Cosmos Bank, Taiwan 2007 Annual Report · 2015-04-22 · 6 BANK OVERVIEW I. Introduction 1....

2007AnnualReportCosmos Bank, Taiwan

The Local Bank with World Class Capabilities

1

Contents

Letter to Shareholders

Bank Overview Introduction

Organizational Structure

Information for Directors

Fund Raising Status and Operational Highlights Capital & Dividend

Financial Bonds

Preferred Shares

Issuance of Depository Receipt

Employee Stock Option Plan (ESOP)

Merging or Acquisition of Other Financial Institutions

Scope of Business

Profile of Employees

Corporate Responsibilities and Ethics

Labor/Management Relations

Major Contracts

Risk Management

Private Placement of Marketable Securities

Financial Report from Audit Committee in 2007

Financial Review

Independent Auditors' Report

Financial Statements

Note to Financial Statements

Contact Details of Head Offices and Branches

2

56

8

10

1415

20

21

22

22

22

22

29

30

30

32

33

43

47

4849

50

58

106

3

LETTER TO SHAREHOLDERS

In 2007, the performance of the global financial market has been impacted by the rising commodity prices and the US sec-

ond mortgage issue. However, with the continuing growth in the emerging markets, the global economy managed a

growth of 3.8%, a slight reduction compared to 2006. With growing trade, better consumer spending and investment sen-

timents, the local economy managed a growth of 5.7% p.a., an increase of 81 basis points from the growth rate of 4.89%

in 2006.

For the past 12 months, the Taiwan financial industry has seen further consolidation. Cosmos Bank (the “Bank”) has also

successfully completed its recapitalization on Dec 28, 2007 with SAC Private Capital Group and GE Money as the new

major shareholders. The Bank's external rating has also been reverted to its original rating of twBBB/twA-3 by the Taiwan

Ratings (“TRS”). TRS has also adjusted the Bank's long term credit rating outlook to “positive”. The credit rating can be

further enhanced by the Bank's effective deployment of the capital and management resources of SAC PCG and GE Money

to strengthen core earning capabilities and market leadership. The Bank's capital adequacy ratio at 31 Dec. 2007 improved

significantly to 20.72%.

Following the recapitalization, Bank management has implemented growth initiatives to further enhance operational effi-

ciency. The Bank has invited individuals with vast international banking experience to join the board, with the aim of

improving and enhancing board oversight. In addition, the Bank is also setting up an Audit Committee as well as other

committees of the Board and expanding the management team with talents that are familiar with local and global banking

practices, with the aim of enhancing corporate governance and building a corporate culture that is disciplined and perfor-

mance driven. To further strengthen the existing distribution network, the Bank will also reorganize its distribution and

enabling functions with various process improvement and productivity initiatives.

To ensure efficient use of resources, the Bank will focus its growth in four core areas i.e. cash card, credit card, wealth man-

agement and SME (small and medium enterprises). In February 2008, the Bank became the first domestic financial institu-

tion to set up a flagship wealth management flagship centre in the prestigious Taipei 101 Tower. The aim is to provide the

highest quality wealth management services to the Bank's high net-worth VIP customers.

To build a foundation for future growth and profitability, the Bank has been improving the asset qualities of cash and credit

card portfolio for the past year. This include improvements in origination, use of more scientific and quantitative risk rating

models for underwriting and accounts management, periodic portfolio quality review so as to enhance credit risk forecast

and prevention. Following the use of rating models, our new cash and credit card assets have shown significant improve-

ments in quality. On an overall portfolio basis, percentage of low to medium risk assets are similar to same period in 2006

and is showing signs of further improvement. Similarly, we have enhanced internal underwriting and rating processes and

implemented risk based valuation system for our SME portfolio. This will be used as a basis to strengthen our product offer-

ing and enhance overall business propositions

4

LETTER TO SHAREHOLDERS

Having been impacted by the domestic card crisis, the Bank has been operating in a difficult operating environment in

2007. To enhance risk management mitigation going forward, the Bank has written off large bad debt exposures and

increased provisions for loan losses. As a result, the Bank incurred a net operatinga loss of NT$9.45 billion. Under the lead-

ership of the new Board of Directors and the new management team, the Bank has taken steps to execute its new growth

initiatives, strengthen risk management structure, enhance collection performance and undertake proper financial planning

to improve the Bank's capital structure.

2008 will be a year where the Bank will commence a new journey to create a local bank with world class capabilities. In

view of the rapid developments in the Taiwan financial services sector as well as internal corporate culture changes, we are

confident the team can work and create greater value for the shareholders.

Simon Williams

ChairmanSteve R.S. Chou

President & CEO

6

BANK OVERVIEW

I. Introduction

1. EstablishmentCosmos Bank (the “Bank”) was incorporated on August 13, 1991 and obtained the Certificate of Business

Registration on January 14 the following year. The Bank officially commenced its operations on February 12, 1992.

Since its establishment, the Bank has operated as a commercial bank, offering excellent financial services to both corpo-

rate and individual customers. On Dec. 28, 2007, two global financial groups SAC and GE Money acquired 81.7% (fully

diluted basis*) of the shares in Cosmos Bank following the completion of the recapitalization exercise. Under the lead-

ership of our new Chairman Mr. Simon Williams, Cosmos Bank is on its way to become a local bank with world class

capabilities.

2. Organization The Bank is a commercial bank operating as a limited corporation and is not a member of a financial holding group.

3. Merger & Acquisition, Investment in Related Companies and Corporate RestructureThe Bank has no investment in related companies or undertaken corporate restructuring for the past year as of the

printing date of the annual report.

4. Changes in Shareholding, Ownership and Other Major Events(1) The Bank completed its recapitalization exercise on December 28, 2007 where SAC Private Capital Group (“SAC”)

and GE Money and their subsidiaries injected NT$29.7 billion into Cosmos Bank. SAC acquired 58.5% (on a fully

diluted basis) of Cosmos shares by acquiring NT$21.45 billion of Series A Preferred Shares and Mandatory

Convertible Bonds (MCB) newly issued by the Bank. GE Money acquired 23.2% (on a fully diluted basis) of Cosmos

shares by acquiring NT$8.25 billion of common shares and MCB newly issued by the Bank.

(2) In addition, the holders of unsecured MCB and subordinate Convertible Bond issued in 2006 have agreed to convert

outstanding bonds into 2.1 billion common shares of the Bank, totaling 11.5% of Cosmos shares on a fully diluted

basis.

(3) Other than Mr. Simon Williams, who was appointed by SAC as the Chairman of Cosmos Bank, 7 others directors

representing SAC have also joined the Board of Directors. GE Money had also appointed 2 representatives. By intro-

ducing directors and management team with international experience plus the existing wealth of local knowledge,

the Bank aims at becoming a local bank with world class capabilities.

5. History

(1) Acquired the Tainan Fourth Credit Cooperative Bank, Miaoli Credit Cooperative Bank, and Hsinchu Fifth Credit

Cooperative Bank on April 13, 1998, August 13, 2001, and July 28, 2003, respectively. Merged with the Cosmos

Bills Finance Corp. on October 31, 2002. The Bank's branches have grown significantly in number from 23 in 1997

to 63 at present.

(2) The Bank launched the George & Mary Cash Card in 1999.

(3) In 2001, the Bank and Core Pacific City Living Mall jointly issued the first chip credit card in Taiwan that met the EMV

(Europay, MasterCard, Visa) standards.

7

(4) Continually increase the auto-service network to provide convenient access for customers. Cosmos has the most

Automatic Lending Machine (“ALM”) sites in Taiwan's market.

(5) On January 23 2006, Cosmos entered into an stock acquisition agreement with GE Capital Finance and completed

the strategic investment project on June 8, 2006. GE has appointed senior executive officers to jointly manage the

Bank's operations. The Bank took the opportunity to introduce GE's world-class management expertise to enhance

our long-term competitive niche.

(6) In 2006, the Bank issued the MoneyBack Platinum Card offering special discounts at department stores and cash

rebate.

(7) After the NT$4.2 billion recapitalization exercise on Dec. 28th 2007, SAC Private Capital Group (SAC PCG) became

the biggest shareholder. In addition, GE Money has also participated in the capital injection and both now hold more

than 80% of the Bank's shares in total. Both the major shareholders have introduced board members that have

global experience and a new management team to engage in various growth initiatives so as to strengthen corpo-

rate governance, improve the overall operation performance and starting a new chapter in the Bank's history.

* Fully diluted basis refers to the shareholding structure after the conversion of the Mandatory Convertible Bond.

8

BANK OVERVIEW

II. Organization Structure

1. Major Departments

Manage the overall wealth management, deposit andtrust businesses. The branches of wealth manage-ment and deposit are its channels.

Responsible for product design for each product line,conduct underwriting and all management business-es within consumer banking.

Responsible for the development, underwriting andmanagement of corporate banking and foreignexchange businesses. Corporate Banking Center is incharge of exploring channels and customer connec-tion.

Responsible for the collection activities of the Bankand all branches

Chungho Operation Center is responsible for cus-tomer service, telemarketing, deposit and wiring;Secretariat takes care of confidential matters aswell as documentation, company seal manage-ment, administration affairs, maintenance & con-struction, property management and disbursementactivities.Consumer Banking Execution team is responsiblefor managing the automated equipment of all thebranches.

Responsible for accounting, financial planning andanalysis, internal control over financial reporting; alsoresponsible for investment and funding activities.

Manage overall risk management in the Bank

Manage R&D, maintenance and operation of all busi-nesses related to IT in the Bank

Manage human resources and the safety and healthof employees

Plan the overall strategy of the Bank, manage admin-istration, legal and compliance

Manage all matters related to auditing in the Bank

Wealth Management Dept., Deposit Dept.,Trust Dept. and Wealth Management/Deposit Branches

Credit Card Dept., Mortgage Dept.,Consumer Banking Marketing Dept.,Consumer Banking DS Centers, RegionalConsumer Banking Centers

Corporate Banking Dept.,Credit Administration Dept.,International Banking, OBU,Corporate Banking Centers

Collection Dept.

Chungho Operation Center, SecretariatDept., Consumer Banking Execution Team

Financial Planning & Analysis, AccountingDept., Treasury Dept.

Risk Management Dept.

Banking Service AP, Consumer Lending AP,Service Provision AP

Human Resources Dept., Labor Safety & Health Dept.

Corporate Planning Dept., Legal Dept., Compliance Dept.

Auditing Dept.

Wealth Management

Consumer Banking

Corporate Banking

Collection

Operation

Finance

Risk Management

IT

Human Resources

AdministrationManagement

Auditing

Department Major BusinessFunction

▲▲

▲

9

BO

D

Ch

airm

an &

Co

-CEO

Pres

iden

t &

Co

-CEO

No

min

atin

gC

om

mit

tee

Co

mp

ensa

tio

nC

om

mit

tee

Ris

kC

om

mit

tee

Au

dit

Co

mm

itte

e

Au

dit

Au

dit

ing

As

at A

pril

11, 2

008

Wea

lth

Man

agem

ent

Wea

lth

Man

agem

ent

Dep

osi

t

Tru

st

WM

/ SF

E/D

epo

sit

Bra

nch

Cre

dit

Car

d

Cre

dit

Car

d

Mo

rtg

age

Cas

h C

ard

SME

&C

orp

ora

teLo

an

Co

llect

ion

sO

per

atio

nFi

nan

ce

Trea

sury

Ris

kIT

HR

HR

Safe

ty &

Hea

lth

Ban

kin

gSe

rvic

e A

P

Co

nsu

mer

Len

din

g A

P

Serv

ice

Pro

visi

on

AP

Risk

Man

agem

ent

FP&

A

Acc

ount

ing

Ch

un

gh

oC

ente

r

Secr

etar

iat

Co

nsu

mer

Ban

kin

gM

gt

Exe

Team

Co

rpo

rate

Ban

kin

g

Cre

dit

Adm

inist

ratio

n

Inte

rnat

ion

alB

anki

ng

OB

U

10 C

orp

ora

teLo

an C

ente

rs

Sale

s St

rate

gy

&M

anag

emen

t

Mar

keti

ng

&Pr

od

uct

Dev

elo

pm

ent

Cre

dit

Op

erat

ion

DS

Cen

ter

7 C

on

sum

erFi

nan

ceC

ente

rs

Mo

rtg

age

Ad

min

istr

atio

n

Co

rpo

rate

Plan

nin

g

Leg

al

Co

mp

lian

ce

2. O

rgan

izat

ion

Ch

art

10

BANK OVERVIEW

III. Information for Directors

0

0

0

0

0

0

0

0

0

0

569,435

0

0

0

0

0

(%)Shares

Spouse & MinorShareholding

0

0

0

0

0

0

0

0

0

0

0

0

0

0

0

0

0

0

0

0

0

0

339,954

700

0

700

0

0

(%)Shares

PresentShareholding

0.00

19.56

0.00

19.56

0.00

19.56

0.00

19.56

0.00

0.00

0.00

0.00

0.00

0.00

0.00

0.00

0

0

0

0

0

0

339,954

700

0

700

0

0

(%)Shares

ShareholdingWhen Elected

0.00

19.56

0.00

19.56

0.00

19.56

0.00

19.56

0.00

0.00

0.00

0.00

0.00

0.00

0.00

0.00

12.05.2007

03.04.2008

03.04.2008

03.04.2008

03.04.2008

12.05.2007

12.05.2007

05.30.2007

05.30.2007

05.30.2007

Date FirstElected

12.28.2007

03.04.2008

03.04.2008

03.04.2008

03.04.2008

12.28.2007

12.25.2007

05.30.2007

05.30.2007

05.30.2007

DateElected

Chairman

NameTitle Term(Year)

1,650,000,000(preferred

shares)

1,650,000,000(preferred

shares)

Simon Williams

S.A.C. PEI TaiwanHoldings B.V.

Representative：Wouter Kolff


Representative：Frank Baker

S.A.C. PEI TaiwanHoldings B.V.Representative：Jeffrey M. Hendren

Representative：Peter Berger

3 yrs

3 yrs

3 yrs

3 yrs

3 yrs

3 yrs

3 yrs

3 yrs

3 yrs

3 yrs

Director

Director

Director

Director

Director

Director

Director

Director

IndependentDirectors


David M. Fite

C.C. Hu

GE Capital

Representative：Jim Slavik(Note 6)

GE Capital

Representative：Manoj Naik(Note 6)

Chang-ji Chang

1,650,000,000(preferred

shares)

1,650,000,000(preferred

shares)

1,650,000,000(preferred

shares)

1,650,000,000(preferred

shares)

1,650,000,000(preferred

shares)

1,650,000,000(preferred

shares)

11

As at March 24, 2008

0

0

0

0

0

0

0

0

0

0

0

0

0

0

0

0

Also serve con-currently as

Other managers,directors or supervi-

sors who have spouseor family within 2-degree relationship

Experience/Education

(%)Shares

Shareholding inOthers' Names

0.00

0.00

0.00

0.00

0.00

0.00

0.00

0.00

0.00

0.00

0.00

0.00

0.00

0.00

0.00

0.00

BA of mathematics in Exeter UniversityHonorary Graduate of Fontainebleau INSEAD Business School(with scholarship granted by the Dean), Business Manager ofCitigroup Inc and the member of Management Committee

BA of Erasmus University in Rotterdam, MA of HarvardUniversity in Boston, Independent Director of the Board ofDirectors in Yes Bank Mumbai in India, Board Director ofFetim/Benovem B.V. in Amsterdam

BA of University of Chicago, MA of Harvard University(Business School), employee of M&A Department inGoldman Sachs and JMP (for derivatives products), Japanresident in Ripplewood's Tokyo Office/ RHJI

MA of Harvard University (Business School), Board Directorand Executive Director of RHJ in New York, ManagingDirector of Ripplewood Financial Holdings in New York

Graduated from Business School of Columbia University,SAC Private Equity, Executive Director of Ripplewood

MA of Business School of Stanford University (BusinessSchool, with Arjay Miller Scholarship), BA of Food ResearchDepartment, Executive partner of Euclid Capital Partners,Senior Executive Manger and CFO of Shinsei Bank

B. English Literature, National Taiwan University; Supervisorin charge of businesses in Taiwan, Citibank New YorkHeadquarter; Vice-President, Citibank (Taipei Branch); Vice-President, Cosmos Bank

B. Finance, University of Pennsylvania; CEO,GE Money AutoWarranty Services; COO, GE Money Bank Czech Republic &Slovensko

Victoria Jubilee Technical Institute (VJTI); University ofBombay India; Indian Institute of Management（IIM）

Bangalore; India Head-European Treasury Services; GECorporate Treasury, India; CFO, GE Money, India

Ph D of Strategic Science (Economics) of MarylandUniversity, USA, MA of Politics in National ChengchiUniversity, Professor of Labor Studies in National ChengchiUniversityAssistant researcher of Academy Sinica (Institution ofEconomics), Vice Chairperson of Labor Council(Administration Affairs), Consultant of CEPD and Taipei CityGovernment, Member of Council of Labor Affairs,Investment Commission of MOEA and Mainland AffairsCouncil

N/A

N/A

N/A

N/A

N/A

N/A

N/A

N/A

N/A

N/A

Chairman of CosmosBank

President of CosmosBank

CMD of Cosmos Bank

12

BANK OVERVIEW

(%)Shares

Spouse & MinorShareholding

(%)Shares

PresentShareholding

(%)Shares

ShareholdingWhen ElectedDate First

ElectedDate

ElectedNameTitle Term(Year)

Peggy Wang

Wen-yu Wang

Ji-huang Lin

Note：1. The director of Prince Motors, Ken S. J. Hsui and supervisors of Prince Investment Company resigned on Sept. 6th 2007.2. Director Zhao-rong Co., Ltd, Sheng-rong Motors Co., Ltd., Zhao-sheng Development Co., Ltd., First Insurance Brokerage Co.,

Ltd, and Director Lin jun-xing resigned Dec. 5th 2007; and the Bank has by-elected 7 directors on the same day: Simon Williams,Frank Baker, Jeffrey M. Hendren, Peter Berger, Wouter Kolff, David M. Fite and C.C. Hu.

3. Supervisor Jih Sheng Automobile Co., Ltd. resigned on Dec. 31st 2007.4. Supervisor Rong-zi Construction Co., Ltd. resigned on Jan. 9th 2008.5. The Directors Frank Baker, Jeffrey M. Hendren, Peter Berger and Wouter Kolff resigned on March 4th 2008；on the same day, the

Bank also by-elected 4 corporate director: S.A.C. PEI Taiwan Holdings B.V. represented by Frank Baker, S.A.C. PEI Taiwan HoldingsB.V. represented by Jeffrey M. Hendren, S.A.C. PEI Taiwan Holdings B.V. represented Peter Berger, S.A.C. PEI Taiwan Holdings B.V.represented by Wouter Kolff.

6. GE Capital re-delegated their corporate representatives on Apr. 9th 2008 to be Pearl Wang and Des O'Shea. 7. The AOI was amended in the AGM on March 4th 2008 and the set-up of Audit Committee was approved. The Committee will be

comprised of 4 independent directors.

0.00

0.00

0.00

0.00

0.00

0.00

0.00

0.00

0.00

0

0

0

0

0

0

0

0

0

05.30.2007

05.30.2007

05.30.2007

05.30.2007

05.30.2007

05.30.2007




3 yrs

3 yrs

3 yrs

13

As at March 24, 2008

Also serve con-currently as

Other managers,directors or supervi-

sors who have spouseor family within 2-degree relationship

Experience/Education

(%)Shares

Shareholding inOthers' Names

MA of Dept. of Finance and Tax in National ChengchiUniversity, CPA of Taiwan and the US, Acting Director ofAccounting Dept. in JCIC, CPA of Ingram & Walils Corp.USA, CPA of William C. Chalmers Corp. USA

Ph D of laws in University of Stanford, USA, MA of laws inColumbia University, BA of laws in National ChengchiUniversityProfessor of Department of Laws in National TaiwanUniversity, Visiting Professor of University of Hawaii, HongKong University, University of Singapore and University ofBeijing Director of TSEC, TAIFEX and Cooperative BankMember of Fair Trade Commission (Executive Yuan) andlegal consultant of Lee & Li

Ph D and MA of Finance in University of Oklahoma, USA,BA of Agricultural EconomicsProfessor of Financial Management in National ChengchiUniversity, Assistant Prof. of Financial Management inNational Sun Yet-Sen University, Chief Director of FinancialManagement Dept. in National Chengchi University,Assistant Prof. in South Australia University, FinancialAnalyst in the Bank of Land

0.00

0.00

0.00

0

0

0

N/A

N/A

N/A

15

FUND RAISING STATUSAND OPERATIONAL HIGHLIGHTS

I. Capital & Dividend

1. Sources of Capital

Jan. 1992

Apr. 1997

July 1998

Apr. 2000

Oct. 2002

June 2006

Dec. 2007

Dec. 2007

Sources ofCapital

Amount OtherSharesAmountShares

RemarksIssued SharesAuthorized SharesIssuePrice

Date ofIssue

$10

$10

$10

$10

$10

$10

-

$10

1,200,000

1,253,460

1,337,481

1,400,928

1,771,002

2,500,000

2,500,000

20,000,000

12,000,000

12,534,600

13,374,810

14,009,277

17,710,015

25,000,000

25,000,000

200,000,000

1,200,000

1,253,460

1,337,481

1,400,928

1,771,002

1,967,780

1,377,446

8,436,650

12,000,000

12,534,600

13,374,810

14,009,277

17,710,015

19,677,795

13,774,456

84,366,500

Unit: 1,000 NT, 1,000 sharesUnit of Issuance: NTD

Unit: 1,000 shares

Foundingcapital

Recapitalizationof earnings



Merge withCosmos BillsFinance Corp.

Private place-ment of shares

CapitalReduction


Per Tai-Tsai-JongNo.86120178 issuedon April 30, 1997

Per Tai-Tsai-JongNo.87717793 issuedon April 24, 1998

Per Tai-Tsai-JongNo.89073362 issuedon March 7, 2000

Per Tai-Tsai-Jong (2)No.0918011575 issuedon Sep. 3, 2002

Per Jin-Kuan-Yin (2)No.09500113480issued on April 12,2006

Per FSC official letterNo.0960029665 issuedon July 13, 2007

Per FSC official letterNo.09600503410issued on Dec. 10,2007

Un-issued Shares TotalRemarks

Issued Shares

Authorized CapitalShare Type

Common Shares

Preferred Shares

6,786,650

1,650,000

11,563,350

0

18,350,000

1,650,000

Listed

Unlisted (because it's private placement)

16


Unit: 1,000 shares, HeadcountBase Date: Mar. 24, 2008

Number of Shareholders

Shareholding(Shares)

Shareholding (%)

2

1

0.00%

GovernmentAgencies

13

2,188,943

25.95%

FinancialInstitutions

ShareholderStatus

Number

98

364,930

4.32%

Other LegalEntities

41,223

713,840

8.46%

DomesticIndividuals

68

5,168,936

61.27%

ForeignInstitutions &

Individuals

41,404

8,436,650

100.00%

Total

2. Composition of Shareholders

1 ~ 999

1,000 ~ 5,000

5,001 ~ 10,000

10,001 ~ 15,000

15,001 ~ 20,000

20,001 ~ 30,000

30,001 ~ 40,000

40,001 ~ 50,000

50,001 ~ 100,000

100,001 ~ 200,000

200,001 ~ 400,000

400,001 ~ 600,000

600,001 ~ 800,000

800,001 ~ 1,000,000

1,000,001 and more

Total

18,227

8,660

6,539

2,156

701

1,451

908

454

1,188

569

290

68

54

27

111

41,403

5,478

21,941

49,502

28,296

12,264

34,586

31,725

20,422

85,301

80,080

79,753

32,921

37,337

24,162

6,242,882

6,786,650

0.08%

0.32%

0.73%

0.42%

0.18%

0.51%

0.47%

0.30%

1.26%

1.18%

1.17%

0.48%

0.55%

0.36%

91.99%

100.00%

Class of ShareholdingsNumber of

Shareholders Shareholding (Shares) Holding Percentage

3. Distribution of Shareholding

(1) Distribution of Common Shares

Note: Face value is NT$10

Unit: 1,000 sharesBase Date: Mar. 24, 2008

17

4. List of Major ShareholdersUnit: Share

Base Date: Mar. 24, 2008

GE Capital Asia Investment Holdings B.V.

S.A.C. PEI Taiwan Holdings B.V.

China Development Industrial Bank

Shing Kong Life Insurance Co., Ltd.

Shing Kong Commercial Bank Co., Ltd.

Taiwan Bank Life Insurance Co., Ltd.

Sheng-Chang Co., Ltd,

Allianz Life Insurance Co., Ltd.

Sinon Life Insurance Co., Ltd.

Rong-ji Investment Co., Ltd.

