2022:                        
Wealth management products     584,077,496       660,509       584,738,005  
                         
Total     584,077,496       660,509       584,738,005  

 

    Aggregate
cost basis
    Profits and
losses from
fair value changes
    Aggregate
fair value
 
    RMB     RMB     RMB  
As of December 31, 2021:                  
Wealth management products     845,888,854       1,158,441       847,047,295  
                         
Total     845,888,854       1,158,441       847,047,295  

 

The investments in asset management products principally invests in bonds listed and traded between banks and exchanges, monetary market instruments, treasury bonds, convertible or exchangeable bonds and other fixed income financial instruments.

 

Wealth management products are investment products issued by commercial banks and other financial institutions in China. The wealth management products invest in a pool of liquid financial assets in the interbank market or exchange, including debt securities, asset backed securities, interbank lending, reverse repurchase agreements and bank deposits. The products can be redeemed on weekdays on demand.

 

28

 

 

CNFINANCE HOLDINGS LIMITED

 

Notes to the unaudited condensed consolidated financial statements

 

(Expressed in Renminbi unless otherwise stated)

 

5Investment securities (continued)

 

(b)Debt securities

 

   Amortized cost   Impairment   Net
amortized cost
 
   RMB   RMB   RMB 
As of September 30, 2022:            
Investment in partnership   383,003,311    (7,845,764)   375,157,547 
Corporate bond   4,518,925    (1,999,425)   2,519,500 
                
Total   387,522,236    (9,845,189)   377,677,047 

 

   Amortized cost   Impairment   Net
amortized cost
 
   RMB   RMB   RMB 
As of December 31, 2021:            
Investment in partnership   246,400,000    (5,403,084)   240,996,916 
                
Total   246,400,000    (5,403,084)   240,996,916 
                

 

The debt securities are in the form of investments in partnership and corporate bond. The partnerships guarantee investment principle and a fixed interest income to the Group. The Group has the intent and ability to hold the debt securities to maturity or payoff.

 

29

 

 

CNFINANCE HOLDINGS LIMITED

 

Notes to the unaudited condensed consolidated financial statements

 

(Expressed in Renminbi unless otherwise stated)

 

6Intangible assets and goodwill

 

(a)Intangible assets

 

    December 31, 2021     September 30, 2022  
    Gross carrying
value
    Accumulated
amortisation
    Net carrying
value
    Gross carrying
 value
    Accumulated
amortisation
    Net carrying
Value
 
    RMB     RMB     RMB     RMB     RMB     RMB  
Amortized intangible assets:                                    
Software     10,793,974       (9,754,602 )     1,039,372       10,793,974       (10,148,968 )     645,006  
Cooperation agreement     5,030,000       (5,030,000 )    
-
      5,030,000       (5,030,000 )    
-
 
                                                 
Total amortized intangible assets     15,823,974       (14,784,602 )     1,039,372       15,823,974       (15,178,968 )     645,006  
                                                 
Unamortized intangible assets:                                                
Trademarks     2,970,000                       2,970,000                  

 

As of December 31, 2021 and September 30, 2022, accumulated amortization was RMB14,784,602 and RMB15,178,968, respectively. Below table provides the current year and estimated future amortization expense for amortized intangible assets. The Group based its projections of amortization expense shown below on existing asset balances as of September 30, 2022. Future amortization expense may vary from these projections.

 

   Software 
   RMB 
     
Nine months ended September 30, 2022 (actual)   394,366 
Remainder of 2022   136,023 
Estimate for year ended December 31, 2023   508,393 
2024   590 
2025   
-
 
2026   
-
 
2027   
-
 

 

7Interest-bearing borrowings

 

(a)Borrowings under agreements to repurchase

 

Financial assets sold under agreements to repurchase are effectively short-term collateralized borrowings. In these transactions, the Group receives cash in exchange for transferring financial assets as collateral and recognizes an obligation to reacquire the financial assets for cash at the transaction’s maturity. These types of transactions create risks, including (1) fair value of the financial assets transferred may decline below the amount of obligation to reacquire the financial assets, and therefore create an obligation to pledge additional amounts, or to replace collaterals pledged, and (2) the Group does not have sufficient liquidity to repurchase the financial assets at the transaction’s maturity.

