COSMOS BANK, TAIWAN

Financial Statements

June 30, 2010 and 2009

(With Auditors’ Report Thereon)

Independent Auditors’ Report

The Board of Directors and Stockholders

Cosmos Bank, Taiwan:

We have audited the accompanying balance sheets of Cosmos Bank, Taiwan as of June 30, 2010 and 2009,

and the related statements of income, changes in stockholders’ equity, and cash flows for the six-month

periods then ended. These financial statements are the responsibility of the Bank’s management. Our

responsibility is to express an opinion on these financial statements based on our audits.

We conducted our audits in accordance with the Regulations Governing the Auditing of Financial

Statements of Financial Institutions by Certified Public Accountants and auditing standards generally

accepted in the Republic of China. Those standards and regulations require that we plan and perform the

audit to obtain reasonable assurance about whether the financial statements are free of material

misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and

disclosures in the financial statements. An audit also includes assessing the accounting principles used

and significant estimates made by management, as well as evaluating the overall financial statement

presentation. We believe that our audits provide a reasonable basis for our opinion.

As stated in note 4(h) to the financial statements, the equity investments accounted for under the equity

method amounting to $27,635 thousand and $60,840 thousand as of June 30, 2010 and 2009, respectively,

and the related investment income of $7,665 thousand and $10,065 thousand, respectively, recognized for

the six-month periods then ended, were based on the investee companies’ unaudited financial statements.

As stated in note 4(k) to the financial statements, the Bank signed individual contracts with asset

management companies between 2004 and 2006 to sell non-performing loans. Based on the Law

Governing Mergers of Financial Institutions and Tai-Cai-Rong-(3)-Zi No. 0913000051 issued by the

Ministry of Finance on March 8, 2002, the losses on these sales were amortized using the straight-line

method over 5 years. However, it was not in accordance with generally accepted accounting principles in

the Republic of China. The unamortized balance was recorded as deferred losses on the sale of non-

performing loans. Had these losses not been deferred, the carrying value of the deferred losses as of June

30, 2010 and 2009, would have decreased by $5,818,473 thousand and $11,709,977 thousand, respectively,

and retained earnings would have decreased by $4,829,333 thousand and $8,782,483 thousand,

respectively. In addition, the loss after tax would have decreased by $2,298,580 thousand and $2,708,670

thousand for the six-month periods ended June 30, 2010 and 2009, respectively.

Note to Readers

The accompanying financial statements are intended only to present the financial position, results of operations and cash flows in

accordance with the accounting principles and practices generally accepted in Taiwan, the Republic of China and not those of any

other jurisdictions. The standards, procedures and practices to audit such financial statements are those generally accepted and

applied in Taiwan, the Republic of China.

The auditors’ report and the accompanying financial statements are the English translation of the Chinese version prepared and

used in the Republic of China. If there is any conflict between, or any difference in the interpretation of, the English and Chinese

language auditors’ report and financial statements, the Chinese version shall prevail.

In our opinion, except for the fact that financial statements of certain investees have not been audited as

mentioned in the third paragraph, and the effects of the deferred loss on the sale of the non-performing

loans mentioned in the fourth paragraph, the financial statements referred to above present fairly, in all

material respects, the financial position of Cosmos Bank, Taiwan as of June 30, 2010 and 2009, and the

results of its operations and its cash flows for the six-month periods ended June 30, 2010 and 2009, in

conformity with the Guidelines Governing the Preparation of Financial Reports by Public Banks, the

related financial accounting standards of the “Business Entity Accounting Act” and of the “Regulation on

Business Entity Accounting Handling”, and accounting principles generally accepted in the Republic of

China.

August 23, 2010

See accompanying notes to financial statements.

COSMOS BANK, TAIWAN

Balance Sheets

June 30, 2010 and 2009 (Expressed in thousands of New Taiwan dollars)

2010

2009

Percentage

Increase

(Decrease)

Assets Amount Amount %

Cash and cash equivalents (notes 4(a) and 5) $ 2,253,947 2,549,605 (12)

Due from the Central Bank and call loans to banks (notes 4(b)

and 5)

38,212,560

28,512,069

34

Financial assets at fair value through profit or loss, net (note 4(c)) 630,977 153,055 312

Receivables, net (notes 4(d) and 5) 5,671,439 7,310,119 (22)

Assets held for sale (note 4(e)) - 125,199 -

Discounts and loans, net (notes 4(f) and 5) 62,694,974 80,967,644 (23)

Available-for-sale financial assets, net (notes 4(g) and 6) 954,809 895,513 7

Equity investments under the equity method, net (notes 4(h) and 5) 27,635 60,840 (55)

Other financial assets, net (notes 4(i) and 6) 1,052,716 1,031,636 2

Fixed assets, net (note 4(j)) 6,279,570 6,434,969 (2)

Intangible assets (note 10(d)) 110,161 137,272 (20)

Other assets, net (notes 4(k) and 5) 14,623,015 21,100,465 (31)

Total assets $ 132,511,803 149,278,386 (11)

2010

2009

Percentage

Increase

(Decrease)

Liabilities and Stockholders’ Equity Amount Amount %

Due to the Central Bank and other banks (note 4(l)) $ 9,396,715 11,966,323 (21)

Financial liabilities at fair value through profit or loss (note 4(c)) 901 5,000 (82)

Securities sold under repurchase agreements (note 4(m)) 30,000 - -

Payables (note 4(n)) 1,381,261 4,104,281 (66)

Deposits and remittances (notes 4(o) and 5) 105,453,550 113,038,253 (7)

Bank debentures (note 4(p)) 515,000 515,000 -

Accrued pension liabilities (note 4(q)) 185,122 202,894 (9)

Other financial liabilities (note 4(p)) 1,630,475 2,177,948 (25)

Other liabilities 545,891 280,350 95

Total liabilities 119,138,915 132,290,049 (10)

Capital stock (note 4(s))

Common stock 16,234,639 22,347,209 (27)

Preferred stock - 5,433,151 -

Total capital stock 16,234,639 27,780,360 (42)

Capital surplus

Others (note 4(s)) 12,970,567 15,856,306 (18)

Total capital surplus 12,970,567 15,856,306 (18)

Retained earnings

Accumulated deficit (note 4(s))

(15,850,903)

(26,675,389)

41

Total accumulated deficit (15,850,903) (26,675,389) 41

Others

Unrealized gains on financial instruments 18,585 27,060 (31)

18,585 27,060 (31)

Total stockholders’ equity 13,372,888 16,988,337 (21)

Commitments and contingencies (note 7)

Total liabilities and stockholders’ equity $ 132,511,803 149,278,386 (11)

See accompanying notes to financial statements.

COSMOS BANK, TAIWAN

Income Statements

For the six-month periods ended June 30, 2010 and 2009 (Expressed in thousands of New Taiwan dollars, except earnings per share,

which are expressed in New Taiwan dollars)

2010

2009

Percentage

Increase

(Decrease)

Amount Amount %

Interest revenue $ 2,786,064 3,567,004 (22)

Less: interest expense (note 4(p)) (552,701) (1,256,984) 56

Net interest 2,233,363 2,310,020 (3)

Net revenues (losses) other than interest

Service fee income, net 659,473 538,816 22

Gains (losses) on financial assets and liabilities at fair

value through profit or loss (note 4(c))

(6,083)

1,897

(421)

Realized gains on the sale of available-for-sale financial

assets

3,858

238

1,521

Income from equity investments under the equity

method (note 4(h))

7,665

10,065

(24)

Foreign exchange gains (losses), net 28,355 (12,429) 328

Gain on reversal of asset impairment loss (loss on

asset impairment) (notes 4(e), (j), and (k))

3,506

(31,299)

111

Other noninterest losses, net (notes 4(i), (k), and (u)) (22,210) (19,386) (15)

Loss on the sale of nonperforming loans (note 4(k)) (2,769,373) (3,611,560) 23

Total net revenues (losses) other than interest (2,094,809) (3,123,658) 33

Total net revenues (losses) 138,554 (813,638) 117

Provision for loan losses (note 4(f)) (26,408) (2,563,233) 99

Operating expenses (note 5)

Personnel (893,414) (1,319,721) 32

Depreciation and amortization (178,333) (257,213) 31

Others (720,607) (851,687) 15

Total operating expenses (1,792,354) (2,428,621) 26

Loss before income tax (1,680,208) (5,805,492) 71

Income tax (expense) benefit (note 4(r)) (898,261) 649,193 (238)

Net loss $ (2,578,469) (5,156,299) 50

Before

Tax

After

Tax

Before

Tax

After

Tax

Loss per share (note 4(t)) $ (1.03) (1.59) (2.60) (2.31)

Loss per share – retroactive (note 4(t)) $ (5.69) (5.05)

See accompanying notes to financial statements.

COSMOS BANK, TAIWAN

Statements of Changes in Stockholders’ Equity

For the six-month periods ended June 30, 2010 and 2009 (in thousands of New Taiwan dollars)

Common

stock

Preferred

stock

Capital

surplus

Accumulated

deficit

Unrealized

valuation gains or

losses on financial

instruments Total

Balance at January 1, 2009 $ 22,347,209 5,433,151 15,844,318 (21,519,090) 16,489 22,122,077

Stock-based compensation - - 11,988 - - 11,988

Net loss for six-month period ended June 30, 2009 - - - (5,156,299) - (5,156,299)

Unrealized valuation gains on financial instruments - - - - 10,571 10,571

Balance at June 30, 2009 $ 22,347,209 5,433,151 15,856,306 (26,675,389) 27,060 16,988,337

Balance at January 1, 2010 $ 16,234,639 - 12,961,607 (13,272,434) 30,497 15,954,309

Stock-based compensation - - 8,960 - - 8,960

Net loss for six-month period ended June 30, 2010 - - - (2,578,469) - (2,578,469)

Unrealized valuation losses on financial instruments - - - - (11,912) (11,912)

Balance at June 30, 2010 $ 16,234,639 - 12,970,567 (15,850,903) 18,585 13,372,888

See accompanying notes to financial statements.

COSMOS BANK, TAIWAN

Statements of Cash Flows

For the six-month periods ended June 30, 2010 and 2009 (in thousands of New Taiwan dollars)

2010 2009

Cash flows from operating activities:

Net loss $ (2,578,469) (5,156,299)

Adjustments to reconcile net loss to net cash provided by (used in)

operating activities:

Depreciation expenses 93,833 129,806

Amortization expenses 85,748 127,407

Provision for loan losses 1,030,526 3,238,197

Share-based compensation expense 17,188 11,988

Amortization of discount on convertible bank debentures 77,575 119,694

(Gain) loss on sale and disposal of properties, net (4) 324

Income from equity investments under the equity method (7,665) (10,065)

(Gain) loss on disposal of investment, net (3,788) 1,604

Gain on disposal of assets held for sale, net (6,603) -

(Gain) loss on non-financial asset impairment (3,506) 31,299

Amortization of loss on the sale of nonperforming loans 2,769,373 3,611,560

Net changes in operating assets and liabilities:

(Increase) decrease in financial assets at fair value through profit or

loss (482,244) 2,974

Increase in receivables (139,654) (1,378,888)

Increase in other financial assets (1,482) (31,547)

Increase in other assets (26,106) (31,688)

Decrease (increase) in deferred income tax assets, net 897,912 (649,566)

Decrease in financial liabilities at fair value through profit or loss (2,827) (8,027)

(Decrease) increase in payables (914,282) 741,824

Increase (decrease) in other liabilities 268,250 (20,818)

Increase (decrease) in provision for pension cost 2,946 (83,621)

Net cash provided by operating activities 1,076,721 646,158

Cash flows from investing activities:

Proceeds from the sale of available-for-sale financial assets 35,820 6,335

Increase in due from the Central Bank and call loans to banks (8,188,131) (1,442,548)

Decrease in discounts and loans 7,488,270 10,240,011

Acquisition of properties (1,923) (12,876)

Proceeds from the sale of properties 9 159

Proceeds from the sale of debt instruments with no active market 13,276 445,648

Increase in intangible assets (4,637) (87,404)

Decrease in refundable deposits 63,625 57,637

Proceeds from the sale of held-for-sale assets 55,034 -

Rebates from the sale of nonperforming loans 58,750 63,334

Cancellation of reacquisition (reacquisition) of sold nonperforming loans 887 (7)

(Increase) decrease in other assets (6,113) 48,526

Net cash (used in) provided by investing activities (485,133) 9,318,815

Cash flows from financing activities:

Decrease in due to the Central Bank and other banks (2,692,441) (1,250,033)

Increase (decrease) in deposits and remittances 2,199,944 (9,562,471)

Increase (decrease) in securities sold under repurchase agreements 30,000 (7,034)

Decrease in other financial liabilities (332,970) (53,064)

Net cash used in financing activities (795,467) (10,872,602)

Net decrease in cash and cash equivalents (203,879) (907,629)

Cash and cash equivalents at beginning of year 2,457,826 3,457,234

Cash and cash equivalents at end of half year $ 2,253,947 2,549,605

Supplementary cash flow information

Interest paid $ 436,631 1,556,132

Income tax paid $ 104 258

Supplemental disclosures of non-cash investing and financing activities:

Fixed assets transferred to rental assets $ 161,800 -

Fixed assets transferred to deferred expenses $ - 35,112

Other assets transferred to fixed assets $ 16,799 -

Unrealized (gain) loss on valuation of available-for-sale financial

instruments at fair value $ 11,912 (10,571)

(Continued)

COSMOS BANK, TAIWAN

Notes to Financial Statements

June 30, 2010 and 2009 (Expressed in New Taiwan dollars unless otherwise specified)

1 Organization and Operations

Cosmos Bank, Taiwan (the “Bank”) engages in banking activities permitted by the Banking Act of the

Republic of China (Banking Act).

As of June 30, 2010, the Bank had a main office, an offshore banking unit (OBU), and 48 domestic

branches.

In accordance with the resolution of the 32nd

meeting of the 6th session of the Bank’s Board of

Directors held on January 23, 2009, in an effort to improve operational effectiveness, the Bank applied

to close 12 branches, and on March 24, 2009, the Bank obtained the approval from the FSC under Jin

Guan Yin (2) No. 09800043360 and then closed the branches. As of June 30, 2010 and 2009, the

Bank had 1,640 and 1,725 employees, respectively.

The business of the Bank’s Trust Department includes planning, managing and operating trust business

regulated under the Banking Act and Trust Business Regulations of the Republic of China (ROC).

The shares of the Bank have been traded on the Taiwan Stock Exchange (TSE) since June 29, 1998.

Under the TSE’s operating rules and regulations, the Bank had to change the way its shares were

traded on September 5, 2007. However, the trading method was changed back to the original method

on May 6, 2009.

Under section 64 of the Banking Act of the Republic of China, “Directors and Supervisors shall report

to the central government authority when banks have accumulated losses over 1/3 of the capital. The

central government authority shall have the Bank recover the capital within three months, otherwise

the Bank shall be ordered to suspend its business or be taken over by the government.” To avoid the

situation as described under Section 64 of the Banking Act of the Republic of China, the Financial

Supervisory Commission (FSC) issued Directive Jin Guan Yin (1) No. 09700480350 and requested the

Bank to actively improve operating results and to propose practical plans to strengthen the Bank’s

capital structure. In the 33rd

meeting of the 6th session of the Bank’s Board of Directors held on

February 25, 2009, the Bank approved a plan to enhance capital; please refer to paragraph (a) below.

In addition, on July 23, 2009, the FSC issued Directive Jin Guan Yin Guo No. 09800325300 and stated

that the Bank had accumulated losses over 1/3 of the capital. According to Jin Guan Yin (2) No.

09800101560, the Bank should implement plans to strengthen its capital structure and recover the

capital before October 31, 2009.

2

COSMOS BANK, TAIWAN

Notes to Financial Statements

(Continued)

(a) The contents of the capital increase and reduction of common stock plan are as follows:

(1) In order to improve the Bank’s financial structure, General Electric International Inc. (GEII)

and GE Processing Services Pty Limited (GE Australia) have reached an agreement to resolve

the differences regarding their technical service agreement with the Bank. Under the new

agreement, the remaining payable will be partially settled by cash, and the remainder will be

through a private placement of common shares.

(2) Based on the issuance principles of the 2007 issuance of preferred shares, the preferred shares

will be converted into common shares at a 1:1 ratio.

(3) S.A.C. PEI Taiwan Holdings B.V. holds Subordinated Unsecured Mandatory Convertible

Bonds (MCB) issued by the Bank in 2007, a portion of which will be converted prior to the

maturity date into common shares.

(4) The Bank will complete a capital reduction to offset accumulated losses and the share

discount from the issuance of common shares from the abovementioned capital injection.

(b) The Bank will actively dispose of non-performing loans and reduce personnel costs and recurring

expenses in order to reduce the speed at which capital is used. Also, it will continue to engage in

product innovation, improve the risk management process, and implement internal control policies

in order to improve the operating efficiency of the Bank.