SharesName of Major Shareholders

3,437,744,567

1,650,000,000

1,283,575,472

440,368,249

267,570,755

82,811,321

56,140,000

54,938,892

49,686,792

43,900,290

Number of Shareholding

40.75%

19.56%

15.21%

5.22%

3.17%

0.98%

0.67%

0.65%

0.59%

0.52%

Holding Percentage

1,000,001 and above

Total

1

1

1,650,000

1,650,000

Class of ShareholdingsNumber of

ShareholdersShareholding

(Shares)Holding Percentage

100.00%

100.00%

(2) Allocation of Preferred Shares

Note: The above is Top 10 Shareholders based on the number of shareholding.

Unit: 1,000 sharesBase Date: Mar. 24, 2008

18


5. Market Price, Net Worth, Earnings, and Dividends per Share for the Past Two Years

Highest market price (NT$)

Lowest market price (NT$)

Average Market Price (NT$)

Before Distribution (NT$)

After Distribution (NT$)

Weighted average shares (Thousand Shares)

Earnings per share (NT$)

Cash dividends

Revenue

Capital gain

Cumulative unappropriated dividends

Price/Earning Ratio (Note 2)

Price/Dividends Ratio

Cash dividend yield rate

YearItem

16.15

2.00

8.02

3.83

(Note 1)

1,436,725

(6.58)

－

－

－

－

(Note 3)

－

－

14.95

11.20

13.26

6.04

6.04

1,317,819

(8.56)

－

－

－

－

(Note 3)

－

－

2007 2006

4.03

2.76

3.12

3.48

(Note 1)

6,786,650

(0.43)

－

－

－

－

(Note 4)

－

－

Current Year up untilMarch 31, 2008 (Note 7)

Note 1：The net per share after distribution for March 2008 and 2007 has not been approved by the Shareholders' Meeting.

Note 2：EPS= Average Settlement Price per share during the year/Earnings per share.

Note 3：The earning per share is negative so this is not applicable.

Note 4：The EPS as of March 31st 2008 is not applicable as it is less than one year.

Note 5：The BVS includes that of Preferred Shares.

Note 6：The Bank reduced 590,334 thousand common shares on July 20th 2007. On Dec. 28th 2007, the common shares was increased by

5,409,204 thousand shares. Due to capital reduction, the Bank will track this number and make adjustment if necessary. The

basic and diluted EPS in 2006 increased from (6.00) NT to (8.56) NT.

Note 7：The number of BVS and EPS as of March 31st 2008 have not been reviewed and approved by CPA.

Market PricePer Share

BVS(Note 5)

EarningsPer Share

(Note 6)

DividendsPer Share

Return OnInvestment

Share dividends

19

6. Dividend Policy & Execution Status

(1) Dividend Policy in the Articles of Incorporation (AOI)

For the purpose of long-term financial plan, increasing the self-owned capital adequacy rate, and considering share-

holders' demand for cash flow, if there is surplus from annual accounting settlements, it shall offset previous year's

loss after the business income tax is paid. When there is any surplus after offsetting, 30% of the remaining surplus

shall be reserved as a legal surplus reserve and a special surplus reserve for the shareholders' equity deduction.

Combined with previous year's cumulative unappropriated earnings, the remaining portion shall be appropriated for

shareholders as dividends by 80% and the rest 20% shall be distributed by the following proportion:

a. 80% as shareholders' bonus

b. 15% as employees' bonus

c. 5% as remuneration for directors

The total amount of cash dividends should not be less than 10% of the total amount of dividends distributed.

However, when cash dividend per share is less than NT$0.1, stock dividends shall be distributed instead of stock divi-

dends. If the cumulative surplus of the previous year or current year after-tax surplus is insufficient for the appropria-

tion as shareholders' equity deduction, a special surplus reserve of equivalent amount shall be appropriated from the

cumulative unappropriated earnings of the previous year and none of the earnings should be distributed.

With regards to the aforementioned earnings, shareholders' meeting may decide to reserve all or part of it from dis-

tribution based on future business needs as well as profit and loss.

The amount of cash surplus allocation shall not exceed 15% of the Bank's paid-in capital; however, this does not

apply to the situation when legal surplus reserve is equal to the paid-in capital.

(2) Plan to submit a proposal of dividend distribution in AGM: None.

20


II. Financial Bonds1st term of 2006

Subordinate Financial BondsType

Official letter from FSC No. 09600547240 onDec. 18, 2007Dec. 28 , 2007NT$ 10,000,000 or its multipleTaiwan R.O.C.New Taiwan DollarsAt Par Value

NT$19.8 billion

Year 1, 2: coupon rate 6%Year 3, 4, 5: coupon rate 4%

5 yearsMaturity Date: Dec. 28, 2012

SecondaryN/AN/AN/AN/AN/ATrust Dept. in An-Tai BankConverted to Common Shares of CosmosNT$ 19.8 billion19,677,795 thousand dollars11,893,997 thousand dollarsNormalNo early repayment, redemption, re-purchase,purchase or cancellation for part of or all of thefinancial bonds is allowed unless otherwiseagreed by bondholders and regulators inadvance in written form.(1) Mandatory conversion: The bonds will (a)

terminate upon maturity or (b) be convertedproportionally when all or requested bond-holders see it necessary in order to maintainCAR above 8%, or Tier 1 capital above 4%.However, no mandatory conversion of thisdebenture is required before Series APreferred Shares are fully converted.

(2) Free conversion: Applicable from the 31st dayafter the issue date but before the maturitydate

Subordinate debenture

Enhance capital structure to fund medium andlong-term business developments and growth

170.80%

Yes, tier 2 capital

None

Official letter from FSC No. 09500481860on Nov. 17, 2006Dec. 14, 2006NT$ 1,000,000 (Note 1)Taiwan R.O.C.New Taiwan DollarsAt Par ValueTotal amount is NT$7 billion, among whichType A is NT$4.5 billion and Type B is NT$2.5billionType A: 3.00%Type B: 3.20%(1) Type A: 7 years

Maturity date: Dec. 14, 2013(2) Type B: 10 years

Maturity date: Dec. 14, 2016SecondaryN/AN/AN/AN/AN/AN/A(Note 2)NT$515 million17,710,015 thousand dollars20,397,283 thousand dollarsBased on the resolution of the Bondholders'Meeting for 1st term Subordinate FinancialBonds Type A and B in 2006 (on Dec. 27,2007, Note 2 and 3)

N/A

Subordinate debentureEnhance capital structure to fund mediumand long-term business developments andgrowth

64.96%

Yes, tier 2 capital

None

Date & Approval No.

Issue DateFace ValuePlace of IssueCurrencyIssued Price

Total Amount

Interest Rate

Maturity

Lien PositionGuarantee InstitutionTrusteeConsignee Certified LawyerCertified CPACertified Financial InstitutionRepayment MethodsUnredeemed BalancePaid-in Capital in last Fiscal YearAfter-tax Net Worth in last Fiscal YearPerformance

Redemption or Early Redemption

Conversion & Exchange Conditions

Limitation Article

Fund Utilization Plan

Balance of bonds as a percentage ofafter-tax net worth (%)Whether it is accounted for equitycapital and typeName of credit rating agency, dateand result of rating

Subordinate MCB (Private placement)

21

III. Preferred Shares

Items

Official letter from FSC No. 09600503410 on Dec. 10, 2007

Dec. 28, 2007NT$10NT$2 per share1,650,000,000 shares (face value : NT$10)NT$16.5 billion (face value is calculated as NT$10 per share)Series A Preferred Shares will be based on the converted common shares and thedividends will be distributed on the same base date as the resolution of theBoard of Directors and the pay day of common shares with the same proportion.1. In case of settlement, prior to distributing or making any payment to holders

of subordinate securities, the shareholders of Series A Preferred Shares areentitled to request the Bank to make payment in cash for the remaining prop-erty with exact number distributed to the shareholders legally (hereinafterreferred to as “Order of Distributing Remaining Property”.)

2. In case of settlement and that the Bank's remaining property is not sufficientenough to distribute to all bondholders and shareholders, holders of Series APreferred Shares and securities of the same lien position should be the priori-ties to be paid based on their proportion of total asset.

The holders of Series A Preferred Shares have voting rights over all kinds of top-ics (including election of directors and supervisors) in the Shareholders' Meetingand their voting rights are equivalent to the number of common shares afterconversion. Unless otherwise indicated in other rules or in the Issuance Policy ofSeries A Preferred Shares Article 7, the holders of Series A Preferred Shares havethe same voting rights with holders of common shares.Unless otherwise provided in AOI, when the Bank issues any shares or securitiesrelated to equity, holders of Series A Preferred Shares have the priority to sub-scribe to securities related to their equity based on their proportion of outstand-ing equity (based on fully diluted equity) under statutory laws.

N/A

Unconverted: 1,650,000,000 shares

Holders of Series A Preferred Shares may exercise their conversion rights (here-inafter referred to as “conversion rights”) to convert the preferred shares withfully-paid common shares that are exempt from any fee at par (hereinafterreferred to as “conversion of shares”): (A) After issue date, the shareholdersmay exercise their rights at any time (B) When necessary, in order to maintain8% CAR or 4% tier 1 capital (based on the BOD approved statement as present-ed by the CFO 30 days prior to the end of each quarter ), convert Series APreferred Shares from the shareholders proportionally and (C) Exercise conversionrights on the 4th annual date after issue date. All Series A Preferred Shares shouldbe converted before the conversion of Subordinate Unsecured CB.

Regulators' Approval Date and Number ofDocumentsIssue DateFace ValueValue upon IssuanceNumber of SharesTotal amount

Distribution of Dividends andBonus

Distribution of RemainingProperty

Execution of Voting Rights

Other

Number of Redemption orConversionUnredeemed or UnconvertedBalance

Terms of Redemption orConversion

Series A Preferred Shares (private placement)

Note 1: The lowest selling unit in practice is NT$10 million.

Note 2:Cosmos Bank has signed a Subscription Agreement (and its amendments) with 9 financial institutions including China Development

Industrial Bank. They agreed to waive domestic unsecured CB of 2006 issued with a principal of NT$6,250 million and 58% of the

subordinate CB of the 1st term in 2006 for a principal of NT$6,485 million. Other than the cash settlement of NT$1,130,291 thou-

sand, the rest of the NT$4,218,409 thousand is converted into 2,109,204 thousand common shares. In addition, the after-tax NEA

of NT$4,183,724 thousand (the issued cost was NT$34,685 thousand) was listed as Shareholders' equity. The NT$5,539,725 thou-

sand debt equity revenue will be listed as extra ordinary gain. The 2006 1st term subordinate CB bondholders Zhu-nan Credit

Cooperative Bank, Singfor Life Insurance Co., Ltd., San-zhi Agricultural Association in Taipei county did not sign the Subscription

Agreement. As of year 2007 end, NT$515,000 thousand was left and listed as“Convertible Bonds Payable”.

Note 3:The resolutions made in the Bondholders' Meeting for the 1st term Subordinate CB (Type A & B) in 2006 held on Dec. 27, 2007 are

currently being reviewed by the local court (reported on Feb. 4, 2008).

OutstandingPreferredShares

Obligation

22


IV. Issuance of Depository Receipt: None

V. Employee Stock Option Plan (ESOP)

The Board meeting on Dec. 28th 2007 passed a resolution on the policy for the 2008 ESOP. As of the printing date of the

annual report, the Bank has not submitted the ESOP application to regulators.

VI. Merging or Acquisition of Other Financial Institutions

1. Comments from CPAs on the rationality for shares conversion ratio due to merging or acquiring other financial institu-

tions: None

2. Merging or acquiring other financial institutions in the recent 5 years:

On July 28th 2003, the Bank acquired the 5th Credit Cooperative of Hsinchu and restructured them into 10 branches

including the Phong-cheng Branch.

3. As of the printing date of the annual report, any M&A proposals passed by the Board of Directors: None

VII. Scope of Business

1. Business Overview

(1) Major business activities

A. Wealth Management and Deposit

Providing all types of services in line with customers' needs on investments, including deposit, trust, and bank

insurance.

B. Consumer Banking

In charge of handling personal loans, including cash card, credit card, housing loan, and consumer loans etc.

Items

－

N/A

The same as the terms of bond conversion

If preferred shares are converted into common shares, the amount of dilutionwill depend on the converted common shares.

－

Market price per shareConverted or subscribedamount as of the printing dateof this annual reportPolicy of Issuance andConversion or Subscription

The impact of issue terms to the equity ofpreferred shareholders and current share-holders, and the possible dilution of equity Impact of redeeming preferred shares tothe equity capital and RWA

Series A Preferred Shares (private placement)

OtherEquity

23

C. Corporate Banking

In charge of handling loans, including secured/unsecured short-term working capital, mid- and long-term financ-

ing, and acceptances.

D. Foreign Exchange

In charge of handling acceptances, including export bill financing, import bill financing, international remittances,

foreign currency deposits, foreign currency loans and foreign currency guarantee.

E. Other businesses approved by the competent authority .

(2) Business Portfolio

Unit: NT $1,000

Net Interest

Net fee income

Net income on the sale and valuation of financial assetsand liabilities at fair value through profit or loss

Realized P&L on the sale of ready-to-sell financial assets

Income from equity investments under the equitymethod

Net Income of FX

Loss on asset impairment

Non active financial asset

Amortization of loss from the sale of NPL

Other non-interest net loss

Total net income (loss)

7,851,703

1,160,967

96,883

-29,330

5,268

79,212

-1,000,227

-796,170

-9,605,835

-126,224

-2,363,753

Year 2007Item

10,192,952

1,208,227

447,637

461

54,395

43,610

-934,317

－

-6,911,364

-133,045

3,968,556

Year 2006

-23%

-4%

-78%

-6,462%

-90%

82%

7%

－

39%

-5%

-160%

Increase /Decrease

Unit: NT $1,000

Demand Deposit

Time Deposit

Total Deposits

33,351,109

124,849,123

158,200,232

21.08%

78.92%

100.00%

%Item

As at Dec. 31, 2007 As at Dec. 31, 2006 Increase (Decrease)

(3) Summary of major businesses

A. Deposits

amount

47,251,874

162,110,862

209,362,736

22.57%

77.43%

100.00%

%amount

-13,900,765

-37,261,739

-51,162,504

-29.42%

-22.99%

-24.44%

%amount

Note: include foreign exchange deposits and the deposit transferred from post office.

24


Unit: NT $1,000

Fund transaction fee income

Insurance fee income

Total

582,586

3,859

586,445

99.34%

0.66%

100.00%

%Item

Year 2007 Year 2006 Increase (Decrease)

C. Wealth Management

amount

492,226

8,795

501,021

98.24%

1.76%

100.00%

%amount

90,360

-4,936

85,424

18.36%

-56.12%

17.05%

%amount

Unit: US $1,000

Import

Export

Remittance

Total

72,203

467,573

3,234,678

3,774,454

1.91%

12.39%

85.70%

100.00%

%Item

Year 2007 Year 2006 Increase (Decrease)

E. Foreign Exchange

amount

117,285

248,408

2,210,978

2,576,671

4.55%

9.64%

85.81%

100.00%

%amount

-45,082

219,165

1,023,700

1,197,783

-38.44%

88.23%

46.30%

46.49%

%amount

Unit: NT $1,000; Cards

Issued Cards

Valid Cards

Balance of revolving loan

716,447

287,949

3,177,805

ItemAs at Dec. 31, 2007 As at Dec. 31, 2006 Increase (Decrease)

D. Credit Card

Amount/Cards

879,757

351,405

3,773,235

Amount/Cards

-163,310

-63,456

-595,430

-18.56%

-18.06%

-15.78%

%Amount/Cards

2. Business Plan for 2008The Bank successfully completed the capital injection, with the addition of NT$420 billion of capital on Dec. 28, 2007.

Thus the capital structure of Cosmos is strengthened sufficiently to meet the needs of the business today and grow for

tomorrow. With the new management team introduced by major shareholders SAC and GE, a new revitalization pro-

gram will be rolled out focused on building revenue momentum, managing risk and improving productivity. We will

rebuild the Bank's image and move towards the goal of being a “local bank with world class capabilities” with a

brand new look. Our operational guidelines and business plan are summarized as follows:

Unit: NT $1,000

Consumer Loan

Corporate Loan

Total Loans

57,349,333

58,851,180

116,200,513

49.35%

50.65%

100.00%

%Item

As at Dec. 31, 2007 As at Dec. 31, 2006 Increase (Decrease)

B. Loans

amount

67,926,657

69,014,024

136,940,681

49.60%

50.40%

100.00%

%amount

-10,577,324

-10,162,844

-20,740,168

-15.57%

-14.73%

-15.15%

%amount

25

(1) Building a Cohesive Management Team to Strengthen Corporate Governance

A. Introducing experienced directors in international financial sector to enhance the supervisory and decision-making

mechanism of the board of directors;

B. Setting up an Audit Committee to supervise financial, accounting, legal compliance and internal control system;

to ensure the completeness of systems and the appropriateness of implementation;

C. Recruiting banking professionals familiar with domestic and international banking to strengthen our senior man-

agement team; to reconstruct the discipline for legal compliance, the operational environment for performance

orientation and a stringent business culture of internal control and risk management.

(2) Focusing on Four Core Business Strategies-Cash Card, Credit Card, Wealth Management and SME

A. Accelerating resources integration; to focus on core business with niche and growth potential and to maximize

the effectiveness of employing resources;

B. Applying mature risk analytical capability; aiming at needs of different customers and setting differential pricing &

multi-services to expand cash card & credit card business;

C. With the integration of internal resources, we may offer comprehensive services of wealth management to high-

assets VIP customers; developing our branch distribution, e.g. establishing Taipei 101 VIP WM flagship store;

D. Developing proactively our SME customer base and developing new business in corporate banking and cash man-

agement service to promote SME financing relationships.

(3) Restructuring Branch Organization and Back-office Operations by Sales Orientation to Maximize Channel

Effectiveness

A. Developing dedicated Consumer (cash card) Banking Centers, Corporate/SME Banking Centers and branches of

wealth management to have exclusive segmentations providing increased sales;

B. Through changes in operational procedures and centralization, front-end tellers can focus on selling and the back-

office units can focus on service, we can improve overall productivity.

(4) Underlining the Concepts of Customer Orientation to Offer Excellent Service to Customers

A. Combining with external resources of strategic corporation to enhance employees' professional capability;

through custom-made products to offer customer added-value services;

B. Reinforcing the function of Customer Service Center and integrating business database to provide customers with

quick and in-time services so as to increase customers' satisfaction;

C. With quantified analysis of customer data, we develop diverse marketing and service projects to exercise the ser-

vice spirit of tailor-made.

(5) Enhancing Risk Management Mechanism to Increase Return on Capital

A. Strengthening the quantified analysis and the employment of underwriting & Behavior Balance Scorecard to

effectively improve the quality of crediting;

B. Centralizing collection resources and setting high-effective collection system to consolidate the collection manage-

ment for overdue loans;

C. Planning a solid portfolio of assets & liabilities to strengthen financial structure and increase return on capital.

26


3. Market Analysis

(1) Macroeconomic Conditions Overview & Prospect

As we look back in 2007, the global economy has been impacted by sub-prime crisis and price rising on cruel oil and

raw material. However, the strong purchasing power of emerging market supported the global economic to grow

steadily. The economic growth rate decreased slightly from 4.0% in 2006 to 3.8% in 2007. For the domestic econo-

my, the export expanded dramatically in 2007. Consumption and investment has been increasing steadily. According

to the publication from Directorate General of Budget, Accounting and Statistics (DGBAS), the growth rate in 2007

and 2006 was 5.70% and 4.89% respectively, representing an increase of 0.81% as compared to prior year. The

Consumer Price Index (CPI) in 2007 also increased by1.80% due to global price increases.

Looking forward to 2008, even though the growth rate may still be slow related due to the slower global market

impacted by sub-prime crisis and related problems, Taiwanese enterprises should have good performance in the

global market and is expected to have stable growth on international business. In addition, the unemployment rate

has been improved and consumer consumption has been increased. DGBAS estimated that the economic growth

rate of 2008 will be 4.32% and the Consumer Price Index (CPI) will increase by 1.98%.

(2) Developments in the Financial Market and The Bank' s Responses

A. Improve the overall financial environment, integrate international management skills, and improve operation per-

formances

The total pre-tax revenue of domestic banks in 2007 was $38.8 billion, which was a $46.2 billion increase from

2006 (Pre-tax loss: -$7.4 billion). The overall financial environment has been improved. After completing capital

injection, we look forward to becoming a local bank with world-class capabilities. The new management team

will adopt global management practices and technology to build up a performance-oriented company culture and

improve the overall bank performance and profitability.

B. Integrate the consumer financial market and reposition the market value

After the double card crisis in consumer banking, this is a great opportunity for market integration. As a cash card

market leader, we will reposition the market value and rebuild brand reputation by introducing experiences from

new global management team and new marketing campaign. We will introduce product innovation from abroad

to promote reasonably priced multi-functional cash card and credit card in order to satisfy customer demands.

C. Margin for corporate loan is small. Focus on developing SME financing.

Since corporate loan has lower margin and has higher concentration risk, we have adjusted our targets from cor-

porates to SMEs to diversify the loan risk and improve revenue. The loan balance of SMEs accounted for 12.59%

in 2005 and increased to 22.81% in 2007. We will provide integrated banking services to SMEs and view it as

one of our 4 core businesses.

D. Improve the promotion of wealth management business to increase the fee income.

The demand for investment in Taiwan' s market has been increasing in the pas few years. The number of million-

aires in Taiwan accounted for 2.9% of total population in 2006, which rank the 3rd globally. It reflected the huge

growth potential in wealth management market. In order to build up customer-oriented business, we will cooper-

ate with renowned global trust companies to provide comprehensive asset management services and provide

training to our team so as to provide customized products with an aim to improve fee income. We will lead our

wealth management business into a new milestone.

4. Research on Financial Products and Overview of Business Developments

(1) Major Financial products in the past two years and an overview of developments

27

A. George & Mary Cash Card

We introduced the George and Mary Cash Card in 1999. The number of issued cards was 1,120 thousand at end

of December 2007. The loan balance was about NT$44.6 billion. In order to provide private and user-friendly ser-

vices for our customers, the Bank set up ALMs all over Taiwan where there is a lot of traffic, making Cosmos the

largest provider of ALM network.

B. SME Financing

To induce more diverse business growth, we started to introduce the SME financing services in respective regional

corporate banking centers in 2002. Branches were incorporated as part of the team in 2004 to expand our ser-

vice network and increase the SME customer base. A end of December 2007, 55 branches in total offered SME

financing services. The balance of SME loans is about NT$27 billion.

C. Wealth Management

The Bank received approval from regulators to offer wealth management services in November 2005. Since then,

the Bank has continued to increase the number of customers and wealth management scale. The number of cus-

tomers was about 50,000 at end of December 2007. The number of customers increased by 11.42% from 2006,

and the asset scale was about NT$120.2 billion. We set up the VIP Wealth Management Center in Taipei 101 in

February 2008, which was the first amongst local banks. We provide comprehensive VIP services for high net-

worth customers.

D. Promotion of virtual channels: Automated Services & E-banking

To offer customers more convenient services, besides setting up ALMs which provide nation-wide processing cash

card applications at any time, we have added several account-related services to our e-banking since 2005 includ-

ing instant and scheduled account transfer to nominated accounts, reinvestment or termination of time deposits,

parking fee payments, and setting up mortgage percentage of general deposits. We also offer online credit card

and fund investment services, offering our customers banking services round the clock. A end of December 2007,

about 110,000 customers have applied to use the Bank's E-banking service.

(2) Expenditures on On-site Training and R&D for the Past Two Years

The Bank' s R&D investment is primarily on human resource development. In order to improve employees' profes-

sional skills and extend their knowledge, the Bank held and supported diversified trainings internally and externally.

In addition, the Bank offered practical management programs to train potential managers. Each business division

assigned professionals to focus on R&D activities covering marketing, product development, operations procedure

improvement, and service network promotion. The R&D expenditures for the past two years (excluding the payroll

for professionals who are devoted to R&D and expenditures for IT software and hardware development) are listed

below:Unit: NT$ 1,000

Expense of on-site training 12,782

Year 2007

11,045

2006

15.73%

Growth Rate

(3) Result of R&D development in the past 2 years

A. Results of employee training

Internal Training

External Training

Total

11,629

1,675

13,304

Year 2007

16,275

1,098

17,373

2006

-28.55%

52.55%

-23.42%

Growth Rate

Unit: Person

28


B. Results of business developments

Year 2006

(a) Launched MoneyBack Platinum Card, offering up to 10% cash rebate. This product has received the 2006

MasterCard Worldwide “Best Marketing Award”.

(b) E-banking has been offering the following services: redemption of credit card rewards, rewards inquiry, setting

up credit card installment payments and card activation services since March 2006.