 

30

 

 

CNFINANCE HOLDINGS LIMITED

 

Notes to the unaudited condensed consolidated financial statements

 

(Expressed in Renminbi unless otherwise stated)

 

7Interest-bearing borrowings (continued)

 

   Note  Fixed interest
rate per annum
   Term  December 31,
2021
   September 30,
2022
 
             RMB   RMB 
Repurchase agreements                  
                   
Financial institution  (i)   13.8%  Within 1 year   45,250,000    5,965,976 
                      
Interest payable                     
Financial institution  (i)           
-
    
-
 
                      
Total repurchase agreements              45,250,000    5,965,976 

 

(i)Funds obtained from financial institutions

 

On July 27, 2021, the Group transferred loan principals, interests and financing service fee receivables with carrying amount of RMB64,640,192 to a third-party transferee, Guangdong Yuehai Asset Management Co., Ltd. (“Yuehai Asset”), an unrelated third party. However, in accordance with ASC 860, Transfers and Servicing, the right to earnings is not derecognized upon transfer as the Group is required to repurchase the right to earnings one year after the date of transfer. As of December 31, 2021, the amount of funds obtained from Yuehai Asset and the interest payable are 45,250,000 and nil. As of September 30, 2022, the amount of funds obtained from Yuehai Asset and the interest payable are nil.

 

On August 29, 2022, the Group transferred loan principals, interests and financing service fee receivables with carrying amount of RMB5,965,976 to a third-party transferee, Pingan Puhui Lixin Asset Management Co., Ltd (“Pingan Puhui”), an unrelated third party. However, in accordance with ASC 860, Transfers and Servicing, the right to earnings is not derecognized upon transfer as the Group is required to repurchase the right to earnings one year after the date of transfer. As of September 30, 2022, the amount of funds obtained from Pingan Puhui and the interest payable are 5,965,976 and nil.

 

The below table provides the underlying collateral types of the gross obligations under repurchase agreements. For more information about pledged assets, refer to the Note 7(c).

 

   December 31,
2021
    September 30,
2022
 
   RMB   RMB 
Underlying collateral types of gross obligations        
         
Repurchase agreements:          
           
Loans principal, interest and financing service fee receivables   45,250,000    5,965,976 
           
Total repurchase agreements   45,250,000    5,965,976 

 

31

 

 

CNFINANCE HOLDINGS LIMITED

 

Notes to the unaudited condensed consolidated financial statements

 

(Expressed in Renminbi unless otherwise stated)

 

7Interest-bearing borrowings (continued)

 

The below table provides the contractual maturities of the gross obligations under repurchase agreements.

 

   Overnight  

Up to 30

days

  

30 to 90

days

  

Greater than
90 days

  

Total gross

obligations

 
   RMB   RMB   RMB   RMB   RMB 
                     
Repurchase agreements                         
As of September 30,2022   
      -
    
-
    
-
    5,965,976    5,965,976 
As of December 31,2021   
-
    
-
    
-
    45,250,000    45,250,000 

 

(b)Other borrowings

 

   Note  Fixed interest
rate per annum
  Term 

December 31
2021

  

September 30
2022

 
            RMB   RMB 
Short-term:                 
                  
Investors of consolidated VIEs  (i)  6.3% - 10.5% Less than 1 year   4,654,388,213    5,328,338,540 
                    
Long-term:                   
Investors of consolidated VIEs  (i)  7.0% - 11.5% Within 5 years   3,330,334,482    2,210,471,212 
                    
Interest payable to                   
Investors of consolidated VIEs  (i)         57,169,385    55,515,337 
                    
Total            8,041,892,080    7,594,325,089 

 

(i)The financial liabilities arising from the VIEs with underlying investments in loans to customers are classified as payable in these unaudited condensed consolidated financial statements. It is because the Group has an obligation to pay senior tranches holders upon maturity dates based on the related terms of those consolidated structured funds. As of September 30, 2022, the borrowings from VIEs have principal RMB7,594,325,089, bearing interests from 6.3% to 11.5% per year.