In the stockholders’ meeting held on June 19, 2009, the Bank approved the capital increase and

capital reduction plan under which the Bank would reduce the capital by $19,300,000 thousand

after issuance of common shares by a private placement of common shares, conversion of

$3,630,000 thousand of the MCB into common shares, and conversion of preferred shares into

common shares. The abovementioned technical service agreement regarding the settlement

through a private placement of common shares was approved by the meeting of the Bank’s Board

of Directors held on July 28, 2009, and the Board of Directors set the share pricing date as that

date and proposed the private placement of common shares be settled at $3.22 per share. The

proposed share price remained unchanged from the resolution of the extraordinary meeting of the

Board of Directors held on August 25, 2009, and was agreed by the authorized representative of

GEII and GE Australia.

Regarding the capital increase, the Bank applied to increase the common stock on August 26, 2009,

and obtained approval from the FSC under Jin Guan Yin Guo No. 09800425750 on September 22,

2009. According to the resolution of the meeting of the Board of Directors on September 28,

2009, the Bank set September 29, 2009, as the basis date of a private placement with General

Electric International Inc. (GEII) and October 6, 2009, as the basis date of Series A Preferred

Shares converted into common shares and a portion of the MCB converted into common shares.

The Bank obtained approval to change the amount of capital from the FSC under Jin Guan Yin

Guo No. 09800473800 on October 8, 2009.

3

COSMOS BANK, TAIWAN

Notes to Financial Statements

(Continued)

Regarding the capital reduction, the Bank submitted a capital reduction application to compensate

for its accumulated loss and offset the share discount resulting from the aforementioned issuance

of common shares, and obtained approval from the FSC under Jin Guan Cheng Fa No.

0980055038 on October 27, 2009. According to the resolution of the Board of Directors on

October 29, 2009, the Bank set October 30, 2009, as the capital reduction basis date and January

20, 2010, as the stock market quote date. The Bank completed the capital reduction registration

on November 10, 2009.

In order to strengthen the operating capital, improve the financial structure, and increase the capital

adequacy ratio, according to the resolution of the Board of Directors on May 7, 2010, and the

resolution of stockholders on June 18, 2010, the Bank will raise capital by a private placement of

common shares, and issue a maximum of 1,000,000 thousand shares, with a face value of 10

dollars per share; and the total face value of the private placement should not exceed $10,000,000

thousand. In accordance with the “Directions for Public Companies Conducting Private

Placements of Securities”, the private placement of common shares would be settled at 6 dollars

per share temporarily, and the Board of Directors was authorized to determine the actual settled

price afterwards depending on the particular sources of capital.

2 Summary of Significant Accounting Policies

The Bank’s financial statements have been prepared in conformity with the Guidelines Governing the

Preparation of Financial Reports by Public Banks, the Business Entity Accounting Act, the Regulation

on Business Entity Accounting Handling, and accounting principles generally accepted in the Republic

of China. In preparing financial statements in conformity with these guidelines and principles, the

Bank is required to make certain estimates and assumptions that could affect the amounts of allowance

for possible losses, reserve for losses on guarantees, property depreciation, impairment loss on assets,

valuation of financial instruments at fair value, pension, employee bonuses, directors’ and supervisors’

remuneration, share-based payments, allowance for income tax assets, income tax, and accrued

litigation loss. Actual results could differ from these estimates.

Since the operating cycle in the banking industry cannot be reasonably identified, accounts included in

the Bank’s financial statements are not classified as current or noncurrent. Nevertheless, these

accounts are properly categorized according to the nature of each account and sequenced by liquidity.

Please refer to Note 4(u) for the maturity analysis of assets and liabilities.

The Bank’s significant accounting policies are summarized as follows:

(a) Basis of Preparation

The accompanying financial statements include the accounts of the Head Office, the OBU, and all

the branches. All interoffice transactions and balances have been eliminated.

4

COSMOS BANK, TAIWAN

Notes to Financial Statements

(Continued)

(b) Cash and Cash Equivalents

The Bank considers cash on hand, due from banks, and checks for clearing to be cash and cash

equivalents.

(c) Financial Instruments at Fair Value Through Profit or Loss

Financial instruments classified as financial assets or financial liabilities at fair value through

profit or loss (“FVTPL”) include financial assets or financial liabilities held for trading and those

designated as at FVTPL on initial recognition. The Bank recognizes a financial asset or a

financial liability on its balance sheet when the Bank becomes a party to the contractual provisions

of the financial instrument. A financial asset is derecognized when the Bank has lost control of

its contractual rights over the financial asset. A financial liability is derecognized when the

obligation specified in the relevant contract is discharged, cancelled or expired.

Financial instruments at FVTPL are initially measured at fair value. At each balance sheet date

subsequent to the initial recognition, financial assets or financial liabilities at FVTPL are

remeasured at fair value, with changes in fair value recognized directly in profit or loss in the year

in which they arise. On derecognition of a financial asset or a financial liability, the difference

between its carrying amount and the sum of the consideration received and receivable or

consideration paid and payable is recognized in profit or loss. All regular way purchases or sales

of financial assets are recognized and derecognized on a trade-date basis.

Financial instruments used in derivative transactions that do not qualify for hedge accounting are

classified as financial assets or liabilities held for trading. If the fair value of a derivative is a

positive number, the derivative is carried as an asset, and if the fair value is a negative number, the

derivative is carried as a liability.

Fair values are determined as follows: (a) short-term bills - at reference prices published by

Reuters; (b) bonds - at year-end or period-end reference prices published by the GreTai Securities

Market (GTSM); (c) listed stocks and GTSM stocks - at closing prices as of the balance sheet date;

and (d) financial assets/liabilities without quoted prices in an active market - at values determined

using valuation techniques.

(d) Securities Purchased/Sold Under Resell/Repurchase Agreements

Securities purchased under resell agreements and securities sold under repurchase agreements are

generally treated as collateralized financing transactions. Interest earned on resell agreements or

interest incurred on repurchase agreements is recognized as interest income or interest expense

over the life of each agreement.

5

COSMOS BANK, TAIWAN

Notes to Financial Statements

(Continued)

(e) Assets Held for Sale

Assets held for sale are initially measured at the lower of the book value of the assets before they

were classified as held for sale or the net fair value. An impairment loss is recognized when the

net fair value is lower than the book value. The impairment loss is reversed if an increase in the

investment recoverable amount is due to an event that occurred after the impairment loss was

recognized, and the accumulated impairment loss is debited to net fair value; however, the adjusted

carrying amount of the investment may not exceed the carrying amount that would have been

determined had no impairment loss been recognized for the investment in prior years. Assets

classified as held for sale cannot be depreciated, depleted, or amortized.

(f) Accounts Receivable

For the Bank, consumer loans to credit card holders are reflected by the amounts reported by

merchants. Interest income is recognized on an accrual basis using the interest method.

A credit card loan or accrued interest that is over 90 days past due is reclassified to a non-accrual

account without accruing interest. Interest collected while accruing of interest has stopped is

included in earnings only to the extent of cash actually received.

The Bank engages in factoring and management of accounts receivable. The interest and

transaction fees from factoring and management of such accounts are treated as current income.

An allowance for credit losses is provided by reviewing the balance of factoring accounts

receivable at period-end.

(g) Loans

Loans are recorded at the amount of outstanding principal excluding unearned income. Interest

income is recognized on an accrual basis using the interest method.

When a loan becomes overdue, interest receivable is no longer accrued internally. Interest income

is recorded when payment is actually received.

(h) Overdue Loans

Under Ministry of Finance (MOF) guidelines, the Bank classifies loans and other credits

(including accrued interest) overdue for at least six months as overdue loans. However, the

following loans are excluded: (1) The borrowers paid by installment after negotiations; or (2) the

borrowers negotiated with the Bank through the R.O.C. Unsecured Consumer Financing Debt

Negotiation Mechanism and Consumer Debt Clearance regulations.

6

COSMOS BANK, TAIWAN

Notes to Financial Statements

(Continued)

Overdue loans (except other credits) are classified as discounts and loans, and other overdue

credits (such as guarantees, acceptances, and credit card charges) are classified as other financial

assets.

(i) Allowances for Possible Losses and Reserve for Losses on Guarantees

In accordance with the “Regulations Governing the Procedures for Banking Institutions to

Evaluate Assets and Deal with Non-performing/Non-accrual Loans”, the Bank evaluates credit

assets on and off the balance sheet, and evaluates the collectability of credit assets in consideration

of the overdue periods and their collateral values. Under the abovementioned regulations, the

Bank makes 100%, 50%, 10%, and 2% provisions for credits deemed uncollectible, highly

uncollectible, substandard, and special mention, respectively, as minimum provisions for possible

losses. Meanwhile, the Bank makes provisions for credit card receivables in accordance with the

“Regulations Governing Institutions Engaging in Credit Card Business.”

In addition, the Bank may adopt a special reserve as a specified provision to enhance the asset

quality when the credit assets encounter depreciation risk or other significant unfavorable factors.

The Bank would write off overdue loans and credits after deducting the estimated recovery amount,

and the write-offs are then approved by the Board of Directors.

(j) Available-for-sale Financial Assets

Available-for-sale financial assets are initially recognized at fair value plus transaction costs that

are directly attributable to the financial asset acquisition. When assets are subsequently measured

at fair value, the changes in fair value are excluded from earnings and reported as a separate

component of stockholders’ equity. The accumulated gains or losses are recognized as earnings

when the financial asset is de-recognized from the balance sheet. The Bank uses trade-date

accounting when recording transactions.

Cash dividends are recognized on the ex-dividend date, except for dividends distributed from the

pre-acquisition profit, which are treated as a reduction of investment cost. Stock dividends are

not recognized as investment income but are recorded as an increase in the number of shares.

The total number of shares subsequent to the increase is used for recalculation of cost per share.

The difference between the initial cost of a debt instrument and its maturity amount is amortized

using the effective interest method (or the straight-line method can be used if there will be no

significant difference), with the amortized interest recognized in profit or loss.

If an available-for-sale financial asset is determined to be impaired, a loss is recognized. If the

impairment loss on equity securities decreases, this loss is reversed to the extent of the decrease

and recorded as an adjustment to stockholders’ equity; and for available-for-sale debt instruments,

if the decrease can be objectively related to an event occurring after the impairment loss, it should

be reversed through profit or loss.

7

COSMOS BANK, TAIWAN

Notes to Financial Statements

(Continued)

(k) Equity Investments under the Equity Method

Investments in which the Bank holds 20% or more of the investees’ voting shares or exercises

significant influence over the investees’ operating and financial policy decisions are accounted for

by the equity method.

The difference between the investment cost and net equity of an investee is tested for impairment

at each balance sheet date. If there is evidence indicating that an impairment loss has occurred,

then the carrying amount of the investment is reduced to reflect its net realizable value. For long-

term equity investment in which the Bank has significant influence and a non-controlling interest,

the Bank would evaluate the asset impairment of the investment individually based on its carrying

amount.

For equity-method investments, stock dividends received are recognized only as increases in the

number of shares held, and not as income. Cost of equity investments sold is determined by the

weighted-average method.

(l) Other Financial Assets

Investments in equity instruments (including unlisted stocks) with no quoted market prices in an

active market and with fair values that cannot be reliably measured are recognized at cost on

acquisition. If there is objective evidence that a financial asset is impaired, an impairment loss is

recognized. However, impairment loss reversal is prohibited.

Debt instruments with no active market are those without quoted market prices in an active market

and with fair values that cannot be reliably measured. These instruments are carried at amortized

cost.

An impairment loss is recognized when there is objective evidence that the investment is impaired.

The impairment loss is reversed if an increase in the investment’s recoverable amount is due to an

event which occurred after the impairment loss was recognized; however, the adjusted carrying

amount of the investment may not exceed the carrying amount that would have been determined

had no impairment loss been recognized for the investment in prior years.

(m) Fixed Assets

Fixed assets are carried at cost less accumulated depreciation. Major betterments, additions and

renewals are capitalized, while repairs and maintenance are expensed as incurred.

8

COSMOS BANK, TAIWAN

Notes to Financial Statements

(Continued)

Depreciation is computed using the straight-line method over service lives initially estimated as

follows (plus one year to represent estimated salvage value):

(i) buildings: 20 to 60 years;

(ii) machinery and equipment: 2 to 5 years;

(iii) transportation and communications equipment: 2 to 15 years;

(iv) miscellaneous equipment: 2 to 10 years.

Properties that have reached their estimated useful lives but are still being used are depreciated

over their newly estimated service lives.

Upon sale or other disposal of properties, the related cost and accumulated depreciation are

removed from the accounts, and any gain or loss is credited or charged to net noninterest income.

(n) Intangible Assets

Computer software initially is measured at cost and is amortized over 5 years.

(o) Leased Assets and Depreciation

Fixed assets which were leased to others are stated as leased assets under other assets; rental

revenues are recognized as net revenues other than interest in the income statements. Leased assets

are carried at cost less accumulated depreciation. Depreciation is computed using the straight-

line method over the service lives initially estimated and is accounted for as a reduction of net

revenues other than interest in the income statements.

(p) Foreclosed Collateral

Foreclosed collateral taken over is booked at the acquisition cost stated by the court. Foreclosed

collateral is recorded at the lower of cost or net realizable value on the balance sheet date. If

collateral assumed is not disposed of within the statutory period, relevant regulations require that

the Bank should either apply for an extension of the disposal period or increase its provision for

possible losses.

(q) Deferred Loss on the Sale of Nonperforming Loans

In compliance with the Law Governing Mergers of Financial Institutions, loss on the sale of

nonperforming loans is amortized using the straight-line method over five years.

9

COSMOS BANK, TAIWAN

Notes to Financial Statements

(Continued)

(r) Asset Impairment

Under Statement of Financial Accounting Standards No. 35 - “Impairment of Assets”, the Bank

evaluates impairment on the balance sheet date if an asset (equity investment under the equity

method, fixed asset, asset held for sale, goodwill, foreclosed collateral, idle asset, or deferred

charge classified under other assets - other) is impaired.

If an asset is impaired, its recoverable amount is compared with its carrying amount. If the

recoverable amount is lower than the carrying amount, the carrying amount of the asset should be

reduced to its recoverable amount, and the reduction should be recognized as impairment loss.

After recognizing impairment of assets, the calculation of depreciation or amortization expense

should be based on the adjusted book value minus its residual value and amortized in a reasonable

and systematic manner over the remaining estimated useful period. The accumulated impairment

loss on an asset (except goodwill) recognized in prior years should be reversed if the recoverable

amount increases. In addition, the asset carrying amount should be increased to its recoverable

amount, but this increase should not exceed the carrying amount of the asset that would have been

determined net of depreciation or amortization had no impairment loss been recognized for the

asset in prior years.

(s) Bank Debentures

For convertible bonds issued, the Bank first determines the carrying amount of the liability

component by measuring the fair value of a similar liability (including any embedded non-equity

derivatives) that does not have an associated equity component, then determines the carrying

amount of the equity component, representing the equity conversion option, by deducting the fair

value of the liability component from the fair value of the convertible bonds as a whole. The

liability component (excluding the embedded non-equity derivatives) is measured at amortized

cost using the effective interest method, while the embedded non-equity derivatives are measured

at fair value. Upon conversion, the Bank uses the aggregate carrying amount of the liability and

equity components of the bonds at the time of conversion as the basis to record the common shares

issued.

Pursuant to a newly released SFAS, transaction costs of bonds issued on or after January 1, 2006,

are allocated in proportion to the liability and equity components of the bonds. Transaction costs

allocated to the equity component are accounted for as a deduction from equity, net of any income

tax benefit.

10

COSMOS BANK, TAIWAN

Notes to Financial Statements

(Continued)

(t) Pension Costs

The Bank has two types of pension plans: defined benefit and defined contribution.

Under the defined benefit pension plan, pension costs are recorded on the basis of actuarial

calculations. Unrecognized net transition obligation is amortized over 15 years, and prior service

cost and actuarial gains or losses are amortized over the employees’ remaining service years using

the straight-line method. Under the defined contribution pension plan, the Bank recognizes its

required monthly contributions to employees’ individual pension accounts as current expense

during the employees’ service periods.

(u) Share-based Payments

The value of compensatory stock options and stock appreciation rights is based on the expected

number of shares and the fair value on the grant date, and expense is recognized over the vesting

period using the straight-line method. At the same time, adjustment is made to capital surplus –

employee stock option for share-based payment, while adjustment is made to liabilities for non-

share-based payment.

If the grant date is later than the date that an employee who was given the share-based payment

awards started working, the fair value of the equity awards on the grant date is estimated, and is

recorded as a personnel expense for the period from the start-working date to the grant date.

After the grant date is confirmed, the amount recognized as an expense is adjusted to reflect the

fair value of the equity awards on the grant date.

(v) Employee Bonuses and Directors’ Remuneration

Employee bonuses and directors’ remuneration are accrued in accordance with Interpretation 96 Ji-

Mi No. 052 issued by the Accounting Research and Development Foundation in Taiwan and are

recorded under personnel costs. If the subsequent resolution by the shareholders’ meeting differs

from the amount disclosed in the financial statements, it is recognized as a change in estimates and

recorded under current-period profit/loss.

(w) Recognition of Interest Revenue and Service Fees

Interest revenue on loans is recorded on an accrual basis. Under MOF regulations, no interest

revenue is recognized on loans and other credits extended by the Bank that are classified as

overdue loans. The interest revenue on those loans is recognized upon collection.

The unpaid interest on rescheduled loans should be recorded as deferred revenue (included in other

liabilities), and the paid interest is recognized as interest revenue.