(c) Cooperated with Taipei County and Tainan City Governments to offer agency payment services for parking

fees. Our customers could apply through E-banking from August 2006.

Year 2007

(a) Built up underwriting system for corporate banking to automate the underwriting procedure. Also built up a

tracking system to support customer data maintenance/analysis and risk management.

(b) Offered “Assigned payment receipt's account number management system” business for processing Taiwan

Clearing House's e-checks.

(c) Added new functions to set up and inquire general deposit mortgage percentage through E-banking.

(4) Future R&D Plans and Timeline

A. Add debit function under cash cards through financial companies and VISA platform. The cardholders can use

debit function for payment in designated stores, such as hypermarket, gas station, supermarket, convenience

store which provide POS service. The Bank expected to provide additional value for customers besides the short-

term money withdrawal feature, with a purpose to enhance the card usage and customer loyalty, and increase

additional profit such as fee income of debit function.

B. Expand the channels for cashing credit card bonus and exchanged items. Add the small payment function as a

convenience service for customer to waive the signature procedure when shopping in designated stores.

C. Launch money market interest for demand deposit accounts. Planned demand deposit accounts for customers

who qualify for wealth management in order to manage investments and deposit returns.

D. Promote the growth and profit of each product through pricing strategy and customer loyalty enhancement pro-

jects.

E. In terms of risk management, we will continue to develop and maintain the pricing strategies based on the

“score card” mechanism and credit assessment procedures based on customer behavior analysis. We will also

group our customers according to different customer attributes and apply it to preliminary credit assessment,

interim follow-up and credit collection management to improve our overall risk management capabilities.

5. Long-term Business Development Plans

We will focus on Consumer Banking and take Cash Card, Credit Card, Wealth Management and SME Banking as the

four major focuses of development with the prospect of becoming a ”Local Bank with World Class Capabilities” by

strengthening customer-oriented service and risk management.

(1) Consumer Banking

A. With our know-how in internal control and a comprehensive framework of front-office marketing, back-office

credit assessment policies, we are able to effectively control risks, maintain service quality and pursue profitable

growth.

29

B. Focus on developing new clients and expanding cross-sell to increase customer penetration and the usage rate of

low-risk customers to increase our profit.

C. Centralized credit collection resources to improve operation procedures. The goal is to improve credit collection

results and debt recovery rate.

(2) Wealth Management

A. Broaden existing client base and effectively segment customer groups. We'll also plan customized financial prod-

ucts and offer integrated financial management services for specific customers.

B. Through strategic alliance with our global partner, we introduced world-class experience in wealth management

to provide comprehensive training to financial service specialist and improve our ability on product design.

C. Improve our brand image and market position in wealth management to gradually enter top-notch customer

groups.

(3) Corporate Banking

A. Focus on developing SME banking to increase the Bank's revenue. We will gradually increase the weighting of

SME loans.

B. Develop multi-facet financial services to deepen our relationship with major corporate clients. Position the bank as

the one providing primary banking services to them.

C. Set up a risk-based pricing mechanism to strengthen risk management and improve operating results.

VIII. Profile of Employees

1. Employee Composition

Staff

Workers

Total

Average Age

Average Years of Service

Doctorate

Master Degree

Degree/Diploma

Senior High School

Junior High School & Under

Year

2,975

40

3,015

34.44

6.89

0.00%

4.48%

85.04%

9.85%

0.63%

2007

3,246

52

3,298

33.14

5.8

0.00%

4.6%

85.54%

9.34

0.52%

2006

2,938

39

2,977

34.68

7.08

0.00%

4.27%

85.15%

10.01%

0.57%

Current Year up untilMarch 31, 2008

Number ofEmployees

Education

Unit: Person

30


2. Code of Employee Conduct and Ethics

The Bank has formulated the "Work Rules of Cosmos Bank." to regulate employees' conduct at work. All employees

shall demonstrate cooperative, obedient and enthusiastic spirit at work and complete their tasks in a timely and accu-

rate manner. They shall be loyal to the company, comply with corporate policies and shall not engage in unlawful trans-

actions by taking advantage of their positions at the Bank. Meanwhile, the policy clearly sets out the Bank's merit/disci-

pline rules to give employees appropriate incentives or punishments. On the basis of this policy, both managers and

staff have common understanding on their communications and this is beneficial for the Bank's business developments

and organizational management.

3. Protective Measures for Workplace and Employee Safety

(1) The public areas where customers are served were constructed in accordance with the relevant building regulations.

Daily security maintenance is carried out based on the standards prescribed by the Financial Supervisory Committee

(FSC) and Banking Association. Our security system is linked to the police authorities and security guards are also sta-

tioned at the respective business units to ensure security. Some security procedures are outsourced to professional

agents where possible.

(2) The “Labor Safety & Health Supervisor”, “Fire Security Administrator” and “Emergency Rescue Officer” have

been appointed to work at branches and offices and any vacancy is filled immediately.

(3) Formulate the annual “Employee Safety and Health Self Assessment Plan” in accordance with the “Work Rules of

Labor Safety and Health” and organize the meeting of “Committee of Labor Safety and Health” on a regular

basis to review any possible improvements of working environment.

(4) Formulate the “Rules overning the Processing of Official/Bereavement Leaves” to ensure that employees are well

looked after.

(5) Join the Security Maintenance Fund administered by the Bankers' Association through which more comprehensive

guarantees are provided to employees.

IX. Corporate Responsibilities and Ethics

1. Launched the Safety Chip Card and donated 0.5% of the proceeds to charity funds.

2. The Bank has held blood donation campaign for 11 years in a row.

3. With caring and compassion, the Bank keeps improving service quality to protect customers and was awarded

“Outstanding Bank” under the “Evaluation of Consumer Protection by Banks” program administered by the FSC.

X. Labor/Management Relations

1. Employee welfare, retirement policy and implementation status, Labor/Managementagreements, employee welfare and implementation status.

(1) Employee Welfare & Implementation Status

31

To ensure sound labor relations, we offer the following employee benefits: secured medium and long-term loans and

consumer loan, deposit at special rate, composite insurance, labor insurance, national health insurance, group insur-

ance (including regular life, accident and medical & health insurance of which the premiums are paid by the Bank),

contracted medical staff to provide on-premise medical consultation and health checkup services, sports allowance

and uniform. The Bank has also set up an Employee Welfare Committee according to law and set aside a reserve to

handle employees' welfare-related affairs. To enhance employees' loyalty to the Bank, we also distribute employee

bonus based on earnings results where appropriate.

(2) Retirement Policy & Implementation Status

Our retirement policy has been set up in accordance with the Labor Standards Law and relevant labor pension regu-

lations. We have in place an employee retirement policy to look after employees post-retirement.

(3) Labor and Management Agreements

The Bank signed the labor and management agreement of employee benefit program on December 6th, 2007. The

employee benefit details are as below:

The service bonus in 2007 was based on the Bank's regulation.

Performance bonus in 2007: The bank has paid additional bonus as the amount of 2 times monthly salary to

qualified employees in February, 2008.

Favorable Retirement Program: The Bank will execute the two-phrases Favorable Retirement Program from

January 1st, 2008 to December 31st, 2008.

A. Employees' Retirement Policy (ERP):

(a) Phase I: From January 1st, 2008 to June 30st, 2008. Senior employees whose service years plus his/her age is

greater or equal to 50 are all eligible.

(b) Phase II: From July 1st, 2008 to December 31st, 2008. Employees other than the senior employees mentioned

above are eligible. (The years of service plus his/her age is less than 50.) However, the total number of quali-

fied employees is limited to 20% of total non-senior employees.

B. Severance Pay: The applicant will receive 2 times monthly average salary for each full year. If the years of service is

shorter than half a year, then it will be counted as half a year. If the years of service is longer than half a year,

then it will be counted as one year.

Retention Rate: The Bank guarantees that within 2 years after recapitalization, the retention rate will not be less

than 85% (The rate does not include the employees who resigned voluntarily or ERP applicants.)

Lay-Off Program: If the Bank lays off employee according to Labor Standards Law within 3 years after completing

the recapitalization, the severance pay will be calculated by his/her years of service. The employee will receive 2

times monthly average salary for each full year (If the years of service is shorter than half a year, then it will be

counted as half a year. If the years of service is longer than half a year, then it will be counted as one year.) plus 2

times monthly average salary.

Salary and other benefit: The Bank guarantees that within 3 years (1) before signing the Collective Bargaining

Agreement or (2) after capital raising, it will not change any terms of employment which might not benefit all

employees.

Collective Bargaining Agreement: The Bank and the Union committed that the Collective Bargaining Agreement

will be completed within 1 year after capital injection. If this plan fails, the Agreement must be finalized within 2

years after recapitalization.

▲▲

▲▲

▲▲

▲

32


No-Strike: The Union agreed that within 1 year after recapitalization, it will not initiate strike, conduct any act

which might impact work or conduct other labor group act.

Human Resource Committee: After capital injection, the Union has the right to assign 4 employee representatives

on behalf of all employees to attend Human Resource Management Committee (10 seats in total)

Communication with the Union: The Chairman of Cosmos Bank will convene the meeting with Union representa-

tives at least once per month to discuss the rights and benefits of employees.

Policy of Issue ESOP: The Bank will formulate policy of ESOP. The amount of stock options to be granted will

depend on the performance and years of service.

2. The indemnities incurred from dispute between management and labor in 2007 andprior to the printing date of the annual report:

A former employee claimed that the Bank should make compulsory payment to him after retirement; another former

employee claimed that the retirement pension should include his service years in the previous company, his unused

leaves (translated into reimbursement) and work bonus. Both cases are currently being processed.

XI. Major Contracts

DetailsNature

None

None

None

The annual technology service fee is $22 millionUSD and the total is $84 million USD. GEHoldings, GEII and GE Australia leverage theirresources worldwide to fully provide all kinds ofIT and management systems for Cosmos' busi-ness, and support all types of integration pro-grams including data processing and systemsupport. They also offer customorized IT pack-age, while at the same time providing completetraining and technology transfer service.Through this technology service plan, they willbe able to introduce best practices worldwide toassist the Bank redesign and consolidate somekey systems required for developing all types ofbusinesses and management so that the Bankcan implement data processing, R&D and main-tenance needed for all systems, plus daily oper-ation, data management and technologies tosupport decisions.

Acquired auto loans totaling $1,359,280 thou-sand from GECT. Total cost of purchase was$1,413,467 thousand. The premium wasaround 4%.

Acquired auto loan totaling $1,023,770 thou-sand from Mega Commercial Bank. Total cost ofpurchase was amounted to $1,064,721 thou-sand. The premium was around 4%.

ServiceAgreement

Auto LoanConsignmentAgreement

1. General ElectricInternational Inc.(hereinafter referredto as “GEII”)

2. GE ProcessingServices Pty Limited(hereinafter referredto as “GEAustralia”)

GE Capital TaiwanLimited (hereinafterreferred to as "GECT")

Mega InternationalCommercial Bank

Jan. 1,2006~Jan.

1, 2010

June 29,2006

August 17,2006

RestrictiveConvenantsTermCounter

Party

▲▲

▲▲

33

DetailsNature

None

None

SAC Holdings and GE Holdings participated inthe Bank's private placement to issue commonstocks. The amount and price of CommonShares, Series A Preferred Share andSubordinate Unsecured MCB were as below:1. GE Holdings subscribed to $3.3 bill ion

Common Shares. The subscription price pershare was $2.

2. SAC Holdings subscribed to $1.65 billionSeries A Preferred Shares. The subscriptionprice per share was $2.

3. Cosmos issued NT$ 19.8 billion SubordinateUnsecured Mandatory convertible Bond.NT$18.15 billion was subscribed by SACHoldings and NT$1.65 billion was subscribedby GE Holdings. The convertible price pershare was $2.

1. The Bank issued Common Shares by privateplacement. The Bank issued $6.25 billionNTD of 1st term domestic unsecured convert-ible bond in 2006 and $7 billion NTD of 1st

term Subordinate Bond in 2006 for sub-scribers (hereinafter “Bondholders”)

2. The bondholders agreed to call the bondwith 58% discount on delivery. The bond-holders will do partial call in cash and pay $2per share for the rest as subscription forcommon share.

Note: Both parties agree to terminate the origi-nal Bondholding Agreement betweenCosmos Bank and General ElectricCapital Corp. on Sep. 10, 2007.

SubscriptionAgreement andits Amendments

SubscriptionAgreement andits Amendments

1. S.A.C. PEI TaiwanHoldings B.V. (here-inafter referred to as

“SAC Holdings”)2. GE Capital Asia

Investment HoldingsB.V. (hereinafterreferred to as “GEHoldings”)

1. China DevelopmentIndustrial Bank

2. Shin Kong LifeInsurance Co., Ltd.

3. Shin Kong Bank4. Grand Cathay

SecuritiesCorporation

5. Bank of Taiwan LifeInsurance Co., Ltd.

6. Allianz Taiwan LifeInsurance

7. SinonLife Corporation8. Mingtai Fire & Marine

Insurance Co., Ltd.9. China Insurance Co.,

Ltd.10. GE Capital Asia

Investment HoldingsB.V.

September 10,2007

December 26,2007

RestrictiveConvenantsTermCounter

Party

XII. Risk Management

1. Risk Management Organization Structure and Policy

(1) Risk Management Organization

Under the Bank's risk management structure, the Board of Directors are ultimately responsible for risk management,

under which is the independent Risk Management Committee (hereinafter “the Committee”). The Committee

coordinates the overall risk management mechanism/plan and reports directly to the Board of Directors. The detailed

rights and obligations of Risk Management Committee are as follow:

34


A. Setting up the Code of Conduct, including the structure of risk management and definition of rights and obliga-

tions, for overall risk management and reporting to the Board of Directors for approval.

B. Assessing and amending all risk management policies and related operation procedures.

C. ln charge of submitting, supervising, and evaluating all risk cap, warning signs, and plan for improvement

D. ln charge of promoting and supervising all law compliance projects.

E. ln charge of supervising and integrating development, operation, and management mechanism of overall risk

materialization and quantification tools.

F. In charge of supervising and integrating the evaluation procedures of the Bank's demand of regulatory capital and

risk-based capital adequacy.

Risk Management Dept. is under the Committee. Risk Management Dept. is responsible for setting up procedures of

identifying, assessing, monitoring and controlling for various risks of credit, operation and market. Besides that,

Legal Dept. & Compliance Dept. is responsible for building risk management of Banking Law and setting up proce-

dures of law compliance. All departments reporting to the President will also execute and implement the various risk

management processes as part of their internal control and operational responsibilities. Where required, they will

also be requested to participate in risk management projects and initiatives. Auditing Department is responsible for

reviewing and examining each unit's actual implementation of all internal systems.

(2) Risk Management Policy

A. With the goal of sustaining operation for the Bank's risk management, we refer to the Best Practices of new Basel

Capital Accord to develop a comprehensive risk assessment structure and capital adequacy management system

in order to ensure that the Bank's capital meets the minimum legal capital and withstand any impact on capital.

B. The Bank's strategies for loan asset portfolio seek to aim at profitability and risk diversification with a special focus

on qualified retailers. By segmenting different levels of risk, the Bank is able to control the overall risk portfolio

within acceptable range. The Bank also proactively transfers risks by means of Small and Medium Business Credit

Guarantee Fund (SMEG) in order to ensure the protection of SME collaterals, mitigate the impact of delinquency

while at the same time achieve risk capital saving. Besides, the Bank drives to improve the underwriting proce-

dure, develop risk management tools, and improve risk management policy to effectively monitor the overall

asset quality and risk.

C. Liquidity, security and profitability are the major objectives of our assets and liabilities management. In addition to

setting investment cap and guideline for financial instruments, we maintain our liquidity reserve at appropriate

level and make adjustment where appropriate in relation to the fluctuation of interest rate in the market and the

structure of the Bank's assets and liabilities. Thus, we can reduce the impact on the cost of capital and profitabili-

ty. We use the sensibility index of market risk factors to monitor the market risk and control profit/loss in order

not to take excessive investment risk due to the market price fluctuation.

D. Carry out the spirit of overall risk management. Besides formulating regulations, code of conduct and also

rewards/discipline policies to govern employee conduct, we have set up standardized operational procedures,

strengthen internal control systems, improve the control of IT system, and provide timely and accurate risk infor-

mation report. Meanwhile, we have an improvement plan, including risk mitigation strategy or purchase proper

insurance, by using risk index and evaluating risk cases periodically.

35

Item

(1) Management StrategyThe loan development strategy of the Bank focuses on cash card, credit card, and SMEloan. We develop the niche market by accurately assessing the risk level of customers, sol-vency, and credit spreads. In addition to accurately selecting target customers, we alsopursue a reasonable allocation between risk and profit.In order to enhance security of loan rights and transfer risk, we will follow the guidelinefrom supervisory institute to develop strategies for credit risk mitigation, including but notlimited to the policy of collateral management and evaluation and operation procedure ofasset securitization.

(2) Management GoalThe main goals of our credit risk management are appropriately evaluating the risk ofdefault, controlling credit quality, and diversifying loan risk in order to control the overallrisk of loan portfolio based on the risk appetite approved by the Board of Directors.

(3) Management PolicyThe purpose of formulating credit risk management policy is to set a standardized proce-dures of credit risk identification, evaluation and monitoring/controlling, reporting, andinformation disclosure, including the credit standard of target customers, underwritingprocedures, loan approval procedure, procedure of reviewing exceptional cases, risk moni-toring and management, credit review, NPL management and document/data manage-ment requirement.

(4) Management ProcedureAll responsible units execute the following management procedure according to creditrisk management policy:(a) Credit Review and Underwriting

We accurately select the target customers and control the credit quality of asset port-folio by reviewing certifications based on credit standard of target customer.

(b) Loan ApprovalThe authorized managers in different ranks can grant credit line to customers whopass underwriting procedure based on the credit limit structure and authorization sys-tem. The Bank manages the credit limit structure and credit authorization system bycomplying with the provisions of the Banking Law and other relevant regulations. Wehave set the maximum credit limit depending on who the borrowers are, the types ofcollateral, institutional client, industry and country. We periodically review theapproved credit line by authorized managers in different ranks based on the profes-sional degree of the managers and the management status of asset quality.

(c) Interim and Follow-up Credit ManagementWe keep track of the financial status of our corporate loan customers through theaccount executive policy and periodic credit review. We provide periodic risk assess-ment report and strategic analysis on loan asset portfolio and set up a warning mech-anism. We keep track and control the change of asset quality through periodicPortfolio Quality Review (PQR) to ensure all the regulations are met. In addition, prob-lematic loans are centralized to be managed and followed up through the IT systemand analysis model with periodic review to improve debt recovery rate and accelerateNPL collection.

1. Credit Risk Strategy, Goal,Policy, and Procedure

Details

2. Risk Evaluation & Control Measures and Exposure Quantification

(1) Credit Risk Management Policy and Capital Requirement

A. Credit Risk Management Policy

Year 2007

36


Item

(d) Risk Report and Information DisclosureThe Risk Management Dept. is in charge of risk assessment and reporting to risk man-ager for risk management index and risk capital requirement.

(e) Development, operation and validation of risk information system.To effectively assess customers' default risk, we develop the Credit Rating Model anduse quantitative statistics as references for credit decisions. We have developed thecredit rating model specifically for the respective types of products and clients, bywhich new clients selection, risk pricing, management of credit line and collectionstrategy for delinquent loan have been implemented. We are also in the progress ofdeveloping a comprehensive, computerized credit assessment system to ensure thequality of the Bank's loans. We have periodic validation mechanism for risk analysismodel. The analyst, who is not the developer, will execute the validation of modeleffectiveness to evaluate if the model is proper and make necessary modificationaccordingly.

Under the Bank's risk management structure, the Board of Directors are ultimately responsi-ble for risk management, under which is the independent Risk Management Committee. TheCommittee coordinates the overall risk management mechanism/plan and reports directly tothe Board of Directors. The Risk Management Dept. is in charge of promoting risk manage-ment policy and execution procedures and provide periodic report to Committee and CRO.The loan assessment dept. provide assessment base on credit standard of the target cus-tomer. In addition, the Bank has formulated the “Guidelines Governing the Delegation ofAuthorities for Credit Granting” to delegate the authority to credit managers in differentranks.The Bank also has Loan Review Committee to deliberate important loan applications or appli-cations of large credit line to control credit quality. The Bank has Credit Review andUnderwriting Dept. to review the loan procedure to ensure the loan policy was compliedeffectively.

The Risk Management Committee provides periodic report to the Board of Directors regard-ing assessment of credit risk index and review of risk management performance, includingthe loan asset portfolio , approval rate, NPL ratio and loss rate, and assessment of risk capitalrequirement in order to continuously monitor the change of credit asset quality.

The Bank's strategies for credit risk hedging or mitigation is evaluated depending on borrow-er and transaction risk. The Bank requests specific clients to provide appropriate collateralwith good liquidity as well as proper amount or transfer guarantee from assurance institute(such as SMEG) to secure our loan rights. The derivatives has not be introduced as a tool forcredit risk mitigation so far.We monitor the effectiveness of hedging. We provide periodic assessment on value fluctua-tion of collateral in addition to confirm the required legal documents when making agree-ments in order to decide if additional collaterals or adjustment on credit line is necessary.

We calculated the regulatory capital requirement of credit risk based on “The CalculationApproach of the Regulatory Equity Capital Requirement and RWA of the Bank -TheStandardized Approach of Credit Risk”.

2. Credit Risk ManagementOrganization & Structure

3. The Scope andCharacteristics of Credit RiskReport and MeasurementSystem

4. Credit Risk Policies ofHedging and Risk MitigationSustainable effectiveStrategy and Procedure ofmonitoring hedging and riskdeduction tools

5. The Method for RegulatoryCapital Requirement

Details

37

B. Risk Exposure after Risk Mitigation under Standardized Approach and Capital Requirement

(2) Risk Management Policy of Asset Securitization, Risk Exposure, and Capital Requirement

A. Risk Management Policy of Asset Securitization

Year 2007

Sovereigns

Non Central- Government Public Sector Entities

Banks ( Multilateral Development Banks included)

Corporates (Securities firms and Insurance companies included)

Claims included in the Retail Portfolios

Residential Property

Equity Securities Investment

Other Assets

Total

Type of Risk Exposure

19,329,919

－

22,299,051

30,569,358

84,305,045

6,799,540

591,250

33,404,687

197,298,850

Risk Exposure afterRisk Mitigation

－

－

410,481

2,115,963

4,778,188

250,480

189,200

2,514,108

10,258,420

Capital Requirement

Unit: NT$ 1,000As at March 31, 2008

Note: The financial data as at March 31, 2008 has not been audited by accountants.

Item Details

1. Management Strategy and Procedure of AssetSecuritization.

2. Management Organization and Structure of AssetSecuritization.

3. The Scope and characteristics of Asset SecuritizationRisk Report and Measurement System.

4. Asset Securitization Hedging or Risk Mitigation Policy.Sustainable effective Strategy and Procedure of moni-toring hedging and risk mitigation tools

5. Method for Regulatory Capital Requirement

Not Applicable (Note: The Bank currently is not handlingcases for an Originating Bank of asset securitization orcredit enhancement institute. We invest in few asset-based securities according to the “Securities InvestmentManagement Regulations”)

Not Applicable

Not Applicable

Not Applicable

We calculated the regulatory capital requirement basedon “The Calculation Approach of the Regulatory EquityCapital Requirement and RWA of the Bank─ TheStandardized Approach for the transaction of AssetSecuritization”

38


B. Asset Securitization Status: None

C. Risk Exposure and Capital Requirement of Asset Securitization

ABS(Credit Card)

CLO(Collateralized

Loan Obligation)

CBO(Collateralized

Bond Obligation)

Total

Purchaseor

Possessionof

Securitiza-tion RiskExposure

Type ofRisk

Exposure

351,277

272,543

267,637

891,457

CapitalRequire-

ment

48,182

76,312

10,705

135,199

RetainedPosition

Traditional Type Portfolio Type

Non-Asset based Commercial Paper

Risk Exposure

Originating BankNon- Originating Bank

－

－

－

－

－

－

－

－

－

－

－

－

－

－

－

－

－

－

－

－

－

－

－

－

UnretainedPosition

RetainedPosition

UnretainedPosition

Assetbased

Commer-cial Paper

CapitalRequire-

mentbefore

Securitiza-tion



39

(3) Operational Risk Management Policy and Capital Requirement

A. Operational Risk Management Policy

Year 2007

Item Details

1. Operational Risk ManagementStrategy and Procedure

2. Operational Risk ManagementOrganization and Structure

3. The Scope and Characteristics ofOperational Risk Report andMeasurement System .

4. Operational Risk Hedging or RiskMitigation Policy. Sustainableeffective Strategy and Procedureof monitoring hedging and riskmitigation tools

5. Method for Regulatory CapitalRequirement

The definition of the Bank's operational risks are internal operational risk, mistakesmade by staff and systematic errors, or risk of external events that incur indemnities tothe Bank, including the legal risk. However, the strategic risk and reputation risk areexcluded.To effectively control operational risks, the Bank has set up a sound internal controlmeasures and standard operational procedures. We have set up review mechanismand IT system for risk management. The self-assessment, internal auditing reviewmechanisms on a regular or irregular basis, and risk analysis would ensure that theeffective execution of review mechanism and system. We have also established thecontingency plan and remote back-up systems based on supervisory regulations tocontrol potential accidental losses and continuous operation. We have done compre-hensive assessment in advance, continuous monitoring, and required amendmentbased on professional services.We also outsource some of our operations and review them based on supervisory andinternal regulations to ensure the legitimacy and the rights and benefits of the Bankand customers .The Bank has trained employees on risk management to improve their skills andensure they understand the regulatory requirements clearly.