 

Aggregate annual maturities of long-term borrowing obligations (based on final maturity dates) are as follows:

 

   September 30, 2022 
   2023   2024   2025   2026   2027   Thereafter   Total 
   RMB   RMB   RMB   RMB   RMB       RMB 
                             
Investors of consolidated VIEs   1,048,206,017    479,441,307    25,823,888    
-
    
-
    657,000,000    2,210,471,212 

 

32

 

 

CNFINANCE HOLDINGS LIMITED

 

Notes to the unaudited condensed consolidated financial statements

 

(Expressed in Renminbi unless otherwise stated)

 

7Interest-bearing borrowings (continued)

 

(c)Pledged assets

 

The Group pledges certain assets to secure borrowings under agreements to repurchase and other borrowings. The table provides the total carrying amounts of pledged assets by asset types.

 

   December 31,
2021
   September 30,
2022
 
   RMB   RMB 
         
Loans principal, interest and financing service fee receivables   64,640,192    5,965,976 
           
Total   64,640,192    5,965,976 

 

Amounts presented above include carrying value of RMB64,640,192 and RMB5,965,976 in collateral for repurchase agreements as of December 31, 2021 and September 30, 2022, respectively.

 

8Credit risk mitigation position

 

   December 31,
2021
   September 30,
2022
 
   RMB   RMB 
         
Balance at the beginning of the year/period   1,209,729,138    1,348,449,426 
Increase during the year/period   1,203,458,816    774,322,489 
Decrease during the year/period   (1,052,004,847)   (713,207,923)
Confiscation during the year/period   (12,733,681)   (47,592,378)
           
Balance at the end of the year/period   1,348,449,426    1,361,971,614 

 

Under the collaboration model, the Group collaborates with sales partners who are dedicated to introduce the Group’s loan services to prospective borrowers. The sales partners need to place security deposits ranging from 10%-25% of the loans issued to the borrowers introduced by them (such contribution, the “credit risk mitigation position”) to the Group. The credit risk mitigation position will be transferred into an account designated by the Group and is fully refundable upon repayment of the loan the credit risk mitigation position is associated with.

 

33

 

 

CNFINANCE HOLDINGS LIMITED

 

Notes to the unaudited condensed consolidated financial statements

 

(Expressed in Renminbi unless otherwise stated)

 

9Accumulated other comprehensive losses

 

   Balance as of
January 1,
2021
   Other
comprehensive
loss, net
   Balance as of
September 30,
2021
 
   RMB   RMB   RMB 
             
Foreign currency translation adjustment (RMB)   (18,456,546)   (1,618,941)   (20,075,487)

 

   Balance as of
January 1,
2022
   Other
comprehensive
loss, net
  

Balance as of
September 30,
2022

 
   RMB   RMB   RMB 
             
Foreign currency translation adjustment (RMB)   (25,393,515)   18,747,601    (6,645,914)

 

The amounts reclassified out of accumulated other comprehensive income represent realized gains on the investment securities upon their sales, which were then recorded in “realized gains/(losses) on sales of investments, net ” in the unaudited condensed consolidated statements of comprehensive income.

 

10Interest and financing service fees on loans

 

Interest and financing service fees on loans, which include financing service fees on loans, are recognized in the unaudited condensed consolidated statements of comprehensive income using the effective interest method. Interest income on loans which is recognized with contractual interest rate were RMB1,319,660,155 and RMB1,178,852,531 for the period from January 1 to September 30, 2021 and 2022, respectively. Financing service fees on loans, are deferred and amortized over the contractual life of the related loans utilizing the effective interest method. Financing service fee on loans were RMB5,996,859 and RMB1,254,135 for the period from January 1 to September 30, 2021 and 2022, respectively.