11

COSMOS BANK, TAIWAN

Notes to Financial Statements

(Continued)

Service fees are recorded when a major part of the earnings process is completed and revenue is

realized.

(x) Income Tax

Provision for income tax is based on intra-period and inter-period tax allocation. The tax effects

of deductible temporary differences, unused tax credits, operating loss carryforwards, and debit of

stockholders’ equity adjustments are recognized as deferred income tax assets, and those of taxable

temporary differences and credits to stockholders’ equity adjustments are recognized as deferred

income tax liabilities. A valuation allowance is provided for deferred income tax assets that are

not certain to be realized.

Tax credits for personnel training and stock investments are recognized in the current period.

Income taxes (10%) on undistributed earnings generated annually since 1998 are recorded as

expenses in the year when the stockholders resolve to retain the earnings.

(y) Foreign-currency Transactions

The Bank records foreign-currency transactions in the respective currencies in which these are

denominated. Every month-end, foreign currency income and expenses are translated into New

Taiwan dollars at the month-end exchange rate. On the balance sheet date, monetary assets and

liabilities denominated in foreign currencies are reporting using the month-end exchange rates, and

exchange differences are recognized in the income statement.

Unrealized exchange differences on nonmonetary financial assets (investments in equity

instruments) are a component of the change in their entire fair value. For nonmonetary financial

assets and liabilities classified as financial instruments measured at fair value through profit or loss,

unrealized exchange differences are recognized in the income statement. For nonmonetary

financial instruments that are classified as available-for-sale, unrealized exchange differences are

recorded directly under stockholders’ equity until the asset is sold or becomes impaired.

Nonmonetary financial instruments that are classified as carried at cost are recognized at the

exchange rates on the transaction dates.

(z) Contingencies

A loss is recognized when it is probable that an asset has been impaired or a liability has been

incurred and the amount of loss can be reasonably estimated. A footnote disclosure is made of a

situation that might result in a possible loss but for which the amount of loss cannot be reasonably

estimated.

12

COSMOS BANK, TAIWAN

Notes to Financial Statements

(Continued)

(aa) Earnings per Share

Basic earnings per share are calculated using the net income after taxes minus dividends paid on

preferred shares divided by the weighted-average number of common shares outstanding during

the period. Newly issued shares through retained earnings or capital surplus, or issued through a

resolution of the 2008 shareholders’ meeting or before, should be recalculated. If the

measurement date is before the balance sheet date, then they should also be recalculated.

The employee stock options and the employee bonuses settled using shares that have yet to be

approved by the shareholders’ meeting are deemed to be potential common stock. If the potential

common stock possesses diluting effects, then diluted EPS must be disclosed in addition to basic

EPS. If diluting effects do not exist, then only basic EPS are required to be disclosed.

3 Accounting Changes: None

4 Summary of Major Accounts

(a) Cash and cash equivalents

June 30, 2010 June 30, 2009

Cash on hand $ 1,384,906 1,861,923

Due from banks 683,030 527,262

Checks for clearing 186,011 160,420

$ 2,253,947 2,549,605

(b) Due from the Central Bank and call loans to banks

June 30, 2010 June 30, 2009

Call loans to banks $ 9,369,831 8,891,313

Deposit in the Central Bank 24,700,000 15,400,000

Reserves for deposits - a/c B 2,745,603 2,915,378

Reserves for deposits - a/c A 1,215,081 1,101,695

Deposits 182,045 203,683

$ 38,212,560 28,512,069

As required by law, the reserves for deposits in the Central Bank are calculated by applying the

prescribed rates to the average monthly balances of various types of deposit accounts. The use of

reserves for deposits - a/c B is restricted by the Central Bank.

13

COSMOS BANK, TAIWAN

Notes to Financial Statements

(Continued)

(c) Financial instruments at fair value through profit or loss (FVTPL)

June 30, 2010 June 30, 2009

Held-for-trading financial assets

Commercial paper $ 499,535 -

Government bonds 131,442 147,945

Cross-currency swap contracts - 4,745

Forward exchange contracts - 255

Foreign-currency swap contracts - 110

$ 630,977 153,055

Held-for-trading financial liabilities

Forward exchange contracts $ 194 255

Foreign-currency swap contracts 707 -

Cross-currency swap contracts - 4,745

$ 901 5,000

The Bank engages in derivative transactions mainly to hedge its exchange rate and interest rate

exposures. The Bank’s financial hedging policy is to reduce or minimize its market price or cash

flow exposures.

Outstanding derivative contracts as of June 30, 2010 and 2009, were as follows:

June 30, 2010 June 30, 2009

Cross-currency swap contracts $ - 267,105

Foreign-currency swap contracts 48,417 65,636

Forward exchange contracts 21,052 90,383

Net (losses) and gains on financial assets held for trading for the six-month periods ended June 30,

2010 and 2009, were ($3,761) thousand and $6,295 thousand, respectively. The net losses on

financial liabilities at FVTPL for the six-month periods ended June 30, 2010 and 2009, were

$2,322 thousand and $4,398 thousand, respectively.

14

COSMOS BANK, TAIWAN

Notes to Financial Statements

(Continued)

(d) Receivables, net

June 30, 2010 June 30, 2009

Credit cards $ 3,739,519 4,096,138

Accounts receivable - no recourse 47,407 335,706

Accrued interest 277,015 403,013

Acceptances 60,697 55,060

Tax refund receivable 51,237 72,079

Accrued income 78,435 76,030

Rental deposits 1,410,700 1,010,700

Others 1,867,241 1,993,373

7,532,251 8,042,099

Less: allowance for possible losses (1,860,812) (731,980)

$ 5,671,439 7,310,119

As of June 30, 2010 and 2009, rental deposits receivable amounting to $1,410,700 thousand and

$1,010,700 thousand, respectively, resulted from the relocation to self-owned property, of which,

deposits from Prince Motors and Cosmos Construction Management Corporation amounted to

$910,700 thousand. As of June 30, 2010, after deducting the value of collateral of $166,700

thousand from deposits of Prince Motors and Cosmos Construction Management Corporation, the

Bank had recorded the shortage amount as a provision for possible losses amounting to $744,000

thousand, and the repayment agreement was under negotiation.

From May 2007 to February 2008, the Bank sold structured notes, which were issued by GVEC

Resource Inc. (GVEC), through a specific trust fund amounting to USD 48,920 thousand. PEM

Corporation, which GVEC group was subordinated to, was found to have committed fraud by the

U.S. Securities and Exchange Commission (SEC). In view of its social responsibility, the Bank’s

Board of Directors decided to buy back the structured notes and ask for compensation from PEM

Corporation on June 26, 2009, and the total sales minus prepaid interest amounting to $1,449,168

thousand (USD 44,896 thousand) was recognized as other receivables. The Bank made a

provision for $655,984 thousand after the evaluation of the amount of assets recoverable. Please

refer to note 4(n).

(e) Assets held for sale

June 30, 2010 June 30, 2009

Land held for sale $ - 213,988

Buildings held for sale - 60,717

- 274,705

Less: accumulated impairment loss - (149,506)

$ - 125,199

15

COSMOS BANK, TAIWAN

Notes to Financial Statements

(Continued)

On January 16, 2008, the Board of Directors of the Bank resolved to sell land and buildings which

were previously used for the Bank’s auto service division or warehouse. For the six-month

periods ended June 30, 2010 and 2009, the Bank evaluated the net fair value of those assets, and

recognized gain on reversal of asset impairment amounting to $3,506 thousand and impairment

loss amounting to $31,299 thousand, respectively.

For the six-month periods ended June 30, 2010 and 2009, part of the assets held for sale with

carrying amounts of $48,431 thousand and $0 thousand, respectively, were sold by the Bank, and

the Bank recognized the disposal gains amounting to $6,603 thousand and $0 thousand,

respectively, as net revenues other than interest in the income statements. In addition, part of the

assets held for sale with carrying amounts of $16,799 thousand and $0 thousand for the six-month

periods ended June 30, 2010 and 2009, respectively, were reclassified to self-use fixed assets,

which was approved by the Board of Directors and the FSC.

(f) Discounts and loans, net

June 30, 2010 June 30, 2009

Bills negotiated $ 7,271 -

Overdraft - 7,614

Loans

Short-term 34,838,576 36,256,609

Medium-term 17,928,510 28,312,937

Long-term 12,019,577 17,555,111

Overdue loans 986,773 2,808,024

65,780,707 84,940,295

Less: allowance for possible losses (3,085,733) (3,972,651)

$ 62,694,974 80,967,644

As of June 30, 2010 and 2009, the balances of loans for which accrual of interest revenues was

discontinued were $965,956 thousand and $2,742,909 thousand, respectively. The unrecognized

interest revenues on these loans were $66,883 thousand and $106,846 thousand for the six-month

periods ended June 30, 2010 and 2009, respectively.

As of June 30, 2010 and 2009, the Bank had written off certain loans after carrying out the

required legal procedures.

16

COSMOS BANK, TAIWAN

Notes to Financial Statements

(Continued)

The details and changes in allowance for possible losses on discounts and loans are summarized

below:

For the six-month period ended June 30, 2010

Specific General

Risk Risk Total

Opening balance at January 1, 2010 $ 2,233,317 747,972 2,981,289

Provision (reversal of provision) (427,272) 441,067 13,795

Recovery of written-off credits 932,157 - 932,157

Write-offs (841,513) - (841,513)

Effects of exchange rate changes 5 - 5

Other adjustment - - -

Ending balance at June 30, 2010 $ 1,896,694 1,189,039 3,085,733

For the six-month period ended June 30, 2009

Specific General

Risk Risk Total

Opening balance at January 1, 2009 $ 3,817,726 626,791 4,444,517

Provision 1,697,222 60,240 1,757,462

Recovery of written-off credits 628,262 - 628,262

Write-offs (2,857,589) - (2,857,589)

Effects of exchange rate changes (1) - (1)

Ending balance at June 30, 2009 $ 3,285,620 687,031 3,972,651

The details of the provision for loan losses for the six-month periods ended June 30, 2010 and

2009, were as follows:

For the six-month periods ended

June 30, 2010 June 30, 2009

Provision for possible losses on discounts and loans $ 13,795 1,757,462

Provision for possible losses on receivables 18,649 657,481

Provision (reversal of provision) for overdue accounts

receivable and other assets

(204)

148,290

Reversal of provision for losses on guarantee (5,832) -

$ 26,408 2,563,233

17

COSMOS BANK, TAIWAN

Notes to Financial Statements

(Continued)

(g) Available-for-sale financial assets, net

June 30, 2010 June 30, 2009

Government bonds $ 952,886 878,290

Visa Card shares 1,923 17,223

$ 954,809 895,513

For the six-month period ended June 30, 2010, the net profit recognized on disposal of Visa Card

shares amounted to $3,788 thousand.

(h) Equity investments under the equity method, net

June 30, 2010 June 30, 2009

Carrying

Value

% of

Owner-

ship

Carrying

Value

% of

Owner-

ship

Reliance Securities Investment Trust

Corporation, Ltd. (RSIT) $ - - 46,752 20.00

Cosmos Insurance Brokers Co., Ltd. 27,635 100.00 14,088 100.00

$ 27,635 60,840

For the six-month periods ended June 30, 2010 and 2009, net income on this investment was

$7,665 thousand and $10,065 thousand, respectively. Net income is calculated and recognized in

accordance with the unaudited financial statements of the investee companies during the same

period.

The Bank no longer possesses significant influence over RSIT, which was originally accounted for

under the equity method, as the Bank did not participate in RSIT’s capital increase plan, and its

holding in RSIT fell below 20%. Starting August 7, 2009, the book value of $46,752 thousand

was reclassified as financial assets carried at cost.

The total assets and capital of the Bank’s subsidiary, Cosmos Insurance Brokers Co., Ltd., were

not significant to the Bank, and the Bank did not prepare consolidated financial statements for the

six-month periods ended June 30, 2010 and 2009.

18

COSMOS BANK, TAIWAN

Notes to Financial Statements

(Continued)

(i) Other financial assets, net

June 30, 2010 June 30, 2009

Debt instruments with no active market, net $ 24,677 66,318

Financial assets carried at cost, net 769,582 722,830

Others 258,457 242,488

$ 1,052,716 1,031,636

(i) Debt instruments with no active market were as follows:

June 30, 2010 June 30, 2009

Special-purpose trust beneficiary certificates $ 24,677 66,318

For the six-month period ended June 30, 2009, the net loss recognized on leveraged spread

notes amounted to $1,795 thousand.

(ii) Financial assets carried at cost were as follows:

June 30, 2010 June 30, 2009

Carrying

Value

% of

Owner-

ship

Carrying

Value

% of

Owner-

ship

Unlisted common stock with no quoted market

price:

CDIB & Partners Investment Holding Ltd. $ 500,000 4.95 500,000 4.95

Taiwan Asset Management Corporation 100,000 0.57 100,000 0.57

Euroc II Venture Capital Corporation 33,263 7.50 33,263 7.50

Financial Information Service Co., Ltd. 49,120 1.23 49,120 1.23

Reliance Securities Investment Trust

Corporation, Ltd. (RSIT)

46,752

12.31

-

-

Euroc III Venture Capital Corp. 18,357 5.00 18,357 5.00

Taiwan International Future Co. Ltd. 10,250 0.51 10,250 0.51

Taiwan Depository & Clearing Corp. 6,345 0.08 6,345 0.08

Yang-Kuan Asset Management Corporation 3,445 5.74 3,445 5.74

Lien-An Service Co. 1,250 5.00 1,250 5.00

Taipei Forex Inc. 800 0.40 800 0.40

Cosmos Construction Management Corporation

(CCMC)

-

9.39

-

9.39

$ 769,582 722,830

Beginning August 7, 2009, RSIT was accounted for under the cost method. For more

details, please refer to note 4(h).

19

COSMOS BANK, TAIWAN

Notes to Financial Statements

(Continued)

(iii) Other financial assets were as follows:

June 30, 2010 June 30, 2009

Pledged certificates of deposit $ 258,351 241,844

Others 106 644

$ 258,457 242,488

As of June 30, 2010, the pledged certificates of deposit of the Bank were composed of the

collateral for spot exchange transactions and the collateral for collections of the National

Treasury tax, which amounted to $238,351 thousand and $20,000 thousand, respectively. As

of June 30, 2009, the collateral for spot exchange transactions was $241,844 thousand.

(j) Fixed assets, net

June 30, 2010

Cost

Accumulated

depreciation

Accumulated

impairment

Net

Land $ 3,995,972 - - 3,995,972

Buildings 2,646,446 507,951 - 2,138,495

Machinery and equipment 1,635,287 1,509,470 - 125,817

Transportation and communications equipment 256,881 247,132 - 9,749

Miscellaneous equipment 318,982 309,445 - 9,537

Total $ 8,853,568 2,573,998 - 6,279,570

June 30, 2009

Cost

Accumulated

depreciation

Accumulated

impairment

Net

Land $ 4,288,952 - 277,575 4,011,377

Buildings 2,774,061 482,408 89,597 2,202,056

Machinery and equipment 1,664,978 1,414,979 54,738 195,261

Transportation and communications equipment 264,261 244,513 7,851 11,897

Miscellaneous equipment 356,619 335,412 6,829 14,378

Total $ 9,348,871 2,477,312 436,590 6,434,969

The Bank defines each product line as a CGU to test assets, including fixed assets, deferred

charges, and intangible assets, for impairment. The recoverable amount of a CGU is its value in

use, and the key assumptions on the economic conditions that will occur over the remaining useful

life of the CGU, such as estimated future cash flows, are based on each CGU’s operations or

objective data on its business cycle. Under the assumption of sustainable operations, the Bank

estimated each CGU’s net cash flow for future years. As of June 30, 2010 and 2009, the

weighted-average cost of capital (WACC) rates for future cash flows were 2.34% and 3.24%,

respectively. On December 31, 2009, the Bank estimated the expected future cash inflow to be

20

COSMOS BANK, TAIWAN

Notes to Financial Statements

(Continued)

larger than the book value of the assets, so the Bank reversed the impairment losses on fixed assets

and deferred charges amounting to $436,590 thousand and $67,137 thousand, respectively.

(k) Other assets, net

June 30, 2010 June 30, 2009

Deferred loss on the sale of nonperforming loans $ 5,818,473 11,709,977

Others:

Prepayments 93,620 98,816

Prepayments of pension 13,789 5,212

Deferred charges 141,190 269,988

Less: accumulated impairment – deferred charges (note 4(j)) - (67,137)

Foreclosed collateral, net - 391,500

Deferred income tax assets, net (note 4(r)) 7,102,088 7,547,666

Refundable deposits 948,885 1,471,298

Less: accumulated impairment – refundable deposits - (373,200)

Leased assets 468,703 -

Less: accumulated depreciation – leased assets (28,146) -

Others 64,413 46,345

8,804,542 9,390,488

$ 14,623,015 21,100,465

(i) Deferred loss on the sale of nonperforming loans

Between 2004 and 2006, the Bank signed contracts to sell the following nonperforming loans:

1) In 2004, the Bank signed contracts with Chung-Cheng Asset Management Co. (CCAM)

and Cosmos Marketing Consulting Co. (CMC) to sell nonperforming loans of $4,700,691

thousand and $3,753,942 thousand, respectively. These transactions, with a selling

price of $495,402 thousand, resulted in a loss of $7,959,231 thousand. CCAM and

CMC both committed that if, within five years from the contract date, there are proceeds

from the sale of nonperforming loans, 45% of these proceeds net of the yield amount,

related tax and litigation expenses, and necessary administrative expenditures should be

returned to the Bank, which was dued on December 31,2009. For the six-month period

ended June 30, 2009, the Bank received proceeds of $10,182 thousand (treated as a

reduction of deferred loss on the sale of nonperforming loans).