The management team in Head Office is responsible for formulating the various busi-ness operation policies and implementing risk management measures. It is responsibleto assist the execution of the Bank's risk policies for incorporation into the variousbusiness activities as well as formulating the risk management policies and internalcontrol measures for the respective businesses. Moreover, it is responsible for report-ing the loss of operational data to the risk management committee. The Legal Dept.and Regulation Compliance Dept. are incharge of legal risk management and promo-tion of regulatory compliance. The Audit Dept. is in charge of independent auditing toensure compliance of business guidelines. The Bank sets up the Operational Risk Management Dept. based on “Pillar II-Supervisory review process” to be responsible for setting up procedures of identify-ing, assessing, monitoring/controlling, reporting and information releasing for opera-tional risks and providing periodic report to the Risk Management Committee andBoard of Directors.

The Bank assigned each management unit to consolidate quarterly loss report basedon the type of operational risk and loss defined in “The New Basel Capital Accord”.The purpose was to understand and improve the operation procedure, IT system, andemployee training. Through (Risk and Control Self-assessment Plan), the Bank willreview the design of operation procedure and set up primary risk index to improvemonitoring/controlling and warning mechanism.

Based on supervisory regulation and internal analysis, the Bank seeks insurance cover-age (For example, comprehensive insurance, accident insurance, and fire insurance) tooffset our operational risks which might cause major loss. The Bank see insurance asrisk mitigation and strengthen the ability for identifying and assessing to ensure theaffordable risk and adjust risk management strategy.

We calculated the regulatory capital requirement based on “The CalculationApproach of the Regulatory Equity Capital Requirement and RWA of the Bank─ TheBasic Index Approach for Operational Risk”

40


B. Operational Risk-Based Capital Requirement

(4) Market Risk Management Policy and Capital Requirement

A. Market Risk Management Policy

Year 2007

Item Details

1. Market Risk ManagementStrategy and Procedure

2. Market Risk ManagementOrganization and Structure

3. The Scope and Characteristics ofMarket Risk Report andMeasurement System

The market risk position includes financial commodities on trading book and non-trad-ing book. The price fluctuation is affected by interest rate, stock price, foreignexchange rate, and commodity price. The Bank's investment is primary on loan. Toincrease the investment performance of remaining capital, we build the market riskposition and manage the liquidity, security, and profitability accordingly in order not totake excessive market risk. The Bank build market risk position based on annual budget and capital allocation ofTreasury Dept. We set up business plan for daily management, including dynamicadjustment of investment portfolio and agent authority. The Risk Management Dept.worked on continuously assessing and monitoring the risk exposure to ensure thecompliance of risk limit and capital adequacy ratio. The Risk Management Dept. sub-mits the risk report to the Risk Management Committee and Board of Directors on aregular basis.

The Bank's Board of Directors is the top commander for overall risk managementorganization, under which is the independent Risk Management Committee. The RiskManagement Committee coordinate the overall risk management mechanism/planand reports directly to the Board of Directors. The Risk Management Committeeworks on the risk management strategies, including risk management policy and riskcap, based on the authorization from the Board of Directors. The Risk ManagementDept. is in charge of risk assessment, monitoring, and reporting based on the riskmanagement policy and risk cap. The Risk Management Dept. is an independentfront-end organization and report to CRO directly.

The market risk assessment includes the risk change in trading book and non-tradingbook. The measurement index includes, nominal position, fair value, sensitivity indexand risk value. The trade book is assessed with the change of daily market price. The market priceassessment is based on GAAP, i.e. the quotation in active market. We only assessedthe value based on model quotation when the activated market quotation could notbe accessed.The trade book position has not been assessed by model assessment. The non-trade book positions primary are the book value of “Hold to maturity”,

“Investment loan in non-active market”, “Investment in claims on commodities withno activated market”, “ Financial asset measured by cost”, and “ Equity invest-ment with equity method”. We provide periodic risk assessment and report based onregulations for such investments. The risk assessment and information disclosure of derivative transactions are based on

“Criteria Governing Derivative Transactions, Cosmos Bank”.

2005

2006

2007

Total

16,295,691

12,179,462

9,252,668

37,727,821

Year Net Profit

-

1,886,391

Capital Requirement


41

Item Details

4. Market Risk Hedging or RiskMitigation Policy. Sustainableeffective Strategy and Procedureof monitoring hedging and riskmitigation tools

5. Method for Regulatory CapitalRequirement

To avoid the risks associated with the Bank's assets and liabilities, we select the hedg-ing tools based on the fair value or cash flow which could write-off the hedging items.The category include but not limit to derivatives.The operation procedure of GAAP, information disclosure and risk management of theBank's hedging transaction on derivatives is based on “Criteria Governing DerivativeTransactions, Cosmos Bank”.The Bank conducted hedging effectiveness test on a regular basis based on the super-visory regulation. We provide periodic report of hedging position and the change offair value or cash flow of hedging items to the Board of Directors.

We calculated the regulatory capital requirement based on “The CalculationApproach of the Regulatory Equity Capital Requirement and RWA of the Bank─ TheStandardized Approach for Market Risk”.

Interest Rate Risk

Equity Securities Risk

Foreign Exchange Risk

Commodity Risk

Total

Type of Risk

19,420

0

87,012

0

106,432

Capital Requirement


B. Market Risk-Based Capital Requirement



Major capital inflow

Major capital outflow

Gap

169,816,704

215,832,721

( 46,016,017)

Amount Outstanding By Time Till Maturity

(5) Liquidity Risk

A. Assets & Liabilities Maturity Analysis

(a) Maturity Analysis — NTD

Total

50,472,332

22,324,637

28,147,695

1~30 days

8,174,974

55,229,744

( 47,054,770)

31 ~90 days

8,738,009

47,328,687

( 38,590,678)

91~180 days

45,388,482

37,910,034

7,478,448

181 days~1 year

57,042,907

53,039,619

4,003,288

More than1 year


42


Unit: US$ 1,000As at March 31, 2008

Assets

Liabilities

Gap

Cumulative Gap

171,239

171,239

0

0

Amount Outstanding By Time Till Maturity

(b) Maturity Analysis—USD

Total

135,947

76,971

58,976

58,976

1~30 days

20,862

25,120

( 4,258)

54,718

31 ~90 days

6,696

15,026

( 8,330)

46,388

91~180 days

0

13,849

( 13,849)

32,539

181 days~1 year

7,734

40,273

( 32,539)

0

More than1 year


B. The method of liquidity management: The Bank manage the liquidity risk based on ”Directions for Auditing

Liquidity of Financial Institutions”. The annual liquidity reserve in 2007 was 9.364%, which is higher than the

required percentage of 7%.

43

XIII. Private Placement of Marketable Securities

1. Common Shares

Item

Type of MarketableSecurities

Date & amountapproved by the GeneralShareholders' Meeting

Basis and reasonablenessof pricing

Selection of the offeree

Rationales for privateplacement

Due Date of Payment

Information of Subscriber

Issue Date: December 28, 2007

Common Share

1. The 1st extraordinary general meeting on October 29, 20072. Common Shares: 5,409,204,339 shares (face value per share: $10 )

1. Issued Price:$ 2 per share2. The price was determined on the basis of the average of the closing prices (published by the

Taiwan Stock Exchange Corporation) of the Bank's share on 1st, 3rd, and 5th business days priorto the pricing date.

1. The offerees qualified Paragraph 1 of Article 43-6 of Securities and Exchange Law2. The Board of Directors will consider the ones who can contribute directly or indirectly to busi-

ness operation and meet the guideline of supervisory regulations as the offerees.

To ensure injection of funds can be completed in a timely manner, private placement is conductedso as to improve the Bank's financial structure and capital adequacy ratio.

December 28, 2007

Intended Party

GE Capital AsiaInvestmentsHoldings B.V.

China DevelopmentIndustrial Bank

Shin Kong Bank

Shin Kong LifeInsurance Co., Ltd.

Qualification

Item 1 of Paragraph 1of Article 43-6 ofSecurities andExchange Law




SubscriptionQuantity

3,300,000,000shares

1,283,575,472shares

517,570,755shares

115,935,849shares

Relationshipwith the Bank

The mainshareholderwith 10%shares of theBank.

None

None

The mainshareholderwith greaterthan 1%shares of theBank.

Participation in theBank operationsafter recapitalization

Assign 2 Directorsand several man-agers from uppermanagement

None

None

None

44



Subscription(or conver-sion) Price

The difference betweensubscription (or conver-sion) price and the refer-ence price

The effect of PrivatePlacement onShareholder's equity (Forexample: cumulative lossincrease)

Investment, utilization,and execution of PrivatePlacement

Benefit of PrivatePlacement

Intended Party

Allianz Taiwan LifeInsurance

Mingtai Fire &Marine InsuranceCO., Ltd.

Sinon LifeCorporation

Bank Taiwan LifeInsurance Co., Ltd.

South ChinaInsurance Co., Ltd.

Qualification







49,686,792shares

4,968,679shares

49,686,792shares

82,811,321shares

4,968,679shares


None

None

None

None

None

Participation in theBank operationsafter recapitalization

None

None

None

None

None

$2 per share

The difference between subscription price $2 and reference price $3.59 is 44%. The recommenda-tion paper has been provided based on regulations.

The cumulative loss increased $43,360,200,170 because of issue at a discount.

Improved the capital adequacy ratio to 20.72%. Met the minimum capital adequacy ratio of 8% asrequired in "Regulations Governing The Capital Adequacy Ratio of Banks".

Improve financial structure and increase capital adequacy ratio.

45

2. Series A Preferred Shares

Item

Type of private placementof marketable securities

Date & amount approvedby the GeneralShareholders' Meeting




Due Date of Payment








Series A Preferred Shares

1. The 1st extraordinary general meeting on October 29, 20072. Type A Preferred Share 1,650,000,000 shares (par value $10 )

1. Issue Price: $2 per share2. The price was determined on the basis of the average of the closing prices (published by the


1. The offerees qualified Paragraph 1 of Article 43-6 of Securities and Exchange Law2. The Board of Directors will consider the ones who can contribute directly or indirectly to business

operation and meet the guideline of supervisory regulations as the offerees.


December 28, 2007

$2 per share

The difference between subscription price $2 and reference price $3.59 is 44%. The recommenda-tion paper has been provided based on regulations.

The cumulative loss increased $13,225,939,849 because of issue at a discount.



Intended Party

S.A.C.PEI TaiwanHoldings B.V.

Qualification



1,650,000,000shares


None

Participation in theBank operations

Assign 7 Directors(including the presi-dent) to participatein the Bank opera-tions

46


3. Subordinate Unsecured Mandatory convertible Bond

Item

Type of private placementof marketable securities

Date & amount approvedby the GeneralShareholders' Meeting




Due Date of Payment








Subordinate Unsecured Mandatory convertible Bond

1. The 1st Extraordinary General Meeting on October 29, 20072. Subordinate Unsecured Mandatory convertible Bond $19.8 billion

1. Issue Price: Issue in full at par.2. The price was determined on the basis of the average of the closing prices (published by the


1. Qualified Paragraph 1 of Article 43-6 of Securities and Exchange Law2. The Board of Directors will consider the ones who can contribute directly or indirectly to business

operation and meet the guideline of supervisory regulations as the offerees.


December 28, 2007

Initial conversion price: $2 per share

The difference between initial conversion price $2 and reference price $3.59 is 44%. The recom-mendation paper has been provided based on regulations.

The additional paid-in capital increased $15,819,198,445 from the qualified equity.



Intended Party

The Hongkong andShanghai BankingCorporation Limited,Taipei Branch is thetrustee banks forinvestment accounts atS.A.C.PEI TaiwanHoldings B.V.

Citi Bank, Taipei Branchis the trustee bank forinvestment accounts atGE Capital AsiaInvestments HoldingsB.V.

Qualification

Item 1 ofParagraph 1 ofArticle 43-6 ofSecurities andExchange Law

Item 1 ofParagraph 1 ofArticle 43-6 ofSecurities andExchange Law


$18,150,000,000

$1,650,000,000


None

The mainshareholderwith 10%shares of theBank

Participation in theBank operations

Assign 7 Directors(including the presi-dent) to participatein the Bank opera-tions

Assign 2 Directorsand several man-agers from uppermanagement

47

XIV. Financial Report from Audit Committee in 2007

Date: April 11, 2008

Inspection report from Audit Committee

Among all the business report, financial reports and provisions for P&L in 2007 approved by the BOD, the financial

report was incorporated by Deloitte & Touche along with inspection report. I certify the conclusion of Audit

Committee, which states that all the above mentioned reports are complete and compliant with Article 14 in Securities

& Exchange Law and Article 219 in Company Act. Please review and approve.

Cosmos Bank, Taiwan

Independent Directors:

Wen-yu Wang,

Peggy Wang,

Ji-huang Lin,

Chang-ji Chang

49

I. 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 December 31, 2007 and 2006, and the

related statements of income, changes in stockholders’ equity and cash flows for the years 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 Rules Governing the Audit of Financial Statements of Financial Institutions

by Certified Public Accountants and auditing standards generally accepted in the Republic of China. Those rules and stan-

dards 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 dis-

closures in the financial statements. An audit also includes assessing the accounting principles used and significant esti-

mates 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 15 to the financial statements, the Bank signed individual contracts with asset management companies

between 2002 and 2006 to sell nonperforming loans. Based on the Law Governing Mergers of Financial Institutions, the

losses on these sales were amortized using the straight-line method over 60 months. The unamortized balance was record-

ed as deferred loss on the sale of nonperforming loans. Had these losses not been deferred, the carrying values of the loss-

es as of December 31, 2007 and 2006 would have decreased by NT$23,012,779 thousand and NT$32,712,701 thousand,

respectively, and retained earnings would have decreased by NT$17,259,584 thousand and NT$24,534,526 thousand,

respectively. In addition, the loss after tax would have decreased by $7,204,376 thousand in 2007 and increased by

NT$10,478,372 thousand in 2006.

In our opinion, except for the effects of the deferred loss on the sale of the nonperforming loans mentioned in the third

paragraph, the financial statements referred to above present fairly in all material respects, the financial position of Cosmos

Bank, Taiwan as of December 31, 2007 and 2006 and the results of its operations and its cash flows for the years then

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

the Business Accounting Law and Guidelines Governing Business Accounting relevant to financial accounting standards,

and accounting principles generally accepted in the Republic of China.

As stated in Note 3 to the financial statements, Cosmos Bank, Taiwan adopted on January 1, 2006 the newly released

Statements of Financial Accounting Standards (“Statements” or SFAS) No. 34 - “Accounting for Financial Instruments”

and No. 36 - “Disclosure and Presentation of Financial Instruments” and related revisions of previously released

Statements. The Bank also adopted, effective January 1, 2006, the newly revised SFAS No. 25 - “Business Combinations -

Accounting Treatment under the Purchase Method,” which provided that goodwill should no longer be amortized and

that goodwill should be assessed for impairment periodically. Cosmos Bank, Taiwan began applying SFAS No. 35 -

“Accounting for Asset Impairment” on January 1, 2005.

March 25, 2008

Notice to Readers

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

flows in accordance with accounting principles and practices generally accepted in the Republic of China and not those of

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

accepted and applied in the Republic of China.

For the convenience of readers, the auditors' report and the accompanying financial statements have been translated into

English from the original Chinese version prepared and used in the Republic of China. If there is any conflict between the

English version and the original Chinese version or any difference in the interpretation of the two versions, the Chinese-lan-

guage auditors' report and financial statements shall prevail.

FINANCIAL REVIEW

50

FINANCIAL REVIEW

2007AmountASSETS

2006Amount

PercentageIncrease

(Decrease)

%

The accompanying notes are an integral part of the financial statements.(With Deloitte & Touche audit report dated March 25, 2008)

II. Financial Statements

CASH AND CASH EQUIVALENTS (Note 4)

DUE FROM THE CENTRAL BANK AND CALL LOANS TO BANKS (Notes5 and 27)

FINANCIAL ASSETS AT FAIR VALUE THROUGH PROFIT OR LOSS (Notes2, 3, 6 and 17)

RECEIVABLES, NET (Notes 2, 7 and 27)ASSET HELD FOR SALE (Notes 2 and 8)DISCOUNTS AND LOANS, NET (Notes 2, 9 and 26)AVAILABLE-FOR-SALE FINANCIAL ASSETS (Notes 2, 3, 10, 17 and 27)EQUITY INVESTMENTS UNDER THE EQUITY METHOD (Notes 2, 3, 11

and 12)OTHER FINANCIAL ASSETS, NET (Notes 2, 12 and 27)

FIXED ASSETS (Notes 2 and 13)Cost

LandBuildingsMachinery and equipmentTransportation and communications equipmentMiscellaneous equipment

Total costAccumulated depreciationAccumulated impairment

Construction in progress and prepayments for equipmentNet fixed assets

INTANGIBLE ASSETS (Notes 2, 3, 13 and 26)GoodwillComputer software

Total intangible assetsOTHER ASSETS

Refundable deposits, net (Notes 26 and 28)Foreclosed collaterals, net (Notes 2 and 14)Deferred loss on the sale of nonperforming loans (Notes 2 and 15)Deferred income tax assets, net (Notes 2 and 24)Others, net(Notes 2, 13 and 26)

Total other assets, netTOTAL

$ 3,009,940

40,553,922

195,503

6,504,729212,941

113,651,805648,440

42,7491,887,056

4,288,9522,774,0611,643,276

268,888381,935

9,357,112(2,108,586)

(436,590)6,811,936

35,2606,847,196

327,05362,892

389,945

2,184,800413,880

23,012,7794,799,212

872,19631,282,867

$ 205,227,093

$ 5,618,763

34,285,795

4,223,017

7,055,771-

130,593,0071,894,082

37,48112,278,073

4,553,5822,848,5991,675,701

281,241401,254

9,760,377(1,792,988)

(176,728)7,790,661

41,5117,832,172

409,77662,243

472,019

2,796,110164,159

32,712,7013,813,426

915,24540,401,641

$244,691,821

(46)

18

(95)

(8)-

(13)(66)

14(85)

(6)(3)(2)(4)(5)(4)18

147(13)(15)(13)

(20)1

(17)

(22)152(30)26(5)

(23)(16)

COSMOS BANK, TAIWANBALANCE SHEETSDECEMBER 31, 2007 AND 2006(In Thousands of New Taiwan Dollars, Except Par Value)

51

2007Amount

2006Amount

PercentageIncrease

(Decrease)

%

DUE TO THE CENTRAL BANK AND OTHER BANKS (Note 16)

FINANCIAL LIABILITIES AT FAIR VALUE THROUGH PROFIT OR LOSS(Notes 2, 3 and 6)SECURITIES SOLD UNDER REPURCHASE AGREEMENTS (Notes 2, 17

and 26)PAYABLES (Notes 18 and 26)DEPOSITS AND REMITTANCES (Notes 19 and 26)BANK DEBENTURES (Notes 2 and 20)ACCRUED PENSION LIABILITIES (Notes 2 and 21)OTHER FINANCIAL LIABILITIES (Notes 2 and 20)OTHER LIABILITIES (Note 2)

Total liabilities

CAPITAL STOCK (NT$10 PAR VALUE; AUTHORIZED: 2007 -20,000,000 THOUSAND SHARES; 2006 - 2,500,000 THOUSANDSHARES) Common stock (issued and outstanding: 2007 -6,786,650 thousand shares; 2006 - 1,967,780 thousand shares)Preferred stock (issued and outstanding: 1,650,000 thousand

shares)Total capital stock

CAPITAL SURPLUSAdditional paid-in capitalTreasury stock transactionsOthers

Total capital surplus

RETAINED EARNINGS (ACCUMULATED DEFICIT)Legal reserveSpecial reserveAccumulated deficit

Total accumulated deficit

OTHERSUnrealized gains (losses) on financial instruments

Total stockholders' equity

TOTAL

$ 32,157,167

15,366

40,9204,502,347

131,126,060515,000

1,053,2693,058,197

460,243172,928,569

67,866,500

16,500,00084,366,500

--

15,831,91015,831,910

--

(67,902,864)(67,902,864)

2,97832,298,524

$ 205,227,093

$19,677,269

31,214

2,160,8395,711,646

191,104,60413,167,163

6,041318,056620,992

232,797,824

19,677,795

-19,677,795

927,5672,245

12,712942,524

777,3891,813,493

(11,286,541)(8,695,659)

(30,663)11,893,997

$244,691,821

63

(51)

(98)(21)(31)(96)

17,335862(26)(26)

245

-329

(100)(100)

124,4431,580

(100)(100)502681

110172

(16)

LIABILITIES AND STOCKHOLDERS' EQUITY

52

FINANCIAL REVIEW

2007Amount

2006Amount

PercentageIncrease

(Decrease)

%


INTEREST REVENUE (Notes 2 and 26)

INTEREST EXPENSE (Note 26)

NET INTEREST

NET REVENUES (LOSSES) OTHER THAN INTERESTService fee income, net (Note 2)Gains on financial assets and liabilities at fair value through profit or

loss (Notes 2, 3 and 6)Realized gains (losses) on the sale of available-for-sale financial

assets (Notes 2 and 22)Income from equity investments under the equity method (Notes 2

and 11)Foreign exchange gains, net (Note 2)Loss on asset impairment (Notes 2, 8, 11, 12, 13, 14, 26 and 28)Realized gains on the sale of debt instruments with no active market

(Note 2)Amortization of loss on the sale of nonperforming loans (Notes 2

and 15)Other noninterest losses (Notes 2 and 12)

Total net losses other than interest

TOTAL NET REVENUES (LOSSES)

PROVISION FOR LOAN LOSSES (Notes 2 and 9)

OPERATING EXPENSES (Notes 23 and 26)PersonnelDepreciation and amortizationOthers

Total operating expenses

$ 12,066,082

(4,214,379)

7,851,703

1,160,967

96,883

(29,330)

5,26879,212

(1,000,227)

(796,170)

(9,605,835)(126,224)

(10,215,456)

(2,363,753)

(7,029,903)

(4,194,999)(647,636)

(3,507,930)

(8,350,565)

$ 14,555,747

(4,362,795)

10,192,952

1,208,227

447,637

461

54,39543,610

(934,317)

-

(6,911,364)(133,045)

(6,224,396)

3,968,556

(11,893,862)

(3,187,754)(690,740)

(3,062,290)

(6,940,784)

(17)

(3)

(23)

(4)

(78)

(6,462)

(90)827

-

39(5)

64

(160)

(41)

32(6)15

20

COSMOS BANK, TAIWANSTATEMENTS OF INCOMEYEARS ENDED DECEMBER 31, 2007 AND 2006(In Thousands of New Taiwan Dollars, Except Earnings (Loss) Per Share)

53

2007Amount

2006Amount

PercentageIncrease

(Decrease)

%

LOSS BEFORE INCOME TAX

INCOME TAX BENEFIT (Notes 2 and 24)

LOSS BEFORE CUMULATIVE EFFECT OF CHANGES IN ACCOUNTINGPRINCIPLES AND EXTRAORDINARY GAIN

EXTRAORDINARY GAIN (NET OF INCOME TAX EXPENSE OF$1,846,575 THOUSAND) (Note 20)

CUMULATIVE EFFECT OF CHANGES IN ACCOUNTING PRINCIPLES (NETOF INCOME TAX EXPENSE OF $5,346 THOUSAND) (Notes 2 and 3)

NET LOSS

LOSS PER SHARE (Note 25)Basic and diluted loss per share

Net loss Extraordinary gainCumulative effect of changes in accounting principles

$(17,744,221)

2,750,280

(14,993,941)

5,539,725

-

$(9,454,216)

$(14,866,090)

3,553,884

(11,312,206)

-

25,665

$(11,286,541)

19

(23)

33

-

(100)

(16)

BeforeIncome

Tax

2006

AfterIncome

Tax

$(8.58)-

0.02$(8.56)

$(11.28)-

0.02$(11.26)