 

34

 

 

CNFINANCE HOLDINGS LIMITED

 

Notes to the unaudited condensed consolidated financial statements

 

(Expressed in Renminbi unless otherwise stated)

 

10Interest and financing service fees on loans (continued)

 

Interest and fees income and costs from traditional facilitation model and new collaboration model for the period from January 1, 2022 to September 30, 2022 are listed as below:

 

   Nine months ended September 30, 2022 
   Traditional
facilitation
model
   Collaboration
Model
   Total 
   RMB   RMB   RMB 
             
Interest and financing service fees on loans   24,901,747    1,155,204,919    1,180,106,666 
Interests on deposits with banks   530,044    8,225,880    8,755,924 
Interest expense on interest-bearing borrowings   (7,859,919)   (575,730,015)   (583,589,934)
                
Net interest and fees income   17,571,872    587,700,784    605,272,656 
                
Interest income charged to sales partners   
-
    89,501,328    89,501,328 
Collaboration cost for sales partners   
-
    (241,162,974)   (241,162,974)
                
Net interest and fees income after collaboration cost   17,571,872    436,039,138    453,611,010 
                
Provision for credit losses   82,716,654    (236,957,351)   (154,240,697)
                
Net interest and fees income after collaboration cost and provision for credit losses   100,288,526    199,081,787    299,370,313 

 

11Interest income charged to sales partners

 

In the event of a loan defaults and the sales partner chooses to repurchase such loan in installments, the Group charges certain percentage of the loan as the interest income charged to sales partners.

 

12Collaboration cost for sales partners

 

The Group started to develop a new collaboration model in December 2018. Under such model, the Group collaborates with sales partners who are dedicated to introduce CNFinance Holdings Limited and its loan services to prospective borrowers. The unique feature of this collaboration model is that the sales partners will be required to deposit an amount equal to 10% - 25% of the loans issued to the borrowers introduced by them. In return, the Group will pay collaboration cost as sales incentives to the sales partners.

 

13Net gains on sales of loans

 

As mentioned in Note 4, the Group transferred the delinquent loans to third parties. Net gains on sale of loans which summarizes the received from sales of loans are net gains of RMB17,878,084 and RMB51,040,366 for the period from January 1 to September 30, 2021 and 2022, respectively.

 

35

 

 

CNFINANCE HOLDINGS LIMITED

 

Notes to the unaudited condensed consolidated financial statements

 

(Expressed in Renminbi unless otherwise stated)

 

14Other expenses

 

   Nine months ended September 30, 
   2021   2022 
   RMB   RMB 
Advertising and promotion expenses   22,645,530    29,003,981 
Litigation and Attorney fees   14,292,490    12,776,243 
Consulting fees   7,082,325    7,953,685 
Entertainment and travelling expenses   7,136,849    6,837,373 
Office and commute expenses   6,767,838    5,531,007 
Directors and officers liability insurance   2,664,241    2,382,305 
Depreciation and amortization   3,095,009    1,800,560 
Communication expenses   3,249,141    1,721,714 
Research and development expenses   1,233,165    415,703 
Others   6,417,874    4,606,659 
           
Total   74,584,462    73,029,230 

 

15Income tax expense

 

The reconciliation of the PRC statutory income tax rate of 25% to the effective income tax rate is as follows:

 

   Nine months ended September 30,  
   2021   2022 
   RMB   RMB 
         
PRC statutory income tax rate   25.00%   25.00%
(Decrease)/increase in effective income tax rate resulting from:          
           
Effect of tax-free income   (7.34)%   (0.18)%
Effect of non-deductible share option expense   1.64%   0.76%
Effect of zero tax rate in foreign countries   0.19%   0.27%
Effect of differential tax rates for non-PRC entities   (0.14)%   (0.53)%
Effect of non-deductible expenses   0.28%   0.34%
Changes in valuation allowance   0.66%   (0.61)%
Others   0.36%   (0.25)%
           
Effective income tax rate   20.65%   24.80%

 

The Group’s only major jurisdiction is China where tax returns generally remain open and subject to examination by tax authorities for tax years 1999 onwards.