2) In 2005, the Bank signed contracts with P.I.C.K. Second Fund Co., Ltd. (P.I.C.K.), CMC,

and Hui-Cheng First Asset Management Co., Ltd. to sell nonperforming loans of

$820,961 thousand, $6,029,567 thousand, and $1,619,640 thousand, respectively.

These transactions, with a selling price of $644,643 thousand, resulted in a loss of

$7,825,525 thousand.

21

COSMOS BANK, TAIWAN

Notes to Financial Statements

(Continued)

3) In 2006, the Bank signed contracts with Yang-Kuan Asset Management Co., Ltd.

(YKAM), ORIX Taiwan Corporation (ORIX), and CMC to transfer and sell to these

three companies nonperforming loans of $103,239 thousand, $2,454,035 thousand, and

$19,465,842 thousand, respectively. For these transactions, the Bank should receive a

payment of $1,140,590 thousand in cash and some YKAM stock at face value. These

sales resulted in a loss of $20,882,526 thousand. CMC agreed that if there are proceeds

from the sale of nonperforming loans within five years from the contract date, 50% of

these proceeds, net of the yield amount, related tax and litigation expenses, and necessary

administrative expenditures, should be returned to the Bank. For the six-month periods

ended June 30, 2010 and 2009, the Bank received proceeds of $58,750 thousand and

$53,152 thousand (treated as a reduction of deferred loss on the sale of nonperforming

loans), respectively.

Under the Law Governing Mergers of Financial Institutions, the Bank deferred and

amortized all of the losses on the sale of the above nonperforming loans by the straight-

line method over five years. The unamortized amounts of $5,818,473 thousand and

$11,709,977 thousand as of June 30, 2010 and 2009, respectively, were presented under

deferred loss on the sale of nonperforming loans. The amortized amounts of $2,769,373

thousand and $3,611,560 thousand for the six-month periods ended June 30, 2010 and

2009, respectively, were classified as amortization of loss on the sale of nonperforming

loans.

(ii) Foreclosed collateral, net

June 30, 2010 June 30, 2009

Foreclosed collateral $ 87,311 504,117

Less: Accumulated impairment (87,311) (112,617)

$ - 391,500

An item of the Bank’s real estate collateral, whose acquisition cost and accumulated

impairment loss were $416,806 thousand and $25,306 thousand, respectively, was sold on

November 30, 2009.

(iii) Please refer to note 4(r) for the deferred income tax assets, net.

22

COSMOS BANK, TAIWAN

Notes to Financial Statements

(Continued)

(iv) Leased assets, net:

June 30, 2010 June 30, 2009

Leased assets – 1and $ 332,135 -

Leased assets – buildings 136,568 -

468,703 -

Less: Accumulated depreciation (28,146) -

$ 440,557 -

(l) Due to the Central Bank and other banks

June 30, 2010 June 30, 2009

Due to Banks $ - 96

Due to Chunghwa Post Co., Ltd. 9,395,805 11,955,285

Due to the Central Bank 910 1,645

Call loans from banks - 9,297

$ 9,396,715 11,966,323

(m) Securities sold under repurchase agreements

As of June 30, 2010, securities sold for $30,000 thousand under repurchase agreements would be

purchased for $30,003 thousand by July 2010.

As of June 30, 2010, available-for-sale financial assets amounting to $27,000 thousand (face value)

had been sold under repurchase agreements.

(n) Payables

June 30, 2010 June 30, 2009

Accrued expenses $ 296,881 1,054,174

Accrued interest 324,249 781,538

Payable on funds purchased 25,944 82,224

Checks for clearing 186,011 160,420

Collections payable 56,829 44,222

Acceptance 60,772 55,156

Others 430,575 1,926,547

$ 1,381,261 4,104,281

23

COSMOS BANK, TAIWAN

Notes to Financial Statements

(Continued)

In accordance with the resolution of the Bank’s Board of Directors on June 26, 2009, the Bank

bought back the structured notes amounting to $1,449,168 thousand (USD44,896 thousand) from

investors and recognized the amount as other payables. The notes were issued by GVEC and sold

by the Bank to investors through a specific trust fund. As of March 31, 2010, the Bank had

bought back all of the notes from investors. For more details, please refer to note 4(d).

(o) Deposits and remittances

June 30, 2010 June 30, 2009

Deposits:

Checking $ 862,440 1,108,676

Demand 9,937,549 7,948,031

Time 22,251,467 10,927,074

Savings 72,368,855 92,900,093

Negotiable certificates of deposit 25,600 142,900

Remittances 7,639 11,479

$ 105,453,550 113,038,253

(p) Bank debentures

June 30, 2010

Cosmos Bank Maturity Date Rate Par Value

Discount

Amount Book Value

First subordinated bank

debenture issued in 2006 B

2006.12.14~

2016.12.14

3.20%

annually $ 515,000 - 515,000

June 30, 2009

Cosmos Bank Maturity Date Rate Par Value

Discount

Amount Book Value

First subordinated bank

debenture issued in 2006 B

2006.12.14~

2016.12.14

3.20%

annually $ 515,000 - 515,000

(i) On November 9, 2006, the Board of Directors resolved to publicly issue a subordinated bank

debenture, with the amount not to exceed $7,000,000 thousand, to strengthen the Bank’s

capital structure for future growth. This public issuance was approved by the Financial

Supervisory Commission (FSC) on November 17, 2006 (FSC approval document: Jin-Kuan-

Yin-(2)-Zi No. 09500481860).

24

COSMOS BANK, TAIWAN

Notes to Financial Statements

(Continued)

On December 14, 2006, the Bank issued one 7-year ($4,500,000 thousand) and one 10-year

($2,500,000 thousand) subordinated bank debenture, with interest payable annually at 3%

and 3.2%, respectively, and the principal fully repayable on maturity.

Under an original subscription agreement that was signed on December 26, 2007, together

with an appendix to the agreement, China Development Industrial Bank Inc. and eight other

banks agreed to reduce by 58% the total creditors’ right to the first convertible bank

debenture issued in 2006, with a principal of $6,485,000 thousand. The residual amount

will be partially paid in cash and partially paid in the Bank’s common shares.

Chu Nan Credit-Cooperative Association, Singfor Life Insurance Co., Ltd., and Taipei

Sanjhih Hsiang Farmers’ Association subscribed for a subordinated bank debenture issued by

the Bank in 2006. The principal of this debenture was $515,000 thousand (classified as

bank debentures) as of June 30, 2010. However, these subscribers did not sign the

subscription agreement. The Bank filed a petition with the courts to waive certain

conditions of the debentures. On November 26, 2008, the case was accepted by the Taiwan

Taipei District Court, civil division, but the counterparties filed an appeal with the collegiate

bench of the Taipei District Court. A retrial for the effectiveness of the subscription

agreement was accepted by the collegiate bench of the Taipei District Court on October 28,

2009. On November 24, 2009, the Bank’s Board of Directors resolved to revise the terms

of the subordinated bank debentures, and the Bank stopped calculating and paying interest

from the second day (December 29, 2007) after the Bank settled the creditors’ right with its

common shares.

On July 21, 2010, the Taiwan High Court adjudged that the resolution of the meeting for

reducing the debenture was effective. Therefore, the Bank will pay back 42% of the

remaining bank debenture in cash, and an after-tax extraordinary gain resulting from the

abovementioned bank debenture relief is estimated to be $247,921 thousand. For more

details, please refer to note 9. In addition, Chu Nan Credit-Cooperative Association filed

another lawsuit to request the Bank pay the interest on the bank debenture, which amounted

to $3,200 thousand; the lawsuit is in process at the summary court of the Taipei District

Court.

(ii) On December 28, 2007, the Bank privately placed Subordinated Unsecured Mandatory

Convertible Bonds (the Bonds). GE Capital Asia Investments Holdings B.V. and S.A.C.

PEI Taiwan Holdings B.V. subscribed for these Bonds, and their holdings amounted to

$1,650,000 thousand and $18,150,000 thousand, respectively. The issuance period is five

years, and the interest rate is from 4.00% to 6.00%. The coupon interest for year 1 should

be fully paid on the issue date, and for year 2 should be fully paid on the first day of year 2.

The coupon interest rate of the first two years is 6%. For years 3 to 5, the coupon interest

(4%) is payable quarterly from the end of the three months after the first day of year 3. The

conversion price upon issuance is NT$2.00 per share, which can be modified anytime using a

certain formula. The Bonds can be converted without restrictions between the 31st day of

the issuance date and the maturity date.

25

COSMOS BANK, TAIWAN

Notes to Financial Statements

(Continued)

Advance repayment, redemption, purchase, cancellation or amendment of all or part of the

Bonds is prohibited under the contract unless the Bank receives a written consent from the

bondholders.

Under Statement of Financial Accounting Standards No. 36 - “Financial Instruments:

Disclosure and Presentation”, the Bank recognized (a) the conversion option as capital

surplus – others, which amounted to $15,819,198 thousand ($15,944,124 thousand less

$124,926 thousand in transaction cost after income tax) and (b) the accrued interest on the

Bonds, which amounted to $3,826,385 thousand ($3,855,876 thousand less $29,491 thousand

in transaction cost after income tax), classified as other financial liabilities. For the six-

month periods ended June 30, 2010 and 2009, the Bank recognized $77,575 thousand and

$119,694 thousand, respectively, in interest. As of June 30, 2010 and 2009, the balance of

accrued interest on the Bonds was $1,436,344 thousand and $1,937,349 thousand,

respectively.

Under mandatory terms, the Bonds should be converted into fully paid common shares of the

Bank (i) on the maturity date or (ii) whenever needed to maintain the Bank’s capital

adequacy ratio at 8% or higher or the Tier 1 capital ratio at 4% or higher, with the related

calculation to include the pro rata conversion of holdings on the date of the conversion.

In order to strengthen the Bank’s financial structure, the Board of Directors approved the

proposal to have S.A.C. PEI Taiwan Holdings B.V. convert the Bonds in the amount of

$3,630,000 thousand into common stock before the maturity date. The conversion ratio was

20%, and the Bank obtained approval from the FSC under Jin Guan Yin Guo No.

09800425750 on September 22, 2009. In accordance with the resolution of the Bank’s

Board of Directors on September 28, 2009, the conversion date was October 6, 2009, the

conversion price upon issuance was NT$6.0049020 per share, and the Bonds should be

converted into 604,506 thousand common shares, with $10 face value per share. The

abovementioned capital increment was approved by the FSC under Jin Guan Yin Guo No.

09800473800 on October 8, 2009.

(q) Pension plan

The Labor Pension Act (the “Act”), which took effect on July 1, 2005, provides for a new defined

contribution pension plan. Bank employees subject to the earlier promulgated Labor Standards

Law were allowed to choose between the pension mechanism under the Labor Standards Law or

the mechanism under the Act. For those employees who chose to be subject to the pension

mechanism under the Act, their service years before the enforcement of the Act will be retained.

However, those hired on or after July 1, 2005, automatically become subject to the Act.

Based on the Act, the rate of the Bank’s required monthly contributions to the employees’

individual pension accounts is 6% of monthly wages and salaries.

26

COSMOS BANK, TAIWAN

Notes to Financial Statements

(Continued)

For the Bank’s employees who chose to continue to be subject to the Labor Standards Law, benefit

payments are based on length of service and average monthly salary or wages upon retirement.

The Bank has two funds under its defined benefit plan: one for management and the other for

nonmanagement employees (“employees”). The Bank makes monthly contributions to the

employees’ pension fund, which is managed by the employees’ fund committee and deposited in

the committee’s name in the Central Trust of China (merged with Bank of Taiwan in July 2007,

with Bank of Taiwan as the surviving entity). The pension fund for management is administered

by the employees’ pension fund administrative committee and deposited under the committee’s

name to an account in the Bank.

On December 6, 2007, the Bank signed with the Bank’s labor union an Employee Benefit

Proposal – Early Retirement Plan (ERP), under which the Bank would carry out the following

enhanced pension plan in stages:

(i) Eligibility and limit on eligibility

1) First stage from January 1 to June 30, 2008 - The ERP will be open to all employees

whose sum of age and years of service is at least 50 years.

2) Second stage from July 1 to December 31, 2008 - The ERP will be open to all employees

other than the employees described in item (1) above if the sum of the age and the years

of service is less than 50 years. However, the qualified employees cannot exceed 20%

of the non-senior employees.

3) The third stage from February 1 to 28, 2009 - The ERP will be open to all employees

who enrolled earlier than December 31, 2007, and are still on the job at February 1, 2009,

and thereafter.

4) Taking into consideration the stability and development of the Bank’s future operations,

the pension expense of the next two years is accrued based on the original plan for the

employees that meet the conditions of the first stage but are required by the Bank to

remain for 2 more years.

(ii) Entitlement

The senior employees who apply for early retirement will be entitled to a lump-sum payment

equal to two months’ average salary for each service year. A service period that is equal to

or more than a half year is counted as one service year, and a service period that is less than a

half year is counted as a half year of service.

27

COSMOS BANK, TAIWAN

Notes to Financial Statements

(Continued)

The Board of Directors approved the ERP on December 11, 2007, and January 15, 2009.

For the six-month periods ended June 30, 2010 and 2009, pension expense recognized as a

result of the ERP amounted to $11,812 thousand and $232,251 thousand, respectively. In

accordance with the resolution of the Bank’s Board of Directors on January 23, 2009, the

Bank applied to close 12 branches, and the Bank accrued the severance payment amounting

to $41,000 thousand as pension expenses for the six-month periods ended June 30, 2009.

As of June 30, 2010 and 2009, ERP pension liability amounted to $185,122 thousand and

$202,894 thousand, respectively.

Pension expenses were $44,396 thousand and $314,560 thousand for the six-month periods

ended June 30, 2010 and 2009, respectively (among which $31,467 thousand and $34,680

thousand, respectively, belong to pension expenses for the defined contribution plan.)

Changes in the employees’ and management’s pension funds were as follows:

For the six-month periods ended

June 30, 2010 June 30, 2009

Employees’ pension fund

Beginning balance $ 506,800 499,667

Contribution 2,012 3,355

Interest income 1,695 4,179

Benefits paid - (3,816)

Ending balance $ 510,507 503,385

Management’s pension fund

Beginning balance $ 359,190 342,133

Contribution 6,286 7,967

Interest income 5,205 1,699

Ending balance $ 370,681 351,799

(r) Income tax

(i) According to the amendment of the Income Tax Act on May 27, 2009, the income tax rate

was changed from 25% to 20% beginning from the year 2010. The income tax rate was

further changed to 17% beginning from the year 2010 according to the amendment of the

Income Tax Act on June 15, 2010. Therefore, the statutory tax rates are 17% and 25% for

the years 2010 and 2009, respectively, and the Bank calculated the basic tax amount in

accordance with the Income Basic Tax Act.

28

COSMOS BANK, TAIWAN

Notes to Financial Statements

(Continued)

(ii) Income tax benefit was calculated as follows:

For the six-month periods ended

June 30, 2010 June 30, 2009

Income tax expense – current before tax credits $ 349 373

Net changes in deferred income tax expense (benefit):

Loss carryforwards (309,673) (1,760,393)

Amortization of goodwill 4,224 6,212

(Increase) decrease in allowance for possible losses on

loans and receivables

(28,937)

226,529

Pension costs 720 20,629

Effect on deferred income tax of income tax rate change 1,333,844 2,083,666

Valuation allowance (reversal) for deferred income tax

assets

(192,074)

(1,213,000)

Others 12,368 (8,942)

Deferred income tax expense (benefit) 820,472 (645,299)

Adjustment of prior year’s tax 77,440 (4,267)

Income tax expense (benefit) $ 898,261 (649,193)

(iii) The income tax computed at the statutory tax rate was reconciled with the provision for

income tax for the six-month periods ended June 30, 2010 and 2009, as follows:

For the six-month periods ended

June 30, 2010 June 30, 2009

Income tax benefit before income tax at statutory rate $ (285,635) (1,451,373)

Tax-exempt gain on domestic cash dividends (131) (2,146)

Interest expense on bank debenture (42,543) (113,131)

Tax-exempt losses from OBU 178 717

Tax-exempt losses on sale of land 1,355 -

Adjustment of prior year’s income tax 77,440 (4,267)

Effect on deferred income tax of income tax rate change 1,333,844 2,122,514

Valuation allowance (reversal) for deferred income tax

assets (192,074) (1,213,000)

Others 5,827 11,493

Income tax expense (benefit) $ 898,261 (649,193)

29

COSMOS BANK, TAIWAN

Notes to Financial Statements

(Continued)

(iv) Net deferred income tax assets and liabilities as of June 30, 2010 and 2009, were as follows:

June 30, 2010 June 30, 2009

Deferred income tax assets (liabilities)

Loss carryforwards $ 7,109,632 7,374,535

Allowance for possible losses on loans and

receivables

713,093

732,273

Pension costs 29,127 57,554

Impairment loss 6,864 119,785

Unrealized foreign exchange loss (gain) (2,028) 6,054

Loss on the transfer of foreclosed collateral to fixed

assets

9,006

10,879

Investment tax credits 11,342 9,023

Amortization and impairment of goodwill 12,907 25,223

Others 1,145 (660)

7,891,088 8,334,666

Less: Valuation allowance (789,000) (787,000)

Net deferred income tax assets $ 7,102,088 7,547,666

(v) The Bank’s unused investment tax credits mainly resulted from personnel training

expenditures from the past five years under the Statute for Upgrading Industries. The

useable amount of the unused investment tax credits is limited to 50% of the annual income

tax for each year, but is not limited in the expiry year. As of June 30, 2010, the Bank’s

unused investment tax credits and their related expiration years were as follows:

Occurrence year

Unused investment tax

credits

Expiry

year

2006 $ 3,313 (assessed) 2010

2007 2,673 (assessed) 2011

2008 3,461 (reported) 2012

2009 1,895 (reported) 2013

$ 11,342

30

COSMOS BANK, TAIWAN

Notes to Financial Statements

(Continued)

(vi) In accordance with the amendment to the Income Tax Act, taxable losses from the past ten

years as assessed by the authorities may be used to reduce net income in the current year.