BeforeIncome

Tax

2007

AfterIncome

Tax

$(10.44)3.86

-$(6.58)

$(12.35)5.14

-$(7.21)

54

FINANCIAL REVIEW


BALANCE, JANUARY 1, 2006

Effect of accounting changes

Appropriation of the 2005 earningsLegal reserveSpecial reserveIssuance of common stock for cash -

NT$14.00 per share

Issuance of convertible bank debentures

Unrealized valuation gains on financialinstruments

Net loss in 2006

BALANCE, DECEMBER 31, 2006

Offset of 2006 accumulated deficitLegal reserveSpecial reserveCapital surplus

Capital decrease, July 20, 2007

Issuance of common stock for cash, NT$2per share

Issuance of preferred stock for cash, NT$2per share

Issuance of common stock from convertiblebank debentures, NT$2 per share

Equity component of subordinated unse-cured mandatory convertible bonds

Net loss in 2007Unrealized valuation gains on financial

instruments

BALANCE, DECEMBER 31, 2007

Treasury StockTransactions

$ 2,245

-

--

-

-

-

-

2,245

--

(2,245)

-

-

-

-

--

-

$ -

Paid-inCapitalin

Excess of ParValue

Capital Surplus (Notes 2, 20and 22)

Capital Stock Issued andOutstanding

$ 176,404

-

--

751,163

-

-

-

927,567

--

(927,567)

-

-

-

-

--

-

$ -

PreferredStock (Note

22)

$ -

-

--

-

-

-

-

-

---

-

-

16,500,000

-

--

-

$ 16,500,000

CommonStock

(Notes 2and 22)

$ 17,710,015

-

--

1,967,780

-

-

-

19,677,795

---

(5,903,339)

33,000,000

-

21,092,044

--

-

$ 67,866,500

Shares (inThousands)

1,771,002

-

--

196,778

-

-

-

1,967,780

---

(590,334)

3,300,000

1,650,000

2,109,204

--

-

8,436,650

COSMOS BANK, TAIWANBALANCE SHEETSDECEMBER 31, 2007 AND 2006(In Thousands of New Taiwan Dollars, Except Par Value)

55

TotalStockholders'

Equity

$ 20,397,283

4,365

--

2,718,943

12,712

47,235

(11,286,541)

11,893,997

---

-

6,548,120

3,274,060

4,183,724

15,819,198(9,454,216)

33,641

$ 32,298,524

UnrealizedValuation

Gains or Losseson FinancialInstruments

(Notes 2, 3and 22)

$(82,263)

4,365

--

-

-

47,235

-

(30,663)

---

-

-

-

-

--

33,641

$ 2,978

Total

$ 2,590,882

-

--

-

-

-

(11,286,541)

(8,695,659)

--

929,812

5,903,339

(26,451,880)

(13,225,940)

(16,908,320)

-(9,454,216)

-

$(67,902,864)

UnappropriatedRetainedEarnings

(AccumulatedDeficit)

$ 111,102

-

(33,331)(77,771)

-

-

-

(11,286,541)

(11,286,541)

777,3891,813,493

929,812

5,903,339

(26,451,880)

(13,225,940)

(16,908,320)

-(9,454,216)

-

$(67,902,864)

SpecialReserve

$ 1,735,722

-

-77,771

-

-

-

-

1,813,493

-(1,813,493)

-

-

-

-

-

--

-

$ -

Capital Surplus (Notes 2, 20and 22)

Retained Earnings (Accumulated Deficit) (Notes 2 and 22)

Legal Reserve

$ 744,058

-

33,331-

-

-

-

-

777,389

(777,389)--

-

-

-

-

--

-

$ -

Total

$ 178,649

-

--

751,163

12,712

-

-

942,524

--

(929,812)

-

-

-

-

15,819,198-

-

$ 15,831,910

Others

$ -

-

--

-

12,712

-

-

12,712

---

-

-

-

-

15,819,198-

-

$ 15,831,910

56

FINANCIAL REVIEW

2007 2006

CASH FLOWS FROM OPERATING ACTIVITIESNet lossExtraordinary gainCumulative effect of changes in accounting principlesDeferred income taxDepreciation and amortization expensesProvision for pension costProvision for loan lossesRecovery of loans and receivables written off in prior yearLoss on sale of debt instruments with no active marketGain on disposal of financial assets carried at cost, netLoss (gain) on sale of properties and foreclosed collaterals, netAmortization of loss on the sale of nonperforming loansLoss on asset impairmentIncome from equity investments under the equity methodLoss (gain) on the sale of available for sale financial assets, netGains on financial assets and liabilities at fair value through profit or loss, netAmortization of discount on debt instruments with no active marketAmortization of discount on convertible bank debenturesAcquisition of financial assets carried at costNet changes in operating assets and liabilities

Financial assets at fair value through profit or lossFinancial liabilities at fair value through profit or lossReceivablesOther financial assetsOther assetsPayablesOther liabilitiesReserve for operations and liabilities

Net cash provided by operating activities

CASH FLOWS FROM INVESTING ACTIVITIESIncrease in due from the Central Bank and call loans to banksDecrease in securities purchased under resell agreementsProceeds of the sale of nonperforming loansProceeds of the feedback from the sale of nonperforming loansPayment of cash for the repurchase of nonperforming loansDecrease (increase) in discounts and loansProceeds of the sale of financial assets carried at costAcquisition of available-for-sale financial assetsProceeds of the sale of available-for-sale financial assetsAcquisition of debt instruments with no active marketProceeds of the sale of debt instruments with no active marketAcquisition of propertiesProceeds of the sale of propertiesDecrease in refundable depositsIncrease in intangible assetsAcquisition of foreclosed collateralsProceeds of the sale of foreclosed collateralsIncrease in other assets - other

$ (9,454,216)(5,539,725)

-(2,832,361)

647,6361,047,2287,029,9032,064,452

796,170(30,124)

3,6009,605,8351,000,227

(5,268)29,330

(96,883)(121)

64,908-

4,148,714(40,165)736,110

2,660,755(242,280)

(1,458,291)111,25731,812

10,278,503

(6,268,127)-

27,45766,630

-8,538,919

39,203-

1,249,953-

6,060,148(38,197)

5238,110(10,654)

(417,112)116,688(50,760)

$ (11,286,541)-

(25,665)(3,631,062)

690,7402,468

11,893,862833,413

-(1,706)

(77,992)6,911,364

934,317(54,395)

(461)(447,637)(138,889)

26,424(9,079)

23,296,384(66,984)

3,427,756(2,416,257)

(58,302)1,030,565

26,566(48,677)

30,810,212

(25,807,698)3,050,742

816,272-

(172)(10,136,896)

15,361(400,000)

2,019,236(642,688)

1,727,119(121,135)

37368,556(38,246)(55,573)126,228(40,984)

COSMOS BANK, TAIWANSTATEMENTS OF CASH FLOWSYEARS ENDED DECEMBER 31, 2007 AND 2006(In Thousands of New Taiwan Dollars)

57


2007 2006

Net cash provided by (used in) investing activities

CASH FLOWS FROM FINANCING ACTIVITIESIssuance of common stock for cashIssuance of preferred stock for cashIssuance of subordinated unsecured mandatory convertible bank debentures -

capital surplusIssuance of subordinated unsecured mandatory convertible bank debentures -

other financial liabilitiesIncrease (decrease) in due to the Central Bank and other banksDecrease in securities sold under repurchase agreementsDecrease in deposits and remittancesIncrease in other financial liabilitiesDecrease in other liabilitiesIncrease (decrease) in bank debentures

Net cash used in financing activities

EFFECTS OF CHANGES IN EXCHANGE RATE

INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS

CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR

CASH AND CASH EQUIVALENTS, END OF YEAR

SUPPLEMENTARY OF CASH FLOW INFORMATIONInterest paidIncome tax paid

EFFECT ON CASH FLOWS BY INVESTING ACTIVITIESIssuance of common stock from convertible bank debenturesLess: Extraordinary gainsLess: Transfer into common stockPayment in cashCarrying values of sold nonperforming loansLess: Deferred loss on the sale of nonperforming loansTransfer priceLess: Other receivablesProceeds of the sale of nonperforming loansCarrying values of transferred nonperforming loansShares of Yang-Kuan Asset Management Corporation acquired in exchange for

nonperforming loansDeferred loss on the sale of nonperforming loansPayment of cash for repurchase of nonperforming loans

NONCASH INVESTING ACTIVITIESReducing capital to offset accumulated deficitFixed assets transferred to held-for-sale assetsFixed assets and construction in progress transferred to other assets

$ 9,552,263

6,600,0003,300,000

15,944,124

2,711,43612,479,898(2,119,919)

(59,978,544)58,195

(304,492)(1,130,291)

(22,439,593)

4

(2,608,823)

5,618,763

$ 3,009,940

$ 4,327,661$ 6,768

12,735,000(7,386,300)(4,218,409)

$ 1,130,291

$ 5,903,339$ 326,971$ 25,936

$ (29,119,841)

2,718,943-

-

-(2,114,373)(3,386,733)

(10,917,071)157,834

(336,664)13,153,451

(724,613)

46,428

1,012,186

4,606,577

$ 5,618,763

$ 4,469,637$ 68,543

21,919,877(20,782,560)

1,137,317(321,045)

$ 816,272$ 103,239

(3,445)(99,966)

$ (172)

58

FINANCIAL REVIEW

1. ORGANIZATION AND OPERATIONS

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

As of December 31, 2007, the Bank had a main office, an offshore banking unit (OBU) and 62 domestic branches.

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

under the Banking Law and Trust Law 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 on September 5, 2007 the way it traded its shares because its

financial statements for the six months ended June 30, 2007 revealed that its net asset value was less than half of its

paid-in capital.

As of December 31, 2007 and 2006, the Bank had 3,015 and 3,298 employees, respectively.

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Basis of Presentation

The Bank's financial statements have been prepared in conformity with the Guidelines Governing the Preparation of

Financial Reports by Public Banks, Business Accounting Law, Guidelines Governing Business Accounting, and account-

ing 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, the valuation of the financial instruments at fair value, pension, 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 29 for the maturity analysis

of assets and liabilities.

For the convenience of readers, the accompanying financial statements have been translated into English from the

original Chinese version prepared and used in the ROC. If there is any conflict between the English version and the

original Chinese version or any difference in the interpretation of the two versions, the Chinese-language financial

statements shall prevail.

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

III. Note to Financial StatementsNOTES TO FINANCIAL STATEMENTSYEARS ENDED DECEMBER 31, 2007 AND 2006(In Thousands of New Taiwan Dollars, Unless Stated Otherwise)

59

Basis of Preparation

The accompanying financial statements include the accounts of the Head Office, OBU, and all branches. All interoffice

transactions and balances have been eliminated.

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. Transaction costs directly attributable to the acquisi-

tion of financial assets or financial liabilities at FVTPL are recognized immediately in profit or loss. At each balance

sheet date subsequent to issue of 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 derecogni-

tion of a financial asset or a financial liability, the difference between its carrying amount and the sum of the consider-

ation received and receivable or consideration paid and payable is recognized in profit or loss. All regular way pur-

chases 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 reference prices published by GreTai Securities Market (GTSM); and (c) listed stocks and the 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.

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 agree-

ments is recognized as interest income or interest expense over the life of each agreement.

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.

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

financial assets.

Allowances for Possible Losses and Reserve for Losses on Guarantees

The Bank makes provisions for bad debts and losses on guarantees based on the evaluation of loans, overdue loans,

bills, discounts, receivables, guarantees and acceptances for their specific or general risks.

60

FINANCIAL REVIEW

Debts and guarantees with specific risks are evaluated internally for their collaterals, collectibility and customers' over-

all credits. Under MOF guidelines, the Bank makes 100%, 50%, 10% and 2% provisions for credits deemed uncol-

lectible, highly uncollectible, substandard and special mention, respectively, as minimum provisions for possible losses.

Under MOF guidelines and consideration of the collectible ability and the collateral value, overdue loans and credits

deemed uncollectible would be written off when the write-offs are approved by the Board of Directors.

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 prof-

it, 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: Straight-line method can be used if there will be no sig-

nificant 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 stock-

holders' equity, and, for debt securities, the loss is recognized as earnings.

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 investment is amortized over 10 years. However, under

the revised Statement of Financial Accounting Standards No. 5 - “Long-term Investments in Equity Securities,” since

January 1, 2006, goodwill no longer needs to be amortized.

Goodwill should be tested for impairment annually or more frequently if any situation indicates an impairment loss.

If the percentage held by the Bank declines or the Bank loses significant influence over the investee, the Bank will stop

using the equity method to recognize the investment and will instead recognize the investment book value at cost, as

required under Statement of Financial Accounting Standards No. 34 - “Accounting for Financial Instruments.” If the

Bank significant influence over an investee, it should change the accounting treatment for the investment from the

equity method to the cost method, and any unrealized gain or loss should be regarded as realized and recognized

immediately.

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.

61

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 val-

ues 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 carry-

ing amount that would have been determined had no impairment loss recognized for the investment in prior years.

Fixed Assets

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

ized, while repairs and maintenance are expensed as incurred.

Depreciation is computed using the straight-line method over service lives initially estimated as follows (plus one year

to represent estimated salvage value): buildings, 42 to 60 years; machinery and equipment, 3 to 6 years; transporta-

tion and communications equipment, 2 to 15 years; and miscellaneous equipment, 2 to 10 years. Properties that have

reached their residual values 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 nonoperating income.

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; however, the adjusted carrying amount of the investment may not

exceed the carrying amount that would have been determined had no impairment loss recognized for the investment

in prior years.

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

Intangible Assets

Computer software was amortized over 5 years. Goodwill was amortized over 10 years. However, effective January 1,

2006, under the newly revised Statement of Financial Accounting Standards No. 25 - “Business Combinations -

Accounting Treatment under Purchase Method,” goodwill is no longer amortized and is assessed for impairment at

least annually.

Foreclosed Collaterals

Foreclosed collaterals are recorded at the lower of cost or net realizable value on the balance sheet date. If collaterals

assumed are not disposed of within the statutory period, relevant regulations require that the Bank should either apply

for the extension of the disposal period or increase its provision for possible losses.

62

FINANCIAL REVIEW

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 60 months.

Asset Impairment

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

ates 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 and 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. Then, the adjusted carrying amount of the asset less its residu-

al value should be used to compute the depreciation (amortization) expense by applying a reasonable and systematic

method over the remaining useful life of the asset. The accumulated impairment loss of an asset (except goodwill) rec-

ognized 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.

Bank Debentures

For convertible bonds issued on or after January 1, 2006, 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, represent-

ing the equity conversion option, by deducting the fair value of the liability component from the fair value of the con-

vertible 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 a 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 pro-

portion 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.

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 contri-

bution pension plan, the Bank recognizes its required monthly contributions to employees' individual pension accounts

as current expense during the employees' service periods.

63

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.

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

Income Tax

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

rary differences, unused tax credits, operating loss carryforwards and debit of stockholders' equity adjustments are rec-

ognized as deferred income tax assets, and those of taxable temporary differences and credits to stockholders' equity

adjustments are recognized as deferred income tax liabilities. Valuation allowance is provided for deferred income tax

assets that are not certain to be realized.

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

Income tax on interest in short-term negotiable instruments or special-purpose trust beneficiary certificates, which is

levied separately, and any adjustment of income taxes of prior years are added to or deducted from the current year's

income tax expense.

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.

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 instru-

ments 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 differ-

ences 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.

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 the situation that might result in a pos-

sible loss but the amount of loss cannot be reasonably estimated.

64

FINANCIAL REVIEW

Reclassifications

Certain accounts for the year ended December 31, 2006 had been reclassified to be consistent with the presentation

of the financial statements for the year ended December 31, 2007.

3. ACCOUNTING CHANGES

On January 1, 2007, the Company adopted the newly released Statements of Financial Accounting Standards (SFAS)

No. 37, “Accounting for Intangible Assets” and reassessed the useful lives of and the amortization method for its rec-

ognized intangible assets as of the same date. The adoption did not result in a significant influence on the financial

statement for the year ended December 31, 2007.

Effective January 1, 2006, the Bank adopted the newly released SFAS No. 34 - “Accounting for Financial Instruments”

and No. 36 - “Disclosure and Presentation of Financial Instruments” and related revisions of previously released

Statements.

The Bank reclassified its financial assets and liabilities upon initial adoption of the newly released Statements. The

adjustments made to the carrying amounts of the financial instruments categorized as financial assets or financial liabili-

ties at fair value through profit or loss were included in the cumulative effect of changes in accounting principles. On

the other hand, the adjustments made to the carrying amounts of those categorized as measured at amortized cost or

available-for-sale financial assets were recognized as adjustments to stockholders' equity.

The effect of asset and liability reclassifications based on the accounting changes on January 1, 2006 is summarized as

follows:

Cumulative Effectof Changes inAccounting

Principles(Net ofIncome Tax)

Stockholders'Equity

Adjustments(Netof Income Tax)

Financial assets at fair value through profit or lossAvailable-for-sale financial assetsFinancial liabilities at fair value through profit or loss

$ 43,437-

(17,772)$ 25,665

$ -4,365

-$ 4,365

2007

December 31

2006

Cash on handDue from banksChecks for clearing

$ 2,219,443471,833318,664

$ 3,009,940

$ 2,695,773859,658

2,063,332$ 5,618,763

Effective January 1, 2006, the Bank adopted the newly revised SFAS No. 5 - “Long-term Investments in Equity

Securities” and No. 25 - “Business Combinations - Accounting Treatment under the Purchase Method.” As a result,

goodwill is no longer amortized and is assessed for impairment periodically. These accounting changes also resulted in

a decrease of $50,776 thousand in the net loss from operating departments in 2006 (including a decrease of net loss

$71,953 thousand in goodwill amortized and a increase of net loss $21,177 thousand in surplus of equity investment

under equity method), and a decrease of $0.03 loss per share.

4. CASH AND CASH EQUIVALENTS

65

2007

December 31

2006

Call loans to banks Reserves for deposits - a/c AReserves for deposits - a/c BDepositsDeposit in the Central Bank

$ 25,409,46511,495,9003,348,543

200,014100,000

$ 40,553,922

$ 5,033,3191,964,1804,828,276

250,02022,210,000

$ 34,285,795

2007

December 31

2006

Cross-currency swap contracts Foreign-currency swap contractsForward exchange contracts

$ 885,605223,437

-

$ 2,391,828-

5,208

2007

December 31

2006

Held-for-trading financial assets

Government bondsBill investmentsCross-currency swap contractsForeign-currency swap contractsListed stocks - domestic

Held-for-trading financial liabilities

Cross-currency swap contractsForeign-currency swap contractsForward contract

$ 149,55031,09913,4361,418

-$ 195,503

$ 13,4361,930

-$ 15,366

$ 158,5343,149,897

48,407-

866,179$ 4,223,017

$ 31,172-

42$ 31,214

5. DUE FROM THE CENTRAL BANK AND CALL LOANS TO BANKS

As required by law, the reserves for deposits in the Central Bank (“Central Bank”) are calculated by applying the pre-

scribed 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.

6. FINANCIAL INSTRUMENTS AT FAIR VALUE THROUGH PROFIT OR LOSS (FVTPL)

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 December 31, 2007 and 2006 were as follows:

Net gains on financial assets held for trading for the years ended December 31, 2007 and 2006 were $121,201 thou-

sand and $478,851 thousand, respectively. The net loss on financial liabilities at FVTPL in 2007 and 2006 were $24,318

thousand and $31,214 thousand.

66

FINANCIAL REVIEW

The gains (losses) on financial assets and liabilities at FVTPL for the years ended December 31, 2007 and 2006 were as fol-

lows:

As of December 31, 2007, the Bank intended to dispose of idle land and buildings in the next year. The land and buildings

were previously used for the Bank's auto service division or warehouses, and a search is underway for a buyer. An impair-

ment loss of $114,030 thousand on these assets as of December 31, 2007 was recognized. This sale plan was approved

by the Board of Directors on January 16, 2008.

7. RECEIVABLES, NET

2007 2006

Financial assets designated as at FVTPL

Realized gains (losses)Valuation gains (losses)

Financial liabilities designated as at FVTPL

Valuation losses

$ 157,848(36,647)121,201

( 24,318)$ 96,883

$ (179,910)658,761478,851

(31,214)$ 447,637

2007

December 31

2006

Credit cardsAccounts receivable - no recourseAccrued interestAcceptancesAccrued incomeReceivables from sales of nonperforming loansOthers

Less allowance for possible losses

$ 4,285,2521,151,527

610,93178,69522,474

-415,031

6,563,910(59,181)

$ 6,504,729

$ 5,255,428-

1,133,339123,25675,389

321,045389,120

7,297,577(241,806)

$ 7,055,771

8. ASSETS HELD FOR SALE

December 31, 2007

Land held for sale Buildings held for sale

Accumulated impairment loss

$ 264,63162,340

326,971(114,030)

$ 212,941

67

9. DISCOUNTS AND LOANS, NET

2007December 31

2006

Bills negotiatedDiscountsOverdraftLoans

Short-termMedium-termLong-term

Overdue loans

Less allowance for possible losses

$ 34,791-

693

50,539,44243,185,18022,480,9893,719,243

119,960,338(6,308,533)

$ 113,651,805

$ 19,2615,3852,692

66,938,39344,482,17025,512,0433,078,633

140,038,577(9,445,570)

$ 130,593,007

General Risk

December 31, 2007

Total

Balance, January 1, 2007ProvisionsRecovery of written-off creditsWrite-offsEffects of exchange rate changesBalance, December 31, 2007

$ 587,153178,613

---

$ 765,766

$ 9,445,5706,407,7481,994,534

(11,530,048)(9,271)

$ 6,308,533

Specific Risk

$ 8,858,4176,229,1351,994,534

(11,530,048)(9,271)

$ 5,542,767

General Risk

December 31, 2006

Total

Balance, January 1, 2006ProvisionsRecovery of written-off creditsWrite-offsEffects of exchange rate changesBalance, December 31, 2006

$ 132,739454,414

---

$ 587,153

$ 2,305,67911,707,775

788,228(5,355,178)

(934)$ 9,445,570

Specific Risk

$ 2,172,94011,253,361

788,228(5,355,178)

(934)$ 8,858,417

As of December 31, 2007 and 2006, the balances of loans, for which accrual of interest revenues was discontinued, were

$3,606,957 thousand and $2,996,947 thousand, respectively. The unrecognized interest revenues on these loans were

$431,114 thousand and $262,275 thousand in 2007 and 2006, respectively.

In 2007 and 2006, the Bank wrote off certain loans after carrying out the required legal procedures.

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

68

FINANCIAL REVIEW

The details of the provision for loan losses in 2007 and 2006 were as follows:

2007 2006

Provisions for possible losses on discounts and loansProvision/reversal for possible losses on receivablesOverdue accounts receivable and other assetsReserves for guarantees

$ 6,407,748(185,068)806,549

674$ 7,029,903

$ 11,707,775179,493

6,594-

$ 11,893,862

2007

December 31

2006

Government bondsListed stocks - domestic

$ 648,440-

$ 648,440

$ 1,747,423146,659

$ 1,894,082

10. AVAILABLE-FOR-SALE FINANCIAL ASSETS

Carrying Value% of

Owner-ship

Reliance Securities Investment Trust Corporation,Ltd.(RSIT) $ 37,481 20.00

Carrying Value

2007 2006

% ofOwner-ship

$ 42,749 20.00

December 31

11. EQUITY INVESTMENTS UNDER THE EQUITY METHOD

The equity-method investee's financial statements as of December 31, 2007 and 2006, on which the calculation of

investment carrying value and the related income was based, had been audited. As of December 31, 2007 and 2006,

net income on this investment was $5,268 thousand and $54,395 thousand, respectively.

The difference between the cost of the investment in RSIT and the Bank's equity in RSIT’s net assets was resulted

from goodwill. The impairment loss of this goodwill as of December 31, 2006 was $32,394 thousand.

12. OTHER FINANCIAL ASSETS, NET

2007

December 31

2006

Debt instruments with no active marketFinancial assets carried at costOthers

$ 925,315761,210200,531

$ 1,887,056

$ 7,781,512770,289

3,726,272$ 12,278,073

69

Carrying Value% of

Owner-ship

Unlisted common stock with no quoted market priceCDIB & Partners Investment Holding Ltd.Taiwan Asset Management CorporationEuroc II Venture Capital CorporationFinancial Information Service Co., Ltd.Euroc III Venture Capital Corp.Taiwan International Future Co. Ltd.Taiwan Depository & Clearing Corp.Yang-Kuan Asset Management CorporationLien-An Service Co.Taipei Forex Inc.Cosmos Construction Management

Corporation(CCMC)

Master Card Incorporated Confidential

$ 500,000100,00060,00049,12030,00010,2506,3453,4451,250

800-

9,079$ 770,289

4.950.577.501.235.000.510.085.745.000.40

9.39-

Carrying Value

2007 2006

% ofOwner-ship

$ 500,000100,00060,00049,12030,00010,2506,3453,4451,250

800

--

$ 761,210

4.950.577.501.235.000.510.085.745.000.40

9.39-

December 31

A. Debt instruments with no active market were as follows:

B. Financial assets carried at cost were as follow:

In August 2006, Cosmos Construction Management Corporation (CCMC) issued common shares for cash.