 

The Group did not have any significant unrecognized tax benefits, and no interest and penalty expenses were recorded in the nine months ended September 30, 2021 and September 30, 2022.

 

36

 

 

CNFINANCE HOLDINGS LIMITED

 

Notes to the unaudited condensed consolidated financial statements

 

(Expressed in Renminbi unless otherwise stated)

 

16Earnings per share

 

The following table sets forth the computation of basic and diluted earnings per share for the nine months ended September 30, 2021 and 2022, for which the basic weighted average number of common shares are based on the 1,371,643,240 common shares issued by the Company, as if those shares were issued as of the earliest date presented.

 

   Nine months ended
September 30,
 
   2021   2022 
   RMB   RMB 
         
Net income   169,855,888    107,214,293 
Basic weighted average number of common shares outstanding   1,371,643,240    1,371,643,240 
Effect of dilutive share options   137,172,125    132,236,758 
Dilutive weighted average number of ordinary shares   1,508,815,365    1,503,879,998 
Basic earnings per share   0.12    0.08 
Diluted earnings per share   0.11    0.07 

 

During the nine months ended September 30, 2021 and 2022, the Group issued 187,933,730 and nil ordinary shares to its share depositary bank, respectively. No consideration was received by the Group for the issuance. As of September 30, 2022, no share out of the total ordinary shares was used to settle share-based compensation. The 187,933,720 ordinary shares are legally issued and not outstanding, and have been excluded from the computation of earnings per share.

 

17Share-based compensation expenses

 

(a)Description of share-based compensation arrangements

 

On January 3, 2017, the Group adopted a new share incentive plan, or the 2017 Share Incentive Plan. Options to purchase 187,933,730 ordinary shares pursuant to the 2017 Share Incentive Plan were issued to certain management and employees. Accordingly, 60%, 20% and 20% of the award options shall vest on December 31, each of the years 2017 to 2019, respectively. Unless terminated earlier, the 2017 Share Incentive Plan will terminate automatically in 2022.

 

On August 27, 2018, 2018 Share Incentive Plan (the “2018 Option”) for granting shares award of CNFinance Holdings Limited to certain management members and employees of the Group was issued to concurrently replace the 2017 Share Incentive Plan which granted Sincere Fame’s share. Except for the above mentioned change of grantor, all terms of the 2017 Share Incentive Plan and the 2018 Share Incentive Plan were the same. No change in the fair value, vesting conditions or the classification of the 2017 Share Incentive Plan and the 2018 Share Incentive Plan. In connection with the 2018 Option, 187,933,730 ordinary shares were issued to JPMorgan Chase Bank N.A. (the “Depositary”) as a reserve pool for future issuances upon the exercise of share options granted under the 2018 Option to the Group’s management members and employees. All shareholder rights of these 187,933,730 ordinary shares including but not limited to voting rights and dividend rights are unconditionally waived until the corresponding shares are exercised.

 

On December 31, 2019, the Group granted options to certain management and employees to purchase 119,674,780 ordinary shares pursuant to the 2018 Share Incentive Plan (the “2019 Option”). Accordingly, 50%, 30% and 20% of the award options shall vest on December 31, each of the years 2020 to 2022, respectively, with expiration dates on December 31, each of the years 2025 to 2027.

 

37

 

 

CNFINANCE HOLDINGS LIMITED

 

Notes to the unaudited condensed consolidated financial statements

 

(Expressed in Renminbi unless otherwise stated)

 

17Share-based compensation expenses (continued)

 

Share-based payment transactions with employees, such as share options are measured based on the grant date fair value of the equity instrument. The Group recognizes the compensation costs net of estimated forfeitures over the applicable vesting period. The estimate of forfeitures will be adjusted over the requisite service period to the extent that actual forfeitures differ, or are expected to differ, from such estimates. Changes in estimated forfeitures will be recognized through a cumulative catch-up adjustment in the period of change and will also impact the amount of stock compensation expenses to be recognized in future periods. There were no market conditions associated with the share option grants.