As of June 30, 2010, loss carryforwards were as follows:

Accrued Year

Total Credits

Granted

Total Tax

Credits Granted

Expiry

Year

2006 (assessed) $ 4,608,024 783,364 2016

2007 (assessed) 11,400,998 1,938,170 2017

2008 (reported) 13,803,205 2,346,545 2018

2009 (reported) 10,187,530 1,731,880 2019

2010 (estimated) 1,821,604 309,673 2020

$ 41,821,361 7,109,632

(vii) Imputed tax credits are summarized as follows:

June 30, 2010 June 30, 2009

Accumulated deficit for year 1998 and thereafter $ (15,850,903) (26,675,389)

Balance of stockholders’ imputed tax credits $ 989,971 982,097

(viii) Income tax returns through 2007 have been examined by the tax authorities. The Taipei

National Tax Administration will refund 65% of certain withholding taxes. The Bank

accepted the refund at this percentage.

(s) Stockholders’ equity

(i) Capital

In accordance with the resolution of the Board of Directors on February 25, 2009, and the

stockholders’ meeting held on June 19, 2009, the Bank had a private placement of common

shares with General Electric International Inc. to settle the Bank’s debts. On September 28,

2009, the Board of Directors set the share pricing date as September 29, 2009, and the private

placement amounted to $550,368 thousand, with 170,922 thousand shares issued at $3.22 per

share. The face value of each share is 10 dollars; therefore, the Bank’s capital increased

$1,709,217 thousand, and the private placement was approved by the FSC under Jin Guan

Yin Guo No. 09800425750.

In addition, in accordance with the resolution of the Board of Directors on February 25, 2009,

and the stockholders’ meeting held on June 19, 2009, the Series A Preferred Shares of the

Bank and a portion of the MCB would be converted into the Bank’s common shares, and the

Bank obtained approval from the FSC under Jin Guan Yin Guo No. 09800425750.

31

COSMOS BANK, TAIWAN

Notes to Financial Statements

(Continued)

According to the resolution of the Board of Directors on September 28, 2009, the Board of

Directors set the conversion date as October 6, 2009, and approved the Series A Preferred

Shares conversion application of S.A.C. PEI Taiwan Holdings B.V. which had been

delivered on October 5, 2009. The preferred shares were converted into 543,315 thousand

common shares with a face value which is 10 dollars per share. Besides, a portion of

$3,630,000 thousand of the MCB were converted into 604,506 thousand common share at

$6.004902 per share, and the face value of each common share is 10 dollars.

The abovementioned capital increase through the private placement of common shares, the

conversion of preferred shares into common shares, and the conversion of a portion of the

MCB into common shares were completed and approved by the FSC under Jin Guan Yin

Guo No. 09800473800 on October 8, 2009, and the Bank also completed the registration of

this capital increase with the Ministry of Economic Affairs on October 23, 2009.

In order to strengthen the financial structure, the shareholders’ meeting on June 19, 2009,

approved reducing capital by $19,300,000 thousand and reducing the number of shares by

1,930,000 thousand shares, constituting a capital reduction of approximately 54.3132%.

The capital reduction was approved by the FSC under Jin Guan Cheng Fa No. 0980055038

on October 27, 2009. In addition, the basis date of the capital reduction was October 30,

2009, the registration of the capital reduction was completed on November 10, 2009, and the

share exchange was completed on January 20, 2010.

In order to strengthen the operating capital, improve the financial structure, and increase the

capital adequacy ratio, according to the resolution of the Board of Directors on May 7, 2010,

and the resolution of stockholders on June 18, 2010, the Bank will raise capital by a private

placement of common shares and issue a maximum of 1,000,000 thousand shares, with a face

value of 10 dollars per share; and the total face value of the private placement should not

exceed $10,000,000 thousand. In accordance with the Directions for Public Companies

Conducting Private Placements of Securities, the private placement of common shares would

be settled at 6 dollars per share temporarily, and the Board of Directors was authorized to

determine the actual settled price afterwards depending on the particular sources of capital.

As of June 30, 2010 and 2009, the Bank had authorized capital stock amounting to

$200,000,000 thousand (of which $12,580,000 thousand was reserved for employee stock

options). The capital stock included common stock of $16,234,639 thousand and

$22,347,209 thousand, and preferred shares of $0 thousand and $5,433,151 thousand, totaling

$16,234,639 thousand and $27,780,360 thousand, as of June 30, 2010 and 2009, respectively.

The face value of each share is 10 dollars.

(ii) Capital surplus

Under related regulations, capital surplus may only be used to offset a deficit. However,

capital surplus (from issuance in excess of common stock par value, issuance of common

stock for combinations, and treasury stock transactions) and donations may be transferred to

32

COSMOS BANK, TAIWAN

Notes to Financial Statements

(Continued)

common stock on the basis of the percentage of shares held by the stockholders. Any

capital surplus transfer should be within a certain percentage prescribed by law.

Capital surplus was as follows:

June 30, 2010 June 30, 2009

Mandatory convertible bonds $ 12,919,012 15,819,198

Issuance of employee stock options 38,843 24,396

Expiration of options 12,712 12,712

$ 12,970,567 15,856,306

(iii) Appropriation of earnings and dividend policy

The Bank’s earnings appropriation policy is aligned with its goals to maintain the adequacy

of capital and provide for future financial needs. Under the Bank’s Articles of

Incorporation (the “Articles”), annual net income, less any losses of prior years, should be

appropriated 30% as legal reserve and appropriated as special reserve (booked as a deduction

item of stockholders’ equity). The remainder plus unappropriated earnings of prior years

should be appropriated 80% as dividends to stockholders, and the remaining 20% should be

appropriated as follows:

1) 80% as bonus to stockholders

2) 15% as bonus to employees

3) 5% as remuneration to directors

The cash dividends should be at least 10% of the total dividends to be paid/distributed.

However, if the cash dividend is less than NT$0.1 per share, the entire dividend should be

paid in stock.

Under a directive of the Securities and Futures Bureau, the Bank has to appropriate a special

reserve from current year’s earnings and the unappropriated earnings generated in prior years

that is equal to the debit balance of any stockholders’ equity account (except deficit). The

special reserve should be adjusted on the basis of the debit balance of the stockholders’

equity account as of year-end.

In making this appropriation, the Bank should consider its capital adequacy ratio, long-term

financial position, and stockholders’ cash needs, and the shareholders’ meeting may decide

not to appropriate any dividend and bonus in full or in part.

33

COSMOS BANK, TAIWAN

Notes to Financial Statements

(Continued)

Under the Law Governing Mergers of Financial Institutions, loss on the sale of

nonperforming loans is amortized using the straight-line method over five years, and a

special reserve equal to the loss should be appropriated.

The appropriation of the deficit for the years ended December 31, 2009 and 2008, resolved

by the Board of Directors and stockholders on June 18, 2010, and June 19, 2009, respectively,

was as follows:

2009 2008

Accumulated deficit, beginning of 2009 and 2008 $ (21,519,090) (67,902,864)

Capital decrease to offset accumulated deficit 19,300,000 56,586,140

Less: Discount on issuing common shares from

settlement of bebts

(1,158,849)

-

Discount on issuing common shares from

conversion of the MCB

(2,730,224)

-

Prior-year net loss (7,164,271) (10,202,366)

Accumulated deficit $ (13,272,434) (21,519,090)

Information on appropriation of earnings or deficit offsetting will be available on the Market

Observation Post System of the Taiwan Stock Exchange (http://emops.tse.com.tw) after the

related meetings.

Under the Company Act, legal reserve should be appropriated until the reserve equals the

Bank’s paid-in capital. This reserve may only be used to offset a deficit. When the

reserve reaches 50% of the aggregate par value of the Bank’s outstanding capital stock, up to

50% thereof may be declared as stock dividends. In addition, the Banking Act provides that,

before the legal reserve equals the Bank’s paid-in capital, annual cash dividends and bonuses

should not exceed 15% of paid-in capital.

The Bank recorded an after-tax loss in the first six months of 2010 and 2009, and therefore is

not required to accrue any employee bonuses or directors’ remuneration.

(iv) Employee stock option plans and the stock appreciation rights plan for executives

To attract and encourage professionals, enhance employees’ loyalty to the Bank, and create

maximum benefits to stockholders and the Bank, the Board of Directors approved on May 22,

2008, an employee stock option plan. As of June 12, 2008, the Bank had registered this plan

with the Financial Supervisory Commission. A full-time employee who first reported for

work before the plan issue date qualifies for the plan. A full-time employee of a Bank

subsidiary in which the Bank owns over 50% of voting shares directly or indirectly in or

outside Taiwan will also qualify for the plan.

34

COSMOS BANK, TAIWAN

Notes to Financial Statements

(Continued)

The options granted are valid for 10 years and are exercisable at certain percentages after the

second anniversary from the grant date. The options were granted at an exercise price equal

to the grant date closing price of the Bank’s common stock listed on the Taiwan Stock

Exchange. For any subsequent changes in common shares, the exercise price and the

number of options are adjusted accordingly. The Bank issued 838,700 thousand units of

employee share options, and a unit can convert into one common share of the Bank. As a

result, the Bank retained 838,700 thousand new shares of common stock for the plan.

The abovementioned plan expired on June 11, 2009, and the Bank’s Board of Directors

approved the “2010 regulation on the issuance and subscription of employee stock options”

in the meeting of the Board of Directors held on February 25, 2010. The total issuance

amount of the new employee stock options was 161,391 thousand units, which had

considered the effect of capital reduction. Meanwhile, the Bank’s Board of Directors

approved the stock appreciation rights plan for executives on December 22, 2009, and the

Bank could settle the stock appreciation rights by the Bank’s common shares or by cash.

The information on employee benefits from share-based payment transactions for the six-

month periods ended June 30, 2010 and 2009, is as follows:

For the six-month periods ended

June 30, 2010 June 30, 2009

Expenses resulting from equity-settled share-based

payment transactions

$ 17,188

11,988

Balance of liabilities resulting from share-based

payment transactions

8,848

-

Additional paid-in capital resulting from equity-settled

share-based payment transactions

8,960

11,988

The information on the Bank’s share-based payment transaction plans as of June 30, 2010, is

as follows:

Stock appreciation rights

plan of executives

Employee stock

option plan

Grant date 2009.12.22 2008.5.5~2008.9.9

Grant amount (thousand shares) 16,571 6,580

Vesting period 2009.12.22~2013.12.21 2008.5.5~2012.9.8

35

COSMOS BANK, TAIWAN

Notes to Financial Statements

(Continued)

The details of the Bank’s employee benefit plan are as follows:

June 30, 2010

Stock appreciation

rights plan of executives

Employee stock

option plan

Units

(thousand

shares)

Exercise

price

(dollars)

Units

(thousand

shares)

Exercise

price

(dollars)

Outstanding units as of January 1,

2010 (balance at period-end) 16,571 $ 7.33 6,580 12.36~20.21

June 30, 2009

Stock appreciation

rights plan of executives

Employee stock

option plan

Units

(thousand

shares)

Exercise

price

(dollars)

Units

(thousand

shares)

Exercise

price

(dollars)

Outstanding units as of January 1,

2009 (balance at period-end) - $ - 17,862 5.65~9.23

When estimating the fair value of the stock options granted using the Black-Scholes Option

Model, the Bank takes into account the following factors:

June 30, 2010

Stock

appreciation

rights plan of

executives

Employee stock

option plan

Exercise price (dollars) 7.33 12.36~20.21

Stock price on grant date (dollars) 7.33 12.36~20.21

Weighted-average expected contractual remaining life 5.48~6.48 3.92~5.20

Expected share price volatility (%) 47.63~49.87 41.60~42.95

Risk-free interest rate (%) 1.27~1.36 2.23~2.74

(v) Unrealized gain or loss on financial instruments

The movements as of June 30, 2010 and 2009, of unrealized gain or loss on available-for-sale

financial instruments were as follows:

36

COSMOS BANK, TAIWAN

Notes to Financial Statements

(Continued)

For the six-month periods ended

June 30, 2010 June 30, 2009

Balance, beginning of year $ 30,497 16,489

Recognized in stockholders’ equity (8,054) 10,809

Transferred to profit or loss (3,858) (238)

Balance, end of year $ 18,585 27,060

(t) Earnings per share

For the six-month periods ended

June 30, 2010 June 30, 2009

Before

income tax

After

income tax

Before

income tax

After

income tax

Basic earnings per share (New Taiwan

dollars):

Net loss $ (1,680,208) (2,578,469) (5,805,492) (5,156,299)

Weighted-average number of shares

outstanding (thousands) 1,623,464 1,623,464 2,234,721 2,234,721

Basic earnings per share (New Taiwan

dollars) $ (1.03) (1.59) (2.60) (2.31)

Retroactively adjusted weighted average

of outstanding shares (thousands) - - 1,020,972 1,020,972

Basic earnings per share – retroactive $ - - (5.69) (5.05)

There was a net loss as of June 30, 2010 and 2009; thus, the basic loss per share equaled the

diluted loss per share as of June 30, 2010 and 2009.

(u) Financial instruments

(i) Fair value of financial instruments

June 30, 2010 June 30, 2009

Carrying

Amount

Estimated

Fair Value

Carrying

Amount

Estimated

Fair Value

Assets

Financial assets at fair value through

profit or loss $ 630,977 630,977 153,055 153,055

Available-for-sale financial assets 954,809 954,809 895,513 895,513

Financial assets carried at cost 769,582 See ii (5) 722,830 See ii (5)

Debt instruments with no active

market 24,677 See ii (6) 66,318 See ii (6)

Liabilities

Financial liabilities at fair value

through profit or loss 901 901 5,000 5,000

37

COSMOS BANK, TAIWAN

Notes to Financial Statements

(Continued)

(ii) Methods and assumptions applied to estimate the fair value of financial instruments are

summarized as follows:

1) For financial instruments measured at fair value through profit or loss and available-for-

sale financial assets, fair value is best determined on the basis of quoted market prices.

However, in many instances where there are no quoted market prices for the Bank’s

various financial instruments, fair values are based on estimates using other financial data

and appropriate valuation methodologies.

2) The carrying amounts of short-term financial instruments approximate their fair values

because of the short maturities of these instruments, such as cash and cash equivalents, due

from the Central Bank and call loans to banks, securities purchased under resell

agreements, net receivables (except tax refund receivable), refundable deposits, due to the

Central Bank and other banks, payables (except tax payable), remittances, securities sold

under repurchase agreements, and guarantee deposits received.

3) If there are no active market prices for derivative financial instruments, fair values of

forward contracts will be calculated using the discounted cash flow method, while values

of options are provided by counter-parties.

The Bank estimates the fair value of each forward contract on the basis of the exchange

rates quoted by Reuters on each settlement date. The fair value of a cross-currency swap

contract is calculated using the prices quoted by Bloomberg.

4) Discounts and loans, cash deposits, and MCB are interest-earning assets and interest-

bearing liabilities. Thus, their carrying amounts represent fair value. The fair value of

overdue loans is based on their carrying amount, net of allowance for possible losses.

5) If equity investments carried at cost consist of unlisted stocks, these investments have no

quoted market prices in an active market and their fair value cannot be reliably measured.

Thus, the Bank does not disclose their fair value.

6) If there are trade prices or prices quoted by major market players, the latest trade prices or

quoted prices are used as the basis for determining the fair value of debt instruments with

no active market, and this kind of instrument would be classified as other financial assets.

7) Other financial liabilities include an appropriate loan fund. They are items that can be

transferred to other banks at any time depending on the business situation. Thus, the

carrying amounts of these liabilities represent their fair values.