However, because the Bank did not subscribe for these newly issued shares, it ceased to have significant influence

over CCMC. Thus, the accounting method for this investment was changed from the equity method to the cost

method, and there were reversals of (a) investment credits amounting to $60,000 thousand under the equity

method (classified as income from equity investments under the equity method) and (b) an unrealized gain of

$42,537 thousand on prior years' downstream transactions (classified as other noninterest loss).

C. Other financial assets were as follow:

2007

December 31

2006

Special-purpose trust beneficiary certificatesLeveraged spread notesMortgage and asset-backed securities guaranteed by U.S. governmentZero-coupon bonds

$ 893,43531,880

--

$ 925,315

$ 1,010,07131,759

4,975,2381,764,444

$ 7,781,512

2007

December 31

2006

Pledged certificates of depositsExchange rate-linked instrumentsInterest rate-linked instrumentsOthers

$ 199,385--

1,146$ 200,531

$ -3,424,487

300,0001,785

$ 3,726,272

70

FINANCIAL REVIEW

Before October 2007, when testing assets for impairment, the Bank defined each branch or operating unit as a

cash-generating unit (CGU). However, to enhance operations, management, and measurement of productivity

and efficiency of functions, the Bank began to define each product line as a CGU in October 2007. Thus, the

Bank allocated unamortized goodwill to branches or operating units resulting from the acquisition of a credit

cooperative.

The recoverable amount of a CGU is determined at 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 the next five years. In 2007 and 2006, the Bank

estimated the future operating cash flows of the Bank and of stockholders' equity, respectively. As of December

31, 2007 and 2006, the discount rates for future cash flows were 4.07% for the weighted average cost of capital

(WACC) and 8.78% for the cost of equity, respectively.

In 2007, the Bank recognized impairment losses of $259,862 thousand on fixed assets; $44,716 thousand on

other deferred changes; and $82,723 thousand on goodwill.

In 2006, the Bank recognized impairment losses of $167,227 thousand on fixed assets; $22,422 thousand on

other deferred charges; and $7,103 thousand on goodwill.

2007

December 31

2006

Accumulated depreciationBuildingsMachinery and equipmentTransportation and communications equipmentMiscellaneous equipment

Accumulated impairment LandBuildingsMachinery and equipmentTransportation and communications equipmentMiscellaneous equipment

$ 401,0481,162,714

211,440333,384

$ 2,108,586

$ 277,57589,59754,7387,8516,829

$ 436,590

$ 356,796932,072181,475322,645

$ 1,792,988

$ 88,17572,01310,8483,6262,066

$ 176,728

Options embedded in exchange rate-linked and interest rate-linked instruments held by the Bank as of December

31, 2006 were separated from the main contracts and recognized as financial assets at fair value through profit

or loss. As of December 31, 2007, these instruments had matured.

In 2006, the Bank recognized an impairment loss of $25,870 thousand on the temporary debit for the disposal of

foreclosed collaterals listed in other financial assets - others because these collaterals were not easy to dispose of

and the deadline set by the authorities for their disposal had expired.

13. FIXED ASSETS

Accumulated depreciation and impairment consisted of:

71

2007

December 31

2006

Foreclosed collateralsAccumulated impairment

$ 504,117(90,237)

$ 413,880

$ 850,007(685,848)

$ 164,159

14. FORECLOSED COLLATERALS, NET

The Bank tested for impairment of the foreclosed collaterals at their fair value less selling costs and recognized impair-

ment losses of $47,649 thousand and $637,922 thousand in 2007 and 2006, respectively.

15. DEFERRED LOSS ON THE SALE OF NONPERFORMING LOANS

Between 2002 and 2006, the Bank signed contracts to sell the following nonperforming loans:

A. In 2002, the Bank signed contracts with China Long Sheng Assets Management Co. (CLSAMC), Taiwan Assets

Management Co. (TAMC) and Long Xing Sheng Assets Management Co. (LXSAMC) to sell nonperforming loans of

$6,240,239 thousand, $5,909,915 thousand and $2,753,317 thousand, respectively. These transactions, with a

total selling price of $2,078,868 thousand, resulted in a loss of $12,824,603 thousand.

LXSAMC committed that if, within five years from the contract date, there are proceeds of the sale of nonperform-

ing loans, 30% of these proceeds net of the yield amount, related tax and litigation expenses and necessary admin-

istrative expenditures should be returned to the Bank. In 2007, the Bank received these proceeds of $6,519 thou-

sand (treated as a reduction of deferred loss on the sale of nonperforming loans).

B. In 2003, the Bank signed contracts with Taiwan Heng-Fong First Asset Management Co. (THFFAMC) to sell nonper-

forming loans of $3,630,562 thousand for $305,880 thousand. This sale resulted in a loss of $3,324,682 thou-

sand.

C. 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 of the sale of nonper-

forming loans, 45% of these proceeds net of yield amount, related tax and litigation expenses and necessary

administrative expenditures should be returned to the Bank. In 2007, the Bank received these proceeds of $32,276

thousand (treated as a reduction of deferred loss on the sale of nonperforming loans).

D. 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.

E. 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 stocks at face value. These sales resulted in a loss of

$20,882,526 thousand.

72

FINANCIAL REVIEW

CMC committed that if there are proceeds of the sale of nonperforming loans within five years from the contract

date, 50% of these proceeds net of yield amount, related tax and litigation expenses and necessary administrative

expenditures should be returned to the Bank. In 2007, the Bank received these proceeds of $27,835 thousand

(treated as a reduction of deferred loss on the sale of nonperforming loans).

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 60 months. The unamortized amounts of

$23,012,779 thousand and $32,712,701 thousand as of December 31, 2007 and 2006, respectively, were presented

under deferred loss on the sale of nonperforming loans. The amortized amounts of $9,605,835 thousand and

$6,911,364 thousand in 2007 and 2006, respectively, were classified as amortization of loss on the sale of nonper-

forming loans.

16. DUE TO THE CENTRAL BANK AND OTHER BANKS

2007

December 31

2006

Due to banks Due to the Central BankBank overdraftCall loans from banks

$ 32,132,02117,9627,184

-$ 32,157,167

$ 19,015,46813,7476,506

641,548$ 19,677,269

17. SECURITIES SOLD UNDER REPURCHASE AGREEMENTS

As of December 31, 2007 and 2006, securities sold for $40,920 thousand and $2,160,839 thousand, respectively

under repurchase agreements would be purchased for $40,945 thousand and $2,162,632 thousand by January 2008

and April 2007, respectively.

As of December 31, 2007, available-for-sale financial assets, which amounted to $37,500 thousand (face value), had

been sold under repurchase agreements.

As of December 31, 2006, financial assets at fair value through profit or loss and available-for-sale financial assets,

which amounted to $1,049,800 thousand and $1,007,600 thousand (face value), respectively, had been sold under

repurchase agreements.

73

2007

December 31

2006

Accrued interestAccrued technology and advisory expensesAccrued salaries and bonusesAccrued transaction costs of issuing capitalChecks for clearingPayable on funds purchasedCollections payableAcceptancesBusiness tax payable and stamp tax payablePayables on linkage bonds purchasedIncome tax payableOthers

$ 1,080,685981,004548,428346,065318,664301,903207,58778,86647,48525,700

-565,960

$ 4,502,347

$ 1,193,967427,041277,686

-2,063,332

508,332122,303123,35662,193

417,9004,846

510,690$ 5,711,646

18. PAYABLES

2007

December 31

2006

Deposits:SavingsTimeDemandCheckingNegotiable certificates of deposit

Remittances

$ 82,853,77538,650,1128,216,1881,081,947

304,20019,838

$ 131,126,060

$ 147,169,25931,267,07210,372,5332,050,037

228,30017,403

$ 191,104,604

19. DEPOSITS AND REMITTANCES

20. BANK DEBENTURES

Book Value

First subordinated bankdebenture issued in2006 B 2006.12.14-2016.12.14 $ 515,000

DiscountAmount

$ -

Par Value

$ 515,000

RateMaturity DateCosmos Bank

3.20% annually

December 31, 2007

74

FINANCIAL REVIEW

A. 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. From 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 con-

version price upon issuance is NT$2.00 per share, which can be modified anytime using a certain formula. 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 - “Disclosure and Presentation of Financial

Instruments,” 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 of bank debentures $3,826,386 thousand ($3,855,877 thousand less $29,491 thousand in

transaction cost after income tax), classified as other financial liabilities.

Under mandatory terms, the Bonds should be converted into fully paid and non-assessable 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. Nevertheless, no Bonds should be mandatorily converted unless the Series A

Preferred Shares have been converted in full. As of December 31, 2007, no Bonds had been converted into com-

mon shares.

B. On December 15, 2005, the Board of Directors resolved to issue privately a convertible bank debenture, with the

amount not to exceed $7,000,000 thousand, to strengthen the Bank's capital structure for future growth. This pri-

vate issuance was approved by the Financial Supervisory Commission (FSC) on January 6, 2006 (FSC approval docu-

ment: Jin-Kuan-Yin-(2)-Zi-No. 09585000780).

On June 8, 2006, the Bank issued a $6,250,000-thousand convertible bank debenture, with a term of four years

and three months. Interest is payable semiannually at a 3.55% annual rate, and the principal is fully repayable on

maturity. Based on the conversion terms, the conversion price is NT$16.00 per share, which can be modified any-

time using a certain formula. However, on September 5, 2007, this convertible bank debenture had to be settled

ahead of its maturity because the manner of trading of the Bank's stock listed on the Taiwan Stock Exchange had to

be changed (Note 1).

Book Value

First convertible bankdebenture issued in2006

First subordinated bankdebenture issued in2006 A

First subordinated bankdebenture issued in2006 B

2006.06.08-2010.09.08

2006.12.14-2013.12.14

2006.12.14-2016.12.14

$ 6,167,163

4,500,000

2,500,000$ 13,167,163

DiscountAmount

$ (82,837)

-

-$ (82,837)

Par Value

$ 6,250,000

4,500,000

2,500,000$ 13,250,000

RateMaturity DateCosmos Bank

3.55% semiannually

3.00% annually

3.20% annually

December 31, 2006

75

On November 9, 2005, the Board of Directors resolved to issue a publicly 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).

On December 14, 2006, the Bank issued one 7-year ($4,500,000 thousand) and one 10-year ($2,500,000 thou-

sand) subordinated bank debentures, with interest payable annually at a 3% and 3.2%, respectively, and the princi-

pal each 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 nine other banks agreed to reduce 58% of the total credi-

tors' right to the first convertible bank debenture issued in 2006, with a principal of $6,250,000 thousand, and of

the subordinated bank debenture issued in 2006, with a principal of $6,485,000 thousand. Thus, this banking syn-

dicate got back cash of $1,130,291 thousand and converted these bank debentures into 2,109,204 thousand com-

mon shares, amounting to $4,218,409 thousand. The Bank recorded $4,183,724 thousand as part of stockholders'

equity after the deduction of the transaction cost net of an income tax of $34,685 thousand. The Bank had an

extraordinary gain of $5,539,725 thousand on this transaction.

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 deben-

ture was $515,000 thousand (classified as bank debentures). However, these subscribers did not sign the subscrip-

tion agreement.

21. PENSION PLAN

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

sion plan. Bank employees subject to the earlier promulgated Labor Standards Law were allowed to choose between

the pension mechanism under the Labor Standards Act or the mechanism under the Act. For those employees who

chose to be subject to the pension mechanism under this Act, their service years before the enforcement of this 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 at 6% of monthly wages and salaries.

Pension expenses were $1,267,214 thousand and $163,760 thousand in 2007 and 2006, respectively (among which

$162,458 thousand and $91,274 thousand, respectively, belong to pension expenses on a defined contribution plan).

For the Bank's employees who chose to continue to be subject to the Labor Standards Act, benefit payments are

based on length of service and average monthly salary and wage of the six months before 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 man-

aged by the employees' fund committee and deposited in the committee's name in the Central Trust of China

(merged with the Bank of Taiwan in July 2007, with the Bank of Taiwan as the survivor entity). The pension fund for

management is administered by the employees' pension fund administrative committee and deposited under the com-

mittee'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 will carry out the following enhanced pension plan in two stages from January 1,

2008 to December 31, 2008:

76

FINANCIAL REVIEW

2007 2006

Benefit obligationVested benefit obligationNonvested benefit obligationAccumulated benefit obligationEffects on employees' future salary levelProjected benefit obligation

Fair value of plan assetsPension fund contributionUnamortized balance of prior service costUnrecognized net transition obligationUnamortized pension gains (losses)Accrued pension liability

Discount rate Salary increase rateExpected rate of return on plan assets

$ 473,067717,554

1,190,621407,657

1,598,278(764,213)834,065

6,096(5,782)

218,890$ 1,053,269

$ 486,569

2.75%3.00%2.75%

$ 79,440705,997785,437257,756

1,043,193(883,856)159,337

7,927(7,709)

(153,514)$ 6,041

$ 90,239

2.75%2.00%2.75%

B. Reconciliation of funding status and prepaid pension cost

C. Vested benefits

D. Actuarial assumptions

2007 2006

Service costInterest costExpected return on plan assetsAmortizationAmortization of unrealized previous service costNet pension cost

$ 49,64028,621

(24,533)4,270

1,046,758$ 1,104,756

$ 67,38832,257

(28,903)1,744

-$ 72,486

A. Eligibility and limit on eligibility

(a) First stage from January 1, 2008 to June 30, 2008 - The ERP will be open to all employees that sum of the age

and the years of service is at least 50 years.

(b) Second stage from July 1, 2008 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.

B. 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 six months are counted as one

service year, and a service period that is less than six months counted as a half year of service.

The board of directors approved the ERP on December 11, 2007. The Bank then estimated the cost of this plan and

added this cost to the actuarial report.

Information about the defined benefit plan was as follows:

A. Net pension cost

77

2007 2006

Employees' pension fundBeginning balanceContributionFrom Miaoli Credit - Cooperative AssociationInterest incomeBenefits paidEnding balance

Management' s pension fundBeginning balanceContributionInterest incomeBenefit paidEnding balance

$ 514,63537,632

1378,552

(12,108)$ 548,848

$ 300,61619,8968,589

(9,250)$ 319,851

$ 506,66647,807

-6,766

(46,604)$ 514,635

$ 271,37222,2117,033

-$ 300,616

E. Changes in the employees' and management's pension funds and were as follows:

22. STOCKHOLDERS' EQUITY

A. Capital

In a special meeting on October 29, 2007, the Bank's stockholders approved the following items: (1) increase of

the authorized capital to $200,000,000 thousand from $45,000,000 thousand in the Bank's Articles of

Incorporation to meet the need to privately place common shares and series A preferred shares for cash; (2) a pri-

vate placement of 3,300,000 thousand common shares and 1,650,000 thousand series A preferred shares for

cash; and (3) a reduction by 58% of the creditors' rights to the first convertible bank debenture issued in 2006

with an aggregate principal of $6,250,000 thousand and to subordinated bank debentures also issued in 2006

with an aggregate principal of $7,000,000 thousand; both debentures had an aggregate principal of $13,250,000

thousand, and were converted into 2,194,500 thousand common shares, with a par value of NT$10.00 and a sub-

scription price of NT$2.00 per share.

The above private placement was approved by the Financial Supervisory Commission (FSC) on December 10, 2007

(FSC approval document: Jin-Kuan-Yin-[2]-Zi-No. 09600503410).

On December 20, 2007, the board of directors resolved that shares privately placed by way of bank debentures,

mentioned in the above item (3), be converted into common shares. This conversion was in agreement with a

decision reached at a conference with the creditors on December 26, 2007.

As mentioned in Note 20 to the financial statements, Chu Nan Credit-Cooperative Association, Singfor Life

Insurance Co., Ltd., and Taipei Sanjhih Hsiang Farmers' Association, subscribed for subordinated bank debentures

with an aggregate principal of $515,000 thousand (classified as bank debentures) and issued in 2006 but did not

sign the subscription agreement.

The total bank debentures converted represented 2,109,204 thousand common shares amounting to $4,218,409

thousand, with subscription price at NT$2.00 per share (Note 20). The board of directors resolved that the basic

date to issue capital was December 28, 2007. The Bank completed the registration of the related capital increase

with the Ministry of Economic Affairs on February 27, 2008.

78

FINANCIAL REVIEW

The transactions mentioned in above items (1), (2) and (3), resulted in the Bank's paid-in capital as of December

31, 2007 comprising common shares amounting to $67,866,500 thousand and preferred shares amounting to

$16,500,000 thousand, with par value of NT$10.00 per share, for a total cash capital increase of $84,366,500

thousand.

On these preferred shares, the Bank privately placed at a discount Series A Preferred Shares, also named Series A

Perpetual Voting Convertible Preferred Shares, on December 28, 2007. Terms and conditions on this private place-

ment are as follows.

(a) Each holder is entitled to receive appropriations from earnings, the same right enjoyed by common stockhold-

ers.

(b) Each outstanding Series A Preferred Share may be converted into one fully paid and non-assessable common

share. The conversion right (a) may be exercised anytime after the issue date at the holder's option; (b) must

be exercised whenever needed to maintain the Bank's capital adequacy ratio at 8% or higher or the tier 1 capi-

tal ratio at 4% or higher, with the related calculation to include the pro rata conversion of holdings on the date

of the conversion; and (c) must be exercised on the fourth anniversary of the issue date. In addition, the Series

A Preferred Shares must all be converted before any Subordinated Unsecured Mandatory Convertible Bonds are

converted, as stated in the mandatory conversion provision of the Subordinated Unsecured Mandatory

Convertible Bonds. As of December 31, 2007, no preferred shares had been converted into common shares.

(c) Holders of Series A Preferred Shares become entitled to the same number of votes accorded common stock-

holders on the conversion of their preferred shares and may thus exercise their right to vote during stockhold-

ers' meetings on all matters presented to the stockholders of the Bank for their action or consideration, includ-

ing the right to elect or be elected as directors or supervisors.

(d) Except as otherwise stated in the Articles of Incorporation, if the Bank issues any shares or equity securities, a

preferred share has preemptive right, to the extent allowed by law, to acquire equity securities in proportion to

their respective holding of outstanding Bank equity securities on a full-dilution basis.

In a regular meeting on May 30, 2007, the stockholders approved the reduction of capital by 590,334 thousand

shares, amounting to $5,903,339 thousand, 30% of capital. This reduction was approved by the Financial

Supervisory Commission (FSC) on July 13, 2007 (FSC approval document: Jin-Kuan-Yin-(2)-Zi-No. 0960029665).

In addition, on July 19, 2007, the board of directors resolved that the basic date of capital reduction was July 20,

2007. The Bank completed the registration of this capital reduction with the Ministry of Economic Affairs on

September 12, 2007.

On October 25, 2007, the board of directors resolved that the basic date of capital reduction through a share

exchange (i.e., the exchange of old shares for new ones) was December 12, 2007. This exchange began on

December 21, 2007. Earlier, on December6, 2007, the trading of the old shares was temporarily stopped, and the

process of discontinuing the trading of these old shares was from December 8, 2007 to December 20, 2007. The

Financial Supervisory Commission (FSC) approved the Bank's capital reduction on December 3, 2007.

On April 19, 2006, to private offering for cash, the stockholders in regular meeting resolved to raise the registered

capital to $19,677,795 thousand at $10 per share and authorized the Board of Directors to plan and execute the

stock issuance for this capital increase.

The Bank increased capital by $1,967,780 thousand and issued 196,778 thousand shares at $14 per share, a total

issuance amounted to $2,754,892 thousand.

79

GE Capital Asia Investments Holdings B.V. subscribed for all the new shares. On May 18, 2006, the Board of

Directors resolved that June 8, 2006 was the basic date to increase capital. This issuance was approved by the

Ministry of Economic Affairs on August 6, 2006.

B. 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, from issuance of common stock for combinations and treasury

stock transactions) and donation may be transferred to 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.

C. Appropriation of earnings and dividend policy

The Bank is in a period of stable growth. Thus, 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 as follows:

(a) 30% as legal reserve;

(b) Special reserve, if needed;

(c) 80% of the remainder plus prior years' unappropriated earnings, as dividends;

(d) The final remainder: 80% as bonus to stockholders, 15% as bonus to employees and 5% as remuneration to

directors and supervisors.

The cash dividends should be at least 10% of the total dividends to be paid/distributed. However, if the cash divi-

dend 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 bal-

ance of the stockholders' equity account as of year-end.

The Articles also provide that the stockholders may appropriate other special reserves or retain all or part of the

annual net income (less legal reserve). In making this appropriation, the Bank should consider its capital adequacy

ratio, long-term financial position, and stockholders' cash needs.

For a higher capital adequacy ratio, increased working capital for business expansion, and enhancement of the

Bank's overall financial condition and profitability, the Bank's dividends will mainly be in the form of stock.

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 special reserve equal to the loss should be appropriated.

As of March 25, 2008, the date of the accompanying auditors' report, the board of directors had not yet proposed

a plan to offset deficit. Information on the appropriation of earning or deficit offsetting can be accessed through

the Web site of the Taiwan Stock Exchange (http://emops.tse.com.tw).

80

FINANCIAL REVIEW

On April 19, 2006, the stockholders resolved to appropriate a legal reserve of $33,331 thousand amounted to

30% of the 2005 net income. Remaining $77,771 thousand of the 2005 net income has been resolved as a spe-

cial reserve.

Under the Company Law, legal reserve should be appropriated until the reserve equals the Bank's paid-in capital.

This reserve may only be used to offset 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

Law 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.

Under the Integrated Income Tax System, which took effect on January 1, 1998, ROC resident stockholders are

allowed a tax credit for the income tax paid by the Bank on earnings generated annually since 1998. An imputa-

tion credit account (ICA) is maintained by the Bank for such income tax.

D. Employee stock option plans

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 in December 2007 the issuance of an employee stock

option plan. A full-time employee who first reported for work before the plan issue date qualified for the plan. A

full-time employee with over 50% of voting shares directly or indirectly in or outside the country will also qualify

for the plan. Others who also qualify for the plan are the Bank's managers, consultants, and directors.

The options granted are valid for 10 years and 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 stocks listed on the Taiwan Stock Exchange. For any subsequent changes, the exercise price and the

number of options are adjusted accordingly. As of March 25, 2008, the date of the accompanying auditors'

report, the Bank had not registered this plan with the Financial Supervisory Commission.

E. Unrealized gain or loss on financial instruments

The movements in 2007 and 2006 of unrealized gain or loss on available-for-sale financial instruments were as fol-

lows:

2007 2006

Balance, beginning of yearCumulative effect of changes in accounting principlesRecognized in stockholders' equity Transferred to profit or loss

Balance, end of year

$ (30,663)-

4,31129,330

$ 2,978

$ (82,263)4,365

47,696(461)

$ (30,663)

The appropriation of deficit resolved by the Board of Director on April 27, 2007 is as follows,

Unappropriated earnings, beginning of 2006Net loss after tax in 2006Accumulated deficitOffset of deficit

Legal reserveSpecial reserveCapital surplus - paid-in capital in excess of par valueCapital surplus from treasury stock

Accumulated deficit

$ -(11,286,541)(11,286,541)

777,3891,813,493

927,5672,245

$ (7,765,847)

81

2007 2006

Personnel expensesSalariesInsurancePensionOthers

Depreciation expensesAmortization expenses

$ 2,584,435197,504

1,267,214145,846409,848237,788

$ 2,653,851175,477163,760194,666430,009260,731

23. PERSONNEL, DEPRECIATION AND AMORTIZATION EXPENSES

24. INCOME TAX

A. Income tax benefit calculated as follows:

B. A reconciliation of income tax expense - current before tax credits and income tax expense on loss before income

tax is shown below:

2007 2006

Income tax expense - current before tax creditsNet changes in deferred income tax:

Allowance for possible losses on loans and receivablesUnrealized foreign exchange gain (loss)Unrealized valuation gain (loss) on financial instrumentsPension costsLoss on the transfer of foreclosed collaterals to fixed assetsProvision for lossImpairment loss on foreclosed collateralsTransaction costs of issuing capitalTax creditsAmortization of goodwillImpairment lossLoss carryforwards

Adjustment of prior year's tax

$ 6,768

1,150,6496,003

(6,953)(279,422)

354(9,934)

-79,186(3,196)5,080

(36,238)(3,658,747)

(3,830)$ (2,750,280)

$ 68,542

(2,376,748)(13,209)

1,476(617)353

7,6078,997

-(3,315)25,557

(54,686)(1,226,435)

8,594$ (3,553,884)

2007 2006

Income tax expense on loss before income tax at statutory rate (25%)Tax effect on adjusting items:

Tax-exempt incomePermanent differences

Temporary differencesIncome tax expense - current before tax credits

$ (4,436,055)

(6,042)71,844

4,377,021$ 6,768

$ (3,716,523)

(21,343)163,431

3,642,977$ 68,542

82

FINANCIAL REVIEW

D. Imputed tax credits are summarized as follows:

2007

December 31

2006

Balance of stockholders' imputed tax credits $ 997,187 $ 762,909

The Bank had no earnings to be distributed in 2007 and the actual creditable tax ratio was 33.33% for 2006 earn-

ings.