 

(b)Fair value of share options and assumptions

 

The fair value of options granted to employees is determined based on a number of factors including valuations. In determining the fair value of equity instruments, the Group referred to valuation reports prepared by an independent third-party appraisal firm, based on data the Group provided. The valuation reports provided the Group with guidelines in determining the fair value of the equity instruments, but the Group is ultimately responsible for the determination of all amounts related to share-based compensation recorded in the financial statements.

 

Excluding the options containing service vesting conditions, the Group calculated the estimated fair value of the options on the respective grant dates using a binomial option pricing model with assistance from independent valuation firms, with the following assumptions:

 

   Share awards
granted on
January 3,
2017 (2018 Option)
   Share awards
granted on
December 31,
2019 (2019 Option)
 
         
Expected volatility   40%   41.52%
Expected dividends   
-
    
-
 
Risk-free interest rate   3.10%   3.12%
Expected term (in years)   5    5 
Expected life (in years)   6    8 

 

The contractual life of the share option is used as an input into the binomial option pricing model. Exercise multiple and post-vesting forfeit are incorporated into the model as well.

 

2018 Option

 

When the options of the 2018 Option were issued, the Group’s shares had not been publicly traded and its shares were rarely traded privately. Therefore, the expected volatility is estimated based on the historical volatility of comparable entities with publicly traded shares for the period before the date of grant with length commensurate to contractual life of the options. Since the contractual life of the options is 6 years, the risk-free rate for the expected term of the options is determined based on the yield to maturity of China 6-year government bond at the date of grant.

 

2019 Option

 

When the options of the 2019 Option were issued, the Group’s shares were already publicly traded. Since the shares have only been publicly traded for just over a year, the expected volatility is estimated based on the historical volatility of comparable entities with publicly traded shares for the period before the date of grant with length commensurate to contractual life of the options. The contractual life of the options is 6 years, 7 years and 8 years, respectively. Therefore, the risk-free rate for the expected term of the options is determined based on the yield to maturity of China 5-year, 7-year and 10-year government bond, using interpolation method, at the date of grant.

 

38

 

 

CNFINANCE HOLDINGS LIMITED

 

Notes to the unaudited condensed consolidated financial statements

 

(Expressed in Renminbi unless otherwise stated)

 

17Share-based compensation expenses (continued)

 

The Group has not declared or paid any cash dividends on its capital stock and does not anticipate any dividend payments on its ordinary shares in the foreseeable future.

 

If any of the assumptions used in the binomial option pricing model changes significantly, share-based compensation expenses for future awards may differ materially compared with the awards granted previously.

 

A summary of share option activity under the 2018 Option is as follows:

 

   Number of
shares
  

Weighted
average

exercise
price

   Weighted
average
grant date
fair value
 
       RMB   RMB 
Balance, December 31, 2016   
-
    
-
    
-
 
Granted   187,933,730    
-
    1.27 
Exercised   
-
    
-
    
-
 
Surrendered   
-
    
-
    
-
 
                
Balance, December 31, 2017   187,933,730    
-
    1.27 
Exercisable, December 31, 2017   112,760,238    
-
    1.27 
Expected to vest, December 31, 2017   75,173,492    
-
    1.27 
                
Balance, December 31, 2017   187,933,730    
-
    1.27 
Granted   
-
    
-
    
-
 
Exercised   
-
    
-
    
-
 
Surrendered   
-
    
-
    
-
 
                
Balance, December 31, 2018   187,933,730    
-
    1.27 
Exercisable, December 31, 2018   150,346,984    
-
    1.27 
Expected to vest, December 31, 2018   37,586,746    
-
    1.27 
                