38

COSMOS BANK, TAIWAN

Notes to Financial Statements

(Continued)

(iii) As of June 30, 2010 and 2009, the fair values of financial assets and liabilities determined

using quoted market prices or estimated using a valuation method were as follows:

June 30, 2010 June 30, 2009

Quoted

Market

Prices

Estimated

Market

Prices

Quoted

Market

Prices

Estimated

Market

Prices

Financial assets

Financial assets at fair value through

profit or loss $ 630,977 - 147,945 5,110

Available-for-sale financial assets 954,809 - 895,513 -

Financial liabilities

Financial liabilities at fair value

through profit or loss - 901 - 5,000

From the above, the gain and loss recognized by the Bank on the valuation of financial

instruments at estimated market prices for the six-month periods ended June 30, 2010 and

2009, were a loss of $4,000 thousand and a gain of $5,054 thousand, respectively.

(iv) For the six-month periods ended June 30, 2010 and 2009, the interest revenues for financial

assets and liabilities at fair value were $2,779,173 thousand and $3,557,261 thousand,

respectively. The incurred interest expenses were $550,135 thousand and $1,251,544

thousand, respectively.

(v) For the six-month periods ended June 30, 2010 and 2009, the adjustments of stockholders’

equity decreased and increased directly from the available-for-sale financial assets amounted

to $8,054 thousand and $10,809 thousand, respectively.

(vi) Financial risk information

1) Market risk

The Bank is engaged in investment in interest rate instruments including time certificates

of deposit, bonds, notes, and similar financial instruments. As a result, it is exposed to

interest rate risk. Since the fair value of these financial instruments is sensitive to the

market interest rates, the following is the sensitivity variation for a 0.01% increase in

market interest rates.

39

COSMOS BANK, TAIWAN

Notes to Financial Statements

(Continued)

(In Thousands of New Taiwan Dollars) June 30, 2010

Currency

Principal

Amount

Average

Duration (Years)

The Effect on the

Fair Value per

Variation of 0.01%

New Taiwan Dollars $ 1,573,477 1.65379 NT$ 266

(In Thousands of New Taiwan Dollars)

June 30, 2009

Currency

Principal

Amount

Average

Duration (Years)

The Effect on the

Fair Value per

Variation of 0.01%

New Taiwan Dollars $ 1,041,918 3.15556 NT$ 345

The Bank monitors profit or loss on investment positions by marking to market to

consider investment strategies and investment positioning.

The Bank evaluated the market risk of financial instruments using daily value at risk

(VaR). VaR is the potential loss in market value of financial instruments held by the

Bank within a certain confidence interval for a specified period. As of June 30, 2010

and 2009, the Bank had price risk from holding bonds and commercial paper.

VaR of securities held by the Bank is shown in the table below. The Bank made an

assumption that, if there is a 99% level of confidence, there is only a 1% chance that the

Bank will incur a loss on its financial instruments within a day. In addition, based on

VaR assumptions, there are only 2 out of 200 days when the Bank could face losses on

its financial instruments. The average, highest and lowest amounts of the interest rate

and price risks that were calculated at the daily VaR for the six-month periods ended

June 30, 2010 and 2009, were as follows (thousands):

For the six-month periods ended

June 30, 2010 June 30, 2009

Type of Market Risk Average Highest Lowest Average Highest Lowest

Fair value interest rate

risk $ 6,723 7,559 5,876 7,356 7,704 6,934

The Bank engages in trade financing and foreign currency exchange; thus, it is exposed

to exchange risks on differences between spot and forward rates. The Bank’s policy is

to have a square position on its forward contracts. If the contract transactions do not

square off, all Bank employees are authorized to handle the contracts in accordance with

the Cosmos Bank Handling International Financing Transaction Rules. In addition, the

exchange rate risks and interest rate risks on foreign security investments or other

40

COSMOS BANK, TAIWAN

Notes to Financial Statements

(Continued)

international financing business are hedged by cross-currency swap contracts, and the

gains and losses on these contracts are measured at rates quoted by Reuters. These

gains and losses are assessed and reported to Bank management regularly in order to

adjust the hedge strategy.

2) Credit risk

The Bank is exposed to potential loss due to contract defaults by counter-parties or

financial instrument issuers.

The Bank evaluates the creditworthiness of credit applications case by case, taking into

account the applicant’s credit history, credit rating and financial condition. As of June 30,

2010 and 2009, about 46% and 47%, respectively, of total loans had been granted, and

about 40% and 16%, respectively, had been secured. Collateral, mostly in the form of

cash, real estate, marketable securities and other assets, may be required depending on

the evaluation result. However, there is no collateral for issuing credit cards. Thus, the

Bank evaluates the creditworthiness of credit card holders regularly and modifies the

credit facilities if necessary. If the counter-parties or others concerned (e.g., guarantors)

break a contract, the Bank will execute its right on the collateral and decrease its credit

risk.

In addition, the Bank discloses its maximum credit exposure without taking collateral fair

value into consideration.

The maximum credit exposure of financial assets is the carrying amounts of financial

assets on the balance sheet date.

The amounts of financial contracts with off-balance-sheet credit risks as of June 30, 2010

and 2009, were as follows:

June 30, 2010 June 30, 2009

Credit card and cash card commitments $ 83,272,393 110,990,857

Guarantees and letters of credit issued 392,968 704,062

Irrevocable loan commitments 156,000 446,280

Concentration of credit risk exists when counter-parties to financial transactions are

individuals or groups engaged in similar activities or activities in the same region, which

would cause their ability to meet contractual obligations to be similarly affected by

changes in economic or other conditions. It is also affected by the nature of the

borrowers’ operations. The concentration of the Bank’s credit risk was as follows:

41

COSMOS BANK, TAIWAN

Notes to Financial Statements

(Continued)

June 30, 2010 June 30, 2009

Group

Private enterprise $ 26,782,324 35,259,126

Natural person 38,990,072 49,670,300

Non-profit enterprise 8,311 10,869

$ 65,780,707 84,940,295

Industries

Wholesale, retail and catering $ 9,846,640 11,193,219

Manufacturing 8,265,437 9,705,854

Finance, insurance and real estate 4,369,401 6,262,701

$ 22,481,478 27,161,774

3) Liquidity risk

As of June 30, 2010 and 2009, the liquidity reserve ratios were 29.06% and 20.32%,

respectively. The Bank has sufficient equity capital and working capital to execute all

contract obligations and has no liquidity risk.

The management policy of the Bank is to match the contractual maturity profile to the

interest rates for its assets and liabilities. Because of uncertainties regarding the

transaction conditions, however, the maturities did not fully match the interest rates,

resulting in gaps that may potentially give rise to gain or loss.

The Bank applied appropriate ways to group assets and liabilities. The maturity

analysis of assets and liabilities was as follows:

June 30, 2010

Due after Due after Due after Due after

One Month Three Months Six Months One Year

Due in Up to Three Up to Up to Up to Due after

One Month Months Six Months One Year Seven Years Seven Years Total

Assets

Cash and cash equivalents $ 2,253,947 - - - - - 2,253,947

Due from the Central Bank

and call loans to banks 13,974,711 5,485,377 16,413,162 1,842,353 496,957 - 38,212,560

Financial assets at fair value

through profit or loss 630,977 - - - - - 630,977

Available-for-sale financial

assets 18,163 8,597 - - 928,049 - 954,809

Debt instruments with no

active market - - - 24,677 - - 24,677

Equity investments under the

equity method - - - - - 27,635 27,635

Financial assets carried at

cost - - - - - 769,582 769,582

Receivables 1,473,519 567,591 714,942 1,376,109 3,395,849 4,241 7,532,251

Discounts and loans 6,824,247 8,002,382 13,019,034 18,128,848 15,729,226 4,076,970 65,780,707

Other financial assets - others 123,091 103,587 32,536 415 11 30,292 289,932

Foreclosed collateral - - 1,869 - 85,442 - 87,311

Refundable deposits 3,044 830 2,701 86,557 855,753 - 948,885

$ 25,301,699 14,168,364 30,184,244 21,458,959 21,491,287 4,908,720 117,513,273

42

COSMOS BANK, TAIWAN

Notes to Financial Statements

(Continued)

June 30, 2010

Due after Due after Due after Due after

One Month Three Months Six Months One Year

Due in Up to Three Up to Up to Up to Due after

One Month Months Six Months One Year Seven Years Seven Years Total

Liabilities

Due to the Central Bank and

other banks $ 682,671 803,117 5,212,556 2,698,371 - - 9,396,715

Financial liabilities at fair

value through profit or

loss 901 - - - - - 901

Securities sold under

repurchase agreements 30,000 - - - - - 30,000

Payables 493,665 167,827 152,984 209,118 357,667 - 1,381,261

Deposits and remittances 12,621,498 20,226,448 22,899,238 31,377,607 18,328,759 - 105,453,550

Bank debentures - 515,000 - - - - 515,000

Other financial liabilities 6,311 161,811 167,227 497,066 798,060 - 1,630,475

$ 13,835,046 21,874,203 28,432,005 34,782,162 19,484,486 - 118,407,902

June 30, 2009

Due after Due after Due after Due after

One Month Three Months Six Months One Year

Due in Up to Three Up to Up to Up to Due after

One Month Months Six Months One Year Seven Years Seven Years Total

Assets

Cash and cash equivalents $ 2,411,982 104,805 - 32,818 - - 2,549,605

Due from the Central Bank

and call loans to banks 25,929,717 727,715 660,955 795,939 397,743 - 28,512,069

Financial assets at fair value

through profit or loss 153,055 - - - - - 153,055

Available-for-sale financial

assets 39,743 - - 3,627 852,143 - 895,513

Debt instruments with no

active market - - - - 66,318 - 66,318

Equity investments under the

equity method - - - - - 60,840 60,840

Financial assets carried at

cost - - - - - 722,830 722,830

Receivables 3,319,764 575,443 823,352 1,697,476 1,618,352 7,712 8,042,099

Discounts and loans 6,017,593 4,331,657 5,179,000 36,362,775 27,390,016 5,659,254 84,940,295

Other financial assets - others 242,275 265 265 137 168 47,172 290,282

Foreclosed collateral - - 418,675 - 85,442 - 504,117

Refundable deposits 407,750 270 7,542 145,485 910,251 - 1,471,298

$ 38,521,879 5,740,155 7,089,789 39,038,257 31,320,433 6,497,808 128,208,321

Liabilities

Due to the Central Bank and

other banks $ 692,798 803,117 5,929,686 4,540,722 - - 11,966,323

Financial liabilities at fair

value through profit or

loss 5,000 - - - - - 5,000

Payables 2,424,089 353,143 852,907 281,520 183,682 8,940 4,104,281

Deposits and remittances 14,686,242 27,759,741 25,319,393 30,289,075 14,983,802 - 113,038,253

Bank debentures - - - - - 515,000 515,000

Other financial liabilities 22,558 770 18,508 25,866 2,110,246 - 2,177,948

$ 17,830,687 28,916,771 32,120,494 35,137,183 17,277,730 523,940 131,806,805

43

COSMOS BANK, TAIWAN

Notes to Financial Statements

(Continued)

4) Fair value interest rate risk and cash flow interest rate risk

When market interest rates change, the cash flows on floating-interest-rate assets will

also fluctuate, and the Bank may suffer risks due to any adverse interest rate changes.

Thus, the Bank used cross-currency swap contracts to reduce risks from adverse changes

in market interest rates.

(vi) Risk control and hedge policy

The Bank documents its risk management policies, including overall operating strategies and

risk control philosophy. Each business unit, when engaged in its various operations, it must

abide by the risk management policies and hedging policies as approved by the Board of

Directors in order to implement risk management, strengthen businesses, and limit risks that

may arise from operation to an acceptable level. Risk management polices and other policies

are adjusted in accordance with the Bank’s overall organization, operating plan, management

targets, and strategy. The Board of Directors reviews the policies regularly and reviews

whether the Bank’s policies are executed properly to control the Bank’s risks.

5 Related-party Transactions

(a) Related parties

Related Party Relationship with the Bank

S.A.C. PEI Taiwan Holdings B.V. Main stockholder

S.A.C. PEI Asia Investments Holdings II S.à r.l.

(“Lux. Co. II”)

Parent company of S.A.C. PEI Taiwan

Holdings B.V.

S.A.C. PEI Asia Investments Holdings I S.à r.l.

(“Lux. Co. I”)

Parent company of Lux. Co. II

S.A.C. Private Equity Investors, L.P.

(“S.A.C. PEI”)

Parent company of Lux. Co. I

S.A.C. Private Equity GP, L.P. (“S.A.C. PEI GP”) Partnership with S.A.C. PEI

GE Capital Asia Investments Holdings B.V

(“GE Asia Holdings”)

Main stockholder

General Electric Capital Corporation (GECC) Affiliate of GE Asia Holdings

GE Capital Taiwan Holdings Inc. (“GE Holdings”) Affiliate of GE Asia Holdings

General Electric International Inc. (GEII) Affiliate of GE Asia Holdings

GE Processing Services Pty Limited

(“GE Australia”)

Affiliate of GE Asia Holdings

GE Capital Thailand Affiliate of GE Asia Holdings

GE Money Taiwan Ltd. Affiliate of GE Asia Holdings

Reliance Securities Investment Trust Corporation,

Ltd. (RSIT)

Equity-method investee (The Bank no longer

has significant influence from August 7,

2009.)

44

COSMOS BANK, TAIWAN

Notes to Financial Statements

(Continued)

Related Party Relationship with the Bank

Cosmos Insurance Brokers Co., Ltd. 100%-owned investee

Others The Bank’s chairman, president, managers

and their relatives with a kinship of up to

the second degree of consanguinity with the

chairman and president

Note: The Bank disclosed related-party transactions as of June 30, 2010, and the transactions with

non-related parties as of June 30, 2010, were not included in the balance sheet as of June 30,

2010.

(b) Significant transactions between the Bank and related parties

(i) Loans, deposits

For the six-month period

ended June 30, 2010

June 30, 2010

Interest Rate

Revenue

(Expense)

Amount % (%) Amount

Loans $ 17,366 0.03 1.04~18.25 98

Deposits $ 177,166 0.17 0~5.69 (1,466)

For the six-month period

ended June 30, 2009

June 30, 2009

Interest Rate

Revenue

(Expense)

Amount % (%) Amount

Loans $ 15,779 0.02 1.04~18.25 181

Deposits $ 141,420 0.13 0~6.045 (2,093)

45

COSMOS BANK, TAIWAN

Notes to Financial Statements

(Continued)

(i) Loans

For the six-month period ended June 30, 2010

(In Thousands of New Taiwan Dollars)

Loan Classification

Type Account Volume

(Number of Names) Highest Balance

Ending

Balance

Normal

Loans

Nonperforming

Loans Collateral

Differences in

Transaction Terms

from Those for

Unrelated Parties

Consumer loans for employees 7 $ 3,075 1,941 1,941 - Real estate; some loans had no

collateral

None

Self-use housing mortgage loan 9 16,345 15,425 15,425 - Real estate None

For the six-month period ended June 30, 2009

Loan Classification

Type Account Volume

(Number of Names) Highest Balance

Ending

Balance

Normal

Loans

Nonperforming

Loans Collateral

Differences in

Transaction Terms

from Those for

Unrelated Parties

Consumer loans for employees 9 $ 7,301 2,931 2,931 - Real estate; some loans had no

collateral

None

Self-used housing mortgage loan 10 17,392 12,848 12,848 - Real estate None

In accordance with sections 32 and 33 of the Banking Act of the Republic of China, no unsecured credit shall be extended by the Bank to any interested party, and for any secured credit

extended by the Bank to any interested party, the terms of such extended credit shall not be more favorable than those terms offered to other same-category customers. However, the

foregoing rule on unsecured credit shall not apply to consumer loans and loans extended to the government.

46

COSMOS BANK, TAIWAN

Notes to Financial Statements

(Continued)

(ii) Support service agreements

1) GE Asia Holdings subscribed for the Bank’s common shares and GECC bought call

options from China Development Industrial Bank Inc. under certain subscription

agreements. The Bank also has support service agreements (SSAs) with GEII and GE

Australia signed on June 5, 2006. Under the SSAs, GE Holdings and GE Australia

will provide the Bank with management systems, data processing service, system

support, and IT (information technology) services as part of intensive training and

technology transfer services. The SSAs also provide for the integration of Global Best

Practices with Bank operations to redesign or enhance systems for business

development and management operations, such as strategic planning and analysis,

product design, marketing, client relationship management, employee-performance

management, human resources, process upgrade, risk management, overdue loan

processing, Six Sigma enhancement, etc. They also support information processing

for all systems, system development and maintenance, daily operations, and strategic

support.

Unless constrained by uncontrollable environmental factors, GE Holdings and the Bank

promise to fully cooperate with each other to use global human resources and obtain

best practices and key information and technology that can help the Bank enhance

earnings generation. The Bank will pay GE Holdings (1) technology provision service

fees of US$84,000 thousand, payable at US$11,000 thousand in the year ending

December 31, 2006; US$22,000 thousand annually from 2007 to 2009; and US$7,000

thousand for the period ending June 30, 2010; and (2) consulting expenses of up to

US$3,339 thousand for assigning directors, chief manager, CEO, CFO, CRO, managers

of the Claims Department, etc., and costs of supporting personnel based on the

assignment period.

As an effort by GE to assist the Bank to improve its financial structure and to resolve

the differences regarding the service contracts with GEII and GE Australia, the Bank

and GE agreed to calculate the remaining payables in 2006 to 2008 in accordance with

the terms and methods specified under the agreements. In accordance with the

agreement approved by the Board of Directors on April 15, 2009, the remaining payable

amount should be calculated based on the estimate of 2 professional valuation firms,

and not exceeding USD18,500 thousand.