E. The accumulated deficit and unappropriated earnings as of December 31, 2007 and 2006, respectively, had no

earnings generated before January 1, 1998.

F. Income tax returns through 2004 had 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.

G. The income tax returns through previous year of Cosmos Bills Finance Corporation, which merged with the Bank in

2002, had been examined by the tax authorities. The Taipei National Tax Administration determined that only 60%

of some taxes withheld by the Bank would be refunded to the Bank. The Bank accepted this assessment.

(However, if the authorities later allow a higher rebate for mergers, the Bank will retroactively claim rebates at the

higher rebate rate.)

C. Net deferred income tax assets were as follows:

2007

December 31

2006

Deferred income tax assets (liabilities)Allowance for possible losses on loans and receivablesLoss carryforwardsUnrealized foreign exchange gainImpairment lossLoss on the transfer of foreclosed collaterals to fixed assetsProvision for lossTax creditsPension costsConvertible bank debentureAmortization of goodwillUnrealized loss (gain) on financial instruments

Less: Valuation allowanceNet deferred income tax assets

As of the end of 2007, loss carryforwards were as follows:

$ 1,388,4344,046,607

(6,652)93,75014,12810,2636,511

280,932-

(26,891)130

5,807,212(1,008,000)

$ 4,799,212

$ 2,539,0831,226,435

(649)57,51214,482

3293,3151,510

43(21,811)(6,823)

3,813,426-

$ 3,813,426

Remaining TaxCredit

ExpiryYear

20062007

$ 1,191,023$ 2,855,584

20112012

Total Tax CreditsGranted

$ 1,191,023$ 2,855,584

Accrued Year

83

25. LOSS PER SHARE

AfterIncome Tax

2007

Basic and diluted loss per shareNet lossExtraordinary gain

2006

Basic and diluted loss per shareNet lossCumulative effect of changes

in accounting principles

$ (10.44)3.86

$ (6.58)

$ (8.58)

0.02$ (8.56)

BeforeIncome Tax

$ (12.35)5.14

$ (7.21)

$ (11.28)

0.02$ (11.26)

Shares(Denominator)(Thousands)

1,436,725

1,317,819

After Income Tax

$ (14,993,941)5,539,725

$ (9,454,216)

$ (11,312,206)

25,665$ (11,286,541)

BeforeIncome Tax

$ (17,744,221)7,386,300

$ (10,357,921)

$ (14,866,090)

31,011$ (14,835,079)

Cosmos Bank

Amount (Numerator) Loss Per Share (NT Dollars)

A capital reduction (Note 22) in 2006 resulted in an increase in basic and diluted loss per share from NT$6.00 to

NT$8.56.

There was net loss in 2007 and 2006; thus, the basic loss per share equaled the diluted loss per share in 2007 and

2006.

26. RELATED-PARTY TRANSACTIONS

The Bank's related parties and significant related-party transactions, in addition to those listed in Table 4 and described

in other footnotes, were as follows:

A. Related parties

Related Party

S.A.C. PEI Taiwan Holdings B.V.S.A.C. PEI Asia Investments Holdings II

S.ar.al. (“Lux.Co. II”)S.A.C. PEI Asia Investments Holdings I

S.ar.al. (“Lux.Co. I”)S.A.C. Private Equity Investors, L.P. (“SAC

PEI”)S.A.C. Private Equity GP, L.P. (“SAC PEI

GP”)Lehman Brothers Commercial Corporation

Asia LimitedGE Capital Asia Investments Holdings

B.V(“GE Asia Holdings”)General Electric Capital Corporation (GECC)GE Capital Taiwan Holdings Inc. (“GE

Holdings”)

Relationship with the Bank

Main stockholder since December 28, 2007Parent company of S.A.C. PEI Taiwan Holdings B.V.

Parent company of Lux. Co. II

Parent company of Lux. Co. I

Partnership with SAC PEI

Equity-method investor of Lux. Co. II

Main stockholder since June 8, 2006

Affiliate of GE Asia HoldingsAffiliate of GE Asia Holdings

(continued)

84

FINANCIAL REVIEW

Related Party

General Electric International Inc. (GEII)GE Processing Services Pty Limited (“GE

Australia”)GE Capital ThailandGE Money Taiwan Ltd.Reliance Securit ies Investment Trust

Corporation, Ltd.(RSIT)Cosmos Construction Management

Corporation(CCMC) (Note)

Prince Motors Corporation (PMC) (Note)Chung Hsien Investment Co., Ltd. (Note)Taizi Investment Co., Ltd. (Note)

Yung Mei Automobile Co., Ltd. (Note)

Formosan Chemical Ind. Corp. (Note)

Shin Kong Chao Fend Co., Ltd. (Note)

Formosan Glass Corporation (Note)

Shin Kong Life Insurance Co., Ltd. (SLIC)(Note)

Shin Kong Financial Holding Co., Ltd. (“SKHoldings”)(Note)

Zheng, Shun Shun (Note)

Lin, Ching JongOthers

Relationship with the Bank

Affiliate of GE Asia Holdings

Affiliate of GE Asia HoldingsAffiliate of GE Asia HoldingsAffiliate of GE Asia Holdings

Equity-method investeeSame chairman as the Bank's until March 14, 2007; changed from

an equity-method investee to a cost-method investee onSeptember 1, 2006

Corporate director until September 6, 2007Corporate director until May 30, 2007Corporate director until May 30, 2007; corporate supervisor from

May 31, 2007 to September 6, 2007The chairman was a second-degree relative of the Bank's chairman;

however, the Bank had a new chairman on September 6, 2007The chairman was a second-degree relative of the Bank's chairman

until September 6, 2007The chairman was a second-degree relative of the Bank's chairman;

however, the Bank had a new chairman on September 6, 2007The chairman was a second-degree relative of the Bank's chairman;



however, the Bank had a new chairman on September 6, 2007A second-degree relative of the Bank's chairman; however, the Bank

had a new chairman on September 6, 2007ManagerThe Bank's chairman, president, directors, supervisors, managers

and their relatives with a kinship of up to the second degree ofconsanguinity with the chairman and president

Note:When some entities ceased to be related parties as of December 31, 2007, the transactions with these entities in 2007 that had noimpact on real accounts were not included in the balance sheet as of December 31, 2007.

85

B. Space Significant transactions between the Bank and related parties

(a)

a) Deposits

b) Loans

c) Guarantees andacceptances

d) Refundabledeposits - rental

PMCOthers

%

0.09

0.04

-

---

Amount

$ 114,000

$ 53,826

$ -

$ --

$ -

$ (44,263)

$ 128,220

$ 4,935

$ (39,356)(31,013)

$ (70,369)

Amount

$ 3,102,237

$ 5,374,986

$ 344,000

$ 1,617,920135,156

$ 1,753,076

Amount

Revenue(Expense)Interest

Rate(%)

$ (46,147)

$ 93,731

$ 954

$ (28,654)(21,984)

$ (50,638)

0-7.205

2.25-18.25

0.50-0.75

0.00-6.79

2.00-18.25

0.50-0.75

--

December31, 2007 December31, 2006

2007

Amount

Revenue(Expense)Interest

Rate(%)

2006

%

2

4

19

585

63

The Bank signed a lease contracts with Prince Motors Corporation (PMC) for renting office building. Either the

rentals are paid monthly, semiannually, annually or no rentals are paid, but the Bank gave deposits to PMC. The

expiry of this contract is on August 31, 2015. As of December 31, 2007, the Bank had paid refundable deposits of

$1,617,920 thousand (classified as refundable deposits) to PMC. To cover the Bank's deposit to PMC, PMC provid-

ed real estate as a guarantee and allowed the Bank to be the second in line to have the right of recourse on the

property.

In addition, the Bank also signed several lease contracts with related parties for renting office buildings, and either

the rentals are paid monthly, semiannually, annually or no rentals are paid but gave deposits to the lessors. These

contracts will expire in succession on August 2010.

(b) Purchase or sell of notes and bonds

Interest RateRange

InterestExpense

2007

SLIC

2006

SLICSK Holdings

1.645%-1.72%

1.41%-1.66%1.43%-1.63%

$ 3,283

32,1735,826

RP Notes andBonds Sold toRelated PartiesRelated Parties

$ 15,100,000

122,807,82830,883,085

(c) The Bank paid SLIC insurance expenses of $3,538 thousand and $4,330 thousand in 2007 and 2006.

(d) The Bank paid CCMC property appraisal fees of $3,563 thousand and $20,299 thousand in 2007 and 2006.

86

FINANCIAL REVIEW

(e) On behalf of Chung Hsien Investment Co., Ltd. the Bank sold short-term repurchase agreements collateralized by

bonds for $282,000 thousand and $706,000 thousand in 2007 and 2006.

(f) 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 agree-

ments (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 tech-

nology) services as part of intensive training and technology transfer services. The SSAs also provide for the inte-

gration of global Best Practices with Bank operations to redesign or enhance systems on business development and

management operations, such as strategy planning and analysis, product design, marketing, client relationship

management, employee-performance management, human resource, process upgrade, risk management, overdue

loan processing, 6σ enhancement, etc. It also supports information processing for all systems, system develop-

ment and maintenance, daily operation,and strategy support.

Unless constrained by uncontrollable environment factors, GE Holdings and the Bank promise to fully cooperate

with each other 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 providing cost

US$84,000 thousand as total service fee, payable at US$11,000 thousand in the six months ending December 31,

2006; US$22,000 thousand annually from 2007 to 2009; and US$7,000 thousand for the six months ending June

30, 2010; (2) consulting expenses of up to US$3,339 thousand for assigning directors, chief manager, CEO, CFO,

CRO and managers of the Claims Department, etc. and costs of supporting personnel based on the assignment

period. The technology provision and consulting service fees of $913,834 thousand in 2007 and $456,395 thou-

sand in 2006 were included in labor expense and other agency and administrative expense under operating

expense. As of December 31, 2007 and 2006, there were unpaid fees (classified as payables - accrued technology

and advisory expenses) of $821,019 thousand and $427,041 thousand, respectively.

(g) GE Australia provided the Bank with Vision Plus software to integrate with the Bank's consumer financing business.

The fees and charges payable to GE Australia for the data processing services are based on the number of cus-

tomer accounts processed with the help of GE Australia. As of December 31, 2007, the Bank had prepaid

US$1,000 thousand for GE Australia's services, classified as other assets. In addition, GEII and GE money made a

payment of $3,541 thousand and $2,119 thousand for the Bank (classified as payables - others).

(h) The Bank got from GE Capital Thailand the right to use NAOS for US$400 thousand based on a support services

agreement. In 2007, the Bank amortized the right $3,023 thousand, classified as depreciation and amortization.

( i ) To improve its car loan operations, the Bank signed a car loan acquisition contract with GE Capital 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 on

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 evaluated using the future cash flow model. At the end of 2007, based

on an estimate of future cash flows, the recognized impairment loss on this car loan was $14,390 thousand.

( j ) On December 28, 2007, the Board of Directors had approved the consulting contract with two directors. This con-

tract has not been signed till March 25, 2008.

Under the Banking Law, except for consumer loans and government loans, credit extended by the Bank to any

related party should be 100% secured, and the terms of credits extended to related parties should be similar to

those for third parties.

87

For the uniqueness of the technology service contract, Vision Plus software, and NAOS, the Bank cannot acquire

comparable price from the unrelated party. However, other related party transactions, which is comparable to

those of the unrelated party, did not appear significantly extraordinary.

27. PLEDGED ASSETS

A. As of December 31, 2006, negotiable certificates of deposit (NCDs) recorded as due from the Central Bank and call

loans to banks, amounting to $2,600,000 thousand had been provided as collateral for day-term overdraft to com-

ply with the requirement for real-time gross settlement under the Central Bank's clearing system.

B. Government bonds with carrying value of $140,500 thousand (recorded as available-for-sale financial assets, net,

amounting to $138,700 thousand, and other receivables amounting to $1,800 thousand) as of December 31, 2007

and government bonds with carrying value of $239,300 thousand (recorded as available-for-sale financial assets,

net, amounting to $231,200 thousand, and other receivables amounting to $8,100 thousand) as of December 31,

2006 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.

C. As of December 31, 2007 and 2006, the Bank had provided the National Credit Card Center (NCCC) with govern-

ment bonds (recorded as available-for-sale financial assets, net) with carrying values of $220,000 thousand and

$210,000 thousand, respectively, as the reserve required by the NCCC for payment of the Bank's credit card obliga-

tions.

D. As of December 31, 2007, negotiable certificates of deposit (NCDS) of $199,385 thousand (recorded as other

financial assets, net) had been provided as collateral for spot exchange transactions.

28. COMMITMENTS AND CONTINGENCIES

In addition to those disclosures in Notes 26 and 29, the commitments as of December 31, 2007 were as follows:

A. Leases

The Bank leases from unrelated parties the premises occupied by its branches under operating lease agreements

expiring on various dates until October 31, 2013. Refundable deposits on these leases amounted to $788,726

thousand as of December 31, 2007. The leases also require the payment of rentals monthly, semiannually or

annually, or a refundable rental deposit, which generates no interest.

An evaluation of the rental deposit showed an impairment loss of $373,200 thousand as of December 31, 2007.

Future minimum annual rentals on these leases as of December 31, 2007 were as follows:

AmountYear

20082009201020112012

$ 333,347247,437172,91386,94224,774

88

FINANCIAL REVIEW

The Bank claimed that a certain client defrauded the Bank and thus sued the client. But the court pronounced the

client as not guilty. Stating that his reputation was damaged because of the Bank's lawsuit, the client filed a civil

lawsuit against the bank. This case is still pending before the court.

29. FINANCIAL INSTRUMENTS

A. Fair value of financial instruments

Carrying AmountEstimatedFair Value

AssetsFinancial assets at fair value through profit or

lossAvailable-for-sale financial assets Other financial assets Other financial assets-with fair values

approximating carrying amounts

LiabilitiesFinancial liabilities at fair value through profit

or loss Bank debenturesOther financial liabilities-with fair values

approximating carrying amounts

$ 4,223,0171,894,082

11,507,784

180,339,713

31,21413,167,163

218,905,375

2006

December 31

$ 4,223,0171,894,082

11,507,784

180,339,713

31,21413,167,163

218,905,375

CarryingAmount

EstimatedFair Value

$ 195,503648,440

1,125,846

166,240,093

15,366515,000

170,837,206

2007

$ 195,503648,440

1,125,846

166,240,093

15,366216,300

170,837,206

B. Significant outstanding purchase contracts

Prepayment Payable

Banking information and operating systems Premise improvements, water and electricity, and air

conditioning

$ 80,123

14,423

$ 59,256

28,327

Contract AmountItem

$ 139,379

42,750

C. The Bank's ex-chairman, Sheng-Fa Xu, and ex-vice chairman, Xian-Rong Xu, were prosecuted for involving illegal

events and this legal cause was in the process of judgment. The Bank is now being managed by a new manage-

ment team, which uses high standards to administer the Bank, and would not be influenced by this legal cause.

Present ValueRental

$ 25,192 $ 21,205

The undiscounted amount and the present value of the minimum rentals from 2013 to 2017, computed at the

one-year time deposit interest rate of 2.62% of the Postal Remittances and Savings Bank, were as follows (thou-

sand):

89

Effective January 1, 2006, the Bank adopted the Statement of Financial Accounting Standards (SFAS) No. 34 -

“Accounting for Financial Instruments."The amount of the cumulative effect of accounting changes and the

adjustments of stockholders' equity resulting from the adoption of SFAS No. 34 are mentioned in Note 3.

B. Methods and assumptions applied to estimate the fair value of financial instruments are summarized as follows:

(a) 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.

(b) The carrying amounts of short-term financial instruments approximate their fair values because of the short

maturities of these instruments. Other short-term financial assets are cash and cash equivalents, due from the

Central Bank and call loans to banks, securities purchased under resell agreements, receivables (except tax

refund receivable) and refundable deposits. Other short-term financial liabilities are due to the Central Bank

and other banks, payables (except tax payable), remittances, securities sold under repurchase agreements and

guarantee deposits received.

(c) 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.

(d) Discounts and loans, deposits 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.

(e) If equity investments under the equity method and financial assets carried at cost both consist of unlisted

stocks, these investments have no quoted market prices in an active market and their fair value cannot be reli-

ably measured. Thus, the Bank does not disclose their fair value.

(f) If there are trade prices or prices quoted by major market players, the latest trade prices and quoted prices are

used as the basis for valuating the fair value of debt instruments with no active market and classified as other

financial assets.

(g) 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.

90

FINANCIAL REVIEW

From above, the gain and loss on the valuation of financial instruments at estimated market prices in 2007 and

2006 were $3,887 thousand and $7,967 thousand.

The net service fee of $1,160,967 thousand consisted of revenues of $1,391,540 thousand and charges of

$230,573 thousand in 2007. The net service fee of $1,208,227 thousand consisted of revenues of $1,453,282

thousand and charges of $245,055 thousand in 2006.

D. In 2007 and 2006, the interest revenues excluded on financial assets and liabilities at fair value through profit or

loss were $11,955,734 thousand and $14,076,633 thousand, respectively. The interest expenses for financial

assets and liabilities at fair value through profit or loss were $4,104,163 thousand and $4,016,697 thousand,

respectively. In 2007 and 2006, the adjustments of stockholders' equity credited directly from the available-for-sale

financial assets amounted to $4,311 thousand and $47,696 thousand, respectively.

E. Financial risk information

(a) Market risk

The Bank is engaged in investment in interest rate instruments including time certificates, bonds, notes, and

similar financial instruments. Since the fair value of these financial instruments is sensitive to the market interest

rates, the following is the sensitive analysis as the variation of 0.01% increase in market interest rates.

QuotedMarket Prices

EstimatedMarket Prices

Financial assets

Financial assets at fair value through profit orloss

Available-for-sale financial assetsOther financial assets

Financial liabilities

Financial liabilities at fair value through profitor loss

$4,174,6101,894,082

-

-

2006

December 31

$48,407-

11,507,784

31,214

QuotedMarket Prices

EstimatedMarket Prices

$180,649648,440

-

-

2007

$14,854-

1,125,846

15,366

C. As of December 31, 2007 and 2006, fair values of financial assets and liabilities determined at quoted market

prices or market prices estimated using a valuation method were as follows:

91

The Effect of the Fair ValuePer Variation of 0.01%

New Taiwan DollarsU.S. Dollars

$ 1170.011

Average Duration(Year)

0.67690.1397

PrincipalAmount

$ 1,699,0351,030

Currency

December 31, 2007

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.

VaR of securities held by the Bank is shown in the table listed 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 the lowest amounts of the interest

rate and price risks that were calculated at the daily VaR in the year ended December 31, 2007 were as follows

(thousand):

The Bank engages in trade financing and foreign currency exchange; thus, it is exposed to exchange risks on dif-

ferences between spot and forward rates. The Bank's policy is to have a square position on its forward con-

tracts. 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 on foreign security investments or other international financing business are hedged by

cross-currency swap contracts, and the gains and losses on these contracts are measured at rates quoted by

Bloomberg. These gains and losses are assessed and reported to Bank management regularly.

(b) 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. Collateral, mostly in the form of cash, inventories, mar-

ketable securities and other assets, may be required depending on the evaluation result. As of December 31,

2007 and 2006, of about 44% of total loans granted, about 11% and 44%, respectively, had been secured.

However, there are no collaterals for issuing credit cards. Thus, the Bank evaluates the creditworthiness of credit

cardholders 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 collaterals and decrease its credit risk.

In addition, the Bank discloses its maximum credit exposure without taking collateral fair value into considera-

tion.

Lowest

Fair value interest raterisk

Price risk$ 4,983

24,524

Highest

$ 12,41783,017

Average

$ 6,66257,603

Type of Market Risk

2006

Lowest

$ 1,767-

Highest

$ 10,39028,522

Average

$ 5,60415,355

2007

92

FINANCIAL REVIEW

(c) Liquidity risk

As of December 31, 2007 and 2006, the liquidity reserve ratios were 9.69% and 16.66%, 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, however, the maturities did not fully match the interest rates,

resulting in gaps that may potentially give rise to gain or loss.

2007

December 31

2006Industries

Wholesale, retail and cateringManufacturingFinance, insurance and real estate

$ 15,212,72314,261,1279,383,074

$ 38,856,924

$ 18,943,67716,140,59012,421,665

$ 47,505,932

2007

December 31

2006Group

Private enterpriseNatural personNonprofit enterprise

$ 50,563,70069,375,667

15,180$ 119,954,547

$ 60,582,66479,396,434

25,969$ 140,005,067

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:

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 December 31, 2007 and 2006 were

as follows:

2007

December 31

2006

Credit card commitmentsGuarantees and letters of credit issuedIrrevocable loan commitments

$ 63,247,7761,024,617

673,746

$ 73,279,4412,376,341

453,843

93

The Bank applied appropriate ways to group assets and liabilities. The maturity analysis of assets and liabilities

was as follows:

Total

Assets

Cash and cash equiva-lents

Due from the CentralBank and call loans tobanks

Financial assets at fairvalue through profit orloss

Available-for-sale finan-cial assets

Debt instruments withno active market

ReceivablesDiscounts and loansEquity investments under

the equity methodFinancial assets carried at

costOther financial assets -

othersForeclosed collateralsRefundable deposits

Liabilities

Due to the Central Bankand other banks

Financial liabilities at fairvalue through profit orloss

PayablesDeposits and remittancesSecurities sold under

repurchase agree-ments

Bank debenturesOther financial liabilities

$ 3,009,940

40,553,922

195,503

648,440

925,3156,563,910

119,960,338

42,749

761,210

303,163504,117

2,558,000$176,026,607

$ 32,157,167

15,3664,502,347

131,126,060

40,920515,000

3,058,197$171,415,057

Due afterSeven Years

$ -

-

-

-

-4,356

8,217,193

42,749

761,210

100,877-

1,616,700$ 10,743,085

$ -

---

-515,000

-$ 515,000

Due after OneYear Up toSeven Years

$ -

-

-

97,590

653,9951,081,674

38,666,680

-

-

50385,442

387,117$ 40,973,001

$ -

-155,484

22,422,526

--

1,794,114$ 24,372,124

Due after ThreeMonths Up to

One Year

$ -

-

-

99,441

271,3203,016,242

56,103,309

-

-

200,383418,675507,783

$ 60,617,153

$ 28,118,924

-630,360

70,101,316

--

1,231,476$100,082,076

Due after OneMonth Up toThree Months

$ -

-

-

-

-747,727

7,208,842

-

-

575-

400$ 7,957,544

$ 3,123,510

-990,884

23,391,725

--

492$ 27,506,611

Due inOne Month

$ 3,009,940

40,553,922

195,503

451,409

-1,713,9119,764,314

-

-

825-

46,000$ 55,735,824

$ 914,733

15,3662,725,619

15,210,493

40,920-

32,115$ 18,939,246

December 31, 2007

94

FINANCIAL REVIEW

Total

Assets

Cash and cash equiva-lents

Due from the CentralBank and call loans tobanks

Financial assets at fairvalue through profit orloss

Available-for-sale finan-cial assets

Debt instruments withno active market

ReceivablesDiscounts and loansEquity investments under

the equity methodFinancial assets carried at

costOther financial assets -

othersForeclosed collateralsRefundable deposits

Liabilities

Due to the Central Bankand other banks

Financial liabilities at fairvalue through profit orloss

PayablesDeposits and remittancesSecurities sold under

repurchase agree-ments

Bank debenturesOther financial liabilities

$ 5,618,763

34,285,795

4,223,017

1,894,082

7,781,5127,297,577

140,038,577

37,481

770,289

3,773,749850,007

2,796,110$209,366,959

$ 19,677,269

31,2145,711,646

191,104,604

2,160,83913,167,163

194,978$232,047,713

Due afterSeven Years

$ -

-

15,908

146,659

-4,281

7,211,878

37,481

770,289

--

1,616,700$ 9,803,196

$ -

--

7,546,056

-2,500,000

-$ 10,046,056

Due after OneYear Up toSeven Years

$ -

-

134,522

1,690,248

5,239,95194,546

41,002,112

-

-

--

681,500$ 48,842,879

$ 6,800,000

-151,254

16,978,102

-10,667,163

-$ 34,596,519

Due after ThreeMonths Up to

One Year

$ -

7,510,000

2,949,422

54,852

2,297,091214,040

62,800,197

-

-

337,242747,887309,160

$ 77,219,891

$ 9,053,688

-712,986

108,766,394

10,000-

176,494$118,719,562

Due after OneMonth Up toThree Months

$ -

1,542,952

200,000

-

162,980367,324

15,342,501

-

-

6,823102,12022,500

$ 17,747,200

$ 2,085,904

-693,148

34,820,905

101,650-

102$ 37,701,709

Due inOne Month

$ 5,618,763

25,232,843

923,165

2,323

81,4906,617,386

13,681,889

-

-

3,429,684-

166,250$ 55,753,793

$ 1,737,677

31,2144,154,258

22,993,147

2,049,189-

18,382$ 30,983,867

December 31, 2006

95

(d) 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 con-

tracts to reduce risks from adverse changes in market interest rates. Please refer to Note 32 for the related

effective interest rates.