Balance, December 31, 2018   187,933,730    
-
    1.27 
Granted   
-
    
-
    
-
 
Exercised   
-
    
-
    
-
 
Surrendered   
-
    
          -
    
-
 
                
Balance, December 31, 2019   187,933,730    
-
    1.27 
Exercisable, December 31, 2019   187,933,730    
-
    1.27 
Expected to vest, December 31, 2019   
-
    
-
    
-
 

 

39

 

 

CNFINANCE HOLDINGS LIMITED

 

Notes to the unaudited condensed consolidated financial statements

 

(Expressed in Renminbi unless otherwise stated)

 

17Share-based compensation expenses (continued)

 

A summary of share option activity under the 2019 Option is as follows:

 

   Number of
shares
   Weighted
average
exercise
price
   Weighted
average
grant date
fair value
 
       RMB   RMB 
Balance, December 31, 2018   
-
    
         -
    
-
 
Granted   119,674,780    
-
    0.72 
Exercised   
-
    
-
    
-
 
Surrendered   
-
    
-
    
-
 
                
Balance, December 31, 2019   119,674,780    
-
    0.72 
Exercisable, December 31, 2019   
-
    
-
    
-
 
Expected to vest, December 31, 2019   119,674,780    
-
    0.72 
                
Balance, December 31, 2019   119,674,780    
-
    0.72 
Granted   
-
    
-
    
-
 
Exercised   
-
    
-
    
-
 
Surrendered   
-
    
-
    
-
 
                
Balance, December 31, 2020   119,674,780    
-
    0.72 
Exercisable, December 31, 2020   59,837,390    
-
    0.72 
Expected to vest, December 31, 2020   59,837,390    
-
    0.72 
                
Balance, December 31, 2020   119,674,780    
-
    0.72 
Granted   
-
    
-
    
-
 
Exercised   
-
    
-
    
-
 
Surrendered   
-
    
-
    
-
 
                
Balance, December 31, 2021   119,674,780    
-
    0.72 
Exercisable, December 31, 2021   95,739,824    
-
    0.72 
Expected to vest, December 31, 2021   23,934,956    
-
    0.72 
                
Balance, December 31, 2021   119,674,780    
-
    0.72 
Granted   
-
    
-
    
-
 
Exercised   
-
    
-
    
-
 
Surrendered   
-
    
-
    
-
 
                
Balance, September 30, 2022   119,674,780    
-
    0.72 
Exercisable, September 30, 2022   95,739,824    
-
    0.72 
Expected to vest, September 30, 2022   23,934,956    
-
    0.72 

 

40

 

 

CNFINANCE HOLDINGS LIMITED

 

Notes to the unaudited condensed consolidated financial statements

 

(Expressed in Renminbi unless otherwise stated)

 

17Share-based compensation expenses (continued)

 

The following table sets forth the fair value of options and ordinary shares estimated at the dates of option grants indicated below with the assistance from an independent valuation firm.

 

Date of options grant  Options
granted
   Exercise
price
  Fair value of
option
  Fair value of
ordinary
shares
              
January 3, 2017   75,173,492   RMB0.50  RMB1.26  RMB1.72
January 3, 2017   112,760,238   RMB0.50  RMB1.27  RMB1.72
December 31, 2019   83,772,346   RMB1.00  RMB0.71  RMB1.40
December 31, 2019   35,902,434   RMB1.00  RMB0.75  RMB1.40

 

For the option granted on January 3, 2017, the Group recognized compensation expenses of RMB39,715,168 and RMB15,886,067 in year 2018 and 2019, respectively. There was no income tax benefit recognized associated with the share-based compensation expenses. As of December 31, 2019, the expenses in relation to the 2018 Option have been fully recognized.

 

For the 2019 Option, the Group recognized compensation expenses of RMB62,073,367, RMB18,766,367 and 5,774,267 in year 2020, 2021 and 2022. There was no income tax benefit recognized associated with the share-based compensation expenses. As of September 30,2022, there is total unrecognized compensation cost of RMB1,443,567.