In accordance with the agreement signed between GEII, GE Australia and the Bank, the

remaining amount payable is limited to USD18,500 thousand; therefore, the Bank

reversed the service fee accrued in 2008 amounting to USD22,000 (NT$759,066)

thousand, and the remaining portion amounting to USD3,500 (NT$141,523) thousand

was recorded under other non-interest income. The remaining amount payable of

USD18,500 thousand was repaid using cash amounting to USD1,700 thousand and a

private placement of common shares amounting to USD16,800 (NT$550,368) thousand.

47

COSMOS BANK, TAIWAN

Notes to Financial Statements

(Continued)

The Bank signed a personnel secondment service agreement with GEII, and quarterly

paid GEII the personnel secondment fees for two high-level employees seconded for the

period from January 1, 2009, to December 31, 2010. The two parties would draw up

and agree on a budget for the personnel secondment fees, and then the fees could not be

increased arbitrarily. The Bank may terminate the agreement at any time by giving a

one-month prior written notice to GEII. For the six-month periods ended June 30,

2010 and 2009, the secondment fees amounted to $14,559 thousand and $23,076

thousand, respectively, and were recorded under other administrative and management

expenses. As of June 30, 2010, the payables from personnel secondment fees

amounted to $8,084 thousand; and as of June 30, 2009, the payables from technical

service fees and personnel secondment fees amounted to $658,088 thousand, recorded

under expenses payable, and the Bank paid the amount by cash and stock in the second

half year of 2009.

In the abovementioned agreement, both parties agree that once the capital strengthening

plan is completed, the agreement will be retroactively terminated on January 1, 2009.

The agreement was approved by the annual shareholders’ meeting on June 19, 2009. On

July 10, 2009, the Bank signed an addendum to the abovementioned agreement with

GEII and GE Australia; in the addendum, both parties agreed that the share pricing date

regarding the private placement of common shares would be no later than July 31, 2009,

or another date that both parties agree to, while that in the original abovementioned

agreement was no later than July 9, 2009.

In accordance with the resolution of the 16th meeting of the 6th session of the Bank’s

Board of Directors held on July 28, 2009, the share pricing date was July 28, 2009. The

private placement of common shares was settled at $3.22 per share. The price

mentioned above was unchanged after reconsideration in the extraordinary meeting of

the Bank’s Board of Directors held on August 25, 2009. Moreover, this price was also

accepted by the directors who represented GEII and GE Australia. The Bank has

already completed implementation of the private capital strengthening plan. For more

details, please see note 4(s)(i).

2) The Bank obtained from GE Capital Thailand the right to use NAOS for $15,115

(USD400) thousand based on a support services agreement. For the six-month periods

ended June 30, 2010 and 2009, the Bank amortized the right in the amount of $1,512

thousand, classified as depreciation and amortization.

3) Due to the uniqueness of the technology service contract, Vision Plus software, and

NAOS, the Bank cannot acquire comparable prices from an unrelated party. However,

other related-party transactions which were comparable to those with unrelated parties

did not appear significantly extraordinary.

48

COSMOS BANK, TAIWAN

Notes to Financial Statements

(Continued)

(iii) To improve its car loan operations, the Bank signed a car loan acquisition contract with GE

Money to buy car loans amounting to $1,359,280 thousand for $1,413,467 thousand. The

premium rate is about 4%, estimated at the net value calculated using the cash flow model.

In addition, on August 17, 2006, the Bank signed a contract for the purchase from Mega

International Commercial Bank of a car loan for $1,023,770 thousand, the amount due to

GECC for GECC’s providing services to Mega Bank for a price of $1,064,721 thousand,

with a premium rate of about 4%. The transaction price was calculated using the future

cash flow model.

(iv) Fee income

The Bank, Cosmos Insurance Broker Co., Ltd., and other insurance companies signed

contracts for three-party cooperative promoting and marketing to sell insurance products

through the channels of the Bank. The Bank’s channel fee income from the

abovementioned transactions was $81,459 thousand and $78,551 thousand for the six-month

periods ended June 30, 2010 and 2009, respectively.

6 Pledged Assets

(a) Government bonds with carrying value of $52,100 thousand (recorded as available-for-sale

financial assets, net, amounting to $49,300 thousand, and refundable deposits amounting to $2,800

thousand) as of June 30, 2010, and government bonds with carrying value of $354,600 thousand

(recorded as available-for-sale financial assets, net, amounting to $339,700 thousand, and

refundable deposits amounting to $14,900 thousand) as of June 30, 2009, had been placed with the

court as guarantee deposits in line with the Bank’s request for court approval to seize and sell the

properties of the Bank’s debtors to satisfy the debtors’ obligations to the Bank.

(b) As of June 30, 2010 and 2009, the Bank had provided government bonds (recorded as available-

for-sale financial assets, net) with carrying value of $220,000 thousand as the reserve and deposits

for guarantee of the Bank’s operating business.

(c) As of June 30, 2010 and 2009, certificates of foreign exchange time deposit of $238,351 thousand

and $241,844 thousand (recorded as other financial assets, net), respectively, had been provided as

collateral for spot exchange transactions.

(d) The Bank provided a Central Bank certificate of deposit amounting to $20,000 thousand as the

collateral for collections of treasury tax.

49

COSMOS BANK, TAIWAN

Notes to Financial Statements

(Continued)

7 Commitments and Contingencies

In addition to the disclosures in Note 4(u), the commitments as of June 30, 2010, were as follows:

(a) The Bank leases from unrelated parties the premises occupied by its branches under operating

lease agreements expiring on various dates until April 30, 2015. Refundable deposits on these

leases amounted to $885,715 thousand as of June 30, 2010. The leases also require the payment

of rentals monthly, semiannually or annually, or a refundable rental deposit which generates no

interest.

Future minimum annual rentals on these leases as of June 30, 2010, were as follows:

Period Amount

2010.07.01~2010.12.31 $ 107,655

2011.01.01~2011.12.31 141,771

2012.01.01~2012.12.31 55,713

2013.01.01~2013.12.31 18,995

2014.01.01~2014.12.31 4,920

$ 329,054

(b) Significant outstanding purchase contracts

Item

Contract

amount

Prepayment

Payable

Banking information and operating systems $ 60,525 12,890 47,635

Premises improvements, water and electricity,

and air conditioning 26,455 - 26,455

$ 86,980 12,890 74,090

(c) The Bank’s ex-chairman, Sheng-Fa Hsui, and ex-vice chairman, Xian-Rong Hsui, were prosecuted

for involvement in illegal events. With the exception of the insider trading portion, which is still

being tried, the defendants have been ruled by the Taipei District Court to be in violation of the

Banking Act and sentenced. The Bank is now being managed by a new management team, which

uses high standards to administer the Bank, and would not be influenced by this legal case.

50

COSMOS BANK, TAIWAN

Notes to Financial Statements

(Continued)

(d) The Bank sold structured notes, which were issued by GVEC Resources Inc. (GVEC), through a

specific trust fund, amounting to USD48,920 thousand. PEM Corporation, a member of the

GVEC group, was found to have committed fraud by the U.S. Securities and Exchange

Commission (SEC). Due to the fraud, the Bank’s Board of the Directors’ meeting held on June 26,

2009, approved buying back the structured notes from the investors and asked for compensation

from PEM Corporation. The Bank recognized the estimated compensation as other receivables

amounting to $1,449,168 thousand (USD44,896 thousand) and made a provision amounting

$655,984 thousand, based on evaluation of the amount of assets recoverable. Please see notes 4(d)

and 4(n).

(e) The Bank’s ex-employees disagreed with the calculation method of pension payment and asked

the Bank to pay higher pensions. The lawsuits were lodged with the courts, and these lawsuits

requested $86,167 thousand. As of August 23, 2010, the lawsuits were in the process of

judgment by the courts.

8 Major Casualty Losses: None

9 Significant Subsequent Events

On December 26, 2007, China Development Industrial Bank Inc. and eight other banks signed an

original subscription agreement together with an appendix with the Bank to reduce the bondholders’

right. In accordance with the revised terms of the subordinated bank debentures, which were

approved by the bondholders’ meeting held on December 27, 2007, the Bank was able to reduce the

amount of the unpaid bank debentures by 58%. However, Chu Nan Credit-Cooperative Association,

Singfor Life Insurance Co., Ltd., and Taipei Sanjhih Hsiang Farmers’ Association, which hold

$515,000 thousand in principal of the bank debentures, did not sign the subscription agreement and

filed a lawsuit. According to the judgment by the Taiwan High Court on July 21, 2010, the resolution

of the meeting for reducing the debenture was effective, and an after-tax extraordinary gain resulting

from the abovementioned bank debenture relief is estimated to be $247,921 thousand. Please refer to

note 4(p).

51

COSMOS BANK, TAIWAN

Notes to Financial Statements

(Continued)

10 Others

(a) Trust business under the Trust Law

(i) Trust-related items, as shown in the following balance sheets and trust property list

Balance Sheets of Trust Accounts

June 30, 2010 and 2009

Trust Assets 2010 2009

Cash in bank $ 186,519 74,603

Short-term investments

Bonds 2,475,985 6,541,217

Common stock 159,361 533,361

Mutual funds 27,826,968 19,675,241

Exchange traded

fund (ETF) 9,006 -

Accounts receivable

Notes receivable 8,521 -

Offset against

business tax

payable - 25

Accounts receivable 6,355 -

Other receivable

Related party 7,649 -

Others 11,917 -

Real property 16,200 16,200

Intangible assets

Superficies 984,534 1,189,000

Prepaid account

Prepaid expenses 1,599,793 2,330,291

Prepaid taxes 187 125

Business tax credits 80 -

Other prepaid 5,116,000 -

Other assets

Deferred expenses 572,222 550,782

Refundable depostits 360 360

Trust assets $ 38,981,657 30,911,205

(in thousands of New Taiwan dollars)

Trust Liabilities 2010 2009

Account payables

Accrued expenses $ 11,840 254

VAT tax payables 27,295 54

Other payables 383 -

Advance receipts

Advance revenues - 2,128,123

Advance real estate

receipts 7,432,876 -

Advance rental

revenues 8,373 -

Other advance

receipts 274 -

Receipts under custody - 825,000

Suspense credits 294 -

Other liabilities 1,000 500

Trust capital

Money 30,471,321 26,399,819

Securities - 350,000

Real property 16,200 16,200

Superficies 984,534 1,189,000

Net income (loss) 309,709 (133,564)

Accumulated earning

(deficit) (282,442) 135,819

Trust liabilities $ 38,981,657 30,911,205

52

COSMOS BANK, TAIWAN

Notes to Financial Statements

(Continued)

Trust Property List

June 30, 2010 and 2009

(in thousands of New Taiwan dollars)

Investment Items 2010 2009

Cash in bank $ 186,519 74,603

Short-term

Bonds 2,475,985 6,541,217

Common stock 159,361 533,361

Mutual funds 27,826,968 19,675,241

ETF 9,006 -

Real property

Others 16,200 16,200

Intangible assets

Superficies 984,534 1,189,000

$ 31,658,573 28,029,622

Statements of Income on Trust Accounts

For the six-month periods ended June 30, 2010 and 2009

(in thousands of New Taiwan dollars)

2010 2009

Revenues

Interest revenues $ 461,258 323,702

Gain from trading properties 139,827 -

Rental revenues 21,710 9,000

Other revenues 1,219 952

Revenues from beneficiary certificates 624,014 333,654

Expenses

Sales expense – electricity 464 -

Levies - 4

Management fees 304,886 143,143

Service fees - 5

Loss from trading properties - 314,689

Interest 8,955 9,377

Expense from beneficiary certificates 314,305 467,218

Net income (loss) before tax 309,709 (133,564)

Income tax expenses - -

Net income (loss) $ 309,709 (133,564)

Note: The above statements of income are for the business of the trust division, and the

amounts are not included in the profit and loss of the Bank.

53

COSMOS BANK, TAIWAN

Notes to Financial Statements

(Continued)

(ii) Nature of trust business operations under the Trust Law: Please refer to note 1.

(b) Average amount of, and average interest rate on, interest-earning assets and interest-bearing

liabilities:

Average balance was calculated as the daily average balances of interest-earning assets and

interest-bearing liabilities.

For the six-month period ended

June 30, 2010

Average Average

Balance Rate (%)

Interest-earning assets

Cash and cash equivalents – due from banks $ 577,811 0.02

Due from the Central Bank and call loans to banks 34,326,587 0.58

Financial assets at fair value through profit or loss

(excluding stocks and funds) 178,045 4.90

Receivables of credit cards 3,346,359 10.19

Discounts and loans (excluding overdue loans) 67,906,598 7.28

Available-for-sale financial assets (excluding stocks and

funds) 955,407 2.07

Debt instruments with no active market 29,004 0.70

Other financial assets – other (excluding stocks) 258,232 0.26

Interest-bearing liabilities

Due to the Central Bank and other banks 11,392,295 1.03

Securities sold under repurchase agreements 166 0.35

Demand deposits 9,041,334 0.07

Savings – demand deposits 24,390,512 0.33

Time deposits 18,615,705 0.96

Savings – time deposits 51,276,031 1.07

Bank debentures 515,000 3.20

Other financial liabilities (Note) 1,664,777 9.40

54

COSMOS BANK, TAIWAN

Notes to Financial Statements

(Continued)

For the six-month period ended

June 30, 2009

Average Average

Balance Rate (%)

Interest-earning assets

Cash and cash equivalents – due from banks $ 639,811 0.11

Due from the Central Bank and call loans to banks 27,716,505 0.61

Financial assets at fair value through profit or loss

(excluding stocks and funds) 150,430 5.77

Receivables of credit cards 3,731,934 11.20

Discounts and loans (excluding overdue loans) 87,792,110 7.38

Available-for-sale financial assets (excluding stocks and

funds) 869,061 2.26

Debt instruments with no active market 385,286 2.05

Other financial assets – other (excluding stocks) 214,147 0.59

Interest-bearing liabilities

Due to the Central Bank and other banks 12,800,551 1.27

Securities sold under repurchase agreements 2,198 0.54

Demand deposits 7,298,023 0.07

Savings – demand deposits 22,680,292 0.39

Time deposits 18,728,655 2.03

Savings – time deposits 68,513,143 2.35

Bank debentures 515,000 3.20

Other financial liabilities (Note) 1,994,925 12.10

Note: The face value of the Subordinated Unsecured Mandatory Convertible Bonds (MCB)

issued by the Bank amounted to $19,800,000 thousand, of which, approximately

$15,800,000 thousand was recorded under stockholders’ equity, which resulted in a high

average interest rate on the financial liabilities. The actual coupon rate is 4% for the six-

month period ended June 30, 2010. After S.A.C. PEI Taiwan Holdings B.V. converted

18.33% of the MCB on October 6, 2009, the face value of outstanding MCB amounted to

$16,170,000 thousand, of which approximately $12,920,000 thousand was recorded under

stockholders’ equity.

55

COSMOS BANK, TAIWAN

Notes to Financial Statements

(Continued)

(c) Asset quality, concentration of credit extensions, interest rate sensitivity, profitability, and maturity analysis of asset and liabilities

(i) Asset quality

Period June 30, 2010 June 30, 2009

Items

Nonperforming

Loans

(Note 1)

Loans

Ratio of

Nonperforming

Loans (Note 2)

Allowance for

Possible Losses

Coverage Ratio

(Note 3)

Nonperforming

Loans

(Note 1)

Loans

Ratio of

Nonperforming

Loans (Note 2)

Allowance for

Possible Losses

Coverage Ratio

(Note 3)

Corporate

Banking

Secured $ 753,912 18,976,275 3.97% 305,283 40.49% $ 992,011 23,919,442 4.15% 336,334 33.90%

Unsecured 751,704 10,511,208 7.15% 1,431,915 190.49% 748,875 16,133,581 4.64% 1,464,499 195.56%

Consumer

Banking

Housing mortgage (Note 4) 97,380 4,900,821 1.99% 6,984 7.17% 140,763 5,690,930 2.47% 5,314 3.78%

Cash card 544,913 27,991,911 1.95% 1,227,697 225.30% 1,302,049 33,880,069 3.84% 1,914,100 147.01%

Small-scale credit loans (Note 5) 31,155 1,502,494 2.07% 107,577 345.29% 169,396 1,865,561 9.08% 212,900 125.68%

Other (Note 6) Secured 41,951 1,704,716 2.46% 3,766 8.98% 100,286 3,234,363 3.10% 22,608 22.54%

Unsecured 28,569 193,282 14.78% 2,511 8.79% 39,097 216,349 18.07% 16,896 43.22%

Total loans 2,249,584 65,780,707 3.42% 3,085,733 137.17% 3,492,477 84,940,295 4.11% 3,972,651 113.75%

Nonperforming

Receivables

(Note 1)

Receivables

Ratio of

Nonperforming

Receivables

(Note 2)

Allowance for

Possible Losses

Coverage Ratio

(Note 3)

Nonperforming

Receivables

(Note 1)

Receivables

Ratio of

Nonperforming

Receivables

(Note 2)

Allowance for

Possible Losses

Coverage Ratio

(Note 3)

Credit cards 30,115 3,770,967 0.80% 68,696 228.11% 51,634 4,143,444 1.25% 62,650 121.33%

Factored accounts receivable without recourse (Note 7) 331 47,460 0.70% 87 26.22% 3,452 336,548 1.03% 1,528 44.27%

Amounts of executed contracts on negotiated debts not

reported as nonperforming loans (Note 8) 1,505,407 1,665,453

Amounts of executed contracts on negotiated debts not

reported as nonperforming receivables (Note 8) 6,539 7,979

Amounts of executed debt settlement program and

rehabilitation program not reported as nonperforming

loans (Note 9) 112,591 800,257

Amounts of executed debt settlement program and

rehabilitation program not reported as nonperforming

receivables (Note 9) 2,531 -

Note 1: Nonperforming loans are reported to the authorities and disclosed to the public, as required by the “Regulations Governing the Procedures for Banking Institutions to Evaluate Assets and Deal with Nonperforming/ Non-accrued Loans.”