30. RISK CONTROL AND HEDGE POLICY

The Bank documents its risk management policies, including overall operating strategies and risk control philosophy.

The Board of Directors reviews the policies regularly and reviews Bank operations monthly to make sure that the

Bank's policies are executed properly.

The Bank has established a risk management committee. On the other hand, the executive director of the risk man-

agement department is in charge of enhancing risk management functions. The functions of the risk management

department are as follows:

A. To develop risk management strategies;

B. To consider ways to execute the risk management strategy and all management rules as well as develop the appro-

priate organization framework;

C. To monitor, control, evaluate and review the Bank's overall operating risk; and

D. To monitor the Bank's risk management and report to the Board of Directors all risk management developments

regularly or make special reports if risk management exceptions occur.

96

FINANCIAL REVIEW

Tier 1 capital (Note3)

Tier 2 capital

Tier 3 capital

Eligible capital

Standardized approach

Internal rating-based approach

Securitization

Basic indicator approach

Standardized approach/Alternative standardized approach

Advanced measurement approach

Standardized approach

Internal model approach

Risk-weighted assets

Capital adequacy ratio

Ratio of tier 1 capital to risk-weighted assets



Ratio of common stock to total assets

Items Year

$ 20,609,871

12,904,456

-

33,514,327

135,685,317

-

1,692,579

23,579,888

-

-

820,752

-

161,778,536

20.72%

12.74%

7.98%

-

33.07%

December 31, 2007

EligibleCapital

Credit risk

Operationalrisk

Market risk

Risk-weightedAssets

(Unit: In Thousands of New Taiwan Dollars, %)31.CAPITAL ADEQUACY RATIO

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 asset 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



(7)Ratio of common stock to total assets = Common stock ÷ Total assets

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, prop-

erty risk, and risk-related developments and also reported them to the supervisors from the Banking Bureau. The Bank is now exe-

cuting a three-year plan to improve the quality of its assets and capital adequacy ratio and thus meet related requirements.

97

Net eligible capital (Note)

Total risk-weighted assets (Note)

Capital adequacy ratios (Note)

Ratios of tier 1 capital to risk-weighted assets (Note)



Ratios of common stockholders' equity to total assets

Items

$ 16,262,893

173,822,698

9.36

6.60

3.30

-

4.86

December 31, 2006

Unit: In Thousands of New Taiwan Dollars, %

Note:Capital adequacy ratio = Net eligible capital/Risk-weighted assets. Under the Banking Law and related regulations, the capital ade-quacy ratio (CAR) should be computed at the end of June and December.

The Banking Law and related regulations require that the Bank maintain its unconsolidated and consolidated CARs at a

minimum of 8%. In addition, if the Bank's CAR falls below 8%, the authorities may impose certain restrictions on the

amount of cash dividends that the Bank can declare or, in certain conditions, totally prohibit the Bank from declaring cash

dividends.

32. AVERAGE AMOUNT OF AND AVERAGE INTEREST RATE ON INTEREST-EARNING ASSETSAND INTEREST-BEARING LIABILITIES

Average balance was calculated at the daily average balances of interest-earning assets and interest-bearing liabilities.

Average Balance

2007

Average Rate (%)

Interest-earning assets

Cash and cash equivalents - due from banksDue from the Central Bank and call loans to banksFinancial assets at fair value through profit or lossReceivables of credit cardsDiscounts and loans (excluding overdue loans)Available-for-sale financial assets - bondsOther financial assets - othersDebt instruments with no active market

Interest-bearing liabilities

Due to the Central Bank and other banksSecurities sold under repurchase agreementsDemand depositsSavings - demand depositsTime depositsTime savings depositsBank debentures

$ 1,081,05516,705,2861,566,4724,823,408

129,445,1801,195,146

108,2144,231,386

22,950,756974,864

8,650,15630,937,49728,376,84690,220,01013,140,717

1.711.852.26

11.868.081.871.864.82

2.391.540.530.822.452.193.99

98

FINANCIAL REVIEW

33. ASSET QUALITY, CONCENTRATION OF CREDIT EXTENSIONS, INTEREST RATE SENSITIVI-TY, PROFITABILITY AND MATURITY ANALYSIS OF ASSETS AND LIABILITIES

A. Asset quality

Table 5 (attached)

B. Concentration of credit extensions

Average Balance

2006

Average Rate (%)

Interest-earning assets

Cash and cash equivalents - due from banksDue from the Central Bank and call loans to banksFinancial assets at fair value through profit or lossSecurities purchased under resell agreementsReceivables of credit cardsDiscounts and loansAvailable-for-sale financial assets - bondsOther financial assets - othersDebt instruments with no active market

Interest-bearing liabilities

Due to the Central Bank and other banksSecurities sold under repurchase agreementsDemand depositsSavings - demand depositsTime depositsTime savings depositsBank debentures

$ 751,74714,492,50519,069,9572,222,1686,423,121

149,328,0002,447,6982,527,1078,508,852

20,962,1707,623,6008,500,125

35,073,92932,807,646

117,737,8673,889,726

1.152.061.631.49

11.698.291.981.614.99

2.071.340.480.822.021.993.86

(In Thousands of New Taiwan Dollars, %)

1

2

3

4

5

6

7

8

9

10

Continental Engineering Corp.

Gin Lai International Group

Prince Motors Group

First Investment Group

Chie Ho Construction Group

Core Pacific Group

China Man-Made Fiber Group

APP Group

Lucky Cement Group

Taiwan Cement Group

Rank(Note 1) Enterprise/Group Name (Note 2)

$ 4,896,053

4,141,420

2,401,000

2,064,750

1,788,821

1,428,192

1,406,663

1,350,433

1,151,000

1,117,376

Total Amount of CreditEndorsement or OtherTransactions (Note 3)

15.16

12.82

7.43

6.39

5.54

4.42

4.36

4.18

3.56

3.46

Percentageof E.SUN

Bank's Equity

December 31, 2007

99


1

2

3

4

5

6

7

8

9

10

Continental Engineering Corp.

Gin Lai International Group

Prince Motors Group

Core Pacific Group

First Investment Group

Chie Ho Construction Group

China Man-Made Fiber Group

Formosan Chemical Ind. Group

APP Group

Lucky Cement Group

Rank(Note 1) Enterprise/Group Name (Note 2)

$ 4,882,016

4,551,210

4,215,000

3,131,895

2,142,750

1,935,910

1,468,208

1,403,600

1,312,152

1,213,000

Total Amount of CreditEndorsement or OtherTransactions (Note 3)

41.05

38.26

35.44

26.33

18.02

16.28

12.34

11.80

11.03

10.20

Percentageof E.SUN

Bank's Equity

December 31, 2006

Note 1:Ranked by the total amount of credit, endorsement or other transactions; list excludes government-owned or state-run enterprises.

Note 2:Group enterprise refers to a group of corporate entities as defined by Article 6 of “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 negotia-

tions, 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.

100

FINANCIAL REVIEW


Interest rate-sensitive assets

Interest rate-sensitive liabilities

Interest rate-sensitive gap

Net worth

Ratio of interest rate-sensitive assets to liabilities

Ratio of interest rate sensitivity gap to net worth

$ 126,322,175

73,818,565

52,503,610

Items 1 to 90 Days

$ 3,815,982

66,628,641

(62,812,659)

91 to 180Days

$ 4,358,775

16,535,088

(12,176,313)

181 Days toOne Year

$ 12,432,573

5,242,040

7,190,533

Over OneYear

$ 146,929,505

162,224,334

(15,294,829)

32,665,550

90.57%

(46.82%)

Total

Interest Rate Sensitivity

December 31, 2007

Note 1:The above amounts included only New Taiwan dollar amounts held by the head office and branches of the Bank (i.e., excluding for-

eign 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 dol-

lars).

C. Interest rate sensitivity information





Net worth



$ 136,218,055

105,760,050

30,458,005

Items 1 to 90 Days

$ 12,269,236

60,029,858

(47,760,622)

91 to 180Days

$ 8,260,143

33,751,475

(25,491,332)

181 Days toOne Year

$ 23,865,491

19,751,725

4,113,766

Over OneYear

$ 180,612,925

219,293,108

(38,680,183)

16,604,318

82.36

(232.95)

Total


December 31, 2006

101

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)

(In Thousands of U.S. Dollars, %)




Net worth



$ 37,336

101,012

(63,676)

Items 1 to 90 Days

$ 12,919

13,884

(965)

91 to 180Days

$ 15,000

59,577

(44,577)

181 Days toOne Year

$ 145,408

-

145,408

Over OneYear

$ 210,663

174,473

36,190

(6,367)

120.74

(568.40)

Total


December 31, 2006

(In Thousands of U.S. Dollars, %)




Net worth



$ 44,880

30,651

14,229

Items 1 to 90 Days

$ 10,682

57,599

(46,917)

91 to 180Days

$ 19,400

21,675

(2,275)

181 Days toOne Year

$ -

-

-

Over OneYear

$ 74,962

109,925

(34,963)

(11,065)

68.19

-

Total


December 31, 2007

102

FINANCIAL REVIEW

(In Thousands of New Taiwan Dollars)

Main capital inflow on maturity

Main capital outflow on maturity

Gap

$180,325,222

220,944,345

(40,619,123)

Total

$ 53,987,972

18,491,809

35,496,163

1-30 Days

$ 7,413,526

27,175,249

(19,761,723)

31-90 Days

$ 11,523,390

59,295,818

(47,772,428)

91-180 Days

$ 48,827,186

55,291,931

(6,464,745)

181 Days-1 Year

$ 58,573,148

60,689,538

(2,116,390)

Over 1 Year

Remaining Period to Maturity

Maturity Analysis of Assets and Liabilities (New Taiwan Dollars)

December 31, 2007

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 in the years ended December 31, 2007 and 2006.

Note 5:The above profitability ratios are expressed annually.

Note 6:Total net revenue is negative so it cannot calculate.

Note:The above amounts included only New Taiwan dollar amounts held by the head office and domestic branches of the Bank (i.e.,

excluding foreign currency).

D. Profitability

E. Maturity analysis of assets and liabilities

(%)

Return on total assets

Return on equity

Net income ratio

Before income tax

After income tax

Before income tax

After income tax

Items

(4.60)

(4.20)

(46.88)

(42.79)

(Note 6)

Year EndedDecember 31, 2007

(5.93)

(4.51)

(91.88)

(69.90)

(284.40)

Year EndedDecember 31, 2006

(In Thousands of New Taiwan Dollars)



Gap

$246,298,162

321,153,066

(74,854,904)

Total

$ 56,874,062

31,024,724

25,849,338

1-30 Days

$ 18,564,241

36,915,090

(18,350,849)

31-90 Days

$ 19,958,527

41,355,388

(21,396,861)

91-180 Days

$ 65,380,382

149,189,082

(83,808,700)

181 Days-1 Year

$ 85,520,950

62,668,782

22,852,168

Over 1 Year


Maturity Analysis of Assets and Liabilities (New Taiwan Dollars)

December 31, 2006

103

(In Thousands of U.S. Dollars)



Gap

$ 122,074

122,074

-

Total

$ 59,579

71,099

(11,520)

1-30 Days

$ 12,890

14,419

(1,529)

31-90 Days

$ 21,600

21,369

231

91-180 Days

$ 9,741

21,969

(12,228)

181 Days-1 Year

$ 18,264

(6,782)

25,046

Over 1 Year


Maturity Analysis of Assets and Liabilities (U.S. Dollars)

December 31, 2007

Balance Sheet of Trust Accounts

December 31, 2007 and 2006

Note 1:The above amounts included only U.S. dollar amounts held by the head office, domestic branches and OBU of the Bank.

Note 2:If the overseas asset is above 10% of total assets of the head office, it is necessary to provide supplementary disclosure information.

(In Thousands of U.S. Dollars)



Gap

$ 253,512

253,512

-

Total

$ 28,467

98,653

(70,186)

1-30 Days

$ 17,180

21,495

(4,315)

31-90 Days

$ 15,817

15,038

779

91-180 Days

$ 29,981

70,863

(40,882)

181 Days-1 Year

$ 162,067

47,463

114,604

Over 1 Year


Maturity Analysis of Assets and Liabilities (U.S. Dollars)

December 31, 2006

34. TRUST BUSINESS UNDER THE TRUST LAW

A. Trust-related items, as shown in the following balance sheet and trust property list

2006

Cash in bankShort-term investments

BondsMutual fundsCommon stock

Account receivablesNote receivables

Prepaid accountPrepaid expensesPrepaid taxes

Real propertyIntangible assets

SuperficiesOther assets

Deferred expensesTrust assets

$ --

33,571,510114,878

8,4001,189,000

--

$ 34,883,788

2007

$ 3,0281,738,926

39,789,491357,78416,200

1,189,0001,470,434

(1,689,615)

$ 42,875,248

Trust Liabilities

Account payablesAdvanced revenuesTrust capital

MoneySecuritiesReal propertySuperficies

Net incomeAccumulated deficit

Trust liabilities

2006

$ -

19,546,00014,025,510

114,878

-

--

8,400

1,189,000

-$ 34,883,788

2007

$ 87,118

20,623,83118,707,727

591,949

3,410

1,105,129102

16,200

1,189,000

550,782$ 42,875,248

Trust Assets

104

FINANCIAL REVIEW

Trust Property List

December 31, 2007 and 2006

2007 2006Investment Items

Cash in bankShort-term

BondsMutual funds Common stock

Real propertyOthers

Intangible assetsSuperficies

$ 87,118

20,623,83118,707,727

591,949

16,200

1,189,000$ 41,215,825

$ -

19,546,00014,025,510

114,878

8,400

1,189,000$ 34,883,788

Statements of Income on Trust Accounts

Year Ended December 31, 2007

2007

Revenues

InterestOther revenuesRevenues from beneficiary certificates

Expenses

Management feesLevies fees Service feesProperty lossExpenses from beneficiary certificatesNet income before taxIncome tax expensesNet income

$ 1,730,919394

1,731,313

125,9777934

134,789260,879

1,470,434-

$ 1,470,434

Note: The above statement of income belongs to trust division and not belongs to the Bank.

B. Nature of trust business operations under the Trust Law: Note 1.

105

35. ADDITIONAL DISCLOSURES

Following are the additional disclosures required by the Securities and Futures Bureau for the Bank and its investees:

A. Related information of significant transactions and investees:

(a) Financing provided: None

(b) Endorsement/guarantee provided: None

(c) Marketable securities held: None

(d) Marketable securities acquired and disposed of at costs or prices of at least NT$300 million or 10% of the paid-

in capital (the Bank disclosed its investments accumulated or disposed of): None

(e) Acquisition of individual real estates at costs of at least NT$300 million or 10% of the paid-in capital: Table 1

(attached)

(f) Disposal of individual real estates at costs of at least NT$300 million or 10% of the paid-in capital: None

(g) Allowance of service fees to related parties amounting to at least NT$5 million: None

(h) Receivables from related parties amounting to at least NT$300 million or 10% of the paid-in capital: None

( i ) Sale of nonperforming loans: Table 2 (attached)

( j ) Financial asset securitization: None

(k) Other significant transactions which may affect the decisions of users of financial reports: Note 22

( l ) Proportionate in investees: Table 3 (attached)

B. Investment in Mainland China: None.

36. SEGMENT INFORMATION

The Bank mainly conducts banking businesses. As of December 31, 2007, the Bank had no overseas operation

department.

106

CONTACT DETAILS OF HEAD OFFICEAND BRANCHES

Office/Branch Phone Number Address

Head Office

Chungho Operation Center

Banking Business Dept.

Chunghsiao Branch

Chiencheng Branch

Chengtung Branch

East Taipei Branch

Sungchiang Branch

Sungshan Branch

Tienmu Mini Branch

Station Front Branch

Taan Branch

Core Pacific City Mini Branch

Pateh Branch

Fuhsing Branch

Taipei 101 Branch

Sanchung Branch

Fuyin Branch

Panchiao Branch

Hsinchuang Branch

Luchou Branch

Tucheng Branch

Chungho Branch

Hsintien Branch

886-2-2701-1777

886-2-8023-9088

886-2-2701-1777

886-2-2778-1277

886-2-2555-7777

886-2-2778-8777

886-2-2570-5777

886-2-2517-3777

886-2-2761-6688

886-2-8866-1117

886-2-2311-6777

886-2-3322-3677

886-2-3762-1999

886-2-3765-1111

886-2-8771-3366

886-2-8101-8177

886-2-2981-2233

886-2-8985-9777

886-2-2259-7767

886-2-2277-6377

886-2-2289-8877

886-2-2260-5588

886-2-8668-5566

886-2-2918-1199

39 Tunhwa S.Rd., Sec. 2, Taipei, Taiwan

Fl. 2, 188 Chingping Rd., Chungho City, Taipei County, Taiwan

39 Tunhwa S.Rd., Sec. 2, Taipei, Taiwan

270 Chunghsiao E. Rd., Sec. 4, Taipei, Taiwan

70 Chengteh Rd., Sec. 1, Taipei, Taiwan

224 Nanking E. Rd., Sec. 3, Taipei, Taiwan

160 Nanking E. Rd., Sec. 4, Taipei, Taiwan

137 Sungchiang Rd., Taipei, Taiwan

132 Sungshan Rd., Taipei, Taiwan

246 Chungshan N. Rd., Sec. 6, Taipei, Taiwan

50 Chunghsiao W. Rd., Taipei, Taiwan

8 Sinsheng S. Rd., Sec. 2, Taipei, Taiwan

B1, 138 Pa Teh Rd., Sec. 4, Taipei, Taiwan

88 Pateh Rd., Sec. 4, Taipei, Taiwan

78 Fuhsing S. Rd., Sec. 1, Taipei, Taiwan

Fl. 5, 45 Shifu Rd, Taipei, Taiwan

192 Chungyang Rd., Sec. 3, Sanchung City, Taipei County, Taiwan

39 MRT Road, Sanchung City, Taipei County, Taiwan

15 Minsheng Rd., Sec. 3, Panchiao City, Taipei County, Taiwan

331 Suyuan Rd., Hsinchuang City, Taipei County, Taiwan

401 Chihsien Rd., Luchou City, Taipei County, Taiwan

123 Chincheng Rd., Sec. 3, Tucheng City, Taipei County, Taiwan

200 Chingping Rd., Chungho City, Taipei County, Taiwan

202 Peihsin Rd., Hsintien City, Taipei County, Taiwan

107


Tansui Branch

Keelung Branch

I-Lan Mini Branch

Lotung Branch

Hualien Branch

Taitung Mini Branch

Taoyuan Branch

Chungli Branch

Hsinsheng Branch

Nankian Branch

Hsinchu Branch

Nanta Branch

Chuke Branch

Fengcheng Branch

Miaoli Branch

Toufen Branch

Taichung Branch

Chikuang Branch

Fengchia Branch

Tali Mini Branch

Taya Branch

Fengyuan Branch

Yuanlin Branch

Changhwa Branch

65 Chungcheng E. Rd., Tansui Township, Taipei County, Taiwan

193 Maijin Rd., Keelung City, Taiwan

147 Chungsan Rd., Sec.2, I-Lan City, I-Lan County, Taiwan

50 Kungcheng Rd., Lotung Township, I-Lan County, Taiwan

560 Chungcheng Rd., Hualien City, Hualien County, Taiwan

341 Chunghwa Rd., Sec. 1, Taitung City, Taitung County, Taiwan

80 Nanhwa St., Taoyuan City, Taoyuan County, Taiwan

13-1 Chungyang E. Rd., Chungli City, Taoyuan County, Taiwan

188 Hsinsheng Rd., Chungli City, Taoyuan County, Taiwan

127 Hsinnan Rd., Sec. 1, Luchu Hsiang, Taoyuan County, Taiwan

645 Sida Rd., Hsinchu City, Taiwan

339 Nanta Rd., Hsinchu City, Taiwan

238 Kuangfu Rd., Sec. 1, Hsinchu City, Taiwan

59 Chungcheng Rd., Hsinchu City, Taiwan

81 Chungcheng Rd., Miaoli City, Miaoli County, Taiwan

1192 Chunghua Rd., Toufen Township, Miaoli County, Taiwan

160-1 Taichung Kang Rd., Sec. 1, Taichung City, Taiwan

63 Chungcheng Rd., Taichung City, Taiwan

349 Fuhsing Rd., Taichung City, Taiwan

331 Chunghsing Rd., Sec. 2, Tali City, Taichung County, , Taiwan

229 Chungching S. Rd., Taya Hsian, Taichung County, Taiwan

329 Chungshan Rd., Fengyuan City, Taichung County, Taiwan

266 Jeuguang Rd., Yuanlin Township, Changhwa County, Taiwan

199-3 Hsiaoyang Rd., Changhwa City, Changhwa County, Taiwan

886-2-2625-0777

886-2-2433-6566

886-3-935-9577

886-3-953-3377

886-3-835-2299

886-89-329-797

886-3-339-7779

886-3-427-2777

886-3-280-5787

886-3-212-9797

886-3-525-5577

886-3-526-3155

886-3-577-5131

886-3-526-1101

886-37-265-725

886-37-669-377

886-4-2328-3331

886-4-2222-0077

886-4-2708-5577

886-4-2486-6363

886-4-2568-4777

886-4-2515-2777

886-4-833-9777

886-4-728-7777

108

CONTACT DETAILS OF HEAD OFFICEAND BRANCHES


886-49-230-5000

886-5-533-1566

886-5-228-0777

886-6-226-8777

886-6-225-6131

886-6-225-6141

886-6-236-4401

886-6-237-6391

886-6-250-2183

886-6-330-8777

886-6-272-7757

886-7-336-7977

886-7-346-3677

886-7-241-1777

886-7-241-0777

886-7-741-9777

886-8-738-5678

Tsaotun Branch

Touliu Branch

Chiayi Branch

Tainan Branch

Chienkang Branch

Tungmen Branch

Peimen Mini Branch

Linsen Mini Branch

Haitung Branch

Kueijen Mini Branch

Yungkang Branch

Kaohsiung Branch

North Kaohsiung Branch

Chungcheng Branch

Hsinhsing Branch

Fengshan Branch

Pingtung Branch

636 Chungcheng Rd., Tsaotun Township, Nantou County, Taiwan

80 Shiping Rd., Touliu City, Yunlin County, Taiwan

302 Chungshan Rd., Chiayi City, Taiwan

351 Hsimen Rd., Sec. 2, Tainan City, Taiwan

167 Chungyi Rd., Sec. 2, Tainan City, Taiwan

26 Fuchien Rd., Sec. 1, Tainan City, Taiwan

133 Kaiyuan Rd., Tainan City, Taiwan

184 Linsen Rd., Sec. 2, Tainan City, Taiwan

129 Haitien Rd., Sec. 1, Tainan City, Taiwan

23 Chungcheng S. Rd., Sec. 1, Kueijen Hsiang, Tainan County, Taiwan

21 Yungda Rd., Sec. 2, Yungkang City, Tainan County, Taiwan

80 Szuwei 3rd Rd., Kaohsiung, Taiwan

878 Minchu 1st Rd., Kaohsiung, Taiwan

151 Chungcheng 4th Rd., Kaohsiung, Taiwan

242 Wufu 2nd Rd., Kaohsiung, Taiwan

165-3 Poai Rd., Fengshan City, Kaohsiung County, Taiwan

451 Kuangtun Rd., Pingtung City, Pingtung County, Taiwan

The Local Bank with World Class Capabilities

Cosmos Bank, Taiwan 2007 Annual Report · 2015-04-22 · 6 BANK OVERVIEW I. Introduction 1....

Documents

Transcript of Cosmos Bank, Taiwan 2007 Annual Report · 2015-04-22 · 6 BANK OVERVIEW I. Introduction 1....