 

18Material related party transactions

 

The Group did not have any related party transactions in the nine months ended September 30, 2021 and September 30, 2022.

 

19Operating leases

 

The Group leases multiple office spaces which are contracted under various non-cancelable operating leases, most of which provide extension or early termination options and are generally expired in 1 to 4 years. The Group does not enter into any finance leases or leases where the Group is a lessor. Moreover, the existing operating lease agreements do not contain any residual value guarantees or material restrictive covenants.

 

Management determines if an arrangement is a lease at inception and record the leases in the financial statements upon lease commencement, which is the date when the underlying office space is made available for use by the lessor. The incremental borrowing rates determined for computing the lease liabilities are based on the People’s Bank of China (PBOC) Benchmark Rates for terms of loans ranging from zero (exclusive) to 5 years and above.

 

41

 

 

CNFINANCE HOLDINGS LIMITED

 

Notes to the unaudited condensed consolidated financial statements

 

(Expressed in Renminbi unless otherwise stated)

 

19Operating leases (continued)

 

The following tables present the operating lease cost and other supplemental information:

 

   Nine months ended
September 30,
 
   2021   2022 
   RMB   RMB 
         
Operating lease cost (1)   11,537,679    10,764,863 

 

(1)Amounts include short-term leases that are immaterial.

 

   December 31,
 2021  
   September 30,
 2022
 
   RMB   RMB 
         
Weighted-average remaining lease term   1 Year    1.15 Years 
           
Weighted-average discount rate   4.73%   4.73%
           
Cash paid for amounts included in the measurement of lease liabilities under operating cash flows   15,478,630    10,804,573 
           
ROU assets obtained in exchange for new operating lease liabilities   16,196,806    15,545,649 

 

The following represents the Group’s future undiscounted cash flows for each of the next five years and thereafter and reconciliation to the lease liabilities (excluding short-term operating leases) as of September 30, 2022:

 

   RMB 
Remainder of 2022   3,775,068 
Year ended December 31,     
2023   9,693,979 
2024   1,435,437 
2025   246,756 
2026   132,792 
2027   
-
 
Thereafter   
-
 
      
Total future operating lease payments   15,284,032 
      
Less: imputed interest   (453,578)
      
Total present value of operating lease liabilities   14,830,454 

 

42

 

 

CNFINANCE HOLDINGS LIMITED

 

Notes to the unaudited condensed consolidated financial statements

 

(Expressed in Renminbi unless otherwise stated)

 

20Commitments and contingencies

 

The Group has not entered into any financial guarantees or other commitments to guarantee the payment obligations of any unconsolidated third parties. In addition, the Group has not entered into any derivative contracts that are indexed to the Group’s shares and classified as shareholders’ equity, or that are not reflected in the Group’s unaudited condensed consolidated financial statements. Furthermore, the Group does not have any retained or contingent interest in assets transferred to an unconsolidated entity that serves as credit, liquidity or market risk support to such entity. Moreover, the Group does not have any variable interest in any unconsolidated entity that provides financing, liquidity, market risk or credit support to the Group or engages in leasing, hedging or product development services with the Group.

 

21Subsequent events

 

The Group has considered subsequent events through December 2, 2022, which was the date of these unaudited condensed consolidated financial statements were issued, and has determined none of these events were required to be recognized or disclosed in the unaudited condensed consolidated financial statements and related notes.

 

 

43

 

In 2020, the Group revised its charge-off policy so that loans that are 180 days past due are charged down to net realizable value (fair value of collateral, less estimated costs to sell) unless the loans are both well-secured and in the process of collection. The financial liabilities arising from the VIEs with underlying investments in loans to customers are classified as payable in these unaudited condensed consolidated financial statements. It is because the Group has an obligation to pay senior tranches holders upon maturity dates based on the related terms of those consolidated structured funds. As of September 30, 2022, the borrowings from VIEs have principal RMB7,594,325,089, bearing interests from 6.3% to 11.5% per year. 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