Nonperforming credit card receivables are reported to the authorities and disclosed to the public, as required by the Banking Bureau’s letter dated July 6, 2005 (Ref. No. 0944000378).

Note 2: Ratio of nonperforming loans: Nonperforming loans ÷ Outstanding loan balance.

Ratio of nonperforming credit card receivables: Nonperforming credit card receivables ÷ Outstanding credit card receivables balance.

Note 3: Coverage ratio of loans: Allowance for possible losses for loans ÷ Nonperforming loans.

Coverage ratio of credit card receivables: Allowance for possible losses for credit card receivables ÷ Nonperforming credit card receivables.

Note 4: The mortgage loan is for house purchase or renovation and is fully secured by housing that is purchased (owned) by the borrower, the spouse or the minor children of the borrowers.

Note 5: Based on the Banking Bureau’s letter dated December 19, 2005 (Ref. No. 09440010950), small-scale credit loans are unsecured, involve small amounts, and exclude credit cards and cash cards.

Note 6: Other consumer banking loans refer to secured or unsecured loans that exclude housing mortgages, cash cards, credit cards and small-scale credit loans.

Note 7: As required by the Banking Bureau in its letter dated July 19, 2005 (Ref. No. 0945000494), factored accounts receivable without recourse are reported as nonperforming receivables within three months after the factors or insurance companies refuse to

indemnify Banks for any liabilities on these accounts.

Note 8: The amounts of executed contracts on negotiated debts that are not reported as nonperforming loans or receivables are reported in accordance with the Banking Bureau’s letter dated April 25, 2006 (Ref. No. 09510001270).

Note 9: The amounts of the executed debt settlement program and rehabilitation program not reported as nonperforming loans or receivables are reported in accordance with the Banking Bureau’s letter dated September 15, 2008 (Ref. No. 09700218940).

56

COSMOS BANK, TAIWAN

Notes to Financial Statements

(Continued)

(ii) Concentration of credit extensions

June 30, 2010

(in thousands of New Taiwan dollars, %)

Rank Business Groups’ Standard

Industrial Classification and Symbol

Total Amount of Credit

Endorsement or Other

Transactions

Percentage of

the Bank’s

Equity (%)

1 A Group-014841 Retail Sale of

Automobiles in Specialized Stores $ 2,977,719 22.27

2 B Group-013010 Motor Vehicles

Manufacturing 1,812,179 13.55

3 C Group-016499 Other Financial

Intermediation 1,398,086 10.45

4 D Group-016899 Other Real Estate 993,958 7.43

5 E Group-016499 Other Financial

Intermediation 989,184 7.40

6 F Group-016499 Other Financial

Intermediation 699,759 5.23

7 G Group-015911 Films Manufacturing 460,817 3.45

8 H Group-012411 Iron and Steel

Smelting 444,558 3.32

9 I Group-013510 Electricity Providers 405,371 3.03

10 J Group-016499 Other Financial

Intermediation 255,512 1.91

57

COSMOS BANK, TAIWAN

Notes to Financial Statements

(Continued)

June 30, 2009

(in thousands of New Taiwan dollars, %)

Rank Business Groups’ Standard

Industrial Classification and Symbol

Total Amount of Credit

Endorsement or Other

Transactions

Percentage

of the Bank’s

Equity (%)

1 K Group-014910 Railway

Transportation $ 4,132,230 24.32

2 A Group-014841 Retail Sale of

Automobiles in Specialized Stores 3,557,851 20.94

3 B Group-013010 Motor Vehicles

Manufacturing 2,304,679 13.57

4 C Group-016499 Other Financial

Intermediation 1,884,848 11.09

5 E Group-016499 Other Financial

Intermediation 1,266,254 7.45

6 D Group-016899 Other Real Estate 1,224,707 7.21

7 F Group-016499 Other Financial

Intermediation 844,759 4.97

8 J Group-014546 Wholesale of Tobacco

Products and Alcoholic Beverages 695,605 4.09

9 G Group-015911 Films Manufacturing 513,636 3.02

10 I Group-013510 Electricity Providers 460,975 2.71

Note 1: Ranked by the total amount of credit, endorsement, or other transactions; list

excludes government-owned or state-run enterprises. If the creditor is a group

enterprise, the Bank would express the amount of credit by aggregating the total

credit of this group enterprise, indicated with the symbol of the enterprise and

industrial classification. The Bank would further identify the industry in which the

group enterprise has the most exposure. The industrial classification refers to the

Industrial Classification Standard of the Directorate General of Budget, Accounting

and Statistics (DGBAS).

Note 2: Group enterprise refers to a group of corporate entities as defined by Article 6 of the

“Supplementary Provisions to the Taiwan Stock Exchange Corporation’s Rules for

Review of Securities Listings.”

Note 3: The total amount of credit, endorsement, or other transactions is the sum of various

loans (including import and export negotiations, discounts, overdrafts, unsecured and

secured short-term loans, margin loans receivable, unsecured and secured medium-

term loans, unsecured and secured long-term loans, and overdue loans), exchange

bills negotiated, factored accounts receivable without recourse, acceptances, and

guarantees.

58

COSMOS BANK, TAIWAN

Notes to Financial Statements

(Continued)

(iii) Interest rate sensitivity information

1)

Interest Rate Sensitivity

June 30, 2010

(in thousands of New Taiwan dollars, %)

Items 1 to 90 Days 91 to 180 Days 181 Days to

One Year Over One Year Total

Interest-rate-sensitive assets $ 78,887,986 16,844,670 2,001,232 3,878,381 101,612,269

Interest-rate-sensitive

liabilities

63,111,030

37,436,861

8,025,727

3,232,232

111,805,850

Interest rate sensitivity gap 15,776,956 (20,592,191) (6,024,495) 646,149 (10,193,581)

Net worth 14,315,053

Ratio of interest-rate-sensitive assets to liabilities (%) 90.88

Ratio of interest rate sensitivity gap to net worth (%) (71.21)

Interest Rate Sensitivity

June 30, 2009

(in thousands of New Taiwan dollars, %)

Items 1 to 90 Days 91 to 180 Days 181 Days to

One Year Over One Year Total

Interest-rate-sensitive assets $ 100,636,586 1,226,825 2,453,585 4,923,074 109,240,070

Interest-rate-sensitive

liabilities

56,561,103

46,989,776

15,123,630

4,709,785

123,384,294

Interest rate sensitivity gap 44,075,483 (45,762,951) (12,670,045) 213,289 (14,144,224)

Net worth 18,507,133

Ratio of interest-rate-sensitive assets to liabilities (%) 88.54

Ratio of interest rate sensitivity gap to net worth (%) (76.43)

Note 1: The above amounts included only New Taiwan dollar amounts held by the head office and branches

of the Bank (i.e., excluding foreign currency).

Note 2: Interest-rate-sensitive assets and liabilities are interest-earning assets and interest-bearing liabilities

with revenues or costs affected by interest rate changes.

Note 3: Interest rate sensitivity gap = Interest-rate-sensitive assets － Interest-rate-sensitive liabilities.

Note 4: Ratio of interest-rate-sensitive assets to liabilities = Interest-rate-sensitive assets/Interest-rate-

sensitive liabilities (in New Taiwan dollars).

59

COSMOS BANK, TAIWAN

Notes to Financial Statements

(Continued)

2)

Interest Rate Sensitivity

June 30, 21010

(in thousands of U.S. dollars, %)

Items 1 to 90 Days 91 to 180 Days 181 Days to

One Year Over One Year Total

Interest-rate-sensitive assets $ 110,898 6,662 - - 117,560

Interest-rate-sensitive liabilities 15,899 82,873 7,910 - 106,682

Interest rate sensitivity gap 94,999 (76,211) (7,910) - 10,878

Net worth (33)

Ratio of interest-rate-sensitive assets to liabilities (%) 110.20

Ratio of interest rate sensitivity gap to net worth (%) (32,963.64)

Interest Rate Sensitivity

June 30, 2009

(in thousands of U.S. dollars, %)

Items 1 to 90 Days 91 to 180 Days 181 Days to

One Year Over One Year Total

Interest rate-sensitive assets $ 100,684 8,249 - - 108,933

Interest rate-sensitive liabilities 16,679 53,920 6,652 - 77,251

Interest rate-sensitive gap 84,005 (45,671) (6,652) - 31,682

Net worth (20,046)

Ratio of interest rate-sensitive assets to liabilities (%) 141.01

Ratio of interest rate sensitivity gap to net worth (%) (158.05)

Note 1: The above amounts included only U.S. dollar amounts held by the head office, domestic branches,

OBU and overseas branches of the Bank, and excluded contingent assets and contingent liabilities.

Note 2: Interest-rate-sensitive assets and liabilities are interest-earning assets and interest-bearing liabilities

with revenues or costs affected by interest rate changes.

Note 3: Interest rate sensitivity gap = Interest-rate-sensitive assets － Interest-rate-sensitive liabilities.

Note 4: Ratio of interest-rate-sensitive assets to liabilities = Interest-rate-sensitive assets/Interest-rate-

sensitive liabilities (in U.S. dollars).

60

COSMOS BANK, TAIWAN

Notes to Financial Statements

(Continued)

(iv) Profitability

(Unit: %)

Items

For the six-

month period

ended June 30,

2010

For the six-

month period

ended June 30,

2009

Return on total assets Before income tax (2.50) (7.40)

After income tax (3.83) (6.57)

Return on equity Before income tax (22.92) (59.38)

After income tax (35.17) (52.74)

Net income ratio (1,860.98) (Note 6)

Note 1: Return on total assets = Income before (after) income tax/Average total assets.

Note 2: Return on equity = Income before (after) income tax/Average equity.

Note 3: Net income ratio = Income after income tax/Total net revenues.

Note 4: Income before (after) income tax was the income for the six-month periods ended

June 30, 2010 and 2009.

Note 5: The above profitability ratios are expressed annually.

Note 6: Not calculated as total net revenue is negative.

(v) Maturity analysis of assets and liabilities

1)

Maturity Analysis of Assets and Liabilities

June 30, 2010

(in thousands of New Taiwan dollars)

Total

Remaining Period to Maturity

1-30 Days 31-90 Days 91-180 Days 181 Days-

1 Year Over 1 Year

Main capital inflow on

maturity $ 120,348,615 24,203,516 13,290,008 29,820,165 21,458,959 31,575,967

Main capital outflow

on maturity 150,693,975 16,858,056 27,891,574 34,030,463 37,097,265 34,816,617

Gap (30,345,360) 7,345,460 (14,601,566) (4,210,298) (15,638,306) (3,240,650)

61

COSMOS BANK, TAIWAN

Notes to Financial Statements

(Continued)

Maturity Analysis of Assets and Liabilities

June 30, 2009

(in thousands of New Taiwan dollars)

Total

Remaining Period to Maturity

1-30 Days 31-90 Days 91-180 Days 181 Days-

1 Year Over 1 Year

Main capital inflow on

maturity $ 128,738,231 32,797,196 5,580,692 6,790,422 39,472,791 44,097,130

Main capital outflow

on maturity 166,349,957 17,621,133 35,212,484 38,154,808 38,541,678 36,819,854

Gap (37,611,726) 15,176,063 (29,631,792) (31,364,386) 931,113 7,277,276

Note: The above amounts include only New Taiwan dollar amounts held by the head office and domestic

branches of the Bank (i.e., excluding foreign currency).

2)

Maturity Analysis of Assets and Liabilities

June 30, 2010

(in thousands of U.S. dollars)

Total

Remaining Period to Maturity

1-30 Days 31-90 Days 91-180 Days 181 Days-

1 Year Over 1 Year

Main capital inflow on

maturity $ 149,929 110,776 26,683 10,970 - 1,500

Main capital outflow

on maturity 149,929 85,364 8,515 7,853 7,927 40,270

Gap - 25,412 18,168 3,117 (7,927) (38,770)

Maturity Analysis of Assets and Liabilities

June 30, 2009

(in thousands of U.S. dollars)

Total

Remaining Period to Maturity

1-30 Days 31-90 Days 91-180 Days 181 Days-

1 Year Over 1 Year

Main capital inflow on

maturity $ 145,933 120,321 8,828 8,284 6,520 1,980

Main capital outflow

on maturity 145,933 102,986 8,211 8,517 12,199 14,020

Gap - 17,335 617 (233) (5,679) (12,040)

62

COSMOS BANK, TAIWAN

Notes to Financial Statements

(Continued)

Note 1: The above amounts include only U.S. dollar amounts held by the head office, domestic branches and

OBU of the Bank.

Note 2: If overseas assets are above 10% of total assets of the Bank, it is necessary to provide supplementary

disclosure information.

(vi) Capital adequacy ratio

(Unit: in thousands of New Taiwan dollars)

Year

Items

June 30,

2010

June 30,

2009

Eligible

Capital

Tier 1 capital $ 7,246,791 8,910,184

Tier 2 capital 6,316,091 8,385,313

Tier 3 capital - -

Eligible capital 13,562,882 17,295,497

Risk-

weighted

Assets

Credit risk

Standardized approach 69,229,460 91,369,888

Internal rating-based approach - -

Securitization 12,400 33,631

Operational risk

Basic indicator approach 14,257,214 18,065,504

Standardized approach/Alternative

standardized approach - -

Advanced measurement approach - -

Market risk Standardized approach 1,610,644 1,494,777

Internal model approach - -

Risk-weighted assets 85,109,718 110,963,800

Capital adequacy ratio 15.94% 15.59%

Ratio of tier 1 capital to risk-weighted assets 8.52% 8.03%

Ratio of tier 2 capital to risk-weighted assets 7.42% 7.56%

Ratio of tier 3 capital to risk-weighted assets - -

Ratio of common stock to total assets 12.25% 14.97%

Leverage 6.06% 6.83%

Note 1: Eligible capital and risk-weighted assets are calculated under the “Regulations Governing the

Capital Adequacy Ratio of Banks” and the “Explanation of Methods for Calculating the

Eligible Capital and Risk-Weighted Assets of Banks.”

Note 2: Formulas used were as follows:

1) Eligible capital = Tier 1 capital + Tier 2 capital + Tier 3 capital.

2) Risk-weighted assets = Risk-weighted assets for credit risk + Capital requirements for

operational risk and market risk x 12.5.

3) Capital adequacy ratio = Eligible capital ÷ Risk-weighted assets.

4) Ratio of Tier 1 capital to risk-weighted assets = Tier 1 capital ÷ Risk-weighted assets.

63

COSMOS BANK, TAIWAN

Notes to Financial Statements

5) Ratio of Tier 2 capital to risk-weighted assets = Tier 2 capital ÷ Risk-weighted assets.

6) Ratio of Tier 3 capital to risk-weighted assets = Tier 3 capital ÷ Risk-weighted assets.

7) Ratio of common stock to total assets = Common stock ÷ Total assets.

8) Leverage＝Tier 1 capital ÷ Adjusted average assets [Average Assets – Deduction from

Tier 1 capital (“Goodwill,” “Deferred loss on sale of nonperforming loans” and the

amount that should be deducted from Tier 1 capital according to the “Explanation of

Methods for Calculating the Eligible Capital and Risk-Weighted Assets of Banks”)].

Note 3: Under the regulation on capital adequacy ratios, the Bank had to use the standardized

approach to calculate its credit risks and had to reduce its Tier 1 capital when its operating

reserve and allowance for possible losses became insufficient. The Bank calculated its

capital adequacy ratios by referring to “The Expected Loss Interpretation of the Banking

Bureau,” previous loss experience, property risk, and risk-related developments and also

reported them to the supervisors from the Banking Bureau.

(d) Personnel, depreciation and amortization expenses

For the six-

month period

ended June 30,

2010

For the six-

month period

ended June 30,

2009

Personnel expenses

Salaries $ 718,768 789,429

Insurance 45,292 57,408

Pension 44,396 314,560

Others 84,958 158,324

Depreciation expenses 93,833 129,806

Amortization expenses 85,748 127,407

For the six-month periods ended June 30, 2010 and 2009, the depreciation on leased assets amounted

to $1,248 thousand and $0 thousand, respectively, recorded as reductions of rental revenue under net

revenues other than interest in the income statements.

11 Segment Financial Information

(a) Industry information: The Bank solely operates a commercial banking business.

(b) Geographic information: The Bank's foreign operating units or identifiable assets did not reach

10% of the Bank's revenues or total assets.

(c) Export sales: Not applicable

(d) Major customers: Not applicable